| Summary of Significant Accounting Policies | (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change to Bank Holding Company Accounting
As described above, effective April 2, 2018, the Company
withdrew its previous election to be regulated as a BDC under the
1940 Act. Prior to such time, the Company
was a closed-end, non-diversified management
Use of Estimates
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the US
(GAAP) 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 change, it is reasonably
possible that the judgments and estimates could change, which may
result in future impairments of loans and other receivables,
investments other than securities, loans held for sale, and
investments, among other effects.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its wholly-owned and controlled subsidiaries
commencing with the three months ended June 30, 2018. All
significant intercompany transactions, balances, and profits
(losses) have been eliminated in consolidation. Prior to the
Company’s election to withdraw from being regulated as a BDC
under the 1940 Act effective April 2, 2018, Medallion Bank and
various other Company subsidiaries were not consolidated with the
Company prior to the three months ended June 30, 2018, and as
such see Note 6 for the presentation of financial information for
Medallion Bank and other controlled subsidiaries for such prior
periods.
The consolidated financial statements have been prepared in
accordance with GAAP. The Company consolidates all entities it
controls through a majority voting interest, a controlling interest
through other contractual rights, or as being identified as the
primary beneficiary of VIEs. The primary beneficiary is the party
who has both (1) the power to direct the activities of a VIE that
most significantly impact the entity’s economic performance
and (2) an obligation to absorb losses of the entity or a right to
receive benefits from the entity that could potentially be
significant to the entity. For consolidated entities that are less
than wholly owned, the third-party’s holding is recorded as
non-controlling interest.
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 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
entity’s 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 14 and 15 to the consolidated financial statements.
Equity Investments
Equity investments of $10,752,000 at September 30, 2018,
comprised mainly of nonmarketable stock, equity units and equity
warrants, are recorded at cost and are evaluated for impairment
periodically. Prior to April 2, 2018, equity investments were
recorded at fair value, represented as cost, plus or minus
unrealized appreciation or depreciation. The fair value of
investments that had no ready market were determined in good faith
by the Board of Directors, based upon the financial condition and
operating performance of the underlying investee companies as well
as general market trends for businesses in the same industry.
Included in the equity investments
were non-marketable
Investment Securities (Bank Holding Company Accounting)
The Company follows FASB ASC Topic 320, Investments – Debt
and Equity Securities (ASC 320), which requires that all applicable
investments in equity securities with readily determinable fair
values, and debt securities be classified as
trading securities, available-for-sale securities, or held-to-maturity securities. from time-to-time in that held-to-maturity securities available-for-sale .
Other Investment Valuation (Investment Company
Accounting)
Prior to April 2, 2018, under the 1940 Act, the
Company’s investment in Medallion Bank, as a wholly owned
portfolio investment, was subject to quarterly assessments of fair
value. The Company conducted a thorough valuation analysis, and
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 of Medallion Bank on at least an
annual basis. The Company’s analysis included factors such as
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
At December 31, 2017, there
were non-marketable
Loans
The Company’s loans are currently reported at the principal
amount outstanding, inclusive of deferred loan acquisition costs,
which primarily includes deferred fees paid to loan originators,
and which is amortized to interest income over the life of the
loan. Effective April 2, 2018, the existing loan balances were
recharged at fair value in connection with the change in reporting,
and balances, net of reserves, became the fair value opening
balances.
Loan origination fees and certain direct origination costs are
deferred and recognized as an adjustment to the yield of the
related loans. At September 30, 2018 and December 31,
2017, net loan origination costs were $14,041,000 and $90,000
($11,187,000 when combined with Medallion Bank). The majority of
these loan origination costs were capitalized into the loan
balances on April 2, 2018 in connection with the change in
reporting status. Net amortization (accretion) to income for the
three months ended September 30, 2018 and 2017 was $1,147,000
and ($17,000) ($901,000 when combined with Medallion Bank), and was
$2,192,000 ($3,065,000 when combined with Medallion Bank) and
($55,000) ($2,526,000 when combined with Medallion Bank) for the
comparable nine month periods.
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. The consumer portfolio has different
characteristics, typified by a larger number of lower dollar loans
that have similar characteristics. A loan is considered to be
impaired, or nonperforming, when based on current information and
events, it is likely the Company will be unable to collect all
amounts due according to the contractual terms of the original loan
agreement. Management considers loans that are in bankruptcy
status, but have not been charged-off, to
Loan collateral in process of foreclosure primarily includes
taxicab medallion loans that have reached 120 days past due and
have been charged down to their net realizable value, in addition
to consumer repossessed collateral in the process of being sold.
The taxicab medallion loan component reflects that the collection
activities on the loans have transitioned from working with the
borrower, to the liquidation of the collateral securing the
loans.
The Company had $123,173,000 and $183,529,000 of net loans pledged
as collateral under borrowing arrangements at September 30,
2018 and December 31, 2017.
The Company accounted for its sales of loans in accordance with
FASB Accounting Standards Codification Topic 860, Transfers and
Servicing (FASB ASC 860) which provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities. In accordance with FASB ASC 860,
the Company had elected the fair value measurement method for its
servicing assets and liabilities. The principal portion of loans
serviced for others by the Company and its affiliates was
$26,558,000 at September 30, 2018 and $338,867,000 at
December 31, 2017, which included $311,988,000 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
existed as of September 30, 2018 and December 31, 2017.
The Company assigned its servicing rights to the Medallion Bank
portfolio to MSC. The costs of servicing were allocated to MSC by
the Company, and the servicing fee income was billed to and
collected from Medallion Bank by MSC.
Allowance for Loan Losses (Bank Holding Company
Accounting)
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management’s periodic review of
the collectability of the loans in light of historical experience,
the nature and volume of the loan portfolio, adverse situations
that may affect the borrower’s ability to repay, estimated
value of any underlying collateral, prevailing economic conditions,
and excess concentration risks. In analyzing the adequacy of the
allowance for loan losses, the Company uses historical delinquency
and actual loss rates with a one year lookback period for consumer
loans. For commercial loans deemed nonperforming, the historical
loss experience and other projections are looked at, and for
medallion loans, non performing loans are valued at the median
sales price over the most recent quarter, and performing medallion
loans are reserved utilizing historical loss ratios over a three
year lookback period. This evaluation is inherently subjective, as
it requires estimates that are susceptible to significant revision
as more information becomes available. As a result, reserves of
$15,587,000 (includes Bank’s reserves since April
2 nd
Unrealized Appreciation (Depreciation) and Realized Gains
(Losses) on Investments (Investment Company Accounting)
Prior to April 2, 2018, under Investment Company Accounting,
the Company’s loans, net of participations and any unearned
discount, were considered investment securities under the 1940 Act
and recorded at fair value. As part of the fair value methodology,
loans were valued at cost adjusted for any unrealized appreciation
(depreciation). Since no ready market existed for these loans, the
fair value was determined in good faith by the Board of Directors.
In determining the fair value, the Board of Directors considered
factors such as the financial condition of the borrower, the
adequacy of the collateral, individual credit risks, cash flows of
the borrower, market conditions for loans (e.g. values used by
other lenders and any active bid/ask market), historical loss
experience, and the relationships between current and projected
market rates and portfolio rates of interest and maturities.
Investments other than securities, which represent collateral
received from defaulted borrowers, were valued similarly.
Under Investment Company Accounting, the Company recognized
unrealized appreciation (depreciation) on investments as 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 on investments was $139,700,000, and
$100,732,000 as of December 31, 2017 and September 30,
2017. Refer to Note 5 for additional details.
Goodwill and Intangible Assets
The Company’s goodwill and intangible assets arose as a
result of the excess of fair value over book value for several of
the Company’s previously unconsolidated portfolio investment
companies as of April 2, 2018. This fair value was brought
forward under the Company’s new Bank Holding Company
reporting, and was subject to a purchase price accounting
allocation process conducted by an independent third party expert
to arrive at the current categories and amounts. Goodwill is not
amortized, but is subject to impairment testing on an annual basis.
Intangible assets are amortized over their useful life of
approximately 20 years. See below for detailed information on
the fair value allocation as of April 2, 2018. As of
September 30, 2018, the Company had goodwill and intangible
assets of $210,761 and recognized $361 and $722 of amortization
expense for the three and nine months periods then ended.
(in thousands) Fair Value as of Allocation as
Medallion Bank
Assets
Net loans (1) $ 890,000
Other assets 130,393
Liabilities
Funds borrowed and other liabilities (853,650 )
Total fair value excluding goodwill and intangibles 166,743
Goodwill 150,803
Intangibles 28,900
Total fair value (2) $ 346,446 $ 346,446
(1)
Includes $12,387 of premiums associated with the loan
portfolio.
(2)
Includes $26,303 of preferred stock held by the US
Treasury. See Note 17 for details.
(in thousands) Fair Value as Allocation as
RPAC Racing LLC
Assets
Cash $ 1,647
Net fixed assets 774
Race cars and parts, net 203
Race cars held for sale 916
Other assets 1,902
Liabilities
Deferred revenue (6,531 )
Notes payable (1) (27,220 )
Other liabilities (2,275 )
Total fair value excluding goodwill and intangibles (30,584 )
Intangibles 31,779
Total fair value (2) $ 1,195 $ 1,195
(1)
Includes $20,177 due to the Company and its affiliates
as of March 31, 2018.
(2)
Fair value as of March 31, 2018 represents the
Company’s investment in RPAC Racing LLC series D units.
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation and
amortization, and are depreciated on a straight-line basis over
their estimated useful lives of 3 to 10 years. Leasehold
improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated economic useful life of
the improvement. Depreciation and amortization expense was
$131,000 and $23,000 ($64,000 had Medallion Bank been consolidated)
for the quarters ended September 30, 2018 and 2017, and was
$289,000 and $71,000 ($166,000 had Medallion Bank been
consolidated) for the comparable nine months.
Deferred Costs
Deferred financing costs, included in other assets, represents
costs associated with obtaining the Company’s borrowing
facilities, and are amortized on a straight line basis over the
lives of the related financing agreements and life of the
respective pool. Amortization expense was $558,000 and $229,000
($567,000 had Medallion Bank been consolidated) for the quarters
ended September 30, 2018 and 2017, and was $1,322,000 and
$697,000 ($1,680,000 had Medallion Bank been consolidated) for the
comparable nine months, recorded as interest expense. 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 are amortized against income
over an appropriate period, or written off. The amount on the
Company’s balance sheet for these purposes was $4,859,000,
$3,070,000 ($5,011,000 had Medallion Bank been consolidated), and
$3,295,000 ($5,437,000 had Medallion Bank been consolidated) as of
September 30, 2018, December 31, 2017, and
September 30, 2017.
Income Taxes
Income taxes are accounted for using the asset and liability
approach in accordance with FASB ASC Topic 740, Income
Taxes (“ASC 740”). Deferred tax assets and
liabilities reflect the impact of temporary differences between the
carrying amount of assets and liabilities and their tax basis and
are stated at tax rates expected to be in effect when taxes are
actually paid or recovered. Deferred tax assets are also recorded
for net operating losses, capital losses, and any tax credit
carryforwards. A valuation allowance is provided against a deferred
tax asset when it is more likely than not that some or all of the
deferred tax assets will not be realized. All available evidence,
both positive and negative, is considered to determine whether a
valuation allowance for deferred tax assets is needed. Items
considered in determining our valuation allowance include
expectations of future earnings of the appropriate tax character,
recent historical financial results, tax planning strategies, the
length of statutory carryforward periods, and the expected timing
of the reversal of temporary differences. Under ASC 740, forming a
conclusion that a valuation allowance is not needed is difficult
when there is negative evidence, such as cumulative losses in
recent years. The Company recognizes tax benefits of uncertain
tax positions only when the position is more likely than not to be
sustained assuming examination by tax authorities. The Company
records income tax related interest and penalties, if applicable,
within current income tax expense.
Earnings (Loss) Per Share (EPS)
Basic earnings (loss) per share are computed by dividing net income
(loss)/net increase (decrease) in net assets resulting from
operations available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur
if option contracts to issue common stock were exercised, or if
restricted stock vests, and has been computed after giving
consideration to the weighted average dilutive effect of the
Company’s stock options and restricted stock. The Company
uses the treasury stock method to calculate diluted EPS, which is a
method of recognizing the use of proceeds that could be obtained
upon exercise of options and warrants, including unvested
compensation expense related to the shares, in computing diluted
EPS. It assumes that any proceeds would be used to purchase common
stock at the average market price during the period. The table
below shows the calculation of basic and diluted EPS.
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in thousands, except per share data) 2018 2017 2018 2017
Net loss/ net decrease in net assets resulting from operations
available to common shareholders ($ 4,697 ) $ 619 ($ 34,218 ) ($ 3,067 )
Weighted average common shares outstanding applicable to basic
EPS 24,235,242 23,930,086 24,207,273 23,916,334
Effect of dilutive stock options
—
—
—
—
Effect of restricted stock grants
— 153,833
—
—
Adjusted weighted average common shares outstanding applicable to
diluted EPS 24,235,242 24,083,919 24,207,273 23,916,334
Basic loss per share ($ 0.19 ) $ 0.03 ($ 1.41 ) ($ 0.13 )
Diluted loss per share (0.19 ) 0.03 (1.41 ) (0.13 )
Potentially dilutive common shares excluded from the above
calculations aggregated 115,000 and 359,000 shares as of
September 30, 2018 and 2017.
Stock Compensation
The Company follows FASB ASC Topic 718 (ASC 718),
“Compensation – Stock Compensation”, for its
equity incentive, 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 income (loss)/net increase
(decrease) in net assets resulting from operations for any new
grants using the fair values established by usage of the
Black-Scholes option pricing model, expensed over the vesting
period of the underlying option. Stock-based employee compensation
costs pertaining to restricted stock are reflected in net income
(loss)/net increase in net assets resulting from operations for any
new grants using the grant date fair value of the shares granted,
expensed over the vesting period of the underlying stock.
During the nine months ended September 30, 2018 and 2017, the
Company issued 101,010 and 258,232 of restricted shares of
stock-based compensation awards, and 39,000 and 23,333 shares of
other stock-based compensation awards, and recognized $151,000 and
$446,000, or $0.01 and $0.02 per share for the 2018 third quarter
and nine months, and $222,000 and $551,000, or $0.01 and $0.02 per
share in the comparable 2017 periods,
of non-cash
Derivatives
The Company manages its exposure to increases in market rates of
interest by periodically purchasing interest rate caps to lock in
the cost of funds of its variable-rate debt in the event of a rapid
run up in interest rates. The Company entered into contracts to
purchase interest rate caps on $20,000,000 of notional value of
principal from various multinational banks, with termination dates
ranging to December 2018. The caps provide for payments to the
Company if various LIBOR thresholds are exceeded during the cap
terms. Total cap purchases were generally fully expensed when paid,
including $0 for the three and nine months ended September 30,
2018 and $0 and $19,000 for the comparable 2017 periods, and all
are carried at $0 on the balance sheet at September 30,
2018.
Regulatory Capital
Medallion Bank is subject to various regulatory capital
requirements administered by the Federal Deposit Insurance
Corporation (FDIC) and the Utah Department of Financial
Institutions. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Bank’s financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance sheet
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 the Bank to maintain minimum amounts and ratios as
defined in the regulations (set forth in the table below).
Additionally, as conditions of granting the Bank’s
application for federal deposit insurance, the FDIC ordered that
the Tier 1 leverage capital to total assets ratio, as defined, be
not less than 15%, and that an adequate allowance for loan losses
be maintained. As of September 30, 2018, the Bank’s Tier
1 leverage capital ratio was 15.08%. The Bank’s actual
capital amounts and ratios, and the regulatory minimum ratios are
presented in the following table.
Regulatory
(Dollars in thousands) Minimum Well- September 30, 2018 December 31, 2017
Common equity Tier 1 capital
—
— $ 138,946 $ 137,494
Tier 1 capital
—
— 165,249 163,797
Total capital
—
— 178,552 176,876
Average assets
—
— 1,096,094 1,127,087
Risk-weighted assets
—
— 1,010,792 995,145
Leverage ratio (1) 4.0 % 5.0 % 15.1 % 14.5 %
Common equity Tier 1 capital ratio (2) 4.5 6.5 13.7 13.8
Tier 1 capital ratio (3) 6.0 8.0 16.3 16.5
Total capital ratio (3) 8.0 10.0 17.7 17.8
(1)
Calculated by dividing Tier 1 capital by average
assets.
(2)
Calculated by subtracting preferred stock
or non-controlling
(3)
Calculated by dividing Tier 1 or total capital by
risk-weighted assets.
In addition, the Bank is subject to a Common Equity Tier 1 capital
conservation buffer on top of the minimum risk-based capital
ratios. The implementation of the capital conservation buffer began
on January 1, 2016 at the 0.625% level and will increase by
0.625% each subsequent January 1 until January 1, 2019.
Including the buffer, by January 1, 2019, the Bank will be
required to maintain the following minimum capital ratios: a Common
Equity Tier 1 risk-based capital ratio of greater than 7.0%, a Tier
1 risk-based capital ratio of greater than 8.5% and a total
risk-based capital ratio of greater than 10.5%
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-13
In January 2017, the FASB issued ASU 2017-04
In June 2016, the FASB issued ASU 2016-13, Financial ASU 2016-13 applies
In February 2016, the FASB issued
ASU 2016-02, 2016-02 2016-02 |
