(15) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.

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

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

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

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

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

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

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

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

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

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

A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur. The following paragraphs describe the sensitivity of the various level 3 valuations to the factors that are relevant in their valuation analysis under both Bank Holding Company Accounting (applicable as of June 30, 2018 and for the quarter then ended) and Investment Company Accounting (applicable to prior periods).

Bank Holding Company Accounting

Commencing with the quarter ended June 30, 2018, equity investments are recorded at cost and are evaluated for impairment periodically.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2018.

Bank Holding Company Accounting

(Dollars in thousands)

Level 1

Level 2

Level 3

Total

Assets

Equity investments

—

10,773

Available for sale investment securities⁽¹⁾

—

44,717

—

44,717

Total

—

44,717

10,773

55,490

(1)	Total unrealized losses of $255, net of tax, was included in accumulated other comprehensive income (loss) for the three months ended June 30, 2018 related to these assets.

Investment Company Accounting

Medallion loans are primarily collateral-based lending, whereby the collateral value exceeds the amount of the loan, providing sufficient excess collateral to protect against losses to the Company. As a result, the initial valuation assessment is that as long as the loan is current and performing, its fair value approximates the par value of the loan. To the extent a loan becomes nonperforming, the collateral value has been adequate to result in a complete recovery. In a case where the collateral value was inadequate, an unrealized loss would be recorded to reflect any shortfall. Collateral values for medallion loans are typically obtained from transfer prices reported by the regulatory agency in a particular local market (e.g. New York City Taxi and Limousine Commission). Those portfolios had historically been at very low loan to collateral value ratios, and as a result, historically have not been highly sensitive to changes in collateral values. Over the last few years, as medallion collateral values have declined, the impact on the Company’s valuation analysis has become more significant, which could result in a significantly lower fair value measurement.

The mezzanine and other secured commercial portions of the commercial loan portfolio are a combination of cash flow and collateral based lending. The initial valuation assessment is that as long as the loan is current and performing, its fair value approximates the par value of the loan. If a loan becomes nonperforming, an evaluation is performed which considers and analyzes a variety of factors which may include the financial condition and operating performance of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience, the relationships between current and projected market rates and portfolio rates of interest and maturities, as well as general market trends for businesses in the same industry. Since each individual nonperforming loan has its own unique attributes, the factors analyzed, and their relative importance to each valuation analysis, differ between each asset, and may differ from period to period for a particular asset. The valuation is highly sensitive to changes in the assumptions used. To the extent that any assumption in the analysis changes significantly from one period to another, that change could result in a significantly lower or higher fair market value measurement. For example, if a borrower’s valuation was determined primarily on the cash flow generated from their business, then if that cash flow deteriorated significantly from a prior period valuation, that could have a material impact on the valuation in the current period.

The investment in Medallion Bank was subject to a thorough valuation analysis as described previously, and on at least an annual basis, the Company also received an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value. The Company determined whether any factors gave rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank’s inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a “commercial firm” (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013, and the lack of any new charter issuances since the moratorium’s expiration. Because of these restrictions and other factors, the Company’s Board of Directors had previously determined that Medallion Bank had little value beyond its recorded book value. As a result of this valuation process, the Company had previously used Medallion Bank’s actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments In the 2015 second quarter, the Company first became aware of external interest in Medallion Bank and its portfolio assets at values in excess of their book value. Expression of interest in Medallion Bank from both investment bankers and interested parties has continued. The Company incorporated these new factors in the Medallion Bank’s fair value analysis and the Board of Directors determined that Medallion Bank had a fair value in excess of book value. In addition, in the 2016 third quarter there was a court ruling involving a marketplace lender that the Company believes heightens the interest of marketplace lenders to acquire or merge with Utah industrial banks. The Company also engaged a valuation specialist to assist the Board of Directors in their determination of Medallion Bank’s fair value, and this appreciation of $15,500,000 was thereby recorded in 2015, and additional appreciation of $128,918,000 was recorded in 2016, $7,489,000 was recorded in 2017 and $39,826,000 was recorded in 2018.

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

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2017.


Investment Company Accounting (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Medallion loans	$	—	$	—	$	208,279	$	208,279
Commercial loans		—		—		90,188		90,188
Investments in Medallion Bank and other controlled subsidiaries		—		—		302,147		302,147
Equity investments		—		—		9,521		9,521
Investments other than securities		—		—		7,450		7,450
Other assets		—		—		339		339

Included in level 3 investments as of December 31, 2017 is primarily the investment in Medallion Bank, as well as other consolidated subsidiaries such as MSC, and other investments detailed in the consolidated summary schedule of investments following these footnotes. Included in level 3 equity investments are unregistered shares of common stock in a publicly-held company, as well as certain private equity positions in non-marketable securities.

The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilities for the quarter ended June 30, 2018, under Bank Holding Company Accounting, and for the quarters ended March 31, 2018 and June 30, 2017 and the six months ended June 30, 2017 under Investment Company Accounting.


(Dollars in thousands)	Equity Investments
March 31, 2018	$	9,458
Gains (losses) included in earnings		(374	)
Purchases, investments, and issuances		529
Sales, maturities, settlements, and distributions		(217	)
Transfers in ⁽¹⁾		1,377

June 30, 2018	$	10,773

Amounts related to held assets⁽²⁾	($	374	)

(1)	Represents the removal of RPAC Racing investments eliminated in consolidation as well as the transfer of LAX from controlled subsidiaries during the 2018 second quarter.

(2)	Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2018.


(Dollars in thousands)	Medallion Loans			Commercial Loans			Investments in Medallion Bank & Other Controlled Subsidiaries			Equity Investments			Investments Other Than Securities			Other Assets
December 31, 2017	$	208,279		$	90,188		$	302,147		$	9,521		$	7,450		$	339
Gains (losses) included in earnings		(38,190	)		(8	)		29,143			(993	)		(1,915	)		—
Purchases, investments, and issuances		7			7,252			462			935			—			—
Sales, maturities, settlements, and distributions		(8,941	)		(3,812	)		(583	)		(5	)		—			—
Transfers in (out)		—			—			—			—			—			—

March 31, 2018	$	161,155		$	93,620		$	331,169		$	9,458		$	5,535		$	339

Amounts related to held assets⁽¹⁾	($	38,190	)	($	10	)	$	29,143		($	993	)	($	1,915	)	$	—

(1)	Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of March 31, 2018.


(Dollars in thousands)	Medallion Loans			Commercial Loans			Investments in Medallion Bank & Other Controlled Subsidiaries			Equity Investments			Investments Other Than Securities		Other Assets
March 31, 2017	$	250,976		$	73,748		$	300,886		$	9,640		$	9,510	$	354
Gains (losses) included in earnings		(12,452	)		(109	)		930			2,894			—		—
Purchases, investments, and issuances		320			7,720			402			856			—		—
Sales, maturities, settlements, and distributions		(5,429	)		(3,267	)		(399	)		(3,074	)		—		—

June 30, 2017	$	233,415		$	78,092		$	301,819		$	10,316		$	9,510	$	354

Amounts related to held assets⁽¹⁾	($	12,426	)	($	118	)	$	930		$	120		$	—	$	—

(1)	Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2017.


(Dollars in thousands)	Medallion Loans			Commercial Loans			Investments in Medallion Bank & Other Controlled Subs			Equity Investments			Investments Other Than Securities		Other Assets
December 31, 2016	$	266,816		$	83,634		$	293,360		$	8,407		$	9,510	$	354
Gains (losses) included in earnings		(21,147	)		(403	)		9,054			4,155			—		—
Purchases, investments, and issuances		320			7,816			402			856			—		—
Sales, maturities, settlements, and distributions		(12,574	)		(12,955	)		(997	)		(3,102	)		—		—

June 30, 2017	$	233,415		$	78,092		$	301,819		$	10,316		$	9,510	$	354

Amounts related to held assets⁽¹⁾	($	21,095	)	($	450	)	$	9,054		$	1,381		$	—	$	—

(1)	Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2017.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2018.

2018 (Dollars in thousands)

Level 1

Level 2

Level 3

Total

Assets

Impaired loans

—

49,558

Loan collateral in process of foreclosure

60,052

Other receivables

5,500

Total

—

115,110

Significant Unobservable Inputs

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

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of June 30, 2018 were as follows under Bank Holding Company Accounting.

(Dollars in thousands)

Fair Value
at 6/30/18

Valuation Techniques

Unobservable Inputs

Range
(Weighted Average)

Equity Investments

6,306

Investee financial analysis

Financial condition and operating performance of the borrower

N/A

Collateral support

N/A

2,556

Investee book value adjusted for market appreciation

Financial condition and operating performance of the investee

N/A

Precedent arm’s length offer

Business enterprise value

6,018 – $7,218

Business enterprise value/revenue multiples

0.94x – 4.42x

1,455

Precedent market transaction

Offering price

8.73 / share

456

Investee book value

Valuation indicated by investee filings

N/A

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of December 31, 2017 were as follows under Investment Company Accounting.

(Dollars in thousands)

Fair Value
at 12/31/17

Valuation Techniques

Unobservable Inputs

Range
(Weighted Average)

Medallion Loans

$208,279

Precedent market transactions

Adequacy of collateral (loan to value)

1% - 420% (131%)

Commercial Loans – Mezzanine and Other

90,188

Borrower financial analysis

Financial condition and operating performance of

N/A

the borrower

Portfolio yields

2% -19.00% (12.02%)

Investment in Medallion Bank

290,548

Precedent M&A transactions

Price / book value multiples

2.1x to 2.5x

Price / earnings multiples

8.7x to 10.6x

Discounted cash flow

Discount rate

17.50%

Terminal value

470,964 to $623,007

Investment in Other Controlled Subsidiaries

4,623

Investee financial analysis

Financial condition and operating performance

N/A

Enterprise value

37,500 - $41,500

Equity value

2,000 - $5,000

3,878

Investee book value adjusted for asset appreciation

Financial condition and operating performance of the investee

N/A

Third party valuation/ offer to purchase asset

N/A

3,001

Investee book value adjusted for market appreciation

Financial condition and operating performance of the investee

N/A

Third party offer to purchase investment

N/A

Investee book value and equity pickup

Financial condition and

operating performance of the investee

N/A

Equity Investments

5,417

Investee financial analysis

Financial condition and operating performance of the borrower

N/A

Collateral support

N/A

2,193

Investee financial analysis

Equity value

2,000 - $5,000

Preferred equity yield

12%

1,455

Precedent market transaction

Offering price

8.73/share

456

Investee book value

Valuation indicated by investee filings

N/A

Investments Other Than Securities

7,450

Precedent market transaction

Transfer prices of Chicago medallions

N/A

Cash flow analysis

Discount rate in cash flow analysis

Other Assets

339

Borrower collateral analysis

Adequacy of collateral (loan to value)