subsidiaries were $302,147,000 at year end, up $8,787,000 or 3% from $293,360,000 a year ago, primarily reflecting the appreciation and equity in the earnings of Medallion Bank other portfolio
company investments, capital contributions made, dividends paid, portfolio sales, and the net valuation adjustment, and which represented 49% of the investment portfolio at the end of 2017 and 45% in the prior year, and which yielded 0.83% at year
end, compared to 2.13% a year ago, primarily reflecting reduced dividends from Medallion Bank. Equity investments were $9,521,000 at year end, up $1,053,000 or 12% from $8,468,000 a year ago, primarily reflecting increase in investments held, and
which represented 2% of the investment portfolio at the end of 2017 and 1% in the prior year, and had a dividend yield of 0% in both years.
Interest expense was $13,770,000 in 2017, up $1,132,000 or 9% from $12,638,000 in 2016. The increase in interest expense was primarily due to
increased borrowing costs on floating rate borrowings. The cost of borrowed funds was 4.12% in 2017, compared to 3.32% a year ago, an increase of 24%, reflecting the recent increases in market interest rates. Average debt outstanding was
$334,022,000 in 2017, compared to $380,305,000 a year ago, down 12%, primarily reflecting decreased borrowings required to fund the contracting medallion loan portfolio. See page 47 for a table that shows average balances and cost of funds for
our funding sources.
Net interest income was $5,854,000 and the net interest margin was 0.93% in 2017, down $6,596,000 or 53% from
$12,450,000 a year ago, which represented a net interest margin of 2.07%, all reflecting the items discussed above.
Noninterest income,
which is comprised of prepayment fees, management fees, servicing fee income, late charges, and other miscellaneous income was $107,000 in 2017, down $301,000 or 74% from $408,000 a year ago, primarily reflecting lower management and other fees
generated from the portfolios.
Operating expenses were $13,810,000 in 2017, down $8,976,000 or 39% from $22,786,000 in 2016 which
included a $5,099,000 goodwill write off. Salaries and benefits expense was $7,508,000 in the year, down $4,262,000 or 36% from $11,770,000 in 2016 primarily due to a reduction in bonus costs recorded in the current period and lower salary expenses
due to the sale of its asset-based lending division in the prior year. Professional fees were $2,619,000 in 2017, up $272,000 or 12% from $2,347,000 a year ago, primarily reflecting higher legal and other professional fee expenses for a variety of
corporate and investment-related matters. Occupancy expense was $1,069,000 in 2017, up $103,000 or 11% from $966,000 in 2016, primarily reflecting annual increases in rent expense at various locations. Other operating expenses of $2,614,000 in 2017
were down $10,000 from $2,604,000 a year ago reflecting decreased travel and entertainment expenses, directors fees, miscellaneous taxes and reduced expense reimbursements, partially offset by increases in collection and other expenses.
Total income tax benefit was $36,226,000 in 2017 compared to income tax expense of $45,900,000 in 2016, a change of $82,126,000. Total taxes
were comprised of three components, a $728,000 benefit related net investment loss compared to $10,047,000 in 2016, benefits related to realized losses and unrealized appreciation on investments of $15,955,000 and $19,543,000, compared to provisions
of $384,000 and $55,563,000 in 2016. The tax benefit recorded in 2017 reflected the $17,279,000 for adjustment to implement the change in U.S. tax law rates on the net tax liabilities. See Note 8 for more information.
Net change in unrealized appreciation on investments was $15,645,000 in 2017, compared to $78,886,000 in 2016, a decrease in appreciation of
$63,241,000. Net change in unrealized appreciation other than the portion related to Medallion Bank and the other controlled subsidiaries, was appreciation of $6,162,000 in 2017 compared to a depreciation of $51,235,000 in 2016, resulting in
increased appreciation of $57,397,000 in 2017. Unrealized appreciation (depreciation) arises when we make valuation adjustments to the investment portfolio. When investments are sold or written off, any resulting realized gain (loss) is grossed up
to reflect previously recorded unrealized components. As a result, movement between periods can appear distorted. The 2017 activity resulted from a net appreciation on Medallion Bank and other controlled subsidiaries of $9,483,000, reversals of
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