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Medallion Financial 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
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 June 30, 2011

OR

 

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

For the transition period from              to             

Commission file number 814-00188

 

 

MEDALLION FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE 04-3291176

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

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

(Address of principal executive offices) (Zip Code)

(212) 328-2100

(Registrant’s telephone number, including area code)

 

 

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 August 4, 2011 was 17,475,948.

 

 

 


Table of Contents

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

     3   

ITEM 1.

  

FINANCIAL STATEMENTS

     3   

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     28   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     47   

ITEM 4.

  

CONTROLS AND PROCEDURES

     47   

PART II – OTHER INFORMATION

     47   

ITEM 1.

  

LEGAL PROCEEDINGS

     47   

ITEM 1A.

  

RISK FACTORS

     48   

ITEM 6.

  

EXHIBITS

     58   

SIGNATURES

     59   

CERTIFICATIONS

     60   

 

Page 2 of 63


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

BASIS OF PREPARATION

We, Medallion Financial Corp. or the Company, are a closed-end, non-diversified management investment company organized as a Delaware corporation. We have elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended, or the 1940 Act. We are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, trailers, and hearing aids. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 6%, and our commercial loan portfolio at a compound annual growth rate of 3% (11% and 9% 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 12%. Total assets under our management, which includes assets serviced for third party investors and managed by Medallion Bank, were $1,125,924,000 as of June 30, 2011, and $1,093,379,000 and $1,057,983,000 as of December 31, 2010 and June 30, 2010, and have grown at a compound annual growth rate of 12% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid dividends in excess of $161,017,000 or $10.21 per share.

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

 

   

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

 

   

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

 

   

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

In December 2010, we formed a wholly-owned portfolio company, Medallion Servicing Corporation (MSC), to provide loan services to Medallion Bank, also a portfolio company wholly-owned by us. We have assigned all of our loan servicing rights for Medallion Bank, which consists of servicing taxi medallion and commercial loans originated by Medallion Bank, to MSC, who will bill and collect the related service fee income from Medallion Bank, and will be allocated and charged by the Company for MSC’s share of these servicing costs.

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

In addition, we conduct business through a wholly-owned portfolio company, Medallion Bank, a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans, which are then serviced by MSC. MSC earns referral and servicing fees for these activities. As a non-investment company, Medallion Bank is not consolidated with the Company, which is an investment company under the 1940 Act.

The financial information is divided into two sections. The first section, Item 1, includes our unaudited consolidated financial statements including related footnotes. The second section, Item 2, consists of Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended June 30, 2011.

Our consolidated balance sheet as of June 30, 2011, and the related consolidated statements of operations, changes in net assets, and cash flows for the three and six months ended June 30, 2011 and 2010 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 six months ended June 30, 2011 and 2010, 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, 2010.

 

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Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(Dollars in thousands, except per share data)

   2011      2010     2011      2010  

Interest income on investments

   $ 7,028       $ 8,047      $ 15,265       $ 15,951   

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

     1,032         1,026        2,055         2,053   

Medallion lease income

     353         287        690         586   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment income

     8,413         9,360        18,010         18,590   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense(2)

     3,343         3,740        6,845         7,255   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     5,070         5,620        11,165         11,335   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     326         1,151        735         1,947   
  

 

 

    

 

 

   

 

 

    

 

 

 

Salaries and benefits

     1,752         2,750        3,959         5,807   

Professional fees

     193         687        523         1,277   

Occupancy expense

     225         346        452         680   

Other operating expenses (3)

     1,747         48        2,646         347   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     3,917         3,831        7,580         8,111   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

     1,479         2,940        4,320         5,171   

Income tax (provision) benefit

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Net investment income after income taxes

     1,479         2,940        4,320         5,171   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net realized gains (losses) on investments

     575         (668     584         (8,890
  

 

 

    

 

 

   

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation) on investments

     311         (945     95         (2,188

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

     2,051         1,708        3,696         9,051   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net unrealized appreciation on investments

     2,362         763        3,791         6,863   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net realized/unrealized gains (losses) on investments

     2,937         95        4,375         (2,027
  

 

 

    

 

 

   

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 4,416       $ 3,035      $ 8,695       $ 3,144   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net increase in net assets resulting from operations per common share

          

Basic

   $ 0.25       $ 0.17      $ 0.50       $ 0.18   

Diluted

     0.25         0.17        0.49         0.18   
  

 

 

    

 

 

   

 

 

    

 

 

 

Dividends declared per share

   $ 0.18       $ 0.15      $ 0.35       $ 0.30   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding

          

Basic

     17,404,288         17,560,352        17,402,272         17,568,072   

Diluted

     17,609,550         17,685,988        17,578,804         17,700,334   

 

(1) Includes $1,000 and $2,000 of dividend income for the three and six months ended June 30, 2011 and 2010 from Medallion Bank.
(2) Average borrowings outstanding were $362,937 and $367,095, and the related average borrowing costs were 3.69% and 3.76% for the 2011 second quarter and six months, and were $361,464, $363,770, 4.15%, and 4.02% for the comparable 2010 periods.
(3) Includes $817 and $1,312 of expense reversals related to the costs of winding up the operations of the SPAC’s in the 2010 second quarter and six months that were reclassified to realized losses on investments, and $93 and $310 that was reversed as a result of favorable negotiations with the creditors of SPAC. See Notes 7 and 10 for additional information.
(4) Includes $193 and $513 of net revenues received from Medallion Bank for the three and six months ended June 30, 2011, and $952 and $1,784 for the comparable 2010 periods, primarily for servicing fees, loan origination fees, and expense reimbursements. See Notes 3 and 10 for additional information.

 

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

 

Page 4 of 63


Table of Contents

MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

 

(Dollars in thousands, except per share data)

   UNAUDITED
June 30, 2011
    December 31, 2010  

Assets

    

Medallion loans, at fair value

   $ 312,139      $ 323,126   

Commercial loans, at fair value (1)

     65,851        76,866   

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

     82,772        78,735   

Equity investments, at fair value

     4,663        4,789   

Investment securities, at fair value

     —          —     
  

 

 

   

 

 

 

Net investments ($249,048 at June 30, 2011 and $260,111 at December 31, 2010 pledged as collateral under borrowing arrangements)

     465,425        483,516   

Cash and cash equivalents ($0 at June 30, 2011 and $0 at December 31, 2010 restricted as to use by lender)

     22,664        17,303   

Accrued interest receivable

     1,320        1,441   

Fixed assets, net

     409        419   

Goodwill, net

     5,069        5,069   

Other assets, net

     43,910        42,564   
  

 

 

   

 

 

 

Total assets

   $ 538,797      $ 550,312   
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued expenses

   $ 5,646      $ 5,102   

Accrued interest payable

     1,849        1,913   

Funds borrowed

     365,457        380,532   
  

 

 

   

 

 

 

Total liabilities

     372,952        387,547   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Shareholders’ equity (net assets)

    

Preferred stock (1,000,000 shares of $0.01 par value stock authorized – none outstanding)

     —          —     

Common stock (50,000,000 shares of $0.01 par value stock authorized – 19,068,034 shares at June 30, 2011 and 18,992,319 shares December 31, 2010 issued)

     190        190   

Treasury stock at cost (1,592,086 shares at June 30, 2011 and December 31, 2010)

     (14,225     (14,225

Capital in excess of par value

     179,229        179,079   

Accumulated undistributed net investment loss

     (9,536     (12,372

Accumulated undistributed net realized gains on investments

     —          —     

Net unrealized appreciation on investments

     10,187        10,093   
  

 

 

   

 

 

 

Total shareholders’ equity (net assets)

     165,845        162,765   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 538,797      $ 550,312   
  

 

 

   

 

 

 

Number of common shares outstanding

     17,475,948        17,400,233   

Net asset value per share

   $ 9.49      $ 9.35   

 

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

 

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(UNAUDITED)

 

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(Dollars in thousands, except per share data)

   2011     2010     2011     2010  

Net investment income after income taxes

   $ 1,479      $ 2,940      $ 4,320      $ 5,171   

Net realized gains (losses) on investments

     575        (668     584        (8,890

Net unrealized appreciation on investments

     2,362        763        3,791        6,863   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     4,416        3,035        8,695        3,144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income, net

     (2,971     (2,637     (5,766     (5,273

Realized gain from investment transactions, net

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends and distributions to shareholders (1)

     (2,971     (2,637     (5,766     (5,273
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense

     57        58        116        113   

Exercise of stock options

     34        —          34        —     

Treasury stock acquired

     —          (371     —          (371
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share transactions

     91        (313     150        (258

Other

     —          —          1     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in net assets

     1,536        85        3,080        (2,387

Net assets at the beginning of the period

     164,309        160,505        162,765        162,977   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets at the end of the period(2)

   $ 165,845      $ 160,590      $ 165,845      $ 160,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital share activity

        

Common stock issued, beginning of period

     19,061,059        18,990,119        18,992,319        18,990,119   

Exercise of stock options

     7,000        —          7,000        —     

Issuance (forfeiture) of restricted stock

     (25     —          68,715        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issued, end of period

     19,068,034        18,990,119        19,068,034        18,990,119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, beginning of period

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

Treasury stock acquired

     —          (52,724     —          (52,724
  

 

 

   

 

 

   

 

 

   

 

 

 

Treasury stock, end of period

     (1,592,086     (1,466,966     (1,592,086     (1,466,966
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock outstanding

     17,475,948        17,523,153        17,475,948        17,523,153   

 

(1) Dividends declared were $0.18 and $0.35 per share for the 2011 second quarter and six months, and were $0.15 and $0.30 for the comparable 2010 periods.
(2) Includes $3,052 of undistributed net investment income and $0 of undistributed net realized gains on investments at June 30, 2011.

 

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

 

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MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

     Six Months Ended June 30,  

(Dollars in thousands)

   2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 8,695      $ 3,144   

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

    

Depreciation and amortization

     631        584   

Accretion of origination fees

     (38     (136

Increase in net unrealized (appreciation) depreciation on investments

     (95     2,188   

Increase in unrealized appreciation on Medallion Bank and other controlled subsidiaries

     (3,696     (9,051

Net realized (gains) losses on investments

     (584     8,890   

Stock-based compensation expense

     116        113   

Decrease in accrued interest receivable

     121        48   

Increase in other assets, net

     (787     (161

Increase (decrease) in accounts payable and accrued expenses

     545        (1,841

Decrease in accrued interest payable

     (64     (49
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,844        3,729   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Investments originated

     (103,314     (85,120

Proceeds from principal receipts, sales, and maturities of investments

     125,046        75,721   

Investments in Medallion Bank and other controlled subsidiaries, net

     (337     (1,032

Capital expenditures

     (70     (46
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     21,325        (10,477
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from funds borrowed

     88,246        76,008   

Repayments of funds borrowed

     (103,322     (76,127

Issuance of SBA debentures

     7,485        —     

Repayments of SBA debentures

     (7,485     —     

Purchase of treasury stock at cost

     —          (371

Exercise of stock options

     34        —     

Payments of declared dividends

     (5,766     (5,273
  

 

 

   

 

 

 

Net cash used for financing activities

     (20,808     (5,763
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     5,361        (12,511

Cash and cash equivalents, beginning of period

     17,303        33,401   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 22,664      $ 20,890   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION

    

Cash paid during the period for interest

   $ 6,359      $ 6,818   

Cash paid during the period for income taxes

     —          —     

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

     —          —     

 

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

 

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MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

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

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

In December 2010, we formed a wholly-owned portfolio company, Medallion Servicing Corporation (MSC), to provide loan services to Medallion Bank, also a portfolio company wholly-owned by us. We have assigned all of our loan servicing rights for Medallion Bank, which consists of servicing taxi medallion and commercial loans originated by Medallion Bank, to MSC, who will bill and collect the related service fee income from Medallion Bank, and will be allocated and charged by the Company for MSC’s share of these servicing costs.

On March 26, 2009, the Company formed a new wholly-owned New York limited liability company subsidiary, Medallion Funding LLC. On February 26, 2010, Medallion Funding Corp. merged into Medallion Funding LLC and following the merger, Medallion Funding LLC was the surviving entity and the successor-in-interest to Medallion Funding Corp.’s business. There is no business or operational change resulting from this corporate restructuring. For federal and state tax purposes, Medallion Funding LLC will be treated as a disregarded entity. Medallion Funding LLC will not independently file any tax return, but will be subsumed in the tax return of the Company. Medallion Funding LLC will maintain its status as an SBIC.

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

In December 2008, MFC established a wholly-owned subsidiary, Taxi Medallion Loan Trust III (Trust III), for the purpose of owning medallion loans originated by MFC or others. Trust III is a separate legal and corporate entity with its own creditors who, in any liquidation of Trust III, will be entitled to be satisfied out of Trust III’s assets prior to any value in Trust III becoming available to Trust III’s equity holders. The assets of Trust III, aggregating $211,114,000 at June 30, 2011, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Trust III. Trust III’s loans are serviced by MFC.

In June 2007, the Company established a wholly-owned subsidiary, Medallion Financing Trust I (Fin Trust) for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $36,165,000 at June 30, 2011, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.

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

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

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

Medallion Bank is not an investment company, and therefore, is not consolidated with the Company, but instead is treated as a portfolio investment. It was initially formed for the primary purpose of originating commercial loans in three categories: 1) loans to finance the purchase of taxicab medallions (licenses), 2) asset-based commercial loans, and 3) SBA 7(a) loans. The loans are marketed and serviced by Medallion Bank’s affiliates who have extensive prior experience in these asset groups. Additionally, Medallion Bank began issuing brokered certificates of deposit in January 2004, and purchased over $84,150,000 of taxicab medallion and asset-based loans from affiliates of the Company. On April 1, 2004, Medallion Bank purchased a consumer loan portfolio from an unrelated financial

 

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institution for consideration of $86,309,000. In the 2004 third quarter, Medallion Bank began originating consumer loans similar to the acquired portfolio, which are serviced by a third party.

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the US requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and assumptions are those that management considers to be the most critical to an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. All of these estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which may result in future impairments of loans receivable, loans held for sale, and investments, among other effects.

Principles of Consolidation

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

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that frequently exceed the federally insured limits.

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 management, and approved by the Board of Directors. In determining the fair value, the Company and Board of Directors consider factors such as the financial condition of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience, and the relationships between current and projected market rates and portfolio rates of interest and maturities. Foreclosed properties, which represent collateral received from defaulted borrowers, and which are carried in other assets on the consolidated balance sheet, are valued similarly.

Equity investments (common stock and stock warrants, including certain controlled subsidiary portfolio investments) and investment securities (US Treasuries and mortgage backed bonds), in total representing 19% and 17% of the investment portfolio at June 30, 2011 and December 31, 2010, are recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of investments that have no ready market are determined in good faith by management, and approved 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 $2,272,000 and $1,669,000 at June 30, 2011 and December 31, 2010, and non-marketable securities of $2,391,000 and $3,120,000 in the comparable periods. The $82,772,000 and $78,735,000 related to portfolio investments in controlled subsidiaries at June 30, 2011 and December 31, 2010 were all non-marketable in each period. Because of the inherent uncertainty of valuations, management’s estimates of the values of the investments may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.

 

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

A majority of the Company’s investments consist of long-term loans to persons defined by SBA regulations as socially or economically disadvantaged, or to entities that are at least 50% owned by such persons. Approximately 67% of the Company’s investment portfolio at June 30, 2011 and December 31, 2010 had arisen in connection with the financing of taxicab medallions, taxicabs, and related assets, of which 74% were in New York City at June 30, 2011 and December 31, 2010. These loans are secured by the medallions, taxicabs, and related assets, and are personally guaranteed by the borrowers, or in the case of corporations, are generally guaranteed personally by the owners. A portion of the Company’s portfolio (14% and 16% at June 30, 2011 and December 31, 2010) represents loans to various commercial enterprises, in a wide variety of industries, including manufacturing, wholesaling, administrative and support services, accommodation and food services, and various other industries. More than 20% of these loans are made primarily in the metropolitan New York City area, with the balance widely scattered across the United States. Investments in controlled unconsolidated subsidiaries, equity investments, and investment securities were 18%, 1%, and 0% at June 30, 2011 and 16%, 1%, and 0% at December 31, 2010.

On a managed basis, which includes the investments of Medallion Bank after eliminating the Company’s investment in Medallion Bank, medallion loans were 62% at June 30, 2011 and December 31, 2010 (77% and 76% in New York City at June 30, 2011 and December 31, 2010), commercial loans were 15% and 16%, and 20% and 19% were consumer loans in all 50 states collateralized by recreational vehicles, boats, motorcycles, trailers, and hearing aids. Investment securities were 2% at June 30, 2011 and December 31, 2010, 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 June 30, 2011 and December 31, 2010, net loan origination costs (fees) were $282,000 and ($27,000). Net amortization income for the three months ended June 30, 2011 and 2010 was $6,000 and $56,000, and was $38,000 and $136,000 for the comparable six month periods.

Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized as an adjustment to the yield of the related investment. At June 30, 2011 and December 31, 2010, there were no premiums or discounts on investment securities, and their related income accretion or amortization was immaterial for 2011 and 2010.

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 June 30, 2011, December 31, 2010, and June 30, 2010, total nonaccrual loans were $23,133,000, $22,477,000, and $22,286,000, and represented 6%, 5%, and 5% of the gross medallion and commercial loan portfolio at each period end, and were primarily concentrated in the secured mezzanine portfolio. The amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $12,329,000, $10,612,000, and $8,484,000 as of June 30, 2011, December 31, 2010, and June 30, 2010, of which $1,030,000 and $651,000 would have been recognized in the quarters ended June 30, 2011 and 2010, and $2,061,000 and $1,371,000 would have been recognized in the comparable six-month periods.

Loan Sales and Servicing Fee Receivable

The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing (FASB ASC 860). FASB ASC 860 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, we have elected the fair value measurement method for our servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $416,283,000 and $386,034,000 at June 30, 2011 and December 31, 2010, and included $349,916,000 and $332,053,000 of loans serviced for Medallion Bank. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860, most of which relates to servicing assets held by Medallion Bank, and determined that no material servicing asset or liability exists as of June 30, 2011 and December 31, 2010. In December 2010, the Company assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed and collected from Medallion Bank by MSC.

 

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

Unrealized appreciation (depreciation) on investments is the amount by which the fair value estimated by the Company is greater (less) than the cost basis of the investment portfolio. Realized gains or losses on investments are generated through sales of investments, foreclosure on specific collateral, and writeoffs of loans or assets acquired in satisfaction of loans, net of recoveries. Unrealized appreciation (depreciation) on net investments was $10,187,000, $10,093,000, and $11,397,000 as of June 30, 2011, December 31, 2010, and June 30, 2010. Our investment in Medallion Bank, a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and determine whether any factors give rise to valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional marketplace restrictions, such as on the ability to transfer industrial bank charters. As a result of this valuation process, we used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future. See Note 3 for the presentation of financial information for Medallion Bank.

The following tables set forth the changes in our unrealized appreciation (depreciation) on investments, other than investments in controlled subsidiaries, for the 2011 and 2010 quarters shown below.

 

 

(Dollars in thousands)

   Medallion
Loans
     Commercial
Loans
    Equity
Investments
     Foreclosed
Properties
     Total  

Balance December 31, 2010

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

Net change in unrealized

             

Appreciation on investments

     —           —          310         —           310   

Depreciation on investments

     —           (533     6         —           (527

Reversal of unrealized appreciation (depreciation) related to realized

             

Gains on investments

     —           —          —           —           —     

Losses on investments

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Balance March 31, 2011

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

Net change in unrealized

             

Appreciation on investments

     —           —          300         1,109         1,409   

Depreciation on investments

     —           (1,567     469         —           (1,098

Reversal of unrealized appreciation (depreciation) related to realized

             

Gains on investments

     —           —          —           —           —     

Losses on investments

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Balance June 30, 2011

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

 

 

 

(Dollars in thousands)

   Medallion
Loans
     Commercial
Loans
    Equity
Investments
    Foreclosed
Properties
    Total  

Balance December 31, 2009

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

Net change in unrealized

           

Appreciation on investments

     —           —          162        1,516        1,678   

Depreciation on investments

     —           (3,678     (510     —          (4,188

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments (1)

     —           —          8,232        —          8,232   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2010

     —           (7,914     (217     20,472        12,341   

Net change in unrealized

           

Appreciation on investments

     —           —          159        (274     (115

Depreciation on investments

     —           (853     24        —          (829

Reversal of unrealized appreciation (depreciation) related to realized

           

Gains on investments

     —           —          —          —          —     

Losses on investments

     —           —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2010

   $ —         ($ 8,767   ($ 34   $ 20,198      $ 11,397   

 

(1) Represents the $7,725 of writeoffs related to the investments in SPAC and SPAC 2. See Note 10 for additional information on these investments.

 

 

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The table below summarizes components of unrealized and realized gains and losses in the investment portfolio for the three and six months ended June 30, 2011 and 2010.

 

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in thousands)

   2011     2010     2011     2010  

Net change in unrealized appreciation (depreciation) on investments

        

Unrealized appreciation

   $ 300      $ 159      $ 610      $ 321   

Unrealized depreciation

     (1,098     (830     (1,624     (4,510

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

     2,051        1,708        3,696        9,051   

Realized gains

     —          —          —          —     

Realized losses (2)

     —          —          —          759   

Unrealized gains (losses) on foreclosed properties

     1,109        (274     1,109        1,242   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,362      $ 763      $ 3,791      $ 6,863   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments

        

Realized gains

   $ —        $ —        $ —        $ —     

Realized losses (3)

     —          —          —          (8,232

Other gains

     562        141        562        141   

Direct recoveries (charge offs) (4)

     13        (809     22        (799

Realized gains on foreclosed properties

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 575      ($ 668   $ 584      ($ 8,890

 

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

 

The following table provides additional information on attributes of the nonperforming loan portfolio as of June 30, 2011.

 

 

(Dollars in thousands)

   Recorded
Investment  (1)
     Unpaid
Principal
Balance
     Average
Recorded
Investment
 

Medallion

   $ —         $ —         $ —     

Commercial (1)

   $ 23,133       $ 29,529       $ 23,825   

 

(1) As of June 30, 2011, $13,200 of unrealized depreciation had been recorded as a valuation allowance with regards to the impaired commercial loans.
(2) Interest income of $174 and $361 was recognized in the three and six months ending June 30, 2011 with regard to commercial loans.

 

The table below shows the aging of medallion and commercial loans as of June 30, 2011.

 

 

     Days Past Due                    Recorded Investment >
90 Days and Accruing
 

(Dollars in thousands)

   31 - 60      61 - 90      90 +      Total      Current      Total     

Medallion loans

   $ 2,983       $ 1,170       $ 523       $ 4,676       $ 307,055       $ 311,731       $ 523   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans

                    

Secured mezzanine

     —           —           8,896         8,896         52,851         61,747         —     

Asset-based receivable

     —           —           —           —           7,747         7,747         —     

Other secured commercial

     —           —           969         969         8,831         9,800         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     —           —           9,865         9,865         69,429         79,294         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,983       $ 1,170       $ 10,388       $ 14,541       $ 376,484       $ 391,025       $ 523   

 

Goodwill

In accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” the Company tests its goodwill for impairment, and engages a consultant to help management evaluate its carrying value. The results of this evaluation demonstrated no impairment in goodwill for any period evaluated, and management believes, and the Board of Directors concurs, that there is no impairment as of June 30, 2011. The Company conducts annual, and if necessary, more frequent, appraisals of its goodwill, and will recognize any impairment in the period any impairment is identified as a charge to operating expenses.

Fixed Assets

Fixed assets are carried at cost less accumulated depreciation and amortization, and are depreciated on a straight-line basis over their estimated useful lives of 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease

 

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term or the estimated economic useful life of the improvement. Depreciation and amortization expense was $40,000 and $44,000 for the three months ended June 30, 2011 and 2010, and was $81,000 and $98,000 for the comparable six months.

 

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Deferred Costs

Deferred financing costs, included in other assets, represents costs associated with obtaining the Company’s borrowing facilities, and is amortized on a straight line basis over the lives of the related financing agreements. Amortization expense was $235,000 and $246,000 for the quarters ended June 30, 2011 and 2010, and was $463,000 and $486,000 for the comparable six 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, including $485,000 related to costs associated with a cancelled equity offering, written off in the 2010 third and fourth quarters. The amounts on the balance sheet for all of these purposes were $3,160,000, $2,854,000, and $3,511,000 as of June 30, 2011, December 31, 2010, and June 30, 2010.

Federal Income Taxes

The Company and each of its major subsidiaries other than Medallion Bank and Medallion Funding LLC (the RIC subsidiaries) have qualified to be treated for federal income tax purposes as regulated investment companies (RICs) under the Internal Revenue Code of 1986, as amended (the Code). As RICs, the Company and each of the RIC subsidiaries are not subject to US federal income tax on any gains or investment company taxable income (which includes, among other things, dividends and interest income reduced by deductible expenses) that it distributes to its shareholders, if at least 90% of its investment company taxable income for that taxable year is distributed. It is the Company’s and the RIC subsidiaries’ policy to comply with the provisions of the Code. The Company’s RIC qualification is determined on an annual basis, and it qualified and filed its federal tax returns as a RIC for 2009 and 2008, and anticipates qualifying and filing as a RIC for 2010. As a result, no provisions for income taxes have been recorded for the three and six months ended June 30, 2011 and 2010. State and local tax treatment follows the federal model.

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

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

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 2007 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, Trust II, and Trust III are not subject to federal income taxation, instead their taxable income is treated as having been earned by the Company.

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

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

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

 

 

     Three Months Ended June 30,      Six Months Ended June 30,  

(Dollars in thousands)

   2011      2010      2011      2010  

Net increase in net assets resulting from

operations available to common shareholders

   $ 4,416       $ 3,035       $ 8,695       $ 3,144   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares

outstanding applicable to basic EPS

     17,404,288         17,560,352         17,402,272         17,568,072   

Effect of dilutive stock options

     192,099         125,636         168,665         132,262   

Effect of restricted stock grants

     13,163         —           7,867         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares

outstanding applicable to diluted EPS

     17,609,550         17,685,988         17,578,804         17,700,334   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.25       $ 0.17       $ 0.50       $ 0.18   

Diluted earnings per share

     0.25         0.17         0.49         0.18   

 

 

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Potentially dilutive common shares excluded from the above calculations aggregated 729,282 and 1,143,768 shares as of June 30, 2011 and 2010.

 

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Stock Compensation

The Company follows FASB Accounting Standard Codification Topic 718 (ASC 718), “Compensation – Stock Compensation”, for its stock option and restricted stock plans, and accordingly, the Company recognizes the expense of these grants as required. Stock-based employee compensation costs pertaining to stock options is reflected in net increase in net assets resulting from operations, for both any new grants, as well as for all unvested options outstanding at December 31, 2005, in both cases using the fair values established by usage of the Black-Scholes option pricing model, expensed over the vesting period of the underlying option. Stock-based employee compensation costs pertaining to restricted stock are reflected in net increase in net assets resulting from operations for any new grants, using the grant date fair value of the shares granted, expensed over the vesting period of the underlying stock.

The Company elected the modified prospective transition method in applying ASC 718. Under this method, the provisions of ASC 718 apply to all awards granted or modified after the date of adoption, as well as for all unvested options outstanding at December 31, 2005. During the six months ended June 30, 2011, the Company issued 68,740 restricted shares of stock-based compensation awards, and recognized $57,000 and $116,000 in the 2011 second quarter and six months, or $0.00 and $0.01 per diluted common share for each period, of non-cash stock-based compensation expense related to the grants. During the three and six months ended June 30, 2010, the Company granted options for 68,500 shares of stock-based compensation awards, and recognized $58,000 and $113,000, or $0.00 and $0.01 per diluted common share for the respective periods of non-cash stock-based compensation expense related to the option grants. As of June 30, 2011, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $540,000, 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. Beginning in 2009, the Company entered into contracts to purchase interest rate caps on $512,000,000 of notional value of principal from various multinational banks, of which $175,000,000 are active with termination dates ranging to March 2013. The caps provide for payments to the Company if various LIBOR thresholds are exceeded during the cap terms. Total cap purchases of $407,000 were generally fully expensed when paid, including $11,000 and $88,000 for three and six months ended June 30, 2011 and $0 and $0 for the comparable 2010 periods, and all are carried at $0 on the balance sheet at June 30, 2011.

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 statements of operations and other valuation adjustments on other controlled subsidiaries for the three and six months ended June 30, 2011 and 2010.

 

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in thousands)

   2011     2010     2011     2010  

Statement of operations

        

Investment income

   $ 12,965      $ 11,679      $ 25,236      $ 22,752   

Interest expense

     1,747        1,833        3,553        3,751   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     11,218        9,846        21,683        19,001   

Noninterest income

     188        123        324        318   

Operating expenses

     3,483        2,649        6,919        5,080   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     7,923        7,320        15,088        14,239   

Income tax provision

     (2,406     (1,727     (4,321     (2,857
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income after income taxes

     5,517        5,593        10,767        11,382   

Net realized/unrealized losses of Medallion Bank

     (1,385     (2,389     (3,553     (6,196
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations of Medallion Bank

     4,132        3,204        7,214        5,186   

Unrealized depreciation on Medallion Bank (1)

     (1,696     (1,299     (2,996     (2,631

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

     (385     (197     (522     6,496   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 2,051      $ 1,708      $ 3,696      $ 9,051   

 

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

 

 

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The following table presents Medallion Bank’s balance sheets and the net investment in other controlled subsidiaries as of June 30, 2011 and December 31, 2010

 

(Dollars in thousands)

   2011      2010  

Loans

   $ 545,040       $ 516,378   

Investment securities, at fair value

     23,316         20,787   
  

 

 

    

 

 

 

Net investments ($0 pledged as collateral under borrowing arrangements at June 30, 2011 and December 31, 2010) (1)

     568,356         537,165   

Cash ($0 at June 30, 2011 and December 31, 2010 restricted as to use by lender)

     21,589         16,980   

Other assets, net

     11,786         14,504   
  

 

 

    

 

 

 

Total assets

   $ 601,731       $ 568,649   
  

 

 

    

 

 

 

Other liabilities

   $ 4,906       $ 2,519   

Due to affiliates

     225         1,113   

Deposits and federal funds purchased, including accrued interest payable

     497,476         470,112   
  

 

 

    

 

 

 

Total liabilities

     502,607         473,744   

Medallion Bank equity (2)

     99,124         94,905   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 601,731       $ 568,649   
  

 

 

    

 

 

 

Investment in other controlled subsidiaries

   $ 4,921       $ 4,727   

Total investment in Medallion Bank and other controlled subsidiaries

   $ 82,772       $ 78,735   

 

(1) Included in Medallion Bank’s net investments is $240 and $330 for purchased loan premium at June 30, 2011 and December 31, 2010.
(2) Includes $21,498 of preferred stock issued to the US Treasury under the Troubled Asset Relief Program (TARP).

 

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 June 30, 2011 and December 31, 2010, the net premium on investment securities totaled $160,000 and $164,000, and $11,000 and $23,000 was amortized into interest income for the second quarter and six months ended June 30, 2011, and $14,000 and $37,000 were amortized in the comparable 2010 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 June 30, 2011, $2,121,000 or 1% of consumer loans, and no commercial or medallion loans were on nonaccrual, compared to $2,686,000 or 1% of consumer loans, $329,000 or less than 1% of commercial loans, and no medallion loans on nonaccrual at December 31, 2010, and $2,439,000 or 1% of consumer loans, $385,000 or 1% of commercial loans, and $114,000 or less than 1% of medallion loans on nonaccrual at June 30, 2010. 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 $88,000, $138,000, and $113,000 as of June 30, 2011, December 31, 2010, and June 30, 2010.

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. The consumer portfolio purchase was net of unrealized depreciation of $4,244,000, or 5.0% of the balances outstanding, and included a purchase premium of approximately $5,678,000, of which $44,000 and $90,000 was amortized into interest income in the 2011 second quarter and six months, and $50,000 and $108,000 was amortized into interest income in the comparable 2010 periods. The premium amount on the balance sheet was $240,000 and $330,000 at June 30, 2011 and December 31, 2010. Adjustments to the fair value of this portfolio are based on the historical loan loss data obtained from the seller, adjusted for changes in delinquency trends and other factors as described previously in Note 2.

In January 2004, Medallion Bank commenced raising deposits to fund the purchase of various affiliates’ loan portfolios. The deposits were raised through the use of investment brokerage firms who package deposits qualifying for FDIC insurance into pools that are sold to Medallion Bank. The rates paid on the deposits are highly competitive with market rates paid by other financial institutions, and include a brokerage fee of 0.15% to 0.50%, depending on the maturity of the deposit, which is capitalized and amortized to interest expense over the life of the respective pool. The total amount capitalized at June 30, 2011 and December 31, 2010 was $1,068,000 and $883,000, and $278,000 and $542,000 was amortized to interest expense during the second quarter and six months ended June 30, 2011, and $238,000 and $488,000 was amortized in the comparable 2010 periods. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity.

 

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The outstanding balances of fixed rate borrowings were as follows:

 

 

     Payments Due for the Fiscal Year Ending June 30,      June  30,
2011
     December  31,
2010
     Interest
Rate (1)
 

(Dollars in thousands)

   2012      2013      2014      2015      2016      Thereafter           

Deposits

   $ 330,582       $ 84,013       $ 81,833       $ —         $ —         $ —         $ 496,428       $ 468,957         0.97

 

(1) Weighted average contractual rate as of June 30, 2011.

 

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

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

Quantitative measures established by regulation to ensure capital adequacy require Medallion Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting Medallion Bank’s application for federal deposit insurance, the FDIC ordered that beginning paid-in-capital funds of not less than $22,000,000 be provided, that the Tier I Leverage Capital to total assets ratio, as defined, be not less than 15%, and that an adequate allowance for loan losses be maintained. As a result, to facilitate maintenance of the capital ratio requirement and to provide the necessary capital for continued growth, the Company periodically makes capital contributions to Medallion Bank. Separately, Medallion Bank declared dividends to the Company of $1,000,000 in each of the 2011 and 2010 second quarters, and $2,000,000 in each of the 2011 and 2010 six months.

On February 27, 2009, Medallion Bank issued and sold, and the US Treasury purchased under the TARP Capital Purchase Program (the CPP), (1) 11,800 shares of Medallion Bank’s Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant, which was immediately exercised, to purchase up to 590 shares of Medallion Bank’s Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B, for an aggregate purchase price of approximately $11,800,000 in cash. On December 22, 2009, Medallion Bank issued and sold, and the US Treasury purchased under the CPP, (1) 9,698 shares of Medallion Bank’s Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, and (2) a warrant, which was immediately exercised, to purchase up to 55 shares of Medallion Bank’s Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, for an aggregate purchase price of approximately $9,698,000 in cash. The liquidation preference of each Series is $1,000 per share.

The securities were sold in private placements exempt from SEC registration.

Non-cumulative dividends on the Series A and C shares will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter, and the dividends on the Series B and D shares will accrue on the liquidation preference at a rate of 9% per annum, both, if, as, and when declared by Medallion Bank’s Board of Directors out of funds legally available thereof. The Preferred Shares have no maturity date and rank senior to Medallion Bank’s common stock (and pari passu with one another) with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution, and winding up of Medallion Bank. Medallion Bank’s Articles of Amendments provide that, subject to the approval of the FDIC, the Preferred Shares are redeemable at the option of Medallion Bank at 100% of their liquidation preference plus declared and unpaid dividends, provided, however, that the Preferred Shares may be redeemed prior to February 27, 2012 and December 22, 2012, respectively, only if (i) Medallion Bank has raised aggregate gross proceeds in one or more Qualified Equity Offerings, as defined, of at least $3,097,500 and $2,438,250, respectively, and (ii) the aggregate redemption price does not exceed the aggregate net proceeds from such offerings. The Series B shares cannot be redeemed until the Series A shares have been redeemed and the Series D shares cannot be redeemed until the Series A, B, and C shares have been redeemed.

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the ARRA) was signed into law. The ARRA, among other things, directs the US Treasury to permit CPP participants to redeem the preferred stock issued under the CPP without first requiring a Qualified Equity Offering, upon consultation with the appropriate Federal banking agency.

The agreements between Medallion Bank and the US Treasury pursuant to which the Preferred Shares and the Warrants were sold contain limitations on the payment of common stock dividends to a quarterly rate of $1.00 per share or $1,000,000, and on Medallion Bank’s ability to repurchase its common stock, and subjects Medallion Bank and the Company to certain of the executive compensation limitations and requirements included in the Emergency Economic Stabilization Act of 2008 (the EESA). As a condition to the closing of the transactions, the Company and its senior executive officers have agreed to all terms and conditions.

The interim final rule promulgated pursuant to Section 111 of the EESA, as amended by the ARRA, prescribes certain standards for compensation and corporate governance for CPP participants (which the Company believes to include parent companies such as the Company), which include, among other things, (i) the repayment by the senior executive officers and the next twenty most highly compensated employees of any bonus, retention award, or incentive compensation if the payment was based on materially inaccurate

 

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financial information or other materially inaccurate performance metric criteria; (ii) the prohibition of any payment for departure from a CPP participant or change of control event of a CPP participant, other than a payment for services performed or benefits accrued, to the senior executive officers and the next five most highly compensated employees; (iii) the prohibition of the payment or accrual of any bonus, retention award, or incentive compensation to a CPP participant’s most highly compensated employee except through restricted stock with delayed vesting and subject to dollar limits; and (iv) the prohibition from providing tax gross-ups or other reimbursements for the payment of taxes to senior executive officers and the next twenty most highly compensated employees relating to severance payments, perquisites, or any other form of compensation. The interim final rule further requires (i) at least once every six months, the compensation committees of CPP participants to meet to discuss, evaluate, and review the CPP participant’s compensation plans and the risks these plans pose to the CPP participant and annually in the CPP participant’s proxy statement describe how such risks were limited and certify that the compensation committee has completed its reviews of the plans and provide such disclosures and certifications to the Treasury; (ii) CPP participants to disclose to the Treasury and their primary federal regulator on an annual basis, perquisites with a total value over $25,000 for any employee who is subject to the bonus prohibition; (iii) CPP participants to disclose to the Treasury and their primary federal regulator whether they have engaged a compensation consultant and indicate the types of services the compensation consultant or any of its affiliates has provided during the past three years, including any “benchmarking” or comparisons employed to identify certain percentile levels of compensation; (iv) CPP participants to adopt an excessive or luxury expenditures policy; (v) CPP participants to permit stockholders to vote on a non-binding resolution approving the institution’s compensation of executives; and (vi) the principal executive officer and principal financial officer of CPP participants to annually certify compliance of the CPP participant with Section 111 of EESA and provide these certifications as an exhibit to the CPP participant’s annual report on Form 10-K and to the Treasury.

The following table represents Medallion Bank’s actual capital amounts and related ratios as of June 30, 2011 and December 31, 2010, compared to required regulatory minimum capital ratios and the ratio required to be considered well capitalized. As of June 30, 2011, Medallion Bank meets all capital adequacy requirements to which it is subject, and is well-capitalized.

 

 

     Regulatory     June 30,
2011
    December 31,
2010
 

(Dollars in Thousands)

   Minimum     Well-capitalized      

Tier I capital

     —          —        $ 97,238      $ 93,866   

Total capital

     —          —          104,485        100,762   

Average assets

     —          —          592,108        552,603   

Risk-weighted assets

     —          —          572,464        544,935   

Leverage ratio (1)

     4     5     16.4     17.0

Tier I capital ratio (2)

     4        6        17.0        17.2   

Total capital ratio (2)

     8        10        18.3        18.5   

 

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

 

(4) FUNDS BORROWED

The outstanding balances of funds borrowed were as follows:

 

 

     Payments Due for the Fiscal Year Ending June 30,      June  30,
2011
     December  31,
2010
     Interest
Rate (1)
 

(Dollars in thousands)

   2012      2013      2014      2015      2016      Thereafter           

Revolving lines of credit

   $ —         $ —         $ 179,579       $ —         $ —         $ —         $ 179,579       $ 180,204         1.25

SBA debentures

     4,500         19,300         9,150         10,000         10,315         26,985         80,250         80,250         5.62

Notes payable to banks

     28,339         13,280         19,445         137         10,553         874         72,628         87,078         4.32

Preferred securities

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 32,839       $ 32,580       $ 208,174       $ 10,137       $ 20,868       $ 60,859       $ 365,457       $ 380,532         3.41

 

(1) Weighted average contractual rate as of June 30, 2011.

 

(A) REVOLVING LINES OF CREDIT

In December 2008, Trust III entered into a revolving line of credit agreement with DZ Bank, to provide up to $200,000,000 of financing through a commercial paper conduit to acquire medallion loans from MFC (DZ line), of which $179,579,000 was outstanding at June 30, 2011. Borrowings under Trust III’s revolving line of credit are collateralized by Trust III’s assets. MFC is the servicer of the loans owned by Trust III. The DZ line includes a borrowing base covenant and rapid amortization in certain circumstances. In addition, if certain financial tests are not met, MFC can be replaced as the servicer. The DZ line matures in December 2013. The interest rate is the lesser of a pooled short-term commercial paper rate (which approximates LIBOR), 30 day LIBOR (0.19% at June 30, 2011) plus 0.75%, or 90 day LIBOR (0.25% at June 30, 2011) plus 0.50%; plus 0.95%.

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

 

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(B) SBA DEBENTURES

In September 2010, the SBA approved a $5,000,000 commitment for MCI to issue additional debentures during a four year period upon payment of a 1% fee. The SBA also approved a $7,485,000 commitment for FSVC to issue additional debentures during a four year period upon payment of a 1% fee, for the purpose of repaying $7,485,000 of debentures which matured in September 2011, which were issued on March 1, 2011 and used to prepay the September 2011 maturing debentures. In September 2006, the SBA approved a $6,000,000 commitment for FSVC to issue additional debentures to the SBA during a four year period upon payment of a 1% fee and the infusion of $2,000,000 of additional capital. In March 2006, the SBA approved a $13,500,000 commitment for MCI to issue additional debentures to the SBA during a four year period upon payment of a 1% fee and the infusion of $6,750,000 of additional capital. In November 2003, the SBA approved an $8,000,000 commitment for FSVC, and during 2001, the SBA approved $36,000,000 each in commitments for FSVC and MCI. As of June 30, 2011, $106,985,000 of commitments had been fully utilized, and $5,000,000 was available for borrowing.

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

(C) NOTES PAYABLE TO BANKS

The Company and its subsidiaries have entered into (i) note agreements and (ii) participation agreements with a variety of local and regional banking institutions over the years. The notes are typically secured by various assets of the underlying borrower. The Company believes the participation agreements represent legal true sales of the loans to the lender, but for accounting purposes these participations are treated as financings, and are included in funds borrowed as shown on our consolidated balance sheets. The table below summarizes the key attributes of our various borrowing arrangements with banks as of June 30, 2011.

 

(Dollars in thousands)

Borrower

  # of
Banks
/Notes
  Note Dates     Maturity
Dates
   

Type

  Note
Amounts
    Balance
Outstanding
at June 30,
2011
   

Monthly Payment

  Average
Interest
Rate at
June 30,
2011
  Interest
Rate Index(1)

The Company

  3/6     1/09 - 1/11        10/11 - 1/16      Participated loans treated as financings   $ 19,670      $ 19,628      Proportionate to the payments received on the participated loans   4.89%   N/A

The Company

  2/3     3/11 - 6/11        6/12 - 5/14      Revolving line of credit secured by pledged loans     35,000        18,000      Interest only   3.00% +
0.25%
unused
fee
  LIBOR + 2.00%,
3.00% floor;
Prime + 0.50%,
4.00% floor;
LIBOR + 2.00%
or Prime -0.50%,
3.00% floor

Medallion Chicago

  3/28     12/10        12/13 - 12/15      Term loans secured by owned Chicago medallions(2)     18,398        18,215      $108 principal & interest   5.00%   N/A

MFC

  6/11     3/09 - 10/10        7/11 - 2/17      Participated loans treated as financings(3)     16,021        15,711      Proportionate to the payments received on the participated loans   4.34%   4.34%(4)

MFC

  3/3     1/05 - 4/11        3/12 - 5/12      Revolving line of credit secured by pledged loans(5)     38,000        1,075      Interest only   2.69%   Prime +
0.50%;
LIBOR +2%,
3.00% floor;
LIBOR +
2.50%
                 
         

 

 

   

 

 

       
          $ 127,089      $ 72,629         

 

(1) At June 30, 2011, 30 day LIBOR was 0.19%, 360 day LIBOR was 0.74%, and the prime rate was 3.25%.
(2) $11,028 guaranteed by the Company.
(3) $4,227 guaranteed by the Company.
(4) Generally, each of these notes reprice on their one year anniversary date at the greater of the current interest rate, or the prime rate plus an index, which ranges from 0.25% to 1.375%. One $708 loan remains fixed to term at 5.50%, and one $672 loan remains fixed to term at 4.125%.
(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 bear 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 June 30, 2011) plus 2.13%. The notes mature in September 2037, and are prepayable at par on or after September 6, 2012. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. At June 30, 2011, $33,000,000 was outstanding on the preferred securities. In December 2007, $2,000,000 of the preferred securities were repurchased from a third party investor.

(E) COVENANT COMPLIANCE

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

 

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(5) STOCK OPTIONS AND RESTRICTED STOCK

The Company has a stock option plan (2006 Stock Option Plan) available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provides for the issuance of a maximum of 800,000 shares of common stock of the Company. At June 30, 2011, 160,605 shares of the Company’s common stock remained available for future grants. The 2006 Stock Option Plan is administered by the Compensation Committee of the Board of Directors. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. The term and vesting periods of the options are determined by the Compensation Committee, provided that the maximum term of an option may not exceed a period of ten years.

The Company’s Board of Directors approved a new non-employee director stock option plan (the 2006 Director Plan) on February 15, 2006, which was approved by shareholders on June 16, 2006, and on which exemptive relief to implement the 2006 Director Plan was received from the SEC on August 28, 2007. The 2006 Director Plan provides for an automatic grant of options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board, with an adjustment for directors who are elected to serve less than a full term. A total of 100,000 shares of the Company’s common stock are issuable under the 2006 Director Plan. At June 30, 2011, no shares of the Company’s common stock remained available for future grants. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. Options granted under the 2006 Director Plan are exercisable annually, as defined in the 2006 Director Plan. The term of the options may not exceed ten years.

The Company’s Board of Directors approved the 2009 Employee Restricted Stock Plan (the Employee Restricted Stock Plan) on April 16, 2009. The Employee Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC and approval of the Employee Restricted Stock Option Plan by the Company’s shareholders on June 11, 2010. The terms of the Employee Restricted Stock Plan provide for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock, which at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 800,000 shares of the Company’s common stock are issuable under the Employee Restricted Stock Plan, and as of June 30, 2011, 731,285 shares of the Company’s common stock remained available for future grants. Awards under the 2009 Employee Plan are subject to certain limitations as set forth in the Employee Restricted Stock Plan. The Employee Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the Employee Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the Employee Restricted Stock Plan, whichever first occurs.

The Company’s Board of Directors approved an amendment to the 2006 Director Plan (the Amended Director Plan) on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009. The Amended Director Plan will become effective upon the Company’s receipt of exemptive relief from the SEC. The Amended Director Plan is intended to amend and restate the 2006 Director Plan by increasing the maximum number of shares of the Company’s common stock that will be available for issuance under the Amended Director Plan from 100,000 to 200,000. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company will grant options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board, with an adjustment for directors who are elected to serve less than a full term. The option price per share may not be less than the current market value of the Company’s common stock on the date the option is granted. Options granted under the 2006 Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options may not exceed ten years.

The Company’s 1996 Stock Option Plan and 1996 Director Plan terminated on May 21, 2006 and no additional shares are available for future issuance. At June 30, 2011, 1,421,429 options on the Company’s common stock were outstanding under the 1996 and 2006 plans, of which 1,352,873 options were exercisable, and there were 68,715 unvested shares of the Company’s common stock outstanding under the Employee Restricted Stock Plan.

The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted during the 2011 second quarter and six months. The weighted average fair value of options granted was $0.96 per share for the three and six months ended June 30, 2010. The following assumption categories are used to determine the value of any option grants.

 

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011      2010     2011      2010  

Risk free interest rate

     NA         2.77     NA         2.77

Expected dividend yield

     NA         8.00        NA         8.00   

Expected life of option in years (1)

     NA         6.00        NA         6.00   

Expected volatility (2)

     NA         30.00        NA         30.00   

 

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

 

 

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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 periods ended June 30, 2011 and December 31, 2010.

 

 

     Number of
Options
    Exercise Price
Per Share
     Weighted Average
Exercise Price
 

Outstanding at December 31, 2009

     1,475,932        $3.50-17.94       $ 8.93   

Granted

     68,500        7.17-8.21         8.06   

Cancelled

     (46,264     9.22-17.94         13.79   

Exercised

     (2,200     4.85         4.85   
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2010

     1,495,968        3.50-14.63         8.75   

Granted

     —          —           —     

Cancelled

     (16,937     9.22-14.63         14.54   

Exercised (1)

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at March 31, 2011

     1,479,031        3.50-13.06         8.68   

Granted

     —          —           —     

Cancelled

     (50,602     4.85-11.70         11.66   

Exercised (1)

     (7,000     4.85         4.85   
  

 

 

   

 

 

    

 

 

 

Outstanding at June 30, 2011 (2)

     1,421,429      $ 3.50-13.06       $ 8.59   
  

 

 

   

 

 

    

 

 

 

Options exercisable at June 30, 2011 (2)

     1,352,873      $ 3.50-13.06       $ 8.63   

 

(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 $30,000 for the 2011 second quarter and six months, and was $0 for the comparable 2010 periods.
(2) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at June 30, 2011 and the related exercise price of the underlying options, was $2,387,000 for outstanding options and $2,259,000 for exercisable options as of June 30, 2011.

 

The following table presents the activity for the restricted stock program under the 2009 Employee Restricted Stock Plan for the periods ended June 30, 2011 and December 31, 2010.

 

 

     Number of
Shares
    Grant Price
Per Share
     Weighted Average
Grant Price
 

Outstanding at December 31, 2009

     —        $ —         $ —     

Granted

     —          —           —     

Cancelled

     —          —           —     

Vested

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2010

     —          —           —     

Granted

     68,740        7.99         7.99   

Cancelled

     —          —           —     

Vested (1)

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at March 31, 2011

     68,740        7.99         7.99   

Granted

     —          —           —     

Cancelled

     (25     7.99         7.99   

Vested (1)

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at June 30, 2011 (2)

     68,715      $ 7.99       $ 7.99   

 

(1) The aggregate fair value of the restricted stock vested was $0 for the 2011 and 2010 second quarters and six months.
(2) The aggregate fair value of the restricted stock was $670,000 as of June 30, 2011.

 

The following table presents the activity for the unvested options outstanding under the plans for the quarter and six months ended June 30, 2011.

 

 

     Number of
Options
    Exercise Price
Per Share
     Weighted Average
Exercise Price
 

Outstanding at December 31, 2010

     263,161      $ 7.17-11.21       $ 8.83   

Granted

     —          —           —     

Cancelled

     —          —           —     

Vested

     (35,139     9.99-11.21         10.73   
  

 

 

   

 

 

    

 

 

 

Outstanding at March 31, 2011

     228,022        7.17-9.24         8.54   

Granted

     —          —           —     

Cancelled

     —          —           —     

Vested

     (159,466     7.17-9.24         8.82   
  

 

 

   

 

 

    

 

 

 

Outstanding at June 30, 2011

     68,556      $ 7.17-8.21       $ 7.89   

 

The intrinsic value of the options vested was $21,000 for the 2011 second quarter and six months.

 

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The following table summarizes information regarding options outstanding and options exercisable at June 30, 2011 under the 1996 and 2006 Stock Option Plans and the 1996 and 2006 Director Plans.

 

     Options Outstanding      Options Exercisable  
            Weighted average             Weighted average  

Range of Exercise Prices

   Shares at
June 30,
2011
     Remaining
contractual life
in years
     Exercise price      Shares at
June 30,
2011
     Remaining
contractual life
in years
     Exercise price  

$    3.50-5.51

     341,647         1.04       $ 4.91         341,647         1.04       $ 4.91   

    6.89-13.06

     1,079,782         5.85         9.76         1,011,226         5.67         9.88   
  

 

 

          

 

 

       

$  3.50-13.06

     1,421,429         4.69         8.59         1,352,873         4.50         8.63   

 

The following table summarizes information regarding restricted stock outstanding at June 30, 2011 under the 2009 Employee Restricted Stock Plan.

 

 

     Restricted Stock Outstanding  
            Weighted average  

Range of Grant Prices

   Shares at
June  30,
2011
     Remaining
vesting period
in years
     Grant price  

$7.99

     68,715         2.64       $ 7.99   

 

(6) SEGMENT REPORTING

We have one business segment, our lending and investing operations. This segment originates and services medallion, secured commercial, and consumer loans, and invests in both marketable and nonmarketable securities.

(7) NONINTEREST INCOME AND OTHER OPERATING EXPENSES

The major components of noninterest income were as follows:

 

 

     Three Months Ended June 30,      Six Months Ended June 30,  

(Dollars in thousands)

           2011                      2010                      2011                      2010          

Prepayment fees

   $ 225       $ 259       $ 350       $ 351   

Late charges

     40         58         136         102   

Servicing fees

     34         765         175         1,401   

Other

     27         69         74         93   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 326       $ 1,151       $ 735       $ 1,947   

 

The decrease in servicing fees in 2011 primarily reflected the absence of servicing fees from Medallion Bank, which are reflected as income earned by MSC, an unconsolidated portfolio investment of the Company, beginning in December 2010. Prepayment fees decreased in the 2011 second quarter compared to the 2010 second quarter due to a lower level of prepayment activity as interest rates appear to have bottomed.

The major components of other operating expenses were as follows:

 

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(Dollars in thousands)

               2011                               2010                              2011                               2010               

Loan collection costs and other investment costs

   $ 970       ($ 889   $ 996       ($ 1,579

Travel, meals, and entertainment

     210         197        454         358   

Directors’ fees

     88         135        203         273   

Miscellaneous taxes

     68         86        187         305   

Office expense

     51         87        115         175   

Telephone

     50         66        95         131   

Depreciation and amortization

     40         44        81         98   

Insurance

     35         63        75         112   

Other expenses

     235         259        440         474   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other operating expenses

   $ 1,747       $ 48      $ 2,646       $ 347   

 

Loan collections and other investment costs increased reflecting $942,000 of accrued costs relating to a proposed investment opportunity in the 2011 second quarter, and also reflecting $817,000 and $1,312,000 of expense reversals related to the costs of winding up the operations of the SPAC’s in the 2010 second quarter and six months that were reclassified to realized losses on investments, and $93,000 and $310,000 that was reversed as a result of favorable negotiations with the creditors of SPAC. Travel, meals, and entertainment increased due to an increase in investment development activities in 2011. Miscellaneous taxes were lower in 2011 due to higher franchise and excise taxes in the prior year. Additionally, most expense categories are lower in 2011 as a result of the costs which are being allocated to MSC for servicing-related activities.

 

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(8) SELECTED FINANCIAL RATIOS AND OTHER DATA

The following table provides selected financial ratios and other data:

 

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(Dollars in thousands, except per share data)

               2011                              2010                              2011                              2010               

Net share data:

        

Net asset value at the beginning of the period

   $ 9.41      $ 9.13      $ 9.35      $ 9.27   

Net investment income

     0.08        0.17        0.25        0.29   

Income tax (provision) benefit

     —          —          —          —     

Net realized gains (losses) on investments

     0.03        (0.04     0.03        (0.50

Net change in unrealized appreciation on investments

     0.14        0.04        0.21        0.39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

     0.25        0.17        0.49        0.18   

Issuance of common stock

     —          —          (0.03     —     

Repurchases of common stock

     —          0.01        —          0.01   

Distribution of net investment income

     (0.17     (0.15     (0.33     (0.30

Distribution of net realized gains on investments

     —          —          —          —     

Other

     —          —          0.01        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in net asset value

     0.08        0.03        0.14        (0.11
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 9.49      $ 9.16      $ 9.49      $ 9.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at beginning of period

   $ 8.79      $ 7.96      $ 8.20      $ 8.17   

Per share market value at end of period

     9.75        6.60        9.75        6.60   

Total return (2)

     52     (62 %)      47     (32 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratios/supplemental data

        

Average net assets

   $ 165,275      $ 160,768      $ 164,778      $ 161,970   

Total expense ratio (3) (4) (5)

     18     19     18     19

Operating expenses to average net assets (4) (5)

     9.51        10        9.28        10   

Net investment income after taxes to average net assets(5)

     3.59        7.33        5.29        6.44   

 

(1) Includes $0.17 and $0.28 of undistributed net investment income per share and $0.00 of undistributed net realized gains per share as of June 30, 2011 and 2010.
(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) Includes $817 and $1,312 of expense reversals related to the costs of winding up the operations of the SPAC’s in the 2010 second quarter and six months that were reclassified to realized losses on investments, and $93 and $310 that was reversed as a result of favorable negotiations with the creditors of SPAC. Excluding these amounts, the total expense ratios were 21% for the 2010 second quarter and six months, and the operating expense ratios were 12%.
(5) In December 2010, MSC assumed our servicing obligations, and as a result, servicing fee income of $1,399 and $2,756, and operating expenses of $1,672 and $2,758, which formerly were the Company’s were now MSC’s for the three and six months ended June 30, 2011. Excluding the impact of the MSC amounts, the total expense ratio, operating expense ratio, and net investment income ratio would have been 21%, 14%, and 2.93% in the quarter, and 21%, 13%, and 5.28% in the six months.

 

(9) RECENTLY ISSUED ACCOUNTING STANDARDS

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

In April 2011, the FASB issued Accounting Standards Update 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (ASU 2011-02). ASU 2011-02 amends Topic 310 by requiring that a credit, when evaluating whether a restructuring constitutes a troubled debt restructuring, separately conclude that both the restructuring constitutes a concession and that the debtor is experiencing financial difficulties. ASU 2011-02 is effective for the first interim or annual reporting period beginning on or after June 15, 2011, and is to be applied retrospectively to the beginning of the annual period of adoption. The Company does not expect the adoption of ASU 2011-02 to have an impact on its financial condition or results of operation.

In December 2010, the FASB issued Accounting Standards Update 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations, a consensus of the FASB Emerging Issues Task Force,” the objective of which was to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The update specifies that a public entity which presents comparative financial statements should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual period only. The amendments in this update are applicable to any public entity which enters into business combinations that are material on an individual or aggregate basis and is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010 with early adoption permitted. 

 

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Adoption of ASU 2010-29 has not had an impact on the financial condition of the Company as it only amends future pro forma disclosures of material business combinations.

(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, subject to various regulatory constraints imposed by the TARP program (see Note 3).

A member of the Board of Directors of the Company since 1996 is also of counsel in the Company’s primary law firm. Amounts paid to the law firm were approximately $236,000 and $185,000 for the three months ended June 30, 2011 and 2010, and were $264,000 and $284,000 for the comparable six months.

At June 30, 2011, December 31, 2010 and June 30, 2010, we serviced $349,916,000, $332,053,000, and $283,432,000 in 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:

 

 

     Three Months Ended June 30,      Six Months Ended June 30,  

(Dollars in thousands)

       2011              2010              2011              2010      

Loan origination fees

   $ 128       $ 215       $ 383       $ 412   

Reimbursement of operating expenses

     60         79         120         158   

Servicing fees

     5         658         10         1,214   

Interest income

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

   $ 193       $ 952       $ 513       $ 1,784   

 

In December 2010, the Company assigned its servicing rights to the Medallion Bank portfolio to MSC, a wholly-owned unconsolidated portfolio investment. The costs of servicing are allocated to MSC by the Company, and the servicing fee income is billed and collected from Medallion Bank by MSC. As a result, $1,399,000 and $2,756,000 of servicing fee income was earned by MSC in the 2011 second quarter and six months.

SPAC

Included in investments in controlled subsidiaries at December 31, 2009 was $6,961,000 of investments in and loans to a special purpose acquisition company, Sports Properties Acquisition Corp. (the SPAC), 18%-owned by the Company, which consummated its initial public offering (IPO) in January 2008. Immediately prior to the IPO, the Company purchased warrants for $5,900,000 from the SPAC in a private placement which would have allowed it to acquire 5,900,000 additional shares of common stock in the future under various conditions and restrictions. The SPAC was unable to consummate an approved business combination within 24 months of the IPO, as a result, the Company’s entire investment in the SPAC became worthless in January 2010, and was therefore fully reserved for with a $6,961,000 charge to unrealized depreciation during the year ended December 31, 2009, and was fully written off to realized losses in the 2010 first quarter. All of the assets of the SPAC have been used to repay the public stockholders.

The Company had entered into a consulting agreement with ProEminent Sports, whose principal acted as a consultant to the Company for sports related investments and, included within the scope of his duties, also provided services to the SPAC, including serving as its Chief Executive Officer, and assisting generally with the SPAC’s offering and business combination. The Company had paid ProEminent Sports a monthly fee of $20,000, which during 2009 was reduced to $10,000, and then $0. The Company had previously entered into a consulting agreement with GamePlan, LLC which was terminated as of June 1, 2008, when the SPAC entered into its own consulting agreement with GamePlan, LLC. The Company had paid GamePlan, LLC a monthly fee of $10,000.

The Company had agreed to indemnify the SPAC in the event of the SPAC’s liquidation for all claims of any vendors, service providers, or other entities that are owed money by the SPAC for services rendered or contracted for, or for products sold to the SPAC, including claims of any prospective acquisition targets. At December 31, 2009, the SPAC’s liabilities exceeded its cash on hand by $1,581,000. The SPAC negotiated these liabilities downwards, and obtained forbearance from those associated with a failed deal, and during 2010, $1,292,000 of the expenses were paid, $310,000 were forgiven, including $495,000 and $217,000, respectively, in the 2010 first quarter, and there were no remaining claims outstanding.

Certain of the Company’s officers and directors also served as officers and directors of the SPAC, and in that role entered into agreements with the SPAC and its underwriter(s) to present to the SPAC, prior to presentation to any other person or entity, opportunities to acquire entities, until the earlier of the SPAC’s consummation of a business combination, the SPAC’s liquidation, or until such time as they ceased to be an officer or director of the SPAC. The Company entered into a similar agreement.

SPAC 2

Included in deferred costs in other assets at December 31, 2009 was $759,000 of investments in and loans to a special purpose acquisition company, National Security Solutions, Inc. (SPAC 2), 74%-owned by the Company, which was in organization prior to registration with the SEC to register units for sale in an initial public offering. As a result of the market conditions which led to the failure of the SPAC, it was determined to cease activities related to SPAC 2, and as a result, the investment was fully reserved for with a $759,000 charge to unrealized depreciation during the year ended December 31, 2009, and was fully written off to realized losses in the 2010 first quarter. In addition, the Company had additional realized losses of $20,000 in 2010.

(11) FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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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 June 30, 2011 and December 31, 2010, the estimated fair value of these off-balance-sheet instruments was not material.

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

 

 

     June 30, 2011      December 31, 2010  

(Dollars in thousands)

   Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

           

Investments

   $ 465,425       $ 465,425       $ 483,516       $ 483,516   

Cash

     22,664         22,664         17,303         17,303   

Accrued interest receivable

     1,320         1,320         1,441         1,441   

Financial liabilities

           

Funds borrowed

     365,457         365,457         380,532         380,532   

Accrued interest payable

     1,849         1,849         1,913         1,913   

 

(12) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC Topic 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. The Company accounts for substantially all of its financial instruments at fair value or considers fair value in its measurement, in accordance with the accounting guidance for investment companies. See Note 2 sections “Fair Value of Assets and Liabilities” and “Investment Valuation” for a description of our valuation methodology which is unchanged during 2010.

In accordance with FASB ASC Topic 820, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).

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

Financial assets and liabilities recorded on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

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

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

 

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

 

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

 

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

 

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

Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about

 

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the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, certain residential and commercial mortgage-related assets (including loans, securities, and derivatives), and long-dated or complex derivatives including certain equity derivatives and long-dated options on gas and power).

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

The following tables present Medallion’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010.

 

 

June 30, 2011 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —         $ —         $ 312,139       $ 312,139   

Commercial loans

     —           —           65,851         65,851   

Investment in Medallion Bank and other controlled subsidiaries

     —           —           82,772         82,772   

Equity investments

     273         —           4,390         4,663   

Other assets

     —           38,585         —           38,585   

 

 

December 31, 2010 (Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Medallion loans

   $ —         $ —         $ 323,126       $ 323,126   

Commercial loans

     —           —           76,866         76,866   

Investment in Medallion Bank and other controlled subsidiaries

     —           —           78,735         78,735   

Equity investments

     280         —           4,509         4,789   

Other assets

     —           37,476         —           37,476   

 

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

The following tables provide a summary of changes in fair value of Medallion’s level 3 financial assets and liabilities for the quarters and six months ended June 30, 2011 and 2010.

 

 

(Dollars in thousands)

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

March 31, 2011

   $ 310,499      $ 74,406      $ 79,935      $ 4,685      $ —     

Gains (losses) included in earnings

     —          (1,554     3,051        1,344        —     

Purchases, investments, and issuances

     35,272        577        1,315        —          —     

Sales, maturities, settlements, and distributions

     (33,632     (7,578     (1,529     (1,639     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2011

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   $ —        ($ 1,567   $ 3,051      $ 299      $ —     

 

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

 

(Dollars in thousands)

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

December 31, 2010

   $ 323,126      $ 76,866      $ 78,735      $ 4,509      $ —     

Gains (losses) included in earnings

     —          (2,081     5,696        1,655        —     

Purchases, investments, and issuances

     100,777        2,536        1,515        —          —     

Sales, maturities, settlements, and distributions

     (111,764     (11,470     (3,174     (1,774     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2011

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts related to held assets(1)

   $ —        ($ 2,100   $ 5,696      $ 610      $ —     

 

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

 

 

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(Dollars in thousands)

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

March 31, 2010

   $ 311,496      $ 73,522      $ 72,598      $ 2,931       $ —     

Gains (losses) included in earnings

     —          (705     2,708        159         —     

Purchases, investments, and issuances

     53,785        399        175        —           —     

Sales, maturities, settlements, and distributions

     (31,963     (1,547     (1,377     —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2010

   $ 333,318      $ 71,669      $ 74,104      $ 3,090       $ —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Amounts related to held assets(1)

   $ —        ($ 854   $ 1,708      $ 159       $ —     

 

(1) Total realized and unrealized gains (losses) included in income 2010 second quarter which relate to assets held as of June 30, 2010.

 

 

(Dollars in thousands)

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

December 31, 2009

   $ 321,915      $ 77,922      $ 71,736      $ 2,769       $ —     

Gains (losses) included in earnings

     —          (4,384     4,086        321         —     

Purchases, investments, and issuances

     84,580        540        659        —           —     

Sales, maturities, settlements, and distributions

     (73,177     (2,409     (2,377     —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2010

   $ 333,318      $ 71,669      $ 74,104      $ 3,090       $ —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Amounts related to held assets(1)

   $ —        ($ 4,533   $ 2,086      $ 321       $ —     

 

(1) Total realized and unrealized gains (losses) included in income for the 2010 six months which relate to assets held as of June 30, 2010.

 

(13) SUBSEQUENT EVENTS

We have evaluated subsequent events that have occurred through August 4, 2011, the date of financial statement issuance.

On July 26, 2011, the Company’s board of directors declared a $0.18 per share common stock dividend, payable on September 2, 2011 to shareholders of record on August 19, 2011.

On July 21, 2011, Medallion Bank issued and sold, 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 approximately $26.3 million under the Small Business Lending Fund Program (SBLF). The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. In connection with the issuance of the Series E, the Bank exited the TARP CPP by redeeming all $22.1 million of the preferred stock outstanding under the program. In addition, the Bank received additional funds of approximately $4.0 million, net of dividends due on the repaid securities. The Bank will pay an initial dividend rate of 1% on the Series E.

 

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

GENERAL

We are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, trailers, and hearing aids. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 6%, and our commercial loan portfolio at a compound annual growth rate of 3% (11% and 9% 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 12%. Total assets under our management, which includes assets serviced for third party investors and managed by Medallion Bank, were $1,125,924,000 as of June 30, 2011, and $1,093,379,000 and $1,057,983,000 as of December 31, 2010 and June 30, 2010, and have grown at a compound annual growth rate of 12% from $215,000,000 at the end of 1996. Since our initial public offering in 1996, we have paid dividends in excess of $161,017,000 or $10.21 per share.

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

 

   

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

 

   

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

 

   

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

In December 2010, we formed a wholly-owned portfolio company, Medallion Servicing Corporation (MSC), to provide loan services to Medallion Bank, also a portfolio company wholly-owned by us. We have assigned all of our loan servicing rights for Medallion Bank, which consists of servicing taxi medallion and commercial loans originated by Medallion Bank, to MSC, who will bill and collect the related service fee income from Medallion Bank, and will be allocated and charged by the Company for MSC’s share of these servicing costs.

 

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

In addition, we conduct business through a wholly-owned portfolio company, Medallion Bank, a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans. We earn referral fees for these activities. In December 2010, all of these servicing activities were assigned to MSC. As a non-investment company, Medallion Bank is not consolidated with the Company, which is an investment company under the 1940 Act.

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 i