10-Q 1 d811162d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended September 30, 2014

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)

 

 

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  x    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 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   x
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  x

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of November 4, 2014 was 25,162,791.

 

 

 


Table of Contents

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

     3   

ITEM 1. FINANCIAL STATEMENTS

     3   

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

     40   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     60   

ITEM 4. CONTROLS AND PROCEDURES

     60   

PART II - OTHER INFORMATION

     60   

ITEM 1. LEGAL PROCEEDINGS

     60   

ITEM 1A. RISK FACTORS

     61   

ITEM 6. EXHIBITS

     73   

SIGNATURES

     74   

CERTIFICATIONS

  


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASIS OF PREPARATION

We, Medallion Financial Corp. or the Company, are a closed-end, non-diversified management investment company organized as a Delaware corporation. We have elected to be treated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. 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 5%, and our commercial loan portfolio at a compound annual growth rate of 2% (10% and 5% 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 17%. 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 $1,485,000,000 as of September 30, 2014, and $1,330,000,000 and $1,290,373,000 as of December 31, 2013 and September 30, 2013, 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 $224,000,000 or $13.07 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 have 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.

We also conduct business through our asset-based lending division, Medallion Business Credit, an originator of loans to small businesses for the purpose of financing inventory and receivables.

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 $438,726,000 at September 30, 2014. 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 1940 Act.

The financial information is divided into two sections. The first section, Item 1, includes our unaudited consolidated financial statements including related footnotes. The second section, Item 2, consists of Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2014.

Our consolidated balance sheet as of September 30, 2014, and the related consolidated statements of operations, changes in net assets, and cash flows for the three and nine months ended September 30, 2014 and 2013 included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the US have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the three and nine months ended September 30, 2014 and 2013, or for any other interim period, may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in thousands, except per share data)

   2014     2013     2014     2013  

Interest income on investments

   $ 6,933      $ 5,997      $ 18,781      $ 15,439   

Dividends and interest income on short-term investments(1)

     4,015        3,018        10,217        8,547   

Medallion lease income

     431        420        1,291        1,238   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     11,379        9,435        30,289        25,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense(2)

     2,222        2,092        6,282        6,279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     9,157        7,343        24,007        18,945   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     136        181        435        804   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and benefits

     2,906        2,369        8,431        7,265   

Professional fees

     70        (105     623        1,291   

Occupancy expense

     207        195        588        587   

Other operating expenses (3)

     882        650        2,320        1,986   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,065        3,109        11,962        11,129   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes(1) (4)

     5,228        4,415        12,480        8,620   

Income tax (provision) benefit

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     5,228        4,415        12,480        8,620   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized losses on investments(5)

     (193     (596     (1,051     (515
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

     (1,723     894        20        7,423   

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

     3,382        1,684        9,115        3,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation on investments

     1,659        2,578        9,135        11,013   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized/unrealized gains on investments

     1,466        1,982        8,084        10,498   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 6,694      $ 6,397      $ 20,564      $ 19,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations per common share

        

Basic

   $ 0.27      $ 0.29      $ 0.83      $ 0.89   

Diluted

     0.27        0.29        0.82        0.87   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per share

   $ 0.24      $ 0.23      $ 0.72      $ 0.67   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

        

Basic

     24,924,433        21,730,116        24,872,230        21,596,054   

Diluted

     25,118,420        22,116,793        25,107,905        21,966,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $4,000 and $10,000 of dividend income for the three and nine months ended September 30, 2014 from Medallion Bank, and $3,000 and $8,500 for the comparable 2013 periods.
(2) Average borrowings outstanding were $328,731 and $310,751, and the related average borrowing costs were 2.68% and 2.70% for the 2014 third quarter and nine months, and were $320,546 and $316,624, 2.59%, and 2.65% for the comparable 2013 periods.
(3) See Note 7 for the components of other operating expenses.
(4) Includes $174 and $574 of net revenues received from Medallion Bank for the three and nine months ended September 30, 2014, and $182 and $505 for the comparable 2013 periods, primarily for servicing fees, loan origination fees, and expense reimbursements. See Notes 3 and 10 for additional information.
(5) There were no net losses on investment securities of affiliate issuers.

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

     UNAUDITED        

(Dollars in thousands, except per share data)

   September 30, 2014     December 31, 2013  

Assets

    

Medallion loans, at fair value

   $ 303,502      $ 297,861   

Commercial loans, at fair value (1)

     64,256        60,168   

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

     127,708        108,623   

Equity investments, at fair value

     7,828        6,505   

Investment securities, at fair value

     —          —     
  

 

 

   

 

 

 

Net investments ($241,242 at September 30, 2014 and $241,840 at December 31, 2013 pledged as collateral under borrowing arrangements)

     503,294        473,157   

Cash and cash equivalents ($0 at September 30, 2014 and December 31, 2013 restricted as to use by lender)

     58,257        52,172   

Accrued interest receivable

     942        907   

Fixed assets, net

     318        446   

Foreclosed properties

     48,739        50,403   

Goodwill, net

     5,099        5,069   

Other assets, net

     3,563        12,899   
  

 

 

   

 

 

 

Total assets

   $ 620,212      $ 595,053   
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued expenses

   $ 5,069      $ 5,476   

Accrued interest payable

     1,303        1,124   

Funds borrowed

     335,809        314,958   
  

 

 

   

 

 

 

Total liabilities

     342,181        321,558   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

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 – 26,763,524 shares at September 30, 2014 and 26,570,355 shares at December 31, 2013 issued)

     268        266   

Treasury stock at cost (1,600,733 shares at September 30, 2014 and December 31, 2013)

     (14,304     (14,304

Capital in excess of par value

     270,342        268,522   

Accumulated undistributed net investment loss

     (12,089     (14,782

Accumulated undistributed net realized gains on investments

     —          —     

Net unrealized appreciation on investments

     33,814        33,793   
  

 

 

   

 

 

 

Total shareholders’ equity (net assets)

     278,031        273,495   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 620,212      $ 595,053   
  

 

 

   

 

 

 

Number of common shares outstanding

     25,162,791        24,969,622   

Net asset value per share

   $ 11.05      $ 10.95   
  

 

 

   

 

 

 

 

(1) Includes $13,058 and $12,181 of loans to controlled subsidiaries or entities under their control at September 30, 2014 and December 31, 2013.

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

(UNAUDITED)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in thousands, except per share data)

   2014     2013     2014     2013  

Net investment income after income taxes

   $ 5,228      $ 4,415      $ 12,480      $ 8,620   

Net realized losses on investments

     (193     (596     (1,051     (515

Net unrealized appreciation on investments

     1,659        2,578        9,135        11,013   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     6,694        6,397        20,564        19,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income, net

     (5,921     (2,021     (13,757     (6,853

Return of capital, net

     (118     (2,821     (4,094     (7,617

Realized gains from investment transactions, net

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to shareholders (1)

     (6,039     (4,842     (17,851     (14,470
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock – based compensation expense

     382        366        1,112        1,129   

Exercise of stock options

     4        595        827        3,736   

Capitalized stock issuance costs (2)

     —          —          (117     —     

Treasury stock acquired

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share transactions

     386        961        1,822        4,865   

Other

     —          5        1        32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase in net assets

     1,041        2,521        4,536        9,545   

Net assets at the beginning of the period

     276,990        223,342        273,495        216,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at the end of the period(3)

   $ 278,031      $ 225,863      $ 278,031      $ 225,863   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share activity

        

Common stock issued, beginning of period

     26,763,176        23,569,216        26,570,355        23,251,937   

Exercise of stock options

     430        67,986        92,396        384,165   

Issuance (forfeiture) of restricted stock, net

     (82     (2,802     100,773        (1,702
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issued, end of period

     26,763,524        23,634,400        26,763,524        23,634,400   
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, beginning of period

     (1, 600,733     (1, 600,733     (1,600,733     (1,600,733

Treasury stock acquired

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, end of period

     (1,600,733     (1,600,733     (1,600,733     (1,600,733
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock outstanding

     25,162,791        22,033,667        25,162,791        22,033,667   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Distributions declared were $0.24 and $0.72 per share for the 2014 third quarter and nine months, and were $0.23 and $0.67 for the comparable 2013 periods.
(2) Represents additional costs associated with the December 2013 equity offering applied to capital.
(3) Includes $0 and $0 of undistributed net investment income, $0 and $0 of undistributed net realized gains on investments, and $9,611 and $9,010 of capital loss carryforward at September 30, 2014 and 2013.

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

(UNAUDITED)

 

     Nine Months Ended September 30,  

(Dollars in thousands)

   2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 20,564      $ 19,118   

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

    

Depreciation and amortization

     354        870   

(Accretion) amortization of origination (fees) costs

     (56     151   

Net change in unrealized appreciation on investments

     (20     (7,423

Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries

     (9,115     (3,590

Net realized losses on investments

     1,051        515   

Stock-based compensation expense

     1,112        1,129   

(Increase) decrease in accrued interest receivable

     (35     19   

(Increase) decrease in other assets, net

     10,245        (5,008

Increase (decrease) in accounts payable and accrued expenses

     (406     2,613   

(Increase) decrease in accrued interest payable

     178        (722
  

 

 

   

 

 

 

Net cash provided by operating activities

     23,872        7,672   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Investments originated

     (94,698     (186,265

Proceeds from principal receipts, sales, and maturities of investments

     83,195        181,617   

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

     (9,970     296   

Capital expenditures

     (24     (56
  

 

 

   

 

 

 

Net cash used for investing activities

     (21,497     (4,408
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from funds borrowed

     95,980        207,480   

Repayments of funds borrowed

     (75,629     (193,929

Issuance of SBA debentures

     6,500        25,500   

Repayments of SBA debentures

     (6,000     (23,450

Capitalized stock issuance costs

     (117     —     

Proceeds from exercise of stock options

     827        3,736   

Payments of declared distributions

     (17,851     (14,470
  

 

 

   

 

 

 

Net cash provided by financing activities

     3,710        4,867   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     6,085        8,131   

Cash and cash equivalents, beginning of period

     52,172        26,875   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 58,257      $ 35,006   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION

    

Cash paid during the period for interest

   $ 5,871      $ 6,263   

Cash paid during the period for income taxes

     —          —     

Non-cash investing activities – net transfer to (from) other assets

     —          —     
  

 

 

   

 

 

 

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

SEPTEMBER 30, 2014

(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.

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. The Company also conducts business through its asset-based lending division, Medallion Business Credit (MBC), an originator of loans to small businesses for the purpose of financing inventory and receivables.

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 $187,613,000 at September 30, 2014, 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 $36,155,000 at September 30, 2014, 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 $48,739,000 on the consolidated balance sheet at September 30, 2014, compared to $50,403,000 and $49,928,000 at December 31, 2013 and September 30, 2013, and are considered non-qualifying assets under the 1940 Act.

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 (licenses), 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.

(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, foreclosed properties, loans held for sale, and investments, among other effects.

 

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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 frequently exceed the federally insured limits, and includes $1,600,000 related to compensating balance requirements of several regional banking institutions.

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, 11, and 12 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, historical loss experience, and the relationships between current and projected market rates and portfolio rates of interest and maturities. Foreclosed properties, 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 27% of the investment portfolio at September 30, 2014 and 24% at December 31, 2013, 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 $1,498,000 and $1,579,000 at September 30, 2014 and December 31, 2013, and non-marketable securities of $6,330,000 and $4,926,000 in the comparable periods. The $127,708,000 and $108,623,000 related to portfolio investments in controlled subsidiaries at September 30, 2014 and December 31, 2013 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.

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 an annual basis. 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 has determined that Medallion Bank has little value beyond its recorded book value. As a result of this valuation process, the Company 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, although changes in these restrictions and other applicable factors could change these conclusions in the future. 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 socially or economically disadvantaged, or to entities that are at least 50% owned by such persons. Approximately 60% and 63% of the Company’s investment portfolio at September 30, 2014 and December 31, 2013 had arisen in connection with the financing of

 

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taxicab medallions, taxicabs, and related assets, of which 68% were in New York City at September 30, 2014 and December 31, 2013. 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% at September 30, 2014 and December 31, 2013) represents loans to various commercial enterprises in a wide variety of industries, including manufacturing, retail trade, information, arts, entertainment, and recreation and various other industries. Approximately 26% of these loans are made in each of Minnesota and the metropolitan New York City area, with the balance widely scattered across the United States. Investments in controlled unconsolidated subsidiaries, equity investments, and investment securities were 25%, 2%, and 0% at September 30, 2014 and 23%, 1%, and 0% at December 31, 2013.

On a managed basis, which includes the investments of Medallion Bank after eliminating the Company’s investment in Medallion Bank, medallion loans were 53% and 56% at September 30, 2014 and December 31, 2013 (74% in New York City), commercial loans were 8% and 10%, and 36% and 31% were consumer loans in all 50 states collateralized by recreational vehicles, boats, motorcycles, trailers, and home improvements. Investment securities were 2% at September 30, 2014 and December 31, 2013, and equity investments (including investments in controlled subsidiaries) were 1%.

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 September 30, 2014 and December 31, 2013, net loan origination costs were $261,000 and $164,000. Net (accretion) amortization (income) expense for the three months ended September 30, 2014 and 2013 was ($8,000) and $17,000, and was ($56,000) and $151,000 for the comparable nine months periods.

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 September 30, 2014 and December 31, 2013, there were no premiums or discounts on investment securities, and their related income accretion or amortization was immaterial for 2014 and 2013.

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 September 30, 2014, December 31, 2013, and September 30, 2013, total nonaccrual loans were $11,884,000, $16,760,000, and $18,235,000, and represented 3%, 5%, and 5% of the gross medallion and commercial loan portfolio at each period end, and were primarily concentrated in the secured mezzanine 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 $9,514,000, $9,826,000, and $11,082,000 as of September 30, 2014, December 31, 2013, and September 30, 2013, of which $480,000 and $715,000 would have been recognized in the quarters ended September 30, 2014 and 2013, and $1,408,000 and $2,051,000 would have been recognized in the comparable nine months. The reduction in nonaccrual interest foregone and principal balances reflects the recognition of certain loans as realized losses, and hence removal from the nonaccrual disclosures.

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, the Company has elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $458,777,000 and $427,421,000 at September 30, 2014 and December 31, 2013, and included $428,931,000 and $402,801,000 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 September 30, 2014 and December 31, 2013. 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.

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 (depreciation) on investments was $33,814,000, $33,793,000, and $33,381,000 as of September 30, 2014, December 31, 2013, and September 30, 2013. 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 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. The Company determines whether any factors give rise to 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 on the ability to transfer industrial bank charters.

 

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As a result of this valuation process, the Company 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, although changes in these restrictions and other applicable factors could change these conclusions in the future. See Note 3 for the presentation of financial information for Medallion Bank.

The following tables set forth the changes in the Company’s unrealized appreciation (depreciation) on investments, other than investments in controlled subsidiaries, for the 2014 and 2013 quarters shown below.

 

(Dollars in thousands)

   Medallion
Loans
     Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2013

   $  —         ($ 6,992   $ 381      $ 40,404      $ 33,793   

Net change in unrealized

           

Appreciation on investments

     —           —          100        —          100   

Depreciation on investments

     —           74        195        381        650   

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           312        —          —          312   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2014

     —           (6,606     676        40,785        34,855   

Net change in unrealized

           

Appreciation on investments

     —           —          640        (951     (311

Depreciation on investments

     —           (394     (62     761        305   

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           13        674        —          687   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2014

     —           (6,987     1,928        40,595        35,536   

Net change in unrealized

           

Appreciation on investments

     —           —          (495     (713     (1,208

Depreciation on investments

     —           (1,173     559        —          (614

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           100        —          —          100   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2014

   $ —         ($ 8,060   $ 1,992      $ 39,882      $ 33,814   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

   Medallion
Loans
     Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2012

   $ —         ($ 7,844   $ 44      $ 33,757      $ 25,957   

Net change in unrealized

           

Appreciation on investments

     —           —          (11     3,012        3,001   

Depreciation on investments

     —           (50     14        —          (36

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2013

     —           (7,894     47        36,769        28,922   

Net change in unrealized

           

Appreciation on investments

     —           —          505        2,853        3,358   

Depreciation on investments

     —           (66     273        —          207   

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2013

     —           (7,960     825        39,622        32,487   

Net change in unrealized

           

Appreciation on investments

     —           —          197        475        672   

Depreciation on investments

     —           277        (654     —          (377

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           234        365        —          599   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2013

   $ —         ($ 7,449   $ 733      $ 40,097      $ 33,381   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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The table below summarizes components of unrealized and realized gains and losses in the investment portfolio for the three and nine months ended September 30, 2014 and 2013.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in thousands)

   2014     2013     2014     2013  

Net change in unrealized appreciation (depreciation) on investments

        

Unrealized appreciation

   ($ 495   $ 197      $ 244      $ 691   

Unrealized depreciation

     (614     (377     (800     (207

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

     3,382        1,684        9,115        3,590   

Realized gains

     —          —          —          —     

Realized losses

     99        599        1,099        599   

Unrealized gains (losses) on foreclosed properties and other assets

     (713     475        (523     6,340   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,659      $ 2,578      $ 9,135      $ 11,013   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments

        

Realized gains

   $ —        $ —        $ —        $ —     

Realized losses

     (99     (599     (1,099     (599

Other gains

     —          —          49        —     

Direct recoveries (chargeoffs)

     (94     3        (1     84   

Realized losses on foreclosed properties and other assets

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   ($ 193   ($ 596   ($ 1,051   ($ 515
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table provides additional information on attributes of the nonperforming loan portfolio as of September 30, 2014, December 31, 2013, and September 30, 2013.

 

(Dollars in thousands)

   Recorded
Investment  (1)
     Unpaid
Principal
Balance
     Average
Recorded
Investment
 

September 30, 2014

        

Medallion

   $ —         $ —         $ —     

Commercial (2) (3)

     11,256         19,216         11,500   

December 31, 2013

        

Medallion

     —           —           —     

Commercial (2) (3)

     16,144         23,322         18,950   

September 30, 2013

        

Medallion

     —           —           —     

Commercial (2) (3)

     17,619         26,331         19,652   

 

(1) As of September 30, 2014, December 31, 2013, and September 30, 2013, $7,434, $6,844, and $7,359 of unrealized depreciation had been recorded as a valuation allowance on these commercial loans.
(2) Interest income of $9 and $20 was recognized in the three and nine months ended September 30, 2014, compared to $2 and $61 for the comparable 2013 periods on these commercial loans.
(3) Included in the unpaid principal balance is unearned paid in-kind interest on nonaccrual loans of $7,960, $7,178, and $8,712 which is included in the nonaccrual disclosures in the section titled “Investment Transactions and Income Recognition” on page 10 as of September 30, 2014, December 31, 2013, and September 30, 2013.

The following tables show the aging of medallion and commercial loans as of September 30, 2014 and December 31, 2013.

 

September 30, 2014    Days Past Due                    Recorded Investment >
90 Days and Accruing
 

(Dollars in thousands)

   31 - 60      61 - 90      91 +      Total      Current      Total     

Medallion loans

   $ 2,432       $ 227       $ —         $ 2,659       $ 300,521       $ 303,180         $—     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     510         —           2,018         2,528         51,737         54,265         —     

Asset-based receivable

     —           —           304         304         2,767         3,071         —     

Other secured commercial

     20         260         —           280         14,761         15,041         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     530         260         2,322         3,112         69,265         72,377         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,962       $ 487       $ 2,322       $ 5,771       $ 369,786       $ 375,557       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2013

   Days Past Due                           Recorded Investment >
90 Days and Accruing
 

(Dollars in thousands)

   31 - 60      61 - 90      91 +      Total      Current      Total     

Medallion loans

   $ 252       $ 171       $ —         $ 423       $ 297,195       $ 297,618       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     —           1,512         2,018         3,530         42,570         46,100         —     

Asset-based receivable

     —           —           494         494         7,309         7,803         —     

Other secured commercial

     51         —           —           51         13,285         13,336         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     51         1,512         2,512         4,075         63,164         67,239         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 303       $ 1,683       $ 2,512       $ 4,498       $ 360,359       $ 364,857       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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. 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 September 30, 2014, 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. The one remaining loan is still outstanding. 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 September 30, 2014.

 

(Dollars in thousands)

   The Company     Medallion Bank     Total  

Loans outstanding

   $ 289      $ 2,291      $ 2,580   

Loans charged off (1)

     (190     (940     (1,130

Valuation allowance

     (50     (675     (725
  

 

 

   

 

 

   

 

 

 

Net loans outstanding

     49        676        725   
  

 

 

   

 

 

   

 

 

 

Other receivables

     560        10,642        11,202   

Valuation allowance

     (168     (3,193     (3,361
  

 

 

   

 

 

   

 

 

 

Net other receivables

     392        7,449        7,841   

Total net outstanding

     441        8,125        8,566   
  

 

 

   

 

 

   

 

 

 

Income foregone in 2014

     25        36        61   

Total income foregone

   $ 49      $ 72      $ 121   
  

 

 

   

 

 

   

 

 

 

 

(1) The income foregone on the charged off loan was $20 for the Company and $96 for Medallion Bank.

The Company did not enter into any troubled debt restructurings during the quarter and nine months ended September 30, 2014 and 2013.

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 greater than its carrying amount as of September 30, 2014 and December 31, 2013, and that impairment testing of goodwill is not required. The results of this evaluation demonstrated no impairment in goodwill for any period evaluated, and management believes, and the Board of Directors concurs, that there is no impairment as of September 30, 2014. The Company conducts annual, and if necessary, more frequent, appraisals of its goodwill, and will recognize any impairment in the period any impairment is identified as a charge to operating expenses.

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 $40,000 and $43,000 for the quarters ended September 30, 2014 and 2013, and was $122,000 and $140,000 for the comparable nine months.

 

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Deferred Costs

Deferred financing costs, included in other assets, represents costs associated with obtaining the Company’s borrowing facilities, and are amortized on a straight line basis over the lives of the related financing agreements. Amortization expense was $72,000 and $248,000 for the quarters ended September 30, 2014 and 2013, and was $232,000 and $730,000 for the comparable nine months. In addition, the Company capitalizes certain costs for transactions in the process of completion (other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon completion or termination of the transaction, any accumulated amounts will be amortized against income over an appropriate period, or written off. The amounts on the balance sheet for all of these purposes were $1,734,000, $1,506,000, and $1,657,000 as of September 30, 2014, December 31, 2013, and September 30, 2013.

Federal Income Taxes

The Company and each of its major subsidiaries other than Medallion Bank and Medallion Funding LLC (the RIC subsidiaries) have qualified to be treated for federal income tax purposes as regulated investment companies (RICs) under the Internal Revenue Code of 1986, as amended (the Code). As RICs, the Company and each of the RIC subsidiaries are not subject to US federal income tax on any gains or investment company taxable income (which includes, among other things, dividends and interest income reduced by deductible expenses) that it distributes to its shareholders, if at least 90% of its investment company taxable income for that taxable year is distributed. It is the Company’s and the RIC subsidiaries’ policy to comply with the provisions of the Code. The Company’s RIC qualification is determined on an annual basis, and it qualified and filed its federal tax returns as a RIC for 2013 and 2012, and anticipates qualifying and filing as a RIC for 2014. As a result, no provisions for income taxes have been recorded for the three and nine months ended September 30, 2014 and 2013. State and local tax treatment follows the federal model.

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 2011 through the present are the more significant filings that are open for examination.

Medallion Bank is not a RIC and is taxed as a regular corporation. Fin Trust, Medallion Funding LLC, and Trust III are not subject to federal income taxation, instead their taxable income is treated as having been earned by the Company.

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.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(Dollars in thousands)

   2014      2013      2014      2013  

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

   $ 6,694       $ 6,397       $ 20,564       $ 19,118   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding applicable to basic EPS

     24,924,433         21,730,116         24,872,230         21,596,054   

Effect of dilutive stock options

     71,355         206,440         114,008         220,905   

Effect of restricted stock grants

     122,632         180,237         121,667         149,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted EPS

     25,118,420         22,116,793         25,107,905         21,966,709   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.27       $ 0.29       $ 0.83       $ 0.89   

Diluted earnings per share

     0.27         0.29         0.82         0.87   
  

 

 

    

 

 

    

 

 

    

 

 

 

Potentially dilutive common shares excluded from the above calculations aggregated 99,000 and 18,000 shares as of September 30, 2014 and 2013.

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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During the nine months ended September 30, 2014 and 2013, the Company issued 101,113 and 1,393 restricted shares of stock-based compensation awards, and 18,000 and 18,000 shares of other stock-based compensation awards, and recognized $382,000 and $1,112,000, or $0.02 and $0.04 per diluted common share for the 2014 third quarter and nine months, and $366,000 and $1,129,000, or $0.02 and $0.05 per share in the comparable 2013 periods, of non-cash stock-based compensation expense related to the grants. As of September 30, 2014, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $1,219,000, which is expected to be recognized over the next eleven quarters (see Note 5).

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 $230,000,000 of notional value of principal from various multinational banks, with termination dates ranging to September 2017. 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 $43,000 and $57,000 for the three and nine months ended September 30, 2014, and $41,000 for the nine months ended September 30, 2013, and all are carried at $0 on the balance sheet at September 30, 2014 and December 31, 2013.

Reclassifications

Certain reclassifications have been made to prior year balances to conform with the current quarter’s 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 three and nine months ended September 30, 2014 and 2013.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in thousands)

   2014     2013     2014     2013  

Statement of comprehensive income

        

Investment income

   $ 20,661      $ 16,637      $ 56,342      $ 46,603   

Interest expense

     1,903        1,299        4,977        3,905   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     18,758        15,338        51,365        42,698   

Noninterest income (expense)

     91        (5     278        139   

Operating expenses

     5,012        5,138        14,449        13,482   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     13,837        10,195        37,194        29,355   

Income tax provision

     (4,840     (2,736     (11,981     (8,225
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     8,997        7,459        25,213        21,130   

Net realized/unrealized losses of Medallion Bank

     (2,250     (2,420     (5,898     (8,127
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations of Medallion Bank

     6,747        5,039        19,315        13,003   

Unrealized depreciation on Medallion Bank (1)

     (4,066     (3,066     (10,197     (8,697

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

     701        (289     (3     (716
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 3,382      $ 1,684      $ 9,115      $ 3,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Unrealized depreciation on Medallion Bank reflects the adjustment to the investment carrying amount to reflect the dividends declared to the Company and the US Treasury.

 

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The following table presents Medallion Bank’s balance sheets and the net investment in other controlled subsidiaries as of September 30, 2014 and December 31, 2013.

 

(Dollars in thousands)

   2014      2013  

Loans

   $ 883,289       $ 749,315   

Investment securities, at fair value

     27,846         24,464   
  

 

 

    

 

 

 

Net investments (1)

     911,135         773,779   

Cash

     20,932         17,467   

Other assets, net

     24,944         22,568   

Due from affiliates

     —           —     
  

 

 

    

 

 

 

Total assets

   $ 957,011       $ 813,814   
  

 

 

    

 

 

 

Other liabilities

   $ 3,022       $ 2,249   

Due to affiliates

     410         866   

Deposits and other borrowings, including accrued interest payable

     806,676         682,913   
  

 

 

    

 

 

 

Total liabilities

     810,108         686,028   

Medallion Bank equity (2)

     146,903         127,786   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 957,011       $ 813,814   
  

 

 

    

 

 

 

Investment in other controlled subsidiaries

   $ 7,602       $ 7,145   

Total investment in Medallion Bank and other controlled subsidiaries

   $ 127,708         108,623   
  

 

 

    

 

 

 

 

(1) Included in Medallion Bank’s net investments is $18 and $40 for purchased loan premium at September 30, 2014 and December 31, 2013.
(2) Includes $26,303 of preferred stock issued to the US Treasury under the Small Business Lending Fund Program (SBLF).

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 September 30, 2014 and December 31, 2013, the net premium on investment securities totaled $287,000 and $342,000, and $18,000 and $49,000 was amortized into interest income for the quarter and nine months ended September 30, 2014, and $19,000 and $86,000 was amortized in the comparable 2013 periods.

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At September 30, 2014 and December 31, 2013, net loan origination costs were $10,427,000 and $9,553,000. Net amortization expense for the quarter and nine months ended September 30, 2014 was $844,000 and $2,398,000, and was $770,000 and $2,225,000 for the comparable 2013 periods.

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 September 30, 2014, $2,521,000 or 1% of consumer loans, $1,351,000 or 3% of commercial loans, and no medallion loans were on nonaccrual, compared to $2,266,000 or 1% of consumer loans, $2,291,000 or 4% of commercial loans, and no medallion loans on nonaccrual at December 31, 2013, and $2,185,000 or 1% of consumer loans, $12,933,000 or 20% of commercial loans, and no medallion loans on nonaccrual at September 30, 2013. 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 $72,000, $85,000, and $338,000 as of September 30, 2014, December 31, 2013, and September 30, 2013. See also the paragraph and table on page 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.

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 less than 0.20%, and which is capitalized and amortized to interest expense over the life of the respective pool. The total amount capitalized at September 30, 2014 and December 31, 2013 was $2,266,000 and $1,697,000, and $322,000 and $924,000 was amortized to interest expense during the quarter and nine months ended September 30, 2014, and $304,000 and $915,000 was amortized in the comparable 2013 periods. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity.

 

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The outstanding balances of fixed rate borrowings were as follows.

 

     Payments Due for the Fiscal Year Ending September 30,      September 30,      December 31,      Interest  

(Dollars in thousands)

   2015      2016      2017      2018      2019      Thereafter      2014      2013      Rate (1)  

Deposits and other borrowings

   $ 303,902       $ 203,278       $ 145,103       $ 102,515       $ 51,088       $ —         $ 805,886       $ 682,337         0.82

 

(1) Weighted average contractual rate as of September 30, 2014.

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 discretionary 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 capital 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 $10,000,000 in 2014 and $5,000,000 in 2013. Separately, Medallion Bank declared dividends to the Company of $4,000,000 and $10,000,000 in the 2014 third quarter and nine months, and $3,000,000 and $8,500,000 in the comparable 2013 periods.

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 pays a dividend rate of 1% on the Series E.

The following table represents Medallion Bank’s actual capital amounts and related ratios as of September 30, 2014 and December 31, 2013, compared to required regulatory minimum capital ratios and the ratio required to be considered well capitalized. As of September 30, 2014, Medallion Bank meets all capital adequacy requirements to which it is subject, and is well-capitalized.

 

     Regulatory              

(Dollars in Thousands)

   Minimum     Well-capitalized     September 30, 2014     December 31, 2013  

Tier 1 capital

     —          —        $ 146,242      $ 127,512   

Total capital

     —          —          157,968        137,494   

Average assets

     —          —          933,488        807,331   

Risk-weighted assets

     —          —          931,737        792,129   

Leverage ratio (1)

     4     5     15.7     15.8

Tier 1 capital ratio (2)

     4        6        15.7        16.1   

Total capital ratio (2)

     8        10        17.0        17.4   

 

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

 

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(4) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows.

 

     Payments Due for the Fiscal Year Ending September 30,      September 30,      December 31,      Interest  

(Dollars in thousands)

   2015      2016      2017      2018      2019      Thereafter      2014      2013      Rate (1)  

Revolving lines of credit

   $ —         $ —         $ 127,633       $ —         $ —         $ —         $ 127,633       $ 131,990         1.84

Notes payable to banks

     28,699         56,917         27,075         —           —           —           112,691         87,983         2.52

SBA debentures

     6,500         —           —           —           3,000         52,985         62,485         61,985         3.98

Preferred securities

     —           —           —           —           —           33,000         33,000         33,000         2.36
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 35,199       $ 56,917       $ 154,708       $ —         $ 3,000       $ 85,985       $ 335,809       $ 314,958         2.52
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Weighted average contractual rate as of September 30, 2014.

(A) REVOLVING LINES OF CREDIT

In December 2008, Trust III entered into a revolving line of credit 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 the line reduced to $150,000,000, and of which $127,633,000 was outstanding at September 30, 2014. Borrowings under Trust III’s revolving line of credit are 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 0.16% at September 30, 2014) plus 1.65%, and previously was the lesser of a pooled short-term commercial paper rate, plus 0.95%.

(B) SBA DEBENTURES

In August 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. In September 2010, the SBA approved a $5,000,000 commitment for MCI to issue additional debentures during a four year period upon payment of a 1% fee. The SBA also approved a $7,485,000 commitment for FSVC to issue additional debentures during a four year period upon payment of a 1% fee, for the purpose of repaying $7,485,000 of debentures which matured in September 2011, which were issued on March 1, 2011 and used to prepay the September 2011 maturing debentures. In September 2006, the SBA approved a $6,000,000 commitment for FSVC to issue additional debentures to the SBA during a four year period upon payment of a 1% fee and the infusion of $2,000,000 of additional capital. In March 2006, the SBA approved a $13,500,000 commitment for MCI to issue additional debentures to the SBA during a four year period upon payment of a 1% fee and the infusion of $6,750,000 of additional capital. In November 2003, the SBA approved an $8,000,000 commitment for FSVC, and during 2001, the SBA approved $36,000,000 each in commitments for FSVC and MCI. As of September 30, 2014, $143,985,000 of commitments had been fully utilized, $6,000,000 of remaining commitments were available, and $62,485,000 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, 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.

(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 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 the Company’s consolidated balance sheets.

 

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The table below summarizes the key attributes of the Company’s various borrowing arrangements with these lenders as of September 30, 2014.

 

(Dollars in thousands)

Borrower

   # of Lenders /
Notes
   Note
Dates
   Maturity
Dates
   Type   Note
Amounts
     Balance
Outstanding at
September 30,
2014
     Monthly Payment    Average Interest
Rate at September 30,
2014
     Interest
Rate
Index(1)

The Company

   8/8    4/11 - 9/14    1/15 - 7/16    Revolving
line of
credit
secured by
pledged
loans
  $ 142,500       $ 84,000       Interest only     
 
2.32% (includes
unused fee)
  
  
   Various(2)

Medallion Chicago

   3/28    11/11 - 12/11    12/16    Term loans
secured by
owned
Chicago
medallions(3)
    25,708         24,375       $121
principal &
interest
     3.12%       N/A

The Company

   1/1    1/11    11/16    Participated
loans
treated as
financings
    3,915         3,909       Proportionate
to the
payments
received on
the
participated
loans
     2.50%       N/A

FSVC

   3/5    2/12 - 4/14    2/15 - 4/17    Participated
loans
treated as
financings
    256         252       Proportionate
to the
payments
received on
the
participated
loans
     7.24%       N/A

MFC

   2/3    2/13 - 3/13    2/16 – 3/16    Participated
loans
treated as
financings
    160         155       Proportionate
to the
payments
received on
the
participated
loans
     9.79%       N/A

MFC

   1/1    1/05    5/15    Revolving
line of
credit
secured by
pledged
loans
    8,000         0       Interest only      0%       Prime +
0.50%
             

 

 

    

 

 

          
              $ 180,539       $ 112,691            
             

 

 

    

 

 

          

 

(1) At September 30, 2014, 30 day LIBOR was 0.16%, 360 day LIBOR was 0.58%, and the prime rate was 3.25%.
(2) $92,500 of these lines can also be used by MFC ($41,500 which is available) of which $30,000 of such usage would be guaranteed by the Company. Interest rates on these lines range from LIBOR plus 2% to LIBOR plus 2.125%, and all contain prime rate options from prime minus 0.25% to prime, and one note has a floor, and three notes have an unused fee.
(3) $15,018 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 bore a fixed rate of interest of 7.68% to September 2012, and thereafter a variable rate of interest of 90 day LIBOR (0.24% at September 30, 2014) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor. At September 30, 2014, $33,000,000 was outstanding on the preferred securities.

(E) COVENANT COMPLIANCE

In the normal course of business, the Company and its subsidiaries enter into agreements, or are subject to regulatory requirements, that result in loan restrictions. Certain of the Company’s debt agreements contain restrictions that require the Company to maintain certain financial ratios, including debt to equity and minimum net worth. In addition, the Company’s wholly-owned subsidiary Medallion Bank is subject to various regulatory requirements (see Note 3).

(5) 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, provides for the issuance of a maximum of 800,000 shares of common stock of the Company. At September 30, 2014, 153,673 shares of the Company’s common stock remained available for future grants. 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 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. The terms of the Employee 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 800,000 shares of the Company’s common stock are issuable under the Employee Restricted Stock Plan, and as of September 30, 2014, 390,881 shares 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.

 

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The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan (the Amended Director Plan) on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock are issuable under the Amended Director Plan, and as of September 30, 2014, 64,000 shares of the Company’s common stock remained available for future grants. 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.

The Company’s 1996 Stock Option Plan and 1996 Director Plan terminated on May 21, 2006 and no additional shares are available for future issuance. At September 30, 2014, 453,821 options on the Company’s common stock were outstanding under the 1996 and 2006 plans, of which 420,154 options were exercisable, and there were 238,054 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 $1.71 and $1.41 for the nine months ended September 30, 2014 and 2013. The following assumption categories are used to determine the value of any option grants.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014     2013  

Risk free interest rate

     NA         NA         1.84     1.24

Expected dividend yield

     NA         NA         6.98     8.07

Expected life of option in years (1)

     NA         NA         6.00        6.00   

Expected volatility (2)

     NA         NA         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 program under the 1996 and 2006 Stock Option Plans and the Amended Director Plan for the 2014 quarters and the 2013 full year.

 

     Number of Options     Exercise Price
Per Share
     Weighted Average
Exercise Price
 

Outstanding at December 31, 2012

     971,500      $ 3.50-13.06       $ 9.80   

Granted

     18,000        13.84         13.84   

Cancelled

     (518     9.22         9.22   

Exercised(1)

     (410,765     3.50-13.06         9.90   
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2013

     578,217        7.17-13.84         9.85   

Granted

     —          —           —     

Cancelled

     —          —           —     

Exercised (1)

     (36,966     7.17-11.21         9.04   
  

 

 

   

 

 

    

 

 

 

Outstanding at March 31, 2014

     541,251        7.17-13.84         9.91   

Granted

     18,000        13.53         13.53   

Cancelled

     (50,000     8.51         8.51   

Exercised (1)

     (55,000     7.17-9.07         8.90   
  

 

 

   

 

 

    

 

 

 

Outstanding at June 30, 2014

     454,251        7.49-13.84         10.33   

Granted

     —          —           —     

Cancelled

     —          —           —     

Exercised (1)

     (430     9.22         9.22   
  

 

 

   

 

 

    

 

 

 

Outstanding at September 30, 2014 (2)

     453,821      $ 7.49-13.84       $ 10.33   

Options exercisable at September 30, 2014 (2)

     420,154      $ 7.49-13.84       $ 10.08   
  

 

 

   

 

 

    

 

 

 

 

(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 $1,000 and $452,000 for the 2014 third quarter and nine months, and was $402,000 and $1,682,000 for the comparable 2013 periods.
(2) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2014 and the related exercise price of the underlying options, was $763,000 for outstanding options and $763,000 for exercisable options as of September 30, 2014. The remaining contractual life was 3.69 years for outstanding options and 3.26 years for exercisable options at September 30, 2014.

 

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The following table presents the activity for the restricted stock program under the 2009 Employee Restricted Stock Plan for the 2014 quarters and the 2013 full year.

 

     Number of Shares     Grant Price
Per Share
     Weighted Average
Grant Price
 

Outstanding at December 31, 2012

     300,317      $  7.99-12.55       $ 10.76   

Granted

     11,742        13.12-15.61         15.31   

Cancelled

     (4,088     7.99-13.12         10.12   

Vested (1)

     (73,703     11.08-12.55         11.56   
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2013

     234,268        7.99-15.61         10.72   

Granted

     101,113        13.46         13.46   

Cancelled

     —          —           —     

Vested (1)

     (96,987     7.99-13.12         8.97   
  

 

 

   

 

 

    

 

 

 

Outstanding at March 31, 2014

     238,394        11.08-15.61         12.61   

Granted

     —          —           —     

Cancelled

     (258     11.08-15.61         11.92   

Vested (1)

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at June 30, 2014

     238,136        11.08-15.61         12.60   

Granted

     —          —           —     

Cancelled

     (82     11.53-15.61         14.22   

Vested (1)

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at September 30, 2014 (2)

     238,054      $ 11.08-15.61       $ 12.60   
  

 

 

   

 

 

    

 

 

 

 

(1) The aggregate fair value of the restricted stock vested was $0 and $1,397,000 for the 2014 third quarter and nine months, and was $0 and $401,000 for the comparable 2013 periods.
(2) The aggregate fair value of the restricted stock was $2,776,000 as of September 30, 2014. The remaining vesting period was 1.60 years at September 30, 2014.

The following table presents the activity for the unvested options outstanding under the plans for the 2014 quarters.

 

     Number of Options     Exercise Price
Per Share
     Weighted Average
Exercise Price
 

Outstanding at December 31, 2013

     21,667      $ 11.53-13.84       $ 13.54   

Granted

     —          —           —     

Cancelled

     —          —           —     

Vested

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at March 31, 2014

     21,667        11.53-13.84         13.54   

Granted

     18,000        13.53         13.53   

Cancelled

     —          —           —     

Vested

     (6,000     13.84         13.84   
  

 

 

   

 

 

    

 

 

 

Outstanding at June 30, 2014

     33,667        11.53-13.84         13.48   

Granted

     —          —           —     

Cancelled

     —          —           —     

Vested

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at September 30, 2014

     33,667      $ 11.53-13.84       $ 13.48   
  

 

 

   

 

 

    

 

 

 

The intrinsic value of the options vested was $0 for the 2014 third quarter and nine months.

(6) SEGMENT REPORTING

The Company has one business segment, its lending and investing operations. This segment originates and services medallion, secured commercial, and consumer loans, and invests in both marketable and nonmarketable securities.

 

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(7) NONINTEREST INCOME AND OTHER OPERATING EXPENSES

The major components of noninterest income were as follows.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(Dollars in thousands)

   2014      2013      2014      2013  

Prepayment fees

   $ 69       $ 86       $ 120       $ 451   

Servicing fees

     40         44         129         152   

Late charges

     12         24         28         95   

Management fees

     —           —           75         —     

Other

     15         27         83         106   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 136       $ 181       $ 435       $ 804   
  

 

 

    

 

 

    

 

 

    

 

 

 

Prepayment fees decreased, reflecting larger than normal fees received from loan prepayments a year ago. The decreases in servicing fees in 2014 reflected the fluctuations in the servicing and loan origination activities performed for Medallion Bank. Late charges declined as delinquencies improved in all business units. Management fees initiated on a portfolio investment company in late 2013 were also earned in the 2014 first quarter.

The major components of other operating expenses were as follows.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(Dollars in thousands)

   2014      2013      2014      2013  

Travel, meals, and entertainment

   $ 202       $ 196       $ 663       $ 606   

Miscellaneous taxes

     115         30         197         83   

Directors’ fees

     108         101         317         304   

Computer expense

     95         28         187         77   

Office expense

     47         47         172         147   

Insurance

     45         51         158         141   

Depreciation and amortization

     40         43         122         140   

Bank charges

     33         31         92         99   

Investment management expenses

     32         39         99         118   

Telephone

     16         30         85         91   

Other expenses

     149         54         228         180   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating expenses

   $ 882       $ 650       $ 2,320       $ 1,986   
  

 

 

    

 

 

    

 

 

    

 

 

 

Miscellaneous taxes, which include franchise, excise, road and other governmental assessments, were higher in 2014, and also reflected a tax benefit recognized in 2013. Computer expense increased due to higher costs regarding system upgrades and the maintenance of data centers. Other operating expenses were higher reflecting the prior year’s expense reduction efforts and the reversals of accrued liabilities, partially offset by higher expense reimbursements from Medallion Bank.

 

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(8) SELECTED FINANCIAL RATIOS AND OTHER DATA

The following table provides selected financial ratios and other data.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in thousands, except per share data)

   2014     2013     2014     2013  

Net share data

        

Net asset value at the beginning of the period

   $ 11.01      $ 10.17      $ 10.95      $ 9.99   

Net investment income

     0.21        0.20        0.50        0.39   

Income tax (provision) benefit

     —          —          —          —     

Net realized losses on investments

     (0.01     (0.03     (0.04     (0.02

Net change in unrealized appreciation on investments

     0.07        0.12        0.36        0.50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     0.27        0.29        0.82        0.87   

Issuance of common stock

     0.02        0.01        (0.01     0.04   

Repurchase of common stock

     —          —          —          —     

Distributions of net investment income

     (0.24     (0.09     (0.55     (0.31

Distributions of net realized gains on investments

     —          —          —          —     

Return of capital

     0.00        (0.13     (0.16     (0.35
  

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions

     (0.24     (0.22     (0.71     (0.66

Other

     (0.01     —          —          0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase in net asset value

     0.04        0.08        0.10        0.26   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 11.05      $ 10.25      $ 11.05      $ 10.25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at beginning of period

   $ 12.46      $ 13.91      $ 14.35      $ 11.74   

Per share market value at end of period

     11.66        14.88        11.66        14.88   

Total return (2)

     (18 %)      34     (19 %)      44
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratios/supplemental data

        

Total shareholders’ equity (net assets)

   $ 278,031      $ 225,863      $ 278,031      $ 225,863   

Average net assets

   $ 277,265      $ 224,125      $ 276,068      $ 220,502   

Total expense ratio (3) (4)

     9.00     9.21     8.84     10.56

Operating expenses to average net assets (4)

     5.82        5.50        5.79        6.75   

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

     7.48        7.82        6.04        5.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $0.00 and $0.00 of undistributed net investment income per share and $0.00 and $0.00 of undistributed net realized gains per share as of September 30, 2014 and 2013.
(2) Total return is calculated by dividing the change in market value of a share of common stock during the period, assuming the reinvestment of distributions on the payment date, by the per share market value at the beginning of the period.
(3) Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average net assets.
(4) MSC has assumed certain of the Company’s servicing obligations, and as a result, servicing fee income of $1,541 and $1,507, and operating expenses of $1,459 and $1,753, which formerly were the Company’s were now MSC’s for the three months ended September 30, 2014 and 2013, and were $4,435 and $4,483 of servicing fee income, and $4,354 and $5,472 of operating expenses for the comparable nine months. Excluding the impact of the MSC amounts, the total expense ratio, operating expense ratio, and net investment income ratio would have been 11%, 7.90%, and 7.60% in the 2014 quarter, 12%, 8.61%, and 7.38% in the 2013 quarter, 11%, 7.90%, and 6.08% in the 2014 nine months, and 14%, 10%, and 4.63% in the 2013 nine months.

(9) RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2014, the FASB issued Accounting Standards Update (ASU) 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40)”. ASU 2014-15 provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of a company’s ability to continue as a going concern within one year of the date the financial statements are issued. The company must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. As the update impacts disclosures only, it will have no impact on the Company’s financial condition or results of operations.

In August 2014, the FASB issued ASU 2014-14, “Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40)”. The update requires that certain government-guaranteed mortgage loans, including those guaranteed by the FHA, be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure of loans that meet these criteria, a separate receivable should be recorded based on the amount of the loan balance expected to be recovered from the guarantor. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company does not make government-guaranteed mortgage loans, and as a result believes the adoption of the standard will have no impact on its financial condition or results of operations.

In August 2014, the FASB issued ASU 2014-13, “Consolidation – (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing”. ASU 2014-13 provides an alternative to Topic 820 for measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity to eliminate any differences between their respective fair values. In the event a reporting entity does not elect to utilize the measurement alternative, the update clarifies

 

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that the fair value of the financial assets and liabilities of the consolidated collateralized financing entity should be measured using the requirements of Topic 820 and any differences should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income (loss). This update is effective for periods beginning after December 15, 2015. As a RIC, the Company already follows Topic 820 in its fair valuation processes, and as a result does not believe this update will have an impact on its financial condition or results of operations.

In June 2014, FASB issued Accounting Standards Update (ASU) 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite service Period (a consensus of the FASB Emerging Issues Task Force).” The update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and would be accounted for under existing guidance in Topic 718. The update is effective for periods beginning after December 15, 2015. The Company does not believe the adoption of the standard will have a material impact on its financial condition or results of operations.

In June 2014, FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Purchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU 2014 changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The update also requires new disclosures about transfers that are accounted for as sales in transactions that are economically similar to repurchase agreements and increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The update is effective for periods beginning after December 15, 2014. The Company does not engage in these types of transactions, and as a result, does not believe that the adoption of the standard will have any impact on its financial condition or results of operations.

In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. The update is effective for annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its financial statements and related disclosures.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 changes the requirements for reporting discontinued operations, requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the statement of financial position, and requires additional disclosures about discontinued operations. Additionally, the update expands the disclosures about an entity’s significant continuing involvement with a discontinued operation. The update is to be applied prospectively to annual periods beginning on or after December 15, 2014. The Company does not believe the adoption of the standard will have any impact on its financial condition or results of operations.

(10) 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 since 1996 is also of counsel in the Company’s primary law firm. Amounts paid to the law firm were $19,000 and $2,000 for the 2014 and 2013 third quarters, and were $119,000 and $278,000 for the comparable nine months.

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 $162,000 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 September 30, 2014, December 31, 2013, and September 30, 2013, MSC serviced $428,931,000, $402,801,000, and $413,035,000 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, $1,541,000 and $4,435,000 of servicing fee income was earned by MSC in the 2014 third quarter and nine months, and $1,507,000 and $4,483,000 was earned in the comparable 2013 periods.

 

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(Dollars in thousands)

   2014      2013      2014      2013  

Reimbursement of operating expenses

   $ 111       $ 90       $ 341       $ 243   

Loan origination fees

     59         88         222         248   

Servicing fees

     4         4         11         14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

   $ 174       $ 182       $ 574       $ 505   
  

 

 

    

 

 

    

 

 

    

 

 

 

(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) 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 September 30, 2014 and December 31, 2013, 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.

 

     September 30, 2014      December 31, 2013  

(Dollars in thousands)

   Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

           

Investments

   $ 503,294       $ 503,294       $ 473,157       $ 473,157   

Cash (1)

     58,257         58,257         52,172         52,172   

Accrued interest receivable (2)

     942         942         907         907   

Financial liabilities

           

Funds borrowed (2)

     335,809         335,809         314,958         314,958   

Accrued interest payable (2)

     1,303         1,303         1,124         1,124   

 

(1) Categorized as level 1 within the fair value hierarchy.
(2) Categorized as level 3 within the fair value hierarchy.

(12) 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 the Company’s valuation methodology which is unchanged during 2014.

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). The Company’s 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).

 

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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, 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.

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 almost always 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). 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. These portfolios are generally at very low loan to collateral value ratios, and as a result, are generally not highly sensitive to changes in collateral values as only a very significant downward movement would have an impact on the Company’s valuation analysis, potentially resulting in a significantly lower fair market 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 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 on an annual basis. The Company determines whether any factors give rise to a valuation different than recorded book

 

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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 has determined that Medallion Bank has little value beyond its recorded book value. As a result of this valuation process, the Company uses the actual results of operations as the best estimate of changes in fair value, and records the results as a component of unrealized appreciation (depreciation) on investments.

Investments in controlled subsidiaries, other than Medallion Bank, and equity investments 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 and equity 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.

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 September 30, 2014 and December 31, 2013.

 

2014 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —         $ —         $ 303,502       $ 303,502   

Commercial loans

     —           —           64,256         64,256   

Investment in Medallion Bank and other controlled subsidiaries

     —           —           127,708         127,708   

Equity investments

     214         —           7,614         7,828   

Foreclosed properties

     —           48,739         —           48,739   

Other assets

     —           —           392         392   

2013 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —         $ —         $ 297,861       $ 297,861   

Commercial loans

     —           —           60,168         60,168   

Investment in Medallion Bank and other controlled subsidiaries

     —           —           108,623         108,623   

Equity investments

     280         —           6,225         6,505   

Foreclosed properties

     —           50,403         —           50,403   

Other assets

     —           9,584         392         9,976   

Included in level 3 investments in Medallion Bank and other controlled subsidiaries is the investment in Medallion Bank, MSC, and investments in a start-up business engaged in media-buying consulting. 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 quarters and nine months ended September 30, 2014 and 2013.

 

(Dollars in thousands)

   Medallion Loans     Commercial Loans     Investment in Medallion
Bank & Other Controlled
Subs
    Equity Investments      Other Assets  

June 30, 2014

   $ 318,277      $ 58,702      $ 123,456      $ 7,002       $ 392   

Gains (losses) included in earnings

     —          (1,266     7,382        62         —     

Purchases, investments, and issuances

     21,180        9,395        750        550         —     

Sales, maturities, settlements, and distributions

     (35,955     (2,575     (3,880     —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2014

   $ 303,502      $ 64,256      $ 127,708      $ 7,614       $ 392   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Amounts related to held assets(1)

   $ —        ($ 1,073   $ 7,382      $ 62       $ —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2014.

 

(Dollars in thousands)

   Medallion Loans     Commercial Loans     Investment in Medallion
Bank & Other Controlled
Subs
    Equity Investments     Other Assets  

December 31, 2013

   $ 297,861      $ 60,168      $ 108,623      $ 6,225      $ 392   

Gains (losses) included in earnings

     —          (1,494     19,115        1,128        —     

Purchases, investments, and issuances

     81,586        12,562        11,982        550        —     

Sales, maturities, settlements, and distributions

     (75,945     (6,980     (12,012     (289     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2014

   $ 303,502      $ 64,256      $ 127,708      $ 7,614      $ 392   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   $ —        ($ 1,456   $ 19,115      $ 1,078      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2014.

 

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(Dollars in thousands)

   Medallion Loans     Commercial Loans     Investment in Medallion
Bank & Other Controlled
Subs
    Equity Investments     Other Assets  

June 30, 2013

   $ 294,029      $ 59,229      $ 100,343      $ 6,471      $ —     

Gains (losses) included in earnings

     —          279        4,684        (478     —     

Purchases, investments, and issuances

     44,296        7,766        1,011        104        —     

Sales, maturities, settlements, and distributions

     (46,780     (4,213     (3,661     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2013

   $ 291,545      $ 63,061      $ 102,377      $ 6,097      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   $ —        $ 37      $ 4,684      ($ 478   $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2013.

 

(Dollars in thousands)

   Medallion Loans     Commercial Loans     Investment in Medallion
Bank & Other Controlled
Subs
    Equity Investments     Other Assets  

December 31, 2012

   $ 294,388      $ 56,919      $ 99,083      $ 4,389      $ —     

Gains (losses) included in earnings

     40        204        12,090        266        —     

Purchases, investments, and issuances

     168,210        15,082        2,686        1,604        —     

Sales, maturities, settlements, and distributions

     (171,093     (10,514     (10,112     (162     —     

Transfers in (out) (1)

     —          1,370        (1,370     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2013

   $ 291,545      $ 63,061      $ 102,377      $ 6,097      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(2)

   $ —        ($ 79   $ 12,090      $ 266      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During the nine months ended September 30, 2013 $1,370 of investments in Medallion Fine Art, Inc. was reclassified as a loan.
(2) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2013.

Significant Unobservable Inputs

ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy. The tables below are not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of September 30, 2014 and December 31, 2013 were as follows.

 

(Dollars in thousands)

   Fair Value
at 9/30/14
    

Valuation Techniques

  

Unobservable Inputs

   Range
(Weighted Average)
 

Medallion Loans

   $ 303,502       Precedent market transactions    Adequacy of collateral (loan to value)      0% - 96% (40%)   
  

 

 

          

Commercial Loans - Asset-Based

     2,928       Borrower collateral analysis    Adequacy of collateral (loan to value)      0% - 78% (42%) (1)   
  

 

 

          

Commercial Loans – Mezzanine and Other

     61,328       Borrower financial analysis    Financial condition and operating performance of the borrower      N/A   
         Portfolio yields      3.00% - 17.00% (11.75%)   
  

 

 

          

Investment in Medallion Bank

     120,106       Investee book value and equity pickup    Financial condition and operating performance of the investee      N/A   
  

 

 

          

Investment in Other Controlled Subsidiaries

     4,400       Market comparables    Valuation indicated by private company offers      N/A   
     3,202       Investee book value and equity pickup    Collateral support      N/A   
         Financial condition and operating performance of the investee      N/A   
  

 

 

          

Equity Investments

     2,599       Investee book value    Valuation indicated by investee filings      N/A   
     1,283       Market comparables    Discount for lack of marketability      10% (10%)   
     3,732       Investee financial analysis    Financial condition and operating performance of the borrower      N/A   
         Collateral support      N/A   
  

 

 

          

Other Assets

     392       Borrower collateral analysis    Adequacy of collateral (loan to value)      0%   
  

 

 

          

 

(1) As of September 30, 2014, the Company had one asset based loan in the amount of $205 which had $0 collateral.

 

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(Dollars in thousands)

   Fair Value
at 12/31/13
    

Valuation Techniques

  

Unobservable Inputs

   Range
(Weighted  Average)
 

Medallion Loans

   $ 297,861       Precedent market transactions    Adequacy of collateral (loan to value)      0% - 89% (39%)   
  

 

 

          

Commercial Loans - Asset-Based

     7,476       Borrower collateral analysis    Adequacy of collateral (loan to value)      6% - 86% (63%) (1)   
  

 

 

          

Commercial Loans – Mezzanine and Other

     52,692       Borrower financial analysis    Financial condition and operating performance of the borrower      N/A   
         Portfolio yields     
 
3.00% -
 17.00% (11.29%)
 
  
  

 

 

          

Investment in Medallion Bank

     101,478       Investee book value and equity pickup    Financial condition and operating performance of the investee      N/A   
  

 

 

          

Investment in Other Controlled Subsidiaries

     3,750       Market comparables    Valuation indicated by private company offers      N/A   
     3,395       Investee book value and equity pickup    Collateral support      N/A   
         Financial condition and operating performance of the investee      N/A   
  

 

 

          

Equity Investments

     1,982       Investee book value    Valuation indicated by investee filings      N/A   
     1,299       Market comparables    Discount for lack of marketability      10% (10%)   
     2,944       Investee financial analysis    Financial condition and operating performance of the borrower      N/A   
         Collateral support      N/A   
  

 

 

          

Other Assets

     392       Borrower collateral analysis    Adequacy of collateral (loan to value)      0%   
  

 

 

          

 

(1) As of December 31, 2013, the Company had one asset based loan in the amount of $205 which had $0 collateral.

(13) INVESTMENTS OTHER THAN SECURITIES

The following table presents the Company’s investments other than securities as of September 30, 2014 and December 31, 2013.

 

Investment Type (Dollars in thousands)

   Number of
Investments
    Investment
Cost
     Value as of
9/30/14
    Value as of
12/31/13
 

City of Chicago Taxicab Medallions

     154  (1)    $ 8,411       $ 47,355  (2)    $ 48,972  (2) 

City of Chicago Taxicab Medallions (handicap accessible)

     (1)      278         1,384  (3)      1,431  (3) 
    

 

 

    

 

 

   

 

 

 

Total Foreclosed Properties

     $ 8,689       $ 48,739      $ 50,403   
    

 

 

    

 

 

   

 

 

 

 

(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 $44,088, $0, and $44,088 as of September 30, 2014, and was $45,284, $0, and $45,284 as of December 31, 2013. The aggregate cost for Federal income tax purposes was $3,267 at September 30, 2014 and $3,688 at December 31, 2013.

(3) 

Gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation for Federal income tax purposes was $1,275, $0, and $1,275 as of September 30, 2014 and was $1,309, $0, and $1,309 as of December 31, 2013. The aggregate cost for Federal income tax purposes was $108 at September 30, 2014 and $122 at December 31, 2013.

(14) SUBSEQUENT EVENTS

We have evaluated subsequent events that have occurred through the date of financial statement issuance.

On October 30, 2014, the Company’s board of directors declared a $0.24 per share common stock distribution, payable on November 21, 2014 to shareholders of record on November 13, 2014.

 

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Medallion Financial Corp.

Consolidated Summary Schedule of Investments

September 30, 2014

 

(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 2014
Acquisitions (5)
     Cost  (4)      Fair
Value
 

Medallion Loans

                     

New York

            366        74     3.61   $ 66,212       $ 204,662       $ 204,758   
 

Real Cab Corp

  Term Loan