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, 2022
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 check mark 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 2, 2022, was 22,927,839.
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
56
ITEM 4. CONTROLS AND PROCEDURES
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 6. EXHIBITS
57
SIGNATURES
58
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 ongoing COVID-19 pandemic and 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 58
BASIS OF PREPARATION
We, Medallion Financial Corp., or the Company, are a specialty finance company organized as a Delaware corporation. Our strategic focus is the growth of our consumer finance and commercial lending businesses. Our total assets were $2.2 billion and $1.9 billion as of September 30, 2022 and December 31, 2021.
We conduct our business through various wholly-owned subsidiaries including:
Our consolidated balance sheet as of September 30, 2022, and the related consolidated statements of operations, consolidated statements of other comprehensive income, consolidated statements of stockholders’ equity and cash flows for the three 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 footnote 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, 2022 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, 2021.
Page 3 of 58
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands, except share and per share data)
September 30, 2022
December 31, 2021
Assets
Cash and cash equivalents (1)
$
24,754
64,482
Federal funds sold
73,448
60,002
Investment securities
48,354
44,772
Equity investments
10,670
9,726
Loans
1,855,510
1,488,924
Allowance for loan losses
(61,535
)
(50,166
Net loans receivable
1,793,975
1,438,758
Goodwill
150,803
Loan collateral in process of foreclosure (2)
24,331
37,430
Intangible assets, net
22,398
23,480
Property, equipment, and right-of-use lease asset, net
12,636
11,762
Accrued interest receivable
11,959
10,621
Income tax receivable
3,420
833
Other assets
22,793
20,388
Total assets
2,199,541
1,873,057
Liabilities
Deposits (3)
1,555,832
1,250,880
Long-term debt (4)
219,448
219,973
Deferred tax liabilities, net
26,132
18,210
Operating lease liabilities
8,580
9,053
Accrued interest payable
3,432
3,395
Accounts payable and accrued expenses (5)
26,228
15,718
Total liabilities
1,839,652
1,517,229
Commitments and contingencies (6)
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 - 28,529,993 shares at September 30, 2022 and 28,124,629 shares at December 31, 2021 issued)
285
281
Additional paid in capital
282,681
280,038
Treasury stock (5,344,923 shares at September 30, 2022 and 2,951,243 shares at December 31, 2021)
(43,741
(24,919
Accumulated other comprehensive income (loss)
(3,562
1,034
Retained earnings
55,438
30,606
Total stockholders’ equity
291,101
287,040
Non-controlling interest in consolidated subsidiaries
68,788
Total equity
359,889
355,828
Total liabilities and equity
Number of shares outstanding
23,185,070
25,173,386
Book value per share
12.56
11.40
The accompanying notes should be read in conjunction with these consolidated financial statements.
Page 4 of 58
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
Interest and fees on loans
50,955
41,250
140,759
115,237
Interest and dividends on investment securities
739
247
1,349
716
Total interest income(1)
51,694
41,497
142,108
115,953
Interest on deposits
6,240
4,189
15,306
13,366
Interest on long-term debt
3,198
9,662
Interest on short-term borrowings
3,414
39
9,952
690
Total interest expense
9,654
7,426
25,258
23,718
Net interest income
42,040
34,071
116,850
92,235
Provision (benefit) for loan losses
10,047
(337
21,046
2,000
Net interest income after provision for loan losses
31,993
34,408
95,804
90,235
Other income (loss)
Gain (loss) on equity investments
(1,123
4,101
2,985
7,306
Write-down of loan collateral in process of foreclosure
(94
(438
(608
(5,385
Gain on extinguishment of debt
4,626
Sponsorship and race winnings, net
3,335
10,153
Other income
986
208
6,278
209
Total other (loss) income, net
(231
7,206
8,655
16,909
Other expenses
Salaries and employee benefits
8,411
7,957
23,709
21,542
Professional fees
3,722
1,963
12,106
4,694
Loan servicing fees
2,159
1,684
6,231
5,062
Collection costs
1,593
1,136
3,935
4,010
Rent expense
629
481
1,764
1,780
Regulatory fees
610
488
1,621
1,383
Amortization of intangible assets
359
362
1,082
1,083
Race team related expenses
2,424
7,219
1,926
2,228
5,807
6,412
Total other expenses
19,409
18,723
56,255
53,185
Income before income taxes
12,353
22,891
48,204
53,959
Income tax provision
3,205
6,167
12,892
16,573
Net income after taxes
9,148
16,724
35,312
37,386
Less: income attributable to the non-controlling interest
1,512
784
4,535
2,748
Total net income attributable to Medallion Financial Corp.
7,636
15,940
30,777
34,638
Basic net income per share
0.33
0.65
1.28
1.41
Diluted net income per share
0.32
0.64
1.26
1.39
Weighted average common shares outstanding
Basic
23,154,775
24,634,845
24,020,058
24,583,573
Diluted
23,510,645
24,990,226
24,332,776
24,945,707
Page 5 of 58
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(Dollars in thousands)
Other comprehensive (loss) income, net of tax
(1,461
(141
(4,596
(719
Total comprehensive income
7,687
16,583
30,716
36,667
Less comprehensive income attributable to the non-controlling interest
Total comprehensive income attributable to Medallion Financial Corp.
6,175
15,799
26,181
33,919
Page 6 of 58
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, 2021
28,124,629
(2,951,243
Net income
9,841
11,353
Distributions to non-controlling interest
(1,512
Stock-based compensation expense
4
594
598
Issuance of restricted stock, net
383,925
Forfeiture of restricted stock, net
(5,730
Exercise of stock options
23,192
152
Purchase of common stock
(67,660
(617
Dividend paid on common stock ($0.08 per share)
(2,044
Other comprehensive loss, net of tax
(1,717
Balance at March 31, 2022
28,526,016
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
(5,344,923
Page 7 of 58
Balance at December 31, 2020
27,828,871
278
277,539
(23,502
2,012
231,408
73,153
304,561
8,431
640
9,071
2
496
498
163,561
(7,602
768
(605
Balance at March 31, 2021
27,985,598
280
278,035
(15,071
1,407
239,732
72,282
312,014
10,267
1,325
11,592
Stock-based compensation
576
15,514
(10,332
22,227
116
Net change in unrealized gains on investments, net of tax
27
Balance at June 30, 2021
28,013,007
278,727
(4,804
1,434
250,718
72,096
322,814
Net income (loss)
602
(678
21,075
125
Balance at September 30, 2021
28,033,404
279,454
11,136
1,293
267,244
71,368
338,612
Page 8 of 58
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:
Provision for loan losses
Paid-in-kind interest income
(528
(682
Depreciation and amortization
4,408
5,289
Amortization of origination fees, net
7,184
5,770
Increase in deferred and other tax liabilities, net
5,335
13,113
Net change in value of loan collateral in process of foreclosure
3,806
8,501
Net realized gains on sale of investments
(2,985
(7,436
2,495
1,674
(4,626
(Increase) decrease in accrued interest receivable
(1,338
692
Increase in other assets
(5,641
(1,577
Increase in accounts payable and accrued expenses
9,858
3,498
(Decrease) increase in accrued interest payable
37
(1,626
Net cash provided by operating activities
78,989
61,976
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated
(806,788
(564,914
Proceeds from principal receipts, sales, and maturities of loans
414,760
342,718
Purchases of investments
(18,658
(17,979
Proceeds from principal receipts, sales, and maturities of investments
11,970
21,389
Proceeds from the sale and principal payments on loan collateral in process of foreclosure
17,952
16,661
Net cash used for investing activities
(380,764
(202,125
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from time deposits and funds borrowed
676,264
587,945
Repayments of time deposits and funds borrowed
(371,800
(470,168
Cash dividend paid on common stock
(5,766
Distributions to non-controlling interests
(4,535
(4,534
Treasury stock repurchased
(18,822
Proceeds from the exercise of stock options
240
Net cash provided by financing activities
275,493
113,483
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(26,282
(26,666
Cash and cash equivalents beginning of period(1)
124,484
112,040
Cash and cash equivalents, end of period (1)
98,202
85,374
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest
23,177
23,418
Cash paid during the period for income taxes
5,786
3,150
NON-CASH INVESTING
Loans transferred to loan collateral in process of foreclosure, net
8,659
13,145
Page 9 of 58
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 (“RVs”), boats and other consumer recreational equipment and to finance home improvements such as replacement windows and roofs. Prior to 2014, 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 deposits which are originated nationally through a variety of brokered deposit relationships. In 2019, the Bank began building a strategic partnership program that targets relationships with financial technology, or fintech, companies to offer loans and other financial services to customers. The Bank entered into an initial partnership in 2020 and continues to evaluate and launch additional partnerships.
The Company also conducts business through its subsidiaries Medallion Capital, Inc., or MCI, a Small Business Investment Company, or SBIC, which conducts a mezzanine financing business; Medallion Funding LLC, or MFC, an SBIC, which historically was our primary taxi medallion lending company; and Freshstart Venture Capital Corp., or FSVC, an SBIC that originated and services 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, 2022, 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.
MFC, through several wholly-owned subsidiaries, together, Medallion Chicago, purchased $8.7 million of City of Chicago taxi medallions out of foreclosure. These 159 taxi medallions are carried at a net realizable value of $1.0 million in other assets on the Company’s consolidated balance sheet at September 30, 2022 and December 31, 2021.
(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, third-party holdings are recorded as non-controlling interest.
Page 10 of 58
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, 2022, cash includes $1.3 million of interest-bearing funds deposited in other banks, that are mainly callable, with original terms of 4 to 7 years.
Fair Value of Assets and Liabilities
The Company follows the Financial Accounting Standards Board, or FASB, FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, or FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e., a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entity’s own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 12 and 13 to the consolidated financial statements.
Equity Investments
The Company follows FASB ASC Topic 321, Investments – Equity Securities, or ASC 321, which requires all applicable investments in equity securities with a readily determinable fair value to be valued as such, and those without a readily determinable fair value, are measured at cost, less any impairment plus or minus any observable price changes. Equity investments of $10.7 million and $9.7 million at September 30, 2022 and December 31, 2021, 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, 2022, cumulative impairment of $2.0 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 September 30, 2022 and December 31, 2021, the fair value of these securities were $1.7 million and $2.0 million and are included in other assets on the consolidated balance sheet.
The table below presents the unrealized portion related to the equity securities held.
Net losses recognized during the period on equity securities
(77
(229
(31
Less: Net gains (losses) recognized during the period on equity securities sold during the period
Unrealized 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 September 30, 2022 and $0.3 million at December 31, 2021, and less than $0.1 million and $0.1 million was amortized to interest income for the three and nine months ended September 30, 2022 and less than $0.1 million and $0.1 million for the three and nine months ended September 30, 2021. 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.
The Company’s loans are currently reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan.
Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At September 30, 2022 and December 31, 2021, net loan origination costs were $34.3 million and $26.1 million. Net amortization to income for the three and nine months ended September 30, 2022 was $2.3 million and $6.8 million and was $2.0 million and $5.8 million for the three and nine months ended September 30, 2021.
Page 11 of 58
Interest income is recorded on the accrual basis. Medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received unless a determination has been made to apply all cash receipts to principal. The consumer loan portfolio has different characteristics, typified by a larger number of smaller dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is unlikely the Company will be able to collect all amounts due according to the contractual terms of the original loan agreement. Management considers loans that are in bankruptcy status, but have not been charged-off, to be impaired. Consumer loans are placed on nonaccrual when they become 90 days past due, or earlier if they enter bankruptcy, and are charged-off in their entirety when deemed uncollectible, or when they become 120 days past due (Recreation loans in bankruptcy are not charged off at 120 days), 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 typically 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 $6.0 million at September 30, 2022, or 0.33% of the total loan portfolio, compared to $4.0 million, or 0.28%, at December 31, 2021.
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants concessions to the borrower for other than an insignificant period of time that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring, or TDR. 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 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. Loans classified as TDRs are considered impaired loans. Recreation loans which are party to a Chapter 13 bankruptcy are immediately classified as TDRs. The Company’s policy with regard to bankrupt recreation loans is to take an immediate 40% write down of the loan balance.
Loan collateral in process of foreclosure primarily includes medallion loans that have reached 120 days past due and have been charged-down to their net realizable value, in addition to consumer repossessed collateral in the process of being sold. For New York City medallion loans in the process of foreclosure, the Company continued to utilize a net value of $79,500 when assessing net realizable value for the medallion loans, despite fluctuating current transfer prices which may exceed that level from time to time. The "loan collateral in the process of foreclosure" designation reflects that the collection activities on these loans have transitioned from working with the borrower, to the liquidation of the collateral securing the loans. The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing, or FASB ASC 860, which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, the Company had elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $19.6 million and $20.5 million at September 30, 2022 and December 31, 2021. 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, 2022 and December 31, 2021.
Allowance for Loan Losses
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. In analyzing the adequacy of the allowance for loan losses, the Company uses historical delinquency and actual loss rates with a one-year lookback period for consumer loans. For commercial loans deemed nonperforming, the historical loss experience and other projections are looked at. For medallion loans, delinquent nonperforming loans are valued at collateral value for the most recent quarter. Collateral value for the medallion loans is generally determined utilizing factors deemed relevant under the circumstances of the market including but not limited to: actual transfers, pending transfers, median and average sales prices, discounted cash flows, market direction and sentiment, and general economic trends for the industry and economy. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. As a result of COVID-19, the Company determined that anticipated payment activity on the medallion portfolio was impossible to quantify upon exit of the six-month deferral period with borrowers, and therefore deemed all such loans as impaired in the third quarter of 2020. As a result, all medallion loans were placed on nonaccrual and reserved down to collateral value, net of liquidation costs, which was $79,500 for New York City medallions. The Company continued to use $79,500 as its internally determined value for assessing net realizable value for these medallion loans, despite fluctuating current transfer prices which may exceed that level from time to time. The Company continues to monitor the impact of COVID-19 on the consumer, commercial, and medallion loans. Credit losses are deducted from the allowance and subsequent recoveries are added back to the allowance.
Page 12 of 58
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, 2022 and December 31, 2021, the Company had goodwill of $150.8 million, all of which related to the Bank. As of September 30, 2022 and December 31, 2021, the Company had intangible assets of $22.4 million and $23.5 million. Amortization expense on the intangible assets for the three and nine months ended September 30, 2022 and 2021 was $0.4 million and $1.1 million. Additionally, loan portfolio premiums of $12.4 million were determined as of April 2, 2018, of which $0.1 million and $0.5 million were outstanding as of September 30, 2022 and December 31, 2021, and of which $0.2 million and $0.5 million was amortized to interest income for the three and nine months ended September 30, 2022 and $0.2 million and $2.0 million was amortized to interest income for the three and nine months ended September 30, 2021. Management performed a step 0 analysis in assessing the goodwill and intangibles for impairment at December 31, 2021, concluding that there was no impairment of these assets. The Company has reviewed these assets, all of which relate to the Bank, and concluded that no impairment exists as of September 30, 2022.
The table below shows the details of the intangible assets as of the dates presented.
Brand-related intellectual property
17,050
17,874
Home improvement contractor relationships
5,348
5,606
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, 2022 and was $0.1 million and $0.2 million for the three and nine months ended September 30, 2021.
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 $0.7 million and $2.0 million for the three and nine months ended September 30, 2022 and was $0.6 million and $1.8 million for the three and nine months ended September 30, 2021. 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 $7.2 million and $7.1 million as of September 30, 2022 and December 31, 2021.
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.
Page 13 of 58
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 to the weighted average dilutive effect of the Company’s stock options and restricted stock. The Company uses the treasury stock method to calculate diluted EPS, which is a method of recognizing the use of proceeds that could be obtained upon exercise of options and warrants, including unvested compensation expense related to the shares, in computing diluted EPS. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. The table below shows the calculation of basic and diluted EPS.
Net income available to common stockholders
Weighted average common shares outstanding applicable to basic EPS
Effect of dilutive stock options
48,552
98,906
74,097
82,522
Effect of restricted stock grants
307,318
256,475
238,621
279,612
Adjusted weighted average common shares outstanding applicable to diluted EPS
Potentially dilutive common shares excluded from the above calculations aggregated 657,579 and 26,000 shares as of September 30, 2022 and 2021.
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, 2022 and 2021, the Company issued 383,925 and 163,561 restricted shares of stock-based compensation awards, issued 0 and 317,398 shares of other stock-based compensation awards, and issued 129,638 and 16,803 restricted stock units. The Company recognized $1.0 million and $2.5 million, or $0.04 and $0.10 per share, for the three and nine months ended September 30, 2022, and $0.6 million and $1.7 million, or $0.02 and $0.07 per share, for the three and nine months ended September 30, 2021, of non-cash stock-based compensation expense related to the grants. As of September 30, 2022, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $4.1 million, which is expected to be recognized over the next 10 quarters.
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the bank regulators about components, risk weightings, and other factors.
FDIC-insured banks, including the Bank, are subject to certain federal laws, which impose various legal limitations on the extent to which banks may finance or otherwise supply funds to certain of their affiliates. In particular, the Bank is subject to certain restrictions on any extensions of credit to, or other covered transactions with, such as certain purchases of assets, the Company or its affiliates.
Page 14 of 58
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for federal deposit insurance, the FDIC ordered that the Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%, a level which could preclude its ability to pay dividends to the Company, and that an adequate allowance for loan losses be maintained. As of September 30, 2022, the Bank’s Tier 1 leverage ratio was 16.2%. 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
228,838
193,459
Tier 1 capital
297,626
262,247
Total capital
320,957
281,211
Average assets
1,834,814
1,495,726
Risk-weighted assets
1,829,047
1,482,678
Leverage ratio (1)
4.0
%
5.0
16.2
17.5
Common equity tier 1 capital ratio (2)
7.0
6.5
12.5
13.1
Tier 1 capital ratio (3)
8.5
8.0
16.3
17.7
Total capital ratio (3)
10.5
10.0
17.6
19.0
In the table above, the minimum risk-based ratios as of September 30, 2022 and December 31, 2021 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, 2022 and December 31, 2021.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, or Topic 326: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. Under the FASB’s new standard, the concepts used by entities to account for credit losses on financial instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is removed. Loss estimates are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 2019 for public entities, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022. The Company is assessing the impact the update will have on the accompanying financial statements, but currently anticipates an initial 10-15% overall increase in the allowance as well as earlier recognition of credit losses and potentially greater volatility in the allowance and provision.
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements, or Topic 205: Depository and Lending, or Topic 942: and Financial Services – Investment Companies, or Topic 946: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This new standard amends certain SEC paragraphs from the Codification in response to the issuance of SEC Final Rule No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses and SEC Rule No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The Company has assessed the impact the update and determined it does not have a material impact on the accompanying financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses, or Topic 326: Troubled Debt Restructurings and Vintage Disclosures, or ASU 2022-02. The main objective of this new standard is to amend ASU 2016-13 in response to feedback received from the post-implementation review process. The amendments update ASU 2016-13 to require that an entity measure and record the lifetime expected credit losses on an asset upon origination or acquisition, and, as a result, credit losses from loans modified as troubled debt restructurings (TDRs) have been incorporated into the allowance for credit losses. The amendments also require the disclosure of current period gross write-offs, by year of origination, for financing receivables. ASU 2022-02 is effective upon the adoption of ASU 2016-13. The Company is in the process of evaluating the ASU in conjunction with its adoption of CECL on January 1, 2023.
Page 15 of 58
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement, or Topic 820: Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, or ASU 2016-13. This new standard is effective for the fiscal years beginning after December 31, 2023 and clarifies the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The Company has assessed the impact the update and determined it does not have a material impact 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.
(3) INVESTMENT SECURITIES
Fixed maturity securities available for sale at September 30, 2022 and December 31, 2021 consisted of the following:
September 30, 2022(Dollars in thousands)
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
FairValue
Mortgage-backed securities, principally obligations of U.S. federal agencies
45,444
(5,356
40,088
State and municipalities
9,015
(749
8,266
Total
54,459
(6,105
December 31, 2021(Dollars in thousands)
35,469
672
(403
35,738
9,025
60
(51
9,034
44,494
732
(454
The amortized cost and estimated market value of investment securities at September 30, 2022 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
1,613
1,600
Due after one year through five years
7,692
7,389
Due after five years through ten years
9,426
8,172
Due after ten years
35,728
31,193
The following tables show information pertaining to securities with gross unrealized losses at September 30, 2022 and December 31, 2021, 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
(2,284
25,669
(3,072
12,423
(249
5,536
(500
2,721
(2,533
31,205
(3,572
15,144
16,330
(9
2,124
(42
(1,956
(412
18,454
The Company had 58 and 15 securities as of September 30, 2022 and December 31, 2021, with unrealized losses that have not been recognized in income because the issuers’ bonds are of high credit quality, and the Company has the intent and ability to hold the securities for the foreseeable future. The fair value is expected to recover as the bonds approach the maturity date.
Page 16 of 58
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table shows the major classification of loans, inclusive of capitalized loan origination costs, as of September 30, 2022 and December 31, 2021.
Amount
As aPercent ofGross Loans
Recreation
1,171,819
63
961,320
65
Home improvement
575,210
31
436,772
29
Commercial
93,735
5
76,696
Medallion
13,973
1
14,046
Strategic partnership
773
*
90
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, 2022 and 2021.
Three Months Ended September 30, 2022(Dollars in thousands)
HomeImprovement
StrategicPartnership
Gross loans – June 30, 2022
1,096,670
526,278
96,928
14,152
593
1,734,621
Loan originations
149,151
100,451
4,500
19,428
273,682
Principal payments, sales, maturities, and recoveries
(66,338
(49,630
(4,017
(331
(19,248
(139,564
Charge-offs
(7,534
(1,780
(3,857
(13,171
Transfer to loan collateral in process of foreclosure, net
(2,862
Amortization of origination costs
(3,008
494
(2,514
Amortization of loan premium
(60
(90
(150
FASB origination costs, net
5,800
(513
5,287
Paid-in-kind interest
181
Gross loans – September 30, 2022
Nine Months Ended September 30, 2022(Dollars in thousands)
Gross loans – December 31, 2021
433,764
295,443
28,172
396
34,267
792,042
(204,568
(152,800
(6,220
(126
(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
Page 17 of 58
Three Months Ended September 30, 2021(Dollars in thousands)
Gross loans – June 30, 2021
886,206
368,257
69,520
16,514
70
1,340,567
118,407
68,692
5,700
2,969
195,768
(70,350
(38,571
(3,332
(1,449
(2,944
(116,646
335
239
265
839
(2,085
(397
(2,482
(2,532
386
(2,146
3,869
(139
12
3,743
188
Gross loans – September 30, 2021
933,790
398,774
72,088
14,934
95
1,419,681
Nine Months Ended September 30, 2021(Dollars in thousands)
Gross loans – December 31, 2020
792,686
334,033
65,327
37,768
24
1,229,838
346,724
179,743
20,916
7,339
554,722
(199,449
(115,369
(14,861
(5,663
(7,268
(342,610
(1,334
(237
(10,529
(12,100
(8,118
(5,027
(13,145
(7,171
(2
(5,868
(161
(256
(1,615
(2,032
10,613
(433
10,194
682
The following table sets forth the activity in the allowance for loan losses for the three and nine months ended September 30, 2022 and 2021.
Allowance for loan losses – beginning balance
59,152
46,946
50,166
57,548
(2,313
(10,038
(523
(1,990
(1,142
(15,047
Total charge-offs
(3,978
(27,075
Recoveries
3,348
2,648
10,473
8,704
713
763
1,857
1,753
47
1,446
1,406
5,085
4,518
Total recoveries
5,507
4,817
17,462
14,975
Net recoveries (charge-offs) (1)
(7,664
(9,677
Allowance for loan losses – ending balance (2)
61,535
47,448
The following tables set forth the allowance for loan losses by type as of September 30, 2022 and December 31, 2021.
Percentageof Allowance
Allowance asa Percent ofLoan Category
Allowance asa Percent ofNonaccrual
40,768
66
3.48
132.45
10,208
17
1.77
33.17
963
1.03
3.13
9,596
16
68.68
31.18
3.32
199.93
32,435
64
3.37
91.18
7,356
15
1.68
20.68
1,141
1.49
3.21
9,234
19
65.74
25.96
141.03
Page 18 of 58
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
30,780
35,571
Interest foregone quarter to date
504
466
Amount of foregone interest applied to principal in the quarter
101
114
Interest foregone year to date
1,670
1,620
Amount of foregone interest applied to principal for the year
301
432
Interest foregone life-to-date
3,251
3,623
Amount of foregone interest applied to principal life-to-date
1,178
942
Percentage of nonaccrual loans to gross loan portfolio
1.7
2.4
Percentage of allowance for loan losses to nonaccrual loans
199.9
141.0
The following tables present the performance status of loans as of September 30, 2022 and December 31, 2021.
Performing
Nonperforming
Percentage ofNonperformingto Total
1,164,526
7,293
0.62
574,722
0.08
84,340
9,395
10.02
100.00
1,824,361
31,149
955,763
5,557
0.58
436,640
132
0.03
60,366
21.29
1,452,859
36,065
2.42
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, 2022 and December 31, 2021, all of which had an allowance recorded against the principal balance.
RecordedInvestment
UnpaidPrincipalBalance
RelatedAllowance
With an allowance recorded
251
9
9,469
16,360
15,077
14,958
8,837
Total nonperforming loans with an allowance
32,327
10,819
37,007
10,168
Page 19 of 58
AverageInvestmentRecorded
Interest IncomeRecognized
6,903
4,423
148
491
161
13,577
16,531
16,128
16,941
37,099
38,056
6,895
303
4,641
425
459
151
13,494
16,926
16,326
17,101
37,174
38,819
The following tables show the aging of all loans as of September 30, 2022 and December 31, 2021.
Days Past Due
RecordedInvestment90 Days and
30-59
60-89
90 +
Current
Total (1)
Accruing
23,901
9,306
5,090
38,297
1,096,692
1,134,989
2,149
882
3,522
574,104
577,626
74
93,660
93,734
654
313
967
13,006
26,704
10,188
5,968
42,860
1,778,235
1,821,095
20,037
6,569
3,818
30,424
901,435
931,859
1,517
479
2,128
436,803
438,931
1,795
1,869
74,827
215
7,125
7,340
6,706
23,564
14,173
4,024
41,761
1,419,861
1,461,622
The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 330% and 295% as of September 30, 2022 and December 31, 2021.
The following table shows the TDRs which 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
34
549
Medallion loans
Nine months ended September 30, 2022
825
252
As of September 30, 2022, no 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.
Page 20 of 58
The following table shows the TDRs which the Company entered into during the three and nine months ended September 30, 2021.
Three months ended September 30, 2021
8
94
55
77
Nine months ended September 30, 2021
568
525
11
3,071
As of September 30, 2021, 37 medallion loans modified as TDRs in the previous 12 months were in default and had an investment value of $0.5 million. As of September 30, 2021, 37 recreation loans modified as TDRs in the previous 12 months were in default and had an investment value of $0.4 million.
The following tables show the activity of loan collateral in process of foreclosure, which relate only to the recreation and medallion loans, for the three and nine months ended September 30, 2022 and 2021.
Loan collateral in process of foreclosure – June 30, 2022
878
26,096
26,974
Transfer from loans, net
2,862
Sales
(1,399
(544
(1,943
Cash payments received
(2,243
Collateral valuation adjustments
(1,225
(1,319
Loan collateral in process of foreclosure – September 30, 2022
1,116
23,215
Loan collateral in process of foreclosure – December 31, 2021
1,720
35,710
8,391
268
(5,797
(2,659
(8,456
(9,496
(3,198
(3,806
Loan collateral in process of foreclosure – June 30, 2021
48,157
49,039
2,085
397
2,482
(1,554
(1,640
(3,194
(4,525
(640
(618
(1,258
Loan collateral in process of foreclosure – September 30, 2021
41,771
42,544
Loan collateral in process of foreclosure – December 31, 2020
1,432
53,128
54,560
8,118
5,027
(5,842
(1,871
(7,713
(8,948
(2,935
(5,565
(8,500
As of September 30, 2022, medallion loans in the process of foreclosure included 459 medallions in the New York City market, 335 medallions in the Chicago market, 57 medallions in the Newark market, and 40 medallions in other markets.
Page 21 of 58
(5) FUNDS BORROWED
The outstanding balances of funds borrowed were as follows:
Payments Due for the Twelve Months Ending September 30,
2023
2024
2025
2026
2027
Thereafter
September 30, 2022(1)
December 31, 2021(1)
InterestRate (2)
479,761
375,974
389,223
157,890
155,854
1,558,702
1,253,288
1.63
Privately placed notes
36,000
31,250
53,750
121,000
7.66
SBA debentures and borrowings
5,000
12,763
14,000
21,000
68,763
69,963
2.94
Preferred securities
33,000
5.27
484,761
424,737
403,223
203,140
157,854
107,750
1,781,465
1,477,251
2.16
(A) DEPOSITS
Substantially all 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. The Bank did not have any uninsured deposits as of September 30, 2022 and December 31, 2021. In October 2020, the Bank began to originate time deposits through an internet listing service. These deposits are from other financial institutions and, as of September 30, 2022 and December 31, 2021, the Bank had $9.2 million and $8.7 million in listing service deposit balances. The following table presents the maturity of the deposit pools, which excludes strategic partner reserve deposits, as of September 30, 2022.
Three months or less
110,763
Over three months through six months
128,094
Over six months through one year
240,904
Over one year
1,078,941
Total deposits
(B) PRIVATELY PLACED NOTES
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.
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 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.
(C) SBA DEBENTURES AND BORROWINGS
Over the years, the SBA has approved commitments for MCI and FSVC, typically for a four and 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, 2022, there were $9.5 million commitments available, and $68.8 million was outstanding, including $7.8 million under the SBA Note.
Page 22 of 58
On July 31, 2020, MCI accepted a commitment from the SBA for $25.0 million in debenture financing. As part of the acceptance, MCI paid the SBA a 1% commitment fee. The commitment expires September 24, 2024. As of September 30, 2022, $15.5 million of the commitment had been drawn, including $8.5 million to replace debentures which matured in 2021.
(D) 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. The notes bear a variable rate of interest of 90 day LIBOR (3.75% at September 30, 2022) 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, 2022, $33.0 million was outstanding on the preferred securities.
(E) COVENANT COMPLIANCE
From time to time the Company may enter into debt agreements which may contain restrictions that require the Company and its subsidiaries to maintain certain financial ratios, including minimum net worth. As of September 30, 2022, the Company did not have any borrowing agreements that contained any such restrictions.
(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, 2022 and 2021.
Operating lease costs
580
571
1,759
1,715
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
(47
(41
(133
(76
The following table presents the breakout of the operating leases as of September 30, 2022 and December 31, 2021.
Operating lease right-of-use assets
9,699
10,045
Other current liabilities
2,095
Total operating lease liabilities
10,675
11,212
Weighted average remaining lease term
5.9 years
5.4 years
Weighted average discount rate
5.54
At September 30, 2022, maturities of the lease liabilities were as follows:
Remainder of 2022
638
2,518
2,526
2,505
2,440
2,502
Total lease payments
13,129
Less imputed interest
2,454
(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.
Page 23 of 58
The following table sets forth the significant components of our deferred and other tax assets and liabilities as of September 30, 2022 and December 31, 2021.
Goodwill and other intangibles
(43,509
(43,894
10,360
11,057
Net operating loss carryforwards (1)
3,570
12,167
Accrued expenses, compensation, and other assets
4,042
2,579
Unrealized gains on other investments
1,700
2,176
Total deferred tax liability
(23,837
(15,915
Valuation allowance
(2,295
Deferred tax liability, net
(26,132
(18,210
The components of our tax provision for the three and nine months ended September 30, 2022 and 2021 was as follows:
Federal
693
1,359
2,181
2,154
State
340
721
1,109
991
Deferred
2,081
7,679
9,252
91
889
1,923
4,176
Net provision for income taxes
The following table presents a reconciliation of statutory federal income tax provision to consolidated actual income tax provision for the three and nine months ended September 30, 2022 and 2021.
Statutory Federal income tax provision at 21%
2,613
4,807
10,142
11,331
State and local income taxes, net of federal income tax
511
1,984
2,217
Change in state income tax accruals
1,833
Change in effective state income tax rates and accrual
110
1,479
Income attributable to non-controlling interest
(183
(449
Non-deductible expenses
410
1,484
(81
Other
(329
(718
243
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, 2022.
The Company has filed tax returns in many states and jurisdictions. Federal, New York State, New York City, and Utah tax filings of the Company for the tax years 2019 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, 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 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 3,396,965 remained issuable as of September 30, 2022. 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.
Page 24 of 58
The Company’s Board of Directors approved the 2015 Employee Restricted Stock Plan, or the 2015 Restricted Stock Plan, on February 13, 2015, which was approved by the Company’s shareholders on June 5, 2015. The 2015 Restricted Stock Plan became effective upon the Company’s receipt of exemptive relief from the SEC on March 1, 2016. The terms of 2015 Restricted Stock Plan provided for grants of restricted stock awards to the Company’s employees. A grant of restricted stock is a grant of shares of the Company’s common stock which, at the time of issuance, is subject to certain forfeiture provisions, and thus is restricted as to transferability until such forfeiture restrictions have lapsed. A total of 700,000 shares of the Company’s common stock were issuable under the 2015 Restricted Stock Plan, and 241,919 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. Awards under the 2015 Restricted Stock Plan are subject to certain limitations as set forth in the 2015 Restricted Stock Plan. The 2015 Restricted Stock Plan will terminate when all shares of common stock authorized for delivery under the 2015 Restricted Stock Plan have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2015 Restricted Stock Plan, whichever occurs first.
The Company had a stock option plan, the 2006 Stock Option Plan, available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provided for the issuance of a maximum of 800,000 shares of common stock of the Company. No additional shares are available for issuance under the 2006 Stock Option Plan. The 2006 Stock Option Plan was administered by the Compensation Committee of the Board of Directors. 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. The term and vesting periods of the options were determined by the Compensation Committee, provided that the maximum term of an option could not exceed a period of ten years.
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 exercisable 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 exercisable 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, 2022, 1,081,123 options on the Company’s common stock were outstanding under the Company’s plans, of which 552,056 options were exercisable. Additionally, there were 744,306 unvested shares under the Company’s restricted common stock plan, 130,939 unvested restricted stock units, and 60,992 vested restricted stock units under the Company’s restricted stock plans.
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. The weighted average fair value of options granted was $3.50 per share for the nine months ended September 30, 2021. The following assumption categories are used to determine the value of any option grants. There were no grants issued during the nine months ended September 30, 2022.
Risk free interest rate
0.97
Expected dividend yield
Expected life of option in years (1)
6.25
Expected volatility (2)
53.98
Page 25 of 58
The following table presents the activity for the stock option programs for the 2022 first, second, and third quarters and the 2021 full year.
Number ofOptions
ExercisePrice PerShare
WeightedAverageExercise Price
Outstanding at December 31, 2020 (2)
951,669
2.14 - 12.55
6.41
Granted
317,398
6.79
Cancelled
(113,310
4.89 - 11.53
6.64
Exercised (1)
(44,070
5.21 - 7.25
5.58
Outstanding at December 31, 2021
1,111,687
(4,783
4.89 - 7.25
5.69
(23,192
6.53
Outstanding at March 31, 2022 (2)
1,083,712
(2,103
6.37
Outstanding at June 30, 2022 (2)
1,081,609
(486
6.07
Outstanding at September 30, 2022 (2)
1,081,123
Options exercisable at:
320,922
552,056
6.54
The following table presents the activity for the restricted stock programs for the 2022 first, second, and third quarters and the 2021 full year.
Number ofShares
GrantPrice PerShare
WeightedAverageGrant Price
Outstanding at December 31, 2020
416,140
4.39 - 7.25
6.24
258,120
6.79 - 8.40
7.38
(21,940
5.98
Vested (1)
(158,994
6.16
Outstanding at December 31, 2021(2)
493,326
4.89 - 8.40
6.87
7.68
(5,747
7.33
(126,234
6.55
Outstanding at March 31, 2022(2)
745,270
7.34
(583
7.58
Outstanding at June 30, 2022(2)
744,687
(381
7.76
744,306
Page 26 of 58
During the three and nine months ended September 30, 2022, the Company granted 129,638 restricted stock units (RSUs) with a grant price of $6.75 and during the year ended December 31, 2021, granted 16,803 RSUs which vested on June 17, 2022 with a grant price of $8.87. For the RSUs granted in 2022 and 2021, unitholders 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, 2022, there were 191,931 RSUs outstanding, 60,992 of which had previously vested.
The following table presents the activity for the unvested options outstanding under the plans for the 2022 first, second, and third quarters.
Exercise PricePer Share
790,765
6.52
(4,200
5.48
Vested
(256,972
Outstanding at March 31, 2022
529,593
(365
5.78
Outstanding at June 30, 2022
529,228
5.39
Outstanding at September 30, 2022
529,067
The intrinsic value of the options vested was $0.0 and $0.3 million for the three and nine months ended September 30, 2022.
(9) SEGMENT REPORTING
The Company currently has five business segments, which include four lending and a 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 medallion. The recreation and home improvement lending segments are operated by the Bank and include loans in all fifty states. The highest concentrations of recreation loans are in Texas and Florida at 15% and 9% of loans outstanding and with no other states over 9% as of September 30, 2022. 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, boats, and trailers make up 58%, 20%, and 13% of the segment portfolio as of September 30, 2022. The home improvement lending segment works with contractors and financial service providers to finance residential home improvements concentrated in roofs, swimming pools, and windows at 37%, 23%, and 12% of total home improvement loans outstanding, and with no other product lines over 10% as of September 30, 2022. The highest concentrations of home improvement loans are in Texas and Florida at 10% and 9% of loans outstanding and with no other states over 9% as of September 30, 2022. The commercial lending segment focuses on enterprise-wide industries, including manufacturing services, and various other industries, and 51% of these loans are made in the Midwest. The medallion lending segment arose in connection with the financing of taxi medallions, taxis, and related assets, substantially all of which are located in the New York City metropolitan area as of September 30, 2022.
Page 27 of 58
Our corporate and other investments segment is a non-operating segment that includes items not allocated to our operating segments such as investment securities, equity investments, intercompany eliminations, and other corporate elements. Additionally, through December 1, 2021, the date of disposition, the Company had another non-operating segment, RPAC, a race car team.
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.
The following tables present segment data as of and for the three and nine months ended September 30, 2022 and 2021.
Three Months Ended September 30, 2022
Consumer Lending
CommercialLending
MedallionLending
Corporate and Other Investments
Consolidated
Total interest income
36,539
11,689
2,493
92
881
5,003
2,093
780
133
1,645
Net interest income (loss)
31,536
1,713
(764
Provision (recoveries) for loan losses
7,182
2,041
2,100
(1,275
(1
Net interest income (loss) after loss provision
24,354
7,555
(387
1,234
(763
Other income (expense), net
(7,178
(3,163
(2,214
(2,686
(4,399
(19,640
Net income (loss) before taxes
17,176
4,392
(2,601
(1,452
(5,162
Income tax (provision) benefit
(4,499
(1,152
700
394
1,352
(3,205
Net income (loss) after taxes
12,677
3,240
(1,901
(1,058
(3,810
Income attributable to the non-controlling interest
Total net income (loss) attributable to Medallion Financial Corp.
Balance Sheet Data
Total loans, net
1,131,051
565,002
92,772
4,377
1,145,380
569,603
102,367
27,860
354,331
Total funds borrowed
928,194
461,595
82,956
22,577
287,143
1,782,465
Selected Financial Ratios
Return on average assets
4.54
2.36
(7.32
)%
(13.00
(4.10
Return on average equity
27.07
14.06
(43.65
(74.61
(24.41
10.03
Return on average stockholders' equity
10.35
Interest yield
13.19
8.57
10.82
8.12
N/A
10.97
Net interest margin
11.38
7.03
7.43
(3.62
8.91
Reserve coverage
(1)
Delinquency status(2)
0.45
2.24
Charge-off (recovery) ratio(4)
1.51
0.78
16.74
(3)
(127.68
1.75
(*) Line item is not applicable to segments.
Page 28 of 58
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
(3,165
(21,549
(9,269
(282
(4,252
(12,248
(47,600
51,404
12,705
(1,102
(15,413
(13,747
(3,398
295
(163
4,121
(12,892
37,657
9,307
(807
447
(11,292
4.86
2.48
(1.05
1.30
(4.24
2.33
27.16
13.91
(6.08
6.99
(25.15
13.05
13.26
8.67
10.55
13.61
11.03
11.60
7.30
6.95
1.25
9.09
0.94
0.57
8.49
(145.36
0.81
Page 29 of 58
Three Months Ended September 30, 2021
RPAC
30,529
8,586
2,055
326
2,305
958
662
2,009
38
1,454
28,224
7,628
1,393
(2,008
(38
(1,128
916
369
(1,944
322
27,308
7,259
(64
(1,450
Sponsorship and race winnings
(2,424
(8,856
(3,437
636
2,073
(2,066
(778
(12,428
18,452
3,822
2,029
(1,193
(2,228
(4,752
(951
(510
(504
299
(6,167
13,700
2,871
1,519
1,505
(894
(1,977
Total loans net
902,234
392,278
70,232
5,538
1,951
1,372,233
916,109
405,439
92,257
93,683
30,969
266,777
1,805,234
712,474
296,509
73,806
74,941
8,054
258,358
1,424,142
6.09
2.89
6.60
6.12
(11.28
(2.65
3.73
30.46
14.43
32.99
30.62
(11.08
(19.79
20.02
24.38
13.78
9.04
12.04
0.09
11.55
12.74
8.03
8.16
(139.64
9.48
3.38
(0.00
49.98
3.34
0.34
0.04
0.10
5.42
0.29
(0.15
(0.25
(43.01
(0.38
Page 30 of 58
Nine Months Ended September 30, 2021
Total interest income (loss)
86,857
24,732
4,920
(1,543
987
7,962
3,309
1,950
5,903
113
4,481
78,895
21,423
2,970
(7,446
(113
(3,494
5,546
1,575
(5,931
810
73,349
19,848
(1,515
(4,304
(7,219
(21,774
(7,989
107
(1,228
(5,689
(2,637
(39,210
51,575
11,859
3,077
(2,743
(2,868
(6,941
(13,281
(3,054
(773
689
720
(874
(16,573
38,294
8,805
2,304
(2,054
(2,148
(7,815
6.08
3.20
3.68
(2.52
(8.89
(3.68
2.73
30.39
16.02
18.38
(12.60
(386.73
(27.18
15.61
18.71
14.05
9.37
10.56
(23.55
11.56
12.76
8.11
(113.66
9.19
Charge-off (recovery) ratio
0.22
143.94
1.17
(10) COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key officers for either a one-, two-, three- or five-year term. Annually, the contracts with a five-year term will renew for new five-year terms unless prior to the end of the first year of each five-year 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 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, 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.
Employment agreements expire at various dates through 2027, with future minimum payments under these agreements of approximately $12.1 million.
(B) OTHER COMMITMENTS
As of September 30, 2022, the Company had one commitment to extend credit of up to $1.8 million with an expiration date of January 1, 2025. 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.
Page 31 of 58
(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 antifraud, 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 such charges by the SEC and the Company may be subject to shareholder litigation relating to these SEC matters.
(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. We intend to vigorously defend any outstanding claims and pursue our 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 $239,000 per year, an increase from $195,000 per year in 2021. Mr. Rudnick received an annual cash bonus of $75,000 and $32,500 as well as an equity bonus in the amount of $45,019 and $30,000, during the nine months ended September 30, 2022 and 2021.
(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—Book value equals fair value.
(b) Equity investments and securities—The Company’s equity securities are recorded at cost less any 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 approximated fair value.
(e) Floating rate borrowings—Due to the short-term nature of these instruments, the carrying amount approximated 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, 2022 and December 31, 2021, 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.
Page 32 of 58
CarryingAmount
Financial assets
Cash, cash equivalents, and federal funds sold (1)
Loans receivable
Accrued interest receivable (2)
Equity securities(3)
1,721
Financial liabilities
Funds borrowed
1,478,001
Accrued interest payable (2)
(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). Our 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.
Page 33 of 58
Equity investments were recorded at cost less impairment plus or minus observable price changes. Commencing in 2020, the Company elected to measure equity investments at fair value on a non-recurring basis, which have been adjusted for all periods presented.
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, 2022 and December 31, 2021.
Level 1
Level 2
Level 3
Interest-bearing deposits
1,250
Available for sale investment securities
Equity securities
Total(1)
49,604
51,325
46,022
47,972
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, 2022 and December 31, 2021.
Impaired loans
Loan collateral in process of foreclosure
65,781
82,727
Page 34 of 58
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.
The valuation techniques and significant unobservable inputs used in non-recurring level 3 fair value measurements of assets and liabilities as of September 30, 2022 and December 31, 2021.
Fair Valueat September 30, 2022
Valuation Techniques
Unobservable Inputs
Range(Weighted Average)
10,397
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% - 5.52%
60% of balance
Transfer prices (2)
$0.0 - 79.5
Collateral value
Collateral value (3)
$3.6 - 40.1
Fair Valueat December 31, 2021
9,453
1.50% - 6.00%
$3.6 - 49.8
(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 expected to be three-month Secured Overnight Financing Rate, or 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, or 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, 2022 through the date of financial statement issuance. As of such date, there were no subsequent events that required disclosure.
Page 35 of 58
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, 2022 and the year ended December 31, 2021. 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 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, 2022, our consumer loans represented 94% of our gross loan portfolio, and commercial loans represented 5%. Total assets were $2.2 billion and $1.9 billion as of September 30, 2022 and December 31, 2021.
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 customers, 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.
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 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 medallion assets, the Bank has not originated any new medallion loans since 2014 (and Medallion Financial Corp. has not originated any new 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 started building 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 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
Our accounting policies are fundamental to understanding management's discussion and analysis of its financial condition and results of operations. At September 30, 2022, we identified our policies on the allowance for loan loss, 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, 2021, and there have been no material changes in such policies and estimates since the date of such report.
Page 36 of 58
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, or Topic 326: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. The main objective of this new standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. Under the new standard, the concepts used by entities to account for credit losses on financial instruments will fundamentally change. The existing “probable” and “incurred” loss recognition threshold is removed. Loss estimates are based upon lifetime “expected” credit losses. The use of past and current events must now be supplemented with “reasonable and supportable” expectations about the future to determine the amount of credit loss. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as the CECL (current expected credit loss) model. ASU 2016-13 applies to all entities and is effective for fiscal years beginning after December 15, 2019 for public entities, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such as us, to fiscal years beginning after December 15, 2022. We are assessing the impact the update will have on our financial statements, but currently anticipate an initial 10-15% overall increase in our allowance as well as earlier recognition of credit losses and potentially greater volatility in the allowance and provision.
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements, or Topic 205: Depository and Lending, or Topic 942: and Financial Services – Investment Companies, or Topic 946: Measurement of Credit Losses on Financial Instruments, or ASU 2021-06. This new standard amends certain SEC paragraphs from the Codification in response to the issuance of SEC Final Rule No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses and SEC Rule No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. We have assessed the impact the update and determined it does not have a material impact on our financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses, or Topic 326: Troubled Debt Restructurings and Vintage Disclosures, or ASU 2022-02. The main objective of this new standard is to amend ASU 2016-13 in response to feedback received from the post-implementation review process. The amendments update ASU 2016-13 to require that an entity measure and record the lifetime expected credit losses on an asset upon origination or acquisition, and, as a result, credit losses from loans modified as troubled debt restructurings (TDRs) have been incorporated into the allowance for credit losses. The amendments also require the disclosure of current period gross write-offs, by year of origination, for financing receivables. ASU 2022-02 is effective upon the adoption of ASU 2016-13. We are assessing the impact the update will have on our financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement, or Topic 820: Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, or ASU 2016-13. This new standard is effective for the fiscal years beginning after December 31, 2023 and clarifies the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. We have assessed the impact the update and determined it does not have a material impact on our financial statements.
CONTROL STATUTES
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.
Page 37 of 58
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
In March 2020, in response to the COVID-19 pandemic, we adjusted the payment policies and procedures with our consumer and medallion businesses, and allowed borrowers to defer payments up to 180 days. As of September 30, 2022, no consumer or medallion loans remained on deferral related to COVID-19. For our medallion portfolio, we determined that anticipated payment activity on our medallion portfolio was impossible to quantify upon the end of the deferral moratorium, and therefore all medallion loans were deemed impaired, placed on nonaccrual status, and written down to each market’s net collateral value in the 2020 third quarter, with additional write-offs taken during 2021. We will continue to monitor our medallion portfolio and related assets, which may result in additional write-downs, charge-offs or impairments.
In addition to modifying payment policies, we have taken steps to accommodate remote work and implemented several cost-cutting measures, such as reducing employee headcount at our parent company, Medallion Financial Corp., and closing satellite offices in Long Island City, New York; Chicago, Illinois; and Boston, Massachusetts.
With COVID-19 continuing and new variants emerging, the potential future effects of COVID-19 on our consumer loan portfolio and consumer businesses remain uncertain, and we could suffer potential losses on our consumer loan portfolios as a result of the effects on the ability of our borrowers to repay their loans as well as on the economy and on demand for our loans.
Page 38 of 58
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 and nine months ended September 30, 2022 and 2021.
AverageBalance
Interest
AverageYield/Cost
Interest-earning assets
Interest earning cash equivalents
4,288
44
4.07
3,470
82,588
389
1.87
44,648
6
0.05
49,077
330
2.67
48,161
223
1.84
1,099,362
879,027
30,538
541,273
376,989
91,428
10.96
71,008
2,102
11.74
4,493
112
9.89
5,705
26
1.81
Strategic partnerships
845
30.52
93
21.33
Total loans
1,737,401
50,931
11.63
1,332,822
41,257
12.28
Total interest-earning assets
1,873,354
1,429,101
Non-interest-earning assets
Cash
28,042
30,576
10,874
10,189
Loan collateral in process of foreclosure(1)
25,691
45,962
Goodwill and intangible assets
173,383
200,992
44,958
43,538
Total non-interest-earning assets
282,948
331,257
2,156,302
1,760,358
Interest-bearing liabilities
Deposits
1,519,172
1,164,457
4,190
1.43
Retail and privately placed notes
2,501
8.20
8.21
68,809
562
3.24
64,333
505
3.11
351
4.22
191
2.30
Notes payable to banks
(3
(2.33
Other borrowings
8,049
Total interest-bearing liabilities
1,741,981
2.20
1,391,350
2.12
Non-interest-bearing liabilities
Deferred tax liability
23,837
9,621
Other liabilities (2)
28,748
27,971
Total non-interest-bearing liabilities
52,585
37,592
1,794,566
1,428,942
Non-controlling interest
69,166
72,058
292,570
259,358
Total liabilities and stockholders’ equity
Page 39 of 58
4,281
130
4.06
3,130
28
1.20
70,754
492
0.93
42,135
46,743
830
2.37
45,091
666
1.97
1,020,326
826,772
493,192
353,017
84,957
6,892
10.85
65,606
5,178
4,608
490
14.22
8,759
(1,538
(23.48
477
108
30.27
59
33.99
1,603,560
140,656
11.73
1,254,213
115,244
12.29
1,725,338
1,344,569
42,455
45,244
10,578
9,833
30,759
50,096
173,744
201,354
44,566
44,965
302,102
351,492
2,027,440
1,696,061
1,393,541
1.47
1,104,378
1.62
7,506
8.29
120,615
7,729
69,353
1,646
3.17
63,138
1,586
3.36
800
3.25
791
13,441
1.32
8,009
1.89
1,616,894
2.09
1,342,581
21,166
5,492
27,521
27,831
48,687
33,323
1,665,581
1,375,904
69,241
72,597
292,618
247,560
During the quarter, our net loans receivable had a yield of 11.63% (compared to 12.28% in the prior year’s third quarter), with the yield driven by our recreation, home improvement and commercial loans. The 65 basis point decrease from the prior year’s third quarter is attributable to our changing mix of loans, mainly driven by the growth in the home improvement loans, which have a lower coupon than our recreation and commercial loans, as well as competitive pressures in the home improvement segment. Our debt, a significant component being certificates of deposit, funds our growing lending businesses. Our average interest cost during the quarter of 2.20% increased 8 basis points from the prior year's third quarter, primarily reflecting the current year rising interest rates on certificates of deposit.
During the year to date period, our net loans receivable had a yield of 11.73% (compared to 12.29% in the prior year’s third quarter), the decrease was similarly driven by the changing mix of our loans, mainly driven by the growth in the home improvement loan portfolio. Despite rising costs associated with certificates of deposit during the current year, our average interest cost during the year to date period of 2.09% decreased 27 basis points from the prior year period, primarily reflecting the repayment of retail notes in the prior year, which carried a higher rate of interest when compared to privately placed notes issued in the prior year, offset by the increase in interest rates on certificates of deposits issued in the current year compared to the prior year.
Page 40 of 58
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
193
238
431
(29
(30
86
32
7,323
(1,322
6,001
3,886
(2,310
1,576
3,548
(445
3,103
1,886
(518
1,368
564
(140
424
170
171
(285
1,220
935
11,463
(1,789
9,674
5,493
(1,438
4,055
11,662
(1,465
10,197
5,500
(1,443
4,057
1,457
2,050
(1,537
(1,264
(4
(1,878
(4,238
(6,116
20
(992
6,966
5,974
(75,638
76,541
903
160
(453
(452
1,459
769
(78,237
77,279
(958
Net
10,203
(2,234
7,969
83,737
(78,722
5,015
332
579
(27
(108
135
164
(28
(122
19,195
(4,863
14,332
9,617
(5,285
4,332
9,089
(1,844
7,245
5,839
(538
5,301
1,570
144
1,714
(343
(68
(411
(441
2,469
2,028
13,786
(15,410
(1,624
13
29,508
(4,096
25,412
28,912
(21,299
7,613
29,784
(3,629
26,155
28,857
(21,474
7,383
3,176
(1,236
1,940
789
7,123
7,912
(247
(223
3,267
2,779
6,046
(88
(239
1,151
912
(188
(6
(194
10
586
72
3,102
(1,561
1,541
3,627
11,707
15,334
26,682
(2,068
24,614
25,230
(33,181
(7,951
Page 41 of 58
During the three and nine months ended September 30, 2022, the increase in the interest earning assets was mainly driven by the increase in volume of consumer loans, even as the yield on these loans declined, due to a change in the portfolio mix, specifically the growing home improvement segment, the loans of which have a lower coupon than recreation loans. The increase in debt was similarly driven by the increase in the borrowings, mainly driven by deposits which are used to fund our growing loan portfolio, the costs of which increased in the current quarter.
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, and have, in the past, 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 improved interest rate management strategies.
Our cost of funds is primarily driven by the rates paid on our various debt instruments and their relative mix, 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 tables above show the average borrowings and related borrowing costs for the three and nine months ended September 30, 2022 and 2021. We expect our borrowing costs to increase as prevailing interest rates continue at, or rise from, these levels. Certificates of deposit issued during the 2022 third quarter carried interest rates up to 3.9%, whereas those issued in the 2021 quarter had rates significantly lower.
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 2020, we obtained a $25.0 million commitment from the SBA. At September 30, 2022 and 2021, adjustable rate debt constituted just 2% and 3% of total debt.
LOANS
Loans are 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. During the three and nine months ended September 30, 2022, there was continued growth in the consumer lending segments along with recoveries in the medallion segment, which was partly offset by consumer and medallion charge-offs during the period, the continuing of loans aged over 120 days transferred to loan collateral in process of foreclosure and payments received from borrowers.
Page 42 of 58
The following table presents the approximate maturities and sensitivity to changes in interest rates for our loans as of September 30, 2022.
Loan Maturity
Within 1 year
After 1 to 5 years
After 5 to 15 years
After 15 years
Fixed-rate
23,934
221,238
1,435,268
136,031
1,816,471
2,220
112,868
1,000,248
15,802
1,131,138
30,188
413,909
120,229
5,209
67,414
21,111
10,768
Adjustable-rate
3,125
726
3,851
Total loans(1)
27,059
221,964
1,820,322
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Our methodology to calculate the general reserve portion of the allowance includes the use of quantitative and qualitative factors. We initially determine an allowance based on quantitative loss factors for loans evaluated collectively for impairment. The quantitative loss factors are based primarily on historical loss rates, after considering loan type, historical loss and delinquency experience. The quantitative loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels or other risks. Qualitative loss factors are used to modify the reserve determined by the quantitative factors and are designed to account for losses that may not be included in the quantitative calculation according to management’s best judgment. If our qualitative loss factor rates were to increase 50 basis points, our recreation and home improvement general reserve would increase by $5.7 million and $2.9 million, respectively. Likewise, if our qualitative loss factor rates were to decrease 50 basis points, our recreation and home improvement general reserve would decrease by $5.7 million and $2.9 million, respectively. Performing loans are recorded at book value and the general reserve maintained to absorb expected losses consistent with GAAP.
For medallion loans, during the three and nine months ended September 30, 2022, we continued to utilize a value of $79,500 for New York City taxi medallions in determining loan loss allowances, despite reported transfer prices exceeding that level at various points during the period, as we continue to deem the entire medallion portfolio as impaired.
Page 43 of 58
Net charge-offs (recoveries) (1)
Allowance as a Percent of Nonaccrual
As of September 30, 2022, the total allowance rate for loan losses decreased 5 basis points from December 31, 2021, reflecting the change in portfolio mix, with growth in home improvement loans which carry a lower historic charge-off expense, and the actual allowance increased 23%, reflecting the overall increase in size of the loan portfolio. For recreation and home improvement loans, as of September 30, 2022 the allowances exclude $1.0 million and $0.1 million of loan loss allowances which have been netted within loans as a result of the consolidation of Medallion Bank.
For the recreation loan portfolio, the process to repossess the collateral is typically started at 60 days past due. If the collateral is repossessed, a loss is recorded to write the collateral down to its net realizable value, 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 as a realized loss, and any excess proceeds are recorded as a recovery. Proceeds collected on charged off accounts are recorded as recoveries. All collection, repossession, and recovery efforts are handled on behalf of the Bank by the contracted servicer.
The following table shows the trend in loans 90 days or more past due as of the dates indicated.
% (1)
0.3
Total loans 90 days or more past due
(*) Less than 0.1%
We estimate that the weighted average loan-to-value ratio of our medallion loans was approximately 330% and 295% as of September 30, 2022 and December 31, 2021.
Page 44 of 58
Recreation and 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 months ended September 30, 2022 and 2021.
SEGMENT RESULTS
We manage our financial results under four operating segments; recreation lending, home improvement lending, commercial lending, and medallion lending. We also show results for non-operating segments; RPAC and corporate and other investments. As mentioned earlier, the Company disposed of its investment in RPAC on December 1, 2021 and, as a result, all presented segment results are through such date. For information related to RPAC, refer to our 2021 Form 10-K. All results are for the three and nine months ended September 30, 2022 and 2021.
Page 45 of 58
Recreation Lending
The recreation lending segment is a high-growth prime and non-prime consumer finance business which is a significant source of income for us, accounting for 71% and 71% of our interest income for the three and nine months ended September 30, 2022, and 74% and 75% for the three and nine months ended September 30, 2021. The loans are secured primarily by RVs, boats, and trailers, with RV loans making up 58% of the portfolio, boat loans making up 20% of the portfolio, and trailer loans 13% as of September 30, 2022, compared to 60%, 20% and 9% as of September 30, 2021. Recreation loans are made to borrowers residing in all fifty states, with the highest concentrations in Texas, Florida, and California at 15%, 9%, and 9% of loans outstanding, compared to 16%, 9%, and 10% as of September 30, 2021, and with no other states over 9%.
During the three and nine months ended September 30, 2022, the recreation portfolio grew, with the interest yield in both periods decreasing from the prior year periods as a result of the change in portfolio mix toward higher credit quality but lower yielding assets. Additionally, reserve rates increased 10 basis points from September 30, 2021 as we continued to see delinquencies at near historic lows, with charge-offs beginning to normalize in the third quarter of 2022.
The following table presents certain financial data and ratios as of and for the three and nine months ended September 30, 2022 and 2021.
Selected Earnings Data
Net interest income after loss provision
Net income before taxes
Total loans, gross
932,540
Total loan allowance
30,306
Total borrowings
Delinquency status (1)
Charge-off (recovery) ratio(2)
Page 46 of 58
Home Improvement Lending
The home improvement lending segment is a consumer finance business that works with contractors and financial service providers to finance home improvements and is concentrated in roofs, swimming pools, and windows at 37%, 23%, and 12% of total loans outstanding as of September 30, 2022, as compared to 28%, 26%, and 13% as of September 30, 2021, with no other collateral types over 10%. Home improvement loans are made to borrowers residing in all fifty states, with the highest concentrations in Texas and Florida at 10% and 9% of loans outstanding September 30, 2022, compared to 11% and 11% as of September 30, 2021, with no other states over 9%.
During the three and nine months ended September 30, 2022, the home improvement lending segment grew substantially with loans increasing 44% from the prior year. Reserve rates increased 14 basis points from a year ago. The interest yield was 8.57% and 8.67% for the three and nine months ended September 30, 2022, compared to 9.04% and 9.37% for the three and nine months ended September 30, 2021.
398,165
5,887
Page 47 of 58
Commercial Lending
We originate both senior and subordinated loans nationwide to businesses in a variety of industries, more than 51% of which are located in the Midwest region, with the rest scattered across the country. 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, administrative and support services, and construction making up 55%, 11%, 11%, and 10% of the loans outstanding as of September 30, 2022.
During 2022, the commercial portfolio continued to grow, with $4.5 million of new originations in the quarter and $28.2 million of new originations in the nine months. Additionally, reserve rates reflected reserves on specific investments.
The following table presents certain financial data and ratios as of and for the three and nine months ended September 30, 2022 and 2021. 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. The commercial segment increased in the current year as originations exceeded repayments.
Net interest (expense) income after loss provision
Net (loss) income after taxes
Reserve coverage(1)
Delinquency status (1) (2)
Charge-off (recovery) ratio(3)
As of September 30,
Geographic Concentrations
Total GrossLoans
% ofMarket
California
15,149
5,021
7
Illinois
12,866
14
16,341
23
Minnesota
12,381
5,607
Texas
10,070
5,568
Michigan
6,364
10,837
Other (1)
36,905
26,858
Page 48 of 58
Medallion Lending
The 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, 2022, taxi medallion values remained consistent in the New York City market. We continue 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.
Net interest (loss) income
16,288
10,750
699.32
1360.79
Geographic Concentration
New York City
12,999
12,661
85
Newark
940
All Other
Total Loan Collateral in Process of Foreclosure
18,990
82
34,511
83
3,369
4,793
Chicago
829
2,257
210
Page 49 of 58
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 $0.8 million in net loans as of September 30, 2022, compared to less than $0.1 million as of September 30, 2021, having originations of $19.4 million and $34.3 million during the three and nine months ended September 30, 2022 and $3.0 million and $7.3 million during the three and nine months ended September 30, 2021.
Net interest loss
Total interest (income) expense
Net loss before taxes
Income tax benefit (provision)
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, 2022 and 2021.
(Dollars in thousands, Except per share data)
Dividend payout ratio
23.66
18.73
Other income (loss) ratio (1)
(0.05
2.13
0.67
1.73
Total expense ratio (2)
9.55
5.32
9.58
Equity to assets (3)
16.36
18.76
Debt to equity (3) (4)
4.95
3.98
Net loans receivable to assets
76
Net recoveries (charge-offs)
Net (recoveries) charge-offs as a % of average loans receivable
Allowance coverage ratio
Page 50 of 58
CONSOLIDATED RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2022 compared to the Three and Nine Months Ended September 30, 2021
Net income attributable to shareholders was $7.6 million and $30.8 million, or $0.32 and $1.26 per share, for the three and nine months ended September 30, 2022, compared to $15.9 million and $34.6 million, or $0.64 and $1.39 per share, for the three and nine months ended September 30, 2021.
Total interest income was $51.7 million and $142.1 million for the three and nine months ended September 30, 2022 compared to $41.5 million and $116.0 million for the three and nine months ended September 30, 2021. The increase in interest income reflected the continued growth in our loan portfolio, despite somewhat lower average margins reflected in our recreation, home improvement and commercial loans. The yield on interest earning assets was 10.96% and 11.03% for the three and nine months ended September 30, 2022, compared to 11.55% and 11.56% for the three and nine months ended September 30, 2021. Average interest earning assets were $1.9 billion and $1.7 billion for the three and nine months ended September 30, 2022, an increase from $1.4 billion and $1.3 billion for the three and nine months ended September 30, 2021. We began increasing rates on new home improvement and recreation loans during the three and nine months ended September 30, 2022 as a response to rising interest rates, which increase our cost of funds.
Loans before allowance for loan losses were $1.9 billion as of September 30, 2022, comprised of recreation ($1.2 billion), home improvement ($575.2 million), commercial ($93.7 million), medallion ($14.0 million), and strategic partnership loans ($0.8 million). We had an allowance for loan losses as of September 30, 2022 of $61.5 million, which was attributable to the recreation (66%), home improvement (17%), medallion (16%), and commercial (1%) loans. We experienced significant growth in our consumer and commercial loan business during the three and nine months ended September 30, 2022, but expect origination growth to moderate, particularly in a weakening economy.
Loans increased $366.6 million, or 25%, from December 31, 2021 as a result of $792.0 million of loan originations, partially offset by principal payments, and to a lesser extent transfers, to loan collateral in process of foreclosure and net charge-offs. The provision for loan losses was $10.0 million and $21.0 million for the three and nine months ended September 30, 2022, compared to a benefit of $0.3 million and a provision of $2.0 million in the three and nine months ended September 30, 2021. The net charge-off (recovery) ratios on the loan portfolios were 1.75% and 0.81% for the three and nine months ended September 30, 2022 compared to (0.38)% and 1.17% for the three and nine months ended September 30, 2021. Net charge-offs in the current year quarter and year to date period were $7.7 million and $9.7 million, inclusive of $1.4 million and $5.0 million of net medallion loan recoveries for the three and nine months ended September 30, 2022. During the quarter, charge-offs in our consumer businesses began to normalize, with year to date amounts still below historical levels. We expect the normalization in charge-off expense to continue and may further increase, depending on, among other things, the state of the economy.
Interest expense was $9.7 million and $25.3 million for the three and nine months ended September 30, 2022, as compared to $7.4 million and $23.7 million for the three and nine months ended September 30, 2021, reflective of higher average borrowings, as well as a higher average borrowing costs this quarter, which we expect to increase in this inflationary environment. The average cost of borrowed funds was 2.20% and 2.09% for the three and nine months ended September 30, 2022, compared to 2.12% and 2.36% for the three and nine months ended September 30, 2021. The increase of 8 basis points from the prior year quarter is attributable to the increased cost of newly issued certificates of deposit as older vintages with lower rates roll off. The decrease of 27 basis points in the nine months compared to a year ago is reflects the repayment of our retail notes in the prior year which held a higher cost of borrowing than our newly issued privately placed notes, offset by the increased cost of certificates of deposit issued during the current year, both to replace maturing deposits and assist in facilitating our loan growth. As we replace upcoming maturities with new issues, we expect an increase in our cost of funds through the remainder of 2022 and into 2023. Average debt outstanding was $1.7 billion and $1.6 billion for the three and nine months ended September 30, 2022, up from $1.4 billion and $1.3 billion for the three and nine months ended September 30, 2021, as we issued additional certificates of deposits to increase our liquidity and fund our loan growth. See page 38 for tables that show average balances and cost of funds for our funding sources.
Net interest income was $42.0 million and $116.9 million for the three and nine months ended September 30, 2022, compared to $34.1 million and $92.2 million for the three and nine months ended September 30, 2021. The net interest margin was 8.91% and 9.09% for the three and nine months ended September 30, 2022, compared to 9.48% and 9.19%, for the three and nine months ended September 30, 2021, reflecting the above. With the rates we charge on loans and our cost of funds both increasing due to inflation, we expect our net interest margin to tighten.
Net other income (loss), which is comprised of net recoveries of loan collateral, a majority of which relate to recoveries in the Medallion segment, prepayment fees, servicing fee income, late charges, write-downs of loan collateral, impairment of equity investments, and other miscellaneous income was a loss of $0.2 million and income of $8.7 million for the three and nine months ended September 30, 2022, compared to income of $7.2 million and $16.9 million for the three and nine months ended September 30, 2021. The current quarter included a $1.1 million charge associated with an equity investment tied to our commercial lending business, and $0.5 million of gains associated with the disposition of medallion assets, while the nine months ended September 30, 2022 included net equity gains of $3.0 million and $5.1 million of recoveries associated with the collection and disposition of medallion assets.
Page 51 of 58
Operating expenses were $19.4 million and $56.3 million for the three and nine months ended September 30, 2022, compared to $18.7 million and $53.2 million for the three and nine months ended September 30, 2021. Salaries and benefits were $8.4 million and $23.7 million for the three and nine months ended September 30, 2022, compared to $8.0 million and $21.5 million for the three and nine months ended September 30, 2021, primarily reflecting reduced bonus expense in the prior year as well as increased head count in the current year. Professional fees were $3.7 million and $12.1 million for the three and nine months ended September 30, 2022, compared to $2.0 million and $4.7 million for the three and nine months ended September 30, 2021, primarily reflecting higher legal and professional costs for a variety of corporate matters inclusive of the SEC litigation.
Total income tax expense was $3.2 million and $12.9 million for the three and nine months ended September 30, 2022, compared to $6.2 million and $16.6 million for the three and nine months ended September 30, 2021.
Loan collateral in process of foreclosure was $24.3 million at September 30, 2022, a decline from $37.4 million at December 31, 2021. The decrease primarily reflects cash payments received and structured settlements during the period. See page 37 for a table that shows the changes during the quarter.
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 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, credit facilities and borrowings from banks and other lenders, and SBA debentures and borrowings).
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 52 of 58
The following table presents our interest rate sensitivity gap at September 30, 2022. 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, 2022 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
23,761
17,525
49,630
46,818
107,264
69,590
1,501,710
1,816,298
Adjustable rate
3,374
3,836
2,715
3,595
2,565
4,327
34,047
Cash and cash equivalents
96,952
500
750
Total earning assets
127,212
22,087
52,845
51,163
109,829
73,917
1,535,757
1,972,810
Interest bearing liabilities
19,750
55,000
52,750
Interest rate gap
(357,549
(402,650
(350,378
(151,977
(48,025
18,917
1,483,007
191,345
Cumulative interest rate gap
(760,199
(1,110,577
(1,262,554
(1,310,579
(1,291,662
December 31, 2021 (2)
(230,601
(455,807
(770,239
(891,489
(1,007,810
(940,350
153,539
December 31, 2020 (2)
(366,801
(570,449
(719,385
(827,236
(907,295
(860,941
52,347
Our interest rate sensitive assets were $2.0 billion and interest rate sensitive liabilities were $1.8 billion at September 30, 2022. The one-year cumulative interest rate gap was a negative $357.5 million or 18% of interest rate sensitive assets. We seek to manage interest rate risk by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, by originating adjustable-rate loans, and by other options consistent with managing interest rate risk.
With the cessation of LIBOR in 2023, we are currently reviewing the impact on our loans and borrowings. We do not have loans tied to LIBOR and do not expect a significant impact on our loans. We have trust preferred securities that bear a variable rate of interest of 90 day LIBOR (3.75% at September 30, 2022, up from 0.21% at December 31, 2021) plus 2.13%. We expect to rely on our lenders to adjust and communicate rate adjustments; however, we do not expect a material impact on our borrowings.
Liquidity and Capital Resources
Our sources of liquidity include unfunded commitments to sell debentures to the SBA, loan amortization and prepayments, private issuances of debt securities, participations or sales of loans to third parties, the disposition of our other assets, and dividends from Medallion Capital and the Bank, and are subject to compliance with regulatory ratios. As of September 30, 2022, we had unfunded commitments from the SBA of $9.5 million.
Additionally, the Bank has access to independent sources of funds for our business originated there, primarily through brokered certificates of deposit. The Bank has up to $75.0 million available under Fed Funds lines with several commercial banks.
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.
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.
The net proceeds from the December 2020, February 2021, March 2021 and April 2021 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.
In December 2019, the Bank closed an initial public offering of $46.0 million aggregate liquidation amount, yielding net proceeds of $42.5 million, of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F. 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 expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.
Page 53 of 58
In March 2019, we completed a private placement to certain institutional investors of $30.0 million aggregate principal amount of 8.25% unsecured notes due 2024, with interest payable semiannually. A follow-on offering of these notes in the 2019 third quarter raised an additional $6.0 million.
The table below presents the components of our debt as of September 30, 2022, exclusive of deferred financing costs of September 30, 2022. See Note 5 to the consolidated financial statements for details of the contractual terms of our borrowings.
Balance
Percentage
Rate (1)
Deposits (2)
87
Total outstanding debt
Our contractual obligations expire on or mature at various dates through September 2037. The following table shows all contractual obligations at September 30, 2022.
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
2,512
2,516
2,473
2,471
1,251
13,738
Total contractual obligations
487,273
427,253
405,739
205,613
160,325
109,001
1,795,203
Approximately $909 million of our borrowings have maturity dates during the next two years, a majority of which are brokered CDs.
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.
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, 2022 by $1.0 million on an annualized basis, and the impact of such an immediate increase of 1% over an one year period would have been a reduction in net income by $1.3 million at September 30, 2022. 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.
Page 54 of 58
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 credit facilities and their respective end of period weighted average interest rates at September 30, 2022. See Note 5 to the consolidated financial statements for additional information about each credit facility.
MedallionFinancial Corp.
MFC
MCI
FSVC
MB
September 30,2022
December 31,2021
Cash, cash equivalents and federal funds sold
19,509
255
3,192
75,006
Preferred Securities
Average interest rate
2.31
Maturity
9/37
Retailed notes and privately placed borrowings
3/24-12/27
SBA debentures & borrowings
78,263
79,463
Amounts available
9,500
Amounts outstanding
61,000
7,763
2.90
2.72
3/23 - 3/32
4/24
3/23- 3/32
Brokered CD's & other funds borrowed
1,559,702
(2)
1,254,038
10/22 - 8/27
1/22-12/26
Total Cash
Total debt outstanding
154,000
Loan amortization, prepayments, and sales also provide a source of funding for us. Prepayments on loans are influenced significantly by general interest rates, 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.
Dividends and Stock Repurchases
Beginning in March 2022, the Company's board of directors reinstated our quarterly dividend, with dividends of $0.08 per share, paid in March 2022, May 2022, and August 2022. We may, however, re-evaluate this new 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 May 1, 2022, the Company's board of directors authorized a new stock repurchase program, pursuant to which the Company was authorized to repurchase up to $35 million of its shares. The total amount was subsequently increased to $40 million on August 10, 2022. The new repurchase program replaced the previous one, which was terminated. During the nine months ended September 30, 2022, the Company repurchased 2,393,680 shares of its common stock at an aggregate cost of $18,822,309. Accordingly, as of September 30, 2022, up to $21,794,546 of shares remain authorized for repurchase under our stock repurchase program.
Page 55 of 58
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, 2021.
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, 2022 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 2022 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 2022 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, 2021, which was filed with the Securities and Exchange Commission on March 14, 2022.
On May 1, 2022, the Company's board of directors authorized a new stock repurchase program, pursuant to which the Company was authorized to repurchase up to $35 million of its shares, which was increased to $40 million on August 10, 2022. Such new repurchase program replaced the previous one, which was terminated. During the nine months ended September 30, 2022 the Company repurchased 2,393,680 shares of its common stock at an aggregate cost of $18,822,309. Accordingly, as of September 30, 2022, up to $21,794,546 of shares remain authorized for repurchase under our stock repurchase program.
Total Shares of Common Stock Repurchased
Average Price Paid per Share
TotalAmount Paid
Maximum Value of Shares Yet to Be Purchased
July 1 - July 31
25,025,447
August 1 - August 31
734,547
7.93
5,822,227
24,203,219
September 1 - September 30
319,323
7.54
2,408,673
21,794,546
1,053,870
7.81
8,230,901
Page 56 of 58
EXHIBITS
Number
Description
10.1
Amendment to Cooperation Agreement, dated as of August 10, 2022, by and among Medallion Financial Corp., KORR Value L.P., KORR Acquisitions Group, Inc., Kenneth Orr, David Orr, and Jonathan Orr. Filed as Exhibit 10.2 to the Current Report on Form 8-K filed on August 11, 2022 (File No. 001-37747) and incorporated by reference herein.
10.2
Form of Performance Stock Unit Notice and Agreement. Filed herewith.
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 Antony 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)
Page 57 of 58
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 3, 2022
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.
Page 58 of 58