| 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.
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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:
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(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: |
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|
Loans: |
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|
|
|
|
|
|
|
|
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:
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|
(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 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.
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|
|
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.
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Regulatory |
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|
(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. |