| Summary of Significant Accounting Policies | (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change to Bank Holding Company Accounting
Effective April 2, 2018, the Company withdrew its previous
election to be regulated as a business development company (BDC)
under the Investment Company Act of 1940 (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 loans in process of
foreclosure, goodwill and intangible assets, 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. As a result of 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 that were not previously
consolidated with the Company prior to the three months ended
June 30, 2018, were now consolidated effective April 2,
2018. 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
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. Cash includes $2,475,000 of an
interest reserve associated with the private placement of debt in
March 2019, which cannot be used for any other purpose until March
2022.
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 16 and 17 to the consolidated financial statements.
Equity Investments
Equity investments of $8,699,000 and $9,197,000 at March 31,
2019 and December 31, 2018, comprised mainly of nonmarketable
stock and stock 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.
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
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
adjusted to fair value in connection with the change in reporting,
and balances, net of reserves and fees, became the 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 March 31, 2019 and December 31, 2018,
net loan origination costs were $15,086,000 and $14,416,000. 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 March 31, 2019 and 2018 was $1,151,000 and
($13,000) ($852,000 when combined with Medallion Bank).
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 charged-off charged-off. charged-off
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 $34,732,000 and $40,500,000 of net loans and loans
in process of foreclosure pledged as collateral under borrowing
arrangements at March 31, 2019 and December 31, 2018.
The Company accounts 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
$135,807,000 at March 31, 2019 and $140,180,000 at
December 31, 2018. The Company has evaluated the servicing
aspect of its business in accordance with FASB ASC 860, which
relates to servicing assets held by MFC (related to the remaining
assets in Trust III) and determined that no material servicing
asset or liability existed as of March 31, 2019 and
December 31, 2018. The Company assigned its servicing rights
of 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, nonperforming 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
$6,173,000 were recorded by the Company as a general reserve on
medallion loans as an additional buffer against future losses, not
including the Bank general reserve of $17,351,000 which was netted
against loan balances at consolidation on April 2, 2018.
Credit losses are deducted from the allowance and subsequent
recoveries are added back to the allowance.
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. 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 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. As
of March 31, 2019 and December 31, 2018, the Company had
goodwill of $150,803,000, which all related to the Bank, and
intangible assets of $53,620,000 and $53,982,000, respectively, and
the Company recognized $361,000 of amortization expense on the
intangible assets for the three months ended March 31, 2019.
Additionally, loan portfolio premiums of $12,387,000 were
determined as of April 2, 2018, of which $7,956,000 and
$9,048,000 were outstanding at March 31, 2019 and
December 31, 2018, and of which $1,092,000 was amortized to
interest income for the three months ended March 31, 2019. The
Company engaged an expert to assess the goodwill and intangibles
for impairment at December 31, 2018, who concluded there was
no impairment on Medallion Bank and impairment on the RPAC
intangible asset of $5,615,000, which was recorded in the 2018
fourth quarter.
The table below shows the details of the intangible assets as of
the periods presented.
(Dollars in thousands) March 31, 2019 December 31, 2018
Brand-related intellectual property $ 20,900 $ 21,176
Home improvement contractor relationships 6,555 6,641
Race organization 26,165 26,165
Total intangible assets $ 53,620 $ 53,982
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
$100,000 and $23,000 ($67,000 had Medallion Bank been consolidated)
for the quarters ended March 31, 2019 and 2018.
Deferred Costs
Deferred financing costs, included in other assets, represent 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 $520,000 and $223,000 ($528,000 had
Medallion Bank been consolidated) for the quarters ended
March 31, 2019 and 2018. 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
all of these purposes was $4,411,000, $4,461,000, and $2,862,000
($4,884,000 had Medallion Bank been consolidated) as of
March 31, 2019, December 31, 2018, and March 31,
2018.
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.
Sponsorship and Race Winnings
The Company accounts for the sponsorship and race winnings revenue
under FASB ASC Topic 606, Revenue from Contracts with Customers.
Sponsorship revenue is recognized based upon the contract terms of
the sponsorship contract. Race winnings revenue is recognized after
each race during the season based upon terms provided by NASCAR and
the placement of the driver.
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 March 31,
(Dollars in thousands, except per share data) 2019 2018
Net income/net decrease in net assets resulting from operations
available to common shareholders $ 1,228 $ (14,874 )
Weighted average common shares outstanding applicable to basic
EPS 24,288,263 24,154,879
Effect of dilutive stock options 17,423
—
Effect of restricted stock grants 311,204
—
Adjusted weighted average common shares outstanding applicable to
diluted EPS 24,616,890 24,154,879
Basic earnings (loss) per share $ 0.05 $ (0.62 )
Diluted earnings (loss) per share 0.05 (0.62 )
Potentially dilutive common shares excluded from the above
calculations aggregated 471,000 and 290,960 shares as of
March 31, 2019 and 2018.
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 are reflected in net
increase in net income/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/net increase 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 three months ended March 31, 2019 and 2018, the
Company issued 163,098 and 97,952 of restricted shares of
stock-based compensation awards, and 374,377 and 0 shares of stock
options, and recognized $165,000 and $152,000, or $0.01 and $0.01
per share for each period, of non-cash
Regulatory Capital
Medallion Bank is subject to various regulatory capital
requirements administered by the 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%, which would preclude their ability to pay
dividends to the Company, and that an adequate allowance for loan
losses be maintained. As of March 31, 2019, the Bank’s
Tier 1 leverage ratio was 16.56%. 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-capitalized March 31, 2019 December 31, 2018
Common equity Tier 1 capital
—
— $ 143,409 $ 141,608
Tier 1 capital
—
— 169,712 167,911
Total capital
—
— 182,858 180,917
Average assets
—
— 1,025,114 1,059,461
Risk-weighted assets
—
— 1,005,656 993,374
Leverage ratio (1) 4.0 % 5.0 % 16.6 % 15.8 %
Common equity Tier 1 capital ratio (2) 7.0 6.5 14.3 14.3
Tier 1 capital ratio (3) 8.5 8.0 16.9 16.9
Total capital ratio (3) 10.5 10.0 18.2 18.2
(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 increased by 0.625%
each subsequent January 1 until January 1, 2019.
Including the buffer, as of January 1, 2019, the Bank is
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%. Since the
FDIC’s new capital rule has been fully phased in, the minimum
capital requirements plus the capital conservation buffer exceed
the Prompt Corrective Action well-capitalized thresholds.
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 |
