Fair Value of Assets and liabilities

6 Months Ended

Jun. 30, 2019

(17) 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 paragraph describes the sensitivity of the various level 3 valuations to the factors that are relevant in their valuation analysis under Bank Holding Company Accounting (applicable as of June 30, 2018 and for the quarter then ended) and shows the table under Investment Company Accounting (applicable to prior periods).

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, 2019 and December 31, 2018.

June 30, 2019 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Equity investments	$	—	$	—	$	9,797	$	9,797
Available for sale investment securities⁽¹⁾		—		44,820		—		44,820
Total	$	—	$	44,820	$	9,797	$	54,617

(1)	Total unrealized income of $1,227, net of tax, was included in accumulated other comprehensive income (loss) for the six months ended June 30, 2019 related to these assets.

December 31, 2018 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Equity investments	$	—	$	—	$	9,197	$	9,197
Available for sale investment securities⁽¹⁾		—		45,324		—		45,324
Total	$	—	$	45,324	$	9,197	$	54,521

(1)	Total unrealized losses of $82, net of tax, was included in accumulated other comprehensive income (loss) for the nine months ended December 31, 2018 related to these assets.

The following tables provide a summary of changes in fair value of the Company’s level 3 assets and liabilities for the three and six months ended June 30, 2019 and the three months ended June 30, 2018, under Bank Holding Company Accounting, and for the three months ended March 31, 2018 under Investment Company Accounting.

(Dollars in thousands)	Equity Investments
March 31, 2019	$	8,699
Losses included in earnings		(502	)
Purchases, investments, and issuances		1,600
Sales, maturities, settlements, and distributions		—
June 30, 2019	$	9,797
Amounts related to held assets⁽¹⁾	$	(502	)

(1)	Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2019.

(Dollars in thousands)	Equity Investments
December 31, 2018	$	9,197
Gains included in earnings		96
Purchases, investments, and issuances		1,650
Sales, maturities, settlements, and distributions		(1,146	)
June 30, 2019	$	9,797
Amounts related to held assets⁽¹⁾	$	(306	)

(1)	Total realized and unrealized gains (losses) included in income for the period which relate to assets held as of June 30, 2019.

(Dollars in thousands)	Equity Investments
March 31, 2018	$	9,458
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	)		—			—
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.

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2019 and December 31, 2018 under Bank Holding Company Accounting.

June 30, 2019 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Impaired loans	$	—	$	—	$	26,878	$	26,878
Loan collateral in process of foreclosure		—		—		52,368		52,368
Total	$	—	$	—	$	79,246	$	79,246

December 31, 2018 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Impaired loans	$	—	$	—	$	34,877	$	34,877
Loan collateral in process of foreclosure		—		—		49,495		49,495
Total	$	—	$	—	$	84,372	$	84,372

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, 2019 and December 31, 2018 were as follows under Bank Holding Company Accounting.

(Dollars in thousands)		Fair Value at 6/30/19	Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Equity Investments	$	6,314	Investee financial analysis	Financial condition and operating performance of the borrower	N/A
				Collateral support	N/A
		2,028	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	$6,014 – $7,214
				Business enterprise value/revenue multiples	0.96x – 4.44x
		1,455	Precedent market transaction	Offering price	$8.73 / share

(Dollars in thousands)	Fair Value at 12/31/18		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Equity investments	$	5,683	Investee financial analysis	Financial condition and operating performance of the borrower	N/A
				Collateral support	N/A
	1,850		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	$6,014 – $7,214
				Business enterprise value/revenue multiples	0.96x – 4.54x
	1,455		Precedent market transaction	Offering price	$8.73 / share
	209		Investee book value	Valuation indicated by investee filings	N/A

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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