MEDALLION FINANCIAL CORP, 10-Q filed on 09 May 23
v3.23.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2023
May 05, 2023
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Quarterly Report true  
Document Transition Report false  
Document Period End Date Mar. 31, 2023  
Document Fiscal Year Focus 2023  
Document Fiscal Period Focus Q1  
Entity Registrant Name MEDALLION FINANCIAL CORP  
Entity Central Index Key 0001000209  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   23,321,523
Entity Emerging Growth Company false  
Entity Small Business true  
Entity Shell Company false  
Entity Incorporation, State or Country Code DE  
Entity File Number 001-37747  
Entity Tax Identification Number 04-3291176  
Entity Address, Address Line One 437 MADISON AVENUE, 38th Floor  
Entity Address, City or Town NEW YORK  
Entity Address, State or Province NY  
Entity Address, Postal Zip Code 10022  
City Area Code 212  
Local Phone Number 328-2100  
Title of 12(b) Security Common Stock, par value $0.01 per share  
Trading Symbol MFIN  
Security Exchange Name NASDAQ  
v3.23.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2023
Dec. 31, 2022
Assets    
Cash and cash equivalents $ 20,778 $ 33,172
Federal funds sold 111,604 72,426
Investment securities 48,529 48,492
Equity investments 10,653 10,293
Loans 1,984,180 1,916,953
Allowance for loan losses (70,280) [1] (63,845) [2]
Net loans receivable 1,913,900 1,853,108
Goodwill 150,803 150,803
Intangible assets, net 21,675 22,035
Loan collateral in process of foreclosure [3] 20,467 21,819
Property, equipment, and right-of-use lease asset, net 13,401 13,168
Accrued interest receivable 12,235 12,613
Income tax receivable 0 2,095
Other assets 27,625 19,855
Total assets 2,351,670 2,259,879
Liabilities    
Deposits [4] 1,695,300 1,607,110
Long-term debt [5] 175,864 214,320
Deferred tax liabilities, net 26,205 26,753
Operating lease liabilities 8,168 8,408
Short-term borrowings 38,500 5,000
Accrued interest payable 4,039 4,790
Income tax payable 1,113 0
Accounts payable and accrued expenses [6] 27,328 22,974
Total liabilities 1,976,517 1,889,355
Commitments and contingencies
Stockholders’ equity    
Preferred stock (1,000,000 shares of $0.01 par value stock authorized-none outstanding) 0 0
Common stock (50,000,000 shares of $0.01 par value stock authorized - 28,912,147 shares at March 31, 2023 and 28,663,827 shares at December 31, 2022 issued) 289 287
Additional paid in capital 284,221 283,663
Treasury stock (5,602,154 shares at March 31, 2023 and December 31, 2022) (45,538) (45,538)
Accumulated other comprehensive income (loss) (2,843) (3,349)
Retained earnings 70,236 66,673
Total stockholders’ equity 306,365 301,736
Non-controlling interest in consolidated subsidiaries 68,788 68,788
Total equity 375,153 370,524
Total liabilities and equity $ 2,351,670 $ 2,259,879
Number of shares outstanding 23,309,993 23,061,673
Book value per share $ 13.14 $ 13.08
[1] As of March 31, 2023 and March 31, 2022, there were no allowance for credit losses and net charge-offs related to the strategic partnership loans.
[2] Represents allowance prior to the adoption of ASU 2016-13
[3] Includes financed sales of this collateral to third parties that are reported separately from the loan portfolio, of $7.2 million as of March 31, 2023 and $7.5 million as of December 31, 2022.
[4] Includes $3.8 million of deferred financing costs as of both March 31, 2023 and December 31, 2022. Refer to Note 5 for more details.
[5] Includes $3.0 million and $3.2 million of deferred financing costs as of March 31, 2023 and December 31, 2022. Refer to Note 5 for more details.
[6] Includes the short-term portion of lease liabilities of $2.2 million as of both March 31, 2023 and December 31, 2022. Refer to Note 6 for more details.
v3.23.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2023
Dec. 31, 2022
Preferred stock, shares authorized 1,000,000 1,000,000
Preferred stock, par value $ 0.01 $ 0.01
Preferred stock, shares outstanding 0 0
Common stock, shares authorized 50,000,000 50,000,000
Common stock, par value $ 0.01 $ 0.01
Common stock, shares issued 28,912,147 28,663,827
Treasury stock,shares 5,602,154 5,602,154
Loan collateral in process of foreclosure, financed sales collateral to third parties $ 7.2 $ 7.5
Short term lease liabilities 2.2 2.2
Deposits [Member]    
Deferred financing costs 3.8 3.8
Long-Term Debt [Member]    
Deferred financing costs $ 3.0 $ 3.2
v3.23.1
Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2023
Mar. 31, 2022
Income Statement [Abstract]    
Interest and fees on loans $ 55,169 $ 43,064
Interest and dividends on investment securities 674 239
Total interest income [1] 55,843 43,303
Interest on deposits 8,599 4,154
Interest on long-term debt 2,853 3,221
Interest on short-term borrowings 788 0
Total interest expense 12,240 7,375
Net interest income (loss) 43,603 35,928
Provision for credit losses 4,038 3,240
Net interest income after provision for credit losses 39,565 32,688
Other income (loss)    
Gain on sale of loans and medallion 1,855 1,876
Write-down of loan collateral in process of foreclosure (252) (386)
Loss on equity investments (90) (133)
Other income 570 172
Total other income, net 2,083 1,529
Other expenses    
Salaries and employee benefits 8,836 7,568
Loan servicing fees 2,222 1,953
Professional fees 1,707 3,992
Collection costs 1,538 1,343
Rent expense 623 645
Regulatory fees 682 451
Amortization of intangible assets 360 360
Other expenses 2,425 1,721
Total other expenses 18,393 18,033
Income before income taxes 23,255 16,184
Income tax provision 6,382 4,831
Net income after taxes 16,873 11,353
Less: income attributable to the non-controlling interest 1,512 1,512
Total net income attributable to Medallion Financial Corp. $ 15,361 $ 9,841
Basic net income per share $ 0.69 $ 0.40
Diluted net income per share $ 0.67 $ 0.39
Weighted average common shares outstanding    
Basic 22,342,911 24,770,134
Diluted 22,975,457 25,083,566
[1] Included in interest income is $0.3 million of paid-in-kind interest for the three months ended March 31, 2023 and $0.2 million for the three months ended March 31, 2022.
v3.23.1
Consolidated Statements of Operations (Parenthetical) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2023
Mar. 31, 2022
Income Statement [Abstract]    
Interest paid-in-kind $ 0.3 $ 0.2
v3.23.1
Consolidated Statements of Other Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2023
Mar. 31, 2022
Statement of Comprehensive Income [Abstract]    
Net income $ 16,873 $ 11,353
Other comprehensive (loss) income, net of tax 506 (1,717)
Total comprehensive income 17,379 9,636
Less comprehensive income attributable to the non-controlling interest 1,512 1,512
Total comprehensive income attributable to Medallion Financial Corp. $ 15,867 $ 8,124
v3.23.1
Consolidated Statement of Changes in Stockholders' Equity - USD ($)
$ in Thousands
Total
Common Stock [Member]
Capital in Excess of Par [Member]
Treasury Stock [Member]
Retained Earnings (Accumulated Deficit) [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Parent [Member]
Noncontrolling Interest [Member]
Cumulative Effect, Period of Adoption, Adjusted Balance [Member]
Cumulative Effect, Period of Adoption, Adjusted Balance [Member]
Common Stock [Member]
Cumulative Effect, Period of Adoption, Adjusted Balance [Member]
Capital in Excess of Par [Member]
Cumulative Effect, Period of Adoption, Adjusted Balance [Member]
Treasury Stock [Member]
Cumulative Effect, Period of Adoption, Adjusted Balance [Member]
Retained Earnings (Accumulated Deficit) [Member]
Cumulative Effect, Period of Adoption, Adjusted Balance [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Cumulative Effect, Period of Adoption, Adjusted Balance [Member]
Parent [Member]
Cumulative Effect, Period of Adoption, Adjusted Balance [Member]
Noncontrolling Interest [Member]
Balance at Dec. 31, 2021 $ 355,828 $ 281 $ 280,038 $ (24,919) $ 30,606 $ 1,034 $ 287,040 $ 68,788                
Balance, shares at Dec. 31, 2021   28,124,629   (2,951,243)                        
Net income 11,353       9,841   9,841 1,512                
Distributions to non-controlling interest (1,512)             (1,512)                
Stock-based compensation expense 598 $ 4 594       598                  
Issuance of restricted stock, net, shares   383,925                            
Forfeiture of restricted stock, net, shares   (5,730)                            
Exercise of stock options, value $ 152   152       152                  
Exercise of stock options, shares 44,583 [1] 23,192                            
Purchase of common stock (in Shares)       (67,660)                        
Purchase of common stock $ (617)     $ (617)     (617)                  
Dividend paid on common stock (2,044)       (2,044)   (2,044)                  
Other comprehensive loss, net of tax (1,717)         (1,717) (1,717)                  
Ending balance at Mar. 31, 2022 362,041 $ 285 280,784 $ (25,536) 38,403 (683) 293,253 68,788                
Ending balance, shares at Mar. 31, 2022   28,526,016   (3,018,903)                        
Balance at Dec. 31, 2021 $ 355,828 $ 281 280,038 $ (24,919) 30,606 1,034 287,040 68,788                
Balance, shares at Dec. 31, 2021   28,124,629   (2,951,243)                        
Exercise of stock options, shares [1] 23,745                              
Net change in unrealized gains on investments, net of tax $ (4,400)                              
Ending balance at Dec. 31, 2022 370,524 $ 287 283,663 $ (45,538) 66,673 (3,349) 301,736 68,788 $ 360,589 $ 287 $ 283,663 $ (45,538) $ 56,738 $ (3,349) $ 291,801 $ 68,788
Ending balance (Accounting Standards Update 2016-13 [Member]) at Dec. 31, 2022 $ (9,935)       (9,935)   (9,935)                  
Ending balance, shares at Dec. 31, 2022 23,061,673 28,663,827   (5,602,154)           28,663,827   (5,602,154)        
Net income $ 16,873       15,361   15,361 1,512                
Distributions to non-controlling interest (1,512)             (1,512)                
Stock-based compensation expense 1,036 $ 2 1,034       1,036                  
Issuance of restricted stock, net, shares   304,749                            
Withheld restricted stock for employees' tax obligations, shares   (91,169)                            
Withheld restricted stock for employees' tax obligations, value (768)   (768)       (768)                  
Forfeiture of restricted stock, net, shares   (9,843)                            
Exercise of stock options, value 292   292       292                  
Exercise of stock options, shares   44,583                            
Dividend paid on common stock (1,863)       (1,863)   (1,863)                  
Other comprehensive loss, net of tax 506                              
Net change in unrealized gains on investments, net of tax 506         506 506                  
Ending balance at Mar. 31, 2023 $ 375,153 $ 289 $ 284,221 $ (45,538) $ 70,236 $ (2,843) $ 306,365 $ 68,788                
Ending balance, shares at Mar. 31, 2023 23,309,993 28,912,147   (5,602,154)                        
[1] The aggregate intrinsic value of exercised options, which represents the difference between the price of the Company’s common stock at the exercise date and the related exercise price of the underlying options, was $0.1 million and less than $0.1 million for the three months ended March 31, 2023 and 2022.
v3.23.1
Consolidated Statement of Changes in Stockholders' Equity (Parenthetical) - $ / shares
Mar. 31, 2023
Mar. 31, 2022
Statement of Stockholders' Equity [Abstract]    
Dividends payable, amount per share $ 0.08 $ 0.08
v3.23.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2023
Mar. 31, 2022
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income $ 16,873 $ 11,353
Adjustments to reconcile net income resulting from operations to net cash provided by operating activities:    
Provision for credit losses 4,038 3,240
Paid-in-kind interest income (264) (172)
Depreciation and amortization 1,300 1,640
Amortization of origination fees, net 2,173 2,119
Increase in deferred and other tax liabilities, net 6,437 4,170
Net change in value of loan collateral in process of foreclosure 2,330 1,396
Net realized loss on sale of investments 90 241
Net change in unrealized (appreciation) depreciation on investments (28) 0
Stock-based compensation expense 1,036 598
(Increase) decrease in accrued interest receivable 378 18
Increase in other assets (8,605) (2,455)
Increase in accounts payable and accrued expenses 4,120 2,833
Decrease in accrued interest payable (751) (327)
Net cash provided by operating activities 29,127 24,654
CASH FLOWS FROM INVESTING ACTIVITIES    
Loans originated (230,846) (217,495)
Proceeds from principal receipts, sales, and maturities of loans 143,891 129,121
Purchases of investments (450) (8,407)
Proceeds from principal receipts, sales, and maturities of investments 438 3,856
Proceeds from the sale and principal payments on loan collateral in process of foreclosure 5,526 5,240
Net cash used for investing activities (81,441) (87,685)
CASH FLOWS FROM FINANCING ACTIVITIES    
Proceeds from time deposits and funds borrowed 240,056 200,528
Repayments of time deposits and funds borrowed (157,100) (119,226)
Cash dividend paid on common stock (1,870) (1,984)
Distributions to non-controlling interests (1,512) (1,512)
Payment of withholding taxes on net settlement of vested stock (768) 0
Treasury stock repurchased 0 (617)
Proceeds from the exercise of stock options 292 152
Net cash provided by financing activities 79,098 77,341
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 26,784 14,310
Cash, and cash equivalents beginning of period [1] 105,598 124,484
Cash and cash equivalents, end of period (1) [1] 132,382 138,794
SUPPLEMENTAL INFORMATION    
Cash paid during the period for interest 12,372 7,056
Cash paid during the period for income taxes 143 12
NON-CASH INVESTING    
Loans transferred to loan collateral in process of foreclosure, net $ 6,504 $ 3,040
[1] Includes Federal Funds Sold.
v3.23.1
Organization of Medallion Financial Corp. and its Subsidiaries
3 Months Ended
Mar. 31, 2023
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization of Medallion Financial Corp. and its Subsidiaries

(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES

Medallion Financial Corp., or the Company, is a specialty finance company organized as a Delaware corporation that reports as a bank holding company, but is not a bank holding company for regulatory purposes. The Company conducts its business through various wholly-owned subsidiaries including its primary operating company, Medallion Bank, or the Bank, a Federal Deposit Insurance Corporation, or FDIC, insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activities. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and undergoes examinations by those agencies. The Bank was formed in May 2002 for the purpose of obtaining an industrial bank charter pursuant to the laws of the State of Utah. The Bank originates consumer loans on a national basis for the purchase of recreational vehicles, or “RVs”, boats and other consumer recreational equipment and to finance home improvements such as roofs, swimming pools, and windows. Prior to 2015, the Bank originated commercial loans to finance the purchase of taxi medallions, all of which are serviced by the Company. The loans are financed primarily with time certificates of deposit which are originated nationally through a variety of brokered deposit relationships. In 2019, the Bank began building a strategic partnership program that targets relationships with financial technology, or fintech, companies to offer loans and other financial services to customers. The Bank entered into an initial partnership in 2020 and continues to evaluate and launch additional partnerships.

The Company also conducts business through its subsidiaries Medallion Capital, Inc., or MCI, a Small Business Investment Company, or SBIC, which conducts a mezzanine financing business; Medallion Funding LLC, or MFC, an SBIC, which historically was the Company's primary taxi medallion lending company; and Freshstart Venture Capital Corp., or FSVC, an SBIC that historically originated and serviced medallion and commercial loans. MCI, MFC, and FSVC, as SBICs, are regulated by the Small Business Administration, or SBA. MCI and FSVC are financed in part by the SBA.

The Company established a wholly-owned subsidiary, Medallion Financing Trust I, or Fin Trust, for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $34.0 million at March 31, 2023, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.

v3.23.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2023
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S., or 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 loan collateral 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. All significant intercompany transactions, balances, and profits (losses) have been eliminated in consolidation.

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. As of March 31, 2023, cash includes $1.3 million of interest-bearing funds deposited in other banks, that are mainly callable, with original terms of 3 to 5 years.

Fair Value of Assets and Liabilities

The Company follows the Financial Accounting Standards Board, or FASB, FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, or 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 12 and 13 to the consolidated financial statements.

Equity Investments

The Company follows FASB ASC Topic 321, Investments – Equity Securities, or ASC 321, which requires all applicable investments in equity securities with a readily determinable fair value to be valued as such, and those without a readily determinable fair value, are measured at cost, less any impairment plus or minus any observable price changes. Equity investments of $10.7 million and $10.3 million at March 31, 2023 and December 31, 2022, comprised mainly of nonmarketable stock and stock warrants, are recorded at cost less any impairment plus or minus observable price changes. As of March 31, 2023, cumulative impairment of $2.5 million had been recorded with respect to these investments.

During 2021, the Company purchased $2.0 million of equity securities with a readily determinable fair value. As a result, all unrealized gains and losses are included in gain (loss) on equity investments. As of March 31, 2023 and December 31, 2022, the fair value of these securities were $1.8 million and $1.7 million and are included in other assets on the consolidated balance sheet.

The following table presents the unrealized portion related to the equity securities held.

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2023

 

 

2022

 

Net gains (losses) recognized during the period on equity securities

 

$

28

 

 

$

(91

)

Less: Net gains (losses) recognized during the period on equity
   securities sold during the period

 

 

 

 

 

 

Unrealized gains (losses) recognized during the reporting period on
   equity securities still held at the reporting date

 

$

28

 

 

$

(91

)

Investment Securities

The Company follows FASB ASC Topic 320, Investments – Debt Securities, or ASC 320, which requires that all applicable investments in debt securities be classified as trading securities, available-for-sale securities, or held-to-maturity securities. Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. The net premium on investment securities totaled $0.1 million at both March 31, 2023 and December 31, 2022, and less than $0.1 million was amortized to interest income for each of the three months ended March 31, 2023 and 2022. ASC 320 further requires that held-to-maturity securities be reported at amortized cost and available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the consolidated financial statements, and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity, net of the effect of income taxes, until they are sold. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in stockholders’ equity, which were recorded net of the income tax effect, will be reversed. In accordance with ASC 326, we do not maintain an allowance for credit losses for accrued interest receivable.

 

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.

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, 2023 and December 31, 2022, net loan origination costs were $36.3 million and $34.9 million. Net amortization to income for the three months ended March 31, 2023 was $1.9 million and was $2.1 million for the three months ended March 31, 2022.

Interest income is recorded on the accrual basis. 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 loan portfolio has different characteristics, typified by a larger number of smaller dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is unlikely the Company will be able to collect all amounts due according to the contractual terms of the original loan agreement. Consumer loans are placed on nonaccrual when they become 90 days past due and are charged-off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate recovery efforts against both the borrower and the underlying collateral are initiated. For the recreation loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged-off. If the collateral is repossessed, a loss is recorded by writing the collateral down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off. Proceeds collected on charged-off accounts are recorded as recoveries. Total loans 90 days or more past due were $4.7 million at March 31, 2023, or 0.24% of the total loan portfolio, compared to $8.9 million, or 0.47%, at December 31, 2022. Beginning in the first quarter of 2023, the Company began charging off recreation loans where borrowers have filed for bankruptcy. This change resulted in $2.5 million of loans being charged off in the three months ended March 31, 2023 and reduced the loans 90 days past due from December 31, 2022.

The Company may modify the contractual cash flow of loans in situations where borrowers are experiencing financial difficulties. The Company strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before they reach nonaccrual status. These modified terms may include interest rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize the economic loss to the Company and to avoid foreclosure or repossession of the collateral. For modifications where the Company forgives principal, the entire amount of such principal forgiveness is immediately charged off. Modified loans are considered impaired loans.

Loan collateral in process of foreclosure primarily includes 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. For New York City medallion loans in the process of foreclosure, the Company continued to utilize a net value of $79,500 when assessing net realizable value for these medallion loans, despite fluctuating current transfer prices which may exceed that level from time to time. The "loan collateral in the process of foreclosure" designation reflects that the collection activities on these loans have transitioned from working with the borrower, to the liquidation of the collateral securing the loans.

The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing, or 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 $19.0 million and $19.5 million at March 31, 2023 and December 31, 2022. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860 and determined that no material servicing asset or liability existed as of March 31, 2023 and December 31, 2022.

Allowance for Credit Losses

On January 1, 2023, the Company adopted Accounting Standards Update 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", or ASC 326, which replaced the incurred loss methodology that delayed recognition until it was probable a loss had been incurred with a lifetime expected loss methodology using "reasonable and supportable" expectations about the future, referred to as the current expected credit loss (“CECL”) methodology. For consumer loans, the Company uses historical delinquency and actual loss rates modified by quantitative adjustments based on macroeconomic factors over a twelve-month reasonable and supportable forecast period. For commercial loans, the Company assesses the historical impact that macroeconomic indicators have had on the loan portfolio, to determine an approximate allowance for credit loss. Unlike consumer loans, where loans may have similar performing characteristics, each commercial loan is unique. The Company evaluates each commercial loan for specific impairment with additional allowance for credit losses recognized as necessary. For medallion loans, the Company maintains specific reserves adjusting the carrying amount of loans down to net collateral value. The allowance is evaluated on a quarterly basis by management based on the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, prevailing economic

conditions, and excess concentration risks. This evaluation is inherently subjective, as it requires estimates, including those based on changes in economic conditions, that are susceptible to significant revision as more information becomes available. Credit losses are deducted from the allowance, and subsequent recoveries are added back to the allowance.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after December 15, 2022 are presented under ASC 326. The transition to the CECL methodology on January 1, 2023 resulted in an increase of $13.7 million to the Company's allowance for credit losses on loans (“ACL”) and a negative net-of-tax cumulative-effect adjustment of $9.9 million to the beginning balance of retained earnings. The CECL methodology transition effects on the allowance for credit losses are shown in the following table:

(Dollars in thousands)

 

December 31, 2022
Pre-Topic 326
Adoption

 

 

Effect of ASC 326
Adoption
(Transition Amounts)

 

 

January 1, 2023
Post-ASC 326
Adoption

 

Assets:

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

Recreation

 

$

41,966

 

 

$

10,037

 

 

$

52,003

 

Home improvement

 

 

11,340

 

 

 

1,518

 

 

 

12,858

 

Commercial

 

 

1,049

 

 

 

2,157

 

 

 

3,206

 

Medallion

 

 

9,490

 

 

 

 

 

 

9,490

 

Strategic partnership

 

 

 

 

 

 

 

 

 

Allowance for credit losses on loans

 

$

63,845

 

 

$

13,712

 

 

$

77,557

 

Prior to January 1, 2023, the Company used historical delinquency and actual loss rates with a three-year look-back period for medallion loans and a one-year look-back period for recreation and home improvement loans and used historical loss experience and other projections for commercial loans. The allowance was evaluated on a quarterly basis by management based on the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. This evaluation was inherently subjective, as it required estimates that were susceptible to significant revision as more information became available.

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 quarterly review by management to determine whether additional impairment testing is needed, and such testing is performed at least on an annual basis. Intangible assets are amortized over their useful life of approximately 20 years. As of March 31, 2023 and December 31, 2022, the Company had goodwill of $150.8 million, all of which related to the Bank. As of March 31, 2023 and December 31, 2022, the Company had intangible assets of $21.7 million and $22.0 million. Amortization expense on the intangible assets for the three months ended March 31, 2023 and 2022 was $0.4. Management performed a step 0 analysis in assessing the goodwill and intangibles for impairment at December 31, 2022, concluding that there was no impairment of these assets.

The following table details the intangible assets as of the dates presented:

(Dollars in thousands)

 

March 31, 2023

 

 

December 31, 2022

 

Brand-related intellectual property

 

$

16,500

 

 

$

16,775

 

Home improvement contractor relationships

 

 

5,175

 

 

 

5,260

 

Total intangible assets

 

$

21,675

 

 

$

22,035

 

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 $0.1 million for the three months ended March 31, 2023 and 2022.

Deferred Costs

Deferred financing costs 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 $0.8 million for the three months ended March 31, 2023 and was $0.6 million for the three months ended March 31, 2022. 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 will be amortized against income over an appropriate period, or written off. The amount on the Company’s balance sheet for all of these purposes were $6.7 million and $7.0 million as of March 31, 2023 and December 31, 2022.

 

Income Taxes

Income taxes are accounted for using the asset and liability approach in accordance with FASB ASC Topic 740, Income Taxes, or 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 the Company’s 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. 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 Per Share (EPS)

Basic earnings per share are computed by dividing net income resulting from operations available to common stockholders 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 considering 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 share and per share data)

 

2023

 

 

2022

 

Net income available to common stockholders

 

$

15,361

 

 

$

9,841

 

Weighted average common shares outstanding applicable
   to basic EPS

 

 

22,342,911

 

 

 

24,770,134

 

Effect of dilutive stock options

 

 

149,117

 

 

 

89,507

 

Effect of restricted stock grants

 

 

483,429

 

 

 

223,925

 

Adjusted weighted average common shares outstanding
   applicable to diluted EPS

 

 

22,975,457

 

 

 

25,083,566

 

Basic net income per share

 

$

0.69

 

 

$

0.40

 

Diluted net income per share

 

 

0.67

 

 

 

0.39

 

Potentially dilutive common shares excluded from the above calculations aggregated 9,000 and 466,867 shares as of March 31, 2023 and 2022.

Stock Compensation

The Company follows FASB ASC Topic 718, or 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 income 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 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, 2023 and 2022, the Company issued 304,749 and 383,925 restricted shares of stock-based compensation awards and no restricted stock units or shares of other stock-based compensation awards. The Company recognized $1.0 million, or $0.05 per share, for the three months ended March 31, 2023, and $0.6 million, or $0.02 per diluted common share, for the three months ended March 31, 2022, of non-cash stock-based compensation expense related to the grants. As of March 31, 2023, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $5.2 million, which is expected to be recognized over the next 12 quarters.

Regulatory Capital

The 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 items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the bank regulators about components, risk weightings, and other factors.

 

FDIC-insured banks, including the 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, the Bank is subject to certain restrictions on any extensions of credit to, or other covered transactions with, such as certain purchases of assets, 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%, a level which could preclude its ability to pay dividends to the Company, and that an adequate allowance for credit losses be maintained. As of March 31, 2023, the Bank’s Tier 1 leverage ratio was 16.4%. 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, 2023

 

 

December 31, 2022

 

Common equity tier 1 capital

 

 

 

 

 

 

 

$

254,883

 

 

$

242,049

 

Tier 1 capital

 

 

 

 

 

 

 

 

323,671

 

 

 

310,837

 

Total capital

 

 

 

 

 

 

 

 

348,536

 

 

 

334,913

 

Average assets

 

 

 

 

 

 

 

 

1,969,659

 

 

 

1,917,904

 

Risk-weighted assets

 

 

 

 

 

 

 

 

1,948,398

 

 

 

1,888,530

 

Leverage ratio (1)

 

 

4.0

%

 

 

5.0

%

 

 

16.4

%

 

 

16.2

%

Common equity tier 1 capital ratio (2)

 

 

7.0

 

 

 

6.5

 

 

 

13.1

 

 

 

12.8

 

Tier 1 capital ratio (3)

 

 

8.5

 

 

 

8.0

 

 

 

16.6

 

 

 

16.5

 

Total capital ratio (3)

 

 

10.5

 

 

 

10.0

 

 

 

17.9

 

 

 

17.7

 

(1)
Calculated by dividing Tier 1 capital by average assets.
(2)
Calculated by subtracting preferred stock or non-controlling interest from Tier 1 capital and dividing by risk-weighted assets.
(3)
Calculated by dividing Tier 1 or total capital by risk-weighted assets. With the adoption of CECL on January 1, 2023 the Bank elected to phase in the regulatory capital effects of the transition amount, which reduced the capital impact by $6.2 million and increased the Tier 1 capital ratio by 27 basis points.

In the table above, the minimum risk-based ratios as of March 31, 2023 and December 31, 2022 reflect the capital conservation buffer of 2.5%. The minimum regulatory requirements, inclusive of the capital conservation buffer, were the binding requirements for the risk-based requirements, and the “well-capitalized” requirements were the binding requirements for Tier 1 leverage capital as of both March 31, 2023 and December 31, 2022.

Recently Issued and Adopted Accounting Standards

On January 1, 2023, the Company adopted ASC 326. Please refer to Allowance for Credit Losses, within this footnote, for the impact of adopting this standard.

Reclassifications

Certain reclassifications have been made to prior year balances to conform with the current year presentation. These reclassifications have no effect on the previously reported results of operations.

v3.23.1
Investment Securities
3 Months Ended
Mar. 31, 2023
Schedule of Investments [Abstract]  
Investment Securities

(3) INVESTMENT SECURITIES

The following tables present details of fixed maturity securities available for sale as of March 31, 2023 and December 31, 2022:

March 31, 2023
(Dollars in thousands)

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

Mortgage-backed securities, principally obligations of U.S. federal agencies

 

$

42,773

 

 

$

1

 

 

$

(4,353

)

 

$

38,421

 

State and municipalities

 

 

10,862

 

 

 

46

 

 

 

(800

)

 

 

10,108

 

Total

 

$

53,635

 

 

$

47

 

 

$

(5,153

)

 

$

48,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022
(Dollars in thousands)

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

Mortgage-backed securities, principally obligations of U.S. federal agencies

 

$

43,286

 

 

$

 

 

$

(4,933

)

 

$

38,353

 

State and municipalities

 

 

11,015

 

 

 

13

 

 

 

(889

)

 

 

10,139

 

Total

 

$

54,301

 

 

$

13

 

 

$

(5,822

)

 

$

48,492

 

 

The amortized cost and estimated market value of investment securities at March 31, 2023 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

March 31, 2023
(Dollars in thousands)

 

Amortized
Cost

 

 

Fair
Value

 

Due in one year or less

 

$

44

 

 

$

44

 

Due after one year through five years

 

 

9,554

 

 

 

9,209

 

Due after five years through ten years

 

 

9,186

 

 

 

8,193

 

Due after ten years

 

 

34,851

 

 

 

31,083

 

Total

 

$

53,635

 

 

$

48,529

 

The following tables show information pertaining to securities with gross unrealized losses at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position.

 

 

Less than Twelve Months

 

 

Twelve Months and Over

 

March 31, 2023
(Dollars in thousands)

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

Mortgage-backed securities, principally obligations of U.S. federal agencies

 

$

(160

)

 

$

4,917

 

 

$

(4,194

)

 

$

33,354

 

State and municipalities

 

 

 

 

 

44

 

 

 

(799

)

 

 

8,014

 

Total

 

$

(160

)

 

$

4,961

 

 

$

(4,993

)

 

$

41,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than Twelve Months

 

 

Twelve Months and Over

 

December 31, 2022
(Dollars in thousands)

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

Mortgage-backed securities, principally obligations of U.S. federal agencies

 

$

(731

)

 

$

12,321

 

 

$

(4,202

)

 

$

26,023

 

State and municipalities

 

 

(286

)

 

 

4,628

 

 

 

(603

)

 

 

3,502

 

Total

 

$

(1,017

)

 

$

16,949

 

 

$

(4,805

)

 

$

29,525

 

As of March 31, 2023 and December 31, 2022, the Company had 56 and