UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-37747
MEDALLION FINANCIAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
04-3291176
(State of Incorporation)
(IRS Employer
Identification No.)
437 MADISON AVENUE, 38th Floor
NEW YORK, New York 10022
(Address of Principal Executive Offices) (Zip Code)
(212) 328-2100
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbols
Name of each exchange
on which registered
Common Stock, par value $0.01 per share
MFIN
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of November 3, 2023, was 23,363,731.
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
3
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
58
ITEM 4. CONTROLS AND PROCEDURES
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. EXHIBITS
59
SIGNATURES
60
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our financial statements and the notes to those statements and other financial information appearing elsewhere in this report.
This report contains forward-looking statements relating to future events and future performance applicable to us within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words expects, anticipates, intends, believes, or similar language. In connection with certain forward-looking statements contained in this Form 10-Q and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward-looking statements contained in this Form 10-Q were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict, and many of which are beyond control of the Company. In particular, any forward-looking statements are subject to the risks and great uncertainties associated with the pending litigation with the Securities and Exchange Commission as well as the U.S. and global economies, including the current inflationary environment and the risk of recession.
All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statements. The statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form 10-Q should consider these facts in evaluating the information contained herein. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-Q. The inclusion of the forward-looking statements contained in this Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-Q will be achieved.
In light of the foregoing, readers of this Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein. You should consider these risks and those described under Risk Factors in the Company’s Annual Report on Form 10-K and others that are detailed in the other reports that the Company files from time to time with the Securities and Exchange Commission.
Page 2 of 60
BASIS OF PREPARATION
We, Medallion Financial Corp., or the Company, are a specialty finance company organized as a Delaware corporation. Our strategic focus is growing our consumer finance and commercial lending businesses. Our total assets were $2.6 billion and $2.3 billion as of September 30, 2023 and December 31, 2022, respectively.
We conduct our business through various wholly-owned subsidiaries including:
Our consolidated balance sheet as of September 30, 2023, and the related consolidated statements of operations, consolidated statements of other comprehensive income, consolidated statements of stockholders’ equity and cash flows for the three and nine months then ended included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the three and nine months ended September 30, 2023 may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Page 3 of 60
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands, except share and per share data)
September 30, 2023
December 31, 2022
Assets
Cash and cash equivalents
$
37,472
33,172
Federal funds sold
90,170
72,426
Investment securities
53,175
48,492
Equity investments
10,542
10,293
Loans
2,203,038
1,916,953
Allowance for credit losses
(79,133
)
(63,845
Net loans receivable
2,123,905
1,853,108
Goodwill
150,803
Intangible assets, net
20,952
22,035
Loan collateral in process of foreclosure (1)
15,923
21,819
Accrued interest receivable
13,593
12,613
Property, equipment, and right-of-use lease asset, net
13,278
13,168
Income tax receivable
—
2,095
Other assets
28,814
19,855
Total assets
2,558,627
2,259,879
Liabilities
Deposits (2)
1,855,096
1,607,110
Long-term debt (3)
218,137
214,320
Short-term borrowings
18,489
5,000
Deferred tax liabilities, net
23,131
26,753
Operating lease liabilities
7,075
8,408
Accrued interest payable
4,624
4,790
Income tax payable
2,866
Accounts payable and accrued expenses (4)
31,947
22,974
Total liabilities
2,161,365
1,889,355
Commitments and contingencies (5)
Stockholders’ equity
Preferred stock (1,000,000 shares of $0.01 par value stock authorized-none outstanding)
Common stock (50,000,000 shares of $0.01 par value stock authorized - 28,965,885 shares at September 30, 2023 and 28,663,827 shares at December 31, 2022 issued)
290
287
Additional paid in capital
286,782
283,663
Treasury stock (5,602,154 shares at September 30, 2023 and December 31, 2022)
(45,538
Accumulated other comprehensive loss
(4,960
(3,349
Retained earnings
91,900
66,673
Total stockholders’ equity
328,474
301,736
Non-controlling interest in consolidated subsidiaries
68,788
Total equity
397,262
370,524
Total liabilities and equity
Number of shares outstanding
23,363,731
23,061,673
Book value per share
14.06
13.08
The accompanying notes should be read in conjunction with these consolidated financial statements.
Page 4 of 60
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
Interest and fees on loans
64,608
50,955
179,407
140,759
Interest and dividends on investment securities
1,278
739
4,048
1,349
Total interest income (1)
65,886
51,694
183,455
142,108
Interest on deposits
13,432
6,240
33,360
15,306
Interest on long-term debt
2,901
3,414
8,694
9,952
Interest on short-term borrowings
769
2,325
Total interest expense
17,102
9,654
44,379
25,258
Net interest income
48,784
42,040
139,076
116,850
Provision for credit losses
14,532
10,047
27,045
21,046
Net interest income after provision for credit losses
34,252
31,993
112,031
95,804
Other income (loss)
Gain on sale of loans and taxi medallions
1,417
518
4,578
5,061
Gain (loss) on equity investments
2,180
(1,123
2,189
2,985
Write-down of loan collateral in process of foreclosure
(30
(94
(303
(608
Other income
468
1,868
1,217
Total other income (loss), net
4,306
(231
8,332
8,655
Other expenses
Salaries and employee benefits
9,630
8,411
27,805
23,709
Loan servicing fees
2,501
2,159
7,084
6,231
Collection costs
1,583
1,593
4,729
3,935
Professional fees
1,148
3,722
4,223
12,106
Rent expense
629
1,855
1,764
Regulatory fees
1,021
610
2,484
1,621
Amortization of intangible assets
361
359
1,084
1,082
2,216
1,926
7,220
5,807
Total other expenses
19,089
19,409
56,484
56,255
Income before income taxes
19,469
12,353
63,879
48,204
Income tax provision
6,727
3,205
18,582
12,892
Net income after taxes
12,742
9,148
45,297
35,312
Less: income attributable to the non-controlling interest
1,512
4,536
4,535
Total net income attributable to Medallion Financial Corp.
11,230
7,636
40,761
30,777
Basic net income per share
0.50
0.33
1.81
1.28
Diluted net income per share
0.48
0.32
1.77
1.26
Weighted average common shares outstanding
Basic
22,596,982
23,154,775
22,469,968
24,020,058
Diluted
23,392,901
23,510,645
23,067,944
24,332,776
Page 5 of 60
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(Dollars in thousands)
Other comprehensive loss, net of tax
(1,211
(1,461
(1,611
(4,596
Total comprehensive income
11,531
7,687
43,686
30,716
Less comprehensive income attributable to the non-controlling interest
Total comprehensive income attributable to Medallion Financial Corp.
10,019
6,175
39,150
26,181
Page 6 of 60
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
CommonStock Shares
CommonStock
Capital inExcess ofPar
TreasuryStock Shares
TreasuryStock
RetainedEarnings (Accumulated Deficit)
AccumulatedOtherComprehensiveIncome (Loss)
TotalStockholders’Equity
Non-controllingInterest
TotalEquity
Balance at December 31, 2022
28,663,827
(5,602,154
Adoption of ASU 2016-13, net of tax
(9,935
Balance at January 1, 2023
56,738
291,801
360,589
Net income
15,361
16,873
Distributions to non-controlling interest
(1,512
Stock-based compensation expense
2
1,034
1,036
Issuance of restricted stock, net
304,749
Withheld restricted stock for employees' tax obligations
(91,169
(768
Forfeiture of restricted stock, net
(9,843
Exercise of stock options
44,583
292
Dividends paid on common stock ($0.08 per share)
(1,863
Net change in unrealized gains on investments, net of tax
506
Balance at March 31, 2023
28,912,147
289
284,221
70,236
(2,843
306,365
375,153
14,170
15,682
1,214
11,734
283
(204
Issuance in connection with vesting of restricted stock units
23,211
(1,867
(906
Balance at June 30, 2023
28,947,171
285,435
82,539
(3,749
318,976
387,764
1,232
18,840
1
115
116
(126
(1,869
Balance at September 30, 2023
28,965,885
Page 7 of 60
Balance at December 31, 2021
28,124,629
281
280,038
(2,951,243
(24,919
30,606
287,040
355,828
9,841
11,353
4
594
598
383,925
(5,730
23,192
152
Purchase of common stock
(67,660
(617
(2,044
(1,717
Balance at March 31, 2022
28,526,016
285
280,784
(3,018,903
(25,536
38,403
(683
293,253
362,041
13,300
1,511
14,811
(1,511
863
4,944
(587
(1,272,150
(9,974
(1,971
(1,418
Balance at June 30, 2022
28,530,373
281,647
(4,291,053
(35,510
49,732
(2,101
294,053
362,841
(380
(1,053,870
(8,231
(1,930
Balance at September 30, 2022
28,529,993
282,681
(5,344,923
(43,741
55,438
(3,562
291,101
359,889
Page 8 of 60
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income resulting from operations
Adjustments to reconcile net income resulting from operations to net cash provided by operating activities:
Paid-in-kind interest income
(1,086
(528
Depreciation and amortization
3,878
4,408
Amortization of origination fees, net
7,279
7,184
Increase in deferred and other tax liabilities, net
5,116
5,335
Net change in value of loan collateral in process of foreclosure
6,673
3,806
Net realized loss (gains) on sale of investments
3,136
(2,985
3,482
2,495
Increase in accrued interest receivable
(980
(1,338
Increase in other assets
(13,033
(5,641
Increase in accounts payable and accrued expenses
7,500
9,858
(Decrease) increase in accrued interest payable
(166
37
Net cash provided by operating activities
94,141
78,989
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
(805,048
(806,788
Proceeds from principal receipts, sales, and maturities of loans
471,917
414,760
Purchases of investments
(10,169
(18,658
Proceeds from principal receipts, sales, and maturities of investments
467
11,970
Proceeds from the sale and principal payments on loan collateral in process of foreclosure
14,607
17,952
Net cash used for investing activities
(328,226
(380,764
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from time deposits and funds borrowed
683,568
676,264
Repayments of time deposits and funds borrowed
(417,084
(371,800
Cash dividends paid on common stock
(5,459
(5,766
Distributions to non-controlling interests
(4,536
(4,535
Payment of withholding taxes on net settlement of vested stock
Treasury stock repurchased
(18,822
Proceeds from the exercise of stock options
408
Net cash provided by financing activities
256,129
275,493
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
22,044
(26,282
Cash and cash equivalents, beginning of period (1)
105,598
124,484
Cash and cash equivalents, end of period (1)
127,642
98,202
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest
42,054
23,177
Cash paid during the period for income taxes
12,822
5,786
NON-CASH INVESTING
Loans transferred to loan collateral in process of foreclosure, net
15,384
8,659
Page 9 of 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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 taxi 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 September 30, 2023, are comprised solely of a subordinated note from the Company and 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.
(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.
The Company’s investment in the Bank is consolidated for financial statement purposes. In the notes to the consolidated financial statements included in its Annual Report on Form 10-K, the Company presents its investment in the Bank. Beginning with its financial statements for the year ended December 31, 2022, the presentation was revised to include the preferred equity and applicable non-controlling interest in the Bank to provide a fuller scope of the underlying investment.As the Company’s investment in the Bank is eliminated in consolidation this change in presentation did not have an impact on the Company’s consolidated financial statements.
Page 10 of 60
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 September 30, 2023, cash includes $1.3 million of interest-bearing funds deposited in other banks with original terms of 5 to 6 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 $10.5 million and $10.3 million at September 30, 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 September 30, 2023, a cumulative impairment of $3.4 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 both September 30, 2023 and December 31, 2022, the fair value of these securities were $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.
Net gains (losses) recognized during the period on equity securities
(54
(77
(229
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
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 September 30, 2023 and December 31, 2022, and less than $0.1 million was amortized to interest income for each of the three and nine months ended September 30, 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.
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 are 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 September 30, 2023 and December 31, 2022, net loan origination costs were $41.0 million and $34.9 million. Net amortization to income was $2.2 million and $6.5 million for the three and nine months ended September 30, 2023 and was $2.3 million and $6.8 million for the three and nine months ended September 30, 2022.
Page 11 of 60
Interest income is recorded on the accrual basis. Taxi 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 is 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 $7.0 million at September 30, 2023, or 0.32% 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 at the point when borrowers filed for bankruptcy. This change resulted in approximately $2.5 million of loans being charged off in the first quarter of 2023.
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 taxi 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 taxi 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 taxi 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 $15.6 million at September 30, 2023 and $19.5 million at 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 September 30, 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, or 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 taxi 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.
Page 12 of 60
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, or ACL, and a 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:
December 31, 2022Pre-Topic 326Adoption
Effect of ASC 326Adoption(Transition Amounts)
January 1, 2023Post-ASC 326Adoption
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
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 taxi 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 September 30, 2023 and December 31, 2022, the Company had goodwill of $150.8 million, all of which related to the Bank. As of September 30, 2023 and December 31, 2022, the Company had intangible assets of $21.0 million and $22.0 million. Amortization expense on the intangible assets for the three and nine months ended September 30, 2023 and 2022 was $0.4 million and $1.1 million. 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:
Brand-related intellectual property
15,950
16,775
Home improvement contractor relationships
5,002
5,260
Total intangible assets
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 and $0.3 million for the three and nine months ended September 30, 2023 and $0.1 million and $0.2 million for the three and nine months ended September 30, 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 and $2.3 million for the three and nine months ended September 30, 2023 and was $0.7 million and $2.0 million for the three and nine months ended September 30, 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 $8.2 million and $7.0 million as of September 30, 2023 and December 31, 2022.
Page 13 of 60
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.
Net income available to common stockholders
Weighted average common shares outstanding applicable to basic EPS
Effect of restricted stock grants
481,197
307,318
413,682
238,621
Effect of dilutive stock options
183,274
48,552
125,319
74,097
Effect of performance share units
131,448
58,975
Adjusted weighted average common shares outstanding applicable to diluted EPS
Potentially dilutive common shares excluded from the above calculations aggregated 9,000 and 657,579 shares as of September 30, 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 nine months ended September 30, 2023 and 2022, the Company issued 316,483 and 383,925 restricted shares of stock-based compensation awards, 296,444 and 0 performance stock units, and 83,158 and 129,638 restricted stock units or shares of other stock-based compensation awards. The Company recognized $1.2 million and $3.5 million, or $0.05 and $0.15 per share, for the three and nine months ended September 30, 2023, and $1.0 million and $2.5 million, or $0.04 and $0.10 per diluted common share, for the three and nine months ended September 30, 2022, of non-cash stock-based compensation expense related to the grants. As of September 30, 2023, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $5.4 million, which is expected to be recognized over the next 10 quarters.
Page 14 of 60
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 the Bank's ability to pay dividends to the Company, and that an adequate allowance for credit losses be maintained. As of September 30, 2023, the Bank’s Tier 1 leverage ratio was 16.1%. The Bank’s actual capital amounts and ratios, and the regulatory minimum ratios are presented in the following table.
Regulatory
Minimum
Well-Capitalized
Common equity tier 1 capital
283,342
242,049
Tier 1 capital
352,130
310,837
Total capital
379,754
334,913
Average assets
2,190,234
1,917,904
Risk-weighted assets
2,162,430
1,888,530
Leverage ratio (1)
4.0
%
5.0
16.1
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
16.3
16.5
Total capital ratio (3)
10.5
10.0
17.6
17.7
In the table above, the minimum risk-based ratios as of September 30, 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 September 30, 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.
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures, or Topic 323: Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The main objective of this new standard is to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. The Company is assessing the impact of the update on the accompanying financial statements.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements. The amendments in this update seek to clarify or improve disclosure and presentation requirements. The Company is assessing the impact of the update on the accompanying financial statements.
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.
Page 15 of 60
(3) INVESTMENT SECURITIES
The following tables present details of fixed maturity securities available for sale as of September 30, 2023 and December 31, 2022:
September 30, 2023(Dollars in thousands)
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
FairValue
Mortgage-backed securities, principally obligations of U.S. federal agencies
45,300
(6,344
38,956
State and municipalities
13,733
12
(1,650
12,095
Agency bonds
(65
2,124
Total
61,222
(8,059
December 31, 2022(Dollars in thousands)
43,286
(4,933
38,353
11,015
13
(889
10,139
54,301
(5,822
The amortized cost and estimated market value of investment securities at September 30, 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.
Due in one year or less
2,429
2,341
Due after one year through five years
7,373
6,970
Due after five years through ten years
8,938
7,558
Due after ten years
42,482
36,306
The following tables show information pertaining to securities with gross unrealized losses at September 30, 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
(207
5,822
(6,137
33,134
(286
4,757
(1,364
7,295
(493
10,579
(7,566
42,553
(731
12,321
(4,202
26,023
4,628
(603
3,502
(1,017
16,949
(4,805
29,525
As of September 30, 2023 and December 31, 2022, the Company had 62 and 57 securities with unrealized losses that have not been recognized in income. The investments are mortgage-backed securities and similar instruments with lower risk characteristics. The decline in value was due to the rapid increase in market rates during 2022 and 2023, not the underlying asset credit performance. The Company regularly reviews investment securities for impairment resulting from credit loss using both qualitative and quantitative criteria, as necessary based on the composition of the portfolio at period end. Based on our assessment, no material impairments for credit losses were recognized during the period. We presently do not intend to sell our investment securities that are in an unrealized loss position and believe that it is unlikely that we will be required to sell these securities before recovery of our amortized cost.
Page 16 of 60
(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table shows the major classification of loans, inclusive of capitalized loan origination costs, as of September 30, 2023 and December 31, 2022.
Amount
As aPercent ofGross Loans
1,346,440
61
1,183,512
62
750,508
34
626,399
33
100,322
5
92,899
3,927
*
13,571
1,841
572
Total gross loans
100
Total net loans
(*) Less than 1%.
The following tables show the activity of the gross loans for the three and nine months ended September 30, 2023 and 2022.
Three Months Ended September 30, 2023(Dollars in thousands)
HomeImprovement
StrategicPartnership
Gross loans – June 30, 2023
1,331,114
728,468
92,637
3,448
1,331
2,156,998
Loan originations
92,603
79,333
8,900
36,457
217,393
Principal payments, sales, maturities, and recoveries
(61,885
(53,095
(1,657
(281
(35,947
(152,865
Charge-offs
(11,684
(3,890
(15,574
Transfer to loan collateral in process of foreclosure, net
(4,730
Amortization of origination costs
(3,259
647
(2,612
FASB origination costs, net
4,281
(955
660
3,986
Paid-in-kind interest
442
Gross loans – September 30, 2023
Nine Months Ended September 30, 2023(Dollars in thousands)
Gross loans – December 31, 2022
384,291
291,349
16,650
2,023
96,637
790,950
(181,565
(158,300
(9,413
(6,207
(95,368
(450,853
(33,440
(8,379
(900
(3,814
(46,533
(13,078
(2,306
(15,384
(9,177
1,898
(7,279
15,897
(2,459
14,098
1,086
Page 17 of 60
Three Months Ended September 30, 2022(Dollars in thousands)
Gross loans – June 30, 2022
1,096,670
526,278
96,928
14,152
593
1,734,621
149,151
100,451
4,500
19,428
273,682
(66,338
(49,630
(4,017
(331
(19,248
(139,564
(7,534
(1,780
(3,857
(13,171
(2,862
(3,008
494
(2,514
Amortization of loan premium
(60
(90
(150
5,800
(513
5,287
181
Gross loans – September 30, 2022
1,171,819
575,210
93,735
13,973
773
1,855,510
Nine Months Ended September 30, 2022(Dollars in thousands)
Gross loans – December 31, 2021
961,320
436,772
76,696
14,046
90
1,488,924
433,764
295,443
28,172
396
34,267
792,042
(204,568
(152,800
(6,220
(33,584
(397,298
(17,675
(3,948
(5,441
(75
(27,139
(8,391
(268
(8,659
(8,378
1,194
(7,184
(180
(270
(450
15,927
(1,181
14,746
528
The following table sets forth the activity in the allowance for credit losses for the three and nine months ended September 30, 2023 and 2022.
Allowance for credit losses – beginning balance (1)
74,971
59,152
50,166
CECL transition amount upon ASU 2016-13 adoption
Total charge-offs
Recoveries
2,651
3,348
8,705
10,473
882
713
2,141
1,857
10
47
1,671
1,446
10,208
5,085
Total recoveries
5,204
5,507
21,064
17,462
Net charge-offs (2)
(10,370
(7,664
(25,469
(9,677
Allowance for credit losses – ending balance (3)
79,133
61,535
With the adoption of ASC 326, the Company also adopted ASU 2022-02, Financial Instruments – Credit Losses, or Topic 326: Troubled Debt Restructurings and Vintage Disclosures. Under this standard, the Company is required to disclose current period gross write-offs, by year of origination, for financing receivables.
Page 18 of 60
The following table sets forth the gross charge-offs for the three months ended September 30, 2023, by the year of origination:
2021
2020
2019
Prior
890
4,587
2,250
1,175
1,273
1,509
11,684
964
1,783
733
158
106
146
3,890
1,854
6,370
2,983
1,333
1,379
1,655
15,574
The following table sets forth the gross charge-offs for the nine months ended September 30, 2023, by the year of origination:
934
11,763
7,664
3,631
3,745
5,703
33,440
1,003
4,235
1,834
459
328
520
8,379
900
3,814
1,937
15,998
9,498
4,090
4,973
46,533
The following tables set forth the allowance for credit losses by type as of September 30, 2023 and December 31, 2022.
Percentageof Allowance
Allowance asa Percent ofLoan Category
Allowance asa Percent ofNonaccrual
57,032
72
4.24
276.21
17,300
22
2.31
83.79
3,114
3.10
15.08
1,687
42.97
8.17
3.59
383.25
66
3.55
130.60
18
35.29
1.13
3.26
15
69.93
29.53
3.33
198.69
The following table presents total nonaccrual loans and foregone interest. The fluctuation in nonaccrual interest foregone is due to past due loans and market conditions.
Total nonaccrual loans
20,648
32,133
Interest foregone quarter to date
190
231
Amount of foregone interest applied to principal in the quarter
49
94
Interest foregone year to date
618
1,267
Amount of foregone interest applied to principal for the year
183
375
Interest foregone life-to-date
1,837
2,419
Amount of foregone interest applied to principal life-to-date
839
1,204
Percentage of nonaccrual loans to gross loan portfolio
0.9
1.7
Percentage of allowance for credit losses to nonaccrual loans
383.2
198.7
The following tables present the performance status of loans as of September 30, 2023 and December 31, 2022.
Performing
Nonperforming
Percentage ofNonperformingto Total
1,339,934
6,506
749,528
980
0.13
91,087
9,235
9.21
100.00
2,182,390
0.94
1,173,846
9,666
0.82
625,820
579
0.09
84,165
8,734
9.40
1,884,403
32,550
1.70
Page 19 of 60
For those loans aged under 90 days past due, there is a possibility that their delinquency status will continue to deteriorate and they will subsequently be placed on nonaccrual status and be reserved for, and as such, deemed nonperforming.
The following tables provide additional information on attributes of the nonperforming loan portfolio as of September 30, 2023 and December 31, 2022, all of which had an allowance recorded against the principal balance.
RecordedInvestment
UnpaidPrincipalBalance
RelatedAllowance
With an allowance recorded
276
343
23
9,344
1,121
8,823
963
4,657
14,686
Total nonperforming loans with an allowance
21,487
3,107
33,754
10,806
AverageInvestmentRecorded
Interest IncomeRecognized
6,361
7
6,903
114
491
3,085
13,577
4,571
16,128
14,997
9
37,099
6,300
6,895
303
865
5,229
13,494
4,795
16,326
17,189
37,174
The following tables show the aging of all loans as of September 30, 2023 and December 31, 2022.
Days Past Due
RecordedInvestment90 Days and
30-59
60-89
90 +
Current
Total (1)
Accruing
33,187
12,328
5,913
51,428
1,250,877
1,302,305
4,177
1,613
6,770
746,777
753,547
74
102,183
102,257
16
3,911
37,364
13,957
6,967
58,288
2,105,589
2,163,877
31,781
11,877
7,365
51,023
1,095,072
1,146,095
3,266
1,256
5,101
623,776
628,877
93,396
93,470
142
393
885
1,420
12,151
35,189
13,526
8,903
57,618
1,824,967
1,882,585
The Company estimates that the weighted average loan-to-value ratio of the taxi medallion loans was approximately 189% and 339% as of September 30, 2023 and December 31, 2022.
Page 20 of 60
Under ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures," concurrent with the elimination of troubled debt restructuring, or TDR, disclosures, the Company must disclose loans to borrowers experiencing financial difficulty that were modified during the reporting period. The Company did not have any such loan modifications on January 1, 2023 or during the nine months ended September 30, 2023.
The following table shows the TDRs that the Company entered into during the three and nine months ended September 30, 2022.
Number of Loans
Pre-ModificationInvestment
Post-ModificationInvestment
Three months ended September 30, 2022
Recreation loans
549
Medallion loans
Nine months ended September 30, 2022
56
825
252
As of September 30, 2022, no taxi medallion or commercial loans modified as TDRs in the previous 12 months were in default. As of September 30, 2022, 37 recreation loans modified as TDRs were in default and had an investment value of $0.5 million.
The following tables show the activity of loan collateral in process of foreclosure, which relate only to the recreation and taxi medallion loans, for the three and nine months ended September 30, 2023 and 2022.
Loan collateral in process of foreclosure – June 30, 2023
729
16,074
16,803
Transfer from loans, net
4,730
Sales
(1,080
(117
(1,197
Cash payments received
(163
(1,939
(2,102
Collateral valuation adjustments
(2,281
(2,311
Loan collateral in process of foreclosure – September 30, 2023
1,935
13,988
Loan collateral in process of foreclosure – December 31, 2022
1,376
20,443
13,078
2,306
(5,858
(685
(6,543
(291
(7,773
(8,064
(6,370
(6,673
Loan collateral in process of foreclosure – June 30, 2022
878
26,096
26,974
2,862
(1,399
(544
(1,943
(2,243
(1,225
(1,319
Loan collateral in process of foreclosure – September 30, 2022
1,116
23,215
24,331
Loan collateral in process of foreclosure – December 31, 2021
1,720
35,710
37,430
8,391
268
(5,797
(2,659
(8,456
(9,496
(3,198
(3,806
As of September 30, 2023, taxi medallion loans in the process of foreclosure included 429 taxi medallions in the New York City market, 230 taxi medallions in the Chicago market, 32 taxi medallions in the Newark market, and 31 taxi medallions in other markets.
Page 21 of 60
(5) FUNDS BORROWED
The following table presents outstanding balances of funds borrowed.
Payments Due for the Twelve Months Ending September 30,
2024
2025
2026
2027
2028
Thereafter
September 30, 2023 (1)
December 31, 2022(1)
InterestRate (2)
Deposits (3)
718,976
568,943
285,870
167,466
116,424
1,857,679
1,609,672
2.96
Privately placed notes
3,000
31,250
92,750
127,000
121,000
7.99
SBA debentures and borrowings
5,489
14,000
2,000
1,250
34,000
70,739
68,512
3.52
Preferred securities
33,000
7.79
Federal reserve and other borrowings
10,000
5.85
737,465
582,943
331,120
169,466
210,424
67,000
2,098,418
1,832,184
3.35
(A) DEPOSITS
Most deposits are raised through the use of investment brokerage firms that package time deposits in denominations of less than $250,000 qualifying for FDIC insurance into larger pools that are sold to the Bank. The rates paid on the deposits are highly competitive with market rates paid by other financial institutions. Additionally, a brokerage fee is paid, depending on the maturity of the deposits, which averages less than 0.15%. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity. In October 2020, the Bank began to originate time deposits through internet listing services. These deposits are from other financial institutions and, as of September 30, 2023 and December 31, 2022, the Bank had $12.1 million and $12.4 million in listing service deposit balances. In April 2023, the Bank began to originate retail savings deposits through a third-party service provider and, as of September 30, 2023, the Bank had $18.0 million in retail savings deposit balances. The following table presents the maturity of the deposit pools, which includes strategic partner reserve deposits, as of September 30, 2023.
Three months or less
204,577
Over three months through six months
157,064
Over six months through one year
357,335
Over one year
1,140,203
Total deposits
1,859,179
(B) FEDERAL RESERVE DISCOUNT WINDOW AND OTHER BORROWINGS
In March 2023, the Bank established a discount window line of credit at the Federal Reserve. As of September 30, 2023, the Bank had approximately $37.0 million in investment securities pledged as collateral to the Federal Reserve. The current advance rate on the pledged securities is 100% of fair value, for a total of approximately $37.0 million in secured borrowing capacity, of which none was utilized as of September 30, 2023.
The Bank has borrowings arrangements with several commercial banks. These agreements are accommodations that can be terminated at any time, for any reason, and allow the Bank to borrow up to $75.0 million. As of September 30, 2023, $10.0 million was outstanding on these lines, with $65.0 million available.
(C) PRIVATELY PLACED NOTES
In September 2023, the Company completed a private placement to certain institutional investors of $39.0 million aggregate principal amount of 9.25% unsecured senior notes due September 2028, with interest payable semiannually. The Company used the net proceeds from the offering for general corporate purposes, including the repurchase of $33.0 million of the 8.25% notes issued in March 2019 with a maturity date of March 2024 described below.
In February 2021, the Company completed a private placement to certain institutional investors of $25.0 million aggregate principal amount of 7.25% unsecured senior notes due February 2026, with interest payable semiannually. In March 2021, an additional $3.3 million principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $3.0 million principal amount of such notes was issued to certain institutional investors. The Company used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.
In December 2020, the Company completed a private placement to certain institutional investors of $33.6 million aggregate principal amount of 7.50% unsecured senior notes due December 2027, with interest payable semiannually. In February and March 2021, an additional $8.5 million principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $11.7 million principal amount of such notes was issued to certain institutional investors. The Company used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.
Page 22 of 60
In March 2019, the Company completed a private placement to certain institutional investors of $30.0 million aggregate principal amount of 8.25% unsecured senior notes due March 2024, with interest payable semiannually. The Company used the net proceeds from the offering for general corporate purposes, including repaying certain borrowings under its notes payable to banks at a discount which led to a gain of $4.1 million in 2019. In August 2019, an additional $6.0 million principal amount of such notes was issued to certain institutional investors. As described above, in September 2023, the Company repurchased and cancelled $33.0 million of these notes, leaving $3.0 million principal amount remaining outstanding as of September 30, 2023.
(D) SBA DEBENTURES AND BORROWINGS
Over the years, the SBA has approved commitments for MCI and FSVC, typically for a four-and-a-half year term and a 1% fee, which fee was paid. During 2017, the SBA restructured FSVC’s debentures with SBA totaling $33.5 million in principal into a new loan by the SBA to FSVC in the principal amount of $34.0 million, or the SBA Loan. In connection with the SBA Loan, FSVC executed a Note, or the SBA Note, with an effective date of March 1, 2017, in favor of SBA, in the principal amount of $34.0 million. The SBA Loan bears interest at a rate of 3.25% and all remaining unpaid principal and interest are due on April 30, 2024, the maturity date. As of September 30, 2023, $70.7 million was outstanding, including $0.5 million under the SBA Note.
On July 10, 2023, MCI accepted a commitment from the SBA for $20.0 million in debenture financing. In connection with the commitment, MCI paid the SBA a leverage fee of $0.2 million, with an additional $0.4 million fee to be paid pro-rata as MCI draws under the commitment. As of September 30, 2023, $4.8 million of the commitment had been drawn, and $10.3 million was drawable, with the balance of $5.0 million drawable upon the infusion of $2.5 million of capital from either the capitalization of retained earnings or a capital infusion into MCI from the Company.
(E) PREFERRED SECURITIES
In June 2007, the Company issued and sold $36.1 million aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35.0 million of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. Prior to the cessation of LIBOR on June 30, 2023, the notes bore a variable rate of interest of 90-day LIBOR plus 2.13%. With the cessation of LIBOR, interest is calculated using the Secured Overnight Financing Rate (SOFR) adjusted by a relevant spread adjustment of approximately 26 basis points, plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2.0 million of the preferred securities were repurchased from a third-party investor. As of September 30, 2023, $33.0 million was outstanding on the preferred securities.
(F) COVENANT COMPLIANCE
Certain of the Company's debt agreements contain financial covenants that require the Company to maintain certain financial ratios and minimum tangible net worth. As of September 30, 2023, the Company was in compliance with all such covenants.
(6) LEASES
The Company has leased premises that expire at various dates through November 30, 2030 subject to various operating leases. The Company has implemented ASC Topic 842 under a modified retrospective approach in which no adjustments have been made to the prior year balances.
The following table presents the operating lease costs and additional information for the three and nine months ended September 30, 2023 and 2022.
Operating lease costs
597
580
1,792
1,759
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
684
Right-of-use asset obtained in exchange for lease liability
(56
(47
(167
(133
The following table presents the breakout of the operating leases as of September 30, 2023 and December 31, 2022.
Operating lease right-of-use assets
8,505
9,723
Other current liabilities
2,193
2,239
Total operating lease liabilities
9,268
10,647
Weighted average remaining lease term
5.0 years
5.5 years
Weighted average discount rate
5.59
5.66
Page 23 of 60
At September 30, 2023, maturities of the lease liabilities were as follows:
Remainder of 2023
2,508
2,492
2,440
1,213
1,290
Total lease payments
10,572
Less imputed interest
1,304
(7) INCOME TAXES
The Company is subject to federal and applicable state corporate income taxes on its taxable ordinary income and capital gains. As a corporation taxed under Subchapter C of the Internal Revenue Code, the Company is able, and intends, to file a consolidated federal income tax return with corporate subsidiaries, in which it holds 80% or more of the outstanding equity interest measured by both vote and fair value.
The following table sets forth the significant components of the Company's deferred and other tax assets and liabilities as of September 30, 2023 and December 31, 2022.
Goodwill and other intangibles
43,125
43,397
(11,491
(9,945
Net operating loss carryforwards (1)
(3,804
(3,730
Accrued expenses, compensation, and other assets
(6,038
(3,819
Unrealized gains on other investments
(2,094
(1,445
Total deferred tax liability
19,698
24,458
Valuation allowance
3,433
2,295
Deferred tax liability, net
The following table shows the components of the Company's tax provision for the three and nine months ended September 30, 2023 and 2022 as follows:
Federal
5,893
693
12,349
2,181
State
1,753
340
3,717
1,109
Deferred
(689
2,081
1,761
7,679
(230
91
755
1,923
Net provision for income taxes
The following table presents a reconciliation of statutory federal income tax provision to consolidated actual income tax provision reported for the three and nine months ended September 30, 2023 and 2022.
Statutory Federal income tax provision at 21%
4,088
2,613
13,414
10,142
State and local income taxes, net of federal income tax
800
511
2,624
1,984
Non-deductible expenses
624
410
1,701
1,484
Deferred tax asset valuation allowance
1,138
Other
77
(329
(295
(718
Total income tax provision
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible pursuant to ASC 740. The Company considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company’s evaluation of the realizability of deferred tax assets must consider both positive and negative evidence. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. Based upon these considerations, the Company determined the necessary valuation allowance as of September 30, 2023.
Page 24 of 60
The Company has filed tax returns in many states. Federal, New York State, New York City, and Utah state tax filings of the Company for the tax years 2020 through the present are the more significant filings that are open for examination.
(8) STOCK OPTIONS AND RESTRICTED STOCK
The Company’s Board of Directors approved the 2018 Equity Incentive Plan, or the 2018 Plan, which was approved by the Company’s stockholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to the Company’s employees and non-employee directors, including options, restricted stock, restricted stock units, performance share units, and stock appreciation rights, etc. On April 22, 2020, the Company’s Board of Directors approved an amendment to the 2018 Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder, which was approved by the Company’s stockholders on June 19, 2020, and subsequently on April 26, 2022, the Company’s Board of Directors approved an additional amendment to the 2018 Plan to further increase the number of shares of the Company’s common stock authorized for issuance thereunder, which was approved by the Company’s stockholders on June 14, 2022. A total of 5,710,968 shares of the Company’s common stock are issuable under the 2018 Plan, and 2,317,228 were issuable as of September 30, 2023. Awards under the 2018 Plan are subject to certain limitations as set forth in the 2018 Plan, which will terminate when all shares of common stock authorized for delivery have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2018 Plan, whichever occurs first.
The Company’s Board of Directors approved the 2015 Non-Employee Director Stock Option Plan, or the 2015 Director Plan, on March 12, 2015, which was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on February 29, 2016. A total of 300,000 shares of the Company’s common stock were issuable under the 2015 Director Plan, and 258,334 remained issuable as of June 15, 2018. Effective June 15, 2018, the 2018 Plan was approved, and these remaining shares were rolled into the 2018 Plan. Under the 2015 Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the 2015 Director Plan, the Company granted options to purchase 12,000 shares of the Company’s common stock to a non-employee director upon election to the Board of Directors, with an adjustment for directors who were elected to serve less than a full term. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. Options granted under the 2015 Director Plan are vested annually, as defined in the 2015 Director Plan. The term of the options could not exceed ten years.
The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan, or the Amended Director Plan, on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock were issuable under the Amended Director Plan. No additional shares are available for issuance under the Amended Director Plan. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company would grant options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board of Directors, with an adjustment for directors who were elected to serve less than a full term. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. Options granted under the Amended Director Plan are vested annually, as defined in the Amended Director Plan. The term of the options could not exceed ten years.
Additional shares are only available for future issuance under the 2018 Plan. At September 30, 2023, 965,146 options on the Company’s common stock were outstanding under the Company’s plans, of which 702,886 options were vested. Additionally, as of September 30, 2023, there were 917,608 unvested restricted shares, 296,444 unvested performance share units, 83,944 unvested restricted stock units, and 158,937 vested restricted stock units under the 2018 Plan.
The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted during the nine months ended September 30, 2023 and 2022.
During 2023, the Company’s Compensation Committee of the Board of Directors began granting performance stock units, or PSUs, to certain officers and employees of the Company. Granted PSUs are subject to specified performance criteria for a particular performance period. The number of PSUs that vest can range from zero to 200% of the grant amount. In addition, dividends that accrue during the vesting period are reinvested in dividend equivalent PSUs. PSUs and the related dividend equivalent PSUs are converted into shares of common stock after vesting. Once the PSUs and dividend equivalent PSUs have vested, shares of common stock are delivered.
Page 25 of 60
The following table presents the activity for the stock option programs for the 2023 first, second, and third quarters and the 2022 full year.
Number ofOptions
ExercisePrice PerShare
WeightedAverageExercise Price
Outstanding at December 31, 2021
1,111,687
2.14-12.55
6.41
Granted
Cancelled
(26,093
4.89 - 12.55
7.08
Exercised
(23,745
4.89 - 7.25
6.51
Outstanding at December 31, 2022
1,061,849
2.14 - 9.38
(25,194
4.89 - 9.38
6.97
Exercised (1)
(44,583
6.55
Outstanding at March 31, 2023
992,072
6.53
(7,803
6.31
(283
4.89
Outstanding at June 30, 2023 (2)
983,986
6.50
(18,840
6.17
Outstanding at September 30, 2023 (2)
965,146
Options vested at:
548,426
702,886
The following table presents the activity for the unvested options outstanding under the plans described above for the 2023 first, second, and third quarter.
Exercise PricePer Share
513,423
6.52
(2,951
5.53
Vested
(248,212
262,260
6.49
Outstanding at June 30, 2023
Outstanding at September 30, 2023
The intrinsic value of the options vested was $0.4 million for the nine months ended September 30, 2023.
Page 26 of 60
The following table presents the activity for the restricted stock programs for the 2023 first, second, and third quarter and the 2022 full year.
Number ofShares
GrantPrice PerShare
WeightedAverageGrant Price
493,326
6.87
522,475
6.86 -7.68
7.46
(29,373
4.89 - 8.40
7.32
Vested (1)
(129,140
857,288
7.27
8.08
7.18
(245,990
4.89 - 7.68
7.12
906,204
7.58
7.67
6.86
917,734
7.59
917,608
During the three and nine months ended September 30, 2023, the Company granted 83,158 restricted stock units, or RSUs, with a vesting date of June 22, 2024 and a grant price of $9.14 and during the year ended December 31, 2022, granted 129,638 RSUs which vested on June 14, 2023 and a grant price of $6.75. For the RSUs granted in 2023 and 2022, unit holders had the option of deferring settlement until a future date if the recipient makes a formal election under the guidelines of IRC Section 409A. As of September 30, 2023, there were 242,881 RSUs outstanding, all of which 158,937 had previously vested.
During the nine months ended September 30, 2023, the Company granted 296,444 PSUs at a grant price of $6.08. No PSUs were granted during the three months ended September 30, 2023. The PSUs have vesting conditions based upon certain levels of total pre-tax income as well as return on common equity attained over a three-year period. The PSUs cliff vest after three years based upon the performance of the Company. Dividend equivalent PSUs accumulate and convert to additional shares for the benefit of the grantee at the vesting date or are forfeited if the performance conditions are not met.
Page 27 of 60
(9) SEGMENT REPORTING
The Company has five business segments, which include four lending and one non-operating segment, which are reflective of how Company management makes decisions about its business and operations.
The four lending segments reflect the main types of lending performed at the Company, which are recreation, home improvement, commercial, and taxi medallion. The recreation and home improvement lending segments are operated by the Bank and loans are made to borrowers residing nationwide. The recreation lending segment is a consumer finance business that works with third-party dealers and financial service providers for the purpose of financing RVs, boats, and other consumer recreational equipment, of which RVs and boats make up 58% and 20% of the segment portfolio, with no other product lines exceeding 10%, as of September 30, 2023. The highest concentrations of recreation loans are in Texas and Florida at 15% and 10% of loans outstanding and with no other states over 10% as of September 30, 2023. The home improvement lending segment works with contractors and financial service providers to finance residential home improvement with the largest product lines being roofs, swimming pools, and windows at 40%, 19%, and 13% of total home improvement loans outstanding, and with no other product lines exceeding 10% as of September 30, 2023. The highest concentrations of home improvement loans are in Texas and Florida at 10% and 10% of loans outstanding and with no other states over 10% as of September 30, 2023. The commercial lending segment focuses on serving a wide variety of industries, with concentrations in manufacturing, wholesale trade, construction, and administrative and support services making up 43%, 16%, 15%, and 10%, of the loans outstanding as of September 30, 2023, with no other product lines exceeding 10%. The commercial lending segment invests across the United States with concentrations in California, Minnesota, Illinois, and Texas each having 25%, 14%, 11%, and 10% of the segment portfolio, and no other states having a concentration greater than 10%. The taxi medallion lending segment arose in connection with the financing of taxi medallions, taxis, and related assets, primarily all of which are located in the New York City metropolitan area as of September 30, 2023.
The Company's corporate and other investments segment is a non-operating segment that includes items not allocated to the Company's operating segments such as investment securities, equity investments, intercompany eliminations, and other corporate elements.
As part of segment reporting, capital ratios for all operating segments have been normalized as a percentage of consolidated total equity divided by total assets, with the net adjustment applied to corporate and other investments. In addition, the commercial segment primarily represents the mezzanine lending business, with certain legacy commercial loans (immaterial to total) allocated to corporate and other investments.
Page 28 of 60
The following table presents segment data as of and for the three and nine months ended September 30, 2023.
Three Months Ended September 30, 2023
Consumer Lending
CommercialLending
MedallionLending
Corporate and Other Investments
Consolidated
Total interest income
44,341
16,578
3,248
342
1,377
8,770
5,187
921
(69
2,293
Net interest income (loss)
35,571
11,391
2,327
411
(916
Provision (benefit) for credit losses
3,860
621
(1,772
Net interest income (loss) after loss provision
23,694
7,531
1,706
2,183
(862
128
2,322
1,404
451
(8,637
(4,433
(1,129
(1,421
(3,469
(19,089
Net income (loss) before taxes
15,185
3,099
2,899
2,166
(3,880
Income tax (provision) benefit
(5,169
(1,051
(907
1,355
(6,727
Net income (loss) after taxes
10,016
2,048
1,992
1,211
(2,525
Income attributable to the non-controlling interest
Balance Sheet Data
Total loans
1,307,860
739,452
97,298
17,258
396,759
Total funds borrowed
1,074,592
607,565
79,944
14,180
323,638
2,099,919
Selected Financial Ratios
Return on average assets
3.01
1.11
8.12
26.70
(2.56
)%
2.01
Return on average equity
19.50
7.21
52.31
172.77
(16.56
12.89
Return on average stockholders' equity
13.80
Interest yield
13.12
8.88
13.05
35.22
N/A
11.28
Net interest margin, gross
10.53
6.10
9.35
42.32
8.35
Net interest margin, net of allowance
10.99
6.24
9.61
77.54
8.64
Reserve coverage
Delinquency status (1)
0.45
0.07
Charge-off (recovery) ratio (2)
2.67
1.61
(172.06
1.88
(*) Line item is not applicable to segments.
Nine Months Ended September 30, 2023
123,349
45,519
8,763
1,439
4,385
22,254
12,660
2,582
44
6,839
101,095
32,859
6,181
1,395
(2,454
29,763
10,680
835
(14,167
(66
71,332
22,179
5,346
15,562
(2,388
2,936
4,327
937
(24,884
(12,815
(2,696
(4,191
(11,898
(56,484
46,576
9,368
5,586
15,698
(13,349
(13,549
(2,725
(1,625
(4,567
3,884
(18,582
33,027
6,643
3,961
11,131
(9,465
3.56
1.30
5.33
73.52
(3.31
2.52
22.56
8.21
33.61
463.36
(20.93
15.90
17.49
13.03
8.76
12.11
29.27
11.10
10.68
6.32
8.55
28.38
8.42
11.14
6.46
8.79
72.66
8.71
Delinquency status(1)
Charge-off (recovery) ratio(2)
2.61
1.20
1.23
(130.08
1.65
Page 29 of 60
The following table presents segment data as of and for the three and nine months ended September 30, 2022.
Three Months September 30, 2022
36,539
11,689
2,493
92
881
5,003
2,093
780
133
1,645
31,536
9,596
1,713
(41
(764
7,182
2,041
2,100
(1,275
(1
24,354
7,555
(387
1,234
(763
Other income (loss), net
(1,075
439
403
(7,178
(3,165
(1,139
(3,125
(4,802
(19,409
17,176
4,392
(2,601
(1,452
(5,162
(4,499
(1,152
700
394
1,352
(3,205
12,677
3,240
(1,901
(1,058
(3,810
1,145,380
569,603
102,367
28,553
353,638
2,199,541
941,801
468,362
84,172
23,478
290,784
1,808,597
4.54
2.36
(7.32
(13.92
(4.10
1.68
27.07
(43.65
(82.88
(24.45
10.03
10.35
12.72
8.41
10.60
2.62
10.61
10.98
6.91
7.29
(1.17
8.63
11.38
7.03
7.43
(3.62
8.91
3.48
1.03
68.68
3.32
0.08
2.24
1.46
0.77
16.41
(41.15
1.69
Nine Months Ended September 30, 2022
101,189
31,977
6,701
469
1,772
12,700
5,060
2,287
426
4,785
88,489
26,917
4,414
43
(3,013
15,536
4,943
5,234
(4,819
72,953
21,974
(820
4,862
3,199
3,993
1,450
(21,549
(9,282
(3,481
(8,245
(13,698
(56,255
51,404
12,705
(1,102
(15,413
(13,747
(3,398
295
4,121
(12,892
37,657
9,307
(807
447
(11,292
4.42
2.10
(1.06
2.27
(4.07
2.33
26.88
12.75
(6.41
13.73
(24.68
12.81
8.52
10.39
4.51
10.69
11.20
7.17
6.84
0.41
11.60
7.30
6.95
1.25
9.09
0.91
0.56
8.36
(48.19
0.78
Page 30 of 60
(10) COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key officers, including Mr. Alvin Murstein and Mr. Andrew Murstein, for either a one-, two-, three-, four-, or five-year term. Typically, the contracts with a one- or two-year term will renew for new one- or two-year terms unless prior to the term either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current one or two-year term (as applicable); however, in addition to Mr. Andrew Murstein's employment agreement, as further described below, there is currently one agreement that renews after two years for additional one-year terms and one agreement with a three-year term that does not have a renewal period. In the event of a change in control, as defined, during the employment period, the agreements provide for severance compensation to the executive in an amount equal to the balance of the salary, bonus, and value of fringe benefits which the executive would be entitled to receive for the remainder of the employment period.
On April 25, 2023, Mr. Alvin Murstein, the Company’s Chairman of the Board and Chief Executive Officer, notified the Company of his election not to renew the term of his employment pursuant to the First Amended and Restated Employment Agreement, dated May 29, 1998, as amended, between him and the Company. Accordingly, the term of his employment as Chief Executive Officer of the Company will expire on May 28, 2027, unless sooner terminated in accordance with the provisions thereof.
In addition, on April 27, 2023, Mr. Andrew Murstein, the Company’s President and Chief Operating Officer, entered into an amendment to the First Amended and Restated Employment Agreement, dated May 29, 1998, as amended, between him and the Company. Pursuant to such amendment, effective as of May 29, 2023, (i) the expiration of his then current term of employment shall be revised to end on May 28, 2027, and (ii) on May 29, 2024, and on each May 29 thereafter, such term of employment shall automatically renew each year for a three-year term unless, prior to the end of the first year of the then-applicable three-year term, either Mr. Murstein or the Company provides at least 30 days’ advance notice to the other party of its intention not to renew the then-applicable term of employment for a new three-year term, in each case unless such employment term is otherwise terminated pursuant to the terms thereof.
As of September 30, 2023, employment agreements expire at various dates through 2027, with future minimum payments under these agreements of approximately $11.0 million.
(B) OTHER COMMITMENTS
As of September 30, 2023, the Company had no other commitments. Generally, any commitments would be on the same terms as loans to or investments in existing borrowers or investees, and generally have fixed expiration dates. Since some commitments would be expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
(C) SEC LITIGATION
On December 29, 2021, the SEC filed a civil complaint in the U.S. District Court for the Southern District of New York against the Company and its President and Chief Operating Officer alleging certain violations of the anti-fraud, books and records, internal controls and anti-touting provisions of the federal securities laws. The litigation relates to certain issues that occurred during the period 2015 to 2017, including (i) the Company’s retention of third parties in 2015 and 2016 concerning posting information about the Company on certain financial websites and (ii) the Company’s financial reporting and disclosures concerning certain assets, including Medallion Bank, in 2016 and 2017, a period when the Company had previously reported as a business development company (BDC) under the Investment Company Act of 1940. Since April 2018, the Company does not report as a BDC, and has not worked with such third parties since 2016. The Company does not expect to change previously reported financial results. The Company filed a motion to dismiss the complaint on March 22, 2022, the SEC filed an amended complaint on April 26, 2022 and the Company filed a motion to dismiss the amended complaint on August 5, 2022.
The SEC is seeking injunctive relief, disgorgement plus pre-judgment interest and civil penalties in amounts unspecified, as well as an officer and director bar against the Company’s President and Chief Operating Officer. The Company and its President and Chief Operating Officer intend to defend themselves vigorously and believe that the SEC will not prevail on its claims. Nevertheless, depending on the outcome of the litigation, the Company could incur a loss and other penalties that could be material to the Company, its results of operations and/or financial condition, as well as a bar against its President and Chief Operating Officer. In addition, the Company has and expects to further incur significant legal fees and expenses in defending against such charges by the SEC and the Company may be subject to shareholder litigation relating to these SEC matters.
Page 31 of 60
(D) OTHER LITIGATION AND REGULATORY MATTERS
The Company and its subsidiaries are subject to inquiries from certain regulators and are currently involved in various legal proceedings incident to the normal course of business, including collection matters with respect to certain loans. The Company intends to vigorously defend any outstanding claims and pursue its legal rights. In the opinion of management, based on the advice of legal counsel, except for the pending SEC litigation, as described above, there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse impact on the financial condition or results of operations of the Company.
(11) RELATED PARTY TRANSACTIONS
Certain directors, officers, and stockholders of the Company are also directors and officers of its main consolidated subsidiaries, MFC, MCI, FSVC, and the Bank, as well as other subsidiaries. Officer salaries are set by the Board of Directors of the Company.
Jeffrey Rudnick, the son of one of the Company’s directors, serves as the Company’s Senior Vice President at a salary of $250,950 per year, an increase from $239,000 per year in 2022. Mr. Rudnick received an annual cash bonus of $85,000 and $75,000 as well as an equity bonus in the amount of $50,000 and $45,019, during the nine months ended September 30, 2023 and 2022.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB ASC Topic 825, “Financial Instruments,” requires disclosure of fair value information about certain financial instruments, whether assets, liabilities, or off-balance-sheet commitments, if practicable. The following methods and assumptions were used to estimate the fair value of each class of financial instrument. Fair value estimates that were derived from broker quotes cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
(a) Cash and cash equivalents – Book value equals fair value.
(b) Equity securities – The Company’s equity securities are recorded at cost less impairment plus or minus observable price changes.
(c) Investment securities – The Company’s investments are recorded at the estimated fair value of such investments.
(d) Loans receivable – The Company’s loans are recorded at book value which approximates fair value.
(e) Floating rate borrowings – Due to the short-term nature of these instruments, the carrying amount approximates fair value.
(f) Commitments to extend credit – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, considering the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At September 30, 2023 and December 31, 2022, the estimated fair value of these off-balance-sheet instruments was not material.
(g) Fixed rate borrowings – The fair value of the debentures payable to the SBA is estimated based on current market interest rates for similar debt.
CarryingAmount
Financial assets
Cash, cash equivalents, and federal funds sold (1)
Loans receivable
Accrued interest receivable (2)
Equity securities (3)
1,724
Financial liabilities
Funds borrowed
2,099,918
1,833,484
Accrued interest payable (2)
Page 32 of 60
(13) FAIR VALUE OF ASSETS AND LIABILITIES
The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.
In accordance with FASB ASC 820, the Company has categorized its assets and liabilities measured at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The Company's assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.
As required by FASB ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a level 3 fair value measurement may include inputs that are observable (levels 1 and 2) and unobservable (level 3). Therefore, gains and losses for such assets and liabilities categorized within the level 3 table below may include changes in fair value that are attributable to both observable inputs (levels 1 and 2) and unobservable inputs (level 3).
Assets and liabilities measured at fair value, recorded on the consolidated balance sheets, are categorized based on the inputs to the valuation techniques as follows:
Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most U.S. Government and agency securities, and certain other sovereign government obligations).
Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, and certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).
A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur.
Equity investments were recorded at cost less impairment plus or minus observable price changes. The Company measures equity investments at fair value on a non-recurring basis.
Page 33 of 60
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022.
Level 1
Level 2
Level 3
Interest-bearing deposits
Available for sale investment securities
Equity securities
54,425
56,096
49,742
51,466
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2023 and December 31, 2022.
Impaired loans
Loan collateral in process of foreclosure
47,113
64,245
Significant Unobservable Inputs
ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as level 3 within the fair value hierarchy. The tables below are not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.
Page 34 of 60
The valuation techniques and significant unobservable inputs used in non-recurring level 3 fair value measurements of assets and liabilities as of September 30, 2023 and December 31, 2022.
(Dollars in thousands except per share amounts)
Fair Valueat September 30, 2023
Valuation Techniques
Unobservable Inputs
Range(Weighted Average)
10,269
Investee financial analysis
Financial condition and operating performance of the borrower (1)
Collateral support
273
Precedent market transaction
Offering price
$8.73 / share
Market approach
Historical and actual loss experience
0.00% - 8.04%
Transfer prices (2)
$0.0 - 79.5
Collateral value
Collateral value (3)
$2.9 - $43.2
Fair Valueat December 31, 2022
10,020
0.00% - 6.55%
60% of balance
$0.0 - $79.5
$2.5 - $54.1
(14) MEDALLION BANK PREFERRED STOCK (Non-controlling interest)
On December 17, 2019, the Bank closed an initial public offering of 1,840,000 shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, with a $46.0 million aggregate liquidation amount, yielding net proceeds of $42.5 million, which were recorded in the Bank’s shareholders’ equity. Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is based on the Secured Overnight Financing Rate, or SOFR, and is expected to be three-month Term SOFR) plus a spread of 6.46% per annum.
On July 21, 2011, the Bank issued, and the U.S. Treasury purchased, 26,303 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series E for an aggregate purchase price of $26.3 million under the Small Business Lending Fund Program, or SBLF, with a liquidation amount of $1,000 per share. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. The Bank pays a dividend rate of 9% on the Series E.
(15) SUBSEQUENT EVENTS
The Company has evaluated the effects of events that have occurred subsequent to September 30, 2023 through the date of financial statement issuance for potential recognition or disclosure. As of such date, there was one subsequent event that required disclosure.
On October 18, 2023, the Company received $9.4 million of net proceeds from one of our larger taxi medallion borrowers, resulting in a recovery of approximately $8.0 million to be recognized in the fourth quarter of 2023.
Page 35 of 60
The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes thereto for the three and nine months ended September 30, 2023 and the year ended December 31, 2022. This section is intended to provide management’s perspective of our financial condition and results of operations. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors section in our Annual Report on Form 10-K.
COMPANY BACKGROUND
We are a specialty finance company whose focus and growth has been our consumer finance and commercial lending businesses operated by Medallion Bank, or the Bank, and Medallion Capital, Inc., or Medallion Capital. The Bank is a wholly-owned subsidiary that originates consumer loans for the purchase of recreational vehicles, boats, and home improvements, and provides loan origination and other services to fintech partners. Medallion Capital is a wholly-owned subsidiary that originates commercial loans through its mezzanine financing business. As of September 30, 2023, our consumer loans represented 95% of our gross loan portfolio, and commercial loans represented 5%. Total assets were $2.6 billion and $2.3 billion as of September 30, 2023 and December 31, 2022, respectively.
Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, including bank certificates of deposit issued to consumers, debentures issued to and guaranteed by the SBA, privately placed notes, and preferred securities. Net interest income fluctuates with changes in the yield on our loan portfolios and changes in the cost of borrowed funds, as well as changes in the amount of interest-earning assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice, either due to inflation or other factors, on a different basis than our interest-bearing liabilities. We continue to monitor global supply chain disruptions, gas prices, labor shortages, unemployment, and other factors contributing to U.S. inflation and economic health, as well as other factors which contribute to competition and changes in the demand for our loan products. We are taking steps in light of a potential economic downturn and the current inflationary environment to moderate the pace of our recent growth.
We also provide debt, mezzanine, and equity investment capital to companies in a variety of commercial industries. These investments may be venture capital style investments which may not be fully collateralized. Our investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.
The Bank is an industrial bank regulated by the FDIC and the Utah Department of Financial Institutions that originates consumer loans, raises deposits, and conducts other banking activities. The Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we referred a portion of our taxi medallion and commercial loans to the Bank, which originated these loans, and have since been serviced by Medallion Servicing Corp., or MSC. However, other than in connection with dispositions of existing taxi medallion and related assets, the Bank has not originated any new taxi medallion loans since 2014 (and Medallion Financial Corp. has not originated any new taxi medallion loans since 2015) and is working with MSC to service its remaining portfolio, as it winds down. MSC earns referral and servicing fees for these activities.
In 2019, the Bank launched a strategic partnership program to provide lending and other services to financial technology, or fintech, companies. The Bank entered into an initial partnership in 2020 and began issuing its first loans. The Bank continues to evaluate and launch additional partnership programs with fintech companies.
We continue to consider various alternatives for the Bank, which may include an initial public offering of its common stock, the sale of all or part of the Bank, a spin-off or other potential transaction. We do not have a deadline for its consideration of these alternatives, and there can be no assurance that this process will result in any transaction being announced or consummated.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are fundamental to understanding management's discussion and analysis of its financial condition and results of operations. At September 30, 2023, we identified our policies for the allowance for credit losses, goodwill and intangible assets, and deferred taxes, to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Our critical accounting policies are described in detail in Part I, Item 7 in Medallion Financial Corp.'s Annual Report on Form 10-K for the year ended December 31, 2022, and there have been no material changes in such policies and estimates since the date of such report.
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RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
On January 1, 2023, we 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, we use 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, we assess 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. We evaluate each commercial loan for specific impairment with additional allowance for credit losses recognized as necessary. For taxi medallion loans, we maintain 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.
We 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 our allowance for credit losses on loans (“ACL”) and a 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:
Prior to January 1, 2023, we used historical delinquency and actual loss rates with a three-year look-back period for taxi 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.
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures, or Topic 323: Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The main objective of this new standard is to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. We are assessing the impact of the update on the accompanying financial statements.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements. The amendments in this update seek to clarify or improve disclosure and presentation requirements. We are assessing the impact of the update on the accompanying financial statements.
Page 37 of 60
CONTROL STATUTES AND REGULATIONS
Because the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly, the Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations. Although the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act, your investment in the Company is not insured or guaranteed by the FDIC, or any other agency, and is subject to loss. Under the Utah Financial Institutions Act, control is defined as the power directly or indirectly or through or in concert with one or more persons to (1) direct or exercise a controlling influence over the management or policies of us or the election of a majority of the directors of us, or (2) to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an individual. If any holder of any series of the Bank’s preferred stock is or becomes entitled to vote for the election of the Bank’s directors, such series will be deemed a class of voting stock, and any other person will be required to obtain the non-objection of the FDIC under the Change in Bank Control Act to acquire or maintain 10% or more of that series. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval.
In addition to the regulations detailed above, our operations are subject to supervision and regulation by other federal, state, and local laws and regulations. Additionally, our operations may be subject to various laws and judicial and administrative decisions. This oversight may serve to:
Changes to laws of states in which we do business could affect the operating environment in substantial and unpredictable ways. We cannot predict whether such changes will occur or, if they occur, the ultimate effect they would have upon our financial condition or results of operations.
COVID-19
For our taxi medallion portfolio, in response to the COVID-19 pandemic, we determined that anticipated payment activity on our taxi medallion portfolio was impossible to quantify, and therefore all taxi medallion loans were deemed impaired, placed on nonaccrual status, and written down to each market’s net collateral value in 2020. We continue to monitor our taxi medallion portfolio and related assets, which may result in additional write-downs, charge-offs or impairments.
The potential future effects of COVID-19, or any new potential variants, on our loan portfolios and businesses remain uncertain, and we could suffer losses on our loan portfolios as a result of the effects on the ability of our borrowers to repay their loans as well as the demand for our loans.
Page 38 of 60
AVERAGE BALANCES AND RATES
The following table shows our consolidated average balance sheet, interest income and expense, and the average interest earning/bearing assets and liabilities, and which reflects the average yield on assets and average costs on liabilities for the three months ended September 30, 2023 and 2022.
AverageBalance
Interest
AverageYield/Cost
Interest-earning assets
Interest earning cash equivalents
18,953
216
4.52
4,288
48
4.44
58,504
564
3.82
82,588
356
1.71
54,313
471
3.45
49,077
330
1,340,637
1,139,569
740,923
551,131
98,721
93,269
2,575
10.95
3,853
35.32
13,940
Strategic partnerships
1,674
126
29.86
845
65
30.52
2,185,808
64,635
11.73
1,798,754
50,960
11.24
Total interest-earning assets, before allowance
2,317,578
1,934,707
(77,460
(61,353
Total interest-earning assets, net of allowance
2,240,118
11.66
1,873,354
10.96
Non-interest-earning assets
Cash
26,672
28,042
11,187
10,874
16,358
25,691
Goodwill and intangible assets
171,938
173,383
52,983
44,958
Total non-interest-earning assets
279,138
282,948
2,519,256
2,156,302
Interest-bearing liabilities
Deposits
1,842,602
2.89
1,519,172
1.63
Retail and privately placed notes
122,500
2,514
8.14
8.20
67,579
509
2.99
68,809
562
3.24
7.78
351
4.22
Total interest-bearing liabilities
2,065,681
3.28
1,741,981
2.20
Non-interest-bearing liabilities
Deferred tax liability
24,817
23,837
Other liabilities (1)
36,647
28,748
Total non-interest-bearing liabilities
61,464
52,585
2,127,145
1,794,566
Non-controlling interest
69,166
322,945
292,570
Total liabilities and stockholders’ equity
Page 39 of 60
The following table shows our consolidated average balance sheet, interest income and expense, and the average interest earning/bearing assets and liabilities, and which reflects the average yield on assets and average costs on liabilities for the nine months ended September 30, 2023 and 2022.
20,884
542
3.47
2.06
68,912
4.25
70,754
452
0.85
51,690
1,253
46,743
830
2.37
1,265,781
1,056,223
695,067
501,872
96,709
8,851
12.24
86,264
7,022
10.88
6,572
13,899
464
4.46
1,521
309
27.16
477
108
30.27
2,065,650
179,467
11.62
1,658,735
140,760
11.35
2,207,136
1,780,513
(74,260
(55,175
2,132,876
11.49
1,725,338
11.03
16,163
42,455
10,965
10,578
18,688
30,759
172,299
173,744
52,278
44,566
270,393
302,102
2,403,269
2,027,440
1,738,155
33,363
2.57
1,393,541
1.47
121,600
7,517
8.26
7,506
8.29
1,667
69,353
1,646
3.17
1,832
7.42
3.25
1,959,755
3.02
1,616,894
2.09
24,714
21,166
37,986
27,521
62,700
48,687
2,022,455
1,665,581
69,241
311,573
292,618
For the three months ended September 30, 2023, our loans receivable yielded 11.73%, as compared to 11.24% for the three months ended September 30, 2022. The 49 basis point increase reflects a higher yield on our loan portfolios, as we have increased the rates charged on new consumer originations over the past year as prevailing market interest rates have increased. Similarly, for the nine months ended September 30, 2023, our loans receivable yielded 11.62%, as compared to 11.35% for the nine months ended September 30, 2022, with the 27 basis point increase reflecting the higher yield on our loan portfolios due to higher interest rates charged on new originations compared to the prior year period. We have used the higher interest rate environment as an opportunity to both increase the rates on newly issued recreation and home improvement loans, which is expected to continue to increase the yield on these portfolios over time, as well as increase the credit quality of our new issuances, particularly in our recreation segment, with the average FICO scores of our recreation loans outstanding being 682 as of September 30, 2023 compared to 671 as of September 30, 2022. We use weighted average FICO scores as an indicator of portfolio risk.
Page 40 of 60
Our debt, with certificates of deposits being our largest source, funds our growing lending business. Our average interest cost for the three and nine months ended September 30, 2023 of 3.28% and 3.02% increased 108 and 93 basis points from the three and nine months ended September 30, 2022, which is attributable to the current higher interest rate environment. To the extent that prevailing market interest rates remain at current levels, we expect our cost of funds to continue to increase as we issue new certificates of deposit to replace maturing certificates of deposit and fund our growth. We have taken, and continue to take, steps to pass along a portion of the interest rate increases on newly originated loans, the process for which is slower than the pace of funding cost increases.
RATE/VOLUME ANALYSIS
The following tables present the change in interest income and expense due to changes in the average balances (volume) and average yield/cost, calculated for the periods indicated.
Increase(Decrease)In Volume
Increase(Decrease)In Rate
Net Change
Interest earning cash and cash equivalents
(95
376
193
238
431
45
96
141
6
86
6,650
1,152
7,802
7,323
(1,322
6,001
4,247
642
4,889
3,548
(445
3,103
179
493
672
(140
424
(898
1,149
251
10,240
3,435
13,675
11,463
(1,789
9,674
Total interest-earning assets
10,190
4,002
14,192
11,662
(1,465
10,197
2,358
4,834
7,192
1,457
2,050
31
(18
(4
(9
(44
(53
20
57
Notes payable to banks
296
160
Other borrowings
(38
2,380
5,068
7,448
1,459
2,228
Net
7,810
(1,066
6,744
10,203
(2,234
7,969
450
1,767
2,217
247
332
120
423
29
135
164
20,421
1,739
22,160
19,195
(4,863
14,332
12,652
13,542
9,089
(1,844
7,245
956
873
1,829
1,570
144
1,714
(1,604
2,579
975
(441
2,469
2,028
212
(11
201
95
(2
93
32,637
6,070
38,707
29,508
(4,096
25,412
33,207
8,140
41,347
29,784
(3,629
26,155
6,615
11,442
18,057
3,176
(1,236
1,940
(26
11
24
(247
(223
(59
80
21
148
(88
1,032
(113
6,593
12,528
19,121
3,102
(1,561
1,541
26,614
(4,388
22,226
26,682
(2,068
24,614
Page 41 of 60
During the three and nine months ended September 30, 2023, the increase in interest income was mainly driven by the increase in volume of consumer loans, a large portion of that increase in the first half of the year, as well as an increase in overall yield on interest-earning assets as we issue new loans at interest rates greater than the weighted average rates of our current portfolio. During the quarter, the increase in interest expense was driven by an increase in borrowing cost, primarily the increases in deposits, as well as an increase in borrowings. Likewise, the increase in interest expense for the nine months was largely attributable to the increased costs on our borrowings, primarily deposits, and to a lesser extent, due to growth in our borrowed funds.
Our interest expense is driven by the interest rates payable on our bank certificates of deposit, privately placed notes, fixed-rate, long-term debentures issued to the SBA, preferred securities, and has historically included credit facilities with banks and other short-term notes payable. The Bank issues brokered time certificates of deposit, which are, on average, our lowest borrowing costs. The Bank is able to bid on these deposits at a variety of maturity options, which allows for more flexible interest rate management strategies. As further described below, in September 2023, we issued and sold $39.0 million aggregate principal amount of 9.25% senior notes due in September 2028, and repurchased $33.0 million aggregate principal amount of our 8.25% senior notes due March 2024.
Our cost of funds is primarily driven by the rates paid on our various borrowings and changes in the levels of average borrowings outstanding. See Note 5 to the consolidated financial statements for details on the terms of our outstanding debt. Our debentures issued to the SBA typically have terms of ten years.
We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities outstanding during the period. The above table shows the average borrowings and related borrowing costs for the three and nine months ended September 30, 2023 and 2022. We expect our borrowing costs to further increase as prevailing interest rates continue at, or rise from, these levels.
We continue to seek SBA funding through Medallion Capital, Inc., to the extent it offers attractive rates. SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the Small Business Investment Act of 1985, as amended, or the SBIA, and SBA regulations. In July 2023, we obtained a $20.0 million commitment from the SBA, $4.8 million of which has been utilized as of September 30, 2023, with $10.2 million currently drawable, and the balance of $5.0 million drawable upon the infusion of $2,5 million of capital. At September 30, 2023 and 2022, adjustable rate debt constituted less than 2% of total debt, and was comprised solely of our preferred securities borrowings.
LOANS
Loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to or received from loan originators, and which are amortized to interest income over the life of the loan. During the three and nine months ended September 30, 2023, there was continued growth in the recreation and home improvement segments, offset by a decrease in commercial loans related to repayments exceeding originations for the three and nine months ended September 30, 2023.
Page 42 of 60
The following table presents the approximate maturities and sensitivity to changes in interest rates for our loans as of September 30, 2023.
Loan Maturity
Within 1 year
After 1 to 5 years
After 5 to 15 years
After 15 years
Fixed-rate
129,442
255,613
1,693,296
81,730
2,160,081
57,901
128,598
1,108,879
4,972
1,300,350
64,160
32,970
579,659
76,758
5,196
92,303
4,758
2,185
1,742
Adjustable-rate
537
1,418
1,955
Total loans (1)
129,979
257,031
2,162,036
Page 43 of 60
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The allowance is maintained at a level estimated by management to absorb probable credit losses inherent in the loan portfolios based on management’s quarterly evaluation of the portfolios, the related credit characteristics, and macroeconomic factors affecting the portfolios. As of September 30, 2023 and December 31, 2022, the allowance totaled $79.1 million and $63.8 million, which represented 3.59% and 3.33% of total loans, respectively. The increase in the allowance for credit losses as of September 30, 2023 was primarily driven by the adoption of the CECL accounting standard, which resulted in a $13.7 million increase in our allowance for credit losses, and due to growth in our recreation and home improvement loan portfolios, as well as growth in the commercial loan portfolio, offset by a reduction in allowance specific to the taxi medallion portfolio as the taxi medallion loan portfolio continued to shrink through collections.
Allowance for loan losses – beginning balance (1)
With the adoption of ASC 326, we also adopted ASU 2022-02, Financial Instruments – Credit Losses, or Topic 326: Troubled Debt Restructurings and Vintage Disclosures. Under this standard, we are required to disclose current period gross write-offs, by year of origination, for financing receivables.
Page 44 of 60
Allowance as a Percent of Nonaccrual
As of September 30, 2023, the total allowance rate for credit losses increased 15 basis points from December 31, 2022, due to the adoption of CECL and rising loss rates which resulted in higher allowances for recreation, home improvement, and commercial loans, offset by a reduction in the allowance for taxi medallion loans due to recoveries and structured settlements entered into during the current year.
The following table shows the trend in loans 90 days or more past due as of the dates indicated.
% (1)
0.3
0.4
Total loans 90 days or more past due
0.5
(*) Less than 0.1%.
Page 45 of 60
Recreation and taxi medallion loans that reach 120 days past due are charged down to collateral value and reclassified to loan collateral in process of foreclosure. The following tables show the activity of loan collateral in process of foreclosure for the three and nine months ended September 30, 2023 and 2022.
Page 46 of 60
SEGMENT RESULTS
We manage our financial results under four operating segments; recreation lending, home improvement lending, commercial lending, and taxi medallion lending. We also show results for a non-operating segment, corporate and other investments.
Recreation Lending
Recreation lending is a high-growth business focused on originating prime and non-prime recreation loans which is a significant source of income for us, accounting for 67% of our interest income for the three and nine months ended September 30, 2023 and 71% for the three and nine months ended September 30, 2022.
We maintain relationships with approximately 3,200 dealers and financial service providers, or FSPs, not all of which are active at any one time. FSPs are entities that provide finance and insurance, or F&I, services to small dealers that do not have the desire or ability to provide F&I services themselves. The ability of FSPs to aggregate the financing and relationship management for many small dealers makes them valuable. We receive approximately half of our loan volume from dealers and the other half from FSPs. Our top ten dealer and FSP relationships were responsible for 49% and 41% of recreation lending’s new loan originations for the three and nine months ended September 30, 2023. The percentage of new loan originations by the top ten dealer and FSP relationships is a measure of concentration, which management uses to determine whether to undertake diversification efforts, and which provides investors with information about origination concentration.
The recreation loan portfolio consists of thousands of geographically distributed loans with an average loan size of approximately $20,000 as of September 30, 2023. The loans are fixed rate with an average term at origination of 12.8 years. The weighted average maturity of our loans outstanding as of September 30, 2023 is 10 years.
The loans are secured primarily by RVs, boats, and trailers, with RV loans making up 58% of the portfolio, boat loans making up 20%, and trailers making up 6% of the portfolio as of September 30, 2023, compared to 58%, 20% and 13% as of September 30, 2022. Recreation loans are made to borrowers residing nationwide, with the highest concentrations in Texas and Florida at 15% and 10% of loans outstanding, compared to 15% and 9% as of September 30, 2022, and with no other states over 10%. As of September 30, 2023 and 2022, the weighted average FICO scores of our recreation loans outstanding were 682 and 670.
During the nine months ended September 30, 2023, the recreation portfolio grew 13% from $1.2 billion to $1.3 billion, with the average interest rate increasing 52 basis points to 14.73% from a year ago. Additionally, reserve rates increased 76 basis points from September 30, 2022, reflecting an increase in reserves due to the adoption of CECL and rising loss rates.
The following table presents certain financial data and ratios as of and for the three and nine months ended September 30, 2023 and 2022.
Selected Earnings Data
Net interest income after loss provision
Net income before taxes
Total loans, gross
Total credit allowance
40,768
Total loans, net
1,289,408
1,131,051
Total borrowings
Charge-off ratio
Page 47 of 60
Home Improvement Lending
The home improvement lending segment works with contractors and financial service providers to finance home improvements and is concentrated in roofs, swimming pools, and windows at 40%, 19%, and 13% of total loans outstanding as of September 30, 2023, as compared to 37%, 23%, and 12% as of September 30, 2022, with no other collateral types over 10%. Home improvement loans are made to borrowers residing nationwide, with the highest concentrations in Texas and Florida, each representing 10% of loans outstanding September 30, 2023, compared to 10% and 9% as of September 30, 2022, with no other states over 10%. As of September 30, 2023 and 2022, the weighted average FICO scores of our home improvement loans outstanding were 763 and 753.
A large proportion of our home improvement-financed sales are facilitated by contractor salespeople with limited financing backgrounds rather than by contractor employees who provide F&I services. The result is contractor demand for financing services that facilitate an in-home transaction (e.g., digital tools, including mobile applications for phone or tablet, support for E-SIGN compliant electronic signatures, and extended operating hours), and additional resources for the salesperson throughout the financing process. We currently maintain relationships with approximately 1,100 contractors and FSPs. Our top ten contractors and FSP relationships were responsible for 61% of home improvement lending’s new loan originations for both the three and nine months ended September 30, 2023. The percentage of new loan originations by the top ten contractor and FSP relationships is a measure of concentration, which management uses to determine whether to undertake diversification efforts, and which provides investors with information about origination concentration.
The home improvement loan portfolio consists of thousands of geographically distributed loans with an average loan size approximately $20,000 as of September 30, 2023. The loans are fixed rate with an average term at origination of 13.6 years. The weighted average maturity of our loans outstanding as of September 30, 2023 is 12.4 years.
During the nine months ended September 30, 2023, the home improvement portfolio grew 19.8% from $626.4 million to $750.5 million, with reserve coverage rates increasing 54 basis points from a year ago reflecting an increase in reserves due to the adoption of CECL and rising loss rates. The average interest rate increased 83 basis points to 9.38% from the prior year.
733,208
565,002
Page 48 of 60
Commercial Lending
We originate both senior and subordinated loans nationwide to businesses in a variety of industries, with California, Minnesota, Illinois, and Texas each having 25%, 14%, 11%, and 10% of the segment portfolio, and no other states having a concentration greater than 10%. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $2,000,000 to $5,000,000 at origination, and typically include an equity component as part of the financing. The commercial lending business has concentrations in manufacturing, wholesale trade, construction, and administrative and support services making up 43%, 16%, 15%, and 10%, of the loans outstanding as of September 30, 2023.
During the nine months ended September 30, 2023, we originated $16.7 million of loans, compared to $28.2 million in originations in the 2022 period. As of September 30, 2023, commercial loans totaled $100.3 million, reflecting the originations generated during 2023.
The following table presents certain financial data and ratios as of and for the three and nine months ended September 30, 2023 and 2022. The commercial segment encompasses the mezzanine lending business, and the other legacy commercial loans (immaterial to total) have been allocated to corporate and other investments.
Recoveries for credit losses
Net interest (expense) income after loss provision
Income tax benefit (provision)
97,208
92,772
Reserve coverage (1)
Delinquency status (1) (2)
Charge-off ratio (3)
As of September 30,
Geographic Concentrations
Total GrossLoans
% ofMarket
California
24,747
25
15,149
Minnesota
13,841
14
12,381
Illinois
10,727
12,866
Texas
9,889
10,070
41,118
40
43,269
Page 49 of 60
Taxi Medallion Lending
The taxi medallion lending segment operates primarily in New York City, and to a lesser extent in Newark, Chicago and other markets. During the three and nine months ended September 30, 2023, taxi medallion values remained consistent in the New York City market. We continued to not recognize interest income with all loans being placed on nonaccrual as of the third quarter 2020 (except for settled loans with interest being paid in excess of the loan balance), and by transferring underperforming loans from the portfolio to loan collateral in process of foreclosure with charge-offs to collateral value, once loans become more than 120 days past due. All the loans are secured by taxi medallions and enhanced by personal guarantees of the shareholders and owners.
During the three and nine months ended September 30, 2023, we collected $5.7 million and $29.6 million related to taxi medallion and related assets, which resulted in net recoveries and gains of $3.2 million and $18.4 million in the respective periods. The amount of cash collected as well as recoveries recorded vary greatly from period to period due to a wide variety of circumstances surrounding each of the underlying assets, and while we continue to focus on collection and recovery efforts, including the $9.4 million collected in October 2023, it is unlikely that there will be other future collections at the levels experienced in the current periods.
Net interest income (expense)
2,240
4,377
Recovery ratio
Geographic Concentration
New York City
3,497
89
12,999
Newark
415
940
All Other
Total Loan Collateral in Process of Foreclosure
12,233
87
18,990
82
1,347
3,369
Chicago
829
27
Page 50 of 60
This non-operating segment relates to our equity and investment securities as well as our legacy commercial business, and other assets, liabilities, revenues, and expenses, which are not specifically allocated to the operating segments. Commencing with the 2020 second quarter, the Bank began issuing loans related to the new strategic partnership business, which is currently included within this segment. The associated activities of the strategic partnership business are currently limited to originating loans or other receivables facilitated by our strategic partners and selling those loans or receivables to our strategic partners or other third parties, without recourse, within a specified time after origination, such as three business days. Strategic partnerships represent $1.8 million in net loans as of September 30, 2023, compared to $0.8 million as of September 30, 2022, with originations of $36.5 million and $96.6 million during the three and nine months ended September 30, 2023 and $19.4 million and $34.3 million during the three and nine months ended September 30, 2022.
Net interest loss
Provision (recoveries) for credit losses
Net interest loss after loss provision
Net loss before taxes
Income tax benefit
Net loss after taxes
SUMMARY CONSOLIDATED FINANCIAL DATA
The table below presents our selected financial data for the three and nine months ended September 30, 2023 and 2022.
Equity to assets (1)
15.53
16.36
Debt to equity (1) (2)
5.3x
4.95
Net loans receivable to assets
83
Net charge-offs
10,370
25,469
9,677
Net charge-offs as a % of average loans receivable
Allowance coverage ratio
Page 51 of 60
CONSOLIDATED RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2023 Compared to the Three and Nine Months Ended September 30, 2022
Net income attributable to shareholders was $11.2 million and $40.8 million, or $0.48 and $1.77 per diluted share, for the three and nine months ended September 30, 2023, compared to $7.6 million and $30.8 million, or $0.32 and $1.26 per diluted share, for the three and nine months ended September 30, 2022.
Total interest income was $65.9 million and $183.5 for the three and nine months ended September 30, 2023 compared to $51.7 million and $142.1 million for the three and nine months ended September 30, 2022. The increase in interest income reflects the continued growth in our recreation and home improvement segments and an increased weighted average interest rate on the loan portfolio. The yield on interest earning assets, before allowance, was 11.28% and 11.10% for the three and nine months ended September 30, 2023, compared to 10.61% and 10.69% for the three and nine months ended September 30, 2022. The increase reflects higher interest rates on new originations in our recreation, home improvement and commercial segments, with the yield anticipated to continue to increase as older loans with lower rates amortize and newer originations at the higher current rates become a larger portion of our portfolio.
Loans before allowance for credit losses were $2.2 billion as of September 30, 2023, comprised of recreation ($1.3 billion), home improvement ($750.5 million), commercial ($100.3 million), taxi medallion ($3.9 million), and strategic partnership loans ($1.8 million). We had an allowance for credit losses as of September 30, 2023 of $79.1 million, which was attributable to the recreation (72%), home improvement (22%), commercial (4%), and taxi medallion (2%) loans, and included the impact of our CECL adoption on January 1, 2023, which resulted in an increase in allowance of $13.7 million.
Loans increased $286.1 million, or 15%, from December 31, 2022 as a result of $791.0 million of loan originations, offset by principal payments, and to a lesser extent charge-offs, transfers to loan collateral in process of foreclosure and net charge-offs. The provision for credit losses were $14.5 million and $27.0 million for the three and nine months ended September 30, 2023, compared to $10.0 million and $21.0 million in the three and nine months ended September 30, 2022. The provision for credit loss in the three and nine months ended September 30, 2023 included $5.3 million and $12.4 million of charge-offs with respect to the taxi medallion lending segment, reflecting continued recovery efforts with the impaired taxi medallion portfolio, while net charge offs in the recreation and home improvement segments increased to more normal levels from the historically low levels experienced in the prior year periods. Recoveries in the taxi medallion lending segment are closely tied to our collection efforts and fluctuate significantly from quarter to quarter. Collections for the three and nine months ended September 30, 2023, including $5.7 million and $29.6 million in the taxi medallion loan portfolio, were substantially higher than normal, which we do not expect to occur on a recurring basis.
Interest expense was $17.1 million and $44.4 million for the three and nine months ended September 30, 2023, compared to $9.7 million and $25.3 million for the three and nine months ended September 30, 2022, reflecting both higher average borrowings and higher average borrowing costs during the three and nine months ended September 30, 2023, both of which we expect to further increase in the current inflationary environment. The average cost of borrowed funds was 3.28% and 3.02% for the three and nine months ended September 30, 2023, compared to 2.20% and 2.09% for the three and nine months ended September 30, 2022. The increase of 108 and 93 basis points from the prior year periods is attributable to the increased cost of newly issued certificates of deposit used both to fund our growth and to replace older maturing vintages with lower rates. As we replace upcoming maturities with new issues, we expect our cost of funds to further increase. In addition, we expect our interest expense to increase as a result of our refinancing of our senior notes. Average debt outstanding was $2.1 billion and $2.0 billion for the three and nine months ended September 30, 2023, up from $1.7 billion for both the three and nine months ended September 30, 2022, as we have issued additional certificates of deposits to fund our loan growth. See page 39 for tables that show average balances and cost of funds for our funding sources.
Net interest income was $48.8 million and $139.1 million for the three and nine months ended September 30, 2023, compared to $42.0 million and $116.9 million for the three and nine months ended September 30, 2022. The net interest margin before the impact of the allowance for credit losses was 8.35% and 8.42% for the three and nine months ended September 30, 2023, compared to 8.63% and 8.79% for the three and nine months ended September 30, 2022, reflecting the above as well as a greater composition in our home improvement loan portfolio, which has a lower net interest margin as compared to our recreation loan portfolio. With the rates we charge on loans and our cost of funds both increasing due to inflation, our net interest margin has tightened, and we expect that trend to continue to some degree. However, despite such tightening of our net interest margin, our net interest still increased as a result of a higher volume of originations.
Net other income, which is comprised primarily of gains on the sale of loans and taxi medallions, gain (losses) on equity investments, prepayment fees, servicing fee income, late charges, and write-downs of loan collateral was $4.3 million and $8.3 million for the three and nine months ended September 30, 2023, primarily due to collections on the taxi medallion loans which generated gains of $1.4 million and $4.6 million for the three and nine months ended September 30, 2023, compared to $0.2 million of losses and $5.1 million of income for the three and nine months ended September 30, 2022, which included $0.5 million and $5.1 million of gains on the disposition of taxi medallion and related assets.
Page 52 of 60
Operating expenses were $19.1 million and $56.5 million for the three and nine months ended September 30, 2023, compared to $19.4 million and $56.3 million for the three and nine months ended September 30, 2022. Salaries and benefits were $9.6 million and $27.8 million for the three and nine months ended September 30, 2023, compared to $8.4 million and $23.7 million for the three and nine months ended September 30, 2022, primarily reflecting a greater head count at our operating subsidiaries, Medallion Bank and Medallion Capital, and the increased cost of managing our businesses as they grow. Professional fees were $1.1 million and $4.2 million for the three and nine months ended September 30, 2023, down from $3.7 million and $12.1 million for the three and nine months ended September 30, 2022, primarily reflecting lower legal and professional costs during the quarter for a variety of corporate matters, with costs in the prior year period being elevated due to the SEC litigation. These elevated costs incurred gave rise to an approximate $6.5 million liability as a result of the collection of insurance coverage with respect to those costs. The Company anticipates recognizing the benefit of this liability, offsetting future costs, through the remainder of this matter.
Total income tax expense was $6.7 million and $18.6 million for the three and nine months ended September 30, 2023, compared to $3.2 million and $12.9 million for the three and nine months ended September 30, 2022, and included a $1.1 million valuation allowance in the 2023 periods related to certain deferred tax assets.
Loan collateral in process of foreclosure was $15.9 million at September 30, 2023, a decline from $21.8 million at December 31, 2022. The decrease primarily reflects cash payments received and structured settlements during the period.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of consumer, commercial, and taxi medallion loans, and investment securities) reprice on a different basis over time in comparison to our interest-bearing liabilities (consisting primarily of bank certificates of deposit, SBA debentures and borrowings, historically credit facilities, and borrowings from banks and other lenders).
Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Abrupt increases in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at the higher prevailing interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning assets and interest-bearing liabilities results in interest rate risk.
The effect of changes in interest rates is mitigated by regular turnover of the portfolio. We believe that the average life of our loan portfolio varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment. However, borrowers may prepay for a variety of other reasons, such as to monetize increases in the underlying collateral values. In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years.
A relative measure of interest rate risk can be derived from our interest rate sensitivity gap. The interest rate sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities, and negative when repriceable liabilities exceed repriceable assets. A relative measure of interest rate sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets.
Page 53 of 60
The following table presents our interest rate sensitivity gap at September 30, 2023. The principal amounts of interest earning assets are assigned to the time frames in which such principal amounts are contractually obligated to be repriced. We do not reflect any prepayment assumptions in preparing the analysis, despite historical average life experience being significantly shorter than contractual terms.
September 30, 2023 Cumulative Rate Gap (1)
LessThan1 Year
MoreThan1 and LessThan 2Years
MoreThan 2and LessThan 3Years
MoreThan 3and LessThan 4Years
MoreThan 4and LessThan 5Years
MoreThan5 and LessThan 6Years
Earning assets
129,350
34,319
30,542
93,328
97,422
66,639
1,708,387
2,159,987
Adjustable rate
801
588
Investment securities and equity investments
5,664
1,195
6,234
2,749
2,312
39,777
63,717
126,392
500
750
Total earning assets
261,943
36,815
38,114
96,077
99,763
72,425
1,748,164
2,353,301
Interest bearing liabilities
Interest rate gap
(475,522
(546,128
(293,006
(73,389
(110,661
1,681,164
254,883
Cumulative interest rate gap
(1,021,650
(1,314,656
(1,388,045
(1,498,706
(1,426,281
December 31, 2022 (2)
(367,803
(807,687
(1,158,706
(1,283,654
(1,372,105
(1,314,604
222,536
December 31, 2021 (2)
(230,601
(455,807
(770,239
(891,489
(1,007,810
(940,350
153,539
Our interest rate sensitive assets were $2.4 billion and interest rate sensitive liabilities were $2.1 billion at September 30, 2023. The one-year cumulative interest rate gap was a negative $475.5 million or 20% of interest rate sensitive assets. We seek to manage interest rate risk by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, entering into borrowing arrangements with terms that align with the anticipated life of our assets, and using other options consistent with managing interest rate risk.
LIBOR terminated on June 30, 2023. We did not have loans tied to LIBOR. Our trust preferred securities bore a variable rate of interest of 90-day LIBOR plus 2.13% until June 30, 2023. For these borrowings, the 90-day Secured Overnight Financing Rate adjusted by a relevant spread adjustment of approximately 26 basis points has replaced the previous LIBOR-based rate.
Liquidity and Capital Resources
Our sources of liquidity include brokered certificates of deposit and other borrowings at Medallion Bank, unfunded commitments to sell debentures to the SBA, loan amortization and prepayments, private and public issuances of debt securities, participations or sales of loans to third parties, issuances of preferred securities at our subsidiaries, and the disposition of our other assets.
In September 2023, we completed a private placement to certain institutional investors of $39.0 million aggregate principal amount of 9.25% unsecured senior notes due September 2028, with interest payable semiannually.
In April 2023, the Bank began to originate retail savings deposits through a third-party service provider and, as of September 30, 2023, the Bank had $18.0 million in retail savings deposit balances.
In March 2023, the Bank established a discount window line of credit at the Federal Reserve. As of September 30, 2023, the Bank had approximately $37.0 million in investment securities pledged as collateral to the Federal Reserve. The current advance rate on the pledged securities is 100% of fair value, for a total of approximately $37.0 million in secured borrowing capacity, none of which was utilized as of September 30, 2023.
In February 2021, we completed a private placement to certain institutional investors of $25.0 million aggregate principal amount of 7.25% unsecured senior notes due February 2026, with interest payable semiannually. Follow-on offerings of these notes in March and April 2021 raised an additional $3.3 million and $3.0 million.
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In December 2020, we completed a private placement to certain institutional investors of $33.6 million aggregate principal amount of 7.50% unsecured senior notes due December 2027, with interest payable semiannually. Follow-on offerings of these notes in February and March 2021 raised an additional $8.5 million. In April 2021, we raised an additional $11.7 million in a follow-on offering, and repaid substantially all of our remaining bank borrowings.
In December 2019, the Bank closed an initial public offering of 1,840,000 shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, with a $46.0 million aggregate liquidation amount, yielding net proceeds of $42.5 million, which were recorded in the Bank’s shareholders’ equity. Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is based on the Secured Overnight Financing Rate, or SOFR, and is expected to be three-month Term SOFR) plus a spread of 6.46% per annum.
The net proceeds from the December 2020, February 2021, March 2021, April 2021, and September 2023 private placements were used for general corporate purposes, including repayment of outstanding debt, including repayment of our 9.00% retail notes at maturity in April 2021 and to pay down other borrowings, including some borrowings at a discount, and to repurchase and cancel $33.0 million of our 8.25% notes due in March 2024.
The table below presents the components of our debt and preferred securities as of September 30, 2023, exclusive of deferred financing costs of September 30, 2023. See Note 5 to the consolidated financial statements for details of the contractual terms of our borrowings.
Balance
Percentage
Rate (1)
Total outstanding debt
Our contractual obligations expire on or mature at various dates through September 2037. The following table shows our contractual obligations at September 30, 2023.
Payments due by period
Less than1 year
1 – 2years
2 – 3years
3 – 4years
4 – 5years
More than5 years
Borrowings
Total outstanding borrowings
Operating lease obligations
2,511
2,496
2,453
1,519
1,271
322
Total contractual obligations
739,976
585,439
333,573
170,985
211,695
67,322
2,108,990
Approximately $1.3 billion of our borrowings have maturity dates during the next two years, a majority of which are brokered CDs that have no right of voluntary withdrawal.
In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of them at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of our portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net interest income.
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We use a combination of long-term and short-term borrowings and equity capital to finance our lending and investing activities. Our long-term fixed-rate investments are financed primarily with fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity a hypothetical immediate 1% increase in interest rates would result in an increase to net income as of September 30, 2023 by $2.5 million on an annualized basis, and the impact of such an immediate increase of 1% over a one year period would have been a reduction in net income by $1.1 million at September 30, 2023. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net income from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.
From time to time, we work with investment banking firms and other financial intermediaries to investigate the viability of several other financing options which include, among others, the sale or spinoff of certain assets or divisions, the development of a securitization conduit program, and other independent financing for certain subsidiaries or asset classes. These financing options would also provide additional sources of funds for both external expansion and continuation of internal growth.
The following table illustrates sources of available funds for us and each of our subsidiaries, and amounts outstanding under preferred securities and borrowings and their respective end of period weighted average interest rates at September 30, 2023. See Note 5 to the consolidated financial statements for additional information about each borrowing.
MedallionFinancial Corp.
MFC
MCI
FSVC
MB
September 30,2023
December 31,2022
Cash, cash equivalents and federal funds sold
13,441
13,033
(1)
884
100,091
Average interest rate
Maturity
9/37
Retail notes and privately placed borrowings
7.66
3/24 - 9/28
3/24-12/27
SBA debentures & borrowings
Amounts available
15,250
4,750
Amounts outstanding
70,250
489
3.08
3/24- 3/34
4/24
3/23 - 3/33
Brokered CDs
(2)
1,610,922
1.91
10/23-9/28
1/23-12/27
10/23
Total cash
Total debt outstanding
160,000
1,869,179
1,833,434
Loan amortization, prepayments, and sales also provide a source of funding for us. Prepayments on loans are influenced significantly by general interest rates, taxi medallion loan market values, economic conditions, and competition.
We also generate liquidity through deposits generated at the Bank, the offering of privately placed notes, through the issuance of SBA debentures, and through our preferred securities, and have utilized borrowing arrangements with other banks in the past, as well as from cash flow from operations. In addition, we may choose to participate a greater portion of our loan portfolio to third parties. We regularly seek additional sources of liquidity; however, given current market conditions, there can be no assurance that we will be able to secure additional liquidity on terms favorable to us or at all. If that occurs, we may decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become more favorable; or we may be required to dispose of assets when we would not otherwise do so, and at prices which may be below the net book value of such assets in order for us to repay indebtedness on a timely basis.
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Dividends and Stock Repurchases
Beginning in March 2022, the Company's board of directors reinstated our quarterly dividend. A dividend of $0.08 per share was paid in August 2023. On October 24, 2023, the board of directors authorized and increased the quarterly dividend to $0.10 per share, with a dividend payable on November 30, 2023. We may, however, re-evaluate the dividend policy in the future depending on market conditions. There can be no assurance that we will continue to pay any cash distributions, as we may retain our earnings to facilitate the growth of our business, to finance our investments, to provide liquidity, or for other corporate purposes.
On April 29, 2022, our board of directors authorized a new stock repurchase program, pursuant to which we were authorized to repurchase up to $35 million of our shares, which was increased to $40 million on August 10, 2022. Such new repurchase program replaced the previous one, which was terminated. The Company did not repurchase shares of common stock during the nine months ended September 30, 2023. Accordingly, as of September 30, 2023, up to $19,998,012 of shares remained authorized for repurchase under our stock repurchase program.
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There has been no material change in disclosure regarding quantitative and qualitative disclosures about market risk since we filed our Annual Report on Form 10-K for the year ended December 31, 2022.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a—15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, and have concluded that they are effective as of September 30, 2023 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our internal control over financial reporting to determine whether any changes occurred during the 2023 third quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, and have concluded that there have been no changes that occurred during the 2023 third quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See Note 10 “Commitments and Contingencies” subsections (c) and (d) to the consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for details of the Company’s legal proceedings.
There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the Securities and Exchange Commission on March 10, 2023.
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EXHIBITS
Number
Description
4.1
Form of Note Purchase Agreement, including the form of Note attached thereto. Filed as Exhibit 4.1. to the Current Report on Form 8-K filed on October 2, 2023 (File No. 001-33747) and incorporated by reference herein.
10.1
Commitment Letter, dated July 6, 2023, by the Small Business Administration to Medallion Capital, Inc., accepted and agreed to by Medallion Capital, Inc. on July 10, 2023. Filed as Exhibit 10.1 to the Current Report on Form 8-K filed on July 11, 2023 (File No. 001-33747) and incorporated by reference herein.
31.1
Certification of Alvin Murstein pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2
Certification of Anthony N. Cutrone pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1
Certification of Alvin Murstein pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.2
Certification of Anthony N. Cutrone pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
November 6, 2023
By:
/s/ Alvin Murstein
Alvin Murstein
Chairman and Chief Executive Officer
/s/ Anthony N. Cutrone
Anthony N. Cutrone
Executive Vice President and Chief Financial Officer
Signing on behalf of the registrant as principal financial and accounting officer.
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