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MEDALLION FINANCIAL CORP - Quarter Report: 2012 September (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended September 30, 2012

OR

 

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

For the transition period from                     to                    

Commission file number 814-00188

 

 

MEDALLION FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE 04-3291176

(State of Incorporation) (IRS Employer Identification No.)

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

(Address of principal executive offices) (Zip Code)

(212) 328-2100

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of November 6, 2012 was 21,463,227.

 

 

 


Table of Contents

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

     3   

ITEM 1. FINANCIAL STATEMENTS

     3   

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

     37   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     56   

ITEM 4. CONTROLS AND PROCEDURES

     56   

PART II – OTHER INFORMATION

     56   

ITEM 1. LEGAL PROCEEDINGS

     56   

ITEM 1A. RISK FACTORS

     57   

ITEM 6. EXHIBITS

     69   

SIGNATURES

     70   

CERTIFICATIONS

  

 

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASIS OF PREPARATION

We, Medallion Financial Corp. or the Company, are a closed-end, non-diversified management investment company organized as a Delaware corporation. We have elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended, or the 1940 Act. We are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers and to finance small-scale home improvements. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 5%, and our commercial loan portfolio at a compound annual growth rate of 2% (10% and 7% 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 13%. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which includes assets serviced for third party investors, were $1,176,796,000 as of September 30, 2012, and $1,141,806,000 and $1,113,595,000 as of December 31, 2011 and September 30, 2011, and have grown at a compound annual growth rate of 11% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid/declared dividends in excess of $180,725,000 or $11.23 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 (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 the Company for MSC’s share of these servicing costs.

We also conduct business through our asset-based lending division, Medallion Business Credit, an originator of loans to small businesses for the purpose of financing inventory and receivables, 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 up to three times Tier 1 capital, or $343,827,000 at September 30, 2012. MSC earns referral and servicing fees for these activities. As a non-investment company, Medallion Bank is not consolidated with the Company, which is an investment company under the 1940 Act.

The financial information is divided into two sections. The first section, Item 1, includes our unaudited consolidated financial statements including related footnotes. The second section, Item 2, consists of Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2012.

Our consolidated balance sheet as of September 30, 2012, and the related consolidated statements of operations, changes in net assets, and cash flows for the three and nine months ended September 30, 2012 and 2011 included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the US have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the three and nine months ended September 30, 2012 and 2011, or for any other interim period, may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

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

(Dollars in thousands, except per share data)

   2012     2011     2012     2011  

Interest income on investments

   $ 4,754      $ 6,643      $ 15,440      $ 21,908   

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

     2,021        1,034        6,558        3,089   

Medallion lease income

     372        352        1,076        1,043   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     7,147        8,029        23,074        26,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense(2)

     2,565        3,431        8,720        10,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,582        4,598        14,354        15,764   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     265        218        941        953   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and benefits

     2,240        2,101        6,577        6,060   

Professional fees

     341        220        1,090        743   

Occupancy expense

     211        235        631        688   

Other operating expenses

     718        884        2,257        3,529   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,510        3,440        10,555        11,020   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes(1) (3)

     1,337        1,376        4,740        5,697   

Income tax (provision) benefit

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     1,337        1,376        4,740        5,697   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments

     (2,620     686        (2,355     1,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

     4,779        (74     8,626        20   

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

     3,115        2,847        6,982        6,544   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation on investments

     7,894        2,773        15,608        6,564   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized/unrealized gains on investments

     5,274        3,459        13,253        7,834   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 6,611      $ 4,835      $ 17,993      $ 13,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations per common share

        

Basic

   $ 0.31      $ 0.28      $ 0.93      $ 0.78   

Diluted

     0.31        0.27        0.91        0.77   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.21      $ 0.19      $ 0.63      $ 0.54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

        

Basic

     21,284,143        17,403,007        19,438,227        17,402,520   

Diluted

     21,554,715        17,643,075        19,694,114        17,600,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $2,000 and $6,500 of dividend income for the three and nine months ended September 30, 2012 from Medallion Bank, and $1,000 and $3,000 for the comparable 2011 periods.
(2) Average borrowings outstanding were $293,668 and $320,426, and the related average borrowing costs were 3.47% and 3.64% for the 2012 third quarter and nine months, and were $354,137, $362,728, 3.84%, and 3.79% for the comparable 2011 periods.
(3) Includes $177 and $544 of net revenues received from Medallion Bank for the three and nine months ended September 30, 2012, and $221 and $734 for the comparable 2011 periods, 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

 

     UNAUDITED        

(Dollars in thousands, except per share data)

   September 30, 2012     December 31, 2011  

Assets

    

Medallion loans, at fair value

   $ 281,886      $ 307,167   

Commercial loans, at fair value (1)

     56,765        54,159   

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

     95,167        85,932   

Equity investments, at fair value

     5,202        4,577   

Investment securities, at fair value

     —          —     
  

 

 

   

 

 

 

Net investments ($231,758 at September 30, 2012 and $252,660 at December 31, 2011 pledged as collateral under borrowing arrangements)

     439,020        451,835   

Cash and cash equivalents ($0 at September 30, 2012 and December 31, 2011 restricted as to use by lender)

     14,813        29,352   

Accrued interest receivable

     961        1,120   

Fixed assets, net

     659        466   

Goodwill, net

     5,069        5,069   

Other assets, net

     54,200        49,189   
  

 

 

   

 

 

 

Total assets

   $ 514,722      $ 537,031   
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued expenses

   $ 5,086      $ 6,040   

Accrued interest payable

     573        1,708   

Funds borrowed

     295,296        357,779   
  

 

 

   

 

 

 

Total liabilities

     300,955        365,527   
  

 

 

   

 

 

 

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 – 23,064,385 shares at September 30, 2012 and 19,320,303 shares December 31, 2011 issued)

     229        192   

Treasury stock at cost (1,600,733 shares at September 30, 2012 and December 31, 2011)

     (14,304     (14,304

Capital in excess of par value

     217,078        180,982   

Accumulated undistributed net investment loss

     (9,233     (6,737

Accumulated undistributed net realized gains on investments

     —          —     

Net unrealized appreciation on investments

     19,997        11,371   
  

 

 

   

 

 

 

Total shareholders’ equity (net assets)

     213,767        171,504   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 514,722      $ 537,031   
  

 

 

   

 

 

 

Number of common shares outstanding

     21,463,652        17,719,570   

Net asset value per share

   $ 9.96      $ 9.68   
  

 

 

   

 

 

 

 

(1) Includes a $3,097 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

(UNAUDITED)

 

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

(Dollars in thousands, except per share data)

   2012     2011     2012     2011  

Net investment income after income taxes

   $ 1,337      $ 1,376      $ 4,740      $ 5,697   

Net realized gains (losses) on investments

     (2,620     686        (2,355     1,270   

Net unrealized appreciation on investments

     7,894        2,773        15,608        6,564   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     6,611        4,835        17,993        13,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income, net

     —          (830     (6,011     (6,596

Return of capital

     (4,505     (2,316     (5,852     (2,316

Realized gain from investment transactions, net

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends and distributions to shareholders (1)

     (4,505     (3,146     (11,863     (8,912
  

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock (2)

     (304     —          34,657        —     

Stock – based compensation expense

     218        56        612        172   

Exercise of stock options

     71        —          864        34   

Treasury stock acquired

     —          (78     —          (78
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share transactions

     (15     (22     36,133        128   

Other

     1        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase in net assets

     2,092        1,667        42,263        4,747   

Net assets at the beginning of the period

     211,675        165,845        171,504        162,765   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at the end of the period(3)

   $ 213,767      $ 167,512      $ 213,767      $ 167,512   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share activity

        

Common stock issued, beginning of period

     23,053,486        19,068,034        19,320,303        18,992,319   

Issuance of common stock (2)

     —          —          3,500,000        —     

Exercise of stock options

     11,176        —          151,419        7,000   

Issuance (forfeiture) of restricted stock, net

     (277     (97     92,663        68,618   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issued, end of period

     23,064,385        19,067,937        23,064,385        19,067,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, beginning of period

     (1, 600,733     (1,592,086     (1,600,733     (1,592,086

Treasury stock acquired

     —          (8,647     —          (8,647
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, end of period

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

 

 

   

 

 

   

 

 

   

 

 

 

Common stock outstanding

     21,463,652        17,467,204        21,463,652        17,467,204   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Dividends declared were $0.21 and $0.63 per share for the 2012 third quarter and nine months, and were $0.19 and $0.54 for the comparable 2011 periods.
(2) On May 21, 2012 the Company sold 3,500,000 shares at an offering price of $10.72 per share, resulting in net proceeds after closing costs, underwriting commissions, etc. of $34,657 as of September 30, 2012.
(3) Includes $0 of undistributed net investment income and $0 of undistributed net realized gains on investments at September 30, 2012 and 2011.

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Nine Months Ended September 30,  

(Dollars in thousands)

   2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 17,993      $ 13,531   

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

    

Depreciation and amortization

     936        994   

Amortization (accretion) of origination fees

     127        (18

Increase in net unrealized appreciation on investments

     (8,626     (20

Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries

     (6,982     (6,544

Net realized (gains) losses on investments

     2,355        (1,270

Stock-based compensation expense

     612        172   

Decrease in accrued interest receivable

     159        330   

Increase (decrease) in other assets, net

     916        (614

Increase (decrease) in accounts payable and accrued expenses

     (954     1,090   

Decrease in accrued interest payable

     (1,134     (1,138
  

 

 

   

 

 

 

Net cash provided by operating activities

     5,402        6,513   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Investments originated

     (144,390     (131,677

Proceeds from principal receipts, sales, and maturities of investments

     165,842        166,559   

Investments in Medallion Bank and other controlled subsidiaries, net

     (2,253     18   

Capital expenditures

     (315     (228
  

 

 

   

 

 

 

Net cash provided by investing activities

     18,884        34,672   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from funds borrowed

     52,614        117,004   

Repayments of funds borrowed

     (100,347     (137,084

Issuance of SBA debentures

     —          7,485   

Repayments of SBA debentures

     (14,750     (18,050

Proceeds from issuance of common stock, net

     34,657        —     

Purchase of treasury stock at cost

     —          (78

Proceeds from exercise of stock options

     864        34   

Payments of declared dividends

     (11,863     (8,912
  

 

 

   

 

 

 

Net cash used for financing activities

     (38,825     (39,601
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (14,539     1,584   

Cash and cash equivalents, beginning of period

     29,352        17,303   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 14,813      $ 18,887   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION

    

Cash paid during the period for interest

   $ 9,040      $ 10,538   

Cash paid during the period for income taxes

     —          —     

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

     —          —     
  

 

 

   

 

 

 

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

 

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MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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 $190,334,000 at September 30, 2012, 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 $36,161,000 at September 30, 2012, 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 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.

 

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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the US requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and assumptions are those that management considers to be the most critical to an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. All of these estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions 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, 11, and 12 to the consolidated financial statements.

Investment Valuation

The Company’s loans, net of participations and any unearned discount, are considered investment securities under the 1940 Act and are recorded at fair value. As part of the fair value methodology, loans are valued at cost adjusted for any unrealized appreciation (depreciation). Since no ready market exists for these loans, the fair value is determined in good faith by the Board of Directors. In determining the fair value, the Board of Directors considers factors such as the financial condition of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience, and the relationships between current and projected market rates and portfolio rates of interest and maturities. Foreclosed properties, which represent collateral received from defaulted borrowers, 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 23% and 20% of the investment portfolio at September 30, 2012 and December 31, 2011, are recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of investments that have no ready market are determined in good faith by the Board of Directors, based upon the financial condition and operating performance of the underlying investee companies as well as general market trends for businesses in the same industry. Included in equity investments were marketable securities of $1,793,000 and $2,456,000 at September 30, 2012 and December 31, 2011, and non-marketable securities of $3,409,000 and $2,121,000 in the comparable periods. The $95,167,000 and $85,932,000 related to portfolio investments in controlled subsidiaries at September 30, 2012 and December 31, 2011 were all non-marketable in each period. Because of the inherent uncertainty of valuations, the Board’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.

 

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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 a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as on the current moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) before July 2013. Because of these restrictions and other factors, our Board of Directors has determined that Medallion Bank has little value beyond its 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 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 64% and 68% of the Company’s investment portfolio at September 30, 2012 and December 31, 2011 had arisen in connection with the financing of taxicab medallions, taxicabs, and related assets, of which 72% and 74% were in New York City at September 30, 2012 and December 31, 2011. These loans are secured by the medallions, taxicabs, and related assets, and are personally guaranteed by the borrowers, or in the case of corporations, are generally guaranteed personally by the owners. A portion of the Company’s portfolio (13% and 12% at September 30, 2012 and December 31, 2011) 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. More than 20% 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 22%, 1%, and 0% at September 30, 2012 and 19%, 1%, and 0% at December 31, 2011.

On a managed basis, which includes the investments of Medallion Bank after eliminating the Company’s investment in Medallion Bank, medallion loans were 60% and 63% at September 30, 2012 and December 31, 2011 (78% in New York City), commercial loans were 13%, and 24% and 20% were consumer loans in all 50 states collateralized by recreational vehicles, boats, motorcycles, trailers, and home improvements. Investment securities were 2% and 3% at September 30, 2012 and December 31, 2011, and equity investments (including investments in controlled subsidiaries) were 1%.

Investment Transactions and Income Recognition

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At September 30, 2012 and December 31, 2011, net loan origination costs were $153,000 and $304,000. Net amortization income (expense) for the three months ended September 30, 2012 and 2011 was ($53,000) and ($20,000), and was ($127,000) and $18,000 for the comparable nine month periods.

Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized as an adjustment to the yield of the related investment. At September 30, 2012 and December 31, 2011, there were no premiums or discounts on investment securities, and their related income accretion or amortization was immaterial for 2012 and 2011.

Interest income is recorded on the accrual basis. Taxicab medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received, unless a determination has been made to apply all cash receipts to principal. At September 30, 2012, December 31, 2011, and September 30, 2011, total nonaccrual loans were $24,969,000, $25,795,000, and $30,552,000, and represented 7%, 7%, and 8% of the gross medallion and commercial loan portfolio at each period end, and were primarily concentrated in the secured mezzanine portfolio. The amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $15,412,000, $12,311,000, and $13,771,000 as of September 30, 2012, December 31, 2011, and September 30, 2011, of which $1,536,000 and $1,469,000 would have been recognized in the quarters ended September 30, 2012 and 2011, and $3,991,000 and $3,521,000 would have been recognized in the comparable nine months.

Loan Sales and Servicing Fee Receivable

The Company accounts for its sales of loans in accordance with FASB 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 method for our servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $456,939,000 and $432,385,000 at September 30, 2012 and December 31, 2011, and included $402,612,000 and $370,068,000 of loans serviced for Medallion Bank. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860, most of which relates to servicing assets held by Medallion Bank, and determined that no material servicing asset or liability exists as of September 30, 2012 and December 31, 2011. 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.

 

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

Unrealized appreciation (depreciation) on investments is the amount by which the fair value estimated by the Company is greater (less) than the cost basis of the investment portfolio. Realized gains or losses on investments are generated through sales of investments, foreclosure on specific collateral, and writeoffs of loans or assets acquired in satisfaction of loans, net of recoveries. Unrealized appreciation (depreciation) on investments was $19,997,000, $11,371,000, and $10,113,000 as of September 30, 2012, December 31, 2011, and September 30, 2011. Our investment in Medallion Bank, 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. See Note 3 for the presentation of financial information for Medallion Bank.

The following tables set forth the changes in our unrealized appreciation (depreciation) on investments, other than investments in controlled subsidiaries, for the 2012 and 2011 quarters shown below.

 

(Dollars in thousands)

   Medallion
Loans
    Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2011

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

Net change in unrealized

          

Appreciation on investments

     —          —          (213     2,377        2,164   

Depreciation on investments

     —          (659     51        33        (575

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments

     —          424        —          —          424   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

     —          (14,533     943        26,974        13,384   

Net change in unrealized

          

Appreciation on investments

     —          —          (92     1,997        1,905   

Depreciation on investments

     —          (27     (28     (18     (73

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments

     —          —          2        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2012

     —          (14,560     825        28,953        15,218   

Net change in unrealized

          

Appreciation on investments

     —          —          (191     2,377        2,186   

Depreciation on investments

     —          (33     (7     (18     (58

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments

     —          2,384        200        67        2,651   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2012

   $ —        ($ 12,209   $ 827      $ 31,379      $ 19,997   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

   Medallion
Loans
    Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2010

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

Net change in unrealized

          

Appreciation on investments

     —          —          310        —          310   

Depreciation on investments

     —          (533     6        —          (527

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2011

     —          (11,750     517        21,109        9,876   

Net change in unrealized

          

Appreciation on investments

     —          —          300        1,109        1,409   

Depreciation on investments

     —          (1,567     469        —          (1,098

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2011

     —          (13,317     1,286        22,218        10,187   

Net change in unrealized

          

Appreciation on investments

     —          —          13        2,378        2,391   

Depreciation on investments

     —          (2,450     (15     —          (2,465

Reversal of unrealized appreciation (depreciation) related to realized

          

Gains on investments

     —          —          —          —          —     

Losses on investments

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2011

   $ —        ($ 15,767   $ 1,284      $ 24,596      $ 10,113   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The table below summarizes components of unrealized and realized gains and losses in the investment portfolio for the three and nine months ended September 30, 2012 and 2011.

 

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

(Dollars in thousands)

   2012     2011     2012     2011  

Net change in unrealized appreciation on investments

        

Unrealized appreciation

   ($ 191   $ 14      ($ 497   $ 624   

Unrealized depreciation

     (40     (2,466     (702     (4,091

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

     3,115        2,847        6,982        6,544   

Realized gains

     —          —          —          —     

Realized losses

     2,584        —          3,010        —     

Unrealized gains on foreclosed properties and other assets

     2,426        2,378        6,815        3,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 7,894      $ 2,773      $ 15,608      $ 6,564   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains on investments

        

Realized gains

   $ —        $ —        $ —        $ —     

Realized losses

     (2,584     —          (3,010     —     

Other gains

     136        796        495        1,358   

Direct recoveries (chargeoffs)

     (98     (110     234        (88

Realized losses on foreclosed properties and other assets

     (74     —          (74     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   ($ 2,620   $ 686      ($ 2,355   $ 1,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table provides additional information on attributes of the nonperforming loan portfolio as of September 30, 2012.

 

(Dollars in thousands)

   Recorded
Investment (1)
     Unpaid  Principal
Balance
     Average  Recorded
Investment
 

Medallion

   $ —         $ —         $ —     

Commercial (2) (3)

   $ 24,969       $ 32,294       $ 26,557   
  

 

 

    

 

 

    

 

 

 

 

(1) As of September 30, 2012, $12,072 of unrealized depreciation had been recorded as a valuation allowance on these commercial loans.
(2) Interest income of $3 and $107 was recognized in the three and nine months ended September 30, 2012 on these commercial loans.
(3) Included in the unpaid principal balance is unearned paid in-kind interest on nonaccrual loans of $7,325, which is included in the nonaccrual disclosures in the section titled “Investment Transactions and Income Recognition” on page 10.

The following table shows the aging of medallion and commercial loans as of September 30, 2012.

 

      Days Past Due                    Recorded Investment >
90 Days and Accruing
 

(Dollars in thousands)

   31 - 60      61 - 90      91 +      Total      Current      Total     

Medallion loans

   $ 3,370       $ 16       $ 216       $ 3,602       $ 278,064       $ 281,666       $ 216   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     —           —           6,361         6,361         45,698         52,059         —     

Asset-based receivable

     —           —           —           —           9,138         9,138         —     

Other secured commercial

     434         —           309         743         7,101         7,844         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     434         —           6,670         7,104         61,937         69,041         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,804       $ 16       $ 6,886       $ 10,706       $ 340,001       $ 350,707       $ 216   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the delinquencies in the loan portfolio as described above, the receivable from bonuses related to certain investments of $6,468,000 was delinquent at September 30, 2012.

The following table shows troubled debt restructurings which the Company entered into during the quarter ended September 30, 2012.

 

                           Troubled Debt Restructuring that
Subsequently Defaulted
 

(Dollars in thousands)

   Number of Loans      Pre-Modification
Investment
     Post-Modification
Investment
     Number  of
Loans
     Recorded
Investment
 

Medallion loans

     —         $ —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

              

Secured mezzanine

     1         2,086         2,086         —           —     

Asset-based receivable

     —           —           —           —           —     

Other secured commercial

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     1         2,086         2,086         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 2,086       $ 2,086         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows troubled debt restructurings which the Company entered into during the nine months ended September 30, 2012.

 

                           Troubled Debt Restructuring that
Subsequently Defaulted
 

(Dollars in thousands)

   Number of Loans      Pre-Modification
Investment
     Post-Modification
Investment
     Number of Loans      Recorded
Investment
 

Medallion loans

     —         $ —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

              

Secured mezzanine

     3         7,646         7,096         —           —     

Asset-based receivable

     —           —           —           —           —     

Other secured commercial

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     3         7,646         7,096         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 7,646       $ 7,096         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill

In accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” the Company has determined that it is more likely than not that the relevant reporting unit’s fair value is greater than its carrying amount for 2012 and 2011, and that impairment testing of goodwill 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 September 30, 2012. 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 $46,000 and $36,000 for the quarters ended September 30, 2012 and 2011, and was $122,000 and $117,000 for the comparable nine months.

Deferred Costs

Deferred financing costs, included in other assets, represents costs associated with obtaining the Company’s borrowing facilities, and is amortized on a straight line basis over the lives of the related financing agreements. Amortization expense was $228,000 and $320,000 for the quarters ended September 30, 2012 and 2011, and was $814,000 and $783,000 for the comparable nine months. In addition, the Company capitalizes certain costs for transactions in the process of completion (other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon completion or termination of the transaction, any accumulated amounts will be amortized against income over an appropriate period, or written off. The amounts on the balance sheet for all of these purposes were $1,418,000, $2,206,000, and $2,858,000 as of September 30, 2012, December 31, 2011, and September 30, 2011.

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 2011 and 2010, and anticipates qualifying and filing as a RIC for 2012. As a result, no provisions for income taxes have been recorded for the three and nine months ended September 30, 2012 and 2011. State and local tax treatment follows the federal model.

The Company has filed tax returns in many states. Federal, New York State, and New York City tax filings of the Company for the tax years 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, Medallion Funding LLC, and Trust III are not subject to federal income taxation, instead their taxable income is treated as having been earned by the Company.

 

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

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

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

 

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

(Dollars in thousands)

   2012      2011      2012      2011  

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

   $ 6,611       $ 4,835       $ 17,993       $ 13,531   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding applicable to basic EPS

     21,284,143         17,403,007         19,438,227         17,402,520   

Effect of dilutive stock options

     193,043         220,165         199,349         185,831   

Effect of restricted stock grants

     77,529         19,903         56,538         11,879   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted EPS

     21,554,715         17,643,075         19,694,114         17,600,230   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.31       $ 0.28       $ 0.93       $ 0.78   

Diluted earnings per share

     0.31         0.27         0.91         0.77   
  

 

 

    

 

 

    

 

 

    

 

 

 

Potentially dilutive common shares excluded from the above calculations aggregated 153,720 and 388,502 shares as of September 30, 2012 and 2011.

Stock Compensation

The Company follows FASB Accounting Standard Codification Topic 718 (ASC 718), “Compensation – Stock Compensation”, for its stock option and restricted stock plans, and accordingly, the Company recognizes the expense of these grants as required. Stock-based employee compensation costs pertaining to stock options is reflected in net increase in net assets resulting from operations for any new grants using the fair values established by usage of the Black-Scholes option pricing model, expensed over the vesting period of the underlying option. Stock-based employee compensation costs pertaining to restricted stock are reflected in net increase in net assets resulting from operations for any new grants using the grant date fair value of the shares granted, expensed over the vesting period of the underlying stock.

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. During the nine months ended September 30, 2012 and 2011, the Company issued 92,957 and 68,740 restricted shares of stock-based compensation awards, and 5,000 and no shares of other stock-based compensation awards, and recognized $218,000 and $612,000, or $0.01 and $0.03 per diluted common share for the 2012 third quarter and nine months, and $56,000 and $172,000, or $0.00 and $0.01 per share in the comparable 2011 periods, of non-cash stock-based compensation expense related to the grants. As of September 30, 2012, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $977,000, which is expected to be recognized over the next ten quarters (see Note 5).

Derivatives

The Company manages its exposure to increases in market rates of interest by periodically purchasing interest rate caps to lock in the cost of funds of its variable-rate debt in the event of a rapid run up in interest rates. Beginning in 2009, the Company entered into contracts to purchase interest rate caps on $592,000,000 of notional value of principal from various multinational banks, of which $150,000,000 are active with termination dates ranging to July 2015. The caps provide for payments to the Company if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases of $465,000 were generally fully expensed when paid, including $16,000 and $58,000 for the three and nine months ended September 30, 2012, and $5,000 and $93,000 for the comparable 2011 periods, and all are carried at $0 on the balance sheet at September 30, 2012.

Reclassifications

Certain reclassifications have been made to prior year balances to conform with the current quarter’s presentation. These reclassifications have no effect on the previously reported results of operations.

 

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(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 three and nine months ended September 30, 2012 and 2011.

 

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

(Dollars in thousands)

   2012     2011     2012     2011  

Statement of operations

        

Investment income

   $ 14,834      $ 13,162      $ 41,442      $ 38,398   

Interest expense

     1,328        1,309        3,742        4,862   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     13,506        11,853        37,700        33,536   

Noninterest income

     91        139        310        464   

Operating expenses

     3,919        3,453        11,450        10,372   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     9,678        8,539        26,560        23,628   

Income tax provision

     (3,273 )      (2,693     (8,766 )      (7,015
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     6,405        5,846        17,794        16,613   

Net realized/unrealized losses of Medallion Bank

     (1,094 )      (1,265     (3,530 )      (4,818
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations of Medallion Bank

     5,311        4,581        14,264        11,795   

Unrealized depreciation on Medallion Bank (1)

     (2,066 )      (1,073     (6,697 )      (4,069

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

     (130 )      (661     (585 )      (1,182
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 3,115      $ 2,847      $ 6,982      $ 6,544   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

The following table presents Medallion Bank’s balance sheets and the net investment in other controlled subsidiaries as of September 30, 2012 and December 31, 2011.

 

(Dollars in thousands)

   2012      2011  

Loans

   $ 651,214       $ 561,865   

Investment securities, at fair value

     23,059         26,537   
  

 

 

    

 

 

 

Net investments ($0 pledged as collateral under borrowing arrangements at September 30, 2012 and December 31, 2011) (1)

     674,273         588,402   

Cash ($0 at September 30, 2012 and at December 31, 2011 restricted as to use by lender)

     14,491         28,626   

Other assets, net

     11,864         11,881   
  

 

 

    

 

 

 

Total assets

   $ 700,628       $ 628,909   
  

 

 

    

 

 

 

Other liabilities

   $ 3,742       $ 4,316   

Due to affiliates

     763         964   

Deposits, including accrued interest payable

     579,706         514,779   
  

 

 

    

 

 

 

Total liabilities

     584,211         520,059   

Medallion Bank equity (2)

     116,417         108,850   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 700,628       $ 628,909   
  

 

 

    

 

 

 

Investment in other controlled subsidiaries

   $ 4,788       $ 3,080   

Total investment in Medallion Bank and other controlled subsidiaries

   $ 95,167         85,932   
  

 

 

    

 

 

 

 

(1) Included in Medallion Bank’s net investments is $111 and $183 for purchased loan premium at September 30, 2012 and December 31, 2011.
(2) Includes $26,303 of preferred stock issued to the US Treasury under the Small Business Lending Fund Program (SBLF).

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

Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. At September 30, 2012 and December 31, 2011, the net premium on investment securities totaled $389,000 and $403,000, and $36,000 and $125,000 was amortized into interest income for the quarter and nine months ended September 30, 2012, and $16,000 and $40,000 was amortized in the comparable 2011 periods.

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At September 30, 2012 and December 31, 2011, net loan origination costs were $7,004,000 and $5,597,000. Net amortization expense for the quarter and nine months ended September 30, 2012 was $623,000 and $1,671,000, and was $530,000 and $1,580,000 for the comparable 2011 periods.

 

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Medallion Bank’s policies regarding nonaccrual of medallion and commercial loans are similar to those of the Company. The consumer portfolio has different characteristics compared to commercial loans, typified by a larger number of lower dollar loans that have similar characteristics. These loans are placed on nonaccrual when they become 90 days past due, or earlier if they enter bankruptcy, and are charged off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. At September 30, 2012, $1,937,000 or 1% of consumer loans, and no commercial or medallion loans were on nonaccrual, compared to $2,264,000 or 1% of consumer loans, and no commercial or medallion loans on nonaccrual at December 31, 2011, and $2,388,000 or 1% of consumer loans, and no commercial or medallion loans on nonaccrual at September 30, 2011. 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 immaterial as of September 30, 2012, December 31, 2011, and September 30, 2011.

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 and our own historical loan loss data developed since 2004, 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 September 30, 2012 and December 31, 2011 was $1,296,000 and $1,250,000, and $298,000 and $828,000 was amortized to interest expense during the quarter and nine months ended September 30, 2012, and $257,000 and $800,000 was amortized in the comparable 2011 periods. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity.

The outstanding balances of fixed rate borrowings were as follows.

 

     Payments Due for the Fiscal Year Ending September 30,      September  30,
2012
     December  31,
2011
     Interest
Rate (1)
 

(Dollars in thousands)

   2013      2014      2015      2016      2017      Thereafter           

Deposits

   $ 377,710       $ 127,022       $ 65,293       $ 9,000       $ —         $ —         $ 579,025       $ 514,329         0.70 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Weighted average contractual rate as of September 30, 2012.

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 the leverage capital ratio (Tier 1 capital to average assets) be not less than 15%, and that an adequate allowance for loan losses be maintained. As a result, to facilitate maintenance of the capital ratio requirement and to provide the necessary capital for continued growth, the Company periodically makes capital contributions to Medallion Bank. Separately, Medallion Bank declared dividends to the Company of $2,000,000 and $6,500,000 in the 2012 third quarter and nine months, and declared dividends of $1,000,000 and $3,000,000 in the comparable 2011 periods.

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

 

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The following table represents Medallion Bank’s actual capital amounts and related ratios as of September 30, 2012 and December 31, 2011, compared to required regulatory minimum capital ratios and the ratio required to be considered well capitalized. As of September 30, 2012, Medallion Bank meets all capital adequacy requirements to which it is subject, and is well-capitalized.

 

     Regulatory              

(Dollars in Thousands)

   Minimum     Well-capitalized     September 30, 2012     December 31, 2011  

Tier 1 capital

     —          —        $ 114,609      $ 107,009   

Total capital

     —          —          123,180        114,504   

Average assets

     —          —          682,648        604,329   

Risk-weighted assets

     —          —          679,112        592,528   

Leverage ratio (1)

     4     5     16.8 %      17.7

Tier 1 capital ratio (2)

     4        6        16.9        18.1   

Total capital ratio (2)

     8        10        18.1        19.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(4) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows.

 

     Payments Due for the Fiscal Year Ending September 30,      September  30,
2012
     December  31,
2011
     Interest
Rate (1)
 

(Dollars in thousands)

   2013      2014      2015      2016      2017      Thereafter           

Revolving lines of credit

   $ —         $ 151,218       $ —         $ —         $ —         $ —         $ 151,218       $ 180,566         1.32 % 

Notes payable to banks

     24,678         2,075         25,481         3,909         —           —           56,143         74,528         3.56 % 

SBA debentures

     19,450         12,000         4,500         —           —           18,985         54,935         69,685         5.27 % 

Preferred securities

     —           —           —           —           —           33,000         33,000         33,000         2.54 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 44,128       $ 165,293       $ 29,981       $ 3,909       $ —         $ 51,985       $ 295,296       $ 357,779         2.62
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Weighted average contractual rate as of September 30, 2012.

(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 $151,218,000 was outstanding at September 30, 2012. 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 (0.21% at September 30, 2012) plus 0.75%, or 90 day LIBOR (0.36% at September 30, 2012) 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.

(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 September 30, 2012, $106,985,000 of commitments had been fully utilized, and $5,000,000 was available for borrowing.

 

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The notes are collateralized by substantially all 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 September 30, 2012.

(Dollars in thousands)

 

  

Borrower

  # of
Banks /
Notes
    Note
Dates
    Maturity
Dates
   

Type

  Note
Amounts
    Balance
Outstanding  at
September 30,
2012
   

Monthly Payment

  Average Interest
Rate at
September 30,
2012
 

Interest Rate

Index(1)

Medallion Chicago     3/28        12/11        12/14     

Term loans secured by owned Chicago

medallions(2)

  $ 26,152      $ 25,690      $139 principal & interest   4.04%   N/A
The Company     2/3       
 
6/11 -
9/11
  
  
   
 
6/13 -
5/14
  
  
  Revolving line of credit secured by pledged loans     35,000        16,000      Interest only   3.00% + 0.25%
unused fee
  LIBOR + 2%, 3% floor; Prime + 0.50%, 4% floor; LIBOR + 2% or Prime - 0.50%, 3% floor
The Company     3/4       

 

1/09 -

711

  

  

   

 

10/12 -

1/16

  

  

  Participated loans treated as financings     12,792        12,666      Proportionate to the payments received on the participated loans   3.21%   N/A
MFC     3/4       
 
11/09
-9/10
  
  
   
 
11/12 -
1/15
  
  
  Participated loans treated as financings     2,109        1,787      Proportionate to the payments received on the participated loans   4.18%   4.18%(3)
MFC     3/3       
 
1/05 -
5/12
  
  
   
 
4/13 -
8/13
  
  
  Revolving line of credit secured by pledged loans     53,000 (4)      —        Interest only   0%   Prime + 0.50%; LIBOR +2.50%, or LIBOR +2%, 3% floor
         

 

 

   

 

 

       
          $ 129,053      $ 56,143         
         

 

 

   

 

 

       

 

(1) At September 30, 2012, 30 day LIBOR was 0.21%, 360 day LIBOR was 0.97%, and the prime rate was 3.25%.
(2) $15,804 guaranteed by the Company.
(3) 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 $1,028 loan remains fixed to term at 3.50%, and one $386 loan remains fixed to term at 5.50%.
(4) $25,000 guaranteed by the Company and, effective April 2012, $20,000 of one of the bank notes is also available for use by the Company.

(D) PREFERRED SECURITIES

In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bore a fixed rate of interest of 7.68% to September 2012, and thereafter a variable rate of interest of 90 day LIBOR (0.36% at September 30, 2012) 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 September 30, 2012, $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 various regulatory requirements (see Note 3).

 

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(5) STOCK OPTIONS AND RESTRICTED STOCK

The Company has a stock option plan (2006 Stock Option Plan) available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provides for the issuance of a maximum of 800,000 shares of common stock of the Company. At September 30, 2012, 156,155 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.

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 September 30, 2012, 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 September 30, 2012, 627,669 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, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. The Amended Director Plan amends and restates the 2006 Director Plan by increasing the maximum number of shares of the Company’s common stock available for issuance under the Amended Director Plan from 100,000 to 200,000, and as of September 30, 2012, 100,000 shares of the Company’s common stock are issuable under the Amended Director Plan. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company will grant options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board, with an adjustment for directors who are elected to serve less than a full term. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. Options granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options may not exceed ten years.

The Company’s 1996 Stock Option Plan and 1996 Director Plan terminated on May 21, 2006 and no additional shares are available for future issuance. At September 30, 2012, 1,027,691 options on the Company’s common stock were outstanding under the 1996 and 2006 plans, of which 999,858 options were exercisable, and there were 171,956 unvested shares of the Company’s common stock outstanding under the Employee Restricted Stock Plan.

The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of options granted was $1.25 for the nine months ended September 30, 2012, and there were no options granted during the 2011 nine months. The following assumption categories are used to determine the value of any option grants.

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
     2012      2011      2012      2011  

Risk free interest rate

     NA         NA         1.09         NA   

Expected dividend yield

     NA         NA         7.53         NA   

Expected life of option in years (1)

     NA         NA         6.00         NA   

Expected volatility (2)

     NA         NA         30.00         NA   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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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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 2012 quarters and the 2011 full year.

 

     Number of
Options
    Exercise Price
Per Share
     Weighted Average
Exercise Price
 

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

     (248,316     3.87-11.21         6.75   
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2011

     1,179,563        3.50-13.06         8.96   

Granted

     5,000        11.53         11.53   

Cancelled

     —          —           —     

Exercised (1)

     (130,000 )      3.50-5.51         5.43   
  

 

 

   

 

 

    

 

 

 

Outstanding at March 31, 2012

     1,054,563        3.50-13.06         9.40   

Granted

     —          —           —     

Cancelled

     (5,453 )      4.85         4.85   

Exercised (1)

     (10,243 )      8.21-9.22         8.40   
  

 

 

   

 

 

    

 

 

 

Outstanding at June 30, 2012

     1,038,867        3.50-13.06         9.44   

Granted

     —          —           —     

Cancelled

     —          —           —      

Exercised (1)

     (11,176 )      3.87-9.22         6.38   
  

 

 

   

 

 

    

 

 

 

Outstanding at September 30, 2012 (2)

     1,027,691      $ 3.50-13.06       $ 9.47   
  

 

 

   

 

 

    

 

 

 

Options exercisable at September 30, 2012 (2)

     999,858      $ 3.50-13.06       $ 9.49   
  

 

 

   

 

 

    

 

 

 

 

(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 $56,000 and $835,000 for the 2012 third quarter and nine months, and was $0 and $30,000 for the comparable 2011 periods.
(2) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2012 and the related exercise price of the underlying options, was $2,589,000 for outstanding options and $2,502,000 for exercisable options as of September 30, 2012.

The following table presents the activity for the restricted stock program under the 2009 Employee Restricted Stock Plan for the 2012 quarters and the 2011 full year.

 

     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

     79,668        7.99-11.53         8.48   

Granted

     92,957        11.08         11.08   

Cancelled

     (17 )      11.53         11.53   

Vested (1)

     (375 )      7.99         7.99   
  

 

 

   

 

 

    

 

 

 

Outstanding at March 31, 2012

     172,233        7.99-11.53         9.88   

Granted

     —          —           —     

Cancelled

     —          —           —     

Vested (1)

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at June 30, 2012

     172,233        7.99-11.53         9.88   

Granted

     —          —           —     

Cancelled

     (277 )      7.99-11.53         10.51   

Vested (1)

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at September 30, 2012 (2)

     171,956      $ 7.99-11.53       $ 9.88   
  

 

 

   

 

 

    

 

 

 

 

(1) The aggregate fair value of the restricted stock vested was $0 and $3,000 for the 2012 third quarter and nine months, and was $0 for the comparable 2011 periods.
(2) The aggregate fair value of the restricted stock was $2,031,000 as of September 30, 2012.

 

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The following table presents the activity for the unvested options outstanding under the plans for the 2012 quarters.

 

     Number  of
Options
    Exercise Price
Per  Share
     Weighted Average  Exercise
Price
 

Outstanding at December 31, 2011

     68,556      $ 7.17-8.21       $ 7.89   

Granted

     5,000        11.53         11.53   

Cancelled

     —          —           —     

Vested

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at March 31, 2012

     73,556        7.17-11.53         8.14   

Granted

     —          —           —     

Cancelled

     —          —           —     

Vested

     (45,723     7.17-8.21         7.81   
  

 

 

   

 

 

    

 

 

 

Outstanding at June 30, 2012

     27,833        7.17-11.53         8.68   

Granted

     —          —           —     

Cancelled

     —          —           —     

Vested

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at September 30, 2012

     27,833      $ 7.17-11.53       $ 8.68   
  

 

 

   

 

 

    

 

 

 

The intrinsic value of the options vested was $0 and $128,000 for the 2012 third quarter and nine months.

The following table summarizes information regarding options outstanding and options exercisable at September 30, 2012 under the 1996 and 2006 Stock Option Plans and the 1996 and 2006 Director Plans.

 

     Options Outstanding      Options Exercisable  
     Shares  at
September 30,
2012
     Weighted average      Shares  at
September 30,
2012
     Weighted average  

Range of Exercise

Prices

      Remaining
contractual  life in
years
     Exercise price         Remaining
contractual  life in
years
     Exercise price  
$3.50-3.87      71,554         0.30       $ 3.67         71,554         0.30       $ 3.67   
6.89-13.06      956,137         4.85         9.91         928,304         4.76         9.94   
  

 

 

          

 

 

       
$3.50-13.06      1,027,691         4.53         9.47         999,858         4.44         9.49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes information regarding restricted stock outstanding at September 30, 2012 under the 2009 Employee Restricted Stock Plan.

 

     Restricted Stock Outstanding  
            Weighted average  

Range of Grant Prices

   Shares at September  30,
2012
     Remaining vesting
period in years
     Grant price  

$7.99-11.53

     171,956         1.97       $ 9.88   
  

 

 

    

 

 

    

 

 

 

(6) 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.

(7) NONINTEREST INCOME AND OTHER OPERATING EXPENSES

The major components of noninterest income were as follows.

 

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

(Dollars in thousands)

   2012      2011      2012      2011  

Prepayment fees

   $ 159       $ 88       $ 515       $ 438   

Servicing fees

     51         71         172         246   

Late charges

     27         35         164         171   

Other

     28         24         90         98   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 265       $ 218       $ 941       $ 953   
  

 

 

    

 

 

    

 

 

    

 

 

 

Prepayment fees increased in the 2012 third quarter and in the nine months due to a larger than normal fee received from a mezzanine loan prepayment. Servicing fees decreased in 2012 third quarter and in the nine months reflecting the fluctuations in the servicing and loan origination activities performed for Medallion Bank.

 

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The major components of other operating expenses were as follows.

 

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

(Dollars in thousands)

   2012      2011      2012      2011  

Travel, meals, and entertainment

   $ 240       $ 203       $ 670       $ 657   

Miscellaneous taxes

     84         119         269         305   

Directors’ fees

     61         101         219         304   

Office expense

     53         58         157         173   

Depreciation and amortization

     46         36         122         117   

Insurance

     44         60         134         135   

Bank charges

     35         33         113         97   

Investment management expenses

     33         39         98         134   

Telephone

     29         43         93         137   

Loan collection costs and other investment costs

     16         29         38         1,024   

Other expenses

     77         163         344         446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating expenses

   $ 718       $ 884       $ 2,257       $ 3,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

Travel, meals, and entertainment increased due to an increase in investment development activities. Miscellaneous taxes were lower in the 2012 third quarter and in the nine months due to lower franchise and excise taxes. Directors’ fees decreased in third quarter and in the nine months as a result of expense accrual adjustments. Investment management expenses declined in the nine months, reflecting a lessening of investment activities. Telephone expense decreased due to a change in the service provider. Loan collection costs and other investment costs decreased reflecting $942,000 of accrued costs related to a proposed investment opportunity in the 2011 nine months.

(8) SELECTED FINANCIAL RATIOS AND OTHER DATA

The following table provides selected financial ratios and other data.

 

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

(Dollars in thousands, except per share data)

   2012     2011     2012     2011  

Net share data

        

Net asset value at the beginning of the period

   $ 9.87      $ 9.49      $ 9.68      $ 9.35   

Net investment income

     0.06        0.08        0.24        0.33   

Income tax (provision) benefit

     —          —          —          —     

Net realized gains (losses) on investments

     (0.12     0.04        (0.12     0.07   

Net change in unrealized appreciation on investments

     0.37        0.15        0.79        0.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     0.31        0.27        0.91        0.77   

Issuance of common stock

     (0.01     —          (0.01     (0.03

Repurchases of common stock

     —          —          —          —     

Distribution of net investment income

       (0.05     (0.31     (0.38

Return of capital

     (0.21     (0.13     (0.31     (0.13

Distribution of net realized gains on investments

     —          —          —          —     

Other

       0.01        —          0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in net asset value

     0.09        0.10        0.28        0.24   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 9.96      $ 9.59      $ 9.96      $ 9.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at beginning of period

   $ 10.62      $ 9.75      $ 11.38      $ 8.20   

Per share market value at end of period

     11.81        9.30        11.81        9.30   

Total return (2)

     53     (11 %)      13     26
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratios/supplemental data

        

Total shareholders’ equity (net assets)

   $ 213,767      $ 167,513      $ 213,767      $ 167,513   

Average net assets

   $ 211,967      $ 167,671      $ 192,306      $ 165,828   

Total expense ratio (3) (4)

     11.40     16.26     13.39     17.17

Operating expenses to average net assets (4)

     6.59        8.14        7.33        8.88   

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

     2.51        3.26        3.29        4.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $0.00 of undistributed net investment income per share and $0.00 of undistributed net realized gains per share as of September 30, 2012 and 2011.
(2) Total return is calculated by dividing the change in market value of a share of common stock during the period, assuming the reinvestment of dividends on the payment date, by the per share market value at the beginning of the period.
(3) Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average net assets.
(4) In December 2010, MSC assumed our servicing obligations, and as a result, servicing fee income of $1,535 and $1,389, and operating expenses of $1,630 and $1,369, which formerly were the Company’s were now MSC’s for the three months ended September 30, 2012 and 2011, and were $4,509 and $4,145 of service fee income, and $4,762 and $4,127 of operating expenses for the comparable nine months. Excluding the impact of the MSC amounts, the total expense ratio, operating expense ratio, and net investment income ratio would have been 14%, 9.65%, and 2.33% in the 2012 quarter, 20%, 11%, and 3.30% in the 2011 quarter, 17%, 11%, and 3.12% in the 2012 nine months, and 21%, 12%, and 4.61% in the 2011 nine months.

 

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(9) RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2012, the FASB issued Accounting Standards Update (ASU) 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 revises ASC Topic 350 (Intangibles-Goodwill and Other) by allowing an entity to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary. Prior to the update, an entity was required to assess indefinite-lived intangible assets for impairment by comparing the fair value of an asset to its carrying amount. The update is effective for fiscal years beginning after September 15, 2012. The Company does not believe the adoption of the standard will have an impact on its financial condition or results of operation.

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.

(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 $157,000 and $143,000 for the 2012 and 2011 third quarters, and were $361,000 and $407,000 for the comparable nine months.

Jeffrey Rudnick, the son of one of the Company’s directors, is an officer of LAX Group, LLC (LAX), one of the Company’s portfolio companies. Mr. Rudnick receives a salary from LAX of $160,000 per year, and certain equity from LAX consisting of 10% ownership in LAX Class B stock, vesting at 3.34% per year; 5% of any new equity raised from outside investors at a valuation of $1.5 million or higher; and 10% of LAX’s profits as a year end bonus. In addition, Mr. Rudnick provides consulting services to the Company directly for a monthly retainer of $4,200. At September 30, 2012, December 31, 2011, and September 30, 2011, the Company or MSC serviced $402,612,000, $370,068,000, and $351,303,000 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, $1,535,000 and $4,509,000 of servicing fee income was earned by MSC in the 2012 third quarter and nine months, and $1,389,000 and $4,145,000 was earned in the comparable 2011 periods.

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

 

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

(Dollars in thousands)

   2012      2011      2012      2011  

Loan origination fees

   $ 97       $ 152       $ 313       $ 534   

Reimbursement of operating expenses

     74         64         214         184   

Servicing fees

     6         5         17         16   

Interest income

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

   $ 177       $ 221       $ 544       $ 734   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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 are 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.

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) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

(c) Commitments to extend credit—The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At September 30, 2012 and December 31, 2011, the estimated fair value of these off-balance-sheet instruments was not material.

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

 

     September 30, 2012      December 31, 2011  

(Dollars in thousands)

   Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

           

Investments

   $ 439,020       $ 439,020       $ 451,835       $ 451,835   

Cash (1)

     14,813         14,813         29,352         29,352   

Accrued interest receivable (2)

     961         961         1,120         1,120   

Financial liabilities

           

Funds borrowed (2)

     295,296         295,296         357,779         357,779   

Accrued interest payable (2)

     573         573         1,708         1,708   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

(12) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC 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 2012.

 

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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). Our assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.

As required by FASB ASC 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:

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, 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).

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. During the quarter and nine months ended September 30, 2012, there have been no changes to the inputs and valuation techniques used to measure fair value or the level in which they are classified.

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011.

 

September 30, 2012 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —         $ —         $ 281,886       $ 281,886   

Commercial loans

     —           —           56,765         56,765   

Investment in Medallion Bank and other controlled subsidiaries

     —           —           95,167         95,167   

Equity investments

     244         —           4,958         5,202   

Other assets

     —           49,779         —           49,779   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Included in level 3 investments in Medallion Bank and other controlled subsidiaries is the investment in Medallion Bank, MSC, and investments in 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 the Company’s level 3 financial assets and liabilities for the quarters and nine months ended September 30, 2012 and 2011.

 

(Dollars in thousands)

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

June 30, 2012

   $ 277,756      $ 54,280      $ 89,035      $ 5,149      $  —     

Gains (losses) included in earnings

     —          (131     5,115        (55     —     

Purchases, investments, and issuances

     73,032        4,043        3,017        —          —     

Sales, maturities, settlements, and distributions

     (68,902     (1,427     (2,000     (136     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012

   $ 281,886      $ 56,765      $ 95,167      $ 4,958      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   $ —        ($ 33   $ 5,115      ($ 191   $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2012.

 

(Dollars in thousands)

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

December 31, 2011

   $ 307,167      $ 54,159      $  85,932      $ 4,346      $ —     

Gains (losses) included in earnings

     —          (806     13,482        319        —     

Purchases, investments, and issuances

     131,306        12,334        4,948        750        —     

Sales, maturities, settlements, and distributions

     (156,587     (8,922     (9,195     (457     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012

   $ 281,886      $ 56,765      $ 95,167      $ 4,958      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   $ —        ($ 719   $ 13,482      ($ 138   $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2012.

 

(Dollars in thousands)

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

June 30, 2011

   $ 312,139      $ 65,851      $ 82,772      $ 4,390       $ —     

Gains (losses) included in earnings

     —          (2,518     3,847        109         —     

Purchases, investments, and issuances

     27,710        654        826        —           —     

Sales, maturities, settlements, and distributions

     (35,906     (4,967     (2,181     —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2011

   $ 303,943      $ 59,020      $ 85,264      $ 4,499       $ —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Amounts related to held assets(1)

   $ —        ($ 2,450   $ 3,847      $ 149       $ —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2011.

 

(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

     —          (4,601     9,543        1,764        —     

Purchases, investments, and issuances

     128,487        3,190        2,595        —          —     

Sales, maturities, settlements, and distributions

     (147,670     (16,435     (5,609     (1,774     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2011

   $ 303,943      $ 59,020      $ 85,264      $ 4,499      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   $ —        ($ 4,550   $ 9,543      $ 759      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of September 30, 2011.

(13) SUBSEQUENT EVENTS

We have evaluated subsequent events that have occurred through November 7, 2012, the date of financial statement issuance.

On October 30, 2012, the Company’s Board of Directors declared a $0.21 per share common stock dividend, payable on November 27, 2012 to shareholders of record on November 16, 2012.

 

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Medallion Financial Corp.

Consolidated Summary Schedule of Investments

September 30, 2012

 

(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  2012
Acquisitions (5)
    Cost (4)     Fair
Value
 

Medallion Loans

                   

New York

            431        94     4.16   $ 68,690      $ 202,076      $ 201,958   
  Lena Cab Corp ##     Term Loan      12/9/2011   12/09/15     1        2     3.60     $ 3,704      $ 3,687   
  Sean Cab Corp ##     Term Loan      12/9/2011   12/08/15     1        2     3.60     $ 3,704      $ 3,687   
  Real Cab Corp     Term Loan      7/20/2007   07/20/17     1        1     2.81     $ 2,545      $ 2,545   
  Real Cab Corp     Term Loan      7/20/2007   07/20/17     1        *        2.81     $ 350      $ 350   
  Sifnos, Van-Dim, Kitriani Incs ##     Term Loan      6/8/2010   05/01/15     1        1     4.00     $ 2,539      $ 2,525   
  Cabbo Service Corp ##     Term Loan      9/7/2010   09/07/13     1        1     5.00     $ 1,800      $ 1,786   
  Slo Cab Corp     Term Loan      7/20/2007   07/20/17     1        *        2.81     $ 210      $ 210   
  Slo Cab Corp     Term Loan      7/20/2007   07/20/17     1        1     2.81     $ 1,527      $ 1,527   
  Lety Cab Corp ##     Term Loan      10/21/2010   10/20/15     1        1     4.00     $ 1,616      $ 1,611   
  Daytona Hacking Corp ##     Term Loan      6/1/2012   06/01/15     1        1     3.75   $ 1,400      $ 1,392      $ 1,394   
  Nosilla Service Co., Inc ##     Term Loan      8/13/2012   08/13/15     1        1     3.63   $ 1,350      $ 1,346      $ 1,343   
  Orys Trans Corp ##     Term Loan      9/26/2011   07/22/13     1        1     3.00     $ 1,279      $ 1,281   
  Sandhu & Baath Inc/Note 2 Of 2 ##     Term Loan      5/10/2011   05/10/14     1        *        4.75     $ 641      $ 640   
  Sandhu & Baath Inc/Note 1 Of 2 ##     Term Loan      5/10/2011   05/10/14     1        *        4.75     $ 640      $ 639   
  Cafe Service Co Inc ##     Term Loan      11/9/2011   11/09/16     1        1     4.40     $ 1,252      $ 1,249   
  Vichy Cab Corp ##     Term Loan      2/21/2012   02/21/15     1        1     4.50   $ 1,250      $ 1,250      $ 1,247   
  Bunty & Jyoti Inc ##     Term Loan      11/22/2011   11/22/14     1        1     4.25     $ 1,241      $ 1,238   
  Sonu-Seema Corp ##     Term Loan      11/22/2011   11/22/14     1        1     4.25     $ 1,241      $ 1,238   
  Spurt Cab Corp ##     Term Loan      4/1/2011   10/01/13     1        1     4.75     $ 1,237      $ 1,236   
  Nancy Transit Inc ##     Term Loan      4/6/2011   04/06/14     1        1     4.50     $ 1,237      $ 1,234   
  Januko Transit Inc ##     Term Loan      12/9/2011   12/09/15     1        1     3.60     $ 1,235      $ 1,232   
  Sapphire Transit Inc ##     Term Loan      3/23/2011   12/08/15     1        1     3.60     $ 1,231      $ 1,228   
  Sabrinush Transit Inc ##     Term Loan      3/23/2011   12/08/15     1        1     3.60     $ 1,231      $ 1,228   
  Brini Transit Inc ##     Term Loan      3/23/2011   12/08/15     1        1     3.60     $ 1,231      $ 1,228   

    Various New York &&

  2.22% to 10.13% ##     Term Loan      12/20/00

to

09/24/12

  10/06/12

to

09/10/23

    406        78     4.23   $ 64,690      $ 166,397      $ 166,375   

Chicago

            116        19     5.30   $ 29,488      $ 39,811      $ 39,982   
  Cozy Cab Et Al ##     Term Loan      12/22/2011   12/22/14     1        2     5.50     $ 3,398      $ 3,400   
  Sweetgrass Peach &Chadwick Cap ##     Term Loan      8/28/2012   08/28/15     1        1     5.50   $ 1,750      $ 1,745      $ 1,747   
  Chicago Medallion Nine Llc ##     Term Loan      5/2/2012   05/02/17     1        1     5.75   $ 1,440      $ 1,421      $ 1,423   
  Lucky Seven Chicago One Inc ##     Term Loan      7/19/2012   07/19/15     1        1     4.88   $ 1,290      $ 1,287      $ 1,290   
  Blue Eyes Cab Corp ##     Term Loan      7/19/2012   07/19/15     1        1     4.88   $ 1,290      $ 1,287      $ 1,289   

    Various Chicago &&

  4.50% to 8.75% ##     Term Loan      01/22/10
to
09/21/12
  01/22/13
to
09/21/17
    111        14     5.28   $ 23,718      $ 30,673      $ 30,833   

Newark &&

  5.25% to 8.75% ##     Term Loan      04/06/00
to
09/20/12
  10/11/12
to
08/23/17
    100        8     6.94   $ 3,885      $ 16,836      $ 16,927   

Boston

            47        7     6.10   $ 5,808      $ 14,239      $ 14,290   
  Chidi Trans Inc ##     Term Loan      11/17/2011   11/17/14     1        *        6.00     $ 705      $ 707   
  Chidi Trans Inc     Term Loan      4/20/2012   04/20/15     1        *        5.50   $ 664      $ 660      $ 662   
  Arinze Trans Inc     Term Loan      2/5/2010   02/05/13     1        *        7.25     $ 617      $ 617   
  Arinze Trans Inc     Term Loan      4/20/2012   04/20/15     1        *        5.50   $ 621      $ 615      $ 617   
  Various Boston && 3.25% to 9.66% ##     Term Loan      06/12/07
to
09/27/12
  11/02/12
to
06/12/18
    43        5     6.11   $ 4,523      $ 11,642      $ 11,687   

Cambridge &&

  5.00% to 9.22% ##     Term Loan      03/28/08
to
09/21/12
  10/21/12
to
11/18/20
    19        3     6.44   $ 941      $ 5,753      $ 5,767   

Other

            13        1     6.72   $ 224      $ 2,951      $ 2,962   

    Philadelphia

  Dorit Matityahu ##     Term Loan      8/4/2011   08/04/14     1        1     6.25     $ 2,146      $ 2,147   

    Various Other &&

  6.00% to 11.5% ##     Term Loan      11/26/07
to
01/09/12
  10/01/12
to
03/10/18
    12        *        7.98   $ 224      $ 805      $ 815   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total medallion loans ($222,488 pledged as collateral under borrowing arrangements)

   

        726        132     4.66   $ 109,036      $ 281,666      $ 281,886   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Commercial Loans              

Secured mezzanine (24% Minnesota, 15% Florida, 15% Oklahoma, 9% North Carolina, 9% New York

             

7% California, 7% Wisconsin, 5% Arizona and 9% all other states) (2)

             

Manufacturing (63% of the total)

    Aeration & (interest rate includes PIK interest of 21.00%) (capitalized interest of $81 per footnote 2)   Term Loan   12/31/10   04/30/13     1        1     21.00     $ 2,416      $ 2,187   
    Dynamic Systems (interest rate includes PIK interest of 3.50%) (capitalized interest of $16 per footnote 2)   Term Loan   12/23/10   12/23/17     1        1     15.50     $ 1,841      $ 1,841   
    Motion Tech (interest rate includes PIK interest of 6.00%) (capitalized interest of $19 per footnote 2)   Term Loan   12/23/10   12/23/15     1        1     18.00     $ 1,305      $ 1,310   
    Orchard &   Term Loan   03/10/99   Matured     1        1     13.00     $ 1,390      $ 1,390   
    +      PACA Foods &   Term Loan   12/31/10   12/31/15     1        1     13.00     $ 2,686      $ 2,084   
    +      Packaging Specialists (interest rate includes PIK interest of 6.00%) (capitalized interest of $224 per footnote 2)   Term Loan   04/01/08   12/31/13     1        1     14.00     $ 2,214      $ 2,214   
    Process Fab & (interest rate includes PIK interest of 8.00%)   Term Loan   04/17/08   12/31/15     1        1     8.00     $ 4,500      $ 2,814   
    Quaker Bakery (interest rate includes PIK interest of 5.00%) (capitalized interest of $68 per footnote 2)   Term Loan   03/28/12   03/28/17     1        1     17.00   $ 2,600      $ 2,668      $ 2,656   
    Reel Power (capitalized interest of $85 per footnote 2)   Term Loan   12/31/09   02/04/14     1        2     14.00     $ 3,586      $ 3,586   
    +      RespirTech   Term Loan   04/25/12   04/25/17     1        1     12.00   $ 1,500      $ 1,500      $ 1,510   
    +      Various Other 12.00% to 14.00% (capitalized interest of $108 per footnote 2)   Term Loan   12/15/04

to

07/17/12

  03/31/13
to
07/17/17
    4        2     13.15   $ 1,625      $ 3,741      $ 3,756   

Administrative and Support Services (12% of the total)

    Verifications   Term Loan   09/06/12   09/06/17     1        1     12.00   $ 2,500      $ 2,500      $ 2,518   
    +      Staff One & (interest rate includes PIK interest of 13.00%)   Term Loan   06/30/08   12/31/13     1        1     13.00     $ 3,306      $ 1,853   
    +      Staff One & (interest rate includes PIK interest of 13.00%)   Term Loan   09/15/11   12/31/13     1        *        13.00     $ 615      $ 615   
    Various Other && 19% (capitalized interest of $198 per footnote 2)   Term Loan   1/14/2005   Matured     1        *        19.00     $ 4,971      $ 0   

Wholesale Trade (10% of the total)

    Twin-Star (interest rate includes PIK interest of 1.00%)   Term Loan   06/01/07   04/24/14     1        2     13.00     $ 4,000      $ 4,000   

Arts, Entertainment, and Recreation (9% of the total)

    RPAC Racing (interest rate includes PIK interest of 10.00%) (capitalized interest of $609 per footnote 2)   Term Loan   11/19/10   11/19/15     1        2     10.00     $ 3,648      $ 3,648   

Accommodation and Food Services (3% of the total)

    Various Other && 9.25% to 10.00% (capitalized interest of $232 per footnote 2)   Term Loan   06/30/00
to
11/05/10
  10/01/15
to
11/05/15
    3        1     9.86     $ 3,164      $ 1,113   

Health Care and Social Assistance (2% of the total)

    +      Various Other && 7%   Term Loan   6/28/2007   6/30/2017     1        *        7.00     $ 1,254      $ 954   

Retail Trade (1% of the total)

    Various Other && 10% (capitalized interest of $38 per footnote 2)   Term Loan   6/30/2000   10/1/2015     1        *        10.00     $ 646      $ 270   

Professional, Scientific, and Technical Services (0% of the total)

    Various Other && 10% (capitalized interest of $108 per footnote 2)   Term Loan   10/26/2011   11/1/2014     1        *        10.00     $ 108      $ 108   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total secured mezzanine (2)

        26        19     13.39   $ 8,225      $ 52,059      $ 40,427   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Asset-based (78% New York, 15% New Jersey, and 7% all other states)

             

Wholesale Trade (51% of the total)

             
    Capitalsea, LLC ##   Revolving line of credit   11/07/05   11/07/12     1        1     4.50     $ 1,480      $ 1,450   
    Newburg Egg Corp. ##   Revolving line of credit   03/16/99   03/16/13     1        1     6.00     $ 1,379      $ 1,359   
    Various Other 4.75% to 6.75%   Revolving line of credit   01/23/99
to
06/01/12
  11/30/12
to
08/15/13
    9        1     5.52   $ 360      $ 1,761      $ 1,726   

Transportation and Warehousing (18% of the total)

    Various Other 5.75% to 8.00%   Revolving line of credit   12/31/01
to
07/20/07
  10/18/12
to
07/20/13
    5        1     6.58     $ 1,630      $ 1,601   

Retail Trade (11% of the total)

    Various Other 4.75% to 6.19%   Revolving line of credit   10/19/98
to
08/31/06
  10/12/12
to
08/31/13
    5        *        5.22     $ 1,038      $ 1,008   

Finance and Insurance (7% of the total)

    Various Other 4.25% to 8.25%   Revolving line of credit   02/06/02
to
11/10/11
  10/25/12
to
08/04/13
    6        *        6.26     $ 687      $ 664   

Manufacturing (6% of the total)

    Various Other 5.75% to 7.25%   Revolving line of credit   07/07/04
to
04/20/12
  11/29/12
to
07/07/13
    7        *        6.60   $ 27      $ 555      $ 532   

Construction (3% of the total)

    Various Other 5.75% to 6.00%   Revolving line of credit   06/29/99
to
07/20/99
  06/29/13
to
07/20/13
    2        *        5.86     $ 235      $ 231   

Accommodation and Food Services (2% of the total)

    Various Other 6.00% to 6.00%   Revolving line of credit   04/27/11
to
04/27/11
  04/27/13
to
04/27/13
    1        *        6.00     $ 156      $ 154   

Administrative and Support Services (2% of the total)

    Various Other 5.50% to 5.75%   Revolving line of credit   06/22/04
to
06/30/07
  06/22/13
to
06/30/13
    2        *        5.75     $ 232      $ 221   

Health Care and Social Assistance (0% of the total)

    Various Other 5.75% to 5.75%   Revolving line of credit   10/2/2007   10/2/2012     1        *        5.75     ($ 15   ($ 16
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total asset-based ($6,173 pledged as collateral under borrowing arrangements)

        40        4     5.73   $ 387      $ 9,138      $ 8,930   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Other secured commercial (75% New York, 23% New Jersey, 2% Illinois)

  

       

Accommodation and Food Services (51% of the total)

      

  Dune Deck Owners Corp ##   Term Loan   04/24/07   03/31/14     1        1     7.25     $ 3,097      $ 3,097   
    Various Other && 8.50% to 12.50%   Term Loan   05/25/05
to
07/29/08
  10/14/12
to
02/25/15
    4        *        10.20     $ 662      $ 661   

Retail Trade (42% of the total)

    0.00% to 12.00% &&   Term Loan   09/13/06
to
04/06/12
  03/14/13
to
04/06/19
    14        1     9.39   $ 1,372      $ 3,546      $ 3,110   

Other Services (except Public Administration) (3% of the total)

       

  5.50% to 6.50%   Term Loan   01/16/04
to
05/02/09
  01/16/14
to
05/02/14
    2        *        5.91     $ 239      $ 239   

Real Estate and Rental and Leasing (3% of the total)

      

  4.75% to 6.00%   Term Loan   04/22/99
to
04/01/10
  04/01/15
to
09/01/15
    2        *        5.23     $ 205      $ 203   

Transportation and Warehousing (1% of the total)

      

  5.65% to 6.50%   Term Loan   10/07/10
to
01/20/12
  10/05/12
to
11/22/13
    5        *        5.80   $ 250      $ 95      $ 98   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other secured commercial loans ($3,097 pledged as collateral under borrowing arrangements)

      28        3     8.36   $ 1,622      $ 7,844      $ 7,408   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans ($9,270 pledged as collateral under borrowing arrangements) (2)

      94        27     11.80   $ 10,234      $ 69,041      $ 56,765   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

             

Commercial Banking

    Medallion Bank **   100% of common stock   05/16/02   None     1        42     9.96     $ 90,379      $ 90,379   

Real Estate

    Medallion Hamptons Holding LLC   100% of membership interests   06/21/05   None     1        1     0.00     $ 2,616      $ 2,616   

Various Other

        12/20/04
to
5/23/12
  None     4        1     0.00   $ 900      $ 2,172      $ 2,172   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

      6        45     9.46   $ 900      $ 95,167      $ 95,167   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity investments

                     

Appliance Recycler #

    Appliance Recycling Centers of America, Inc. **   8.86% of common stock   09/10/98   None     1        1     0.00     $ 0      $ 1,549   

Commercial Finance

    Convergent Capital, Ltd   7% of limited partnership interest   07/20/07   None     1        1     0.00     $ 1,093      $ 1,393   

NASCAR Race Team

    Medallion MotorSports, LLC   75% of limited liability interest   11/24/10   None     1        *        0.00     $ 454      $ 454   

Bakery

    Quaker Bakery   *   03/28/12   None     1        *        0.00     $ 359      $ 359   

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

    **   * to 9.25% of common stock   12/31/10
to
3/30/12
  None     3        *        4.30   $ 750      $ 1,786      $ 1,129   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity investments, net

              9        2     1.76   $ 750      $ 4,375      $ 5,202   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities

                     
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities, net

              0        0     0.00     $ 0      $ 0   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Investments ($231,758 pledged as collateral under borrowing arrangements) (3)

      835        205     6.74   $ 120,920      $ 450,249      $ 439,020   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 $1,786 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 205%.
(4) Gross unrealized appreciation, gross unrealized depreciation, and net appreciation for federal income tax purposes totalled $38,898, $19,126 and $19,772, respectively. The tax cost of investments was $419,248.
(5) For revolving lines of credit the amount shown is the cost at September 30, 2012.
* Less than 1.0%
** Not an eligible portfolio company as such term is defined in Section 2(a)(46) of the 1940 Act. The percentage value of all non-eligible portfolio companies to totalled assets of Medallion Financial on an unconsolidated basis was up to 28% and up to 29% on a consolidated basis.
& Loan is on nonaccrual status, or past due on contractual payments, and is therefore considered non-income producing.
&& Some or all of the securities are non-income producing as per & above.
# Publicly traded but sales subject to applicable Rule 144 limitations.
## Pledged as collateral under borrowing arrangements.
+ Includes various warrants, all of which have a cost and fair value of zero at September 30, 2012.

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.

 

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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
 

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   

 

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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
 
   

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   
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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     6.38   $ 213,159      $ 464,724      $ 451,835   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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. The percentage value of all non-eligible portfolio companies to total assets of Medallion Financial on an unconsolidated basis was up to 27% and up to 16% on a consolidated basis.
&    Loan is on nonaccrual status, or past due on contractual payments, and is therefore considered non-income producing.
&&    Some or all of the securities are non-income producing as per & above.
#    Publicly traded but sales subject to applicable Rule 144 limitations.
##    Pledged as collateral under borrowing arrangements.
+    Includes various warrants, all of which have a cost and fair value of zero at December 31, 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.

 

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Table of Contents

Medallion Financial Corp.

Consolidated Schedule of Investments In and Advances to Affiliates

As of and for the nine months ended September 30, 2012

(Dollars in thousands)

 

Name of issuer and title of issue (2)

  

Number of share (all restricted unless

otherwise noted)

   Equity in net profit and
(loss) for the 3 months
    Equity in net profit and
(loss) for the 9 months
    (3 months) Amount
of dividends or
interest (1)
     (9 Months) Amount
of dividends or
interest (1)
     Value as  of
9/30/12
 
(Dollars in thousands)                                      

Medallion Bank—common stock

   1,000,000 shares -100% of common stock    $ 5,245      $ 14,067      $ 2,000       $ 6,500       $ 90,379   

Medallion Hamptons Holding LLC—membership interest

   100% of membership interest      0        0        0         0         2,616   

LAX Group LLC—membership interest

   57% of membership interest      (216     (309     0         0         581   

Medallion Servicing Corp.—common stock

   1,000 shares - 100% of common stock      (94     (243     0         0         655   

Generation Outdoor, Inc.—common stock

   1,000 shares - 100% of common stock      257        267        11         24         932   

Medallion Sports Media, Inc.—common stock

   1,000 shares - 100% of common stock      (77     (290     0         0         4   
     

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries

        5,115        13,492        2,011         6,524         95,167   
     

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Appliance Recycling Centers of America Inc—common stock

   8% of common stock      0        0        0         0         1,549   

RPAC Racing, LLC—membership interest

   30% of membership interest      0        0        0         0         454   

Summit Medical, Inc—common stock

   9.25% of common stock      0        0        0         0         135   

Aeration Industries International LLC—membership interest

   5.25% of membership interest      0        0        0         0         0   

Other equity investments other than in investments in and advances to affiliates

        —          —          —           —           3,064   
     

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total equity investments

        0        0        0         0         5,202   
     

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries and equity investments

      $ 5,115      $ 13,492      $ 2,011       $ 6,524       $ 100,369   
     

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other interest and dividend income other than from investments in and advances to affiliates

            10         34      
         

 

 

    

 

 

    

Total dividend and interest income on short term investments

          $ 2,021       $ 6,558      
         

 

 

    

 

 

    

Total investments in and advances to affiliates

                $ 97,305   

Other equity investments other than in investments in and advances to affiliates

                  3,064   
               

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries and equity investments

                $ 100,369   
               

 

 

 

 

(1) Investments with an amount of $0 are considered non-income producing.

The table below provides a recap of the changes in the investment in the respective issuers for the period ended September 30, 2012.

 

(Dollars in thousands)   

Value

as of

1/1/12

    

Gross

Additions /
Investments

    

Gross

Reductions /
Distributions

    

Net equity

earnings in
profit

and loss,
unrealized
appreciation
and
depreciation

   

Value

as of

3/31/12

    

Gross

Additions /
Investments

    

Gross

Reductions /
Distributions

    

Net equity

earnings in
profit

and loss,
unrealized
appreciation
and
depreciation

   

Value

as of
6/30/12

     Gross
Additions /
Investments
    

Gross

Reductions /
Distributions

    

Net equity

earnings in
profit

and loss,
unrealized
appreciation
and
depreciation

   

Value

as of

9/30/12

 

Medallion Bank—common stock

   $ 82,852       $ 95       $ 2,000       $ 4,059      $ 85,006       $ 0       $ 5,195       $ 4,762      $ 84,573       $ 2,561       $ 2,000       $ 5,245      $ 90,379   

Medallion Hamptons Holding LLC—membership interest

     2,436         70         0         0        2,506         85         0         0        2,591         25         0         0        2,616   

LAX Group LLC—membership interest

     0         0         0         0        0         900         0         (103     797         —           0         (216     581   

Medallion Servicing Corp.—common stock

     577         61         0         (72     566         91         0         (77     580         169         0         (94     655   

Generation Outdoor, Inc.—common stock

     65         0         0         27        92         400         0         (17     475         200         0         257        932   

Medallion Sports Media, Inc.—common stock

     2         150         0         (115     37         80         0         (98     19         62         0         (77     4   

Appliance Recycling Centers of America Inc—common stock

     2,225         0         0         (213     2,012         0         0         (272     1,740         0         0         (191     1,549   

 

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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

(Dollars in thousands)

 

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  

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   

 

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Table of Contents

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

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, trailers and to finance small scale home improvement. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 5%, and our commercial loan portfolio at a compound annual growth rate of 2% (10% and 7% 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 13%. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which includes assets serviced for third party investors, were $1,176,796,000 as of September 30, 2012, and $1,141,806,000 and $1,113,595,000 as of December 31, 2011 and September 30, 2011, and have grown at a compound annual growth rate of 11% from $215,000,000 at the end of 1996.

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

We also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. These investments may be venture capital style investments which may not be fully collateralized. Medallion Capital’s investments are typically in the form of secured debt instruments with fixed interest rates accompanied by 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 business development company 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 Utah industrial bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. 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 $343,827,000 as of September 30, 2012. 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 investments are inversely related. When an appreciated asset is sold to realize a gain, a decrease in the previously recorded unrealized appreciation occurs. Conversely, when a loss previously recorded as unrealized depreciation is realized by the sale or other disposition of a depreciated portfolio asset, the reclassification of the loss from unrealized to realized causes a decrease in net unrealized depreciation and an increase in realized loss.

Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis, and determine whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the current moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) before July 2013. Because of these restrictions and other factors, our Board of Directors has determined that Medallion Bank has little value beyond its

 

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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 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.

 

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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.

 

     September 30, 2012     June 30, 2012     March 31, 2012     December 31, 2011     September 30, 2011  
     Interest     Investment     Interest     Investment     Interest     Investment     Interest     Investment     Interest     Investment  

(Dollars in thousands)

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

Medallion loans

                    

New York

     4.16   $ 202,076        4.43   $ 201,452        4.52   $ 214,858        4.66   $ 227,426        5.20   $ 229,008   

Chicago

     5.30        39,811        5.45        35,355        5.51        33,217        5.79        34,200        6.45        29,149   

Newark

     6.94        16,836        7.11        16,625        7.20        16,848        7.38        17,693        7.49        17,766   

Boston

     6.10        14,239        6.14        14,895        6.49        15,097        6.56        16,955        6.64        16,916   

Cambridge

     6.44        5,753        6.51        6,048        6.57        6,433        6.62        6,179        6.67        6,297   

Other

     6.72        2,951        6.74        3,021        6.46        4,186        6.54        4,318        6.76        4,373   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total medallion loans

     4.66        281,666        4.89        277,396        4.97        290,639        5.11        306,771        5.59        303,509   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Deferred loan acquisition costs

       220          360          386          396          434   

Unrealized depreciation on loans

       —            —            —            —            —     
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net medallion loans

     $ 281,886        $ 277,756        $ 291,025        $ 307,167        $ 303,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial loans

                  

Secured mezzanine

     13.39   $ 52,059        13.54   $ 53,649        13.61   $ 53,577        14.04   $ 51,622        14.24   $ 57,578   

Asset based

     5.73        9,138        5.71        7,123        5.65        9,024        5.77        9,388        5.62        8,070   

Other secured commercial

     8.36        7,844        8.32        8,120        8.25        8,156        8.06        7,539        8.35        9,251   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total commercial loans

     11.80        69,041        12.11        68,892        11.98        70,757        12.25        68,549        12.58        74,899   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Deferred loan acquisition income

       (67       (52       (113       (92       (112

Unrealized depreciation on loans

       (12,209       (14,560       (14,533       (14,298       (15,767
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net commercial loans

     $ 56,765        $ 54,280        $ 56,111        $ 54,159        $ 59,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

     9.46   $ 95,167        8.99   $ 89,035        7.37   $ 88,207        6.40   $ 85,932        4.69   $ 85,264   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity investments

     1.76   $ 4,375        1.64   $ 4,575        1.46   $ 4,581        2.26   $ 3,472        2.13   $ 3,471   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Unrealized appreciation (depreciation) on equities

       827          825          943          1,105          1,284   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net equity investments

     $ 5,202        $ 5,400        $ 5,524        $ 4,577        $ 4,755   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments at cost (2)

     6.74   $ 450,249        6.81   $ 439,898        6.49   $ 454,184        6.38   $ 464,724        6.52   $ 467,143   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Deferred loan acquisition (income) costs

       153          308          273          304          322   

Unrealized appreciation (depreciation) on equities

       827          825          943          1,105          1,284   

Unrealized depreciation on loans

       (12,209       (14,560       (14,533       (14,298       (15,767
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investments

     $ 439,020        $ 426,471        $ 440,867        $ 451,835        $ 452,982   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Medallion Bank investments

                    

Medallion loans

     4.39   $ 328,705        4.53   $ 313,164        4.65   $ 297,421        4.79   $ 294,214        5.22   $ 277,328   

Consumer loans

     17.11        256,396        17.39        232,884        17.68        204,393        17.73        199,843        17.77        204,819   

Commercial loans

     5.01        73,903        5.05        75,451        4.98        79,749        4.97        76,606        4.98        75,383   

Investment securities

     2.54        21,638        2.72        20,680        2.58        24,044        2.51        25,419        3.21        21,660   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Medallion Bank investments at cost

     9.19        680,642        9.20        642,179        9.01        605,607        9.06        596,082        9.55        579,190   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Deferred loan acquisition costs

       7,004          6,417          5,749          5,597          5,744   

Unrealized appreciation on investment securities

       1,032          896          769          714          851   

Premiums paid on purchased securities

       389          315          356          403          222   

Unrealized depreciation on loans

       (14,905       (14,766       (14,480       (14,576       (14,741
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Medallion Bank net investments

     $ 674,162        $ 635,041        $ 598,001        $ 588,220        $ 571,266   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 8.25%, 8.31%, 8.15%, 8.18%, and 8.70% at September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, and September 30, 2011.

 

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Investment Activity

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

 

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

(Dollars in thousands)

   2012     2011     2012     2011  

Net investments at beginning of period

   $ 426,471      $ 465,425      $ 451,835      $ 483,516   

Investments originated (1)

     79,329        28,026        146,643        131,677   

Repayments of investments (1)

     (69,649     (41,530     (165,843     (166,576

Net realized gains (losses) on investments (2)

     (2,546     686        (2,281     1,270   

Net increase in unrealized appreciation (3)

     5,468        395        8,793        3,077   

(Amortization) accretion of origination costs

     (53     (20     (127     18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in investments

     12,549        (12,443     (12,815     (30,534
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investments at end of period

   $ 439,020      $ 452,982      $ 439,020      $ 452,982   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes refinancings.
(2) Excludes net realized losses of $74 for the quarter and nine months ended September 30, 2012, related to foreclosed properties, which are carried in other assets on the consolidated balance sheet.
(3) Excludes net unrealized appreciation of $2,426 and $6,815 for the quarter and nine months ended September 30, 2012, and $2,378 and $3,487 for the comparable 2011 periods, related to foreclosed properties, which are carried in other assets on the consolidated balance sheet.

PORTFOLIO SUMMARY

Total Portfolio Yield

The weighted average yield of the total portfolio at September 30, 2012 was 6.74% (6.07% for the loan portfolio), an increase of 36 basis points from 6.38% at December 31, 2011, and an increase of 22 basis points from 6.52% at September 30, 2011. The weighted average yield of the total managed portfolio at September 30, 2012 was 8.07% (8.25% for the loan portfolio), an increase of 7 basis points from 8.00% at December 31, 2011, and a decrease of 41 basis points from 8.48% at September 30, 2011. The changes in 2012 reflected changes in the portfolio mix.

Medallion Loan Portfolio

Our medallion loans comprised 64% of the net portfolio of $439,020,000 at September 30, 2012, compared to 68% of the net portfolio of $451,835,000 at December 31, 2011, and 67% of $452,982,000 at September 30, 2011. Our managed medallion loans of $609,688,000 comprised 60% of the net managed portfolio of $1,022,149,000 at September 30, 2012, compared to 63% of the net managed portfolio of $956,626,000 at December 31, 2011, and 62% of $942,355,000 at September 30, 2011. The medallion loan portfolio decreased by $25,281,000 or 8% in 2012 (an increase of $9,021,000 or 2% on a managed basis), primarily reflecting the movement of loans to Medallion Bank. Total medallion loans serviced for third parties were $67,558,000, $75,866,000, and $84,673,000 at September 30, 2012, December 31, 2011, and September 30, 2011.

The weighted average yield of the medallion loan portfolio at September 30, 2012 was 4.66%, a decrease of 45 basis points from 5.11% at December 31, 2011, and a decrease of 93 basis points from 5.59% at September 30, 2011. The weighted average yield of the managed medallion loan portfolio at September 30, 2012 was 4.52%, a decrease of 44 basis points from 4.96% at December 31, 2011, and a decrease of 89 basis points from 5.41% at September 30, 2011. The decrease in yield primarily reflected the impact of falling interest rates in the economy and the effects of borrower refinancings. At September 30, 2012, 28% of the medallion loan portfolio represented loans outside New York, compared to 26% at December 31, 2011, and 25% at September 30, 2011. At September 30, 2012, 22% of the managed medallion loan portfolio represented loans outside New York, compared to 22% at December 31, 2011 and September 30, 2011. We continue to focus our efforts on originating higher yielding medallion loans outside the New York market.

Commercial Loan Portfolio

Our commercial loans represented 13%, 12%, and 13% of the net investment portfolio as of September 30, 2012, December 31, 2011, and September 30, 2011, and were 13%, 13%, and 14% on a managed basis. Commercial loans increased by $2,606,000 or 5% during 2012 (decreased $36,000 or less than 1% on a managed basis), primarily reflecting increases in the secured mezzanine portfolio, and on a managed basis, decreases in the asset-based portfolio. Net commercial loans serviced by third parties were $13,231,000 at September 30, 2012, $14,298,000 at December 31, 2011, and $14,029,000 at September 30, 2011.

The weighted average yield of the commercial loan portfolio at September 30, 2012 was 11.80%, a decrease of 45 basis points from 12.25% at December 31, 2011, and a decrease of 78 basis points from 12.58% at September 30, 2011. The weighted average yield of the managed commercial loan portfolio at September 30, 2012 was 8.29%, a decrease of 12 basis points from 8.41% at December 31, 2011,

 

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and a decrease of 48 basis points from 8.77% at September 30, 2011. The fluctuations primarily reflect changes in the portfolio mix and changes in the rates earned. 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 September 30, 2012, variable-rate loans represented approximately 14% of the commercial portfolio, compared to 14% and 12% at December 31, 2011 and September 30, 2011, and were 56%, 57%, and 54% 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.

Consumer Loan Portfolio

Our managed consumer loans, all of which are held in the portfolio managed by Medallion Bank, represented 24%, 20%, and 21% of the managed net investment portfolio as of September 30, 2012, December 31, 2011, and September 30, 2011. Medallion Bank originates adjustable and fixed rate consumer loans secured by recreational vehicles, boats, motorcycles, trailers, and home improvements. located in all 50 states. The portfolio is serviced by a third party subsidiary of a major commercial bank.

The weighted average gross yield of the managed consumer loan portfolio was 17.11% at September 30, 2012, compared to 17.73% and 17.77% at December 31, 2011 and September 30, 2011. Adjustable rate loans represented 78%, 80%, and 80% of the managed consumer portfolio at September 30, 2012, December 31, 2011, and September 30, 2011.

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 third party servicer.

The following table shows the trend in loans 90 days or more past due.

 

     September 30, 2012     June 30, 2012     March 31, 2012     December 31, 2011     September 30, 2011  

(Dollars in thousands)

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

Medallion loans

   $ 216         0.1   $ 580         0.2   $ 47         0.0   $ 35         0.0   $ 495         0.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Commercial loans

                         

Secured mezzanine

     6,361         1.8        8,845         2.5        12,457         3.5        14,930         4.0        8,896         2.4   

Asset-based receivable

     —           0.0        —           0.0        —           0.0        —           0.0        —           0.0   

Other secured commercial

     309         0.1        —           0.0        —           0.0        390         0.1        759         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans

     6,670         1.9        8,845         2.5        12,457         3.5        15,320         4.1        9,655         2.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans 90 days or more past due

   $ 6,886         2.0   $ 9,425         2.7   $ 12,504         3.5   $ 15,355         4.1   $ 10,150         2.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Medallion Bank loans

   $ 980         0.2   $ 887         0.1   $ 1,254         0.2   $ 1,265         0.2   $ 1,354         0.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total managed loans 90 days or more past due

   $ 7,866         0.8   $ 10,312         1.1   $ 13,758         1.5   $ 16,620         1.8   $ 11,504         1.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(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 loan delinquencies remained low. Secured mezzanine delinquencies improved reflecting collection and restructuring efforts, and loan chargeoffs. Medallion Bank experienced continued improvement in the delinquency of its consumer loan portfolios, which remained at low levels in addition to the delinquencies in the loan portfolio as described above, receivables from bonuses related to certain investments of $6,468,000 were delinquent at September 30, 2012. We are actively working with each delinquent borrower/obligor to bring them current, and believe that any potential loss exposure is reflected in our mark-to-market estimates on each investment. 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 tables set forth the changes in our unrealized appreciation (depreciation) on investments, other than investments in controlled subsidiaries, for the 2012 and 2011 quarters shown below.

 

(Dollars in thousands)

   Medallion
Loans
     Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2011

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

Net change in unrealized

           

Appreciation on investments

     —           —          (213     2,377        2,164   

Depreciation on investments

     —           (659     51        33        (575

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           424        —          —          424   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

     —           (14,533     943        26,974        13,384   

Net change in unrealized

           

Appreciation on investments

     —           —          (92     1,997        1,905   

Depreciation on investments

     —           (27     (28     (18     (73

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           —          2        —          2   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2012

     —           (14,560     825        28,953        15,218   

Net change in unrealized

           

Appreciation on investments

     —           —          (191     2,377        2,186   

Depreciation on investments

     —           (33     (7     (18     (58

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           2,384        200        67        2,651   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2012

   $ —         ($ 12,209   $ 827      $ 31,379      $ 19,997   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

   Medallion
Loans
     Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2010

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

Net change in unrealized

           

Appreciation on investments

     —           —          310        —          310   

Depreciation on investments

     —           (533     6        —          (527

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2011

     —           (11,750     517        21,109        9,876   

Net change in unrealized

           

Appreciation on investments

     —           —          300        1,109        1,409   

Depreciation on investments

     —           (1,567     469        —          (1,098

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2011

     —           (13,317     1,286        22,218        10,187   

Net change in unrealized

           

Appreciation on investments

     —           —          13        2,378        2,391   

Depreciation on investments

     —           (2,450     (15     —          (2,465

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2011

   $ —         ($ 15,767   $ 1,284      $ 24,596      $ 10,113   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents credit-related information for the investment portfolios as of the dates shown.

 

(Dollars in thousands)

   September 30,
2012
    June 30,
2012
    March 31,
2012
    December 31,
2011
    September 30,
2011
 

Total loans

          

Medallion loans

   $ 281,886      $ 277,756      $ 291,025      $ 307,167      $ 303,943   

Commercial loans

     56,765        54,280        56,111        54,159        59,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     338,651        332,036        347,136        361,326        362,963   

Investment in Medallion Bank and other controlled subsidiaries

     95,167        89,035        88,207        85,932        85,264   

Equity investments (1)

     5,202        5,400        5,524        4,577        4,755   

Investment securities

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investments

   $ 439,020      $ 426,471      $ 440,867      $ 451,835      $ 452,982   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

   $ 674,162      $ 635,041      $ 598,001      $ 588,220      $ 571,266   

Managed net investments

   $ 1,022,149      $ 976,360      $ 953,297      $ 956,626      $ 942,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized appreciation (depreciation) on investments

          

Medallion loans

   $ —        $ —        $ —        $ —        $ —     

Commercial loans

     (12,209     (14,560     (14,533     (14,298     (15,767
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     (12,209     (14,560     (14,533     (14,298     (15,767

Investment in Medallion Bank and other controlled subsidiaries

     —          —          —          —          —     

Equity investments

     827        825        943        1,105        1,284   

Investment securities

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized depreciation on investments

   ($ 11,382   ($ 13,735   ($ 13,590   ($ 13,193   ($ 14,483
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   ($ 13,873   ($ 13,869   ($ 13,711   ($ 13,862   ($ 13,890

Managed total unrealized depreciation on investments

   ($ 25,255   ($ 27,604   ($ 27,301   ($ 27,055   ($ 28,373
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Medallion loans

     —       —       —       —       —  

Commercial loans

     (17.68     (21.14     (20.54     (20.86     (21.05

Total loans

     (3.48     (4.20     (4.02     (3.81     (4.17

Investment in Medallion Bank and other controlled subsidiaries

     —          —          —          —          —     

Equity investments

     18.90        18.03        20.59        31.82        36.97   

Investment securities

     —          —          —          —          —     

Net investments

     (2.53     (3.12     (2.99     (2.84     (3.10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

     (2.04 %)      (2.16 %)      (2.26 %)      (2.33 %)      (2.40 %) 

Managed net investments

     (2.43 %)      (2.77 %)      (2.80 %)      (2.77 %)      (2.94 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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The following table presents the gain/loss experience on the investment portfolios for the three and nine months ended September 30, 2012 and 2011.

 

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

(Dollars in thousands)

   2012     2011     2012     2011  

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

        

Medallion loans

   $ —        $ —        $ —        $ —     

Commercial loans

     (2,482     (70     (2,894     (51
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     (2,482     (70     (2,894     (51

Investment in Medallion Bank and other controlled subsidiaries

     —          —          —          —     

Equity investments

     (64     756        613        1,321   

Investment securities

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total realized gains (losses) on loans and equity investments

     (2,546     686        (2,281     1,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments at Medallion Bank and other controlled subsidiaries

     (823     (1,292     (3,172     (4,152
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   ($ 3,369   ($ 606   ($ 5,453   ($ 2,882
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Medallion loans

     —       —       —       —  

Commercial loans

     (14.45     (0.36     (5.60     (0.08

Total loans

     (2.83     (0.07     (1.08     (0.02

Investment in Medallion Bank and other controlled subsidiaries

     —          —          —          —     

Equity investments

     (5.64     88.23        19.38        44.66   

Investment securities

     —          —          —          —     

Net investments

     (2.27     0.58        (0.67     0.35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

     (0.49     (0.89     (0.67     (0.98

Managed net investments

     (1.31 %)      (0.25 %)      (0.73 %)      (0.40 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes $74 of realized losses on foreclosed properties for the three and nine months ended September 30, 2012, which are carried in other assets on the consolidated balance sheet.

The table below summarizes components of unrealized and realized gains and losses in the investment portfolio for the three and nine months ended September 30, 2012 and 2011.

 

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

(Dollars in thousands)

   2012     2011     2012     2011  

Net change in unrealized appreciation on investments

        

Unrealized appreciation

   ($ 191   $ 14      ($ 497   $ 624   

Unrealized depreciation

     (40     (2,466     (702     (4,091

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

     3,115        2,847        6,982        6,544   

Realized gains

     —          —          —          —     

Realized losses

     2,584        —          3,010        —     

Unrealized gains on foreclosed properties and other assets

     2,426        2,378        6,815        3,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 7,894      $ 2,773      $ 15,608      $ 6,564   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains on investments

        

Realized gains

   $ —        $ —        $ —        $ —     

Realized losses

     (2,584     —          (3,010     —     

Other gains

     136        796        495        1,358   

Direct recoveries (chargeoffs)

     (98     (110     234        (88

Realized losses on foreclosed properties and other assets

     (74     —          (74     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   ($ 2,620   $ 686      ($ 2,355   $ 1,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Investment in Medallion Bank and Other Controlled Subsidiaries

Investment in Medallion Bank and other controlled subsidiaries represented 22%, 19%, and 19% of our total portfolio at September 30, 2012, December 31, 2011, and September 30, 2011. 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. Separately, Medallion Bank declared dividends to us of $2,000,000 and $6,500,000 in the 2012 third quarter and nine months, and $1,000,000 and $3,000,000 in the comparable 2011 periods. 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 September 30, 2012, December 31, 2011, and September 30, 2011. Equity investments were 1% of our total managed portfolio at September 30, 2012, December 31, 2011, and September 30, 2011. Equity investments are comprised of common stock, partnership interests, and warrants.

Investment Securities

Investment securities were 0% of our total portfolio at September 30, 2012, December 31, 2011, and September 30, 2011. Investment securities were 2%, 3%, and 2% of our total managed portfolio at September 30, 2012, December 31, 2011, and September 30, 2011. 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 three and nine months ended September 30, 2012 and 2011. Our average balances declined and Medallion Bank’s average balances increased, reflecting the sourcing of more business to Medallion Bank, and an increase in loan participations sold. The decrease in borrowing costs reflected the trend of decreasing interest rates in the economy, particularly as Medallion Bank deposits matured and were repriced.

 

      Three Months Ended     Nine Months Ended  

(Dollars in thousands)

   Interest
Expense
     Average
Balance
     Average
Borrowing
Costs
    Interest
Expense
     Average
Balance
     Average
Borrowing
Costs
 

September 30, 2012

                

Revolving lines of credits

   $ 685       $ 148,066         1.84   $ 2,241       $ 161,314         1.86

SBA debentures

     824         57,293         5.72        2,695         60,515         5.95   

Notes payable to banks

     535         55,309         3.84        1,994         65,597         4.06   

Preferred securities

     521         33,000         6.28        1,790         33,000         7.25   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 2,565       $ 293,668         3.47      $ 8,720       $ 320,426         3.64   
  

 

 

    

 

 

      

 

 

    

 

 

    

Medallion Bank borrowings

   $ 1,328       $ 568,829         0.93      $ 3,742       $ 533,751         0.94   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total managed borrowings

   $ 3,893       $ 862,497         1.80      $ 12,462       $ 854,177         1.95   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

September 30, 2011

                

Revolving lines of credits

   $ 753       $ 173,758         1.72   $ 2,281       $ 175,462         1.74

SBA debentures

     1,196         76,805         6.18        3,492         79,089         5.90   

Notes payable to banks

     847         70,574         4.76        2,600         75,177         4.62   

Preferred securities

     635         33,000         7.63        1,903         33,000         7.71   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 3,431       $ 354,137         3.84      $ 10,276       $ 362,728         3.79   
  

 

 

    

 

 

      

 

 

    

 

 

    

Medallion Bank borrowings

   $ 1,309       $ 486,726         1.07      $ 4,862       $ 483,967         1.34   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total managed borrowings

   $ 4,740       $ 840,863         2.24      $ 15,138       $ 846,695         2.39   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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 September 30, 2012 and 2011, short-term adjustable rate debt constituted 68% of total debt, and was 23% and 29% 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 investment portfolio to reflect our estimate of the current value of the total investment portfolio. Since no ready market exists for our investments, fair value is subject to our Board of Directors’ good faith determination. In determining such fair value, our Board of Directors considers factors such as the financial condition of our borrowers and the adequacy of their collateral. Any change in the fair value of portfolio loans or other investments as determined by our Board of Directors is reflected in net unrealized depreciation or appreciation on investments and affects net increase in net assets resulting from operations, but has no impact on net investment income or distributable income.

Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and 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 regulatory restrictions, such as the current moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) before July 2013. Because of these restrictions and other factors, our Board of Directors has determined that Medallion Bank has

 

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little value beyond its 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 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.

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 three and nine months ended September 30, 2012 and 2011.

 

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

(Dollars in thousands, except per share data)

   2012     2011     2012     2011  

Statement of operations

        

Investment income

   $ 7,147      $ 8,029      $ 23,074      $ 26,040   

Interest expense

     2,565        3,431        8,720        10,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,582        4,598        14,354        15,764   

Noninterest income

     265        218        941        953   

Operating expenses

     3,510        3,440        10,555        11,020   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     1,337        1,376        4,740        5,697   

Income tax (provision) benefit

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     1,337        1,376        4,740        5,697   

Net realized gains (losses) on investments

     (2,620     686        (2,355     1,270   

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

     3,115        2,847        6,982        6,544   

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

     4,779        (74     8,626        20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 6,611      $ 4,835      $ 17,993      $ 13,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data

        

Net investment income

   $ 0.06      $ 0.08      $ 0.24      $ 0.33   

Income tax (provision) benefit

     —          —          —          —     

Net realized gains (losses) on investments

     (0.12     0.04        (0.12     0.07   

Net change in unrealized appreciation on investments (1)

     0.37        0.15        0.79        0.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.31      $ 0.27      $ 0.91      $ 0.77   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.21      $ 0.19      $ 0.63      $ 0.54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

        

Basic

     21,284,143        17,403,007        19,438,227        17,402,520   

Diluted

     21,554,715        17,643,075        19,694,114        17,600,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

      September 30,
2012
     December 31,
2011
 

Balance sheet data

     

Net investments

   $ 439,020       $ 451,835   

Total assets

     514,722         537,031   

Total funds borrowed

     295,296         357,779   

Total liabilities

     300,955         365,527   

Total shareholders’ equity

     213,767         171,504   
  

 

 

    

 

 

 

Managed balance sheet data (2)

     

Net investments

   $ 1,022,149       $ 956,626   

Total assets

     1,122,469         1,080,239   

Total funds borrowed

     874,321         872,108   

Total liabilities

     908,703         908,735   
  

 

 

    

 

 

 

 

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     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

Selected financial ratios and other data

        

Return on average assets (ROA) (3)

        

Net investment income after taxes

     1.04     1.02     1.21     1.41

Net increase in net assets resulting from operations

     5.12        3.59        4.61        3.36   

Return on average equity (ROE) (4)

        

Net investment income after taxes

     2.51        3.26        3.29        4.59   

Net increase in net assets resulting from operations

     12.41        11.44        12.50        10.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average yield

     6.57     6.93     7.04     7.42

Weighted average cost of funds

     2.36        2.96        2.66        2.93   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin (5)

     4.21        3.97        4.38        4.49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income ratio (6)

     0.24     0.19     0.29     0.27

Total expense ratio (7)

     5.58        5.92        5.88        6.07   

Operating expense ratio (8)

     3.23        2.97        3.22        3.14   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     September 30, 2012     December 31, 2011  

As a percentage of net investment portfolio

    

Medallion loans

     64     68

Commercial loans

     13        12   

Investment in Medallion Bank and other controlled subsidiaries

     22        19   

Equity investments

     1        1   

Investment securities

     —          —     
  

 

 

   

 

 

 

Investments to assets (9)

     85     84

Equity to assets (10)

     42        32   

Debt to equity (11)

     138        209   
  

 

 

   

 

 

 
(1) Unrealized appreciation (depreciation) on investments represents the increase (decrease) for the period in the fair value of our investments, including the results of operations for Medallion Bank and other controlled subsidiaries, where applicable.
(2) Includes the balances of wholly-owned, unconsolidated portfolio companies, primarily Medallion Bank.
(3) ROA represents the net investment income after taxes or net increase in net assets resulting from operations, divided by average total assets.
(4) ROE represents the net investment income after taxes or net increase in net assets resulting from operations, divided by average shareholders’ equity.
(5) Net interest margin represents net interest income for the period divided by average interest earning assets, and included interest recoveries and bonuses of $22 and $316 in the three and nine months ended September 30, 2012, and $387 and $1,514 for the comparable 2011 periods, and also included $2,000 and $6,500 of dividends from Medallion Bank for the three and nine months ended September 30, 2012, and $1,000 and $3,000 for the comparable 2011 periods. On a managed basis, combined with Medallion Bank, the net interest margin was 6.39% and 6.25% for the three and nine months ended September 30, 2012, and was 6.47% and 6.51% for the comparable 2011 periods.
(6) Noninterest income ratio represents noninterest income divided by average interest earning assets.
(7) Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average interest earning assets.
(8) Operating expense ratio represents operating expenses divided by average interest earning assets.
(9) Represents net investments divided by total assets as of the period indicated.
(10) Represents total shareholders’ equity divided by total assets as of the period indicated.
(11) Represents total funds borrowed divided by total shareholders’ equity as of the period indicated.

Consolidated Results of Operations

2012 Third Quarter and Nine Months Compared to the 2011 Periods

Net increase in net assets resulting from operations was $6,611,000 or $0.31 per diluted common share and $17,993,000 or $0.91 in the 2012 third quarter and nine months, up $1,776,000 or 37% and $4,462,000 or 33% from $4,835,000 or $0.27 per share and $13,531,000 or $0.77 in the 2011 third quarter and nine months, primarily reflecting higher net realized/unrealized gains and noninterest income, partially offset by higher operating expenses and lower net interest income; and in the nine months by higher net realized/unrealized gains and lower operating expenses, partially offset by lower net interest and noninterest income. Net investment income after income taxes was $1,337,000 or $0.06 per share and $4,740,000 or $0.24 in the 2012 quarter and nine months, down $39,000 or 3%, and $957,000 or 17% from $1,376,000 or $0.08 per share and $5,697,000 or $0.33 in the 2011 quarter and nine months.

Investment income was $7,147,000 and $23,074,000 in the 2012 third quarter and nine months, down $882,000 or 11% and $2,966,000 or 11% from $8,029,000 and $26,040,000 in the year ago periods, and included $22,000 and $316,000 from interest recoveries and bonuses on certain investments in the 2012 quarter and nine months, compared to $387,000 and $1,514,000 in the 2011 periods. Also included in the 2012 quarter and nine months was $2,000,000 and $6,500,000 in dividends from Medallion Bank, compared to $1,000,000 and $3,000,000 in the comparable 2011 periods. Excluding those items, investment income decreased $1,517,000 or 23% in the quarter and $5,268,000 or 24% in the nine months, primarily reflecting the repricing of the portfolios to lower current market interest rates, and the sourcing of a greater proportion of the Company’s business to Medallion Bank. The yield on the investment portfolio was 6.57% in the 2012 quarter, down 5% from 6.93% in 2011, and was 7.04% in the 2012 nine months, down 5% from 7.42% in the 2011 nine months. Excluding the extra interest and dividends, the 2012 third quarter and nine month yields were down 18% and 19% to 4.71% and 4.96%,

 

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from 5.73% and 6.13% in the 2011 quarter and nine months, reflecting the general decrease in market interest rates and changes in the portfolio mix. Average investments outstanding were $432,767,000 and $438,001,000 in the 2012 quarter and nine months, down 6% and 7% from $460,083,000 and $469,396,000 in the year ago periods, primarily reflecting portfolio growth, more than offset by loan participations sold and loan payments received.

Medallion loans were $281,886,000 at quarter end, down $22,057,000 or 7% from $303,943,000 a year ago, both representing 64% of the investment portfolio, compared to 57% a year ago, and were yielding 4.66% compared to 5.59% a year ago, a decrease of 17%, reflecting the repricing of the portfolio to lower current market interest rates. The decrease in outstandings primarily reflected the sourcing of more business to Medallion Bank and repayments, primarily in the New York market, partially offset by portfolio growth, particularly in Chicago. The managed medallion portfolio, which includes loans at Medallion Bank and those serviced for third parties, was $677,246,000 at quarter end, up $11,786,000 or 2% from $665,460,000 a year ago, reflecting the above and the strong overall portfolio growth at Medallion Bank, particularly in the New York and Chicago markets, partially offset by a reduction in third party participations sold. The commercial loan portfolio was $56,765,000 at quarter end, compared to $59,020,000 a year ago, a decrease of $2,255,000 or 4%, and represented 13% of the investment portfolio for both periods. The decrease primarily reflected repayments in the high-yield mezzanine loan portfolio. Commercial loans yielded 11.80% at quarter end, down 6% from 12.58% a year ago, reflecting the change in portfolio mix and lower yields on the mezzanine portfolio. The net managed commercial loan portfolio, which includes loans at Medallion Bank and those serviced for or by third parties, was $116,403,000 at quarter end, down $2,907,000 or 2% from $119,310,000 a year ago, primarily reflecting decreases in the asset-based and other secured commercial loan portfolios. Investments in Medallion Bank and other controlled subsidiaries were $95,167,000 at quarter end, up $9,903,000 or 12% from $85,264,000 a year ago, primarily reflecting our equity in the earnings of Medallion Bank, and which represented 22% of the investment portfolio, compared to 19% a year ago, and which yielded 9.46% at quarter end, compared to 4.69% a year ago, reflecting the increased dividends from the Bank over the last several quarters. See Notes 3 and 10 of the consolidated financial statements for additional information about Medallion Bank and the other controlled subsidiaries. Equity investments were $5,202,000 at quarter end, up $447,000 or 9% from $4,755,000 a year ago, primarily reflecting increased equity purchases and portfolio depreciation, and represented 1% of the investment portfolio at both quarter ends, and had a dividend yield of 1.76%, compared to 2.13% a year ago. Investment securities were zero at both quarter ends. See page 29 for a table that shows balances and yields by type of investment.

Interest expense was $2,565,000 and $8,720,000 in the 2012 quarter and nine months, down $866,000 or 25% and $1,556,000 or 15% from $3,431,000 and $10,276,000 in the 2011 periods. The decrease in interest expense was primarily due to decreased levels of borrowing, but also reflected reduced funding costs. The cost of borrowed funds was 3.47% and 3.64% in the 2012 quarter and nine months, compared to 3.84% and 3.79% in the year ago periods, decreases of 10% and 4%, reflecting the adjustable rate nature of much of our borrowings, and changes in our funding mix. Average debt outstanding was $293,668,000 and $320,426,000 for the 2012 quarter and nine months, compared to $354,137,000 and $362,728,000 in the year ago periods, decreases of 17% and 12%, primarily reflecting decreased borrowings as much of our portfolio growth has been in Medallion Bank. See page 36 for a table which shows average balances and cost of funds for our funding sources.

Net interest income was $4,582,000 and $14,354,000 and the net interest margin was 4.21% and 4.38% for the 2012 third quarter and nine months, down $16,000 and down $1,410,000 or 9% from $4,598,000 and $15,764,000 a year ago, which represented net interest margins of 3.97% and 4.49%, all reflecting the items discussed above.

Noninterest income, which is comprised of prepayment fees, servicing fee income, late charges, and other miscellaneous income was $265,000 and $941,000 in the 2012 third quarter and nine months, up $47,000 or 22% and down $12,000 or 1% from $218,000 and $953,000 a year ago, primarily reflecting higher prepayment fees, partially offset by lower servicing and other fees generated from the portfolio base at Medallion Bank.

Operating expenses were $3,510,000 and $10,555,000 in the 2012 third quarter and nine months, up $70,000 or 2% and down $465,000 or 4% from $3,440,000 and $11,020,000 in the 2011 periods. Salaries and benefits expense was $2,240,000 and $6,577,000 in the third quarter and nine months, up $139,000 or 7% and $517,000 or 9% from $2,101,000 and $6,060,000 in 2011, primarily reflecting higher bonus accruals and stock-based compensation expense, partially offset by lower salaries and health insurance costs; and in the nine months, also by lower salary deferrals related to loan originations. Professional fees were $341,000 and $1,090,000 in the quarter and nine months, up $121,000 or 55% and $347,000 or 47% from $220,000 and $743,000 a year ago, primarily reflecting higher legal and other professional expenses related to various investment opportunities; and in the nine months by lower other professional expenses. Occupancy expense was $211,000 and $631,000 in the quarter and nine months, down $24,000 or 10% and $57,000 or 8% from $235,000 and $688,000 in the 2011 periods, primarily reflecting higher rent allocated to unconsolidated portfolio companies. Other operating expenses of $718,000 and $2,257,000 in 2012 were down $166,000 or 19% and $1,272,000 or 36% from $884,000 and $3,529,000 a year ago, primarily reflecting lower other operating expenses, director’s fees, and franchise tax accruals, partially offset by higher travel and entertainment expenses, and in the nine months, by $942,000 of costs accrued in 2011 related to a proposed investment opportunity that may have been recoverable in the future, and lower other operating expenses and director’s fees.

Income tax expense was $0 in the 2012 and 2011 third quarters and nine months.

 

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Net change in unrealized appreciation on investments was $7,894,000 and $15,608,000 in the 2012 third quarter and nine months, compared to $2,773,000 and $6,564,000 in the 2011 third quarter and nine months, an increase in appreciation of $5,121,000 in the quarter and $9,044,000 in the nine months. 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 $4,779,000 and $8,626,000 in the 2012 quarter and nine months, compared to depreciation of $74,000 and appreciation of $20,000 in the 2011 periods, resulting in increased appreciation of $4,853,000 and $8,606,000 in the 2012 quarter and nine months. 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 2012 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $3,115,000 ($6,982,000 in the nine months), net appreciation on foreclosed property of $2,426,000 ($6,815,000 in the nine months), reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $2,384,000 ($2,808,000 in the nine months), and reversals of unrealized depreciation associated with equity investments which were sold of $200,000 ($202,000 in the nine months), partially offset by net unrealized depreciation on equity investments of $198,000 ($480,000 in the nine months) and net unrealized depreciation on loans of $33,000 ($719,000 in the nine months). The 2011 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $2,847,000 ($6,544,000 in the nine months) and net appreciation on foreclosed property of $2,378,000 ($3,487,000 in the nine months), partially offset by net unrealized depreciation on loans of $2,450,000 ($4,550,000 in the nine months) and net unrealized depreciation on equity investments of $2,000 ($1,083,000 of appreciation in the nine months). 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 $2,000,000 and $6,500,000 in the 2012 third quarter and nine months, and were $1,000,000 and $3,000,000 in the comparable 2011 periods.

Our net realized losses on investments were $2,620,000 and $2,355,000 in the 2012 quarter and nine months, compared to gains of $686,000 and $1,270,000 in the 2011 quarter and nine months, an increase in realized losses of $3,306,000 in the quarter and $3,625,000 in the nine months. The 2012 activity reflected the reversals described in the unrealized paragraph above, net direct chargeoffs of $98,000 ($234,000 of net direct recoveries in the nine months), and net realized losses on sales of foreclosed property of $74,000 ($74,000 in the nine months), partially offset by gains on the sale of equity investments of $136,000 ($495,000 in the nine months). The 2011 activity reflected gains on the sale of equity investments of $796,000 ($1,358,000 in the nine months) and net direct chargeoffs of $110,000 ($88,000 in the nine months).

Our net realized/unrealized gains on investments were $5,274,000 and $13,253,000 in the 2012 quarter and nine months, compared to $3,459,000 and $7,834,000 in the 2011 periods, an increase of $1,815,000 and $5,419,000 in net gains in the 2012 periods, reflecting the above.

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

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

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

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 $54,935,000 with a weighted average interest rate of 5.27%, constituting 19% of our total indebtedness as of September 30, 2012. Also, as of September 30, 2012, portions of the adjustable rate debt with banks repriced at intervals of as long as 3 months, and certain of the certificates of deposit were for terms of up to 43 months, further mitigating the immediate impact of changes in market interest rates.

 

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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 September 30, 2012, compared to the respective positions at the end of 2011 and 2010. 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.

 

September 30, 2012 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

   $ 9,138      $ —        $ —        $ —         $ —         $ —         $ —        $ 9,138   

Adjustable-rate

     4,360        —          323        552         —           —           —          5,235   

Fixed-rate

     41,212        65,613        120,395        60,963         45,514         1,901         737        336,335   

Cash

     14,813        —          —          —           —           —           —          14,813   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total earning assets

   $ 69,523      $ 65,613      $ 120,718      $ 61,515       $ 45,514       $ 1,901       $ 737      $ 365,521   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Interest bearing liabilities

                   

Revolving lines of credit

   $ 151,218      $ —        $ —        $ —         $ —         $ —         $ —        $ 151,218   

Notes payable to banks

     24,120        1,396        26,718        3,909         —           —           —          56,143   

SBA debentures

     19,450        12,000        4,500        —           —           —           18,985        54,935   

Preferred securities

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 227,788      $ 13,396      $ 31,218      $ 3,909       $ —         $ —         $ 18,985      $ 295,296   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Interest rate gap

   ($ 158,265   $ 52,217      $ 89,500      $ 57,606       $ 45,514       $ 1,901       ($ 18,248   $ 70,225   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Cumulative interest rate gap (2)

   ($ 158,265   ($ 106,048   ($ 16,548   $ 41,058       $ 86,572       $ 88,473       $ 70,225        —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011 (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        —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) The ratio of the cumulative one year gap to total interest rate sensitive assets was (43%), (40%), and (28%), as of September 30, 2012, and December 31, 2011, and 2010, and was (36%), (26%), and (29%) 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 ($59,622) or (16%) for September 30, 2012, compared to ($57,386) or (14%) and ($30,928) or (7%) for December 31, 2011 and 2010, and was ($170,287) or (16%), ($60,584) or (6%), and ($114,994) or (12%) on a combined basis with Medallion Bank.

Our interest rate sensitive assets were $365,521,000 and interest rate sensitive liabilities were $295,296,000 at September 30, 2012. The one-year cumulative interest rate gap was a negative $158,265,000 or 43% of interest rate sensitive assets, compared to a negative $163,313,000 or 40% at December 31, 2011 and $121,343,000 or 28% at December 31, 2010. However, using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of $59,622,000 or 16% at September 30, 2012. 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 $1,060,653,000 and interest rate sensitive liabilities were $874,308,000 at September 30, 2012. The one year cumulative interest rate gap was a negative $385,899,000 or 36% of interest rate sensitive assets, compared to a negative $272,395,000 or 26% and $289,178,000 or 29% at December 31, 2011 and 2010. Using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of $170,287,000 or 16% at September 30, 2012.

Interest Rate Cap Agreements

We manage our exposure to increases in market rates of interest by periodically purchasing interest rate caps to lock in the cost of funds of our variable-rate debt in the event of a rapid run up in interest rates. Beginning in 2009, we entered into contracts to purchase interest rate caps on $592,000,000 of notional value of principal from various multinational banks, of which $150,000,000 are active with termination dates ranging to July 2015. The caps provide for payments to us if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases of $465,000 were generally fully expensed when paid, including $16,000 and $58,000 for the three and nine months ended September 30, 2012, and $5,000 and $93,000 for the comparable 2011 periods, and all are carried at $0 on the balance sheet at September 30, 2012.

 

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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 $48,782,000 of availability. Lastly, $72,000,000 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 $81,500,000 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 September 30, 2012. See Note 4 to the consolidated financial statements on page 17 for details of the contractual terms of our borrowings.

 

(Dollars in thousands)

   Balance      Percentage     Rate (1)  

Revolving lines of credit

   $ 151,218         51     1.32

Notes payable to banks

     56,143         19        3.56   

SBA debentures

     54,935         19        5.27   

Preferred securities

     33,000         11        2.54   
  

 

 

    

 

 

   

Total outstanding debt

   $ 295,296         100     2.62   
  

 

 

    

 

 

   

 

 

 

Deposits at Medallion Bank

     579,025         —          0.70
  

 

 

      

Total outstanding debt, including Medallion Bank

   $ 874,321         —          1.35   
  

 

 

    

 

 

   

 

 

 

 

(1) Weighted average contractual rate as of September 30, 2012.

Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all contractual obligations at September 30, 2012.

 

      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

   $ —         $ 151,218       $ —         $ —         $ —         $ —         $ 151,218   

Notes payable to banks

     24,678         2,075         25,481         3,909         —           —           56,143   

SBA debentures

     19,450         12,000         4,500         —           —           18,985         54,935   

Preferred securities

     —           —           —           —           —           33,000         33,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,128       $ 165,293       $ 29,981       $ 3,909       $ —         $ 51,985       $ 295,296   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deposits at Medallion Bank

     377,710         127,022         65,293         9,000         —           —           579,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total, including Medallion Bank

   $ 421,838       $ 292,315       $ 95,274       $ 12,909       $ —         $ 51,985       $ 874,321   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We value our portfolio at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy. Unlike certain lending institutions, we are not permitted to establish reserves for loan losses. Instead, we must value each individual investment and portfolio loan on a quarterly basis. We record unrealized depreciation on investments and loans when we believe that an asset has been impaired and full collection is unlikely. We record unrealized appreciation on equities if we have a clear indication that the underlying portfolio company has appreciated in value and, therefore, our equity investment has also appreciated in value. Without a readily ascertainable market value, the estimated value of our portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. We adjust the valuation of the portfolio quarterly to reflect our Board of Directors’ estimate of the current fair value of each investment in the portfolio. Any changes in estimated fair value are recorded in our statement of operations as net unrealized appreciation (depreciation) on investments. Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of its fair value. We conduct a thorough valuation analysis, and 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 the restrictions described previously, including the scheduled expiration in July 2013 of the current moratorium on the acquisition of control of an industrial bank such as Medallion Bank by a “commercial firm,” 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

 

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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 September 30, 2012 by approximately $1,160,000 on an annualized basis, compared to a positive impact of $1,477,000 at December 31, 2011, and the impact of such an immediate increase of 1% over a one year period would have been ($2,141,000) at September 30, 2012, compared to ($1,665,000) at December 31, 2011. 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.

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 September 30, 2012. 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     12/31/2011  

Cash

   $ 1,847      $ 2,131      $ 2,596      $ 2,621       $ 5,618      $ —        $ 14,813      $ 29,352   

Bank loans

     47,665        80,478        —          —           —          —          128,143      $ 147,228   

Amounts undisbursed

     19,000        53,000        —          —           —          —          72,000        72,700   

Amounts outstanding

     28,665        27,478        —          —           —          —          56,143        74,528   

Average interest rate

     3.09     4.05     —          —           —          —          3.56     3.77

Maturity

     10/12-1/16        11/12-1/15        —          —           —          —          10/12-1/16        3/12-2/17   

Preferred securities

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

Average interest rate

     2.54     —          —          —           —          —          2.54     7.68

Maturity

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

Lines of credit

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

Amounts undisbursed

     —          48,782        —          —           —          —          48,782        19,434   

Amounts outstanding

     —          151,218        —          —           —          —          151,218        180,566   

Average interest rate

     —          1.32     —          —           —          —          1.32     1.45

Maturity

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

SBA debentures

     —          —          25,500        —           34,435        —          59,935      $ 74,685   

Amounts undisbursed

     —          —          5,000        —           —          —          5,000        5,000   

Amounts outstanding

     —          —          20,500        —           34,435        —          54,935        69,685   

Average interest rate

     —          —          5.18     —           5.33     —          5.27     5.44

Maturity

     —          —          3/14-3/21        —           3/13-3/21        —          3/13-3/21        9/12-3/21   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and amounts remaining undisbursed under credit facilities

   $ 20,847      $ 103,913      $ 7,596      $ 2,621       $ 5,618      $ —        $ 140,595      $ 126,486   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total debt outstanding

   $ 61,665      $ 178,696      $ 20,500      $ —         $ 34,435      $ —        $ 295,296      $ 357,779   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Including Medallion Bank

                                                 

Cash

     —          —          —          —           —        $ 14,491      $ 14,491      $ 28,626   

Certificates of deposit

     —          —          —          —           —          579,025        579,025        514,329   

Average interest rate

     —          —          —          —           —          0.70     0.70     0.73

Maturity

     —          —          —          —           —          10/12-5/16        10/12-5/16        1/12-12/14   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and amounts remaining undisbursed under credit facilities

   $ 20,847      $ 103,913      $ 7,596      $ 2,621       $ 5,618      $ 14,491      $ 155,086      $ 155,112   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total debt outstanding

   $ 61,665      $ 178,696      $ 20,500      $ —         $ 34,435      $ 579,025      $ 874,321      $ 872,108   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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We have available liquidity of $48,782,000 under our revolving credit agreement with DZ Bank as of September 30, 2012. 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 July 2012, the FASB issued Accounting Standards Update (ASU) 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 revises ASC Topic 350 (Intangibles-Goodwill and Other) by allowing an entity to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary. Prior to the update, an entity was required to assess indefinite-lived intangible assets for impairment by comparing the fair value of an asset to its carrying amount. The update is effective for fiscal years beginning after September 15, 2012. The Company does not believe the adoption of the standard will have an impact on its financial condition or results of operation.

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.

Common Stock

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 November 6, 2012, there were approximately 241 holders of record of the Company’s common stock.

On November 6, 2012, the last reported sale price of our common stock was $12.51 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.

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.

 

2012

   DIVIDENDS
DECLARED
     HIGH      LOW  

Third Quarter

   $ 0.21       $ 12.05       $ 10.73   

Second Quarter

     0.21         11.89         10.00   

First Quarter

     0.21         11.45         10.65   
  

 

 

    

 

 

    

 

 

 

2011

                    

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   
  

 

 

    

 

 

    

 

 

 

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   

January 1 through September 30, 2012

    —          —          —          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, 2012, we extended the terms of the Stock Repurchase Program. Purchases were to commence no earlier than November 2012 and are to conclude 180 days after the commencement of the purchases.

Control Statutes

Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly, Medallion Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of 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 Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act, your investment in Medallion Financial Corp. is not 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in disclosure regarding quantitative and qualitative disclosures about market risk since we filed our Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 4. CONTROLS AND PROCEDURES

Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting pursuant to Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, and have concluded that they are effective as of September 30, 2012. In addition, based on our evaluation as of September 30, 2012, there have been no changes that occurred during the 2012 nine months that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. 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.

 

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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.

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 the remainder of 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 September 30, 2012, we had $295,296,000 of outstanding indebtedness, which had a weighted average borrowing cost of 2.62% at September 30, 2012, and our wholly-owned unconsolidated portfolio companies, primarily Medallion Bank, had $579,025,000 of outstanding indebtedness at a weighted average borrowing cost of 0.70%.

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 Medallion Bank’s consumer loan portfolio.

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

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

 

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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 could result in our inability to rely upon such orders or to cause the SEC to revoke the orders which could result in material changes in our financial reporting or the way in which we conduct our business. Furthermore, any failure to comply with the requirements imposed on BDC’s by the 1940 Act could have material adverse consequences to us or our investors, including possible enforcement action by the SEC and the possible loss of our ability to qualify as a RIC that is exempt from corporate-level income tax under the Code. If we do not remain a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would further significantly decrease our operating flexibility.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was 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, could 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 which may have an adverse effect on our business.

We expect, however, to see an increase over time in regulatory scrutiny and enforcement in the area of consumer financial products regulation, as a result of the establishment of the Consumer Financial Protection Bureau, or the CFPB. 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 Act, and increased regulatory supervision, may increase our cost of doing business, impose new restrictions on the way in which we conduct our business, or add significant operational constraints that might impair our profitability.

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

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

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

Because Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly, Medallion Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of Financial Institutions, as applicable. Under the Change

 

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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 Medallion Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act, your investment in Medallion Financial Corp. is not 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 may affect our ability to, and the way in which we, raise additional capital.

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

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

 

   

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

 

   

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 investments in assets that are not “qualifying assets” are determined to exceed 30% of our total assets, we could be deemed to be in violation of the 1940 Act, which could have a material adverse effect on our business.

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 September 30, 2012, up to 29% 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 or our primary investments are deemed not to be qualifying assets, or if the fair value

 

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of our non-qualifying assets increases or is determined to be higher than previously determined, or if the fair value of our qualifying assets decreases or is determined to be lower than previously determined, we could be deemed in violation of the 1940 Act, or could be precluded from investing in what we believe are attractive investments or from making follow-on investments in existing portfolio companies that are non-qualifying assets, or could be required to dispose of non-qualifying assets at times or on terms that may be disadvantageous to us. Any of the foregoing consequences could have a material adverse effect on us. In addition, if we are found to be in violation of the requirements applicable to business development companies under the 1940 Act, we could be unable to qualify as a RIC under the Code.

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.

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. As of September 30, 2012, our largest investment subject to this test was our investment in Medallion Bank, representing 20% 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.

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.

 

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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.

Our SBIC subsidiaries are licensed by the SBA, and are therefore subject to SBA regulations.

Our SBIC subsidiaries are licensed to act as SBICs and are regulated by the SBA. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause the SBIC subsidiaries to forego attractive investment opportunities that are not permitted under SBA regulations.

Further, SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of a licensed SBIC. If the SBIC subsidiaries fail to comply with applicable SBIC regulations, the SBA could, depending on the severity of the violation, limit or prohibit their use of debentures, declare outstanding debentures immediately due and payable, and/or limit them from making new investments. In addition, the SBA can revoke or suspend a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the SBIA or any rule or regulation promulgated thereunder. Such actions by the SBA would, in turn, negatively affect us.

We 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.

 

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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 with the FDIC requiring it to maintain a 15% leverage ratio (Tier 1 capital to total assets). Medallion Bank may be restricted from declaring and paying dividends if doing so were to cause it to fall below a 15% leverage 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 which could adversely affect our net asset value.

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by our Board of Directors. Unlike other lending institutions, we are not permitted to 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, comparable sales and valuations of companies similar to the portfolio company, regulatory factors that may limit the value of the portfolio company, and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, the valuations may fluctuate over short periods of time and may be based on estimates. As a result, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed, and may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize upon the sale or disposition of one or more of our investments. Investors purchasing our securities in connection with an offering based on an overstated net asset value would pay a higher price than the value of our investments might warrant, and investors purchasing our securities in connection with an offering based on an understated net asset value would pay a lower price than the value of our investments might warrant. Our net asset value could be adversely affected if our determinations 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 September 30, 2012, our net unrealized depreciation on investments other than in controlled subsidiaries, foreclosed properties, and other assets was $11,382,000 or 2.53% 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 September 30, 2012 by approximately $1,160,000 on an annualized basis, compared to a positive impact of approximately $1,477,000 at December 31, 2011, and the impact of such an immediate increase of 1% over a one year period would have been approximately ($2,141,000) at September 30, 2012, compared to approximately ($1,665,000) at December 31, 2011. 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, other acts of violence or war, and natural disasters may affect any market for our securities, impact the businesses in which we invest, and harm our operations and profitability.

Terrorist attacks and natural disasters may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the US or US businesses or major natural disasters hitting the US. Such attacks or natural disasters 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 or elsewhere could severely impact our results of operations. Losses resulting from terrorist attacks are generally uninsurable.

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

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

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

 

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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. The New York State lower court ruled that the law was unconstitutional on August 17, 2012, but the City of New York has stated that it intends to appeal the decision. 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 $1,125,000 for corporate medallions and $717,000 for individual medallions. However, for sustained periods during that time, taxicab medallions have declined in value. Since December 31, 2010, the value of New York City taxicab medallions increased by approximately 15% for individual medallions and 32% 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 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.

 

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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. In addition, taxicab companies that constitute separate issuers may have related management or guarantors and constitute larger business relationships to us. As of September 30, 2012, 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. If our larger borrowers were to significantly reduce their relationships with us and seek financing elsewhere, the size of our loan portfolio and operating results could decrease. In addition, larger business relationships may impede our ability to immediately foreclose on a particular defaulted portfolio company as we may not want to impair an overall business relationship with either the portfolio company management or any related funding source. Additionally, a downturn in any particular industry 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 in our portfolio companies primarily through senior secured loans, junior secured loans, and subordinated debt issued by small- to mid-sized companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization, or bankruptcy of the relevant portfolio company.

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

Even though we may have structured most of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance.

 

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We may not control many of our portfolio companies.

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

We may not realize gains from our equity investments.

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

 

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ITEM 6. EXHIBITS

EXHIBITS

 

Number

  

Description

31.1    Certification of Alvin Murstein pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2    Certification of Larry D. Hall pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1    Certification of Alvin Murstein pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.2    Certification of Larry D. Hall pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
99.1    Consolidated Schedules of Investments as of September 30, 2012 and December 31, 2011. Filed herewith.

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-Q 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-Q 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 the control of the Company. Accordingly, there can be no assurance that the forward-looking statements contained in this Form 10-Q 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-Q 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-Q. The inclusion of the forward-looking statements contained in this Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-Q will be achieved. In light of the foregoing, readers of this Form 10-Q 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-Q and other documents that the Company files from time to time with the Securities and Exchange Commission, including annual reports on Form 10-K, 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 the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MEDALLION FINANCIAL CORP.
Date: November 7, 2012
By:  

/s/ Alvin Murstein

Alvin Murstein
Chairman and Chief Executive Officer
By:  

/s/ Larry D. Hall

Larry D. Hall
Senior Vice President and
Chief Financial Officer

Signing on behalf of the registrant

as principal financial and accounting officer.

 

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