10-Q 1 d286768d10q.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)

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

For the Quarterly Period Ended September 30, 2016

OR

 

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

For the transition period from                      to                     

Commission file number 814-00188

 

 

MEDALLION FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   04-3291176
(State of Incorporation)  

(IRS Employer

Identification No.)

437 MADISON AVENUE, 38th Floor,

NEW YORK, NEW YORK 10022

(Address of principal executive offices) (Zip Code)

(212) 328-2100

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large Accelerated Filer      Accelerated Filer  
Non-Accelerated Filer      Smaller Reporting Company  

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

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of November 8, 2016 was 24,183,065.

 

 

 


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

     46   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     67   

ITEM 4. CONTROLS AND PROCEDURES

     67   

PART II—OTHER INFORMATION

     68   

ITEM 1. LEGAL PROCEEDINGS

     68   

ITEM 1A. RISK FACTORS

     68   

ITEM 6. EXHIBITS

     82   

SIGNATURES

     83   

CERTIFICATIONS

  

 

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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 4%, and our commercial loan portfolio at a compound annual growth rate of 3% (8% and 4% on a managed basis when combined with Medallion Bank). Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 18%. 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 $1,634,000,000 as of September 30, 2016, and $1,655,000,000 and $1,621,000,000 as of December 31, 2015 and September 30, 2015, and have grown at a compound annual growth rate of 11% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid/declared distributions in excess of $263,060,000 or $14.66 per share.

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

 

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

 

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

 

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

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

In addition, we conduct business through a wholly-owned portfolio company, Medallion Bank, a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans, which are then serviced by MSC. However, the FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, or $518,262,000 as of September 30, 2016, well in excess of the $298,869,000 currently on the books of Medallion Bank. 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.

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

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, 2016.

Our consolidated balance sheet as of September 30, 2016, and the related consolidated statements of operations, changes in net assets, and cash flows for the three and nine months ended September 30, 2016 and 2015 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 September 30, 2016 and 2015, 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, 2015.

 

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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)

   2016     2015     2016     2015  

Interest income on investments

   $ 4,290      $ 4,633      $ 13,676      $ 14,859   

Dividend income from controlled subsidiaries

     —         5,000        3,000        15,889   

Interest income from affiliated investments

     815        409        2,153        805   

Interest income from controlled subsidiaries

     99        258        504        681   

Medallion lease income

     53        351        481        1,059   

Dividend income from affiliated investments

     —         —          201        —     

Dividends and interest income on short-term investments

     12        14        76        41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     5,269        10,665        20,091        33,334   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense(1)

     3,373        2,402        9,273        6,957   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,896        8,263        10,818        26,377   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     104        121        165        287   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and benefits

     3,039        2,916        8,816        9,234   

Professional fees

     575        374        1,341        1,153   

Occupancy expense

     294        221        702        669   

Other operating expenses (2)

     698        637        2,093        2,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,606        4,148        12,952        13,194   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (2,606     4,236        (1,969     13,470   

Income tax (provision) benefit

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss) after income taxes

     (2,606     4,236        (1,969     13,470   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments(4)

     2,499        353        (7     8,576   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     25,913        6,648        44,221        13,288   

Net change in unrealized depreciation on investments other than securities

     (14,107     (1,570     (18,862     (9,621

Net change in unrealized appreciation (depreciation) on investments

     (6,656     (2,355     (6,925     (3,247
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on investments

     5,150        2,723        18,434        420   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized/unrealized gains on investments

     7,649        3,076        18,427        8,996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 5,043      $ 7,312      $ 16,458      $ 22,466   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations per common share

        

Basic

   $ 0.21      $ 0.30      $ 0.68      $ 0.92   

Diluted

     0.21        0.30        0.68        0.92   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per share

   $ 0.05      $ 0.25      $ 0.35      $ 0.75   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

        

Basic

     24,136,807        24,290,502        24,173,898        24,387,726   

Diluted

     24,184,518        24,340,913        24,227,068        24,461,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Average borrowings outstanding were $363,943 and $390,471, and the related average borrowing costs were 3.69% and 3.17% for the 2016 third quarter and nine months, and were $365,064, $351,838, 2.61%, and 2.64% for the comparable 2015 periods.
(2) See Note 7 for the components of other operating expenses.
(3) Includes $394 and $980 of net revenues received from Medallion Bank for the three and nine months ended September 30, 2016, and $314 and $750 for the comparable 2015 periods, primarily for servicing fees, loan origination fees, and expense reimbursements. See Notes 3 and 10 for additional information.
(4) There were no net losses on investment securities of affiliated issuers for the three and nine months ended September 30, 2016 and 2015.

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, 2016     December 31, 2015  

Assets

    

Medallion loans, at fair value

   $ 288,257      $ 308,408   

Commercial loans, at fair value

     51,932        58,051   

Commercial loans to affiliated entities, at fair value

     26,210        15,496   

Commercial loans to controlled subsidiaries, at fair value

     2,968        8,348   

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

     208,098        159,913   

Equity investments, at fair value

     5,054        4,447   

Equity investments in affiliated entities, at fair value

     3,109        2,412   

Investment securities, at fair value

     —          49,884   
  

 

 

   

 

 

 

Net investments ($235,017 at September 30, 2016 and $290,151 at December 31, 2015 pledged as collateral under borrowing arrangements)

     585,628        606,959   

Cash and cash equivalents ($7,838 at September 30, 2016 and $7,831 at December 31, 2015 restricted as to use by lender(1))

     24,708        30,912   

Accrued interest receivable

     697        1,003   

Fixed assets, net

     374        198   

Investments other than securities(2)

     19,020        37,882   

Goodwill, net

     5,099        5,099   

Other assets, net(3)

     5,565        6,997   
  

 

 

   

 

 

 

Total assets

   $ 641,091      $ 689,050   
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued expenses

   $ 6,184      $ 5,120   

Accrued interest payable

     1,928        1,302   

Funds borrowed

     352,196        404,540   
  

 

 

   

 

 

 

Total liabilities

     360,308        410,962   
  

 

 

   

 

 

 

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 – 26,934,604 shares at September 30, 2016 and 26,936,762 shares at December 31, 2015 issued)

     269        269   

Treasury stock at cost (2,751,243 shares at September 30, 2016 and 2,590,069 shares at December 31, 2015)

     (24,232     (23,396

Capital in excess of par value

     272,790        272,349   

Accumulated undistributed net investment loss

     (21,553     (15,617

Accumulated undistributed net realized gains on investments

     —         —    

Net unrealized appreciation on investments

     53,509        44,483   
  

 

 

   

 

 

 

Total shareholders’ equity (net assets)

     280,783        278,088   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 641,091      $ 689,050   
  

 

 

   

 

 

 

Number of common shares outstanding

     24,183,361        24,346,693   

Net asset value per share

   $ 11.61      $ 11.42   
  

 

 

   

 

 

 

 

(1) See Note 2 for additional information.
(2) See Note 13 for additional information.
(3) Includes $0 and $3,000 of dividends receivable from Medallion Bank at September 30, 2016 and December 31, 2015.

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)

   2016     2015     2016     2015  

Net investment income (loss) after income taxes

   $ (2,606   $ 4,236      $ (1,969   $ 13,470   

Net realized gains (losses) on investments

     2,499        353        (7     8,576   

Net unrealized appreciation on investments

     5,150        2,723        18,434        420   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     5,043        7,312        16,458        22,466   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income, net

     (5     (3,705     (57     (11,601

Return of capital, net

     (1,206     (2,442     (13,311     (6,684

Realized gains from investment transactions, net

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to shareholders (1)

     (1,211     (6,147     (13,368     (18,285
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock – based compensation expense

     137        371        422        948   

Exercise of stock options

     —         —         19        281   

Capitalized stock issuance costs

     —         —         —         —    

Treasury stock acquired

     (837     (1,602     (837     (3,212
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share transactions

     (700     (1,231     (396     (1,983

Other, distributions not paid on forfeited restricted stock grants

     —          (1     1       49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in net assets

     3,132        (67     2,695        2,247   

Net assets at the beginning of the period

     277,651        276,984        278,088        274,670   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at the end of the period(2)

   $ 280,783      $ 276,917      $ 280,783      $ 276,917   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share activity

        

Common stock issued, beginning of period

     26,928,313        26,937,519        26,936,762        26,797,499   

Exercise of stock options

     —         —         2,100        30,449   

Issuance (forfeiture) of restricted stock, net

     6,291        (361     (4,258     109,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issued, end of period

     26,934,604        26,937,158        26,934,604        26,937,158   
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, beginning of period

     (2,590,069     (2,346,672     (2,590,069     (2,176,876

Treasury stock acquired

     (161,174     (243,397     (161,174     (413,193
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, end of period

     (2,751,243     (2,590,069     (2,751,243     (2,590,069
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock outstanding

     24,183,361        24,347,089        24,183,361        24,347,089   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Distributions declared were $0.05 and $0.35 per share for the 2016 third quarter and nine months, and were $0.25 and $0.75 for the comparable 2015 periods.
(2) Includes $0 and $0 of undistributed net investment income, $0 and $0 of undistributed net realized gains on investments, and $0 and $1,163 of capital loss carryforwards at September 30, 2016 and 2015.

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)

   2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 16,458      $ 22,466   

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

    

Investments originated(1)

     (316,405     (72,535

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

     379,061        41,920   

Capital returned by Medallion Bank and other controlled subsidiaries, net

     (3,964     (6,583

Net cash received on disposition of other controlled subsidiaries

     —         11,969   

Depreciation and amortization

     346        312   

Accretion of origination fees, net

     (71     (63

Net change in unrealized depreciation on investments

     6,925        3,247   

Net change in unrealized depreciation on investment other than securities

     18,862        9,621   

Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries

     (44,221     (13,288

Net realized (gains) losses on investments

     7        (8,576

Stock-based compensation expense

     422        948   

Decrease in accrued interest receivable

     306        38   

(Increase) decrease in other assets, net

     871        (5,207

Increase (decrease) in accounts payable and accrued expenses

     1,103        (1,445

Increase (decrease) in accrued interest payable

     626        (876
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     60,326        (18,052
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from funds borrowed

     294,650        74,943   

Repayments of funds borrowed

     (346,994     (45,810

Proceeds from exercise of stock options

     19        281   

Purchase of treasury stock at cost

     (837 )     (3,212

Payments of declared distributions

     (13,368     (18,285
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     (66,530     7,917   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (6,204     (10,135

Cash and cash equivalents, beginning of period

     30,912        47,083   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 24,708      $ 36,948   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION

    

Cash paid during the period for interest

   $ 8,387      $ 7,628   

Cash paid during the period for income taxes

     —         —    
  

 

 

   

 

 

 

 

(1) $280,563 and $29,963 of originated investments, and $330,466 and $0 of maturities or proceeds from sales related to the investment securities portfolio for the nine months ended September 30, 2016 and 2015.

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, 2016

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

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

A wholly-owned portfolio investment, Medallion Bank, a Federal Deposit Insurance Corporation (FDIC) insured industrial bank, originates medallion loans, commercial loans, and consumer loans, raises deposits, and conducts other banking activities (see Note 3). Medallion Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and undergoes examinations by those agencies. Medallion Bank is not an investment company, and therefore, is not consolidated with the Company, but instead is treated as a portfolio investment. It was initially formed for the primary purpose of originating commercial loans in three categories: 1) loans to finance the purchase of taxicab medallions, 2) asset-based commercial loans, and 3) SBA 7(a) loans. The loans are marketed and serviced by Medallion Bank’s affiliates who have extensive prior experience in these asset groups. Subsequent to its formation, Medallion Bank began originating consumer loans to finance the purchases of RVs, boats, and other related items, and to finance small scale home improvements.

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

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

MFC established a wholly-owned subsidiary, Taxi Medallion Loan Trust III (Trust III), for the purpose of owning medallion loans originated by MFC or others. Trust III is a separate legal and corporate entity with its own creditors who, in any liquidation of Trust III, will be entitled to be satisfied out of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders. The assets of Trust III, aggregating $130,465,000 at September 30, 2016, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC.

The Company established a wholly-owned subsidiary, Medallion Financing Trust I (Fin Trust) for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,148,000 at September 30, 2016, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.

MFC through several wholly-owned subsidiaries (together, Medallion Chicago), purchased $8,689,000 of City of Chicago taxicab medallions out of foreclosure, which are leased to fleet operators while being held for sale. The 159 medallions are carried at a fair value of $19,020,000 on the consolidated balance sheet at September 30, 2016, compared to $37,882,000 at December 31, 2015 and September 30, 2015, and are considered non-qualifying assets under the 1940 Act.

(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 exceed the federally insured limits, and includes $500,000 and $1,500,000 related to compensating balance requirements of regional banking institutions, and $7,838,000 and $7,831,000 pledged to a lender of an affiliate as of September 30, 2016 and December 31, 2015.

Fair Value of Assets and Liabilities

The Company follows FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, (FASB ASC 820), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e. a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entity’s own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 2, 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 37% and 35% of the investment portfolio at September 30, 2016 and December 31, 2015, are recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of investments that have no ready market are determined in good faith by the Board of Directors, based upon the financial condition and operating performance of the underlying investee companies as well as general market trends for businesses in the same industry. Included in equity investments were marketable securities of $491,000 and $570,000 at September 30, 2016 and December 31, 2015, and non-marketable securities of $7,672,000 and $6,289,000 in the comparable periods. The $208,098,000 and $159,913,000 related to portfolio investments in controlled subsidiaries at September 30, 2016 and December 31, 2015 were all non-marketable in each period. Because of the inherent uncertainty of valuations, the Board of Directors’ estimates of the values of the investments may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.

The Company’s investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. The Company conducts a thorough valuation analysis as described previously, and also receives an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank on at least an annual basis. The Company’s analysis includes factors such as various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013 and the lack of any new charter issuances since the moratorium’s expiration. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the second quarter of 2015, the Company first became aware of external interest in Medallion Bank and its portfolio’s assets at values in excess of their book value. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016. In addition, in the third quarter of 2016 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $28,600,000 was recorded in 2016. See Note 3 for additional information about Medallion Bank.

 

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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 49% and 51% of the Company’s investment portfolio at September 30, 2016 and December 31, 2015 had arisen in connection with the financing of taxicab medallions, taxicabs, and related assets, of which 69% were in New York City at September 30, 2016 and December 31, 2015. These loans are secured by the medallions, taxicabs, and related assets, and are personally guaranteed by the borrowers, or in the case of corporations, are generally guaranteed personally by the owners. A portion of the Company’s portfolio (14% at September 30, 2016 and December 31, 2015) represents loans to various commercial enterprises in a wide variety of industries, including manufacturing, retail trade, information, recreation, and various other industries. Approximately 47% of these loans are made primarily in the Midwest and 14% in 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 36%, 1%, and 0% at September 30, 2016, and were 26%, 1%, and 8% at December 31, 2015.

On a managed basis, which includes the investments of Medallion Bank after eliminating the Company’s investment in Medallion Bank, medallion loans were 40% and 43% at September 30, 2016 and December 31, 2015 (74% in New York City), commercial loans were 6% and 8%, and 47% and 41% were consumer loans in all 50 states collateralized by recreational vehicles, boats, motorcycles, trailers, and home improvements. Investment securities were 3% and 6% at September 30, 2016 and December 31, 2015, and equity investments (including investments in controlled subsidiaries) were 4% and 2%.

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, 2016 and December 31, 2015, net loan origination costs were $208,000 and $326,000. Net (accretion) amortization to income for the three months ended September 30, 2016 and 2015 was ($66,000) and $2,000, and was ($71,000) and ($63,000) for the comparable nine month 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, 2016 and December 31, 2015, there were no premiums or discounts on investment securities, and their related income accretion or amortization was immaterial for 2016 and 2015.

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, in most cases, if the 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, 2016, December 31, 2015, and September 30, 2015, total nonaccrual loans were $65,656,000, $16,873,000, and $15,377,000, and represented 17%, 4%, and 4% of the gross medallion and commercial loan portfolio at each period end, and were primarily concentrated in the taxi medallion portfolio at September 30, 2016 and December 31, 2015, and were concentrated in the secured mezzanine portfolio at September 30, 2015. The amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $10,344,000, $8,306,000, and $8,302,000 as of September 30, 2016, December 31, 2015, and September 30, 2015, of which $1,220,000 and $491,000 would have been recognized in the quarters ended September 30, 2016 and 2015, and $2,230,000 and $1,236,000 would have been recognized in the comparable nine months.

Loan Sales and Servicing Fee Receivable

The Company accounts for its sales of loans in accordance with FASB ASC 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 $355,756,000 and $406,460,000 at September 30, 2016 and December 31, 2015, and included $329,304,000 and $382,919,000 of loans serviced for Medallion Bank. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860, most of which relates to servicing assets held by Medallion Bank, and determined that no material servicing asset or liability exists as of September 30, 2016 and December 31, 2015. The Company has assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed to and collected from Medallion Bank by MSC.

 

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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 $53,509,000, $44,483,000, and $42,083,000 as of September 30, 2016, December 31, 2015, and September 30, 2015. The Company’s investment in Medallion Bank, a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. The Company conducts a thorough valuation analysis as described previously, and determines whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional marketplace restrictions, such as the ability to transfer industrial bank charters. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In the second quarter of 2015, the Company first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the third quarter of 2016 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $28,600,000 was recorded in 2016 as a component of unrealized appreciation (depreciation) on investments, in addition to Medallion Bank’s actual results of operations for the quarter. See Note 3 for additional information about Medallion Bank.

The following tables set forth the changes in the Company’s unrealized appreciation (depreciation) on investments for the 2016 and 2015 quarters shown below.

 

(Dollars in thousands)

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

Balance December 31, 2015

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

Net change in unrealized

               

Appreciation on investments

     —         —         6,115         (7     —         (1,585     4,523   

Depreciation on investments

     (2,359     173        305         12        (47     —         (1,916

Reversal of unrealized appreciation (depreciation) related to realized

               

Gains on investments

     —         —         —          —         12        —         12   

Losses on investments

     —         348        —          —         —         —         348   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2016

     (5,797     (1,718     25,060         2,587        (53     27,371        47,450   

Net change in unrealized

               

Appreciation on investments

     —         —         2,213         1,538        7        (3,170     588   

Depreciation on investments

     (2,758     245        —          (8     52        —         (2,469

Reversal of unrealized appreciation (depreciation) related to realized

               

Gains on investments

     —         —         —          —         —         —         —    

Losses on investments

     2,346        195        —          —         —         —         2,541   

Other

     —         —         —          —         (6     —         (6
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2016

     (6,209     (1,278     27,273         4,117        —         24,201        48,104   

Net change in unrealized

               

Appreciation on investments

     —         —         26,169         (111     —         (14,107     11,951   

Depreciation on investments

     (6,051     (65     —           (3     —         —         (6,119

Reversal of unrealized appreciation (depreciation) related to realized

               

Gains on investments

     —         —         —           (600 )     —         —         (600

Losses on investments

     173       —         —          —         —         —         173  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2016

   ($ 12,087   ($ 1,343   $ 53,442       $ 3,403      $ —       $ 10,094      $ 53,509   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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(Dollars in thousands)

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

Balance December 31, 2014

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

Net change in unrealized

            

Appreciation on investments

     —         —         1,087        (244     (3,439     (2,596

Depreciation on investments

     (159     514        (76     19        —         298   

Reversal of unrealized appreciation (depreciation) related to realized

            

Gains on investments

     —         —         (4,809     —         —         (4,809

Losses on investments

     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2015

     (159     (2,435     1,900        1,383        35,206        35,895   

Net change in unrealized

            

Appreciation on investments

     —         —         10,600        (158     (4,612     5,830   

Depreciation on investments

     (324     (68     —         (518     (56     (966

Reversal of unrealized appreciation (depreciation) related to realized

            

Gains on investments

     —         —         —         —         —         —    

Losses on investments

     —         102        —         —         —         102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2015

     (483     (2,401     12,500        707        30,538        40,861   

Net change in unrealized

            

Appreciation on investments

     —         —         5,660        (314     (1,570     3,776   

Depreciation on investments

     (2,367     (377     —         4        (12     (2,752

Reversal of unrealized appreciation (depreciation) related to realized

            

Gains on investments

     —         —         —         —         —         —    

Losses on investments

     130        68        —         —         —         198   

Other (1)

     —         —         (967     967        —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2015

   ($ 2,720   ($ 2,710   $ 17,193      $ 1,364      $ 28,956      $ 42,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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, 2016 and 2015.

 

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

(Dollars in thousands)

   2016      2015      2016      2015  

Net change in unrealized appreciation (depreciation) on investments

           

Unrealized appreciation

   ($ 110    ($ 313    $ 1,429       ($ 639

Unrealized depreciation

     (6,119      (2,228      (10,829      (2,840

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

     25,913         6,648         44,221         18,097   

Realized gains

     (600 )      —          (588      (4,809

Realized losses

     173         198         3,063         300   

Net unrealized gains (losses) on investments other than securities

     (14,107      (1,582      (18,862      (9,689
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,150       $ 2,723       $ 18,434       $ 420   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains (losses) on investments

           

Realized gains

   $ —        $ —        $ —         $ 4,809   

Realized losses

     (173      (198      (3,063      (300

Other gains

     2,904        615         3,308         4,198   

Direct recoveries (chargeoffs)

     (232      (64      (252      (131

Realized losses on investments other than securities

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,499       $ 353       ($ 7    $ 8,576   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table provides additional information on attributes of the nonperforming loan portfolio as of September 30, 2016, December 31, 2015, and September 30, 2015.

 

(Dollars in thousands)

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

September 30, 2016

        

Medallion(3)

   $ 61,508       $ 62,001       $ 63,490   

Commercial(3)

     4,148         11,127         4,024   

December 31, 2015

        

Medallion(3)

   $ 12,973       $ 13,051       $ 13,010   

Commercial (3)

     3,900         10,401         4,293   

September 30, 2015

        

Medallion(3)

   $ 6,414       $ 6,442       $ 6,428   

Commercial(3)

     8,963         15,665         9,223   

 

(1) As of September 30, 2016, December 31, 2015, and September 30, 2015, $13,430, $5,621, and $5,291 of unrealized depreciation had been recorded as a valuation allowance on these loans.
(2) Interest income of $279 and $1,220 was recognized in the three and nine months ended September 30, 2016, compared to $3 and $122 for the comparable 2015 periods on these loans.
(3) Included in the unpaid principal balance is unearned paid in-kind interest on nonaccrual loans of $7,472, $6,579, and $6,729 which is included in the nonaccrual disclosures in the section titled “Investment Transactions and Income Recognition” on page 10 as of September 30, 2016, December 31, 2015, and September 30, 2015.

The following tables show the aging of medallion and commercial loans as of September 30, 2016 and December 31, 2015.

 

September 30, 2016    Days Past Due                    Recorded
Investment >
90 Days and
 

(Dollars in thousands)

   31—60      61—90      91 +      Total      Current      Total      Accruing  

Medallion loans

   $ 16,118       $ 11,491       $ 58,267       $ 85,876       $ 214,141       $ 300,017       $ 3,089   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     —          —          1,390         1,390         72,112         73,502         —    

Asset-based receivable

     —          —          —          —          —          —          —    

Other secured commercial

     194         255        182         631         8,439         9,070         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     194         255        1,572         2,021         80,551         82,572         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,312       $ 11,746       $ 59,839       $ 87,897       $ 294,692       $ 382,589       $ 3,089   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015    Days Past Due                           Recorded
Investment >
90 Days and
 

(Dollars in thousands)

   31—60      61—90      91 +      Total      Current      Total      Accruing  

Medallion loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

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

Asset-based receivable

     —          —          —          —          3,750         3,750         —    

Other secured commercial

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. In April 2013 the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount was divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company’s liquidation. In May 2013, the bankruptcy court presiding over the third party finance company’s case entered an order converting the involuntary chapter 7 case to a chapter 11 case. The Company and Medallion Bank have placed these loans on nonaccrual, and reversed interest income. In addition, the Company and Medallion Bank have established valuation allowances against the outstanding balances. On May 31, 2013, the Company and Medallion Bank commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that the Company’s and Medallion Bank’s loan participations are true participations and not

 

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subject to the bankruptcy estate or to the bank lender’s security interest in the third party finance company’s assets. The third party finance company and bank lenders are contesting the Company’s and Medallion Bank’s position. In April 2014, the Company and Medallion Bank received a decision from the court granting summary judgment in their favor with respect to the issue of whether the Company’s and Medallion Bank’s loan participations are true participations. In March 2015, the Company and Medallion Bank received a decision from the court finding that the bank lenders generally held a first lien on the Company’s and Medallion Bank’s loan participations subject to, among other things, defenses still pending prosecution by the parties and adjudication by the court. The Company and Medallion Bank are appealing the decision. The remaining issues are still being litigated. Although the Company and Medallion Bank believe the claims raised by the third party finance company and the bank lenders are without merit and will vigorously defend against them, the Company and Medallion Bank cannot at this time predict the outcome of this litigation or determine their potential exposure. At September 30, 2016, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow pending resolution of the bankruptcy proceedings. In September 2015, one loan was sold at a discount to a third party, and the related proceeds are held in escrow pending resolution of the bankruptcy proceeding. One loan was charged off in September 2014. The balances related to the paid off loans have been reclassified to other assets on the consolidated balance sheet. The table below summarizes these receivables and their status with the Company and Medallion Bank as of September 30, 2016.

 

(Dollars in thousands)

   The Company      Medallion Bank      Total  

Loans outstanding

   $ 258       $ 1,953       $ 2,211   

Loans charged off (1)

     (258      (1,953      (2,211

Valuation allowance

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Net loans outstanding

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Other receivables

     590         11,062         11,652   

Valuation allowance

     (236      (4,425      (4,661
  

 

 

    

 

 

    

 

 

 

Net other receivables

     354         6,637         6,991   

Total net outstanding

     354         6,637         6,991   
  

 

 

    

 

 

    

 

 

 

Income foregone in 2016

     —          —          —    

Total income foregone

   $ 74       $ 108       $ 182   
  

 

 

    

 

 

    

 

 

 

 

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

The following table shows troubled debt restructurings which the Company entered into during the quarter and nine months ended September 30, 2016.

 

(Dollars in thousands)

   Number of Loans      Pre-Modification
Investment
     Post-Modification
Investment
 

Medallion loans

     1       $ 229       $ 229   
  

 

 

    

 

 

    

 

 

 

Commercial loans

        

Secured mezzanine

     —          —          —    

Asset-based receivable

     —          —          —    

Other secured commercial

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 229       $ 229   
  

 

 

    

 

 

    

 

 

 

During the twelve months ended September 30, 2016, two loans modified as troubled debt restructurings were in default and had an investment value of $1,989,000 as of September 30, 2016.

The following table shows troubled debt restructurings which the Company entered into during the quarter ended September 30, 2015.

 

(Dollars in thousands)

   Number of Loans      Pre-Modification
Investment
     Post-Modification
Investment
 

Medallion loans

     3       $ 875       $ 875   
  

 

 

    

 

 

    

 

 

 

Commercial loans

        

Secured mezzanine

     —          —          —    

Asset-based receivable

     —          —          —    

Other secured commercial

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     3       $ 875       $ 875   
  

 

 

    

 

 

    

 

 

 

 

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The following table shows troubled debt restructurings which the Company entered into during the nine months ended September 30, 2015.

 

(Dollars in thousands)

   Number of Loans      Pre-Modification
Investment
     Post-Modification
Investment
 

Medallion loans

     21       $ 11,519       $ 13,042   
  

 

 

    

 

 

    

 

 

 

Commercial loans

        

Secured mezzanine

     —          —          —    

Asset-based receivable

     —          —          —    

Other secured commercial

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     21       $ 11,519       $ 13,042   
  

 

 

    

 

 

    

 

 

 

 

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During the twelve months ended September 30, 2015, one loan modified as a troubled debt restructuring was in default and had an investment value of $2,139,000.

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, 2016 and December 31, 2015. 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, 2016. 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 $28,000 and $32,000 for the quarters ended September 30, 2016 and 2015, and was $85,000 and $107,000 for the comparable nine months.

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 $233,000 and $70,000 for the quarters ended September 30, 2016 and 2015, and was $486,000 and $205,000 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 $4,161,000, $2,126,000, and $1,825,000 as of September 30, 2016, December 31, 2015, and September 30, 2015.

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) in prior years. 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 2014 and 2015. As a result, no provisions for income taxes have been recorded for the three and nine months ended September 30, 2016 and 2015. State and local tax treatment follows the federal model.

As of September 30, 2016 and June 30, 2016, the Company has not met the 25% asset diversification test, and if such noncompliance cannot be remediated by year-end, then it is likely that the Company will not be eligible to file its tax returns as a RIC for 2016. If that occurs, it is likely that a consolidated tax return would be filed on behalf of the Company and its subsidiaries. The Company believes that filing on a consolidated basis may lower the overall taxes paid for all of the Company entities for 2016 operations. As a result of the substantial net appreciation on its assets, a non-cash deferred liability would be recorded for historical net unrealized appreciation recorded in prior periods.

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

Regulatory

As a BDC, the Company is not permitted to acquire any assets other than “qualifying assets” unless, at the time of such acquisition, at least 70% of its total assets are qualifying assets. The Company’s investment in Medallion Bank and City of Chicago taxicab medallions purchased out of foreclosure, which are carried in investments other than securities on the consolidated balance sheet, are non-qualifying assets. As of September 30, 2016, the percentage of the Company’s total assets that were invested in non-qualifying assets were up to 40.6% on an unconsolidated basis and up to 35.1% on a consolidated basis. The

 

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Company did not satisfy the requirement that no more than 30% of its total assets be comprised of non-qualifying assets, and is currently not permitted to acquire any non-qualifying assets. The Company is therefore unable to make any investments in non-qualifying assets, including follow-on investments in Medallion Bank and the Company’s City of Chicago taxicab medallions purchased out of foreclosure. As a result of such failure, the Company could also be precluded from investing in what the Company believes are attractive investments or could be required to dispose of non-qualifying assets at times or on terms that may be disadvantageous to the Company. The Company would also not be able to support Medallion Bank’s capital requirements, if any, and Medallion Bank may also not be able to grow as quickly because the Company is precluded from providing additional funding to Medallion Bank. Any of the foregoing consequences could have a material adverse effect on the Company. If the Company purchases a non-qualifying asset after failing to satisfy the requirement that no more than 30% of the Company’s total assets be comprised of non-qualifying assets, then the Company would be deemed to be in violation of the 1940 Act and the violation could also result in an event of default on its debt obligations. In addition, if the Company is found to be in violation of the requirements applicable to BDCs under the 1940 Act, the Company could be unable to qualify as a RIC under the Code.

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

During 2014 and 2016, one of our SBIC subsidiaries, Freshstart, was examined by the SBA. The SBA issued a report related to such examination in February 2015 and September 2016, and Freshstart has responded to the SBA’s report. The ultimate outcome of the foregoing regulatory examination cannot be predicted with any certainty at this time.

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)

   2016      2015      2016      2015  

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

   $ 5,043       $ 7,312       $ 16,458       $ 22,466   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding applicable to basic EPS

     24,136,807         24,290,502         24,173,898         24,387,726   

Effect of dilutive stock options

     —           619         307         13,684   

Effect of restricted stock grants

     47,711         49,792         52,863         59,980   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted EPS

     24,184,518         24,340,913         24,227,068         24,461,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.21       $ 0.30       $ 0.68       $ 0.92   

Diluted earnings per share

     0.21         0.30         0.68         0.92   
  

 

 

    

 

 

    

 

 

    

 

 

 

Potentially dilutive common shares excluded from the above calculations aggregated 347,000 and 198,000 shares as of September 30, 2016 and 2015.

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, 2016 and 2015, the Company issued 6,266 and 162,576 restricted shares of stock-based compensation awards, and 12,000 and 27,000 shares of other stock-based compensation awards, and recognized $137,000 and $422,000, or $0.01 and $0.02 per diluted common share for the 2016 third quarter and nine months, and $371,000 and $948,000, or $0.01 and $0.04 per share in the comparable 2015 periods, of non-cash stock-based compensation expense related to the grants. As of September 30, 2016, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $444,000, which is expected to be recognized over the next 11 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 $123,000,000 of notional value of principal from various multinational banks, with termination dates ranging to October 2018. The caps provide for payments to the Company if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases were generally fully expensed when paid, including $10,000 for the three and nine months ended September 30, 2016 and $49,000 and $81,000 for the comparable 2015 periods, and all are carried at $0 on the balance sheet at September 30, 2016.

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, 2016 and 2015.

 

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

(Dollars in thousands)

   2016      2015      2016      2015  

Statement of comprehensive income

           

Investment income

   $ 26,165       $ 23,812       $ 76,982       $ 66,287   

Interest expense

     3,027         2,413         8,730         6,574   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     23,138         21,399         68,252         59,713   

Noninterest income

     102         77         271         223   

Operating expenses

     5,966         5,714         17,415         16,103   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment income before income taxes

     17,274         15,762         51,108         43,833   

Income tax benefit (provision)

     1,528         (4,692      (7,964      (14,357
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment income after income taxes

     18,802         11,070         43,144         29,476   

Net realized/unrealized losses of Medallion Bank

     (19,111      (4,114      (28,555      (11,790
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations of Medallion Bank

     (309      6,956         14,589         17,686   

Unrealized appreciation (depreciation) on Medallion Bank (1)

     26,409         (166      23,942         302   

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

     (187      (142      5,690         (4,700
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 25,913       $ 6,648       $ 44,221       $ 13,288   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Unrealized appreciation (depreciation) on Medallion Bank reflects the adjustment to the investment carrying amount to reflect the dividends declared to the Company and the US Treasury, and fair value adjustments to the carrying amount of Medallion Bank.

 

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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, 2016 and December 31, 2015.

 

(Dollars in thousands)

   2016      2015  

Loans

   $ 977,874       $ 996,375   

Investment securities, at fair value

     37,066         35,524   
  

 

 

    

 

 

 

Net investments (1)

     1,014,940         1,031,899   

Cash

     64,565         23,094   

Other assets, net

     34,763         24,827   

Due from affiliates

     —          —    
  

 

 

    

 

 

 

Total assets

   $ 1,114,268       $ 1,079,820   
  

 

 

    

 

 

 

Other liabilities

   $ 4,535       $ 6,106   

Due to affiliates

     1,267         1,387   

Deposits and other borrowings, including accrued interest payable

     933,117         909,909   
  

 

 

    

 

 

 

Total liabilities

     938,919         917,402   

Medallion Bank equity (2)

     175,349         162,418   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 1,114,268       $ 1,079,820   
  

 

 

    

 

 

 

Investment in other controlled subsidiaries

   $ 14,245       $ 7,747   

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

     208,098         159,913   
  

 

 

    

 

 

 

 

(1) Included in Medallion Bank’s net investments is $4 and $6 for purchased loan premium at September 30, 2016 and December 31, 2015.
(2) Includes $26,303 of preferred stock issued to the US Treasury under the Small Business Lending Fund Program (SBLF).
(3) Includes $44,100 and $15,500 of unrealized appreciation on Medallion Bank, in excess of Medallion Bank’s book value as of September 30, 2016 and December 31, 2015.

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

Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. At September 30, 2016 and December 31, 2015, the net premium on investment securities totaled $258,000 and $311,000, and $19,000 and $61,000 was amortized into interest income for the quarter and nine months ended September 30, 2016, and $19,000 and $58,000 was amortized in the comparable 2015 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, 2016 and December 31, 2015, net loan origination costs were $12,657,000 and $11,400,000. Net amortization expense for the quarter and nine months ended September 30, 2016 was $947,000 and $2,688,000, and was $871,000 and $2,505,000 for the comparable 2015 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, 2016, $3,467,000 or 1% of consumer loans, no commercial loans, and $47,403,000 or 15% of medallion loans were on nonaccrual, compared to $3,381,000 or 1% of consumer loans, no commercial loans, and $21,722,000 or 6% of medallion loans on nonaccrual at December 31, 2015, and $2,669,000 or less than 1% of consumer loans, $5,889,000 or 2% of medallion loans, and no commercial loans on nonaccrual at September 30, 2015. 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 $1,161,000, $233,000, and $67,000 as of September 30, 2016, December 31, 2015, and September 30, 2015. See also the paragraph and table on page 50 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 0.15%, and which is capitalized and amortized to interest expense over the life of the respective pool. The total amount capitalized at September 30, 2016 and December 31, 2015 was $1,997,000 and $2,034,000, and $345,000 and $1,035,000 was amortized to interest expense during the quarter and nine months ended September 30, 2016, and $338,000 and $972,000 was amortized in the comparable 2015 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)

   2017      2018      2019      2020      2021      Thereafter      2016      2015      Rate (1)  

Deposits and other borrowings

   $ 400,745       $ 304,262       $ 163,430       $ 40,169       $ 23,006       $ —        $ 931,612       $ 908,896         1.16
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Weighted average contractual rate as of September 30, 2016.

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

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

Quantitative measures established by regulation to ensure capital adequacy require Medallion Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting Medallion Bank’s application for federal deposit insurance, the FDIC ordered that the leverage 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 $3,000,000 in 2016 and $7,000,000 in 2015. Separately, Medallion Bank declared dividends to the Company of $3,000,000 in the 2016 nine months, and $5,000,000 and $15,000,000 in the 2015 quarter and nine months.

On February 27, 2009 and December 22, 2009, Medallion Bank issued, and the US Treasury purchased under the TARP Capital Purchase Program (the CPP) Medallion Bank’s fixed rate non-cumulative Perpetual Preferred Stock, Series A, B, C, and D for an aggregate purchase price of $21,498,000 in cash. On July 21, 2011, Medallion Bank issued, and the US Treasury purchased 26,303 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series E (Series E) for an aggregate purchase price of $26,303,000 under the Small Business Lending Fund Program (SBLF). The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. In connection with the issuance of the Series E, the Bank exited the CPP by redeeming the Series A, B, C, and D; and received approximately $4,000,000, net of dividends due on the repaid securities. The Bank previously paid a dividend rate of 1% on the Series E, which increased to 9% in the 2016 first quarter.

The following table represents Medallion Bank’s actual capital amounts and related ratios as of September 30, 2016 and December 31, 2015, compared to required regulatory minimum capital ratios and the ratios required to be considered well capitalized. As of September 30, 2016, 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, 2016     December 31, 2015  

Common equity tier 1 capital

     —         —       $ 146,451      $ 135,635   

Tier 1 capital

     —         —         172,754        161,938   

Total capital

     —         —         186,670        175,533   

Average assets

     —         —         1,109,482        1,071,980   

Risk-weighted assets

     —         —         1,077,713        1,077,103   

Leverage ratio (1)

     4     5     15.6     15.1

Common equity tier 1 capital ratio (3)

     5        7        13.6        12.6   

Tier 1 capital ratio (2)

     6        8        16.0        15.0   

Total capital ratio (2)

     8        10        17.3        16.3   

 

(1) Calculated by dividing Tier 1 capital by average assets.
(2) Calculated by dividing Tier 1 or total capital by risk-weighted assets.
(3) Calculated by subtracting preferred stock or non-controlling interests from Tier 1 capital and dividing by risk-weighted assets.

 

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(4) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows. These balances are exclusive of deferred financing costs of $4,161,000 and $2,126,000 as of September 30, 2016 and December 31, 2015, which are included in other assets.

 

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

(Dollars in thousands)

   2017      2018      2019      2020      2021      Thereafter      2016      2015      Rate (1)  

Revolving lines of credit

   $ 108,284       $ —        $ —        $  —        $ —        $ —        $ 108,284       $ 129,518         2.20

Notes payable to banks

     64,514         30,712         36         —          40         —          95,302         122,429         3.04

SBA debentures

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

Unsecured note

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

Preferred securities

     —           —          —          —          —          33,000         33,000         33,000         2.96

Margin loan

     —          —          —          —          —          —          —           45,108         —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 172,798       $ 30,712       $ 3,036       $ —        $ 49,650       $ 96,000       $ 352,196       $ 404,540         3.48
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Weighted average contractual rate as of September 30, 2016.

(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 which was further reduced in stages in December 2015 to $135,000,000, and to $125,000,000 on July 1, 2016; and of which $108,284,000 was outstanding at September 30, 2016. During 2016, the DZ line was amended several times, for the most part to improve Trust III’s flexibility under the credit facility.

Borrowings under Trust III’s 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 0.53% at September 30, 2016) plus 1.65%.

(B) SBA DEBENTURES

In 2016, the SBA approved $10,000,000 of commitments for MCI for a four and a half year term and a 1% fee, which was paid. In 2015, the SBA approved $15,500,000 of commitments for MCI for a four year term and a 1% fee, which was paid. In 2014, the SBA approved $10,000,000 of commitments for MCI for a four year term and a 1% fee, which was paid. In 2013, the SBA approved $23,000,000 and $5,000,000 of commitments for FSVC and MCI, respectively, for a four year term and a 1% fee, which was paid, and of which FSVC issued $23,000,000 of debentures, $18,150,000 of which was used to repay maturing debentures, and MCI issued $2,500,000 of debentures. As of at September 30, 2016, $169,985,000 of commitments had been fully utilized, there were $5,500,000 of commitments available, and $81,985,000 was outstanding.

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

(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, 2016.

 

(Dollars in thousands)

 

Borrower

  # of Lenders
/Notes
  Note
Dates
  Maturity
Dates
 

Type

  Note
Amounts
    Balance
Outstanding at
September 30,
2016
   

Monthly Payment

  Average Interest
Rate at September 30,
2016
    Interest
Rate
Index(1)
 

The Company

  6/6   4/11

-

8/14

  4/17

-

7/18

  Term loans and demand notes secured by pledged loans   $ 68,118 (2)    $ 68,118      Interest only    
 
 
 
3.02%
(includes
unused
fee)
 
  
 
  
    Various (2) 

Medallion Chicago

  3/28   11/11

-

12/11

  10/16

-

12/16

  Term loans secured by owned Chicago medallions(3)     25,708        22,949      $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

  1/17

-

11/18

  Participated loans treated as financings     256        248      Proportionate to the payments received on the participated loans     6.03     N/A   

MFC

  1/2   3/13

-

12/15

  12/16

-

12/20

  Participated loans treated as financings     85        78      Proportionate to the payments received on the participated loans     8.18     N/A   
         

 

 

   

 

 

       
          $ 98,082      $ 95,302         
         

 

 

   

 

 

       

 

(1) At September 30, 2016, 30 day LIBOR was 0.53% and the prime rate was 3.50%.
(2) One note has an interest rate of Prime, one note has an interest rate of Prime plus 0.50%, and the other interest rates on these borrowings range are LIBOR plus 2%.
(3) $14,159 guaranteed by the Company.

(D) PREFERRED SECURITIES

In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bear a variable rate of interest of 90 day LIBOR (0.85% at September 30, 2016) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor. At September 30, 2016, $33,000,000 was outstanding on the preferred securities.

(E) MARGIN LOAN

In June 2015, the Company entered into a margin loan agreement with Morgan Stanley. The margin loan is secured by the pledge of short-term, high-quality investment securities held by the Company, and is initially available at 90% of the current fair market value of the securities. The margin loan bears interest at 30-day LIBOR (0.53% at September 30, 2016) plus 1.00%. As of September 30, 2016, there were no outstandings under the margin loan.

(F) UNSECURED NOTE

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

(G) 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, provided for the issuance of a maximum of 800,000 shares of common stock of the Company. No additional shares are available for issuance under the 2006 Stock Option Plan. The 2006 Stock Option Plan is administered by the Compensation Committee of the Board of Directors. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. The term and vesting periods of the options are determined by the Compensation Committee, provided that the maximum term of an option may not exceed a period of ten years.

 

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The Company’s Board of Directors approved the 2015 Employee Restricted Stock Plan (2015 Restricted Stock Plan) on February 13, 2015 and which was approved by the Company’s shareholders on June 5, 2015. The 2015 Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC on March 1, 2016. The terms of 2015 Restricted Stock Plan provide for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock which, at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 700,000 shares of the Company’s common stock are issuable under the 2015 Restricted Stock Plan, and 693,734 remained issuable as of September 30, 2016. Awards under the 2015 Restricted Stock Plan are subject to certain limitations as set forth in the 2015 Restricted Stock Plan. The 2015 Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the 2015 Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2015 Restricted Stock Plan, whichever first occurs.

The Company’s Board of Directors approved the 2009 Employee Restricted Stock Plan (the Employee Restricted Stock Plan) on April 16, 2009. The Employee Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC and approval of the Employee Restricted Stock Option Plan by the Company’s shareholders on June 11, 2010. No additional shares are available for issuance under the Employee Restricted Stock Plan. The terms of the Employee Restricted Stock Plan provided for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock which, at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 800,000 shares of the Company’s common stock were issuable under the Employee Restricted Stock Plan, and as of September 30, 2016, none of the Company’s common stock remained available for future grants. Awards under the 2009 Employee Plan are subject to certain limitations as set forth in the Employee Restricted Stock Plan. The Employee Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the Employee Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the Employee Restricted Stock Plan, whichever first occurs.

The Company’s Board of Directors approved the 2015 Non-Employee Director Stock Option Plan (2015 Director Plan) on March 12, 2015, which was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on February 29, 2016. A total of 300,000 shares of the Company’s common stock are issuable under the 2015 Director Plan, and 288,000 remained issuable as of September 30, 2016. Under the 2015 Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the 2015 Director Plan, the Company will grant options to purchase 12,000 shares of the Company’s common stock to a non-employee director upon election to the Board of Directors, with an adjustment for directors who are elected to serve less than a full term. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. Options granted under the 2015 Director Plan are exercisable annually, as defined in the 2015 Director Plan. The term of the options may not exceed ten years.

The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan (the Amended Director Plan) on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock were issuable under the Amended Director Plan. No additional shares are available for issuance under the Amended Director Plan. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company will grant options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board of Directors, with an adjustment for directors who are elected to serve less than a full term. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. Options granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options may not exceed ten years.

The Company’s Employee Restricted Stock Plan, 1996 Stock Option Plan, and 1996 Director Plan have terminated and no additional shares are available for future issuance. At September 30, 2016, 346,712 options on the Company’s common stock were outstanding under the 2006 plans, of which 313,712 options were exercisable, and there were 134,146 unvested shares of the Company’s common stock outstanding under the Employee Restricted Stock Plan.

 

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The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of options granted was $0.53 and $0.90 for the nine months ended September 30, 2016 and 2015. The following assumption categories are used to determine the value of any option grants.

 

     Nine Months Ended September 30,  
     2016     2015  

Risk free interest rate

     1.22     1.87

Expected dividend yield

     10.13        8.90   

Expected life of option in years (1)

     6.00        6.00   

Expected volatility (2)

     30.00        30.00   

 

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

The following table presents the activity for the stock option programs for the 2016 quarters and the 2015 full year.

 

     Number of Options      Exercise
Price Per
Share
     Weighted
Average
Exercise Price
 

Outstanding at December 31, 2014

     461,821       $ 7.49-13.84       $ 10.38   

Granted

     27,000         9.38         9.38   

Cancelled

     (12,118      9.22-13.06         11.07   

Exercised (1)

     (30,449      9.22         9.22   
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2015

     446,254         7.49-13.84         10.38   

Granted

     —          —          —    

Cancelled

     (9,000      13.84         13.84   

Exercised (1)

     (2,100      9.22         9.22   
  

 

 

    

 

 

    

 

 

 

Outstanding at March 31, 2016

     435,154         7.49-13.84         10.31   

Granted

     12,000         7.10         7.10   

Cancelled

     (100,442      9.22-13.84         12.15   

Exercised (1)

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2016

     346,712         7.10-13.84         9.67   

Granted

     —          —          —    

Cancelled

     —          —          —    

Exercised (1)

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2016 (2)

     346,712       $ 7.10-13.84       $ 9.67   

Options exercisable at September 30, 2016 (2)

     313,712         7.49-13.84         9.75   
  

 

 

    

 

 

    

 

 

 

 

(1) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at the exercise date and the related exercise price of the underlying options, was $0 for the 2016 third quarter and nine months, and was $0 and $33,000 for the comparable 2015 periods.
(2) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2016 and the related exercise price of the underlying options, was $0 for outstanding options and $0 for exercisable options as of September 30, 2016. The remaining contractual life was 2.65 years for outstanding options and 1.98 years for exercisable options at September 30, 2016.

The following table presents the activity for the restricted stock programs for the 2016 quarters and the 2015 full year.

 

     Number of
Shares
     Grant Price
Per Share
     Weighted
Average
Grant Price
 

Outstanding at December 31, 2014

     209,365       $ 10.08-15.61       $ 12.47   

Granted

     162,576         9.08-10.38         9.89   

Cancelled

     (53,761      9.92-15.61         11.16   

Vested (1)

     (109,140      10.08-15.61         12.16   
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2015

     209,040         9.08-15.61         10.96   

Granted

     —          —          —    

Cancelled

     (214      10.08-15.61         11.32   

Vested (1)

     (69,803      9.92-13.46         11.34   
  

 

 

    

 

 

    

 

 

 

Outstanding at March 31, 2016

     139,023         9.08-15.61         10.78   

Granted

     —          —          —    

Cancelled

     (9,502      9.92-15.61         11.18   

Vested (1)

     (833      9.08         9.08   
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2016

     128,688         9.08-15.61         10.76   

Granted

     6,266         7.98         7.98   

Cancelled

     (808      10.08-15.61         11.32   

Vested (1)

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2016 (2)

     134,146       $ 7.98-15.61       $ 10.63   
  

 

 

    

 

 

    

 

 

 

 

(1) The aggregate fair value of the restricted stock vested was $0 and $694,000 for the 2016 third quarter and nine months, and was $0 and $624,000 for the comparable 2015 periods.
(2) The aggregate fair value of the restricted stock was $566,000 as of September 30, 2016. The remaining vesting period was 1.22 years at September 30, 2016.

 

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The following table presents the activity for the unvested options outstanding under the plans for the 2016 quarters.

 

     Number of
Options
     Exercise Price
Per Share
     Weighted Average Exercise Price  

Outstanding at December 31, 2015

     54,333       $ 9.38-13.84       $ 11.14   

Granted

     —          —          —    

Cancelled

     (3,000      13.84         13.84   

Vested

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Outstanding at March 31, 2016

     51,333         9.38-13.84         10.98   

Granted

     12,000         7.10         7.10   

Cancelled

     (15,333      11.42-13.53         12.25   

Vested

     (15,000      9.38-13.84         11.10   
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2016

     33,000         7.10-13.84         8.93   

Granted

     —          —          —    

Cancelled

     —          —          —    

Vested

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2016

     33,000       $ 7.10-13.84       $ 8.93   
  

 

 

    

 

 

    

 

 

 

The intrinsic value of the options vested was $0 for the 2016 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.

(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)

   2016      2015      2016      2015  

Prepayment fees

   $ 64       $ 59       $ 85       $ 65   

Servicing fees

     29         24         33         44   

Late charges

     4         10         20         40   

Management fees

     —          —          —           75   

Other

     7         28         27         63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 104       $ 121       $ 165       $ 287   
  

 

 

    

 

 

    

 

 

    

 

 

 

The major components of other operating expenses were as follows.

 

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

(Dollars in thousands)

   2016      2015      2016      2015  

Travel, meals, and entertainment

   $ 175       $ 205       $ 646       $ 686   

Directors’ fees

     108         116         256         332   

Printing and stationery

     80         27         114         124   

Computer expense

     65         64         176         268   

Office expense

     59         44         147         164   

Miscellaneous taxes

     58         102         247         185   

Insurance

     47         44         150         126   

Other expenses

     106         35         357         253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating expenses

   $ 698       $ 637       $ 2,093       $ 2,138   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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)

   2016     2015     2016     2015  

Net share data

        

Net asset value at the beginning of the period

   $ 11.41      $ 11.26      $ 11.42      $ 11.16   

Net investment income (loss)

     (0.10     0.17        (0.08     0.55   

Income tax (provision) benefit

     —         —         —         —    

Net realized gains (losses) on investments

     0.10        0.02        —         0.35   

Net change in unrealized appreciation on investments

     0.21        0.11        0.76        0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     0.21        0.30        0.68        0.92   

Issuance of common stock

     —         0.01        0.02        (0.02

Repurchase of common stock

     0.04        0.04        0.04        0.06   

Distributions of net investment income

     —         (0.15     —         (0.47

Distributions of net realized gains on investments

     —         —         —         —    

Return of capital

     (0.05     (0.10     (0.55     (0.27
  

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions

     (0.05     (0.25     (0.55     (0.74

Other

     —         0.01        —         (0.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase in net asset value

     0.20        0.11        0.19        0.21   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 11.61      $ 11.37      $ 11.61      $ 11.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at beginning of period

   $ 7.38      $ 8.35      $ 7.04      $ 10.01   

Per share market value at end of period

     4.22        7.58        4.22        7.58   

Total return (2)

     (168 %)      (25 %)      (48 %)      (24 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratios/supplemental data

        

Total shareholders’ equity (net assets)

   $ 280,783      $ 276,917      $ 280,783      $ 276,917   

Average net assets

   $ 277,579      $ 276,889      $ 278,149      $ 276,650   

Total expense ratio (3) (4)

     11.44     9.39     10.67     9.74

Operating expenses to average net assets (4)

     6.60        5.94        6.22        6.38   

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

     (3.73     6.07        (0.95     6.51   

 

(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, 2016 and 2015.
(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 $1,416 and $1,458, and operating expenses of $1,296 and $1,421, which formerly were the Company’s were now MSC’s for the three months ended September 30, 2016 and 2015, and were $4,231 and $4,216 of servicing fee income, and $4,422 and $4,634 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 13%, 8.46%, and (3.56)% in the 2016 quarter, 11%, 7.98%, and 6.12% in the 2015 quarter, 13%, 8.34%, and (1.04)% in the 2016 nine months, and 12%, 8.62%, and 6.31% in the 2015 nine months.

(9) RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

 

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

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

(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 from 1996 through 2014 was also of counsel in the Company’s primary law firm. Amounts paid to the law firm were $245,000 and $23,000 for the 2016 and 2015 third quarters, and were $518,000 and $117,000 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 $166,000 per year, and certain equity from LAX consisting of 10% ownership in LAX Class B stock, vesting at 3.34% per year; 5% of any new equity raised from outside investors at a valuation of $1,500,000 or higher; and 10% of LAX’s profits as a year-end bonus. In addition, Mr. Rudnick provides consulting services to the Company directly for a monthly retainer of $4,200.

At September 30, 2016, December 31, 2015, and September 30, 2015, the Company and MSC serviced $329,304,000, $382,919,000, and $391,903,000 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, $1,416,000 and $4,231,000 of servicing fee income was earned by MSC in the 2016 third quarter and nine months, and $1,458,000 and $4,216,000 was earned in the comparable 2015 periods.

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

 

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

(Dollars in thousands)

   2016      2015      2016      2015  

Reimbursement of operating expenses

   $ 257       $ 257       $ 754       $ 616   

Loan origination fees

     137         56         225         126   

Servicing fees

     —           1         1         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

   $ 394       $ 314       $ 980       $ 749   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company had a loan to Medallion Fine Art, Inc. in the amount of $2,968,000 and $8,348,000 as of September 30, 2016 and December 31, 2015. The loan bears interest at a rate of 12%, all of which is paid in kind. During 2016 and 2015, the Company advanced $200,000 and $1,225,000, and was repaid $6,111,000 and $550,000 with respect to this loan. Additionally, the Company recognized $99,000 and $504,000 of interest income in the three and nine months ended September 30, 2016 and $258,000 and $681,000 in the comparable 2015 periods.

The Company and MCI had loans to an affiliate of Medallion Motorsports LLC which totaled $8,454,000 and $5,033,000 as of September 30, 2016 and December 31, 2015. The loans bear interest at rates of 8% and 10%, all of which is paid in kind. The Company and MCI recognized $174,000 and $429,000 of interest income for the three and nine months ended September 30, 2016, and $0 and $0 for the comparable 2015 periods with respect to these loans.

 

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(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, 2016 and December 31, 2015, the estimated fair value of these off-balance-sheet instruments was not material.

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

 

     September 30, 2016      December 31, 2015  

(Dollars in thousands)

   Carrying Amount      Fair Value      Carrying Amount      Fair Value  

Financial assets

           

Investments

   $ 585,628       $ 585,628       $ 606,959       $ 606,959   

Cash (1)

     24,708         24,708         30,912         30,912   

Accrued interest receivable (2)

     697         697         1,003         1,003   

Financial liabilities

           

Funds borrowed (2)

     352,196         352,196         404,540         404,540   

Accrued interest payable (2)

     1,928         1,928         1,302         1,302   

 

(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 our valuation methodology which is unchanged during 2016.

In accordance with FASB ASC 820, the Company has categorized its assets and liabilities measured at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). Our assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.

As required by FASB ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a level 3 fair value measurement may include inputs that are observable (level 1 and 2) and unobservable (level 3). Therefore gains and losses for such assets and liabilities categorized within the level 3 table below may include changes in fair value that are attributable to both observable inputs (level 1 and 2) and unobservable inputs (level 3).

Assets and liabilities measured at fair value, recorded on the consolidated balance sheets, are categorized based on the inputs to the valuation techniques as follows:

Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most US Government and agency securities, and certain other sovereign government obligations).

 

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Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

 

  A) Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);

 

  B) Quoted price for identical or similar assets or liabilities in non-active markets (for example, corporate and municipal bonds, which trade infrequently);

 

  C) Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and

 

  D) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, and certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur. The following paragraphs describe the sensitivity of the various level 3 valuations to the factors that are relevant in their valuation analysis.

Medallion loans and the asset-based portion of the commercial loan portfolio are primarily collateral-based lending, whereby the collateral value exceeds the amount of the loan, providing sufficient excess collateral to protect against losses to the Company. As a result, the initial valuation assessment is that as long as the loan is current and performing, its fair value approximates the par value of the loan. To the extent a loan becomes nonperforming, the collateral value has been adequate to result in a complete recovery. In a case where the collateral value was inadequate, an unrealized loss would be recorded to reflect any shortfall. Collateral values for medallion loans are typically obtained from transfer prices reported by the regulatory agency in a particular local market (e.g. New York City Taxi and Limousine Commission). Recently, as transfer price activity and the collateral values of medallion loans have declined, and greater weight has been placed on the operating cash flows of the borrowers and the values of their personal guarantees in determining whether or not a valuation adjustment is necessary. Collateral values for asset based loans were confirmed through daily borrowing base analysis of borrower availability, confirmations obtained from a borrower’s underlying customers, and field examinations by us or third parties engaged by us. Those portfolios had historically been at very low loan to collateral value ratios, and as a result, historically have not been highly sensitive to changes in collateral values 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 on at least an annual basis, the Company also receives an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value. The Company determines whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013, and the lack of any new charter issuances since the moratorium’s expiration. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments. In 2015 the Company first became aware of external interest in Medallion Bank and its portfolio’s assets at

 

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values in excess of their carrying amount. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued through 2016. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the third quarter of 2016 there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $28,600,000 was recorded in 2016. See Note 3 for additional information about Medallion Bank.

Investments in controlled subsidiaries, other than Medallion Bank, equity investments, and investments other than securities are valued similarly, while also considering available current market data, including relevant and applicable market trading and transaction comparables, the nature and realizable value of any collateral, applicable interest rates and market yields, the portfolio company’s ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, and borrower financial analysis, among other factors. As a result of this valuation process, the Company uses the actual results of operations of the controlled subsidiaries as the best estimate of changes in fair value, in most cases, and records the results as a component of unrealized appreciation (depreciation) on investments. For the balance of controlled subsidiary investments, equity investments, and investments other than securities positions, the result of the analysis results in changes to the value of the position if there is clear evidence that it’s value has either decreased or increased in light of the specific facts considered for each investment. The valuation is highly sensitive to changes in the assumptions used. To the extent that any assumption in the analysis changes significantly from one period to another, that change could result in a significantly lower or higher fair market value measurement. For example, if an investee’s valuation was determined primarily on the cash flow generated from their business, then if that cash flow deteriorated significantly from a prior period valuation, that could have a material impact on the valuation in the current period.

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, 2016 and December 31, 2015.

 

(Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

2016 Assets

           

Medallion loans

   $ —        $ —        $ 288,257       $ 288,257   

Commercial loans

     —          —          81,110         81,110   

Investment in Medallion Bank and other controlled subsidiaries

     —          —          208,098         208,098   

Equity investments

     61         —          8,102         8,163   

Investment other than securities

     —          —          19,020         19,020   

Other assets

     —          —          354         354   
  

 

 

    

 

 

    

 

 

    

 

 

 

2015 Assets

           

Medallion loans

   $ —        $ —        $ 308,408       $ 308,408   

Commercial loans

     —          —          81,895         81,895   

Investment in Medallion Bank and other controlled subsidiaries

     —          —          159,913         159,913   

Equity investments

     62         —          6,797         6,859   

Investment securities

     49,884         —          —          49,884   

Investment other than securities

     —          —          37,882         37,882   

Other assets

     —          —          354         354   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in level 3 investments in Medallion Bank and other controlled subsidiaries is primarily the investment in Medallion Bank, as well as other consolidated subsidiaries such as MSC, and other investments detailed in the consolidated summary schedule of investments following these footnotes. Included in level 3 equity investments are unregistered shares of common stock in a publicly-held company, as well as certain private equity positions in non-marketable securities. The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilities for the quarters and nine months ended September 30, 2016 and 2015.

 

(Dollars in thousands)

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

June 30, 2016

   $ 297,367      $ 88,045      $ 180,954      $ 8,561      $ 33,127      $ 354   

Gains (losses) included in earnings

     (6,087     1,864        25,913        84        (14,107     —    

Purchases, investments, and issuances

     5,628        355        1,315        250        —         —    

Sales, maturities, settlements, and distributions

     (8,651     (9,154     (84     (793     —         —    

Transfers in (out)

     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2016

   $ 288,257      $ 81,110      $ 208,098      $ 8,102      $ 19,020      $ 354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   ($ 6,050   ($ 114   $ 25,913      ($ 110   ($ 14,107     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2016

 

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(Dollars in thousands)

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

December 31, 2015

   $ 308,408      $ 81,895      $ 159,913      $ 6,797      $ 37,882      $ 354   

Gains (losses) included in earnings

     (11,317     2,403        47,221        2,021        (18,862     —    

Purchases, investments, and issuances

     18,071        16,371        5,061        1,400        —         —    

Sales, maturities, settlements, and distributions

     (26,905     (19,783     (4,097     (1,892     —         —    

Transfers in (out) (1)

     —         224        —         (224     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2016

   $ 288,257      $ 81,110      $ 208,098      $ 8,102      $ 19,020      $ 354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(2)

   ($ 11,168   ($ 297   $ 47,221      $ 1,022      ($ 18,862     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During 2016, the equity interest in WRWP LLC was exchanged for a loan and has resulted in the transfer from equity interest to commercial loan.
(2) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2016.

 

(Dollars in thousands)

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

June 30, 2015

   $ 309,482      $ 75,292      $ 141,132      $ 7,105      $ 0      $ 336   

Gains (losses) included in earnings

     (2,382     (373     11,648        814        (1,570     (12

Purchases, investments, and issuances

     13,991        1,630        5,100        50        —         —    

Sales, maturities, settlements, and distributions

     (11,659     (4,227     (5,036     (1,122     —         —    

Transfers, in (out)

     —         (30     1,612        (1,612     39,452        30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2015

   $ 309,432      $ 72,292      $ 154,456      $ 5,235      $ 37,882      $ 354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   ($ 2,367   ($ 378   $ 11,648      ($ 313   $ (1,570   ($ 12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2015.

 

(Dollars in thousands)

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

December 31, 2014

   $ 311,894      $ 71,149      $ 136,848      $ 7,532      $ 0      $ 392   

Gains (losses) included in earnings

     (2,865     6        36,843        129        (1,570     (68

Purchases, investments, and issuances

     25,912        15,860        8,839        812        —         —    

Sales, maturities, settlements, and distributions

     (25,509     (14,693     (29,686     (1,626     —         —    

Transfers, in (out)

     —         (30     1,612        (1,612     39,452        30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2015

   $ 309,432      $ 72,292      $ 154,456      $ 5,235      $ 37,882      $ 354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   ($ 2,850   $ 69      $ 33,613      ($ 719   $ (1,570   ($ 68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2015.

Significant Unobservable Inputs

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

 

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The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of September 30, 2016 and December 31, 2015 were as follows.

 

(Dollars in thousands)

  Fair Value
at 9/30/16
   

Valuation Techniques

 

Unobservable Inputs

  Range
(Weighted Average)
 

Medallion Loans

  $ 288,257      Precedent market transactions   Adequacy of collateral (loan to value)     1% - 190% (96%)   
 

 

 

       

Commercial Loans – Mezzanine and Other

    81,110      Borrower financial analysis   Financial condition and operating performance of the borrower     N/A   
 

 

 

       
      Portfolio yields     3% -19.00% (13.07%)   
    Third party valuation using a weighting of the three methods utilized  

Comparable Transactions Analysis

Precedent M&A transaction approach

Discount rate in Cash Flow Analysis

   
 

 
 

 

(29.4% premium to book
value)

(29.4% premium to book
value)

(10.58%)

 
  

 
  

  

Investment in Medallion Bank

    193,853      Investee book value and equity pickup   Financial condition and operating performance of the investee     N/A   
      Premium on portfolio assets     (4.51% premium recorded)   

Investment in Other Controlled Subsidiaries

    6,027      Investee book value adjusted for asset appreciation   Financial condition and operating performance of the investee     N/A   
      Third party valuation/offer to purchase asset     N/A   
    4,269      Investee financial analysis   Financial condition and operating performance     N/A   
      Implied value of individual franchises     $30,000   
      Equity value     $3,000 - $5,000   
    3,330      Investee book value adjusted for market appreciation   Third party offer to purchase investment  
      Financial condition and operating performance of the investee     N/A   
    619      Investee book value and equity pickup  

Financial condition and

operating performance of the investee

    N/A   
 

 

 

       

Equity Investments

    1,264      Investee book value   Valuation indicated by investee filings     N/A   
    430      Market comparables   Discount for lack of marketability     10% (10%)   
    6,408      Investee financial analysis   Financial condition and operating performance of the borrower     N/A   
 

 

 

       
      Collateral support     N/A   

Investments Other Than Securities

    19,020      Precedent market transaction   Transfer prices of Chicago medallions     N/A   
    Cash flow analysis   Discount rate in cash flow analysis     6%   

Other Assets

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

(Dollars in thousands)

  Fair Value
at 12/31/15
   

Valuation Techniques

 

Unobservable Inputs

  Range
(Weighted Average)
 

Medallion Loans

  $ 308,408      Precedent market transactions   Adequacy of collateral (loan to value)     1% - 155% (79%)   
 

 

 

       

Commercial Loans – Asset-Based

    3,678      Borrower collateral analysis   Adequacy of collateral (loan to value)     0% - 84% (54%)   
 

 

 

       

Commercial Loans – Mezzanine and Other

    78,217      Borrower financial analysis   Financial condition and operating performance of the borrower     N/A   
 

 

 

       
      Portfolio yields     3% - 19.00% (13.13%)   

Investment in Medallion Bank

    152,166      Third party valuation using a weighting of the three methods utilized  

Comparable Transactions Analysis

Control Premium Analysis

Discount rate in Cash Flow Analysis

   
 

 

 

(11.4% premium to book
value)

(32%)

(20%)

 
  

  

  

    Investee book value and equity pickup   Financial condition and operating performance of the investee     N/A   
      Premium on portfolio assets     (1.56% premium recorded)   

Investment in Other Controlled Subsidiaries

    4,234      Investee book value and equity pickup, adjusted for asset appreciation   Financial condition and operating performance of the investee     N/A   
    986      Investee book value and equity pickup   Third party valuation/ offer to purchase assets     N/A   
      Collateral support     N/A   
      Financial condition and operating performance of the investee     N/A   
    2,527      Investee financial analysis   Financial condition and operating performance     N/A   
 

 

 

       

Equity Investments

    1,957      Investee book value   Valuation indicated by investee filings     N/A   
    509      Market comparables   Discount for lack of marketability     10% (10%)   
    4,331      Investee financial analysis   Financial condition and operating performance of the borrower     N/A   
      Collateral support     N/A   

Investments Other Than Securities

    37,882      Precedent market transaction   Transfer prices of Chicago medallions     $150 - $238 ($194)   
    Cash flow analysis   Discount rate in cash flow analysis     6%   

Other Assets

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

 

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Table of Contents

(13) INVESTMENTS OTHER THAN SECURITIES

The following table presents the Company’s investments other than securities as of September 30, 2016 and December 31, 2015.

 

Investment Type (Dollars in thousands)

   Number of
Investments
    Investment
Cost
     Value as of
9/30/16
    Value as of
12/31/15
 

City of Chicago Taxicab Medallions

     154  (1)    $ 8,411       $ 18,480  (2)    $ 36,806  (2) 

City of Chicago Taxicab Medallions (handicap accessible)

     5  (1)       278         540 (3)       1,076  (3) 
    

 

 

    

 

 

   

 

 

 

Investment Other Than Securities

     $ 8,689       $ 19,020      $ 37,882   
    

 

 

    

 

 

   

 

 

 

 

(1) Investment is not readily marketable, is considered mostly non-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 is $16,387, $0, and $16,387 as of September 30, 2016, and was $34,240, $0, and $34,240 as of December 31, 2015. The aggregate cost for Federal income tax purposes was $2,093 at September 30, 2016 and $2,566 at December 31, 2015.
(3) Gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation for Federal income tax purposes was $478, $0, and $478 as of September 30, 2016, and was $989, $0, and $989 as of December 31, 2015. The aggregate cost for Federal income tax purposes was $62 at September 30, 2016 and $84 at December 31, 2015.

(14) SUBSEQUENT EVENTS

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

On October 26, 2016, the Company’s Board of Directors declared a $0.05 per share common stock distribution, payable on December 7, 2016 to shareholders of record on November 30, 2016.

The Company is finalizing a one year extension of Medallion Chicago’s term loans secured by owned Chicago Medallions that are scheduled to mature on November 9, 2016. The Company and its subsidiaries obtain financing under lending facilities extended by various banks and other financial institutions, some of which are secured by loans, taxi medallions and other assets. Where these facilities are extended to its subsidiaries, the Company and others of its subsidiaries may guarantee the obligations of the relevant borrower. Five of its smallest subsidiaries are borrowers under promissory notes extended to them by a bank that total $8.8 million that came due on October 17, 2016. These loans are secured by Chicago taxi medallions owned by the Company’s subsidiaries. These notes are guaranteed by Medallion Funding, not by the Company. These subsidiaries have not repaid the amounts due under the notes, and the bank has filed a suit seeking payment of these amounts. This failure to pay would constitute an event of default under other loan agreements under which the Company or its subsidiaries are borrowers, but to the lenders under those agreements have waived the default. The majority of such waivers have been signed but will not be effective until all of the waivers have been received. If judgment is entered against the Company in the suit brought by the bank, or entered and not satisfied within specified periods of time, this event may constitute an additional event of default under these other agreements. The Company not yet asked for waivers from the other lenders of this additional default. If such waivers are required and not granted, it would lead to events of default under other of the Company’s financing arrangements. The Company is currently negotiating the renewal of the five loans of its subsidiaries in an effort to reach a mutually beneficial settlement.

 

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Medallion Financial Corp.

Consolidated Summary Schedule of Investments

September 30, 2016

 

(Dollars in

thousands)

 

Obligor

Name/Interest Rate

Range

 

Security
Type (all
restricted
unless
otherwise
noted)

 

Acquisition
Date

 

Maturity
Date

  No. of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2016
Acquisitions (5)
    Principal
Outstanding
    Cost (4)     Fair
Value
 

Medallion Loans

                     

New York

            386        71     3.76   $ 12,977      $ 206,576      $ 206,404      $ 200,440   
  Real Cab Corp ##   Term Loan   07/20/07   07/20/17     1        1     2.81     $ 2,545      $ 2,545      $ 2,545   
  Real Cab Corp   Term Loan   08/19/14   07/20/17     1        *        3.31     $ 481      $ 481      $ 481   
  Real Cab Corp ##   Term Loan   07/20/07   07/20/17     1        *        2.81     $ 350      $ 350      $ 350   
  Sean Cab Corp ##   Term Loan   12/09/11   11/23/18     1        1     4.63     $ 3,297      $ 3,297      $ 3,297   
  Slo Cab Corp ##   Term Loan   07/20/07   07/20/17     1        1     2.81     $ 1,527      $ 1,527      $ 1,527   
  Slo Cab Corp ##   Term Loan   08/19/14   07/20/17     1        *        3.31     $ 289      $ 289      $ 289   
  Slo Cab Corp ##   Term Loan   07/20/07   07/20/17     1        *        2.81     $ 210      $ 210      $ 210   
  Whispers Taxi Inc ## &   Term Loan   05/28/13   05/28/16     1        1     3.35     $ 2,026      $ 2,026      $ 2,026   
  Esg Hacking Corp ##   Term Loan   03/12/14   03/12/17     1        1     3.50     $ 1,725      $ 1,725      $ 1,726   
  Christian Cab Corp &   Term Loan   11/27/12   11/27/18     1        1     3.75     $ 1,489      $ 1,489      $ 1,493   
  Junaid Trans Corp ## {Annually-Prime plus 1.00%}   Term Loan   04/30/13   04/29/19     1        1     4.50     $ 1,419      $ 1,419      $ 1,419   
  Hamilton Transit LLC ## &   Term Loan   03/26/14   03/26/17     1        *        3.38     $ 1,494      $ 1,494      $ 1,401   
  Silke Hacking Corp ## &   Term Loan   03/26/14   03/26/17     1        *        3.38     $ 1,495      $ 1,495      $ 1,400   
  Kaderee M & G Corp ## &   Term Loan   03/26/14   03/26/17     1        *        3.38     $ 1,488      $ 1,488      $ 1,399   
  Daytona Hacking Corp ## &   Term Loan   03/26/14   03/26/17     1        *        3.38     $ 1,488      $ 1,488      $ 1,399   
  Jacal Hacking Corp ##   Term Loan   12/20/13   12/20/16     1        *        3.50     $ 1,386      $ 1,386      $ 1,386   
  Ocean Hacking Corp ##   Term Loan   12/20/13   12/20/16     1        *        3.50     $ 1,386      $ 1,386      $ 1,386   
  Hj Taxi Corp ##   Term Loan   04/11/14   04/11/17     1        *        3.25     $ 1,376      $ 1,376      $ 1,376   
  Avi Taxi Corporation ##   Term Loan   04/11/14   04/11/17     1        *        3.25     $ 1,376      $ 1,376      $ 1,376   
  Kby Taxi Inc ##   Term Loan   04/11/14   04/11/17     1        *        3.25     $ 1,376      $ 1,376      $ 1,376   
  Apple Cab Corp ##   Term Loan   04/11/14   04/11/17     1        *        3.25     $ 1,376      $ 1,376      $ 1,376   
  Anniversary Taxi Corp ##   Term Loan   04/11/14   04/11/17     1        *        3.25     $ 1,376      $ 1,376      $ 1,376   
  Devin Taxi Corp ## &   Term Loan   05/28/13   05/28/16     1        *        3.35     $ 1,351      $ 1,351      $ 1,351   
  Benson Hacking Corp ## &   Term Loan   05/28/13   05/28/16     1        *        3.35     $ 1,351      $ 1,351      $ 1,351   
  Dayna Hacking Corp ## &   Term Loan   05/28/13   05/28/16     1        *        3.35     $ 1,351      $ 1,351      $ 1,351   
  Yosi Transit Inc ##   Term Loan   07/20/07   07/20/17     1        *        2.81     $ 1,018      $ 1,018      $ 1,018   
  Yosi Transit Inc ##   Term Loan   08/19/14   07/20/17     1        *        3.31     $ 193      $ 193      $ 193   
  Yosi Transit Inc ##   Term Loan   07/20/07   07/20/17     1        *        2.81     $ 140      $ 140      $ 140   

Various New York && ##

  1.75% to 8.96%   Term Loan  

03/23/01

to

09/20/16

  03/22/16 to 09/10/23     358        59     3.82   $ 12,977      $ 170,197      $ 170,025      $ 164,422   

Chicago

            111        13     4.57   $ 109      $ 38,562      $ 38,432      $ 35,344   
  Sweetgrass Peach &Chadwick Cap ##   Term Loan   08/28/12   02/24/18     1        1     5.00     $ 1,470      $ 1,470      $ 1,470   

Various Chicago && ##

  0.00% to 7.00%   Term Loan  

01/22/10

to

08/08/16

  03/12/16 to 12/29/20     110        12     4.55   $ 109      $ 37,092      $ 36,962      $ 33,874   

Newark && ##

  4.50% to 7.00%   Term Loan  

04/09/10

to

04/14/16

  09/19/16 to 05/14/25     113        8     5.27   $ 314      $ 23,791      $ 23,776      $ 23,809   

Boston && ##

  3.90% to 6.15%   Term Loan  

06/12/07

to

09/28/16

  12/07/15 to 11/06/25     60        8     4.58   $ 1,185      $ 26,147      $ 26,010      $ 23,862   

Cambridge && ##

  3.75% to 5.50%   Term Loan  

05/06/11

to

12/15/15

  03/29/16 to 01/26/20     13        1     4.47     $ 4,447      $ 4,410      $ 4,022   

Various Other && ##

  4.75% to 11.50%   Term Loan  

04/28/08

to

07/30/15

  07/01/15 to 09/01/23     11        0     7.28     $ 997      $ 985      $ 780   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total medallion loans ($237,025 pledged as collateral under borrowing arrangements)

      694        103     4.07   $ 14,585      $ 300,520      $ 300,017      $ 288,257   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Loans

  

Secured mezzanine (20% Minnesota, 13% Ohio, 10% Oklahoma, 8% Delaware, 8% Pennsylvania, 7% North Carolina, 5% Kansas, 5% North Dakota, 4% Massachusetts, 4% Colorado, 4% Illinois, 3% Texas and 9% all other states) (2)

             

Manufacturing (50% of the total)

  Stride Tool Holdings, LLC (interest rate includes PIK interest of 3.00%)   Term Loan   04/05/16   04/05/21     1        1     15.00   $ 4,000      $ 4,060      $ 4,060      $ 4,008   
 

(capitalized interest of $60 per footnote 2)

                   
  MicroGroup, Inc.   Term Loan   06/29/15   06/29/21     1        1     12.00     $ 3,244      $ 3,244      $ 3,244   
 

(capitalized interest of $44 per footnote 2)

                   

 

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Medallion Financial Corp.

Consolidated Summary Schedule of Investments

September 30, 2016

 

(Dollars in

thousands)

 

Obligor

Name/Interest Rate

Range

 

Security
Type (all
restricted
unless
otherwise
noted)

 

Acquisition
Date

 

Maturity
Date

  No. of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2016
Acquisitions (5)
    Principal
Outstanding
    Cost (4)     Fair
Value
 
  AA Plush Holdings, LLC (interest rate includes PIK interest of 6.00%)   Term Loan   08/15/14   08/15/19     1        1     14.00     $ 3,148      $ 3,148      $ 3,141   
 

(capitalized interest of $148 per footnote 2)

                   
  Liberty Paper Products Acquisition LLC (interest rate includes PIK interest of 2.00%)   Term Loan   06/09/16   06/09/21     1        1     14.00   $ 3,000      $ 3,019      $ 3,019      $ 3,019   
 

(capitalized interest of $19 per footnote 2)

                   
  EGC Operating Company, LLC (interest rate includes PIK interest of 3.00%)   Term Loan   09/30/14   09/30/19     1        1     15.00     $ 3,002      $ 3,002      $ 3,009   
 

(capitalized interest of $73 per footnote 2)

                   
  Pinnacle Products International, Inc. (interest rate includes PIK interest of 3.00%)   Term Loan   10/09/15   10/09/20     1        1     15.00     $ 2,885      $ 2,885      $ 2,885   
 

(capitalized interest of $84 per footnote 2)

                   

+

  Production Services Associates LLC (d/b/a American Card Services) (interest rate includes PIK interest of 2.00%)   Term Loan   02/17/15   02/17/20     1        1     16.00     $ 2,687      $ 2,687      $ 2,669   
 

(capitalized interest of $86 per footnote 2)

                   
  WRWP, LLC (interest rate includes PIK interest of 5.00%)   Term Loan   12/30/14   12/30/19     1        1     17.00     $ 2,377      $ 2,377      $ 2,384   
 

(capitalized interest of $135 per footnote 2)

                   
  WRWP, LLC (interest rate includes PIK interest of 6.00%)   Term Loan   01/01/15   01/01/24     1        *        6.00     $ 248      $ 248      $ 248   
 

(capitalized interest of $24 per footnote 2)

                   
  BB Opco, LLC d/b/a BreathableBaby, LLC (interest rate includes PIK interest of 3.00%)   Term Loan   08/01/14   08/01/19     1        1     14.00     $ 2,616      $ 2,616      $ 2,619   
 

(capitalized interest of $117 per footnote 2)

                   
  Tech Cast Holdings, LLC   Term Loan   12/12/14   12/12/19     1        1     15.00     $ 2,635      $ 2,635      $ 2,611   
  American Cylinder, Inc. d/b/a All Safe (interest rate includes PIK interest of 7.00%)   Term Loan   07/03/13   01/03/18     1        1     19.00     $ 1,663      $ 1,663      $ 1,662   
 

(capitalized interest of $163 per footnote 2)

                   

+

  Respiratory Technologies, Inc.   Term Loan   04/25/12   04/25/17     1        1     12.00     $ 1,500      $ 1,500      $ 1,501   
  Orchard Holdings, Inc. &   Term Loan   03/10/99   03/31/10     1        *        13.00     $ 1,390      $ 1,390      $ 1,390   
  Quaker Bakery Brands, Inc.   Term Loan   03/28/12   03/28/17     1        *        17.00     $ 1,300      $ 1,300      $ 1,299   

+

  Various Other && 12.00% to 14.00%   Term Loan  

03/31/06

to

03/06/14

  03/31/18 to 03/06/19     2        *        13.69     $ 750      $ 750      $ 625   

Professional, Scientific, and Technical Services (15% of the total)

  Weather Decision Technologies, Inc. {One-time on 1/1/18 to 15%} (interest rate includes PIK interest of 9.00%)   Term Loan   12/11/15   12/11/20     1        1     18.00     $ 3,767      $ 3,767      $ 3,757   
 

(capitalized interest of $267 per footnote 2)

                   
  Northern Technologies, LLC (interest rate includes PIK interest of 1.00%)   Term Loan   01/29/16   01/29/23     1        1     13.00   $ 3,500      $ 3,524      $ 3,524      $ 3,523   
 

(capitalized interest of $24 per footnote 2)

                   

+

  DPIS Engineering, LLC   Term Loan   12/01/14   06/30/20     1        1     12.00     $ 2,000      $ 2,000      $ 1,997   
  J. R. Thompson Company LLC (interest rate includes PIK interest of 2.00%)   Term Loan   05/21/15   05/21/22     1        1     14.00     $ 1,617      $ 1,617      $ 1,617   
 

(capitalized interest of $6 per footnote 2)

                   

Information (11% of the total)

  US Internet Corp.   Term Loan   06/12/13   09/18/20     1        1     14.50     $ 3,000      $ 3,000      $ 3,011   
  US Internet Corp.   Term Loan   03/18/15   09/18/20     1        1     14.50     $ 1,750      $ 1,750      $ 1,742   
  US Internet Corp.   Term Loan   02/05/16   02/11/23     1        *        14.50   $ 1,900      $ 950      $ 950      $ 940   
  Centare Holdings, Inc. (interest rate includes PIK interest of 2.00%)   Term Loan   08/30/13   08/30/18     1        1     14.00     $ 2,500      $ 2,500      $ 2,493   

Arts, Entertainment, and Recreation (7% of the total)

  RPAC Racing, LLC (interest rate includes PIK interest of 10.00%)   Term Loan   11/19/10   01/15/17     1        2     10.00     $ 5,420      $ 5,420      $ 5,420   
 

(capitalized interest of $2380 per footnote 2)

                   

Transportation and Warehousing (5% of the total)

  LLL Transport, Inc. (interest rate includes PIK interest of 3.00%)   Term Loan   10/23/15   04/23/21     1        1     15.00     $ 3,595      $ 3,595      $ 3,592   
 

(capitalized interest of $95 per footnote 2)

                   

 

Page 35 of 83


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

September 30, 2016

 

(Dollars in
thousands)

 

Obligor
Name/Interest Rate
Range

  

Security
Type (all
restricted
unless
otherwise
noted)

   Acquisition
Date
     Maturity
Date
     No. of
Invest.
     % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2016
Acquisitions (5)
     Principal
Outstanding
     Cost (4)      Fair
Value
 

Administrative and Support Services (4% of the total)

  Staff One, Inc.    Term Loan      06/30/08         03/31/18         1         1     3.00      $ 2,813       $ 2,813       $ 2,813   
  Staff One, Inc.    Term Loan      09/15/11         03/31/18         1         *        3.00      $ 352       $ 352       $ 352   

Wholesale Trade (4% of the total)

  +   Classic Brands, LLC    Term Loan      01/08/16         04/30/23         1         1     12.00   $ 2,880       $ 2,879       $ 2,879       $ 2,879   

Construction (2% of the total)

    Highland Crossing-M, LLC    Term Loan      01/07/15         02/01/25         1         1     11.50      $ 1,450       $ 1,450       $ 1,450   

Accommodation and Food Services (1% of the total)

    Various Other && 9.25% to 10.00%    Term Loan     
 
 
06/30/00
to
11/05/10
  
  
  
    
 
 
09/30/17
to
11/05/20
  
  
  
     3         *        9.78      $ 1,254       $ 1,254       $ 480   

Retail Trade (1% of the total)

    Various Other && 10.00%    Term Loan      06/30/00        09/30/17        1         *        10.00      $ 107       $ 107       $ 35   
               

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total secured mezzanine (2)

  

        35         26     13.55   $ 15,280       $ 73,502       $ 73,502       $ 72,415   
               

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Other secured commercial (44% New York, 35% North Carolina, 18% New Jersey and 3% all other states)

   

                  

Retail Trade (56% of the total)

    Medallion Fine Art Inc (interest rate includes PIK interest of 12%)    Term Loan      12/17/12         12/17/17         1         1     12.00      $ 2,968       $ 2,968       $ 2,968   
   

(capitalized interest of $2604 per footnote 2)

                           
    Various Other && 4.75% to 10.50%    Term Loan     
 
 
10/28/08
to
05/03/16
  
  
  
    
 
 
03/15/17
to
05/03/21
  
  
  
     8         1     8.26   $ 175       $ 2,082       $ 2,062       $ 1,947   

Arts, Entertainment, and Recreation (35% of the total)

    Rpac Racing LLC (interest rate includes PIK interest of 8%)    Term Loan      06/22/16         10/31/16         1         1     8.00   $ 2,000       $ 2,034       $ 2,034       $ 2,034