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MEDALLION FINANCIAL CORP - Annual Report: 2011 (Form 10-K)

Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the Fiscal Year Ended December 31, 2011

OR

 

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

For the transition period from to             

Commission file number 814-00188

MEDALLION FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

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

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

(Address of principal executive offices) (Zip Code)

(212) 328-2100

(Registrant’s telephone number, including area code)

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

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

Common Stock, par value $0.01 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:    YES  ¨    NO  x

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

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

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

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

Large Accelerated Filer  ¨        Accelerated Filer  x        Non Accelerated Filer  ¨        Smaller Reporting Company  ¨

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant, computed by reference to the last reported price at which the stock was sold on June 30, 2011 was $143,401,177.

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of March 26, 2012 was 17,942,527.

 

 

 


Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement for its 2011 Annual Meeting of Shareholders, which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year-end of December 31, 2011, are incorporated by reference into Part III of this form 10-K

MEDALLION FINANCIAL CORP.

2011 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

PART I

     3   

ITEM 1. OUR BUSINESS

     3   

ITEM 1A. RISK FACTORS

     21   

ITEM 1B. UNRESOLVED STAFF COMMENTS

     31   

ITEM 2. PROPERTIES

     31   

ITEM 3. LEGAL PROCEEDINGS

     31   

PART II

     31   

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

     31   

ITEM 6. SELECTED FINANCIAL DATA

     34   

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

     35   

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     54   

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     55   

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

     55   

ITEM 9A. CONTROLS AND PROCEDURES

     55   

ITEM 9B. OTHER INFORMATION

     58   

PART III

     58   

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     58   

ITEM 11. EXECUTIVE COMPENSATION

     58   

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

     58   

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

     58   

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     58   

PART IV

     58   

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     58   

SIGNATURES

     63   

CERTIFICATIONS

     67   

 

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

This report contains forward-looking statements relating to future events and future performance applicable to us within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words expects, anticipates, intends, believes, or similar language. Actual results could differ materially from those anticipated in such forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statements. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

PART I

 

ITEM 1. OUR BUSINESS

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

Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 6%, and our commercial loan portfolio at a compound annual growth rate of 2% (10% and 8% 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 11%. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which also includes assets serviced for third party investors, were $1,141,806,000 as of December 31, 2011 and $1,093,379,000 as of December 31, 2010, and have grown at a compound annual growth rate of 12% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid dividends in excess of $167,901,000 or $10.60 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.

In December 2010, 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.

On March 26, 2009, we formed a new wholly-owned New York limited liability company subsidiary, Medallion Funding LLC. On February 26, 2010, Medallion Funding Corp. merged into Medallion Funding LLC and following the merger, Medallion Funding LLC was the surviving entity and the successor-in-interest to Medallion Funding Corp.’s business. There was no business or operational change resulting from this corporate restructuring. For federal and most state tax purposes, Medallion Funding LLC is treated as a disregarded entity, and is subsumed in the tax return of the Company. Medallion Funding LLC maintains its status as an SBIC.

 

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We also conduct business through our asset-based lending division, Medallion Business Credit, an originator of loans to small businesses for the purpose of financing inventory and receivables, which prior to December 31, 2007, was a wholly-owned investment company subsidiary. On December 31, 2007, Medallion Business Credit was merged into us and ceased to exist as a separate legal entity.

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 $321,027,000 as of December 31, 2011. MSC earns referral and servicing fees for these activities. As a non-investment company, Medallion Bank is not consolidated with the Company, which is an investment company under the Investment Company Act of 1940 (the 1940 Act).

We are a closed-end, non-diversified management investment company, organized as a Delaware corporation, under the 1940 Act. We have elected to be treated as a business development company (BDC) under the 1940 Act. We have also elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Internal Revenue Code, or the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our shareholders as dividends, if we meet certain source-of-income and asset diversification requirements. Medallion Bank is not a RIC and must pay corporate-level US federal and state income taxes.

We are managed by our executive officers under the supervision of our board of directors. As a result, we do not pay investment advisory fees, but instead we incur the operating costs associated with employing investment and portfolio management professionals. Alvin Murstein, our chairman and chief executive officer, has over 45 years of experience in the ownership, management, and financing of taxicab medallions and other commercial businesses. Andrew M. Murstein, our president, has 20 years of experience and is the third generation in his family to participate in the business.

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

 

LOGO

 

(1) An SBIC and a RIC which originates and services taxicab medallion and commercial loans.
(2) An SBIC which is our primary taxicab medallion lending company.
(3) An SBIC and a RIC which conducts a mezzanine financing business.
(4) Formed for the purpose of holding and managing equity investments in a racing team, an equipment manufacturing business, and an airport and food retail business.
(5) Formed for the purpose of originating taxicab medallion loans.
(6) Formed for the purpose of holding foreclosed real estate.
(7) Formed for the purpose of owning medallion loans originated by Medallion Funding.
(8) Formed for the purpose of holding an equity investment in a racing team.
(9) Formed for purpose of owning and leasing repossessed Chicago taxicab medallions.
(10) Formed for the purpose of issuing unsecured preferred securities to investors.
(11) Formed for the purpose of holding foreclosed real estate.

 

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(12) 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.
(13) Formed for the purpose of conducting loan servicing activities.
(14) Formed for the purpose of engaging in out-of-home media planning and buying.
(15) Formed for the purpose of holding and managing a hotel investment.
(16) Formed for the purpose of engaging in sports advertising and sponsorship services.
(17) Formed for the purpose of engaging in general consulting services.

Our Market

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

 

   

loans that finance taxicab medallions;

 

   

loans that finance commercial businesses; and

 

   

loans that finance consumer purchases of recreational vehicles, boats, motorcycles, and trailers.

The following chart shows the components of our $956,626,000 managed net investment portfolio as of December 31, 2011.

 

(Dollars in thousands)

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

Medallion loans

   $ 307,167       $ 293,500      $ 600,667   

Commercial loans

     54,159         75,511        129,670   

Consumer loans

     —           192,672        192,672   

Investments in Medallion Bank and other controlled subsidiaries

     85,932         (83,429     2,503   

Investment securities

     —           26,537        26,537   

Equity investments

     4,577         —          4,577   
  

 

 

    

 

 

   

 

 

 

Net investment portfolio

   $ 451,835       $ 504,791      $ 956,626   
  

 

 

    

 

 

   

 

 

 

 

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

Medallion Loans

Taxi medallion loans of $307,167,000 comprised 68% of our $451,835,000 net investment portfolio as of December 31, 2011, compared to $323,126,000 or 67% of our $483,516,000 net investment portfolio as of December 31, 2010. Managed taxi medallion loans of $600,667,000 comprised 63% of our $956,626,000 managed net investment portfolio as of December 31, 2011, compared to $583,593,000 or 62% of our $946,343,000 managed net investment portfolio as of December 31, 2010. Including loans to unaffiliated investors, the total amount of medallion loans under our management was $676,533,000 as of December 31, 2011, compared to $647,527,000 as of December 31, 2010. Since 1979, we and Medallion Bank have originated, on a combined basis, approximately $2,534,407,000 in medallion loans in New York City, Chicago, Boston, Newark, Cambridge, and other cities within the United States. In addition, our management has a long history of owning, managing, and financing taxicab fleets, taxicab medallions, and corporate car services, dating back to 1956.

Medallion loans collateralized by New York City taxicab medallions and related assets comprised 74% of the value of the medallion loan portfolio as of December 31, 2011 and 2010, and were 78% and 76% on a managed basis. The New York City Taxi and Limousine Commission, or TLC, estimates that the total value of all of New York City taxicab medallions and related assets exceeded $11.9 billion as of December 31, 2011. We estimate that the total value of all taxicab medallions and related assets in our major US markets exceeded $15.2 billion as of December 31, 2011.

Although some of the medallion loans have from time to time been in arrears or in default, our loss experience on medallion loans has been negligible. We believe that our medallion loan portfolio is of high credit quality because medallions have generally increased in value and are relatively simple to repossess and resell in an active market. In the past, when a borrower has defaulted on a loan, we have repossessed the medallion collateralizing that loan. If the loan was not brought current, the medallion was sold in the active market at prices at or in excess of the amounts due.

 

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The following table displays information on managed medallion loans outstanding (other than those managed for third party investors) in each of our major markets at December 31, 2011. For a presentation of only the consolidated on-balance sheet medallion loans, see the Consolidated Summary Schedule of Investments in the consolidated financial statements on page F-30.

 

(Dollars in thousands)

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

Managed medallion loans

         

New York

     880         78     4.52   $ 466,385   

Chicago

     275         11        5.91        67,756   

Newark

     140         4        7.36        22,459   

Boston

     66         3        6.58        18,649   

Cambridge

     32         2        6.49        13,728   

Other

     84         2        7.67        12,007   
  

 

 

    

 

 

     

 

 

 

Total managed medallion loans

     1,477         100     4.96        600,984   
  

 

 

    

 

 

     

 

 

 

Deferred loan acquisition costs

            1,143   

Unrealized depreciation on loans

            (1,460
         

 

 

 

Net managed medallion loans

          $ 600,667   
         

 

 

 
(1) Based on principal balance outstanding at December 31, 2011.

 

(2) Based on the contractual rates of the portfolios at December 31, 2011.

The New York City Market. A New York City taxicab medallion is the only permitted license to operate a taxicab and accept street hails in New York City. As reported by the TLC, individual (owner-driver) medallions sold for approximately $699,000 and corporate medallions sold for approximately $1,000,000 as of December 31, 2011. The number of taxicab medallions is limited by law, and as a result of the limited supply of medallions, an active market for medallions has developed. The law limiting the number of medallions also stipulates that the ownership for the 13,237 medallions outstanding as of December 31, 2011 shall remain divided into 5,573 individual medallions and 7,664 fleet or corporate medallions. Corporate medallions are more valuable because they can be aggregated by businesses, leased to drivers, and operated for more than one shift. New York City auctioned 600 additional medallions during 2004, 308 during 2006, and 89 during 2008. The medallions auctioned in 2006 were restricted to hybrid fuel vehicles and wheelchair accessible vehicles. In addition, New York City auctioned an additional 63 medallions for wheelchair accessible vehicles in 2007. New York City announced a 25% fare hike to support the increased level of medallions, which took effect in the 2004 second quarter. The New York State legislature enacted a law on December 21, 2011 which was amended on February 17, 2012 to permit cars for hire to pick up street hails in the boroughs outside Manhattan. This law has not yet been implemented.

A prospective medallion owner must qualify under the medallion ownership standards set and enforced by the TLC. These standards prohibit individuals with criminal records from owning medallions, require that the funds used to purchase medallions be derived from legitimate sources, and mandate that taxicab vehicles and meters meet TLC specifications. In addition, before the TLC will approve a medallion transfer, the TLC requires a letter from the seller’s insurer stating that there are no outstanding claims for personal injuries in excess of insurance coverage. After the transfer is approved, the owner’s taxicab is subject to quarterly TLC inspections.

Most New York City medallion transfers are handled through approximately 22 medallion brokers licensed by the TLC. In addition to brokering medallions, these brokers also arrange for TLC documentation insurance, vehicles, meters, and financing. We have excellent relations with many of the most active brokers, and regularly receive referrals from them. Brokers generated 36% of the loans originated during 2011, and 40% for 2010. However, we receive most of our referrals from a small number of brokers.

The Chicago Market. We estimate that Chicago medallions currently sell for approximately $280,000 as of December 31, 2011. Pursuant to a municipal ordinance, the number of outstanding medallions is currently capped at 6,951. We estimate that the total value of all Chicago medallions and related assets is over $2,001,888,000 as of December 31, 2011.

The Boston Market. We estimate that Boston medallions currently sell for approximately $483,000 as of December 31, 2011. The number of Boston medallions is currently capped at 1,825. We estimate that the total value of all Boston medallions and related assets is over $903,047,000 as of December 31, 2011.

The Newark Market. We estimate that Newark medallions currently sell for approximately $330,000 as of December 31, 2011. The number of Newark medallions has been limited to 600 since 1950 by local law. We estimate that the total value of all Newark medallions and related assets is over $201,600,000 as of December 31, 2011.

The Cambridge Market. We estimate that Cambridge medallions currently sell for approximately $490,000 as of December 31, 2011. The number of Cambridge medallions is currently 257. We estimate that the total value of all Cambridge medallions and related assets is over $128,680,000 as of December 31, 2011.

 

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Commercial Loans

Commercial loans finance either the purchase of the equipment and related assets necessary to open a new business or the purchase or improvement of an existing business. From the inception of the commercial loan business in 1987 through December 31, 2011, we and Medallion Bank have originated more than 10,305 commercial loans for an aggregate principal amount of approximately $803,663,000. Commercial loans of $54,159,000 comprised 12% of our $451,835,000 net investment portfolio as of December 31, 2011, compared to $76,866,000 or 16% of our $483,516,000 net investment portfolio as of December 31, 2010. Managed commercial loans of $129,700,000 comprised 13% of our $956,626,000 net investment portfolio as of December 31, 2011, compared to $149,567,000 or 16% of our $946,343,000 managed net investment portfolio as of December 31, 2010. We have increased our commercial loan activity in recent years, primarily because of the attractive higher yielding, floating rate nature of most of this business. The outstanding balances of managed commercial loans have grown at a compound annual rate of 10% since 1996. The increase since 1996 has been primarily driven by internal growth through the origination of additional commercial loans. We focus our marketing efforts on the manufacturing, wholesale trade, administrative and support services, and accommodation and food services industries with the portfolio concentrated in the manufacturing industry. The majority of our commercial borrowers are located in the New York metropolitan area, the Midwest region, and Florida. We plan to continue expanding our commercial loan activities by developing a more diverse borrower base, a wider geographic area of coverage, and by expanding targeted industries.

Commercial loans are generally secured by equipment, accounts receivable, real estate, or other assets, and have interest rates averaging 551 basis points over the prevailing prime rate at year end, down from 619 basis points over prime at the end of 2010. As with medallion loans, the vast majority of the principals of borrowers personally guarantee commercial loans. The aggregate realized loss of principal on managed commercial loans has averaged 1.7% per annum for the last five years.

The following table displays information on managed commercial loans outstanding (other than those managed for third party investors) in each of our major markets at December 31, 2011. For a presentation of only the consolidated on-balance sheet commercial loans, see the Consolidated Summary Schedule of Investments in the consolidated financial statements on page F-30.

 

(Dollars in thousands)

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

Managed commercial loans

         

Asset-based

     43         56     5.80   $ 81,880   

Secured mezzanine

     26         36        13.78        51,622   

Other secured commercial

     53         8        7.28        11,654   
  

 

 

    

 

 

     

 

 

 

Total managed commercial loans

     122         100     8.76        145,156   
  

 

 

    

 

 

     

 

 

 

Deferred loan acquisition income

            (46

Unrealized depreciation on loans

            (15,440
         

 

 

 

Net managed commercial loans

          $ 129,670   
         

 

 

 

 

(1) Based on principal balance outstanding at December 31, 2011.

 

(2) Based on the contractual rates of the portfolios at December 31, 2011.

Asset Based Loans. Through our Medallion Business Credit division, we originate, manage, and service asset-based loans to small businesses which require working capital credit facilities ranging from $500,000 to $6,500,000. Medallion Business Credit refers most of its potential commercial loans to Medallion Bank to originate, so that we can benefit from Medallion Bank’s lower cost of funds. Additionally, from time to time, Medallion Business Credit also sells and purchases loan participations to or from independent third parties. Together, these loans represent approximately 56% of the managed commercial loan portfolio as of December 31, 2011 and were 48% as of December 31, 2010. The commercial loans are secured principally by the borrower’s accounts receivable, but may also be secured by inventory, machinery, equipment, and/or real estate, and are personally guaranteed by the principals. Currently, our clients are mostly located in the New York metropolitan area, and include wholesale and retail trade, transportation and warehousing, and other industrial and services businesses. We had successfully established 43 commercial loans as of December 31, 2011.

Secured Mezzanine Loans. Through our subsidiary Medallion Capital, we originate both senior and subordinated loans nationwide to businesses in a variety of industries, including manufacturing and various service providers, more than a third of which are located in the upper Midwest and Great Lakes region, with the rest scattered across the country. These loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $1,000,000 to $5,000,000, and represent approximately 36% of our managed commercial loan portfolio as of December 31, 2011, and were 42% as of December 31, 2010. Frequently, we also receive warrants to purchase an equity interest in the borrowers of secured mezzanine loans.

 

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Other Secured Commercial Loans. We originate, primarily through our subsidiary Freshstart, other secured commercial loans that are focused on food services, real estate, dry cleaner and laundromat businesses, which are typically within 200 miles of New York City. These loans are secured by all of the assets of the businesses and are personally guaranteed by the principals. Frequently, we receive assignments of lease from our borrowers. The loans range in size from under $100,000 to approximately $3,000,000. These loans represented approximately 8% of the managed commercial loan portfolio as of December 31, 2011, and were 10% as of December 31, 2010. Historically, most of the portfolio has consisted of fixed-rate loans.

Consumer Loans

Consumer loans are originated by Medallion Bank, a wholly-owned, unconsolidated portfolio company. Consumer loans of $192,672,000 comprised 20% of our $956,626,000 managed net investment portfolio as of December 31, 2011 and consumer loans of $182,879,000 comprised 19% of our $946,343,000 managed net investment portfolio as of December 31, 2010. The loans are collateralized by recreational vehicles, boats, motorcycles, and trailers, located in all 50 states. The portfolio is serviced by a large third party servicer. We believe that Medallion Bank’s consumer loan portfolio is of acceptable credit quality given the high interest rates earned on the loans, which compensate for the higher degree of credit risk in the portfolio.

Other

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

Our Strategy

Our core philosophy has been “In niches there are riches.” We try to identify markets that are profitable and where we can be an industry leader. Key elements of our strategy include:

Capitalize on our relationships with brokers and dealers. We are committed to establishing, building, and maintaining our relationships with our brokers and dealers. Our marketing efforts are focused on building relationships with brokers in the medallion market and dealers in the consumer market. We believe that our relationships with brokers and dealers provide us with, in addition to potential investment opportunities, other significant benefits, including an additional layer of due diligence and additional monitoring capabilities. We have assembled a management team that has developed an extensive network of broker and dealer relationships in our target market over the last 50 years. We believe that our management team’s relationships with these brokers and dealers have and will continue to provide us with significant investment opportunities. During 2011, approximately 36% of our originated investment transactions were generated by brokers and dealers.

Employ disciplined underwriting policies and maintain rigorous portfolio monitoring. We have an extensive investment underwriting and monitoring process. We conduct a thorough analysis of each potential investment and its prospects, competitive position, financial performance, and industry dynamics. We stress the importance of credit and risk analysis in our underwriting process. We believe that our continued adherence to this disciplined process will permit us to continue to generate a stable, diversified, and increasing revenue stream of current income from our debt investments to enable us to make distributions to our shareholders.

Leverage the skills of our experienced management team. Our management team is led by our Chief Executive Officer, Mr. Alvin Murstein, and our President, Mr. Andrew M. Murstein. Alvin Murstein has over 45 years of experience in the ownership, management, and financing of taxicab medallions and other commercial businesses, and Andrew M. Murstein is the third generation in his family to participate in the business. The other members of our management team have broad investment backgrounds, with prior experience at specialty finance companies, middle market commercial banks, and other financial services companies. We believe that the experience and contacts of our management team will continue to allow us to effectively implement the key aspects of our business strategy.

Perform Strategic Acquisitions. In addition to increasing market share in existing lending markets and identifying new niches, we seek to acquire medallion financing businesses and related portfolios and specialty finance companies that make secured loans to small businesses which have experienced historically low loan losses similar to our own. Since our initial public offering in May 1996, eight specialty finance companies, five loan portfolios, and three taxicab rooftop advertising companies have been acquired.

 

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Investment Activity

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

 

     Year ended December 31,  

(Dollars in thousands)

   2011     2010     2009  

Net investments at beginning of year

   $ 946,343      $ 846,542      $ 922,007   

Investments originated (1)

     471,194        525,872        329,708   

Repayments of investments (1)

     (438,646     (392,417     (365,108

Net realized gains (losses) on investments (2)

     (6,810     (18,333     (15,467

Net increase in unrealized depreciation (3)

     (4,038     66        (9,210

Transfers to other assets/liabilities, net

     (9,171     (13,478     (13,619

Amortization of origination costs

     (2,246     (1,909     (1,769
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in investments

     10,283        99,801        (75,465
  

 

 

   

 

 

   

 

 

 

Net investments at end of year

   $ 956,626      $ 946,343      $ 846,542   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes refinancings.
(2) Excludes net realized losses of $779 for the year ended December 31, 2010, related to the investment in SPAC 2, and realized gains (losses) of ($1) for the year ended December 31, 2009, related to foreclosed properties, which were carried in other assets on the consolidated balance sheet.
(3) Excludes net unrealized appreciation of $3,455, $2,153, and $3,742 for the years ended December 31, 2011, 2010, and 2009, related to foreclosed properties, which were carried in other assets on the consolidated balance sheet, and the reversal of unrealized depreciation of $759 for the year ended December 31, 2010, related to the realized loss of the SPAC 2 investment.

Investment Characteristics

Medallion Loans. Our medallion loan portfolio consists of mostly fixed-rate loans, collateralized by first security interests in taxicab medallions and related assets (vehicles, meters, and the like). The portfolio was originated at an approximate loan-to-value ratio range of 60-75%. We estimate that the average loan-to-value ratio of all of the medallion loans was approximately 40% as of December 31, 2011. In addition, we have recourse against a vast majority of the owners of the taxicab medallions and related assets through personal guarantees.

Medallion loans generally require equal monthly payments covering accrued interest and amortization of principal over a five to twenty-five year schedule, subject to a balloon payment of all outstanding principal after three or five years. More recently, we have begun to originate loans with one-to-three year maturities where interest rates are adjusted and a new maturity period set. Borrowers may prepay medallion loans upon payment of a fee of approximately 90 days’ interest.

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

Commercial Loans. We have typically originated commercial loans in principal amounts ranging from $100,000 to $6,500,000, and occasionally, have originated loans in excess of that amount. These loans are generally retained and typically have maturities ranging from three to ten years and require monthly payments ranging from full amortization over the loan term to fully deferred interest and principal at maturity, with multiple payment options in between. Substantially all loans may be prepaid with a fee ranging from 30 to 120 days’ interest. The term of, and interest rate charged on, certain of our outstanding loans are subject to SBA regulations. Under SBA regulations, the maximum rate of interest permitted on loans originated by us is 19%. Unlike medallion loans, for which competition precludes us from charging the maximum rate of interest permitted under SBA regulations, we are able to charge the maximum rate on certain commercial loans. We believe that the increased yield on commercial loans compensates for their higher risk relative to medallion loans and further illustrates the benefits of diversification.

Commercial loans are generally originated at an average loan-to-value ratio of 60 to 75%. Substantially all of the commercial loans are collateralized by security interests in the assets being financed by the borrower. In addition, we have recourse against the vast majority of the principals of borrowers who personally guarantee the loans. Although personal guarantees increase the commitment of borrowers to repay their loans, we cannot assure you that the assets available under personal guarantees would, if required, be sufficient to satisfy the obligations secured by such guarantees. In certain cases, equipment vendors may provide full and partial recourse guarantees on loans.

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

 

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Marketing, Origination, and Loan Approval Process

We employ 22 loan originators to originate medallion, commercial, and consumer loans. Each loan application is individually reviewed through analysis of a number of factors, including loan-to-value ratios, a review of the borrower’s credit history, public records, personal interviews, trade references, personal inspection of the premises, and approval from the TLC, SBA, or other regulatory body, if applicable. Each medallion and commercial loan applicant is required to provide personal or corporate tax returns, premises leases, and/or property deeds. Senior management establishes loan origination criteria. Loans that conform to such criteria may be processed by a loan officer with the proper credit authority, and non-conforming loans must be approved by the chief executive officer and/or the chief credit officer. Both medallion and commercial loans are sourced from brokers with extensive networks of applicants, and commercial loans are also referred by contacts with banks, attorneys, and accounting firms. Consumer loans are primarily sourced through relationships which have been established with recreational vehicle and boat dealers throughout our market area.

Sources of Funds

We have historically funded our lending operations primarily through credit facilities with bank syndicates and, to a lesser degree, through equity or debt offerings or private placements, and fixed-rate, senior secured notes and long-term subordinated debentures issued to or guaranteed by the SBA. Since the inception of Medallion Bank, substantially all of Medallion Bank’s funding has been provided by FDIC insured brokered certificates of deposit. The determination of funding sources is established by our management, based upon an analysis of the respective financial and other costs and burdens associated with funding sources. Our funding strategy and interest rate risk management strategy is to have the proper structuring of debt to minimize both rate and maturity risk, while maximizing returns with the lowest cost of funding over an intermediate period of time.

The table below summarizes our sources of available funds and amounts outstanding under credit facilities and their respective end of period weighted average interest rates at December 31, 2011. See Note 4 to the consolidated financial statements for additional information about each credit facility.

 

Consolidated sources of funds (Dollars in thousands)

   Total  

Cash

   $ 29,352   

Bank loans

   $ 147,228   

Amounts undisbursed

     72,700   

Amounts outstanding

     74,528   

Average interest rate

     3.77

Maturity

     3/12-2/17   

Preferred securities

   $ 33,000   

Average interest rate

     7.68

Maturity

     9/37   

Lines of credit

   $ 200,000   

Amounts undisbursed

     19,434   

Amounts outstanding

     180,566   

Average interest rate

     1.45

Maturity

     12/13   

SBA debentures

   $ 74,685   

Amounts undisbursed

     5,000   

Amounts outstanding

     69,685   

Average interest rate

     5.44

Maturity

     9/12-3/21   
  

 

 

 

Total cash and amounts remaining undisbursed under credit facilities

   $ 126,486   
  

 

 

 

Total debt outstanding

   $ 357,779   
  

 

 

 

Medallion bank sources of funds

  

Cash

   $ 28,626   

Deposits

     514,329   

Average interest rate

     0.73

Maturity

     1/12-12/14   
  

 

 

 

Total cash and amounts remaining undisbursed under credit facilities, including Medallion Bank

   $ 155,112   
  

 

 

 

Total debt outstanding, including Medallion Bank

   $ 872,108   
  

 

 

 

 

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We fund our fixed-rate loans with variable-rate credit lines and bank debt, and with fixed-rate SBA debentures. The mismatch between maturities and interest-rate sensitivities of these balance sheet items results in interest rate risk. We seek to manage our exposure to increases in market rates of interest to an acceptable level by:

 

   

Originating adjustable rate loans;

 

   

Incurring fixed-rate debt; and

 

   

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

Nevertheless, we accept varying degrees of interest rate risk depending on market conditions. For additional discussion of our funding sources and asset liability management strategy, see Asset/Liability Management on page 49.

Competition

Banks, credit unions, and finance companies, some of which are SBICs, compete with us in originating medallion, commercial, and consumer loans. In addition, finance subsidiaries of equipment manufacturers also compete with us in originating commercial loans. Many of these competitors have greater resources than we do and certain competitors are subject to less restrictive regulations than us. As a result, we cannot assure you that we will be able to identify and complete the financing transactions that will permit us to compete successfully.

Employees

As of December 31, 2011 we employed 127 persons, including 32 at our Medallion Bank subsidiary. We believe that relations with all of our employees are good.

MATERIAL US FEDERAL INCOME TAX CONSIDERATIONS

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

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

 

   

a citizen or individual resident of the United States;

 

   

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

 

   

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

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

A “non-US shareholder” is a beneficial owner of shares of our common stock that is not a US shareholder.

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

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

 

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Election to Be Taxed as a RIC

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

Taxation as a RIC

If we:

 

   

qualify as a RIC; and

 

   

satisfy the Annual Distribution Requirement;

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

We will be subject to a 4% nondeductible federal excise tax on certain undistributed income of RICs unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98% of our capital gain net income for the one-year period ending October 31 in that calendar year, and (3) any income realized, but not distributed, in preceding years, or the Excise Tax Avoidance Requirement. We currently intend to make sufficient distributions each taxable year to satisfy the Excise Tax Avoidance Requirement.

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

 

   

qualify to be treated as a BDC under the 1940 Act at all times during each taxable year;

 

   

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

 

   

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

 

   

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

 

   

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

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

Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.

 

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We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our shareholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “Regulation—Senior Securities.” Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, we will be subject to tax in that year on all of our taxable income, regardless of whether we make any distributions to our shareholders. In that case, all of our income will be subject to corporate-level federal income tax, reducing the amount available to be distributed to our shareholders. In contrast, assuming we qualify as a RIC, our corporate-level federal income tax should be substantially reduced or eliminated. See “Election to be Taxed as a RIC” above.

The remainder of this discussion assumes that we qualify as a RIC and have satisfied the Annual Distribution Requirement.

Taxation of US Shareholders

Distributions by us generally are taxable to US shareholders as ordinary income or capital gains. Distributions of our “investment company taxable income” (which is, generally, our ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be taxable as ordinary income to US shareholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by us to non-corporate shareholders (including individuals) are attributable to dividends from US corporations and certain qualified foreign corporations, such distributions generally will be eligible for a maximum tax rate of 15% for taxable years beginning before January 1, 2013. In this regard, it is anticipated that distributions paid by us will generally not be attributable to dividends and, therefore, generally will not qualify for the 15% maximum rate. Distributions of our net capital gains (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly reported by us as “capital gain dividends” will be taxable to a US shareholder as long-term capital gains (currently at a maximum rate of 15% in the case of individuals, trusts, or estates), regardless of the US shareholder’s holding period for his, her, or its common stock, and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our earnings and profits first will reduce a US shareholder’s adjusted tax basis in such shareholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such US shareholder.

Although we currently intend to distribute any long-term capital gains at least annually, we may in the future decide to retain some or all of our long-term capital gains, but designate the retained amount as a “deemed distribution.” In that case, among other consequences, we will pay tax on the retained amount, each US shareholder will be required to include his, her, or its share of the deemed distribution in income as if it had been actually distributed to the US shareholder, and the US shareholder will be entitled to claim a credit equal to his, her, or its allocable share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the US shareholder’s tax basis for his, her, or its common stock. Since we expect to pay tax on any retained capital gains at our regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of tax that individual shareholders will be treated as having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the US shareholder’s other US federal income tax obligations or may be refunded to the extent it exceeds a shareholder’s liability for US federal income tax. A shareholder that is not subject to federal income tax or otherwise required to file a US federal income tax return would be required to file a US federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, we must provide written notice to our shareholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a “deemed distribution.”

For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the US shareholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November, or December of any calendar year, payable to shareholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by our US shareholders on December 31 of the year in which the dividend was declared.

 

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If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though it represents a return of his, her, or its investment.

A shareholder generally will recognize taxable gain or loss if the shareholder sells or otherwise disposes of his, her, or its shares of our common stock. Any gain arising from such sale or disposition generally will be treated as capital gain or loss if the shareholder has held his, her or its shares for more than one year. Otherwise, it would be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other shares of our common stock are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition.

In general, individual and other non-corporate US shareholders currently are subject to a maximum federal income tax rate of 15% on their net capital gain, i.e., the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year, including a long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate US shareholders currently are subject to federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Non-corporate shareholders with net capital losses for a year (i.e., capital losses in excess of capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate shareholder in excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate shareholders generally may not deduct any net capital losses against ordinary income for a year, but may carryback such losses for three years or carry forward such losses for five years.

We will send to each of our US shareholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share basis, the amounts includible in such US shareholder’s taxable income for such year as ordinary income and as long-term capital gain. In addition, the US federal tax status of each year’s distributions generally will be reported to the IRS (including the amount of dividends, if any, eligible for the 15% maximum rate). Distributions may also be subject to additional state, local, and foreign taxes depending on a US shareholder’s particular situation. Dividends distributed by us generally will not be eligible for the dividends-received deduction or the 15% maximum rate applicable to qualifying dividends.

We may be required to withhold US federal income tax (“backup withholding”) currently at a rate of 28% from all taxable distributions to any non-corporate US shareholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such shareholder is exempt from backup withholding, or (2) with respect to whom the IRS notifies us that such shareholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the US shareholder’s federal income tax liability and may entitle such shareholder to a refund, provided that proper information is timely provided to the IRS.

Taxation of Non-US Shareholders

Whether an investment in our common stock is appropriate for a non-US shareholder will depend upon that person’s particular circumstances. An investment in our common stock by a non-US shareholder may have adverse tax consequences. Non-US shareholders should consult their tax advisers before investing in our common stock.

Dividends paid by us to non-US shareholders are generally subject to withholding at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income and short-term capital gains. In order to obtain a reduced rate of withholding, a non-US shareholder will be required to provide an IRS Form W-8BEN certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-US shareholder who provides a Form W-8ECI, certifying that the dividends are effectively connected with the non-US shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular US income tax as if the non-US shareholder were a US shareholder. A non-US corporation receiving effectively connected dividends may also be subject to additional “branch profits tax” imposed at a rate of 30% (or lower treaty rate). A non-US shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate.

In general, US federal withholding tax will not apply to any gain or income realized by a non-US shareholder in respect of any distributions of net long-term capital gains over net short-term capital losses, exempt-interest dividends, or upon the sale or other disposition of shares of our common stock.

 

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Beginning in 2014, the Code may impose a withholding tax of 30% on payments (including interest, dividends, and, beginning in 2015, gross proceeds on sales of securities) that are attributable to certain US investments and made to non-US entities, unless such entities comply with certain reporting requirements to the IRS and/or to us as to identifying information (including name, address and taxpayer identification number) of their direct and indirect US investors.

Non-US persons should consult their own tax advisors with respect to the US federal income tax and withholding tax, and state, local, and foreign tax consequences of an investment in the shares.

Failure to Qualify as a RIC

If we were unable to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to shareholders, nor would they be required to be made. Distributions would generally be taxable to our shareholders as ordinary dividend income eligible for the 15% maximum rate for taxable years beginning before January 1, 2013 to the extent of our current and accumulated earnings and profits for US federal tax purposes. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the shareholder’s tax basis, and any remaining distributions would be treated as a capital gain.

GOVERNMENT REGULATION

Regulation under the 1940 Act

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

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

 

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Qualifying Assets

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

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

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

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

(c) satisfies any of the following:

 

   

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

 

   

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

 

   

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

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

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

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

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

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

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

Managerial Assistance to Portfolio Companies

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

Temporary Investments

Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash equivalents, US government securities, or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in US Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the US government

 

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or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements.

Senior Securities

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

Regulation by the SBA

Medallion Funding, Medallion Capital, and Freshstart each operate as Small Business Investment Companies, or SBIC’s. The Small Business Investment Act (SBIA) authorizes the organization of SBIC’s as vehicles for providing equity capital, long term financing, and management assistance to small business concerns. The SBIA and the SBA regulations define a “small business concern” as a business that is independently owned and operated, which does not dominate its field of operation, and which (i) has a net worth, together with any affiliates, of $18.0 million or less and average annual net income after US federal income taxes for the preceding two years of $6.0 million or less (average annual net income is computed without the benefit of any carryover loss), or (ii) satisfies alternative criteria under SBA regulations that focus on the industry in which the business is engaged and the number of persons employed by the business or its gross revenues. In addition, at the end of each year, at least 20% of the total amount of loans made after April 25, 1994 must be made in “smaller businesses” which have a net worth of $6.0 million or less, and average net income after federal income taxes for the preceding two years of $2.0 million or less. SBA regulations also prohibit an SBIC from providing funds to a small business concern for certain purposes, such as relending and reinvestment.

Medallion Funding is authorized to make loans to borrowers other than disadvantaged businesses (that is, businesses that are at least 50% owned, and controlled, and managed, on a day to day basis, by a person or persons whose participation in the free enterprise system is hampered because of social or economic disadvantage) if, at the time of the loan, Medallion Funding has in its portfolio outstanding loans to disadvantaged businesses with an aggregate cost basis equal to or exceeding the value of the unamortized repurchase discount under the preferred stock repurchase agreement between Medallion Funding and the SBA, which is currently zero.

Under current SBA Regulations, the maximum rate of interest that Medallion Funding may charge may not exceed the higher of (i) 19% or (ii) the sum of (a) the higher of (i) that company’s weighted average cost of qualified borrowings, as determined under SBA Regulations, or (ii) the current SBA debenture rate, plus (b) 11%, rounded to the next lower eighth of one percent. As of December 31, 2011, the maximum rate of interest permitted on loans originated by Medallion Funding, Medallion Capital, and Freshstart was 19%. As of December 31, 2011, our outstanding medallion loans had a weighted average rate of interest 5.11% and our outstanding commercial loans had a weighted average rate of interest of 12.06%. Current SBA regulations also require that each loan originated by an SBIC has a term between one and 20 years; loans to disadvantaged businesses also may be for a minimum term of one year.

The SBA restricts the ability of SBICs to repurchase their capital stock, to retire their SBA debentures, and to lend money to their officers, directors, and employees, or invest in affiliates thereof. The SBA also prohibits, without prior SBA approval, a “change of control” or transfers which would result in any person (or group of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC. A “change of control” is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements, or otherwise.

Under SBA Regulations, without prior SBA approval, loans by licensees with outstanding SBA leverage to any single small business concern may not exceed 20% of an SBIC’s regulatory capital, as defined. Under the terms of the respective conversion agreements with the SBA, however, Medallion Funding is authorized to make loans to disadvantaged borrowers in amounts not exceeding 30% of its respective regulatory capital.

SBICs must invest idle funds that are not being used to make loans in investments permitted under SBA regulations. These permitted investments include direct obligations of, or obligations guaranteed as to principal and interest by, the government of the US with a term of 15 months or less and deposits maturing in one year or less issued by an institution insured by the FDIC. These

 

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permitted investments must be maintained in (i) direct obligations of, or obligations guaranteed as to principal and interest by, the US, which mature within 15 months from the date of the investment; (ii) repurchase agreements with federally insured institutions with a maturity of seven days or less if the securities underlying the repurchase agreements are direct obligations of, or obligations guaranteed as to principal and interest by the US, and such securities must be maintained in a custodial account in a federally insured institution; (iii) certificates of deposit with a maturity of one year or less, issued by a federally insured institution; (iv) a deposit account in a federally insured institution, subject to withdrawal restriction of one year or less; (v) a checking account in a federally insured institution; or (vi) a reasonable petty cash fund.

SBICs may purchase voting securities of small business concerns in accordance with SBA regulations. Although prior regulations prohibited an SBIC from controlling a small business concern except in limited circumstances, new regulations adopted by the SBA on October 22, 2002 (pursuant to Public Law 106-554) now allow an SBIC to exercise control over a small business for a period of seven years from the date on which the SBIC initially acquires its control position. This control period may be extended for an additional period of time with the SBA’s prior written approval.

Regulation of Medallion Bank as an Industrial Bank

In May 2002, we formed Medallion Bank, which received approval from the FDIC for federal deposit insurance in October 2003. Medallion Bank, a Utah-chartered industrial bank, is a depository institution subject to regulatory oversight and examination for safety and soundness by both the FDIC and the Utah Department of Financial Institutions. Under its banking charter, Medallion Bank is empowered to make consumer and commercial loans, and may accept all FDIC-insured deposits other than demand deposits (checking accounts). The creation of Medallion Bank allows us to apply stable and low-cost bank deposit funding for key lending business activities throughout our business.

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

Medallion Bank is further subject to capital adequacy guidelines issued by the Federal Financial Institutions Examination Council, or the FFIEC. These guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and consider off-balance sheet exposures in determining capital adequacy. Under the rules and regulations of the FFIEC, at least half of a bank’s total capital is required to be Tier I capital, comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual preferred stock. The remaining capital, Tier II capital, may consist of other preferred stock, certain hybrid debt/equity instruments, a limited amount of term-subordinated debt, or a limited amount of the reserve for possible credit losses. The FFIEC has also adopted minimum leverage ratios for banks, which are calculated by dividing Tier I capital by total average assets. Recognizing that the risk-based capital standards address only credit risk, and not interest rate, liquidity, operational, or other risks, many banks are expected to maintain capital in excess of the minimum standards.

In addition, pursuant to provisions of the FDIC Improvement Act of 1991, or FDICIA, and related regulations with respect to prompt corrective action, FDIC-insured institutions such as Medallion Bank may only accept brokered deposits without FDIC permission if they meet specified capital standards, and are subject to restrictions with respect to the interest they may pay on deposits unless they are well-capitalized. To be well-capitalized under the prompt corrective action provisions, a bank must have a ratio of combined Tier I and Tier II capital to risk-weighted assets of not less than 10%, Tier I capital to risk-weighted assets of not less than 6%, and a Tier I to average assets of not less than 5%.

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

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

The USA Patriot Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, or the Patriot Act, was enacted on October 26, 2001, and is intended to detect and prosecute terrorism and international money laundering. The Patriot Act establishes new standards for verifying customer identification incidental to the opening of new accounts. Medallion

 

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Bank has undertaken appropriate measures to comply with the Patriot Act and associated regulations. Other provisions of the Patriot Act provide for special information sharing procedures governing communications with the government and other financial institutions with respect to suspected terrorists and money laundering activity, and enhancements to suspicious activity reporting, including electronic filing of suspicious activity reports over a secure filing network. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

Federal and state banking agencies require Medallion Bank to prepare annual reports on financial condition and to conduct an annual audit of financial affairs in compliance with minimum standards and procedures. Medallion Bank, must undergo regular on-site examinations by the appropriate banking agency, which will examine for adherence to a range of legal and regulatory compliance responsibilities. A bank regulator conducting an examination has complete access to the books and records of the examined institution. The results of the examination are confidential. The cost of examinations may be assessed against the examined institution as the agency deems necessary or appropriate.

Other

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

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

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

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

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

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

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

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

 

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AVAILABLE INFORMATION

Our corporate website is located at www.medallion.com. We make copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendment to those reports filed with or furnished to the SEC available to investors on or through our website free of charge as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Our SEC filings can be found in the For Investors section of our website, the address of which is http://www.medallion.com/investors.htm. Our Code of Ethical Conduct and Insider Trading Policy can be located in the Corporate Governance section of our website at http://www.medallion.com/investors_governance.htm. These documents, as well as our SEC filings are available in print to any stockholder who requests a copy from our Secretary.

 

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ITEM 1A. RISK FACTORS

Risks Relating to Our Business and Structure

We have recently experienced a period of capital markets disruption and severe recession and we expect these conditions to improve very slowly over the next 18 months.

The recent market conditions have materially and adversely affected the debt and equity capital markets in the US, which could have a negative impact on our business and operations. The US capital markets have experienced extreme volatility and disruption for more than 3 years as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the repricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. These events have contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of credit and equity capital for the markets as a whole and financial services firms in particular. We believe that the US economy is emerging from a prolonged recession, and forecasts for 2012 and 2013 generally call for a very slow recovery from the economic recession. As a result, we believe these conditions may continue for a prolonged period of time and possibly worsen in the future. A prolonged period of market illiquidity would continue to have an adverse effect on our business, financial condition, and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Equity capital may be difficult to raise because, subject to some limited exceptions, we generally are not able to issue and sell our common stock at a price below net asset value per share. In addition, the debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and conditions.

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

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

As of December 31, 2011, we had $357,779,000 of outstanding indebtedness, which had a weighted average borrowing cost of 3.29% at December 31, 2011, and our wholly-owned unconsolidated portfolio companies, primarily Medallion Bank, had $514,329,000 of outstanding indebtedness at a weighted average borrowing cost of 0.73%.

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

By its nature, lending to consumers that have blemishes on their credit reports carries with it a higher risk of loss. Although the net interest margins should be higher to compensate Medallion Bank for this increased risk, the recent economic downturn could result in higher loss rates and lower returns than expected, and could affect the profitability of the consumer loan portfolio.

We are dependent upon our key investment personnel for our future success.

We depend on the diligence, skill, and network of business contacts of the investment professionals we employ for sourcing, evaluating, negotiating, structuring, and monitoring our investments. Our future success will also depend, to a significant extent, on the continued service and coordination of our senior management team, particularly, Alvin Murstein, our Chairman and Chief Executive Officer, Andrew M. Murstein, our President, and Larry D. Hall, our Chief Financial Officer. The departure of Messrs. Murstein or Mr. Hall, or any member of our senior management team, could have a material adverse effect on our ability to achieve our investment objective.

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

The 1940 Act imposes numerous constraints on the operations of BDC’s. For example, BDC’s are required to invest at least 70% of their total assets in qualifying assets, primarily securities of “eligible portfolio companies” (as defined under the 1940 Act), cash, cash equivalents, US government securities, and other high quality debt investments that mature in one year or less. Our regulatory requirements may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective. In addition, we rely upon several exemptive orders from the SEC permitting us to consolidate our financial reporting and operate our business as presently conducted. Our failure to satisfy the conditions set forth in those exemptive orders

 

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could result in our inability to rely upon such orders or to cause the SEC to revoke the orders which could result in material changes in our financial reporting or the way in which we conduct our business. Furthermore, any failure to comply with the requirements imposed on BDC by the 1940 Act could cause the SEC to bring an enforcement action against us. If we do not remain a BDC’s, we might be regulated as a closed-end investment company under the 1940 Act, which would further significantly decrease our operating flexibility.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was signed into law on July 21, 2010. The Dodd-Frank Act significantly changes federal financial services regulation and affects, among other things, the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations. The federal agencies have significant discretion in issuing these rules and regulations, and consequently, many of the details and much of the effect of the Dodd-Frank Act may not be known for many months or years. As such, we cannot predict and may not be able to anticipate all the effects of the Dodd-Frank Act on our financial condition or operations.

We are also subject to a wide range of federal, state, and local laws and regulations, such as local licensing requirements, and retail financing, debt collection, consumer protection, environmental, health and safety, creditor, wage-hour, anti-discrimination, whistleblower and other employment practices laws and regulations and we expect these costs to increase going forward. The violation of these or future requirements or laws and regulations can result in administrative, civil, or criminal sanctions against us, which may include a cease and desist order against the subject operations or even revocation or suspension of our license to operate the subject business. As a result, we have incurred and will continue to incur capital and operating expenditures and other costs to comply with these requirements and laws and regulations.

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

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

We expect, however, to see an increase over time in regulatory scrutiny and enforcement in the area of consumer financial products regulation, as a result of the establishment of the Consumer Financial Protection Bureau, or the CFPB. The CFPB became operational in certain respects in July 2011, and on January 4, 2012, President Obama appointed a Director of the CFPB in a recess appointment bypassing Senate confirmation. Although there remain doubts about the legality of this appointment and the appointment may be subject to legal challenge, the CFPB has announced that it will now exercise full regulatory, supervisory, and enforcement powers. While Medallion Bank’s size currently falls below the threshold that would give the CFPB direct authority over it, Medallion Bank’s existing bank supervisors may pursue similar policies and make similar information requests to those of the CFPB with respect to consumer financial products and other matters within the scope of the CFPB’s authority. We believe that the CFPB’s regulatory reforms, together with other provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and increased regulatory supervision, may increase our cost of doing business, impose new restrictions on the way in which we conduct our business, or add significant operational constraints that might impair our profitability.

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

Our inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse effect on our operations in that market and on our reputation generally. No assurance can be given that applicable laws or regulations will not be amended or construed differently or that new laws and regulations will not be adopted, either of which could materially adversely affect our business, financial condition, or results of operations.

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

Because we are an “insured depository institution” within the meaning of the Change in Bank Control Act and a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us without, in most cases, prior written approval of the FDIC or the Commissioner of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations. Although we are an “insured depository institution” within the meaning of the Change in Bank

 

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Control Act, your investment in Medallion Financial Corp. is not guaranteed by the FDIC and is subject to loss. Under the Utah Financial Institutions Act, control is defined as the power to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an individual. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval. These provisions could delay or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the market price of our common stock.

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

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

Senior Securities and Other Indebtedness. We may issue debt securities or preferred stock, and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities, up to the maximum amount permitted by the 1940 Act. If we issue senior securities, including debt or preferred stock, we will be exposed to additional risks, including the following:

 

   

Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be restricted from issuing additional debt, may be limited in making distributions on our stock, and may be required to sell a portion of our investments and, depending on the nature of our leverage, to repay a portion of our debt at a time when such sales and/or repayments may be disadvantageous. In addition to the 1940 Act, we are subject to two exemptive orders which govern how we calculate our senior securities.

 

   

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

 

   

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

 

   

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

 

   

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

Additional Common Stock. We are not generally able to issue and sell our common stock at a price below net asset value (less any distributing commission or discount) per share. We may, however, sell our common stock, warrants, options, or rights to acquire our common stock, at a price below the current net asset value of the common stock if our Board of Directors determines that such sale is in our best interests and that of our shareholders, and our shareholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our shareholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our shareholders at that time would decrease and they may experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all.

If our primary investments are deemed not to be qualifying assets, we could be deemed to be in violation of the 1940 Act.

As a BDC, we are not permitted to acquire any assets other than “qualifying assets” unless, at the time of such acquisition, at least 70% of our total assets are qualifying assets. Our investment in Medallion Bank may constitute a non-qualifying asset. As of December 31, 2011, up to 27% of our total assets were invested in non-qualifying assets.

At the end of each fiscal quarter, we may take proactive steps to prospectively preserve investment flexibility in the next quarter which is assessed against our total assets at our most recent quarter end. We can accomplish this in many ways including purchasing US Treasury bills or other investment-grade debt securities, and closing out our position on a net cash basis subsequent to quarter end. However, if such proactive measures are ineffective and our primary investments are deemed not to be qualifying assets, we could be deemed in violation of the 1940 Act, which could have a material effect on our business.

 

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We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code.

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

 

   

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

 

   

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

 

   

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

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

If we fail to qualify for RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. In addition, the asset coverage and distribution requirements impose significant cash flow management restrictions on us and limit our ability to retain earnings to cover periods of loss, provide for future growth, and pay for extraordinary items. Additionally, we could fail to satisfy the requirement that a RIC derive at least 90% of its gross income from qualifying sources, with the result that we would not qualify as a RIC. Qualification as a RIC is made on an annual basis and, although we and some of our subsidiaries have qualified in the past, we cannot assure you that we will qualify for such treatment in the future.

A change in our treatment of losses recognized on worthless loans could result in a decrease in taxable income.

In the fourth quarter of 2010, based on developments under the Code and after discussions with external advisers, our Board of Directors determined that the loans received in connection with our lending activities were “accounts or notes receivables acquired in the ordinary course of a trade or business for services” for purposes of Section 1221(a)(4) of the Code. As a result, commencing with the tax year beginning January 1, 2010, we treat losses recognized on worthless loans as ordinary losses rather than as capital losses. Our Board of Directors further determined that we may take such position in tax returns subsequently filed without obtaining prior IRS approval.

The change in the characterization of a loss resulting from a worthless loan from a capital loss to an ordinary loss could materially impact the amount or character of the dividends received by our shareholders. We are required to distribute 90% of our taxable income in order to maintain our RIC status. In the event losses from worthless loans are treated as ordinary losses, those losses will offset taxable income in the taxable year in which such losses are recognized, and we will not be able to carry forward any net operating losses generated by such ordinary losses. This could result in a decrease in our taxable income which could result in a decrease in our dividend. Alternatively, if we choose to maintain our current level of dividend, an increased portion of the dividend could be deemed to be a return of capital to the shareholder.

The Code’s diversification requirements may limit our ability to expand our business.

RIC qualification rules require that at the end of each quarter of our taxable year, (i) at least 50% of the market value of our assets must be represented by cash, securities of other RICs, US government securities, and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of our assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of our assets may be invested in the securities (other than US government securities or securities of other RICs) of any one issuer, any two or more issuers of which 20% or more of the voting stock is held by us and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships.

 

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As of December 31, 2011, our largest investment subject to this test was our investment in Medallion Bank, representing 18% of our RIC assets. No other investments were more than 5% of our RIC assets. We will continue to monitor the levels of this and any other investment concentrations in conjunction with the diversification tests.

 

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We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

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

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

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

Some of our subsidiaries are subject to the SBIA. Our SBIC subsidiaries that are also RICs may be prohibited by the SBIA from making the distributions necessary to qualify as a RIC. Each year, in order to comply with the SBA regulations and the RIC distribution requirements, we must request and receive a waiver of the SBA’s restrictions. While the current policy of the SBA’s Office of SBIC Operations is to grant such waivers if the SBIC makes certain offsetting adjustments to its paid-in capital and surplus accounts, we cannot assure you that this will continue to be the SBA’s policy or that our subsidiaries will have adequate capital to make the required adjustments. If our subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC status and a consequent imposition of an entity-level tax at the subsidiary level.

We operate in a highly competitive market for investment opportunities.

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

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

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

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

We depend on cash flow from our subsidiaries to make dividend payments and other distributions to our shareholders.

We are primarily a holding company, and we derive most of our operating income and cash flow from our subsidiaries. As a result, we rely heavily upon distributions from our subsidiaries to generate the funds necessary to make dividend payments and other distributions to our shareholders. Funds are provided to us by our subsidiaries through dividends and payments on intercompany indebtedness, but we cannot assure you that our subsidiaries will be in a position to continue to make these dividend or debt payments. Furthermore, as a condition to receipt of FDIC insurance, Medallion Bank entered into a capital maintenance agreement requiring it to maintain a 15% capital ratio. Medallion Bank may be restricted from declaring and paying dividends if doing so were to cause it to fall below a 15% capital ratio.

 

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

Medallion Bank relies on the established brokered deposit market to originate deposits to fund its operations. Medallion Bank’s brokered deposits consist of deposits raised through the brokered deposit market rather than through retail branches. While Medallion Bank has developed contractual relationships with a diversified group of investment brokers, and the brokered deposit market is well developed and utilized by many banking institutions, conditions could change that might affect the availability of deposits. If the capital levels at Medallion Bank fall below the “well-capitalized” level as defined by the FDIC or the capital level currently required by the FDIC pursuant to its capital maintenance agreement or if Medallion Bank experiences a period of sustained operating losses, the cost of attracting deposits from the brokered deposit market could increase significantly, and the ability of Medallion Bank to raise deposits from this source could be impaired. Medallion Bank’s ability to manage its growth to stay within the “well-capitalized” level, and the capital level currently required by the FDIC pursuant to its capital maintenance agreement, which is also considerably higher than the level required to be classified as “well-capitalized”, is critical to Medallion Bank’s retaining open access to this funding source.

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

Our borrowers generally have the right to prepay their loans upon payment of a fee ranging from 30 to 120 days interest for standard commodity loans, and for higher amounts, as negotiated, for larger more custom loan arrangements. A borrower is likely to exercise prepayment rights at a time when the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. In a lower interest rate environment, we will have difficulty re-lending prepaid funds at comparable rates, which may reduce the net interest income that we receive. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if a substantial number of our portfolio companies elect to prepay amounts owed to us and we are not able to reinvest the proceeds for comparable yields in a timely fashion. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.

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

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by our Board of Directors. Unlike other lending institutions, we are not permitted to maintain a general reserve for anticipated losses. Instead, we are required by the 1940 Act to specifically value each individual investment and record an unrealized gain or loss for any asset we believe has increased or decreased in value. Typically, there is not a public market for most of the investments in which we have invested and will generally continue to invest. As a result, our Board of Directors values our investments on a quarterly basis based on a determination of their fair value made in good faith and in accordance with the written guidelines approved by our Board of Directors. Our Board of Directors regularly reviews the appropriateness and accuracy of the method used in valuing our investments, and makes any necessary adjustments. The types of factors that may be considered in determining the fair value pricing of our investments include the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow, and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, the valuations may fluctuate over short periods of time and may be based on estimates. As a result, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities. Considering these factors, we have determined that the fair value of our portfolio is below its cost basis. As of December 31, 2011, our net unrealized depreciation on investments other than in controlled subsidiaries, foreclosed properties, and other assets was $13,193,000 or 2.84% of our investment portfolio.

The lack of liquidity in our investments may adversely affect our business.

We generally make investments in private companies. Substantially all of these securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded our investments. We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we have material non-public information regarding such portfolio company.

 

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In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would have positively impacted net increase in net assets resulting from operations as of December 31, 2011 by approximately $1,477,000 on an annualized basis, compared to a positive impact of $1,291,000 at December 31, 2010, and the impact of such an immediate increase of 1% over a one year period would have been ($1,665,000) at December 31, 2011, compared to ($2,026,000) for December 31, 2010. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net increase in net assets resulting from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

We may experience fluctuations in our quarterly results.

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

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

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

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

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

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

Acquisitions may lead to difficulties that could adversely affect our operations.

By their nature, corporate acquisitions entail certain risks, including those relating to undisclosed liabilities, the entry into new markets, operational, and personnel matters. We may have difficulty integrating acquired operations or managing problems due to sudden increases in the size of our loan portfolio. In such instances, we might be required to modify our operating systems and procedures, hire additional staff, obtain and integrate new equipment, and complete other tasks appropriate for the assimilation of new business activities. We cannot assure you that we would be successful, if and when necessary, in minimizing these inherent risks or in establishing systems and procedures which will enable us to effectively achieve our desired results in respect of any future acquisitions.

 

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

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

The SBA restricts the ability of SBICs to lend money to their officers, directors, and employees, or invest in affiliates thereof.

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

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

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

Risks Relating to Our Investments

Changes in taxicab industry regulations that result in the issuance of additional medallions or increases in the expenses involved in operating a medallion could lead to a decrease in the value of our medallion loan collateral.

Every city in which we originate medallion loans, and most other major cities in the US, limits the supply of taxicab medallions. This regulation results in supply restrictions that support the value of medallions. Actions that loosen these restrictions and result in the issuance of additional medallions into a market could decrease the value of medallions in that market. If this were to occur, the value of the collateral securing our then outstanding medallion loans in that market could be adversely affected. For example, the New York State legislature enacted a law on December 21, 2011 which was amended on February 17, 2012 to permit cars for hire to pickup street hails in boroughs outside of Manhattan. If this law is implemented, income from operating medallions and the value of medallions serving as collateral for our loans could decrease by a material amount. This could increase our loan to value ratios, loan delinquencies, or loan defaults. We are unable to forecast with any degree of certainty whether any other potential increases in the supply of medallions will occur.

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

A significant portion of our loan revenue is derived from loans collateralized by New York City taxicab medallions. According to New York City TLC data, over the past 20 years New York City taxicab medallions have appreciated in value from under $160,000 to $1,000,000 for corporate medallions and $699,000 for individual medallions. However, for sustained periods during that time, taxicab medallions have declined in value. Since December 31, 2009, the value of New York City taxicab medallions increased by approximately 20% for individual medallions and 29% for corporate medallions.

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

Lending to small businesses involves a high degree of business and financial risk, which can result in substantial losses and should be considered speculative. Our borrower base consists primarily of small business owners that may have limited resources and that are generally unable to obtain financing from traditional sources. There is generally no publicly available information about these small business owners, and we must rely on the diligence of our employees and agents to obtain information in connection with our

 

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credit decisions. In addition, these small businesses often do not have audited financial statements. Some smaller businesses have narrower product lines and market shares than their competition. Therefore, they may be more vulnerable to customer preferences, market conditions, or economic downturns, which may adversely affect the return on, or the recovery of, our investment in these businesses.

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

Our portfolio is and may continue to be concentrated in a limited number of portfolio companies and industries. As of December 31, 2011, investments in New York City taxi medallion loans represented approximately 78% of our managed taxi medallion loans. Beyond the asset diversification requirements associated with our qualification as a RIC, we do not have fixed guidelines for diversification, and while we are not targeting any specific industries, our investments are, and could continue to be, concentrated in relatively few industries. As a result, the aggregate returns we realize may be adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Additionally, a downturn in any particular industry in which we are invested could also negatively impact the aggregate returns we realize.

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

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

An economic downturn such as what we recently experienced could result in certain of our commercial and consumer loan customers experiencing declines in business activities and/or personal resources, which could lead to difficulties in their servicing of their loans with us, and increasing the level of delinquencies, defaults, and loan losses in our commercial and consumer loan portfolios.

Laws and regulations implemented in response to climate change could result in increased operating costs for our portfolio companies.

Congress and other governmental authorities have either considered or implemented various laws and regulations in response to climate change and the reduction of greenhouse gases. Existing environmental regulations could be revised or reinterpreted, new laws and regulations could be adopted, and future changes in environmental laws and regulations could occur, which could impose additional costs on the operation of our portfolio companies. For example, regulations to cut gasoline use and control greenhouse gas emissions from new cars could adversely affect our medallion portfolio companies. Our portfolio companies may have to make significant capital and other expenditures to comply with these laws and regulations. Changes in, or new, environmental restrictions may force our portfolio companies to incur significant expenses or expenses that may exceed their estimates. There can be no assurance that such companies would be able to recover all or any increased environmental costs from their customers or that their business, financial condition or results of operations would not be materially and adversely affected by such expenditures or any changes in environmental laws and regulations, in which case the value of these companies could be adversely affected.

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

We invest primarily in senior secured loans, junior secured loans, and subordinated debt issued by small- to mid-sized companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization, or bankruptcy of the relevant portfolio company.

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

Even though we may have structured most of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that

 

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portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance.

We may not control many of our portfolio companies.

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

We may not realize gains from our equity investments.

Certain investments that we have made in the past and may make in the future include warrants or other equity securities. In addition, we may from time to time make non-control, equity co-investments in companies in conjunction with private equity sponsors. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization, or public offering, which would allow us to sell the underlying equity interests.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

We lease approximately 17,000 square feet of office space in New York City for our corporate headquarters under a lease expiring in June 2016, and lease a facility in Long Island City, New York, of approximately 6,000 square feet for certain corporate back-office operations. We also lease office space for loan origination offices and subsidiary operations in Boston, MA, Chicago, IL, Minneapolis, MN, and Flemington, NJ. Medallion Bank leases space in Salt Lake City, UT, and Seattle, WA. We do not own any real property, other than foreclosed property obtained as a result of lending relationships. We believe that our leased properties, taken as a whole, are in good operating condition and are suitable for our current business operations.

 

ITEM 3. LEGAL PROCEEDINGS

We and our subsidiaries are currently involved in various legal proceedings incident to the ordinary course of our business, including collection matters with respect to certain loans. We intend to vigorously defend any outstanding claims and pursue our legal rights. In the opinion of our management and based upon the advice of legal counsel, there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision would result in a material adverse effect on our results of operations or financial condition.

PART II

 

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

Our common stock is quoted on the Nasdaq Global Select Market under the symbol “TAXI.” Our common stock commenced trading on May 23, 1996. As of March 26, 2012, there were approximately 247 holders of record of our common stock.

On March 26, 2012, the last reported sale price of our common stock was $11.10 per share. Historically, our common stock has traded at a premium to net asset value per share, but there can be no assurance that our stock will trade at a premium in the future.

 

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

 

2011

   DIVIDENDS
DECLARED
     HIGH      LOW  

Fourth Quarter

   $ 0.20       $ 12.03       $ 8.91   

Third Quarter

     0.19         10.13         9.01   

Second Quarter

     0.18         9.89         8.70   

First Quarter

     0.17         8.79         7.82   

2010

                    

Fourth Quarter

   $ 0.16       $ 8.79       $ 7.79   

Third Quarter

     0.15         7.79         6.50   

Second Quarter

     0.15         8.24         6.59   

First Quarter

     0.15         8.45         7.81   

Information about our equity compensation plans is incorporated by reference in all information under the caption “Equity Compensation Plan Information” included in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2012.

As a RIC, we intend to distribute at least 90% of our investment company taxable income to our shareholders. Distributions of our income are generally required to be made within the calendar year the income was earned as a RIC; however, in certain circumstances distributions can be made up to a full calendar year after the income has been earned. Investment company taxable income includes, among other things, interest, dividends, and capital gains reduced by deductible expenses. Our ability to make dividend payments as a RIC is restricted by certain asset coverage requirements under the 1940 Act and has been dependent upon maintenance of our status as a RIC under the Code in the past, by SBA regulations, and under the terms of the SBA debentures. There can be no assurances, however, that we will have sufficient earnings to pay such dividends in the future.

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

 

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ISSUER PURCHASES OF EQUITY SECURITIES (1)

 

Period

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

November 5 through December 31, 2003

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

January 1 through December 31, 2004

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

January 1 through December 31, 2005

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

January 1 through December 31, 2006

     —           —           —           7,720,523   

January 1 through December 31, 2007

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

January 1 through December 31, 2008

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

January 1 through December 31, 2009

     —           —           —           7,319,397   

January 1 through December 31, 2010

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

January 1 through December 31, 2011

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

 

 

       

 

 

    

Total

     1,580,615         8.84         1,580,615      
  

 

 

       

 

 

    

 

(1) We publicly announced our Stock Repurchase Program in a press release dated November 5, 2003, after the Board of Directors approved the repurchase of up to $10,000,000 of our outstanding common stock, which was increased by an additional $10,000,000 authorization on November 3, 2004. The stock repurchase program expires 180 days after the commencement of the purchases. If we have not repurchased the additional $10,000,000 of common stock by the end of such period, we are permitted to extend the stock repurchase program for additional 180-day periods until we have repurchased the total amount authorized. In October 2011, we extended the terms of the Stock Repurchase Program. Purchases were to commence no earlier than November 2011 and are to conclude 180 days after the commencement of the purchases.

 

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ITEM 6. SELECTED FINANCIAL DATA

Summary Consolidated Financial Data

You should read the consolidated financial information below with the Consolidated Financial Statements and Notes thereto for the years ended December 31, 2011, 2010, 2009, 2008, and 2007.

 

     Year ended December 31,  

(Dollars in thousands, except per share data)

   2011     2010     2009     2008     2007  

Statement of operations

          

Investment income

   $ 37,227      $ 37,253      $ 41,403      $ 52,284      $ 51,393   

Interest expense

     13,538        14,585        16,876        23,711        30,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     23,689        22,668        24,527        28,573        20,689   

Noninterest income

     1,185        3,533        3,383        3,837        2,444   

Operating expenses (1)

     14,111        16,328        19,730        17,320        17,835   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     10,763        9,873        8,180        15,090        5,298   

Income tax (provision) benefit

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     10,763        9,873        8,180        15,090        5,298   

Net realized gains (losses) on investments

     (546     (7,638     (4,135     (3,746     14,172   

Net change in unrealized appreciation (depreciation) on Medallion Bank

and other controlled subsidiaries (2)

     7,668        12,535        (5,671     (2,419     2,292   

Net change in unrealized appreciation (depreciation) on investments (2)

     1,278        (3,491     2,648        6,323        (6,326
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 19,163      $ 11,279      $ 1,022      $ 15,248      $ 15,436   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share data

          

Net investment income

   $ 0.61      $ 0.56      $ 0.46      $ 0.85      $ 0.30   

Income tax (provision) benefit

     —          —          —          —          —     

Net realized gains (losses) on investments

     (0.03     (0.43     (0.23     (0.21     0.80   

Net change in unrealized appreciation (depreciation) on investments (2)

     0.51        0.51        (0.17     0.22        (0.23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 1.09      $ 0.64      $ 0.06      $ 0.86      $ 0.87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.74      $ 0.61      $ 0.72      $ 0.76      $ 0.76   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

          

Basic

     17,426,097        17,501,414        17,569,688        17,520,966        17,480,523   

Diluted

     17,659,831        17,631,928        17,691,437        17,722,575        17,786,310   

Balance sheet data

          

Net investments

   $ 451,835      $ 483,516      $ 475,133      $ 570,597      $ 653,046   

Total assets

     537,031        550,312        555,174        646,685        721,262   

Total funds borrowed

     357,779        380,532        382,522        462,650        542,549   

Total liabilities

     365,527        387,547        392,197        471,739        548,839   

Total shareholders’ equity

     171,504        162,765        162,977        174,946        172,423   

Managed balance sheet data (3)

          

Net investments

   $ 956,626      $ 946,343      $ 846,542      $ 922,007      $ 934,955   

Total assets

     1,080,239        1,041,729        950,909        1,018,114        1,025,633   

Total funds borrowed

     872,108        849,489        754,241        829,058        841,632   

Total liabilities

     908,735        878,964        787,932        843,168        853,211   

 

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     Year ended December 31,  
     2011     2010     2009     2008     2007  

Selected financial ratios and other data

          

Return on average assets (ROA) (4) (13)

          

Net investment income after taxes

     2.01     1.82     1.36     2.27     0.79

Net increase in net assets resulting from operations

     3.57        2.08        0.17        2.29        2.30   

Return on average equity (ROE) (5) (13)

          

Net investment income after taxes

     6.46        6.11        4.74        8.67        3.09   

Net increase in net assets resulting from operations

     11.49        6.98        0.59        8.76        9.00   

Weighted average yield

     8.01     7.91     7.77     8.58     8.44

Weighted average cost of funds

     2.91        3.10        3.17        3.89        5.04   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin (6)

     5.10        4.81        4.60        4.69        3.40   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income ratio (7) (13)

     0.26        0.75        0.63        0.63        0.40   

Total expense ratio (1) (8) (13)

     5.95        6.56        6.87        6.74        7.98   

Operating expense ratio (1)(9) (13)

     3.04        3.47        3.70        2.84        2.93   

As a percentage of net investment portfolio

          

Medallion loans

     68     67     68     70     76

Commercial loans

     12        16        16        16        14   

Investment in Medallion Bank and other controlled subsidiaries

     19        16        15        13        9   

Equity investments

     1        1        1        1        1   

Investment securities

     —          —          —          —          —     

Investments to assets (10)

     84     88     86     88     91

Equity to assets (11)

     32        30        29        27        24   

Debt to equity (12)

     209        234        235        264        315   

 

(1) Includes $1,312 of expense reversals related to the costs of winding up the operations of the SPAC’s in 2010 that were reclassified to realized losses on investments, and $310 that was reversed as a result of favorable negotiations with the creditors of SPAC. Also includes $1,622 of charges in 2009 related to winding up the operations of the SPAC’s. Excluding these amounts, the total expense ratios were 6.91% and 6.56%, and the operating expense ratios were 3.81% and 3.40% for 2010 and 2009.

 

(2) Unrealized appreciation (depreciation) on investments represents the increase (decrease) for the year in the fair value of our investments, including the results of operations for Medallion Bank and other controlled subsidiaries, where applicable.

 

(3) Includes the balances of wholly-owned, unconsolidated portfolio companies, primarily Medallion Bank.

 

(4) ROA represents the net investment income after taxes or net increase in net assets resulting from operations, divided by average total assets.

 

(5) ROE represents the net investment income after taxes or net increase in net assets resulting from operations, divided by average shareholders’ equity.

 

(6) Net interest margin represents net interest income for the year divided by average interest earning assets, and included interest recoveries and bonuses of $4,070 in 2011, $2,678 in 2010, $1,684 in 2009, $4,471 in 2008, and $821 in 2007, and also included dividends from Medallion Bank of $5,500 in 2011, $4,000 in 2010, $4,000 in 2009, $6,000 in 2008, and $5,750 in 2007. On a managed basis, combined with Medallion Bank, the net interest margin was 6.68%, 6.59%, 6.10%, 5.21%, and 4.21% for 2011, 2010, 2009, 2008, and 2007.

 

(7) Noninterest income ratio represents noninterest income divided by average interest earning assets.

 

(8) Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average interest earning assets.

 

(9) Operating expense ratio represents operating expenses divided by average interest earning assets.

 

(10) Represents net investments divided by total assets as of December 31.

 

(11) Represents total shareholders’ equity divided by total assets as of December 31.

 

(12) Represents total funds borrowed divided by total shareholders’ equity as of December 31.

 

(13) In December 2010, MSC assumed our servicing obligations, and as a result, servicing fee income of $5,492 and operating expenses of $5,659, which formerly were ours, were now MSC’s for the year ended December 31, 2011. Excluding the impact of the MSC amounts, the 2011 ROA and ROE on net investment income after taxes were 1.98% and 6.36%, and the noninterest income, total expense, and operating expense ratios were 1.44%, 7.17%, and 4.26%.

 

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

The information contained in this section should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the years ended December 31, 2011, 2010, and 2009. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors section on page 21.

CRITICAL ACCOUNTING POLICIES

The SEC has issued cautionary advice regarding disclosure about critical accounting policies. The SEC defines critical accounting policies as those that are both most important to the portrayal of a company’s financial condition and results, and that

 

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require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain and may change materially in subsequent periods. The preparation of our consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Significant estimates made by us include valuation of loans, equity investments, and investments in subsidiaries, evaluation of the recoverability of accounts receivable and income tax assets, and the assessment of litigation and other contingencies. The matters that give rise to such provisions are inherently uncertain and may require complex and subjective judgments. Although we believe that estimates and assumptions used in determining the recorded amounts of net assets and liabilities at December 31, 2011 are reasonable, actual results could differ materially from the estimated amounts recorded in our financial statements.

GENERAL

We are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers. 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 6%, and our commercial loan portfolio at a compound annual growth rate of 2% (10% and 8% 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 11%. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which also includes assets serviced for third party investors, were $1,141,806,000 as of December 31, 2011 and $1,093,379,000 as of December 31, 2010, and have grown at a compound annual growth rate of 12% from $215,000,000 at the end of 1996.

Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, such as revolving bank facilities, bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio and changes in the cost of borrowed funds, as well as changes in the amount of interest-bearing assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice on a different basis than our interest-bearing liabilities.

We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Medallion Capital’s investments are typically in the form of secured debt instruments with fixed interest rates accompanied by warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.

We are a closed-end, management investment company under the 1940 Act. We have elected to be treated as a BDC under the 1940 Act. We have also elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our shareholders as dividends if we meet certain source-of-income and asset diversification requirements. Medallion Bank is not a RIC and must pay corporate-level US federal and state income taxes.

Our wholly-owned portfolio company, Medallion Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans. However, the FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, or $321,027,000 as of December 31, 2011. We earn referral fees for these activities. In December 2010, all of these servicing activities were assigned to MSC. As a non-investment company, Medallion Bank is not consolidated with the Company.

Realized gains or losses on investments are recognized when the investments are sold or written off. The realized gains or losses represent the difference between the proceeds received from the disposition of portfolio assets, if any, and the cost of such portfolio assets. In addition, changes in unrealized appreciation or depreciation on investments are recorded and represent the net change in the estimated fair values of the portfolio assets at the end of the period as compared with their estimated fair values at the beginning of the period. Generally, realized gains (losses) on investments and changes in unrealized appreciation (depreciation) on

 

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investments are inversely related. When an appreciated asset is sold to realize a gain, a decrease in the previously recorded unrealized appreciation occurs. Conversely, when a loss previously recorded as unrealized depreciation is realized by the sale or other disposition of a depreciated portfolio asset, the reclassification of the loss from unrealized to realized causes a decrease in net unrealized depreciation and an increase in realized loss.

Our investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and determine whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional marketplace restrictions, such as the ability to transfer industrial bank charters. As a result of this valuation process, we used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future.

The credit markets have recently experienced a crisis which has disrupted a wide range of traditional financing sources. The crisis has made it increasingly difficult and significantly more expensive through higher credit spreads for finance companies to obtain and renew financing. Continued turmoil in the credit markets could limit our access to funds and restrict us from continuing our current operating strategy or implementing new operating strategies. If funds are available to us, we anticipate that our cost of funds will increase as we obtain new financing.

The credit crisis has also caused many financial institutions to record significant write-downs, mostly on their residential mortgage related assets and structured investment vehicles, due to unsound lending practices. We are not involved in these types of transactions and always understand the importance of proper underwriting. Nonetheless, the judgments used by management in applying the critical accounting policies discussed herein may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. Subsequent evaluations of our loan portfolio and other investments, in light of the factors then prevailing, may result in changes to the fair value of the investments, including a decrease in the fair value. In addition, the fair value of investments in our portfolio may be negatively impacted by illiquidity or dislocation in marketplaces resulting in depressed market prices.

In the 2010 fourth quarter, based on developments under the Code and after discussions with external advisers, our Board of Directors determined that the loans received in connection with our lending activities were “accounts or notes receivables acquired in the ordinary course of a trade or business for services” for purposes of Section 1221(a)(4) of the Code. As a result, commencing with the tax year beginning January 1, 2010, we treat losses recognized on worthless loans as ordinary losses rather than as capital losses. Our Board of Directors further determined that we may take such position in tax returns subsequently filed without obtaining prior IRS approval.

The change in the characterization of a loss resulting from a worthless loan from a capital loss to an ordinary loss could materially impact the amount or character of the dividends received by our shareholders. We are required to distribute 90% of our taxable income in order to maintain our RIC status. In the event losses from worthless loans are treated as ordinary losses, those losses will offset taxable income in the taxable year in which such losses are recognized. This could result in a decrease in our taxable income which could result in a decrease in our dividend. Alternatively, if we choose to maintain our current level of dividend, an increased portion of the dividend could be deemed to be a return of capital to the shareholder.

 

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Trends in Investment Portfolio

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

 

     December 31, 2011     December 31, 2010     December 31, 2009  

(Dollars in thousands)

   Interest
Rate (1)
    Investment
Balances
    Interest
Rate (1)
    Investment
Balances
    Interest
Rate (1)
    Investment
Balances
 

Medallion loans

            

New York

     4.66   $ 227,426        5.52   $ 239,435        5.90   $ 244,082   

Chicago

     5.79        34,200        6.69        34,832        6.91        25,868   

Newark

     7.38        17,693        7.81        19,777        7.98        21,790   

Boston

     6.56        16,955        6.74        18,237        7.14        21,383   

Cambridge

     6.62        6,179        6.72        5,501        7.10        3,025   

Other

     6.54        4,318        7.05        5,047        7.14        5,435   
    

 

 

     

 

 

     

 

 

 

Total medallion loans

     5.11        306,771        5.90        322,830        6.23        321,583   
  

 

 

     

 

 

     

 

 

   

Deferred loan acquisition costs

       396          296          332   

Unrealized depreciation on loans

       —            —            —     
    

 

 

     

 

 

     

 

 

 

Net medallion loans

     $ 307,167        $ 323,126        $ 321,915   
    

 

 

     

 

 

     

 

 

 

Commercial loans

            

Secured mezzanine

     14.04   $ 51,622        14.41   $ 68,299        14.63   $ 61,834   

Asset based

     5.77        9,388        5.73        10,234        5.74        8,991   

Other secured commercial

     8.06        7,539        7.50        9,873        7.95        11,706   
    

 

 

     

 

 

     

 

 

 

Total commercial loans

     12.25        68,549        12.63        88,406        12.71        82,531   
  

 

 

     

 

 

     

 

 

   

Deferred loan acquisition income

       (92       (323       (373

Unrealized depreciation on loans

       (14,298       (11,217       (4,236
    

 

 

     

 

 

     

 

 

 

Net commercial loans

     $ 54,159        $ 76,866        $ 77,922   
    

 

 

     

 

 

     

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

     6.40   $ 85,932        5.08   $ 78,735 (3)      5.53   $ 72,279 (3) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity investments

     2.26   $ 3,472        1.48   $ 4,588        2.50   $ 3,393   
  

 

 

     

 

 

     

 

 

   

Unrealized appreciation (depreciation) on equities

       1,105          201          (376
    

 

 

     

 

 

     

 

 

 

Net equity investments

     $ 4,577        $ 4,789        $ 3,017   
    

 

 

     

 

 

     

 

 

 

Investment securities

     —     $ —          —     $ —          —     $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments at cost (2)

     6.36   $ 464,724        6.89   $ 494,559 (3)      7.22   $ 479,786 (3) 
  

 

 

     

 

 

     

 

 

   

Deferred loan acquisition (income) costs

       304          (27       (41

Unrealized appreciation (depreciation) on equities

       1,105          201          (376

Unrealized depreciation on loans

       (14,298       (11,217       (4,236
    

 

 

     

 

 

     

 

 

 

Net investments

     $ 451,835        $ 483,516        $ 475,133   
    

 

 

     

 

 

     

 

 

 

Medallion Bank investments

            

Medallion loans

     4.79   $ 294,214        5.57   $ 260,808        6.15   $ 160,403   

Consumer loans

     17.73        199,843        17.94        189,752        17.96        193,382   

Commercial loans

     5.80        76,606        5.84        73,574        5.84        72,540   

Investment securities

     2.51        25,419        3.32        20,479        3.99        20,784   
    

 

 

     

 

 

     

 

 

 

Medallion Bank investments at cost (2)

     9.16        596,082        9.83        544,613        11.11        447,109   
  

 

 

     

 

 

     

 

 

   

Deferred loan acquisition costs

       5,597          5,559          5,633   

Unrealized appreciation on investment securities

       714          144          92   

Premiums paid on purchased securities

       403          164          185   

Unrealized depreciation on loans

       (14,576       (13,645       (13,610
    

 

 

     

 

 

     

 

 

 

Medallion Bank net investments

     $ 588,220        $ 536,835        $ 439,409   
    

 

 

     

 

 

     

 

 

 

 

(1) Represents the weighted average interest or dividend rate of the respective portfolio as of the date indicated.

 

(2) The weighted average interest rate for the entire managed loan portfolio (medallion, commercial, and consumer loans) was 8.24%, 8.86%, and 9.56% at December 31, 2011, 2010, and 2009.

 

(3) Includes $1,389 and $1,593 for unrealized appreciation on Medallion Hamptons Holding as of December 31, 2010 and 2009.

 

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PORTFOLIO SUMMARY

Total Portfolio Yield

The weighted average yield of the total portfolio at December 31, 2011 was 6.36% (6.38% for the loan portfolio), a decrease of 53 basis points from 6.89% at December 31, 2010, which was a decrease of 33 basis points from 7.22% at December 31, 2009. The weighted average yield of the total managed portfolio at December 31, 2011 was 8.05% (8.24% for the loan portfolio), a decrease of 62 basis points from 8.67% at December 31, 2010, which was a decrease of 68 basis points from 9.35% at December 31, 2009. The decreases from 2009 reflected the general market condition of falling interest rates, and the resultant repricing downwards of most asset categories.

Medallion Loan Portfolio

Our medallion loans comprised 68% of the net portfolio of $451,835,000 at December 31, 2011, compared to 67% of the net portfolio of $483,516,000 at December 31, 2010 and 68% of $475,133,000 at December 31, 2009. Our managed medallion loans of $600,667,000 comprised 63% of the net managed portfolio of $956,626,000 at December 31, 2011, compared to 62% the net managed portfolio of $946,343,000 at December 31, 2010, and 57% of $846,542,000 at December 31, 2009. The medallion loan portfolio decreased by $15,959,000 or 5% in 2011 (and increased by $17,074,000 or 3% on a managed basis), primarily reflecting decreases in New York market, primarily reflecting the sale of participation interests to third parties. The increase in the managed portfolio was primarily driven by increases in the New York market; partially offset by decreases in the other months. Total medallion loans serviced for third parties were $75,866,000, $63,933,000, and $102,307,000 at December 31, 2011, 2010, and 2009.

The weighted average yield of the medallion loan portfolio at December 31, 2011 was 5.11%, a decrease of 79 basis points from 5.90% at December 31, 2010, which was a decrease of 33 basis points from 6.23% at December 31, 2009. The weighted average yield of the managed medallion loan portfolio at December 31, 2011 was 4.96%, a decrease of 79 basis points from 5.75% at December 31, 2010, which was a decrease of 45 basis points from 6.20% at December 31, 2009. The decreases in yield primarily reflected the impact of falling interest rates in the economy and the effects of borrower refinancings. At December 31, 2011, 26% of the medallion loan portfolio represented loans outside New York, compared to 26% and 24% at year-end 2010 and 2009. At December 31, 2011, 22% of the managed medallion loan portfolio represented loans outside New York, compared to 24% and 25% at year-end 2010 and 2009. We continue to focus our efforts on originating higher yielding medallion loans outside the New York market.

Commercial Loan Portfolio

Our commercial loans represented 12% of the net investment portfolio as of December 31, 2011, compared to 16% at December 31, 2010 and 2009, and were 13%, 16%, and 18% on a managed basis. Commercial loans decreased by $22,707,000 or 30% during 2011 ($19,897,000 or 13% on a managed basis), primarily reflecting repayments and reserve increases in the high-yield mezzanine loan portfolio, and on a managed basis, partially offset by increases in the asset-based loan portfolio. Net commercial loans serviced by third parties were $14,298,000, $12,282,000, and $13,376,000 at December 31, 2011, 2010, and 2009.

The weighted average yield of the commercial loan portfolio at December 31, 2011 was 12.25%, a decrease of 38 basis points from 12.63% at December 31, 2010, which was down 8 basis points from 12.71% at December 31, 2009. The weighted average yield of the managed commercial loan portfolio at December 31, 2011 was 8.76%, a decrease of 68 basis points from 9.44% at December 31, 2010, which was down 6 basis points from 9.50% at December 31, 2009. The decreases reflected the continued lowering of interest rates in the economy as loans repriced, and the lower proportion of higher-yielding mezzanine loans in the portfolio in 2011, compared to 2010. We continue to originate adjustable-rate and floating-rate loans tied to the prime rate to help mitigate our interest rate risk in a rising interest rate environment. At December 31, 2011, variable-rate loans represented 14% of the commercial portfolio, compared to 20% and 17% at December 31, 2010 and 2009, and were 57%, 54%, and 55% on a managed basis. Although this strategy initially produces a lower yield, we believe that this strategy mitigates interest rate risk by better matching our earning assets to their adjustable-rate funding sources.

 

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Consumer Loan Portfolio

Our managed consumer loans, all of which are held in the portfolio managed by Medallion Bank, represented 20% of the managed net investment portfolio as of December 31, 2011, compared to 19% and 22% at December 31, 2010 and 2009. Medallion Bank originates adjustable rate consumer loans secured by recreational vehicles, boats, motorcycles, and trailers located in all 50 states. The portfolio is serviced by a third party subsidiary of a major commercial bank.

The weighted average gross yield of the managed consumer loan portfolio was 17.73% at December 31, 2011, compared to 17.94% and 17.96% at December 31, 2010 and 2009. Adjustable rate loans represented 80% of the managed consumer portfolio at December 31, 2011, compared to 83% and 85% at December 31, 2010 and 2009.

Delinquency and Loan Loss Experience

We generally follow a practice of discontinuing the accrual of interest income on our loans that are in arrears as to payments for a period of 90 days or more. We deliver a default notice and begin foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the most appropriate course of action under the circumstances. A loan is considered to be delinquent if the borrower fails to make a payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment terms of the loan with a borrower that cannot make payments in accordance with the original loan agreement. For loan modifications, the loan will only be returned to accrual status if all past due interest payments are brought fully current. For credit that is collateral based, we evaluate the anticipated net residual value we would receive upon foreclosure of such loans, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequate in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install a new operator to run the business and reduce the debt.

For the consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged off to realized losses. If the collateral is repossessed, a realized loss is recorded to write the collateral down to 75% of its net realizable value, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off as a realized loss, and any excess proceeds are recorded as a realized gain. Proceeds collected on charged off accounts are recorded as realized gains. All collection, repossession, and recovery efforts are handled on behalf of Medallion Bank by the servicer.

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

 

     2011     2010     2009  

(Dollars in thousands)

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

Medallion loans

   $ 35         0.0   $ 361         0.1   $ 1,090         0.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Commercial loans

               

Secured mezzanine

     14,930         4.0        9,391         2.3        6,600         1.6   

Asset-based receivable

     —           0.0        —           0.0        —           0.0   

Other secured commercial

     390         0.1        1,364         0.3        295         0.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans

     15,320         4.1        10,755         2.6        6,895         1.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans 90 days or more past due

   $ 15,355         4.1   $ 11,116         2.7   $ 7,985         2.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Medallion Bank loans

   $ 1,265         0.2   $ 2,246         0.4   $ 3,861         0.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total managed loans 90 days or more past due

   $ 16,620         1.8   $ 13,362         1.4   $ 11,846         1.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

In general, collection efforts since the establishment of our collection department have contributed to the reduction in overall delinquencies of medallion and other secured commercial loans. Medallion and other secured commercial loan delinquencies have continued to decline, and remain at very low levels. Secured mezzanine delinquencies have continued to increase reflecting the impact of the recession and slow recovery of some of the portfolio company investments. Medallion Bank experienced declining delinquencies as a few loans secured by commercial real estate were resolved, and consumer portfolio performance improved. We are actively working with each delinquent borrower to bring them current, and believe that any potential loss exposure is reflected in our mark-to-market estimates on each loan. Although there can be no assurances as to changes in the trend rate and further negative changes in the economy, management believes that any loss exposures are properly reflected in reported asset values.

 

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We monitor delinquent loans for possible exposure to loss by analyzing various factors, including the value of the collateral securing the loan and the borrower’s prior payment history. Under the 1940 Act, our loan portfolio must be recorded at fair value or “marked-to-market.” Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio is adjusted quarterly to reflect our estimate of the current realizable value of our loan portfolio. Since no ready market exists for this portfolio, fair value is subject to the good faith determination of our Board of Directors. Because of the subjectivity of these estimates, there can be no assurance that in the event of a foreclosure or the sale of portfolio loans we would be able to recover the amounts reflected on our balance sheet.

In determining the value of our portfolio, the Board of Directors may take into consideration various factors such as the financial condition of the borrower and the adequacy of the collateral. For example, in a period of sustained increases in market interest rates, the Board of Directors could decrease its valuation of the portfolio if the portfolio consists primarily of long-term, fixed-rate loans. Our valuation procedures are designed to generate values that approximate that which would have been established by market forces, and are therefore subject to uncertainties and variations from reported results. Based upon these factors, net unrealized appreciation or depreciation on investments is determined, based on the fluctuations of our estimate of the current realizable value of our portfolio from our cost basis.

The following table sets forth the changes in our unrealized appreciation (depreciation) on investments, other than investments in controlled subsidiaries, for the years ended December 31, 2011, 2010, and 2009.

 

(Dollars in thousands)

   Medallion
Loans
    Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2008

     $—        ($ 5,115   $ 437        $15,614        $10,936   

Net change in unrealized

          

Appreciation on investments

     —          —          (333     4,242        3,909   

Depreciation on investments (1)

     (3     (3,504     (8,205     (519     (12,231

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          (900     (900

Losses on investments

     3        3,983        —          919        4,905   

Other

     —          400        —          (400     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2009

     —          (4,236     (8,101     18,956        6,619   

Net change in unrealized

          

Appreciation on investments

     —          —          545        2,153        2,698   

Depreciation on investments

     —          (7,172     (475     —          (7,647

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments (1)

     —          191        8,232        —          8,423   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2010

     —          (11,217     201        21,109        10,093   

Net change in unrealized

          

Appreciation on investments

     —          —          825        3,518        4,343   

Depreciation on investments

     —          (5,708     79        (63     (5,692

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments

     —          2,627        —          —          2,627   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2011

     $—        ($ 14,298   $ 1,105      $ 24,564      $ 11,371   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes unrealized depreciation of $7,720 in 2009 related to investments in SPAC and SPAC 2, and the related writeoff of these investments in 2010. See Note 10 to the consolidated financial statements for additional information on these investments.

 

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

 

(Dollars in thousands)

   2011     2010     2009  

Total loans

      

Medallion loans

   $ 307,167      $ 323,126      $ 321,915   

Commercial loans

     54,159        76,866        77,922   
  

 

 

   

 

 

   

 

 

 

Total loans

     361,326        399,992        399,837   

Investment in Medallion Bank and other controlled subsidiaries

     85,932        78,735        72,279   

Equity investments (1)

     4,577        4,789        3,017   

Investment securities

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net investments

   $ 451,835      $ 483,516      $ 475,133   
  

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

   $ 588,220      $ 536,835      $ 439,409   

Managed net investments

   $ 956,626      $ 946,343      $ 846,542   

Unrealized appreciation (depreciation) on investments

      

Medallion loans

   $ —          $—          $—     

Commercial loans

     (14,298     (11,217     (4,236
  

 

 

   

 

 

   

 

 

 

Total loans

     (14,298     (11,217     (4,236

Investment in Medallion Bank and other controlled subsidiaries (2)

     —          —          —     

Equity investments

     1,105        201        (376

Investment securities

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total unrealized depreciation on investments (2)

     ($13,193     ($11,016     ($4,612
  

 

 

   

 

 

   

 

 

 

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

     ($13,862     ($13,501     ($13,519

Managed total unrealized depreciation on investments (2)

     ($27,055     ($24,517     ($18,131
  

 

 

   

 

 

   

 

 

 

Unrealized appreciation (depreciation) as a % of balances outstanding (3)

      

Medallion loans

     —       —       —  

Commercial loans

     (20.86     (12.69     (5.13

Total loans

     (3.81     (2.73     (1.05

Investment in Medallion Bank and other controlled subsidiaries

     —          —          —     

Equity investments

     31.82        4.37        (11.10

Investment securities

     —          —          —     

Net investments

     (2.84     (2.23     (0.96
  

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

     (2.33 %)      (2.48 %)      (3.02 %) 

Managed net investments

     (2.77 %)      (2.54 %)      (2.11 %) 
(1) Represents common stock and warrants held as investments.

 

(2) Excludes $0, $1,389, and $1,593 for unrealized appreciation on Medallion Hamptons Holding, a wholly owned subsidiary, and $0, $0, and $6,966 for unrealized depreciation on the SPAC at December 31, 2011, 2010, and 2009.

 

(3) Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio is adjusted quarterly to reflect estimates of the current realizable value of the loan portfolio. These percentages represent the discount or premium that investments are carried on the books at, relative to their par or gross value.

 

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The following table presents the gain/loss experience on the investment portfolios for the years ended December 31, 2011, 2010, and 2009.

 

(Dollars in thousands)

   2011     2010     2009  

Realized gains (losses) on loans and equity investments (1)

      

Medallion loans

   $ —        $ —        $ 915   

Commercial loans

     (2,672     (40     (5,050
  

 

 

   

 

 

   

 

 

 

Total loans

     (2,672     (40     (4,135

Investment in Medallion Bank and other controlled subsidiaries (2)

     —          (8,258     —     

Equity investments

     2,126        1,439        —     

Investment securities

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total realized gains (losses) on loans and equity investments (2)

     ($546     ($6,859     ($4,135
  

 

 

   

 

 

   

 

 

 

Net realized losses on investments at

Medallion Bank and other controlled subsidiaries

     (6,264     (11,474     (11,333
  

 

 

   

 

 

   

 

 

 

Total managed realized gains (losses) on loans and equity investments (2)

     ($6,810     ($18,333     ($15,468
  

 

 

   

 

 

   

 

 

 

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

      

Medallion loans

     —       —       0.25

Commercial loans

     (3.34     (0.05     (5.64

Total loans

     (0.68     (0.01     (0.90

Investment in Medallion Bank and other controlled subsidiaries

     —          (11.04     —     

Equity investments

     55.30        41.04        —     

Investment securities

     —          —          —     

Net investments

     (0.11     (1.43     (0.77
  

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

     (1.10 %)      (2.33 %)      (2.65 %) 

Managed net investments

     (0.70 %)      (2.03 %)      (1.72 %) 

 

(1) Includes realized gains (losses) of $0, $0, and ($1) for the years ended December 31, 2011, 2010, and 2009, related to foreclosed properties, which are carried in other assets on the consolidated balance sheet.

 

(2) Excludes $779 of net realized losses in 2010, related to the investment in SPAC 2, which was carried in other assets on the consolidated balance sheet.

The table below summarizes components of unrealized and realized gains and losses in the investment portfolios for the years ended December 31, 2011, 2010, and 2009.

 

(Dollars in thousands)

   2011     2010     2009  

Net change in unrealized appreciation (depreciation) on investments

      

Unrealized appreciation

     $825        $545        ($333

Unrealized depreciation (1)

     (5,629     (7,139     (4,747

Net unrealized appreciation (depreciation) on investment in

Medallion Bank and other controlled subsidiaries (2)

     7,668        12,535        (5,671

Realized gains

     —          —          —     

Realized losses (1)

     2,627        950        3,986   

Unrealized gains (losses) on foreclosed properties and other assets

     3,455        2,153        3,742   
  

 

 

   

 

 

   

 

 

 

Total

     $8,946        $9,044        ($3,023
  

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments

      

Realized gains

   $ —        $ —        $ —     

Realized losses (3)

     (2,627     (8,423     (3,986

Other gains

     2,171        1,581        —     

Direct recoveries (charge-offs) (4)

     (90     (796     (148

Realized gains (losses) on foreclosed properties and other assets

     —          —          (1
  

 

 

   

 

 

   

 

 

 

Total

     ($546     ($7,638     ($4,135
  

 

 

   

 

 

   

 

 

 
(1) Includes unrealized depreciation of $759 in 2009 related to the $759 investment in SPAC 2, and the related writeoff of $759 in 2010, which was carried in other assets on the consolidated balance sheet.

 

(2) Includes $6,966 of net unrealized depreciation related to the investment in SPAC, including $508 that was recorded in 2010, that was reversed during 2010, upon the writeoff of the SPAC investment.

 

(3) Represents the writeoffs related to the investments in SPAC and SPAC 2 in 2010. See Note 10 for additional information on these investments.

 

(4) Includes $817 of direct chargeoffs related to the settlement of the liabilities associated with the writeoff of SPAC and SPAC 2 in 2010, all of which represented a reversal of accrued expenses.

 

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Investment in Medallion Bank and Other Controlled Subsidiaries

Investment in Medallion Bank and other controlled subsidiaries were 19%, 16%, and 15% of our total portfolio at December 31, 2011, 2010, and 2009. The portfolio company investments primarily represent the wholly-owned unconsolidated subsidiaries of ours, substantially all of which is represented by our investment in Medallion Bank, a non-pass-through, taxpaying entity. We have held discussions with the IRS to obtain LLC tax treatment for Medallion Bank, which would provide “pass-through” taxation for our shareholders, and which has already been agreed to by the State of Utah. We cannot assure you that we will be successful in our efforts, but if we are successful, this treatment would reduce taxes and increase the reported net income of Medallion Bank. In addition, to facilitate maintenance of Medallion Bank’s capital ratio requirement and to provide the necessary capital for continued growth, we periodically make capital contributions to Medallion Bank, including an aggregate $1,750,000 contributed in January 2009. Separately, Medallion Bank declared dividends to us of $5,500,000 in 2011, $4,000,000 in 2010, and $4,000,000 in 2009. Without the capital infusions by us, a portion of the Medallion Bank dividends would have been retained to ensure Medallion Bank met its capital ratio requirements, and in such circumstance, if we maintained our dividend at the existing levels, a portion of those dividends would have represented a tax-free return of capital. See Note 3 of the consolidated financial statements for additional information about these investments.

Equity Investments

Equity investments were 1% of our total portfolio at December 31, 2011, 2010, and 2009. Equity investments were 1%, 1% and less than 1% of our total managed portfolio at December 31, 2011, 2010, and 2009. Equity investments are comprised of common stock, partnership interests, and warrants.

Investment Securities

Investment securities were 0% of our total portfolio at December 31, 2011, 2010, and 2009. Investment securities were 3%, 2%, and 2% of our total managed portfolio at December 31, 2011, 2010, and 2009. The investment securities are primarily adjustable-rate mortgage-backed securities purchased by Medallion Bank to better utilize required cash liquidity.

Trend in Interest Expense

Our interest expense is driven by the interest rates payable on our short-term credit facilities with banks, bank certificates of deposit, fixed-rate, long-term debentures issued to the SBA, and other short-term notes payable. We established a medallion lending relationship with DZ Bank in December 2008, that provides for growth in the portfolio at generally lower rates than under prior facilities, all of which have been fully paid off. In addition, Medallion Bank began raising brokered bank certificates of deposit during 2004, which were at our lowest borrowing costs. As a result of Medallion Bank raising funds through certificates of deposit as previously noted, we were able to realign the ownership of some of our medallion loans and related assets to Medallion Bank allowing us and our subsidiaries to use cash generated through these transactions to retire debt with higher interest rates. In addition, Medallion Bank is able to bid on these deposits at a wide variety of maturity levels which allows for improved interest rate management strategies.

Our cost of funds is primarily driven by the rates paid on our various debt instruments and their relative mix, and changes in the levels of average borrowings outstanding. See Note 4 to the consolidated financial statements for details on the terms of all outstanding debt. Our debentures issued to the SBA typically have terms of ten years.

 

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We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities outstanding during the period. The following table shows the average borrowings and related borrowing costs for the years ended December 31, 2011, 2010, and 2009. Our average balances decreased and Medallion Bank’s average balances increased, reflecting the sourcing of more business to Medallion Bank, and an increase in loan participations sold during the year. The decrease in borrowing costs reflected the trend of decreasing interest rates in the economy, and the repricing of term borrowings.

 

(Dollars in thousands)

   Interest
Expense
     Average
Balance
     Average
Borrowing
Costs
 

December 31, 2011

        

Revolving lines of credit

   $ 3,034       $ 174,081         1.74

SBA debentures

     4,508         76,719         5.88   

Notes payable to banks

     3,458         75,859         4.56   

Preferred securities

     2,538         33,000         7.69   
  

 

 

    

 

 

    

Total

   $ 13,538       $ 359,659         3.76   
  

 

 

    

 

 

    

Medallion Bank borrowings

     6,058         486,414         1.25   
  

 

 

    

 

 

    

Total managed borrowings

   $ 19,596       $ 846,073         2.32   
  

 

 

    

 

 

    

December 31, 2010

        

Revolving lines of credit

   $ 3,205       $ 181,489         1.77

SBA debentures

     5,449         85,113         6.40   

Notes payable to banks

     3,393         67,041         5.06   

Preferred securities

     2,538         33,000         7.69   
  

 

 

    

 

 

    

Total

   $ 14,585       $ 366,643         3.98   
  

 

 

    

 

 

    

Medallion Bank borrowings

     7,478         416,062         1.80   
  

 

 

    

 

 

    

Total managed borrowings

   $ 22,063       $ 782,705         2.82   
  

 

 

    

 

 

    

December 31, 2009

        

Revolving lines of credit

   $ 6,489       $ 253,388         2.56

SBA debentures

     5,725         88,250         6.49   

Notes payable to banks

     2,124         44,165         4.81   

Preferred securities

     2,538         33,000         7.69   
  

 

 

    

 

 

    

Total

   $ 16,876       $ 418,803         4.03   
  

 

 

    

 

 

    

Medallion Bank borrowings

     11,046         361,613         3.06   
  

 

 

    

 

 

    

Total managed borrowings

   $ 27,922       $ 780,416         3.58   
  

 

 

    

 

 

    

We will continue to seek SBA funding to the extent it offers attractive rates. SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under Small Business Investment Act (SBIA) and SBA regulations. We believe that financing operations primarily with short-term floating rate secured bank debt has generally decreased our interest expense, but has also increased our exposure to the risk of increases in market interest rates, which we mitigate with certain interest rate strategies. At December 31, 2011, 2010, and 2009, short-term adjustable rate debt constituted 68%, 67%, and 70% of total debt, and was 28%, 30%, and 36% on a fully managed basis including the borrowings of Medallion Bank.

Factors Affecting Net Assets

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

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

 

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Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and determine whether any factors give rise to valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional marketplace and regulatory restrictions, such as the ability to transfer industrial bank charters. As a result of this valuation process, we used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future.

Consolidated Results of Operations

For the Years Ended December 31, 2011 and 2010

Net increase in net assets resulting from operations was $19,163,000 or $1.09 per diluted common share in 2011, up $7,884,000 or 70% from $11,279,000 or $0.64 per share in 2010, primarily reflecting higher net realized/unrealized gains, lower operating expenses, and higher net interest income, partially offset by lower noninterest income. Net investment income after taxes was $10,763,000 or $0.61 per share in 2011, up $890,000 or 9% from $9,873,000 or $0.56 in 2010.

Investment income was $37,227,000 in 2011, down $26,000 from $37,253,000 a year ago, and included $4,070,000 from interest recoveries and bonuses on certain investments in 2011, compared to $2,678,000 in 2010. Also included in 2011 and 2010 were $5,500,000 and $4,000,000 in dividends from Medallion Bank, respectively. Excluding those items, investment income decreased $2,918,000 or 10%, primarily reflecting changes in the yields earned and the sourcing of a greater proportion of our business to Medallion Bank. The yield on the investment portfolio was 8.01% in 2011, up 1% from 7.91% in 2010. Excluding the extra interest and dividends, the 2011 yield was down 8% to 5.95% from 6.49% in 2010, reflecting the general decrease in market interest rates and changes in the portfolio mix. Average investments outstanding were $464,541,000 in 2011, down 1% from $471,105,000 a year ago, primarily reflecting portfolio growth, partially offset by loan participations sold and loan payments received.

Medallion loans were $307,167,000 at year end, down $15,959,000 or 5% from $323,126,000 a year ago, representing 68% of the investment portfolio compared to 67% a year ago, and were yielding 5.11% compared to 5.90% a year ago, a decrease of 13%, reflecting the repricing of the portfolio to lower current market interest rates. The decrease in outstandings primarily reflected sold participations and repayments, primarily in the New York market, partially offset by portfolio growth. The managed medallion portfolio, which includes loans at Medallion Bank and those serviced for third parties, was $676,533,000 at year end, up $29,006,000 or 4% from $647,527,000 a year ago, reflecting the above and the strong overall portfolio growth at Medallion Bank, particularly in the New York market. The commercial loan portfolio was $54,159,000 at year end, compared to $76,866,000 a year ago, a decrease of $22,707,000 or 30%, and represented 12% of the investment portfolio compared to 16% a year ago. The decrease primarily reflected repayments and reserve increases in the high-yield mezzanine loan portfolio. Commercial loans yielded 12.06% at year end, down 3% from 12.44% a year ago, reflecting the general reduction in market interest rates and changes in the portfolio mix. The net managed commercial loan portfolio, which includes loans at Medallion Bank and those serviced for or by third parties, was $115,371,000 at year end, down $21,914,000 or 16% from $137,285,000 a year ago, primarily reflecting the changes described above and increases in Medallion Bank’s asset-based portfolio, mostly offset by decreases in other secured commercial loans. Investments in Medallion Bank and other controlled subsidiaries were $85,932,000 at year end, up $7,197,000 or 9% from $78,735,000 a year ago, primarily reflecting our equity in the earnings of Medallion Bank, and which represented 19% of the investment portfolio, compared to 16% a year ago, and which yielded 6.40% at year end, compared to 5.08% a year ago, reflecting the increased 2011 fourth quarter dividend from Medallion Bank. See Notes 3 and 10 of the consolidated financial statements for additional information about Medallion Bank and the other controlled subsidiaries. Equity investments were $4,577,000 at year end, down $212,000 or 4% from $4,789,000 a year ago, primarily reflecting portfolio dispositions, partially offset by portfolio appreciation, and represented 1% of the investment portfolio at both year ends, and had a dividend yield of 2.26%, compared to 1.48% a year ago. Investment securities were zero at both year ends. See page 38 for a table that shows balances and yields by type of investment.

Interest expense was $13,538,000 in 2011, down $1,047,000 or 7% from $14,585,000 in 2010. The decrease in interest expense was primarily due to the decreased cost of borrowed funds. The cost of borrowed funds was 3.76% in 2011, compared to 3.98% a year ago, a decrease of 6%, reflecting the adjustable rate nature of much of our borrowings, and changes in our funding mix. Average debt outstanding was $359,659,000 in 2011, compared to $366,643,000 a year ago, a decrease of 2%, primarily reflecting the stabilization of our borrowing needs as much of our portfolio growth was in Medallion Bank. See page 45 for a table which shows average balances and cost of funds for our funding sources.

 

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Net interest income was $23,689,000 and the net interest margin was 5.10% in 2011, up $1,021,000 or 5% from $22,668,000 a year ago, which represented a net interest margin of 4.81%, all reflecting the items discussed above.

Noninterest income, which is comprised of prepayment fees, servicing fee income, late charges, and other miscellaneous income was $1,185,000 in 2011, down $2,348,000 or 66% from $3,533,000 a year ago, primarily reflecting lower servicing and other fees generated from the portfolio base at Medallion Bank, and lower prepayment fees. Excluded from noninterest income in 2011 was $5,492,000, compared to $412,000 in 2010, of servicing fee income, which beginning in the 2010 fourth quarter was assigned to Medallion Servicing Corp. (MSC), a wholly-owned unconsolidated portfolio company, established for the purpose of conducting most of the servicing activities for Medallion Bank.

Operating expenses were $14,111,000 in 2011, down $2,217,000 or 14% from $16,328,000 in 2010, which included $1,622,000 of 2010 expense reversals associated with potential liabilities of the SPAC’s. Also, excluded from operating expenses in 2011 and 2010 was $5,659,000 and $349,000, respectively, of servicing-related expenses, which beginning in the 2010 fourth quarter were charged to MSC. Excluding the SPAC and MSC amounts, operating expenses increased $1,471,000 or 8% in 2011. Salaries and benefits expense was $8,480,000 in the year, down $2,059,000 or 20% from $10,539,000 in 2010, and which reflected $3,908,000 and $225,000 of MSC allocations in 2011 and 2010. Excluding the MSC allocations, salaries and benefits expense increased $1,624,000 or 15%, primarily reflecting higher salary levels and bonus accruals. Professional fees were $1,515,000 in 2011, down $824,000 or 35% from $2,339,000 a year ago, and which reflected $250,000 and $25,000 of MSC allocations in 2011 and 2010. Excluding the MSC allocations, professional fees expense decreased $599,000 or 25%, primarily reflecting higher 2010 legal and other professional expenses related to costs associated with a cancelled equity initiative, various investment opportunities, and the MFC reorganization, and lower accounting costs in 2011. Occupancy expense was $911,000 in 2011, down $419,000 or 32% from $1,330,000 in 2010, and which reflected $550,000 and $43,000 of MSC allocations in 2011 and 2010. Excluding the MSC allocations, occupancy expense increased $88,000 or 6%, primarily reflecting scheduled rent increases. Other operating expenses of $3,205,000 in 2011 were up $1,085,000 or 51% from $2,120,000 a year ago, primarily reflecting $1,622,000 of 2010 expense reversals associated with potential liabilities of the SPAC’s, and also which reflected $951,000 and $56,000 of MSC allocations in 2011 and 2010. Excluding the SPAC and MSC amounts, other operating expenses increased $358,000 or 9%, primarily reflecting lower expense reimbursements from Medallion Bank and higher travel and entertainment expenses.

Income tax expense was $0 in 2011 and 2010.

Net change in unrealized appreciation on investments was $8,946,000 in 2011, compared to $9,044,000 in 2010, a decrease in appreciation of $98,000 or 1%. Net change in unrealized appreciation (depreciation), net of the net change in unrealized appreciation or depreciation on Medallion Bank and the other controlled subsidiaries, was appreciation of $1,278,000 in 2011, compared to depreciation of $3,491,000 in 2010, resulting in increased appreciation of $4,769,000 in 2011. Unrealized appreciation (depreciation) arises when we make valuation adjustments to the investment portfolio. When investments are sold or written off, any resulting realized gain (loss) is grossed up to reflect previously recorded unrealized components. As a result, movement between periods can appear distorted. The 2011 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $7,668,000, net appreciation on foreclosed property of $3,455,000, reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $2,627,000, and net unrealized appreciation on equity investments of $904,000, partially offset by net unrealized depreciation on loans of $5,708,000. The 2010 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $12,535,000, net appreciation on foreclosed property of $2,153,000, reversals of unrealized depreciation associated with equity investments (SPAC 2) which were charged off of $759,000, net unrealized appreciation on equity investments of $556,000, and reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $191,000, partially offset by net unrealized depreciation on loans of $7,150,000. The net appreciation or depreciation on Medallion Bank and other controlled subsidiaries described above is net of the dividends declared by them to us of $5,500,000 in 2011 and $4,000,000 in 2010, and also in 2010 included the reversal of unrealized depreciation of $7,473,000 related to the writeoffs of the SPAC investments realized in the 2010 first quarter.

Our net realized losses on investments were $546,000 in 2011, compared to $7,638,000 in 2010, a decrease in realized losses of $7,092,000 in 2011. The 2011 activity reflected gains on the sale of equity investments of $2,171,000 and net direct chargeoffs of $90,000. The 2010 activity reflected the reversals described in the unrealized paragraph above and net direct chargeoffs of $796,000, partially offset by net direct gains on the sale of investments of $1,581,000.

 

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Table of Contents

Our net realized/unrealized gains on investments were $8,400,000 in 2011, compared to $1,406,000 in 2010, an increase of $6,994,000 of net gains in the year, reflecting the above.

For the Years Ended December 31, 2010 and 2009

Net increase in net assets resulting from operations was $11,279,000 or $0.64 per diluted common share in 2010, up $10,257,000 from $1,022,000 or $0.06 per share in 2009, primarily reflecting $9,342,000 of charges associated with writing off our investments in the SPAC’s in 2009. Aside from these writeoffs, the increase was $915,000 or 9%, primarily reflecting higher other net realized/unrealized gains, noninterest income, and lower operating expenses, partially offset by lower net interest income. Net investment income after taxes was $9,873,000 or $0.56 per share in 2010, up $1,693,000 or 21% from $8,180,000 or $0.46 in 2009.

Investment income was $37,253,000 in 2010, down $4,150,000 or 10% from $41,403,000 a year ago, and included $2,678,000 from interest recoveries and bonuses on certain investments in 2010, compared to $1,684,000 in 2009. Also included in 2010 and 2009 were $4,000,000 in dividends from Medallion Bank in each year. Excluding those items, investment income decreased $5,144,000 or 14%, primarily reflecting loan participations sold and loan prepayments, and to a lesser extent, changes in the yields earned. The yield on the investment portfolio was 7.91% in 2010, up 2% from 7.77% in 2009. Excluding the extra interest and dividends, the 2010 yield was down 3% to 6.49% from 6.70% in 2009, reflecting the general decrease in market interest rates and changes in the portfolio mix. Average investments outstanding were $471,105,000 in 2010, down 12% from $533,106,000 a year ago, primarily reflecting loan participations sold and loan prepayments.

Medallion loans were $323,126,000 at year end, up $1,211,000 from $321,915,000 a year ago, representing 67% of the investment portfolio compared to 68% a year ago, and were yielding 5.90% compared to 6.23% a year ago, a decrease of 5%. The increase in outstandings primarily reflected portfolio growth, partially offset by sold participations and repayments. The managed medallion portfolio, which includes loans at Medallion Bank and those serviced for third parties, was $647,527,000 at year end, up $63,133,000 or 11% from $584,394,000 a year ago, reflecting the above and the strong overall portfolio growth at Medallion Bank. The commercial loan portfolio was $76,866,000 at year end, compared to $77,922,000 a year ago, a decrease of $1,056,000 or 1%, and represented 16% of the investment portfolio in both years. The decrease primarily reflected repayments of other secured commercial loans and reserve increases in the high-yield mezzanine loan portfolio, mostly offset by portfolio growth in the mezzanine and asset-based portfolios. Commercial loans yielded 12.45% at year end, down 2% from 12.71% a year ago, reflecting the general reduction in market interest rates. The net managed commercial loan portfolio, which includes loans at Medallion Bank and those serviced for or by third parties, was $138,158,000 at year end, up $2,145,000 or 2% from $136,013,000 a year ago, primarily reflecting the changes described above and increases in Medallion Bank’s asset-based portfolio, and by the net decrease in third party loan participations purchased. Investments in Medallion Bank and other controlled subsidiaries were $78,735,000 at year end, up $6,456,000 or 9% from $72,279,000 a year ago, primarily reflecting our equity in the earnings of Medallion Bank, and which represented 16% of the investment portfolio, compared to 15% a year ago, and which yielded 5.08% at year end, compared to 5.53% a year ago. See Notes 3 and 10 of the consolidated financial statements for additional information about Medallion Bank and the other controlled subsidiaries. Equity investments were $4,789,000 at year end, up $1,772,000 or 59% from $3,017,000 a year ago, primarily reflecting increased equity purchases and portfolio appreciation, and represented 1% of the investment portfolio at both year ends, and had a dividend yield of 1.48%, compared to 2.50% a year ago. Investment securities were zero at both year ends. See page 38 for a table that shows balances and yields by type of investment.

Interest expense was $14,585,000 in 2010, down $2,291,000 or 14% from $16,876,000 in 2009. The decrease in interest expense was primarily due to decreased levels of borrowings. The cost of borrowed funds was 3.98% in 2010, compared to 4.03% a year ago, a decrease of 1%, reflecting the stabilization of interest rates, the adjustable rate nature of much of our borrowings, and changes in our funding mix. Average debt outstanding was $366,643,000 in 2010, compared to $418,803,000 a year ago, a decrease of 12%, primarily reflecting decreased borrowings as portfolio outstandings declined. See page 45 for a table which shows average balances and cost of funds for our funding sources.

Net interest income was $22,668,000 and the net interest margin was 4.81% in 2010, down $1,859,000 or 8% from $24,527,000 a year ago, which represented a net interest margin of 4.60%, all reflecting the items discussed above.

Noninterest income, which is comprised of servicing fee income, prepayment fees, late charges, and other miscellaneous income was $3,533,000 in 2010, up $150,000 or 4% from $3,383,000 a year ago, primarily reflecting higher servicing and other fees generated from a larger portfolio base at Medallion Bank, and higher prepayment fees; partially offset by lower fees earned from an unconsolidated portfolio company and lower late charges. Excluded from noninterest income in 2010 was $412,000 of servicing fee income, which during the 2010 fourth quarter was assigned to Medallion Servicing Corp. (MSC), a wholly-owned unconsolidated portfolio company, established for the purpose of conducting most of the servicing activities for Medallion Bank.

 

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Operating expenses were $16,328,000 in 2010, down $3,402,000 or 17% from $19,730,000 in 2009, primarily reflecting $1,622,000 of expense charges in 2009 associated with potential liabilities of the SPAC’s, and their subsequent reversal to realized losses in 2010. Also, excluded from operating expenses in 2010 was $349,000 of servicing-related expenses, which during the 2010 fourth quarter were charged to MSC. Excluding the SPAC and MSC amounts, operating expenses increased $191,000 or 1% in 2010. Salaries and benefits expense was $10,539,000 in the year, down $450,000 or 4% from $10,989,000 in 2009, primarily reflecting $225,000 of MSC allocations, and otherwise reflecting higher salary and bonus accruals, mostly offset by higher salary deferrals related to loan originations. Professional fees were $2,339,000 in 2010, up $784,000 or 50% from $1,554,000 a year ago, primarily reflecting higher legal, accounting, and other professional expenses related to costs associated with a cancelled equity initiative, various investment opportunities, and the MFC reorganization, and also reflected $25,000 of MSC allocations. Occupancy expense was $1,330,000 in 2010, up $55,000 or 4%, from $1,275,000 in 2009, primarily reflecting lower rent reimbursements received from an unconsolidated portfolio company, and also reflected $43,000 of MSC allocations. Other operating expenses of $2,120,000 in 2010 were down $3,792,000 or 64% from $5,912,000 a year ago, primarily reflecting $1,622,000 of expense charges in 2009 associated with potential liabilities of the SPAC’s, and their subsequent reversal to realized losses in 2010, and also reflected $56,000 of MSC allocations. Excluding the SPAC and MSC amounts, other operating expenses decreased $492,000 or 11% in 2010. The decrease primarily reflected higher expense reimbursements from Medallion Bank, and lower travel and entertainment and depreciation and amortization expenses, partially offset by higher franchise tax accruals.

Income tax expense was $0 in 2010 and 2009.

Net change in unrealized appreciation on investments was $9,044,000 in 2010, compared to depreciation of $3,023,000 in 2009, an increase in appreciation of $12,067,000. Net change in unrealized depreciation, net of the net unrealized appreciation or depreciation on Medallion Bank and the other controlled subsidiaries was $3,491,000 in 2010, compared to appreciation of $2,648,000 in 2009, resulting in decreased appreciation of $6,139,000 in 2010. Unrealized appreciation (depreciation) arises when we make valuation adjustments to the investment portfolio. When investments are sold or written off, any resulting realized gain (loss) is grossed up to reflect previously recorded unrealized components. As a result, movement between periods can appear distorted. The 2010 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $12,535,000, net appreciation on foreclosed property of $2,153,000, reversals of unrealized depreciation associated with equity investments (SPAC 2) which were charged off of $759,000, net unrealized appreciation on equity investments of $556,000, and reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $191,000, partially offset by net unrealized depreciation on loans of $7,150,000. The 2009 activity resulted from net depreciation on Medallion Bank and other controlled subsidiaries of $5,671,000, net unrealized depreciation on loans of $3,507,000, and net unrealized depreciation on equity investments of $1,573,000, partially offset by reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $3,986,000, net appreciation on foreclosed property of $3,724,000, and reversals of unrealized depreciation associated with foreclosed properties that were sold of $18,000. The net appreciation or depreciation on Medallion Bank and other controlled subsidiaries described above is net of the dividends declared by them to us of $4,000,000 in each of 2010 and 2009. Also included were unrealized depreciation of $6,965,000 in 2009, and the subsequent reversal of unrealized depreciation of $7,473,000 in 2010, related to the writeoffs of the SPAC investments realized in the 2010 first quarter.

Our net realized losses on investments were $7,638,000 in 2010, compared to $4,135,000 in 2009, an increase in realized losses of $3,503,000 in 2010. The 2010 activity reflected the reversals described in the unrealized paragraph above and net direct chargeoffs of $796,000, partially offset by net direct gains on the sale of investments of $1,581,000. The 2009 activity reflected the reversals described in the unrealized paragraph above and net direct charge offs of $148,000, partially offset by net direct gains on the sale of foreclosed properties of $18,000.

Our net realized/unrealized gains/losses on investments were a gain of $1,406,000 in 2010, compared to losses of $7,158,000 in 2009, an increase of $8,564,000 of net gains in the year, reflecting the above.

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

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

 

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

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

In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals or the maturities of tranches drawn under the revolving lines of credit or issued as certificates of deposit, for terms of up to five years. We had outstanding SBA debentures of $69,685,000 with a weighted average interest rate of 5.44%, constituting 20% of our total indebtedness as of December 31, 2011. Also, as of December 31, 2011, portions of the adjustable rate debt with banks repriced at intervals of as long as 10 months, and certain of the certificates of deposit were for terms of up to 35 months, further mitigating the immediate impact of changes in market interest rates.

A relative measure of interest rate risk can be derived from our interest rate sensitivity gap. The interest rate sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities, and negative when repriceable liabilities exceed repriceable assets. A relative measure of interest rate sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets.

The following table presents our interest rate sensitivity gap at December 31, 2011, compared to the respective positions at the end of 2010 and 2009. The principal amounts of interest earning assets are assigned to the time frames in which such principal amounts are contractually obligated to be repriced. We have not reflected an assumed annual prepayment rate for such assets in this table.

 

     December 31, 2011 Cumulative Rate Gap (1)  

(Dollars in thousands)

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

Earning assets

                   

Floating-rate

   $ 9,388      $ —        $ —        $ —         $ —         $ —         $ —        $ 9,388   

Adjustable rate

     17,179        61        —          563         —           —           —          17,803   

Fixed-rate

     32,730        64,752        137,213        68,853         36,883         6,603         1,096        348,130   

Cash

     29,352        —          —          —           —           —           —          29,352   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total earning assets

   $ 88,649      $ 64,813      $ 137,213      $ 69,416       $ 36,883       $ 6,603       $ 1,096      $ 404,673   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Interest bearing liabilities

                   

Revolving lines of credit

   $ 180,566      $ —        $ —        $ —         $ —         $ —         $ —        $ 180,566   

Notes payable to banks

     35,396        6,635        28,584        —           3,913         —           —          74,528   

SBA debentures

     3,000        19,450        13,500        9,250         —           —           24,485        69,685   

Preferred securities

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 251,962      $ 26,085      $ 42,084      $ 9,250       $ 3,913       $ —         $ 24,485      $ 357,779   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Interest rate gap

   ($ 163,313   $ 38,728      $ 95,129      $ 60,166       $ 32,970       $ 6,603         ($23,389   $ 46,894   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Cumulative interest rate gap (2)

   ($ 163,313     ($124,585     ($29,456   $ 30,710       $ 63,680       $ 70,283       $ 46,894        —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010 (2)

   ($ 121,343     ($85,323   $ 33,820      $ 39,954       $ 62,579       $ 62,709       $ 48,006        —     

December 31, 2009 (2)

   ($ 129,336     ($39,371   $ 28,151      $ 57,045       $ 65,972       $ 65,089       $ 54,992        —     

 

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(1) The ratio of the cumulative one year gap to total interest rate sensitive assets was (40%), (28%), and (30%), as of December 31, 2011, 2010, and 2009, and was (26%), (29%), and (25%) on a combined basis with Medallion Bank.

 

(2) Adjusted for the medallion loan 40% prepayment assumption results in a cumulative one year negative interest rate gap and related ratio of ($57,386) or (14%) for December 31, 2011, compared to ($30,928) or (7%) and ($34,286) or (8%) for December 31, 2010 and 2009, respectively, and was ($60,584) or (6%), ($114,994) or (12%), and ($85,130) or (9%) on a combined basis with Medallion Bank.

Our interest rate sensitive assets were $404,673,000 and interest rate sensitive liabilities were $357,779,000 at December 31, 2011. The one-year cumulative interest rate gap was a negative $163,313,000 or 40% of interest rate sensitive assets, compared to a negative $121,343,000 or 28% at December 31, 2010 and $129,336,000 or 30% at December 31, 2009. However, using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of $57,386,000 or 14% at December 31, 2011. We seek to manage interest rate risk by originating adjustable-rate loans, by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, and by other options consistent with managing interest rate risk.

On a combined basis with Medallion Bank, our interest rate sensitive assets were $1,029,380,000 and interest rate sensitive liabilities were $872,108,000 at December 31, 2011. The one-year cumulative interest rate gap was a negative $272,395,000 or 26% of interest rate sensitive assets, compared to a negative $289,178,000 or 29% and $225,251,000 or 25% at December 31, 2010 and 2009. Using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of $60,584,000 or 6% at December 31, 2011.

Interest Rate Cap Agreements

We manage our exposure to increases in market rates of interest by periodically purchasing interest rate caps to lock in the cost of funds of its variable-rate debt in the event of a rapid run up in interest rates. Beginning in 2009, we entered into contracts to purchase interest rate caps on $512,000,000 of notional value of principal from various multinational banks, of which $175,000,000 are active with termination dates ranging to March 2013. The caps provide for payments to us if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases of $407,000 were generally fully expensed when paid, including $93,000, $142,000, and $171,000 in 2011, 2010, and 2009, respectively, and all are carried at $0 on the balance sheet at December 31, 2011.

Liquidity and Capital Resources

Our sources of liquidity are the revolving lines of credit with DZ Bank and with a variety of local and regional banking institutions, unfunded commitments to purchase debentures from the SBA, loan amortization and prepayments, private issuances of debt securities, and participations or sales of loans to third parties. As a RIC, we are required to distribute at least 90% of our investment company taxable income; consequently, we have primarily relied upon external sources of funds to finance growth. Trust III’s $200,000,000 revolving line of credit with DZ Bank had $19,434,000 of availability, $72,700,000 was available under revolving credit agreements with commercial banks, and unfunded commitments from the SBA were $5,000,000.

Additionally, Medallion Bank, our wholly-owned, unconsolidated portfolio company has access to independent sources of funds for our business originated there, primarily through brokered certificates of deposit. At the current required capital levels, it is expected, although there can be no guarantee, that deposits of approximately $107,500,000 could be raised by Medallion Bank to fund future loan origination activities, and Medallion Bank also has $30,000,000 available under Fed Funds lines with several commercial banks. In addition, Medallion Bank, as a non-RIC subsidiary of ours, is allowed to retain all earnings in the business to fund future growth.

The components of our debt were as follows at December 31, 2011. See Note 4 to the consolidated financial statements on page F-17 for details of the contractual terms of our borrowings.

 

(Dollars in thousands)

   Balance      Percentage     Rate (1)  

Revolving lines of credit

   $ 180,566         50     1.45

Notes payable to banks

     74,528         21        3.77   

SBA debentures

     69,685         20        5.44   

Preferred securities

     33,000         9        7.68   
  

 

 

    

 

 

   

Total outstanding debt

   $ 357,779         100     3.29   
  

 

 

    

 

 

   

 

 

 

Deposits at Medallion Bank

     514,329         —          0.73
  

 

 

      

Total outstanding debt, including Medallion Bank

   $ 872,108         —          1.78   
  

 

 

    

 

 

   

 

 

 

 

(1) Weighted average contractual rate as of December 31, 2011.

 

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Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all contractual obligations at December 31, 2011.

 

     Payments due by period  

(Dollars in thousands)

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

Revolving lines of credit

   $ —         $ 180,566       $ —         $ —         $ —         $ —         $ 180,566   

Notes payable to banks

     15,798         23,528         30,413         —           3,915         874         74,528   

SBA debentures

     3,000         19,450         13,500         9,250         —           24,485         69,685   

Preferred securities

     —           —           —           —           —           33,000         33,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,798       $ 223,544       $ 43,913       $ 9,250       $ 3,915       $ 58,359       $ 357,779   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deposits at Medallion Bank

     269,339         184,669         60,321         —           —           —           514,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total, including Medallion Bank

   $ 288,137       $ 408,213       $ 104,234       $ 9,250       $ 3,915       $ 58,359       $ 872,108   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We value our portfolio at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy. Unlike certain lending institutions, we are not permitted to establish reserves for loan losses. Instead, we must value each individual investment and portfolio loan on a quarterly basis. We record unrealized depreciation on investments and loans when we believe that an asset has been impaired and full collection is unlikely. We record unrealized appreciation on equities if we have a clear indication that the underlying portfolio company has appreciated in value and, therefore, our equity investment has also appreciated in value. Without a readily ascertainable market value, the estimated value of our portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. We adjust the valuation of the portfolio quarterly to reflect our Board of Directors’ estimate of the current fair value of each investment in the portfolio. Any changes in estimated fair value are recorded in our statement of operations as net unrealized appreciation (depreciation) on investments. Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of its fair value. We conduct a thorough valuation analysis as described previously, and determine whether any factors give rise to valuation different than recorded book value. As a result of this valuation process, we used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the result as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future.

In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would have positively impacted net increase in net assets resulting from operations as of December 31, 2011 by approximately $1,477,000 on an annualized basis, compared to a positive impact of $1,291,000 at December 31, 2010, and the impact of such an immediate increase of 1% over a one year period would have been ($1,665,000) at December 31, 2011, compared to ($2,026,000) for December 31, 2010. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net increase in net assets resulting from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

We continue to work with investment banking firms and other financial intermediaries to investigate the viability of a number of other financing options which include, among others, the sale or spin off certain assets or divisions, the development of a securitization conduit program, and other independent financing for certain subsidiaries or asset classes. These financing options would also provide additional sources of funds for both external expansion and continuation of internal growth.

 

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The following table illustrates sources of available funds for us and each of our subsidiaries, and amounts outstanding under credit facilities and their respective end of period weighted average interest rates at December 31, 2011. See Note 4 to the consolidated financial statements for additional information about each credit facility.

 

(Dollars in thousands)

   The Company     MFC     MCI     MBC      FSVC     MB     Total     12/31/2010  

Cash

   $ 1,630      $ 2,970      $ 12,521      $ 2,088       $ 10,143      $ —        $ 29,352      $ 17,303   

Bank loans

     53,170        94,058        —          —           —          —        $ 147,228        97,578   

Amounts undisbursed

     17,600        55,100        —          —           —          —          72,700        10,500   

Amounts outstanding

     35,570        38,958        —          —           —          —          74,528        87,078   

Average interest rate

     3.69     3.86     —          —           —          —          3.77     4.41

Maturity

     7/12-1/16        3/12-2/17        —          —           —          —          3/12-2/17        1/11-2/17   

Preferred securities

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

Average interest rate

     7.68     —          —          —           —          —          7.68     7.68

Maturity

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

Lines of credit

     —          200,000        —          —           —          —        $ 200,000      $ 200,000   

Amounts undisbursed

     —          19,434        —          —           —          —          19,434        19,796   

Amounts outstanding

     —          180,566        —          —           —          —          180,566        180,204   

Average interest rate

     —          1.45     —          —           —          —          1.45     1.31

Maturity

     —          12/13        —          —           —          —          12/13        12/13   

SBA debentures

     —          —          34,250        —           40,435        —        $ 74,685      $ 92,735   

Amounts undisbursed

     —          —          5,000        —           —          —          5,000        12,485   

Amounts outstanding

     —          —          29,250        —           40,435        —          69,685        80,250   

Average interest rate

     —          —          5.43     —           5.45     —          5.44     5.48

Maturity

     —          —          3/14-3/21        —           9/12-3/21        —          9/12-3/21        9/11-3/21   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and amounts remaining undisbursed under credit facilities

   $ 19,230      $ 77,504      $ 17,521      $ 2,088       $ 10,143      $ —        $ 126,486      $ 60,084   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total debt outstanding

   $ 68,570      $ 219,524      $ 29,250      $ —         $ 40,435      $ —        $ 357,779      $ 380,532   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Including Medallion Bank

                 

Cash

     —          —          —          —           —        $ 28,626      $ 28,626      $ 16,980   

Deposits

     —          —          —          —           —          514,329        514,329        468,957   

Average interest rate

     —          —          —          —           —          0.73     0.73     1.34

Maturity

     —          —          —          —           —          1/12-12/14        1/12-12/14        1/11-9/13   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and amounts remaining undisbursed under credit facilities

   $ 19,230      $ 77,504      $ 17,521      $ 2,088       $ 10,143      $ 28,626      $ 155,112      $ 77,064   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total debt outstanding

   $ 68,570      $ 219,524      $ 29,250      $ —         $ 40,435      $ 514,329      $ 872,108      $ 849,489   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loan amortization, prepayments, and sales also provide a source of funding for us. Prepayments on loans are influenced significantly by general interest rates, medallion loan market values, economic conditions, and competition.

We have available liquidity of $19,434,000 under our revolving credit agreement with DZ Bank as of December 31, 2011. We also generate liquidity through deposits generated at Medallion Bank, borrowing arrangements with other banks, and through the issuance of SBA debentures, as well as from cash flow from operations. In addition, we may choose to participate a greater portion of our loan portfolio to third parties. We are actively seeking additional sources of liquidity, however, given current market conditions, we cannot assure you that we will be able to secure additional liquidity on terms favorable to us or at all. If that occurs, we may decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become more favorable; or we may be required to dispose of assets when we would not otherwise do so, and at prices which may be below the net book value of such assets in order for us to repay indebtedness on a timely basis. Also, Medallion Bank is not a RIC, and therefore is able to retain earnings to finance growth.

 

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Recently Issued Accounting Standards

In December 2011, the FASB issued Accounting Standards Update (ASU) 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 adds certain additional disclosure requirements about financial instruments and derivative instruments that are subject to offsetting and related arrangements. The new disclosures are required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those periods. As the amendment impacts disclosures only, it will not have an effect on our financial condition or results of operation.

In May 2011, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards”. ASU 2011-04 amends Topic 820 (Fair Value Measurement) by providing a consistent definition of fair value, ensuring that the fair value measurement and disclosure requirements are similar between US GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, particularly for level 3 fair value measurements. ASU 2011-04 is effective for the first interim or annual reporting period beginning after December 15, 2011, and is to be applied prospectively. The Company is evaluating the impact adoption of ASU 2011-04 will have on its disclosures, and does not believe adoption will have an impact on its financial condition or results of operation.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our business activities contain elements of risk. We consider the principal types of risk to be fluctuations in interest rates and portfolio valuations. We consider the management of risk essential to conducting our businesses. Accordingly, our risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits, and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.

We value our portfolio at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy. Unlike certain lending institutions, we are not permitted to establish reserves for loan losses. Instead, we must value each individual investment and portfolio loan on a quarterly basis. We record unrealized depreciation on investments and loans when we believe that an asset has been impaired and full collection is unlikely. We record unrealized appreciation on equities if there is a clear indication that the underlying portfolio company has appreciated in value and, therefore, our equity investment has also appreciated in value. Without a readily ascertainable market value, the estimated value of our portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. We adjust the valuation of the portfolio quarterly to reflect our Board of Directors’ estimate of the current fair value of each investment in the portfolio. Any changes in estimated fair value are recorded in our statement of operations as net unrealized appreciation (depreciation) on investments. Our investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and determine whether any factors give rise to valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional marketplace restrictions, such as on the ability to transfer industrial bank charters. As a result of this valuation process, we used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future.

In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would have positively impacted net increase in net assets resulting from operations as of December 31, 2011 by approximately $1,477,000 on an annualized basis, compared to a positive impact of $1,291,000 at December 31, 2010, and the impact of such an immediate increase of 1% over a one year period would have been ($1,665,000) at December 31, 2011, compared to ($2,026,000) for December 31, 2010. Although management believes that this measure is indicative of our sensitivity to interest rate

 

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changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net increase in net assets resulting from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the financial statements set forth under Item 15 (A) (1) in this Annual Report on Form 10-K, which financial statements are incorporated herein by reference in response to this Item 8.

 

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

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this annual report. As a result of this evaluation, we have concluded that our disclosure controls and procedures were effective as of December 31, 2011.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our internal control over financial reporting to determine whether any changes occurred during the 2011 fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, and have concluded that there have been no changes that occurred during the 2011 fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

 

   

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

   

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

   

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on its assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of December 31, 2011.

We believe that the consolidated financial statements included in this report fairly represent our consolidated financial position and consolidated results of operations for all periods presented.

Our Independent Registered Public Accounting Firm, WeiserMazars LLP, has audited and issued a report on management’s assessment of our internal control over financial reporting. The report of WeiserMazars LLP appears below.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited Medallion Financial Corp. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company including the consolidated summary schedule of investments, as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the three-year period ended December 31, 2011, and the selected financial ratios and other data for each of the five years in the five-year period ended December 31, 2011, and our report dated March 27, 2012 expressed an unqualified opinion on those consolidated financial statements.

/s/ WeiserMazars LLP

New York, New York

March 27, 2012

 

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ITEM 9B. OTHER INFORMATION

None.

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2012 for its fiscal year 2012 Annual Meeting of Shareholders under the captions “Our Directors and Executive Officers” and “Corporate Governance.”

 

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2012 for our fiscal year 2012 Annual Meeting of Shareholders under the caption “Executive Compensation.”

 

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

Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2012 for our fiscal year 2012 Annual Meeting of Shareholders under the captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”

 

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

Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2012 for our fiscal year 2012 Annual Meeting of Shareholders under the caption “Certain Relationships and Related Party Transactions.”

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated by reference from our Definitive Proxy Statement expected to be filed by April 30, 2012 for our fiscal year 2012 Annual Meeting of Shareholders under the caption “Principal Accountant Fees and Services.”

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

  (A) 1. FINANCIAL STATEMENTS

The consolidated financial statements of Medallion Financial Corp. and the Report of Independent Public Accountants thereon are included as set forth on the Index to Financial Statements on F-1.

2. FINANCIAL STATEMENT SCHEDULES

See Index to Financial Statements on F-1.

3. EXHIBITS

 

Number

 

Description

3.1(a)   Restated Medallion Financial Corp. Certificate of Incorporation. Filed as Exhibit 2(a) to the Company’s Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein.

 

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      3.1(b)   Amendment to Restated Certificate of Incorporation. Filed as Exhibit 3.1.1 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 (File No. 814-00188) and incorporated by reference herein.
      3.2   Restated By-Laws. Filed as Exhibit (b) to the Company’s Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein.
      4.1   Amended and Restated Loan and Security Agreement, dated as of March 28, 2011, by and among Medallion Financial Corp., Medallion Funding LLC, and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on April 1, 2011 (File No. 814-00188) and incorporated by reference herein.
      4.2   Fixed/Floating Rate Junior Subordinated Note, dated June 7, 2007, by Medallion Financial Corp., in favor of Medallion Financing Trust I. Filed as Exhibit 4.1 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188) and incorporated by reference herein.
    10.1   First Amended and Restated Employment Agreement, between Medallion Financial Corp. and Alvin Murstein dated May 29, 1998. Filed as Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 814-00188) and incorporated by reference herein.*
    10.2   First Amended and Restated Employment Agreement, between Medallion Financial Corp. and Andrew Murstein dated May 29, 1998. Filed as Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 814-00188) and incorporated by reference herein.*
    10.3   Employment Agreement, dated August 3, 2006, by and between Medallion Financial Corp. and Michael Kowalsky. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 4, 2006 (File No. 814-00188) and incorporated by reference herein.*
    10.4   Medallion Financial Corp. Amended and Restated 1996 Stock Option Plan. Filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 (File No. 814-00188) and incorporated by reference herein.*
    10.5   Medallion Financial Corp. Amended and Restated 1996 Non-Employee Directors Stock Option Plan. Filed as Exhibit A to the Company’s Request Form on Amendment and the Order by the Commission approving the plan as of April 3, 2000 (File No. 812-11800) and incorporated by reference herein.*
    10.6   2006 Employee Stock Option Plan. Filed as Exhibit II to our definitive proxy statement for our 2006 Annual Meeting of Shareholders filed on April 28, 2006 (File No. 814-00188) and incorporated by reference herein.*
    10.7   2006 Non-Employee Director Stock Option Plan. Filed as Exhibit I to our definitive proxy statement for our 2006 Annual Meeting of Shareholders filed on April 28, 2006 (File No. 814-00188) and incorporated by reference herein.*
    10.8   2009 Employee Restricted Stock Plan. Filed as Exhibit I to our definitive proxy statement for our 2010 Annual Meeting of Shareholders filed on April 29, 2010 (File No. 814-00188) and incorporated by reference herein.*
    10.9   Non-Employee Director Compensation Summary Sheet. Filed herewith.*
    10.10   Indenture of Lease, dated October 31, 1997, by and between Sage Realty Corporation, as Agent and Landlord, and Medallion Financial Corp., as Tenant. Filed as Exhibit 10.64 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 814-00188) and incorporated by reference herein.
    10.11   First Amendment of Lease, dated September 6, 2005, by and between Medallion Financial Corp. and Sage Realty Corporation. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 12, 2005 (File No. 814-00188) and incorporated by reference herein.

 

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    10.12    Amended and Restated Loan and Security Agreement, dated as of March 28, 2011, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on April 1, 2011 (File No. 814-00188) and incorporated by reference herein.
    10.13    First Amendment to Amended and Restated Loan and Security Agreement, dated September 1, 2011, by and among Medallion Financial Corp., Medallion Funding LLC and Sterling National Bank. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 7, 2011 (File No. 814-00188) and incorporated by reference herein.
    10.14    Amended and Restated Unlimited Guaranty, dated March 28, 2011, by Medallion Funding LLC, in favor of Sterling National Bank. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on April 1, 2011 (File No. 814-00188) and incorporated by reference herein.
    10.15    Commitment Letter, dated March 1, 2006, by the Small Business Administration to Medallion Capital, Inc., accepted and agreed to by Medallion Capital, Inc. on March 8, 2006. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 9, 2006 (File No. 814-00188) and incorporated by reference herein.
    10.16    Commitment Letter, dated September 20, 2006, by the Small Business Administration to Freshstart Venture Capital Corp., accepted and agreed to by Freshstart Venture Capital Corp. on October 10, 2006. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 11, 2006 (File No. 814-00188) and incorporated by reference herein.
    10.17    Commitment Letter, dated September 1, 2010, by the Small Business Administration to Medallion Capital, Inc., accepted and agreed to by Medallion Capital, Inc. on September 7, 2010. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on September 13, 2010 (File No. 814-00188) and incorporated by reference herein.
    10.18    Commitment Letter, dated September 1, 2010, by the Small Business Administration to Freshstart Venture Capital Corp., accepted and agreed to by Freshstart Venture Capital Corp. on September 8, 2010. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 13, 2010 (File No. 814-00188) and incorporated by reference herein.
    10.19    Junior Subordinated Indenture, dated as of June 7, 2007, between Medallion Financing Trust I and Wilmington Trust Company as trustee. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188) and incorporated by reference herein.
    10.20    Amended and Restated Trust Agreement, dated as of June 7, 2007, among Medallion Financial Corp. as depositor, Wilmington Trust Company as property trustee and Delaware trustee and the Administrative Trustees named therein. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188) and incorporated by reference herein.
    10.21    Purchase Agreement, dated as of June 7, 2007, among Medallion Financial Corp., Medallion Financing Trust I, and Merrill Lynch International. Filed as Exhibit 10.3 to the Current Report on Form 8-K filed on June 11, 2007 (File No. 814-00188) and incorporated by reference herein.
    10.22    Loan and Security Agreement, dated as of December 12, 2008, among Taxi Medallion Loan Trust III, Autobahn Funding Company LLC, as Lender, and DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, as Agent. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.
    10.23    Amendment No. 1 to Loan and Security Agreement, dated as of August 5, 2009, by and among Taxi Medallion Loan Trust III, Autobahn Funding Company LLC, as Lender, and DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, as Agent. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 10, 2009 (File No. 814-00188) and incorporated by reference herein.
    10.24    Servicing Agreement, dated as of December 12, 2008, by and among Taxi Medallion Loan Trust III, Medallion Funding Corp., and DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.

 

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    10.25    Loan Sale and Contribution Agreement, dated December 12, 2008, by and between Medallion Funding Corp. and Taxi Medallion Loan Trust III. Filed as Exhibit 10.3 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.
    10.26    Amended and Restated Trust Agreement, dated as of December 12, 2008, by and between Medallion Funding Corp. and US Bank Trust, N.A. Filed as Exhibit 10.4 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.
    10.27    Limited Recourse Guaranty, dated as of December 12, 2008, by Medallion Funding Corp., in favor of Autobahn Funding Company LLC, as Lender, and DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, as Agent. Filed as Exhibit 10.5 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.
    10.28    Performance Guaranty, dated as of December 12, 2008, by Medallion Financial Corp., in favor of Taxi Medallion Loan Trust III, Autobahn Funding Company LLC, as Lender, and DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, as Agent. Filed as Exhibit 10.6 to the Current Report on Form 8-K filed on December 16, 2008 (File No. 814-00188) and incorporated by reference herein.
    10.29    Reaffirmation Agreement, dated as of February 26, 2010, by and among Medallion Funding LLC, Taxi Medallion Loan Trust III, DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, in its capacity as Agent, and Wells Fargo Bank, National Association. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on March 5, 2010 (File No. 814-00188) and incorporated by reference herein.
    10.30    Custodial Agreement, dated as of December 12, 2008, among DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, Taxi Medallion Loan Trust III, Wells Fargo Bank, National Association, and Medallion Funding Corp. Filed as Exhibit j.2 to the Registration Statement on Form N-2 filed on December 20, 2011 (File No. 333-178644) and incorporated by reference herein.
    10.31    Custodian Agreement, effective July 23, 2003, among Wells Fargo Bank Minnesota, National Association, as custodian, and Medallion Financial Corp., Medallion Funding Corp. and Freshstart Venture Capital Corp. Filed as Exhibit j.1 to the Registration Statement on Form N-2 filed on December 20, 2011 (File No. 333-178644) and incorporated by reference herein.
    12.1    Computation of ratio of debt to equity. Filed herewith.
    21.1    List of Subsidiaries of Medallion Financial Corp. Filed herewith.
    23.1    Consent of WeiserMazars LLP, independent registered public accounting firm, related to reports on financial statements of Medallion Financial Corp. and Medallion Bank. Filed herewith.
    31.1    Certification of Alvin Murstein pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
    31.2    Certification of Larry D. Hall pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
    32.1    Certification of Alvin Murstein pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
    32.2    Certification of Larry D. Hall pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
    99.1    Certification of Alvin Murstein pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008. Filed herewith.
    99.2    Certification of Larry D. Hall pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008. Filed herewith.
    99.3    Consolidated Schedules of Investments as of December 31, 2011 and 2010. Filed herewith.

 

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

 

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IMPORTANT INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain forward-looking statements contained in this Form 10-K and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward-looking statements contained in this Form 10-K were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict, and many of which are beyond control of the Company. Accordingly, there can be no assurance that the forward-looking statements contained in this Form 10-K will be realized or that actual results will not be significantly higher or lower. The statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form 10-K should consider these facts in evaluating the information contained herein. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-K. The inclusion of the forward-looking statements contained in this Form 10-K should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-K will be achieved. In light of the foregoing, readers of this Form 10-K are cautioned not to place undue reliance on the forward-looking statements contained herein. These risks and others that are detailed in this Form 10-K and other documents that the Company files from time to time with the Securities and Exchange Commission, including quarterly reports on Form 10-Q and any current reports on Form 8-K, must be considered by any investor or potential investor in the Company.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange of Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MEDALLION FINANCIAL CORP.
Date: March 27, 2012
By:  

/s/ Alvin Murstein

  Alvin Murstein
  Chairman and Chief Executive Officer

 

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures

  

Title

 

Date

/s/ Alvin Murstein

   Chairman of the Board of Directors   March 27, 2012
Alvin Murstein   

and Chief Executive Officer

(Principal Executive Officer)

 

/s/ Larry D. Hall

   Senior Vice President and Chief Financial Officer   March 27, 2012
Larry D. Hall    (Principal Financial and Accounting Officer)  

/s/ Andrew M. Murstein

   President and Director   March 27, 2012
Andrew M. Murstein     

/s/ Henry L. Aaron

   Director   March 27, 2012
Henry L. Aaron     

/s/ Mario M. Cuomo

   Director   March 27, 2012
Mario M. Cuomo     

/s/ Henry D. Jackson

   Director   March 27, 2012
Henry D. Jackson     

/s/ Stanley Kreitman

   Director   March 27, 2012
Stanley Kreitman     

/s/ Frederick A. Menowitz

   Director   March 27, 2012
Frederick A. Menowitz     

/s/ David L. Rudnick

   Director   March 27, 2012
David L. Rudnick     

/s/ Lowell P. Weicker, Jr.

   Director   March 27, 2012
Lowell P. Weicker, Jr.     

 

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MEDALLION FINANCIAL CORP.

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Statements of Operations for the Years ended December 31, 2011, 2010, and 2009

     F-3   

Consolidated Balance Sheets as of December 31, 2011 and 2010

     F-4   

Consolidated Statements of Changes in Net Assets for the Years ended December  31, 2011, 2010, and 2009

     F-5   

Consolidated Statements of Cash Flows for the Years ended December 31, 2011, 2010, and 2009

     F-6   

Notes to Consolidated Financial Statements

     F-7   

Consolidated Summary Schedules of Investments as of December 31, 2011 and 2010

     F-30   

Consolidated Schedules of Investments In and Advances to Affiliates as of and for the years ended December 31, 2011 and 2010

     F-36   

Medallion Bank Financial Statements

     F-38   

Report of Independent Registered Public Accounting Firm

     F-39   

Statements of Operations for the Years ended December 31, 2011, 2010, and 2009

     F-40   

Balance Sheets as of December 31, 2011 and 2010

     F-41   

Statements of Changes in Shareholders’ Equity for the Years ended December  31, 2011, 2010, and 2009

     F-42   

Statements of Cash Flows for the Years ended December 31, 2011, 2010, and 2009

     F-43   

Notes to Financial Statements

     F-44   

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Medallion Financial Corp.

We have audited the accompanying consolidated balance sheets of Medallion Financial Corp. and subsidiaries (the “Company”), including the consolidated summary schedule of investments, as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the three-year period ended December 31, 2011 and the selected financial ratios and other data (see note 13) for each of the five years in the five-year period ended December 31, 2011. We have also audited the consolidated schedules of investments in and advances to affiliates as of and for the years ended December 31, 2011 and 2010. These consolidated financial statements, selected financial ratios and other data, and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements, selected financial ratios and other data, and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements, selected financial ratios and other data, and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our procedures included physical inspection or confirmation of securities owned as of December 31, 2011 and 2010. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements and the selected financial ratios and other data referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2011 and 2010, and the consolidated results of their operations, changes in net assets, and cash flows for each of the three years in the three-year period ended December 31, 2011 and the selected financial ratios and other data for each of the five years in the five-year period ended December 31, 2011, in conformity with US generally accepted accounting principles. Also, in our opinion, the consolidated schedules of investments in and advances to affiliates, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control-Integrated Framework Issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 27, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ WeiserMazars LLP

New York, New York

March 27, 2012

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Year Ended December 31,  

(Dollars in thousands, except per share data)

   2011     2010     2009  

Interest income on investments

   $ 30,225      $ 31,918      $ 36,072   

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

     5,606        4,111        4,151   

Medallion lease income

     1,396        1,224        1,180   
  

 

 

   

 

 

   

 

 

 

Total investment income

     37,227        37,253        41,403   
  

 

 

   

 

 

   

 

 

 

Total interest expense(2)

     13,538        14,585        16,876   
  

 

 

   

 

 

   

 

 

 

Net interest income

     23,689        22,668        24,527   
  

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,185        3,533        3,383   
  

 

 

   

 

 

   

 

 

 

Salaries and benefits

     8,480        10,539        10,989   

Professional fees

     1,515        2,339        1,554   

Occupancy expense

     911        1,330        1,275   

Other operating expenses(3)

     3,205        2,120        5,912   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     14,111        16,328        19,730   
  

 

 

   

 

 

   

 

 

 

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

     10,763        9,873        8,180   

Income tax (provision) benefit

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     10,763        9,873        8,180   
  

 

 

   

 

 

   

 

 

 

Net realized losses on investments

     (546     (7,638     (4,135
  

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

     1,278        (3,491     2,648   

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

     7,668        12,535        (5,671
  

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on investments

     8,946        9,044        (3,023
  

 

 

   

 

 

   

 

 

 

Net realized/unrealized gains (losses) on investments

     8,400        1,406        (7,158
  

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 19,163      $ 11,279      $ 1,022   
  

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations per common share

      

Basic

   $ 1.10      $ 0.64      $ 0.06   

Diluted

   $ 1.09      $ 0.64      $ 0.06   
  

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.74      $ 0.61      $ 0.72   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

      

Basic

     17,426,097        17,501,414        17,569,688   

Diluted

     17,659,831        17,631,928        17,691,437   

 

(1) Includes $5,500, $4,000, and $4,000 of dividend income in 2011, 2010, and 2009 from Medallion Bank.

 

(2) Average borrowings outstanding were $359,659, $366,643, and $418,803, and the related average borrowing costs were 3.76%, 3.98%, and 4.03% for the years ended December 31, 2011, 2010, and 2009.

 

(3) Includes $1,312 of expense reversals related to the costs of winding up the operations of the SPAC’s that were reclassified to realized losses on investments and $310 that was reversed as a result of favorable negotiations with the creditors of SPAC in 2010, and includes $1,622 of costs related to the winding up of operations of the SPAC’s in 2009. See notes 10 and 12 for additional information.

 

(4) Includes $889, $3,422, and $2,871 of net revenues received from Medallion Bank for the years ended December 31, 2011, 2010, and 2009 primarily for servicing fees, loan origination fees, and expense reimbursements. See notes 3 and 10 for additional information.

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share data)

   December 31, 2011     December 31, 2010  

Assets

    

Medallion loans, at fair value

   $ 307,167      $ 323,126   

Commercial loans, at fair value (1)

     54,159        76,866   

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

     85,932        78,735   

Equity investments, at fair value

     4,577        4,789   

Investment securities, at fair value

     —          —     
  

 

 

   

 

 

 

Net investments ($252,660 at December 31, 2011 and $260,111 at December 31, 2010 pledged as collateral under borrowing arrangements)

     451,835        483,516   

Cash and cash equivalents ($0 at December 31, 2011 and 2010 restricted as to use by lender)

     29,352        17,303   

Accrued interest receivable

     1,120        1,441   

Fixed assets, net

     466        419   

Goodwill, net

     5,069        5,069   

Other assets, net

     49,189        42,564   
  

 

 

   

 

 

 

Total assets

   $ 537,031      $ 550,312   
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued expenses

   $ 6,040      $ 5,102   

Accrued interest payable

     1,708        1,913   

Funds borrowed

     357,779        380,532   
  

 

 

   

 

 

 

Total liabilities

     365,527        387,547   
  

 

 

   

 

 

 

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 – 19,320,303 shares at December 31, 2011 and 18,992,319 shares at December 31, 2010 issued)

     192        190   

Treasury stock at cost (1,600,733 shares at December 31, 2011 and 1,592,086 shares at December 31, 2010)

     (14,304 )      (14,225

Capital in excess of par value

     180,982        179,079   

Accumulated undistributed net investment loss

     (6,737     (12,372

Accumulated undistributed net realized gains on investments

     —          —     

Net unrealized appreciation on investments

     11,371        10,093   
  

 

 

   

 

 

 

Total shareholders’ equity (net assets)

     171,504        162,765   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 537,031      $ 550,312   
  

 

 

   

 

 

 

Number of common shares outstanding

     17,719,570        17,400,233   

Net asset value per share

   $ 9.68      $ 9.35   

 

(1) Includes a $3,100 loan to an entity which is majority owned by one of our controlled subsidiaries.

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

 

     Year Ended December 31,  

(Dollars in thousands, except per share data)

   2011     2010     2009  

Net investment income after income taxes

   $ 10,763      $ 9,873      $ 8,180   

Net realized losses on investments

     (546     (7,638     (4,135

Net unrealized appreciation (depreciation) on investments

     8,946        9,044        (3,023
  

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     19,163        11,279        1,022   
  

 

 

   

 

 

   

 

 

 

Investment income, net

     (12,251     (10,511     (13,060

Realized gains from investment transactions, net

     —          —          (295
  

 

 

   

 

 

   

 

 

 

Dividends and distributions to shareholders (1)

     (12,251     (10,511     (13,355
  

 

 

   

 

 

   

 

 

 

Stock – based compensation expense

     228        223        234   

Exercise of stock options

     1,677        10        130   

Treasury stock acquired

     (78     (1,213     —     
  

 

 

   

 

 

   

 

 

 

Capital share transactions

     1,827        (980     364   
  

 

 

   

 

 

   

 

 

 

Total increase (decrease) in net assets

     8,739        (212     (11,969

Net assets at the beginning of the year

     162,765        162,977        174,946   
  

 

 

   

 

 

   

 

 

 

Net assets at the end of the year(2)

   $ 171,504      $ 162,765      $ 162,977   
  

 

 

   

 

 

   

 

 

 

Capital share activity

      

Common stock issued, beginning of year

     18,992,319        18,990,119        18,963,466   

Exercise of stock options

     248,316        2,200        26,653   

Issuance of restricted stock, net

     79,668        —          —     
  

 

 

   

 

 

   

 

 

 

Common stock issued, end of year

     19,320,303        18,992,319        18,990,119   
  

 

 

   

 

 

   

 

 

 

Treasury stock, beginning of year

     (1,592,086     (1,414,242     (1,414,242

Treasury stock acquired

     (8,647     (177,844     —     
  

 

 

   

 

 

   

 

 

 

Treasury stock, end of year

     (1,600,733     (1,592,086     (1,414,242
  

 

 

   

 

 

   

 

 

 

Common stock outstanding

     17,719,570        17,400,233        17,575,877   

 

(1) Dividends declared were $0.74, $0.61, and $0.72 per share for the years ended December 31, 2011, 2010, and 2009.

 

(2) Includes $1,134, $2,941, and $5,160 of undistributed net investment income and $0, $0, and $0 of undistributed net realized gains on investments at December 31, 2011, 2010, and 2009.

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year ended December 31,  

(Dollars in thousands)

   2011     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net increase in net assets resulting from operations

   $ 19,163      $ 11,279      $ 1,022   

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

      

Depreciation and amortization

     1,316        1,421        1,718   

(Accretion) amortization of origination costs, net

     58        (333     (57

Increase in net unrealized (appreciation) depreciation on investments

     (1,278     3,491        (2,648

Increase in unrealized (appreciation) depreciation on Medallion Bank and other controlled subsidiaries

     (7,668     (12,535     5,671   

Net realized losses on investments

     546        7,638        4,135   

Stock-based compensation expense

     228        223        234   

Decrease in accrued interest receivable

     321        220        488   

Increase in other assets, net

     (4,012     (2,025     (1,223

Increase (decrease) in accounts payable and accrued expenses

     939        (2,366     394   

Increase (decrease) in accrued interest payable

     (206     (294     191   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     9,407        6,719        9,925   
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

      

Investments originated

     (198,084     (219,737     (174,868

Proceeds from principal receipts, sales, and maturities of investments

     233,875        213,139        262,970   

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

     474        (2,179     (3,200

Capital expenditures

     (216     (336     (149
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     36,049        (9,113     84,753   
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

      

Proceeds from funds borrowed

     201,689        173,790        286,284   

Repayments of funds borrowed

     (213,879     (167,780     (366,411

Issuance of SBA debentures

     7,485        8,500        —     

Repayments of SBA debentures

     (18,050     (16,500     —     

Proceeds from exercise of stock options

     1,677        10        130   

Purchase of treasury stock at cost

     (78     (1,213     —     

Payments of declared dividends

     (12,251     (10,511     (13,355
  

 

 

   

 

 

   

 

 

 

Net cash used for financing activities

     (33,407     (13,704     (93,352
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     12,049        (16,098     1,326   

CASH and cash equivalents, beginning of year

     17,303        33,401        32,075   
  

 

 

   

 

 

   

 

 

 

CASH and cash equivalents, end of year

   $ 29,352      $ 17,303      $ 33,401   
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION

      

Cash paid during the year for interest

   $ 12,598      $ 13,676      $ 15,225   

Cash paid during the year for income taxes

     —          —          —     

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

     303        —          480   

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

 

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MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

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

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

In December 2010, we formed a wholly-owned portfolio company, Medallion Servicing Corporation (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, 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.

On March 26, 2009, the Company formed a new wholly-owned New York limited liability company subsidiary, Medallion Funding LLC. On February 26, 2010, Medallion Funding Corp. merged into Medallion Funding LLC and following the merger, Medallion Funding LLC was the surviving entity and the successor-in-interest to Medallion Funding Corp.’s business. There was no business or operational change resulting from this corporate restructuring. For federal and most state tax purposes, Medallion Funding LLC is treated as a disregarded entity, and is subsumed in the tax return of the Company. Medallion Funding LLC maintains its status as an SBIC.

The Company also conducts business through Medallion Capital, Inc. (MCI), an SBIC which conducts a mezzanine financing business, and Freshstart Venture Capital Corp. (FSVC), an SBIC which originates and services taxicab medallion and commercial loans. MFC, MCI, and FSVC, as SBICs, are regulated by the Small Business Administration (SBA). MCI and FSVC are financed in part by the SBA. The Company also conducts business through our asset-based lending division, Medallion Business Credit (MBC), an originator of loans to small businesses for the purpose of financing inventory and receivables.

In December 2008, 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 $215,933,000 at December 31, 2011, 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.

In June 2007, 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 $36,163,000 at December 31, 2011, 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.

In December 2006, MFC established a wholly-owned subsidiary, Taxi Medallion Loan Trust II (Trust II), for the purpose of owning medallion loans originated by MFC or others. Trust II was a separate legal and corporate entity with its own creditors who, in any liquidation of Trust II, would have been entitled to be satisfied out of Trust II’s assets prior to any value in Trust II becoming available to Trust II’s equity holders. In 2010, Trust II ceased operations and its assets were reduced to $0.

In December 2006, September 2006, and previously in June 2003, MFC through several wholly-owned and newly formed subsidiaries which, along with an existing subsidiary (together, Medallion Chicago), purchased certain City of Chicago taxicab medallions out of foreclosure which are leased to fleet operators while being held for sale.

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

Medallion Bank is not an investment company, and therefore, is not consolidated with the Company, but instead is treated as a portfolio investment. It was initially formed for the primary purpose of originating commercial loans in three categories: 1) loans to finance the purchase of taxicab medallions (licenses), 2) asset-based commercial loans, and 3) SBA 7(a) loans. The loans are

 

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marketed and serviced by Medallion Bank’s affiliates who have extensive prior experience in these asset groups. Additionally, Medallion Bank began issuing brokered certificates of deposit in January 2004, and purchased over $84,150,000 of taxicab medallion and asset-based loans from affiliates of the Company. On April 1, 2004, Medallion Bank purchased a consumer loan portfolio from an unrelated financial institution for consideration of $86,309,000. In the 2004 third quarter, Medallion Bank began originating consumer loans similar to the acquired portfolio, which are serviced by a third party.

In September 2002, MFC established a wholly-owned subsidiary, Taxi Medallion Loan Trust I (Trust), for the purpose of owning medallion loans originated by MFC or others. The Trust was a separate legal and corporate entity with its own creditors who, in any liquidation of the Trust, would have been entitled to be satisfied out of the Trust’s assets prior to any value in the Trust becoming available to the Trust’s equity holders. In 2009, the Trust ceased operations and its assets were reduced to $0.

(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 persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which may result in future impairments of loans receivable, loans held for sale, and investments, among other effects.

Principles of Consolidation

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

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that frequently exceed the federally insured limits, and includes $1,000,000 related to a compensating balance requirement of a regional banking organization.

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 entities own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 2, 15, and 16 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 consider 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, and which are carried in other assets on the consolidated balance sheet, 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 20% and 17% of the investment portfolio at December 31, 2011 and 2010, 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

 

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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 $2,456,000 and $1,669,000 at December 31, 2011 and 2010, and non-marketable securities of $2,121,000 and $3,120,000 in the comparable periods. The $85,932,000 and $78,735,000 related to portfolio investments in controlled subsidiaries at December 31, 2011 and 2010 were all non-marketable in each period. Because of the inherent uncertainty of valuations, management’s 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.

Our investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and determine whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional marketplace restrictions, such as on the ability to transfer industrial bank charters. As a result of this valuation process, we used Medallion Bank’s actual results of operations as the best estimate of changes in- fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future. See Note 3 for additional information about Medallion Bank.

A majority of the Company’s investments consist of long-term loans to persons defined by SBA regulations as socially or economically disadvantaged, or to entities that are at least 50% owned by such persons. Approximately 68% and 67% of the Company’s investment portfolio at December 31, 2011 and 2010 had arisen in connection with the financing of taxicab medallions, taxicabs, and related assets, of which 74% were in New York City at December 31, 2011 and 2010. 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 (12% and 16% at December 31, 2011 and 2010) represents loans to various commercial enterprises in a wide variety of industries, including manufacturing, wholesaling, administrative and support services, accommodation and food services, and various other industries. Approximately 28% of these loans are made primarily 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 19%, 1%, and 0% at December 31, 2011 and 16%, 1%, and 0% at December 31, 2010.

On a managed basis, which includes the investments of Medallion Bank after eliminating the Company’s investment in Medallion Bank, medallion loans were 63% and 62% at December 31, 2011 and 2010 (78% and 76% in New York City), commercial loans were 13% and 16%, and 20% and 19% were consumer loans in all 50 states collateralized by recreational vehicles, boats, motorcycles, and trailers. Investment securities were 3% and 2% at December 31, 2011 and 2010, and equity investments (including investments in controlled subsidiaries) were 1% at both year ends.

Investment Transactions and Income Recognition

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At December 31, 2011 and 2010, net loan origination costs (fees) were $304,000 and ($27,000). Net amortization income (expense) for the years ended December 31, 2011, 2010, and 2009 was $58,000, $333,000, and $57,000.

Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized as an adjustment to the yield of the related investment. At December 31, 2011 and 2010, there were no premiums or discounts on investment securities, and their related income accretion or amortization was immaterial for 2011, 2010, and 2009.

Interest income is recorded on the accrual basis. Taxicab medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. At December 31, 2011, 2010, and 2009, total non-accrual loans were $25,795,000, $22,477,000, and $19,784,000, and represented 7%, 5%, and 5% of the gross medallion and commercial loan portfolio at each year end, and were primarily concentrated in the secured mezzanine portfolio. The amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $12,311,000, $10,612,000, and $7,114,000 as of December 31, 2011, 2010, and 2009, of which $4,349,000, $3,503,000, and $3,207,000 would have been recognized in the years ended December 31, 2011, 2010, and 2009.

Loan Sales and Servicing Fee Receivable

The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing (FASB ASC 860). FASB ASC 860 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, we have elected the fair value measurement

 

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method for our servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $432,385,000 and $386,034,000 at December 31, 2011 and 2010, and included $370,068,000 and $332,053,000 of loans serviced for Medallion Bank. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860, most of which relates to servicing assets held by Medallion Bank, and determined that no material servicing asset or liability exists as of December 31, 2011 and 2010. In December 2010, the Company 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.

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

Unrealized appreciation (depreciation) on investments is the amount by which the fair value estimated by the Company is greater (less) than the cost basis of the investment portfolio. Realized gains or losses on investments are generated through sales of investments, foreclosure on specific collateral, and writeoffs of loans or assets acquired in satisfaction of loans, net of recoveries. Unrealized appreciation on net investments was $11,371,000, $10,093,000, and $6,619,000 as of December 31, 2011, 2010, and 2009. Our investment in Medallion Bank, a wholly owned portfolio investment, is a also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and determine whether any factors give rise to valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional marketplace restrictions, such as on the ability to transfer industrial bank charters. As a result of this valuation process, we used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future. See Note 3 for the presentation of financial information for Medallion Bank.

The following table sets forth the changes in our unrealized appreciation (depreciation) on investments, other than investments in controlled subsidiaries, for the years ended December 31, 2011, 2010, and 2009.

 

(Dollars in thousands)

   Medallion
Loans
    Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2008

   $ —        ($ 5,115   $ 437      $ 15,614      $ 10,936   

Net change in unrealized

          

Appreciation on investments

     —          —          (333     4,242        3,909   

Depreciation on investments(1)

     (3     (3,504     (8,205     (519     (12,231

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          (900     (900

Losses on investments

     3        3,983        —          919        4,905   

Other

     —          400        —          (400     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2009

     —          (4,236     (8,101     18,956        6,619   

Net change in unrealized

          

Appreciation on investments

     —          —          545        2,153        2,698   

Depreciation on investments

     —          (7,172     (475     —          (7,647

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments(1)

     —          191        8,232        —          8,423   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2010

     —          (11,217     201        21,109        10,093   

Net change in unrealized

          

Appreciation on investments

     —          —          825        3,518        4,343   

Depreciation on investments

     —          (5,708     79        (63     (5,692

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments

     —          2,627        —          —          2,627   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2011

   $ —        ($ 14,298   $ 1,105      $ 24,564      $ 11,371   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(1) Includes unrealized depreciation of $7,720 in 2009 related to investments in SPAC and SPAC 2, and the related writeoff of these investments in 2010. See Note 10 for additional information on these investments.

 

F-10


Table of Contents

The table below summarizes components of unrealized and realized gains and losses in the investment portfolios for the years ended December 31, 2011, 2010, and 2009.

 

(Dollars in thousands)

   2011     2010     2009  

Net change in unrealized appreciation (depreciation) on investments

      

Unrealized appreciation

   $ 825      $ 545      ($ 333

Unrealized depreciation (1)

     (5,629     (7,139     (4,747

Net unrealized appreciation (depreciation) on investment in Medallion Bank and other controlled subsidiaries(2)

     7,668        12,535        (5,671

Realized gains

     —          —          —     

Realized losses(1)

     2,627        950        3,986   

Unrealized gains (losses) on foreclosed properties and other assets

     3,455        2,153        3,742   
  

 

 

   

 

 

   

 

 

 

Total

   $ 8,946      $ 9,044      ($ 3,023
  

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments

      

Realized gains

   $ —        $ —        $ —     

Realized losses(3)

     (2,627     (8,423     (3,986

Other gains

     2,171        1,581        —     

Direct recoveries (charge-offs) (4)

     (90     (796     (148

Realized gains (losses) on foreclosed properties and other assets

     —          —          (1
  

 

 

   

 

 

   

 

 

 

Total

   ($ 546   ($ 7,638   ($ 4,135
  

 

 

   

 

 

   

 

 

 
(1) Includes unrealized depreciation of $759 in 2009 related to the $759 investment in SPAC 2, and the related writeoff of $759 in 2010, which was carried in other assets on the consolidated balance sheet.
(2) Includes $6,966 of net unrealized depreciation in 2009 related to the investment in SPAC, including $508 that was recorded in 2010, that was reversed during 2010, upon the writeoff of the SPAC investment.
(3) Represents the writeoffs related to the investments in SPAC and SPAC 2 in 2010. See Note 10 for additional information on these investments.
(4) Includes $817 of direct chargeoffs related to the settlement of the liabilities associated with the writeoff of SPAC and SPAC 2 in 2010, all of which represented a reversal of accrued expenses.

The following tables provide additional information on attributes of the nonperforming loan portfolio as of December 31, 2011 and 2010.

 

(Dollars in thousands)

   Recorded
Investment
     Unpaid Principal
Balance
     Average
Recorded
Investment
 

With no related allowance recorded, December 31, 2011

        

Medallion

   $ —         $ —         $ —     

Commercial (1) (2)

   $ 25,795       $ 31,735       $ 25,565   

 

(1) As of December 31, 2011, $14,157 of unrealized depreciation has been recorded as a valuation allowance with regards to the impaired commercial loans.
(2) Interest income of $1,081 attributed to commercial loans was recognized during the year.

 

(Dollars in thousands)

   Recorded
Investment
     Unpaid Principal
Balance
     Average
Recorded
Investment
 

With no related allowance recorded, December 31, 2010

        

Medallion

   $ —         $ —         $ —     

Commercial (1) (2)

   $ 22,477       $ 22,592       $ 21,846   

 

(1) As of December 31, 2010, $11,065 of unrealized depreciation has been recorded as a valuation allowance with regards to the impaired commercial loans.
(2) Interest income of $389 attributed to commercial loans was recognized during the year.

The following tables show the aging of medallion and commercial loans as of December 31, 2011 and 2010.

 

December 31, 2011    Days Past Due      Total                    Recorded Investment >
90 Days and Accruing
 

(Dollars in thousands)

   31 - 60      61 - 90      91 +         Current      Total     

Medallion loans

   $ 4,316       $ 556       $ 35       $ 4,907       $ 301,864       $ 306,771       $ 35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     —           2,415         14,930         17,345         34,277         51,622         —     

Asset-based receivable

     —           —           —           —           9,388         9,388         —     

Other secured commercial

     104         —           390         494         7,045         7,539         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     104         2,415         15,320         17,839         50,710         68,549         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,420       $ 2,971       $ 15,355       $ 22,746       $ 352,574       $ 375,320       $ 35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

F-11


Table of Contents
December 31, 2010    Days Past Due      Total                    Recorded Investment >
90 Days and Accruing
 

(Dollars in thousands)

   31 - 60      61 - 90      91 +         Current      Total     

Medallion Loans

   $ 8,847       $ 2,395       $ 361       $ 11,603       $ 311,227       $ 322,830       $ 361   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Loans

                    

Secured mezzanine

     —           —           6,985         6,985         61,314         68,299         —     

Asset-based receivable

     —           —           —           —           10,234         10,234         —     

Other secured commercial

     —           345         1,364         1,709         8,164         9,873         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial Loans

     —           345         8,349         8,694         79,712         88,406         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,847       $ 2,740       $ 8,710       $ 20,297       $ 390,939       $ 411,236       $ 361   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill

In accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” the Company has determined that it is more likely than not the relevant reporting unit’s fair value is greater than its carrying amount for 2011, and that the goodwill impairment testing is not required. For 2010 and prior periods, the Company tested its goodwill for impairment, and engaged a consultant to help management evaluate its carrying value. 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 December 31, 2011. 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 $170,000, $218,000, and $258,000 for the years ended December 31, 2011, 2010, and 2009.

Deferred Costs

Deferred financing costs, included in other assets, represents costs associated with obtaining the Company’s borrowing facilities, and is amortized on a straight line basis over the lives of the related financing agreements. Amortization expense was $1,052,000, $1,060,000, and $1,289,000 for the years ended December 31, 2011, 2010, and 2009. 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, including $759,000 related to the investment in SPAC 2, which was fully reserved for in 2009 and written off in 2010, and $485,000 related to costs associated with a canceled equity offering. The amounts on the balance sheet for all of these purposes were $2,206,000 and $2,854,000 at December 31, 2011, and 2010.

Federal Income Taxes

The Company and each of its major subsidiaries other than Medallion Bank and Medallion Funding LLC (the RIC subsidiaries) have qualified to be treated for federal income tax purposes as regulated investment companies (RICs) under the Internal Revenue Code of 1986, as amended (the Code). As RICs, the Company and each of the RIC subsidiaries are not subject to US federal income tax on any gains or investment company taxable income (which includes, among other things, dividends and interest income reduced by deductible expenses) that it distributes to its shareholders, if at least 90% of its investment company taxable income for that taxable year is distributed. It is the Company’s and the RIC subsidiaries’ policy to comply with the provisions of the Code. The Company’s RIC qualification is determined on an annual basis, and it qualified and filed its federal tax returns as a RIC for 2010 and 2009, and anticipates qualifying and filing as a RIC for 2011. As a result, no provisions for income taxes have been recorded for the years ended December 31, 2011, 2010, and 2009. State and local tax treatment follows the federal model.

In the fourth quarter of 2010, based on developments under the Code and after discussions with external advisers, the Company’s Board of Directors determined that the loans received in connection with the Company’s lending activities were “accounts or notes receivables acquired in the ordinary course of a trade or business for services” for purposes of Section 1221(a)(4) of the Code. As a result, commencing with the tax year beginning January 1, 2010, the Company intends to treat losses recognized on worthless loans as ordinary losses rather than as capital losses. The Company’s Board of Directors further determined that the Company may take such position in tax returns subsequently filed without obtaining prior IRS approval.

The change in the characterization of a loss resulting from a worthless loan from a capital loss to an ordinary loss could materially impact the amount or character of the dividends received by the Company’s shareholders. The Company is required to distribute 90% of its taxable income in order to maintain its RIC status. In the event losses from worthless loans are treated as ordinary losses, those losses will offset taxable income in the taxable year in which such losses are recognized. This could result in a decrease in the Company’s taxable income which could result in a decrease in the Company’s dividend. Alternatively, if the Company chooses to maintain its current level of dividend, an increased portion of the dividend could be deemed to be a return of capital to the shareholder.

 

F-12


Table of Contents

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 2008 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, and Medallion Funding LLC, Trust II, and Trust III are not subject to federal income taxation, instead their taxable income is treated as having been earned by the Company.

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

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

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

 

     Years Ended December 31,  

(Dollars in thousands)

   2011      2010      2009  

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

   $ 19,163       $ 11,279       $ 1,022   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding applicable to basic EPS

     17,426,097         17,501,414         17,569,688   

Effect of dilutive stock options

     218,448         130,514         121,749   

Effect of restricted stock grants

     15,286         —           —     
  

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted EPS

     17,659,831         17,631,928         17,691,437   
  

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 1.10       $ 0.64       $ 0.06   

Diluted earnings per share

     1.09         0.64         0.06   
  

 

 

    

 

 

    

 

 

 

Potentially dilutive common shares excluded from the above calculations aggregated 290,396, 1,005,171, and 1,061,602 shares as of December 31, 2011, 2010, and 2009.

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 both any new grants, as well as for all unvested options outstanding at December 31, 2005, in both cases 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.

The Company elected the modified prospective transition method in applying ASC 718. Under this method, the provisions of ASC 718 apply to all awards granted or modified after the date of adoption, as well as for all unvested options outstanding at December 31, 2005. During 2011, the Company issued 79,800 restricted shares of stock-based compensation awards, and during 2010 and 2009, the Company issued 68,500 and 68,667 shares of stock-based compensation awards, and recognized $228,000, $223,000, and $234,000, or $0.01, $0.01, and $0.01 per diluted common share for each respective year, of non-cash stock-based compensation expense related to the grants. As of December 31, 2011, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $556,000, which is expected to be recognized over the next 12 quarters (see Note 5).

 

F-13


Table of Contents

Dividends to Shareholders

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

 

     Years Ended December 31,  

(Dollars in thousands)

   2011      2010      2009  

Dividends paid from

        

Investment income, net

   $ 12,251       $ 10,511       $ 13,060   

Realized gains from investment transactions, net

     —           —           295   
  

 

 

    

 

 

    

 

 

 

Total dividends

   $ 12,251       $ 10,511       $ 13,355   
  

 

 

    

 

 

    

 

 

 

Our ability to make dividend payments is restricted by SBA regulations and under the terms of the SBA debentures. As of December 31, 2011, the Company anticipates paying an estimated $1,134,000 of ordinary income dividends for tax purposes by September 15, 2012.

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. Beginning in 2009, the Company entered into contracts to purchase interest rate caps on $512,000,000 of notional value of principal from various multinational banks, of which $175,000,000 are active with termination dates ranging to March 2013. The caps provide for payments to the Company if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases of $407,000, were generally fully expensed when paid, including $93,000, $142,000, and $171,000 in 2011, 2010, and 2009, respectively and all are carried at $0 on the balance sheet at December 31, 2011.

Reclassifications and Other Presentation Matters

Certain reclassifications have been made to prior year balances to conform with the current year presentation. These reclassifications have no effect on the previously reported results of operations. In addition, the Company has adjusted the presentation of its 2010 consolidated summary schedule of investments to provide additional information.

(3) INVESTMENT IN MEDALLION BANK AND OTHER CONTROLLED SUBSIDIARIES

The following table presents information derived from Medallion Bank’s statement of operations and other valuation adjustments on other controlled subsidiaries for the years ended December 31, 2011, 2010, and 2009.

 

(Dollars in thousands)

   2011     2010     2009  

Statement of operations

      

Investment income

   $ 51,291      $ 47,273      $ 44,681   

Interest expense

     6,058        7,478        11,046   
  

 

 

   

 

 

   

 

 

 

Net interest income

     45,233        39,795        33,635   

Noninterest income

     635        520        429   

Operating expenses

     13,756        10,827        9,858   
  

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     32,112        29,488        24,206   

Income tax provision

     9,487        6,718        3,659   
  

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     22,625        22,770        20,547   

Net realized/unrealized losses of Medallion Bank

     (6,850     (11,502     (13,981
  

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations of Medallion Bank

     15,775        11,268        6,566   

Unrealized depreciation on Medallion Bank (1)

     (6,635     (5,230     (4,715

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

     (1,472     6,497        (7,522
  

 

 

   

 

 

   

 

 

 

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

   $ 7,668      $ 12,535      ($ 5,671
  

 

 

   

 

 

   

 

 

 

 

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

 

F-14


Table of Contents

The following table presents Medallion Bank’s balance sheets and the net investment in other controlled subsidiaries as of December 31, 2011 and 2010.

 

(Dollars in thousands)

   2011      2010  

Loans

   $ 561,865       $ 516,378   

Investment securities, at fair value

     26,537         20,787   
  

 

 

    

 

 

 

Net investments ($0 pledged as collateral under borrowing arrangements at December 31, 2011 and 2010) (1)

     588,402         537,165   

Cash ($0 at December 31, 2011 and 2010 restricted as to use by lender)

     28,626         16,980   

Other assets, net

     11,881         14,504   
  

 

 

    

 

 

 

Total assets

   $ 628,909       $ 568,649   
  

 

 

    

 

 

 

Other liabilities

   $ 4,316       $ 2,519   

Due to affiliates

     964         1,113   

Deposits and federal funds purchased, including accrued interest payable

     514,779         470,112   
  

 

 

    

 

 

 

Total liabilities

     520,059         473,744   

Medallion Bank equity (2)

     108,850         94,905   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 628,909       $ 568,649   
  

 

 

    

 

 

 

Investment in other controlled subsidiaries

   $ 3,080       $ 4,727   

Total investment in Medallion Bank and other controlled subsidiaries

     85,932         78,735   
  

 

 

    

 

 

 

 

(1) Included in Medallion Bank’s net investments is $183 and $330 for purchased loan premium at December 31, 2011 and 2010.

 

(2) Includes $26,303 of preferred stock issued to the US Treasury under the Small Business Lending Fund Program (SBLF) at December 31, 2011, and $21,498 of preferred stock issued to the US Treasury under the Troubled Asset Relief Program (TARP) at December 31, 2010.

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

Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. At December 31, 2011 and 2010, the net premium on investment securities totaled $403,000 and $164,000, and $76,000, $67,000, and $69,000 was amortized to interest income for the years ended December 31, 2011, 2010, and 2009. Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At December 31, 2011 and 2010, net loan origination costs were $5,597,000 and $5,559,000. Net amortization expense for the years ended December 31, 2011, 2010, and 2009 was $2,188,000, $2,242,000, and $1,826,000.

Medallion Bank’s policies regarding nonaccrual of medallion and commercial loans are similar to those of the Company. The consumer portfolio has different characteristics compared to commercial loans, typified by a larger number of lower dollar loans that have similar characteristics. These loans are placed on nonaccrual, when they become 90 days past due, or earlier if they enter bankruptcy, and are charged off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. At December 31, 2011, $2,264,000 or 1% of consumer loans, and no commercial and medallion loans were on nonaccrual, compared to $2,686,000 or 1% of consumer loans, $329,000 or less than 1% of commercial loans, and no medallion loans on nonaccrual at December 31, 2010, and $3,321,000 or 2% of consumer loans, $1,124,000 or 2% of commercial loans, and no medallion loans on nonaccrual at December 31, 2009. 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 $44,000, $138,000, and $233,000 for the years ended December 31, 2011, 2010, and 2009.

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 fair value of this portfolio are based on the historical loan loss data obtained from the seller, adjusted for changes in delinquency trends and other factors as described previously in Note 2.

In January 2004, Medallion Bank commenced raising deposits to fund the purchase of various affiliates’ loan portfolios. 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 of 0.15% to 0.50%, depending on the maturity of the deposit, which is capitalized and amortized to interest expense over the life of the respective pool. The total amount capitalized at December 31, 2011 and 2010 was $1,250,000 and $883,000, and $1,053,000, $1,007,000, and $1,069,000 was amortized to interest expense during 2011, 2010, and 2009. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity.

 

F-15


Table of Contents

The outstanding balances of fixed rate borrowings were as follows:

 

     Payments Due for the Fiscal Year Ending December 31,      December  31,
2011
     December  31,
2010
     Interest
Rate (1)
 

(Dollars in thousands)

   2012      2013      2014      2015      2016      Thereafter           

Deposits

   $ 269,339       $ 184,669       $ 60,321       $ —         $ —         $ —         $ 514,329       $ 468,957         0.73
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Weighted average contractual rate as of December 31, 2011.

Medallion Bank is subject to various regulatory capital requirements administered by the FDIC and State of Utah Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Medallion Bank’s and our 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 beginning paid-in-capital funds of not less than $22,000,000 be provided, that the Tier I Leverage Capital to total assets ratio, as defined, 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 an aggregate of $1,750,000 contributed in January 2009. Separately, Medallion Bank declared dividends to the Company of $5,500,000 in 2011, $4,000,000 in 2010, and $4,000,000 in 2009. Without the capital infusions by us, a portion of the Medallion Bank dividends would have been retained to ensure Medallion Bank met its capital ratio requirements, and in such circumstance, if we maintained our dividend at the existing levels, a portion of those dividends would have represented a tax-free return of capital.

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

The following table represents Medallion Bank’s actual capital amounts and related ratios as of December 31, 2011 and 2010, compared to required regulatory minimum capital ratios and the ratio required to be considered well capitalized. As of December 31, 2011, Medallion Bank meets all capital adequacy requirements to which it is subject, and is well-capitalized.

 

     Regulatory     December 31,
2011
    December 31,
2010
 

(Dollars in Thousands)

   Minimum     Well-capitalized      

Tier I capital

   $ —        $ —        $ 107,009      $ 93,866   

Total capital

     —          —          114,504        100,762   

Average assets

     —          —          604,329        552,603   

Risk-weighted assets

     —          —          592,528        544,935   

Leverage ratio (1)

     4     5     17.7     17.0

Tier I capital ratio (2)

     4        6        18.1        17.2   

Total capital ratio (2)

     8        10        19.3        18.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Calculated by dividing Tier I capital by average assets.

 

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

 

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(4) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows:

 

     Payments Due for the Fiscal Year Ending December 31,      December  31,
2011
     December  31,
2010
     Interest
Rate (1)
 

(Dollars in thousands)

   2012      2013      2014      2015      2016      Thereafter           

Revolving lines of credit

   $ —         $ 180,566       $ —         $ —         $ —         $ —         $ 180,566       $ 180,204         1.45

Notes payable to banks

     15,798         23,528         30,413         —           3,915         874         74,528         87,078         3.77   

SBA debentures

     3,000         19,450         13,500         9,250         —           24,485         69,685         80,250         5.44   

Preferred securities

     —           —           —           —           —           33,000         33,000         33,000         7.68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 18,798       $ 223,544       $ 43,913       $ 9,250       $ 3,915       $ 58,359       $ 357,779       $ 380,532         3.29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Weighted average contractual rate as of December 31, 2011.

(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), of which $180,566,000 was outstanding at December 31, 2011. 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 DZ line matures in December 2013. The interest rate is the lesser of a pooled short-term commercial paper rate (which approximates LIBOR), 30 day LIBOR (0.30% at December 31, 2011) plus 0.75%, or 90 day LIBOR (0.58% at December 31, 2011) plus 0.50%; plus 0.95%.

In December 2006, Trust II entered into a revolving line of credit agreement with Citibank N.A., to provide up to $250,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC (Citi line), which was paid off in March 2010, in advance of the May 2010 maturity. In November 2008, the line of credit was reduced to $225,000,000, and was further reduced to $35,000,000 in November 2009. Borrowings under Trust II’s revolving line of credit were collateralized by Trust II’s assets. MFC was the servicer of the loans owned by Trust II. The Citi line included a borrowing base covenant and rapid amortization in certain circumstances. In addition, if certain financial tests were not met, MFC could have been replaced as the servicer. The interest rate was a pooled short-term commercial paper rate, which approximated LIBOR plus 1.07% with a facility fee of 1.50% on the aggregate Citi line, and prior to November 2009 was plus 0.82% with a facility fee of 0.15% on the aggregate Citi line.

(B) SBA DEBENTURES

In September 2010, the SBA approved a $5,000,000 commitment for MCI to issue additional debentures during a four year period upon payment of a 1% fee. The SBA also approved a $7,485,000 commitment for FSVC to issue additional debentures during a four year period upon payment of a 1% fee, for the purpose of repaying $7,485,000 of debentures which matured in September 2011, which were issued on March 1, 2011 and used to prepay the September 2011 maturing debentures. In September 2006, the SBA approved a $6,000,000 commitment for FSVC to issue additional debentures to the SBA during a four year period upon payment of a 1% fee and the infusion of $2,000,000 of additional capital. In March 2006, the SBA approved a $13,500,000 commitment for MCI to issue additional debentures to the SBA during a four year period upon payment of a 1% fee and the infusion of $6,750,000 of additional capital. In November 2003, the SBA approved an $8,000,000 commitment for FSVC, and during 2001, the SBA approved $36,000,000 each in commitments for FSVC and MCI. As of December 31, 2011, $106,985,000 of commitments had been fully utilized, and $5,000,000 was available for borrowing.

The notes are collateralized by substantially all of the Company’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

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. The notes are typically secured by various assets of the underlying borrower. The Company believes the participation agreements represent legal true sales of the loans to the lender, but for accounting purposes these participations are treated as financings, and are included in funds borrowed as shown on our consolidated balance sheets. The table below summarizes the key attributes of our various borrowing arrangements with banks as of December 31, 2011.

 

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Table of Contents

(Dollars in thousands)

Borrower

  # of
Banks/
Notes
  Note Dates   Maturity
Dates
 

Type

  Note
Amounts
    Balance
Outstanding at
December 31,
2011
   

Monthly Payment

  Average Interest
Rate at

December 31,
2011
  Interest Rate
Index (1)

MFC

  4/7   11/09 - 9/10   7/12 - 2/17   Participated loans treated as financings   $ 5,195      $ 4,908      Proportionate to the payments received on the participated loans   4.39%   4.39% (4)

Medallion Chicago

  3/28   12/11   12/14   Term loans secured by owned Chicago medallions (2)     26,151        26,151      $139 principal & interest   4.04%   N/A

The Company

  4/6   1/09 - 7/11   7/12 - 1/16   Participated loans treated as financings     18,259        18,169      Proportionate to the payments received on the participated loans   4.15%   N/A

The Company

  2/3   3/11 - 9/11   6/13 - 5/14   Revolving line of credit secured by pledged loans     35,000        17,400      Interest only   3.00% + 0.25%
unused fee
  LIBOR + 2%, 3%
floor; Prime + 0.5% ,
4% floor; LIBOR +
2% or Prime – 0.5%,
3% floor

MFC

  4/4   1/05 - 8/11   3/12 - 8/13   Revolving line of credit secured by pledged loans (3)     63,000        7,900      Interest only   2.92%   Prime + 0.50%;
LIBOR + 2%, 3%
floor; LIBOR +
2.5%, or LIBOR +
2%, 3% floor
         

 

 

   

 

 

       
          $ 147,605      $ 74,528         
         

 

 

   

 

 

       
(1) At December 31, 2011, 30 day LIBOR was 0.30%, 360 day LIBOR was 1.13%, and the prime rate was 3.25%.

 

(2) $16,087 guaranteed by the Company.

 

(3) Guaranteed by the Company.

 

(4) Generally, each of these notes reprice on their one year anniversary date at the greater of the current interest rate, or the prime rate plus an index, which ranges from 0.25% to 0.50%. One $542 loan remains fixed to term at 5.50%, and one $670 loan remains fixed to term at 4.125%.

(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 fixed rate of interest of 7.68% to September 2012, and thereafter a variable rate of interest of 90 day LIBOR (0.58% at December 31, 2011) plus 2.13%. The notes mature in September 2037, and are prepayable at par on or after September 6, 2012. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. At December 31, 2011, $33,000,000 was outstanding on the preferred securities. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor.

(E) COVENANT COMPLIANCE

In the normal course of business, the Company and its subsidiaries enter into agreements, or are subject to regulatory requirements, that result in loan restrictions. Certain of our 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 regulatory requirements related to the declaration of dividends (see Note 3).

(5) STOCK OPTIONS AND RESTRICTED STOCK

The Company has a stock option plan (2006 Stock Option Plan) available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provides for the issuance of a maximum of 800,000 shares of common stock of the Company. At December 31, 2011, 161,155 shares of the Company’s common stock remained available for future grants. The 2006 Stock Option Plan is administered by the Compensation Committee of the Board of Directors. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. The term and vesting periods of the options are determined by the Compensation Committee, provided that the maximum term of an option may not exceed a period of ten years.

 

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The Company’s Board of Directors approved a new non-employee director stock option plan (the 2006 Director Plan) on February 15, 2006, which was approved by shareholders on June 16, 2006, and on which exemptive relief to implement the 2006 Director Plan was received from the SEC on August 28, 2007. The 2006 Director Plan provides for an automatic grant of options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board, with an adjustment for directors who are elected to serve less than a full term. A total of 100,000 shares of the Company’s common stock are issuable under the 2006 Director Plan. At December 31, 2011, no shares of the Company’s common stock remained available for future grants. 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 2006 Director Plan are exercisable annually, as defined in the 2006 Director Plan. The term of the options may not exceed ten years.

The Company’s Board of Directors approved the 2009 Employee Restricted Stock Plan (the Employee Restricted Stock Plan) on April 16, 2009. The Employee Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC and approval of the Employee Restricted Stock Option Plan by the Company’s shareholders on June 11, 2010. The terms of the Employee Restricted Stock Plan provide for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock which, at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 800,000 shares of the Company’s common stock are issuable under the Employee Restricted Stock Plan, and as of December 31, 2011, 720,332 shares of the Company’s common stock remained available for future grants. Awards under the 2009 Employee Plan are subject to certain limitations as set forth in the Employee Restricted Stock Plan. The Employee Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the Employee Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the Employee Restricted Stock Plan, whichever first occurs.

The Company’s Board of Directors approved an amendment to the 2006 Director Plan (the Amended Director Plan) on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009. The Amended Director Plan will become effective upon the Company’s receipt of exemptive relief from the SEC. The Amended Director Plan is intended to amend and restate the 2006 Director Plan by increasing the maximum number of shares of the Company’s common stock that will be available for issuance under the Amended Director Plan from 100,000 to 200,000. 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, 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 2006 Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options may not exceed ten years.

The Company’s 1996 Stock Option Plan and 1996 Director Plan terminated on May 21, 2006 and no additional shares are available for future issuance. At December 31, 2011, 1,179,563 options on the Company’s common stock were outstanding under the 1996 and 2006 plans, of which 1,111,007 options were exercisable, and there were 79,668 unvested shares of the Company’s common stock outstanding under the Employee Restricted Stock Plan.

The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted during 2011. The weighted average fair value of options granted was $0.96 and $0.91 per share for the years ended December 31, 2010 and 2009. The following assumption categories are used to determine the value of any option grants.

 

     Year ended December 31,  
     2011      2010     2009  

Risk free interest rate

     NA         2.77     2.89

Expected dividend yield

     NA         8.00        8.00   

Expected life of option in years (1)

     NA         6.00        6.00   

Expected volatility (2)

     NA         30.00        30.00   

 

(1) Expected life is calculated using the simplified method.

 

(2) We determine our expected volatility using the Black-Scholes option pricing model based on our historical volatility.

 

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Table of Contents

The following table presents the activity for the stock option program under the 1996 and 2006 Stock Option Plans and the 1996 and 2006 Director Plans for the years ended December 31, 2011, 2010, and 2009.

 

     Number of
Options
    Exercise Price
Per Share
     Weighted Average
Exercise Price
 

Outstanding at December 31, 2008

     1,729,187      $ 3.50-18.75       $ 10.25   

Granted

     68,667        7.49-7.62         7.57   

Cancelled

     (295,269     7.68-18.75         16.68   

Exercised (1)

     (26,653     3.50-5.51         4.87   
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2009

     1,475,932        3.50-17.94         8.93   

Granted

     68,500        7.17-8.21         8.06   

Cancelled

     (46,264     9.22-17.94         13.79   

Exercised (1)

     (2,200     4.85         4.85   
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2010

     1,495,968        3.50-14.63         8.75   

Granted

     —          —           —     

Cancelled

     (68,089     4.85-14.63         12.35   

Exercised (1)

     (248,316     3.87-11.21         6.75   
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2011 (2)

     1,179,563      $ 3.50-13.06       $ 8.96   
  

 

 

   

 

 

    

 

 

 

Options exercisable at

       

December 31, 2009

     1,084,562      $ 3.50-17.94       $ 8.84   

December 31, 2010

     1,232,807        3.50-14.63         8.73   

December 31, 2011 (2)

     1,111,007        3.50-13.06         9.02   

 

(1) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at the exercise date and the related exercise price of the underlying options, was $1,184,000, $8,000, and $45,000 for 2011, 2010, and 2009.

 

(2) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at December 31, 2011 and the related exercise price of the underlying options, was $3,107,000 for outstanding options and $2,868,000 for exercisable options as of December 31, 2011.

The following table presents the activity for the restricted stock program under the 2009 Employee Restricted Stock Plan, which commenced activity during 2011.

 

     Number of
Shares
    Grant Price
Per Share
     Weighted
Average
Grant Price
 

Outstanding at December 31, 2010

     —        $ —         $ —     

Granted

     79,800        7.99-11.53         8.48   

Cancelled

     (132     7.99         7.99   

Vested (1)

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2011 (2)

     79,668      $ 7.99-11.53       $ 8.48   
  

 

 

   

 

 

    

 

 

 

 

(1) The aggregate fair value of the restricted stock vested was $0 for 2011.

 

(2) The aggregate fair value of the restricted stock was $907,000 as of December 31, 2011.

The following table presents the activity for the unvested options outstanding under the plan for the year ended December 31, 2011.

 

     Number of
Options
    Exercise Price
Per Share
     Weighted
Average
Exercise Price
 

Outstanding at December 31, 2010

     263,161      $ 7.17-11.21       $ 8.83   

Granted

     —          —           —     

Cancelled

     —          —           —     

Vested

     (194,605     7.17-11.21         9.16   
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2011

     68,556      $ 7.17-8.21       $ 7.89   
  

 

 

   

 

 

    

 

 

 

The intrinsic value of the options vested was $57,000, $3,000, and $1,000 in 2011, 2010, and 2009.

 

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Table of Contents

The following table summarizes information regarding options outstanding and options exercisable at December 31, 2011 under the 1996 and 2006 Stock Option Plans and the 1996 and 2006 Director Plans.

 

      Options Outstanding     Options Exercisable  
      Shares at
December 31,

2011
    Weighted average     Shares at
December 31,
2011
    Weighted average  

Range of Exercise
Prices

      Remaining
contractual life
in years
    Exercise price       Remaining
contractual life
in years
    Exercise price  
$ 3.50-5.51        212,947        0.61      $ 4.78        212,947        0.61      $ 4.78   
  6.89-13.06        966,616        5.60        9.88        898,060        5.42        10.03   
 

 

 

       

 

 

     
$ 3.50-13.06        1,179,563        4.70        8.96        1,111,007        4.50        9.02   
 

 

 

       

 

 

     

The following table summarizes information regarding restricted stock outstanding at December 31, 2011 under the 2009 Employee Restricted Stock Plan.

 

     Restricted Stock Outstanding  
     Shares at
December 31,
2011
     Weighted average  

Range of Grant Prices

      Remaining
vesting period
in years
     Grant price  

$7.99-11.53

     79,668         2.25       $ 8.48   
  

 

 

    

 

 

    

 

 

 

(6) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table presents the Company’s quarterly results of operations for the years ended December 31, 2011, 2010, and 2009.

 

(Dollars in thousands except per share data)

   March 31      June 30      September 30      December 31  

2011 Quarter Ended

           

Investment income

   $ 9,597       $ 8,413       $ 8,029       $ 11,188   

Net investment income after income taxes

     2,841         1,479         1,376         5,067   

Net increase in net assets resulting from operations

     4,280         4,416         4,835         5,632   

Net increase in net assets resulting from operations per common share

           

Basic

   $ 0.25       $ 0.25       $ 0.28       $ 0.32   

Diluted

     0.24         0.25         0.27         0.32   
  

 

 

    

 

 

    

 

 

    

 

 

 

2010 Quarter Ended

           

Investment income

   $ 9,230       $ 9,360       $ 9,553       $ 9,110   

Net investment income after income taxes

     2,232         2,940         2,368         2,333   

Net increase in net assets resulting from operations

     109         3,035         3,468         4,667   

Net increase in net assets resulting from operations per common share

           

Basic

   $ 0.01       $ 0.17       $ 0.20       $ 0.27   

Diluted

     0.01         0.17         0.20         0.27   
  

 

 

    

 

 

    

 

 

    

 

 

 

2009 Quarter Ended

           

Investment income

   $ 10,734       $ 10,613       $ 10,196       $ 9,560   

Net investment income after income taxes

     1,909         2,116         2,001         2,154   

Net increase (decrease) in net assets resulting from operations

     1,889         2,003         2,889         (5,759 (1) 

Net increase (decrease) in net assets resulting from operations per common share

           

Basic

   $ 0.11       $ 0.11       $ 0.16       ($ 0.33

Diluted

     0.11         0.11         0.16         (0.33
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $9,342 of charges associated with writing off the Company’s investments in the SPAC’s.

(7) RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2011, the FASB issued Accounting Standards Update (ASU) 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 adds certain additional disclosure requirements about financial instruments and derivative instruments that are subject to offsetting and related arrangements. The new disclosures are required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those periods. As the amendment impacts disclosures only, it will not have an effect on the Company’s financial condition or results of operation.

In May 2011, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards”. ASU 2011-04 amends Topic 820 (Fair Value Measurement) by providing a consistent definition of fair value, ensuring that the fair value measurement and

 

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Table of Contents

disclosure requirements are similar between US GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, particularly for level 3 fair value measurements. ASU 2011-04 is effective for the first interim or annual reporting period beginning after December 15, 2011, and is to be applied prospectively. The Company is evaluating the impact adoption of ASU 2011-04 will have on its disclosures, and does not believe adoption will have an impact on its financial condition or results of operation.

(8) SEGMENT REPORTING

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

(9) COMMITMENTS AND CONTINGENCIES

(a) Employment Agreements

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

Employment agreements expire at various dates through 2016. At December 31, 2011, minimum payments under employment agreements are as follows:

 

(Dollars in thousands)

      

2012

   $ 952   

2013

     625   

2014

     625   

2015

     624   

2016

     260   

Thereafter

     —     
  

 

 

 

Total

   $ 3,086   
  

 

 

 

(b) Other Commitments

The Company had portfolio commitments outstanding of $697,000 at December 31, 2011. Generally, commitments are on the same terms as loans to or investments in existing borrowers or investees, and generally have fixed expiration dates. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In addition, the Company had approximately $33,834,000 of undisbursed funds relating to revolving credit facilities with borrowers. These amounts may be drawn upon at the customer’s request if they meet certain credit requirements.

Commitments for leased premises expire at various dates through December 31, 2021. At December 31, 2011, minimum rental commitments for non-cancelable leases are as follows:

 

(Dollars in thousands)

      

2012

   $ 1,117   

2013

     978   

2014

     978   

2015

     978   

2016

     524   

Thereafter

     357   
  

 

 

 

Total

   $ 4,932   
  

 

 

 

Occupancy expense was $911,000, $1,330,000, and $1,275,000 for the years ended December 31, 2011, 2010, and 2009.

 

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(c) Litigation

The Company and its subsidiaries become defendants to various legal proceedings arising from the normal course of business. In the opinion of management, based on the advice of legal counsel, there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision would result in a material adverse impact on the financial condition or results of operations of the Company.

(10) RELATED PARTY TRANSACTIONS

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

A member of the Board of Directors of the Company since 1996 is also of counsel in the Company’s primary law firm. Amounts paid to the law firm were approximately $421,000, $468,000, and $522,000 in 2011, 2010, and 2009.

At December 31, 2011, 2010, and 2009, the Company or MSC serviced $370,068,000, $332,053,000 and $229,810,000 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.

In December 2010, the Company assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed and collected from Medallion Bank by MSC. As a result, $5,492,000 and $412,000 of servicing fee income was earned by MSC in the years ended December 31, 2011 and 2010.

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

 

     Year ended December 31,  

(Dollars in thousands)

   2011      2010      2009  

Loan origination fees

   $ 625       $ 819       $ 849   

Reimbursement of operating expenses

     243         509         215   

Servicing fees

     21         2,094         1,805   

Interest income

     —           —           2   
  

 

 

    

 

 

    

 

 

 

Total other income

   $ 889       $ 3,422       $ 2,871   
  

 

 

    

 

 

    

 

 

 

SPAC

Included in investments in controlled subsidiaries at December 31, 2009 was $6,961,000 of investments in and loans to a special purpose acquisition company, Sports Properties Acquisition Corp. (the SPAC), 18%-owned by the Company, which consummated its initial public offering (IPO) in January 2008. Immediately prior to the IPO, the Company purchased warrants for $5,900,000 from the SPAC in a private placement which would have allowed it to acquire 5,900,000 additional shares of common stock in the future under various conditions and restrictions. The SPAC was unable to consummate an approved business combination within 24 months of the IPO, as a result, the Company’s entire investment in the SPAC became worthless in January 2010, and was therefore fully reserved for with a $6,961,000 charge to unrealized depreciation during the year ended December 31, 2009, and was fully written off to realized losses in the 2010 first quarter. All of the assets of the SPAC have been used to repay the public stockholders.

The Company had entered into a consulting agreement with ProEminent Sports, whose principal acted as a consultant to the Company for sports related investments and, included within the scope of his duties, also provided services to the SPAC, including serving as its Chief Executive Officer, and assisting generally with the SPAC’s offering and business combination. The Company had paid ProEminent Sports a monthly fee of $20,000, which during 2009 was reduced to $10,000, and then $0. The Company had previously entered into a consulting agreement with GamePlan, LLC which was terminated as of June 1, 2008, when the SPAC entered into its own consulting agreement with GamePlan, LLC. The Company had paid GamePlan, LLC a monthly fee of $10,000.

The Company had agreed to indemnify the SPAC in the event of the SPAC’s liquidation for all claims of any vendors, service providers, or other entities that were owed money by the SPAC for services rendered or contracted for, or for products sold to the SPAC, including claims of any prospective acquisition targets. At December 31, 2009, the SPAC’s liabilities exceeded its cash on hand by $1,581,000. The SPAC negotiated these liabilities downwards, and obtained forbearance from those associated with a failed deal, and during 2010, $1,292,000 of the expenses were paid, $310,000 were forgiven, and there were no remaining claims outstanding.

 

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Certain of the Company’s officers and directors also served as officers and directors of the SPAC, and in that role entered into agreements with the SPAC and its underwriter(s) to present to the SPAC, prior to presentation to any other person or entity, opportunities to acquire entities, until the earlier of the SPAC’s consummation of a business combination, the SPAC’s liquidation, or until such time as they ceased to be an officer or director of the SPAC. The Company entered into a similar agreement.

SPAC 2

Included in deferred costs in other assets at December 31, 2009 was $759,000 of investments in and loans to a special purpose acquisition company, National Security Solutions, Inc. (SPAC 2), 74%-owned by the Company, which was in organization prior to registration with the SEC to register units for sale in an initial public offering. As a result of the market conditions which led to the failure of the SPAC, it was determined to cease activities related to SPAC 2, and as a result, the investment was fully reserved for with a $759,000 charge to unrealized depreciation during the year ended December 31, 2009, and was fully written off to realized losses in 2010. In addition, the Company had additional realized losses of $20,000 in 2010.

(11) SHAREHOLDERS’ EQUITY

In November 2003, the Company announced a stock repurchase program which authorized the repurchase of up to $10,000,000 of common stock during the following six months, with an option for the Board of Directors to extend the time frame for completing the purchases, which expires in May 2012. In November 2004, the repurchase program was increased by an additional $10,000,000. As of December 31, 2011, a total of 1,580,615 shares had been repurchased for $13,971,973.

(12) NONINTEREST INCOME AND OTHER OPERATING EXPENSES

The major components of noninterest income were as follows.

 

     Year ended December 31,  

(Dollars in thousands)

   2011      2010      2009  

Prepayment fees

   $ 561       $ 729       $ 662   

Servicing fees

     277         2,462         2,181   

Late charges

     213         192         277   

Other

     134         150         263   
  

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 1,185       $ 3,533       $ 3,383   
  

 

 

    

 

 

    

 

 

 

Prepayment fees decreased in 2011 compared to 2010 due to a lower level of prepayment activity as interest rates appear to have bottomed. The decrease in servicing fees in 2011 primarily reflected the absence of servicing fees from Medallion Bank, which are reflected as income earned by MSC, an unconsolidated portfolio investment of the Company, beginning in December 2010.

The major components of other operating expenses were as follows.

 

     Year ended December 31,  

(Dollars in thousands)

   2011      2010     2009  

Travel, meals, and entertainment

   $ 808       $ 866      $ 1,135   

Miscellaneous taxes

     424         485        371   

Directors’ fees

     405         537        579   

Office expense

     232         338        365   

Insurance

     180         223        237   

Depreciation and amortization

     170         218        258   

Telephone

     163         246        242   

Loan collection costs and other investment costs

     74         (1,545     1,810   

Other expenses

     749         752        915   
  

 

 

    

 

 

   

 

 

 

Total other operating expenses

   $ 3,205       $ 2,120      $ 5,912   
  

 

 

    

 

 

   

 

 

 

Most expense categories were lower in 2011 as a result of the costs which are being allocated to MSC for servicing-related activities. Travel, meals, and entertainment decreased due to a decrease in investment development activities in 2011. Miscellaneous taxes were lower in 2011 due to higher franchise and excise taxes in the prior year. Loan collection costs and other investment costs reflected $1,312,000 of expense reversals related to the costs of winding up the operations of the SPAC’s in 2010 that were reclassed to realized losses on investments, and $310,000 that was reversed as a result of favorable negotiations with the creditors of the SPAC, charges that were originally recorded in 2009.

 

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(13) SELECTED FINANCIAL RATIOS AND OTHER DATA

The following table provides selected financial ratios and other data:

 

     Year ended December 31,  

(Dollars in thousands, except per share data)

   2011     2010     2009     2008     2007  

Net share data

          

Net asset value at the beginning of the year

   $ 9.35      $ 9.27      $ 9.97      $ 9.86      $ 9.73   

Net investment income

     0.61        0.56        0.46        0.85        0.30   

Income tax (provision) benefit

     0.00        0.00        0.00        0.00        0.00   

Net realized gains (losses) on investments

     (0.03     (0.43     (0.23     (0.21     0.80   

Net change in unrealized appreciation (depreciation) on investments

     0.51        0.51        (0.17     0.22        (0.23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     1.09        0.64        0.06        0.86        0.87   

Issuance of common stock

     (0.04     —          —          —          (0.01

Repurchase of common stock

     —          0.03        —          —          0.01   

Distribution of net investment income

     (0.70     (0.60     (0.76     (0.76     (0.45

Distribution of net realized gains on investments

     —          —          —          —          (0.31

Other

     (0.02     0.01        —          0.01        0.02   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in net asset value

     0.33        0.08        (0.70     0.11        0.13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 9.68      $ 9.35      $ 9.27      $ 9.97      $ 9.86   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at beginning of year

   $ 8.20      $ 8.17      $ 7.63      $ 10.02      $ 12.37   

Per share market value at end of year

     11.38        8.20        8.17        7.63        10.02   

Total return (2)

     49     8     18     (16 %)      (13 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios/supplemental data

          

Total shareholders’ equity (net assets)

   $ 171,504      $ 162,765      $ 162,977      $ 174,946      $ 172,423   

Average net assets

     166,738        161,620        172,558        174,082        171,503   

Total expense ratio (3) (4) (5)

     17     19     21     24     28

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

     8.46        10.10        11.43        9.95        10.40   

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

     6.46        6.11        4.74        8.67        3.09   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $0.06, $0.17, $0.29, $0.08, and $0.16 of undistributed net investment income per share as of December 31, 2011, 2010, 2009, 2008, and 2007, and $0.00 of undistributed net realized gains per share for all years presented.
(2) Total return is calculated by dividing the change in market value of a share of common stock during the year, assuming the reinvestment of dividends on the payment date, by the per share market value at the beginning of the year.
(3) Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average net assets.
(4) Includes $1,312 of expense reversals related to the costs of winding up the operations of the SPAC’s that were reclassified to realized losses on investments, and $310 that was reversed as a result of favorable negotiations with the creditors of SPAC in 2010, and includes $1,622 of costs related to winding up the operations of the SPAC’s in 2009. Excluding these amounts, the total expense ratios were 20% in 2010 and 2009, and the operating expense ratios were 11.11% and 10.49%.
(5) In December 2010, MSC assumed our servicing obligations, and as a result, servicing fee income of $5,492, and $412, and operating expenses of $5,659 and $349, which formerly were the Company’s, were now MSC’s for the years ended December 31, 2011 and 2010. Excluding the impact of the MSC amounts, the total expense ratio, operating expense ratio, and net investment income ratio would have been 20%, 12%, and 6.36% in 2011 and 20%, 11.32%, and 6.15% in 2010, also including the amounts referred to in footnote 4 to this table.

(14) EMPLOYEE BENEFIT PLANS

The Company has a 401(k) Investment Plan (the 401(k) Plan) which covers all full-time and part-time employees of the Company who have attained the age of 21 and have a minimum of one year of service, including the employees of Medallion Bank. Under the 401(k) Plan, an employee may elect to defer not less than 1% and no more than 15% of the total annual compensation that would otherwise be paid to the employee, provided, however, that employee’s contributions may not exceed certain maximum amounts determined under the Internal Revenue Code. Employee contributions are invested in various mutual funds according to the directions of the employee. The Company matches employee contributions to the 401(k) Plan in an amount per employee up to one-third of such employee’s contribution but in no event greater than 2% of the portion of such employee’s annual salary eligible for 401(k) Plan benefits. The Company’s 401(k) plan expense, including amounts for the employees of Medallion Bank and other unconsolidated, wholly-owned portfolio companies, was approximately $154,000, $134,000, and $111,000 for the years ended December 31, 2011, 2010, and 2009.

 

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(15) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

(c) Commitments to extend credit - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At December 31, 2011 and 2010, the estimated fair value of these off-balance-sheet instruments was not material.

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

 

     December 31, 2011      December 31, 2010  

(Dollars in thousands)

   Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

           

Investments

   $ 451,835       $ 451,835       $ 483,516       $ 483,516   

Cash

     29,352         29,352         17,303         17,303   

Accrued interest receivable

     1,120         1,120         1,441         1,441   

Financial liabilities

           

Funds borrowed

     357,779         357,779         380,532         380,532   

Accrued interest payable

     1,708         1,708         1,913         1,913   
  

 

 

    

 

 

    

 

 

    

 

 

 

(16) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC Topic 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 2011.

In accordance with FASB ASC Topic 820, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).

As required by FASB ASC Topic 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).

Financial assets and liabilities recorded on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

 

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Level 1. Financial 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, exchanged-traded derivatives, most US Government and agency securities, and certain other sovereign government obligations).

Level 2. Financial 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. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, certain residential and commercial mortgage-related assets (including loans, securities, and derivatives), and long-dated or complex derivatives including certain equity derivatives and long-dated options on gas and power).

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 financial 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 tables present Medallion’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010.

 

$307,167 $307,167 $307,167 $307,167

2011 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —         $ —         $ 307,167       $ 307,167   

Commercial loans

     —           —           54,159         54,159   

Investment in Medallion Bank and other controlled subsidiaries

     —           —           85,932         85,932   

Equity investments

     231         —           4,346         4,577   

Other assets

     —           43,822         —           43,822   

 

$307,167 $307,167 $307,167 $307,167

2010 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —         $ —         $ 323,126       $ 323,126   

Commercial loans

     —           —           76,866         76,866   

Investment in Medallion Bank and other controlled subsidiaries

     —           —           78,735         78,735   

Equity investments

     280         —           4,509         4,789   

Other assets

     —           37,476         —           37,476   

 

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Included in level 3 investments in other controlled subsidiaries is the investment in Medallion Bank, MSC, and investments in a start-up businesses engaged in media-buying consulting. Included in level 3 equity investments are unregistered shares of common stock in a publicly-held company, as well as certain private equity positions in non-marketable securities.

 

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The following tables provide a summary of changes in fair value of Medallion’s level 3 financial assets and liabilities for the years ended December 31, 2011 and 2010.

 

(Dollars in thousands)

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

December 31, 2010

  $ 323,126      $ 76,866      $ 78,735      $ 4,509        —     

Gains (losses) included in earnings

    —          (5,754     13,168        3,080        —     

Purchases, investments, and issuances

    191,871        6,213        3,434        —          —     

Sales, maturities, settlements, and distributions

    (207,830     (23,166     (9,405     (3,243     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

    307,167        54,159        85,932        4,346        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

  $ —        ($ 5,708   $ 13,168      $ 606        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the year which relate to assets held as of December 31, 2011.

 

(Dollars in thousands)

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

December 31, 2009

  $ 321,915      $ 77,922      $ 71,736      $ 2,769        —     

Gains (losses) included in earnings

    —          (7,021     9,569        1,985        —     

Purchases, investments, and issuances

    201,372        17,111        2,519        1,254        —     

Sales, maturities, settlements, and distributions

    (200,161     (11,146     (5,089     (1,499     —     

Transfers in (out)

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2010

    323,126        76,866        78,735        4,509        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

  $ —        ($ 7,203   $ 9,569      $ 545        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the year which relate to assets held as of December 31, 2010.

(17) SUBSEQUENT EVENTS

We have evaluated subsequent events that have occurred through March 27, 2012, the date of financial statement issuance.

On March 1, 2012, the Company prepaid $11,250,000 of its SBA debentures.

On February 16, 2012, the Company’s board of directors declared a $0.20 per share common stock dividend, payable on March 30, 2012 to shareholders of record on March 23, 2012.

 

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Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2011

 

    

(Dollars in thousands)

 

Obligor

Name/Interest Rate

Range

  Security
Type (all
restricted
unless
otherwise
noted)
    Acquisition
Date
  Maturity
Date
  # of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2011
Acquisitions (5)
    Cost (4)     Fair
Value
 

Medallion Loans

                   

New York

            502        133     4.66   $ 154,686      $ 227,426      $ 227,480   
 

Sean Cab Corp ##

    Term loan      12/9/2011   12/08/15     1        2     3.60   $ 3,774      $ 3,775      $ 3,770   
 

Lena Cab Corp ##

    Term loan      12/9/2011   12/09/15     1        2     3.60   $ 3,774      $ 3,775      $ 3,770   
 

Sifnos, Van-Dim, Kitriani Incs ##

    Term loan      6/8/2010   06/07/15     1        2     5.25     $ 2,611      $ 2,607   
 

Real Cab Corp ##

    Term loan      7/20/2007   07/20/17     1        1     6.75     $ 2,546      $ 2,541   
 

Cabbo Service Corp ##

    Term loan      9/7/2010   09/07/13     1        1     5.00     $ 1,801      $ 1,792   
 

Lety Cab Corp ##

    Term loan      10/21/2010   10/20/15     1        1     4.00     $ 1,647      $ 1,645   
 

Slo Cab Corp ##

    Term loan      7/20/2007   07/20/17     1        1     6.75     $ 1,528      $ 1,524   
 

Sandhu & Baath Inc ##

    Term loan      5/10/2011   05/10/14     1        1     4.75   $ 1,320      $ 1,303      $ 1,304   
 

Orys Trans Corp ##

    Term loan      9/26/2011   09/26/14     1        1     4.00   $ 1,300      $ 1,296      $ 1,296   
 

Cafe Service Co Inc ##

    Term loan      11/9/2011   11/09/16     1        1     4.40   $ 1,275      $ 1,274      $ 1,274   
 

Bunty & Jyoti Inc ##

    Term loan      11/22/2011   11/22/14     1        1     4.25   $ 1,264      $ 1,263      $ 1,263   
 

Sonu-Seema Corp ##

    Term loan      11/22/2011   11/22/14     1        1     4.25   $ 1,264      $ 1,263      $ 1,263   
 

Spurt Cab Corp ##

    Term loan      4/1/2011   10/01/13     1        1     4.75   $ 1,275      $ 1,258      $ 1,261   
 

Januko Transit Inc ##

    Term loan      12/9/2011   12/09/15     1        1     3.60   $ 1,258      $ 1,258      $ 1,258   
 

Nancy Transit Inc ##

    Term loan      4/6/2011   04/06/14     1        1     4.50   $ 1,275      $ 1,258      $ 1,257   
 

Fenway Cab Corp ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

Slate Cab Corp ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

Yankl Transit Inc ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

Munkach Transit Inc ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

Sapphire Transit Inc ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

W Mit Trans Corp ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

Brini Transit Inc ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

Daf Cab Corp ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

W. Vil Trans Corp ##

    Term loan      3/22/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

Sabrinush Transit Inc ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

Mamkale Transit Inc ##

    Term loan      3/23/2011   12/08/15     1        1     3.60   $ 1,275      $ 1,256      $ 1,255   
 

New Direction Cab Corp ##

    Term loan      11/18/2011   11/18/14     1        1     4.00   $ 1,200      $ 1,195      $ 1,200   
 

Ride Yellow Llc ##

    Term loan      1/14/2011   02/15/16     1        1     4.88   $ 1,200      $ 1,200      $ 1,200   
 

Hoyt Cab Corp ##

    Term loan      2/18/2011   02/18/14     1        1     4.50   $ 1,200      $ 1,200      $ 1,200   

Various New York &&

  2.67% to 14.00% ##     8/17/98

to

12/23/2011

  12/6/11

to

9/10/2023

    473        106     4.75   $ 119,282      $ 182,159      $ 182,250   

Boston &&

  3.25% to 9.66% ##     Term loan      6/12/07

to

11/17/2011

  06/12/12
to
07/11/16
    59        10     6.56   $ 7,118      $ 16,955      $ 17,012   

Cambridge

  5.50% to 9.22% ##     Term loan      3/28/08

to

11/23/11

  03/19/12
to
11/18/20
    21        4     6.62   $ 1,405      $ 6,179      $ 6,198   

Chicago

            136        20     5.79   $ 35,709      $ 34,200      $ 34,352   
  Cozy Cab et al ##     Term loan      12/22/2011   12/22/14     1        2     5.50   $ 3,031      $ 3,031      $ 2,999   
  Sweetgrass Peach & Chadwick Cap ##     Term loan      11/23/2011   11/23/14     1        1     5.75   $ 1,530      $ 1,525      $ 1,527   

Various Chicago

  5.00% to 10.30% ##     Term loan      4/29/05

to

12/16/2011

  03/10/12

to

12/16/16

    134        17     5.82   $ 31,148      $ 29,644      $ 29,825   

Newark &&

  6.00% to 9.00% ##     Term loan      4/6/00

to

12/8/2011

  01/11/12

to

12/08/21

    109        10     7.38   $ 6,009      $ 17,693      $ 17,790   

Other

            21        3     6.54   $ 2,930      $ 4,318      $ 4,335   

Philadelphia

  Dorit Matityahu ##     Term loan      8/4/2011   08/04/14     1        1     6.25   $ 2,209      $ 2,187      $ 2,189   

Various Other &&

  5.43% to 11.50% ##     Term loan      10/15/04

to

9/22/11

  02/15/12

to

3/10/2018

    20        1     6.84   $ 721      $ 2,131      $ 2,147   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total medallion loans ($243,057 pledged as collateral under borrowing arrangements)

      848        179     5.11   $ 207,858      $ 306,771      $ 307,167   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Loans

                 

Secured mezzanine (18% Florida, 14% Minnesota, 14% Oklahoma, 10% Indiana, 9% California, 7% Texas and 28% all other states) (2)

  

 

Manufacturing

                   

+

 

Reel Power (capitalized interest of $86 per footnote 2) (interest rate includes PIK interest of 2%)

    Term loan      08/04/08   02/04/14     1        2     14.00     $ 3,586      $ 3,586   
 

Process Fab (capitalized interest of $384 per footnote 2) & (interest rate includes PIK interest of 3%)

    Term loan      04/17/08   04/17/15     1        2     14.00     $ 4,884      $ 3,358   
 

Motion Tech (capitalized interest of $189 per footnote 2) (interest rate includes PIK interest of 6%)

    Term loan      12/23/10   12/23/15     1        2     18.00     $ 3,189      $ 3,195   
 

Imperial (capitalized interest of $4 per footnote 2) (interest rate includes PIK interest of 3%)

    Term loan      12/15/11   12/31/16     1        2     15.00   $ 2,800      $ 2,804      $ 2,823   

+

 

Packaging Specialists (capitalized interest of $191 per footnote 2) (interest rate includes PIK interest of 6%)

    Term loan      04/01/08   04/01/13     1        1     14.00     $ 2,191      $ 2,191   
 

Aeration (capitalized interest of $81 per footnote 2) & (interest rate includes PIK interest of 6%)

    Term loan      12/31/10   06/30/16     1        1     18.00     $ 2,416      $ 2,190   
 

Dynamic Systems (capitalized interest of $74 per footnote 2) (interest rate includes PIK interest of 3.5%)

    Term loan      12/23/10   12/23/17     1        1     15.50     $ 2,074      $ 2,074   

+

  PACA Foods     Term loan      12/31/10   12/31/15     1        1     14.00     $ 1,500      $ 1,499   

+

  PACA Foods     Term loan      12/31/10   12/31/15     1        1     12.00     $ 1,500      $ 1,499   
  Orchard &     Term loan      03/10/99   Matured     1        1     13.00     $ 1,420      $ 1,220   

+

 

Various Other – 12% to 13% (capitalized interest of $92 per footnote 2) && (interest rate includes PIK interest of 12%)

    Term loan      12/15/04

to

10/2/06

  03/01/12
to
03/31/13
    3        1     12.34     $ 1,896      $ 1,891   

Administrative and Support Services

             
  Staff One &     Term loan      06/30/08   12/31/13     1        1     13.00     $ 3,306      $ 1,850   

 

F-30


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2011

 

(Dollars in thousands)

      

Obligor

Name/Interest Rate

Range

  Security
Type (all
restricted
unless
otherwise
noted)
    Acquisition
Date
  Maturity
Date
  # of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2011
Acquisitions (5)
    Cost (4)     Fair
Value
 
   

Staff One &

    Term loan      09/15/11   12/31/13     1        *        13.00   $ 100      $ 100      $ 100   
   

Various Other (capitalized interest of $275 per footnote 2) && (interest rate includes PIK interest of 9%)

    Term loan      01/14/05   Matured     1        *        19.00     $ 5,070      $ 0   

Wholesale Trade

                     
   

Twin-Star (interest rate includes PIK interest of 1%)

    Term loan      06/01/07   04/24/14     1        2     13.00     $ 4,000      $ 4,000   
 

+

 

Various Other &&

    Term loan      03/31/08   03/31/13     1        *        16.00     $ 2,484      $ 101   

Accommodation and Food Services

   

(capitalized interest of $386 per footnote 2) -- 9.25% to 10.00% & (interest rate includes PIK interest of 3.5%)

    Term loan      12/22/94
to
11/5/10
  10/1/15-
11/5/15
    3        1     9.86     $ 3,540      $ 1,488   

Arts, Entertainment, and Recreation

   

RPAC Racing (capitalized interest of $340 per footnote 2) (interest rate includes PIK interest of 10%)

    Term loan      11/19/10   11/19/15     1        2     10.00     $ 3,379      $ 3,379   

Health Care and Social Assistance

 

+

 

Various Other &&

    Term loan      12/31/98   06/30/17     1        1     7.00     $ 1,386      $ 986   

Retail Trade

   

(capitalized interest of $143 per footnote 2) && (interest rate includes PIK interest of 3.5%)

    Term loan      09/23/97   10/01/15     1        *        10.00     $ 752      $ 376   

Professional, Scientific, and Technical Services

   

Various Other &&

    Term loan      10/26/11   11/02/14     1        *        10.00   $ 150      $ 145      $ 45   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total secured mezzanine (2)

  

        25        22     14.04   $ 3,050      $ 51,622      $ 37,851   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-31


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2011

 

(Dollars in thousands)

 

Obligor

Name/Interest Rate

Range

 

Security Type
(all restricted unless
otherwise noted)

  Acquisition
Date
  Maturity
Date
  # of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of 2011
Acquisitions (5)
    Cost (4)     Fair
Value
 

Asset-based (82% New York, 13% New Jersey and 5% all other states)

  

       
Wholesale Trade                    
  Newburg Egg Corp. ##   Revolving line of credit   03/16/99   03/16/12     1        1     6.00     $ 1,446      $ 1,425   
  Capitalsea, LLC ##   Revolving line of credit   11/07/05   11/07/12     1        1     4.50     $ 1,349      $ 1,320   
Various Other   4.75% to 6.75% ##   Revolving line of credit   1/23/99
to
11/30/11
  01/14/12
to
11/30/12
    10        1     5.51   $ 84      $ 1,593      $ 1,564   
Transportation and Warehousing   5.75% to 8.00% ##   Revolving line of credit   12/31/01
to
7/20/07
  02/06/12
to
12/31/12
    5        1     6.51     $ 1,885      $ 1,846   
Finance and Insurance   4.25% to 8.25%   Revolving line of credit   2/6/02 to
11/10/11
  02/06/12
to
11/10/12
    6        *        6.28   $ 38      $ 718      $ 687   
Construction   5.75 % to 6.00% ##   Revolving line of credit   6/29/99
to
7/20/99
  06/29/12
to
07/20/12
    2        *        5.77     $ 666      $ 656   
Retail Trade   4.75% to 6.11% ##   Revolving line of credit   10/19/98
to
8/31/06
  07/24/12
to
12/21/12
    5        *        5.45     $ 649      $ 630   
Administrative and Support Services   5.50% to 5.75%   Revolving line of credit   6/22/04
to
6/30/07
  06/22/12
to
06/30/12
    2        *        5.59     $ 387      $ 372   
Manufacturing   5.50% to 7.00% ##   Revolving line of credit   7/7/04 to
5/6/11
  02/18/12
to
11/29/12
    7        *        6.55   $ 34      $ 348      $ 329   
Health Care and Social Assistance   5.75% to 6.00% ##   Revolving line of credit   10/2/07
to
12/1/10
  10/02/12
to
12/01/12
    2        *        5.83     $ 289      $ 275   
Accommodation and Food Services   6.00%   Revolving line of credit   04/27/11   04/27/12     1        *        6.00   $ 51      $ 57      $ 60   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total asset-based ($6,506 pledged as collateral under borrowing arrangements)

    42        5     5.77   $ 207      $ 9,388      $ 9,165   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other secured commercial (83% New York, 15% New Jersey and 2% Illinois)

  

       
Accommodation and Food Services            
  Dune Deck Owners Corp ##   Term loan   04/24/07   03/31/14     1        2     7.25     $ 3,097      $ 3,097   
Various Other   8.50% to 12.50%   Term loan   5/25/2005
to
12/23/08
  06/25/12
to
07/29/14
    5        *        10.21     $ 741      $ 739   
Retail Trade   0.00% to 12.00% &&   Term loan   9/13/06
to 8/4/11
  01/13/12
to
08/09/16
    12        1     9.31   $ 2,045      $ 2,536      $ 2,263   
Arts, Entertainment, and Recreation   6.5% &&   Term loan   01/24/07   05/28/15     1        *        6.50     $ 390      $ 265   
Other Services (except Public Administration)   5.50% to 6.50%   Term loan   1/16/04
to

5/2/09

  01/16/14
to
05/02/14
    2        *        5.96     $ 282      $ 283   
Transportation and Warehousing   6.00% to 6.50%   Term loan   6/8/09 to
12/8/10
  01/12/12
to
11/22/13
    15        *        6.05     $ 276      $ 285   
Real Estate and Rental and Leasing   5.50% to 6.00%   Term loan   4/22/99
to 4/1/10
  04/01/15
to
09/01/15
    2        *        5.68     $ 217      $ 211   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other secured commercial loans ($3,097 pledged as collateral under borrowing arrangements)

    38        4     8.06   $ 2,045      $ 7,539      $ 7,143   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total commercial loans ($9,603 pledged as collateral under borrowing arrangements) (2)     105        32     12.25   $ 5,303      $ 68,549      $ 54,159   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Investment in Medallion Bank and other controlled subsidiaries            
Commercial Banking   Medallion Bank   100% of common stock   05/16/02   None     1        48     6.58     $ 82,852      $ 82,852   
Real Estate   Medallion Hamptons Holding LLC   100% of membership interests   06/21/05   None     1        1     0.00     $ 2,436      $ 2,436   
Various Other       12/20/04
to

1/5/11

  None     3        *        0.00     $ 644      $ 644   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Investment in Medallion Bank and other controlled subsidiaries, net     5        50     6.40     $ 85,932      $ 85,932   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Equity investments                    
Appliance Recycler #   Appliance Recycling Centers of America, Inc.**   8% of common stock   09/10/98   None     1        1     0.00     $ 0      $ 2,225   
Commercial Finance   Convergent Capital, Ltd   7% of limited partnership interest   07/20/07   None     1        1     0.00     $ 1,094      $ 1,214   
NASCAR Race Team   RPAC Racing   30.6% of limited liability interest   11/19/10   None     1        *        0.00     $ 454      $ 454   
Machinery Manufacturer +   Reel Power International, Inc.   2% of common stock   08/04/08   None     1        *        0.00     $ 318      $ 318   
Equipment Manufacturing   Aeration Industries International, LLC   5.25% of limited liability interest   12/31/10   None     1        *        0.00     $ 365      $ 0   
Various Other       12/5/02
to
11/1/10
  None     4        *        6.65     $ 1,241      $ 366   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Equity investments, net           9        3     2.26     $ 3,472      $ 4,577   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Investment securities                  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Investment securities, net           0        0     0.00     $ 0      $ 0   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net Investments ($252,660 pledged as collateral under borrowing arrangements) (3)     967        263     6.36   $ 213,159      $ 464,724      $ 451,835   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-32


Table of Contents
(1) Represents the actual or weighted average interest or dividend rate of the respective security or portfolio as of the date indicated. Investments without an interest rate or with a rate of 0.00% are considered non-income producing.
(2) Included in secured mezzanine commercial loans was $2,246 of interest income capitalized into the outstanding investment balances, in accordance with the terms of the investment contract.
(3) The ratio of restricted securities fair value to net assets is 262%.
(4) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $2,345, $15,538, and $13,193, respectively. The tax cost of investments was $436,120.
(5) For revolving lines of credit the amount shown is the cost at December 31, 2011.
* Less than 1.0%
** Not an eligible portfolio company as such term is defined in Section 2(a)(46) of the 1940 Act.
& Loan is on nonaccrual status, or past due on contractual payments, and is therefore considered non-income producing.
&& Some or all of the securities are non-income producing as per & above.
# Publicly traded but sales subject to applicable Rule 144 limitations.
## Pledged as collateral under borrowing arrangements.
+ Includes various warrants, all of which have a cost and fair value of zero at December 31, 2011

The Summary Schedule of Investments does not reflect the Company’s complete portfolio holdings. It includes the Company’s 50 largest holdings and each investment of any issuer that exceeds 1% of the Company’s net assets. “Various Other” represent all issues not required to be disclosed under the rules adopted by the U.S. Securities and Exchange Commission (“SEC”). Footnotes above may apply to securities that are included in “Various Other”. For further detail, the complete schedule of portfolio holdings is available (i) without charge, upon request, by calling (877) MEDALLION; and (ii) on the SEC’s website at http://www.sec.gov.

 

F-33


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments (as adjusted)

December 31, 2010

 

(Dollars in
thousands)

     

Obligor Name

  Security
Type (all
restricted
unless
otherwise
noted)
  Acquisition Date   Maturity Date   # of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original Cost of
2010
Acquisitions (5)
    Cost (4)     Fair
Value
 

Medallion Loans

                   

New York

                603        147     5.52   $ 178,710      $ 239,435      $ 239,430   
    Sifnos, Van-Dim, Kitriani Incs     #   Term loan   06/08/10   06/07/15     1        2     5.25   $ 2,800      $ 2,739      $ 2,737   
    Real Cab Corp     #   Term loan   07/20/07   07/20/17     1        2     6.75     $ 2,545      $ 2,542   
    Lena Cab Corp     #   Term loan   06/03/08   06/03/16     1        1     5.00       $2,416        $2,413   
    Cabbo Service Corp     #   Term loan   09/07/10   09/07/13     1        1     5.00   $ 1,800      $ 1,800      $ 1,790   
    Sean Cab Corp     #   Term loan   06/02/06   06/03/16     1        1     5.00     $ 1,740      $ 1,731   
    Lety Cab Corp     #   Term loan   10/21/10   10/20/13     1        1     5.00   $ 1,687      $ 1,681      $ 1,681   
    Slo Cab Corp     #   Term loan   07/20/07   07/20/17     1        1     6.75     $ 1,527      $ 1,525   
    Emerald I Taxi Corp     #   Term loan   05/03/10   05/03/13     1        1     4.80   $ 1,472      $ 1,472      $ 1,472   
    Sonu-Seema Corp     #   Term loan   10/21/10   10/21/13     1        1     5.75   $ 1,250      $ 1,247      $ 1,250   
    Ride Yellow Llc     #   Term loan   03/25/10   03/25/13     1        1     5.13   $ 1,200      $ 1,200      $ 1,200   
    Honeybee Taxi Llc     #   Term loan   03/11/10   03/11/13     1        1     5.13   $ 1,200      $ 1,200      $ 1,200   
    Bedford Taxi Llc     #   Term loan   10/01/10   10/01/13     1        1     4.75   $ 1,204      $ 1,199      $ 1,200   
    King Ed Taxi Inc     #   Term loan   09/07/10   09/03/13     1        1     5.00   $ 1,200      $ 1,200      $ 1,194   
    Corcovado Cab Corp     #   Term loan   09/07/10   09/03/13     1        1     5.00   $ 1,200      $ 1,200      $ 1,194   
    Dag Taxi Inc     #   Term loan   09/01/10   09/01/13     1        1     5.00   $ 1,200      $ 1,200      $ 1,193   
    Katom Taxi Inc     #   Term loan   09/01/10   09/01/13     1        1     5.00   $ 1,200      $ 1,200      $ 1,193   
    Merry Cab Corp     #   Term loan   09/01/10   09/01/13     1        1     5.00   $ 1,200      $ 1,200      $ 1,193   
    Ocean Hacking Corp     #   Term loan   08/17/10   08/16/13     1        1     5.25   $ 1,200      $ 1,190      $ 1,190   
    Cafe Service Co Inc     #   Term loan   06/25/10   06/25/15     1        1     5.00   $ 1,200      $ 1,188      $ 1,188   
    Lofos Inc     #   Term loan   05/12/10   05/12/15     1        1     5.00   $ 1,200      $ 1,186      $ 1,188   

Various Other

    3.75% to 14% &&     #   Term loan   5/22/1998 to 12/31/10   11/19/2010 to 9/10/23     583        128     5.55   $ 156,497      $ 209,105      $ 209,156   

Chicago

                151        21     6.69   $ 20,271      $ 34,832      $ 34,986   
    Chicago Seven Inc     #   Term loan   09/10/09   09/10/12     1        1     6.63     $ 2,408      $ 2,408   
    Cozy Cab Co, Et Al     #   Term loan   09/09/08   09/24/12     1        1     7.88     $ 2,056      $ 2,057   

Various Other

    6.00% to 10.50%     #   Term loan   8/6/1999 to 12/29/10   3/16/2011 to 12/21/15     149        19     6.61   $ 20,271      $ 30,368      $ 30,521   

Newark

    6.00% to 9.00% &&     #   Term loan   4/6/00 to 12/16/10   12/7/10 to 10/7/20     127        12     7.81   $ 5,730      $ 19,777      $ 19,844   

Boston

                71        11     6.74   $ 4,849      $ 18,237      $ 18,273   
    Arinze Trans Inc     Term loan   02/05/10   02/05/13     1        *        7.25   $ 655      $ 649      $ 649   
    Arinze Trans Inc     #   Term loan   07/24/08   07/24/13     1        *        7.00     $ 580      $ 581   
    Chiso Trans Inc     Term loan   11/30/09   11/30/13     1        *        7.25     $ 584      $ 585   
    Chiso Trans Inc     Term loan   07/24/08   07/24/13     1        *        7.00     $ 581      $ 581   

Various Other

    3.25% to 9.00% &&     #   Term loan   5/12/06 to 12/23/10   12/7/10 to 10/1/15     67        10     6.68   $ 4,194      $ 15,843      $ 15,877   

Cambridge

    5.50% to 9.22% &&     #   Term loan   11/8/07 to 11/18/10   3/12/12 to 11/18/10     20        3     6.72   $ 3,485      $ 5,501      $ 5,522   

Other

                22        3     7.05   $ 1,594      $ 5,048      $ 5,071   

Philadelphia

    Mordecai Matityahu & Dorit Mat     #   Term loan   07/02/08   07/02/11     1        1     6.50     $ 2,256      $ 2,256   

Various Other

    6.38% to 11.50% &&     #   Term loan   10/15/2004 to 12/22/10   2/15/2012 to 3/10/18     21        2     7.49   $ 1,594      $ 2,792      $ 2,815   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total medallion loans ($246,813 pledged as collateral under borrowing arrangements)

      994        199     5.90   $ 214,639      $ 322,830      $ 323,126   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Loans

                     

Secured mezzanine (21% Minnesota, 14% Florida, 10% Oklahoma, 8% Indiana,
7% Wisconsin, 7% California, 6% Texas and 27% all other states) (2)

             

Accommodation and Food Services (4% of the total)

   

9.25% to 10.00%&& (capitalized interest of $513 per footnote 2)

    Term loan   12/22/94 to 11/5/10   10/1/15 to 11/5/15     3        1     9.87   $ 700      $ 3,892      $ 2,386   
   

(interest rate includes PIK interest of 5%)

                   

Administrative and Support Services (6% of the total)

    Staff One     Term loan   06/30/08   06/30/13     1        2     13.50     $ 3,308      $ 3,297   

Various Other

   

& (capitalized interest of $660 per footnote 2)

    Term loan   01/14/05   01/14/10     2        *        18.66     $ 5,565      ($ 0
   

(interest rate includes PIK interest of 9%)

                   

Arts, Entertainment, and Recreation (5% of the total)

   

Rpac Racing (capitalized interest of $32 per footnote 2)

    Term loan   11/19/10   11/24/15     1        2     10.00   $ 3,039      $ 3,071      $ 3,071   
   

(interest rate includes PIK interest of 10%)

                   

Health Care and Social Assistance (2% of the total)

  +  

Will Vision & (capitalized interest of $112 per footnote 2)

    Term loan   12/31/98   06/30/17     1        1     7.00     $ 1,586      $ 1,186   

Information (3% of the total)

  +  

United Record & (capitalized interest of $94 per footnote 2)

    Term loan   07/06/07   07/06/12     1        1     18.00     $ 1,433      $ 1,433   
   

(interest rate includes PIK interest of 6%)

                   
  +   United Record &     Term loan   07/06/07   07/06/12     1        *        12.00     $ 59      $ 59   
  +   United Record &     Term loan   07/06/07   07/06/12     1        *        12.00     $ 35      $ 35   

Manufacturing (65% of the total)

  +  

Stremel (capitalized interest of $1,358 per footnote 2)

    Term loan   12/06/05   04/18/12     1        4     19.00     $ 6,358      $ 6,359   
   

(interest rate includes PIK interest of 19%)

                   
   

Process Fab (capitalized interest of $270 per footnote 2)

    Term loan   04/17/08   04/05/15     1        3     14.00     $ 4,770      $ 4,735   
   

(interest rate includes PIK interest of 3%)

                   
  +  

Reel Power (capitalized interest of $86 per footnote 2)

    Term loan   08/04/08   02/04/14     1        2     14.00     $ 3,586      $ 3,586   
   

(interest rate includes PIK interest of 2%)

                   
   

Aeration (capitalized interest of $93 per footnote 2)

    Term loan   12/30/10   06/30/13     1        2     18.00   $ 3,200      $ 3,200      $ 3,210   
    Motion Tech (capitalized interest of $4 per footnote 2)     Term loan   12/23/10   12/23/15     1        2     18.00   $ 3,000      $ 3,004      $ 3,011   
   

(interest rate includes PIK interest of 6%)

                   
  +   Paca Foods     Term loan   12/31/10   12/31/15     1        1     14.00   $ 1,500      $ 1,500      $ 1,498   
  +   Paca Foods     Term loan   12/31/10   12/31/15     1        1     12.00   $ 1,500      $ 1,500      $ 1,498   
  +  

Packaging Specialists (capitalized interest of $62 per footnote 2)

    Term loan   04/01/08   04/01/13     1        1     14.00     $ 2,062      $ 2,062   
   

(interest rate includes PIK interest of 2%)

                   
   

Dynamic Systems (capitalized interest of $2 per footnote 2)

    Term loan   12/23/10   12/23/17     1        1     15.50   $ 2,000      $ 2,002      $ 2,002   
   

(interest rate includes PIK interest of 3.5%)

                   
  +   Igc Technology     Term loan   10/31/06   04/30/12     1        1     12.00     $ 2,000      $ 2,000   
  +  

Vermont Composite (capitalized interest of $142 per footnote 2)

    Term loan   09/20/04   12/31/11     1        1     14.00     $ 1,643      $ 1,643   
   

(interest rate includes PIK interest of 2%)

                   
    Orchard     Term loan   03/10/99   Matured     1        1     13.00     $ 1,420      $ 1,420   
  +   American Finishing     Term loan   07/31/06   07/31/11     1        1     12.50     $ 1,250      $ 1,250   
  +  

Craft Cast (capitalized interest of $30 per footnote 2)

    Term loan   08/23/07   08/23/12     1        1     17.00     $ 1,189      $ 1,189   
   

(interest rate includes PIK interest of 5%)

                   

Various Other

  +  

12.00% to 13.00% (capitalized interest of $60 per footnote 2)

    Term loan   12/15/04 to 10/2/06   2/28/2011 to 1215/12     3        1     12.32     $ 2,000      $ 1,988   
   

(interest rate includes PIK interest 12%)

                   

Professional, Scientific, and Technical Services (1% of the total)

  +  

& (interest rate includes PIK interest of 7%)

    Term loan   10/14/04   03/29/15     1        *        10.00     $ 2,406      $ 756   

Retail Trade (1% of the total)

   

& (capitalized interest of $232 per footnote 2)

    Term loan   09/23/97   10/01/15     1        *        10.00     $ 846      $ 470   
   

(interest rate includes PIK interest of 5%)

                   

Wholesale Trade (13% of the total)

   

Twin-Star (capitalized interest of $46 per footnote 2)

    Term loan   06/01/07   04/24/14     1        2     13.00     $ 4,046      $ 4,046   
   

(interest rate includes PIK interest of 1%)

                   
  +   I-Deal Optics Holdings     Term loan   12/19/08   12/19/13     1        1     14.00     $ 2,000      $ 1,997   
  +   Las Olas &     Term loan   03/31/08   03/31/13     1        1     16.00     $ 2,568      $ 1,189   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total secured mezzanine (2)

            33        35     14.41   $ 14,939      $ 68,299      $ 57,376   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-34


Table of Contents

 

Medallion Financial Corp.

Consolidated Summary Schedule of Investments (as adjusted)

December 31, 2010

 

(Dollars in
thousands)

       

Obligor Name

  Security Type (all
restricted unless
otherwise noted)
  Acquisition Date   Maturity Date   # of
Invest.
    % of
Net
Assets
    Interest
Rate (1)
    Original Cost of
2010
Acquisitions (5)
    Cost (4)     Fair
Value
 

Asset-based (85% New York, 9% New Jersey and 6% all other states)

                                   

Administrative and Support Services (5% of the total)

    5.50% to 6.25%     Revolving line of credit   6/22/2004 to 6/30/07   6/22/2011 to 6/30/11     2        *        5.94     $ 498      $ 466   

Construction (5% of the total)

    5.75% to 6.00%     #   Revolving line of credit   6/29/99 to 7/20/1999   6/29/11 to 7/20/2011     2        *        5.68     $ 488      $ 479   

Finance and Insurance (6% of the total)

    4.25% to 8.25%     Revolving line of credit   2/6/2002 to 2/14/08   2/1/2011 to 10/25/11     5        *        6.25     $ 598      $ 531   

Health Care and Social Assistance (7% of the total)

    6.00% to 6.50%     #   Revolving line of credit   10/2/2007 to 12/1/10   10/2/2011 to 12/1/11     2        *        6.38   $ 184      $ 752      $ 713   

Manufacturing (5% of the total)

    5.75% to 6.75%     #   Revolving line of credit   7/7/2004 to 6/22/10   2/18/2011 to 11/19/11     7        *        6.38   $ 69      $ 379      $ 320   

Real Estate and Rental and Leasing (0% of the total)

        Revolving line of credit   09/07/10   09/07/11     1        *        6.25   $ 14      $ 0      $ 2   

Retail Trade (12% of the total)

    3.25% to 5.75%     #   Revolving line of credit   10/19/1998 to 8/31/06   3/9/2011 to 12/21/11     6        1     5.69     $ 1,154      $ 1,099   

Transportation and Warehousing (17% of the total)

    5.75% to 8.00%     #   Revolving line of credit   12/31/2001 to 7/20/07   2/6/2011 to 12/31/11     5        1     6.60     $ 1,697      $ 1,646   

Wholesale Trade (47% of the total)

    Capitalsea, Llc     #   Revolving line of credit   11/07/05   11/07/11     1        1     4.50     $ 2,045      $ 1,996   
    Newburg Egg Corp.     #   Revolving line of credit   03/16/99   03/16/11     1        1     6.00     $ 1,344      $ 1,324   

Various Other

    4.75% to 6.75%     #   Revolving line of credit   1/23/1999 to 11/16/10   1/14/2011 to 11/16/11     9        1     5.40   $ 317      $ 1,279      $ 1,247   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total asset-based ($7,177 pledged as collateral under borrowing arrangements)

            41        6     5.73   $ 583      $ 10,234      $ 9,824   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other secured commercial (86% New York, 12% New Jersey and 2% Illinois)

                   

Accommodation and Food Services (46% of the total)

    Dune Deck Owners Corp     #   Term loan   04/24/07   03/31/11     1        2     4.25     $ 3,097      $ 3,090   

Various Other

    8.50% to 12.50% &&     Term loan   8/21/03 to 12/23/08   3/3/2011 to 12/8/15     8        1     9.92     $ 1,448      $ 1,342   

Arts, Entertainment, and Recreation (4% of the total)

        Term loan   01/24/07   05/28/15     1        *        6.50     $ 396      $ 396   

Other Services (except Public Administration) (6% of the total)

    4.50% to 6.50%     Term loan   1/16/2004 to 5/2/09   4/29/2011 to 5/2/14     6        *        6.18     $ 550      $ 546   

Real Estate and Rental and Leasing (4% of the total)

    5.5% to 7.00%     #   Term loan   4/22/1999 to 4/1/10   4/1/2015 to 9/1/15     3        *        6.32   $ 1,640      $ 447      $ 433   

Retail Trade (31% of the total)

    7.25% to 12.75% &&     Term loan   3/18/2004 to 12/7/09   7/5/2011 to 12/17/14     16        2     10.38     $ 3,131      $ 3,029   

Transportation and Warehousing (9% of the total)

    6.00% to 7.25%     Term loan   2/19/08 to 12/8/10   2/19/11 to 11/22/13     26        1     6.16   $ 749      $ 805      $ 831   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other secured commercial loans ($3,313 pledged as collateral under borrowing arrangements)

    

          61        6     7.50   $ 2,389      $ 9,873      $ 9,667   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans ($10,490 pledged as collateral under borrowing arrangements) (2)

            135        47     12.63   $ 17,912      $ 88,406      $ 76,866   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

                       

Commercial Banking

    Medallion Bank     100% of common
stock
  05/16/02   None     1        45     5.41     $ 74,008      $ 74,008   

Real Estate

    Medallion Hamptons Holding LLC     100% of membership
interests
  06/21/05   None     1        2     0.00     $ 2,261      $ 3,650   

Various Other

          12/20/04 to 11/5/2010   None     2        1     0.00     $ 1,077      $ 1,077   
 

 

 

             

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

            4        48     5.08     $ 77,346      $ 78,735   
             

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Equity investments

                       

Appliance Recycler #

    Appliance Recycling Centers of America, Inc.**     8% of common stock   09/10/98   None     1        1     0.00     $ 0      $ 1,389   

Commercial Finance

    Convergent Capital, Ltd     7% of limited
partnership interest
  07/20/07   None     1        1     0.00     $ 1,180      $ 1,300   

Equipment Manufacturing

   

  Aeration Industries International, LLC     7.25% of limited
liability interest
  12/30/10   None     1        *        0.00     $ 500      $ 500   

NASCAR Race Team

    RPAC Racing, LLC     40.8% of limited
liability interest
  11/19/10   None     1        *        0.00     $ 454      $ 454   

Machinery Manufacturer

    +      Reel Power International, Inc.     2% of common stock   08/04/08   None     1        *        0.00     $ 318      $ 318   

Various Other

          12/05/02 - 12/30/10   None     5        1     3.18     $ 2,136      $ 828   
             

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Equity investments, net

                10        3     1.48     $ 4,588      $ 4,789   
             

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Investment securities

                       

Investment securities, net

    

              0        0     0.00     $ 0      $ 0   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Investments ($257,303 pledged as collateral under borrowing arrangements) (3)

            1,143        297     6.89   $ 232,548      $ 493,170      $ 483,516   
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents the actual or weighted average interest or dividend rate of the respective security or portfolio as of the date indicated. Investments without an interest rate or with a rate of 0.00% are considered non-income producing.
(2) Included in secured mezzanine commercial loans was $3,796 of interest income capitalized into the outstanding investment balances, in accordance with the terms of the investment contract.
(3) The ratio of restricted securities fair value to net assets is 296%.
(4) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $2,898, $12,525, and $9,627, respectively. The tax cost of investments was $475,314.
(5) For revolving lines of credit the amount shown is the cost at December 31, 2010.
* Less than 1.0%
** Not an eligible portfolio company as such term is defined in Section 2(a)(46) of the 1940 Act.
& Loan is on nonaccrual status, or past due on contractual payments, and is therefore considered non-income producing.
&& Some or all of the securities are non-income producing as per & above.
# Publicly traded but sales subject to applicable Rule 144 limitations.
## Pledged as collateral under borrowing arrangements.
+ Includes various warrants, all of which have a cost and fair value of zero at December 31, 2010

The Summary Schedule of Investments does not reflect the Company’s complete portfolio holdings. It includes the Company’s 50 largest holdings and each investment of any issuer that exceeds 1% of the Company’s net assets. “Various Other” represent all issues not required to be disclosed under the rules adopted by the U.S. Securities and Exchange Commission (“SEC”). Footnotes above may apply to securities that are included in “Various Other”. For further detail, the complete schedule of portfolio holdings is available (i) without charge, upon request, by calling (877) MEDALLION; and (ii) on the SEC’s website at http://www.sec.gov.

 

F-35


Table of Contents

Medallion Financial Corp.

Consolidated Schedule of Investments In and Advances to Affiliates

As of and for the year ended December 31, 2011

 

Name of issuer and title of issue (2)

 

Number of share (all restricted unless
otherwise noted)

  Equity in net profit and
(loss) for the period
    Amount of dividends or
interest (1)
    Value as of 12/31/11  
(Dollars in thousands)                      

Medallion Bank - common stock

  1,000,000 shares - 100% of common stock   $ 14,640      $ 5,500      $ 82,852   

Medallion Hamptons Holding LLC - membership interest

  100% of membership interest     (1,389     0        2,436   

Medallion Servicing Corp. - common stock

  1,000 shares - 100% of common stock     (197     0        577   

Generation Outdoor, Inc. - common stock

  1,000 shares - 100% of common stock     545        64        65   

Medallion Sports Media, Inc. - common stock

  1,000 shares - 100% of common stock     (431     0        2   
   

 

 

   

 

 

   

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries

  $ 13,168      $ 5,564      $ 85,932   
   

 

 

   

 

 

   

 

 

 

Appliance Recycling Centers of America Inc - common stock

  8% of common stock   $ 0      $ 0      $ 2,225   

RPAC Racing, LLC - membership interest

  30% of membership interest     0        0        454   

Summit Medical, Inc - common stock

  9.25% of common stock     0        0        135   

Aeration Industries International LLC - membership interest

  5.25% of membership interest     0        0        0   

On Top - ownership share

  12% of ownership shares     0        0        0   

Equity investments other than in investments in and advances to affiliates

    —          —          1,763   
   

 

 

   

 

 

   

 

 

 

Total equity investments

    $ 0      $ 0      $ 4,577   
   

 

 

   

 

 

   

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries and equity investments

  $ 13,168      $ 5,564      $ 90,509   
   

 

 

   

 

 

   

 

 

 

Other interest and dividend income other than from investments in and advances to affiliates

      42     
     

 

 

   

Total dividend and interest income on short term investments

    $ 5,606     
     

 

 

   

Total investments in and advances to affiliates

      $ 88,746   

Other equity investments other than in investments in and advances to affiliates

        1,763   
       

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries and equity investments

      $ 90,509   
       

 

 

 

 

(1) Investments with an amount of 0 are considered non-income producing.
(2) The table below provides a recap of the changes in the investment in the respective issuers for 2011.

 

    Value as of 1/1/11     Gross Additions /
Investments
    Gross Reductions /
Distributions
    Net equity earnings
in profit and loss,
unrealized
appreciation and
depreciation
    Value as of 12/31/11  

(Dollars in thousands)

         

Medallion Bank - common stock

  $ 74,008      $ 704      $ 6,500      $ 14,640      $ 82,852   

Medallion Hamptons Holding LLC - membership interest

    3,650        175        0        (1,389     2,436   

Medallion Servicing Corp. - common stock

    33        741        0        (197     577   

Generation Outdoor, Inc. - common stock

    1,044        1,381        2,905        545        65   

Medallion Sports Media, Inc. - common stock

    0        433        0        (431     2   

Appliance Recycling Centers of America Inc - common stock

    1,389        0        0        836        2,225   

Summit Medical, Inc - common stock

    0        0        0        135        135   

Aeration Industries International LLC - membership interest

    500        —          135        (365     0   

 

F-36


Table of Contents

Medallion Financial Corp.

Consolidated Schedule of Investments In and Advances to Affiliates

As of and for the year ended December 31, 2010

 

Name of issuer and title of issue (2)

 

Number of share (all restricted unless otherwise
noted)

  Equity in net profit and
(loss) for the period
    Amount of dividends or
interest (1)
    Value as of 12/31/11  
(Dollars in thousands)                      

Medallion Bank - common stock

  1,000,000 shares - 100% of common stock   $ 10,038      $ 4,000      $ 74,008   

Medallion Hamptons Holding LLC - membership interest

  100% of membership interest     (204     0        3,650   

Medallion Servicing Corp. - common stock

  1,000 shares - 100% of common stock     28        0        33   

Generation Outdoor, Inc. - common stock

  1,000 shares - 100% of common stock     (292     58        1,044   
   

 

 

   

 

 

   

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries

    $ 9,570      $ 4,058      $ 78,735   
   

 

 

   

 

 

   

 

 

 

Appliance Recycling Centers of America Inc - common stock

  8% of common stock   $ 0      $ 0      $ 1,389   

Aeration Industries International LLC - membership interest

  7.25% of membership interest     0        0        500   

RPAC Racing, LLC - membership interest

  40% of membership interest     0        0        454   

On Top - ownership share

  12% of ownership shares     0        0        0   

Equity investments other than in investments in and advances to affiliates

    —          —          2,446   
   

 

 

   

 

 

   

 

 

 

Total equity investments

    $ 0      $ 0      $ 4,789   
   

 

 

   

 

 

   

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries and equity investments

  $ 9,570      $ 4,058      $ 83,524   
   

 

 

   

 

 

   

 

 

 

Other interest and dividend income other than from investments in and advances to affiliates

      53     
     

 

 

   

Total dividend and interest income on short term investments

    $ 4,111     

Total investments in and advances to affiliates

        $ 81,078   

Other equity investments other than in investments in and advances to affiliates

        2,446   
       

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries and equity investments

      $ 83,524   
       

 

 

 

 

(1) Investments with an amount of 0 are considered non-income producing.
(2) The table below provides a recap of the changes in the investment in the respective issuers for 2010.

 

    Value as of 1/1/10     Gross Additions /
Investments
    Gross Reductions /
Distributions
    Net equity earnings in
profit and loss,
unrealized
appreciation and
depreciation
    Value as of 12/31/10  
(Dollars in thousands)                              

Medallion Bank - common stock

  $ 68,000      $ 0      $ 4,030      $ 10,038      $ 74,008   

Medallion Hamptons Holding LLC - membership interest

    3,650        204        0        (204     3,650   

Medallion Servicing Corp. - Common Stock

    0        5        0        28        33   

Generation Outdoor, Inc. - Common Stock

    86        2,310        1,060        (292     1,044   

Sports Properties Acquisition Corp. - Common Stock

    543        1,267        552        (1,258     0   

Appliance Recycling Centers of America Inc - common stock

    964        0        0        425        1,389   

Aeration Industries International LLC - membership interest

    0        500        0        0        500   

RPAC Racing, LLC - membership interest

    0        454        0        0        454   

 

F-37


Table of Contents

Medallion Bank

(A wholly owned subsidiary of Medallion Financial Corp.)

Financial Statements for the years ended December 31, 2011, 2010, and, 2009

 

 

F-38


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of Medallion Bank

We have audited the accompanying balance sheets of Medallion Bank (the “Bank”) (a wholly owned subsidiary of Medallion Financial Corp.) as of December 31, 2011 and 2010, and the related statements of operations and other comprehensive income (loss), changes in shareholder’s equity, and cash flows for each of the three years in the three-year period ended December 31, 2011. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 2011, in conformity with US generally accepted accounting principles.

/s/ WeiserMazars LLP

New York, New York

March 27, 2012

 

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Table of Contents

Medallion Bank

Statements of Operations and Other Comprehensive Income (Loss)

For the years ended December 31,

 

     2011      2010      2009  

Interest income

        

Investments

   $ 744,261       $ 733,062       $ 843,811   

Loan interest including fees

     50,546,306         46,539,768         43,837,041   
  

 

 

    

 

 

    

 

 

 

Total interest income

     51,290,567         47,272,830         44,680,852   

Interest expense

     6,057,452         7,477,813         11,045,599   
  

 

 

    

 

 

    

 

 

 

Net interest income

     45,233,115         39,795,017         33,635,253   

Provision for loan losses

     7,346,861         12,137,566         14,770,611   
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     37,886,254         27,657,451         18,864,642   

Noninterest income

     635,098         520,346         429,192   

Gain on sale of assets

     139,853         602,501         692,209   

Noninterest expense

        

Loan servicing

     7,394,730         4,256,213         3,540,161   

Salaries and benefits

     2,738,708         2,644,882         2,477,571   

Collection costs

     1,356,067         1,454,941         1,661,197   

Professional fees

     613,560         537,919         472,183   

Regulatory fees

     519,943         670,272         709,944   

Occupancy and equipment

     189,947         185,638         202,753   

Insurance

     139,247         125,096         110,748   

Director’s fees

     134,700         80,842         73,094   

Credit reports

     110,638         105,282         146,214   

Affiliate services

     81,302         368,666         91,859   

Other

     477,107         397,350         372,262   
  

 

 

    

 

 

    

 

 

 

Total noninterest expense

     13,755,949         10,827,101         9,857,986   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     24,905,256         17,953,197         10,128,057   

Provision for income taxes

     9,486,983         6,717,896         3,659,200   
  

 

 

    

 

 

    

 

 

 

Net income

     15,418,273         11,235,301         6,468,857   

Other comprehensive income (loss), net of tax

     356,355         32,546         97,327   
  

 

 

    

 

 

    

 

 

 

Total comprehensive income

   $ 15,774,628       $ 11,267,847       $ 6,566,184   
  

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Medallion Bank

Balance Sheets

December 31,

 

     2011     2010  

Assets

    

Cash and cash equivalents, substantially all of which are federal funds sold

   $ 28,625,549      $ 16,980,157   

Investment securities, available-for-sale

     26,536,697        20,786,953   

Loans, inclusive of net deferred loan acquisition costs

     576,421,745        529,991,684   

Allowance for loan losses

     (14,556,266     (13,613,958
  

 

 

   

 

 

 

Loans, net

     561,865,479        516,377,726   

Repossessed loan collateral

     999,321        1,520,374   

Fixed assets, net

     122,556        90,096   

Deferred and other tax assets

     3,002,777        4,978,573   

Accrued interest receivable and other assets

     7,756,897        7,915,618   
  

 

 

   

 

 

 

Total assets

   $ 628,909,276      $ 568,649,497   
  

 

 

   

 

 

 

Liabilities and shareholder’s equity

    

Liabilities

    

Federal funds purchased

   $ —        $ 3,000,000   

Time deposits

     514,329,000        465,957,000   

Accrued interest payable

     449,946        1,155,010   

Other liabilities

     4,315,859        2,519,070   

Due to affiliates

     964,037        1,113,014   
  

 

 

   

 

 

 

Total liabilities

     520,058,842        473,744,094   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Shareholder’s equity

    

Preferred stock, $1.00 par value, 26,303 shares at December 31, 2011 and 22,143 shares at December 31, 2010 authorized, issued, and outstanding

     26,303,000        21,498,000   

Common stock, $1 par value, 1,000,000 shares authorized, 1,000,000 issued and outstanding

     1,000,000        1,000,000   

Additional paid in capital

     51,500,000        51,500,000   

Accumulated other comprehensive income, net of tax

     446,240        89,885   

Retained earnings

     29,601,194        20,817,518   
  

 

 

   

 

 

 

Total shareholder’s equity

     108,850,434        94,905,403   
  

 

 

   

 

 

 

Total liabilities and shareholder’s equity

   $ 628,909,276      $ 568,649,497   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

Medallion Bank

Statements of Changes in Shareholder’s Equity

For the years ended December 31, 2011, 2010, and 2009

 

    Preferred Stock     Common Stock     Additional
Paid in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total
Shareholder’s
Equity
 
    Shares
Outstanding
    Amount     Shares
Outstanding
    Amount          

Balance at December 31, 2008

    $ —          1,000,000      $ 1,000,000      $ 49,750,000      ($ 39,988   $ 13,058,341      $ 63,768,353   

Sale of preferred stock to US Treasury under TARP

    22,143        21,498,000        —          —          —          —          —          21,498,000   

Capital contributions

    —          —          —          —          1,750,000        —          —          1,750,000   

Net income

    —          —          —          —          —          —          6,468,857        6,468,857   

Dividends declared to parent

    —          —          —          —          —          —          (4,000,000     (4,000,000

Dividends declared to US Treasury

                (714,603     (714,603

Net change in unrealized gains on investment securities, net of tax

    —          —          —          —          —          97,327        —          97,327   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

    22,143        21,498,000        1,000,000        1,000,000        51,500,000        57,339        14,812,595        88,867,934   

Net income

    —          —          —          —          —          —          11,235,301        11,235,301   

Dividends declared to parent

    —          —          —          —          —          —          (4,000,000     (4,000,000

Dividends declared to US Treasury

    —          —          —          —          —          —          (1,230,378     (1,230,378

Net change in unrealized gains on investment securities, net of tax

    —          —          —          —          —          32,546        —          32,546   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

    22,143        21,498,000        1,000,000        1,000,000        51,500,000        89,885        20,817,518        94,905,403   

Redemption of preferred stock to US Treasury under TARP

    (22,143     (21,498,000     —          —          —          —          —          (21,498,000

Sale of preferred stock to US Treasury under SBLF

    26,303        26,303,000        —          —          —          —          —          26,303,000   

Net income

    —          —          —          —          —          —          15,418,273        15,418,273   

Dividends declared to parent

    —          —          —          —          —          —          (5,500,000     (5,500,000

Dividends declared to US Treasury

    —          —          —          —          —          —          (1,134,597     (1,134,597

Net change in unrealized gains on investment securities, net of tax

    —          —          —          —          —          356,355        —          356,355   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    26,303      $ 26,303,000        1,000,000      $ 1,000,000      $ 51,500,000      $ 446,240      $ 29,601,194      $ 108,850,434   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-42


Table of Contents

Medallion Bank

Statements of Cash Flows

For the years ended December 31,

 

     2011     2010     2009  

Cash flows from operating activities

      

Net income from operations

   $ 15,418,273      $ 11,235,301      $ 6,468,857   

Adjustments to reconcile net income to net cash flows provided by operating activities:

      

Depreciation and amortization

     3,523,826        3,528,235        3,327,188   

Provision for loan losses

     7,346,861        12,137,566        14,770,611   

Deferred and other tax assets

     1,761,983        (1,725,294     (1,681,690

Loss from disposal of premises and equipment

     2,177        —          28,043   

(Gain) loss from sale of repossessed loan collateral

     (147,084     (612,055     (669,139

Gain from sale of investments

     —          —          (34,426

Changes in operating assets and liabilities:

      

Interest receivable

     58,492        178,746        21,585   

Other assets

     (953,078     (338,846     (2,532,716

Interest payable

     (705,064     (353,517     (2,147,012

Other liabilities

     (12,481     8,933        (12,199

Taxes payable

     —          —          (106,199
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     26,293,905        24,059,069        17,432,903   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Increase in loans, net

     (59,121,697     (117,996,963     (45,413,424

Purchase of investments

     (12,008,181     (8,786,206     (7,308,237

Purchase of other investment assets

     —          (1,800,000     —     

Proceeds from sale of investments

     —          —          3,095,541   

Proceeds from maturity of investments

     6,752,366        9,088,732        3,361,187   

Proceeds from sale of repossessed inventory

     4,619,856        6,547,376        7,310,441   

Purchase of premises and equipment

     (93,553     (9,888     (32,582
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (59,851,209     (112,956,949     (38,987,074
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Issuance of time deposits

     713,319,000        659,538,000        497,230,000   

Payments made at maturity of time deposits

     (664,947,000     (565,300,000     (491,919,000

Federal funds purchased

     19,000,000        33,000,000        26,000,000   

Payments made at maturity of federal funds purchased

     (22,000,000     (30,000,000     (26,000,000

Issuance of preferred stock

     26,303,000        —          21,498,000   

Redemption of preferred stock

     (21,498,000     —          —     

Change in due to affiliates

     (148,977     382,637        395,308   

Proceeds from capital contributions

     —          —          1,750,000   

Dividends paid to parent

     (4,000,000     (4,000,000     (3,000,000

Dividends paid to US Treasury

     (825,327     (1,082,604     (460,888
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     45,202,696        92,538,033        25,493,420   
  

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     11,645,392        3,640,153        3,939,249   

Cash and cash equivalents, beginning of the year

     16,980,157        13,340,004        9,400,755   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of the year

   $ 28,625,549      $ 16,980,157      $ 13,340,004   
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

      

Cash paid for interest

   $ 5,709,261      $ 6,824,341      $ 12,122,869   

Cash paid for income taxes

     7,725,000        8,445,000        5,390,000   

Non-cash investing activities-loans transferred to repossessed loan collateral

     8,867,986        13,478,072        13,138,867   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Medallion Bank

Notes to Financial Statements

For the year ended December 31, 2011

 

1. Organization and summary of significant accounting policies

Description of business – Medallion Bank (the Bank) is a limited service industrial bank headquartered in Salt Lake City, Utah. The Bank was formed in May 2002 for the purpose of obtaining an industrial bank (IB) charter pursuant to the laws of the State of Utah. The Bank is a wholly owned subsidiary of Medallion Financial Corp. (Medallion). The Bank originates asset-based commercial loans and commercial loans to finance the purchase of taxi medallions (licenses), both of which are marketed and serviced by the Bank’s affiliates who have extensive prior experience in these asset groups. The Bank originates consumer loans on a national basis that are secured by marine, recreational vehicle, and trailer products to customers with prior credit blemishes. The loans are financed primarily with time certificates of deposits which are originated nationally through a variety of brokered deposit relationships.

Basis of presentation – The Bank’s financial statements are presented in accordance with accounting principles generally accepted in the US and prevailing industry practices, which require management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Estimates, by their nature, are based upon judgment and available information. Actual results could differ materially from those estimates.

Cash and cash equivalents – The Bank considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. A non-interest bearing compensating balance of $100,000 is maintained at a correspondent bank. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that frequently exceed the federally insured limits.

Investment securities – FASB ASC Topic 320, “Investments – Debt and Equity Securities,” requires that all applicable investments be classified as trading securities, available-for-sale securities, or held-to-maturity securities. Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. At December 31, 2011 and 2010, the net premium on investment securities totaled $403,000 and $164,000, and $76,000, $67,000, and $69,000 was amortized to interest income for the years ended December 31, 2011, 2010, and 2009. The Bank had $26,537,000 and $20,787,000 of available-for-sale securities at fair value as of December 31, 2011 and 2010. The topic further requires that held-to-maturity securities be reported at amortized cost and available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the financial statements, and reported in accumulated other comprehensive income (loss) as a separate component of shareholder’s equity, net of the effect of income taxes, until they are sold. The Bank had $714,000 and $144,000 of pretax net unrealized gains on available-for-sale securities as of December 31, 2011 and 2010. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in shareholder’s equity, which were recorded net of the income tax effect, will be reversed.

Loans – Loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan.

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At December 31, 2011 and 2010, net loan origination costs were $5,577,000 and $5,528,000 which included $20,000 and $31,000 of valuation reserves acquired in a portfolio acquisition. Net amortization expense for the years ended December 31, 2011, 2010, and 2009 was $2,188,000, $2,242,000, and $1,826,000.

Interest income is recognized on an accrual basis. Taxicab medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. The consumer portfolio has different characteristics compared to commercial loans, typified by a larger number of lower dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is likely the Bank will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Management considers loans that are in bankruptcy status, but have not been charged-off, to be impaired. These loans are placed on nonaccrual, when they become 90 days past due, or earlier if they enter bankruptcy, and are charged off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate

 

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collection and recovery efforts against both the borrower and the underlying collateral are initiated. Other loans are charged off when management determines that a loss has occurred. All interest accrued but not collected for loans that are charged off is reversed against interest income. For the recreational consumer loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged off. If the collateral is repossessed, a loss is recorded to write the loan down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off, and any excess proceeds are recorded as a realized gain. Proceeds collected on charged off accounts are recorded as a recovery. Total loans more than 90 days past due were $1,265,000, $2,246,000, and $3,861,000 at December 31, 2011, 2010, and 2009, or 0.2%, 0.4%, and 0.9% of the total loan portfolio.

At December 31, 2011, $2,264,000 or 1% of consumer loans, and no commercial and medallion loans were on nonaccrual, compared to $2,686,000 or 1% of consumer loans, $329,000 or less than 1% of commercial loans, and no medallion loans on nonaccrual at December 31, 2010, and $3,321,000 or 2% of consumer loans, $1,124,000 or 2% of commercial loans, and no medallion loans on nonaccrual at December 31, 2009. 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 $44,000, $138,000, and $233,000 for the years ended December 31, 2011, 2010, and 2009.

These loans are charged-down to fair value and placed on nonaccrual status. Fair value is determined based upon comparable market prices for substantially similar collateral plus management’s estimate of disposal costs. All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash basis until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Troubled Debt Restructurings (TDRs) – In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession for other than an insignificant period of time to the borrower that the Bank would not otherwise consider, the related loan is classified as a TDR. The Bank strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before it reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize our economic loss and to avoid foreclosure or repossession of the collateral. For modifications where the Bank forgives principal, the entire amount of such principal forgiveness is immediately charged off. Loans classified as TDRs are considered impaired loans.

When the Bank identifies a loan as impaired, the Bank measures the impairment based on the present value of expected future cash flows, discounted at the loan’s effective interest rate. When collateral is the sole source of repayment for the loan, the Bank may measure impairment based on the fair value of the collateral. If foreclosure is probable, the Bank uses the current fair value of the collateral less selling costs, instead of discounted cash flows.

If the Bank determines that the value of an impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), the Bank recognizes impairment. When the value of an impaired loan is calculated by discounting expected cash flows, interest income is recognized using the loan’s effective interest rate over the remaining life of the loan.

Allowance for loan losses – In analyzing the adequacy of the allowance for loan losses, the Bank uses historical delinquency and actual loss rates. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Credit losses are deducted from the allowance and subsequent recoveries are added.

Fixed assets – Fixed assets are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense while significant improvements are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Capitalized leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the remaining lease term.

Income taxes – The Bank uses the asset and liability method in providing income taxes on all transactions that have been recognized in the financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their existing tax bases. The Bank files its tax returns on a separate company basis.

Other comprehensive income (loss) – The Bank had $356,000, $33,000, and $97,000 of net unrealized gains due to the mark-to-market of available-for-sale securities for the years ended December 31, 2011, 2010, and 2009. The Bank had no other components of comprehensive income (loss).

        Restrictions on dividends, loans, and advances – Banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to Medallion. The total amount of dividends that may be paid at any date is generally limited to the retained earnings of the Bank. However, dividends paid by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum standards.

Financial instruments – FASB ASC Topic 825, “Financial Instruments,” requires disclosure of fair value information about certain financial instruments, whether assets, liabilities, or off-balance-sheet commitments, if practicable. See also Note 11 to the financial statements.

Fair value of assets and liabilities – The Bank follows FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” (FASB ASC 820), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e. a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entities own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Note 12 to the financial statements.

 

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Reclassifications – Certain reclassifications have been made to prior year balances to conform with the current year presentation. These reclassifications have no effect on the previously reported results of operations.

Recently issued accounting standards – In December 2011, the FASB issued Accounting Standards Update (ASU) 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 adds certain additional disclosure requirements about financial instruments and derivative instruments that are subject to offsetting and related arrangements. The new disclosures are required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those periods. As the amendment impacts disclosures only, it will not have an effect on the Company’s financial condition or results of operation.

In May 2011, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards”. ASU 2011-04 amends Topic 820 (Fair Value Measurement) by providing a consistent definition of fair value, ensuring that the fair value measurement and disclosure requirements are similar between US GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, particularly for level 3 fair value measurements. ASU 2011-04 is effective for the first interim or annual reporting period beginning after December 15, 2011, and is to be applied prospectively. The Company is evaluating the impact adoption of ASU 2011-04 will have on its disclosures, and does not believe adoption will have an impact on its financial condition or results of operation.

 

2. Investment securities

Fixed maturity securities available-for-sale at December 31, 2011 consist of the following.

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Mortgage-backed securities, principally obligations of US federal agencies

   $ 23,006,404       $ 638,059       $ 48,090       $ 23,596,373   

State and municipalities

     2,816,310         124,014         —           2,940,324   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,822,714       $ 762,073       $ 48,090       $ 26,536,697   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities available-for-sale at December 31, 2010 consist of the following.

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Mortgage-backed securities, principally obligations of US federal agencies

   $ 19,491,568       $ 374,432       $ 215,580       $ 19,650,420   

State and municipalities

     1,151,570         2,873         17,910         1,136,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,643,138       $ 377,305       $ 233,490       $ 20,786,953   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated market value of investment securities as of December 31, 2011 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Amortized Cost      Market Value  

Due in one year or less

   $ —         $ —     

Due after one year through five years

     1,500,000         1,550,595   

Due after five years through ten years

     2,182,261         2,288,803   

Due after ten years

     22,140,453         22,697,299   
  

 

 

    

 

 

 

Total

   $ 25,822,714       $ 26,536,697   
  

 

 

    

 

 

 

Information pertaining to securities with gross unrealized losses at December 31, 2011 and 2010 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows.

 

     Less than Twelve Months      Over Twelve Months  

December 31, 2011

   Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value  

Mortgage-backed securities,

principally obligations of US federal agencies

   $ 48,090       $ 3,020,198       $ —         $ —     

State and municipalities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 48,090       $ 3,020,198       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Less than Twelve Months      Over Twelve Months  

December 31, 2010

   Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value  

Mortgage-backed securities, principally obligations of US federal agencies

   $ 215,580       $ 4,910,469       $ —         $ —     

State and municipalities

     17,910         482,090         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 233,490       $ 5,392,559       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

3. Loans and allowance for loan losses

Loans are summarized as follows at December 31.

 

Loans

   2011      2010  

Consumer (1)

   $ 200,025,746       $ 190,081,160   

Medallion (1)

     294,213,705         260,808,393   

Commercial: (2)

     

Asset-based

     72,491,669         67,593,066   

Construction

     3,650,238         5,275,581   

Other commercial

     463,593         705,372   
  

 

 

    

 

 

 

Total commercial

     76,605,500         73,574,019   

Deferred loan acquisition costs, net

     5,576,794         5,528,112   
  

 

 

    

 

 

 

Total loans

   $ 576,421,745       $ 529,991,684   
  

 

 

    

 

 

 

 

(1) Collectively evaluated for impairment

 

(2) Individually evaluated for impairment

Changes in the allowance for loan losses are summarized as follows.

 

     Medallion  (1)      Asset-based
and
commercial  (2)
    Construction (2)     Consumer (1)     Total  

Balance at 12/31/08

   $ 458,395       $ 1,181,183      $ 251,720      $ 8,916,519      $ 10,807,817   

Provision for loan losses

     266,082         (186,183     484,072        14,206,640        14,770,611   

Loan charge-offs

     —           —          (416,187     (14,633,085     (15,049,272

Recoveries

     —           —          —          3,024,102        3,024,102   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at 12/31/09

     724,477         995,000        319,605        11,514,176        13,553,258   

Provision for loan losses

     534,576         18,894        494,955        11,089,141        12,137,566   

Loan charge-offs

     —           —          (739,430     (14,350,642     (15,090,072

Recoveries

     —           —          —          3,013,206        3,013,206   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at 12/31/10

     1,259,053         1,013,894        75,130        11,265,881        13,613,958   

Provision for loan losses

     182,030         73,478        (17,207     7,108,560        7,346,861   

Loan charge-offs

     —           —          (3,170     (9,327,362     (9,330,532

Recoveries

     —           —          —          2,925,979        2,925,979   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at 12/31/11

   $ 1,441,083       $ 1,087,372      $ 54,753      $ 11,973,058      $ 14,556,266   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Collectively evaluated for impairment

 

(2) Individually evaluated for impairment

The loan charge-offs and recoveries resulted primarily from the consumer portfolio. There were no loans acquired with deteriorated credit quality.

See Note 1 to the financial statements, which describes the nature of the portfolios, their collection and income recognition processes, and the methodology used to assess the adequacy of the allowance.

The medallion and asset-based loan portfolios 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 Bank. The adequacy of these amounts is

 

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demonstrated by the minimal loss experience in these portfolios since the Bank’s inception. The asset-based portfolio is analyzed and evaluated in the aggregate, as a pool of loans, until becoming nonperforming, at which time they receive individualized attention. The medallion portfolio is analyzed and evaluated in the aggregate, as a pool of loans.

The consumer loan portfolio is primarily customer driven, whereby borrowers are assessed a score based on income level, home ownership, FICO score, and other factors weighted in a credit scoring model that determines whether a borrower is qualified. Loan losses in this portfolio fluctuate with economic conditions, and can range widely over time. The consumer loan portfolio is analyzed and evaluated in the aggregate, as a pool of loans.

Other commercial or construction loans are infrequent, and made on a case by case basis, after performing thorough borrower review, credit, and collateral checks. The risks associated with these types of loans is individual to that particular credit, and they are monitored and tracked closely.

Allocations for the allowance for credit losses may be made for specific loans, but the allowance is general in nature and is available to absorb losses from any loan type.

The following table provides a summary of the loan portfolio by its performance status and by type.

 

     Performing      Nonperforming      Total  
     2011      2010      2011      2010      2011      2010  

Medallion

   $ 294,213,705       $ 260,808,393       $ —         $ —         $ 294,213,705       $ 260,808,393   

Asset-based and commercial

     72,955,262         68,298,438         —           —           72,955,262         68,298,438   

Construction

     3,650,238         4,946,581         —           329,000         3,650,238         5,275,581   

Consumer

     197,373,077         187,395,160         2,652,669         2,686,000         200,025,746         190,081,160   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 568,192,282       $ 521,448,572       $ 2,652,669       $ 3,015,000       $ 570,844,951       $ 524,463,572   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables provide additional information on attributes of the nonperforming loan portfolio.

 

00000000000 00000000000 00000000000 00000000000 00000000000

December 31, 2011

   Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
     Average Recorded
Investment
     Interest Income
Recognized
 

With no related allowance recorded

              

Medallion

   $ —         $ —         $ —         $ —         $ —     

Asset –based and commercial

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Consumer

     —           —           —           —           —     

With an allowance recorded

              

Medallion

     —           —           —           —           —     

Asset –based and commercial

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Consumer

     2,652,669         2,652,669         134,184         2,331,596         274,065   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Medallion

     —           —           —           —           —     

Asset –based and commercial

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Consumer

   $ 2,652,669       $ 2,652,669       $ 134,184       $ 2,331,596       $ 274,065   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

00000000000 00000000000 00000000000 00000000000 00000000000

December 31, 2010

   Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
     Average Recorded
Investment
     Interest Income
Recognized
 

With no related allowance recorded

              

Medallion

   $ —         $ —         $ —         $ —         $ —     

Asset –based and commercial

     —           —           —           —           —     

Construction

     267,000         267,000         —           602,627         —     

Consumer

     —           —           —           —           —     

With an allowance recorded

              

Medallion

     —           —           —           —           —     

Asset –based and commercial

     —           —           —           —           —     

Construction

     62,396         62,396         936         62,396         4,078   

Consumer

     2,686,000         2,686,000         159,047         2,770,412         238,640   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Medallion

     —           —           —           —           —     

Asset –based and commercial

     —           —           —           —           —     

Construction

     329,396         329,396         936         665,023         4,078   

Consumer

   $ 2,686,000       $ 2,686,000       $ 159,047       $ 2,770,412       $ 238,640   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The table below shows the aging of all loan types as of December 31, 2011.

 

    Days Past Due     Current     Total     Recorded
Investment
>90

Days and
Accruing
 
    31-60     61-90     91 +     Total Past Due        

Medallion

  $ 1,749,400      $ —        $ —        $ 1,749,400      $ 292,464,305      $ 294,213,705      $ —     

Asset –based and commercial

    —          —          —          —          72,955,262        72,955,262        —     

Construction

    —          —          —          —          3,650,238        3,650,238        —     

Consumer

    6,651,942        1,765,121        1,265,679        9,682,742        190,343,004        200,025,746        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 8,401,342      $ 1,765,121      $ 1,265,679      $ 11,432,142      $ 559,412,809      $ 570,844,951      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table below shows the aging of all loan types as of December 31, 2010.

 

    Days Past Due     Current     Total     Recorded
Investment
>90

Days and
Accruing
 
    31-60     61-90     91 +     Total Past Due        

Medallion loans

  $ 399,942      $ —        $ 194,348      $ 594,290      $ 260,214,103      $ 260,808,393      $ 194,348   

Asset –based and commercial loans

    —          —          —          —          68,298,438        68,298,438        —     

Construction loans

    —          —          329,396        329,396        4,946,185        5,275,581        —     

Consumer loans

    7,980,517        2,445,193        1,722,636        12,148,346        177,932,814        190,081,160        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 8,380,459      $ 2,445,193      $ 2,246,380      $ 13,072,032      $ 511,391,540      $ 524,463,572      $ 194,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table below shows loans that were modified during 2011.

 

    Troubled Debt Restructuring     Troubled Debt Restructuring that
Subsequently Defaulted
 
    Number of
Loans
    Pre-Modification
Outstanding
Recorded
Investments
    Post-Modification
Outstanding
Recorded
Investments
    Number of
Loans
    Recorded
Investments
 

Troubled debt restructuring

    —        $ —        $ —          —        $ —     

Commercial

    —          —          —          —          —     

Commercial real estate

    —          —          —          —          —     

Consumer

    34        658,134        556,206        2        39,424   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

4. Fixed assets

Fixed assets and their related useful lives at December 31 were as follows:

 

     Useful lives    2011     2010  

Computer software

   3 years    $ 118,907      $ 121,657   

Furniture and fixtures

   5-10 years      97,576        95,740   

Leasehold improvements

   3-5 years      80,829        75,568   

Equipment

   5 years      112,557        61,022   

Telephone equipment

   3 years      44,057        36,846   

Deposit system

   3 years      13,975        13,975   
     

 

 

   

 

 

 
        467,901        404,808   

Less accumulated depreciation and amortization

        (345,345     (314,712
     

 

 

   

 

 

 

Net fixed assets

      $ 122,556      $ 90,096   
     

 

 

   

 

 

 

Depreciation expense was $59,000, $58,000, and $73,000 for the years ended December 31, 2011, 2010, and 2009.

 

5. Deposits

At December 31, 2011 the scheduled maturities of all time deposits were as follows.

 

2012

   $ 269,339,000   

2013

     184,669,000   

2014

     60,321,000   
  

 

 

 

Total

   $ 514,329,000   
  

 

 

 

 

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All time deposits are in denominations of less than $100,000 and have been originated through Certificate of Deposit Broker relationships. The weighted average interest rate of deposits outstanding at December 31, 2011 was 0.73%.

In January 2004, Medallion Bank commenced raising deposits to fund the purchase of various affiliates’ loan portfolios. Deposits are raised through the use of investment brokerage firms who package deposits qualifying for FDIC insurance into pools that are sold to Medallion Bank. The rates paid on the deposits are highly competitive with market rates paid by other financial institutions. Additionally, a brokerage fee of 0.15% to 0.50% is paid, depending on the maturity of the deposit, which is capitalized and amortized to interest expense over the life of the respective pool. The total amount capitalized at December 31, 2011 and 2010 was $1,250,000 and $883,000, and $1,053,000, $1,007,000, and $1,069,000 was amortized to interest expense during 2011, 2010, and 2009. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity.

At December 31, 2011, the Bank had unsecured and undrawn Federal Funds lines with correspondent banks of $30,000,000.

 

6. Income taxes

The components of the provisions for income taxes were as follows for the years ended December 31,

 

     2011     2010      2009  

Current

       

Federal

   $ 8,885,401      $ 5,746,992       $ 4,175,929   

State

     1,197,957        947,996         688,800   

Deferred

       

Federal

     (519,917     19,971         (1,050,974

State

     (76,458     2,937         (154,555
  

 

 

   

 

 

    

 

 

 

Net provision for income taxes

   $ 9,486,983      $ 6,717,896       $ 3,659,200   
  

 

 

   

 

 

    

 

 

 

The following table reconciles the provision for income taxes to the US federal statutory income tax rate for the years ended December 31, 2011, 2010, and 2009.

 

     2011     2010     2009  

US federal statutory tax rate

     35.0     34.0     34.0

State taxes

     3.1        3.5        4.5   

Prior year under (over) accrual

     —          —          (1.0

Other

     —          (0.1     (1.4
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     38.1     37.4     36.1
  

 

 

   

 

 

   

 

 

 

The Bank files its tax returns on a separate company basis.

Deferred tax and other asset balances reflected in the balance sheet were as follows as of December 31,

 

     2011     2010  

Provision for loan losses

   $ 5,534,525      $ 5,077,949   

Deferred loan acquisition costs

     (2,262,509     (2,138,361

Unrealized gains on investments

     (267,744     (53,931

Other

     130,746        (131,448
  

 

 

   

 

 

 

Net deferred tax asset

     3,135,018        2,754,209   

Overpayment (underpayment) of estimated taxes

     (132,241     2,224,364   
  

 

 

   

 

 

 

Net deferred tax and other assets

   $ 3,002,777      $ 4,978,573   
  

 

 

   

 

 

 

 

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In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible pursuant to ASC Topic 740, “Income Taxes.” Management considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management’s evaluation of the realizability of deferred tax assets must consider both positive and negative evidence. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. Based on these considerations, no valuation allowance was deemed necessary as of December 31, 2011 and 2010.

The Bank has filed US Federal tax returns as well as tax returns with the State of Utah. Tax years 2008 through the present are open for examination.

 

7. Other transactions with affiliates

The Bank’s taxi medallion, asset-based commercial, and certain other construction loans aggregated $370,068,000 and $332,053,000 at December 31, 2011 and 2010. These loans are sourced and serviced by the affiliates. The Bank paid $21,000, $2,094,000, and $1,805,000 for loan servicing fees to Medallion for 2011, 2010, and 2009, and also in 2011 and 2010, paid $5,492,000 and $412,000 to another Medallion affiliate. Origination fees of $906,000, $1,568,000, and $904,000 were paid to Medallion for 2011, 2010, and 2009. Amortization costs were $1,009,000, $1,133,000, and $717,000 for 2011, 2010, and 2009.

At December 31, 2011 and 2010, the Bank owed $964,000 and $992,000 to affiliates for origination fees, monthly servicing fees on loans, charges for corporate overhead, and legal and business development expenses due to the affiliates, partially offset by payments due the Bank from collection of loan payments by affiliates. The Bank reimbursed the parent for expenses incurred on its behalf of $243,000, $509,000, and $215,000 for 2011, 2010, and 2009.

 

8. 401(k) plan

The Bank participates in the 401(k) plan offered by Medallion. The 401(k) Plan covers all full and part-time employees of the Bank who have attained the age of 21 and have a minimum of one year of service. Under the 401(k) Plan, an employee may elect to defer not less than 1% and no more than 15% of the total annual compensation that would otherwise be paid to the employee, provided however, that employees’ contributions may not exceed certain maximum amounts determined under the Internal Revenue Code. Employee contributions are invested in various mutual funds according to the directions of the employee. At the discretion of Medallion’s Board of Directors, the Bank can provide for employer matching contributions. Medallion has elected to match employee contributions up to one-third of the employee’s contribution, but not greater than 2% of the portion of the employee’s annual salary eligible for 401(k) benefits. For the years ended December 31, 2011, 2010, and 2009, the Bank provided $19,000, $15,000, and $14,000 in employer matching, which amount is included in salaries and benefits expense on the accompanying statement of operations.

 

9. Commitments and contingencies

Loans – At December 31, 2011, the Bank had commitments to extend credit of $29,753,000 to asset-based customers as long as there is no violation of any condition established in the contract. The Bank had commitments to extend credit of $825,000 to taxi medallion customers for unfunded amounts.

Leases – The Bank leases office space under a non-cancelable operating lease that expires November 2017. Rental expense related to the lease was $131,000, $127,000, and $130,000 for the years ended December 31, 2011, 2010, and 2009. The Bank has the option to extend the lease term for an additional five years.

Future minimum lease payments under this operating lease as of December 31, 2011 were as follows:

 

2012

   $ 115,673   

2013

     115,673   

2014

     115,673   

2015

     115,673   

2016

     115,673   

Thereafter

     106,033   
  

 

 

 

Total

   $ 684,398   
  

 

 

 

 

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10. Capital requirements

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for federal deposit insurance, the FDIC ordered that beginning paid-in-capital funds of not less than $22,000,000 be provided, that the Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%, and that an adequate allowance for loan losses be maintained. As of December 31, 2011, the Bank’s Tier 1 leverage capital ratio was 17.7%.

The Bank’s actual capital amounts and ratios as of December 31, 2011 and 2010, and the regulatory minimum ratios are presented in the following tables.

 

     As of December 31, 2011     As of December 31, 2010     Minimum Ratio for
Capital Adequacy
Purposes
    Minimum Ratio To be Well
Capitalized Under  Prompt
Corrective Action
Provisions
 
     Amount      Ratio     Amount      Ratio      

Tier 1 Capital (to average assets)

   $ 107,009,000         17.7   $ 93,866,000         17.0     4.0     5.0

Tier 1 Capital (to risk-weighted assets)

     107,009,000         18.1        93,866,000         17.2        4.0        6.0   

Total Capital (to risk-weighted assets)

     114,504,000         19.3        100,762,000         18.5        8.0        10.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

11. Fair value of financial instruments

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

(a) Loans – Current fair value most closely approximates book value.

(b) Investments - The Bank’s investments are recorded at the estimated fair value of such investments.

(c) Cash – Book value equals market value.

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

(e) Commitments to extend credit – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At December 31, 2011 and 2010, the estimated fair value of these off-balance-sheet instruments was not material.

(f) Fixed rate borrowings – Due to the short-term nature of these instruments, the carrying amount approximates fair value.

 

     December 31, 2011      December 31, 2010  

(Dollars in thousands)

   Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial Assets

           

Loans

   $ 561,865       $ 561,865       $ 516,378       $ 516,378   

Investment securities

     26,537         26,537         20,787         20,787   

Cash

     28,626         28,626         16,980         16,980   

Accrued interest receivable

     3,113         3,113         3,171         3,171   

Financial Liabilities

           

Funds borrowed

     514,329         514,329         468,957         468,957   

Accrued interest payable

     450         450         1,155         1,155   

 

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12. Fair value of assets and liabilities

The Company follows the provisions of FASB ASC Topic 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 a 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 1 “Fair value of assets and liabilities” for a description of our valuation methodology which is unchanged during 2011.

In accordance with FASB ASC Topic 820, the Bank has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).

As required by FASB ASC Topic 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).

Financial assets and liabilities recorded on the balance sheets are categorized based on the inputs to the valuation techniques as follows:

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

Level 2. Financial 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. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, certain residential and commercial mortgage-related assets (including loans, securities, and derivatives), and long-dated or complex derivatives including certain equity derivatives and long-dated options on gas and power).

Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category.

The following tables present the Bank’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010.

 

00000000 00000000 00000000 00000000

2011 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Available-for-sale investment securities (1)

   $ —         $ 26,537       $ —         $ 26,537   

 

(1) Total unrealized gains of $356 were included in accumulated other comprehensive income (loss) for 2011 related to these assets.

 

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00000000 00000000 00000000 00000000

2010 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Available-for-sale investment securities (1)

   $ —         $ 20,787       $     —         $ 20,787   

 

(1) Total unrealized gains of $33 were included in accumulated other comprehensive income (loss) for 2010 related to these assets.

The following tables present the Bank’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2011 and 2010.

 

00000000 00000000 00000000 00000000

2011 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets (1)

           

Impaired loans

   $ —         $     —         $ 2,518       $   2,518   

 

(1) Total unrealized losses of $134 for impaired loans were included in income for 2011 related to these assets.

 

00000000 00000000 00000000 00000000

2010 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets (1)

           

Impaired loans

   $ —         $     —         $ 2,855       $   2,855   

 

(1) Total unrealized losses of $160 for impaired loans were included in income for 2010 related to these assets.

 

13. Small Business Lending Fund Program (SBLF) and Troubled Assets Relief Program (TARP)

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

 

14. Subsequent Events

We have evaluated subsequent events that have occurred through March 27, 2012, the date of financial statement issuance.

 

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