Annual Statements Open main menu

MEDALLION FINANCIAL CORP - Quarter Report: 2013 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, 2013

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 7, 2013 was 22,033,510.

 

 

 


Table of Contents

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

     1   

ITEM 1. FINANCIAL STATEMENTS

     1   

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

     37   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     55   

ITEM 4. CONTROLS AND PROCEDURES

     55   

PART II - OTHER INFORMATION

     56   

ITEM 1. LEGAL PROCEEDINGS

     56   

ITEM 1A. RISK FACTORS

     56   

ITEM 6. EXHIBITS

     67   

SIGNATURES

     68   

CERTIFICATIONS

  


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASIS OF PREPARATION

We, Medallion Financial Corp., or the Company, are a closed-end, non-diversified management investment company organized as a Delaware corporation. We have elected to be treated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. We are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers, and to finance small-scale home improvements. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 5%, and our commercial loan portfolio at a compound annual growth rate of 2% (10% and 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 15%. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which includes assets serviced for third party investors, were $1,290,373,000 as of September 30, 2013, and $1,219,224,000 and $1,176,796,000 as of December 31, 2012 and September 30, 2012, 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 $200,278,000 or $12.12 per share.

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

 

   

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

 

   

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

 

   

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

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

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

In addition, we conduct business through a wholly-owned portfolio company, Medallion Bank, a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans, which are then serviced by MSC. However, the FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, or $364,200,000 at September 30, 2013. MSC earns referral and servicing fees for these activities. As a non-investment company, Medallion Bank is not consolidated with the Company, which is an investment company under the Investment Company Act of 1940, or the 1940 Act.

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, 2013.

Our consolidated balance sheet as of September 30, 2013, and the related consolidated statements of operations, changes in net assets, and cash flows for the three and nine months ended September 30, 2013 and 2012 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, 2013 and 2012, 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, 2012.

 

Page 1 of 68


Table of Contents

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)

   2013     2012     2013     2012  

Interest income on investments

   $ 5,997      $ 4,754      $ 15,439      $ 15,440   

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

     3,018        2,021        8,547        6,558   

Medallion lease income

     420        372        1,238        1,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,435        7,147        25,224        23,074   
  

 

 

   

 

 

   

 

 

   

 

 

 
        
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense (2)

     2,092        2,565        6,279        8,720   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     7,343        4,582        18,945        14,354   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     181        265        804        941   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and benefits

     2,369        2,240        7,265        6,577   

Professional fees

     (105     341        1,291        1,090   

Occupancy expense

     195        211        587        631   

Other operating expenses

     650        718        1,986        2,257   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,109        3,510        11,129        10,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     4,415        1,337        8,620        4,740   

Income tax (provision) benefit

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     4,415        1,337        8,620        4,740   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized losses on investments (4)

     (596     (2,620     (515     (2,355
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation on investments

     894        4,779        7,423        8,626   

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

     1,684        3,115        3,590        6,982   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation on investments

     2,578        7,894        11,013        15,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized/unrealized gains on investments

     1,982        5,274        10,498        13,253   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 6,397      $ 6,611      $ 19,118      $ 17,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations per common share

        

Basic

   $ 0.29      $ 0.31      $ 0.89      $ 0.93   

Diluted

     0.29        0.31        0.87        0.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.23      $ 0.21      $ 0.67      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

        

Basic

     21,730,116        21,284,143        21,596,054        19,438,227   

Diluted

     22,116,793        21,554,715        21,966,709        19,694,114   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $3,000 and $8,500 of dividend income for the three and nine months ended September 30, 2013 from Medallion Bank, and $2,000 and $6,500 for the comparable 2012 periods.
(2) Average borrowings outstanding were $320,546 and $316,624, and the related average borrowing costs were 2.59% and 2.65% for the 2013 third quarter and nine months, and were $293,668, $320,426, 3.47%, and 3.64% for the comparable 2012 periods.
(3) Includes $182 and $505 of net revenues received from Medallion Bank for the three and nine months ended September 30, 2013, and $177 and $544 for the comparable 2012 periods, primarily for servicing fees, loan origination fees, and expense reimbursements. See Notes 3 and 10 for additional information.
(4) Represents net losses on investment securities of unaffiliated issuers except for a loss of $74 on foreclosed properties in the 2012 third quarter and nine months.

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

 

Page 2 of 68


Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

     UNAUDITED        

(Dollars in thousands, except per share data)

   September 30,
2013
    December 31,
2012
 

Assets

    

Medallion loans, at fair value

   $ 291,545      $ 294,388   

Commercial loans, at fair value (1)

     63,061        56,919   

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

     102,377        99,083   

Equity investments, at fair value

     6,386        4,620   

Investment securities, at fair value

     —          —     
  

 

 

   

 

 

 

Net investments ($237,302 at September 30, 2013 and $236,357 at December 31, 2012 pledged as collateral under borrowing arrangements)

     463,369        455,010   

Cash and cash equivalents ($0 at September 30, 2013 and December 31, 2012 restricted as to use by lender)

     35,006        26,875   

Accrued interest receivable

     938        957   

Fixed assets, net

     517        601   

Goodwill, net

     5,069        5,069   

Foreclosed properties

     49,928        43,588   

Other assets, net

     15,674        11,365   
  

 

 

   

 

 

 

Total assets

   $ 570,501      $ 543,465   
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued expenses

   $ 5,757      $ 3,144   

Accrued interest payable

     510        1,233   

Funds borrowed

     338,371        322,770   
  

 

 

   

 

 

 

Total liabilities

     344,638        327,147   
  

 

 

   

 

 

 

Commitments and contingencies (2)

     —          —     

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 – 23,634,400 shares at September 30, 2013 and 23,251,937 shares December 31, 2012 issued)

     236        233   

Treasury stock at cost (1,600,733 shares at September 30, 2013 and December 31, 2012)

     (14,304     (14,304

Capital in excess of par value

     222,484        217,621   

Accumulated undistributed net investment loss

     (15,934     (13,189

Accumulated undistributed net realized gains on investments

     —          —     

Net unrealized appreciation on investments

     33,381        25,957   
  

 

 

   

 

 

 

Total shareholders’ equity (net assets)

     225,863        216,318   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 570,501      $ 543,465   
  

 

 

   

 

 

 

Number of common shares outstanding

     22,033,667        21,651,204   

Net asset value per share

   $ 10.25      $ 9.99   
  

 

 

   

 

 

 

 

(1) Includes loans of $3,759 and $3,075 to controlled subsidiaries or entities under their control at September 30, 2013, and $3,081 at December 31, 2012.
(2) See Note 9 for additional information.

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

 

Page 3 of 68


Table of Contents

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)

   2013     2012     2013     2012  

Net investment income after income taxes

   $ 4,415      $ 1,337      $ 8,620      $ 4,740   

Net realized gains (losses) on investments

     (596     (2,620     (515     (2,355

Net unrealized appreciation on investments

     2,578        7,894        11,013        15,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     6,397        6,611        19,118        17,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income, net

     (2,021     —          (6,853     (6,011

Return of capital

     (2,821     (4,505     (7,617     (5,852

Realized gain from investment transactions, net

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends and distributions to shareholders (1)

     (4,842     (4,505     (14,470     (11,863
  

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock (2)

     —          (304     —          34,657   

Stock – based compensation expense, net

     366        218        1,129        612   

Exercise of stock options

     595        71        3,736        864   

Treasury stock acquired

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share transactions

     961        (15     4,865        36,133   

Other

     5        1        32        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase in net assets

     2,521        2,092        9,545        42,263   

Net assets at the beginning of the period

     223,342        211,675        216,318        171,504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at the end of the period (3)

   $ 225,863      $ 213,767      $ 225,863      $ 213,767   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share activity

        

Common stock issued, beginning of period

     23,569,216        23,053,486        23,251,937        19,320,303   

Issuance of common stock (2)

     —          —          —          3,500,000   

Exercise of stock options

     67,986        11,176        384,165        151,419   

Issuance (forfeiture) of restricted stock, net

     (2,802     (277     (1,702     92,663   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issued, end of period

     23,634,400        23,064,385        23,634,400        23,064,385   
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, beginning of period

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

Treasury stock acquired

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, end of period

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

 

 

   

 

 

   

 

 

   

 

 

 
        
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock outstanding

     22,033,667        21,463,652        22,033,667        21,463,652   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Dividends declared were $0.23 and $0.67 per share for the 2013 third quarter and nine months, and were $0.21 and $0.63 for the comparable 2012 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, $0 of undistributed net realized gains on investments, and $9,010 and $8,927 of capital loss carryforwards at September 30, 2013 and 2012.

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

 

Page 4 of 68


Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Nine Months Ended September 30,  

(Dollars in thousands)

   2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 19,118      $ 17,993   

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

    

Depreciation and amortization

     870        936   

Amortization of origination fees

     151        127   

Net change in net unrealized appreciation on investments

     (7,423     (8,626

Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries

     (3,590     (6,982

Net realized losses on investments

     515        2,355   

Stock-based compensation expense

     1,129        612   

Decrease in accrued interest receivable

     19        159   

(Increase) decrease in other assets, net

     (5,008     916   

Increase (decrease) in accounts payable and accrued expenses

     2,613        (954

Decrease in accrued interest payable

     (722     (1,134
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,672        5,402   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Investments originated

     (186,265     (144,390

Proceeds from principal receipts, sales, and maturities of investments

     181,617        165,842   

Investments in Medallion Bank and other controlled subsidiaries, net

     296        (2,253

Capital expenditures

     (56     (315
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     (4,408     18,884   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from funds borrowed

     207,480        52,614   

Repayments of funds borrowed

     (193,929     (100,347

Issuance of SBA debentures

     25,500        —     

Repayments of SBA debentures

     (23,450     (14,750

Proceeds from issuance of common stock, net

     —          34,657   

Proceeds from exercise of stock options

     3,736        864   

Payments of declared dividends

     (14,470     (11,863
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     4,867        (38,825
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     8,131        (14,539

Cash and cash equivalents, beginning of period

     26,875        29,352   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 35,006      $ 14,813   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION

    

Cash paid during the period for interest

   $ 6,263      $ 9,040   

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.

 

Page 5 of 68


Table of Contents

MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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

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

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

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

MFC established a wholly-owned subsidiary, Taxi Medallion Loan Trust III (Trust III), for the purpose of owning medallion loans originated by MFC or others. Trust III is a separate legal and corporate entity with its own creditors who, in any liquidation of Trust III, will be entitled to be satisfied out of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders. The assets of Trust III, aggregating $194,856,000 at September 30, 2013, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC.

The Company established a wholly-owned subsidiary, Medallion Financing Trust I (Fin Trust) for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,158,000 at September 30, 2013, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.

MFC through several wholly-owned subsidiaries (together, Medallion Chicago), purchased certain City of Chicago taxicab medallions out of foreclosure which are leased to fleet operators while being held for sale. The 159 medallions are carried at a fair value of $49,928,000 on the consolidated balance sheet at September 30, 2013, compared to $43,588,000 and $41,210,000 at December 31, 2012 and September 30, 2012.

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

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

 

Page 6 of 68


Table of Contents

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 $1,500,000 related to compensating balance requirements of several regional banking organizations.

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% of the investment portfolio at September 30, 2013 and December 31, 2012, 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 $1,560,000 and $811,000 at September 30, 2013 and December 31, 2012, and non-marketable securities of $4,826,000 and $3,809,000 in the comparable periods. The $102,377,000 and $99,083,000 related to portfolio investments in controlled subsidiaries at September 30, 2013 and December 31, 2012 were all non-marketable in each period. Because of the inherent uncertainty of valuations, the Board of Directors’ estimates of the values of the investments may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.

The Company’s investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. The Company conducts a thorough valuation analysis as described previously, and also receives an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank. The Company determines whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013. Because of these restrictions and other factors, the Company’s Board of Directors has determined that Medallion Bank has little value beyond its recorded book value. As a result of this valuation process, the Company used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future. See Note 3 for additional information about Medallion Bank.

 

Page 7 of 68


Table of Contents

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 63% and 65% of the Company’s investment portfolio at September 30, 2013 and December 31, 2012 had arisen in connection with the financing of taxicab medallions, taxicabs, and related assets, of which 68% and 71% were in New York City at September 30, 2013 and December 31, 2012.

These loans are secured by the medallions, taxicabs, and related assets, and are personally guaranteed by the borrowers, or in the case of corporations, are generally guaranteed personally by the owners. A portion of the Company’s portfolio (14% and 12% at September 30, 2013 and December 31, 2012) represents loans to various commercial enterprises, in a wide variety of industries, including manufacturing, administrative and support services, accommodation and food services, retail trade and various other industries. Approximately 25% 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, 2013 and December 31, 2012.

On a managed basis, which includes the investments of Medallion Bank after eliminating the Company’s investment in Medallion Bank, medallion loans were 56% and 60% at September 30, 2013 and December 31, 2012 (75% and 78% in New York City), commercial loans were 11% and 12%, and 30% and 25% were consumer loans in all 50 states collateralized by recreational vehicles, boats, motorcycles, and trailers, and home improvements. Investment securities were 2% at September 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, net loan origination costs were $115,000 and $127,000. Net amortization expense for the three months ended September 30, 2013 and 2012 was $17,000 and $53,000, and was $151,000 and $127,000 for the comparable nine months periods.

Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized as an adjustment to the yield of the related investment. At September 30, 2013 and December 31, 2012, there were no premiums or discounts on investment securities, and their related income accretion or amortization was immaterial for 2013 and 2012.

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, 2013, December 31, 2012, and September 30, 2012, total nonaccrual loans were $18,235,000, $20,607,000, and $24,969,000, and represented 5%, 6%, and 7% 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 $11,082,000, $8,496,000, and $15,412,000 as of September 30, 2013, December 31, 2012, and September 30, 2012, of which $715,000 and $1,536,000 would have been recognized in the quarters ended September 30, 2013 and 2012, and $2,051,000 and $3,991,000 would have been recognized in the comparable nine months. The reduction in nonaccrual interest foregone and principal balances reflects the recognition of certain loans as realized losses, and hence removal from the nonaccrual disclosures.

Loan Sales and Servicing Fee Receivable

The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing (FASB ASC 860). 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, the Company has elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $430,172,000 and $452,057,000 at September 30, 2013 and December 31, 2012, and included $413,035,000 and $406,956,000 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, 2013 and December 31, 2012. The Company has assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed to and collected from Medallion Bank by MSC.

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

Unrealized appreciation (depreciation) on investments is the amount by which the fair value estimated by the Company is greater (less) than the cost basis of the investment portfolio. Realized gains or losses on investments are generated through sales of investments, foreclosure on specific collateral, and writeoffs of loans or assets acquired in satisfaction of loans, net of recoveries. Unrealized appreciation (depreciation) on investments was $33,381,000, $25,957,000, and $19,997,000 as of September 30, 2013,

 

Page 8 of 68


Table of Contents

December 31, 2012, and September 30, 2012. The Company’s investment in Medallion Bank, a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. The Company conducts a thorough valuation analysis as described previously, and also receives an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank. The Company determines whether any factors give rise to valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013. As a result of this valuation process, the Company used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future. See Note 3 for the presentation of financial information for Medallion Bank.

The following tables set forth the changes in the Company’s unrealized appreciation (depreciation) on investments, other than investments in controlled subsidiaries, for the 2013 and 2012 quarters shown below.

 

(Dollars in thousands)

   Medallion
Loans
     Commercial
Loans
    Equity
Investments
    Foreclosed
Properties 
     Total  

Balance December 31, 2012

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

Net change in unrealized

            

Appreciation on investments

     —           —          (11     3,012         3,001   

Depreciation on investments

     —           (50     14        —           (36

Reversal of unrealized appreciation (depreciation) related to realized

            

Gains on investments

     —           —          —          —           —     

Losses on investments

     —           —          —          —           —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance March 31, 2013

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

Net change in unrealized

            

Appreciation on investments

     —           —          505        2,853         3,358   

Depreciation on investments

     —           (66     273        —           207   

Reversal of unrealized appreciation (depreciation) related to realized

            

Gains on investments

     —           —          —          —           —     

Losses on investments

     —           —          —          —           —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance June 30, 2013

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

Net change in unrealized

            

Appreciation on investments

     —           —          197        475         672   

Depreciation on investments

     —           277        (654     —           (377

Reversal of unrealized appreciation (depreciation) related to realized

            

Gains on investments

     —           —          —          —           —     

Losses on investments

     —           234        365        —           599   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance September 30, 2013

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

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

Page 9 of 68


Table of Contents

(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   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 10 of 68


Table of Contents

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, 2013 and 2012.

 

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

(Dollars in thousands)

   2013     2012     2013     2012  

Net change in unrealized appreciation on investments

        

Unrealized appreciation

   $ 197      ($ 191   $ 691      ($ 497

Unrealized depreciation

     (377     (40     (207     (702

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

     1,684        3,115        3,590        6,982   

Realized gains

     —          —          —          —     

Realized losses

     599        2,584        599        3,010   

Unrealized gains on foreclosed properties and other assets

     475        2,426        6,340        6,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,578      $ 7,894      $ 11,013      $ 15,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains on investments

        

Realized gains

   $ —        $ —        $ —        $ —     

Realized losses

     (599     (2,584     (599     (3,010

Other gains

     —          136        —          495   

Direct recoveries (chargeoffs)

     3        (98     84        234   

Realized losses on foreclosed properties and other assets

     —          (74     —          (74
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   ($ 596   ($ 2,620   ($ 515   ($ 2,355
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table provides additional information on attributes of the nonperforming loan portfolio as of September 30, 2013, December 31, 2012, and September 30, 2012.

 

(Dollars in thousands)

   Recorded
Investment  (1)
     Unpaid
Principal
Balance
     Average
Recorded
Investment
 

September 30, 2013

        

Medallion

   $ —         $ —         $ —     

Commercial (2) (3)

     18,235         26,947         20,268   

December 31, 2012

        

Medallion

     —           —           —     

Commercial (2) (3)

     20,607         28,391         25,367   

September 30, 2012

        

Medallion

     —           —           —     

Commercial (2) (3)

     24,969         32,294         26,557   

 

(1) Unrealized depreciation of $7,359, $7,729, and $12,072 had been recorded as a valuation allowance on these commercial loans at September 30, 2013, December 31, 2012, and September 30, 2012.
(2) Interest income of $2 and $61 was recognized in the three and nine months ended September 30, 2013, compared to $3 and $107 for the comparable 2012 periods on these commercial loans.
(3) Included in the unpaid principal balance is unearned paid in-kind interest on nonaccrual loans of $8,712, $7,784 and $7,325, which is included in the nonaccrual disclosures in the section titled “Investment Transactions and Income Recognition” on page 10 as of September 30, 2013, December 31, 2012, and September 30, 2012.

The following table shows the aging of medallion and commercial loans as of September 30, 2013.

 

     Days Past Due                    Recorded Investment >
90 Days and Accruing
 

(Dollars in thousands)

   31 - 60      61 - 90      91 +      Total      Current      Total     

Medallion loans

   $ 1,820       $ —         $ 582       $ 2,402       $ 288,970       $ 291,372       $ 582   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     532         —           2,182         2,714         48,858         51,572         —     

Asset-based receivable

     —           —           1,054         1,054         6,019         7,073         —     

Other secured commercial

     61         —           —           61         11,863         11,924         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     593         —           3,236         3,829         66,740         70,569         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,413       $ —         $ 3,818       $ 6,231       $ 355,710       $ 361,941       $ 582   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the loan portfolio delinquencies as described above, the receivable from bonuses related to certain investments of $6,468,000 was delinquent for more than 91 days at September 30, 2013, and is carried in other assets on the consolidated balance sheet.

 

Page 11 of 68


Table of Contents

The Company entered into no troubled debt restructuring during the quarter and nine months ended September 30, 2013.

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         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 as of September 30, 2013 and December 31, 2012, and that the impairment testing of goodwill is not required. The results of this evaluation demonstrated no impairment in goodwill for any period evaluated, and management believes, and the Board of Directors concurs, that there is no impairment as of September 30, 2013. 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 $43,000 and $46,000 for the quarters ended September 30, 2013 and 2012, and was $140,000 and $122,000 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 $248,000 and $228,000 for the quarters ended September 30, 2013 and 2012, and was $730,000 and $814,000 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 $1,657,000, $1,337,000, and $1,418,000 as of September 30, 2013, December 31, 2012, and September 30, 2012.

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

 

Page 12 of 68


Table of Contents

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 2012 and 2011, and anticipates qualifying and filing as a RIC for 2013. As a result, no provisions for income taxes have been recorded for the three and nine months ended September 30, 2013 and 2012. 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 2010 through the present are the more significant filings that are open for examination.

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

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

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

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

 

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

(Dollars in thousands)

   2013      2012      2013      2012  

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

   $ 6,397       $ 6,611       $ 19,118       $ 17,993   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding applicable to basic EPS

     21,730,116         21,284,143         21,596,054         19,438,227   

Effect of dilutive stock options

     206,440         193,043         220,905         199,349   

Effect of restricted stock grants

     180,237         77,529         149,750         56,538   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted EPS

     22,116,793         21,554,715         21,966,709         19,694,114   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.29       $ 0.31       $ 0.89       $ 0.93   

Diluted earnings per share

     0.29         0.31         0.87         0.91   

Potentially dilutive common shares excluded from the above calculations aggregated 18,000 and 153,720 shares as of September 30, 2013 and 2012.

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.

During the nine months ended September 30, 2013 and 2012, the Company issued 1,393 and 92,957 restricted shares of stock-based compensation awards, and 18,000 and 5,000 shares of other stock-based compensation awards, and recognized $366,000 and $1,129,000, or $0.02 and $0.05 per diluted common share for the 2013 third quarter and nine months, and $218,000 and $612,000, or $0.01 and $0.03 per share in the comparable 2012 periods, of non-cash stock-based compensation expense related to the grants. As of September 30, 2013, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $1,123,000, which is expected to be recognized over the next eleven quarters (see Note 5).

Derivatives

The Company manages its exposure to increases in market rates of interest by periodically purchasing interest rate caps to lock in the cost of funds of its variable-rate debt in the event of a rapid run up in interest rates. The Company entered into contracts to purchase interest rate caps on $160,000,000 of notional value of principal from various multinational banks, 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 were generally fully expensed when paid, including $41,000 for the nine months ended September 30, 2013, and $16,000 and $58,000 for the 2012 three and nine months, and all are carried at $0 on the balance sheet at September 30, 2013.

 

Page 13 of 68


Table of Contents

Reclassifications

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

(3) INVESTMENT IN MEDALLION BANK AND OTHER CONTROLLED SUBSIDIARIES

The following table presents information derived from Medallion Bank’s statement of comprehensive income and other valuation adjustments on other controlled subsidiaries for the three and nine months ended September 30, 2013 and 2012.

 

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

(Dollars in thousands)

   2013     2012     2013     2012  

Statement of comprehensive income

        

Investment income

   $ 16,637      $ 14,834      $ 46,603      $ 41,442   

Interest expense

     1,299        1,328        3,905        3,742   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     15,338        13,506        42,698        37,700   

Noninterest income (expense)

     (5     91        139        310   

Operating expenses

     5,138        3,919        13,482        11,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     10,195        9,678        29,355        26,560   

Income tax provision

     (2,736     (3,273     (8,225     (8,766
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     7,459        6,405        21,130        17,794   

Net realized/unrealized losses of Medallion Bank

     (2,420     (1,094     (8,127     (3,530
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations of Medallion Bank

     5,039        5,311        13,003        14,264   

Unrealized depreciation on Medallion Bank (1)

     (3,066     (2,066     (8,697     (6,697

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

     (289     (130     (716     (585
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,684      $ 3,115      $ 3,590      $ 6,982   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, 2013 and December 31, 2012.

 

(Dollars in thousands)

   2013      2012  

Loans

   $ 746,128       $ 664,381   

Investment securities, at fair value

     25,476         22,122   
  

 

 

    

 

 

 

Net investments (1)

     771,604         686,503   

Cash

     17,361         24,770   

Other assets, net

     12,764         12,100   
  

 

 

    

 

 

 

Total assets

   $ 801,729       $ 723,373   
  

 

 

    

 

 

 

Other liabilities

   $ 3,199       $ 1,643   

Due to affiliates

     539         1,462   

Deposits and other borrowings, including accrued interest payable

     676,053         602,635   
  

 

 

    

 

 

 

Total liabilities

     679,791         605,740   

Medallion Bank equity (2)

     121,938         117,633   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 801,729       $ 723,373   
  

 

 

    

 

 

 

Investment in other controlled subsidiaries

   $ 6,170       $ 6,914   

Total investment in Medallion Bank and other controlled subsidiaries

   $ 102,377         99,083   
  

 

 

    

 

 

 

 

(1) Included in Medallion Bank’s net investments is $49 and $96 for purchased loan premium at September 30, 2013 and December 31, 2012.
(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, 2013 and December 31, 2012, the net premium on investment securities totaled $362,000 and $336,000, and $19,000 and $86,000 was amortized into interest income for the quarter and nine months ended September 30, 2013, and $36,000 and $125,000 was amortized in the comparable 2012 periods.

 

Page 14 of 68


Table of Contents

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, 2013 and December 31, 2012, net loan origination costs were $9,605,000 and $7,019,000. Net amortization expense for the quarter and nine months ended September 30, 2013 was $770,000 and $2,225,000, and was $623,000 and $1,671,000 for the comparable 2012 periods.

Medallion Bank’s policies regarding nonaccrual of medallion and commercial loans are similar to those of the Company. The consumer portfolio has different characteristics compared to commercial loans, typified by a larger number of lower dollar loans that have similar characteristics. These loans are placed on nonaccrual when they become 90 days past due, or earlier if they enter bankruptcy, and are charged off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate collection and recovery efforts against both the borrower and the underlying collateral are initiated. At September 30, 2013, $2,185,000 or 1% of consumer loans, 12,933,000 or 20% of commercial loans, and no medallion loans were on nonaccrual, compared to $2,451,000 or 1% of consumer loans, and no commercial and medallion loans on nonaccrual at December 31, 2012, and $1,937,000 or 1% of consumer loans, and no commercial or medallion loans on nonaccrual at September 30, 2012. 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 $338,000, $0, and $0 as of September 30, 2013, December 31, 2012, and September 30, 2012.

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

Medallion Bank raises deposits to fund loan originations. The deposits were raised through the use of investment brokerage firms who package deposits qualifying for FDIC insurance into pools that are sold to Medallion Bank. The rates paid on the deposits are highly competitive with market rates paid by other financial institutions, and include a brokerage fee 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, 2013 and December 31, 2012 was $1,504,000 and $1,249,000, and $304,000 and $915,000 was amortized to interest expense during the quarter and nine months ended September 30, 2013, and $298,000 and $828,000 was amortized in the comparable 2012 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,
2013
     December 31,
2012
     Interest
Rate  (1)
 

(Dollars in thousands)

   2014      2015      2016      2017      2018      Thereafter           

Deposits and other borrowings

   $ 336,628       $ 174,415       $ 146,654       $ 7,692       $ 10,015       $ —         $ 675,404       $ 602,151         0.59
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Weighted average contractual rate as of September 30, 2013.

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

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

Quantitative measures established by regulation to ensure capital adequacy require Medallion Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting Medallion Bank’s application for federal deposit insurance, the FDIC ordered that the leverage capital ratio (Tier 1 capital to average assets) be not less than 15%, and that an adequate allowance for loan losses be maintained. As a result, to facilitate maintenance of the capital ratio requirement and to provide the necessary capital for continued growth, the Company periodically makes capital contributions to Medallion Bank. Separately, Medallion Bank declared dividends to the Company of $3,000,000 and $8,500,000 in the 2013 third quarter and nine months, and $2,000,000 and $6,500,000 in the comparable 2012 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

 

Page 15 of 68


Table of Contents

capital to qualified smaller banks at favorable rates. In connection with the issuance of the Series E, the Bank exited the CPP by redeeming the Series A, B, C, and D; and received approximately $4,000,000, net of dividends due on the repaid securities. The Bank pays a dividend rate of 1% on the Series E.

The following table represents Medallion Bank’s actual capital amounts and related ratios as of September 30, 2013 and December 31, 2012, compared to required regulatory minimum capital ratios and the ratio required to be considered well capitalized. As of September 30, 2013, 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, 2013     December 31, 2012  

Tier 1 capital

     —          —        $ 121,400      $ 116,026   

Total capital

     —          —          131,262        124,791   

Average assets

     —          —          776,259        711,794   

Risk-weighted assets

     —          —          781,115        695,306   

Leverage ratio (1)

     4     5     15.6     16.3

Tier 1 capital ratio (2)

     4        6        15.5        16.7   

Total capital ratio (2)

     8        10        16.8        18.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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,
2013
     December 31,
2012
     Interest
Rate (1)
 

(Dollars in thousands)

   2014      2015      2016      2017      2018      Thereafter           

Revolving lines of credit

   $ 145,150       $ —         $ —         $ —         $ —         $ —         $ 145,150       $ 163,628         1.16

Notes payable to banks

     49,562         27,665         12,028         8,981         —           —           98,236         66,207         2.76

SBA debentures

     6,000         6,500         —           —           —           49,485         61,985         59,935         4.08

Preferred securities

     —           —           —           —           —           33,000         33,000         33,000         2.38
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 200,712       $ 34,165       $ 12,028       $ 8,981       $ —         $ 82,485       $ 338,371       $ 322,770         2.28
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Weighted average contractual rate as of September 30, 2013.

(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 $145,150,000 was outstanding at September 30, 2013. 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 (0.18% at September 30, 2013) plus 0.75%, or 90 day LIBOR (0.25% at September 30, 2013) plus 0.50%; plus 0.95%.

(B) SBA DEBENTURES

In the 2013 third quarter, the SBA approved an $8,000,000 commitment for FSVC to issue additional debentures upon payment of a 1% fee, which was paid and the debentures issued, $3,150,000 of which was used to repay a maturing debenture. In the 2013 first quarter, the SBA approved a $15,000,000 commitment for FSVC and a $5,000,000 commitment for MCI to issue additional debentures until September 30, 2017 upon payment of a 1% fee. FSVC issued $15,000,000 of debentures on March 1, 2013 and used the proceeds to repay debentures maturing on that date. 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, 2013, $137,485,000 of commitments had been fully utilized, $2,500,000 of commitments were available, and $61,985,000 was outstanding.

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.

 

Page 16 of 68


Table of Contents

(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, as well as other non-bank lenders. The notes are typically secured by various assets of the underlying borrower. The Company believes the participation agreements represent legal true sales of the loans to the lender, but for accounting purposes these participations are treated as financings, and are included in funds borrowed as shown on the Company’s consolidated balance sheets.

The table below summarizes the key attributes of the Company’s various borrowing arrangements with banks as of September 30, 2013.

 

(Dollars in thousands)

Borrower

   No. of Lenders
/ Notes
  

Note

Dates

   Maturity
Dates
  

Type

   Note Amounts     Balance
Outstanding at
September 30,
2013
   

Monthly Payment

   Average Interest
Rate at
September 30,
2013
  Interest
Rate
Index (1)
The Company    6/7   

4/11 - 9/13

   5/14 - 7/16    Revolving line of credit secured by pledged loans    $ 113,200 (2)    $ 58,800      Interest only    2.67% + 0.25%
unused fee
  Various(2)
Medallion Chicago    3/28   

12/11

   12/14    Term loans secured by owned Chicago medallions(3)      26,152        24,998      $124 principal & interest    3.04%   N/A
The Company    3/4   

1/09 - 6/13

   12/14 - 11/16    Participated loans treated as financings      9,834        9,827      Proportionate to the payments received on the participated loans    2.50%   N/A
MFC    4/5   

1/10 - 6/13

   1/14 - 11/16    Participated loans treated as financings      2,802        2,737      Proportionate to the payments received on the participated loans    2.95%   2.95%(4)
MFC    1/1   

1/05

   5/14    Revolving line of credit secured by pledged loans      9,800        1,800 (5)    Interest only    2.43%   Prime + 0.50%
or LIBOR +
2.25%
FSVC    2/3   

2/12 - 3/13

   2/15 - 3/16    Participated loans treated as financings      76        74      Proportionate to the payments received on the participated loans    10.32%   N/A
              

 

 

   

 

 

        
               $ 161,864      $ 98,236          
              

 

 

   

 

 

        

 

(1) At September 30, 2013, 30 day LIBOR was 0.18%, 360 day LIBOR was 0.63%, and the prime rate was 3.25%.
(2) $53,200 of these lines can also be used by MFC of which $18,200 of such usage would be guaranteed by the Company. Interest rates on these lines range from LIBOR plus 2% to LIBOR + 2.5%, all contain prime rate options from prime minus 0.5% to prime plus 0.5%, and three notes have a 3% floor.
(3) $15,370 guaranteed by the Company.
(4) One $42 note reprices on its one year anniversary date at the greater of the current interest rate, or the prime rate plus 0.50%, the balance was fixed to term at an average rate of 2.93%.
(5) Guaranteed by the Company.

(D) PREFERRED SECURITIES

In June 2007, the Company issued and sold $36,083,000 aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35,000,000 of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bore a fixed rate of interest of 7.68% to September 2012, and thereafter a variable rate of interest of 90 day LIBOR (0.25% at September 30, 2013) plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor. At September 30, 2013, $33,000,000 was outstanding on the preferred securities.

(E) COVENANT COMPLIANCE

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

(5) STOCK OPTIONS AND RESTRICTED STOCK

The Company has a stock option plan (2006 Stock Option Plan) available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provides for the issuance of a maximum of 800,000 shares of common stock of the Company. At September 30, 2013, 153,155 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 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

 

Page 17 of 68


Table of Contents

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, 2013, 501,009 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 the First Amended and Restated 2006 Director Plan (the Amended Director Plan) on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock are issuable under the Amended Director Plan, and as of September 30, 2013, 82,000 shares of the Company’s common stock remained available for future grants. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company will grant options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board of Directors, with an adjustment for directors who are elected to serve less than a full term. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. Options granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options may not exceed ten years.

The Company’s 1996 Stock Option Plan and 1996 Director Plan terminated on May 21, 2006 and no additional shares are available for future issuance. At September 30, 2013, 605,335 options on the Company’s common stock were outstanding under the 1996 and 2006 plans, of which 581,002 options were exercisable, and there were 267,749 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 $1.41 and $1.25 for the nine months ended September 30, 2013 and 2012. The following assumption categories are used to determine the value of any option grants.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013     2012  

Risk free interest rate

     NA         NA         1.24     1.09   

Expected dividend yield

     NA         NA         8.07        7.53   

Expected life of option in years (1)

     NA         NA         6.00        6.00   

Expected volatility (2)

     NA         NA         30.00        30.00   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Expected life is calculated using the simplified method.
(2) We determine our expected volatility using the Black-Scholes option pricing model based on our historical volatility.

The following table presents the activity for the stock option program under the 1996 and 2006 Stock Option Plans and the 1996 and 2006 Director Plans for the 2013 quarters and the 2012 full year.

 

     Number of Options     Exercise Price
Per Share
   Weighted Average
Exercise Price
 

Outstanding at December 31, 2011

     1,179,563      $3.50-13.06    $ 8.96   

Granted

     8,000      11.53-12.55      11.91   

Cancelled

     (5,453   4.85      4.85   

Exercised (1)

     (210,610   3.50-11.21      5.29   
  

 

 

   

 

  

 

 

 

Outstanding at December 31, 2012

     971,500      3.50-13.06      9.80   

Granted

     —        —        —     

Cancelled

     —        —        —     

Exercised (1)

     (175,003   3.50-11.24      9.34   
  

 

 

   

 

  

 

 

 

Outstanding at March 31, 2013

     796,497      7.17-13.06      9.90   

Granted

     18,000      13.84      13.84   

Cancelled

     —        —        —     

Exercised (1)

     (141,176   7.49-13.06      10.67   
  

 

 

   

 

  

 

 

 

Outstanding at June 30, 2013 (2)

     673,321      7.17-13.84      9.84   

Granted

     —        —        —     

Cancelled

     —        —        —     

Exercised (1)

     (67,986   7.62-11.21      8.75   
  

 

 

   

 

  

 

 

 

Outstanding at September 30, 2013 (2)

     605,335      $7.17-13.84    $ 9.97   
  

 

 

   

 

  

 

 

 

Options exercisable at September 30, 2013 (2)

     581,002      $7.17-13.06    $ 9.83   
  

 

 

   

 

  

 

 

 

 

Page 18 of 68


Table of Contents
(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 $402,000 and $1,682,000 for the 2013 third quarter and nine months, and was $56,000 and $835,000 for the comparable 2012 periods.
(2) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2013 and the related exercise price of the underlying options, was $2,974,000 for outstanding options and $2,937,000 for exercisable options as of September 30, 2013.

 

Page 19 of 68


Table of Contents

The following table presents the activity for the restricted stock program under the 2009 Employee Restricted Stock Plan for the 2013 quarters and the 2012 full year.

 

     Number of
Shares
    Grant Price
Per Share
   Weighted
Average Grant
Price
 

Outstanding at December 31, 2011

     79,668      $7.99-11.53    $ 8.48   

Granted

     221,693      11.08-12.55      11.56   

Cancelled

     (669   7.99-11.53      10.32   

Vested (1)

     (375   7.99      7.99   
  

 

 

   

 

  

 

 

 

Outstanding at December 31, 2012

     300,317      7.99-12.55      10.76   

Granted

     1,393      13.12      13.12   

Cancelled

     —        —        —     

Vested (1)

     (30,866   11.08      11.08   
  

 

 

   

 

  

 

 

 

Outstanding at March 31, 2013

     270,844      7.99-13.12      10.72   

Granted

     —        —        —     

Cancelled

     (293   7.99-13.12      11.06   

Vested (1)

     —        —        —     
  

 

 

   

 

  

 

 

 

Outstanding at June 30, 2013

     270,551      7.99-13.12      10.71   

Granted

     —        —        —     

Cancelled

     (2,802   7.99-11.89      9.70   

Vested (1)

     —        —        —     
  

 

 

   

 

  

 

 

 

Outstanding at September 30, 2013 (2)

     267,749      $7.99-13.12    $ 10.72   
  

 

 

   

 

  

 

 

 

 

(1) The aggregate fair value of the restricted stock vested was $0 and $401,000 for the 2013 third quarter and nine months, and was $0 and $3,000 for the comparable 2012 periods.
(2) The aggregate fair value of the restricted stock was $3,984,000 as of September 30, 2013.

The following table presents the activity for the unvested options outstanding under the plans for the quarter and nine months ended September 30, 2013.

 

     Number of
Options
    Exercise Price
Per Share
   Weighted Average Exercise
Price
 

Outstanding at December 31, 2012

     29,167      $7.17-12.55    $ 8.92   

Granted

     —        —        —     

Cancelled

     —        —        —     

Vested

     —        —        —     
  

 

 

   

 

  

 

 

 

Outstanding at March 31, 2013

     29,167      7.17-12.55      8.92   

Granted

     18,000      13.84      13.84   

Cancelled

     —        —        —     

Vested

     (22,833   7.17-8.21      8.06   
  

 

 

   

 

  

 

 

 

Outstanding at June 30, 2013

     24,334      11.53-13.84      13.36   

Granted

     —        —        —     

Cancelled

     —        —        —     

Vested

     —        —        —     
  

 

 

   

 

  

 

 

 

Outstanding at September 30, 2013

     24,334      $11.53-13.84    $ 13.36   
  

 

 

   

 

  

 

 

 

The intrinsic value of the options vested was $135,000 for the 2013 third quarter and nine months.

The following table summarizes information regarding options outstanding and options exercisable at September 30, 2013 under the 1996 and 2006 Stock Option Plans and the 1996 and the Amended Director Plan.

 

     Options Outstanding      Options Exercisable  
            Weighted average             Weighted average  

Range of Exercise Prices

   Shares at
September 30,
2013
     Remaining
contractual life in
years
     Exercise price      Shares at
September 30,
2013
     Remaining
contractual life
in years
     Exercise price  

$7.17-13.84

     605,335         3.84         9.97         581,002         3.61         9.83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20 of 68


Table of Contents

The following table summarizes information regarding restricted stock outstanding at September 30, 2013 under the 2009 Employee Restricted Stock Plan.

 

     Restricted Stock Outstanding  
            Weighted average  

Range of Grant Prices

   Shares at
September 30, 2013
     Remaining
vesting period in
years
     Grant price  

$7.99-13.12

     267,749         1.53       $ 10.72   
  

 

 

    

 

 

    

 

 

 

(6) SEGMENT REPORTING

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

(7) NONINTEREST INCOME AND OTHER OPERATING EXPENSES

The major components of noninterest income were as follows.

 

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

(Dollars in thousands)

   2013      2012      2013      2012  

Prepayment fees

   $ 86       $ 159       $ 451       $ 515   

Servicing fees

     44         51         152         172   

Late charges

     24         27         95         164   

Other

     27         28         106         90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 181       $ 265       $ 804       $ 941   
  

 

 

    

 

 

    

 

 

    

 

 

 

Prepayment fees decreased in the 2013 third quarter and nine months reflecting a larger than normal fee received from a mezzanine loan prepayment in the 2012 third quarter. Late charges declined in the nine months as delinquencies have improved in all business units.

The major components of other operating expenses were as follows.

 

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

(Dollars in thousands)

   2013      2012      2013      2012  

Travel, meals, and entertainment

   $ 196       $ 240       $ 606       $ 670   

Directors’ fees

     101         61         304         219   

Insurance

     51         44         141         134   

Office expense

     47         53         147         157   

Depreciation and amortization

     43         46         140         122   

Investment management expenses

     39         33         118         98   

Bank charges

     31         35         99         113   

Telephone

     30         29         91         93   

Miscellaneous taxes

     30         84         83         269   

Other expenses

     82         93         257         382   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating expenses

   $ 650       $ 718       $ 1,986       $ 2,257   
  

 

 

    

 

 

    

 

 

    

 

 

 

Travel, meals, and entertainment decreased due to lower investment development activities in 2013. Directors’ fees increased reflecting accrual adjustments in the prior periods. Miscellaneous taxes, which includes franchise, excise, road and other governmental assessments, reflected a franchise tax benefit recognized in the 2013 periods. Other operating expenses were lower reflecting expense reduction efforts and reversals of accrued liabilities.

 

Page 21 of 68


Table of Contents

(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)

   2013     2012     2013     2012  

Net share data

        

Net asset value at the beginning of the period

   $ 10.17      $ 9.87      $ 9.99      $ 9.68   

Net investment income

     0.20        0.06        0.39        0.24   

Income tax (provision) benefit

     —          —          —          —     

Net realized gains (losses) on investments

     (0.03     (0.12     (0.02     (0.12

Net change in unrealized appreciation on investments

     0.12        0.37        0.50        0.79   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     0.29        0.31        0.87        0.91   

Issuance of common stock

     0.01        (0.01     0.04        (0.01

Repurchases of common stock

     —          —          —          —     

Distribution of net investment income

     (0.09     —          (0.31     (0.31

Return of capital

     (0.13     (0.21     (0.35     (0.31

Distribution of net realized gains on investments

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions

     (0.22     (0.21     (0.66     (0.62

Other

     —          —          0.01        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in net asset value

     0.08        0.09        0.26        0.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 10.25      $ 9.96      $ 10.25      $ 9.96   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at beginning of period

   $ 13.91      $ 10.62      $ 11.74      $ 11.38   

Per share market value at end of period

     14.88        11.81        14.88        11.81   

Total return (2)

     34     53     44     13

Ratios/supplemental data

        

Total shareholders’ equity (net assets)

   $ 225,863      $ 213,767      $ 225,863      $ 213,767   

Average net assets

   $ 224,125      $ 211,967      $ 220,502      $ 192,306   

Total expense ratio (3) (4)

     9.21     11.40     10.56     13.39

Operating expenses to average net assets (4)

     5.50        6.59        6.75        7.33   

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

     7.82        2.51        5.23        3.29   

 

(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, 2013 and 2012.
(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) MSC has assumed certain of the Company’s servicing obligations, and as a result, servicing fee income of $1,507 and $1,535, and operating expenses of $1,753 and $1,630, which formerly were the Company’s were now MSC’s for the three months ended September 30, 2013 and 2012, and were $4,483 and $4,509 of servicing fee income, and $5,472 and $4,762 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 12%, 8.61%, and 7.38% in the 2013 quarter, 14%, 9.65%, and 2.33% in the 2012 quarter, 14%, 10%, and 4.63% in the 2013 nine months, and 17%, 11%, and 3.12% in the 2012 nine months.

(9) RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2013, the FASB issued Accounting Standards Update (ASU) 2013-11, “Income Tax (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists – a consensus of the FASB Emerging Issues Task Force.” ASU 2013-11 requires, with limited exception, that an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset. The update applies to all entities that have unrecognized tax benefits with a net operating loss carryforward, a similar tax loss, or a tax credit carryforward which exists as of the reporting date. The update is effective for periods beginning after December 15, 2013, with early adoption permitted. As a BDC which has elected to be treated as a RIC for federal income tax purposes, the Company does not have any unrecognized tax benefits and as such the Company does not believe that adoption of this standard will have a material impact on its financial condition or results of operations.

In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815) Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes – a consensus of the FASB Emerging Issues Task Force.” ASU 2013-10 permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The update also removes the restriction on using different benchmark rates for similar hedges. The update applied to all entities that elect to apply hedge accounting of the benchmark interest rate under Topic 815. The update is prospective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this standard has not had an impact on the financial condition or result of operations of the Company.

In June 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements.” ASU 2013-08 clarifies the characteristics of an investment company, provides a comprehensive guide for assessing whether an entity is an investment company, requires an investment company to measure noncontrolling ownership interests in other investment companies at fair value, requires disclosure that an entity is an investment company applying the guidance in Topic 946, as well as requiring the disclosure of any changes in the entity’s status as an investment company. The update specifies that an entity regulated under the 1940 Act is an investment company with respect to Topic 946. The update is

 

Page 22 of 68


Table of Contents

effective for periods beginning after December 15, 2013. As a BDC, regulated under the 1940 Act, the Company has presented itself as an investment company, as such the company does not believe that adoption of this standard will have a material impact on its financial condition or results of operations.

(10) RELATED PARTY TRANSACTIONS

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

A member of the Board of Directors of the Company since 1996 is also of counsel in the Company’s primary law firm. Amounts paid to the law firm were $2,000 and $157,000 for the 2013 and 2012 third quarters, and were $278,000 and $361,000 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 $1,500,000 or higher; and 10% of LAX’s profits as a year end bonus. In addition, Mr. Rudnick provides consulting services to the Company directly for a monthly retainer of $4,200.

At September 30, 2013, December 31, 2012, and September 30, 2012, MSC serviced $413,035,000, $406,956,000, and $402,612,000 of loans for Medallion Bank. Included in net investment income were amounts as described in the table below that were received from Medallion Bank for services rendered in originating and servicing loans, and also for reimbursement of certain expenses incurred on their behalf.

The Company has assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed and collected from Medallion Bank by MSC. As a result, $1,507,000 and $4,483,000 of servicing fee income was earned by MSC in the 2013 third quarter and nine months, and $1,535,000 and $4,509,000 was earned in the comparable 2012 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)

   2013      2012      2013      2012  

Loan origination fees

   $ 88       $ 97       $ 248       $ 313   

Reimbursement of operating expenses

     90         74         243         214   

Servicing fees

     4         6         14         17   

Interest income

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

   $ 182       $ 177       $ 505       $ 544   
  

 

 

    

 

 

    

 

 

    

 

 

 

(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, 2013 and December 31, 2012, 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.

 

Page 23 of 68


Table of Contents
     September 30, 2013      December 31, 2012  

(Dollars in thousands)

   Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

           

Investments

   $ 463,369       $ 463,369       $ 455,010       $ 455,010   

Cash (1)

     35,006         35,006         26,875         26,875   

Accrued interest receivable (2)

     938         938         957         957   

Financial liabilities

           

Funds borrowed (2)

     338,371         338,371         322,770         322,770   

Accrued interest payable (2)

     510         510         1,233         1,233   

 

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

(12) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. The Company accounts for substantially all of its financial instruments at fair value or considers fair value in its measurement, in accordance with the accounting guidance for investment companies. See Note 2 sections “Fair Value of Assets and Liabilities” and “Investment Valuation” for a description of the Company’s valuation methodology which is unchanged during 2013.

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

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

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

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

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

 

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

 

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

 

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

 

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

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

A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur.

 

Page 24 of 68


Table of Contents

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, 2013 and December 31, 2012.

 

September 30, 2013 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —         $ —         $ 291,545       $ 291,545   

Commercial loans

     —           —           63,061         63,061   

Investment in Medallion Bank and other controlled subsidiaries

     —           —           102,377         102,377   

Equity investments

     289         —           6,097         6,386   

Foreclosed properties

     —           49,928         —           49,928   

Other assets

     —           10,112         —           10,112   

December 31, 2012 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —         $ —         $ 294,388       $ 294,388   

Commercial loans

     —           —           56,919         56,919   

Investment in Medallion Bank and other controlled subsidiaries

     —           —           99,083         99,083   

Equity investments

     231         —           4,389         4,620   

Foreclosed properties

     —           43,588         —           43,588   

Other assets

     —           8,861         —           8,861   

Included in level 3 investments in Medallion Bank and other controlled subsidiaries is the investment in Medallion Bank, MSC, and investments in a start-up business engaged in media-buying consulting. Included in level 3 equity investments are unregistered shares of common stock in a publicly-held company, as well as certain private equity positions in non-marketable securities.

The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilities for the quarters and nine months ended September 30, 2013 and 2012.

 

(Dollars in thousands)

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

June 30, 2013

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

Gains (losses) included in earnings

     —          279        4,684        (478     —     

Purchases, investments, and issuances

     44,296        7,766        1,011        1047        —     

Sales, maturities, settlements, and distributions

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2013

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

(Dollars in thousands)

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

December 31, 2012

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

Gains (losses) included in earnings

     40        204        12,090        266        —     

Purchases, investments, and issuances

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

Sales, maturities, settlements, and distributions

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

Transfers in (out) (1)

     —          1,370        (1,370     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2013

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(2)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

(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.

 

Page 25 of 68


Table of Contents

(13) SUBSEQUENT EVENTS

We have evaluated subsequent events that have occurred through November 8, 2013, the date of financial statement issuance.

In November 2013, Medallion Chicago extended fourteen of its notes for an additional two years to December 2016, with other minor modifications.

In October 2013, the Company extended a $25,000,000 revolving line of credit for an additional year to June 30, 2015 and lowered the interest rate floor from 3% to 2.50%.

On October 29, 2013, the Company’s Board of Directors declared a $0.23 per share common stock dividend, payable on November 27, 2013 to shareholders of record on November 15, 2013.

 

Page 26 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

September 30, 2013

 

(Dollars in
thousands)

 

Obligor Name/Interest Rate Range

 

Security Type
(all restricted unless
otherwise noted)

  Acquisition
Date
    Maturity Date     No. of
Invest.
    % of
Net
Assets
    Interest
Rate  (1)
    Original
Cost  of

2013
Acquisitions (5)
    Cost  (4)     Fair
Value
 

Medallion Loans

                   

New York

            362        88     3.54   $ 123,576      $ 198,739      $ 198,676   
  Sean Cab Corp ##   Term Loan     12/9/2011        12/08/15        1        2     3.60     $ 3,606      $ 3,588   
  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     $ 2,474      $ 2,459   
  Whispers Taxi Inc ##   Term Loan     5/28/2013        05/28/16        1        1     3.35   $ 2,197      $ 2,175      $ 2,165   
  Slo Cab Corp   Term Loan     7/20/2007        07/20/17        1        1     2.81     $ 1,527      $ 1,527   
  Slo Cab Corp   Term Loan     7/20/2007        07/20/17        1              2.81     $ 210      $ 210   
  Lety Cab Corp ##   Term Loan     10/21/2010        10/20/15        1        1     3.13     $ 1,570      $ 1,562   
  Bunty & Jyoti Inc ##   Term Loan     3/13/2013        03/13/16        1        1     3.75   $ 1,575      $ 1,557      $ 1,551   
  Nancy Transit Inc ##   Term Loan     3/11/2013        03/11/16        1        1     3.50   $ 1,575      $ 1,556      $ 1,551   
  Junaid Trans Corp ##   Term Loan     4/30/2013        04/30/16        1        1     3.75   $ 1,550      $ 1,534      $ 1,528   
  Christian Cab Corp   Term Loan     11/27/2012        11/27/15        1        1     4.00     $ 1,503      $ 1,499   
  Silke Hacking Corp ##   Term Loan     6/28/2013        06/28/16        1        1     2.90   $ 1,450      $ 1,449      $ 1,454   
  Dayna Hacking Corp ##   Term Loan     5/28/2013        05/28/16        1        1     3.35   $ 1,465      $ 1,453      $ 1,447   
  Benson Hacking Corp ##   Term Loan     5/28/2013        05/28/16        1        1     3.35   $ 1,465      $ 1,453      $ 1,447   
  Devin Taxi Corp ##   Term Loan     5/28/2013        05/28/16        1        1     3.35   $ 1,465      $ 1,453      $ 1,447   
  Ukraine Service Co ##   Term Loan     7/23/2013        07/23/16        1        1     3.00   $ 1,425      $ 1,422      $ 1,427   
  Lil Amandachaka Hacking Corp ##   Term Loan     7/23/2013        07/23/16        1        1     3.00   $ 1,425      $ 1,417      $ 1,419   
  Nosilla Service Co., Inc ##   Term Loan     7/23/2013        07/23/16        1        1     3.00   $ 1,425      $ 1,417      $ 1,419   
  Flow Taxi Corp ##   Term Loan     7/23/2013        07/23/16        1        1     3.00   $ 1,425      $ 1,417      $ 1,419   
  Sonu-Seema Corp ##   Term Loan     12/7/2012        12/07/15        1        1     3.75     $ 1,424      $ 1,418   
  Orys Trans Corp ##   Term Loan     7/24/2013        07/24/16        1        1     2.75   $ 1,400      $ 1,400      $ 1,402   
  Alltaxitwo Cab Corp ##   Term Loan     7/24/2013        07/24/16        1        1     2.75   $ 1,400      $ 1,400      $ 1,402   
  S600 Service Co Inc ##   Term Loan     2/21/2013        02/21/16        1        1     3.00   $ 1,396      $ 1,372      $ 1,367   
  Perem Hacking Corp ##   Term Loan     2/21/2013        02/21/16        1        1     3.00   $ 1,396      $ 1,372      $ 1,367   
  Daytona Hacking Corp ##   Term Loan     6/28/2013        06/28/16        1        1     2.90   $ 1,364      $ 1,358      $ 1,360   

Various New York &&

  2.22% to 10.00%   Term Loan     12/20/00 to 09/26/13        10/01/2013 to 09/10/23        336        70     3.61   $ 98,178      $ 158,325      $ 158,346   

Chicago

            110        18     4.95   $ 30,601      $ 41,244      $ 41,315   
  Sweetgrass Peach &Chadwick Cap ##   Term Loan     8/28/2012        08/28/15        1        1     5.50     $ 1,707      $ 1,699   
  Regal Cab Company Et Al ##   Term Loan     8/29/2013        08/29/16        1        1     5.00   $ 1,400      $ 1,400      $ 1,395   
  Chicago Medallion Nine LLC ##   Term Loan     5/2/2012        05/02/17        1        1     5.75     $ 1,381      $ 1,375   

Various Chicago

  3.75% to 8.50%   Term Loan     01/22/10 to 09/27/13        01/18/15 to 09/27/18        107        16     4.89   $ 29,201      $ 36,756      $ 36,846   

Newark &&

  4.75% to 8.00%   Term Loan     12/07/06 to 09/26/13        12/03/13 to 01/10/23        101        9     5.83   $ 9,930      $ 20,211      $ 20,324   

Boston

            53        10     5.12   $ 7,727      $ 22,532      $ 22,575   
  Various Boston && 4.00% to 7.25%   Term Loan     06/12/07 to 09/18/13        11/30/13 to 06/12/18        53        10     5.12   $ 7,727      $ 22,532      $ 22,575   

Cambridge &&

  4.00% to 6.60%   Term Loan     03/19/10 to 05/13/13        10/08/13 to 11/18/20        15        2     5.28   $ 1,632      $ 5,355      $ 5,369   

Other

            13        1     6.35   $ 860      $ 3,291      $ 3,286   

Philadelphia

  Dorit Matityahu ##   Term Loan     8/4/2011        08/04/14        1        1     6.25     $ 2,088      $ 2,077   

Various Other

  5.00% to 11.50%   Term Loan     11/26/07 to 08/21/13        03/23/14 to 09/01/23        12        1     6.53   $ 860      $ 1,203      $ 1,209   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total medallion loans ($228,153 pledged as collateral under borrowing arrangements)

  

    654        129     4.08   $ 174,326      $ 291,372      $ 291,545   
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Loans

  

           

Secured mezzanine (36% Minnesota, 9% North Carolina, 8% New York, 7% Texas, 6% California, 6% Wisconsin, 6% Oklahoma, 6% Delaware, 5% Arizona, 4% Florida and 7% all other states) (2)

   

           

Manufacturing (53% of the total)

 

Bluff Manufacturing (interest rate includes PIK interest of 3.50%)

  Term Loan     12/14/12        12/14/17        1        1     15.50     $ 3,000      $ 3,009   

 

Page 27 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

September 30, 2013

 

(Dollars in thousands)

       

Obligor Name/Interest Rate Range

  

Security
Type
(all restricted
unless
otherwise
noted)

   Acquisition
Date
   Maturity
Date
   No. of
Invest.
     % of
Net
Assets
    Interest
Rate  (1)
    Original
Cost of
2013
Acquisitions (5)
     Cost  (4)      Fair
Value
 
    

Process Fab & (interest rate includes PIK interest of 8.00%)

   Term Loan    04/17/08    12/31/15      1         1     8.00      $ 4,500       $ 2,823   
    

Quaker Bakery (interest rate includes PIK interest of 5.00%) (capitalized interest of $207 per footnote 2)

   Term Loan    03/28/12    03/28/17      1         1     17.00      $ 2,807       $ 2,798   
    

American Cylinder (interest rate includes PIK interest of 5.00%) (capitalized interest of $19 per footnote 2)

   Term Loan    07/03/13    01/03/18      1         1     17.00   $ 1,500       $ 1,519       $ 1,519   
    

American Cylinder

   Term Loan    07/03/13    07/03/17      1               10.00   $ 800       $ 800       $ 795   
  +   

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   
    

Dynamic Systems (interest rate includes PIK interest of 3.50%) (capitalized interest of $83 per footnote 2)

   Term Loan    12/23/10    12/23/17      1         1     15.50      $ 1,908       $ 1,908   
  +   

PACA Foods &

   Term Loan    12/31/10    12/31/15      1         1     13.00      $ 2,437       $ 1,835   
  +   

RespirTech

   Term Loan    04/25/12    04/25/17      1         1     12.00      $ 1,500       $ 1,508   
    

Orchard &

   Term Loan    03/10/99    03/31/10      1         1     13.00      $ 1,390       $ 1,390   
  +   

Various Other 12.00% to 14.00% (capitalized interest of $43 per footnote 2)

   Term Loan    12/15/04 to 07/17/12    03/31/14 to 07/17/17      4         2     13.17      $ 3,690       $ 3,704   

Information (12% of the total)

    

US Internet

   Term Loan    06/12/13    06/12/20      1         1     14.50   $ 3,000       $ 3,000       $ 3,017   
    

Centare (interest rate includes PIK interest of 2.00%) (capitalized interest of $4 per footnote 2)

   Term Loan    08/30/13    08/30/18      1         1     14.00   $ 2,500       $ 2,504       $ 2,485   

Administrative and Support Services (11% of the total)

    

Verifications

   Term Loan    09/06/12    09/06/17      1         1     12.00      $ 2,500       $ 2,515   
  +   

Staff One & (interest rate includes PIK interest of 13.00%)

   Term Loan    06/30/08    12/31/14      1         1     13.00      $ 3,306       $ 1,856   
  +   

Staff One & (interest rate includes PIK interest of 13.00%)

   Term Loan    09/15/11    12/31/14      1               13.00      $ 615       $ 615   
    

Various Other && 0.00% (capitalized interest of $44 per footnote 2)

   Term Loan    01/14/05    01/14/2010      1               0.00      $ 792       $ 0   

Professional, Scientific, and Technical Services (11% of the total)

  +   

Portu-Sunberg

   Term Loan    12/31/12    12/31/17      1         1     12.00      $ 2,500       $ 2,512   
    

Barton Walter (interest rate includes PIK interest of 3.00%) (capitalized interest of $30 per footnote 2)

   Term Loan    01/15/13    01/15/18      1         1     15.00   $ 2,600       $ 2,230       $ 2,233   
    

Various Other && 10.00% (capitalized interest of $59 per footnote 2)

   Term Loan    10/26/11    11/01/14      1               10.00      $ 59       $ 59   

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

    

RPAC Racing (interest rate includes PIK interest of 10.00%) (capitalized interest of $991 per footnote 2)

   Term Loan    11/19/10    11/19/15      1         2     10.00      $ 4,031       $ 4,031   

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

  +   

Various Other && 7.00%

   Term Loan    06/28/07    06/30/17      1               7.00      $ 1,114       $ 919   

Accommodation and Food Services (1% of the total)

    

Various Other && 9.25% to 10.00% (capitalized interest of $21 per footnote 2)

   Term Loan    06/30/00 to 11/05/10    10/01/15 to 11/05/15      3               9.85      $ 2,653       $ 603   

 

Page 28 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

September 30, 2013

 

(Dollars in thousands)

  

Obligor Name/Interest Rate Range

  

Security Type
(all restricted unless
otherwise noted)

   Acquisition
Date
   Maturity
Date
   No. of
Invest.
     % of
Net
Assets
    Interest
Rate  (1)
    Original
Cost of
2013
Acquisitions (5)
     Cost  (4)      Fair
Value
 

Retail Trade (1% of the total)

   Various Other && 10.00%    Term Loan    06/30/00    10/01/15      1               10.00      $ 503       $ 127   
              

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total secured mezzanine (2)

                 29         20     12.48   $ 10,400       $ 51,572       $ 44,475   
              

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Asset-based (80% New York, 11% New Jersey and 9% all other states)

               

Wholesale Trade (59% of the total)

                           
   Capitalsea, LLC ##    Revolving line of credit    11/07/05    11/07/13      1         1     4.50      $ 2,535       $ 2,433   
   Various Other && 4.75% to 6.75% ##    Revolving line of credit    01/23/99 to 06/01/12    11/30/13 to 08/15/14      9         1     5.54      $ 1,592       $ 1,516   

Transportation and Warehousing (13% of the total)

   Various Other && 5.25% to 8.00% ##    Revolving line of credit    12/31/01 to 10/18/06    10/18/13 to 05/02/14      3               6.39      $ 927       $ 892   

Finance and Insurance (9% of the total)

   Various Other && 4.25% to 8.25%    Revolving line of credit    02/06/02 to 11/10/11    10/25/13 to 07/25/14      6               6.25      $ 659       $ 626   

Retail Trade (8% of the total)

   Various Other 4.75% to 6.40% ##    Revolving line of credit    10/19/98 to 08/31/06    10/12/13 to 08/31/14      5               5.37      $ 564       $ 531   

Construction (4% of the total)

   Various Other 5.75% to 6.75% ##    Revolving line of credit    07/20/99 to 07/23/13    02/26/14 to 07/23/14      3               6.26   $ 373       $ 279       $ 275   

Health Care and Social Assistance (3% of the total)

   Various Other 5.75% to 6.41% ##    Revolving line of credit    10/02/07 to 11/09/12    10/02/13 to 11/09/13      2               5.85      $ 188       $ 179   

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    06/22/14 to 06/30/14      2               5.67      $ 182       $ 166   

Manufacturing (2% of the total)

   Various Other 5.75% 6.50% ##    Revolving line of credit    07/07/04 to 06/22/10    11/29/13 to 07/07/14      5               6.31 %       $ 147       $ 121   
              

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total asset-based ($6,074 pledged as collateral under borrowing arrangements)

     36         3     5.39   $ 373       $ 7,073       $ 6,739   
              

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other secured commercial (72% New York, 27% New Jersey, 1% Illinois)

               

Retail Trade (65% of the total)

  

Medallion Fine Art Inc (interest rate includes PIK interest of 12.00%) (capitalized interest of $259 per footnote 2)

   Term Loan    12/17/12    12/17/17      1         2     12.00      $ 3,759       $ 3,759   
   Various Other && 0.00% to 12.00%    Term Loan    09/13/06 to 08/02/13    09/16/13 to 01/09/20      14         2     8.91   $ 1,025       $ 3,928       $ 3,911   

Accommodation and Food Services (31% of the total)

   Dune Deck Owners Corp ##    Term Loan    4/24/2007    3/31/2014      1         1     7.25      $ 3,074       $ 3,074   
   Various Other 7.50% to 9.00% &&    Term Loan    05/25/05 to 07/25/13    03/18/14 to 07/25/18      3               8.25   $ 260       $ 644       $ 580   

Real Estate and Rental and Leasing (2% of the total)

   Various Other 4.00% to 6.00%    Term Loan    04/22/99 to 07/15/13    04/01/15 to 07/15/16      3               5.07   $ 40       $ 212       $ 214   

Other Services (except Public Administration) (1% of the total)

   Various Other 5.50% to 6.50%    Term Loan    01/16/04 to 05/02/09    01/16/14 to 05/02/14      2               5.74      $ 165       $ 165   

Health Care and Social Assistance (1% of the total)

   Various Other 7.50%    Term Loan    05/14/13    05/14/18      1               7.50   $ 150       $ 142       $ 144   
              

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total other secured commercial loans ($3,075 pledged as collateral under borrowing arrangements)

                 25         5     9.29   $ 1,475       $ 11,924       $ 11,847   
              

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total commercial loans ($9,149 pledged as collateral under borrowing arrangements) (2)

        90         28     11.23   $ 12,248       $ 70,569       $ 63,061   
              

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

               

Commercial Banking

   Medallion Bank **    100% of common stock    05/16/02    None      1         42     13.11      $ 95,359       $ 95,359   

Art Dealer

   Medallion Fine Art, Inc.    100% of common stock    12/03/12    None      1               0.00      $ 1,126       $ 1,126   

Real Estate

   Medallion Hamptons Holding LLC    100% of membership interests    06/21/05    None      1         2     0.00      $ 3,750       $ 3,750   

 

Page 29 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

September 30, 2013

 

(Dollars in thousands)

  

Obligor Name/Interest Rate Range

  

Security Type
(all restricted unless
otherwise noted)

   Acquisition
Date
   Maturity
Date
   No. of
Invest.
     % of
Net
Assets
    Interest
Rate  (1)
    Original
Cost of
2013
Acquisitions (5)
     Cost  (4)      Fair
Value
 

Various Other

         12/20/04 to 5/23/12    None      3         1     0.00      $ 2,142       $ 2,142   
              

 

 

    

 

 

   

 

 

      

 

 

    

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

     6         45     12.21      $ 102,377       $ 102,377   
              

 

 

    

 

 

   

 

 

      

 

 

    

 

 

 

Equity investments

                           

Commercial Finance

   Convergent Capital, Ltd **    7% of limited partnership interest    07/20/07    None      1         1     0.00      $ 1,133       $ 1,882   

NASCAR Race Team

   Medallion MotorSports, LLC    75% of limited liability interest    11/24/10    None      1         1     0.00      $ 1,954       $ 1,954   

Bakery

   Quaker Bakery    * of senior preferred stock    03/28/12    None      1               0.00      $ 359       $ 359   

IT Services

   Centare    7.23% of common stock, 3.88% of preferred stock    08/30/13    None      1               0.00      $ 103       $ 103   

Various Other

   **    * to 9.25% of common stock    09/10/98 to 3/30/12    None      5         1     2.39      $ 2,103       $ 2,088   
              

 

 

    

 

 

   

 

 

      

 

 

    

 

 

 

Equity investments, net

                 9         3     0.89      $ 5,652       $ 6,386   
              

 

 

    

 

 

   

 

 

      

 

 

    

 

 

 

Investment securities

                           
              

 

 

    

 

 

   

 

 

      

 

 

    

 

 

 

Investment securities, net

     0         0     0.00      $ 0       $ 0   
              

 

 

    

 

 

   

 

 

      

 

 

    

 

 

 

Net Investments ($237,302 pledged as collateral under borrowing arrangements) (3)

        759         205     6.89   $ 186,574       $ 469,970       $ 463,369   
              

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Represents the actual or weighted average interest or dividend rate of the respective security or portfolio as of the date indicated. Investments without an interest rate or with a rate of 0.00% are considered non-income producing.
(2) Included in secured mezzanine commercial loans and other commercial loans was $1,984 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 204%.
(4) Gross unrealized appreciation, gross unrealized depreciation, and net appreciation for federal income tax purposes totaled $42,720, $13,814 and $28,906, respectively. The tax cost of investments was $431,434.
(5) For revolving lines of credit the amount shown is the cost at September 30, 2013.
* Less than 1.0%
** Not an eligible portfolio company as such term is defined in Section 2(a)(46) of the 1940 Act. The percentage value of all non-eligible portfolio companies to totaled assets of Medallion Financial on an unconsolidated basis was up to 24% and up to 27% on a consolidated basis. Under the 1940 Act, we may not acquire any non-qualifying assets, unless at the time such acquisition is made, qualifying assets, which include securities of eligible portfolio companies, represent at least 70% of our total assets. The status of these assets under the 1940 Act are subject to change. We monitor the status of these assets on an ongoing basis.
& Loan is on nonaccrual status, or past due on contractual payments, and is therefore considered non-income producing.
&& Some or all of the securities are non-income producing as per & above.
# Publicly traded but sales subject to applicable Rule 144 limitations.
## Pledged as collateral under borrowing arrangements.
+ Includes various warrants, all of which have a cost and fair value of zero at September 30, 2013.

The Summary Schedule of Investments does not reflect the Company’s complete portfolio holdings. It includes the Company’s 50 largest holdings and each investment of any issuer that exceeds 1% of the Company’s net assets. “Various Other” represents all issues not required to be disclosed under the rules adopted by the U.S. Securities and Exchange Commission (“SEC”). Footnotes above may apply to securities that are included in “Various Other”. For further detail, the complete schedule of portfolio holdings is available (i) without charge, upon request, by calling (877) MEDALLION; and (ii) on the SEC’s website at http://www.sec.gov (Filed as Exhibit 99.1 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, filed on November 12, 2013 (File No. 814-00188).

 

Page 30 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Schedule of Investments In and Advances to Affiliates

As Of And For the Quarter Ended 9/30/2013

 

Name of issuer and title of issue

  

Number of shares (all restricted unless otherwise noted)

  Equity in net
profit and
(loss) for the
three months
ended
September 30
2013
    Equity in net
profit and
(loss) for the
nine months
ended
September 30,
2013
    Amount of
dividends or
interest (1) for
the three
months ended
September 30,
2013
    Amount of
dividends or
interest (1) for
the nine
months ended
September 30,
2013
    Value as
of 9/30/13
 
(Dollars in thousands)                                   

Medallion Bank – common stock

   1,000,000 shares – 100% of common stock     4,973        12,805        3,000        8,500      $ 95,359   

Medallion Hamptons Holding LLC – membership interest

   100% of membership interest     0        869        0        0      $ 3,750   

Medallion Fine Art, Inc. – common stock (2)

   1,000 shares – 100% of common stock     (114     (346     0        0      $ 1,126   

Generation Outdoor, Inc. – common stock

   1,000 shares – 100% of common stock     218        (2     10        21      $ 987   

Medallion Servicing Corp. –common stock

   1,000 shares – 100% of common stock     (245     (995     0        0      $ 717   

LAX Group LLC – membership interest

   42% of membership interest     (148     (241     0        0      $ 438   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries

       4,684        12,090        3,010        8,521      $ 102,377   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Medallion Motorsports, LLC – membership interest (3)

   75% of membership interest     0        0        0        0      $ 1,954   

Appliance Recycling Centers of America Inc – common stock

   8.86% of common stock     0        0        0        0      $ 1,270   

Summit Medical, Inc – common stock

   9.25% of common stock     0        0        0        0      $ 135   

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

       —          —          —          —        $ 3,027   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity investments

       0        0        0        0      $ 6,386   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

       4,684        12,090        3,010        8,521      $ 108,763   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           8        26     
        

 

 

   

 

 

   

Total dividend and interest income on short term investments

           3,018        8,547     
        

 

 

   

 

 

   

Total investments in and advances to affiliates

             $ 105,736   

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

             $ 3,027   
            

 

 

 

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

             $ 108,763   
            

 

 

 

 

(1) Investments with an amount of 0 are considered non-income producing.
(2) Additionally, the Company has a loan due from Medallion Fine Art, Inc in the amount of $3,759 as of September 30, 2013.
(3) In addition to the equity ownership, a controlled subsidiary of the Company has a $3,039 loan to an affiliate of Medallion Motorsports, LLC which is carried at $4,031, and on which $289 of interest income was earned in the 2013 nine months.

The table below provides a recap of the changes in the investment in the respective issuers for the 2013 quarters.

 

    Value as of
12/31/12
    Gross
Additions /
Investments
    Gross
Reductions /
Distributions
    Net equity
earnings in
profit and
loss,
unrealized
appreciation
and
depreciation
    Values as
of 3/31/13
    Gross
Additions /
Investments
    Gross
Reductions /
Distributions
 
(Dollars in thousands)                                          

Medallion Bank – common stock

  $ 92,169        0        3,275        4,585      $ 93,479          2,678   

Medallion Hamptons Holding LLC – membership interest

  $ 2,696        65        0        0      $ 2,761        120     

Medallion Motorsports, LLC – membership interest (1)

  $ 454        0        0        —        $ 454        1,500     

Medallion Fine Art, Inc. – common stock (2)

  $ 2,843        0        1,370        (77   $ 1,396       

Appliance Recycling Centers of America Inc – common stock

  $ 579        0        0        (11   $ 568       

LAX Group LLC – membership interest

  $ 461        —          0        39      $ 500        218     

Medallion Servicing Corp. – common stock

  $ 613        426        100        (320   $ 619        400        18   

Generation Outdoor, Inc. – common stock

  $ 301        377        200        (260   $ 218        65        175   

 

    Net equity
earnings in
profit and
loss,
unrealized
appreciation
and
depreciation
    Other
Adjustments
    Values as
of 6/30/13
    Gross
Additions /
Investments
    Gross
Reductions /
Distributions
    Net equity
earnings in
profit and
loss,
unrealized
appreciation
and
depreciation
    Other
Adjustments
    Value as
of 9/30/13
 
(Dollars in thousands)                                                

Medallion Bank – common stock

    3,247        $ 94,048          3,662        4,973        $ 95,359   

Medallion Hamptons Holding LLC – membership interest

    869        $ 3,750            —          $ 3,750   

Medallion Motorsports, LLC – membership interest (1)

    —          $ 1,954            —          $ 1,954   

Medallion Fine Art, Inc. – common stock (2)

    (155     (1   $ 1,240            (114     $ 1,126   

Appliance Recycling Centers of America Inc – common stock

    505        $ 1,073            197        $ 1,270   

LAX Group LLC – membership interest

    (133     $ 585            (148     1      $ 438   

Medallion Servicing Corp. – common stock

    (430     $ 571        391          (245     $ 717   

Generation Outdoor, Inc. – common stock

    40        1      $ 149        620          218        $ 987   

 

(1)

In addition to the equity ownership, a controlled subsidiary of the Company has a $3,039 loan to an affiliate of Medallion Motorsports, LLC which is carried at $4,031, and on which $289 of interest income was earned in the 2013 nine months.

(2)

Additionally, the Company has a loan due from Medallion Fine Art, Inc in the amount of $3,759 as of September 30, 2013, the full amount of which was advanced during the nine months ended September 30, 2013.

 

Page 31 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2012

 

(Dollars in thousands)

 

Obligor

Name/Interest Rate

Range

   Security
Type (all
restricted
unless
otherwise
noted)
   Acquisition
Date
     Maturity
Date
     No. of
Invest.
     % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of  2012
Acquisitions (5)
     Cost  (4)      Fair
Value
 

Medallion Loans

                          

New York

                419         96     3.96   $ 98,361       $ 208,564       $ 208,563   
 

Lena Cab Corp ##

   Term Loan      12/9/2011         12/09/15         1         2     3.60      $ 3,680       $ 3,665   
 

Sean Cab Corp ##

   Term Loan      12/9/2011         12/08/15         1         2     3.60      $ 3,680       $ 3,665   
 

Real Cab Corp

   Term Loan      7/20/2007         07/20/17         1         1     2.81      $ 2,545       $ 2,545   
 

Sifnos, Van-Dim, Kitriani Incs ##

   Term Loan      6/8/2010         05/01/15         1         1     4.00      $ 2,524       $ 2,513   
 

Lety Cab Corp ##

   Term Loan      10/21/2010         10/20/15         1         1     4.00      $ 1,605       $ 1,598   
 

Slo Cab Corp

   Term Loan      7/20/2007         07/20/17         1         1     2.81      $ 1,527       $ 1,527   
 

Christian Cab Corp

   Term Loan      11/27/2012         11/27/15         1         1     4.00   $ 1,500       $ 1,500       $ 1,502   
 

Silke Hacking Corp ##

   Term Loan      12/26/2012         12/26/15         1         1     3.50   $ 1,450       $ 1,450       $ 1,452   
 

Hoyt Cab Corp ##

   Term Loan      12/26/2012         12/26/15         1         1     3.50   $ 1,450       $ 1,450       $ 1,452   
 

Bunty & Jyoti Inc ##

   Term Loan      12/7/2012         12/07/15         1         1     3.75   $ 1,450       $ 1,450       $ 1,446   
 

Sonu-Seema Corp ##

   Term Loan      12/7/2012         12/07/15         1         1     3.75   $ 1,450       $ 1,450       $ 1,446   
 

Nancy Transit Inc ##

   Term Loan      11/6/2012         11/06/15         1         1     4.15   $ 1,425       $ 1,423       $ 1,415   
 

Perem Hacking Corp ##

   Term Loan      12/5/2012         12/05/15         1         1     3.50   $ 1,400       $ 1,398       $ 1,394   
 

S600 Service Co Inc ##

   Term Loan      12/5/2012         12/05/15         1         1     3.50   $ 1,400       $ 1,398       $ 1,394   
 

Daytona Hacking Corp ##

   Term Loan      6/1/2012         06/01/15         1         1     3.75   $ 1,400       $ 1,383       $ 1,385   
 

Uddin Taxi Corp ##

   Term Loan      11/14/2012         11/14/15         1         1     5.25   $ 1,378       $ 1,378       $ 1,371   
 

Nosilla Service Co., Inc ##

   Term Loan      8/13/2012         08/13/15         1         1     3.63   $ 1,350       $ 1,336       $ 1,332   
 

Ming Trans Corp ##

   Term Loan      11/19/2012         12/01/16         1         1     3.70   $ 1,300       $ 1,300       $ 1,297   
 

Orys Trans Corp ##

   Term Loan      9/26/2011         07/22/13         1         1     3.00      $ 1,279       $ 1,280   
 

Sandhu & Baath Inc/Note 2 Of 2 ##

   Term Loan      5/10/2011         05/10/14         1         *        4.75      $ 638       $ 636   
 

Sandhu & Baath Inc/Note 1 Of 2 ##

   Term Loan      5/10/2011         05/10/14         1         *        4.75      $ 636       $ 634   
 

Real Cab Corp

   Term Loan      7/20/2007         07/20/17         1         *        2.81      $ 350       $ 350   
 

Slo Cab Corp

   Term Loan      7/20/2007         07/20/17         1         *        2.81      $ 210       $ 210   

Various New York &&

  2.22% to 10.13%    Term Loan     

 
 

12/20/00

to
12/27/12

 

  
  

    
 

 

02/02/13
to

09/10/23

  
  

  

     396         80     4.02   $ 81,408       $ 172,974       $ 173,054   

Chicago

                115         19 %      5.28 %    $ 31,955       $ 40,405       $ 40,449   
 

Cozy Cab Et Al ##

   Term Loan      12/22/2011         12/22/14         1         2     5.50      $ 3,380       $ 3,368   
 

Sweetgrass Peach &Chadwick Cap ##

   Term Loan      8/28/2012         08/28/15         1         1     5.50   $ 1,750       $ 1,737       $ 1,731   
 

Chicago Medallion Nine Llc ##

   Term Loan      5/2/2012         05/02/17         1         1     5.75   $ 1,440       $ 1,413       $ 1,408   
 

Lucky Seven Chicago One Inc ##

   Term Loan      7/19/2012         07/19/15         1         1     4.88   $ 1,290       $ 1,281       $ 1,278   
 

Blue Eyes Cab Corp ##

   Term Loan      7/19/2012         07/19/15         1         1     4.88   $ 1,290       $ 1,281       $ 1,277   

Various Chicago

  4.50% to 8.75%    Term Loan     

 

 

01/22/10

to

12/14/12

  

  

  

    

 

 

01/22/13

to

12/14/17

  

  

  

     110         15     5.25   $ 26,185       $ 31,313       $ 31,387   

Newark &&

  5.25% to 8.75%    Term Loan     
 
 
12/07/06
to
12/13/12
  
  
  
    
 
 
01/08/13
to
12/13/17
  
  
  
     99         8     6.70   $ 6,214       $ 17,342       $ 17,427   

Boston

                51         9     5.47   $ 13,211       $ 19,713       $ 19,776   
 

Chidi Trans Inc ##

   Term Loan      11/17/2011         11/17/14         1         *        6.00      $ 701       $ 699   
 

Ngozi Trans Inc.

   Term Loan      12/31/2012         12/31/15         1         *        4.50   $ 660       $ 660       $ 663   
 

Chidi Trans Inc

   Term Loan      4/20/2012         04/20/15         1         *        5.50   $ 664       $ 655       $ 657   
 

Ngozi Trans Inc. ##

   Term Loan      4/20/2012         04/20/15         1         *        5.50   $ 377       $ 369       $ 371   
 

Ngozi Trans Inc.

   Term Loan      12/31/2012         12/31/15         1         *        4.50   $ 330       $ 330       $ 333   
 

Various Boston && 3.50% to 7.75%

   Term Loan     
 
 
06/12/07
to
12/28/12
  
  
  
    
 
 
02/05/13
to
06/12/18
  
  
  
     46         8     5.51   $ 11,180       $ 16,998       $ 17,053   

Cambridge

  4.00% to 9.22%    Term Loan     
 
 
09/19/08
to
12/07/12
  
  
  
    
 
 
02/19/13
to
11/18/20
  
  
  
     18         2     5.74    $ 1,720       $ 5,260       $ 5,275   

Other

                12         1     6.70    $ 224       $ 2,899       $ 2,898   

Philadelphia

  Dorit Matityahu ##    Term Loan      8/4/2011         08/04/14         1         1     6.25       $ 2,132       $ 2,124   

Various Other &&

  6.00% to 11.50%    Term Loan     
 
 
11/26/07
to
01/09/12
  
  
  
    
 
 
04/28/13
to
03/10/18
  
  
  
     11         *        7.95    $ 224       $ 767       $ 774   
             

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total medallion loans ($227,521 pledged as collateral under borrowing arrangements)

  

        715         136     4.46    $ 151,685       $ 294,183       $ 294,388   
             

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Commercial Loans

                        

Secured mezzanine (29% Minnesota, 14% Oklahoma, 9% North Carolina, 9% Texas, 8% New York

  

7% California, 6% Wisconsin, 5% Arizona, 5% Florida and 8% all other states (2) Manufacturing (68% of the total)

  

+

  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       $ 2,815   

+

  PACA Foods &    Term Loan      12/31/10         12/31/15         1         1     13.00       $ 2,623       $ 2,021   

 

Page 32 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2012

 

(Dollars in thousands)

 

Obligor

Name/Interest Rate

Range

   Security
Type (all
restricted
unless
otherwise
noted)
   Acquisition
Date
     Maturity
Date
     No. of
Invest.
     % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of  2012
Acquisitions (5)
     Cost  (4)      Fair
Value
 
 

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   

+

 

RespirTech

   Term Loan      04/25/12         04/25/17         1         1     12.00   $ 1,500       $ 1,500       $ 1,510   
 

Motion Tech (interest rate includes PIK interest of 6.00%) (capitalized interest of $38 per footnote 2)

   Term Loan      12/23/10         12/23/15         1         1     18.00      $ 1,325       $ 1,329   
 

Dynamic Systems (interest rate includes PIK interest of 3.50%) (capitalized interest of $33 per footnote 2)

   Term Loan      12/23/10         12/23/17         1         1     15.50      $ 1,858       $ 1,858   
 

Reel Power (capitalized interest of $86 per footnote 2)

   Term Loan      12/31/09         02/04/14         1         2     14.00      $ 3,587       $ 3,587   
 

Orchard &

   Term Loan      03/10/99         03/31/10         1         1     13.00      $ 1,390       $ 1,390   
 

Bluff Manufacturing (interest rate includes PIK interest of 3.50%) (capitalized interest of $5 per footnote 2)

   Term Loan      12/14/12         12/14/17         1         1     15.50   $ 3,000       $ 3,005       $ 3,016   

+

 

Quaker Bakery (interest rate includes PIK interest of 5.00%) (capitalized interest of $103 per footnote 2)

   Term Loan      3/28/2012         3/28/2017         1         1     17.00   $ 2,600       $ 2,703       $ 2,692   
 

Various Other && 12.00% to 14.00% (capitalized interest of $69 per footnote 2)

   Term Loan     

 

 

12/15/04

to

07/17/12

 

  

  

    

 

 

03/31/13

to

07/17/17

 

 

  

     4         2     13.16   $ 1,625       $ 3,723       $ 3,738   

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       $ 2,517   

+

 

Staff One & (interest rate includes PIK interest of 13.00%)

   Term Loan      06/30/08         12/31/13         1         1     13.00      $ 3,306       $ 1,854   

+

 

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         01/14/10         1         *        19.00      $ 989       $ 0   

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

 

RPAC Racing (interest rate includes PIK interest of 10.00%) (capitalized interest of $703 per footnote 2)

   Term Loan      11/19/10         11/19/15         1         2     10.00      $ 3,742       $ 3,742   

Professional, Scientific, and Technical Services (6% of the total) +

 

Portu-Sunberg

   Term Loan      12/31/12         12/31/17         1         1     12.00   $ 2,500       $ 2,500       $ 2,514   
 

Various Other && 10% (capitalized interest of $96 per footnote 2)

   Term Loan      10/26/2011         11/1/2014         1         *        10.00      $ 96       $ 96   

Accommodation and Food Services (2% of the total)

 

Various Other && 9.25% to 10.00% (capitalized interest of $179 per footnote 2)

   Term Loan     
 
 
06/30/00
to
11/05/10
  
  
  
    
 
 
10/01/15
to
11/05/15
  
  
  
     3         *        9.86      $ 3,035       $ 985   

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

 

Various Other && 7%

   Term Loan      6/28/2007         6/30/2017         1         *        7.00      $ 1,219       $ 919   

Retail Trade (1% of the total)

 

Various Other && 10% (capitalized interest of $2 per footnote 2)

   Term Loan      6/30/2000         10/1/2015         1         *        10.00      $ 610       $ 234   
             

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total secured mezzanine (2)

                27         19     13.04   $ 13,725       $ 49,456       $ 41,833   
             

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

        Asset-based Other secured commercial (74% New York, 12% New Jersey, 5% Delaware and 9% all other states)

  

            

Wholesale Trade (43% of the total)

                          
 

Capitalsea, LLC ##

   Revolving line of credit      11/07/05         11/07/13         1         1     4.50      $ 1,558       $ 1,530   
 

Various Other 4.75% to 6.75% ##

   Revolving line of credit     
 
 
01/23/99
to
06/01/12
  
  
  
    
 
 
01/14/13
to
11/30/13
  
  
  
     9         1     5.87   $ 74       $ 2,013       $ 1,974   

Transportation and Warehousing (19% of the total)

 

Various Other 5.75% to 8.00% ##

   Revolving line of credit     
 
 
12/31/01
to
07/20/07
  
  
  
    
 
 
02/06/13
to
12/31/13
  
  
  
     5         1     6.58      $ 1,459       $ 1,427   

Retail Trade (10% of the total)

 

Various Other 4.75% to 6.31% ##

   Revolving line of credit     
 
 
10/19/98
to
08/31/06
  
  
  
    
 
 
07/24/13
to
12/21/13
  
  
  
     5         *        5.73      $ 738       $ 716   

Finance and Insurance (9% of the total)

 

Various Other 4.25% to 8.25%

   Revolving line of credit     
 
 
02/06/02
to
11/10/11
  
  
  
    
 
 
02/06/13
to
11/10/13
  
  
  
     6         *        6.28      $ 678       $ 644   

Construction (7% 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         *        5.76      $ 555       $ 546   

Manufacturing (7% of the total)

 

Various Other 5.75% to 7.25% ##

   Revolving line of credit     
 
 
07/07/04
to
04/20/12
  
  
  
    
 
 
02/18/13
to
11/29/13
  
  
  
     7         *        6.61   $ 58       $ 529       $ 505   

Administrative and Support Services (4% 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         *        5.63      $ 308       $ 295   

 

Page 33 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2012

 

(Dollars in thousands)

 

Obligor

Name/Interest Rate

Range

   Security
Type (all
restricted
unless
otherwise
noted)
  Acquisition
Date
   Maturity
Date
   No. of
Invest.
     % of
Net
Assets
    Interest
Rate (1)
    Original
Cost of  2012
Acquisitions (5)
     Cost (4)     Fair
Value
 

Accommodation and Food Services (1% of the total)

  Various Other 6%    Revolving line of credit   4/27/2011    4/27/2013      1         *        6.00      $ 66      $ 64   

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

  Various Other 5.75% ##    Revolving line of credit   10/02/07
to
11/09/12
   10/02/13
to
11/09/13
     2         *        5.75   $ 15       ($ 273   ($ 289
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total asset-based ($5,755 pledged as collateral under borrowing arrangements)

          40         3     5.79   $ 147       $ 7,631      $ 7,412   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other secured commercial (69% New York, 29% New Jersey, 2% Illinois)

                      

Accommodation and Food Services (47% of the total)

  Dune Deck Owners Corp ##    Term Loan   04/24/07    03/31/14      1         1     7.25      $ 3,081      $ 3,081   
  Various Other && 4.50% to 10.50%    Term Loan   05/25/05
to
07/29/08
   03/25/13
to
02/25/15
     3         *        7.12      $ 620      $ 557   

Retail Trade (47% of the total)

  0.00% to 12.00% &&    Term Loan   09/13/06
to
10/09/12
   05/19/13
to
01/09/20
     14         2     9.09   $ 1,972       $ 3,628      $ 3,611   

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         *        5.88      $ 221      $ 221   

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         *        5.25      $ 197      $ 196   

Transportation and Warehousing (0% of the total)

  6.50% to 6.50%    Term Loan   12/02/10
to
12/02/10
   11/22/13
to
11/22/13
     1         *        6.50      $ 7      $ 8   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other secured commercial loans ($3,081 pledged as collateral under borrowing arrangements)

        23         4     8.01   $ 1,972       $ 7,754      $ 7,674   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial loans ($8,836 pledged as collateral under borrowing arrangements) (2)

          90         26     11.59   $ 15,844       $ 64,841      $ 56,919   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries

                   

Commercial Banking

  Medallion Bank **    100% of common stock   05/16/02    None      1         43     11.39      $ 92,169      $ 92,169   

Art Dealer

  Medallion Fine Art, Inc.    100% of common stock   12/03/12    None      1         1     0.00   $ 2,843       $ 2,843      $ 2,843   

Real Estate

  Medallion Hamptons Holding LLC    100% of membership interests   06/21/05    None      1         1     0.00      $ 2,696      $ 2,696   

Various Other

       12/20/04
to
5/23/12
   None      4         1     0.00   $ 900       $ 1,375      $ 1,375   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

          7         46     10.60   $ 3,743       $ 99,083      $ 99,083   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equity investments

                        

Appliance Recycler #

  Appliance Recycling Centers of America, Inc.    8.86%
of common stock
  09/10/98    None      1         *        0.00      $ 0      $ 579   

Commercial Finance

  Convergent Capital, Ltd**    7% of limited partnership interest   07/20/07    None      1         1     0.00      $ 1,294      $ 1,793   

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         1     4.26   $ 750       $ 1,786      $ 1,117   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equity investments, net

               9         2     1.66   $ 750       $ 4,576      $ 4,620   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Investment securities

                        
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Investment securities, net

               0         0     0.00   $ 0       $ 0      $ 0   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Investments ($236,357 pledged as collateral under borrowing arrangements) (3)

        821         210     6.75   $ 172,022       $ 462,683      $ 455,010   
            

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(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 $1,817 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 210%.
(4) Gross unrealized appreciation, gross unrealized depreciation, and net appreciation for federal income tax purposes totaled $8,571, $10,965 and $27,606, respectively. The tax cost of investments was $427,404.
(5) For revolving lines of credit the amount shown is the cost at December 31, 2012.
* Less than 1.0%

 

Page 34 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Summary Schedule of Investments

December 31, 2012

 

**     Not an eligible portfolio company as such term is defined in Section 2(a)(46) of the 1940 Act. The percentage value of all non-eligible portfolio companies to totaled assets of Medallion Financial on an unconsolidated basis was up to 28% and up to 29% on a consolidated basis. Under the 1940 Act, we may not acquire any non-qualifying assets, unless at the time such acquisition is made, qualifying assets, which include securities of eligible portfolio companies, represent at least 70% of our total assets. The status of these assets under the 1940 Act are subject to change. We monitor the status of these assets on an ongoing basis.

&      Loan is on nonaccrual status, or past due on contractual payments, and is therefore considered non-income producing.

&&   Some or all of the securities are non-income producing as per & above.

#       Publicly traded but sales subject to applicable Rule 144 limitations.

##     Pledged as collateral under borrowing arrangements.

+       Includes various warrants, all of which have a cost and fair value of zero at December 31, 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 (Filed as Exhibit 99.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on March 13, 2013 (File No. 814-00188).

 

Page 35 of 68


Table of Contents

Medallion Financial Corp.

Consolidated Schedule of Investments In and Advances to Affiliates

As Of And For the Year Ended 12/31/2012

 

Name of issuer and title of issue (2)

 

Number of shares (all restricted unless

otherwise noted)

   Equity in net profit  and
(loss) for the year
    Amount of dividends  or
interest (1)
     Value as of 12/31/12  
(Dollars in thousands)                        

Medallion Bank - common stock

  1,000,000 shares - 100% of common stock      19,283        10,500       $ 92,169   

Medallion Fine Art, Inc. - common stock

  1,000 shares - 100% of common stock      (28 )       $ 2,843   

Medallion Hamptons Holding LLC - membership interest

  100% of membership interest      0        0       $ 2,696   

Medallion Servicing Corp. - common stock

  1,000 shares - 100% of common stock      (283 )      0       $ 613   

LAX Group LLC - membership interest

  42% of membership interest      (439 )      0       $ 461   

Generation Outdoor, Inc. - common stock

  1,000 shares - 100% of common stock      (137 )      33       $ 301   
    

 

 

   

 

 

    

 

 

 

Total investments in Medallion Bank and other controlled subsidiaries

     18,396        10,533       $ 99,083   
    

 

 

   

 

 

    

 

 

 

Appliance Recycling Centers of America Inc - common stock

  8% of common stock      0        0       $ 579   

Medallion Motorsports, LLC - membership interest (2)

  75% 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   

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

     —          —         $ 3,452   
    

 

 

   

 

 

    

Total equity investments

       0        0       $ 4,620   
    

 

 

   

 

 

    

 

 

 

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

     18,396        10,533       $ 103,703   
    

 

 

   

 

 

    

 

 

 

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

   

    37      
      

 

 

    

Total dividend and interest income on short term investments

       10,570      
      

 

 

    

Total investments in and advances to affiliates

        $ 100,251   

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

  

     $ 3,452   
         

 

 

 

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

   

     $ 103,703   
         

 

 

 

 

(1) Investments with an amount of 0 are considered non-income producing.
(2) In addition to the equity ownership, a controlled subsidiary of the Company has a $3,039 loan to an affiliate of Medallion Motorsports, LLC, which is carried at $3,742, and on which $363 of interest income was earned in 2012.

The table below provides a recap of the changes in the investment in the respective issuers for the year ended December 31, 2012.

 

     Value as of 1/1/12      Gross Additions /
Investments
     Gross Reductions /
Distributions
     Net equity earnings
in  profit and loss,
unrealized
appreciation and
depreciation
    Other
Adjustments
    Value as of 12/31/12  

(Dollars in thousands)

               

Medallion Bank - common stock

   $ 82,852         3,230         13,196         19,283        $ 92,169   

Medallion Hamptons Holding LLC - membership interest

   $ 2,436         260         0         0        $ 2,696   

LAX Group LLC - membership interest

   $ 0         900         0         (439 )      $ 461   

Medallion Servicing Corp. - common stock

   $ 577         321         2         (283 )      $ 613   

Generation Outdoor, Inc. - common stock

   $ 65         600         600         209        27 (1)    $ 301   

Appliance Recycling Centers of America Inc - common stock

   $ 2,225         0         0         (1,646 )      $ 579   

Medallion Fine Art, Inc. - common stock

   $ 0         2,871         0         (28 )      $ 2,843   

Medallion Sports Media, Inc. - common stock

   $ 2         371         0         (346 )      (27 )(1)    $ 0   

(1) Represents the net equity investment of Medallion Sports Media Inc at December 31, 2012 prior its merger into Generation Outdoor Inc.

 

Page 36 of 68


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, 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 15%. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which includes assets serviced for third party investors, were $1,290,373,000 as of September 30, 2013, and $1,219,224,000 and $1,176,796,000 as of December 31, 2012 and September 30, 2012, 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 BDC under the 1940 Act. We have also elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our shareholders as dividends if we meet certain source-of-income and asset diversification requirements. Medallion Bank is not a RIC and must pay corporate-level US federal and state income taxes.

Our wholly-owned portfolio company, Medallion Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans. However, the FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, or $364,200,000 as of September 30, 2013. We earn referral fees for these activities. All of these servicing activities have been assigned to MSC. As a non-investment company, Medallion Bank is not consolidated with the Company.

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

Our investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and also receive an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank. We 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 prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013. As a result of this valuation process, we used

 

Page 37 of 68


Table of Contents

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.

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, 2013     June 30, 2013     March 31, 2013     December 31, 2012     September 30, 2012  

(Dollars in thousands)

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

Medallion loans

                   

New York

    3.54   $ 198,739        3.58   $ 204,578        3.68   $ 199,509        3.96   $ 208,564        4.16   $ 202,076   

Chicago

    4.95        41,244        5.00        39,260        5.26        40,780        5.28        40,405        5.30        39,811   

Boston

    5.12        22,532        5.26        21,975        5.22        22,140        5.47        19,713        6.10        14,239   

Newark

    5.83        20,211        5.98        19,109        6.32        17,934        6.70        17,342        6.94        16,836   

Cambridge

    5.28        5,355        5.40        5,745        5.46        5,458        5.74        5,260        6.44        5,753   

Other

    6.35        3,291        6.40        3,279        6.72        3,058        6.70        2,899        6.72        2,951   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total medallion loans

    4.08        291,372        4.12        293,946        4.25        288,879        4.46        294,183        4.66        281,666   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Deferred loan acquisition costs

      173          83          (6       205          220   

Unrealized depreciation on loans

      —            —            —            —            —     
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net medallion loans

    $ 291,545        $ 294,029        $ 288,873        $ 294,388        $ 281,886   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Commercial loans

               

Secured mezzanine

    12.48   $ 51,572        12.68   $ 48,200        12.79   $ 51,939        13.04   $ 49,456        13.39   $ 52,059   

Asset based

    5.39        7,073        5.69        7,207        5.66        7,183        5.79        7,631        5.73        9,138   

Other secured commercial

    9.29        11,923        9.32        11,822        9.31        10,948        8.01        7,754        8.36        7,844   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total commercial loans

    11.23        70,568        11.34        67,229        11.52        70,070        11.59        64,841        11.80        69,041   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Deferred loan acquisition income

      (58       (40       (80       (78       (67

Unrealized depreciation on loans

      (7,449       (7,960       (7,894       (7,844       (12,209
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net commercial loans

    $ 63,061        $ 59,229        $ 62,096        $ 56,919        $ 56,765   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Investment in Medallion Bank and other controlled subsidiaries, net

    12.21   $ 102,377        11.46   $ 100,343        11.62   $ 98,973        10.60   $ 99,083        9.46   $ 95,167   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity investments

    0.89   $ 5,653        0.98   $ 5,914        1.48   $ 4,576        1.66   $ 4,576        1.76   $ 4,375   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Unrealized appreciation (depreciation) on equities

      733          825          47          44          827   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net equity investments

    $ 6,386        $ 6,739        $ 4,623        $ 4,620        $ 5,202   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Investment securities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments at cost (2)

    6.89   $ 469,970        6.69   $ 467,432        6.90   $ 462,498        6.75   $ 462,683        6.74   $ 450,249   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Deferred loan acquisition (income) costs

      115          43          (86       127          153   

Unrealized appreciation (depreciation) on equities

      733          825          47          44          827   

Unrealized depreciation on loans

      (7,449       (7,960       (7,894       (7,844       (12,209
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net investments

    $ 463,369        $ 460,340        $ 454,565        $ 455,010        $ 439,020   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Medallion Bank investments

                   

Medallion loans

    3.81   $ 346,639        3.86   $ 343,825        3.93   $ 351,227        4.17   $ 337,108        4.39   $ 328,705   

Consumer loans

    15.92        341,273        16.22        311,968        16.56        273,849        16.81        264,691        17.11        256,396   

Commercial loans

    4.94        66,242        4.95        65,095        4.92        67,371        4.94        70,103        5.01        73,903   

Investment securities

    2.60        25,618        2.45        22,498        1.90        20,439        2.37        20,951        2.54        21,638   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Medallion Bank investments at cost (2)

    9.17        779,772        9.10        743,386        8.82        712,886        9.02        692,853        9.19        680,642   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Deferred loan acquisition costs

      9,605          8,524          7,168          7,019          7,004   

Unrealized appreciation (depreciation) on investment securities

      (504       (137       745          835          1,032   

Premiums paid on purchased securities

      362          315          296          336          389   

Unrealized depreciation on loans

      (17,680       (17,290       (14,192       (14,636       (14,905
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Medallion Bank net investments

    $ 771,555        $ 734,798        $ 706,903        $ 686,407        $ 674,162   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

(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 8.12%, 8.03%, 7.88%, 8.02% and 8.25% at September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, and September 30, 2012.

 

Page 38 of 68


Table of Contents

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)

   2013     2012     2013     2012  

Net investments at beginning of period

   $ 460,340      $ 426,471      $ 455,010      $ 451,835   

Investments originated (1)

     52,165        79,329        186,265        146,643   

Repayments of investments (1)

     (50,626     (69,649     (181,913     (165,843

Net realized losses on investments (2)

     (596     (2,546     (515     (2,281

Net increase in unrealized appreciation (3)

     2,103        5,468        4,673        8,793   

Amortization of origination costs

     (17     (53     (151     (127
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in investments

     3,029        12,549        8,359        (12,815
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investments at end of period

   $ 463,369      $ 439,020      $ 463,369      $ 439,020   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes refinancings.
(2) Excludes net realized losses of $74 for the quarter and nine months ended September 30, 2012, related to foreclosed properties.
(3) Excludes net unrealized appreciation of $475 and $6,340 for the quarter and nine months ended September 30, 2013, and $2,426 and $6,815 for the comparable 2012 periods, related to foreclosed properties.

PORTFOLIO SUMMARY

Total Portfolio Yield

The weighted average yield of the total portfolio at September 30, 2013 was 6.89% (5.48% for the loan portfolio), an increase of 14 basis points from 6.75% at December 31, 2012, and an increase of 15 basis points from 6.74% at September 30, 2012. The weighted average yield of the total managed portfolio at September 30, 2013 was 7.92% (8.12% for the loan portfolio), an increase of 9 basis points from 7.83% at December 31, 2012, and a decrease of 15 basis points from 8.07% at September 30, 2012. The slight changes in 2013 reflected changes in the portfolio mix.

Medallion Loan Portfolio

Our medallion loans comprised 63% of the net portfolio of $463,369,000 at September 30, 2013, compared to 65% of the net portfolio of $455,010,000 at December 31, 2012, and 64% of $439,020,000 at September 30, 2012. Our managed medallion loans of $637,301,000 comprised 56% of the net managed portfolio of $1,138,848,000 at September 30, 2013, compared to 60% of the net managed portfolio of $1,048,635,000 at December 31, 2012, and 60% of $1,022,149,000 at September 30, 2012. The medallion loan portfolio decreased by $2,843,000 or 1% in 2013 (an increase of $6,698,000 or 1% on a managed basis), reflecting portfolio stability. Total medallion loans serviced for third parties were $28,118,000, $57,676,000, and $67,558,000 at September 30, 2013, December 31, 2012, and September 30, 2012.

The weighted average yield of the medallion loan portfolio at September 30, 2013 was 4.08%, a decrease of 38 basis points from 4.46% at December 31, 2012, and a decrease of 58 basis points from 4.66% at September 30, 2012. The weighted average yield of the managed medallion loan portfolio at September 30, 2013 was 3.93%, a decrease of 38 basis points from 4.31% at December 31, 2012, and a decrease of 59 basis points from 4.52% at September 30, 2012. The decrease in yield primarily reflected the impact of falling interest rates in the economy and the effects of borrower refinancings. At September 30, 2013, 32% of the medallion loan portfolio represented loans outside New York, compared to 29% and 28% at December 31, 2012 and September 30, 2012. At September 30, 2013, 25% of the managed medallion loan portfolio represented loans outside New York, compared to 22% at December 31, 2012 and September 30, 2012. We continue to focus our efforts on originating higher yielding medallion loans outside the New York market.

Commercial Loan Portfolio

Our commercial loans represented 14%, 12%, and 13% of the net investment portfolio as of September 30, 2013, December 31, 2012, and September 30, 2012, and were 11%, 12% and 13% on a managed basis. Commercial loans increased by $6,142,000 or 11% during 2013 (decreased $74,000 on a managed basis), primarily reflecting increases in the other secured commercial and secured mezzanine portfolios. Net commercial loans serviced by third parties were $10,981,000 at September 30, 2013, $12,575,000 at December 31, 2012, and $13,231,000 at September 30, 2012.

The weighted average yield of the commercial loan portfolio at September 30, 2013 was 11.23%, a decrease of 36 basis points from 11.59% at December 31, 2012, and a decrease of 57 basis points from 11.80% at September 30, 2012. The weighted average yield of the managed commercial loan portfolio at September 30, 2013 was 8.19%, an increase of 6 basis points from 8.13% at December 31, 2012, and a decrease of 10 basis points from 8.29% at September 30, 2012. The fluctuations primarily reflect lower yields on the mezzanine and

 

Page 39 of 68


Table of Contents

asset-based portfolios, partially offset by higher yields on the other secured commercial portfolio. We continue to originate adjustable-rate and floating-rate loans tied to the prime rate to help mitigate our interest rate risk in a rising interest rate environment. At September 30, 2013, variable-rate loans represented approximately 11% of the commercial portfolio, compared to 13% and 14% at December 31, 2012 and September 30, 2012, and were 52%, 56%, and 56% 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 30%, 25%, and 24% of the managed net investment portfolio as of September 30, 2013, December 31, 2012, and September 30, 2012. Medallion Bank originates adjustable rate consumer loans secured by recreational vehicles, boats, motorcycles, and trailers, and also finances small-scale home improvements 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 15.92% at September 30, 2013, compared to 16.81% and 17.11% at December 31, 2012 and September 30, 2012. Adjustable rate loans represented 70%, 76%, and 78% of the managed consumer portfolio at September 30, 2013, December 31, 2012, and September 30, 2012.

Delinquency and Loan Loss Experience

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

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

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

 

     September 30, 2013     June 30, 2013     March 31, 2013     December 31, 2012     September 30, 2012  

(Dollars in thousands)

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

Medallion loans

   $ 582         0.2   $ —           0.0   $ —           0.0   $ —           0.0   $ 216         0.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Commercial loans

                         

Secured mezzanine

     2,182         0.6        2,182         0.6        2,380         0.7        2,380         0.7        6,361         1.8   

Asset-based receivable

     1,054         0.3        205         0.1        —           0.0        —           0.0        —           0.0   

Other secured commercial

     —           0.0        492         0.1        —           0.0        —           0.0        309         0.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans

     3,236         0.9        2,879         0.8        2,380         0.7        2,380         0.7        6,670         1.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans 90 days or more past due

   $ 3,818         1.1   $ 2,879         0.8   $ 2,380         0.7   $ 2,380         0.7   $ 6,886         2.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Medallion Bank loans

   $ 14,165         1.9   $ 1,198         0.2   $ 1,007         0.2   $ 1,252         0.2   $ 980         0.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total managed loans 90 days or more past due

   $ 17,983         1.6   $ 4,077         0.4   $ 3,387         0.3   $ 3,632         0.4   $ 7,866         0.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. At September 30, 2013, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount is divided between seven separate borrowers operating in a variety of industries. In April 2013, the finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the finance company’s liquidation. In May 2013, the bankruptcy court presiding over the finance company’s case entered an order converting the involuntary chapter 7 case to a chapter 11 case. We believe the loan participations are fully secured by the underlying collateral, including personal guarantees from one or more of the principals of each of the underlying seven borrowers. We and Medallion Bank have received no payments on these accounts since March 31, 2013. Because of this and the inherent uncertainty associated with bankruptcy proceedings, we and Medallion Bank have placed these loans on nonaccrual, and have reversed interest income of $52,000 and $170,000 in that regard, and in addition, have established valuation allowances against the outstanding balances of 20% or $169,000 and $2,587,000. On May 31, 2013, we commenced an adverse proceeding against the finance company and the bank lenders seeking

 

Page 40 of 68


Table of Contents

declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the finance company’s assets. The finance company and bank lenders are contesting our position. Although we believe the claims raised by the finance company and the bank lenders are without merit and will vigorously defend against them, we cannot at this time predict the outcome of this litigation or determine our potential exposure.

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 have remained at the same level as last quarter. The increase in delinquencies in the asset-based and Medallion Bank loan portfolios reflects the states of the loans described in the preceding paragraph. Medallion Bank continued with low levels of delinquency in its consumer loan portfolio. In addition to the delinquencies in the loan portfolio as described above, a receivable from bonuses related to certain investments of $6,468,000 was more than 90 days delinquent at September 30, 2013. 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.

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 2013 and 2012 quarters shown below.

 

(Dollars in thousands)

  Medallion
Loans
    Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2012

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

Net change in unrealized

         

Appreciation on investments

    —          —          (11     3,012        3,001   

Depreciation on investments

    —          (50     14        —          (36

Reversal of unrealized appreciation (depreciation) related to realized

         

Gains on investments

    —          —          —          —          —     

Losses on investments

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2013

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

Net change in unrealized

         

Appreciation on investments

    —          —          505        2,853        3,358   

Depreciation on investments

    —          (66     273        —          207   

Reversal of unrealized appreciation (depreciation) related to realized

         

Gains on investments

    —          —          —          —          —     

Losses on investments

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2013

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

Net change in unrealized

         

Appreciation on investments

    —          —          197        475        672   

Depreciation on investments

    —          277        (654     —          (377

Reversal of unrealized appreciation (depreciation) related to realized

         

Gains on investments

    —          —          —          —          —     

Losses on investments

    —          234        365        —          599   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2013

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 41 of 68


Table of Contents

(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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

(Dollars in thousands)

  September 30,
2013
    June 30,
2013
    March 31,
2013
    December 31,
2012
    September 30,
2012
 

Total loans

         

Medallion loans

  $ 291,545      $ 294,029      $ 288,873      $ 294,388      $ 281,886   

Commercial loans

    63,061        59,229        62,096        56,919        56,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    354,606        353,258        350,969        351,307        338,651   

Investment in Medallion Bank and other controlled subsidiaries

    102,377        100,343        98,973        99,083        95,167   

Equity investments (1)

    6,386        6,739        4,623        4,620        5,202   

Investment securities

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investments

  $ 463,369      $ 460,340      $ 454,565      $ 455,010      $ 439,020   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

  $ 771,555      $ 734,798      $ 706,903      $ 686,407      $ 674,162   

Managed net investments

  $ 1,138,848      $ 1,100,518      $ 1,067,371      $ 1,048,635      $ 1,022,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized appreciation (depreciation) on investments

         

Medallion loans

  $ —        $ —        $ —        $ —        $ —     

Commercial loans

    (7,449     (7,960     (7,894     (7,844     (12,209
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    (7,449     (7,960     (7,894     (7,844     (12,209

Investment in Medallion Bank and other controlled subsidiaries (2)

    —          —          —          —          —     

Equity investments

    733        825        47        44        827   

Investment securities

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized depreciation on investments (2)

  ($ 6,716   ($ 7,135   ($ 7,847   ($ 7,800   ($ 11,382
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  ($ 18,184   ($ 17,427   ($ 13,447   ($ 13,801   ($ 13,873

Managed total unrealized depreciation on investments(2)

  ($ 24,900   ($ 24,562   ($ 21,294   ($ 21,601   ($ 25,255
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

         

Medallion loans

    —       —       —       —       —  

Commercial loans

    (10.56     (11.84     (11.27     (12.10     (17.68

Total loans

    (2.06     (2.20     (2.20     (2.18     (3.48

Investment in Medallion Bank and other controlled subsidiaries

    —          —          —          —          —     

Equity investments

    12.98        13.96        1.04        0.97        18.90   

Investment securities

    —          —          —          —          —     

Net investments

    (1.43     (1.53     (1.70     (1.69     (2.53
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

    (2.33 %)      (2.34 %)      (1.89 %)      (1.99 %)      (2.04 %) 

Managed net investments

    (2.16 %)      (2.20 %)      (1.97 %)      (2.03 %)      (2.43 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents common stock and warrants held as investments.
(2) Excludes $869, $869, $0, $0, and $0 of unrealized appreciation on Medallion Hamptons Holding, a wholly-owned subsidiary, at September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, and September 30, 2012.
(3) Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio is adjusted quarterly to reflect estimates of the current realizable value of the investment portfolio. These percentages represent the discount or premium that investments are carried on the books at, relative to their par or gross value.

 

Page 42 of 68


Table of Contents

The following table presents the gain/loss experience on the investment portfolios for the three and nine months ended September 30, 2013 and 2012.

 

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

(Dollars in thousands)

   2013     2012     2013     2012  

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

        

Medallion loans

   $ —        $ —        $ 40      $ —     

Commercial loans

     (231     (2,482     (190     (2,894
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     (231     (2,482     (150     (2,894

Investment in Medallion Bank and other controlled subsidiaries

     —          —          —          —     

Equity investments

     (365     (64     (365     613   

Investment securities

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total realized gains (losses) on loans and equity investments

     (596     (2,546     (515     (2,281
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,801     (823     (4,245     (3,172
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   ($ 2,397   ($ 3,369   ($ 4,760   ($ 5,453
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Medallion loans

     —       —       0.02     —  

Commercial loans

     (1.32     (14.45     (0.37     (5.60

Total loans

     (0.25     (2.83     (0.06     (1.08

Investment in Medallion Bank and other controlled subsidiaries

     —          —          —          —     

Equity investments

     (25.03     (5.64     (9.71     19.38   

Investment securities

     —          —          —          —     

Net investments

     (0.50     (2.27     (0.15     (0.67
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investments at Medallion Bank and other controlled subsidiaries

     (0.93     (0.49     (0.78     (0.67

Managed net investments

     (0.84 %)      (1.31 %)      (0.58 %)      (0.73 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes $74 of realized losses on foreclosed properties for the three and nine months ended September 30, 2012.

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, 2013 and 2012.

 

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

(Dollars in thousands)

   2013     2012     2013     2012  

Net change in unrealized appreciation (depreciation) on investments

        

Unrealized appreciation

   $ 197      ($ 191   $ 691      ($ 497

Unrealized depreciation

     (377     (40     (207     (702

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

     1,684        3,115        3,590        6,982   

Realized gains

     —          —          —          —     

Realized losses

     599        2,584        599        3,010   

Unrealized gains on foreclosed properties and other assets

     475        2,426        6,340        6,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,578      $ 7,894      $ 11,013      $ 15,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains on investments

        

Realized gains

   $ —        $ —        $ —        $ —     

Realized losses

     (599     (2,584     (599     (3,010

Other gains

     —          136        —          495   

Direct recoveries (chargeoffs)

     3        (98     84        234   

Realized losses on foreclosed properties and other assets

     —          (74     —          (74
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   ($ 596   ($ 2,620   ($ 515   ($ 2,355
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 43 of 68


Table of Contents

Investment in Medallion Bank and Other Controlled Subsidiaries

Investment in Medallion Bank and other controlled subsidiaries represented 22% of our total portfolio at September 30, 2013, December 31, 2012, and September 30, 2012. 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. 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 $3,000,000 and $8,500,000 in the 2013 third quarter and nine months, and $2,000,000 and $6,500,000 in the comparable 2012 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, 2013, December 31, 2012, and September 30, 2012. Equity investments were 1% of our total managed portfolio at September 30, 2013, December 31, 2012, and September 30, 2012. Equity investments are comprised of common stock, partnership interests, and warrants.

Investment Securities

Investment securities were 0% of our total portfolio at September 30, 2013, December 31, 2012, and September 30, 2012. Investment securities were 2% of our total managed portfolio at September 30, 2013, December 31, 2012, and September 30, 2012. 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.

 

Page 44 of 68


Table of Contents

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, 2013 and 2012. 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, and the repricing of term borrowings.

 

     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, 2013

                

Revolving lines of credit

   $ 620       $ 153,374         1.61   $ 1,929       $ 157,293         1.64

Notes payable to banks

     575         75,091         3.04        1,637         67,265         3.25   

SBA debentures

     694         59,081         4.66        2,108         59,066         4.77   

Preferred securities

     203         33,000         2.44        605         33,000         2.45   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 2,092       $ 320,546         2.59      $ 6,279       $ 316,624         2.65   
  

 

 

    

 

 

      

 

 

    

 

 

    

Medallion Bank borrowings

   $ 1,299       $ 651,535         0.79      $ 3,905       $ 621,505         0.84   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total managed borrowings

   $ 3,391       $ 972,081         1.38      $ 10,184       $ 938,129         1.45   
  

 

 

    

 

 

      

 

 

    

 

 

    

September 30, 2012

                

Revolving lines of credit

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

Notes payable to banks

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

SBA debentures

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

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   
  

 

 

    

 

 

      

 

 

    

 

 

    

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, 2013 and 2012, short-term adjustable rate debt constituted 71% and 68% of total debt, and was 24% and 23% 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 investments or other investments as determined by our Board of Directors is reflected in net unrealized depreciation or appreciation on investments and affects net increase in net assets resulting from operations, but has no impact on net investment income or distributable income.

Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and also receive an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank. We 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 prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013. Because of these restrictions and other factors,

 

Page 45 of 68


Table of Contents

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.

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, 2013 and 2012.

 

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

(Dollars in thousands, except per share data)

   2013     2012     2013     2012  

Statement of operations

        

Investment income

   $ 9,435      $ 7,147      $ 25,224      $ 23,074   

Interest expense

     2,092        2,565        6,279        8,720   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     7,343        4,582        18,945        14,354   

Noninterest income

     181        265        804        941   

Operating expenses

     3,109        3,510        11,129        10,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     4,415        1,337        8,620        4,740   

Income tax (provision) benefit

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     4,415        1,337        8,620        4,740   

Net realized gains (losses) on investments

     (596     (2,620     (515     (2,355

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

     1,684        3,115        3,590        6,982   

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

     894        4,779        7,423        8,626   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 6,397      $ 6,611      $ 19,118      $ 17,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data

        

Net investment income

   $ 0.20      $ 0.06      $ 0.39      $ 0.24   

Income tax (provision) benefit

     —          —          —          —     

Net realized gains (losses) on investments

     (0.03     (0.12     (0.02     (0.12

Net change in unrealized appreciation on investments (1)

     0.12        0.37        0.50        0.79   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.29      $ 0.31      $ 0.87      $ 0.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.23      $ 0.21      $ 0.67      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

        

Basic

     21,730,116        21,284,143        21,596,054        19,438,227   

Diluted

     22,116,793        21,554,715        21,966,709        19,694,114   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     September 30,
2013
     December 31,
2012
 

Balance sheet data

     

Net investments

   $ 463,369       $ 455,010   

Total assets

     570,501         543,465   

Total funds borrowed

     338,371         322,770   

Total liabilities

     344,638         327,147   

Total shareholders’ equity

     225,863         216,318   
  

 

 

    

 

 

 

Managed balance sheet data (2)

     

Net investments

   $ 1,138,848       $ 1,048,635   

Total assets

     1,273,236         1,174,124   

Total funds borrowed

     1,013,775         924,921   

Total liabilities

     1,047,373         957,806   
  

 

 

    

 

 

 

 

Page 46 of 68


Table of Contents
     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Selected financial ratios and other data

        

Return on average assets (ROA) (3)

        

Net investment income after taxes

     3.11     1.04     2.09     1.21

Net increase in net assets resulting from operations

     4.50        5.12        4.64        4.61   

Return on average equity (ROE) (4)

        

Net investment income after taxes

     7.82        2.51        5.23        3.29   

Net increase in net assets resulting from operations

     11.32        12.41        11.59        12.50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average yield

     8.13     6.57     7.37     7.04

Weighted average cost of funds

     1.80        2.36        1.84        2.66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin (5)

     6.33        4.21        5.53        4.38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income ratio (6)

     0.16     0.24     0.23     0.29

Total expense ratio (7)

     4.48        5.58        5.08        5.88   

Operating expense ratio (8)

     2.68        3.23        3.25        3.22   

 

     September 30, 2013     December 31, 2012  

As a percentage of net investment portfolio

    

Medallion loans

     63     65

Commercial loans

     14        12   

Investment in Medallion Bank and other controlled subsidiaries

     22        22   

Equity investments

     1        1   

Investment securities

     —          —     
  

 

 

   

 

 

 

Investments to assets (9)

     87     84

Equity to assets (10)

     40        40   

Debt to equity (11)

     150        149   
  

 

 

   

 

 

 

 

(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 $1,196 and $1,232 in the three and nine months ended September 30, 2013, and $22 and $316 for the comparable 2012 periods, and also included $3,000 and $8,500 of dividends from Medallion Bank for the three and nine months ended September 30, 2013, and $2,000 and $6,500 for the comparable 2012 periods. On a managed basis, combined with Medallion Bank, the net interest margin was 6.96% and 6.55% for the three and nine months ended September 30, 2013, and was 6.39% and 6.25% for the comparable 2012 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

2013 Third Quarter and Nine Months compared to the 2012 periods

Net increase in net assets resulting from operations was $6,397,000 or $0.29 per diluted common share and $19,118,000 or $0.87 in the 2013 third quarter and nine months, down $214,000 or 3% and up $1,125,000 or 6% from $6,611,000 or $0.31 per share and $17,993,000 or $0.91 in the 2012 third quarter and nine months. The changes reflect higher net interest income and lower operating expenses, more than offset by lower net realized/unrealized gains and noninterest income, and in the nine months, also by higher operating expenses. Net investment income after income taxes was $4,415,000 or $0.20 per share and $8,620,000 or $0.39 in the 2013 quarter and nine months, up $3,078,000 and $3,880,000 or 82% from $1,337,000 or $0.06 per share and $4,740,000 or $0.24 in the 2012 quarter and nine months.

Investment income was $9,435,000 and $25,224,000 in the 2013 third quarter and nine months, up $2,288,000 or 32% and $2,150,000 or 9% from $7,147,000 and $23,074,000 in the year ago periods, and included $1,196,000 and $1,232,000 from interest recoveries and bonuses on certain investments in the 2013 quarter and nine months, compared to $22,000 and $316,000 in the 2012 periods. Also included in the 2013 quarter and nine months was $3,000,000 and $8,500,000 in dividends from Medallion Bank, compared to $2,000,000 and $6,500,000 in the comparable 2012 periods. Excluding those items, investment income increased $114,000 or 2% in the quarter and decreased $766,000 or 5% in the six months, primarily reflecting the repricing of the portfolios to lower current market interest rates, and the sourcing of a greater proportion of our business to Medallion Bank. The yield on the investment portfolio was 8.13% in the 2013 quarter, up 24% from 6.57% in 2012, and was 7.37% in the 2013 nine months, up 5% from 7.04% in the 2012 nine months. Excluding the extra interest and dividends, the 2013 third quarter and nine month yields were down 4% and 9% to 4.51% and 4.52%, from

 

Page 47 of 68


Table of Contents

4.71% and 4.96% in the 2012 quarter and nine months, reflecting the general decrease in market interest rates and changes in the portfolio mix. Average investments outstanding were up 6% to $460,579,000 in the 2013 quarter and up 5% to $457,887,000 in the nine months, from $432,767,000 and $438,001,000 in the year ago periods, primarily reflecting portfolio growth, partially offset by loan participations sold and loan payments received.

Medallion loans were $291,545,000 at quarter end, up $9,659,000 or 3% from $281,886,000 a year ago, representing 63% of the investment portfolio compared to 64% a year ago, and were yielding 4.08% compared to 4.66% a year ago, a decrease of 12%, reflecting the repricing of the portfolio to lower current market interest rates. The increase in outstandings primarily reflected portfolio growth in Boston, Newark, and Chicago, partially offset by a decline in the New York market. The managed medallion portfolio, which includes loans at Medallion Bank and those serviced for third parties, was $665,419,000 at quarter end, down $11,827,000 or 2% from $677,246,000 a year ago, reflecting the above and the strong overall portfolio growth at Medallion Bank, more than offset by a reduction in third party participations sold. The commercial loan portfolio was $63,061,000 at quarter end, compared to $56,765,000 a year ago, an increase of $6,296,000 or 11%, and represented 14% of the investment portfolio compared to 13% a year ago. The increase primarily reflected growth in the high-yield mezzanine and other secured commercial loan portfolios, partially offset by a decrease in the asset-based loan portfolio. Commercial loans yielded 11.23% at quarter end, down 5% from 11.80% a year ago, primarily reflecting lower yields on the mezzanine and asset-based portfolios, partially offset by higher yields on the other secured commercial portfolio. The net managed commercial loan portfolio, which includes loans at Medallion Bank and those serviced for or by third parties, was $115,001,000 at quarter end, down $1,402,000 or 1% from $116,403,000 a year ago, primarily reflecting the changes described above, and further decreases and reserve increases in the asset-based loan portfolio at Medallion Bank. Investments in Medallion Bank and other controlled subsidiaries were $102,377,000 at quarter end, up $7,210,000 or 8% from $95,167,000 a year ago, primarily reflecting our equity in the earnings of Medallion Bank and other portfolio company investments, and investment appreciation, and which represented 22% of the investment portfolio at both period ends, and which yielded 12.21% at quarter end, compared to 9.46% a year ago, reflecting the increased level of dividends from Medallion Bank. See Notes 3 and 10 of the consolidated financial statements for additional information about Medallion Bank and the other controlled subsidiaries. Equity investments were $6,386,000 at quarter end, up $1,184,000 or 23% from $5,202,000 a year ago, primarily reflecting increased equity investments, partially offset by portfolio depreciation, and represented 1% of the investment portfolio at both quarter ends, and had a dividend yield of 0.89%, compared to 1.76% 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 $2,092,000 and $6,279,000 in the 2013 quarter and nine months, down $473,000 or 18% and $2,441,000 or 28% from $2,565,000 and $8,720,000 in the 2012 periods. The decrease in interest expense was primarily due to reduced funding costs. The cost of borrowed funds was 2.59% and 2.65% in the 2013 quarter and nine months, compared to 3.47% and 3.64% in the year ago periods, decreases of 25% and 27%, reflecting the repricing of certain debt to lower interest rates, as well as the adjustable rate nature of much of our borrowings, and changes in our funding mix. Average debt outstanding was up 9% to $320,546,000 for the 2013 quarter, and was down 1% to $316,624,000 in the nine months, compared to $293,668,000 and $320,426,000 in the year ago periods, primarily reflecting decreased borrowings as much of our portfolio growth has been in Medallion Bank. See page 45 for a table which shows average balances and cost of funds for our funding sources.

Net interest income was $7,343,000 and $18,945,000 and the net interest margin was 6.33% and 5.53% for the 2013 third quarter and nine months, up $2,761,000 or 60% and $4,590,000 or 32% from $4,582,000 and $14,355,000 a year ago, which represented net interest margins of 4.21% and 4.38%, all reflecting the items discussed above.

Noninterest income, which is comprised of prepayment fees, servicing fee income, late charges, and other miscellaneous income was $181,000 and $804,000 in the 2013 third quarter and nine months, down $84,000 or 32% and $137,000 or 15% from $265,000 and $941,000 a year ago, primarily reflecting lower prepayment fees in the mezzanine lending business, and in the nine months, also by lower late charges.

Operating expenses were $3,109,000 and $11,129,000 in the 2013 third quarter and nine months, down $401,000 or 11% and up $574,000 or 5% from $3,510,000 and $10,555,000 in the 2012 periods. Salaries and benefits expense was $2,369,000 and $7,265,000 in the third quarter and nine months, up $129,000 or 6% and $688,000 or 10% from $2,240,000 and $6,577,000 in 2012, primarily reflecting higher stock-based compensation expense and bonus accruals, partially offset by lower salaries expense, and in the nine months, also by higher salary deferrals related to loan originations. Professional fees were ($105,000) and $1,291,000 in the quarter and nine months, down $446,000 and up $201,000 or 18% from $341,000 and $1,090,000 a year ago, primarily reflecting reimbursements from unconsolidated portfolio companies of legal fees associated with the realization of certain portfolio investments, and in the nine months, also by higher consultant and accounting costs related to investment activities, portfolio valuations, and assistance with enhancements to the operating and structural environment. Occupancy expense was $195,000 and $587,000 in the quarter and nine months, down $16,000 or 8% and $44,000 or 7% from $211,000 and $631,000 in the 2012 periods, primarily reflecting higher rent allocated to unconsolidated portfolio companies. Other operating expenses of $650,000 and $1,986,000 in 2013 were down $68,000 or 9% and down $271,000 or 12% from $718,000 and $2,257,000 a year ago, primarily reflecting lower franchise tax accruals and travel and entertainment expenses, partially offset by higher directors fees, and in the nine months, also by lower other operating expenses.

Income tax expense was $0 in the 2013 and 2012 third quarters and nine months.

 

Page 48 of 68


Table of Contents

Net change in unrealized appreciation on investments was $2,578,000 and $11,013,000 in the 2013 third quarter and nine months, compared to $7,894,000 and $15,608,000 in the 2012 third quarter and nine months, a decrease in appreciation of $5,316,000 or 67% in the quarter and $4,595,000 or 29% in the nine months. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries, was appreciation of $894,000 and $7,423,000 in the 2013 quarter and nine months, compared to $4,779,000 and $8,626,000 in the 2012 periods, resulting in decreased appreciation of $3,885,000 or 81% and $1,203,000 or 14% 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 2013 activity resulted from net appreciation on Medallion Bank and other controlled subsidiaries of $1,684,000 ($3,590,000 in the nine months), net appreciation on foreclosed property of $475,000 ($6,340,000 in the nine months), reversals of unrealized depreciation associated with equity investments which were charged off of $365,000 ($365,000 in the nine months), reversals of unrealized depreciation associated with fully depreciated loans which were charged off of $234,000 ($234,000 in the nine months), and by net unrealized appreciation on loans of $277,000 ($160,000 in the nine months), partially offset net unrealized depreciation on equity investments of $457,000 ($324,000 of appreciation in the nine months). 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 net appreciation on Medallion Bank and other controlled subsidiaries described above is net of the dividends declared by them to us of $3,000,000 and $8,500,000 in the 2013 third quarter and nine months, and were $2,000,000 and $6,500,000 in the comparable 2012 periods.

Our net realized losses on investments were $596,000 and $515,000 in the 2013 quarter and nine months, compared to $2,620,000 and $2,355,000 in the 2012 quarter and nine months, a decrease in realized losses of $2,024,000 or 77% in the quarter and $1,840,000 or 78% in the nine months. The 2013 activity reflected the reversals described in the unrealized paragraph above, partially offset by net direct recoveries of $3,000 ($84,000 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).

Our net realized/unrealized gains on investments were $1,982,000 and $10,498,000 in the 2013 quarter and nine months, compared to $5,274,000 and $13,253,000 in the 2012 periods, a decrease of $3,292,000 or 62% and $2,755,000 or 0.21% in net gains in the 2013 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 $61,985,000 with a weighted average interest rate of 4.08%, constituting 18% of our total indebtedness as of September 30, 2013. Also, as of September 30, 2013, portions of the adjustable rate debt with banks repriced at intervals of as long as 33 months, and certain of the certificates of deposit were for terms of up to 56 months, further mitigating the immediate impact of changes in market interest rates.

 

Page 49 of 68


Table of Contents

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, 2013, compared to the respective positions at the end of 2012 and 2011. 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, 2013 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

   $ 7,073      $ —        $ —        $ —         $ —         $ —        $ —        $ 7,073   

Adjustable rate

     159        3,032        543        558         —           —          —          4,292   

Fixed-rate

     22,283        46,999        182,030        59,608         34,857         —          4,799        350,576   

Cash

     35,006        —          —          —           —           —          —          35,006   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total earning assets

   $ 64,521      $ 50,031      $ 182,573      $ 60,166       $ 34,857       $ —        $ 4,799      $ 396,947   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest bearing liabilities

                  

Revolving lines of credit

   $ 145,150      $ —        $ —        $ —         $ —         $ —        $ —        $ 145,150   

Notes payable to banks

     60,642        28,384        228        8,982         —           —          —          98,236   

SBA debentures

     6,000        6,500        —          —           —           3,000        46,485        61,985   

Preferred securities

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

   $ 244,792      $ 34,884      $ 228      $ 8,982       $ —         $ 3,000      $ 46,485      $ 338,371   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest rate gap

   ($ 180,271   $ 15,147      $ 182,345      $ 51,184       $ 34,857       ($ 3,000   ($ 41,686   $ 58,576   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Cumulative interest rate gap (2)

   ($ 180,271   ($ 165,124   $ 17,221      $ 68,405       $ 103,262       $ 100,262      $ 58,576        —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

December 31, 2012 (2)

   ($ 181,961   ($ 163,542   $ 8,504      $ 45,211       $ 78,313       $ 81,009      $ 63,129        —     

December 31, 2011 (2)

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

 

(1) The ratio of the cumulative one year gap to total interest rate sensitive assets was (45%), (47%), and (40%), as of September 30, 2013, and December 31, 2012 and 2011, and was (31%), (40%), and (26%) 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 ($70,439) or (18%) for September 30, 2013, compared to ($75,090) or (19%) and ($57,386) or (14%) for December 31, 2012 and 2011, and was ($131,577) or (11%), ($213,406) or (19%), and ($60,584) or (6%) on a combined basis with Medallion Bank.

Our interest rate sensitive assets were $396,947,000 and interest rate sensitive liabilities were $338,371,000 at September 30, 2013. The one-year cumulative interest rate gap was a negative $180,271,000 or 45% of interest rate sensitive assets, compared to a negative $181,961,000 or 47% at December 31, 2012 and $163,313,000 or 40% at December 31, 2011. However, using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of $70,439,000 or 18% at September 30, 2013. 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 $1,194,080,000 and interest rate sensitive liabilities were $1,013,775,000 at September 30, 2013. The one year cumulative interest rate gap was a negative $370,106,000 or 31% of interest rate sensitive assets, compared to a negative $442,219,000 or 40% and $272,395,000 or 26% at December 31, 2012 and 2011. Using our estimated 40% prepayment/refinancing rate for medallion loans to adjust the interest rate gap resulted in a negative gap of $131,577,000 or 11% at September 30, 2013.

Interest Rate Cap Agreements

We manage our exposure to increases in market rates of interest by periodically purchasing interest rate caps to lock in the cost of funds of our variable-rate debt in the event of a rapid run up in interest rates. We entered into contracts to purchase interest rate caps on $160,000,000 of notional value of principal from various multinational banks, 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 were generally fully expensed when paid, including $41,000 for the nine months ended September 30, 2013, and $16,000 and $58,000 for the 2012 three and nine months, and all are carried at $0 on the balance sheet at September 30, 2013.

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 sell debentures to 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 $54,850,000 of availability. Lastly, $62,400,000 was available under revolving credit agreements with commercial banks, and unfunded commitments from the SBA were $2,500,000.

 

Page 50 of 68


Table of Contents

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 $7,600,000 could be raised by Medallion Bank to fund future loan origination activities, and Medallion Bank also has $25,000,000 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, 2013. See Note 4 to the consolidated financial statements on page 18 for details of the contractual terms of our borrowings.

 

(Dollars in thousands)

   Balance      Percentage     Rate (1)  

Revolving lines of credit

   $ 145,150         43     1.16

Notes payable to banks

     98,236         29        2.76   

SBA debentures

     61,985         18        4.08   

Preferred securities

     33,000         10        2.38   
  

 

 

    

 

 

   

Total outstanding debt

   $ 338,371         100     2.28   
  

 

 

    

 

 

   

 

 

 

Deposits and other borrowings at Medallion Bank

     675,404         —          0.59
  

 

 

      

Total outstanding debt, including Medallion Bank

   $ 1,013,775         —          1.16   
  

 

 

    

 

 

   

 

 

 

 

(1) Weighted average contractual rate as of September 30, 2013.

Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all contractual obligations at September 30, 2013.

 

     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

   $ 145,150       $ —         $ —         $ —         $ —         $ —         $ 145,150   

Notes payable to banks

     49,562         27,665         12,028         8,981         —           —           98,236   

SBA debentures

     6,000         6,500         —           —           —           49,485         61,985   

Preferred securities

     —           —           —           —           —           33,000         33,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 200,712       $ 34,165       $ 12,028       $ 8,981       $ —         $ 82,485       $ 338,371   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deposits and other borrowings at Medallion Bank

     336,628         174,415         146,654         7,692         10,015         —           675,404   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total, including Medallion Bank

   $ 537,340       $ 208,580       $ 158,682       $ 16,673       $ 10,015       $ 82,485       $ 1,013,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We value our portfolio at fair value as determined in good faith by the Board of Directors in accordance with our valuation policy. Unlike certain lending institutions, we are not permitted to establish reserves for loan losses. Instead, we must value each individual investment and portfolio loan on a quarterly basis. We record unrealized depreciation on investments and loans when we believe that an asset has been impaired and full collection is unlikely. We record unrealized appreciation on equities if we have a clear indication that the underlying portfolio company has appreciated in value and, therefore, our equity investment has also appreciated in value. Without a readily ascertainable market value, the estimated value of our portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. We adjust the valuation of the portfolio quarterly to reflect our Board of Directors’ estimate of the current fair value of each investment in the portfolio. Any changes in estimated fair value are recorded in our statement of operations as net unrealized appreciation (depreciation) on investments. Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of its fair value. We conduct a thorough valuation analysis, and also receive an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank. We determine whether any factors give rise to valuation different than recorded book value. As a result of this valuation process, we 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 expiration in July 2013 of the prior 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 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

 

Page 51 of 68


Table of Contents

with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item “net increase in net assets resulting from operations” as of September 30, 2013 by approximately $1,270,000 on an annualized basis, compared to a positive impact of $1,282,000 at December 31, 2012, and the impact of such an immediate increase of 1% over a one year period would have been ($2,305,000) at September 30, 2013, compared to ($2,880,000) at December 31, 2012. 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, 2013. 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     12/31/2012  

Cash

  $ 17,641      $ 3,398      $ 2,639      $ 4,102      $ 7,226      $ —        $ 35,006      $ 26,875   

Bank loans

    123,027        37,535        —          —          74        —          160,636      $ 126,207   

Amounts undisbursed

    54,400 (1)      8,000        —          —          —          —          62,400        60,000   

Amounts outstanding

    68,627        29,535        —          —          74        —          98,236        66,207   

Average interest rate

    2.65     2.99     —          —          10.32     —          2.76     3.09

Maturity

    5/14-11/16        1/14-11/16        —          —          2/15-3/16        —          1/14-11/16        4/13-1/16   

Preferred securities

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

Average interest rate

    2.38     —          —          —          —          —          2.38     2.44

Maturity

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

Lines of credit

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

Amounts undisbursed

    —          54,850        —          —          —          —          54,850        36,372   

Amounts outstanding

    —          145,150        —          —          —          —          145,150        163,628   

Average interest rate

    —          1.16     —          —          —          —          1.16     1.24

Maturity

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

SBA debentures

    —          —          26,500        —          37,985        —          64,485      $ 59,935   

Amounts undisbursed

    —          —          2,500        —          —          —          2,500        —     

Amounts outstanding

    —          —          24,000        —          37,985        —          61,985        59,935   

Average interest rate

    —          —          4.21     —          3.99     —          4.08     4.91

Maturity

    —          —          3/14-3/24        —          3/15-9/23        —          3/14-3/24        3/13-3/23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and amounts remaining undisbursed under credit facilities

  $ 72,041      $ 66,248      $ 5,139      $ 4,102      $ 7,226      $ —        $ 154,756      $ 123,247   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total debt outstanding

  $ 101,627      $ 174,685      $ 24,000      $ —        $ 38,059      $ —        $ 338,371      $ 322,770   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Including Medallion Bank

                                               

Cash

    —          —          —          —          —        $ 17,361      $ 17,361      $ 24,770   

Deposits and other borrowings

    —          —          —          —          —          675,404        675,404        602,151   

Average interest rate

    —          —          —          —          —          0.59     0.59     0.69

Maturity

    —          —          —          —          —          10/13-6/18        10/13-6/18        1/13-10/17   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and amounts remaining undisbursed under credit facilities

  $ 72,041      $ 66,248      $ 5,139      $ 4,102      $ 7,226      $ 17,361      $ 172,117      $ 148,017   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total debt outstanding

  $ 101,627      $ 174,685      $ 24,000      $ —        $ 38,059      $ 675,404      $ 1,013,775      $ 924,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) $22,200 of this availability can also be used by MFC.

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.

 

Page 52 of 68


Table of Contents

We have available liquidity of $54,850,000 under our revolving credit agreement with DZ Bank as of September 30, 2013. 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.

Recently Issued Accounting Standards

In July 2013, the FASB issued Accounting Standards Update (ASU) 2013-11, “Income Tax (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists – a consensus of the FASB Emerging Issues Task Force.” ASU 2013-11 requires, with limited exception, that an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset. The update applies to all entities that have unrecognized tax benefits with a net operating loss carryforward, a similar tax loss, or a tax credit carryforward which exists as of the reporting date. The update is effective for periods beginning after December 15, 2013, with early adoption permitted. As a BDC which has elected to be treated as a RIC for federal income tax purposes, we do not have any unrecognized tax benefits and as such we do not believe that adoption of this standard will have a material impact on our financial condition or results of operations.

In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815) Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes – a consensus of the FASB Emerging Issues Task Force.” ASU 2013-10 permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The update also removes the restriction on using different benchmark rates for similar hedges. The update applied to all entities that elect to apply hedge accounting of the benchmark interest rate under Topic 815. The update is prospective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this standard has not had an impact on our financial condition or results of operations.

In June 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements.” ASU 2013-08 clarifies the characteristics of an investment company, provides a comprehensive guide for assessing whether an entity is an investment company, requires an investment company to measure noncontrolling ownership interests in other investment companies at fair value, requires disclosure that an entity is an investment company applying the guidance in Topic 946, as well as requiring the disclosure of any changes in the entity’s status as an investment company. The update specifies that an entity regulated under the 1940 Act is an investment company with respect to Topic 946. The update is effective for periods beginning after December 15, 2013. As a BDC, regulated under the 1940 Act, we have presented ourselves as an investment company, as such we do not believe that adoption of this standard will have a material impact on our financial condition or results of operations.

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 7, 2013, there were approximately 253 holders of record of our common stock.

On November 7, 2013, the last reported sale price of our common stock was $15.76 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.

 

2013

   DIVIDENDS
DECLARED
     HIGH      LOW  

Third Quarter

   $ 0.23       $ 15.11       $ 14.06   

Second Quarter

     0.22         15.78         13.13   

First Quarter

     0.22         13.60         12.01   
  

 

 

    

 

 

    

 

 

 

2012

                    

Fourth Quarter

   $ 0.22       $ 12.56       $ 11.07   

Third Quarter

     0.21         12.05         10.73   

Second Quarter

     0.21         11.89         10.00   

First Quarter

     0.21         11.45         10.65   
  

 

 

    

 

 

    

 

 

 

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,

 

Page 53 of 68


Table of Contents

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.

Issuer Purchases of Equity Securities (1)

 

Period

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

November 5 through December 31, 2003

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

January 1 through December 31, 2004

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

January 1 through December 31, 2005

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

January 1 through December 31, 2006

     —           —           —           7,720,523   

January 1 through December 31, 2007

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

January 1 through December 31, 2008

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

January 1 through December 31, 2009

     —           —           —           7,319,397   

January 1 through December 31, 2010

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

January 1 through December 31, 2011

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

January 1 through December 31, 2012

     —           —           —           6,028,027   

January 1 through September 30, 2013

     —           —           —           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 2013, we extended the terms of the Stock Repurchase Program. Purchases were to commence no earlier than November 2013 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.

 

Page 54 of 68


Table of Contents

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, 2012.

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, 2013. In addition, based on our evaluation as of September 30, 2013, there have been no changes that occurred during the 2013 nine months that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Page 55 of 68


Table of Contents

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.

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 these conditions could worsen in the future.

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 an extended period of time 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. While recent market conditions have improved there have been continuing periods of volatility and there can be no assurance that adverse market conditions will not repeat themselves or worsen in the future. 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 could have an adverse effect on our business, financial condition, and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Equity capital may be difficult to raise because, subject to some limited exceptions, we generally are not able to issue and sell our common stock at a price below net asset value per share. In addition, the debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and conditions.

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, 2013, we had $338,371,000 of outstanding indebtedness, which had a weighted average borrowing cost of 2.28% at September 30, 2013, and our wholly-owned unconsolidated portfolio companies, primarily Medallion Bank, had $675,404,000 of outstanding indebtedness at a weighted average borrowing cost of 0.59%.

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, an economic downturn could result in higher loss rates and lower returns than expected, and could affect the profitability of Medallion Bank’s consumer loan portfolio.

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

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

 

Page 56 of 68


Table of Contents

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.

 

Page 57 of 68


Table of Contents

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 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 generally not 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 or could be precluded from investing in what we believe are attractive investments, which could have a material adverse effect on our business.

 

Page 58 of 68


Table of Contents

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 is a non-qualifying asset. As of September 30, 2013, up to 28% 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 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. Medallion Bank may also not be able to grow as quickly if we are precluded from providing additional funding to Medallion Bank. 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, 2013, our largest investment subject to this test was our investment in Medallion Bank, representing 19% 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.

 

Page 59 of 68


Table of Contents

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

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

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

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

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

Some of our subsidiaries are subject to the SBIA. Our SBIC subsidiaries that are 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 may materially change our corporate structure and the nature of our business

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

We operate in a highly competitive market for investment opportunities.

 

Page 60 of 68


Table of Contents

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

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

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

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

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

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

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.

 

Page 61 of 68


Table of Contents

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, 2013, our net unrealized depreciation on investments other than in controlled subsidiaries, foreclosed properties, and other assets was $6,716,000 or 1.43% 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.

In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. Our long-term fixed-rate investments are financed primarily with short-term floating-rate debt, and to a lesser extent by term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, and including the impact on Medallion Bank, a hypothetical immediate 1% increase in interest rates would result in an increase to the line item “net increase in net assets resulting from operations” as of September 30, 2013 by approximately $1,270,000 on an annualized basis, compared to a positive impact of approximately $1,282,000 at December 31, 2012, and the impact of such an immediate increase of 1% over a one year period would have been approximately ($2,305,000) at September 30, 2013, compared to approximately ($2,880,000) at December 31, 2012. 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.

 

Page 62 of 68


Table of Contents

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 United States. 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.

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.

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.

 

Page 63 of 68


Table of Contents

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. Pursuant to the law, the New York City Taxi and Limousine Commission, or the TLC, began issuing Street Hail Livery licenses in June 2013. We do not yet know the impact that these licenses will have on the taxicab industry. In the event such licenses materially reduce the market for taxicab services, 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 $1,164,000 for corporate medallions and $1,025,000 for individual medallions. However, for sustained periods during that time, taxicab medallions have declined in value. Since December 31, 2011, the value of New York City taxicab medallions increased by approximately 47% for individual medallions and 16% 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.

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, 2013, investments in New York City taxi medallion loans represented approximately 75% 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 also impede our ability to immediately foreclose on a particular defaulted portfolio company as we may not want to impair an overall business relationship with either the portfolio company management or any related funding source. Additionally, a downturn in any particular industry 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.

 

Page 64 of 68


Table of Contents

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

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

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

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

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

A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. At September 30, 2013, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount is divided between seven separate borrowers operating in a variety of industries. In April 2013, the finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the finance company’s liquidation. In May 2013, the bankruptcy court presiding over the finance company’s case entered an order converting the involuntary chapter 7 case to a chapter 11 case. We believe the loan participations are fully secured by the underlying collateral, including personal guarantees from one or more of the principals of each of the underlying seven borrowers. On May 31, 2013, we commenced an adverse proceeding against the finance company and the bank lenders seeking declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender’s security interest in the finance company’s assets. The finance company and bank lenders are contesting our position. Although we believe the claims raised by the finance company and the senior lenders are without merit and will vigorously defend against them, we cannot at this time predict the outcome of this litigation or determine our potential exposure. If we are incorrect in our assessments our results of operations could be materially adversely affected. See page 40 for additional information regarding this matter.

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

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

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.

 

Page 65 of 68


Table of Contents

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.

 

Page 66 of 68


Table of Contents

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, 2013 and December 31, 2012. 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.

 

Page 67 of 68


Table of Contents

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 8, 2013
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.

 

Page 68 of 68