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Table of Contents

 

 

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, 2016

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 814-00188

 

 

MEDALLION FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   04-3291176

(State of

Incorporation)

 

(IRS Employer

Identification No.)

437 MADISON AVENUE, 38th Floor, NEW YORK, NEW YORK 10022

(Address of principal executive offices) (Zip Code)

(212) 328-2100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act

Common Stock, par value $0.01 per share

(Title of class)

 

 

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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files). YES  ☐    NO  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  ☐

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

 

Large Accelerated Filer  ☐   Accelerated Filer  ☒    Non Accelerated Filer  ☐   Smaller Reporting Company  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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 30, 2016 was $154,371,047.

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of March 10, 2017 was 24,127,785.

 

 

 


Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement for its 2017 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, 2016, are incorporated by reference into Part III of this form 10-K

MEDALLION FINANCIAL CORP.

2016 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

PART I

     3  

ITEM 1. OUR BUSINESS

     3  

ITEM 1A. RISK FACTORS

     19  

ITEM 1B. UNRESOLVED STAFF COMMENTS

     32  

ITEM 2. PROPERTIES

     32  

ITEM 3. LEGAL PROCEEDINGS

     32  

ITEM 4. MINE SAFETY DISCLOSURES

     32  

PART II

     32  

ITEM  5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     32  

ITEM 6. SELECTED FINANCIAL DATA

     36  

ITEM  7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     38  

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     58  

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     59  

ITEM  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     59  

ITEM 9A. CONTROLS AND PROCEDURES

     59  

ITEM 9B. OTHER INFORMATION

     62  

PART III

     62  

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     62  

ITEM 11. EXECUTIVE COMPENSATION

     62  

ITEM  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     62  

ITEM  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     62  

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     62  

PART IV

     62  

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     62  

SIGNATURES

     68  

CERTIFICATIONS

  

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

This report contains forward-looking statements relating to future events and future performance applicable to us within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words expects, anticipates, intends, believes, or similar language. Actual results could differ materially from those anticipated in such forward-looking statements. 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. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

 

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PART I

 

ITEM 1. OUR BUSINESS

We, Medallion Financial Corp. or the Company, are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, trailers, and to finance small scale home improvements. Our core philosophy has been “In niches there are riches.” We try to identify markets that are profitable and where we can become an industry leader. Our investment objectives are to provide high level of distributable income, consistent with the preservation of capital, as well as long-term growth of net asset value and our stock price. These investment objectives may be changed without shareholder approval. We also provide other debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. For additional information about our business and operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 3%, and our commercial loan portfolio at a compound annual growth rate of 4% (7% and 4% on a managed basis when combined with Medallion Bank). 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 18%. In January 2017, the Company announced its plans to transform our overall strategy. We are transitioning away from medallion lending and placing our strategic focus on our growing consumer finance portfolio. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which includes our managed net investment portfolio, as well as assets serviced for third party investors, were $1,632,000,000 as of December 31, 2016 and $1,655,000,000 as of December 31, 2015, and have grown at a compound annual growth rate of 11% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid/declared distributions in excess of $263,060,000 or $14.66 per share.

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

 

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

 

    Medallion Capital, Inc., or Medallion Capital, an SBIC and a regulated investment company, or RIC, which conducts a mezzanine financing business; and

 

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

We formed a wholly-owned portfolio company, Medallion Servicing Corporation, or MSC, to provide loan services to Medallion Bank, also a portfolio company wholly-owned by us. We have assigned all of our loan servicing rights for Medallion Bank, which consists of servicing taxi medallion and commercial loans originated by Medallion Bank, to MSC, which bills and collects the related service fee income from Medallion Bank, and is allocated and charged by us for MSC’s share of these servicing costs.

In addition, we conduct business through a wholly-owned portfolio company, Medallion Bank, a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans, which are then serviced by MSC. However, the FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, or $469,383,000 as of December 31, 2016. MSC earns referral and servicing fees for these activities. As a non-investment company, Medallion Bank is not consolidated with the Company, which is an investment company under the Investment Company Act of 1940, or the 1940 Act.

Our diversified investments in other controlled subsidiaries are comprised of Medallion Fine Art, Inc., Medallion Motorsports, LLC, and LAX Group, LLC. In addition, we made both marketable and nonmarketable equity investments.

We are a closed-end, non-diversified management investment company, organized as a Delaware corporation, under the 1940 Act. We have elected to be treated as a business development company, or BDC, under the 1940 Act. During our tax year ended December 31, 2016, we did not qualify as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code, and therefore we became subject to taxation as a corporation under Subchapter C of the Code. We had in previous years qualified and elected to be treated for federal income tax purposes as a RIC. As a RIC, we generally did not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distributed to our shareholders as dividends, if we met certain source-of-income and asset diversification requirements. Medallion Bank is not a RIC and must pay corporate-level US federal and state income taxes. See Note 5 for more information.

 

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Table of Contents

We are managed by our executive officers under the supervision of our Board of Directors. As a result, we do not pay investment advisory fees, but instead we incur the operating costs associated with employing investment and portfolio management professionals. Alvin Murstein, our chairman and chief executive officer, has over 60 years of experience in the ownership, management, and financing of taxicab medallions and other commercial businesses. Andrew M. Murstein, our president, has over 25 years of experience and is the third generation in his family to participate in the business.

Below is our organizational structure reflecting our consolidated and unconsolidated subsidiaries.

 

LOGO

 

(1) An SBIC and a RIC which originates and services taxicab medallion and commercial loans.
(2) An SBIC which is our primary taxicab medallion lending company.
(3) An SBIC and a RIC which conducts a mezzanine financing business.
(4) Formed for the purpose of holding and managing equity investments in a racing team.
(5) Formed for the purpose of owning medallion loans originated by Medallion Funding.
(6) Formed for purpose of owning and leasing repossessed Chicago taxicab medallions.
(7) Formed for the purpose of issuing unsecured preferred securities to investors.
(8) A Utah industrial bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities.
(9) Formed for the purpose of conducting loan servicing activities.
(10) Formed for the purpose of holding an equity investment in a professional lacrosse team.
(11) Formed for the purpose of holding and managing a hotel investment and such investment was sold in March 2015.
(12) Formed for the purpose of engaging in art dealing.
(13) Formed for the purpose of engaging in general consulting services.
(14) Formed for the purpose of holding an equity investment in a racing team.

Our Market

We provide loans to individuals and small to mid-size businesses, both directly through our investment company subsidiaries and also through Medallion Bank, in three primary markets:

 

    loans that finance taxicab medallions;

 

    loans that finance commercial businesses; and

 

    loans that finance consumer purchases of recreational vehicles, boats, motorcycles, and trailers, and to finance small scale home improvements.

 

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The following chart shows the components of our $1,517,592,000 managed net investment portfolio as of December 31, 2016.

 

(Dollars in thousands)

  On-Balance Sheet      Off-Balance Sheet (1)      Total Managed Investments  

Medallion loans

  $ 266,816      $ 261,827      $ 528,643  

Commercial loans

    83,634        2,567        86,201  

Consumer loans

    —          700,685        700,685  

Investments in Medallion Bank and other controlled subsidiaries

    293,360        (136,626      156,734  

Investment securities

    —          36,861        36,861  

Equity investments

    8,468        —          8,468  
 

 

 

    

 

 

    

 

 

 

Net investment portfolio

  $ 652,278      $ 865,314      $ 1,517,592  
 

 

 

    

 

 

    

 

 

 

 

(1) Off-balance sheet investments are those owned by our wholly-owned unconsolidated portfolio companies, primarily Medallion Bank.

Medallion Loans

Taxi medallion loans of $266,816,000 comprised 41% of our $652,278,000 net investment portfolio as of December 31, 2016, compared to $308,408,000 or 51% of our $606,959,000 net investment portfolio as of December 31, 2015. Managed taxi medallion loans of $528,643,000 comprised 35% of our $1,517,592,000 managed net investment portfolio as of December 31, 2016, compared to $640,904,000 or 43% of our $1,501,555,000 managed net investment portfolio as of December 31, 2015. Including loans to unaffiliated investors, the total amount of medallion loans under our management was $553,439,000 as of December 31, 2016, compared to $667,863,000 as of December 31, 2015. Since 1979, we and Medallion Bank have originated, on a combined basis, approximately $3,581,000,000 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 taxicab fleets, taxicab medallions, and corporate car services, dating back to 1956.

Medallion loans collateralized by New York City taxicab medallions and related assets comprised 69% of the value of the medallion loan portfolio as of December 31, 2016 and 2015, and were 76% and 74% on a managed basis. Based on taxi medallion values published by the New York City Taxi and Limousine Commission, or TLC, we estimate that the total value of all of New York City taxicab medallions and related assets such as the vehicle, taximeter, and roof lights exceeded $7.6 billion as of December 31, 2016. We estimate that the total value of all taxicab medallions and related assets in our major US markets exceeded $8.8 billion as of December 31, 2016.

While medallion loans do become delinquent or in default, all of our medallion loans are secured by the medallion and enhanced with personal guarantees of the shareholders and owners. When a borrower defaults on a loan, we have the ability to restructure the underlying loan or repossess the medallion collateralizing that loan and sell it in the market or through a foreclosure auction and pursue the personal guarantees. Given the current market conditions we have taken significant unrealized losses against non-performing loans to mitigate potential future losses.

The following table displays information on managed medallion loans outstanding (other than those managed for third party investors) in each of our major markets at December 31, 2016. For a presentation of only the consolidated on-balance sheet medallion loans, see the Consolidated Summary Schedule of Investments in the consolidated financial statements on page F-37.

 

(Dollars in thousands)

   # of Loans      % of Medallion
Loan Portfolio (1)
    Average
Interest Rate (2)
    Principal
Balance
 

Managed medallion loans

            

New York

     743           76     3.64   $ 448,035  

Chicago

     219           13       4.33       78,773  

Newark

     140           5       5.23       29,953  

Boston

     68           5       4.51       28,061  

Cambridge

        15        1       4.48       4,458  

Other

        27        —         7.51       2,205  
     

 

 

    

 

 

     

 

 

 

Total managed medallion loans

        1,212        100     3.88       591,485  
     

 

 

    

 

 

   

 

 

   

Deferred loan acquisition costs

               410  

Unrealized depreciation on loans

               (63,252
            

 

 

 

Net managed medallion loans

             $ 528,643  
            

 

 

 

 

(1) Based on principal balance outstanding at December 31, 2016.
(2) Based on the contractual rates of the portfolios at December 31, 2016.

 

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The New York City Market. A New York City taxicab medallion is the only permitted license to operate a taxicab and accept street hails in New York City, except as discussed below. As reported by the TLC, individual (owner-driver) medallions sold for approximately $500,000 and corporate medallions sold for approximately $550,000 as of December 31, 2016. Individual medallions are issued to an owner-driver who must drive the taxicab for a minimum number of hours in each calendar year whereas corporate medallions are medallions that can be aggregated by businesses, leased to drivers, and operated for more than one shift. The number of taxicab medallions is limited by law, and as a result of the limited supply of medallions, an active market for medallions has developed. The law limiting the number of medallions also stipulates that the ownership for the 13,630 medallions outstanding as of December 31, 2016 shall remain divided into 5,733 individual medallions and 7,897 fleet or corporate medallions. Corporate medallions are more valuable because they can be aggregated by businesses, leased to drivers, and operated for more than one shift. New York City auctioned 600 additional medallions during 2004, 308 during 2006, 89 during 2008, 200 in 2013, and 206 in 2014. The medallions auctioned in 2006 were restricted to hybrid fuel vehicles and wheelchair accessible vehicles. In addition, New York City auctioned an additional 63 medallions for wheelchair accessible vehicles in 2007. There was a 25% fare increase which took effect in May 2004 and a 17% fare increase that took effect in September 2012. The New York State legislature enacted a law on December 21, 2011 which was amended on February 17, 2012 to permit cars for hire to pick up street hails in the boroughs outside Manhattan. Pursuant to the law, the TLC began issuing Street Hail Livery licenses in June 2013.

A prospective medallion owner must qualify under the medallion ownership standards set and enforced by the TLC. These standards prohibit individuals with criminal records from owning medallions, require that the funds used to purchase medallions be derived from legitimate sources, and mandate that taxicab vehicles and meters meet TLC specifications. In addition, before the TLC will approve a 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 taxicab is subject to quarterly TLC inspections.

Most New York City medallion transfers are handled through approximately 24 medallion brokers licensed by the TLC. In addition to brokering 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 regularly receive referrals from them. Brokers generated 26% of the loans originated during 2016, and 24% for 2015. However, we receive most of our referrals from a small number of brokers.

The Chicago Market. We estimate that Chicago medallions sold for approximately $60,000 as of December 31, 2016. Pursuant to a municipal ordinance, the number of outstanding medallions is capped at 6,995 as of December 31, 2016. We estimate that the total value of all Chicago medallions and related assets is over $489,650,000 as of December 31, 2016.

The Boston Market. We estimate that Boston medallions sold for approximately $300,000 as of December 31, 2016. The number of Boston medallions is capped at 1,825 as of December 31, 2016. We estimate that the total value of all Boston medallions and related assets is over $569,984,000 as of December 31, 2016.

The Newark Market. We estimate that Newark medallions sold for approximately $200,000 as of December 31, 2016. The number of Newark medallions has been limited to 600 since 1950 by local law. We estimate that the total value of all Newark medallions and related assets is over $123,600,000 as of December 31, 2016.

The Cambridge Market. We estimate that Cambridge medallions sold for approximately $165,000 as of December 31, 2016. The number of Cambridge medallions is 257 as of December 31, 2016. We estimate that the total value of all Cambridge medallions and related assets is over $45,154,000 as of December 31, 2016.

Commercial Loans

Commercial loans 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, 2016, we and Medallion Bank have originated more than $930,335,000 of commercial loans. Commercial loans of $83,634,000 comprised 13% of our $652,278,000 net investment portfolio as of December 31, 2016, compared to $81,895,000 or 14% of our $606,959,000 net investment portfolio as of December 31, 2015. Managed commercial loans of $86,200,000 comprised 6% of our $1,517,592,000 net investment portfolio as of December 31, 2016, compared to $125,882,000 or 8% of our $1,501,555,000 managed net investment portfolio as of December 31, 2015. We have worked to increase our commercial loan activity in recent years, primarily because of the attractive higher yielding, floating rate nature of most of this business. The outstanding balances of managed commercial loans have grown at a compound annual rate of 4% since 1996. The increase since 1996 has been primarily driven by internal growth through the origination of additional commercial loans. We focus our marketing efforts on the manufacturing,

 

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professional, scientific, and technical services and other services. The majority of our commercial borrowers are located in the New York metropolitan area and the Midwest. We plan to continue expanding our commercial loan activities by developing a more diverse borrower base, a wider geographic area of coverage, and by expanding targeted industries.

Commercial loans are generally secured by equipment, accounts receivable, real estate, or other assets, and have interest rates averaging 901 basis points over the prevailing prime rate at year end, up from 668 basis points over prime at the end of 2015. As with medallion loans, the vast majority of the principals of borrowers personally guarantee commercial loans. The aggregate realized loss of principal on managed commercial loans has averaged 2.0% per annum for the last five years.

The following table displays information on managed commercial loans outstanding (other than those managed for third party investors) in each of our major markets at December 31, 2016. For a presentation of only the consolidated on-balance sheet commercial loans, see the Consolidated Summary Schedule of Investments in the consolidated financial statements on F-30.

 

(Dollars in thousands)

   # of Loans      % of
Commercial
Loan Portfolio (1)
    Average
Interest Rate (2)
    Principal
Balance
 

Managed commercial loans

         

Secured mezzanine

     37        87     13.47   $ 76,470  

Other secured commercial

     38        13       7.97       11,224  
  

 

 

    

 

 

     

 

 

 

Total managed commercial loans

     75        100     12.76       87,694  
  

 

 

    

 

 

   

 

 

   

Deferred loan acquisition income

            (112

Unrealized depreciation on loans

            (1,381
         

 

 

 

Net managed commercial loans

          $ 86,201  
         

 

 

 

 

(1) Based on principal balance outstanding at December 31, 2016.
(2) Based on the contractual rates of the portfolios at December 31, 2016.

Secured Mezzanine Loans. Through our subsidiary Medallion Capital, we originate both senior and subordinated loans nationwide to businesses in a variety of industries, including manufacturing and various service providers, more than 61% of which are located in the Midwest and Northeast regions, with the rest scattered across the country. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $1,000,000 to $5,600,000, and represent approximately 87% of our managed commercial loan portfolio as of December 31, 2016, and were 53% as of December 31, 2015. Frequently, we also receive warrants to purchase an equity interest in the borrowers of secured mezzanine loans.

Other Secured Commercial Loans. We originate other commercial loans to a variety of businesses nationwide, including retail trade and various service providers. These commercial loans are generally secured by all of the assets of the businesses and are generally personally guaranteed by the principals. Frequently, we receive assignments of lease from our borrowers. The loans generally range in size from under $100,000 to approximately $3,200,000. These loans represented approximately 13% of the managed commercial loan portfolio as of December 31, 2016 and 2015. Historically, most of the portfolio has consisted of fixed-rate loans.

Consumer Loans. Consumer loans are originated by Medallion Bank, a wholly-owned, unconsolidated portfolio company. Consumer loans of $700,685,000 comprised 46% of our $1,517,592,000 managed net investment portfolio as of December 31, 2016, compared to $619,887,000 or 41% of our $1,501,555,000 managed net investment portfolio as of December 31, 2015, and represent our largest lending segment. The loans are collateralized by recreational vehicles, boats, motorcycles, trailers, and home improvements, located in all 50 states. The portfolio is serviced by a large third party servicer. We believe that Medallion Bank’s 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 portfolio.

Other. As a business development company, we also provide debt, mezzanine, and equity investment capital to companies in a variety of industries. These investments may be venture capital style investments which may not be fully collateralized. This is a small, but growing portion of our business.

 

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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. 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 market and brokers in the medallion market. We believe that our relationships with dealers and brokers provide us with, in addition to potential investment opportunities, other 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 and will continue to provide us with significant investment opportunities. In 2016, 100% of our consumer loans were generated by brokers and dealers, and there were few originations in the medallion or commercial lending space.

Employ disciplined underwriting policies and maintain rigorous portfolio monitoring. We have an extensive investment underwriting and monitoring process. We conduct a thorough analysis of each potential investment 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 debt investments to enable us to make distributions to our shareholders.

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 taxicab medallions and other commercial businesses, and Andrew M. Murstein is the third generation in his family to participate in the business and has over 25 years of experience in the ownership, management, and financing of taxicab medallions and other commercial businesses. The other members of our management team have broad investment backgrounds, with prior experience 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 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, eight specialty finance companies, five loan portfolios, and three taxicab rooftop advertising companies have been acquired.

Investment Activity

The following table sets forth the components of investment activity in the managed investment portfolio for the years indicated.

 

     Year ended December 31,  

(Dollars in thousands)

   2016      2015      2014  

Net investments at beginning of year

   $ 1,501,555      $ 1,310,685      $ 1,144,596  

Investments originated (1)

     738,238        492,127        469,816  

Repayments of investments (1)

     (752,582      (288,783      (288,649

Net realized losses on investments

     (34,888      (3,902      (12,290

Net increase in unrealized appreciation (depreciation) (2)

     79,650        3,286        8,661  

Transfers to other assets/liabilities, net

     (10,941      (8,553      (8,413

Amortization of origination costs

     (3,440      (3,305      (3,036
  

 

 

    

 

 

    

 

 

 

Net increase in investments

     16,037        190,870        166,089  
  

 

 

    

 

 

    

 

 

 

Net investments at end of year

   $ 1,517,592      $ 1,501,555      $ 1,310,685  
  

 

 

    

 

 

    

 

 

 

 

(1) Includes refinancings.
(2) Excludes net unrealized appreciation (depreciation) of ($28,372), ($10,839), and ($1,759) for the years ended December 31, 2016, 2015, and 2014 related to investments other than securities and other assets.

Investment Characteristics

Medallion Loans. Our medallion loan portfolio consists of mostly fixed-rate loans, collateralized by first security interests in taxicab medallions and related assets (vehicles, meters, and the like). We estimate that the weighted average loan-to-value ratio of all

 

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of the medallion loans was 129% as of December 31, 2016, compared to 76% as of December 31, 2015, reflecting the very conservative values we have placed on all medallion loans, including the vast majority which are performing as agreed. These ratios also do not factor in the managed unrealized depreciation on these loans of $63,252,000 and $9,574,000 as of December 31, 2016 and 2015. In addition, we have recourse against a vast majority of the owners of the taxicab 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. In most cases, borrowers may prepay medallion loans upon payment of a fee of approximately 1% to 2%.

Historically, we generally retain the medallion loans we originate; however, from time to time, we participate or sell shares of some loans or portfolios to interested third party financial institutions. In these cases, we retain the borrower relationships and service the sold loans.

Mezzanine and Commercial Loans. We have typically originated mezzanine and commercial loans in principal amounts generally ranging from under $100,000 to $5,600,000, and occasionally, have originated loans 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 fee will 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 precludes us from charging the maximum rate of interest permitted under SBA regulations, we are able to charge the maximum rate on certain commercial loans.

Consumer Loans. Consumer loans generally require equal monthly payments covering accrued interest and amortization of principal over a negotiated term, generally around ten years. Interest rates offered are fixed. Borrowers may prepay consumer loans without any prepayment penalty. In general, Medallion Bank has established relationships with dealers and contractors in the industry, who are the sources for most of the customers of Medallion Bank.

Marketing, Origination, and Loan Approval Process

We employ 32 loan originators to originate medallion, commercial, and consumer loans. Each loan application is individually reviewed through analysis of a number of factors, including loan-to-value ratios, a review of 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. 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 must be approved by the chief executive officer and/or the chief credit officer. 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 recreational vehicle 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 bank syndicates 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 Medallion Bank, substantially all of Medallion 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.

 

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The table below summarizes our sources of available funds and amounts outstanding under credit facilities and their respective end of period weighted average interest rates at December 31, 2016. See Note 4 to the consolidated financial statements for additional information about each credit facility.

 

Consolidated sources of funds (Dollars in thousands)

   Total  

Cash and cash equivalents (1)

   $ 20,962  

Bank loans

     94,219  

Average interest rate

     3.22

Maturity

     10/16-12/20  

Preferred securities

     33,000  

Average interest rate

     3.07

Maturity

     9/37  

Unsecured notes

     33,625  

Average interest rate

     9.00

Maturity

     4/21  

DZ loan

     106,244  

Average interest rate

     2.36

Maturity

     6/17  

SBA debentures

     87,485  

Amounts available (2)

     5,500  

Amounts outstanding

     81,985  

Average interest rate

     3.63

Maturity (3)

     3/19-3/27  
  

 

 

 

Total debt outstanding

   $ 349,073  
  

 

 

 

Medallion Bank

  

Cash and cash equivalents

   $ 30,881  

Deposits and other borrowings

     908,442  

Average interest rate

     1.22

Maturity

     1/17-12/21  
  

 

 

 

Total cash and cash equivalents, including Medallion Bank

   $ 51,843  
  

 

 

 

Total debt outstanding, including Medallion Bank

   $ 1,257,515  
  

 

 

 

 

(1) $7,840 is pledged to a lender of an affiliate.
(2) $2,000 of this requires a $1,000 capital contribution from the Company.
(3) In connection with the Freshstart loan described in Note 19, the $33,485 of principal was restructured into a new note and matures in tranches from February 2018 to February 2020.

We fund our fixed-rate loans with variable-rate credit lines and bank debt, and with fixed-rate SBA debentures and other 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;

 

    Incurring fixed-rate debt; and

 

    Purchasing interest rate caps to hedge a portion of variable-rate debt against increases in interest rates.

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 52.

Competition

Banks, credit unions, and finance companies, some of which are SBICs, compete with us in originating medallion, commercial, and consumer loans. In addition, finance subsidiaries of equipment manufacturers also compete with us in originating commercial loans. Many of these competitors have greater resources than we do and certain competitors are subject to less restrictive regulations than us. 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.

 

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Employees

As of December 31, 2016 we employed 131 persons, including 64 at our Medallion Bank subsidiary. We believe that relations with all of our employees are good.

MATERIAL US FEDERAL INCOME TAX CONSIDERATIONS

Taxation as a Corporation

For our tax year ended December 31, 2016, we did not qualify for RIC status and as a result our status changed from a RIC subject to Subchapter M of the Code to a corporation subject to taxation under Subchapter C of the Code. As a result of such change, for the taxable period ended December 31, 2016, we will be taxed as a corporation and must pay corporate-level federal and state income taxes on our taxable income. Through December 31, 2015, we qualified and elected to be treated as a RIC under Subchapter M of the Code. As a result of our status as a RIC in prior years, we generally were not subject to federal income tax on the portion of our taxable income and capital gains we distributed to our shareholders, but we were also not permitted to carry forward net operating losses from year to year. Because we are taxed as a corporation under Subchapter C of the Code for the tax year ended December 31, 2016, we are able to carry forward any net operating losses historically incurred to succeeding years, which we would not be permitted to do if we were subject to taxation as a RIC under Subchapter M of the Code. However, because we did not qualify for RIC status for the tax year ended December 31, 2016, distributions will generally be taxable to our shareholders 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 shareholder’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. Qualification as a RIC is made on an annual basis and, although we and some of our subsidiaries have qualified in the past, we cannot assure you that we will qualify for such treatment in the future.

Taxation as a RIC

If we satisfy the requirements to be treated as a RIC in a future taxable year, the following discussion is a general summary of the material US federal income tax considerations that would be applicable to us and to an investment in shares of our common stock in such tax year. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment in a year in which we satisfy the requirements to be treated as a RIC. For example, we have not described tax consequences that we assume to be generally known by investors or certain considerations that may be relevant to certain types of holders subject to special treatment under US federal income tax laws, including shareholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, and financial institutions. This summary assumes that investors will hold our common stock in such a taxable year as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this annual report and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the Internal Revenue Service, or the IRS, regarding an investment in our common stock for a year in which we satisfy the requirements to be treated as a RIC. This summary does not discuss any aspects of the Medicare Contribution tax, US estate or gift tax, or foreign, state, or local tax. It does not discuss the special treatment under US federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.

As used herein, a “US person” is a person that is for US federal income tax purposes:

 

    a citizen or individual resident of the United States;

 

    a corporation, or other entity treated as a corporation for US federal income tax purposes, created or organized in or under the laws of the US or any state thereof or the District of Columbia; or

 

    a trust or an estate, the income of which is subject to US federal income taxation regardless of its source.

A “US shareholder” is a beneficial owner of shares of our common stock that is a US person.

A “non-US shareholder” is a beneficial owner of shares of our common stock that is not a US shareholder and is not a partnership for US federal income tax purposes.

If a partnership (including an entity treated as a partnership for US federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective shareholder that is a partner of a partnership holding shares of our common stock should consult its tax advisors with respect to the purchase, ownership, and disposition of shares of our common stock.

 

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Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her, or its particular situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of federal, state, local, and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.

In the event we meet the requirements to be treated as a RIC in a taxable year, in such tax year we generally would not have to pay corporate-level US federal income taxes on any ordinary income or capital gains that we distribute to our shareholders as dividends for such taxable year. To qualify as a RIC in a taxable year, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to obtain RIC tax treatment in a taxable year we would be required to distribute to our shareholders, for each such taxable year, at least 90% of our “investment company taxable income,” which is generally our ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses. We refer to this distribution requirement as the Annual Distribution Requirement.

If we, in a taxable year:

 

    qualify as a RIC; and

 

    satisfy the Annual Distribution Requirement;

then we would not be subject to US federal income tax for such tax year on the portion of our investment company taxable income and net capital gain (i.e., net long-term capital gains in excess of net short-term capital losses) we distribute to shareholders. We will be subject to US federal income tax at the regular corporate rates in such tax year on any income or capital gain not distributed (or deemed distributed) to our shareholders.

As a RIC we would be subject to a 4% nondeductible US federal excise tax on certain undistributed income of RICs unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year, and (3) any income realized, but not distributed, in preceding years. We refer to this distribution requirement as the Excise Tax Avoidance Requirement.

In order to qualify as a RIC for US federal income tax purposes in a tax year, we must, among other things:

 

    qualify to be treated as a business development company under the 1940 Act at all times during each such taxable year;

 

    derive in each such taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or foreign currencies, or other income derived with respect to our business of investing in such stock or securities or currencies, and net income derived from interests in “qualified publicly traded partnerships” (i.e., partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends, capital gains, and other traditionally permitted mutual fund income described in this paragraph) or the 90% Income Test; and

 

    diversify our holdings so that at the end of each quarter of each such taxable year:

 

    at least 50% of the value of our assets consists of cash, cash equivalents, US Government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and

 

    no more than 25% of the value of our assets is invested in the securities, other than US Government securities or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in the securities of one or more qualified publicly traded partnerships. We refer to these two requirements as the Diversification Tests.

In such taxable year in which we meet the RIC qualification requirements, we may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income in such taxable year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our shareholders in such taxable year in which we are treated as a RIC in order to satisfy the Annual Distribution Requirement, even though we would not have received any corresponding cash amount.

In the taxable years we met the requirements to be treated as a RIC, we were authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we were not permitted to make distributions to our shareholders while our debt obligations and other senior securities were outstanding unless certain “asset coverage” tests were met. See “Regulation—Senior Securities.” In any tax year that we qualify as a RIC, our ability to dispose of assets to meet the distribution

 

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requirements in such year may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we were to dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement in such tax year, we may have to make such dispositions at times that, from an investment standpoint, are not advantageous.

The remainder of this discussion in this subsection would apply in any taxable year in which we have met the requirements to be treated as a RIC and have satisfied the Annual Distribution Requirement.

GOVERNMENT REGULATION

Regulation by the SEC and under the 1940 Act

We are a closed-end, management investment company that has elected to be treated as a business development company (BDC) under the 1940 Act. We conduct our business through various wholly-owned investment company subsidiaries including Medallion Funding LLC, a closed end investment company, Medallion Capital, Inc., a BDC, and Freshstart Venture Capital Corp., a BDC. Pursuant to various exemptive orders, we operate and are regulated as a single BDC. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters, and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a majority of our outstanding voting securities voting as a class.

We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act of 1933. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any registered investment company, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment company. Certain of these limits are not applicable to our investments in our wholly-owned SBIC subsidiaries. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. None of our policies are fundamental, and each may be changed without stockholder approval.

Qualifying Assets

Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following:

 

  (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is generally defined in the 1940 Act as any issuer which:

 

  (a) is organized under the laws of, and has its principal place of business in, any state in the US;

 

  (b) is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and

 

  (c) satisfies any of the following:

 

    does not have any class of securities listed on a national securities exchange, or has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;

 

    is controlled by a BDC or a group of companies including a BDC, and the BDC in fact exercises a controlling influence on the management or policies of such eligible portfolio company and, as a result of such control, has an affiliated person who is a director of the eligible portfolio company; or

 

    is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million.

 

  (2) Securities of any eligible portfolio company which we control.

 

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  (3) Securities purchased in transactions not involving any public offering from a US issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.

 

  (4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own at least 60% of the outstanding equity of the eligible portfolio company.

 

  (5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.

 

  (6) Cash, cash equivalents, US Government securities or high-quality debt securities maturing in one year or less from the time of investment.

 

  (7) Subject to certain conditions, securities issued by a company that met the definition of eligible portfolio company at the time of our initial investment but subsequently does not meet the definition because the company no longer meets the definition set forth above.

Managerial Assistance to Portfolio Companies

In addition, a BDC must have been organized and have its principal place of business in the US and must be operated for the purpose of making investments in the types of securities described in (1), (2), or (3) above. However, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers, or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company.

Temporary Investments

Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash equivalents, US government securities, or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in US Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the US government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements.

Senior Securities

We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our shareholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary purposes without regard to full asset coverage requirements. In addition to the 1940 Act, we are subject to two exemptive orders which govern how we calculate our senior securities and under which we have agreed that we will meet the applicable asset coverage ratios both individually and on a consolidated basis. For a discussion of the risks associated with leverage, see “Risk Factors—Risks Relating to Our Business and Structure—Regulations governing our operation as a BDC will affect our ability to, and the way in which we raise additional capital.”

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 organization of SBICs as vehicles for providing equity capital, long term financing, and management assistance to small business concerns. Under the regulations promulgated by the SBA a “small business concern” is defined as a business that is independently owned and operated, which does not dominate 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

 

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computed without the benefit of any carryover loss), or (ii) satisfies alternative criteria under the Federal government’s North American 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 loans made (after April 25, 1994) must be made in “smaller businesses” 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 business” for purposes of meeting SBA’s size standard regulations.

Investments by SBICs must be in active, primarily domestic businesses. SBIC regulations preclude investment in the following types of businesses: (1) financial companies whose principal 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 U. S. intending to use the proceeds of the investment outside of the U.S. or companies that are located in the U.S. that have more than 50% of their employees located outside of the U.S.; (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. Nonetheless, the regulations provide an exception to (1) above for an SBIC that provides Venture Capital Financing investments (represented by common or preferred stock, a limited partnership interest or a similar partnership interest) to a Disadvantaged Business that is a relender or reinvestor), so long as, without SBA prior approval, total outstanding financings do not exceed the SBICs regulatory capital at the end of its fiscal year.

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, 2016, the maximum rate of interest permitted on loans originated by Medallion Funding, Medallion Capital, and Freshstart was 19%. As of December 31, 2016, our outstanding medallion loans had a weighted average rate of interest 4.01% and our outstanding commercial loans had a weighted average rate of interest of 13.05%. Current SBA regulations also require that each loan originated by an SBIC has a term between one and 20 years.

In addition, SBICs are subject to periodic examination by the SBA, for which the SBA charges examination fees. SBICs are required to maintain certain minimum levels of capital and 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, to maintain certain minimum levels of capital, to file annual reports containing financial, management and other information and to file notices of certain material changes in their ownership and operations.

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 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) 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 by licensees with outstanding SBA leverage to any single small business concern may not exceed 30% of an SBIC’s regulatory capital, as defined in the SBIA.

SBICs must invest idle funds that are not being used to make loans in 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.

 

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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, regulations adopted by the SBA on October 22, 2002 (pursuant to Public Law 106-554) 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 regulation applicable to it, the SBA has the right to accelerate the maturity of all amounts due under its debentures. Additionally, the SBA can bring suit for the appointment of a receiver for the SBIC and for its liquidation in the event a default on payment of a SBIC’s debentures or for serious regulatory violations.

Regulation of Medallion Bank as an Industrial Bank

In May 2002, we formed Medallion Bank, which received approval from the FDIC for federal deposit insurance in October 2003. Medallion Bank, a Utah-chartered industrial bank, is a depository institution subject to regulatory oversight and examination for safety and soundness by both the FDIC and the Utah Department of Financial Institutions. Numerous other federal and state laws and regulations govern almost all aspects of Medallion Bank’s operations and, to some degree, our operations and those of our non-bank subsidiaries as institution-affiliated parties. Under its banking charter, Medallion Bank is empowered to make consumer and commercial loans, and may accept all FDIC-insured deposits other than demand deposits (checking accounts). Medallion Bank provides stable and low-cost bank deposit funding for our key lending business activities conducted through Medallion Bank.

In addition, the FDIC has regulatory authority to prohibit Medallion Bank from engaging in any unsafe or unsound practice in conducting its business.

Medallion Bank is subject to risk-based and leverage capital standards issued by the federal banking regulators. These standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, to account for off-balance sheet exposure, to minimize disincentives for holding liquid assets, and to achieve greater consistency in evaluating the capital adequacy of major banks throughout the world. Under the risk-based capital standards, assets and 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 and off-balance sheet items.

In July 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency adopted the U.S. Basel III capital rules, which implement many aspects of the Basel Committee on Banking Supervision’s Basel III capital framework and are aimed at increasing both the quantity and quality of regulatory capital. The requirements in the U.S. Basel III capital rules began to phase in on January 1, 2015, for many covered banking organizations, including Medallion Bank. Most requirements in the U.S. Basel III capital rules will be fully phased in by January 1, 2019. Because Medallion Bank was already subject to a capital maintenance agreement with the FDIC that required it to hold capital in excess of the then applicable capital requirements, we do not believe that the U.S. Basel III capital rules will have a material impact on Medallion Bank’s business.

Under the U.S. Basel III capital rules, Medallion Bank is subject to the following minimum capital ratios:

 

    a new Common Equity Tier 1 risk-based capital ratio of 4.5%;

 

    a Tier 1 risk-based capital ratio of 6%;

 

    a Total risk-based capital ratio of 8%; and

 

    a Tier 1 leverage ratio of 4%.

In addition, Medallion Bank is subject to a Common Equity Tier 1 capital conservation buffer on top of the minimum risk-based capital ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase by 0.625% each subsequent January 1 until January 1, 2019. Including the buffer, by January 1, 2019, Medallion Bank will be required to maintain the following minimum capital ratios: a Common Equity Tier 1 risk-based capital ratio of greater than 7.0%, a Tier 1 risk-based capital ratio of greater than 8.5% and a total risk-based capital ratio of greater than 10.5%. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of qualifying minority interests that are in the form of common stock.

The U.S. Basel III capital rules retain or modify certain deductions from and adjustments to regulatory capital and also provide for new ones. In addition, the U.S. Basel III capital rules provide for limited recognition in Common Equity Tier 1 capital, and deduction from Common Equity Tier 1 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).

 

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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 U.S. Basel III capital rules, range from 0% to 1,250%, depending on the nature of the asset. Direct obligations of the U.S. Treasury or obligations unconditionally guaranteed by the U.S. 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. Most first-lien residential mortgage exposures that are prudently underwritten and performing according to their original terms carry a 50% risk weight, with a 100% risk weight for other residential mortgage exposures. In addition, certain off-balance sheet items are assigned credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk weight is applied. For example, the unused portion of unconditionally cancellable commitments is assigned a 0% conversion factor, while self-liquidating, transaction-related contingent items with an original maturity of one year or less and the amount of a commitment with an initial maturity of one year or less that is not unconditionally cancellable by the covered banking organization are converted at 20%. Transaction-related contingencies such as bid bonds and standby letters of credit backing nonfinancial obligations, as well as the amount of a commitment with an original maturity of more than one year that is not unconditionally cancellable, have a 50% conversion factor. General guarantees and standby letters of credit backing financial obligations are given a 100% conversion factor.

In addition, pursuant to provisions of the FDIC Improvement Act of 1991, or FDICIA, and related regulations with respect to prompt corrective action, FDIC-insured institutions such as Medallion Bank may only accept brokered deposits without FDIC permission if they meet specified capital standards, and are subject to restrictions with respect to the interest they may pay on deposits unless they are well capitalized. The U.S. Basel III capital rules revised the capital threshold to be well capitalized. Effective January 1, 2015, in order to qualify as well capitalized, an insured depository institution must maintain a Common Equity Tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 5.0%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level.

Pursuant to a capital maintenance agreement with the FDIC, we and Medallion Bank have agreed that the capital levels of Medallion Bank will at all times meet or exceed the levels required for Medallion Bank to be considered well-capitalized under the FDIC rules and regulations, that Medallion Bank’s Tier 1 capital to total assets leverage ratio will be maintained at not less than 15%, and that Medallion Bank will maintain an adequate allowance for loan and lease losses.

Medallion Bank is also subject to certain federal laws that restrict and control its ability to extend credit and provide or receive services between affiliates. Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder limit the transfer of funds by a depository institution to certain of its affiliates, including us, in the form of loans, extensions of credit, investments, or purchases of assets. Sections 23A and 23B and Regulation W also require generally that the depository institution’s transactions with its affiliates be on terms no less favorable to Medallion Bank than comparable transactions with unrelated third parties.

The USA Patriot Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, or the Patriot Act, was enacted on October 26, 2001, and is intended to detect and prosecute terrorism and international money laundering. The Patriot Act establishes new standards for verifying customer identification incidental to the opening of new accounts. Medallion Bank has undertaken appropriate measures to comply with the Patriot Act and associated regulations. 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 compliance programs required by the Patriot Act are intended to supplement pre-existing compliance requirements that apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control, or OFAC, regulations to which Medallion Bank is also subject. 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. Medallion Bank has in place policies, procedures and internal controls in order to comply with Bank Secrecy Act and OFAC laws and regulations. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

Federal and state banking agencies require Medallion Bank to prepare annual reports on financial condition and to conduct an annual audit of financial affairs in compliance with minimum standards and procedures. Medallion Bank must undergo regular on-site examinations by the appropriate banking agency, which will 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.

 

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Other

Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly, Medallion Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations. 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. 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 Medallion Financial Corp. is not insured or guaranteed by the FDIC, or any other agency, and is subject to loss.

We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC.

We are periodically examined by the SEC for compliance with the 1940 Act. We are examined by the SBA annually for compliance with applicable SBA regulations. We are also periodically examined by the FDIC and the Utah Department of Financial Institutions. Medallion Bank is examined annually by the FDIC and the Utah Department of Financial Institutions.

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our shareholders arising from willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of such person’s office.

We have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws, and intend to review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We have designated a chief compliance officer to be responsible for administering our policies and procedures.

In addition to the regulations detailed above, our operations are subject to supervision and regulation by other federal, state, and local laws and regulations. Additionally, our operations may be subject to various laws and judicial and administrative decisions. This oversight may serve to:

 

    regulate credit granting activities, including establishing licensing requirements, if any, in various jurisdictions;

 

    establish maximum interest rates, finance charges and other charges;

 

    require disclosures to customers;

 

    govern secured transactions;

 

    set collection, foreclosure, repossession and claims handling procedures and other trade practices;

 

    prohibit discrimination in the extension of credit and administration of loans; and

 

    regulate the use and reporting of information related to a borrower’s credit experience and other data collection.

Changes to laws of states in which we do business could affect the operating environment in substantial and unpredictable ways. We cannot accurately predict whether such changes will occur or, if they occur, the ultimate effect they would have upon our financial condition or results of operations.

Compliance with the Sarbanes-Oxley Act of 2002 and NASDAQ Corporate Governance Regulations

The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. The Sarbanes-Oxley Act has required us to review our policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all future regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

 

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In addition, NASDAQ has adopted corporate governance listing standards. We believe we are in compliance with such corporate governance listing standards. We will continue to monitor our compliance with all future listing standards and will take actions necessary to ensure that we are in compliance therewith.

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 amendment to those reports filed with or furnished to the SEC available to investors 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 For Investors section of our website, the address of which is http://www.medallion.com/investors.html. Our Code of Ethical Conduct and Insider Trading Policy can be located in the Corporate Governance section of our website at http://www.medallion.com/investors_corporate_governance.html. These documents, as well as our SEC filings are available in print to any stockholder who requests a copy from our Secretary.

 

ITEM 1A. RISK FACTORS

Risks Relating to Our Business and Structure

Changes in the taxicab and for-hire vehicle industries have resulted in increased competition and have had a material adverse effect on our business, financial condition, and operations.

There have been recent changes in the taxicab and for-hire vehicle industries that have resulted in increased competition in all of our taxi medallion markets. Ridesharing applications, or ridesharing apps, utilized by for-hire vehicles were introduced in New York City in 2011 and 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 TLC, between January 2016 and January 2017 approximately 17,100 new for-hire vehicle licenses were issued, increasing the total number of for-hire vehicles to approximately 89,100 as of January 31, 2017, a 24% increase from January 2016.

In addition, the New York State legislature enacted a law on December 21, 2011, which was amended on February 17, 2012, to permit cars for-hire to pickup street hails in boroughs outside of Manhattan. Pursuant to this law the TLC has issued approximately 8,300 Street Hail Livery licenses since June 2013, of which approximately 5,000 are active.

TLC annualized data through December 2016 has shown a 9.3% reduction in total New York City taxicab fares, compared to the same period in 2015, and a 10.7% reduction in the total number of New York City taxicab trips. Such reductions in fare totals and taxicab trips are likely the result of a combination of ridesharing apps, Street Hail Livery licenses, and other forms of public transportation.

As of December 31, 2016, 18.8% of our managed medallion loan portfolio and 24.4% of our on-balance sheet loan portfolios were 90 days or more past due, compared to 4.1% and 3% at December 31, 2015. As discussed in further detail below, there have also been recent decreases in the values of our medallion loan collateral and our Chicago medallions purchased out of foreclosure. Increased competition from ridesharing apps and Street Hail Livery licenses has reduced our market share, the overall market for taxicab services, the supply of taxicab drivers, income from operating medallions, and the value of taxicab medallions. If these trends continue and intensify, there would be a further material increase to our loan to value ratios, loan delinquencies, and loan defaults resulting in a material adverse effect on our business, financial condition, and results of operations.

Decreases in the value of our medallion loan collateral and our Chicago medallions purchased out of foreclosure have had a material adverse effect on our business.

A significant portion of our loan revenue is derived from loans collateralized by New York City taxicab medallions. According to TLC data, over the past 20 years New York City taxicab medallions had appreciated in value from under $200,000 to $1,320,000 for corporate medallions and $1,050,000 for individual medallions in 2014. Over approximately the last two years, however, taxicab medallions have declined in value. Since the September 30, 2014 peak valuation, the value of New York City taxicab medallions decreased by approximately 52% for individual medallions and 58% for corporate medallions. As reported by the TLC, individual (owner-driver) medallions sold for approximately $500,000 and corporate medallions sold for approximately $550,000 as of December 31, 2016.

 

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We own 159 Chicago taxicab medallions that were purchased out of foreclosure in 2003. Additionally, a portion of our loan revenue is derived from loans collateralized by Chicago taxicab medallions. The Chicago medallions had appreciated in value from $50,000 in 2003 to approximately $370,000 in 2013. Since that time, however, there has been a decline in the value of Chicago taxicab medallions to approximately $60,000 at the end of 2016.

Decreases in the value of our medallion loan collateral has 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 managed medallion loans was approximately 129% as of December 31, 2016 and 76% as of December 31, 2015. If taxicab medallion values continue to decline, there would be an increase in medallion loan delinquencies, foreclosures and borrower bankruptcies. Our ability to recover on defaulted medallion loans by foreclosing on and selling the medallion collateral would be diminished, which would result in material losses on defaulted medallion loans which would have a material adverse effect on our business. A substantial decrease in the value of our Chicago medallions purchased out of foreclosure would adversely affect our ability to dispose of such medallions at times when it may be advantageous for us to do so. If we are required to liquidate all or a portion of our medallions quickly, we would realize less than the value at which we had previously recorded such medallions.

We borrow money, which magnifies the potential for gain or loss on amounts invested, and may increase the risk of investing in us.

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested, and therefore increase the risk associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders, and through long-term subordinated SBA debentures. These creditors have fixed dollar claims on our assets that are superior to the claims of our shareholders. If the value of our assets increases, then leveraging would cause the net asset value to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could reduce the amount available for distribution payments.

As of December 31, 2016, we had $349,073,000 of outstanding indebtedness, which had a weighted average borrowing cost of 3.60% at December 31, 2016, and our wholly-owned unconsolidated portfolio companies, primarily Medallion Bank, had $908,442,000 of outstanding indebtedness at a weighted average borrowing cost of 1.22%.

Most of our borrowing relationships have maturity dates during 2017. We have been in active and ongoing discussions with each of these lenders and have extended each of the facilities as they matured except as set forth in the following risk factor. Certain lenders have worked with us to extend and change the terms of the borrowing agreements. See note 4 for a discussion of the current and new lending arrangements to date.

Failure to obtain an extension of our existing credit facilities or failure to obtain additional revolving credit facilities could have a material adverse effect on our results of operations and financial position.

We utilize secured revolving credit facilities and other facilities to fund our investments. We cannot guarantee that our credit facilities will continue to be available beyond their current maturity dates on reasonable terms or at all or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. Our revolving credit facilities have converted to term loans. Obtaining additional revolving credit facilities or other alternative sources of financing may be difficult and we cannot guarantee that we will be able to do so on terms favorable to us or at all. The availability of revolving credit facilities depends, in part, on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit, the financial strength and strategic objectives of the banks that participate in our credit facilities and the availability of bank liquidity in general. If the credit facilities are not renewed or extended by our lenders by their maturity dates, we will not be able to make further borrowings under the facilities after they mature and the outstanding principal balances under such facilities will be due and payable at maturity. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, our financial condition would be adversely affected and our lenders may foreclose on the property securing such indebtedness. If we are unable to extend or replace these facilities or arrange new credit facilities or other types of interim financing, we may need to curtail or suspend loan origination and funding activities which could have a material adverse effect on our results of operations and financial position.

We and our subsidiaries obtain financing under lending facilities extended by various banks and other financial institutions, some of which are secured by loans, taxi medallions and other assets. Where these facilities are extended to our subsidiaries, we and others of our subsidiaries may guarantee the obligations of the relevant borrower. Five of our smallest subsidiaries are borrowers under promissory notes extended to them by a bank that total $8.8 million that came due on October 17, 2016. These loans are secured by Chicago taxi medallions owned by our subsidiaries. These notes are guaranteed by Medallion Funding, not by Medallion Financial

 

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Corp. These subsidiaries have not repaid the amounts due under the notes and the bank has filed a suit seeking payment of these amounts. This failure to pay would constitute an event of default under certain loan agreements which we or our subsidiaries are borrowers, but the lenders under those agreements have waived the default. If judgment is entered against us in the suit brought by the bank or entered and not satisfied within specified periods of time, these outcomes may constitute an additional event of default under these other agreements. If waivers are required and not granted for this additional event of default, it would lead to events of default under other of our financing arrangements.

We are subject to certain financial covenants and other restrictions under our loan and credit arrangements, which could affect our ability to finance future operations or capital needs or to engage in other business activities.

Our loan and credit agreements contain financial covenants and other restrictions relating to borrowing base eligibility, tangible net worth, net income, leverage ratios, shareholders’ equity, and collateral values. Our ability to meet these financial covenants and restrictions could be affected by events beyond our control, such as a substantial decline in collateral values or a rise in borrower delinquencies. A breach of these covenants could result in an event of default under the applicable debt instrument. Such a default, if not cured or waived, may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default provision. Certain other events can constitute an event of default. Furthermore, if we were unable to repay the amounts due and payable under our credit facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or holders of the related notes accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Based on the foregoing factors, the operating and financial restrictions and covenants in our current credit agreements and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage in other business activities.

Consumer lending by Medallion Bank carries a higher risk of loss and could be adversely affected by an economic downturn.

By its nature, lending to consumers carries with it a higher risk of loss than commercial lending. Although the net interest margins should be higher to compensate Medallion Bank for this increased risk, an economic downturn could result in higher loss rates and lower returns than expected, and could affect the profitability of Medallion Bank’s consumer loan portfolio.

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, and Larry D. Hall, our Chief Financial Officer. The departure of Messrs. Murstein or Hall, or any member of our senior management team, could have a material adverse effect on our ability to achieve our investment objective.

Changes in taxicab industry regulations that result in the issuance of additional medallions or increases in the expenses involved in operating a medallion would lead to a decrease in the value of our medallion loan collateral and our Chicago medallions purchased out of foreclosure.

Every city in which we originate medallion loans, and most other major cities in the United States, limits the supply of taxicab medallions. This regulation results in supply restrictions that support the value of medallions. Actions that loosen these restrictions and result in the issuance of additional medallions into a market could decrease the value of medallions in that market. If this were to occur, the value of the collateral securing our then outstanding medallion loans in that market would be adversely affected. We are unable to forecast with any degree of certainty whether any other potential increases in the supply of medallions will occur.

In New York City, Chicago, Boston, and other markets where we originate medallion loans, taxicab fares are generally set by government agencies. Expenses associated with operating taxicabs are largely unregulated. As a result, the ability of taxicab operators to recoup increases in expenses is limited in the short term. Escalating expenses, such as rising gas prices and an increase in interest rates, can render taxicab operations less profitable, could cause borrowers to default on loans from us and would adversely affect the value of our collateral.

We operate in a highly regulated environment, and if we are found to be in violation of any of the federal, state, or local laws or regulations applicable to us, our business could suffer.

The 1940 Act imposes numerous constraints on the operations of BDC’s. For example, BDC’s are required to invest at least 70% of their total assets in qualifying assets, primarily securities of “eligible portfolio companies” (as defined under the 1940 Act),

 

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cash, cash equivalents, US government securities, and other high quality debt investments that mature in one year or less. Our regulatory requirements may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective. In addition, we rely upon several exemptive orders from the SEC permitting us to consolidate our financial reporting and operate our business as presently conducted. Our failure to satisfy the conditions set forth in those exemptive orders could result in our inability to rely upon such orders or to cause the SEC to revoke the orders which could result in material changes in our financial reporting or the way in which we conduct our business. Furthermore, any failure to comply with the requirements imposed on BDC’s by the 1940 Act could have material adverse consequences to us or our investors, including possible enforcement action by the SEC. If we do not remain a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would further significantly decrease our operating flexibility.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted in 2010. The Dodd-Frank Act significantly changed federal financial services regulation and affects, among other things, the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. In addition to the statutory requirements under the Dodd-Frank Act, the legislation also delegated authority to US banking, securities and derivatives regulators to impose additional restrictions through required rulemaking. The Dodd-Frank Act requires a company that owns an industrial bank to serve as a “source of strength” to the institution. We believe that we have historically served, and will serve in the future, as a source of strength to our industrial bank subsidiary, Medallion Bank. We do not believe that the codification of this requirement under the Dodd-Frank Act materially impacts our obligations. A company that owns an industrial bank is also subject to the Dodd-Frank Act “Volcker Rule.” We do not believe that the “Volcker Rule” materially impacts our operations as presently conducted.

Other changes in the laws or regulations applicable to us more generally, may negatively impact the profitability of our business activities, require us to change certain of our business practices, materially affect our business model, limit the activities in which we may engage, affect retention of key personnel, require us to raise additional regulatory capital, increase the amount of liquid assets that we hold, 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.

Changes in laws, regulations, or policies may adversely affect our business.

The post-financial crisis era has been marked by an increase in regulation, regulatory intensity, and enforcement. We are unable to predict all of the ways in which this change in the regulatory environment could impact our business models or objectives. The laws and regulations governing our lending, servicing, and debt collection activities or the regulatory or enforcement environment at the federal level or in any of the states in which we operate may change at any time which may have an adverse effect on our business.

We expect, however, to see an increase over time in regulatory scrutiny and enforcement in the area of consumer financial products regulation, as a result of the establishment of the Consumer Financial Protection Bureau, or the CFPB, by the Dodd-Frank Act. The CFPB is responsible for interpreting and enforcing a broad range of consumer protection laws that govern the provision of deposit accounts and the making of loans, including the regulation of mortgage lending and servicing and automobile finance. While Medallion Bank’s size currently falls below the threshold that would give the CFPB direct authority over it, Medallion Bank’s existing bank supervisors may pursue similar policies and make similar information requests to those of the CFPB with respect to consumer financial products and other matters within the scope of the CFPB’s authority. We believe that the CFPB’s regulatory reforms, together with other provisions of the Dodd-Frank Act, and increased regulatory supervision, may increase our cost of doing business, impose new restrictions on the way in which we conduct our business, or add significant operational constraints that might impair our profitability.

We are unable to predict how these or any other future legislative proposals or programs will be administered or implemented or in what form, or whether any additional or similar changes to statutes or regulations, including the interpretation or implementation thereof, will occur in the future. Any such action could affect us in substantial and unpredictable ways and could have an adverse effect on our results of operations and financial condition.

 

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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.

Federal and state law may discourage certain acquisitions of our common stock which could have a material adverse effect on our shareholders.

Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly Medallion Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of the Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations. Under the Utah Financial Institutions Act, control is defined as the power to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an individual. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval. These provisions could delay or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the market price of our common stock. 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 Medallion Financial Corp. is not insured or guaranteed by the FDIC, or any other agency, and is subject to loss.

Regulations governing our operation as a BDC may affect our ability to, and the way in which, we raise additional capital.

Our business may periodically require capital. We may acquire additional capital from the following sources:

Senior Securities and Other Indebtedness. 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, up to the maximum amount permitted by the 1940 Act. If we issue senior securities, including debt or preferred stock, we will be exposed to additional risks, including the following:

 

    Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be restricted from issuing additional debt, may be limited in making distributions on our stock, and may be required to sell a portion of our investments and, depending on the nature of our leverage, to repay a portion of our debt at a time when such sales and/or repayments may be disadvantageous. In addition to the 1940 Act, we are subject to two exemptive orders which govern how we calculate our senior securities and under which we have agreed that we will meet the applicable asset coverage ratios both individually and on a consolidated basis. As of December 31, 2016, our asset coverage was approximately 276%, calculated on a consolidated basis, and 261% calculated on an unconsolidated basis.

 

    Any amounts that we use to service our debt or make payments on preferred stock will not be available for distributions to our common shareholders.

 

    It is likely that any senior securities or other indebtedness we issue will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, some of these securities or other indebtedness may be rated by rating agencies, and in obtaining a rating for such securities and other indebtedness, we may be required to abide by operating and investment guidelines that further restrict operating and financial flexibility.

 

    We and, indirectly, our shareholders will bear the cost of issuing and servicing such securities and other indebtedness.

 

    Preferred stock or any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges more favorable than those of our common stock, including separate voting rights, and could delay or prevent a transaction or a change in control to the detriment of the holders of our common stock.

Additional Common Stock. We are not generally able to issue and sell our common stock at a price below net asset value (less any distributing commission or discount) per share. We may, however, sell our common stock, warrants, options, or rights to acquire our common stock, at a price below the current net asset value of the common stock if our Board of Directors determines that such sale is in our best interests and that of our shareholders, and our shareholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our Board of Directors, closely

 

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approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our shareholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our shareholders at that time would decrease and they may experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all.

Since our investments in assets that are not “qualifying assets” exceeded 30% of our total assets as of December 31, 2016, we are precluded from making any follow-on investments in Medallion Bank and our City of Chicago taxicab medallions purchased out of foreclosure, and could be precluded from investing in what we believe are attractive investments, which could have a material adverse effect on our business.

As a business development company, we are not permitted to acquire any assets other than “qualifying assets” unless, at the time of such acquisition, at least 70% of our total assets are qualifying assets. Our investment in Medallion Bank and City of Chicago taxicab medallions purchased out of foreclosure, which are carried in investments other than securities on the consolidated balance sheet, are non-qualifying assets. As of December 31, 2016, the percentage of our total assets that were invested in non-qualifying assets were up to 52.1% on an unconsolidated basis and up to 43.0% on a consolidated basis. We did not satisfy the requirement that no more than 30% of our total assets be comprised of non-qualifying assets, and are currently not permitted to acquire any non-qualifying assets. We are therefore unable to make any investments in non-qualifying assets, including follow-on investments in Medallion Bank and our City of Chicago taxicab medallions purchased out of foreclosure. As a result of such failure, we could also be precluded from investing in what we believe are attractive investments or could be required to dispose of non-qualifying assets at times or on terms that may be disadvantageous to us. We would also not be able to support Medallion Bank’s capital requirements, if any, and Medallion Bank may also not be able to grow as quickly because we are precluded from providing additional funding to Medallion Bank. Any of the foregoing consequences could have a material adverse effect on us. If we purchase a non-qualifying asset after failing to satisfy the requirement that no more than 30% of our total assets be comprised of non-qualifying assets, then we would be deemed to be in violation of the 1940 Act and the violation could also result in an event of default on our debt obligations.

We are exploring measures to return the amount of qualifying assets to at least 70% of our total assets. However, we cannot guarantee that we will be able to do so. At the end of each fiscal quarter, we may take proactive steps to prospectively preserve investment flexibility in the next quarter which is assessed against our total assets at our most recent quarter end. We can accomplish this in many ways including purchasing US Treasury bills or other investment-grade debt securities, and closing out our position on a net cash basis subsequent to quarter end. However, if such proactive measures are ineffective or our primary investments are deemed not to be qualifying assets, or if the fair value of our non-qualifying assets increases or is determined to be higher than previously determined, or if the fair value of our qualifying assets decreases or is determined to be lower than previously determined, we could continue to fail to satisfy the requirement that no more than 30% of our total assets be comprised of non-qualifying assets.

Change in the Company’s Tax Classification.

RIC qualification rules require that at the end of each quarter of our taxable year, (i) at least 50% of the market value of our assets must be represented by cash, securities of other RICs, US government securities, and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of our assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of our assets may be invested in the securities (other than US government securities or securities of other RICs) of any one issuer, any two or more issuers of which 20% or more of the voting stock is held by us and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships. We monitor our compliance with these asset tests and any other investment concentrations in conjunction with the diversification tests. As of December 31, 2016, our largest investment subject to this test was our investment in Medallion Bank, representing 51.1% of our RIC assets, and no other investments were more than 5% of our RIC assets. As a result of our failure of the 25% asset diversification test, we are not eligible to file our tax returns as a RIC for 2016.

Because we do not meet the qualifications for RIC tax treatment for the tax year ended December 31, 2016, and now we are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Qualification as a RIC is made on an annual basis and, although we and some of our subsidiaries have qualified in the past, we cannot assure you that we will qualify for such treatment in the future.

If we do not qualify as a RIC for more than two consecutive years, and then seek to requalify and elect RIC status, we would be required to recognize gain to the extent of any unrealized appreciation on our assets unless we make a special election to pay corporate-level tax on any such unrealized appreciation recognized during the succeeding 10-year period.

 

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To obtain and maintain RIC tax treatment under the Code in any future taxable year, we must meet the following annual distribution, income source, and asset diversification requirements.

 

    The annual distribution requirement for a RIC will be satisfied if we distribute to our shareholders on an annual basis at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, and at least 90% of our net tax-exempt income. Because we use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

 

    The income source requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities, or similar sources.

 

    The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. Failure to meet those requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

If we meet the requirements to be treated as a RIC in a future tax year, for US federal income tax purposes, we would have to include in taxable income certain amounts that we would not have yet received in cash, such as original issue discount, which may arise if we received warrants in connection with the origination of a loan or possibly in other circumstances, or contractual payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount or increases in loan balances as a result of payment-in-kind interest will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.

Since, in certain cases, we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the annual distribution requirement necessary to achieve and maintain RIC tax treatment under the Code. Accordingly, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital, or reduce new investment originations for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

As Medallion Bank grows, a greater portion of our business will be subject to corporate-level tax.

Medallion Bank must pay corporate-level US federal and state income taxes. As Medallion Bank grows its business, more of its income will be taxed, which will reduce the amount of cash available for distribution to us and, in turn, to our shareholders.

Our SBIC subsidiaries may be unable to meet the investment company requirements, which could result in the imposition of an entity-level tax.

Some of our subsidiaries are subject to the SBIA. Our SBIC subsidiaries that are RICs may be prohibited by the SBIA from making the distributions necessary to qualify as a RIC. The SBA has agreed that our SBIC subsidiaries can make these distributions provided we reinvest the distributions in our SBIC subsidiaries as undistributed net realized earnings. We cannot assure you that this will continue to be the SBA’s policy or that our subsidiaries will have adequate capital to make the required adjustments. If our subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC status and a consequent imposition of an entity-level tax at the subsidiary level. In the event we are granted a waiver, we will be required to reinvest the distribution into the SBIC as capital. This may result in us recognizing taxable income without receiving a corresponding amount of cash to pay the distribution. Any failure to pay the distribution could cause a loss of RIC status and the imposition of entity level tax.

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

 

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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 bring a suit for the appointment of a receiver for the SBIC and for its liquidation for willful or repeated violation of, or willful or repeated failure to observe, any provision of the SBIA or any rule or regulation promulgated thereunder. Such actions by the SBA would, in turn, negatively affect us.

We may materially change our corporate structure and the nature of our business.

We are very much affected by the legal, regulatory, tax and accounting regimes under which we operate. We periodically evaluate whether those regimes and our existing corporate structure are the optimum means for the operation and capitalization of our business. As a result of these evaluations, we may decide to proceed with structural and organizational changes (certain of which may require the approval of our shareholders), which could result in material dispositions of various assets, changes in our corporate form, withdrawal of our election to be regulated as a BDC, our conversion from an investment company to an operating company or other fundamental changes. If we were no longer an investment company, our accounting practices, among others would change and lead to the consolidation of certain majority owned companies for financial reporting purposes that we do not currently consolidate as an investment company. Additionally, if we were no longer an investment company, our shareholders would not benefit from the investor protections provided by the 1940 Act. We may incur certain costs in completing these evaluations and may receive no benefit from these expenditures, particularly if we do not proceed with any changes. No decisions have been made with respect to any such changes and there is no timetable for making any decisions, including any decision not to proceed with any such changes.

We operate in a highly competitive market for investment opportunities.

We compete for investments with other business development companies and other investment funds as well as traditional financial services companies such as commercial banks and credit unions. Many of our competitors are substantially larger and have considerably greater financial, technical, and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships, and offer better pricing and more flexible structuring than us. We may be unwilling to match our competitors’ pricing, terms, and structure of certain loans and investments opportunities due to potential risks, which may result in us earning less income than our competitors. If we are forced to match our competitors’ pricing, terms, and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC.

We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time.

Changes in interest rates may affect our cost of capital and net investment income.

Because we borrow to fund our investments, a portion of our income is dependent upon the difference between the interest rate at which we borrow funds and the interest rate at which we invest these funds. A portion of our investments, such as taxi medallion loans, will have fixed interest rates, while a portion of our borrowings will likely have floating interest rates. As a result, a significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income. We may hedge against interest rate fluctuations by using standard hedging instruments, subject to applicable legal requirements. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition, and results of operations. Also, we will have to rely on our counterparties to perform their obligations under such hedges.

A decrease in prevailing interest rates may lead to more loan prepayments, which could adversely affect our business.

Our borrowers generally have the right to prepay their loans upon payment of a fee ranging from 1% to 2% for standard commodity 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.

An increase in prevailing interest rates could adversely affect our business.

The majority of our loan portfolio is comprised of fixed-rate loans. An abrupt increase in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at higher prevailing interest rates.

We depend on cash flow from our subsidiaries to make distribution payments to our shareholders.

We are primarily a holding company, and we derive most of our operating income and cash flow from our subsidiaries. As a result, we rely heavily upon distributions from our subsidiaries to generate the funds necessary to make distribution payments to our shareholders. Funds are provided to us by our subsidiaries through dividends and payments on intercompany indebtedness, but we cannot assure you that our subsidiaries will be in a position to continue to make these dividend or debt payments. The Utah Department of Financial Institutions and FDIC have the authority to prohibit or to limit the payment of dividends by Medallion Bank. In addition, as a condition to receipt of FDIC insurance, Medallion Bank entered into a capital maintenance agreement with the FDIC requiring it to maintain a 15% leverage ratio (Tier 1 capital to average assets). As of December 31, 2016 Medallion Bank’s leverage ratio was 14.5% and Medallion Bank may be restricted from declaring and paying dividends as a result of the leverage ratio being below 15%.

Medallion Bank’s use of brokered deposit sources for its deposit-gathering activities may not be available when needed.

Medallion Bank relies on the established brokered deposit market to originate deposits to fund its operations. Medallion Bank’s brokered deposits consist of deposits raised through the brokered deposit market rather than through retail branches. While Medallion Bank has developed contractual relationships with a diversified group of investment brokers, and the brokered deposit market is well developed and utilized by many banking institutions, conditions could change that might affect the availability of deposits. If the capital levels at Medallion Bank fall below the “well-capitalized” level as defined by the FDIC or the capital level currently required by the FDIC pursuant to its capital maintenance agreement, or if Medallion Bank experiences a period of sustained operating losses, the cost of attracting deposits from the brokered deposit market could increase significantly, and the ability of Medallion Bank to raise deposits from this source could be impaired. Brokered deposits may also not be as stable as other types of deposits. Medallion Bank’s ability to manage its growth to stay within the “well-capitalized” level, and the capital level currently required by the FDIC pursuant to its capital maintenance agreement, which is also considerably higher than the level required to be classified as “well-capitalized”, is critical to Medallion Bank’s retaining open access to this funding source.

Our investment portfolio is, and will continue to be, recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is, and will continue to be, uncertainty as to the value of our portfolio investments which could adversely affect our net asset value.

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by our Board of Directors. Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, we are required by the 1940 Act to specifically value each individual investment and record an unrealized gain or loss for any asset we believe has increased or decreased in value. Typically, there is not a public market for most of the investments in which we have invested and will generally continue to invest. As a result, our Board of Directors values our investments on a quarterly basis based on a determination of their fair value made in good faith and in accordance with the written guidelines approved by our Board of Directors. Our Board of Directors regularly review the appropriateness and accuracy of the method used in valuing our investments, and makes any necessary adjustments. The types of factors that may be considered in determining the fair value pricing of our investments include the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, market conditions for loans (e.g., values used by other lenders and any active bid/ask market), comparison to publicly traded companies, discounted cash flow, comparable sales and valuations of companies similar to the portfolio company, regulatory factors that may limit the value of the portfolio company, and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, the valuations may fluctuate over short periods of time and may be based on estimates. As a result, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed, and may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize upon the sale or disposition of one or more of our investments. Investors purchasing our securities in connection with an offering based on an overstated net asset value would pay a higher price than the value of our investments might warrant, and investors purchasing our securities in connection with an offering based on an understated net asset value would pay a lower price than the value of our investments might warrant. Our net asset value could be adversely affected if our determinations

 

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regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities. Considering these factors, we have determined that the fair value of our portfolio is above its cost basis. As of December 31, 2016, our net unrealized appreciation on investments was $126,783,000 or 24% of our investment portfolio, and the appreciation on our investments other than securities and other assets was $584,000 or 6% of our investments other than securities and other assets.

Uncertainty relating to the reporting of collateral values for our loans may adversely affect the value of our portfolio.

Medallion loans are primarily collateral-based lending, whereby the collateral value exceeds the amount of the loan, providing sufficient excess collateral to protect us against losses. 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. If these benchmarks are artificially influenced by market participants we could suffer losses. We have experienced a significant downward movement in medallion collateral values which may continue, and has caused a negative impact on our valuation analysis and could result in a significantly lower fair market value measurement of our portfolio.

We require an objective benchmark in determining the fair value of our portfolio. If the benchmarks that we currently use are deemed to be unreliable, we will need to use other intrinsic factors in determining the collateral values for our loans.

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 sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. 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, and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item “net increase in net assets resulting from operations” as of December 31, 2016 by approximately $1,100,000 on an annualized basis, compared to a positive impact of $692,000 at December 31, 2015, and the impact of such an immediate increase of 1% over a one year period would have been approximately ($792,000) at December 31, 2016, compared to ($1,855,000) at December 31, 2015. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net increase in net assets resulting from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets, and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

 

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Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers and personally identifiable information of our customers and employees, in our data centers, and on our networks. The secure processing, maintenance, and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information and regulatory penalties, disrupt our operations and damage our reputation, which could adversely affect our business.

We experienced a period of capital markets disruption and severe recession beginning in 2008, and the impact of resulting changes on the financial markets may not be fully known for some time.

In response to the 2008 global financial crisis, the US, the Federal Reserve, other governments, and certain foreign central banks took steps to support financial markets, including by keeping interest rates at historically low levels. More recently, the Federal Reserve has reduced its market support activities. Further reduction or withdrawal of this support, failure of efforts in response to the crisis, or investor perception that such efforts are not succeeding could negatively affect financial markets generally as well as the value and liquidity of certain securities. There have been continuing periods of volatility and there can be no assurance that adverse market conditions will not repeat themselves or worsen in the future. A prolonged period of market volatility or illiquidity could have an adverse effect on our business, financial condition, and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Equity capital may be difficult to raise because, subject to some limited exceptions, we generally are not able to issue and sell our common stock at a price below net asset value per share. In addition, the debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and conditions.

Terrorist attacks, other acts of violence or war, and natural disasters may affect any market for our securities, impact the businesses in which we invest, and harm our operations and profitability.

Terrorist attacks and natural disasters may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the US or US businesses or major natural disasters hitting the United States. Such attacks or natural disasters in the US or elsewhere may impact the businesses in which we directly or indirectly invest by undermining economic conditions in the United States. In addition, a substantial portion of our business is focused in the New York City metropolitan area, which suffered a terrorist attack in 2001. Another terrorist attack in New York City or elsewhere could severely impact our results of operations. Losses resulting from terrorist attacks are generally uninsurable.

Our financial condition and results of operations will depend on our ability to manage growth effectively.

Our ability to achieve our investment objective will depend on our ability to grow, which will depend, in turn, on our management team’s ability to identify, evaluate, and monitor, and our ability to finance and invest in, companies that meet our investment criteria.

Accomplishing this result on a cost-effective basis will be largely a function of our management team’s handling of the investment process, its ability to provide competent, attentive, and efficient services, and our access to financing on acceptable terms. In addition to monitoring the performance of our existing investments, members of our management team and our investment professionals may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time may distract them or slow the rate of investment. In order to grow, we will need to hire, train, supervise, and manage new employees. However, we cannot assure you that any such employees will contribute to the success of our business. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition, and results of operations.

Our ability to enter into transactions with our affiliates is restricted.

The 1940 Act restricts our ability to knowingly participate in certain transactions with our affiliates. These restrictions limit our ability to buy or sell any security from or to our affiliates, or engage in “joint” transactions with our affiliates, which could include investments in the same portfolio company (whether at the same or different times). With respect to controlling or certain closely affiliated persons, we will generally be prohibited from engaging in such transactions absent the prior approval of the SEC. With respect to other affiliated persons, we may engage in such transactions only with the prior approval of our independent directors.

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.

Our Board of Directors may change our operating policies and strategies without prior notice or shareholder approval, the effects of which may be adverse.

Our Board of Directors has the authority to modify or waive our current operating policies and strategies without prior notice and without shareholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results, and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you distributions and cause you to lose all or part of your investment.

Risks Relating to Our Investments

Lending to small businesses involves a high degree of risk and is highly speculative.

Lending to small businesses involves a high degree of business and financial risk, which can result in substantial losses and should be considered speculative. Our borrower base consists primarily of small business owners that may have limited resources and that are generally unable to obtain financing from traditional sources. There is generally no publicly available information about these small business owners, and we must rely on the diligence of our employees and agents to obtain information in connection with our credit decisions. In addition, these small businesses often do not have audited financial statements. Some smaller businesses have narrower product lines and market shares than their competition. Therefore, they may be more vulnerable to customer preferences, market conditions, or economic downturns, which may adversely affect the return on, or the recovery of, our investment in these businesses.

Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, and industries and sectors, which will subject us to a risk of significant loss if any of these companies defaults on its obligations to us or by a downturn in the particular industry or sector.

Our portfolio is and may continue to be concentrated in a limited number of portfolio companies, and industries and sectors. In addition, taxicab companies that constitute separate issuers may have related management or guarantors and constitute larger business relationships to us. As of December 31, 2016, investments in New York City taxi medallion loans represented approximately 76% of our managed taxi medallion loans, which in turn represented 35% of our managed net investment portfolio. We do not have fixed guidelines for diversification, and while we are not targeting any specific industries, our investments are, and could continue to be, concentrated in relatively few industries. As a result, the aggregate returns we realize may be adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. If our larger borrowers were to significantly reduce their relationships with us and seek financing elsewhere, the size of our loan portfolio and operating results could decrease. In addition, larger business relationships may also impede our ability to immediately foreclose on a particular defaulted portfolio company as we may not want to impair an overall business relationship with either the portfolio company management or any related funding source. Additionally, a downturn in any particular industry or sector in which we are invested could also negatively impact the aggregate returns we realize.

If we are unable to continue to diversify geographically, our business may be adversely affected if the New York City taxicab industry experiences a sustained economic downturn.

A significant portion of our loan revenue is derived from medallion loans collateralized by New York City taxicab medallions. An economic downturn in the New York City taxicab industry could lead to an increase in defaults on our medallion loans. We cannot assure you that we will be able to sufficiently diversify our operations geographically.

An economic downturn could result in certain of our 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.

 

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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.

A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount was divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company’s liquidation. In May 2013, the bankruptcy court presiding over the third party finance company’s case entered an order converting the involuntary Chapter 7 case to a Chapter 11 case. On May 31, 2013, we commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the third party finance company’s assets. The third party finance company and bank lenders are contesting our position. In April 2014, we received a decision from the court granting summary judgment in our favor with respect to the issue of whether our loan participations are true participations. In March 2015, we and Medallion Bank received a decision from the court finding that the bank lenders generally held a first lien on our and Medallion Bank’s loan participations subject to, among other things, defenses still pending prosecution by the parties and adjudication by the court. We and Medallion Bank are appealing the decision. The remaining issues are still being litigated. Although we believe the claims raised by the third party finance company and the senior lenders are without merit and will vigorously defend against them, we cannot at this time predict the outcome of this litigation or determine our potential exposure. If we are incorrect in our assessments our results of operations could be materially adversely affected. At December 31, 2016, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. In September 2015, one loan was sold at a discount to a third party, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. One loan was charged off in September 2014. See page 42 for additional information regarding this matter.

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.

 

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We may not control many of our portfolio companies.

We may not control many of our portfolio companies, even though we may have board representation or board observation rights, and our debt agreements may contain certain restrictive covenants. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree, and the management of such company may take risks or otherwise act in ways that do not serve our interests as debt investors.

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.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

We lease approximately 19,000 square feet of office space in New York City for our corporate headquarters under a lease expiring in April 2027, and lease a facility in Long Island City, New York, of approximately 6,000 square feet for certain corporate back-office operations. We also lease office space for loan origination offices and subsidiary operations in Boston, MA, Chicago, IL, and Minneapolis, MN. Medallion Bank leases space in Salt Lake City, UT, and Seattle, WA. 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 and our subsidiaries are currently involved in various legal proceedings incident to the ordinary course of our business, including collection matters with respect to certain loans. We intend to vigorously defend any outstanding claims and pursue our legal rights. In the opinion of our management and based upon the advice of legal counsel, other than as set forth in the following paragraph there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse effect on our results of operations or financial condition.

We and our subsidiaries obtain financing under lending facilities extended by various banks and other financial institutions, some of which are secured by loans, taxi medallions and other assets. Where these facilities are extended to our subsidiaries, we and others of our subsidiaries may guarantee the obligations of the relevant borrower. Five of our smallest subsidiaries are borrowers under promissory notes extended to them by a bank that total $8.8 million that came due on October 17, 2016. These loans are secured by Chicago taxi medallions owned by our subsidiaries. These notes are guaranteed by Medallion Funding, not by Medallion Financial Corp. These subsidiaries have not repaid the amounts due under the notes and the bank has filed a suit seeking payment of these amounts. This failure to pay would constitute an event of default under certain loan agreements which we or our subsidiaries are borrowers, but the lenders under those agreements have waived the default. If judgment is entered against us in the suit brought by the bank or entered and not satisfied within specified periods of time, these outcomes may constitute an additional event of default under these other agreements. If waivers are required and not granted for this additional event of default, it would lead to events of default under other of our financing arrangements.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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, 2011 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, 2011 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.

 

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Cumulative Total Return

Based on Initial Investment of $100 on December 31, 2011

with dividends reinvested

 

LOGO

Our common stock is quoted on NASDAQ under the symbol “MFIN.” Our common stock commenced trading on May 23, 1996. As of March 10, 2017, there were approximately 334 holders of record of our common stock.

On March 10, 2017, the last reported sale price of our common stock was $2.03 per share. Since our initial public offering, our common stock has traded at a premium to net asset value per share more frequently than at a discount to net asset value per share, but there can be no assurance that our stock will trade at a premium in the future.

The following table sets forth, for the periods indicated, the range of high and low closing prices for our common stock on the Nasdaq Global Select Market.

 

2016    DISTRIBUTIONS
DECLARED
     HIGH      LOW  

Fourth Quarter

   $ 0.00      $ 4.59      $ 2.95  

Third Quarter

     0.05        8.12        3.95  

Second Quarter

     0.05        9.42        7.00  

First Quarter

     0.25        9.90        6.11  
  

 

 

    

 

 

    

 

 

 

2015

        

Fourth Quarter

   $ 0.25      $ 8.76      $ 6.36  

Third Quarter

     0.25        9.23        6.17  

Second Quarter

     0.25        11.01        8.35  

First Quarter

     0.25        10.80        9.06  

Information about our equity compensation plans is incorporated by reference in all information under the caption “Equity Compensation Plan Information” included in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 23, 2017.

We are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains beginning with our tax year ended December 31, 2016, 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.

 

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We have adopted a dividend reinvestment plan pursuant to which shareholders may elect to have distributions reinvested in additional shares of common stock. When we declare a distribution, all participants will have credited to their plan accounts the number of full and fractional shares (computed to three decimal places) that could be obtained with the cash, net of any applicable withholding taxes that would have been paid to them if they were not participants. The number of full and fractional shares is computed at the weighted average price of all shares of common stock purchased for plan participants within the 30 days after the distribution is declared plus brokerage commissions. The automatic reinvestment of distributions will not release plan participants of any income tax that may be payable on the distribution. Shareholders may terminate their participation in the dividend reinvestment plan by providing written notice to the Plan Agent at least 10 days before any given distribution payment date. Upon termination, we will issue to a shareholder both a certificate for the number of full shares of common stock owned and a check for any fractional shares, valued at the then current market price, less any applicable brokerage commissions and any other costs of sale. There are no additional fees or expenses for participation in the dividend reinvestment plan. Shareholders may obtain additional information about the dividend reinvestment plan by contacting the American Stock Transfer & Trust Company, LLC at 6201 15th Avenue, Brooklyn, NY, 11219.

 

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ISSUER PURCHASES OF EQUITY SECURITIES (1)

 

Period

   Total Number of
Shares Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans  or
Programs
     Maximum Number of
Shares (or Approximate
Dollar Value) that May Yet
Be Purchased Under the
Plans or Programs
 

November 5 through December 31, 2003

     10,816      $ 9.20        10,816      $ 9,900,492  

January 1 through December 31, 2004

     952,517        9.00        952,517        11,329,294  

January 1 through December 31, 2005

     389,900        9.26        389,900        7,720,523  

January 1 through December 31, 2006

     —          —          —          7,720,523  

January 1 through December 31, 2007

     33,200        9.84        33,200        7,393,708  

January 1 through December 31, 2008

     7,691        9.66        7,691        7,319,397  

January 1 through December 31, 2009

     —          —          —          7,319,397  

January 1 through December 31, 2010

     177,844        6.82        177,844        6,106,354  

January 1 through December 31, 2011

     8,647        9.06        8,647        6,028,027  

January 1 through December 31, 2012

     —          —          —          6,028,027  

January 1 through December 31, 2013

     —          —          —          6,028,027  

January 1 through December 31, 2014

     576,143        10.21        576,143        14,120,043  

January 1 through December 31, 2015

     413,193        7.77        413,193        24,398,115  

January 1 through December 31, 2016

     361,174        4.22        361,174        22,874,509  
  

 

 

    

 

 

    

 

 

    

Total

     2,931,125        8.39        2,931,125     
  

 

 

    

 

 

    

 

 

    

 

(1) We publicly announced our Stock Repurchase Program in a press release dated November 5, 2003, after the Board of Directors approved the repurchase of up to $10,000,000 of our outstanding common stock, which was increased by an additional $10,000,000 authorization on November 3, 2004, 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. The stock repurchase program expires 180 days after the commencement of the purchases. If we have not repurchased the common stock remaining in the repurchase authorization by the end of such period, we are permitted to extend the stock repurchase program for additional 180-day periods until we have repurchased the total amount authorized. In October 2016, we extended the terms of the Stock Repurchase Program. Purchases were to commence no earlier than November 2016 and conclude 180 days after the commencement of the purchases.

 

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ITEM 6. SELECTED FINANCIAL DATA

Summary Consolidated Financial Data

You should read the consolidated financial information below with the Consolidated Financial Statements and Notes thereto for the years ended December 31, 2016, 2015, 2014, 2013, and 2012.

 

     Year ended December 31,  

(Dollars in thousands, except per share data)

   2016     2015     2014     2013      2012  

Statement of operations

           

Investment income

   $ 25,088     $ 42,653     $ 41,068     $ 34,929      $ 32,344  

Interest expense

     12,638       9,422       8,543       8,361        10,858  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income

     12,450       33,231       32,525       26,568        21,486  

Noninterest income

     408       319       509       1,282        1,135  

Operating expenses

     22,786       16,724       17,889       15,661        13,856  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net investment income (loss) before income taxes

     (9,928     16,826       15,145       12,189        8,765  

Income tax benefit

     10,047       —       —       —        —  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net investment income after income taxes

     119       16,826       15,145       12,189        8,765  

Net realized gains (losses) on investments

     457       7,636       (5,607     692        (6,731

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

     130,121       16,830       15,643       5,060        7,896  

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

     (22,863     (2,295     6,412       1,020        5,077  

Net change in unrealized appreciation on investments other than securities

     (28,372     (9,621     (2,901     6,815        9,510  

Income tax provision

     (55,947     —       —       —        —  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 23,515     $ 29,376     $ 28,692     $ 25,776      $ 24,517  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Per share data

           

Net investment income (loss)

   $ (0.41   $ 0.69     $ 0.60     $ 0.55      $ 0.43  

Income tax provision

     (1.90 )     —       —       —        —  

Net realized gains (losses) on investments

     0.02       0.31       (0.22     0.03        (0.33

Net change in unrealized appreciation on investments (1)

     3.26       0.20       0.76       0.58        1.11  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 0.97     $ 1.20     $ 1.14     $ 1.16      $ 1.21  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Distributions declared per share

   $ 0.35     $ 1.00     $ 0.96     $ 0.90      $ 0.85  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding

           

Basic

     24,123,888       24,315,427       24,850,496       21,850,415        19,912,883  

Diluted

     24,173,020       24,391,959       25,073,323       22,225,783        20,180,694  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance sheet data

           

Net investments

   $ 652,278     $ 606,959     $ 527,601     $ 473,157      $ 455,010  

Total assets

     689,377       689,050       632,287       595,053        543,465  

Total funds borrowed

     349,073       404,540       348,795       314,958        322,770  

Total liabilities

     403,281       410,962       357,617       321,558        327,147  

Total shareholders’ equity

     286,096       278,088       274,670       273,495        216,318  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Managed balance sheet data (2)

           

Net investments

   $ 1,517,592     $ 1,501,555     $ 1,310,685     $ 1,144,596      $ 1,048,635  

Total assets

     1,605,435       1,631,118       1,469,751       1,305,809        1,174,124  

Total funds borrowed

     1,257,515       1,313,436       1,156,735       997,295        924,921  

Total liabilities

     1,319,340       1,353,030       1,195,081       1,032,314        957,806  

 

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     Year ended December 31,  
             2016                     2015                     2014                     2013                     2012          

Selected financial ratios and other data

          

Return on average assets (ROA) (3)

          

Net investment income after taxes

     0.02     2.59     2.51     2.19     1.68

Net increase in net assets resulting from operations

     3.48       4.53       4.75       4.64       4.69  

Return on average equity (ROE) (4)

          

Net investment income after taxes

     0.04       6.08       5.48       5.40       4.44  

Net increase in net assets resulting from operations

     8.49       10.61       10.39       11.42       12.41  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average yield

     4.17     7.74     8.25     7.60     7.37

Weighted average cost of funds

     2.10       1.71       1.71       1.82       2.48  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin (5)

     2.07       6.03       6.54       5.78       4.89  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income ratio (6)

     0.07       0.06       0.10       0.28       0.26  

Total expense ratio (7)

     13.50       4.75       5.31       5.23       5.63  

Operating expense ratio (8)

     3.78       3.04       3.60       3.41       3.16  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a percentage of net investment portfolio

          

Medallion loans

     41     51     59     63     65

Commercial loans

     13       14       14       13       12  

Investment in Medallion Bank and other controlled subsidiaries

     45       26       26       23       22  

Equity investments

     1       1       1       1       1  

Investment securities

     —       8       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments to assets (9)

     95     88     83     80     84

Equity to assets (10)

     42       40       43       46       40  

Debt to equity (11)

     122       145       127       115       149  

 

(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.
(2) Includes the balances of wholly-owned, unconsolidated portfolio companies, primarily Medallion Bank.
(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 impairment writeoff, the ratio was 0.77%.
(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 impairment writeoff, the ratio was 1.88%.
(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 in 2016, $817 in 2015, $4,160 in 2014, $2,326 in 2013, and $444 in 2012, and also included dividends from Medallion Bank and other controlled subsidiaries of $3,000 in 2016, $18,889 in 2015, $15,000 in 2014, $12,000 in 2013, and $10,500 in 2012. On a managed basis, combined with Medallion Bank, the net interest margin was 6.77%, 6.98%, 7.09%, 6.66%, and 6.31% for 2016, 2015, 2014, 2013, and 2012.
(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 impairment writeoff, the ratio was 12.65%.
(8) Operating expense ratio represents operating expenses divided by average interest earning assets, and includes the goodwill impairment of $5,099 in 2016. Excluding impairment writeoff, the ratio was 2.94%.
(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.

 

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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 Notes thereto for the years ended December 31, 2016, 2015, and 2014. 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 19. Additionally, more information about our business activities can be found in “Business”.

CRITICAL ACCOUNTING POLICIES

The SEC has issued cautionary advice regarding disclosure about critical accounting policies. The SEC defines critical accounting policies as those that are both most important to the portrayal of a company’s financial condition and results, and that require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain and may change materially in subsequent periods. The preparation of our consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Significant estimates made by us include valuation of loans, equity investments, and investments in subsidiaries, evaluation of the recoverability of accounts receivable and income tax assets, and the assessment of litigation and other contingencies. The matters that give rise to such provisions are inherently uncertain and may require complex and subjective judgments. Although we believe that estimates and assumptions used in determining the recorded amounts of net assets and liabilities at December 31, 2016 are reasonable, actual results could differ materially from the estimated amounts recorded in our financial statements.

GENERAL

We are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers, and to finance small-scale home improvements. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 3%, and our commercial loan portfolio at a compound annual growth rate of 4% (7% and 4% on a managed basis when combined with Medallion Bank). 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 18%. In January 2017, the Company announced its plans to transform our overall strategy. We are transitioning away from medallion lending and placing our strategic focus on our growing consumer finance portfolio. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which includes our managed net investment portfolio, as well as assets serviced for third party investors, were $1,632,000,000 as of December 31, 2016 and $1,655,000,000 as of December 31, 2015, and have grown at a compound annual growth rate of 11% 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 revolving bank facilities, bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, 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. Medallion Capital’s 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.

We are a closed-end, non-diversified management investment company, organized as a Delaware corporation, under the 1940 Act. We have elected to be treated as a business development company, or BDC, under the 1940 Act. During our tax year ended December 31, 2016, we did not qualify as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code, and therefore we became subject to taxation as a corporation under Subchapter C of the Code. We had in previous years qualified and elected to be treated for federal income tax purposes as a RIC. As a RIC, we generally did not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distributed to our shareholders as dividends, if we met certain source-of-income and asset diversification requirements. Medallion Bank is not a RIC and must pay corporate-level US federal and state income taxes. See Note 5 for more information.

 

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Our wholly-owned portfolio company, Medallion Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans. However, the FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, or $469,383,000 as of December 31, 2016. We earn referral fees for these activities. All of these servicing activities have been assigned to MSC. As a non-investment company, Medallion Bank is not consolidated with the Company.

Realized gains or losses on investments are recognized when the investments are sold or written off. The realized gains or losses represent the difference between the proceeds received from the disposition of portfolio assets, if any, and the cost of such portfolio assets. In addition, changes in unrealized appreciation or depreciation on investments are recorded and represent the net change in the estimated fair values of the portfolio assets at the end of the period as compared with their estimated fair values at the beginning of the period. Generally, realized gains (losses) on investments and changes in unrealized appreciation (depreciation) on investments are inversely related. When an appreciated asset is sold to realize a gain, a decrease in the previously recorded unrealized appreciation occurs. Conversely, when a loss previously recorded as unrealized depreciation is realized by the sale or other disposition of a depreciated portfolio asset, the reclassification of the loss from unrealized to realized causes a decrease in net unrealized depreciation and an increase in realized loss.

Our investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis, and determine whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional marketplace restrictions, such as the ability to transfer industrial bank charters. Because of these restrictions and other factors, our Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, we had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the second quarter of 2015, we first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016. We incorporated these new factors in the Medallion Bank fair value analysis, and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the third quarter of 2016 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. We also engaged a valuation specialist to assist the Board of Directors in its determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016 as a component of unrealized appreciation (depreciation) on investments, in addition to Medallion Bank’s actual results of operations.

 

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Trends in Investment Portfolio

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

 

     December 31, 2016     December 31, 2015     December 31, 2014  
     Interest     Investment     Interest     Investment     Interest     Investment  

(Dollars in thousands)

   Rate (1)     Balances     Rate (1)     Balances     Rate (1)     Balances  

Medallion loans

            

New York

     3.67   $ 202,469       3.72   $ 213,356       3.60   $ 213,099  

Chicago

     4.54       38,091       4.87       39,406       4.97       39,280  

Boston

     4.52       25,857       4.63       26,436       4.69       27,277  

Newark

     5.27       23,267       5.26       24,585       5.28       25,043  

Cambridge

     4.47       4,401       4.64       6,607       4.80       6,006  

Other

     7.26       965       7.27       1,043       6.59       814  
    

 

 

     

 

 

     

 

 

 

Total medallion loans

     4.01       295,050       4.09       311,433       4.03       311,519  
  

 

 

     

 

 

     

 

 

   

Deferred loan acquisition costs

       289         413         375  

Unrealized depreciation on loans

       (28,523       (3,438       —    
    

 

 

     

 

 

     

 

 

 

Net medallion loans

     $ 266,816       $ 308,408       $ 311,894  
    

 

 

     

 

 

     

 

 

 

Commercial loans

            

Secured mezzanine

     13.47   $ 76,469       13.59   $ 67,849       12.88   $ 55,059  

Asset based

     —         —         5.82       3,750       5.82       3,633  

Other secured commercial

     9.33       8,657       10.68       12,622       9.91       15,506  
    

 

 

     

 

 

     

 

 

 

Total commercial loans

     13.05       85,126       12.80       84,221       11.91       74,198  
  

 

 

     

 

 

     

 

 

   

Deferred loan acquisition income

       (114       (87       (100

Unrealized depreciation on loans

       (1,378       (2,239       (2,949
    

 

 

     

 

 

     

 

 

 

Net commercial loans

     $ 83,634       $ 81,895       $ 71,149  
    

 

 

     

 

 

     

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

     2.13   $ 140,610       12.74   $ 141,273       11.44   $ 131,150  
  

 

 

     

 

 

       

Unrealized appreciation on subsidiary investments

       152,750         18,640         5,698  
    

 

 

     

 

 

     

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

     $ 293,360       $ 159,913       $ 136,848  
    

 

 

     

 

 

     

 

 

 

Equity investments

     0.00   $ 4,534       0.72   $ 4,277       0.86   $ 6,102  
  

 

 

     

 

 

     

 

 

   

Unrealized appreciation on equities

       3,934         2,582         1,608  
    

 

 

     

 

 

     

 

 

 

Net equity investments

     $ 8,468       $ 6,859       $ 7,710  
    

 

 

     

 

 

     

 

 

 

Investment securities

     —     $ —         0.35   $ 49,902       —     $ —    
  

 

 

     

 

 

     

 

 

   

Unrealized depreciation on investment securities

       —           (18       —    
    

 

 

     

 

 

     

 

 

 

Net investment securities

     $ —         $ 49,884       $ —    
    

 

 

     

 

 

     

 

 

 

Investments at cost (2)

     4.94   $ 525,320       7.06   $ 591,106       6.97   $ 522,969  
  

 

 

     

 

 

     

 

 

   

Deferred loan acquisition costs

       175         326         275  

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

       156,684         21,204         7,306  

Unrealized depreciation on loans

       (29,901       (5,677       (2,949
    

 

 

     

 

 

     

 

 

 

Net investments

     $ 652,278       $ 606,959       $ 527,601  
    

 

 

     

 

 

     

 

 

 

Medallion Bank investments

            

Consumer loans

     14.27   $ 708,524       14.06   $ 626,132       14.71   $ 478,027  

Medallion loans

     3.75       296,436       3.84       338,285       3.84       366,397  

Commercial loans

     3.40       2,567       5.23       44,634       4.68       44,499  

Investment securities

     2.27       37,420       2.30       35,713       2.53       27,376  
    

 

 

     

 

 

     

 

 

 

Medallion Bank investments at cost (2)

     10.83       1,044,947       9.97       1,044,764       9.51       916,299  
  

 

 

     

 

 

     

 

 

   

Deferred loan acquisition costs

       12,371         11,400         9,937  

Unrealized depreciation on investment securities

       (797       (501       252  

Premiums paid on purchased securities

       238         311         272  

Unrealized depreciation on loans

       (54,819       (24,081       (17,797
    

 

 

     

 

 

     

 

 

 

Medallion Bank net investments

     $ 1,001,940       $ 1,031,893       $ 908,963  
    

 

 

     

 

 

     

 

 

 

 

(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 9.74%, 9.03%, and 8.46% at December 31, 2016, 2015, and 2014.

 

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PORTFOLIO SUMMARY

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 portfolio at December 31, 2016 was 4.97% (6.03% for the loan portfolio), a decrease of 209 basis points from 7.06% at December 31, 2015, which was an increase of 9 basis points from 6.97% at December 31, 2014. The decreased yield in 2016 was primarily attributable to the decreased yield in our investment in Medallion Bank and other controlled subsidiaries. The weighted average yield of the total managed portfolio at December 31, 2016 was 9.50% (9.74% for the loan portfolio), an increase of 97 basis points from 8.53% at December 31, 2015, which was an increase of 26 basis points from 8.27% at December 31, 2014. The increased yield of the total managed portfolio was mainly due to the higher yield of the total managed commercial portfolio, driven by our exit from the asset-based lending business which has a lower average yield in comparison to our mezzanine and other secured commercial loans, and the higher yield of our equity investments.

Medallion Loan Portfolio

Our medallion loans comprised 41% of the net portfolio of $652,278,000 at December 31, 2016, compared to 51% of the net portfolio of $606,959,000 at December 31, 2015, and 59% of $527,601,000 at December 31, 2014. Our managed medallion loans of $528,643,000 comprised 35% of the net managed portfolio of $1,517,592,000 at December 31, 2016, compared to 43% the net managed portfolio of $1,501,555,000 at December 31, 2015, and 52% of $1,310,685,000 at December 31, 2014. The medallion loan portfolio decreased by $41,592,000 or 13% in 2016 (and decreased by $112,261,000 or 18% on a managed basis). The decreases in outstandings were primarily concentrated in the New York market, although all markets declined, and reflected increased realized and unrealized losses and net amortization of loan principal. Total medallion loans serviced for third parties were $24,796,000, $26,959,000, and $27,658,000 at December 31, 2016, 2015, and 2014.

The weighted average yield of the medallion loan portfolio at December 31, 2016 was 4.01%, a decrease of 8 basis points from 4.09% at December 31, 2015, which was an increase of 6 basis points from 4.03% at December 31, 2014. The weighted average yield of the managed medallion loan portfolio at December 31, 2016 was 3.88%, a decrease of 8 basis points from 3.96% at December 31, 2015, which was an increase of 3 basis points from 3.93% at December 31, 2014. The decreases in yield from prior year primarily reflected the repricing of the existing portfolio to current market interest rates. At December 31, 2016, 31% of the medallion loan portfolio represented loans outside New York, compared to 31% and 32% at year-end 2015 and 2014. At December 31, 2016, 24% of the managed medallion loan portfolio represented loans outside New York, compared to 26% at year-end 2015 and 2014.

Commercial Loan Portfolio

Our commercial loans represented 13% of the net investment portfolio as of December 31, 2016, compared to 14% at December 31, 2015 and 2014, and were 6%, 8%, and 9% on a managed basis. Commercial loans increased by $1,739,000 or 2% during 2016 (decreased by $39,682,000 or 32% on a managed basis), primarily reflecting growth in the high-yield mezzanine portfolio, partially offset by a decrease in the other secured commercial loan portfolio and the exit from the asset based lending business. The decrease in the managed portfolio was primarily reflective of the sale of the asset-based portfolio as well as the changes described above. Net commercial loans serviced for third parties were $1,644,000 at December 31, 2016, and serviced by third parties were $3,419,000 and $118,000 at December 31, 2015, and 2014.

The weighted average yield of the commercial loan portfolio at December 31, 2016 was 13.05%, an increase of 25 basis points from 12.80% at December 31, 2015, which was an increase of 89 basis points from 11.91% at December 31, 2014. The weighted average yield of the managed commercial loan portfolio at December 31, 2016 was 12.76%, an increase of 258 basis points from 10.18% at December 31, 2015, which was an increase of 98 basis points from 9.20% at December 31, 2014. The increases primarily reflected the change in portfolio mix and higher yields on the mezzanine portfolio. We continue to originate adjustable-rate and floating-rate loans tied to the prime rate to help mitigate our interest rate risk in a rising interest rate environment. At December 31, 2016, variable-rate loans represented 7% of the commercial portfolio, compared to 9% and 6% at December 31, 2015 and 2014, and were 7%, 38%, and 38% on a managed basis. Although this strategy initially produces a lower yield, we believe that this strategy mitigates interest rate risk by better matching our earning assets to their adjustable-rate funding sources.

 

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Consumer Loan Portfolio

Our managed consumer loans, all of which are held in the portfolio managed by Medallion Bank, represented 46% of the managed net investment portfolio as of December 31, 2016, compared to 41% and 36% at December 31, 2015 and 2014. Medallion Bank originates adjustable rate consumer loans secured by recreational vehicles, boats, motorcycles, trailers, and home improvements located in all 50 states. The portfolio is serviced by a third party subsidiary of a major commercial bank.

The weighted average gross yield of the managed consumer loan portfolio was 14.27% at December 31, 2016, compared to 14.06% and 14.71% at December 31, 2015 and 2014. The increase in 2016 reflected the second quarter sale of loans that was weighted towards lower yielding home improvement loans. Adjustable rate loans represented 12% of the managed consumer portfolio at December 31, 2016, compared to 20% and 37% at December 31, 2015 and 2014, reflecting Medallion Bank no longer offering variable rate recreation loans since January 2014.

Delinquency and Loan Loss Experience

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 realized gain. Proceeds collected on charged off accounts are recorded as realized gains. All collection, repossession, and recovery efforts are handled on behalf of Medallion Bank by the servicer.

The following table shows the trend in loans 90 days or more past due as of December 31.

 

     2016     2015     2014  

(Dollars in thousands)

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

Medallion loans

   $ 71,976        18.9   $ 11,880        3.0   $ —          0.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Commercial loans

               

Secured mezzanine

     1,390        0.4       1,390        0.4       1,391        0.3  

Asset-based

     —          0.0       —          0.0       303        0.1  

Other secured commercial

     734        0.2       945        0.2       —          0.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans

     2,124        0.6       2,335        0.6       1,694        0.4  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans 90 days or more past due

   $ 74,100        19.5   $ 14,215        3.6   $ 1,694        0.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Medallion Bank loans

   $ 42,269        4.2   $ 17,154        1.7   $ 3,113        0.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total managed loans 90 days or more past due

   $ 116,369        8.4   $ 31,369        2.2   $ 4,807        0.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount was divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company’s liquidation. In May 2013, the bankruptcy court

 

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presiding over the third party finance company’s case entered an order converting the involuntary chapter 7 case to a chapter 11 case. We and Medallion Bank have placed these loans on nonaccrual, and reversed interest income. In addition, we have established valuation allowances against the outstanding balances. On May 31, 2013, we commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the third party finance company’s assets. The third party finance company and bank lenders are contesting our position. In April 2014, we and Medallion Bank received a decision from the court granting summary judgment in our favor with respect to the issue of whether our loan participations are true participations. In March 2015, we and Medallion Bank received a decision from the court finding that the bank lenders generally held a first lien on our and Medallion Bank’s loan participations subject to, among other things, defenses still pending prosecution by the parties and adjudication by the court. We and Medallion Bank are appealing the decision. The remaining issues are still being litigated. Although we believe the claims raised by the third party finance company and the bank lenders are without merit and will vigorously defend against them, we cannot at this time predict the outcome of this litigation or determine our potential exposure. At December 31, 2016, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. In September 2015, one loan was sold at a discount to a third party, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. One loan was charged off in September 2014. The balances related to the paid off loans have been reclassified to other assets on the consolidated balance sheet. The table below summarizes these receivables and their status with the Company and Medallion Bank.

 

(Dollars in thousands)

   The Company      Medallion Bank      Total  

Loans outstanding

   $ 258      $ 1,953      $ 2,211  

Loans charged off (1)

     (258      (1,953      (2,211

Valuation allowance

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Net loans outstanding

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Other receivables

     590        11,062        11,652  

Valuation allowance

     (236      (4,425      (4,661
  

 

 

    

 

 

    

 

 

 

Net other receivables

     354        6,637        6,991  

Total net outstanding

     354        6,637        6,991  
  

 

 

    

 

 

    

 

 

 

Income foregone in 2016

     —          —          —    

Total income foregone

   $ 74      $ 108      $ 182  
  

 

 

    

 

 

    

 

 

 

 

(1) The income foregone on the charged off loan was $99 for the Company and $213 for Medallion Bank.

The recent increases in medallion delinquencies reflected our borrowers experiencing declining cash flows due to competitive internet ride hailing services and decreases in medallion values putting stress on certain of our borrowers, all of whom we continue to work with. We have vigorously pursued strategies to offset these declines which have included adding personnel to the collection staff, receiving principal reductions as loans renew, and requiring additional collateral so as to offer temporary solutions until cash flows improve. Additionally, we have had some success in assisting delinquent customers in selling their medallions to new owners putting a reasonable amount of cash equity into the sale so as to reduce our exposure on the collateral. This in turn has improved the overall cash flow to debt service ratio. Secured mezzanine delinquencies have not changed in recent periods. Commercial loan delinquencies have declined due to recent collection efforts. Medallion Bank delinquencies increased due to a weaker portfolio performance attributed to the increase in medallion loan delinquencies being managed as described above.

We monitor delinquent loans for possible exposure to loss by analyzing various factors, including the value of the collateral securing the loan and the borrower’s prior payment history. Under the 1940 Act, our loan portfolio must be recorded at fair value or “marked-to-market.” Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio is adjusted quarterly to reflect our estimate of the current realizable value of our loan portfolio. Since no ready market exists for this portfolio, fair value is subject to the good faith determination of our Board of Directors. Because of the subjectivity of these estimates, there can be no assurance that in the event of a foreclosure or the sale of portfolio loans we would be able to recover the amounts reflected on our balance sheet. For more information, see “Risk Factors—Risks Relating to Our Business and Structure—Our investment portfolio is, and will continue to be, recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is, and will continue to be, uncertainty as to the value of our portfolio investments which could adversely affect our net asset value.”

In determining the value of our portfolio, the Board of Directors may take into consideration various factors such as the financial condition of the borrower and the adequacy of the collateral. For example, in a period of sustained increases in market

 

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interest rates, the Board of Directors could decrease its valuation of the portfolio if the portfolio consists primarily of long-term, fixed-rate loans. Our valuation procedures are designed to generate values that approximate that which would have been established by market forces, and are therefore subject to uncertainties and variations from reported results. Based upon these factors, net unrealized appreciation or depreciation on investments is determined, based on the fluctuations of our estimate of the current realizable value of our portfolio from our cost basis.

The following table sets forth the pretax changes in our unrealized appreciation (depreciation) on investments, for the years ended December 31, 2016, 2015, and 2014.

 

(Dollars in thousands)

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

Balance December 31, 2013

   $ —       $ (6,992   $ 814     $ 381     $ —       $ 40,404     $ 34,607  

Net change in unrealized

              

Appreciation on investments

     —         —         4,884       195       —         (2,900     2,179  

Depreciation on investments

     —         (1,365     —         358       —         1,141       134  

Reversal of unrealized appreciation (depreciation) related to realized

              

Gains on investments

     —         —         —         —         —         —         —    

Losses on investments

     —         5,408       —         674       —         —         6,082  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2014

     —         (2,949     5,698       1,608       —         38,645       43,002  

Net change in unrealized

              

Appreciation on investments

     —         —         18,132       1,141       —         (9,621     9,652  

Depreciation on investments

     (3,568     (176     586       (1,426     (18     (68     (4,670

Reversal of unrealized appreciation (depreciation) related to realized

              

Gains on investments

     —         —         (4,809     (9     —         —         (4,818

Losses on investments

     130       886       —         301         —         1,317  

Other (1)

     —         —         (967     967       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2015

     (3,438     (2,239     18,640       2,582       (18     28,956       44,483  

Net change in unrealized

              

Appreciation on investments

     —         —         133,805       2,979       7       (28,372     108,419  

Depreciation on investments

     (28,028     318       305       —         5       —         (27,400

Reversal of unrealized appreciation (depreciation) related to realized

              

Gains on investments

     —         —         —         (1,627     —         —         (1,627

Losses on investments

     2,943       543       —         —         12       —         3,498  

Other

     —         —         —         —         (6     —         (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Reclassification of Medallion Motorsports from equity investments to controlled subsidiaries.

 

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The following table presents credit-related information for the investment portfolios as of December 31.

 

(Dollars in thousands)

   2016     2015     2014  

Total loans

      

Medallion loans

   $ 266,816     $ 308,408     $ 311,894  

Commercial loans

     83,634       81,895       71,149  
  

 

 

   

 

 

   

 

 

 

Total loans

     350,450       390,303       383,043  

Investment in Medallion Bank and other controlled subsidiaries

     293,360       159,913       136,848  

Equity investments (1)

     8,468       6,859       7,710  

Investment securities

     —         49,884       —    
  

 

 

   

 

 

   

 

 

 

Net investments

   $ 652,278     $ 606,959     $ 527,601  
  

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

   $ 1,001,940     $ 1,031,893     $ 908,963  

Managed net investments

   $ 1,517,592     $ 1,501,555     $ 1,310,685  
  

 

 

   

 

 

   

 

 

 

Unrealized appreciation (depreciation) on investments

      

Medallion loans

   ($ 28,523   ($ 3,438   $ —    

Commercial loans

     (1,378     (2,239     (2,949
  

 

 

   

 

 

   

 

 

 

Total loans

     (29,901     (5,677     (2,949

Investment in Medallion Bank and other controlled subsidiaries

     152,750       18,640       5,698  

Equity investments

     3,934       2,582       1,608  

Investment securities

     —         (18     —    
  

 

 

   

 

 

   

 

 

 

Total unrealized appreciation (depreciation) on investments

   $ 126,783     $ 15,527     $ 4,357  
  

 

 

   

 

 

   

 

 

 

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

   ($ 55,616   ($ 24,582   ($ 17,545

Managed total unrealized depreciation on investments

   $ 71,167     ($ 9,055   ($ 13,188
  

 

 

   

 

 

   

 

 

 

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

      

Medallion loans

     (9.67 %)      (1.10 %)      —  

Commercial loans

     (1.62     (2.66     (3.97

Total loans

     (7.87     (1.43     (0.76

Investment in Medallion Bank and other controlled subsidiaries

     108.63       13.19       4.34  

Equity investments

     86.77       60.39       26.35  

Investment securities

     —         —         —    

Net investments

     24.13       2.63       0.83  
  

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

     (5.32 %)      (2.35 %)      (1.91 %) 

Managed net investments

     4.96     (0.60 %)      (1.00 %) 

 

(1) Represents common stock, warrants, preferred stocks, and limited partnership interests held as investments.
(2) Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio is adjusted quarterly to reflect estimates of the current realizable value of the investment portfolio. These percentages represent the discount or premium that investments are carried on the books at, relative to their par or gross value.

 

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The following table presents the gain/loss experience on the investment portfolio for the years ended December 31, 2016, 2015, and 2014.

 

(Dollars in thousands)

   2016     2015     2014  

Realized gains (losses) on loans and equity investments

      

Medallion loans

   ($ 2,938   ($ 140   $ —    

Commercial loans(1)

     1,284       (946     (4,983
  

 

 

   

 

 

   

 

 

 

Total loans

     (1,654     (1,086     (4,983

Investment in Medallion Bank and other controlled subsidiaries

     214       8,108       —    

Equity investments

     1,884       614       (624

Investment securities

     13       —         —    
  

 

 

   

 

 

   

 

 

 

Total realized gains (losses) on loans and equity investments

   $ 457     $ 7,636     ($ 5,607
  

 

 

   

 

 

   

 

 

 

Net realized losses on investments at

Medallion Bank and other controlled subsidiaries

     (35,341     (10,388     (6,682
  

 

 

   

 

 

   

 

 

 

Total managed realized gains (losses) on loans and equity investments

   ($ 34,884   ($ 2,752   ($ 12,289
  

 

 

   

 

 

   

 

 

 

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

      

Medallion loans

     (0.97 %)      (0.04 %)      —  

Commercial loans

     1.49       (1.23     (7.30

Total loans

     (0.42     (0.28     (1.33

Investment in Medallion Bank and other controlled subsidiaries

     0.14       6.07       —    

Equity investments

     41.15       10.87       (10.51

Investment securities

     0.01       —         —    

Net investments

     0.08       1.40       (1.11
  

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

     (3.33 %)      (1.06 %)      (0.77 %) 

Managed net investments

     (2.34 %)      (0.20 %)      (0.98 %) 

 

(1) Includes $2,056 of gain recognized on the sale of the asset based lending portfolio.

The table below summarizes pre-tax components of unrealized and realized gains and losses in the investment portfolio for the years ended December 31, 2016, 2015, and 2014.

 

(Dollars in thousands)

   2016      2015      2014  

Net change in unrealized appreciation (depreciation) on investments

        

Unrealized appreciation

   $ 2,986      $ 288      $ 553  

Unrealized depreciation

     (27,705      (3,822      (1,365

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

     130,121        21,638        15,643  

Realized gains

     (1,627      (4,818      —    

Realized losses

     3,498        1,317        6,082  

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

     (28,387      (9,689      (1,759
  

 

 

    

 

 

    

 

 

 

Total

   $ 78,886      $ 4,914      $ 19,154  
  

 

 

    

 

 

    

 

 

 

Net realized gains (losses) on investments

        

Realized gains

   $ —        $ 4,818      $ —    

Realized losses

     (3,486      (1,317      (6,082

Other gains

     4,140        4,261        434  

Direct recoveries (chargeoffs)

     (197      (126      41  

Realized losses on investments other than securities and other assets

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

   $ 457      $ 7,636      ($ 5,607
  

 

 

    

 

 

    

 

 

 

 

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Investment in Medallion Bank and Other Controlled Subsidiaries

Investment in Medallion Bank and other controlled subsidiaries were 45%, 26%, and 26% of our total portfolio at December 31, 2016, 2015, and 2014. The portfolio company investments primarily represent the wholly-owned unconsolidated subsidiaries of ours, substantially all of which is represented by our investment in Medallion Bank. In addition, to facilitate maintenance of Medallion Bank’s capital ratio requirement and to provide the necessary capital for continued growth, we periodically make capital contributions to Medallion Bank, including $3,000,000 in 2016 and $8,000,000 in 2015. Separately, Medallion Bank declared dividends to us of $3,000,000 in 2016, $18,000,000 in 2015, and $15,000,000 in 2014. See Note 3 of the consolidated financial statements for additional information about these investments.

Equity Investments

Equity investments were 1% of our total portfolio at December 31, 2016, 2015, and 2014. Equity investments were 1%, less than 1%, and 1% of our total managed portfolio at December 31, 2016, 2015, and 2014. Equity investments are comprised of common stock, warrants, preferred stock, and limited partnership interests.

Investment Securities

Investment securities were 0%, 8%, and 0% of our total portfolio at December 31, 2016, 2015, and 2014. Investment securities were 2%, 6%, and 2% of our total managed portfolio at December 31, 2016, 2015, and 2014. The investment securities are primarily U.S. Treasury bills and adjustable-rate mortgage-backed securities purchased by Medallion Bank to better utilize required cash liquidity.

Trend in Interest Expense

Our interest expense is driven by the interest rates payable on our short-term credit facilities with banks, bank certificates of deposit, fixed-rate, long-term debentures issued to the SBA, and other short-term notes payable. We established a medallion lending relationship with DZ Bank in December 2008 that provided for growth in the portfolio at generally lower rates than under prior facilities. In addition, Medallion Bank began raising brokered bank certificates of deposit during 2004, which were at our lowest borrowing costs. As a result of Medallion Bank raising funds through certificates of deposit as previously noted, we were able to transfer certain of our medallion loans and related assets to Medallion Bank allowing us and our subsidiaries to use cash generated through these transactions to retire debt with higher interest rates. In addition, Medallion 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 4 to the consolidated financial statements for details on the terms of all outstanding debt. Our debentures issued to the SBA typically have terms of ten years.

 

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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 table shows the average borrowings and related borrowing costs for the years ended December 31, 2016, 2015, and 2014. Our average balances increased during the year reflecting increased borrowing required to fund operating and investing activities and Medallion Bank’s average balances increased, reflecting the strong growth in the consumer loan portfolio. The increase in borrowing costs reflected the increase of interest rates and changes in our borrowing mix, and Medallion Bank’s lengthening of the maturity profile of its certificates of deposit.

 

(Dollars in thousands)

   Interest
Expense
     Average
Balance
     Average
Borrowing
Costs
 

December 31, 2016

        

DZ loan

   $ 2,670      $ 119,492        2.23

Notes payable to banks

     3,119        105,893        2.95  

SBA debentures

     3,134        79,175        3.96  

Preferred securities

     945        33,000        2.87  

Retail note

     2,501        23,748        10.53  

Margin loans

     269        18,997        1.42  
  

 

 

    

 

 

    

Total

   $ 12,638      $ 380,305        3.32  
  

 

 

    

 

 

    

Medallion Bank borrowings

     11,762        924,235        1.27  
  

 

 

    

 

 

    

Total managed borrowings

   $ 24,400      $ 1,304,540        1.87  
  

 

 

    

 

 

    

December 31, 2015

        

Revolving lines of credit

   $ 2,413      $ 122,482        1.97

Notes payable to banks

     3,247        124,666        2.60  

SBA debentures

     2,776        68,018        4.08  

Preferred securities

     812        33,000        2.46  

Margin loans

     174        13,572        1.28  
  

 

 

    

 

 

    

Total

   $ 9,422      $ 361,738        2.60  
  

 

 

    

 

 

    

Medallion Bank borrowings

     9,205        851,474        1.08  
  

 

 

    

 

 

    

Total managed borrowings

   $ 18,627      $ 1,213,212        1.54  
  

 

 

    

 

 

    

December 31, 2014

        

Revolving lines of credit

   $ 2,459      $ 127,115        1.93

Notes payable to banks

     2,663        97,012        2.75  

SBA debentures

     2,628        59,715        4.40  

Preferred securities

     793        33,000        2.40  
  

 

 

    

 

 

    

Total

   $ 8,543      $ 316,842        2.70  
  

 

 

    

 

 

    

Medallion Bank borrowings

     7,008        755,163        0.93  
  

 

 

    

 

 

    

Total managed borrowings

   $ 15,551      $ 1,072,005        1.45  
  

 

 

    

 

 

    

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, 2016, 2015, and 2014, short-term adjustable rate debt constituted 59%, 75%, and 72% of total debt, and was 16%, 23%, and 22% on a fully managed basis including the borrowings of Medallion Bank.

Factors Affecting Net Assets

Factors that affect our net assets include net realized gain or loss on investments and change in net unrealized appreciation or depreciation on investments. Net realized gain or loss on investments is the difference between the proceeds derived upon sale or foreclosure of a loan or an equity investment and the cost basis of such loan or equity investment. Change in net unrealized appreciation or depreciation on investments is the amount, if any, by which our estimate of the fair value of our investment portfolio is above or below the previously established fair value or the cost basis of the portfolio. Under the 1940 Act, our loan portfolio and other investments must be recorded at fair value.

 

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Unlike certain lending institutions, we are not permitted to establish reserves for loan losses, but adjust quarterly the valuation of the investment portfolio to reflect our estimate of the current value of the total investment portfolio. Since no ready market exists for our investments, fair value is subject to our Board of Directors’ good faith determination. In determining such fair value, our Board of Directors considers factors such as the financial condition of our borrowers and the adequacy of their collateral. Any change in the fair value of portfolio investments or other investments as determined by our Board of Directors is reflected in net unrealized depreciation or appreciation on investments and affects net increase in net assets resulting from operations, but has no impact on net investment income or distributable income.

Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and also receive an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank on at least an annual basis. Our analysis includes factors such as various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from nonfinancial 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, our Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, we had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the second quarter of 2015, we first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016. We incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the third quarter of 2016 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. We also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016 as a component of unrealized appreciation (depreciation) on investments, in addition to Medallion Bank’s actual results of operations. See Note 3 for additional information about Medallion Bank.

Consolidated Results of Operations

For the Years Ended December 31, 2016 and 2015

Net increase in net assets resulting from operations was $23,515,000 or $0.97 per diluted common share in 2016, down $5,861,000 or 20% from $29,376,000 or $1.20 per share in 2015, primarily reflecting an initial income tax provision that resulted from our not qualifying to elect RIC status for 2016, lower net interest income, and higher operating expenses, partially offset by higher net realized/unrealized gains and noninterest income. Net investment income after income taxes was $119,000 or $0.00 per share in 2016, down $16,707,000 or 99% from $16,826,000 or $0.69 in 2015.

Investment income was $25,088,000 in 2016, down $17,565,000 or 41% from $42,653,000 a year ago, and included in 2016 and 2015 were $3,000,000 and $18,889,000 in dividends from Medallion Bank and other controlled subsidiaries. Excluding those items, investment income decreased $1,676,000 or 7%, primarily reflecting a $1,317,000 increase in foregone interest income on nonaccrual loans, and a $851,000 reduction in lease revenue from our owned Chicago medallions, in both cases, reflecting the poor performance of a number of our borrowers and lessees as business conditions have worsened. The yield on the investment portfolio was 4.17% in 2016, down 46% from 7.74% in 2015. Excluding the dividends, the 2016 yield was down 6% to 3.67% from 4.31% in 2015, reflecting the above. Average investments outstanding were $602,349,000 in 2016, up 9% from $550,763,000 a year ago, primarily reflecting the appreciation on Medallion Bank, partially offset by increased reserves and paydowns in the medallion portfolio.

Medallion loans were $266,816,000 at year end, down $41,592,000 or 13% from $308,408,000 a year ago, representing 41% of the investment portfolio, compared to 51% a year ago, and were yielding 4.01% compared to 4.09% a year ago. The decrease in outstandings was primarily concentrated in the New York market, although all markets declined, and reflected increased realized and unrealized losses and net amortization of loan principal. The managed medallion portfolio, which includes loans at Medallion Bank and those serviced for third parties, was $553,439,000 at year end, down $114,582,000 or 17% from $667,863,000 a year ago, reflecting the above. The commercial loan portfolio was $83,634,000 at year end, compared to $81,895,000 a year ago, an increase of $1,739,000 or 2%, and represented 13% of the investment portfolio compared to 14% a year ago. The increase primarily reflected growth in the high-yield mezzanine portfolio, partially offset by a decrease in the other secured commercial loan portfolio and the sale of the asset-based portfolio. Commercial loans yielded 13.05% at year end, up 2% from 12.80% a year ago, reflecting the change in portfolio mix and higher yields on the mezzanine portfolio. The net managed commercial loan portfolio, which includes loans at Medallion Bank and those serviced for or by third parties, was $87,844,000 at year end, down $34,619,000 or 28% from $122,463,000

 

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a year ago, primarily reflecting the sale of the asset-based portfolio as well as the changes described above. Approximately $11,652,000 of managed asset-based loans ($6,991,000 after valuation adjustments) has been reclassified to other assets awaiting the outcome of legal proceedings as described further on page 43. Investments in Medallion Bank and other controlled subsidiaries were $293,360,000 at year end, up $133,447,000 or 83% from $159,913,000 a year ago, primarily reflecting the appreciation and our equity in the earnings of Medallion Bank’s other portfolio company investments, capital contributions made, dividends paid, portfolio sales, and the net valuation adjustments, and which represented 45% of the investment portfolio at the end of 2016 and 26% in the prior year, and which yielded 2.13% at year end, compared to 12.74% a year ago, primarily reflecting reduced dividends from Medallion Bank. See Notes 3 and 10 of the consolidated financial statements for additional information about Medallion Bank and the other controlled subsidiaries. Equity investments were $8,468,000 at year end, up $1,609,000 or 23% from $6,859,000 a year ago, primarily reflecting increased net appreciation on investment, and which represented 1% of the investment portfolio at both year ends, and had a dividend yield of 0%, compared to 0.72% a year ago.

Interest expense was $12,638,000 in 2016, up $3,216,000 or 34% from $9,422,000 in 2015. The increase in interest expense was primarily due to increased borrowing costs and higher borrowing levels. The cost of borrowed funds was 3.32% in 2016, compared to 2.60% a year ago, an increase of 28%, reflecting increases of interest rates and changes in our borrowing mix. Average debt outstanding was $380,305,000 in 2016, compared to $361,738,000 a year ago, up 5%, primarily reflecting increased borrowings required to fund operating and investment activity. See page 48 for a table that shows average balances and cost of funds for our funding sources.

Net interest income was $12,450,000 and the net interest margin was 2.07% in 2016, down $20,781,000 or 63% from $33,231,000 a year ago, which represented a net interest margin of 6.03%, all reflecting the items discussed above.

Noninterest income, which is comprised of management fees, prepayment fees, servicing fee income, late charges, and other miscellaneous income was $408,000 in 2016, up $89,000 or 28% from $319,000 a year ago, primarily reflecting higher servicing and other fees generated from the subsidiaries of Medallion Financial Corp.

Operating expenses were $22,786,000 in 2016, up $6,062,000 or 36% from $16,724,000 in 2015, and which included a $5,099,000 goodwill impairment writeoff in 2016. Excluding the goodwill writedown, operating expenses increased 6%. Salaries and benefits expense was $11,770,000 in the year, up $126,000 or 1% from $11,644,000 in 2015, reflecting higher executive bonuses and executive salary expenses in the current year, partially offset by lower salaries related to the exiting of the asset-based lending business in late 2016. Professional fees were $2,347,000 in 2016, up $861,000 or 58% from $1,486,000 a year ago, primarily reflecting higher legal expenses for a variety of corporate and investment-related matters. Occupancy expense was $966,000 in 2016, up $89,000 or 10% from $877,000 in 2015. Other operating expenses of $2,604,000 in 2016 were down $113,000 or 4% from $2,717,000 a year ago, primarily reflecting lower advertising expense.

Total income tax expense was $45,900,000 in 2016 compared to $0 in 2015, and was comprised of three components, a $10,047,000 benefit related net investment loss, and provisions of $384,000 and $55,563,000 related to realized and unrealized gains on investments. These provisions included amounts relevant to prior years’ unrealized gains and losses, and were recorded in 2016 as a result of our failure to qualify for RIC tax treatment. See note 5 for more information.

Net change in unrealized appreciation on investments before taxes was $78,886,000 in 2016, compared to $4,914,000 in 2015, an increase in appreciation of $73,972,000. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries, was depreciation of $51,235,000 in 2016 compared to $11,916,000 in 2015, resulting in increased depreciation of $39,319,000 in 2016. 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 2016 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $130,121,000 and by reversals of unrealized depreciation associated with fully depreciated loans which were charged off 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 2015 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $16,830,000 reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $1,015,000, net reversals of unrealized depreciation associated with equity investments which were sold of $292,000 and net unrealized appreciation on other investments of $209,000, partially offset by net depreciation on investments other than securities of $9,621,000, net unrealized depreciation on loans of $3,743,000, net depreciation on other assets of $68,000. The net appreciation on Medallion Bank and other controlled subsidiaries described above is net of the dividends declared by them to us of $3,000,000 in 2016 and $18,889,000 in 2015.

        Our net realized gains on investments before taxes were $457,000 in 2016, compared to gains of $7,636,000 in 2015, a decrease in realized gains of $7,179,000 in 2016. The 2016 activity reflected the reversals described in the unrealized paragraph above, and other net loan chargeoffs 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. The 2015 activity reflected the reversals described in the unrealized paragraph

 

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above, and reversals of $4,809,000 of unrealized appreciation related to sales of other controlled subsidiaries, $3,296,000 of other gains from the other controlled subsidiaries sales, and other gains on equity investments of $913,000, partially offset by net direct chargeoffs of loans and equity investments of $75,000.

Our net realized/unrealized gains on investments were $23,396,000 in 2016, compared to $12,550,000 in 2015, an increase of $10,846,000 or 86% of net gains in the year, reflecting the above.

For the Years Ended December 31, 2015 and 2014

Net increase in net assets resulting from operations was $29,376,000 or $1.20 per diluted common share in 2015, up $684,000 or 2% from $28,692,000 or $1.14 per share in 2014, primarily reflecting lower operating expenses and higher net interest income, partially offset by lower net realized/unrealized gains and noninterest income. Net investment income after income taxes was $16,826,000 or $0.69 per share in 2015, up $1,681,000 or 11% from $15,145,000 or $0.60 in 2014.

Investment income was $42,653,000 in 2015, up $1,585,000 or 4% from $41,068,000 a year ago, and included $864,000 from interest recoveries and bonuses on certain investments in 2015, compared to $4,363,000 in 2014. Also included in 2015 and 2014 were $18,889,000 and $15,000,000 in dividends from Medallion Bank and other controlled subsidiaries. Excluding those items, investment income increased $1,195,000 or 6%, primarily reflecting portfolio growth, partially offset by the repricing of the portfolios to lower current market interest rates. Investment income also reflected a $326,000 or 19% reduction in lease revenue received from our owned Chicago medallions, reflecting the tightening of the market and increased competition in Chicago. The yield on the investment portfolio was 7.74% in 2015, down 6% from 8.25% in 2014. Excluding the extra interest and dividends, the 2015 yield was down 5% to 4.16% from 4.36% in 2014, reflecting the general decrease in market interest rates and changes in the portfolio mix. Average investments outstanding were $550,763,000 in 2015, up 11% from $497,536,000 a year ago, primarily reflecting portfolio growth, partially offset by loan payments received.

Medallion loans were $308,408,000 at year end, down $3,486,000 or 1% from $311,894,000 a year ago, representing 51% of the investment portfolio, compared to 59% a year ago, and were yielding 4.09% compared to 4.03% a year ago, up 1%, reflecting our increasing rates as loans refinance. The decrease in outstandings primarily reflected increases in valuation reserves reflecting current market conditions, and relatively stable portfolio markets. The managed medallion portfolio, which includes loans at Medallion Bank and those serviced for third parties, was $667,863,000 at year end, down $36,950,000 or 5% from $704,813,000 a year ago, reflecting the above and portfolio decreases in the New York and Chicago markets, reflecting management’s decision to cull weaker and less profitable borrowers from the portfolio. The commercial loan portfolio was $81,895,000 at year end, compared to $71,149,000 a year ago, an increase of $10,746,000 or 15%, and represented 14% of the investment portfolio in both years. The increase primarily reflected growth in the high-yield mezzanine portfolio, partially offset by a decrease in the other secured commercial loan portfolio. Commercial loans yielded 12.80% at year end, up 7% from 11.91% a year ago, reflecting the change in portfolio mix and higher yields on the mezzanine portfolio. The net managed commercial loan portfolio, which includes loans at Medallion Bank and those serviced for or by third parties, was $122,463,000 at year end, up $8,177,000 or 7% from $114,286,000 a year ago, primarily reflecting the changes described above, and an increase in asset-based loan participations purchased. Approximately $11,652,000 of managed asset-based loans ($6,991,000 after valuation adjustments) has been reclassified to other assets awaiting the outcome of legal proceedings as described further on page 43. Investments in Medallion Bank and other controlled subsidiaries were $159,913,000 at year end, up $23,065,000 or 17% from $136,848,000 a year ago, primarily reflecting our equity in the earnings of Medallion Bank other portfolio company investments, capital contributions made, dividends paid, portfolio sales, and net appreciation, and which represented 26% of the investment portfolio in both years, and which yielded 12.74% at year end, compared to 11.44% a year ago, primarily reflecting the dividends from Medallion Bank. See Notes 3 and 10 of the consolidated financial statements for additional information about Medallion Bank and the other controlled subsidiaries. Equity investments were $6,859,000 at year end, down $851,000 or 11% from $7,710,000 a year ago, primarily reflecting increased equity investments offset by portfolio depreciation and the transfer of an investment to investment in controlled subsidiaries, and which represented 1% of the investment portfolio at both year ends, and had a dividend yield of 0.72%, compared to 0.86% a year ago. Investment securities were $49,884,000 at year end, compared to $0 a year ago, representing 8% of the net investment portfolio, and had a yield of 0.35%, reflecting new investment activity. See page 40 for a table that shows balances and yields by type of investment.

Interest expense was $9,422,000 in 2015, up $879,000 or 10% from $8,543,000 in 2014. The increase in interest expense was primarily due to increased borrowing levels. The cost of borrowed funds was 2.60% in 2015, compared to 2.70% a year ago, a decrease of 4%, reflecting the adjustable rate nature of much of our borrowings, and changes in our funding mix. Average debt outstanding was $361,738,000 in 2015, compared to $316,842,000 a year ago, up 14%, primarily reflecting increased borrowings required to fund portfolio growth and investment activity. See page 48 for a table that shows average balances and cost of funds for our funding sources.

        Net interest income was $33,231,000 and the net interest margin was 6.03% in 2015, up $706,000 or 2% from $32,525,000 a year ago, which represented a net interest margin of 6.54%, all reflecting the items discussed above.

 

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Noninterest income, which is comprised of management fees, prepayment fees, servicing fee income, late charges, and other miscellaneous income was $319,000 in 2015, down $190,000 or 37% from $509,000 a year ago, primarily reflecting lower servicing and other fees generated from the portfolio base at Medallion Bank, and lower prepayment fees.

Operating expenses were $16,724,000 in 2015, down $1,165,000 or 7% from $17,889,000 in 2014. Salaries and benefits expense was $11,644,000 in the year, down $1,159,000 or 9% from $12,803,000 in 2014, primarily reflecting lower bonus accruals, partially offset by higher salaries and health insurance costs, and also by lower salary deferrals related to loan originations. Professional fees were $1,486,000 in 2015, up $292,000 or 24% from $1,194,000 a year ago, primarily reflecting higher legal expenses for a variety of corporate and investment-related matters. Occupancy expense was $877,000 in 2015, up $79,000 or 10% from $798,000 in 2014, primarily reflecting rent previously allocated to a sold unconsolidated portfolio company. Other operating expenses of $2,717,000 in 2015 were down $377,000 or 12% from $3,094,000 a year ago, primarily reflecting lower advertising expenses.

Income tax expense was $0 in 2015 and 2014.

Net change in unrealized appreciation on investments was $4,914,000 in 2015, compared to $19,154,000 in 2014, a decrease in appreciation of $14,240,000 or 74%. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries, was depreciation of $11,916,000 in 2015, compared to appreciation of $3,511,000 in 2014, resulting in decreased appreciation of $15,427,000 in 2015. 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 2015 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $16,830,000, reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $1,015,000, net reversals of unrealized depreciation associated with equity investments which were sold of $292,000, and net unrealized appreciation on equity investments of $209,000, partially offset by net depreciation on investments other than securities of $9,621,000, net unrealized depreciation on loans of $3,743,000, and net depreciation on other assets of $68,000. The 2014 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $15,643,000, reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $5,408,000, net appreciation on other assets of $1,141,000, reversals of unrealized depreciation associated with equity investments which were sold of $674,000, and net unrealized appreciation on equity investments of $553,000, partially offset by net depreciation on investments other than securities of $2,900,000 and net unrealized depreciation on loans of $1,365,000. The net appreciation on Medallion Bank and other controlled subsidiaries described above is net of the dividends declared by them to us of $18,889,000 in 2015 and $15,000,000 in 2014.

Our net realized gains on investments were $7,636,000 in 2015, compared to losses of $5,607,000 in 2014, an increase in realized gains of $13,243,000 in 2015. The 2015 activity reflected the reversals described in the unrealized paragraph above, and reversals of $4,809,000 of unrealized appreciation related to sales of other controlled subsidiaries, $3,296,000 of other gains from the other controlled subsidiaries sales, and other gains on equity investments of $913,000, partially offset by net direct chargeoffs of loans and equity investments of $75,000. The 2014 activity reflected the reversals described in the unrealized paragraph above and other gains on loans of $385,000, other gains on equity investments of $49,000, and net direct loan recoveries of $41,000.

Our net realized/unrealized gains on investments were $12,550,000 in 2015, compared to $13,547,000 in 2014, a decrease of $997,000 or 7% of net gains in the year, reflecting the above.

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

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

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

 

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

In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years. We had outstanding SBA debentures of $81,985,000 with a weighted average interest rate of 3.63%, constituting 24% of our total indebtedness, and unsecured notes of $33,625,000, with a weighted average interest rate of 9.00%, constituting 10% of total indebtness as of December 31, 2016. Also, as of December 31, 2016, certain of the certificates of deposit were for terms of up to 59 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, 2016, compared to the respective positions at the end of 2015 and 2014. 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, 2016 Cumulative Rate Gap (1)  

(Dollars in thousands)

  Less Than 1 Year     More Than 1 and
Less Than 2
Years
    More Than 2 and
Less Than 3
Years
    More Than 3 and
Less Than 4
Years
    More Than 4 and
Less Than 5
Years
    More Than 5 and Less
Than 6 Years
    Thereafter     Total  

Earning assets

             

Floating-rate

  $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    

Adjustable rate

    29,360       —         2,407       3,854       —         —         —         35,621  

Fixed-rate

    180,491       93,893       23,087       15,166       18,128       3,258       10,532       344,555  

Cash

    20,962       —         —         —         —         —         —         20,962  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

  $ 230,813     $ 93,893     $ 25,494     $ 19,020     $ 18,128     $ 3,258     $ 10,532     $ 401,138  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest bearing liabilities

             

DZ loan

  $ 106,244     $ —       $ —       $ —       $ —       $ —       $ —       $ 106,244  

Notes payable to banks

    94,111       68       —         40       —         —         —         94,219  

SBA debentures

    2,000       —         3,000       —         15,985       —         61,000       81,985  

Unsecured notes

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

Preferred securities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 235,355     $ 68     $ 3,000     $ 40     $ 49,610     $ —       $ 61,000     $ 349,073  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate gap

  ($ 4,542   $ 93,825     $ 22,494     $ 18,980     ($ 31,482   $ 3,258     ($ 50,468   $ 52,065  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest rate gap (2)

  ($ 4,542   $ 89,283     $ 111,777     $ 130,757     $ 99,275     $ 102,533     $ 52,065       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015 (2)

  ($ 114,848   $ 19,834     $ 86,273     $ 102,726     $ 125,935     $ 114,139     $ 71,928       —    

December 31, 2014 (2)

  ($ 160,108   ($ 47,283   $ 73,765     $ 108,360     $ 124,790     $ 131,736     $ 84,006       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(1) The ratio of the cumulative one year gap to total interest rate sensitive assets was (1%), (24%), and (37%), as of December 31, 2016, 2015, and 2014, and was (11%), (14%), and (19%) on a combined basis with Medallion Bank.
(2) Adjusted for the medallion loan 40% prepayment assumption results in a cumulative one year positive interest rate gap and related ratio of $36,392 or 9% for December 31, 2016, compared to negative interest rate gaps of ($43,838) or (9%) and ($53,066) or (12%) for December 31, 2015 and 2014, and was ($86,349) or (6%), ($77,488) or (5%), and ($28,650) or (2%) on a combined basis with Medallion Bank.

        Our interest rate sensitive assets were $401,138,000 and interest rate sensitive liabilities were $349,073,000 at December 31, 2016. The one-year cumulative interest rate gap was a negative $4,542,000 or 1% of interest rate sensitive assets, compared to a negative $114,848,000 or 24% at December 31, 2015 and $160,108,000 or 37% at December 31, 2014. However, using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a positive gap of $36,392,000 or 9% at December 31, 2016. 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.

On a combined basis with Medallion Bank, our interest rate sensitive assets were $1,476,967,000 and interest rate sensitive liabilities were $1,257,515,000 at December 31, 2016. The one-year cumulative interest rate gap was a negative $160,931,000 or 11% of interest rate sensitive assets, compared to a negative $220,686,000 or 14% and $257,578,000 or 19% at December 31, 2015 and 2014. Using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of $86,349,000 or 6% at December 31, 2016.

 

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Interest Rate Cap Agreements

We manage our exposure to increases in market rates of interest by periodically purchasing interest rate caps to lock in the cost of funds of our variable-rate debt in the event of a rapid run up in interest rates. We entered into contracts to purchase interest rate caps on $110,000,000 of notional value of principal from various multinational banks, with termination dates ranging to December 2018. The caps provide for payments to us if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases were generally fully expensed when paid, including $20,000, $81,000, and $75,000, in 2016, 2015, and 2014, and all are carried at $0 on the balance sheet at December 31, 2016.

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 Bank. As a RIC, we were required to distribute at least 90% of our investment company taxable income; consequently, we primarily relied upon external sources of funds to finance growth. However, for the year ended December 31, 2016, we did not qualify for the RIC election, and therefore became subject to taxation as a corporation under Subchapter C of the Code. There were $5,500,000 of unfunded commitments from the SBA, $3,500,000 of which would be issued without further capital contribution from us.

Additionally, Medallion Bank, our wholly-owned, unconsolidated portfolio company has access to independent sources of funds for our business originated there, primarily through brokered certificates of deposit. Medallion Bank has $25,000,000 available under Fed Funds lines with several commercial banks. In addition, Medallion Bank is allowed to retain all earnings in the business to fund future growth.

The components of our debt were as follows at December 31, 2016. See Note 4 to the consolidated financial statements on page F-20 for details of the contractual terms of our borrowings.

 

(Dollars in thousands)

   Balance      Percentage     Rate (1)  

DZ loan

   $ 106,244        30     2.36

Notes payable to banks

     94,219        27       3.22  

SBA debentures

     81,985        24       3.63  

Unsecured notes

     33,625        10       9.00  

Preferred securities

     33,000        9       3.07  
  

 

 

    

 

 

   

Total outstanding debt

   $ 349,073        100     3.60  
  

 

 

    

 

 

   

 

 

 

Deposits and other borrowings at Medallion Bank

     908,442        —       1.22

Total outstanding debt, including Medallion Bank

   $ 1,257,515        —       1.88  
  

 

 

    

 

 

   

 

 

 

 

(1) Weighted average contractual rate as of December 31, 2016.

 

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Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all contractual obligations at December 31, 2016.

 

     Payments due by period  

(Dollars in thousands)

   Less than 1 year      1 – 2 years      2 – 3 years      3 – 4 years      4 – 5 years      More than 5 years      Total  

DZ loan

   $ 106,244      $ —      $ —      $ —      $ —      $ —      $ 106,244  

Notes payable to banks

     62,748        31,431        —          40        —        —        94,219  

SBA debentures

     —        —        3,000        —        15,985        63,000        81,985  

Unsecured notes

     —        —        —        —        33,625        —        33,625  

Preferred securities

     —        —        —        —        —        33,000        33,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 168,992      $ 31,431      $ 3,000      $ 40    $ 49,610      $ 96,000      $ 349,073  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deposits and other borrowings at Medallion Bank

     411,493        255,792        156,401        40,147        44,609        —        908,442  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total, including Medallion Bank

   $ 580,485      $ 287,223      $ 159,401      $ 40,187      $ 94,219      $ 96,000      $ 1,257,515  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Most of our borrowing relationships have maturity dates during 2017. We have been in active and ongoing discussions with each of these lenders and have extended each of the facilities as they matured except as set forth in the following paragraph. The lenders have worked with us to extend and change the terms of the borrowing agreements. We have arranged for changes to the terms of the notes and payment and borrowing base calculations which we anticipate will facilitate our operations for the foreseeable future.

We and our subsidiaries obtain financing under lending facilities extended by various banks and other financial institutions, some of which are secured by loans, taxi medallions and other assets. Where these facilities are extended to our subsidiaries, we and others of our subsidiaries may guarantee the obligations of the relevant borrower. Five of our smallest subsidiaries are borrowers under promissory notes extended to them by a bank that total $8.8 million that came due on October 17, 2016. These loans are secured by Chicago taxi medallions owned by our subsidiaries. These notes are guaranteed by Medallion Funding, not by Medallion Financial Corp. These subsidiaries have not repaid the amounts due under the notes and the bank has filed a suit seeking payment of these amounts. This failure to pay would constitute an event of default under certain loan agreements under which we or our subsidiaries are borrowers, but the lenders under those agreements have waived the default. If judgment is entered against us in the suit brought by the bank or entered and not satisfied within specified periods of time, these outcomes may constitute an additional event of default under these other agreements. If waivers are required and not granted for this additional event of default, it would lead to events of default under other of our financing arrangements.

We value our portfolio at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy. Unlike certain lending institutions, we are not permitted to establish reserves for loan losses. Instead, we must value each individual investment and portfolio loan on a quarterly basis. We record unrealized depreciation on investments and loans when we believe that an asset has been impaired and full collection is unlikely. We record unrealized appreciation on equities if we have a clear indication that the underlying portfolio company has appreciated in value and, therefore, our equity investment has also appreciated in value. Without a readily ascertainable market value, the estimated value of our portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. We adjust the valuation of the portfolio quarterly to reflect our Board of Directors’ estimate of the current fair value of each investment in the portfolio. Any changes in estimated fair value are recorded in our statement of operations as net unrealized appreciation (depreciation) on investments. Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of its fair value. We conduct a thorough valuation analysis, and also receive an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank. We determine whether any factors give rise to valuation different than recorded book value. As a result of this valuation process, we had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the second quarter of 2015, we first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016. In addition, in the third quarter of 2016 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. We incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. We also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016 as a component of unrealized appreciation (depreciation) on investments, in addition to Medallion Bank’s actual results of operations for the year. For more information, see “Risk Factors – Risks Relating to Our Business and Structure – Our investment portfolio is, and will continue to be, recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is, and will continue to be, uncertainty as to the value of our portfolio investments which could adversely affect our net asset value.”

 

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In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. 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, and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item “net increase in net assets resulting from operations” as of December 31, 2016 by $1,100,000 on an annualized basis, compared to a positive impact of $692,000 at December 31, 2015, and the impact of such an immediate increase of 1% over a one year period would have been ($792,000) at December 31, 2016, compared to ($1,855,000) at December 31, 2015. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net increase in net assets resulting from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

We 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.

 

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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, 2016. See Note 4 to the consolidated financial statements for additional information about each credit facility.

 

(Dollars in thousands)

  The Company     MFC     MCI     FSVC     MB     12/31/2016     12/31/2015  

Cash

  $ 8,922 (1)    $ 1,033     $ 7,656     $ 3,351     $ —       $ 20,962     $ 30,912  

Bank loans

    71,135       22,836       —         248       —         94,219       122,429  

Average interest rate

    3.16     3.36     —         6.03     —         3.22     2.60

Maturity

    11/16-7/18 (2)      10/16-12/20       —         1/17-11/18       —         10/16-12/20       2/16-12/20  

Preferred securities

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

Average interest rate

    3.07     —         —         —         —         3.07     2.58

Maturity

    9/37       —         —         —         —         9/37       9/37  

Unsecured notes

    33,625       —         —         —         —         33,625       —    

Average interest rate

    9.00             9.00     —    

Maturity

    4/21               4/21       —    

DZ loan

    —         106,244       —         —         —         106,244       129,518  

Average interest rate

    —         2.36     —         —         —         2.36     2.05

Maturity

    —         6/17       —         —         —         6/17       12/16  

Margin loans

    —         —         —         —         —         —         45,108  

Average interest rate

    —       —         —         —         —         —       1.48

Maturity

    N/A       —         —         —         —         N/A       N/A  

SBA debentures

    —         —         54,000       33,485       —         87,485       77,485  

Amounts undisbursed (3)

    —         —         5,500 (2)      —         —         5,500       3,000  

Amounts outstanding

    —         —         48,500       33,485       —         81,985       74,485  

Average interest rate

    —         —         3.42     3.92     —         3.63     3.52

Maturity

    —         —         3/21-3/27       3/19-9/23 (4)      —         3/19-3/27       3/19-3/26  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total debt outstanding

  $ 137,760     $ 129,080     $ 48,500     $ 33,733     $ —       $ 349,073     $ 404,540  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Including Medallion Bank

             

Cash

    —         —         —         —       $ 30,881     $ 30,881     $ 23,094  

Deposits and other borrowings

    —         —         —         —         908,442       908,442       908,896  

Average interest rate

    —         —         —         —         1.22     1.22     1.04

Maturity

    —         —         —         —         1/17-12/21       1/17-12/21       1/16-12/20  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash

  $ 8,922     $ 1,033     $ 7,656     $ 3,351     $ 30,881     $ 51,843     $ 54,006  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total debt outstanding

  $ 137,760     $ 129,080     $ 48,500     $ 33,733     $ 908,442     $ 1,257,515     $ 1,313,436  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) $7,840 is pledged to a lender of an affiliate.
(2) $3,898 that matured in November 2016 was refinanced in 2017.
(3) $2,000 of this requires a $1,000 capital contribution from the Company.
(4) In connection with the Freshstart loan described in Note 19 the $33,485 of principal was restructured into a new note and matures in tranches from February 2018 to February 2020.

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 generate liquidity through deposits generated at Medallion Bank, borrowing arrangements with other banks, and through the issuance of SBA debentures, as well as from cash flow from operations. In addition, we may choose to participate a greater portion of our loan portfolio to third parties. We are actively seeking additional sources of liquidity, however, given current market conditions, we cannot assure you that we will be able to secure additional liquidity on terms favorable to us or at all. If that occurs, we may decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become more favorable; or we may be required to dispose of assets when we would not otherwise do so, and at prices which may be below the net book value of such assets in order for us to repay indebtedness on a timely basis. Also, Medallion Bank is not a RIC, and therefore is able to retain earnings to finance growth.

Recently Issued Accounting Standards

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

In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 enhances the reporting model for stock compensation and provides users of financial statements with more decision-useful information. ASU 2016-09 simplifies guidance on several aspects of the accounting

 

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for shared-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The update, as amended, is effective for annual periods beginning after December 15, 2016. We do not believe this update will have a material impact on our financial condition.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for leases classified as operating under current GAAP. ASU 2016-02 applies to all entities and is effective for fiscal years beginning after December 15, 2018 for public entities and is effective for fiscal years beginning after December 15, 2019 for all other entities, with early adoption permitted. We are assessing the impact the update will have on our financial condition and results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The main objective of this Update is to enhance the reporting model for financial instruments and provide users of financial statements with more decision-useful information. ASU 2016-01 requires equity investments to be measured at fair value, simplifies the impairment assessment of equity investment without readily determinable fair value, eliminates the requirements to disclose the fair value of financial instruments measured at amortized cost, and requires public business entities to use the exit price notion when measuring the fair value of financial instruments. The update, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We do not believe this update will have a material impact on our financial condition.

 

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.

We value our portfolio at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy. Unlike certain lending institutions, we are not permitted to establish reserves for loan losses. Instead, we must value each individual investment and portfolio loan on a quarterly basis. We record unrealized depreciation on investments and loans when we believe that an asset has been impaired and full collection is unlikely. We record unrealized appreciation on equities if we have a clear indication that the underlying portfolio company has appreciated in value and, therefore, our equity investment has also appreciated in value. Without a readily ascertainable market value, the estimated value of our portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. We adjust the valuation of the portfolio quarterly to reflect our Board of Directors’ estimate of the current fair value of each investment in the portfolio. Any changes in estimated fair value are recorded in our statement of operations as net unrealized appreciation (depreciation) on investments. Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of its fair value. We conduct a thorough valuation analysis, and also receive an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank. We determine whether any factors give rise to valuation different than recorded book value. As a result of this valuation process, we had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the second quarter of 2015, we first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016. In addition, in the third quarter of 2016 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. We incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. We also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016 as a component of unrealized appreciation (depreciation) on investments, in addition to Medallion Bank’s actual results of operations for the year. For more information, see “Risk Factors – Risks Relating to Our Business and Structure – Our investment portfolio is, and will continue to be, recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is, and will continue to be, uncertainty as to the value of our portfolio investments which could adversely affect our net asset value.”

In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising

 

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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 to the extent permitted by the 1940 Act. 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, and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item “net increase in net assets resulting from operations” as of December 31, 2016 by $1,100,000 on an annualized basis, compared to a positive impact of $692,000 at December 31, 2015, and the impact of such an immediate increase of 1% over a one year period would have been ($792,000) at December 31, 2016, compared to ($1,855,000) at December 31, 2015. 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.

 

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.

 

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this annual report. As a result of this evaluation, we have concluded that our disclosure controls and procedures were effective as of December 31, 2016.

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 2016 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 2016 fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

 

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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, 2016. 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, 2016.

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.

 

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Report Of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Medallion Financial Corp.

We have audited Medallion Financial Corp. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.

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.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company including the consolidated summary schedule of investments, as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the three-year period ended December 31, 2016, and the selected financial ratios and other data for each of the five years in the five-year period ended December 31, 2016 of the Company, and our report dated March 14, 2017 expressed an unqualified opinion.

/s/ Mazars USA LLP

New York, New York

March 14, 2017

 

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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 May 1, 2017 for our fiscal year 2017 Annual Meeting of Shareholders under the captions “Our Directors and Executive Officers” and “Corporate Governance.”

 

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference from our Definitive Proxy Statement expected to be filed by May 1, 2017 for our fiscal year 2017 Annual Meeting of Shareholders under the caption “Executive Compensation.”

 

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 May 1, 2017 for our fiscal year 2017 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 May 1, 2017 for our fiscal year 2017 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 May 1, 2017 for our fiscal year 2017 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.

 

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3. EXHIBITS

 

Number

 

Description

3.1(a)   Restated Medallion Financial Corp. Certificate of Incorporation. Filed as Exhibit 2(a) to the Company’s Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein.
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. 814-00188) and incorporated by reference herein.
  3.2   Restated By-Laws. Filed as Exhibit (b) to the Company’s Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein.
  4.1   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.
  4.2   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.
  4.3   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.
  4.4   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.
10.1   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.*
10.2   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.*
10.3   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.*
10.4   Medallion Financial Corp. Amended and Restated 1996 Stock Option Plan. Filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 (File No. 814-00188) and incorporated by reference herein.*
10.5   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.*
10.6   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.*
10.7   2009 Employee Restricted Stock Plan. Filed as Exhibit I to our definitive proxy statement for our 2010 Annual Meeting of Shareholders filed on April 29, 2010 (File No. 814-00188) and incorporated by reference herein.*
10.8   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.*
10.9   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.*
10.10   Non-Employee Director Compensation Summary Sheet. Filed herewith.*
10.11   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. 814-00188) and incorporated by reference herein.
10.12   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.

 

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10.13    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.
10.14    Amended and Restated Loan and Security Agreement, dated as of March 28, 2011, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on April 1, 2011 (File No. 814-00188) and incorporated by reference herein.
10.15    First Amendment to Amended and Restated Loan and Security Agreement, dated September 1, 2011, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 7, 2011 (File No. 814-00188) and incorporated by reference herein.
10.16    Second Amendment to Amended and Restated Loan and Security Agreement, dated January 8, 2013, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 11, 2013 (File No. 814-00188) and incorporated by reference herein.
10.17    Third Amendment to Amended and Restated Loan and Security Agreement, dated October 23, 2013, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on November 5, 2013 (File No. 814-00188) and incorporated by reference herein.
10.18    Fourth Amendment to Amended and Restated Loan and Security Agreement, dated August 11, 2014, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 14, 2014 (File No. 814-00188) and incorporated by reference herein.
10.19    Sixth Amendment to Amended and Restated Loan and Security Agreement, dated June 29, 2016, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on June 30, 2016 (File No. 814-00188) and incorporated by reference herein.
10.20    Eighth Amendment to Amended and Restated Loan and Security Agreement, dated July 29, 2016, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 4, 2016 (File No. 814-00188) and incorporated by reference herein.
10.21    Ninth Amendment to Amended and Restated Loan and Security Agreement, dated August 11, 2016, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 15, 2016 (File No. 814-00188) and incorporated by reference herein.
10.22    Amended and Restated Unlimited Guaranty, dated March 28, 2011, by Medallion Funding LLC, in favor of Sterling National Bank. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on April 1, 2011 (File No. 814-00188) and incorporated by reference herein.
10.23    Commitment Letter, dated March 1, 2006, by the Small Business Administration to Medallion Capital, Inc., accepted and agreed to by Medallion Capital, Inc. on March 8, 2006. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 9, 2006 (File No. 814-00188) and incorporated by reference herein.
10.24    Commitment Letter, dated September 20, 2006, by the Small Business Administration to Freshstart Venture Capital Corp., accepted and agreed to by Freshstart Venture Capital Corp. on October 10, 2006. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 11, 2006 (File No. 814-00188) and incorporated by reference herein.
10.25    Commitment Letter, dated September 1, 2010, by the Small Business Administration to Medallion Capital, Inc., accepted and agreed to by Medallion Capital, Inc. on September 7, 2010. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on September 13, 2010 (File No. 814-00188) and incorporated by reference herein.
10.26    Commitment Letter, dated September 1, 2010, by the Small Business Administration to Freshstart Venture Capital Corp., accepted and agreed to by Freshstart Venture Capital Corp. on September 8, 2010. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 13, 2010 (File No. 814-00188) and incorporated by reference herein.
10.27    Commitment Letter, dated January 25, 2013, by the Small Business Administration to Medallion Capital, Inc., accepted and agreed to by Medallion Capital, Inc. on January 28, 2013. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 30, 2013 (File No. 814-00188) and incorporated by reference herein.
10.28    Commitment Letter, dated February 6, 2013, by the Small Business Administration to Freshstart Venture Capital Corp., accepted and agreed to by Freshstart Venture Capital Corp. on February 13, 2013. Filed as Exhibit 10.1 to Current Report on Form 8-K filed on February 14, 2013 (File No. 814-00188) and incorporated by reference herein.
10.29    Commitment Letter, dated July 29, 2013, by the Small Business Administration to Freshstart Venture Capital Corp., accepted and agreed to by Freshstart Venture Capital Corp. on August 1, 2013. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 5, 2013 (File No. 814-00188) and incorporated by reference herein.

 

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10.30    Commitment Letter, dated September 2, 2014, by the Small Business Administration to Medallion Capital, Inc., accepted and agreed to by Medallion Capital, Inc. on September 2, 2014. Filed as Exhibit 10.1 to the Quarterly period ended September 30, 2014 (File No. 814.00188) and incorporated by reference herein.
10.31    Commitment Letter, dated April 15, 2015, by the Small Business Administration to Medallion Capital, Inc., accepted and agreed to by Medallion Capital, Inc. on April 20, 2015. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on April 21, 2015 (File No. 814-00188) and incorporated by reference herein.
10.32    Commitment Letter, dated October 27, 2015, by the Small Business Administration to Medallion Capital, Inc., accepted and agreed to by Medallion Capital, Inc. on November 2, 2015. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on November 3, 2015 (filed No. 814-00188) and incorporated by reference herein.
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.
10.34    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.
10.35    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.
10.36    Servicing Agreement, dated as of December 12, 2008, by and among Taxi Medallion Loan Trust III, Medallion Funding Corp., and DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.
10.37    Loan Sale and Contribution Agreement, dated December 12, 2008, by and between Medallion Funding Corp. and Taxi Medallion Loan Trust III. Filed as Exhibit 10.3 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.
10.38    Limited Recourse Guaranty, dated as of December 12, 2008, by Medallion Funding Corp., in favor of Autobahn Funding Company LLC, as Lender, and DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, as Agent. Filed as Exhibit 10.5 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.
10.39    Performance Guaranty, dated as of December 12, 2008, by Medallion Financial Corp., in favor of Taxi Medallion Loan Trust III, Autobahn Funding Company LLC, as Lender, and DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, as Agent. Filed as Exhibit 10.6 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.
10.40    Reaffirmation Agreement, dated as of February 26, 2010, by and among Medallion Funding LLC, Taxi Medallion Loan Trust III, DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, in its capacity as Agent, and Wells Fargo Bank, National Association. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on March 5, 2010 (File No. 814-00188) and incorporated by reference herein.
10.41    Custodial Agreement, dated as of December 12, 2008, among DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, Taxi Medallion Loan Trust III, Wells Fargo Bank, National Association, and Medallion Funding Corp. Filed as Exhibit j.2 to the Registration Statement on Form N-2 filed on December 20, 2011 (File No. 333-178644) and incorporated by reference herein.
10.42    Second Amended and Restated Trust Agreement, dated as of December 12, 2013, by and between Medallion Funding LLC and US Bank Trust, N.A. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on December 16, 2013 (File No. 814-00188) and incorporated by reference herein.
10.43    Amended and Restated Loan and Security Agreement, dated as of December 12, 2016, among Taxi Medallion Loan Trust III, Autobahn Funding Company LLC, and DZ Bank AG Deutsche Zentral Genossenschaftsbank, Frankfurt am Main. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on December 13, 2016 (File No. 814-00188) and incorporated by reference herein.

 

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10.44    Amendment No. 1 to Second Amended and Restated Trust Agreement, dated as of December 12, 2016, by and among Medallion Funding LLC, U.S. Bank Trust, N.A. and DZ Bank AG Deutsche Zentral Genossenschaftsbank, Frankfurt am Main. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on December 13, 2016 (File No. 814-00188) and incorporated by reference herein.
10.45    Omnibus Amendment No. 1, dated as of February 15, 2017, by and among Taxi Medallion Loan Trust III, Medallion Funding LLC, Medallion Financial Corp., Medallion Capital, Inc., Freshstart Venture Capital Corp., Autobahn Funding Company LLC, and DZ Bank AG Deutsche Zentral Genossenschaftsbank, Frankfurt am Main. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on February 17, 2017 (File No. 814-00188) and incorporated by reference herein.
10.46    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.
10.47    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.
12.1    Computation of ratio of debt to equity. Filed herewith.
21.1    List of Subsidiaries of Medallion Financial Corp. Filed herewith.
23.1    Consent of Mazars USA LLP, independent registered public accounting firm, related to reports on financial statements of Medallion Financial Corp. and Medallion Bank. Filed herewith.
31.1    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.
31.2    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.
32.1    Certification of Alvin Murstein pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.2    Certification of Larry D. Hall pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
99.1    Consolidated Schedule of Investments for the years ended December 31, 2016 and 2015. Filed herewith.

 

* Compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this Annual Report on Form 10-K.

 

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IMPORTANT INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain forward-looking statements contained in this 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. Accordingly, there can be no assurance that the forward-looking statements contained in this Form 10-K will be realized or that actual results will not be significantly higher or lower. The statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this 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. These risks 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, must be considered by any investor or potential investor in the Company.

 

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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 14, 2017
By:   /s/ Alvin Murstein
  Alvin Murstein
 

Chairman and Chief

Executive Officer

 

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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

  

Title

 

Date

/s/ Alvin Murstein

  

Chairman of the Board of Directors

and Chief Executive Officer

(Principal Executive Officer)

  March 14, 2017

Alvin Murstein

    

/s/ Larry D. Hall

  

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

  March 14, 2017

Larry D. Hall

    

/s/ Andrew M. Murstein

   President and Director   March 14, 2017

Andrew M. Murstein

    

/s/ Henry L. Aaron

   Director   March 14, 2017

Henry L. Aaron

    

/s/ Stanley Kreitman

   Director   March 14, 2017

Stanley Kreitman

    

/s/ Frederick A. Menowitz

   Director   March 14, 2017

Frederick A. Menowitz

    

/s/ David L. Rudnick

   Director   March 14, 2017

David L. Rudnick

    

/s/ Lowell P. Weicker, Jr.

   Director   March 14, 2017

Lowell P. Weicker, Jr.

    

 

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MEDALLION FINANCIAL CORP.

INDEX TO FINANCIAL STATEMENTS

 

     Page

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Statements of Operations for the Years ended December  31, 2016, 2015, and 2014

   F-3

Consolidated Balance Sheets as of December 31, 2016 and 2015

   F-4

Consolidated Statements of Changes in Net Assets for the Years ended December 31, 2016, 2015, and 2014

   F-5

Consolidated Statements of Cash Flows for the Years ended December  31, 2016, 2015, and 2014

   F-6

Notes to Consolidated Financial Statements

   F-7

Consolidated Summary Schedules of Investments as of December  31, 2016 and 2015

   F-37

Consolidated Schedule of Investments In and Advances to Affiliates as of and for the years ended December 31, 2016 and 2015

   F-42

Medallion Bank Financial Statements

   F-55

Report of Independent Registered Public Accounting Firm

   F-56

Statements of Comprehensive Income for the Years ended December  31, 2016, 2015, and 2014

   F-57

Balance Sheets as of December 31, 2016 and 2015

   F-58

Statements of Changes in Shareholder Equity for the Years ended December 31, 2016, 2015, and 2014

   F-59

Statements of Cash Flows for the Years ended December  31, 2016, 2015, and 2014

   F-60

Notes to Financial Statements

   F-61

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Medallion Financial Corp.

We have audited the accompanying consolidated balance sheets of Medallion Financial Corp. and subsidiaries (the “Company”), including the consolidated summary schedule of investments, as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the three-year period ended December 31, 2016 and the selected financial ratios and other data (see note 14) for each of the five years in the five-year period ended December 31, 2016. We have also audited the consolidated schedules of investments in and advances to affiliates as of and for the years ended December 31, 2016 and 2015. These consolidated financial statements, selected financial ratios and other data, and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements, selected financial ratios and other data, and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements, selected financial ratios and other data, and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our procedures included physical inspection or confirmation of securities owned as of December 31, 2016 and 2015. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements and the selected financial ratios and other data referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2016 and 2015, and the consolidated results of their operations, changes in net assets, and cash flows for each of the three years in the three-year period ended December 31, 2016 and the selected financial ratios and other data for each of the five years in the five-year period ended December 31, 2016, in conformity with US generally accepted accounting principles. Also, in our opinion, the consolidated schedules of investments in and advances to affiliates, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 14, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Mazars USA LLP

New York, New York

March 14, 2017

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Dollars in thousands, except per share data)

   2016     2015     2014  

Interest income on investments

   $ 17,654     $ 19,638     $ 22,646  

Dividend income from controlled subsidiaries

     3,000       18,889       15,000  

Interest income from affiliated investments

     3,018       1,748       503  

Medallion lease income

     538       1,388       1,714  

Interest income from controlled subsidiaries

     596       944       765  

Dividend income from affiliated investments

     201       —       —  

Dividends and interest income on short-term investments

     81       46       440  
  

 

 

   

 

 

   

 

 

 

Total investment income

     25,088       42,653       41,068  
  

 

 

   

 

 

   

 

 

 

Total interest expense(1)

     12,638       9,422       8,543  
  

 

 

   

 

 

   

 

 

 

Net interest income

     12,450       33,231       32,525  
  

 

 

   

 

 

   

 

 

 

Total noninterest income

     408       319       509  
  

 

 

   

 

 

   

 

 

 

Salaries and benefits

     11,770       11,644       12,803  

Professional fees

     2,347       1,486       1,194  

Occupancy expense

     966       877       798  

Goodwill impairment

     5,099       —       —  

Other operating expenses (2)

     2,604       2,717       3,094  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     22,786       16,724       17,889  
  

 

 

   

 

 

   

 

 

 

Net investment income (loss) before income taxes (3)

     (9,928     16,826       15,145  

Income tax benefit

     10,047       —       —  
  

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     119       16,826       15,145  
  

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments(4)

     457       7,636       (5,607

Income tax provision

     (384     —       —  
  

 

 

   

 

 

   

 

 

 

Total net realized gains (losses) on investments(4)

     73       7,636       (5,607
  

 

 

   

 

 

   

 

 

 

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

     130,121       16,830       15,643  

Net change in unrealized depreciation on investments other than securities

     (28,372     (9,621     (2,901

Net change in unrealized appreciation (depreciation) on investments

     (22,863     (2,295     6,412  

Income tax provision

     (55,563     —       —  
  

 

 

   

 

 

   

 

 

 

Net unrealized appreciation on investments

     23,323       4,914       19,154  
  

 

 

   

 

 

   

 

 

 

Net realized/unrealized gains on investments

     23,396       12,550       13,547  
  

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 23,515     $ 29,376     $ 28,692  
  

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations per common share

      

Basic

   $ 0.97     $ 1.21     $ 1.15  

Diluted

   $ 0.97     $ 1.20     $ 1.14  
  

 

 

   

 

 

   

 

 

 

Distributions declared per share

   $ 0.35     $ 1.00     $ 0.96  
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

      

Basic

     24,123,888       24,315,427       24,850,496  

Diluted

     24,173,020       24,391,959       25,073,323  
  

 

 

   

 

 

   

 

 

 

 

(1) Average borrowings outstanding were $380,305, $361,738, and $316,842, and the related average borrowing costs were 3.32%, 2.60%, and 2.70% for the years ended December 31, 2016, 2015, and 2014.
(2) See note 13 for the components of other operating expenses.
(3) Includes $1,235, $951, and $1,020 of net revenues received from Medallion Bank for the years ended December 31, 2016, 2015, and 2014 primarily for servicing fees, loan origination fees, and expense reimbursements. See notes 3 and 11 for additional information.
(4) There were no net losses on investment securities of affiliated issuers for the years ended December 31, 2016, 2015, and 2014.

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share data)

   December 31, 2016     December 31, 2015  

Assets

    

Medallion loans, at fair value

   $ 266,816     $ 308,408  

Commercial loans, at fair value

     53,120       58,051  

Commercial loans to affiliated entities, at fair value

     27,355       15,496  

Commercial loans to controlled subsidiaries, at fair value

     3,159       8,348  

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

     293,360       159,913  

Equity investments, at fair value

     4,891       4,447  

Equity investments in affiliated entities, at fair value

     3,577       2,412  

Investment securities, at fair value

     —         49,884  
  

 

 

   

 

 

 

Net investments ($231,494 at December 31, 2016 and $290,151 at December 31, 2015 pledged as collateral under borrowing arrangements)

     652,278       606,959  

Cash and cash equivalents ($7,840 at December 31, 2016 and $7,831 at December 31, 2015 restricted as to use by lender (1)

     20,962       30,912  

Accrued interest receivable

     769       1,003  

Fixed assets, net

     267       198  

Investments other than securities (2)

     9,510       37,882  

Goodwill, net

     —         5,099  

Other assets, net (3)

     5,591       6,997  
  

 

 

   

 

 

 

Total assets

   $ 689,377     $ 689,050  
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued expenses

   $ 5,425     $ 5,120  

Accrued interest payable

     2,883       1,302  

Deferred and other tax liabilities, net(4)

     45,900       —    

Funds borrowed

     349,073       404,540  
  

 

 

   

 

 

 

Total liabilities

     403,281       410,962  
  

 

 

   

 

 

 

Commitments and contingencies (5)

     —       —  

Shareholders’ equity (net assets)

    

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 – 26,976,064 shares at December 31, 2016 and 26,936,762 shares at December 31, 2015 issued)

     270       269  

Treasury stock at cost (2,951,243 shares at December 31, 2016 and 2,590,069 shares at December 31, 2015)

     (24,919     (23,396

Capital in excess of par value

     272,934       272,349  

Accumulated undistributed net investment loss

     (33,993     (15,617

Accumulated undistributed net realized gains on investments

     —       —  

Net unrealized appreciation on investments, net of tax

     71,804       44,483  
  

 

 

   

 

 

 

Total shareholders’ equity (net assets)

     286,096       278,088  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 689,377     $ 689,050  
  

 

 

   

 

 

 

Number of common shares outstanding

     24,024,821       24,346,693  

Net asset value per share

   $ 11.91     $ 11.42  
  

 

 

   

 

 

 

 

(1) See Note 2 for additional information.
(2) See Note 18 for additional information.
(3) Includes $0 and $3,000 of dividends receivable from Medallion Bank at December 31, 2016 and 2015.
(4) See Note 5 for additional information.
(5) See Note 10 for additional information.

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

 

     Year Ended December 31,  

(Dollars in thousands, except per share data)

   2016     2015     2014  

Net investment income after income taxes

   $ 119     $ 16,826     $ 15,145  

Net realized gains (losses) on investments, net of tax

     73       7,636       (5,607

Net unrealized appreciation on investments, net of tax

     23,323       4,914       19,154  
  

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     23,515       29,376       28,692  
  

 

 

   

 

 

   

 

 

 

Investment income, net

     (14,570     (20,042     (14,974

Return of capital

     —       (4,330     (8,918

Realized gains from investment transactions, net

     —       —       —  
  

 

 

   

 

 

   

 

 

 

Distributions to shareholders (1)

     (14,570     (24,372     (23,892
  

 

 

   

 

 

   

 

 

 

Stock – based compensation expense

     568       1,294       1,490  

Exercise of stock options

     19       281       882  

Treasury stock acquired

     (1,524     (3,212     (5,880

Capitalized stock issuance costs

     —       —       (117
  

 

 

   

 

 

   

 

 

 

Capital share transactions

     (937     (1,637     (3,625

Other, distributions not paid on forfeited restricted stock grants

     —         51       —  
  

 

 

   

 

 

   

 

 

 

Total increase in net assets

     8,008       3,418       1,175  

Net assets at the beginning of the year

     278,088       274,670       273,495  
  

 

 

   

 

 

   

 

 

 

Net assets at the end of the year(2)

   $ 286,096     $ 278,088     $ 274,670  
  

 

 

   

 

 

   

 

 

 

Capital share activity

      

Common stock issued, beginning of year

     26,936,762       26,797,499       26,570,355  

Exercise of stock options

     2,100       30,449       98,396  

Issuance of restricted stock, net

     37,202       108,814       128,748  
  

 

 

   

 

 

   

 

 

 

Common stock issued, end of year

     26,976,064       26,936,762       26,797,499  
  

 

 

   

 

 

   

 

 

 

Treasury stock, beginning of year

     (2,590,069     (2,176,876     (1,600,733

Treasury stock acquired

     (361,174     (413,193     (576,143
  

 

 

   

 

 

   

 

 

 

Treasury stock, end of year

     (2,951,243     (2,590,069     (2,176,876
  

 

 

   

 

 

   

 

 

 

Common stock outstanding

     24,024,821       24,346,693       24,620,623  
  

 

 

   

 

 

   

 

 

 

 

(1) Distributions declared were $0.35, $1.00, and $0.96 per share for the years ended December 31, 2016, 2015, and 2014.
(2) Includes $0, $0, and $0 of undistributed net investment income and $0, $0, and $0 of undistributed net realized gains on investments, and $0, $1,447, and $9,245 of capital loss carryforwards at December 31, 2016, 2015, and 2014.

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year ended December 31,  

(Dollars in thousands)

   2016     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net increase in net assets resulting from operations

   $ 23,515     $ 29,376     $ 28,692  

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:

      

Investments originated(1)

     (324,753     (117,540     (110,477

Proceeds from principal receipts, sales, and maturities of investments(1)

     390,524       57,026       83,993  

(Investment in) capital returned by Medallion Bank and other controlled subsidiaries, net

     (3,326     (8,525     (12,581

Net cash received on disposition of other controlled subsidiaries

     —       11,969       —  

Depreciation and amortization

     485       415       483  

Increase (decrease) in deferred and other tax liability, net

     45,900       —       —  

Accretion of origination fees, net

     (49     (49     (103

Net change in unrealized depreciation on investments

     22,863       2,295       (6,412

Net change in unrealized depreciation on investment other than securities

     28,372       9,621       2,901  

Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries

     (130,121     (16,830     (15,643

Net realized (gains) losses on investments

     (457     (7,636     5,607  

Goodwill impairment

     5,099       —       —  

Stock-based compensation expense

     568       1,294       1,490  

(Increase) decrease in accrued interest receivable

     234       (15     (81

(Increase) decrease in other assets, net

     804       (3,664     9,989  

Increase (decrease) in accounts payable and accrued expenses

     353       (1,481     1,176  

Increase (decrease) in accrued interest payable

     1,580       (869     1,047  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     61,591       (44,613     (9,919
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

      

Proceeds from funds borrowed

     294,650       111,742       124,480  

Repayments of funds borrowed

     (350,116     (55,997     (90,643

Proceeds from exercise of stock options

     19       281       882  

Purchase of treasury stock at cost

     (1,524     (3,212     (5,880

Payments of declared distributions

     (14,570     (24,372     (23,892

Issuance of common stock, net

     —       —       (117 )
  

 

 

   

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (71,541     28,442       4,830  
  

 

 

   

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (9,950     (16,171     (5,089

Cash and cash equivalents, beginning of year

     30,912       47,083       52,172  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 20,962     $ 30,912     $ 47,083  
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION

      

Cash paid during the year for interest

   $ 10,682     $ 10,015     $ 7,175  

Cash paid during the year for income taxes

     —       —       —  
  

 

 

   

 

 

   

 

 

 

 

(1) $280,563, and $49,884, and $0 of originated investments, and $330,466, $0, and $0 of maturities or proceeds from sales related to the investment securities portfolio for the years ended December 31, 2016, 2015, and 2014.

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

 

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MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

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

Medallion Financial Corp. (the Company) is a closed-end management investment company organized as a Delaware corporation. The Company has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). The Company conducts its business through various wholly-owned subsidiaries including its primary operating company, Medallion Funding LLC (MFC), a Small Business Investment Company (SBIC) which originates and services taxicab medallion and commercial loans.

A wholly-owned portfolio investment, Medallion Bank, a Federal Deposit Insurance Corporation (FDIC) insured industrial bank, originates medallion loans, commercial loans, and consumer loans, raises deposits, and conducts other banking activities (see Note 3). Medallion Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and undergoes examinations by those agencies.

Medallion Bank is not an investment company, and therefore, is not consolidated with the Company, but instead is treated as a portfolio investment. It was initially formed for the primary purpose of originating commercial loans in three categories: 1) loans to finance the purchase of taxicab medallions, 2) asset-based commercial loans, and 3) SBA 7(a) loans. The loans are marketed and serviced by Medallion Bank’s affiliates who have extensive prior experience in these asset groups. Subsequent to its formation, Medallion Bank began originating consumer loans to finance the purchases of RVs, boats, and other related items, and to finance small scale home improvements.

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

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

MFC established a wholly-owned subsidiary, Taxi Medallion Loan Trust III (Trust III), for the purpose of owning medallion loans originated by MFC or others. Trust III is a separate legal and corporate entity with its own creditors who, in any liquidation of Trust III, will be entitled to be satisfied out of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders. The assets of Trust III, aggregating $125,153,000 at December 31, 2016, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC.

The Company established a wholly-owned subsidiary, Medallion Financing Trust I (Fin Trust) for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,148,000 at December 31, 2016, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.

MFC through several wholly-owned subsidiaries (together, Medallion Chicago), purchased $8,689,000 of City of Chicago taxicab medallions out of foreclosure, which are leased to fleet operators while being held for sale. The 159 medallions are carried at a fair value of $9,510,000 on the consolidated balance sheet at December 31, 2016, compared to $37,882,000 a year ago, and are considered non-qualifying assets under the 1940 Act.

 

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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, except for Medallion Bank and other portfolio investments. All significant intercompany transactions, balances, and profits have been eliminated in consolidation. As a non-investment company, Medallion Bank is not consolidated with the Company, which is an investment company under the 1940 Act. See Note 3 for the presentation of financial information for Medallion Bank and other controlled subsidiaries.

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, and includes $500,000 and $1,500,000 related to compensating balance requirements of regional banking institutions, and $7,840,000 and $7,831,000 pledged to a lender of an affiliate as of December 31, 2016 and 2015.

Fair Value of Assets and Liabilities

The Company follows FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, (FASB ASC 820), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e. a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entity’s own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 2, 16, and 17 to the consolidated financial statements.

Investment Valuation

The Company’s loans, net of participations and any unearned discount, are considered investment securities under the 1940 Act and are recorded at fair value. As part of the fair value methodology, loans are valued at cost adjusted for any unrealized appreciation (depreciation). Since no ready market exists for these loans, the fair value is determined in good faith by the Board of Directors. In determining the fair value, the Board of Directors considers 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, are valued similarly.

Equity investments (common stock and stock warrants, including certain controlled subsidiary portfolio investments) and investment securities (US Treasuries and mortgage backed bonds), in total representing 46% and 35% of the investment portfolio at December 31, 2016 and 2015, are recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of investments that have no ready market are determined in good faith by the Board of Directors, based upon the financial condition and operating performance of the underlying investee companies as well as general market trends for businesses in the same industry. Included in equity investments were marketable securities of $537,000 and $570,000 at December 31, 2016 and 2015, and non-marketable securities of $7,931,000 and $6,289,000 in the comparable periods. The $293,360,000 and $159,913,000 related to portfolio investments in controlled subsidiaries at December 31, 2016 and 2015 were all non-marketable in each period. Because of the inherent uncertainty of valuations, the Board of Directors’ estimates of the values of the investments may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.

 

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Table of Contents

The Company’s investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. The Company conducts a thorough valuation analysis as described previously, and also receives an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank on at least an annual basis. The Company’s analysis includes factors such as various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013 and the lack of any new charter issuances since the moratorium’s expiration. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the second quarter of 2015, the Company first became aware of external interest in Medallion Bank and its portfolio’s assets at values in excess of their book value. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016. In addition, in the third quarter of 2016 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016. See Note 3 for additional information about Medallion Bank.

A majority of the Company’s investments consist of long-term loans to persons defined by SBA regulations as small business concerns. Approximately 41% and 51% of the Company’s investment portfolio at December 31, 2016 and 2015 had arisen in connection with the financing of taxicab medallions, taxicabs, and related assets, of which 69% were in New York City at December 31, 2016 and 2015. These loans are secured by the medallions, taxicabs, and related assets, and are personally guaranteed by the borrowers, or in the case of corporations, are generally guaranteed personally by the owners. A portion of the Company’s portfolio (13% and 14% at December 31, 2016 and 2015) represents loans to various commercial enterprises in a wide variety of industries, including manufacturing, retail trade, information services, and other services. Approximately 13% of these loans are made primarily in the metropolitan New York City area, 43% in the Midwest, and the balance is widely scattered across the United States. Investments in controlled unconsolidated subsidiaries, equity investments, and investment securities were 45%, 1%, and 0% at December 31, 2016, and 26%, 1%, and 8% at December 31, 2015.

On a managed basis, which includes the investments of Medallion Bank after eliminating the Company’s investment in Medallion Bank, medallion loans were 35% and 43% at December 31, 2016 and 2015 (76% and 74% in New York City), commercial loans were 6% and 8%, and 46% and 41% were consumer loans in all 50 states collateralized by recreational vehicles, boats, motorcycles, trailers, and home improvements. Investment securities were 2% and 6% at December 31, 2016 and 2015, and equity investments (including investments in controlled subsidiaries) were 11% and 2% at December 31, 2016 and 2015.

Investment Transactions and Income Recognition

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, 2016 and 2015, net loan origination costs were $175,000 and $326,000. Net amortization expense (income accretion) for the years ended December 31, 2016, 2015, and 2014 was ($49,000), ($49,000), and ($103,000).

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 as an adjustment to the yield of the related investment. At December 31, 2016 and 2015, there were no premiums or discounts on investment securities, and their related income accretion or amortization was immaterial for 2016, 2015, and 2014.

Interest income is recorded on the accrual basis. Taxicab medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. At December 31, 2016, 2015, and 2014, total non-accrual loans were $77,161,000, $16,873,000, and $11,092,000, and represented 20%, 4%, and 3% of the gross medallion and commercial loan portfolio at each year end, and were primarily concentrated in the medallion portfolio. The amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $10,658,000, $8,306,000, and $8,444,000 as of December 31, 2016, 2015, and 2014, of which $2,634,000, $1,315,000, and $1,524,000 would have been recognized in the years ended December 31, 2016, 2015, and 2014. The fluctuations in nonaccrual interest foregone and increase in principal balances reflected the increase in past due loans and market conditions during the affected periods.

 

F-9


Table of Contents

Loan Sales and Servicing Fee Receivable

The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing (FASB ASC 860) which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, we have elected the fair value measurement method for our servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $352,191,000 and $406,460,000 at December 31, 2016 and 2015, and included $325,751,000 and $382,919,000 of loans serviced for Medallion Bank. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860, most of which relates to servicing assets held by Medallion Bank, and determined that no material servicing asset or liability exists as of December 31, 2016 and 2015. The Company has assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed to and collected from Medallion Bank by MSC. During 2016, the Company exited the asset based lending business and sold the entire portfolio of $45,023,000, including $42,919,000 on the books of Medallion Bank to a third party bank for a gain of $2,701,000, before deductions for closing costs.

Unrealized Appreciation (Depreciation) and Realized Gains (Losses) on Investments

Unrealized appreciation (depreciation) on investments is the amount by which the fair value estimated by the Company is greater (less) than the cost basis of the investment portfolio. Realized gains or losses on investments are generated through sales of investments, foreclosure on specific collateral, and writeoffs of loans or assets acquired in satisfaction of loans, net of recoveries. Unrealized appreciation on net investments was $127,367,000, $44,483,000, and $43,002,000 as of December 31, 2016, 2015, and 2014. The Company’s investment in Medallion Bank, a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. The Company conducts a thorough valuation analysis as described previously, and determines whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional marketplace restrictions, such as the ability to transfer industrial bank charters. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the second quarter of 2015, the Company first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the third quarter of 2016 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016 as a component of unrealized appreciation (depreciation) on investments, in addition to Medallion Bank’s actual results of operations for the quarter. See Note 3 for additional information about Medallion Bank.

The following table sets forth the pretax changes in our unrealized appreciation (depreciation) on investments for the years ended December 31, 2016, 2015, and 2014.

 

(Dollars in thousands)

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

Balance December 31, 2013

   $ —     $ (6,992   $ 814      $ 381     $ —     $ 40,404     $ 34,607  

Net change in unrealized

               

Appreciation on investments

     —       —         4,884        195       —         (2,900     2,179  

Depreciation on investments

     —       (1,365     —        358       —       1,141       134  

Reversal of unrealized appreciation (depreciation) related to realized

               

Gains on investments

     —       —         —          —         —         —         —    

Losses on investments

     —       5,408       —        674       —       —       6,082  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2014

     —       (2,949     5,698        1,608       —       38,645       43,002  

Net change in unrealized

               

Appreciation on investments

     —       —       18,132        1,141       —       (9,621     9,652  

Depreciation on investments

     (3,568     (176     586        (1,426     (18     (68     (4,670

 

F-10


Table of Contents

(Dollars in thousands)

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

Reversal of unrealized appreciation (depreciation) related to realized

              

Gains on investments

     —       —       (4,809     (9     —       —       (4,818

Losses on investments

     130       886       —       301         —       1,317  

Other (1)

     —       —       (967     967       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2015

     (3,438     (2,239     18,640       2,582       (18     28,956       44,483  

Net change in unrealized

              

Appreciation on investments

     —       —       133,805       2,979       7     (28,372     108,419  

Depreciation on investments

     (28,028     318       305       —       5       —       (27,400

Reversal of unrealized appreciation (depreciation) related to realized

              

Gains on investments

     —       —       —       (1,627     —       —       (1,627

Losses on investments

     2,943       543       —       —       12     —       3,498  

Other

     —       —       —       —       (6     —       (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2016(2)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Reclassification of Medallion Motorsports from equity investments to controlled subsidiaries.

 

F-11


Table of Contents

The table below summarizes components of unrealized and realized gains and losses in the investment portfolio for the years ended December 31, 2016, 2015, and 2014.

 

(Dollars in thousands)

   2016      2015      2014  

Net change in unrealized appreciation (depreciation) on investments

        

Unrealized appreciation

   $ 2,986      $ 288      $ 553  

Unrealized depreciation

     (27,705      (3,822      (1,365

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

     130,121        21,638        15,643  

Realized gains

     (1,627      (4,818      —  

Realized losses

     3,498        1,317        6,082  

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

     (28,387      (9,689      (1,759
  

 

 

    

 

 

    

 

 

 

Total

   $ 78,886      $ 4,914      $ 19,154  
  

 

 

    

 

 

    

 

 

 

Net realized gains (losses) on investments

        

Realized gains

   $ —      $ 4,818      $ —  

Realized losses

     (3,486      (1,317      (6,082

Other gains

     4,140        4,261        434  

Direct recoveries (chargeoffs)

     (197      (126      41  

Realized losses on investments other than securities and other

assets

     —        —        —  
  

 

 

    

 

 

    

 

 

 

Total

   $ 457      $ 7,636      ($ 5,607
  

 

 

    

 

 

    

 

 

 

The following table provides additional information on attributes of the nonperforming loan portfolio as of December 31, 2016 and 2015.

 

(Dollars in thousands)

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

December 31, 2016

        

Medallion (3)

   $ 73,192      $ 74,078      $ 87,999  

Commercial (3)

     3,969        11,118        4,695  

December 31, 2015

        

Medallion (3)

     12,973        13,051        13,010  

Commercial (3)

     3,900        10,401        4,293  

 

(1) As of December 31, 2016 and 2015, $29,901 and $5,621 of unrealized depreciation had been recorded as a valuation allowance on these loans.
(2) Interest income of $1,919 and $585 was recognized on these loans for the years ended December 31, 2016 and 2015.
(3) Included in the unpaid principal balance is unearned and paid-in-kind interest on nonaccrual loans of $8,035 and $6,579, which is included in the nonaccrual disclosures in the section titled “Investment Transactions and Income Recognition” on page F-9, as of December 31, 2016 and 2015.

 

F-12


Table of Contents

The following tables show the aging of medallion and commercial loans as of December 31, 2016 and 2015.

 

December 31, 2016

(Dollars in thousands)

   Days Past Due      Total      Current      Total      Recorded Investment >
90 Days and Accruing
 
   31 – 60      61 – 90      91 +              

Medallion loans

   $  12,350      $  13,064      $  71,976      $ 97,390      $  197,660      $  295,050      $  4,665
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     —        —        1,390        1,390        75,079        76,469        —  

Other secured commercial

     69        472        734        1,275        7,382        8,657        —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     69        472        2,124        2,665        82,461        85,126        —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,419      $ 13,536      $ 74,100      $ 100,055      $ 280,121      $ 380,176      $ 4,665
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015

(Dollars in thousands)

   Days Past Due      Total      Current      Total      Recorded Investment >
90 Days and Accruing
 
   31 – 60      61 – 90      91 +              

Medallion loans

   $ 17,354      $ 10,224      $ 11,880      $ 39,458      $ 271,975      $ 311,433      $  —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     —        —        1,390        1,390        66,459        67,849        —  

Asset-based receivable

     —        —        —        —        3,750        3,750        —  

Other secured commercial

     202        92        945        1,239        11,383        12,622        —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     202        92        2,335        2,629        81,592        84,221        —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,556      $ 10,316      $ 14,215      $ 42,087      $ 353,567      $ 395,654      $ —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013 the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount was divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company’s liquidation. In May 2013, the bankruptcy court presiding over the third party finance company’s case entered an order converting the involuntary chapter 7 case to a chapter 11 case. The Company and Medallion Bank have placed these loans on nonaccrual, and reversed interest income. In addition, the Company and Medallion Bank have established valuation allowances against the outstanding balances. On May 31, 2013, the Company and Medallion Bank commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that the Company’s and Medallion Bank’s loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the third party finance company’s assets. The third party finance company and bank lenders are contesting the Company’s and Medallion Bank’s position. In April 2014, the Company and Medallion Bank received a decision from the court granting summary judgment in their favor with respect to the issue of whether the Company’s and Medallion Bank’s loan participations are true participations. In March 2015, the Company and Medallion Bank received a decision from the court finding that the bank lenders generally held a first lien on the Company’s and Medallion Bank’s loan participations subject to, among other things, defenses still pending prosecution by the parties and adjudication by the court. The Company and Medallion Bank are appealing the decision. The remaining issues are still being litigated. Although the Company and Medallion Bank believe the claims raised by the third party finance company and the bank lenders are without merit and will vigorously defend against them, the Company and Medallion Bank cannot at this time predict the outcome of this litigation or determine their potential exposure. At December 31, 2016, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. In September 2015, one loan was sold at a discount to a third party, and the related proceeds are held in escrow pending resolution of the bankruptcy proceeding. One loan was charged off in September 2014. The balances related to the paid off loans have been reclassified to other assets on the consolidated balance sheet. The table below summarizes these receivables and their status with the Company and Medallion Bank as of December 31, 2016.

 

(Dollars in thousands)

   The Company      Medallion Bank      Total  

Loans outstanding

   $ 258      $ 1,953      $ 2,211  

Loans charged off (1)

     (258      (1,953      (2,211

Valuation allowance

     —        —        —  
  

 

 

    

 

 

    

 

 

 

Net loans outstanding

     —        —        —  
  

 

 

    

 

 

    

 

 

 

Other receivables

     590        11,062        11,652  

Valuation allowance

     (236      (4,425      (4,661
  

 

 

    

 

 

    

 

 

 

Net other receivables

     354        6,637        6,991  

Total net outstanding

     354        6,637        6,991  
  

 

 

    

 

 

    

 

 

 

Income foregone in 2016

     —        —        —  

Total income foregone

   $ 74      $ 108      $ 182  
  

 

 

    

 

 

    

 

 

 

 

(1) The income foregone on the charged off loan was $99 for the Company and $213 for Medallion Bank.

 

F-13


Table of Contents

The following table shows troubled debt restructurings which the Company entered into during the year ended December 31, 2016.

 

(Dollars in thousands)

   Number of Loans      Pre-Modification
Investment
     Post-Modification
Investment
 

Medallion loans

     7      $  3,639      $  3,670  
  

 

 

    

 

 

    

 

 

 

Commercial loans

     —        —          —    
  

 

 

    

 

 

    

 

 

 

Total

     7      $ 3,639      $ 3,670  
  

 

 

    

 

 

    

 

 

 

During the twelve months ended December 31, 2016, one loan modified as troubled debt restructurings was in default and had an investment value of $394,000 as of December 31, 2016, net of $335,000 of unrealized depreciation.

The following table shows troubled debt restructurings which the Company entered into during the year ended December 31, 2015.

 

(Dollars in thousands)

   Number of Loans      Pre-Modification
Investment
     Post-Modification
Investment
 

Medallion loans

     24      $ 13,620      $ 15,143  

Commercial loans

     —        —        —  
  

 

 

    

 

 

    

 

 

 

Total

     24      $ 13,620      $ 15,143  
  

 

 

    

 

 

    

 

 

 

During the twelve months ended December 31, 2015, twelve loans modified as troubled debt restructurings were in default and had an investment value of $9,459,000 as of December 31, 2015.

Goodwill

In accordance with ASC Topic 350, Intangibles – Goodwill and Other, the Company has determined that it is more likely than not that the relevant reporting unit’s fair value is less than its carrying amount as of December 31, 2016, and was greater as of December 31, 2015. The results of this evaluation demonstrated impairment in goodwill as of December 31, 2016, and therefore goodwill of $5,099,000 was written off to operating expenses in the fourth quarter of 2016.

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 $110,000, $140,000, and $160,000 for the years ended December 31, 2016, 2015, and 2014.

Deferred Costs

Deferred financing costs, included in other assets, represent costs associated with obtaining the Company’s borrowing facilities, and is amortized on a straight line basis over the lives of the related financing agreements. Amortization expense was $722,000, $276,000, and $322,000 for the years ended December 31, 2016, 2015, and 2014, recorded as interest expense on the Consolidated Statements of Operations. 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 balance sheet for all of these purposes were $4,003,000 and $2,126,000 at December 31, 2016 and 2015.

 

F-14


Table of Contents

Income Taxes

Income taxes are accounted for using the asset and liability approach in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are also recorded for net operating losses, capital losses and any tax credit carryforwards. A valuation allowance is provided against a deferred tax asset when it is more likely than not that some or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether a valuation allowance for deferred tax assets is needed. Items considered in determining our valuation allowance include expectations of future earnings of the appropriate tax character, recent historical financial results, tax planning strategies, the length of statutory carryforward periods and the expected timing of the reversal of temporary differences. Under ASC 740, forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years. The Company recognizes tax benefits of uncertain tax positions only when the position is more likely than not to be sustained assuming examination by tax authorities. The Company records income tax related interest and penalties, if applicable, within current income tax expense. Through December 31, 2015 the Company qualified to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine taxable income.

Net Increase in Net Assets Resulting from Operations per Share (EPS)

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

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

 

     Years Ended December 31,  

(Dollars in thousands)

   2016      2015      2014  

Net increase in net assets resulting from operations available to common shareholders

   $ 23,515      $ 29,376      $ 28,692  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding applicable to basic EPS

     24,123,888        24,315,427        24,850,496  

Effect of dilutive stock options

     230        10,378        97,057  

Effect of restricted stock grants

     48,902        66,154        125,770  
  

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted EPS

     24,173,020        24,391,959        25,073,323  
  

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.97      $ 1.21      $ 1.15  

Diluted earnings per share

     0.97        1.20        1.14  

Potentially dilutive common shares excluded from the above calculations aggregated 346,232, 435,254, and 148,267 shares as of December 31, 2016, 2015, and 2014.

Stock Compensation

The Company follows FASB Accounting Standard Codification Topic 718 (ASC 718), Compensation – Stock Compensation, for its 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 is reflected in net increase in 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 increase in net assets resulting from operations for any new grants using the grant date fair value of the shares granted, expensed over the vesting period of the underlying stock.

 

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Table of Contents

During 2016, 2015, and 2014, the Company issued 48,527, 162,576, and 129,126 restricted shares of stock-based compensation awards, and issued 12,000, 27,000, and 32,000 shares of other stock-based compensation awards, and recognized $568,000, $1,294,000, and $1,490,000, or $0.02, $0.05, and $0.06 per diluted common share for each respective year, of non-cash stock-based compensation expense related to the grants. As of December 31, 2016, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $411,000, which is expected to be recognized over the next 13 quarters (see Note 6).

Distributions to Shareholders

The table below shows the tax character of distributions for tax reporting purposes.

 

     Years Ended December 31,  

(Dollars in thousands)

   2016      2015      2014  

Distributions paid from

        

Investment income, net

   $ 14,570      $ 20,042      $ 14,974  

Return of capital

     —        4,330        8,918  

Realized gains from investment transactions, net

     —        —        —  
  

 

 

    

 

 

    

 

 

 

Total distributions

   $ 14,570      $ 24,372      $ 23,892  
  

 

 

    

 

 

    

 

 

 

Our ability to make distributions is restricted by SBA regulations and under the terms of the SBA debentures. As of December 31, 2016, the Company had no undistributed net investment income or realized gains.

Derivatives

The Company manages its exposure to increases in market rates of interest by periodically purchasing interest rate caps to lock in the cost of funds of its variable-rate debt in the event of a rapid run up in interest rates. The Company entered into contracts to purchase interest rate caps on $110,000,000 of notional value of principal from various multinational banks, with termination dates ranging to December 2018. The caps provide for payments to the Company if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases were generally fully expensed when paid, including $20,000, $81,000, and $75,000 in 2016, 2015, and 2014, and all are carried at $0 on the balance sheet at December 31, 2016.

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 IN MEDALLION BANK AND OTHER CONTROLLED SUBSIDIARIES

The following table presents information derived from Medallion Bank’s statement of comprehensive income and other valuation adjustments on other controlled subsidiaries for the years ended December 31, 2016, 2015, and 2014.

 

(Dollars in thousands)

   2016      2015      2014  

Statement of comprehensive income

        

Investment income

   $ 103,454      $ 91,021      $ 77,291  

Interest expense

     11,762        9,205        7,008  
  

 

 

    

 

 

    

 

 

 

Net interest income

     91,692        81,816        70,283  

Noninterest income

     308        291        344  

Operating expenses (1)

     24,281        21,621        19,812  
  

 

 

    

 

 

    

 

 

 

Net investment income before income taxes

     67,719        60,486        50,815  

Income tax provision (benefit)

     (326      18,974        16,508  
  

 

 

    

 

 

    

 

 

 

Net investment income after income taxes

     68,045        41,512        34,307  

Net realized/unrealized losses of Medallion Bank (1)

     (66,328      (18,275      (7,386
  

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations of Medallion Bank

     1,717        23,237        26,921  

Unrealized appreciation (depreciation) on Medallion Bank (2)

     123,667        (2,763      (15,263

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

     4,737        (3,644      3,985  
  

 

 

    

 

 

    

 

 

 

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

   $ 130,121      $ 16,830      $ 15,643  
  

 

 

    

 

 

    

 

 

 

 

(1) Excluded from operating expenses and included in net realized/unrealized losses of Medallion Bank were $0, $1,150 and $0 of unrealized losses on other assets for 2016, 2015, and 2014.
(2) Unrealized appreciation (depreciation) on Medallion Bank reflects the adjustment to the investment carrying amount to reflect the dividends declared to the Company and the US Treasury, and in 2016 and 2015, the fair value adjustments to the carrying amount of Medallion Bank.

 

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Table of Contents

The following table presents Medallion Bank’s balance sheets and the net investment in other controlled subsidiaries as of December 31, 2016 and 2015.

 

(Dollars in thousands)

   2016      2015  

Loans

   $ 965,082      $ 996,375  

Investment securities, at fair value

     36,861        35,524  
  

 

 

    

 

 

 

Net investments (1)

     1,001,943        1,031,899  

Cash

     30,881        23,094  

Other assets, net

     43,134        24,827  
  

 

 

    

 

 

 

Total assets

   $ 1,075,958      $ 1,079,820  
  

 

 

    

 

 

 

Other liabilities

   $ 3,453      $ 6,106  

Due to affiliates

     1,084        1,387  

Deposits and other borrowings, including accrued interest payable

     909,536        909,909  
  

 

 

    

 

 

 

Total liabilities

     914,073        917,402  

Medallion Bank equity (2)

     161,885        162,418  
  

 

 

    

 

 

 

Total liabilities and equity

   $ 1,075,958      $ 1,079,820  
  

 

 

    

 

 

 

Investment in other controlled subsidiaries

   $ 12,771      $ 7,747  

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

   $ 293,360      $ 159,913  
  

 

 

    

 

 

 

 

(1) Included in Medallion Bank’s net investments is $4 and $6 for purchased loan premium at December 31, 2016 and 2015.
(2) Includes $26,303 of preferred stock issued to the US Treasury under the Small Business Lending Fund Program (SBLF).
(3) Includes $144,418 and $15,500 of unrealized appreciation on Medallion Bank, in excess of Medallion Bank’s book value as of December 31, 2016 and 2015.

The following paragraphs summarize the accounting and reporting policies of Medallion Bank, and provide additional information relating to the tables presented above.

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. At December 31, 2016 and 2015, the net premium on investment securities totaled $238,000 and $311,000, and $82,000, $83,000, and $64,000 was amortized to interest income for the years ended December 31, 2016, 2015, and 2014.

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, 2016 and 2015, net loan origination costs were $12,371,000 and $11,400,000. Net amortization expense for the years ended December 31, 2016, 2015, and 2014 was $3,489,000, $3,354,000, and $3,138,000.

Medallion Bank’s policies regarding nonaccrual of medallion and commercial loans are similar to those of the Company. The consumer portfolio has different characteristics compared to commercial loans, typified by a larger number of lower dollar loans that have similar characteristics. 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. At December 31, 2016, $4,179,000 or 1% of consumer loans, no commercial loans, and $47,841,000 or 16% of medallion loans were on nonaccrual, compared to $3,381,000 or 1% of consumer loans, no commercial loans, and $21,722,000 or 6% of medallion loans on nonaccrual at December 31, 2015, and $2,536,000 or 1% of consumer loans, $1,351,000 or 3% of commercial loans, and no medallion loans on nonaccrual at December 31, 2014. The amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $514,000, $233,000, and $90,000 as of December 31, 2016, 2015, and 2014. See also the paragraph and table on page F-13 following the delinquency table for a discussion of other past due amounts.

Medallion Bank’s loan and investment portfolios are assessed for collectability on a monthly basis, and a loan loss allowance is established for any realizability concerns on specific investments, and general reserves have also been established for any unknown factors. Adjustments to the value of this portfolio are based on the Company’s own historical loan loss data developed since 2004, adjusted for changes in delinquency trends and other factors as described previously in Note 2.

 

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Table of Contents

Medallion Bank raises deposits to fund loan originations. The deposits were raised through the use of investment brokerage firms who package deposits qualifying for FDIC insurance into pools that are sold to Medallion Bank. The rates paid on the deposits are highly competitive with market rates paid by other financial institutions, and include a brokerage fee, depending on the maturity of the deposit, which averages 0.15% and, which is capitalized and amortized to interest expense over the life of the respective pool. The total amount capitalized at December 31, 2016 and 2015 was $1,996,000 and $2,034,000, and $1,369,000, $1,314,000, and $1,251,000 was amortized to interest expense during 2016, 2015, and 2014. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity.

The outstanding balances of fixed rate borrowings were as follows:

 

    Payments Due for the Year Ending December 31,     December 31,
2016
    December 31,
2015
    Interest
Rate (1)
 

(Dollars in thousands)

  2017     2018     2019     2020     2021     Thereafter        

Deposits and other borrowings

  $ 411,493     $ 255,792     $ 156,401     $ 40,147     $ 44,609     $ —     $ 908,442     $ 908,896       1.22 % 

 

(1) Weighted average contractual rate as of December 31, 2016.

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

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

Quantitative measures established by regulation to ensure capital adequacy require Medallion Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting Medallion Bank’s application for federal deposit insurance, the FDIC ordered that the leverage ratio (Tier 1 capital to average assets) be not less than 15%, and that an adequate allowance for loan losses be maintained. As a result, to facilitate maintenance of the capital ratio requirement and to provide the necessary capital for continued growth, the Company periodically makes capital contributions to Medallion Bank, including $3,000,000 in 2016, $8,000,000 in 2015, and $10,000,000 in 2014. Separately, Medallion Bank declared dividends to the Company of $3,000,000 in 2016, $18,000,000 in 2015, and $15,000,000 in 2014. As of December 31, 2016 Medallion Bank’s leverage ratio was 14.5% and Medallion Bank may be restricted from declaring and paying dividends if doing so would cause the leverage ratio to below 15%. The Company expects Medallion Bank’s leverage ratio will exceed 15% in the near term due in part to the retention of earnings for Medallion Bank in the first quarter of 2017.

On February 27, 2009 and December 22, 2009, Medallion Bank issued, and the US Treasury purchased under the TARP Capital Purchase Program (the CPP) Medallion 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, Medallion Bank issued, and the US Treasury purchased 26,303 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series E (Series E) for an aggregate purchase price of $26,303,000 under the Small Business Lending Fund Program (SBLF). The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. In connection with the issuance of the Series E, the Bank exited the CPP by redeeming the Series A, B, C, and D; and received approximately $4,000,000, net of dividends due on the repaid securities. The Bank previously paid a dividend rate of 1% on the Series E, which increased to 9% in the first quarter of 2016.

The following table represents Medallion Bank’s actual capital amounts and related ratios as of December 31, 2016 and 2015, compared to required regulatory minimum capital ratios and the ratios required to be considered well capitalized. As of December 31, 2016, Medallion Bank meets all regulatory capital adequacy requirements to which it is subject, and is well-capitalized.

 

F-18


Table of Contents
     Regulatory        

(Dollars in Thousands)

   Minimum     Well-capitalized     December 31, 2016     December 31, 2015  

Common equity tier I capital

   $ —     $ —     $ 130,158     $ 135,635  

Tier 1 capital

     —       —       156,461       161,938  

Total capital

     —       —       170,385       175,533  

Average assets

     —       —       1,081,522       1,071,980  

Risk-weighted assets

     —       —       1,067,103       1,077,103  

Leverage ratio (1)

     4     5     14.5     15.1

Common equity tier I capital ratio

     5       7       12.2       12.6  

Tier 1 capital ratio (2)

     6       8       14.7       15.0  

Total capital ratio (2)

     8       10       16.0       16.3  

 

(1) Calculated by dividing Tier 1 capital by average assets.
(2) Calculated by dividing Tier 1 or total capital by risk-weighted assets.

(4) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows:

 

     Payments Due for the Year Ending December 31,      December 31,
2016
     December 31,
2015
     Interest
Rate (1)
 

(Dollars in thousands)

   2017      2018      2019      2020      2021      Thereafter           

DZ loan

   $ 106,244      $ —      $ —      $ —      $ —      $ —      $ 106,244      $ 129,518        2.36

Notes payable to banks

     62,748        31,431        —        40        —        —        94,219        122,429        3.22  

SBA debentures

     —        —        3,000        —        15,985        63,000        81,985        74,485        3.63  

Margin loan

     —          —        —        —        —        —        —        45,108        —    

Unsecured notes

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

Preferred securities

     —        —        —        —        —        33,000        33,000        33,000        3.07  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 168,992      $ 31,431      $ 3,000      $ 40      $ 49,610      $ 96,000      $ 349,073      $ 404,540        3.60  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

(1) Weighted average contractual rate as of December 31, 2016.

(A) DZ LOAN

In December 2008, Trust III entered into a DZ loan agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC (DZ line), which was extended in December 2013 until December 2016, and, through an amended and restated credit agreement, was further extended in December 2016 until June 2017, and the line reduced to $150,000,000, and which was further reduced in stages in December 2015 to $135,000,000, and to $125,000,000 on July 1, 2016, and remaining as an amortizing facility; and of which $106,244,000 was outstanding at December 31, 2016. During 2016, the DZ line was amended several times, for the most part to improve Trust III’s flexibility under the credit facility.

Borrowings under Trust III’s DZ loan is collateralized by Trust III’s assets. MFC is the servicer of the loans owned by Trust III. The DZ line includes a borrowing base covenant and rapid amortization in certain circumstances. In addition, if certain financial tests are not met, MFC can be replaced as the servicer. The interest rate with the 2013 extension is a pooled short-term commercial paper rate which approximates LIBOR (30 day LIBOR was 0.77% at December 31, 2016) plus 1.65%.

(B) SBA DEBENTURES

In 2016, the SBA approved $10,000,000 of commitments for MCI for a four and a half year term and a 1% fee, which was paid. In 2015, the SBA approved $15,500,000 of commitments for MCI for a four year term and a 1% fee, which was paid. In 2014, the SBA approved $10,000,000 of commitments for MCI for a four year term and a 1% fee, which was paid. In 2013, the SBA approved $23,000,000 and $5,000,000 of commitments for FSVC and MCI, respectively, for a four year term and a 1% fee, which was paid, and of which FSVC issued $23,000,000 of debentures, $18,150,000 of which was used to repay maturing debentures, and MCI issued $2,500,000 of debentures. As of at December 31, 2016, $169,985,000 of commitments had been fully utilized, there were $5,500,000 of commitments available, and $81,985,000 was outstanding.

The notes are collateralized by substantially all of FSVC’s and MCI’s assets and are subject to the terms and conditions of agreements with the SBA which, among other things, restrict stock redemptions, disposition of assets, new indebtedness, dividends or distributions, and changes in management, ownership, investment policy, or operations. The debentures have been issued in various tranches for terms of ten years with interest payable semiannually.

 

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Table of Contents

(C) NOTES PAYABLE TO BANKS/OTHER LENDERS

The Company and its subsidiaries have entered into (i) note agreements and (ii) participation agreements with a variety of local and regional banking institutions over the years, as well as with other non-bank lenders. The notes are typically secured by various assets of the underlying borrower. The Company believes the participation agreements represent legal true sales of the loans to the lender, but for accounting purposes these participations are treated as financings, and are included in funds borrowed as shown on our consolidated balance sheets. The table below summarizes the key attributes of our various borrowing arrangements with these lenders as of December 31, 2016.

 

(Dollars in thousands)

 

Borrower

  # of Lenders/
Notes
    Note
Dates
    Maturity
Dates
    

Type

  Note
Amounts
    Balance
Outstanding at
December 31,
2016
    

Monthly Payment

  Average Interest
Rate at
December 31,
2016
    Interest Rate
Index(1)
 

The Company

    6/6      

4/11 -

8/14

 

 

   

4/17 -

7/18

 

 

   Term loans and demand notes secured by pledged loans   $ 67,236 (2)    $ 67,236      Interest only     3.20     Various (2) 

Medallion Chicago

    3/28      

11/11 -

12/11

 

 

   

10/16 -

6/17

 

 

   Term loans secured by owned Chicago medallions(3)     25,708       22,759      $162 principal & interest     3.35     N/A  

The Company

    1/1       1/11       11/16     

Participated loans

treated as financings

    3,915       3,898      Proportionate to the payments received on the participated loans     2.50     N/A  

FSVC

    3/5      

2/12 -

4/14

 

 

   

1/17 -

11/18

 

 

  

Participated loans

treated as financings

    256       248      Proportionate to the payments received on the participated loans     6.03     N/A  

MFC

    1/2      

3/13 -

12/15

 

 

   

12/16 -

12/20

 

 

  

Participated loans

treated as financings

    85       78      Proportionate to the payments received on the participated loans     8.17     N/A  
          

 

 

   

 

 

        
           $ 97,200     $ 94,219         
          

 

 

   

 

 

        

 

(1) At December 31, 2016, 30 day LIBOR was 0.77% and the prime rate was 3.75%.
(2) One note has an interest rate of Prime, one note has an interest rate of Prime plus 0.50%, and the other interest rates on these borrowings are LIBOR plus 2%.
(3) $14,042 guaranteed by the Company.

(D) 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 (1.00% at December 31, 2016) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor. At December 31, 2016, $33,000,000 was outstanding on the preferred securities.

(E) MARGIN LOAN

In June 2015, the Company entered into a margin loan agreement with Morgan Stanley. The margin loan is secured by the pledge of short-term, high-quality investment securities held by the Company, and is initially available at 90% of the current fair market value of the securities. The margin loan bears interest at 30-day LIBOR (0.77% at December 31, 2016) plus 1.00%. As of December 31, 2016, there were no outstandings under this margin loan.

(F) UNSECURED NOTE

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.

(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. The Company is in compliance with such restrictions as of December 31, 2016 and 2015.

 

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Table of Contents

(5) INCOME TAXES

Through December 31, 2015, the Company qualified to be taxed as a RIC under Subchapter M of the Code. A RIC is not subject to federal income tax on the portion of its taxable ordinary income and net long-term capital gains that are distributed to its shareholders. For our tax year ended December 31, 2015, the Company had an ordinary loss for tax purposes.

During 2016, the Company’s assets did not meet the quarterly investment diversification requirements to qualify as a RIC, primarily due to the increase in Medallion Bank’s fair value. Therefore, for the year ended December 31, 2016, the Company became subject to taxation as a regular corporation under Subchapter C of the Code. This change in tax status does not affect the Company’s status as a BDC under the 1940 Act or its compliance with the portfolio composition requirements of that statute.

As a result of being taxed as a corporation under Subchapter C, 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, the Company is able, and intends, to file a consolidated federal income tax return with corporate subsidiaries, including portfolio companies such as Medallion Bank, in which it holds 80 percent or more of the outstanding equity interest measured by both vote and fair value.

As a result of our change in tax status during our tax year ended December 31, 2016, the Company is now required to recognize deferred tax assets and liabilities. The following table sets forth the significant components of our deferred and other tax assets and liabilities as of December 31, 2016.

 

(Dollars in thousands)

   2016      2015      2014  

Unrealized gain on investment in Medallion Bank

   $ (58,512    $ —        $ —    

Unrealized losses on loans and nonaccrual interest

     16,382        —          —    

Unrealized gain on investments in other controlled subsidiaries

     (5,610      —          —    

Unrealized gains on investments other than securities

     (3,206      —          —    

Accrued expenses, compensation

     1,263        —          —    

Net operating loss carryforwards (1)

     732        —          —    

Unrealized gains on other investments

     (299      —          —    
  

 

 

    

 

 

    

 

 

 

Total deferred tax liability

     (49,250      —          —    

Valuation allowance

     (30      —          —    
  

 

 

    

 

 

    

 

 

 

Deferred tax liability, net

     (49,280      —          —    

Taxes receivable (payable)

     3,380        —          —    
  

 

 

    

 

 

    

 

 

 

Net deferred and other tax liabilities

   $ (45,900    $ —        $ —    
  

 

 

    

 

 

    

 

 

 

 

(1) As of December 31, 2015, Medallion Chicago collectively has $1,712 of net operating loss carryforwards that expire at various dates between December 31, 2026 and December 31, 2035.

The components of our tax provision (benefit) for the years ended December 31, 2016, 2015, and 2014 were as follows.

 

(Dollars in thousands)

   2016      2015      2014  

Current

        

Federal

   $ (2,690    $ —        $ —    

State

     (689      —          —    

Deferred

        

Federal

     39,028        —          —    

State

     10,251        —          —    
  

 

 

    

 

 

    

 

 

 

Net provision (benefit) for income taxes

   $ 45,900      $ —        $ —    
  

 

 

    

 

 

    

 

 

 

The following table presents a reconciliation of statutory federal income tax (benefit) expense to consolidated actual income tax (benefit) expense reported in net increase in net assets for the years ended December 31, 2016, 2015, and 2014.

 

(Dollars in thousands)

   2016      2015      2014  

Statutory Federal Income tax at 35%

   $ 24,295      $ —        $ —    

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

     3,829        —          —    

Conversion to a taxable corporation

     16,630        —          —    

Book impairment of goodwill

     2,065        —          —    

Other

     (919      —          —    
  

 

 

    

 

 

    

 

 

 

Total income tax (benefit) expense

   $ 45,900      $ —        $ —    
  

 

 

    

 

 

    

 

 

 

 

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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. It is based upon these considerations by which the Company has determined the valuation allowance deemed necessary as of December 31, 2016.

The Company has filed tax returns in many states. Federal, New York State, and New York City tax filings of the Company for the tax years 2013 through the present are the more significant filings that are open for examination.

(6) STOCK OPTIONS AND RESTRICTED STOCK

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

The Company’s Board of Directors approved the 2015 Employee Restricted Stock Plan (2015 Restricted Stock Plan) on February 13, 2015 and 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 provide 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 are issuable under the 2015 Restricted Stock Plan, and 651,473 remained issuable as of December 31, 2016. Awards under the 2015 Restricted Stock Plan are subject to certain limitations as set forth in the 2015 Restricted Stock Plan. The 2015 Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the 2015 Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2015 Restricted Stock Plan, whichever first occurs.

The Company’s Board of Directors approved the 2009 Employee Restricted Stock Plan (the Employee Restricted Stock Plan) on April 16, 2009. The Employee Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC and approval of the Employee Restricted Stock Option Plan by the Company’s shareholders on June 11, 2010. No additional shares are available for issuance under the Employee Restricted Stock Plan. The terms of the Employee 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 800,000 shares of the Company’s common stock were issuable under the Employee Restricted Stock Plan, and as of December 31, 2016, none of the Company’s common stock remained available for future grants. Awards under the 2009 Employee Plan are subject to certain limitations as set forth in the Employee Restricted Stock Plan. The Employee Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the Employee 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 Employee Restricted Stock Plan, whichever first occurs.

The Company’s Board of Directors approved the 2015 Non-Employee Director Stock Option Plan (2015 Director Plan) on March 12, 2015, which was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on February 29, 2016. A total of 300,000 shares of the Company’s common stock are issuable under the 2015 Director Plan, and 288,000 remained issuable as of December 31, 2016. Under the 2015 Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the 2015 Director Plan, the Company will grant 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 are elected to serve less than a full term. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. Options granted under the 2015 Director Plan are exercisable annually, as defined in the 2015 Director Plan. The term of the options may not exceed ten years.

The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan (the Amended Director Plan) on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement

 

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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 will 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 are elected to serve less than a full term. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. Options granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options may not exceed ten years.

No additional shares are available for future issuance under the Employee Restricted Stock Plan and the Amended Director Plan. At December 31, 2016, 345,518 options on the Company’s common stock were outstanding under the 1996, 2006 and 2015 plans, of which 312,518 options were exercisable, and there were 167,703 unvested shares of the Company’s common stock outstanding under the Employee Restricted Stock Plan.

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 $0.53, $0.90, and $1.54 per share for the years ended December 31, 2016, 2015, and 2014. The following assumption categories are used to determine the value of any option grants.

 

     Year ended December 31,  
     2016     2015     2014  

Risk free interest rate

     1.22     1.87     1.82

Expected dividend yield

     10.13       8.90       7.21  

Expected life of option in years (1)

     6.00       6.00       6.00  

Expected volatility (2)

     30.00     30.00     30.00

 

(1) Expected life is calculated using the simplified method.
(2) We determine our expected volatility based on our historical volatility.

The following table presents the activity for the stock option programs for the years ended December 31, 2016, 2015, and 2014.

 

     Number of Options      Exercise
Price Per
Share
     Weighted
Average
Exercise Price
 

Outstanding at December 31, 2013

     578,217      $ 7.17-13.84      $ 9.85  

Granted

     32,000        11.42-13.53        12.61  

Cancelled

     (50,000      8.51        8.51  

Exercised (1)

     (98,396      7.17-11.21        8.96  
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2014

     461,821        7.49-13.84        10.38  

Granted

     27,000        9.38        9.38  

Cancelled

     (12,118      9.22-13.06        11.07  

Exercised (1)

     (30,449      9.22        9.22  
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2015

     446,254        7.49-13.84        10.38  

Granted

     12,000        7.10        7.10  

Cancelled

     (110,636      9.22-13.84        12.25  

Exercised (1)

     (2,100      9.22        9.22  
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2016 (2)

     345,518      $ 7.10-13.84      $ 9.67  
  

 

 

    

 

 

    

 

 

 

Options exercisable at

        

December 31, 2014

     416,821      $ 7.49-13.84      $ 10.10  

December 31, 2015

     391,921        7.49-13.84        10.27  

December 31, 2016 (2)

     312,518        7.49-13.84        9.75  
  

 

 

    

 

 

    

 

 

 

 

(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, $0, and $464,000 for 2016, 2015, and 2014.
(2) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at December 31, 2016 and the related exercise price of the underlying options, was $0 for outstanding options and $0 for exercisable options as of December 31, 2016. The remaining contractual life was 2.40 years for outstanding options and 1.73 years for exercisable options at December 31, 2016.

 

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The following table presents the activity for the restricted stock programs for the years ended December 31, 2016, 2015, and 2014.

 

     Number of Shares      Grant
Price Per
Share
     Weighted
Average
Grant Price
 

Outstanding at December 31, 2013

     234,268      $ 7.99-15.61      $ 10.72  

Granted

     129,126        10.08-13.46        12.82  

Cancelled

     (378      11.08-15.61        12.65  

Vested (1)

     (153,651      7.99-15.61        10.11  
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2014

     209,365        10.08-15.61        12.47  

Granted

     162,576        9.08-10.38        9.89  

Cancelled

     (53,761      9.92-15.61        11.16  

Vested (1)

     (109,140      10.08-15.61        12.16  
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2015

     209,040        9.08-15.61        10.96  

Granted

     48,527        3.95-7.98        4.47  

Cancelled

     (11,325      9.92-15.61        11.17  

Vested (1)

     (78,539      9.08-15.61        11.38  
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2016 (2)

     167,703      $ 3.95-13.46      $ 8.88  
  

 

 

    

 

 

    

 

 

 

 

(1) The aggregate fair value of the restricted stock vested was $722,000, $916,000, and $2,023,000 for 2016, 2015, and 2014.
(2) The aggregate fair value of the restricted stock was $506,000 as of December 31, 2016. The remaining vesting period was 1.48 years at December 31, 2016.

The following table presents the activity for the unvested options outstanding under the plans for the year ended December 31, 2016.

 

     Number of
Options
     Exercise Price
Per Share
     Weighted
Average
Exercise Price
 

Outstanding at December 31, 2015

     54,333      $ 9.38-13.84      $ 11.14  

Granted

     12,000        7.10        7.10  

Cancelled

     (18,333      11.42-13.84        12.51  

Vested

     (15,000      9.38-13.84        11.10  
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2016

     33,000      $ 7.10-13.53      $ 8.93  
  

 

 

    

 

 

    

 

 

 

The intrinsic value of the options vested was $0, $0, and $0 in 2016, 2015, and 2014.

(7) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table presents the Company’s quarterly results of operations for the years ended December 31, 2016, 2015, and 2014.

 

(Dollars in thousands, except per share data)

   March 31      June 30      September 30      December 31  

2016 Quarter Ended

           

Investment income

   $ 8,986      $ 5,836      $ 5,269      $ 4,997  

Net investment income (loss) after income taxes

     2,039        (1,402      (2,606      2,088  

Net increase in net assets resulting from operations

     6,848        4,568        5,043        7,056  

Net increase in net assets resulting from operations per common share

           

Basic

   $ 0.28      $ 0.19      $ 0.21      $ 0.29  

Diluted

     0.28        0.19        0.21        0.29  

2015 Quarter Ended

           

Investment income

   $ 11,831      $ 10,838      $ 10,665      $ 9,319  

Net investment income after income taxes

     4,904        4,330        4,236        3,356  

Net increase in net assets resulting from operations

     7,068        8,086        7,312        6,911  

Net increase in net assets resulting from operations per common share

           

Basic

   $ 0.29      $ 0.33      $ 0.30      $ 0.29  

Diluted

     0.29        0.33        0.30        0.29  

2014 Quarter Ended

           

Investment income

   $ 9,035      $ 9,875      $ 11,379      $ 10,779  

Net investment income after income taxes

     3,450        3,803        5,228        2,664  

Net increase in net assets resulting from operations

     6,766        7,105        6,694        8,127  

Net increase in net assets resulting from operations per common share

           

Basic

   $ 0.27      $ 0.29      $ 0.27      $ 0.33  

Diluted

     0.27        0.28        0.27        0.33  

 

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(8) RECENTLY ISSUED ACCOUNTING STANDARDS

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

In August 2016, the FASB issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 enhances the reporting model for stock compensation and provides users of financial statements with more decision-useful information. ASU 2016-09 simplifies guidance on several aspects of the accounting for shared-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The update, as amended, is effective for annual periods beginning after December 15, 2016. The Company does not believe this update will have a material impact on its financial condition.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for leases classified as operating under current GAAP. ASU 2016-02 applies to all entities and is effective for fiscal years beginning after December 15, 2018 for public entities and is effective for fiscal years beginning after December 15, 2019 for all other entities, with early adoption permitted. The Company is assessing the impact the update will have on its financial condition and results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective of this Update is to enhance the reporting model for financial instruments and provide users of financial statements with more decision-useful information. ASU 2016-01 requires equity investments to be measured at fair value, simplifies the impairment assessment of equity investment without readily determinable fair value, eliminates the requirements to disclose the fair value of financial instruments measured at amortized cost, and requires public business entities to use the exit price notion when measuring the fair value of financial instruments. The update, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company does not believe this update will have a material impact on its financial condition.

(9) SEGMENT REPORTING

We have one business segment, our lending and investing operations. This segment originates and services medallion, secured commercial, and consumer loans, and invests in both marketable and nonmarketable securities.

(10) COMMITMENTS AND CONTINGENCIES

(a) Employment Agreements

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

 

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Employment agreements expire at various dates through 2021. At December 31, 2016, minimum payments under employment agreements are as follows:

 

(Dollars in thousands)

      

2017

   $ 2,488  

2018

     1,131  

2019

     756  

2020

     652  

2021

     272  

Thereafter

     —  
  

 

 

 

Total

   $ 5,299  
  

 

 

 

(b) Other Commitments

The Company had no portfolio commitments outstanding at December 31, 2016. Generally, commitments are on the same terms as loans to or investments in existing borrowers or investees, and generally have fixed expiration dates. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Commitments for leased premises expire at various dates through April 30, 2027. At December 31, 2016, minimum rental commitments for non-cancelable leases are as follows:

 

(Dollars in thousands)

      

2017

   $ 1,512  

2018

     1,537  

2019

     1,794  

2020

     1,796  

2021

     1,846  

Thereafter

     9,678  
  

 

 

 

Total

   $ 18,163  
  

 

 

 

Occupancy expense was $966,000, $877,000, and $798,000 for the years ended December 31, 2016, 2015, and 2014.

(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, other than as set forth in the following paragraph there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse impact on the financial condition or results of operations of the Company.

The Company and its subsidiaries obtain financing under lending facilities extended by various banks and other financial institutions, some of which are secured by loans, taxi medallions and other assets. Where these facilities are extended to its subsidiaries, the Company and others of its subsidiaries may guarantee the obligations of the relevant borrower. Five of the Company’s smallest subsidiaries are borrowers under promissory notes extended to them by a bank that total $8.8 million that came due on October 17, 2016. These loans are secured by Chicago taxi medallions owned by its subsidiaries. These notes are guaranteed by Medallion Funding, not by Medallion Financial Corp. These subsidiaries have not repaid the amounts due under the notes and the bank has filed a suit seeking payment of these amounts. This failure to pay would constitute an event of default under certain loan agreements which the Company or its subsidiaries are borrowers, but the lenders under those agreements have waived the default. If judgment is entered against the Company in the suit brought by the bank or entered and not satisfied within specified periods of time, these outcomes may constitute an additional event of default under these other agreements. If waivers are required and not granted for this additional event of default, it would lead to events of default under other of its financing arrangements.

(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 Freshstart’s transfer to liquidation status and the restructure of the Freshstart loan described in Note 19.

 

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As a regulated entity, Medallion Bank is subject to periodic routine examination from its regulators. In connection with a recent examination, the regulators required Medallion Bank to take additional loan loss reserves for the quarter ended September 30, 2016 and to file a restatement of its previously filed regulatory report for such period in January 2017. The valuation specialist engaged by the Company to assist the Board of Directors in their determination of Medallion Bank’s fair value as of September 30, 2016 assessed such restatement and determined that it did not result in a material change to its valuation. In addition, the Company’s Board of Directors assessed such restatement and determined that it did not affect the Company’s carrying value of Medallion Bank as of September 30, 2016.

(11) RELATED PARTY TRANSACTIONS

Certain directors, officers, and shareholders of the Company are also directors and officers of its wholly-owned subsidiaries, MFC, MCI, FSVC, and Medallion Bank, as well as of certain portfolio investment companies. Officer salaries are set by the Board of Directors of the Company.

A member of the Board of Directors of the Company from 1996 through 2014 was also of counsel in the Company’s primary law firm. Amounts paid to the law firm were approximately $676,000, $208,000, and $187,000 in 2016, 2015, and 2014.

Jeffrey Rudnick, the son of one of the Company’s directors, is an officer of LAX Group, LLC (LAX), one of the Company’s portfolio companies. Mr. Rudnick receives a salary from LAX of $166,000 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.

At December 31, 2016, 2015, and 2014, MSC serviced $325,751,000, $382,919,000, and $410,915,000 of loans for Medallion Bank. Included in net investment income were amounts as described in the table below that were received from Medallion Bank for services rendered in originating and servicing loans, and also for reimbursement of certain expenses incurred on their behalf.

The Company has assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed and collected from Medallion Bank by MSC. As a result, $5,421,000, $5,658,000, and $5,946,000 of servicing fee income was earned by MSC in the years ended December 31, 2016, 2015, and 2014.

The following table summarizes the net revenues received from Medallion Bank.

 

     Year ended December 31,  

(Dollars in thousands)

   2016      2015      2014  

Reimbursement of operating expenses

   $ 1,006      $ 775      $ 743  

Loan origination fees

     227        168        262  

Servicing fees

     2        8        15  
  

 

 

    

 

 

    

 

 

 

Total other income

   $ 1,235      $ 951      $ 1,020  
  

 

 

    

 

 

    

 

 

 

The Company had a loan to Medallion Fine Art, Inc. in the amount of $3,159,000 and $8,348,000 as of December 31, 2016 and 2015. The loan bears interest at a rate of 12%, all of which is paid in kind. During 2016 and 2015, the Company advanced $300,000 and $1,225,000 and was repaid $6,111,000 and $550,000 with respect to this loan. Additionally, the Company recognized $596,000, $944,000, and $765,000 of interest income in 2016, 2015, and 2014.

The Company and MCI had loans to RPAC Racing, LLC, an affiliate of Medallion Motorsports LLC which totaled $8,589,000 and $5,033,000 as of December 31, 2016 and 2015. The loans bear interest at rates of 8% and 10%, all of which is paid in kind. During 2016, 2015, and 2014, the Company and MCI recognized $626,000, $547,000, and $355,000 of interest income with respect to these loans.

(12) 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 during the following six months, with an option for the Board of Directors to extend the time frame for completing the purchases, which expires in May 2017. 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, 2016, a total of 2,931,125 shares had been repurchased for $24,587,000. Purchases in 2016 were 361,174 shares for $1,524,000, and were 413,193 shares for $3,212,000 in 2015, and were 576,143 shares for $5,880,000 in 2014.

 

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(13) NONINTEREST INCOME AND OTHER OPERATING EXPENSES

The major components of noninterest income were as follows.

 

     Year ended December 31,  

(Dollars in thousands)

   2016      2015      2014  

Prepayment fees

   $ 89      $ 65      $ 139  

Management fees

     75        75        75  

Late charges

     47        49        49  

Servicing fees

     36        51        142  

Partnership income

     35        —          —    

Other

     126        79        104  
  

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 408      $ 319      $ 509  
  

 

 

    

 

 

    

 

 

 

The major components of other operating expenses were as follows.

 

     Year ended December 31,  

(Dollars in thousands)

   2016      2015      2014  

Travel, meals, and entertainment

   $ 964      $ 940      $ 931  

Directors’ fees

     387        396        425  

Miscellaneous taxes

     328        213        276  

Computer expense

     257        315        272  

Insurance

     205        173        209  

Office expense

     200        216        224  

Depreciation and amortization

     110        140        160  

Other expenses

     153        324        597  
  

 

 

    

 

 

    

 

 

 

Total other operating expenses

   $ 2,604      $ 2,717      $ 3,094  
  

 

 

    

 

 

    

 

 

 

(14) SELECTED FINANCIAL RATIOS AND OTHER DATA

The following table provides selected financial ratios and other data:

 

     Year ended December 31,  

(Dollars in thousands, except per share data)

   2016     2015     2014     2013     2012  

Net share data

          

Net asset value at the beginning of the year

   $ 11.42     $ 11.16     $ 10.95     $ 9.99     $ 9.68  

Net investment income (loss)

     (0.41     0.69       0.60       0.55       0.43  

Income tax provision

     (1.90     0.00       0.00       0.00       0.00  

Net realized gains (losses) on investments

     0.02       0.31       (0.22     0.03       (0.33

Net change in unrealized appreciation on investments

     3.26       0.20       0.76       0.58       1.11  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     0.97       1.20       1.14       1.16       1.21  

Issuance of common stock

     —       —       (0.01     0.67       (0.07

Repurchase of common stock

     0.12       0.06       0.03       —       —  

Distribution of net investment income

     (0.60     (0.81     (0.60     (0.48     (0.39

Return of capital

     —       (0.18     (0.35     (0.41     (0.44

Distribution of net realized gains on investments

     —       —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions

     (0.60     (0.99     (0.95     (0.89     (0.83

Other

     —       (0.01     —       0.02       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase in net asset value

     0.49       0.26       0.21       0.96       0.31  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 11.91     $ 11.42     $ 11.16     $ 10.95     $ 9.99  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at beginning of year

   $ 7.04     $ 10.01     $ 14.35     $ 11.74     $ 11.38  

Per share market value at end of year

     3.02       7.04       10.01       14.35       11.74  

Total return (2)

     (54 %)      (22 %)      (25 %)      29     11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios/supplemental data

          

Total shareholders’ equity (net assets)

   $ 286,096     $ 278,088     $ 274,670     $ 273,495     $ 216,318  

Average net assets

     276,978       276,745       276,254       225,653       197,504  

Total expense ratio (3) (4) (5)

     29.36     9.45     9.57     11     13

Operating expenses to average net assets (4) (5)

     8.23       6.04       6.48       6.94       7.02  

Net investment income after income taxes to average net assets (4) (5)

     0.04       6.08       5.48       5.40       4.44  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(1) Includes $0.00 of undistributed net investment income per share as of December 31, 2016, 2015, 2014, 2013, and 2012, and $0.00 of undistributed net realized gains per share for all years presented.

 

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(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 $5,421, $5,658, $5,946, $5,920, and $6,066, and operating expenses of $5,249, $6,044, $6,005, $5,841, and $6,359 which formerly were the Company’s, were now MSC’s for the years ended December 31, 2016, 2015, 2014, 2013, and 2012. Excluding the impact of the MSC amounts, the total expense ratio, operating expense ratio, and net investment income (loss) ratio would have been 29.42%, 8.28%, and 1.95% in 2016, 11.63%, 8.23%, and 5.94% in 2015, 11.74%, 8.65%, and 5.46% in 2014, 13.23%, 9.53%, and 5.39% in 2013, and 15.73%, 10.23%, and 4.29% in 2012.
(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%

(15) EMPLOYEE BENEFIT PLANS

The Company has a 401(k) Investment Plan (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% and no more than 15% of the total annual compensation that would otherwise be paid to the employee, provided, however, that employee’s contributions may not exceed certain maximum amounts determined under 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 up to one-third of such employee’s contribution but in no event greater than 2% of the portion of such employee’s annual salary eligible for 401(k) Plan benefits. The Company’s 401(k) plan expense, including amounts for the employees of Medallion Bank and other unconsolidated, wholly-owned portfolio companies, was approximately $187,000, $185,000, and $181,000 for the years ended December 31, 2016, 2015, and 2014.

(16) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

(a) Investments—The Company’s investments are recorded at the estimated fair value of such investments.

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

(c) 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, 2016 and 2015, the estimated fair value of these off-balance-sheet instruments was not material.

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

 

     December 31, 2016      December 31, 2015  

(Dollars in thousands)

   Carrying Amount      Fair Value      Carrying Amount      Fair Value  

Financial assets

           

Investments

   $ 652,278      $ 652,278      $ 606,959      $ 606,959  

Cash (1)

     20,962        20,962        30,912        30,912  

Accrued interest receivable (2)

     769        769        1,003        1,003  

Financial liabilities

           

Funds borrowed(2)(3)

     349,073        340,290        404,540        404,540  

Accrued interest payable(2)

     2,883        2,883        1,302        1,302  

 

(1) Categorized as level 1 within the fair value hierarchy.
(2) Categorized as level 3 within the fair value hierarchy.
(3) As of December 31, 2016, publicly traded unsecured notes traded at a discount to par of $8,783.

 

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(17) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. The Company accounts for substantially all of its financial instruments at fair value or considers fair value in its measurement, in accordance with the accounting guidance for investment companies. See Note 2 sections “Fair Value of Assets and Liabilities” and “Investment Valuation” for a description of our valuation methodology which is unchanged during 2016.

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

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

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

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

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

 

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

 

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

 

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

 

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

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

A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur. The following paragraphs describe the sensitivity of the various level 3 valuations to the factors that are relevant in their valuation analysis.

 

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Medallion loans and the asset-based portion of the commercial loan portfolio are primarily collateral-based lending, whereby the collateral value exceeds the amount of the loan, providing sufficient excess collateral to protect against losses to the Company. As a result, the initial valuation assessment is that as long as the loan is current and performing, its fair value approximates the par value of the loan. To the extent a loan becomes nonperforming, the collateral value has been adequate to result in a complete recovery. In a case where the collateral value was inadequate, an unrealized loss would be recorded to reflect any shortfall. Collateral values for medallion loans are typically obtained from transfer prices reported by the regulatory agency in a particular local market (e.g. New York City Taxi and Limousine Commission). Recently, as transfer price activity and the collateral value of medallion loans has declined, and greater weight has been placed on the operating cash flows of the borrowers and the values of their personal guarantees in determining whether or not a valuation adjustment is necessary. Collateral values for asset based loans are confirmed through daily borrowing base analysis of borrower availability, confirmations obtained from a borrower’s underlying customers, and field examinations by us or third parties engaged by us. Those portfolios had historically been at very low loan to collateral value ratios, and as a result, historically have not been highly sensitive to changes in collateral values. In 2015 and 2016, as medallion collateral values have declined, the impact on the Company’s valuation analysis has become more significant, which could result in a significantly lower fair value measurement.

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

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

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

 

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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, 2016 and 2015.

 

(Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

2016 Assets

           

Medallion loans

   $ —      $ —      $ 266,816      $ 266,816  

Commercial loans

     —        —        83,634        83,634  

Investment in Medallion Bank and other controlled subsidiaries

     —        —        293,360        293,360  

Equity investments

     61        —        8,407        8,468  

Investments other than securities

     —        —        9,510        9,510  

Other assets

     —        —        354        354  

2015 Assets

           

Medallion loans

   $ —      $ —      $ 308,408      $ 308,408  

Commercial loans

     —        —        81,895        81,895  

Investment in Medallion Bank and other controlled subsidiaries

     —        —        159,913        159,913  

Equity investments

     62        —        6,797        6,859  

Investment securities

     49,884        —        —        49,884  

Investments other than securities

     —        —        37,882        37,882  

Other assets

     —        —        354        354  

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

The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilities for the years ended December 31, 2016 and 2015.

 

(Dollars in thousands)

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

December 31, 2015

   $ 308,408     $ 81,895     $ 159,913     $ 6,797     $ 37,882     $ 354  

Gains (losses) included in earnings

     (28,223     2,394       133,121       3,383       (28,372     —    

Purchases, investments, and issuances

     19,996       22,544       5,061       1,851       —       —  

Sales, maturities, settlements, and distributions

     (33,365     (23,423     (4,735     (3,400     —       —  

Transfers in (out) (1)

     —       224       —       (224     —       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(2)

   ($ 28,028   ($ 261   $ 133,121     $ 2,481     ($ 28,372     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During 2016, the equity interest in WRWP LLC was exchanged for a loan and has resulted in the transfer from equity interest to commercial loan.
(2) Total unrealized gains (losses) included in income for the year which relate to assets held as of December 31, 2016.

 

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(Dollars in thousands)

  Medallion
Loans
    Commercial
Loans(3)
    Investment in
Medallion

Bank & Other
Controlled  Subs(2)
    Equity
Investments(2)
    Investments
Other Than
Securities(4)
    Other
Assets(3)
 

December 31, 2014

  $ 311,894     $ 71,149     $ 136,848     $ 7,532     $ 0     $ 392  

Gains (losses) included in earnings

    (3,578     (236     43,384       1,113       (1,570     (68

Purchases, investments, and issuances

    38,966       27,255       10,604       1,447       —       —  

Sales, maturities, settlements, and distributions

    (38,874     (16,243     (32,535     (1,683     —       —  

Transfers in (out)

    —       (30     1,612       (1,612     39,452       30  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

  $ 308,408     $ 81,895     $ 159,913     $ 6,797     $ 37,882     $ 354  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

  ($ 3,438   ($ 175   $ 40,154     $ 207     ($ 9,621     (68
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total unrealized gains (losses) included in income for the year which relate to assets held as of December 31, 2015.
(2) During 2015, the investment in Medallion Motorsports was transferred from equity investment to controlled subsidiary at fair value in the amount of $1,612.
(3) During 2015, a commercial loan was settled, the proceeds of which are held in escrow subject to litigation. The investment was transferred from commercial loan to other assets at fair value in the amount of $30.
(4) During 2015, the investments other than securities were transferred from level 2 to level 3.

Significant Unobservable Inputs

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

 

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The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of December 31, 2016 and 2015 were as follows.

 

(Dollars in thousands)

   Fair Value
at 12/31/16
     Valuation Techniques    Unobservable Inputs   Range
(Weighted Average)
 

Medallion Loans

   $ 266,816      Precedent market
transactions
   Adequacy of collateral
(loan to value)
    0% - 379% (135%)  

Commercial Loans – Mezzanine and Other

     83,634      Borrower financial
analysis
   Financial condition and
operating performance
of the borrower
    N/A  
                   Portfolio yields     3% - 19.00% (13.05%)  

Investment in Medallion Bank

     280,589      Publicly traded
comparables
   Price / Tangible Book
Value multiples
    1.4x to 1.6x  
         Price / Earnings
multiples
    10.5x to 12.5x  
         Weight of the
valuation method
    40%  
      Precedent M&A
transactions
   Price / Tangible Book
Value multiples
    1.5x to 1.7x  
         Price / Earnings
multiples
    12.0x to 14.0x  
         Weight of the
valuation method
    40%  
      Discounted cash
flow
   Risk-free rate     2.40%  
         Discount rate     11.74%  
         Terminal value     $468,700  
                   Weight of the
valuation method
    20%  

Investment in Other Controlled Subsidiaries

     3,647      Investee book
value adjusted for
asset appreciation
   Financial condition and
operating performance
of the investee
    N/A  
         Third party valuation/
offer to purchase asset
    N/A  
     6,980      Investee financial
analysis
   Financial condition and
operating performance
    N/A  
         Implied value of
individual franchises
    $30,000  
         Equity value     $3,000 - $5,000  
     1,690      Investee book
value adjusted for
market
appreciation
    
         Financial condition and
operating performance
of the investee
    N/A  
       454      Investee book
value and equity
pickup
   Financial condition and

operating performance
of the investee

    N/A  

Equity Investments

     1,101      Investee book
value
   Valuation indicated by
investee filings
    N/A  
     475      Market
comparables
   Discount for lack of
marketability
    10% (10%)  
     5,480      Investee financial
analysis
   Financial condition and
operating performance
of the borrower
    N/A  
         Collateral support     N/A  
     1,351      Investee financial
analysis
   Equity value     $3,000 - $5,000  
                   Preferred equity yield     12%  

Investments Other Than Securities

     9,510      Precedent market
transaction
   Transfer prices of
Chicago medallions
    N/A  
              Cash flow analysis    Discount rate in cash
flow analysis
    6%  

Other Assets

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

 

F-34


Table of Contents

(Dollars in thousands)

   Fair Value
at 12/31/15
     Valuation Techniques    Unobservable Inputs   Range
(Weighted Average)
 

Medallion Loans

   $ 308,408      Precedent market

transactions

   Adequacy of collateral

(loan to value)

    1% - 155% (79%)  

Commercial Loans – Asset-Based

     3,678      Borrower collateral

analysis

   Adequacy of collateral

(loan to value)

    0% - 84% (54%)  

Commercial Loans – Mezzanine and Other

     78,217      Borrower financial

analysis

   Financial condition and

operating performance

of the borrower

    N/A  
                   Portfolio yields     3% - 19.00% (13.13%)  

Investment in Medallion Bank

     152,166      Third party valuation

using a weighting of

the three methods

utilized

   Comparable

Transactions Analysis

Control Premium

Analysis

Discount rate in Cash

Flow Analysis

   

 

 

(11.4% premium to book

value)

 

(32%)

 

(20%)


 

 

 

 

 

      Investee book value

and equity pickup

   Financial condition and

operating performance

of the investee

    N/A  
                   Premium on portfolio

assets

    (1.56% premium recorded)  

Investment in Other Controlled Subsidiaries

     4,234      Investee book value

and equity pickup,

adjusted for asset

appreciation

   Financial condition and

operating performance

of the investee

    N/A  
     986      Investee book value

and equity pickup

   Third party valuation/

offer to purchase assets

    N/A  
         Collateral support     N/A  
         Financial condition and

operating performance

of the investee

    N/A  
       2,527      Investee financial

analysis

   Financial condition and

operating performance

    N/A  

Equity Investments

     1,957      Investee book value    Valuation indicated by

investee filings

    N/A  
     509      Market comparables    Discount for lack of

marketability

    10% (10%)  
     4,331      Investee financial

analysis

   Financial condition and

operating performance

of the borrower

    N/A  
                   Collateral support     N/A  

Investments Other Than Securities

     37,882      Precedent market

transaction

   Transfer prices of

Chicago medallions

    $150 - $238 ($194)  
              Cash flow analysis    Discount rate in cash

flow analysis

    6%  

Other Assets

     354      Borrower collateral

analysis

   Adequacy of collateral

(loan to value)

    0%  

 

F-35


Table of Contents

(18) INVESTMENTS OTHER THAN SECURITIES

The following table presents the Company’s investments other than securities as of December 31, 2016 and 2015.

 

Investment Type (Dollars in thousands)

   Number of
Investments
    Investment
Cost
     Value as of
12/31/16
    Value as of
12/31/15
 

City of Chicago Taxicab Medallions

     154  (1)    $ 8,411      $ 9,240  (2)    $ 36,806  (2) 

City of Chicago Taxicab Medallions (handicap accessible)

     5  (1)      278        270  (3)      1,076  (3) 
    

 

 

    

 

 

   

 

 

 

Total Investments Other Than Securities

     $ 8,689      $ 9,510     $ 37,882  
    

 

 

    

 

 

   

 

 

 

 

(1) Investment is not readily marketable, is considered income producing, is not subject to option, and is a non-qualifying asset under the 1940 Act.
(2) Gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation for Federal income tax purposes was $7,287, $0, and $7,287 as of December 31, 2016, and was $34,240, $0, and $34,240 as of December 31, 2015. The aggregate cost for Federal income tax purposes was $1,953 at December 31, 2016 and $2,566 at December 31, 2015.
(3) Gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation for Federal income tax purposes was $212, $0, and $212 as of December 31, 2016 and is $989, $0, and $989 as of December 31, 2015. The aggregate cost for Federal income tax purposes was $58 at December 31, 2016 and $84 at December 31, 2015.

(19) SUBSEQUENT EVENTS

We have evaluated subsequent events that have occurred through the date of financial statement issuance.

On January 25, 2017, SBA restructured Freshstart’s debentures with SBA totaling $33,485,000 in principal into a new loan by SBA to Freshstart in the principal amount of $34,024,756 (the “SBA Loan”). In connection with the SBA Loan, on January 25, 2017, Freshstart and the Company entered into a Loan Agreement (the “SBA Loan Agreement”) with SBA and Freshstart executed a Note (the “SBA Note”), with an effective date of March 1, 2017, in favor of SBA, in the principal amount of $34,024,756. The SBA Loan bears interest at a rate of 3.25% per annum and requires a minimum of $5,500,000 of principal and interest to be paid on or before February 1, 2018, a minimum of $9,500,000 of principal and interest to be paid on or before February 1, 2019, and all remaining unpaid principal and interest on or before February 1, 2020, the final maturity date of the SBA Loan. The SBA Loan Agreement contains covenants and events of default, including, without limitation, payment defaults, breaches of representations and warranties and covenant defaults.

On February 15, 2017, the Company’s Board of Directors authorized a note repurchase program for up to $8,400,000 aggregate principal amount of its 9.00% Notes due 2021. Under the terms of such program, the Company may repurchase such notes in the open market from time-to-time.

 

F-36


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2016

 

(Dollars in

thousands)

 

Obligor

Name/Interest Rate

Range

   Security
Type (all
restricted
unless
otherwise
noted)
     Acquisition
Date
     Maturity
Date
     No. of
Invest.
     % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2016
Acquisitions (5)
     Principal
Outstanding
     Cost (4)      Fair
Value
 

Medallion Loans

                             

New York

                380        66     3.67   $ 15,068      $ 202,845      $ 202,469      $ 189,571  
  Sean Cab Corp ##      Term Loan        12/09/11        11/23/18        1        1     4.63      $ 3,270      $ 3,270      $ 3,270  
  Real Cab Corp ##      Term Loan        07/20/07        07/20/17        1        1     2.81      $ 2,545      $ 2,545      $ 2,545  
  Real Cab Corp ##      Term Loan        07/20/07        07/20/17        1        *       2.81      $ 350      $ 350      $ 350  
  Real Cab Corp      Term Loan        08/19/14        07/20/17        1        *       3.31      $ 338      $ 338      $ 338  
  Slo Cab Corp ##      Term Loan        07/20/07        07/20/17        1        1     2.81      $ 1,527      $ 1,527      $ 1,527  
  Slo Cab Corp ##      Term Loan        07/20/07        07/20/17        1        *       2.81      $ 210      $ 210      $ 210  
  Slo Cab Corp ##      Term Loan        08/19/14        07/20/17        1        *       3.31      $ 203      $ 203      $ 203  
  Esg Hacking Corp ##      Term Loan        03/12/14        03/12/17        1        1     3.50      $ 1,713      $ 1,713      $ 1,714  
  Whispers Taxi Inc ## &      Term Loan        05/28/13        05/28/16        1        1     3.35      $ 2,026      $ 2,014      $ 1,531  
  Christian Cab Corp &      Term Loan        11/27/12        11/27/18        1        1     3.75      $ 1,489      $ 1,489      $ 1,493  
  Junaid Trans Corp ## {Annually-Prime plus 1.00%}      Term Loan        04/30/13        04/29/19        1        *       4.50      $ 1,409      $ 1,409      $ 1,409  
  Ocean Hacking Corp ##      Term Loan        12/20/13        12/20/16        1        *       3.50      $ 1,379      $ 1,379      $ 1,379  
  Jacal Hacking Corp ##      Term Loan        12/20/13        12/20/16        1        *       3.50      $ 1,379      $ 1,379      $ 1,379  
  Avi Taxi Corporation ##      Term Loan        04/11/14        04/11/17        1        *       3.25      $ 1,366      $ 1,366      $ 1,366  
  Apple Cab Corp ##      Term Loan        04/11/14        04/11/17        1        *       3.25      $ 1,366      $ 1,366      $ 1,366  
  Anniversary Taxi Corp ##      Term Loan        04/11/14        04/11/17        1        *       3.25      $ 1,366      $ 1,366      $ 1,366  
  Hj Taxi Corp ##      Term Loan        04/11/14        04/11/17        1        *       3.25      $ 1,366      $ 1,366      $ 1,366  
  Kby Taxi Inc ##      Term Loan        04/11/14        04/11/17        1        *       3.25      $ 1,366      $ 1,366      $ 1,366  
  Bunty & Jyoti Inc ##      Term Loan        03/13/13        12/13/18        1        *       2.50      $ 1,336      $ 1,336      $ 1,336  
  Penegali Taxi LLC ##      Term Loan        12/11/14        12/10/17        1        *       3.75      $ 1,331      $ 1,331      $ 1,332  
  Sonu-Seema Corp ##      Term Loan        12/07/12        12/20/18        1        *       2.50      $ 1,313      $ 1,313      $ 1,313  
  Uddin Taxi Corp ##      Term Loan        11/05/15        11/05/18        1        *       4.75      $ 1,298      $ 1,297      $ 1,298  
  Yosi Transit Inc ##      Term Loan        07/20/07        07/20/17        1        *       2.81      $ 1,018      $ 1,017      $ 1,018  
  Yosi Transit Inc ##      Term Loan        07/20/07        07/20/17        1        *       2.81      $ 140      $ 140      $ 140  
  Yosi Transit Inc ##      Term Loan        08/19/14        07/20/17        1        *       3.31      $ 135      $ 135      $ 135  

Various New York && ##

  0.00% to 8.96%      Term Loan       

03/23/01
to
12/27/16
 
 
 
    

05/28/16
to
12/21/26
 
 
 
     355        56     3.71   $ 15,068      $ 171,606      $ 171,244      $ 158,821  

Chicago

                111        10     4.54   $ 109      $ 38,320      $ 38,091      $ 28,850  
  Sweetgrass Peach &Chadwick Cap ##      Term Loan        08/28/12        02/24/18        1        1     5.00      $ 1,454      $ 1,454      $ 1,454  
  Regal Cab Company Et Al ##      Term Loan        08/29/13        08/27/18        1        *       5.00      $ 1,322      $ 1,322      $ 1,322  

Various Chicago && ##

  0.00% to 7.00%      Term Loan       

01/22/10
to
08/08/16
 
 
 
    

03/12/16
to
12/29/20
 
 
 
     109        9     4.50   $ 109      $ 35,544      $ 35,315      $ 26,074  

Newark && ##

                111        8     5.27   $ 314      $ 23,291      $ 23,267      $ 23,157  
  Viergella Inc ##      Term Loan        02/20/14        02/20/18        1        *       4.75      $ 1,312      $ 1,312      $ 1,313  

Various Newark && ##

  4.50% to 7.00%      Term Loan       

04/09/10
to
04/14/16
 
 
 
    

12/12/16
to
05/14/25
 
 
 
     110        8     5.30   $ 314      $ 21,979      $ 21,955      $ 21,844  

Boston && ##

  0.00% to 6.15%      Term Loan       

06/12/07
to
12/09/16
 
 
 
    

12/07/15
to
11/06/25
 
 
 
     60        8     4.52   $ 1,214      $ 26,061      $ 25,857      $ 21,818  

Cambridge && ##

  3.75% to 5.50%      Term Loan       

05/06/11
to
12/15/15
 
 
 
    

03/29/16
to
01/26/20
 
 
 
     13        1     4.47      $ 4,441      $ 4,401      $ 2,649  

Various Other && ##

  4.75% to 9.00%      Term Loan       

04/28/08
to
07/30/15
 
 
 
    

01/03/17
to
09/01/23
 
 
 
     9        0     7.26      $ 978      $ 965      $ 771  
             

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total medallion loans ($231,494 pledged as collateral under borrowing arrangements)

 

           684        93     4.01   $ 16,705      $ 295,936      $ 295,050      $ 266,816  
             

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Loans

                           

Secured mezzanine (22% Minnesota, 12% Ohio, 10% Oklahoma, 8% Texas, 7% Delaware, 7% Pennsylvania, 7% North Carolina, 5% Kansas, 5% North Dakota, 4% Massachusetts, 4% Colorado, and 9% all other states) (2)

 

                        

Manufacturing (44% of the total)

  Stride Tool Holdings, LLC (interest rate includes PIK interest of 3.00%)      Term Loan        04/05/16        04/05/21        1        1     15.00   $ 4,000      $ 4,091      $ 4,091      $ 4,041  
  (capitalized interest of $91 per footnote 2)                            
  MicroGroup, Inc.      Term Loan        06/29/15        06/29/21        1        1     12.00      $ 3,244      $ 3,244      $ 3,244  
  (capitalized interest of $44 per footnote 2)                            

 

F-37


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2016

 

(Dollars in

thousands)

     

Obligor

Name/Interest Rate

Range

   Security
Type (all
restricted
unless
otherwise
noted)
     Acquisition
Date
     Maturity
Date
     No. of
Invest.
     % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2016
Acquisitions (5)
     Principal
Outstanding
     Cost (4)      Fair
Value
 
    AA Plush Holdings, LLC (interest rate includes PIK interest of 6.00%)      Term Loan        08/15/14        08/15/19        1        1     14.00      $ 3,197      $ 3,197      $ 3,190  
    (capitalized interest of $197 per footnote 2)                            
    Liberty Paper Products Acquisition LLC (interest rate includes PIK interest of 2.00%)      Term Loan        06/09/16        06/09/21        1        1     14.00   $ 3,000      $ 3,034      $ 3,034      $ 3,034  
    (capitalized interest of $34 per footnote 2)                            
    Pinnacle Products International, Inc. (interest rate includes PIK interest of 3.00%)      Term Loan        10/09/15        10/09/20        1        1     15.00      $ 2,907      $ 2,907      $ 2,907  
    (capitalized interest of $107 per footnote 2)                            
    WRWP, LLC (interest rate includes PIK interest of 5.00%)      Term Loan        12/30/14        12/30/19        1        1     17.00      $ 2,407      $ 2,407      $ 2,413  
    (capitalized interest of $165 per footnote 2)                            
    WRWP, LLC (interest rate includes PIK interest of 6.00%)      Term Loan        01/01/15        01/01/24        1        *       6.00      $ 252      $ 252      $ 252  
    (capitalized interest of $28 per footnote 2)                            
    BB Opco, LLC d/b/a BreathableBaby, LLC (interest rate includes PIK interest of 3.00%)      Term Loan        08/01/14        08/01/19        1        1     14.00      $ 2,637      $ 2,637      $ 2,640  
    (capitalized interest of $137 per footnote 2)                            
    Tech Cast Holdings, LLC      Term Loan        12/12/14        12/12/19        1        1     15.00      $ 2,635      $ 2,635      $ 2,613  
    EGC Operating Company, LLC (interest rate includes PIK interest of 3.00%)      Term Loan        09/30/14        09/30/19        1        1     15.00      $ 2,424      $ 2,424      $ 2,430  
    (capitalized interest of $14 per footnote 2)                            
    American Cylinder, Inc. d/b/a All Safe (interest rate includes PIK interest of 7.00%)      Term Loan        07/03/13        01/03/18        1        1     19.00      $ 1,693      $ 1,693      $ 1,692  
    (capitalized interest of $193 per footnote 2)                            
 

+

  Respiratory Technologies, Inc.      Term Loan        04/25/12        04/25/17        1        1     12.00      $ 1,500      $ 1,500      $ 1,501  
    Orchard Holdings, Inc. &      Term Loan        03/10/99        03/31/10        1        *       13.00      $ 1,390      $ 1,390      $ 1,390  
    Quaker Bakery Brands, Inc.      Term Loan        03/28/12        03/28/17        1        *       17.00      $ 1,300      $ 1,300      $ 1,299  
 

+

  Various Other && 12.00% to 14.00%      Term Loan       

03/31/06
to
03/06/14
 
 
 
    

03/31/18
to
03/06/19
 
 
 
     2        *       13.56      $ 369      $ 369      $ 245  

Professional, Scientific, and Technical Services (21% of the total)

    Weather Decision Technologies, Inc. {One-time on 1/1/18 to 15%} (interest rate includes PIK interest of 9.00%)      Term Loan        12/11/15        12/11/20        1        1     18.00      $ 3,854      $ 3,854      $ 3,844  
    (capitalized interest of $354 per footnote 2)                            
    ADSCO Opco, LLC (interest rate includes PIK interest of 2.00%)      Term Loan        10/25/16        10/25/21        1        1     13.00   $ 3,600      $ 3,613      $ 3,613      $ 3,601  
    (capitalized interest of $13 per footnote 2)                            
    Northern Technologies, LLC (interest rate includes PIK interest of 1.00%)      Term Loan        01/29/16        01/29/23        1        1     13.00   $ 3,500      $ 3,533      $ 3,533      $ 3,532  
    (capitalized interest of $33 per footnote 2)                            
 

+

  DPIS Engineering, LLC      Term Loan        12/01/14        06/30/20        1        1     12.00      $ 2,000      $ 2,000      $ 1,998  
    J. R. Thompson Company LLC (interest rate includes PIK interest of 2.00%)      Term Loan        05/21/15        05/21/22        1        1     14.00      $ 1,625      $ 1,625      $ 1,625  
    (capitalized interest of $14 per footnote 2)                            
    Portu-Sunberg Marketing LLC      Term Loan        10/21/16        03/21/22        1        *       12.00   $ 1,250      $ 1,250      $ 1,250      $ 1,244  

Information (12% of the total)

    US Internet Corp.      Term Loan        06/12/13        09/18/20        1        1     14.50      $ 3,000      $ 3,000      $ 3,010  
    US Internet Corp.      Term Loan        02/05/16        02/11/23        1        1     14.50   $ 1,900      $ 1,900      $ 1,900      $ 1,890  
    US Internet Corp.      Term Loan        03/18/15        09/18/20        1        1     14.50      $ 1,750      $ 1,750      $ 1,743  
    Centare Holdings, Inc. (interest rate includes PIK interest of 2.00%)      Term Loan        08/30/13        08/30/18        1        1     14.00      $ 2,500      $ 2,500      $ 2,494  

Arts, Entertainment, and Recreation (7% of the total)

    RPAC Racing, LLC (interest rate includes PIK interest of 10.00%)      Term Loan        11/19/10        01/15/17        1        2     10.00      $ 5,555      $ 5,555      $ 5,555  
    (capitalized interest of $2,516 per footnote 2)                            

Administrative and Support Services (5% of the total)

    Staff One, Inc.      Term Loan        06/30/08        03/31/18        1        1     3.00      $ 2,776      $ 2,776      $ 2,776  
    Staff One, Inc. (interest rate includes PIK interest of 7.00%)      Term Loan        12/28/16        03/31/18        1        *       19.00   $ 643      $ 557      $ 557      $ 557  
    Staff One, Inc.      Term Loan        09/15/11        03/31/18        1        *       3.00      $ 347      $ 347      $ 347  

 

F-38


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2016

 

(Dollars in

thousands)

     

Obligor

Name/Interest Rate

Range

  Security
Type (all
restricted
unless
otherwise
noted)
    Acquisition
Date
    Maturity
Date
    No. of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2016
Acquisitions (5)
    Principal
Outstanding
    Cost (4)     Fair
Value
 

Transportation and Warehousing (5% of the total)

    LLL Transport, Inc. (interest rate includes PIK interest of 3.00%)     Term Loan       10/23/15       04/23/21       1       1     15.00     $ 3,622     $     3,622     $ 3,620  
    (capitalized interest of $122 per footnote 2)                    

Wholesale Trade (4% of the total)

 

+

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

Construction (2% of the total)

    Highland Crossing-M, LLC     Term Loan       01/07/15       02/01/25       1       1     11.50     $ 1,450     $     1,450     $ 1,450  

Accommodation and Food Services (0% of the total)

    Various Other && 9.25% to 10.00%     Term Loan      

06/30/00
to
11/05/10
 
 
 
   

09/30/17
to
11/05/20
 
 
 
    3       *       9.77   $ 0     $ 1,108     $     1,108     $ 455  

Retail Trade (0% of the total)

    Various Other && 10.00%     Term Loan       06/30/00       09/30/17       1       *       10.00   $ 0     $ 69     $ 69     $ 36  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total secured mezzanine (2)

          37       26     13.47   $ 20,773     $ 76,469     $ 76,469     $ 75,548  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other secured commercial (46% New York, 38% North Carolina, 14% New Jersey and 2% all other states)

 

             

Retail Trade (54% of the total)

    Medallion Fine Art Inc (interest rate includes PIK interest of 12%)     Term Loan       12/17/12       12/17/17       1       1     12.00     $ 3,159     $ 3,159     $ 3,159  
    (capitalized interest of $2,695 per footnote 2)                    
    Various Other && 4.75% to 10.50%     Term Loan      

10/28/08
to
05/03/16
 
 
 
   

05/09/18
to
05/03/21
 
 
 
    7       *       7.92   $ 175     $ 1,570     $ 1,546     $ 1,254  

Arts, Entertainment, and Recreation (38% of the total)

    RPAC Racing LLC (interest rate includes PIK interest of 8%)     Term Loan       06/22/16       12/31/16       1       1     8.00   $ 2,000     $ 2,034     $ 2,034     $ 2,034  
    (capitalized interest of $34 per footnote 2)                    
    RPAC Racing LLC (interest rate includes PIK interest of 8%)     Term Loan       09/14/16       12/31/16       1       *       8.00   $ 1,000     $ 1,000     $ 1,000     $ 1,000  

Accommodation and Food Services (6% of the total)

    Various Other && 6.75% to 9.00%     Term Loan      
11/29/05
06/06/14
 
 
   
04/18/17
09/06/19
 
 
    3       *       8.29   $ 0     $ 690     $ 597     $ 459  

Transportation and Warehousing (1% of the total)

    Various Other && 4.00% to 4.25%     Term Loan      
09/19/14
03/17/15
 
 
   
03/31/17
09/10/18
 
 
    2       *       4.08   $ 0     $ 260     $ 252     $ 120  

Real Estate and Rental and Leasing (1% of the total)

    Various Other && 5.00%     Term Loan       03/31/15       03/31/20       1       *       5.00   $ 0     $ 72     $ 69     $ 60  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Commercial Loans (2)

          16       3     9.33   $ 3,175     $ 8,785     $ 8,657     $ 8,086  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans (2)

 

    53       29     13.05   $ 23,948     $ 85,254     $   85,126     $ 83,634  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

 

               

Commercial Banking

    Medallion Bank **     100% of common stock       05/16/02       None       1       98     2.20       $ 136,171     $ 280,590  

NASCAR Race Team

    Medallion MotorSports, LLC     75% of LLC units       11/24/10       None       1       2     0.00       $ 2,820     $ 6,980  

Art Dealer

    Medallion Fine Art, Inc.     100% of common stock       12/03/12       None       1       1     0.00       $ 724     $ 3,646  

Loan Servicing

    Medallion Servicing Corp.     100% of common stock       11/05/10       None       1       *       0.00       $ 455     $ 454  

Professional Sports Team

    LAX Group LLC    

45.74% of
membership
interests
 
 
 
    05/23/12       None       1       1     0.00       $ 440     $ 1,690  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

      5       103     2.13   $ 0     $ 0     $ 140,610     $ 293,360  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity investments

                       

Commercial Finance

    Convergent Capital, Ltd **     7% of limited partnership interest       07/20/07       None       1       *       0.00       $ (794   $ 1,100  

NASCAR Race Team

    RPAC Racing LLC    

1,000
shares of
Series D
 
 
 
    08/25/15       None       1       *       0.00       $ 0     $ 1,351  

Employee Leasing Services

    Staff One, Inc.    

46.4%
preferred
stock
 
 
 
    06/30/08       None       2       *       0.00       $ 472     $ 1,172  

 

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Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2016

 

(Dollars in

thousands)

     

Obligor

Name/Interest Rate

Range

 

Security

Type (all

restricted

unless

otherwise

noted)

  Acquisition
Date
    Maturity
Date
    No. of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2016
Acquisitions (5)
    Principal
Outstanding
    Cost (4)     Fair
Value
 

Weather Forecasting Services

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

Hand Tool Manufacturer

    Stride Tool Holdings, LLC   7.14% of Series A-2 LLC units     04/05/16       None       1       *       0.00   $ 500       $ 500     $ 500  

Services related to advertising

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

Envirnomental Consulting Services

    Northern Technologies, LLC   7.98% of LLC units    

01/29/2016
and
12/5/16
 
 
 
    None       2       *       0.00   $ 350       $ 350     $ 351  

Paper Tapes Manufacturer

    Liberty Paper Products Acquisition, LLC   100% of Series A preferred LLC units - 12% total     06/09/16       None       1       *       0.00   $ 350       $ 350     $ 350  

Stuffed Toy Manufacturer

    AA Plush Holdings, LLC   1.6% LLC common units     08/15/14       None       1       *       0.00       $ 300     $ 300  

Investment Castings

    Tech Cast Holdings LLC   4.14% LLC units     12/12/14       12/12/19       1       *       0.00       $ 300     $ 300  

Machine Shop

    MicroGroup, Inc.   5.5% common stock     06/29/15       None       1       *       0.00       $ 300     $ 300  

Baby Sleep Products

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

Manufacture Space Heaters, etc.

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

IT Services

    Centare Holdings, Inc.   7.23% of common stock, 3.88% of preferred stock     08/30/13       None       1       *       0.00       $ 104     $ 104  

Hobbyists’ Supplies Merch. Wholesale

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

Various Other #

  +   **   * Various    
09/10/98
to 7/24/15
 
 
   
None to
2/5/23
 
 
    15       *       2.27   $ 300       $ 1,366     $ 1,355  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity investments, net

              32       3     0.00   $ 1,900     $ 0     $ 4,533     $ 8,468  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities

                       
           

 

 

   

 

 

         

 

 

   

 

 

 

Investment securities, net

              0       0         $ 0     $ 0  
           

 

 

   

 

 

         

 

 

   

 

 

 

Net Investments ($231,494 pledged as collateral under borrowing arrangements) (3)

 

             
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
              774       228     4.94   $ 42,553     $ 381,190     $ 525,319     $ 652,278  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents the actual or weighted average interest or dividend rate of the respective security or portfolio as of the date indicated. Investments without an interest rate or with a rate of 0.00% are considered non-income producing.
(2) Included in secured mezzanine commercial loans and other commercial loans was $6,791 of interest income capitalized into the outstanding investment balances, in accordance with the terms of the investment contract.
(3) The ratio of restricted securities fair value to net assets is 228%.
(4) Gross unrealized appreciation, gross unrealized depreciation and net appreciation for federal income tax purposes totaled $210,510, $31,028 and $179,482, respectively. The tax cost of investments was $472,796.
(5) For revolving lines of credit the amount shown is the cost at December 31, 2016.
* Less than 1.0%
** Not an eligible portfolio company as such term is defined in Section 2(a)(46) of the 1940 Act. The percentage value of all non-eligible portfolio companies to totaled assets of Medallion Financial on an unconsolidated basis was up to 52% and up to 43% on a consolidated basis. Under the 1940 Act, we may not acquire any non-qualifying assets, unless at the time such acquisition is made, qualifying assets, which include securities of eligible portfolio companies, represent at least 70% of our total assets. The status of these assets under the 1940 Act are subject to change. We monitor the status of these assets on an ongoing basis. 
& Loan is on nonaccrual status, or past due on contractual payments, and is therefore considered non-income producing.
&& Some or all of the securities are non-income producing as per & above.
# Publicly traded but sales subject to applicable Rule 144 limitations.
## Pledged as collateral under borrowing arrangements.
+ Includes various warrants, all of which have a cost and fair value of zero at December 31, 2016.

 

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Table of Contents
The Summary Schedule of Investments does not reflect the Company’s complete portfolio holdings. It includes the Company’s 50 largest holdings and each investment of any issuer that exceeds 1% of the Company’s net assets. “Various Other” represents all issues not required to be disclosed under the rules adopted by the U.S. Securities and Exchange Commission (“SEC”). Footnotes above may apply to securities that are included in “Various Other”. For further detail, the complete schedule of portfolio holdings is available (i) without charge, upon request, by calling (877) MEDALLION; and (ii) on the SEC’s website at http://www.sec.gov. Filed as Exhibit 99.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on March 14, 2017 (File No. 814-00188)

 

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Table of Contents

Medallion Financial Corp

CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFIILIATES

As of and for the year ended December 31, 2016

 

Name of issuer and title of issue

 

Number of shares

(all restricted unless otherwise noted)

  Equity in net profit
and (loss)
    Amount of dividends
or interest(1)
    Value as of
12/31/16
 
(Dollars in thousands)                      

Medallion Bank—common stock

 

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

  $ 128,385     $ 3,000     $ 280,589  

Medallion Motorsports, LLC—membership interest (3)

 

75% of membership interest

    4,465       0       6,980  

Medallion Fine Art, Inc.—common stock (2)

 

1,000 shares—100% of common stock

    (587     0       3,647  

LAX Group LLC—membership interest

 

45.1% of membership interest

    700       0       1,690  

Medallion Servicing Corp.—common stock

 

1,000 shares—100% of common stock

    158       0       454  
   

 

 

   

 

 

   

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries

      133,121       3,000       293,360  
   

 

 

   

 

 

   

 

 

 

RPAC Racing LLC (3)

 

100% of Series D units

    0       0       1,351  

Stride Tool Holdings LLC (4)—membership interest

 

7.14% of Series A membership interest

    0       0       500  

Appliance Recycling Centers of America Inc.—common stock

 

8.86% of common stock

    0       0       475  

ADSCO Holdco LLC (5)

 

7.9% of membership interest

    0       0       400  

Northern Technologies LLC—membership interest (6)

 

7.7% of membership interest

    0       0       351  

Micro Group, Inc. (7)

 

5.50% of common stock

    0       0       300  

Third Century JRT, Inc. (8)

 

13% of common stock

    0       0       200  

WRWP, LLC—membership interest (9)

 

0.00% of membership interest

    0       0       0  

Production Services Associates LLC (10)

 

5.65% of membership interest

    0       0       0  
   

 

 

   

 

 

   

 

 

 

Total equity investments in affiliates

    $ 0     $ 0     $ 3,577  
   

 

 

   

 

 

   

 

 

 

 

(1) Investments with an amount of $0 are considered non-income producing.
(2) The Company also has a loan due from Medallion Fine Art, Inc. in the amount of $3,159 as of December 31, 2016, on which $596 of interest income was earned during 2016.
(3) The Company and a controlled subsidiary of the Company have 3 loans due from RPAC Racing LLC, an affiliate of Medallion Motorsports, LLC in the amount of $8,589 as of December 31, 2016, on which $626 of interest income was earned during 2016.
(4) The Company had a loan due from Production Services Associates LLC during 2016, $0 of which was outstanding at December 31, 2016, on which $356 of interest income was earned during 2016.
(5) The Company has a loan due from Micro Group, Inc. in the amount of $3,244 as of December 31, 2016, on which $410 of interest income was earned during 2016.
(6) The Company has loans due from WRWP, LLC in the amount of $2,659 as of December 31, 2016, on which $404 of interest income was earned during 2016.
(7) The Company has a loan due from JR Thompson Company LLC, or affiliate of Third Century JRT, Inc., in the amount of $1,625 as of December 31, 2016, on which $255 of interest income was earned during 2016.
(8) The Company has loan from Northern Technologies LLC in the amount of $3,533 as of December 31, 2016, on which $426 of interest income was earned during 2016.
(9) The Company has a loan from Stride Tool Holding LLC in the amount of $4,091 as of December 31, 2016, on which $455 of interest income was earned during 2016.
(10) The Company has a loan to ADSCO Holdco LLC in the amount of $3,613 as of December 31, 2016, on which $87 of interest income was earned during 2016.

 

F-42


Table of Contents

The table below provides a recap of the changes in the investment in the respective issuers for the year ended December 31, 2016.

 

Name of Issuer

  Medallion
Bank
    Medallion
Fine Art,
Inc.
    Medallion
Motorsports,
LLC (2)
    Appliance
Recycling
Centers
of
America,
Inc.
    Medallion
Servicing
Corp.
    LAX
Group, LLC
    Production
Services
Associates,
LLC (3)
    Micro
Group,
Inc. (4)
    WRWP,
LLC
    Third
Century
JRT,
Inc. (6)
    Northern
Technologies,
LLC (7)
    Stride Tool
Holding
LLC (8)
    ADSCO Holdco
LLC (9)
    RPAC Racing
LLC (2)
 

Title of Issue

  Common
Stock
    Common
Stock(1)
    Membership
Interest
    Common
Stock
    Common
Stock
    Membership
Interest
    Membership
Interest
    Common
Stock
    Membership
Interest(5)
    Common
Stock
    Membership
Interest
    Membership
Interest
    Membership
Interest
    Membership
Interest
 
(Dollars in thousands)                                                                                

Value as of 12/31/15

  $ 152,166     $ 4,234     $ 2,527     $ 509     $ 631     $ 355     $ 1,179     $ 300     $ 224     $ 200     $ —       $ —       $ —       $ —    

Gross additions / investments

    4,265       —         1       —         160       635       —         —         —         —         351       500       400       —    

Gross reductions / distributions

    (4,272     —         (13     —         (495     —         (1,082     —         (224     —         —         —         —         —    

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

    128,385       (587     4,465       (34     158       700       (97     —         —         —         —         —         —         1,351  

Other adjustments

    —         —         —         —         —         —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Value as of 12/31/16

  $ 280,589     $ 3,647     $ 6,980     $ 475     $ 454     $ 1,690     $ —       $ 300     $ —       $ 200     $ 351     $ 500     $ 400     $ 1,351  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(1) The Company has a loan due from Medallion Fine Art, Inc. in the amount of $3,159 as of December 31, 2016, $300 of which was advanced during 2016, and for which $6,111 was repaid.
(2) In addition to the equity ownership, the Company and a controlled subsidiary of the Company have three loans due from RPAC Racing LLC, an affiliate of Medallion Motorsports, LLC in the amount of $8,589 as of December 31, 2016, $3,626 of which was advanced during 2016.
(3) The Company had a loan due from Production Services Associates LLC, during 2016, $0 of which of outstanding at December 31, 2016.
(4) The Company has a loan due from Micro Group, Inc. in the amount of $3,244 as of December 31, 2016, $11 of which was advanced during 2016.
(5) The Company has a loan due from WRWP LLC in the amount of $2,659 as of December 31, 2016, $348 of which was advanced during 2016, $224 of which was an exchange of the equity interest.
(6) The Company has a loan due from J. R. Thompson Company, LLC, an affiliate of Third Century JRT, INC in the amount of $1,625 as of December 31, 2016, $29 of which was advanced during 2016, and for which $677 was repaid.
(7) The Company has a loan due from Northern Technologies LLC in the amount of $3,533 as of December 31, 2016, all of which was advanced during 2016.
(8) The Company has a loan due from Stride Tool Holdings LLC in the amount of $4,091 as of December 31, 2016, all of which was advanced during 2016.
(9) The Company has a loan due from ADSCO Holdco LLC in the amount of $3,613 as of December 31, 2016, all of which was advanced during 2016.

 

F-43


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2015

 

(Dollars in thousands)

 

Obligor

Name/Interest Rate Range

 

Security

Type (all

restricted

unless

otherwise

noted)

  Acquisition
Date
    Maturity
Date
    No. of
Invest.
    % of
Net
Assets
    Interest
Rate
(1)
    Original
Cost of 2015
Acquisitions
(5)
    Principal
Outstanding
    Cost
(4)
    Fair
Value
 

Medallion Loans

                     

New York

            391       77     3.72   $ 25,051     $ 213,374     $ 213,356     $ 213,278  
  Real Cab Corp ##   Term Loan     07/20/07       07/20/17       1       1     2.81     $ 2,545     $ 2,545     $ 2,545  
  Real Cab Corp   Term Loan     08/19/14       07/20/17       1       *       3.31     $ 903     $ 903     $ 903  
  Real Cab Corp   Term Loan     07/20/07       07/20/17       1       *       2.81     $ 350     $ 350     $ 351  
  Sean Cab Corp ##   Term Loan     12/09/11       11/23/18       1       1     4.63     $ 3,376     $ 3,376     $ 3,374  
  Slo Cab Corp ##   Term Loan     07/20/07       07/20/17       1       1     2.81     $ 1,527     $ 1,527     $ 1,527  
  Slo Cab Corp ##   Term Loan     08/19/14       07/20/17       1       *       3.31     $ 542     $ 542     $ 542  
  Slo Cab Corp ##   Term Loan     07/20/07       07/20/17       1       *       2.81     $ 210     $ 210     $ 211  
  Whispers Taxi Inc ##   Term Loan     05/28/13       05/28/16       1       1     3.35     $ 2,046     $ 2,046     $ 2,045  
  Esg Hacking Corp ##   Term Loan     03/12/14       03/12/17       1       1     3.50     $ 1,760     $ 1,760     $ 1,763  
  Sag Taxi LLC ##   Term Loan     03/28/14       03/28/17       1       1     3.50     $ 1,754     $ 1,754     $ 1,755  
  Pontios Taxi LLC ##   Term Loan     03/28/14       03/28/17       1       1     3.50     $ 1,753     $ 1,753     $ 1,754  
  Kos Taxi LLC ##   Term Loan     03/28/14       03/28/17       1       1     3.50     $ 1,752     $ 1,752     $ 1,753  
  Ikaria Taxi LLC ##   Term Loan     03/28/14       03/28/17       1       1     3.50     $ 1,752     $ 1,752     $ 1,753  
  Yosi Transit Inc ##   Term Loan     07/20/07       07/20/17       1       *       2.81     $ 1,018     $ 1,018     $ 1,018  
  Yosi Transit Inc ##   Term Loan     08/19/14       07/20/17       1       *       3.31     $ 361     $ 361     $ 361  
  Yosi Transit Inc ##   Term Loan     07/20/07       07/20/17       1       *       2.81     $ 140     $ 140     $ 141  
  Hamilton Transit LLC ##   Term Loan     03/26/14       03/26/17       1       1     3.38     $ 1,502     $ 1,502     $ 1,505  
  Silke Hacking Corp ##   Term Loan     03/26/14       03/26/17       1       1     3.38     $ 1,502     $ 1,502     $ 1,503  
  Daytona Hacking Corp ##   Term Loan     03/26/14       03/26/17       1       1     3.38     $ 1,502     $ 1,502     $ 1,503  
  Kaderee M & G Corp ##   Term Loan     03/26/14       03/26/17       1       1     3.38     $ 1,502     $ 1,502     $ 1,503  
  Christian Cab Corp   Term Loan     11/27/12       11/27/18       1       1     3.75     $ 1,490     $ 1,490     $ 1,490  
  Bunty & Jyoti Inc ##   Term Loan     03/13/13       03/13/16       1       1     3.75     $ 1,467     $ 1,467     $ 1,466  
  Junaid Trans Corp ##   Term Loan     04/30/13       04/30/16       1       1     3.75     $ 1,446     $ 1,446     $ 1,445  
  Ocean Hacking Corp ##   Term Loan     12/20/13       12/20/16       1       1     3.50     $ 1,424     $ 1,424     $ 1,425  
  Jacal Hacking Corp ##   Term Loan     12/20/13       12/20/16       1       1     3.50     $ 1,424     $ 1,424     $ 1,424  
  Anniversary Taxi Corp ##   Term Loan     04/11/14       04/11/17       1       1     3.25     $ 1,395     $ 1,395     $ 1,395  
  Avi Taxi Corporation ##   Term Loan     04/11/14       04/11/17       1       1     3.25     $ 1,395     $ 1,395     $ 1,395  

 

F-44


Table of Contents

(Dollars in

thousands)

  

Obligor

Name/Interest Rate

Range

   Security
Type (all
restricted
unless
otherwise
noted)
     Acquisition
Date
     Maturity
Date
     No. of
Invest.
     % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2015
Acquisitions (5)
     Principal
Outstanding
     Cost (4)      Fair
Value
 
   Kby Taxi Inc ##      Term Loan        04/11/14        04/11/17        1        1 %      3.25      $ 1,395      $ 1,395      $ 1,395  
   Apple Cab Corp ##      Term Loan        04/11/14        04/11/17        1        1 %      3.25      $ 1,395      $ 1,395      $ 1,395  
   Hj Taxi Corp ##      Term Loan        04/11/14        04/11/17        1        1 %      3.25      $ 1,395      $ 1,395      $ 1,395  

Various New York

&& ##

   2.75% to 10.00%      Term Loan       

03/23/01

to

12/28/15

 

 

 

    

01/03/16

to

09/10/23

 

 

 

     361        62     3.78   $ 25,051      $ 171,351      $ 171,333      $ 171,243  

Chicago

                              
                 112        14 %      4.87 %    $ 4,656      $ 39,412      $ 39,406      $ 39,260  
   Sweetgrass Peach &Chadwick Cap ##      Term Loan        08/28/12        02/24/18        1        1 %      5.00 %       $ 1,517      $ 1,517      $ 1,516  

Various Chicago && ##

   3.25% to 12.00%      Term Loan       

01/22/10

to

12/22/15

 

 

 

    

10/19/15

to

12/22/20

 

 

 

     111        14     4.87   $ 4,656      $ 37,895      $ 37,889      $ 37,744  

Newark && ##

   4.50% to 7.00%      Term Loan       

04/09/10

to

12/10/15

 

 

 

    

02/14/16

to

05/14/25

 

 

 

     115        9 %      5.26 %    $ 1,749      $ 24,585      $ 24,585      $ 24,654  

Boston

                 56        9 %      4.63 %    $ 3,268      $ 26,471      $ 26,436      $ 25,883  
   Chiso Trans Inc &      Term Loan        11/26/13        11/07/16        1        *       4.25      $ 819      $ 819      $ 820  
   Chiso Trans Inc &      Term Loan        04/20/12        04/20/18        1        *       5.50      $ 581      $ 581      $ 581  

Various Boston && ##

   4.00% to 6.15%      Term Loan       

06/12/07

to

09/29/15

 

 

 

    

12/07/15

to

11/06/25

 

 

 

     54        9     4.62   $ 3,268      $ 25,071      $ 25,036      $ 24,482  

Cambridge && ##

   3.75% to 5.50%      Term Loan       

05/06/11

to

12/15/15

 

 

 

    

03/22/16

to

01/26/20

 

 

 

     14        2     4.64   $ 2,414      $ 6,624      $ 6,607      $ 4,287  

Various Other && ##

   4.75% to 11.50%      Term Loan       

04/28/08

to

07/30/15

 

 

 

    

07/01/15

to

09/01/23

 

 

 

     11        0     7.27   $ 320      $ 1,045      $ 1,043      $ 1,046  
              

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total medallion loans ($238,103 pledged as collateral under borrowing arrangements)

           699        111 %      4.09   $ 37,458      $ 311,511      $ 311,433      $ 308,408  

 

F-45


Table of Contents

(Dollars in

thousands)

 

Obligor

Name/Interest Rate

Range

 

Security

Type (all

restricted

unless

otherwise

noted)

  Acquisition
Date
    Maturity
Date
    No. of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2015
Acquisitions (5)
    Principal
Outstanding
    Cost (4)     Fair
Value
 

Commercial Loans

                     

Secured mezzanine (23% Minnesota, 10% Oklahoma, 8% Pennsylvania, 8% Ohio, 8% North Carolina, 5% Kansas, 5% New York, 5% Massachusetts, 5% Rhode Island, 4% Wisconsin, 4% Illinois, 4% Deleware, 4% Michigan, 3% Texas and 4% all other states) (2)

 

Manufacturing (51% of the total)

 

MicroGroup, Inc.

(interest rate includes

PIK interest of 2.00%)

  Term Loan     06/29/15       06/29/20       1       1     14.00   $ 3,200     $ 3,233     $ 3,233     $ 3,233  
 

(capitalized interest of

$33 per footnote 2)

                   
 

AA Plush Holdings, LLC

(interest rate includes

PIK interest of 2.00%)

  Term Loan     08/15/14       08/15/19       1       1     14.00     $ 3,085     $ 3,085     $ 3,075  
 

(capitalized interest of

$85 per footnote 2)

                   
  EGC Operating Company, LLC (interest rate includes PIK interest of 2.00%)   Term Loan     09/30/14       09/30/19       1       1     15.00     $ 2,945     $ 2,945     $ 2,954  

 

F-46


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2015

 

(Dollars in

thousands)

 

Obligor

Name/Interest Rate

Range

 

Security

Type (all

restricted

unless

otherwise

noted)

   Acquisition
Date
     Maturity
Date
     No. of
Invest.
     % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2015
Acquisitions (5)
     Principal
Outstanding
     Cost (4)      Fair
Value
 
  (capitalized interest of $15 per footnote 2)                           
  Pinnacle Products International, Inc. (interest rate includes PIK interest of 3.00%)   Term Loan      10/09/15        10/09/20        1        1     15.00   $ 2,800      $ 2,820      $ 2,820      $ 2,820  
  (capitalized interest of $20 per footnote 2)                           
  Tech Cast Holdings, LLC (interest rate includes PIK interest of 3.00%)   Term Loan      12/12/14        12/12/19        1        1     15.00      $ 2,690      $ 2,690      $ 2,661  

+

  Production Services Associates LLC (d/b/a American Card Services) (interest rate includes PIK interest of 2.00%)   Term Loan      02/17/15        02/17/20        1        1     16.00   $ 2,600      $ 2,646      $ 2,646      $ 2,624  
  (capitalized interest of $46 per footnote 2)                           
  BB Opco, LLC d/b/a BreathableBaby, LLC (interest rate includes PIK interest of 2.00%)   Term Loan      08/01/14        08/01/19        1        1     14.00      $ 2,573      $ 2,573      $ 2,577  
  (capitalized interest of $73 per footnote 2)                           
  WRWP, LLC (interest rate includes PIK interest of 3.00%)   Term Loan      12/30/14        12/30/19        1        1     15.00      $ 2,311      $ 2,311      $ 2,319  
  (capitalized interest of $70 per footnote 2)                           
  Dynamic Systems, Inc. (interest rate includes PIK interest of 3.50%)   Term Loan      12/23/10        12/23/17        1        1     15.50      $ 2,066      $ 2,066      $ 2,066  
  (capitalized interest of $241 per footnote 2)                           
  American Cylinder, Inc. d/b/a All Safe (interest rate includes PIK interest of 7.00%)   Term Loan      07/03/13        01/03/18        1        1     19.00      $ 1,577      $ 1,577      $ 1,575  
  (capitalized interest of $77 per footnote 2)                           

+

  GAF Manufacturing, LLC (interest rate includes PIK interest of 2.00%)   Term Loan      03/06/14        03/06/19        1        1     14.00      $ 1,556      $ 1,556      $ 1,562  
  (capitalized interest of $56 per footnote 2)                           

+

  Respiratory Technologies, Inc.   Term Loan      04/25/12        04/25/17        1        1     12.00      $ 1,500      $ 1,500      $ 1,503  

+

  Various Other && 12.00% to 17.00%   Term Loan     

03/10/99

to

07/17/12

 

 

 

    

03/31/10

to

01/31/19

 

 

 

     5        2     13.97      $ 5,561      $ 5,561      $ 5,561  

 

F-47


Table of Contents

(Dollars in

thousands)

 

Obligor

Name/Interest Rate

Range

   Security Type
(all
restricted
unless
otherwise
noted)
     Acquisition
Date
     Maturity
Date
     No. of
Invest.
     % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2015
Acquisitions (5)
     Principal
Outstanding
     Cost (4)      Fair
Value
 

Professional, Scientific, and Technical Services (12% of the total)

  Weather Decision Technologies, Inc. {One-time on 1/1/18 to 15%} (interest rate includes PIK interest of 9.00%)      Term Loan        12/11/15        12/11/20        1        1     18.00   $ 3,500      $ 3,517      $ 3,517      $ 3,505  
  (capitalized interest of $18 per footnote 2)                            
  JR Thompson Company LLC (interest rate includes PIK interest of 2.00%)      Term Loan        05/21/15        05/21/22        1        1     14.00   $ 2,800      $ 2,273      $ 2,273      $ 2,273  
  (capitalized interest of $12 per footnote 2)                            

+

  DPIS Engineering, LLC      Term Loan        12/01/14        06/30/20        1        1     12.00      $ 2,000      $ 2,000      $ 1,997  

Information (11% of the total)

  US Internet Corp.      Term Loan        06/12/13        09/18/20        1        1     14.50      $ 3,000      $ 3,000      $ 3,013  
  US Internet Corp.      Term Loan        03/18/15        09/18/20        1        1     14.50   $ 1,750      $ 1,750      $ 1,750      $ 1,741  
  Centare Holdings, Inc. (interest rate includes PIK interest of 2.00%)      Term Loan        08/30/13        08/30/18        1        1     14.00      $ 2,500      $ 2,500      $ 2,490  

Arts, Entertainment, and Recreation (8% of the total)

  RPAC Racing, LLC (interest rate includes PIK interest of 10.00%)      Term Loan        11/19/10        01/15/17        1        2     10.00      $ 5,033      $ 5,033      $ 5,033  
  (capitalized interest of $1,994 per footnote 2)                            

Transportation and Warehousing (5% of the total)

  LLL Transport, Inc. (interest rate includes PIK interest of 3.00%)      Term Loan        10/23/15        04/23/21        1        1     15.00   $ 3,500      $ 3,514      $ 3,514      $ 3,511  
  (capitalized interest of $14 per footnote 2)                            

Administrative and Support Services (5% of the total)

  Staff One, Inc.      Term Loan        06/30/08        03/31/17        1        1     3.00      $ 2,931      $ 2,931      $ 2,931  
  Staff One, Inc.      Term Loan        09/15/11        03/31/17        1        *       3.00      $ 369      $ 369      $ 369  

Wholesale Trade (5% of the total)

  Fit & Fresh, Inc (interest rate includes PIK interest of 2.00%)      Term Loan        03/02/15        03/02/20        1        1     14.00   $ 3,000      $ 3,051      $ 3,051      $ 3,057  
  (capitalized interest of $51 per footnote 2)                            

Construction (2% of the total)

  Highland Crossing-M, LLC      Term Loan        01/07/15        02/01/25        1        1     11.50   $ 2,200      $ 1,450      $ 1,450      $ 1,450  

Accommodation and Food Services (1% of the total)

  Various Other && 9.25% to 10.00%      Term Loan       

06/30/00

to

11/05/10

 

 

 

    

09/30/16

to

11/05/20

 

 

 

     3        *       9.81      $ 1,674      $ 1,674      $ 535  

Retail Trade (0% of the total)

  Various Other && 10.00%      Term Loan        06/30/00        09/30/16        1        *       10.00      $ 224      $ 224      $ 36  
             

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total secured mezzanine (2)

                33        24     13.59   $ 25,350      $ 67,849      $ 67,849      $ 66,471  
             

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

F-48


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2015

 

(Dollars in

thousands)

 

Obligor

Name/Interest Rate

Range

  Security
Type (all
restricted
unless
otherwise
noted)
 

Acquisition

Date

 

Maturity

Date

  No. of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2015
Acquisitions (5)
    Principal
Outstanding
   

Cost (4)

  Fair
Value
 

Asset-based (43% New Jersey, 34% New York, 13% Florida, 7% Virginia and 3% all other states)

             

Wholesale Trade (24% of the total)

  Various Other 4.00% to 6.50% ##   Revolving line of credit  

01/23/99

to

07/21/15

 

01/14/16

to

11/30/16

    9       *       5.46   $ 425     $ 880     $       880   $ 895  
  {Daily-Prime + .75% to 3.25%}                    

Retail Trade (17% of the total)

  Various Other 4.75% to 7.25% ##   Revolving line of credit  

10/19/98

to

08/31/06

 

08/31/16

to

10/19/16

    3       *       5.11     $ 649     $       649   $ 630  
  {Daily-Prime + 1.5% to 4%}                    

Transportation and Warehousing (14% of the total)

  Various Other 6.00% ##   Revolving line of credit   12/31/01   12/31/16     1       *       6.00     $ 506     $       506   $ 499  
  {Daily-Prime + 2.75%}                    

Professional, Scientific, and Technical Services (11% of the total)

  Various Other 6.75%   Revolving line of credit   12/22/14   12/22/16     1       *       6.75     $ 408     $       408   $ 408  
  {Daily-Prime + 3.5%}                    

Construction (9% of the total)

  Various Other 5.75% ##   Revolving line of credit   07/20/99   07/20/16     1       *       5.75     $ 354     $       354   $ 349  
  {Daily-Prime + 2.5%}                    

Health Care and Social Assistance (7% of the total)

  Various Other 5.50% to 5.75% ##   Revolving line of credit  

10/02/07

to

11/09/12

 

10/02/16

to

11/09/16

    2       *       5.72     $ 294     $       294   $ 273  
  {Daily-Prime + 2.25% to 2.5%}                    

Finance and Insurance (7% of the total)

  Various Other 7.00%   Revolving line of credit   08/26/15   08/26/16     1       *       7.00   $ 95     $ 250     $       250   $ 242  
  {Daily-Prime + 3.75%}                    

Manufacturing (6% of the total)

  Various Other 5.75% to 7.25% ##   Revolving line of credit  

07/07/04

to

11/10/15

 

01/27/16

to

11/29/16

    6       *       6.38   $ 53     $ 236     $       236   $ 215  
  {Daily-Prime + 2.5% to 4%}                    

Administrative and Support Services (5% of the total)

  Various Other 5.50%   Revolving line of credit   06/30/07   06/30/16     1       *       5.50     $ 173     $       173   $ 167  
  {Daily-Prime + 2.25%}                    

Real Estate and Rental and Leasing (0% of the total)

  Various Other 7.75%   Revolving line of credit   12/24/15   12/24/16     1       *       7.75     $ 0     $           0   $ 0  
  {Daily-Prime + 4.5%}                    
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Total asset-based ($2,164 pledged as collateral under borrowing arrangements)

    26       1     5.82   $ 573     $ 3,750     $    3,750   $ 3,678  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

F-49


Table of Contents

(Dollars in

thousands)

 

Obligor

Name/Interest Rate

Range

  Security
Type (all
restricted
unless
otherwise
noted)
 

Acquisition

Date

 

Maturity

Date

  No. of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2015
Acquisitions (5)
    Principal
Outstanding
   

Cost (4)

  Fair
Value
 

Other secured commercial (80% New York, 16% New Jersey, 3% Illinois and 1% all other states)

             

Retail Trade (90% of the total)

  Medallion Fine Art Inc (interest rate includes PIK interest of 12%)   Term Loan   12/17/12   12/17/17     1       3     12.00     $ 8,348     $    8,348   $ 8,348  
  (capitalized interest of $2,073 per footnote 2)                    
  Various Other && 4.75% to 10.50%   Term Loan  

10/28/08

to

12/23/15

 

03/15/17

to

02/13/21

    10       1     8.58   $ 954     $ 3,129     $    3,073   $ 2,300  

Accommodation and Food Services (5% of the total)

  Various Other && 6.75% to 9.00%   Term Loan  

11/29/05

to

06/06/14

 

03/16/16

to

09/06/19

    3       *       8.29     $ 786     $       721   $ 615  

Transportation and Warehousing (3% of the total)

  Various Other && 4.00% to 4.25%   Term Loan  

09/19/14

to

03/17/15

 

09/10/18

to

02/05/20

    2       *       4.08   $ 120     $ 301     $       301   $ 303  

Real Estate and Rental and Leasing (1% of the total)

  Various Other && 4.00% to 5.00%   Term Loan  

07/15/13

to

03/31/15

 

07/15/16

to

03/31/20

    2       *       4.93   $ 100     $ 99     $       99   $ 99  

Health Care and Social Assistance (1% of the total)

  Various Other 7.50%   Term Loan   05/14/13   05/14/18     1       *       7.50     $ 80     $         80   $ 81  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Total Other Commercial Loans

          19       4     10.68   $ 1,174     $ 12,743     $  12,622   $ 11,746  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Total commercial loans ($2,164 pledged as collateral under borrowing arrangements) (2)

    78       29     12.80   $ 27,097     $ 84,342     $  84,221   $ 81,895  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

               

Commercial Banking

  Medallion Bank **   100% of common stock   05/16/02   None     1       55     13.17       $136,666   $ 152,166  

NASCAR Race Team

  Medallion MotorSports, LLC   75% of LLC units   11/24/10   None     1       1     0.00       $    2,832   $ 2,527  

Art Dealer

  Medallion Fine Art, Inc.   100% of common stock   12/03/12   None     1       2     0.00       $       789   $ 4,234  

 

F-50


Table of Contents

(Dollars in

thousands)

     

Obligor

Name/Interest Rate

Range

 

Security

Type (all

restricted

unless

otherwise

noted)

  Acquisition
Date
   

Maturity

Date

  No. of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2015
Acquisitions (5)
    Principal
Outstanding
    Cost (4)     Fair
Value
 

Loan Servicing

    Medallion Servicing Corp.   100% of common stock     11/05/10     None     1       *       0.00       $ 631     $ 631  

Professional Sports Team

    LAX Group LLC   44.31% of membership interests     05/23/12     None     1       *       0.00       $ 355     $ 355  
           

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

    5       58     12.74   $ 0       $ 141,273     $ 159,913  
           

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Equity investments

                       

Commercial Finance

    Convergent Capital, Ltd **   7% of limited partnership interest     07/20/07     None     1       1     0.00       $ 326     $ 1,957  

Gift card service & marketing

 

+

  Production Services Associates d/b/a American Card Services   5.65% of LLC units     02/17/15     None     1       *       0.00   $ 250       $ 250     $ 1,179  

Weather forecasting services

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

Employee Leasing Services

    Staff One, Inc.   46.4% preferred stock     06/30/08     None     2       *       0.00       $ 472     $ 472  

Stuffed Toy Manufacturer

    AA Plush Holdings, LLC   1.6% LLC common units     08/15/14     None     1       *       0.00       $ 300     $ 300  

Investment Castings

    Tech Cast Holdings LLC   4.14% LLC units     12/12/14     12/12/19     1       *       0.00       $ 300     $ 300  

Machine Shop

    MicroGroup, Inc.   5.5% common stock     06/29/15     None     1       *       0.00   $ 300       $ 300     $ 300  

Baby Sleep Products

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

Wire Manufacturer

    WRWP LLC   10.3% preferred LLC units, 7.23% common LLC units     12/30/14     12/30/19     1       *       0.00       $ 224     $ 224  

Marketing Services

    Third Century JRT Inc.   13% common stock     05/21/15     None     1       *       0.00   $ 200       $ 200     $ 200  

Manufacture space heaters, etc.

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

IT Services

    Centare Holdings, Inc.   7.23% of common stock, 3.88% of preferred stock     08/30/13     None     1       *       0.00       $ 104     $ 104  

Various Other #

 

+

  **   * Various    

09/10/98

to

7/24/15

 

 

 

 

None to

6/30/22

    7       *       3.37   $ 50       $ 916     $ 938  
           

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Equity investments, net

              20       2     0.72   $ 1,435       $ 4,277     $ 6,859  
           

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Investment securities

                       

Investment securities

    US Treasury Note AAA       06/30/15     07/15/16     1       4     0.63   $ 10,059     $ 10,000     $ 10,059     $ 10,029  
    US Treasury Bill       07/30/15     07/21/16     1       4     0.33   $ 9,936     $ 10,000     $ 9,936     $ 9,972  
    US Treasury Bill       09/22/15     09/15/16     1       4     0.39   $ 9,968     $ 10,000     $ 9,968     $ 9,964  
    US Treasury Bill       10/30/15     10/13/16     1       7     0.21   $ 19,939     $ 20,000     $ 19,939     $ 19,919  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities, net

              4       18     0.35   $ 49,902     $ 50,000     $ 49,902     $ 49,884  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Investments ($240,267 pledged as collateral under borrowing arrangements)(3)

 

      806       218     7.06   $ 115,892     $ 445,853     $ 591,106     $ 606,959  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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(2)    

  Included in secured mezzanine commercial loans and other commercial loans was $4,878 of interest income capitalized into the outstanding investment balances, in accordance with the terms of the investment contract.

(3)    

  The ratio of restricted securities fair value to net assets is 218%.

(4)    

  Gross unrealized appreciation, gross unrealized depreciation and net appreciation for federal income tax purposes totaled $79,139, $5,896 and $73,243, respectively. The tax cost of investments was $533,716.

(5)    

  For revolving lines of credit the amount shown is the cost at December 31, 2015.
*   Less than 1.0%

**     

  Not an eligible portfolio company as such term is defined in Section 2(a)(46) of the 1940 Act. The percentage value of all non-eligible portfolio companies to totaled assets of Medallion Financial on an unconsolidated basis was up to 29% and up to 29% on a consolidated basis. Under the 1940 Act, we may not acquire any non-qualifying assets, unless at the time such acquisition is made, qualifying assets, which include securities of eligible portfolio companies, represent at least 70% of our total assets. The status of these assets under the 1940 Act are subject to change. We monitor the status of these assets on an ongoing basis.

&      

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

&&  

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

#       

  Publicly traded but sales subject to applicable Rule 144 limitations.

##    

  Pledged as collateral under borrowing arrangements.

+       

  Includes various warrants, all of which have a cost and fair value of zero at December 31, 2015.
The Summary Schedule of Investments does not reflect the Company’s complete portfolio holdings. It includes the Company’s 50 largest holdings and each investment of any issuer that exceeds 1% of the Company’s net assets. “Various Other” represents all issues not required to be disclosed under the rules adopted by the U.S. Securities and Exchange Commission (“SEC”). Footnotes above may apply to securities that are included in “Various Other”. For further detail, the complete schedule of portfolio holdings is available (i) without charge, upon request, by calling (877) MEDALLION; and (ii) on the SEC’s website at http://www.sec.gov. Filed as Exhibit 99.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed on March 7, 2016 (File No. 814-00188)

 

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Medallion Financial Corp

CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFIILIATES

As of and for the year ended December 31, 2015

 

Name of issuer and title of issue

 

Number of shares (all restricted unless

otherwise noted)

   Equity in
net profit
and (loss)
    Amount of
dividends
or interest (1)
     Value as
of
12/31/15
 
(Dollars in thousands)                        

Medallion Bank – common stock

  1,000,000 shares - 100% of common stock    $ 38,474     $ 18,000      $ 152,166  

Medallion Fine Art, Inc. – common stock (2)

  1,000 shares - 100% of common stock      2,552       0        4,234  

Medallion Motorsports, LLC –
membership interest (3)

  75% of membership interest      150       0        2,527  

Medallion Servicing Corp. – common stock

  1,000 shares - 100% of common stock      (394     0        631  

LAX Group LLC – membership interest

  44.31% of membership interest      (627     0        355  

Generation Outdoor, Inc.

       3,206       889        0  

Medallion Hamptons Holding LLC – membership interest

  100% of membership interest      24       0        0  
    

 

 

   

 

 

    

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries

     43,385       18,889        159,913  
    

 

 

   

 

 

    

 

 

 

Appliance Recycling Centers of America Inc. – common stock

  8.86% of common stock      0       0        509  

Micro Group, Inc. (5)

  5.5% of common stock      0       0        300  

Production Services Associates LLC (4)

  5.65% of membership interest      0       0        1,179  

WRWP, LLC – membership interest (6)

  7.23% of membership interest      0       0        224  

Third Century JRT, Inc. (7)

  13% of common stock      0       0        200  

Summit Medical, Inc. – common stock

       0       0        0  
    

 

 

   

 

 

    

 

 

 

Total equity investments in affiliates

       —         0        2,412  
    

 

 

   

 

 

    

 

 

 

 

(1) Investments with an amount of 0 are considered non-income producing.
(2) Additionally, the Company has a loan due from Medallion Fine Art, Inc. in the amount of $8,348 as of December 31, 2015, and on which $944 of interest income was earned during 2015.
(3) Additionally, a controlled subsidiary of the Company has a loan due from an affiliate of Medallion Motorsports, LLC in the amount of $5,033, and on which $547 of interest income was earned during 2015.
(4) Additionally, the Company has a loan due from Production Services Associates LLC in the amount of $2,646 as of December 31, 2015, on which $367 of interest income was earned during 2015.
(5) Additionally, the Company has a loan due from Micro Group, Inc. in the amount of $3,233 as of December 31, 2015, on which $230 of interest income was earned during 2015.
(6) Additionally, the Company has a loan due from WRWP, LLC in the amount of $2,311 as of December 31, 2015, on which $348 of interest income was earned during 2015.
(7) Additionally, the Company has a loan due from Third Century JRT, Inc., in the amount of $2,273 as of December 31, 2015, on which $230 of interest income was earned during 2015.

 

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The table below provides a recap of the changes in the investment in the respective issuers for the year ended December 31, 2015.

 

Name of Issuer

  Medallion
Bank
    Medallion
Fine Art,
Inc.
    Medallion
Motorsports,
LLC
    Appliance
Recycling
Centers
of
America,
Inc.
    Medallion
Servicing
Corp.
    LAX Group,
LLC
    Production
Services
Associates,
LLC (3)
    Micro
Group,
Inc. (4)
    WRWP, LLC     Third
Century
JRT,
Inc. (6)
    Generation
Outdoor,
Inc.
    Medallion
Hamptons
Holding,
LLC
    Summit
Medical,
Inc.
 

Title of Issue

  Common
Stock
    Common
Stock(1)
    Membership
Interest (2)
    Common
Stock
    Common
Stock
    Membership
Interest
    Membership
Interest
    Common
Stock
    Membership
Interest(5)
    Common
Stock
    Common
Stock
    Membership
Interest
    Common
Stock
 
(Dollars in thousands)                                                                              

Value as of 12/31/14

  $ 125,027     $ 1,157     $ 1,600     $ 1,231     $ 852     $ 349     $ 0     $ 0     $ 224     $ 0     $ 5,063     $ 4,400     $ 135  

Gross additions / investments

    8,000       525       777       —         600       633       250       300       —         200       —         80       —    

Gross reductions / distributions

    (19,335     —         —         —         (427     —         —         —         —         —         (8,269     (4,504     (369

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

    38,474       2,552       150       (722     (394     (627     929       —         —         —         3,206       24       234  

Other adjustments

    —         —         —         —         —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Value as of 12/31/15

    152,166       4,234       2,527       509       631       355       1,179       300       224       200       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Additionally, the Company has a loan due from Medallion Fine Art, Inc. in the amount of $8,348 as of December 31, 2015, $2,161 of which was advanced during 2015, and for which $550 was repaid.
(2) In addition to the equity ownership, a controlled subsidiary of the Company has a loan due from an affiliate of Medallion Motorsports, LLC in the amount of $5,033, $548 of which was advanced during 2015.
(3) Additionally, the Company has a loan due from Production Services Associates LLC in the amount of $2,646 as of December 31, 2015, all of which was advanced during 2015, on which there were $367 of interest income was earned during 2015.
(4) Additionally, the Company has a loan due from Micro Group, Inc. in the amount of $3,233 as of December 31, 2015 all of which was advanced during 2015.
(5) Additionally, the Company has a loan due from WRWP LLC in the amount of $2,311 as of December 31, 2015, $69 of which was advanced during 2015.
(6) Additionally, the Company has a loan due from J. R. Thompson Company, LLC, an affiliate of Third Century JRT, INC in the amount of $2,273 as of December 31, 2015, all of which was advanced during 2015.

 

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Medallion Bank

(A wholly owned subsidiary of Medallion Financial Corp.)

Financial Statements for the years ended December 31, 2016, 2015, and 2014

 

F-55


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of Medallion Bank

We have audited the accompanying balance sheets of Medallion Bank (the “Bank”) (a wholly owned subsidiary of Medallion Financial Corp.) as of December 31, 2016 and 2015, and the related statements of comprehensive income, changes in shareholder’s equity, and cash flows for each of the three years in the three-year period ended December 31, 2016. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 2016, in conformity with US generally accepted accounting principles.

/s/ Mazars USA LLP

New York, New York

March 14, 2017

 

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Table of Contents

Medallion Bank

Statements of Comprehensive Income

For the years ended December 31,

 

(Dollars in thousands)

   2016     2015     2014  

Interest income

      

Investments

   $ 973     $ 793     $ 729  

Loan interest including fees

     102,481       90,228       76,562  
  

 

 

   

 

 

   

 

 

 

Total interest income

     103,454       91,021       77,291  

Interest expense

     11,762       9,205       7,008  
  

 

 

   

 

 

   

 

 

 

Net interest income

     91,692       81,816       70,283  

Provision for loan losses

     69,466       16,701       8,056  
  

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     22,226       65,115       62,227  

Noninterest income

     308       291       344  

Gain/(loss) on sale of repossessed loan collateral

     (3     (2     11  

Gain/(loss) on sale of loans

     3,386       —         —    

Gain on sale of investment securities

     —         31       —    

Noninterest expense

      

Loan servicing

     9,324       9,072       8,844  

Salaries and benefits

     5,784       5,299       4,997  

Professional fees

     2,006       2,594       1,859  

Collection costs

     2,123       1,362       1,245  

Regulatory fees

     1,287       877       807  

Affiliate services

     544       500       502  

Occupancy and equipment

     340       274       283  

Insurance

     212       201       199  

Credit reports

     239       204       177  

Director’s fees

     216       174       140  

Provision for losses on other assets

     —         1,150       —    

Other

     2,206       1,064       759  
  

 

 

   

 

 

   

 

 

 

Total noninterest expense

     24,281       22,771       19,812  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,636       42,664       42,770  

Provision (benefit) for income taxes

     (326     18,974       16,508  
  

 

 

   

 

 

   

 

 

 

Net income

     1,962       23,690       26,262  

Other comprehensive income, net of tax

      

Net change in unrealized gains (losses) on investment securities

     (245     (453     659  
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 1,717     $ 23,237     $ 26,921  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Medallion Bank

Balance Sheets

December 31,

 

(Dollars in thousands)

   2016     2015  

Assets

    

Cash and cash equivalents, substantially all of which are federal funds sold

   $ 30,881     $ 23,094  

Investment securities, available-for-sale

     36,861       35,524  

Loans, inclusive of net deferred loan acquisition costs

     1,019,901       1,020,456  

Allowance for loan losses

     (54,819     (24,081
  

 

 

   

 

 

 

Loans, net

     965,082       996,375  

Repossessed loan collateral

     1,197       1,048  

Fixed assets, net

     234       85  

Deferred and other tax assets, net

     23,333       5,112  

Accrued interest receivable and other assets

     18,370       18,582  
  

 

 

   

 

 

 

Total assets

   $ 1,075,958     $ 1,079,820  
  

 

 

   

 

 

 

Liabilities and shareholder’s equity

    

Liabilities

    

Funds borrowed

   $ 908,442     $ 908,896  

Accrued interest payable

     1,094       1,013  

Other liabilities

     3,453       6,106  

Due to affiliates

     1,084       1,387  
  

 

 

   

 

 

 

Total liabilities

     914,073       917,402  
  

 

 

   

 

 

 

Commitments and contingencies (Note 9)

     —         —    

Shareholder’s equity

    

Preferred stock, $1.00 par value, 26,303 shares at December 31, 2016 and 2015 authorized, issued, and outstanding

     26,303       26,303  

Common stock, $1 par value, 7,000,000 shares authorized, 1,000,000 issued and outstanding

     1,000       1,000  

Additional paid in capital

     77,500       74,500  

Accumulated other comprehensive income/(loss), net of tax

     (541     (296

Retained earnings

     57,623       60,911  
  

 

 

   

 

 

 

Total shareholder’s equity

     161,885       162,418  
  

 

 

   

 

 

 

Total liabilities and shareholder’s equity

   $ 1,075,958     $ 1,079,820  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Medallion Bank

Statements of Changes in Shareholder’s Equity

For the years ended December 31, 2016, 2015, and 2014

 

(Dollars in thousands)

   Preferred Stock      Common Stock                     
     Shares
Outstanding
     Amount      Shares
Outstanding
     Amount      Additional
Paid in
Capital
     Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total
Shareholder’s
Equity
 

Balance at December 31, 2013

     26,303      $ 26,303        1,000,000      $ 1,000      $ 56,500      $ (502   $ 44,485     $ 127,786  

Capital contributions

     —          —          —          —          10,000        —         —         10,000  

Net income

                      26,262       26,262  

Dividends declared to parent

     —          —          —          —          —          —         (15,000     (15,000

Dividends declared to US Treasury

     —          —          —          —          —          —         (263     (263

Net change in unrealized gains on investment securities, net of tax

     —          —          —          —          —          659       —         659  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

     26,303        26,303        1,000,000        1,000        66,500        157       55,484       149,444  

Capital contributions

     —          —          —          —          8,000        —         —         8,000  

Net income

                      23,690       23,690  

Dividends declared to parent

     —          —          —          —          —          —         (18,000     (18,000

Dividends declared to US Treasury

     —          —          —          —          —          —         (263     (263

Net change in unrealized losses on investment securities, net of tax

     —          —          —          —          —          (453     —         (453
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

     26,303        26,303        1,000,000        1,000        74,500        (296     60,911       162,418  

Capital contributions

     —          —          —          —          3,000        —         —         3,000  

Net income

                      1,962       1,962  

Dividends declared to parent

     —          —          —          —          —          —         (3,000     (3,000

Dividends declared to US Treasury

     —          —          —          —          —          —         (2,250     (2,250

Net change in unrealized losses on investment securities, net of tax

     —          —          —          —          —          (245     —         (245
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

     26,303      $ 26,303        1,000,000      $ 1,000      $ 77,500      $ (541   $ 57,623     $ 161,885  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Medallion Bank

Statements of Cash Flows

For the years ended December 31,

 

(Dollars in thousands)

   2016     2015     2014  

Cash flows from operating activities

      

Net income from operations

   $ 1,962     $ 23,690     $ 26,262  

Adjustments to reconcile net income to net cash flows provided by operating activities:

      

Depreciation and amortization

     5,056       4,816       4,542  

Deferred tax benefit

     (11,889     (2,623     (397

Provision for loan losses

     69,466       16,701       8,056  

Provision for losses on other assets

     —         1,150       —    

Gain from sale of repossessed loan collateral and other assets, net

     —         (1     (16

Gain from sale of loans, net

     (3,386     —         —    

Changes in operating assets and liabilities:

      

Interest receivable

     (197     (1,171     (689

Other tax assets

     (6,210     3,233       (28

Other assets

     (960     (1,926     (2,286

Interest payable

     82       317       121  

Other liabilities

     347       175       482  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     54,271       44,361       36,047  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Increase in loans, net

     (188,826     (139,720     (148,006

Proceeds from sale of loans

     144,818       —         —    

Purchase of investments

     (6,496     (15,046     (5,604

Proceeds from maturity/sale of investments

     4,781       6,587       3,158  

Proceeds from sale of repossessed loan collateral

     5,510       4,514       4,646  

Purchase of fixed assets

     (263     (22     (41
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (40,476     (143,687     (145,847
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Issuance of time deposits and other borrowed funds

     494,350       475,926       576,822  

Repayments of funds borrowed

     (494,805     (374,970     (451,019

Federal funds purchased

     42,000       35,043       27,000  

Repayments of federal funds purchased

     (42,000     (35,043     (27,000

Change in due to affiliates

     (303     (1,645     2,165  

Additional paid-in capital contributed by parent

     3,000       8,000       10,000  

Dividends paid to parent

     (6,000     (15,000     (15,000

Dividends paid to US Treasury

     (2,250     (263     (263
  

 

 

   

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (6,008     92,048       122,705  
  

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     7,787       (7,278     12,905  

Cash and cash equivalents, beginning of the year

     23,094       30,372       17,467  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of the year

   $ 30,881     $ 23,094     $ 30,372  
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

      

Cash paid for interest

   $ 10,311     $ 7,575     $ 5,636  

Cash paid for income taxes

     17,773       18,364       16,933  

Non-cash investing activities - loans transferred to repossessed loan collateral

     10,941       8,523       8,413  

Non-cash investing activities - loans transferred to other assets

     —         338       —    

Non-cash financing activity - dividends payable to parent

     —         3,000       —    

The accompanying notes are an integral part of these financial statements.

 

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Medallion Bank

Notes to Financial Statements

December 31, 2016

 

1. Organization and summary of significant accounting policies

Description of business – Medallion Bank (the Bank) is a limited service industrial bank headquartered in Salt Lake City, Utah. The Bank was formed in May 2002 for the purpose of obtaining an industrial bank (IB) charter pursuant to the laws of the State of Utah. The Bank is a wholly owned subsidiary of Medallion Financial Corp. (Medallion). The Bank originates medallion commercial loans to finance the purchase of taxi medallions, of which are marketed and serviced by the Bank’s affiliates who have extensive prior experience in this asset group. The Bank originates consumer loans on a national basis that are secured by marine, recreational vehicle, and trailer products to customers with prior credit blemishes. The Bank also originates unsecured home improvement consumer loans on a national basis. The loans are financed primarily with time certificates of deposits which are originated nationally through a variety of brokered deposit relationships.

Basis of presentation – The Bank’s financial statements are presented in accordance with accounting principles generally accepted in the US and prevailing industry practices, which require management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Estimates, by their nature, are based upon judgment and available information. Actual results could differ materially from those estimates.

Cash and cash equivalents – The Bank considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. A non-interest bearing compensating balance of $210,000 is maintained at two correspondent banks. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that frequently exceed the federally insured limits.

Investment securities – FASB ASC Topic 320, “Investments – Debt and Equity Securities,” requires that all applicable investments 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. At December 31, 2016 and 2015, the net premium on investment securities totaled $238,000 and $311,000, and $82,000, $83,000, and $64,000 was amortized to interest income for the years ended December 31, 2016, 2015, and 2014. The Bank had $36,861,000 and $35,524,000 of available-for-sale securities at fair value as of December 31, 2016 and 2015. The topic 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 shareholder’s equity, net of the effect of income taxes, until they are sold. The Bank had $797,000 and $501,000 of pretax net unrealized loss on available-for-sale securities as of December 31, 2016 and 2015. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in shareholder’s equity, which were recorded net of the income tax effect, will be reversed.

Loans – 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.

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, 2016 and 2015, net loan origination costs were $12,371,000 and $11,399,000. Net amortization expense for the years ended December 31, 2016, 2015, and 2014 was $3,489,000, $3,354,000, and $3,138,000.

Interest income is recognized on an accrual basis. Taxicab medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. In 2016, the Bank adopted a policy to fully charge-off all taxicab medallion loans which reached 180 days past due. The consumer portfolio has different characteristics compared to commercial loans, 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 Bank 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 (loans in bankruptcy are not charged-off at 120 days), whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. Other loans are charged off when management determines that a loss has occurred. All interest accrued but not collected for loans that are

 

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charged off is reversed against interest income. For the recreational consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged off. If the collateral is repossessed, a loss is recorded to write the collateral down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off. Proceeds collected on charged off accounts are recorded as a recovery. Total loans more than 90 days past due were $42,269,000, $17,153,000, and $3,114,000 at December 31, 2016, 2015, and 2014, or 4.2%, 1.7%, and 0.4% of the total loan portfolio.

At December 31, 2016, $4,179,000 or 1% of consumer loans, no commercial loans, and $47,841,000 or 16% of medallion loans were on nonaccrual, compared to $3,381,000 or 1% of consumer loans, no commercial loans, and $21,722,000 or 6% medallion loans on nonaccrual at December 31, 2015, and $2,536,000 or 1% of consumer loans, and $1,351,000 or 3% of commercial loans, and no medallion loans on nonaccrual at December 31, 2014. The amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $106,000, $183,000, and $90,000 as of December 31, 2016, 2015, and 2014.

These loans are charged-down to fair value and placed on nonaccrual status. Fair value is determined based upon comparable market prices for substantially similar collateral plus management’s estimate of disposal costs. All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash basis until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Troubled Debt Restructurings (TDRs) – In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession for other than an insignificant period of time to the borrower that the Bank would not otherwise consider, the related loan is classified as a TDR. The Bank strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before it reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize the economic loss to the Bank and to avoid foreclosure or repossession of the collateral. For modifications where the Bank forgives principal, the entire amount of such principal forgiveness is immediately charged off. Loans classified as TDRs are considered impaired loans.

When the Bank identifies a loan as impaired, the Bank measures the impairment based on the present value of expected future cash flows, discounted at the loan’s effective interest rate. When collateral is the sole source of repayment for the loan, the Bank may measure impairment based on the fair value of the collateral. If foreclosure is probable, the Bank uses the current fair value of the collateral less selling costs, instead of discounted cash flows.

If the Bank determines that the value of an impaired loan is less than the recorded investment in the loan (net of previous chargeoffs, deferred loan fees or costs and unamortized premium or discount), the Bank recognizes impairment. When the value of an impaired loan is calculated by discounting expected cash flows, interest income is recognized using the loan’s effective interest rate over the remaining life of the loan.

Allowance for loan losses – In analyzing the adequacy of the allowance for loan losses, the Bank uses historical delinquency and actual loss rates with a one year lookback period. 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. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.

Fixed assets – Fixed assets are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense while significant improvements are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Capitalized leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the remaining lease term.

Income taxes – The Bank uses the asset and liability method in providing income taxes on all transactions that have been recognized in the financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their existing tax bases. The Bank files its tax returns on a separate company basis.

Other comprehensive income (loss) – The Bank had $(245,000), $(453,000), and 659,000 of net unrealized gains/(loss) due to the mark-to-market of available-for-sale securities for the years ended December 31, 2016, 2015, and 2014.

 

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Restrictions on dividends, loans, and advances – Banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to Medallion. The total amount of dividends that may be paid at any date is generally limited to the retained earnings of the Bank. However, dividends paid by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum standards.

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.

Fair value of assets and liabilities – The Bank follows FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” (FASB ASC 820), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e. a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entities 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 Note 12 to the financial statements.

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.

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

In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Bank does not expect the adoption of ASU 2016-15 to have a material impact on its financial statements.

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

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 enhances the reporting model for stock compensation and provides users of financial statements with more decision-useful information. ASU 2016-09 simplifies guidance on several aspects of the accounting for shared-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The update, as amended, is effective for annual periods beginning after December 15, 2016. The Bank does not believe this update will have a material impact on its financial condition.

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”. ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for leases classified as operating under current GAAP. ASU 2016-02 applies to all entities and is effective for fiscal years beginning after December 15, 2018 for public entities and is effective for fiscal years beginning after December 15, 2019 for all other entities, with early adoption permitted. The Bank is assessing the impact the update will have on its financial condition.

 

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In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The main objective of this Update is to enhance the reporting model for financial instruments and provide users of financial statements with more decision-useful information. ASU 2016-01 requires equity investments to be measured at fair value, simplifies the impairment assessment of equity investment without readily determinable fair value, eliminates the requirements to disclose the fair value of financial instruments measured at amortized cost, and requires public business entities to use the exit price notion when measuring the fair value of financial instruments. The update, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Bank does not believe this update will have a material impact on its financial condition.

2. Investment securities

Fixed maturity securities available-for-sale at December 31 consisted of the following.

 

(Dollars in thousands)

   Amortized Cost      Gross
Unrealized
Gains
     Gross Unrealized
Losses
     Fair Value  

2016

           

Mortgage-backed securities, principally obligations of US federal agencies

   $ 27,619      $ 90      $ 540      $ 27,169  

State and municipalities

     10,039        9        356        9,692  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 37,658      $ 99      $ 896      $ 36,861  
  

 

 

    

 

 

    

 

 

    

 

 

 

2015

           

Mortgage-backed securities, principally obligations of US federal agencies

   $ 25,888      $ 133      $ 351      $ 25,670  

State and municipalities

     10,137        37        320        9,854  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,025      $ 170      $ 671      $ 35,524  
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated market value of investment securities as of December 31, 2016 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)

   Amortized
Cost
     Market
Value
 

Due in one year or less

   $ —        $ —    

Due after one year through five years

     2,235        2,219  

Due after five years through ten years

     14,912        14,694  

Due after ten years

     20,511        19,948  
  

 

 

    

 

 

 

Total

   $ 37,658      $ 36,861  
  

 

 

    

 

 

 

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

 

     Less than Twelve Months      Twelve Months and Over  

(Dollars in thousands)

   Gross Unrealized
Losses
     Fair Value      Gross Unrealized
Losses
     Fair Value  

2016

           

Mortgage-backed securities, principally obligations of US federal agencies

   $ 540      $ 24,292      $ —        $ —    

State and municipalities

     310        8,573        46        757  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 850      $ 32,865      $ 46      $ 757  
  

 

 

    

 

 

    

 

 

    

 

 

 

2015

           

Mortgage-backed securities, principally obligations of US federal agencies

   $ 170      $ 14,083      $ 181      $ 7,797  

State and municipalities

     125        4,630        194        2,492  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 295      $ 18,713      $ 375      $ 10,289  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, and the Bank 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.

3. Loans and allowance for loan losses

Loans are summarized as follows at December 31,

 

Loans (Dollars in thousands)

   2016      2015  

Consumer (1)

   $ 708,527      $ 626,138  

Medallion (2)

     296,436        338,285  

Commercial: (2)

     

Asset-based

     —          40,869  

Other commercial

     2,567        3,765  
  

 

 

    

 

 

 

Total commercial

     2,567        44,634  

Deferred loan acquisition costs, net

     12,371        11,399  
  

 

 

    

 

 

 

Total loans

   $ 1,019,901      $ 1,020,456  
  

 

 

    

 

 

 

 

(1) Collectively evaluated for impairment
(2) Individually evaluated for impairment

Changes in the allowance for loan losses are summarized as follows.

 

(Dollars in thousands)

   Medallion (2)      Asset-based and
commercial (2)
     Consumer (1)      Total  

Balance at 12/31/13

   $ 1,749      $ 1,906      $ 12,779      $ 16,434  

Provision for loan losses

     92        330        7,634        8,056  

Loan charge-offs

     —          (940      (8,913      (9,853

Recoveries

     —          —          3,162        3,162  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at 12/31/14

     1,841        1,296        14,662        17,799  

Provision for loan losses

     4,295        335        12,071        16,701  

Loan charge-offs

     —          (1,013      (12,667      (13,680

Recoveries

     —          —          3,261        3,261  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at 12/31/15

     6,136        618        17,327        24,081  

Provision for loan losses

     56,239        (612      13,841        69,466  

Loan charge-offs

     (27,646      —          (15,749      (43,395

Recoveries

     —          —          4,667        4,667  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at 12/31/16

   $ 34,729      $ 4      $ 20,086      $ 54,819  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Collectively evaluated for impairment
(2) Individually evaluated for impairment

There were no loans acquired with deteriorated credit quality.

See Note 1 to the financial statements which describes the nature of the portfolios, their collection and income recognition processes, and the methodology used to assess the adequacy of the allowance.

 

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Other commercial or construction loans are infrequent, and made on a case by case basis, after performing thorough borrower review, credit, and collateral checks. The risk associated with these types of loans is individual to that particular credit, and they are monitored and tracked closely.

The consumer loan portfolio is primarily customer driven, whereby borrowers are assessed a score based on income level, home ownership, FICO score, and other factors weighted in a credit scoring model that determines whether a borrower is qualified. Loan losses in this portfolio fluctuate with economic conditions, and can range widely over time. The consumer loan portfolio is analyzed and evaluated in the aggregate, as a pool of loans.

Allocations for the allowance for credit losses may be made for specific loans, but the allowance is general in nature and is available to absorb losses from any loan type.

The following table provides a summary of the loan portfolio by its performance status and by type.

 

     Performing      Nonperforming      Total  

(Dollars in thousands)

   2016      2015      2016      2015      2016      2015  

Medallion

   $ 240,616      $ 315,652      $ 55,820      $ 22,633      $ 296,436      $ 338,285  

Asset-based and commercial

     2,567        44,634        —          —          2,567        44,634  

Consumer

     704,120        622,504        4,408        3,634        708,528        626,138  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 947,303      $ 982,790      $ 60,228      $ 26,267      $ 1,007,530      $ 1,009,057  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables provide additional information on attributes of the nonperforming loan portfolio.

 

(Dollars in thousands)

December 31, 2016

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

With no related allowance recorded

              

Medallion

   $ —        $ —        $ —        $ —        $ —    

Asset-based and commercial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

With an allowance recorded

              

Medallion

     55,820        55,820        22,576        39,142        520  

Asset–based and commercial

     —          —          —          —          —    

Consumer

     4,408        4,408        136        3,292        264  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Medallion

     55,820        55,820        22,576        39,142        520  

Asset –based and commercial

     —          —          —          —          —    

Consumer

   $ 4,408      $ 4,408      $ 136      $ 3,292      $ 264  

 

(Dollars in thousands)

December 31, 2015

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

With no related allowance recorded

              

Medallion

   $ —        $ —        $ —        $ —        $ —    

Asset–based and commercial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

With an allowance recorded

              

Medallion

     22,633        22,633        1,350        5,635        118  

Asset–based and commercial

     —          —          —          —          —    

Consumer

     3,633        3,633        108        2,721        261  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Medallion

     22,633        22,633        1,350        5,635        118  

Asset –based and commercial

     —          —          —          —          —    

Consumer

   $ 3,633      $ 3,633      $ 108      $ 2,721      $ 261  

 

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The table below shows the aging of all loan types as of December 31,

 

(Dollars in thousands)

   Days Past Due                    Recorded
Investment >90
Days and
Accruing
 

2016

   31-60      61-90      91 +      Total Past Due      Current      Total     

Medallion

   $ 7,910      $ 21,929      $ 38,973      $ 68,812      $ 227,624      $ 296,436      $ —    

Asset–based and commercial

     —          —          218        218        2,349        2,567        —    

Consumer

     13,517        4,546        3,078        21,141        687,386        708,527        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,427      $ 26,475      $ 42,269      $ 90,171      $ 917,359      $ 1,007,530      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

   Days Past Due                    Recorded
Investment >90
Days and
Accruing
 

2015

   31-60      61-90      91 +      Total Past Due      Current      Total     

Medallion

   $ 5,166      $ 13,908      $ 14,949      $ 34,023      $ 304,262      $ 338,285      $ —    

Asset–based and commercial

     265        —          —          265        44,369        44,634        —    

Consumer

     9,903        3,207        2,204        15,314        610,824        626,138        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,334      $ 17,115      $ 17,153      $ 49,602      $ 959,455      $ 1,009,057      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other assets

A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount was divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company’s liquidation. In May 2013, the bankruptcy court presiding over the third party finance company’s case entered an order converting the involuntary chapter 7 case to a chapter 11 case. The Bank has placed these loans on nonaccrual, and reversed interest income. In addition, the Bank has established valuation allowances against the outstanding balances. On May 31, 2013, the Bank commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the third party finance company’s assets. The third party finance company and bank lenders are contesting the Bank’s position. In April 2014, the Bank received a decision from the court granting summary judgment in the Bank’s favor with respect to the issue of whether the Bank’s loan participations are true participations. In March 2015, the Bank received a decision from the court finding that the bank lenders generally held a first lien on the Bank’s loan participations subject to, among other things, defenses still pending prosecution by the parties and adjudication by the court. The Bank is appealing the decision. The remaining issues are still being litigated. Although the Bank believes the claims raised by the third party finance company and the bank lenders are without merit and will vigorously defend against them, the Bank cannot at this time predict the outcome of this litigation or determine our potential exposure. At December 31, 2016, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. One loan was charged off in September 2014. In September 2015, one loan was sold at a discount to a third party, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. The balances related to the paid off loans have been reclassified to other assets on the consolidated balance sheet. The table below summarizes these receivables and their status with the Bank as of December 31, 2016.

 

(Dollars in thousands)

   Medallion Bank  

Loans outstanding

   $ 1,953  

Loans charged off (1)

     (1,953

Valuation allowance

     —    
  

 

 

 

Net loans outstanding

     —    
  

 

 

 

Other receivables

     11,062  

Valuation allowance

     (4,425
  

 

 

 

Net other receivables

     6,637  

Total net outstanding

     6,637  
  

 

 

 

Income foregone in 2016

     —    

Total income foregone

   $ 108  
  

 

 

 

 

(1) The income foregone on the charged off loan was $213 for the Bank.

 

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The table below shows loans that were modified during 2016 and 2015.

 

(Dollars in thousands)

   Troubled Debt Restructuring      Troubled Debt Restructuring
that Subsequently Defaulted
 
     Number of
Loans
     Pre-
Modification
Outstanding
Recorded
Investments
     Post-Modification
Outstanding
Recorded
Investments
     Number of
Loans
     Recorded
Investments
 

2016

              

Troubled debt restructuring

              

Medallion

     21      $ 14,384      $ 14,396        —        $ —    

Commercial real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2015

              
Troubled debt restructuring               

Medallion

     11      $ 6,307      $ 5,607        —        $ —    

Commercial real estate

     —          —          —          —          —    

Consumer

     1        19        18        —          —    

4. Fixed assets

Fixed assets and their related useful lives at December 31 were as follows:

 

(Dollars in thousands)

   Useful lives      2016      2015  

Computer software

     3 years      $ 259      $ 16  

Equipment

     5 years        61        44  

Furniture and fixtures

     5-10 years        87        83  

Leasehold improvements

     3-5 years        13        13  

Telephone equipment

     3 years        33        33  

Deposit system

     3 years        14        14  
     

 

 

    

 

 

 
        467        203  

Less accumulated depreciation and amortization

 

     (233      (118
     

 

 

    

 

 

 

Net fixed assets

      $ 234      $ 85  
     

 

 

    

 

 

 

Depreciation expense was $115,000, $56,000, and $63,000 for the years ended December 31, 2016, 2015, and 2014.

5. Deposits and other borrowings

At December 31, 2016, the scheduled maturities of all borrowed funds, which were primarily composed of brokered certificates of time deposit as follows.

 

(Dollars in  thousands)

      

2017

   $ 411,493  

2018

     255,792  

2019

     156,401  

2020

     40,147  

2021

     44,609  
  

 

 

 

Total

   $ 908,442  
  

 

 

 

All time deposits are in denominations of less than $250,000 and have been originated through Certificate of Deposit Broker relationships. The weighted average interest rate of deposits outstanding at December 31, 2016 was 1.22%.

 

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Deposits are raised through the use of investment brokerage firms who package deposits qualifying for FDIC insurance into pools that are sold to Medallion 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 0.14%, and which is capitalized and amortized to interest expense over the life of the respective pool. The total amount capitalized at December 31, 2016 and 2015 was $1,996,000 and $2,034,000, and $1,369,000, $1,314,000, and $1,251,000 was amortized to interest expense during 2016, 2015, and 2014. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity.

At December 31, 2016, the Bank had unsecured and undrawn Federal Funds lines with correspondent banks of $25,000,000.

6. Income taxes

The components of the provisions for income taxes were as follows for the years ended December 31,

 

(Dollars in thousands)

   2016      2015      2014  

Current

        

Federal

   $ 8,772      $ 15,997      $ 15,396  

State

     2,791        5,600        1,508  

Deferred

        

Federal

     (9,021      (1,849      (360

State

     (2,868      (774      (36
  

 

 

    

 

 

    

 

 

 

Net provision for income taxes

   $ (326    $ 18,974      $ 16,508  
  

 

 

    

 

 

    

 

 

 

The following table reconciles the provision for income taxes to the US federal statutory income tax rate for the years ended December 31, 2016, 2015, and 2014.

 

     2016      2015      2014  

Statutory Federal Income tax at 35%

   $ 573      $ 14,932      $ 14,970  

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

     64        1,664        984  

Change in state tax nexus

     (770      1,579        —    

Other

     (193      799        554  
  

 

 

    

 

 

    

 

 

 

Total

   $ (326    $ 18,974      $ 16,508  
  

 

 

    

 

 

    

 

 

 

Historically, the Bank filed its 2015 tax returns on a separate company basis, however Medallion did not qualify as a RIC status for 2016, and will therefore file consolidated 2016 tax returns with the Bank.

Deferred tax and other asset balances reflected in the balance sheet were as follows as of December 31,

 

(Dollars in thousands)

   2016      2015  

Provision for loan losses

   $ 23,408      $ 11,451  

Deferred loan acquisition costs

     (4,812      (4,490

Unrealized gains on investments

     327        205  

Other

     600        347  
  

 

 

    

 

 

 

Net deferred tax asset

     19,523        7,513  

Prepaid (accrued) taxes

     3,809        (2,401
  

 

 

    

 

 

 

Net deferred tax and other assets

   $ 23,333      $ 5,112  
  

 

 

    

 

 

 

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 Topic 740, “Income Taxes.” Management considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management’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 on these considerations, no valuation allowance was deemed necessary as of December 31, 2016 and 2015.

The Bank has filed US Federal tax returns as well as tax returns with various states. Generally, tax years 2013 through the present are open for examination. Currently the Bank is undergoing a state tax examination covering the years 2010 to 2013. In 2016, the Bank’s state tax accruals have decreased due to changes in the state nexus rules in a state and locality where the Bank conducts business. In addition, the Bank began accruing additional state income tax due to a change in their determination regarding nexus in certain other states where the Bank conducts business.

 

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7. Other transactions with affiliates

The Bank’s taxi medallion, and commercial loans aggregated $298,293,000 and $382,919,000 at December 31, 2016 and 2015. These loans are sourced and serviced by its affiliates. The Bank paid $2,000, $8,000, and $15,000 for loan servicing fees to Medallion for 2016, 2015, and 2014, and also in 2016, 2015, and 2014, paid $5,421,000, $5,658,000, and $5,946,000 to another Medallion affiliate. Origination fees of $110,000, $198,000, and $523,000 were paid to Medallion for 2016, 2015, and 2014. Amortization costs were $99,000, $367,000, and $507,000 for 2016, 2015, and 2014.

At December 31, 2016 and 2015, the Bank owed $1,084,000 and $1,387,000 to affiliates for origination fees, monthly servicing fees on loans, charges for corporate overhead, and legal and business development expenses due to the affiliates, partially offset by payments due the Bank from collection of loan payments by affiliates. The Bank reimbursed the parent for expenses incurred on its behalf of $1,006,000, $775,000, and $743,000 for 2016, 2015, and 2014.

8. 401(k) plan

The Bank participates in the 401(k) plan offered by Medallion. The 401(k) Plan covers all full and part-time employees of the Bank who have attained the age of 21 and have a minimum of one year of service. Under the 401(k) Plan, an employee may elect to defer not less than 1% and no more than 15% of the total annual compensation that would otherwise be paid to the employee, provided however, that employees’ contributions may not exceed certain maximum amounts determined under the Internal Revenue Code. Employee contributions are invested in various mutual funds according to the directions of the employee. At the discretion of Medallion’s Board of Directors, the Bank can provide for employer matching contributions. Medallion has elected to match employee contributions up to one-third of the employee’s contribution, but not greater than 2% of the portion of the employee’s annual salary eligible for 401(k) benefits. For the years ended December 31, 2016, 2015, and 2014, the Bank provided $55,000, $55,000, and $42,000 in employer matching, which amount is included in salaries and benefits expense on the accompanying statement of comprehensive income.

9. Commitments and contingencies

Loans – At December 31, 2016, the Bank had commitments to extend credit of $720,000 to taxi medallion customers for unfunded amounts.

Leases – The Bank leases office space under two non-cancelable operating leases that expire in August 2017 and November 2017. Rental expense related to the leases was $225,000, $217,000, and $220,000 for the years ended December 31, 2016, 2015, and 2014.

Future minimum lease payments under these operating leases as of December 31, 2016 were as follows:

 

     (Dollars in thousands)  

2017

   $ 190  

10. Capital requirements

The Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation (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.

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%, and that an adequate allowance for loan losses be maintained. As of December 31, 2016, the Bank’s Tier 1 leverage capital ratio was 14.5%. The Bank’s actual capital amounts and ratios as of December 31, 2016 and 2015, and the regulatory minimum ratios are presented in the following tables.

 

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(Dollars in thousands)

  As of December 31, 2016     As of December 31, 2015     Minimum Ratio for
Capital Adequacy
Purposes
    Minimum Ratio To be Well
Capitalized Under Prompt
Corrective Action Provisions
 
    Amount     Ratio     Amount     Ratio      

Tier 1 Capital (to average assets)

  $ 156,461       14.5   $ 161,938       15.1     4.0     5.0

Common Equity Tier 1 (to risk-weighted assets)

    130,158       12.2       135,635       12.6       4.5       6.5  

Tier 1 Capital (to risk-weighted assets)

    156,461       14.7       161,938       15.0       6.0       8.0  

Total Capital (to risk-weighted assets)

    170,385       16.0       175,533       16.3       8.0       10.0  

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

11. 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) Loans – Current fair value most closely approximates book value.

(b) Investments—The Bank’s investments are recorded at the estimated fair value of such investments.

(c) Cash and cash equivalents – Book value equals market value.

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

(e) 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, 2016 and 2015, the estimated fair value of these off-balance-sheet instruments was not material.

(f) Fixed rate borrowings – Due to the short-term nature of these instruments, the carrying amount approximates fair value.

 

     December 31, 2016      December 31, 2015  

(Dollars in thousands)

   Carrying Amount      Fair Value      Carrying Amount      Fair Value  

Financial Assets

           

Loans

   $ 965,082      $ 965,082      $ 996,375      $ 996,375  

Investment securities

     36,861        36,861        35,524        35,524  

Cash

     30,881        30,881        23,094        23,094  

Accrued interest receivable

     6,160        6,160        5,966        5,966  

Financial Liabilities

           

Funds borrowed

     908,442        908,442        908,896        908,896  

Accrued interest payable

     1,094        1,094        1,013        1,013  

12. Fair value of assets and liabilities

The Bank 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.

 

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In accordance with FASB ASC 820, the Bank 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).

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

Assets and liabilities measured at fair value, recorded on the 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 Bank has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most US Government and agency securities, and certain other sovereign government obligations).

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

 

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

 

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

 

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

 

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

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

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.

The following tables present the Bank’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015.

 

2016 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Available-for-sale investment securities (1)

   $ —        $ 36,861      $ —        $ 36,861  

 

(1) Total unrealized loss of $245, net of tax was included in accumulated other comprehensive income (loss) for 2016 related to these assets.

 

2015 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Available-for-sale investment securities (1)

   $ —        $ 35,524      $ —        $ 35,524  

 

(1) Total unrealized loss of $453, net of tax was included in accumulated other comprehensive income (loss) for 2015 related to these assets.

The following tables present the Bank’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2016 and 2015.

 

2016 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets (1)

           

Impaired loans

   $ —        $ —        $ 31,247      $ 31,247  

Repossessed loan collateral

           1,197        1,197  

Other receivables

           6,637        6,637  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 39,081      $ 39,081  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Total unrealized losses of $21,002 for impaired loans, $0 for repossessed loan collateral, and $0 for other receivables were included in income for 2016 related to these assets.

 

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Table of Contents

2015 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets (1)

           

Impaired loans

   $ —        $ —        $ 24,856      $ 24,856  

Repossessed loan collateral

           1,048        1,048  

Other receivables

           6,637        6,637  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 32,541      $ 32,541  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Total unrealized losses of $499 for impaired loans, $0 for repossessed loan collateral, and $1,150 for other receivables were included in income for 2015 related to these assets.

13. Small Business Lending Fund Program (SBLF) and Troubled Assets Relief Program (TARP)

On February 27, 2009 and December 22, 2009, Medallion Bank issued, and the US Treasury purchased under the TARP Capital Purchase Program (the CPP) Medallion 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, Medallion Bank issued, and the US Treasury purchased 26,303 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series E (Series E) for an aggregate purchase price of $26,303,000 under the SBLF. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. In connection with the issuance of the Series E, the Bank exited the CPP by redeeming the Series A, B, C, and D; and received approximately $4,000,000, net of dividends due on the repaid securities. The Bank previously paid a dividend rate of 1% on the Series E, which increased to 9% in first quarter of 2016.

14. Subsequent Events

We have evaluated subsequent events that have occurred through March 14, 2017, the date of financial statement issuance.

 

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