OBJECTIVE
The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes thereto for the years endedDecember 31, 2021 , 2020, and 2019. This section is intended to provide management's perspective of our financial condition and results of operations. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors section on page 17. Additionally, more information about our business activities can be found in "Business." GENERAL We are a finance company whose focus and growth has been through Medallion Bank (a wholly-owned subsidiary), which originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and home improvements, and provides loan origination and other services to fintech partners. Our focus is on growing our consumer finance and commercial lending portfolios. As ofDecember 31, 2021 , our consumer loans represented 94% of our gross loan portfolio, with commercial loans representing 5% and medallion loans representing 1%. Total assets under management, which includes assets serviced for third-party investors, were$1.9 billion as ofDecember 31, 2021 and$1.7 billion as ofDecember 31, 2020 . 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, currently and historically, through a wide variety of interest-bearing sources, such as bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, privately placed notes, preferred securities, and bank term debt. Net interest income fluctuates with changes in the yield on our loan portfolio 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 also provide debt, mezzanine, and equity investment capital to companies in a variety of industries, consistent with our investment objectives. 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. 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, then entered into another strategic partnership in 2021, and continues to explore opportunities with additional fintech companies. We have focused on growing our consumer lending segments and maintaining the profitability of our commercial lending segment. Since the beginning of 2020, we have taken various steps to pursue this strategy, including:
•
seeking to grow the Bank organically with a significant focusing on our consumer lending segments, and to a lesser extent by partnering with fintech companies in our strategic partnership program;
•
carrying-out cost-cutting measures, including reducing our employee headcount by more than 30% at our parent companyMedallion Financial Corp. and closing satellite offices inLong Island City, New York ;Chicago, Illinois ; andBoston, Massachusetts ; and
•
exiting non-core investments, including selling the assets ofLAX Group, LLC onDecember 16, 2020 , exiting our investments in RPAC onDecember 1, 2021 , reducing balance sheet exposure to zero atMedallion Fine Art, Inc. during 2021, and selling approximately 80% of our investment inUpgrade, Inc. during 2021, resulting in net cash proceeds of$12.5 million and a gain of$11.3 million . The Bank is an industrial bank regulated by theFDIC and theUtah 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 32 -------------------------------------------------------------------------------- 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 (andMedallion 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. We are considering 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.
COVID-19[female[feminine
The ongoing coronavirus, or COVID-19, pandemic, its broad impact and preventive measures taken to contain or mitigate the outbreak have had, and may continue to have, significant negative effects on the US and global economy, employment levels, employee productivity, and financial market conditions. This has had, and may continue to have negative effects on the ability of our borrowers to repay outstanding loans, the value of collateral securing loans, the demand for loans and other financial services products and consumer discretionary spending. As a result of these or other consequences, the outbreak has adversely and materially affected our business, results of operations and financial condition. Although we continue to see signs of recovery, it remains uncertain, and the effects of the outbreak on us could be exacerbated given that our business model is largely consumer and small business directed, which are more severely affected by COVID-19 and the preventative measures taken to contain or mitigate the outbreak, including its significant negative effects on consumer discretionary spending. The full extent to which the outbreak will continue to impact our operations will depend on future developments, including the impact of the Omicron and other potential variants, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the continued outbreak, the actions taken to contain or mitigate the outbreak and how long, and to what extent the economic recovery from its effects will take. We have taken steps to operate through this crisis, including having had our workforce work remotely on a part-time basis inNew York , though our employees outside ofNew York largely continue to work remotely. In addition, we implemented several cost-cutting measures, such as reducing employee headcount at our parent company,Medallion Financial Corp. , and closing satellite offices inLong Island City ,Chicago andBoston . InMarch 2020 , we adjusted the payment policies and procedures with our consumer and medallion businesses, and allowed borrowers to defer payments up to 180 days. As ofDecember 31, 2021 , minimal consumer loans remained on deferral and no medallion loans remained on deferral. For our consumer loan portfolios, although we believe that our deferral programs have been effective to date in mitigating the effect of COVID-19, the ultimate effects of COVID-19 on these portfolios remains to be seen. 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, the impact of which could be material to our results of operations and financial condition. Substantially all our medallion loans and related assets are concentrated inNew York City . As a result of the COVID-19 pandemic, economic activity and taxi ridership decreased dramatically inNew York City and despite the reopening ofNew York City , there has not been a substantial increase in ridership and gross meter fares. The extent to which the COVID-19 pandemic will continue to adversely affect taxi medallion owners and, by extension, our medallion loans and related assets, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, actions taken by governmental authorities, and the direct and indirect impact of the pandemic on taxi medallion owners and the behaviors of people who have historically taken taxis. With regard to our commercial business, many of our mezzanine portfolio companies accessed the Paycheck Protection Program. This provided needed liquidity during a period of depressed market demands.Medallion Capital drew on its remaining unfunded commitments and has a commitment from the SBA for$16.5 million in debenture financing with a ten-year term, upon a capital infusion fromMedallion Financial Corp. For the commercial portfolio, performance is slowly recovering although lingering impacts of COVID-19 continue to weigh on performance. RPAC received$0.7 million under the Paycheck Protection Program in the 2020 second quarter, all of which has been forgiven and accordingly recorded as Other income during 2021.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We follow financial accounting and reporting policies that are in accordance with GAAP. Some of these significant accounting policies require management to make difficult, subjective or complex judgments. The policies noted below, however, are deemed to be our "critical accounting policies" under the definition given to this term by theSEC . According to theSEC , "critical accounting policies" mean those policies that are most important to the presentation of a company's financial condition and results of operations, and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 33 -------------------------------------------------------------------------------- The judgments used by management in applying the critical accounting policies may be affected by deterioration in the economic environment, which may result in changes to future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes to the allowance for loan losses in future periods, and the inability to collect on outstanding loans could result in increased loan losses.
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 three-year look-back period for medallion loans and a one-year look-back period for recreation and home improvement loans, and uses historical loss experience and other projections for commercial loans. The allowance 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 size 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. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. 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. Our qualitative loss factor rates increased 116 basis points and 21 basis points for recreation and home improvement loans, respectively, in 2021 compared to 2020 as a result of the adverse COVID-19 economic conditions. If our qualitative loss factor rates were to increase 50 basis points, our recreation and home improvement general reserve would increase by$4.7 million and$2.2million , respectively. Likewise, if our qualitative loss factor rates were to decrease 50 basis points, our recreation and home improvement general reserve would decrease by$4.7 million and$2.2 million , respectively. Performing loans are recorded at book value and the general reserve maintained to absorb expected losses consistent with GAAP. All medallion loans that reach 90 days or more delinquent require a specific allowance for those loans, which is determined on an individual basis. We deem a loan impaired when, based on current information and events, it is probable that we will be unable to collect the amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. All impaired loans also require a specific allowance. We charge-off loans in the period that such loans are deemed uncollectible or when they reach 120 days delinquent regardless of whether the loan is a recreation, home improvement, or medallion loan. The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be responsive to changes in portfolio credit quality and inherent credit losses. The changes are reflected in both the pooled formula reserve and in specific reserves as the collectability of larger classified loans is regularly recalculated with new information as it becomes available. Management is primarily responsible for the overall adequacy of the allowance.
Medallion Loan Collateral Assessment
The determination of taxi medallion collateral fair value is derived quarterly for each jurisdiction. 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.
Goodwill and intangible assets arose as a result of the excess of the fair value that was determined by an independent third party expert over the book value of several of our previously unconsolidated portfolio investment companies as ofApril 2, 2018 .Goodwill is assessed annually for impairment by a third party expert and is reviewed by management quarterly. The annual goodwill assessment is focused on the Bank goodwill of$150.8 million and intangible assets of$23.5 million , both of which utilized a step zero qualitative impairment analysis based on historical and projected financial data. The Bank-related intangible assets are amortized over their approximate useful life.
Deferred taxes
Deferred taxes reflect the impact of temporary differences between the book value of assets and liabilities and their tax value.
34 -------------------------------------------------------------------------------- basis and are stated at tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are recognized subject to management's judgment that it is more like than not that it will be recognized. In addition, a valuation allowance is recorded when it is deemed that some or all of the deferred tax assets will not be realized due to the temporary differences.
Average balances and rates
The following table shows the Company's consolidated average balance sheets, interest income and expense, and the average interest earning/bearing assets and liabilities, and which reflect the average yield on assets and average costs on liabilities as of and for the years endedDecember 31, 2021 , 2020, and 2019. Year Ended December 31, 2021 2020 2019 Average Average Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost Interest-earning assets Interest earning cash equivalents$ 3,149 $ 56 1.78 %$ 1,528 $ 37 2.42 % $ - $ - - Federal funds sold 45,096 23 0.05 65,783 129 0.20 36,444 574 1.58 Investment securities 45,195 769 1.70 46,691 997 2.14 45,283 1,285 2.84 Loans Recreation 848,956 118,305 13.94 743,118 110,706 14.90 646,425 99,463 15.39 Home improvement 367,808 34,204 9.30 282,202 27,273 9.66 209,842 19,943 9.50 Commercial 66,589 7,070 10.62 69,293 7,334 10.58 63,039 7,632 12.11 Medallion 7,903 (1,483 ) (18.77 ) 71,821 (1,518 ) (2.11 ) 127,109 3,665 2.88 Strategic partnerships 70 22 31.43 9 4 44.44 - - - Total loans 1,291,326 158,118 12.24 1,166,443 143,799 12.33 1,046,415 130,703 12.49 Total interest-earning assets 1,384,766 158,966 11.51 1,280,445 144,962 11.32 1,128,142 132,562 11.75 Non-interest-earning assets Cash 47,050 19,312 30,494 Equity investments 9,830 10,385 9,560 Loan collateral in process of foreclosure(1) 47,764 50,893 51,924 Goodwill and intangible assets 199,160 202,618 204,063 Income tax receivable (621 ) 702 771 Other assets 44,750 47,488 44,252 Total non-interest-earning assets 347,933 331,398 341,064 Total assets$ 1,732,699 $ 1,611,843 $ 1,469,206 Interest-bearing liabilities Deposits$ 1,134,531 $ 17,543 1.55 %$ 1,043,096 $ 22,330 2.14 %$ 916,416 $ 22,521 2.46 % Retail and privately placed notes 120,704 10,226 8.47 70,384 6,813 9.68 59,252 5,789 9.77 SBA debentures and borrowings 64,733 2,116 3.27 71,490 2,633 3.68 76,544 2,985 3.90 Preferred securities 33,000 981 2.97 33,000 966 2.97 33,000 1,522 4.61 Notes payable to banks 10,960 134 1.22 32,246 1,246 3.86 45,506 2,069 4.55 Other borrowings 6,782 140 2.06 8,270 163 1.97 8,028 159 1.98 Total interest-bearing liabilities 1,370,710 31,140 2.28 1,258,486 34,151 2.71 1,138,746 35,045 3.08 Non-interest-bearing liabilities Deferred tax liability 7,444 4,959 7,602 Other liabilities (2) 27,634 29,174 28,331 Total non-interest-bearing liabilities 35,078 34,133 35,933 Total liabilities 1,405,788 1,292,619 1,174,679 Non-controlling interest 72,162 71,904 31,450 Total stockholders' equity 254,749 247,320 263,077 Total liabilities and stockholders' equity$ 1,732,699 $ 1,611,843 $ 1,469,206 Net interest income$ 127,826 $ 110,811 $ 97,517 Net interest margin 9.25 % 8.65 % 8.64 % (1) Includes financed sales of this collateral to third parties reported separately from the loan portfolio, and that are conducted by the Bank of$7.4 million ,$3.5 million , and$8.2 million as ofDecember 31, 2021 , 2020, and 2019. (2) Excludes deferred financing costs of$7.1 million and$5.8 million as ofDecember 31, 2021 and 2020. For the year endedDecember 31, 2021 , our net loans receivable yielded 12.24% (compared to 12.33% for the year endedDecember 31, 2020 ), mainly driven by growth in the home improvement portfolio, which has a lower yield than our recreation portfolio, along with the slight decline in the home improvement and recreation loan average yield. In addition, in 2021 there was a decline on the commercial loan yield as a result of an increase in average non-accrual loans throughout the year. Our debt, mainly certificates of deposit, help fund the growing consumer loan business and as market rates have decreased, so has the average cost of borrowing. In addition, we issued new privately placed notes sinceDecember 31, 2020 , which were at lower rates compared to the prior issuances. 35 --------------------------------------------------------------------------------
Rate/volume analysis
The following table presents the change in interest income and expense due to changes in the average balances (volume) and average rates, calculated for the years endedDecember 31, 2021 , 2020, and 2019. Year Ended December 31, 2021 2020 2019 Increase Increase Increase Increase Increase Increase (Decrease) (Decrease) (Decrease) (Decrease) (Decrease) (Decrease) (Dollars in thousands) In Volume In Rate Net
Change in rate volume Net change in volume
In Rate Net Change Interest-earning assets Interest earning cash and cash equivalents$ (31 ) $ (55 ) $
(86 )
Investment security
(24 ) (205 ) (229 ) 46 (332 ) (286 ) 3 129 132
Loans
Recreation 14,749 (7,150 ) 7,599 15,078 (3,832 ) 11,246 10,531 (2,756 ) 7,775 Home improvement 7,961 (1,030 ) 6,931 6,933 396 7,329 2,558 487 3,045 Commercial (287 ) 23 (264 ) 803 (1,101 ) (298 ) (1,933 ) (850 ) (2,783 ) Medallion 11,994 (11,959 ) 35 (1,734 ) (3,448 ) (5,182 ) (2,245 ) (972 ) (3,217 ) Strategic partnerships 19 (1 ) 18 - - - - - - Total loans$ 34,436 $ (20,117 ) $ 14,319 $ 21,080 $ (7,985 ) $ 13,095 $ 8,911
Total interest-earning assets
$ (3,887 ) $ 4,733 Interest-bearing liabilities Retail and privately placed notes$ 4,263 $ (850 ) $ 3,413 $ 1,093 $ (69 ) $ 1,024 $ 2,464 $ (172 ) $ 2,292 Deposits 1,302 (6,089 ) (4,787 ) 3,213 (3,402 ) (189 ) 409 2,913 3,322 Notes payable to banks (261 ) (850 ) (1,111 ) (515 ) (308 ) (823 ) (979 ) 32 (947 ) SBA debentures and borrowings (223 ) (294 ) (517 ) (190 ) (162 ) (352 ) (130 ) 32 (98 ) Preferred securities - 14 14 - (557 ) (557 ) - 24 24 DZ loan - - - - - - (2,367 ) - (2,367 ) Other borrowings (31 ) 8 (23 ) 1 2 3 1 (2 ) (1 ) Total interest-bearing liabilities$ 5,050 $ (8,061 ) $ (3,011 ) $ 3,602 $ (4,496 ) $ (894 ) $ (602 ) $ 2,827 $ 2,225 Net$ 29,331 $ (12,316 ) $ 17,015 $ 18,025 $ (4,731 ) $ 13,294 $ 9,222 $ (6,714 ) $ 2,508 For the year endedDecember 31, 2021 , interest income increased primarily due to the increased volume of our recreation and home improvement loan portfolios, even as the average rate decreased on the recreation and home improvement loan portfolio. Additionally, we continued to see a decline in our overall medallion portfolio as all loans had been placed on non-accrual, and they have continued to age 120 days or more past due and be charged-off to loan collateral in process of foreclosure. Interest expense decreased for 2021 primarily driven by the overall decrease in borrowing rates, mainly on the deposits. Our interest expense is driven by the interest rates payable on our bank certificates of deposit, fixed-rate, long-term private notes, fixed-rate, long-term debentures issued to the SBA, and have historically included short-term credit facilities with banks and other short-term notes payable. The Bank issues brokered bank certificates of deposit, which are our lowest borrowing costs. The Bank is able to bid on these deposits at a wide variety of maturity levels 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 continue to seek SBA funding throughMedallion Capital 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. InJuly 2020 , we obtained a$25.0 million commitment from the SBA. As ofDecember 31, 2021 and 2020, adjustable rate debt constituted 2% of total debt. 36
--------------------------------------------------------------------------------
Loans
The gross loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan. For the years endedDecember 31, 2021 and 2020, there was continued growth in the consumer lending segments, which was slightly offset by the continued shrinkage of the medallion portfolio as loans have continued to age over 120 days and be transferred to loan collateral in the process of foreclosure and payments received from borrowers. In addition, as a result of the COVID-19 pandemic, there was an increase in charge-offs and loans transferred for the medallion segment. Year Ended December 31, 2021 Home Strategic (Dollars in thousands) Recreation Improvement Commercial Medallion Partnership Total Gross loans - December 31, 2020$ 792,686 $ 334,033 $ 65,327 $ 37,768 $ 24$ 1,229,838 Loan originations 441,921 258,038 36,415 - 10,997 747,371 Principal payments, sales, and maturities (264,424 ) (155,442 ) (25,873 ) (7,778 ) (10,931 ) (464,448 ) Charge-offs, net (2,581 ) (551 ) - (8,872 ) - (12,004 ) Transfer to loan collateral in process of foreclosure, net (10,431 ) - - (5,457 ) - (15,888 ) Amortization of origination costs (9,678 ) 1,671 13 (2 ) - (7,996 ) Amortization of loan premium (221 ) (346 ) - (1,615 ) - (2,182 ) FASB origination costs, net 14,048 (631 ) - 2 - 13,419 Paid-in-kind interest - - 814 - - 814 Gross loans - December 31, 2021$ 961,320 $ 436,772 $ 76,696 $ 14,046 $ 90$ 1,488,924 Year Ended December 31, 2020 Home Strategic (Dollars in thousands) Recreation Improvement Commercial Medallion Partnership Total Gross loans - December 31, 2019$ 713,332 $ 247,324 $ 69,767 $ 130,432 $ -$ 1,160,855 Loan originations 294,885 193,098 7,575 - 1,663 497,221 Principal payments, sales, and maturities (187,989 ) (105,813 ) (13,183 ) (13,207 ) (1,639 ) (321,831 ) Charge-offs, net (14,457 ) (1,229 ) (28 ) (42,648 ) - (58,362 ) Transfer to loan collateral in process of foreclosure, net (14,871 ) - - (32,383 ) - (47,254 ) Amortization of origination costs (7,809 ) 1,910 8 (131 ) - (6,022 ) Amortization of loan premium (191 ) (320 ) - (2,531 ) - (3,042 ) FASB origination costs, net 9,786 (937 ) - 36 - 8,885 Paid-in-kind interest - - 1,188 - - 1,188 Transfer to other foreclosed property - - - (1,800 ) - (1,800 ) Gross loans - December 31, 2020$ 792,686 $ 334,033 $ 65,327 $ 37,768 $ 24$ 1,229,838
The following table shows the approximate maturities and sensitivity to changes in interest rates of our loans to
Loan Maturity
After 1 to After 5 to
(Dollars in thousands) Within 1 year 5 years 15 years After 15 years Total
Fixed-rate $ 39,966 $ 169,397 $ 1,160,589 $ 82,515 $ 1,452,467
Recreation 2,198 89,844 827,167 6,544 925,753
Home improvement 25,572 23,756 313,632 75,971 438,931
Commercial 9,300 45,840 19,790 - 74,930
Medallion 2,896 9,957 - - 12,853
Adjustable-rate $ 7,104 $ 1,961 $ - $ - $ 9,065
Recreation 4,145 1,961 - - 6,106
Commercial 1,766 - - - 1,766
Medallion 1,193 - - - 1,193
Total loans(1)(2) $ 47,070 $ 171,358 $ 1,160,589 $ 82,515 $ 1,461,532
(1)
Excludes strategic partnership loans. (2) As ofDecember 31, 2021 , there were no floating-rate loans.
Allowance and provision for loan loss
During the year endedDecember 31, 2021 , theNew York City taxi medallion values remained constant at a net realizable value of$79,500 , even as other markets slightly decreased, whereas for the year endedDecember 31, 2020 theNew York City taxi medallion values had decreased to a net realizable value of$79,500 from$167,000 atDecember 31, 2019 . In addition, the consumer recreation loan allowance percentages declined slightly for the year endedDecember 31, 2021 , whereas, for the year endedDecember 31, 2020 due to the change in economic factors due to COVID-19, we increased the reserve percentages for the consumer loan portfolio between 25 to 100 basis points. 37 -------------------------------------------------------------------------------- Activity in the allowance for loan losses for the years endedDecember 31, 2021 and 2020 follows: December 31, (Dollars in thousands) 2021 2020 Allowance for loan losses - beginning balance$ 57,548 $ 46,093 Charge-offs Recreation (14,712 ) (23,543 ) Home improvement (2,949 ) (2,909 ) Commercial - (31 ) Medallion (15,287 ) (49,361 ) Total charge-offs (32,948 ) (75,844 ) Recoveries Recreation 12,131 9,086 Home improvement 2,398 1,680 Commercial - 3 Medallion 6,415 6,713 Total recoveries 20,944 17,482 Net charge-offs (1) (12,004 ) (58,362 ) Provision for loan losses 4,622 69,817
Allowance for loan losses – closing balance (2)
(1)
As ofDecember 31, 2021 , cumulative net charge-offs of loans and loan collateral in process of foreclosure in the medallion portfolio were$258.3 million , some of which may represent collection opportunities for us. (2) As ofDecember 31, 2021 , there was no allowance for loan loss and net charge-offs related to the strategic partnership loans.
Allowance for loan losses by type at
Allowance as Allowance as a
December 31, 2021 Percentage a Percent of Percent of
(Dollars in thousands) Amount of Allowance Loan Category Nonaccrual
Recreation $ 32,435 64 % 3.37 % 91.18 %
Home improvement 7,356 15 1.68 20.68
Commercial 1,141 2 1 3.21
Medallion 9,234 19 65.74 25.96
Total $ 50,166 100 % 3.37 % 141.03 %
Allowance as Allowance as a
December 31, 2020 Percentage a Percent of Percent of
(Dollars in thousands) Amount of Allowance Loan Category Nonaccrual
Recreation $ 27,348 48 % 3.45 % 378.20 %
Home improvement 5,157 9 1.54 NM
Commercial - - - -
Medallion 25,043 43 66.31 68.01
Total $ 57,548 100 % 4.68 % 93.17 %
As of December 31, 2021 , the overall allowance for loan losses decreased from
December 31, 2020 , mainly due to the mix of the loan portfolio, specifically the
decrease in medallion loans, which have a higher allowance as a percentage of
loan balance, and an increase in consumer loans, which have a lower allowance as
a percentage of loan balance. For recreation and home improvement loans, as of
December 31, 2021 the presented allowances exclude $4.2 million and $0.5 million
of loan loss allowances which have been netted within loans as a result of the
consolidation of Medallion Bank.
For the consumer loan portfolio, the process to repossess the collateral is
started at 60 days past due. If the collateral is not located and the account
reaches 120 days delinquent, the account is charged-off to realized losses. If
the collateral is repossessed, a realized 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 servicer.
The following table shows the trend in loans 90 days or more past due as of the
dates indicated.
Year Ended December 31,
2021 2020 2019
(Dollars in thousands) Amount % (1) Amount % (1) Amount % (1)
Recreation $ 3,818 0.3 % $ 5,343 0.5 % $ 5,800 0.5 %
Home improvement 132 0 170 0.0 184 0.0
Commercial 74 0 75 0.0 107 0.0
Medallion - - 1,290 0.1 2,572 0.2
Total loans 90 days or more
past due $ 4,024 0.3 % $ 6,878 0.6 % $ 8,663 0.7 %
(1)
Percentages are calculated relative to the total or managed loan portfolio, as applicable.
We estimate that the weighted average loan-to-value ratio of our medallion loans was approximately 295%, 327%, and 190%, for the years endedDecember 31, 2021 , 2020, and 2019. 38 -------------------------------------------------------------------------------- For recreation loans, the process to repossess the collateral is generally 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. 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 table shows the activity of loan collateral in process of foreclosure for the twelve months endedDecember 31, 2021 and 2020. Year EndedDecember 31, 2021 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - December 31, 2020$ 1,432 $ 53,128 $ 54,560 Transfer from loans, net 10,431 5,457 15,888 Sales (6,951 ) (2,928 ) (9,879 ) Cash payments received - (14,173 ) (14,173 ) Collateral valuation adjustments (3,192 ) (5,774 ) (8,966 ) Loan collateral in process of foreclosure - December 31, 2021$ 1,720 $ 35,710 $ 37,430 Year EndedDecember 31, 2020 (Dollars in thousands) Recreation Medallion
Total
Loan collateral in process of foreclosure - December 31, 2019$ 1,476 $ 51,235 $ 52,711 Transfer from loans, net 14,871 32,403 47,274 Sales (7,512 ) (300 ) (7,812 ) Cash payments received - (5,687 ) (5,687 ) Collateral valuation adjustments (7,403 ) (24,523 ) (31,926 ) Loan collateral in process of foreclosure - December 31, 2020$ 1,432 $ 53,128 $ 54,560 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 two non-operating segments; RPAC and corporate and other investments. As mentioned earlier, the Company disposed of its investment in RPAC onDecember 1, 2021 and, as a result, all presented segment results are through such date. All results are for the years endedDecember 31, 2021 , 2020, and 2019. 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 74%, 74%, and 75% of our interest income for the years endedDecember 31, 2021 , 2020, and 2019. The loans are secured primarily by RVs, boats, and other consumer recreational equipment, with RV loans making up 60% of the portfolio, boat loans making up 19% of the portfolio, and trailer loans 9% as ofDecember 31, 2021 , compared to 60%, 19% and 9% as ofDecember 31, 2020 . Recreation loans are made to borrowers residing in all fifty states, with the highest concentrations inTexas ,California , andFlorida , at 16%, 10%, and 9% of loans outstanding, compared to 17%, 10%, and 9% as ofDecember 31, 2020 , with no other states over 5%. During the year endedDecember 31, 2021 , the recreation portfolio continued to grow compared to the prior year, with the interest yield in both periods decreasing as a result of the change in portfolio mix as the portfolio continues to grow. Additionally, reserve rates decreased slightly as delinquencies and charge-offs improved, whereas in the prior period there had been an increase due to the uncertainty regarding the COVID-19 pandemic. 39 --------------------------------------------------------------------------------
The following table presents selected financial data and ratios at the dates and for the years ended
Year Ended December 31,
(Dollars in thousands) 2021 2020 2019
Selected Earnings Data
Total interest income $ 118,305 $ 110,706 $ 99,463
Total interest expense 9,993 13,013 13,304
Net interest income 108,312 97,693 86,159
Provision for loan losses 7,671 23,736 28,638
Net interest income after provision for losses 100,641 73,957 57,521 Total other income (expense), net
(30,156 ) (27,341 ) (23,490 ) Net income before taxes 70,485 46,616 34,031 Income tax provision (18,699 ) (12,004 ) (8,813 ) Net income after taxes$ 51,786 $ 34,612 $ 25,218 Balance Sheet Data Total loans, gross$ 961,320 $ 792,686 $ 713,332 Total loan allowance 32,435 27,348 18,075 Total loans, net 928,885 765,338 695,257 Total assets 896,223 777,605 707,377 Total borrowings 710,616 621,735 563,805 Selected Financial Ratios Return on average assets 6.00 % 4.59 % 3.84 % Return on average equity 30.01 22.93 17.19 Interest yield 13.94 14.90 15.39 Net interest margin 12.76 13.15 13.33 Reserve coverage 3.37 3.45 2.53 Delinquency status (1) 0.41 0.70 0.84 Charge-off% 0.30 1.95 2.69 (1)
Loans past due 90 days or more.
Home Improvement Loans
The home improvement lending segment works with contractors and financial service providers to finance home improvements and is concentrated in roofs, swimming pools, and windows at 30%, 26%, and 13% of total loans outstanding as ofDecember 31, 2021 , as compared to 27%, 24%, and 13% as ofDecember 31, 2020 , with no other collateral types over 8%. Home improvement loans are made to borrowers residing in all fifty states, with the highest concentrations inFlorida ,Texas , andOhio at 10%, 10%, and 8% of loans outstandingDecember 31, 2021 , compared to 11%, 11%, and 9% as ofDecember 31, 2020 , with no other states over 6%. 40
-------------------------------------------------------------------------------- During the year endedDecember 31, 2021 , the home improvement lending segment continued to grow with the net portfolio increasing 31% from the prior year. Reserve rates increased 14 basis points from a year ago. The interest yield decreased slightly from the prior year period, while net interest margins increased, reflecting lower rates on borrowings and CDs issued in the current year as compared to the prior year.
The following table presents selected financial data and ratios at the dates and for the years ended
Year Ended December 31,
(Dollars in thousands) 2021 2020 2019
Selected Earnings Data
Total interest income $ 34,204 $ 27,273 $ 19,943
Total interest expense 4,153 5,699 4,757
Net interest income 30,051 21,574 15,186
Provision for loan losses 2,750 3,778 1,598
Net interest income after loss provision 27,301 17,796 13,588
Other income (expense), net (11,640 ) (9,611 ) (7,520 )
Net income before taxes 15,661 8,185 6,068
Income tax provision (4,155 ) (2,108 ) (1,572 )
Net income after taxes $ 11,506 $ 6,077 $ 4,496
Balance Sheet Data
Total loans, gross $ 436,772 $ 334,033 $ 247,324
Total loan allowance 7,356 5,157 2,608
Total loans, net 429,416 328,876 244,716
Total assets 371,781 340,494 252,704
Total borrowings 294,786 272,284 201,605
Selected Financial Ratios
Return on average assets 3.01 % 2.07 % 2.20 %
Return on average equity 15.04 10.35 10.22
Interest yield 9.30 9.66 9.50
Net interest margin 8.17 7.62 7.24
Reserve coverage 1.68 1.54 1.05
Delinquency status (1) 0.03 0.05 0.07
Charge-off% 0.15 0.44 0.37
(1)
Loans past due 90 days or more.
Commercial loans
We originate both senior and subordinated loans nationwide to businesses in a variety of industries, more than 53% 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$2.0 million to$5.0 million at origination, and typically include an equity component as part of the financing. The commercial lending business has concentrations in manufacturing and administrative, wholesale trade and support services, making up 40% and 14%, and 13% of the loans outstanding as ofDecember 31, 2021 , compared to 63%, 0%, and 13% as ofDecember 31, 2020 . During the year endedDecember 31, 2021 , the commercial portfolio continued to grow. Additionally, reserve rates increased, reflecting specific reserves on aged investments. 41
-------------------------------------------------------------------------------- The following table presents selected financial data and ratios as of and for the years endedDecember 31, 2021 , 2020, and 2019. The commercial segment encompasses the mezzanine lending business, and the other legacy commercial loans (immaterial to total) have been allocated to corporate and other investments. Year Ended December 31, (Dollars in thousands) 2021 2020 2019 Selected Earnings Data Total interest income$ 6,592 $ 6,926 $ 7,183 Total interest expense 2,720 2,538 2,833 Net interest income 3,872 4,388 4,350 Provision for loan losses - - 364 Net interest income after loss provision 3,872 4,388 3,986 Other income (expense), net 3,101 (3,196 ) (1,149 ) Net income before taxes 6,973 1,192 2,837 Income tax provision (1,850 ) (299 ) (684 ) Net income after taxes$ 5,123 $ 893 $ 2,153 Balance Sheet Data Total loans, gross$ 74,854 $ 62,037 $ 66,405 Total loan allowance 1,141 - - Total loans, net 73,713 62,037 66,405 Total assets 103,631 80,622 84,924 Total borrowings 82,169 65,924 68,666 Selected Financial Ratios Return on average assets 5.85 % 1.07 % 2.44 % Return on average equity 29.23 5.17 12.21 Interest yield 10.41 10.51 11.39 Net interest margin 6.12 6.66 6.90 Reserve coverage(1) 1.49 0.00 0.00 Delinquency status (1) (2) 0.10 0.11 0.15 Charge-off% (3) - 0.04 1.30 (1) Ratio is based off of total commercial balances, and relates solely to the legacy commercial loans balances. (2) Loans 90 days or more past due. (3) Ratio is based on total commercial lending business, and relates to the total loan business. As of December 31, 2021 2020 Total Gross % of Total Gross % of Geographic Concentrations Loans Market Loans Market Illinois$ 11,667 16 %$ 9,473 15 % California 10,034 13 5,000 8 Minnesota 9,916 13 5,679 9 North Carolina 7,264 10 6,836 11 Michigan 6,269 8 10,461 17 Texas 5,570 7 5,559 9 New Hampshire 5,503 7 - - New Jersey 4,164 6 4,072 7 Kansas 4,107 5 4,107 7 Florida - - 3,978 6 North Dakota 2,805 4 3,259 5 Other (1) 7,555 11 3,613 6 Total$ 74,854 100 %$ 62,037 100 % (1)
Includes seven other states, all of which were below 5% at
Loan of medallions
The medallion lending segment operates mainly in theNew York City ,Newark , andChicago markets. We have a long history of owning, managing, and financing taxi fleets, taxi medallions, and corporate car services. During the year endedDecember 31, 2021 , taxi medallion values remained consistent in theNew York City market even as other markets saw declines. We continue to not recognize interest income with all loans being placed on nonaccrual as of the third quarter 2020, and 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. 42 --------------------------------------------------------------------------------
The following table presents selected financial data and ratios at the dates and for the years ended
Year Ended December 31,
(Dollars in thousands) 2021 2020 2019
Selected Earnings Data
Total interest income (loss) $ (1,483 ) $ (1,518 ) $ 3,665
Total interest expense 5,914 3,610 7,962
Net interest loss (7,397 ) (5,128 ) (4,297 )
(Benefit) provision for loan losses (7,752 ) 42,276
16,331
Net interest income (loss) after provision for losses 355 (47,404 )
(20,628 ) Other income (expense), net (1,991 ) (30,366 ) (10,493 ) Net loss before taxes (1,636 ) (77,770 ) (31,121 ) Income tax benefit 433 19,520 7,596 Net loss after taxes$ (1,203 ) $ (58,250 ) $ (23,525 ) Balance Sheet Data Total loans, gross$ 14,046 $ 37,768 $ 123,097 Total loan allowance 9,234 25,043 18,075 Total loans, net 4,812 12,725 105,022 Total assets 42,011 124,554 217,483 Total borrowings 69,221 98,636 176,825 Selected Financial Ratios Return on average assets (1.15 )% (33.21 )% (9.73 )% Return on average equity (5.75 ) (165.21 ) (48.49 ) Interest yield (18.77 ) (2.11 ) 2.88 Net interest margin (93.60 ) (7.14 ) (3.38 ) Reserve coverage 65.74 66.31 19.48 Delinquency status (1) - 3.57 2.04 Charge-off% 95.40 59.38 14.68 (1)
Loans past due 90 days or more.
As of December 31,
2021 2020
Total Gross % of Total Gross % of
Geographic Concentration Loans Market Loans Market
New York City $ 12,514 89 % $ 33,657 89 %
Newark 1,486 11 3,811 10
All Other 46 0 (1) 300 1
Total $ 14,046 0 % $ 37,768 100 %
(1)
Less than 1%.
As of December 31,
2021 2020
Total Loan Total Loan
Collateral in Collateral in
Process of % of Process of % of
Geographic Concentration Foreclosure Market Foreclosure Market
New York City $ 29,303 82 % $ 38,738 73 %
Newark 4,247 12 7,994 15
Chicago 1,952 5 6,057 11
All Other 208 1 339 1
Total $ 35,710 0 % $ 53,128 100 %
RPAC
Until December 1, 2021 , we were the majority owner and managing member of RPAC
Racing, LLC , a performance and marketing company for NASCAR . Revenues were
mainly earned through sponsorships and race winning activity over the ten month
race season (February through November) during the year. As a result of
COVID-19, the prior year race season was suspended from March 15, 2020 through
May 17, 2020 .
43
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The following table presents selected financial data and ratios at the dates and for the years ended
Year Ended December 31,
(Dollars in thousands) 2021 (1) 2020 2019
Selected Earnings Data
Sponsorship, race winnings, and other income $ 12,567 $ 20,042 $ 18,742
Race and other expenses 14,667 16,339 15,938
Interest expense 546 163 159
Total expenses 15,213 16,502 16,097
Net income (loss) before taxes (2,646 ) 3,540
2,645
Income tax (provision) benefit (1,498 ) (889 ) (329 ) Net income (loss) after taxes$ (4,144 ) $ 2,651 $ 2,316 Balance Sheet Data Total assets $ -$ 33,711 $ 31,538 Total borrowings - 8,689 7,794 Selected Financial Ratios Return on average assets NM 7.98 % 7.28 % Return on average equity NM NM (96.37 ) (1)
The Company sold its interest in PRPP in
Corporate and other investments
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 not 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. Strategic partnerships represent$0.1 million in net loans as ofDecember 31, 2021 , compared to less than$0.1 million as ofDecember 31, 2020 . This segment also reflects the elimination of all intercompany activity among the consolidated entities, as well as the gains (losses) on the dispositions of certain non-core assets.
The following table presents selected financial data and ratios at the dates and for the years ended
(Dollars in thousands) Year Ended December 31,
2021 2020 2019
Selected Earnings Data
Total interest income $ 1,348 $ 1,575 $ 2,308
Total interest expense 7,814 9,128 6,030
Net interest loss (6,466 ) (7,553 ) (3,722 )
Total interest expense 1,953 27 455
Net interest loss (8,419 ) (7,580 ) (4,177 )
Other income (expense), net 1,455 (11,164 ) (7,946 )
Net loss before taxes (6,964 ) (18,744 ) (12,123 )
Income tax benefit 1,552 5,854 3,461
Net loss after taxes $ (5,412 ) $ (12,890 ) $ (8,662 )
Balance Sheet Data
Total loans, gross $ 1,933 $ 3,314 $ 3,362
Total loan allowance - - -
Total loans, net $ 1,933 3,314 3,362
Total assets 459,411 285,425 247,641
Total borrowings 328,358 244,987 150,898
Selected Financial Ratios
Return on average assets (1.89 )% (5.06 )% (3.71 )%
Return on average equity (13.62 ) (23.29 ) (14.26 )
44
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Summary of consolidated financial ratios
The following table presents selected financial data and ratios at the dates and for the years ended
Year Ended December
31,
(Dollars in thousands, Except per share data) 2021 2020
2019
Return on average assets (ROA) 3.12 % (2.16 )% (0.12 )% Return on average equity (ROE) 21.24 (10.90 ) (0.59 ) Net interest margin 9.25 8.65 8.64 Other income ratio (1) 2.28 (0.46 ) 1.81 Total expense ratio (2) 9.26 7.51 9.18 Equity to assets (3) 19.00 18.54 21.70 Debt to equity (4) 4.2x 4.3x 3.5x Loans receivable to assets 77 % 71 % 72 % Net charge-offs 12,004 58,362 37,688 Net charge-offs (recoveries) as a % of average loans receivable 0.93 % 5.00 % 3.60 % Allowance coverage ratio 3.37 4.68 3.97 (1) Other income ratio represents other income divided by average interest earning assets. (2) Total expense ratio represents total expenses (interest expense, operating expenses, and income taxes) divided by average interest earning assets. (3) Includes$68.8 million ,$73.2 million , and$71.3 million related to non-controlling interests in consolidated subsidiaries as ofDecember 31, 2021 , 2020, and 2019. (4) Excludes deferred financing costs of$7.1 million ,$5.8 million , and$5.1 million as ofDecember 31, 2021 , 2020, and 2019.
Consolidated operating results
For the year ended
Net income attributable to shareholders was$54.1 million , or$2.17 per share for the year endedDecember 31, 2021 , compared to net loss attributable to shareholders of$34.8 million , or$1.42 per share, for the year endedDecember 31, 2020 . Total interest income was$159.0 million for the year endedDecember 31, 2021 , compared to$145.0 million for the year endedDecember 31, 2020 . The increase in interest income is reflective of the continued growth in the consumer lending segments, offset by contraction in the medallion lending segment, all loans of which are on nonaccrual status beginning in third quarter 2020, and a reduction in interest rates. The yield on interest earning assets was 11.51% for the year endedDecember 31, 2021 , compared to 11.32% for the year endedDecember 31, 2020 . Average interest earning assets were$1,384.8 million for the year endedDecember 31, 2021 , an increase from$1,280.4 million for the year endedDecember 31, 2020 . Loans before allowance for loan losses were$1,488.9 million as ofDecember 31, 2021 , comprised of recreation ($961.3 million ), home improvement ($436.8 million ), commercial ($76.7 million ), medallion ($14.0 million ), and strategic partnership (less than$0.1 million ) loans. We had an allowance for loan losses as ofDecember 31, 2021 of$50.2 million , which was attributable to the recreation (64%), home improvement (15%), medallion (19%), and commercial (2%) loan portfolios. As ofDecember 31, 2020 , loans before allowance for loan losses were$1,229.8 million , comprised of recreation ($792.7 million ), home improvement ($334.0 million ), commercial ($65.3 million ), medallion ($37.8 million ), and strategic partnership ($24.0 million ) loans. We had an allowance for loan losses as ofDecember 31, 2020 of$57.5 million , which was attributable to recreation (48%), medallion (43%), and home improvement (9%) loans. Loans increased$259.1 million , or 21%, from$1,229.8 million as ofDecember 31, 2020 to$1,488.9 million as ofDecember 31, 2021 as a result of$747.4 million of loan originations, 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$4.6 million for the year endedDecember 31, 2021 , compared to a$69.8 million for the year endedDecember 31, 2020 . The improvement over the prior year is attributable to the entire medallion loan portfolio being placed on non-accrual status and reserved down to collateral value in 2020, along with increases in reserve rates between 50 and 100 basis points on the recreation subprime loan business, as well as lower net charge-offs in the consumer, primarily recreation, loan portfolio in the current year. The charge-off ratios on the loan portfolios was 0.93% for the year endedDecember 31, 2021 compared to 5.00% for the year endedDecember 31, 2020 , primarily reflective of higher recoveries and lower charge-offs in the current year within the consumer loan portfolio. See Note 4 of the accompanying consolidated financial statements for additional information on loans and allowance for loan losses. Interest expense was$31.1 million for the year endedDecember 31, 2021 , compared to$34.2 million for the year endedDecember 31, 2020 . The decrease is from the prior year is attributable to lower costs associated with new deposits issued during the year, despite the overall increase in outstanding deposits, due to lower interest rates, offset slightly by higher priced longer-term private notes replacing lower cost short term bank borrowings. The average cost of borrowed funds was 2.28% for the year endedDecember 31, 2021 , compared to 2.71% for the year endedDecember 31, 2020 , the decrease mainly driven by the decline in market rates for deposits, the repayment of retail notes, offset to a lesser extent with the replacement of notes payable to banks with higher fixed rate private notes. Average debt outstanding was$1,370.7 million for the year endedDecember 31, 2021 , up from$1,258.5 million for the year endedDecember 31, 2020 , as we issued additional certificates of deposits to increase our liquidity, along with the new issuance of privately placed notes, offset by the repayment of publicly traded retail notes and other bank borrowings. We expect 45 -------------------------------------------------------------------------------- interest expense to increase as certificates of deposit mature and get replaced with certificates of deposit with higher rates. See page 35 for tables that show average balances and cost of funds for our funding sources. Net interest income was$127.8 million for the year endedDecember 31, 2021 , compared to$110.8 million for the year endedDecember 31, 2020 . Net interest margin was 9.25% for the year endedDecember 31, 2021 , compared to 8.65%, for the year endedDecember 31, 2020 , reflecting the continued growth and performance of the higher yielding consumer loans, as well as the trends in interest rates. Net other income (loss), which is comprised of sponsorship and race winnings, prepayment fees, servicing fee income, late charges, write-downs of loan collateral, impairment of equity investments, and other miscellaneous income was$31.6 million for the year endedDecember 31, 2021 , compared to a loss of$5.9 million for the year endedDecember 31, 2020 . The increase was mainly due to gains recorded on the extinguishment of debt, gains on the disposal of equity investments in the current year,$11.3 million resulting from the sale of shares in Upgrade, as well as lower write-downs of the loan collateral in process of foreclosure as compared to the prior year. We will not earn additional sponsorship and race winnings as a result of the sale of RPAC inDecember 2021 . Operating expenses were$72.9 million for year endedDecember 31, 2021 , compared to$72.0 million for year endedDecember 31, 2020 . Salaries and benefits were$31.6 million for the year endedDecember 31, 2021 , up from$28.2 million for the year endedDecember 31, 2020 , with the increase mainly attributable to both the growth in our loan portfolio as well as increased compensation in connection with current year performance. Professional fees were$5.3 million for the year endedDecember 31, 2021 , compared to$8.0 million for the year endedDecember 31, 2020 , primarily reflective of lower legal costs for a variety of corporate matters. Race team costs were$9.6 million for the year endedDecember 31, 2021 , compared to$8.4 million for the year endedDecember 31, 2020 , reflective of a full race team in 2021 as compared to the shortened 2020 season due to the COVID-19 pandemic. Due to the sale of RPAC inDecember 2021 , we do not expect to continue to incur race team costs. Loan servicing costs were$7.0 million for the year endedDecember 31, 2021 , down slightly from the year endedDecember 31, 2020 . Occupancy and other operating expenses were$19.4 million for the year endedDecember 31, 2021 compared to$20.7 million for the year endedDecember 31, 2020 . Total income tax expense was$24.2 million for the year endedDecember 31, 2021 , compared to a benefit of$10.1 million for the year endedDecember 31, 2020 . The 2021 year included$1.8 million of tax expense related to a valuation allowance with respect to certain tax assets which we believe will not be realized. Loan collateral in process of foreclosure was$37.4 million atDecember 31, 2021 , a decline from$54.6 million atDecember 31, 2020 . The decrease was primarily reflective of cash payments received, sales, and to a lesser extent, the decline in collateral values offset by the additional loans having reached 120 days past due being charged-down to their collateral value and reclassified to loan collateral in process of foreclosure.
For the year ended
For a comparison of the Company's results of operations for the year endedDecember 31, 2020 to the year endedDecember 31, 2019 , see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSecurities and Exchange Commission onMarch 16, 2021 .
ASSET/LIABILITY MANAGEMENT
Sensitivity to interest rates
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, privately placed notes, 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
portfolios. We believe that the average life of our loan portfolios 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
46
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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.
The following table presents our interest rate sensitivity gap at December 31,
2021 . 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 have not reflected an assumed annual prepayment rate for such
assets in this table.
December 31, 2021 Cumulative Rate Gap (1)
More More More More More
Than Than 2 Than 3 Than 4 Than
Less 1 and Less and Less and Less and Less 5 and Less
Than Than 2 Than 3 Than 4 Than 5 Than 6
(Dollars in thousands) 1 Year Years Years Years Years Years Thereafter
Total Earning assets Fixed-rate$ 39,966 $ 19,984 $ 19,572 $ 54,025 $ 75,816 $ 65,613 $ 1,177,492 $ 1,452,468 Adjustable rate 7,104 688 1,250 - 23 - - 9,065 Investment securities 4,406 2,087 4,394 4,023 1,869 1,847 26,147 44,773 Cash 123,234 - - 500 750 - - 124,484 Total earning assets$ 174,710 $ 22,759 $ 25,216 $ 58,548 $ 78,458 $ 67,460 $ 1,203,639 $ 1,630,790 Interest bearing liabilities Deposits$ 405,311 $ 242,965 $
289,685
Retail and privately placed tickets
- - 36,000 - 31,250 - 53,750
121,000
SBA debentures and borrowings - 5,000 13,963 14,000 14,000 - 23,000 69,963 Preferred securities - - - - - - 33,000 33,000 Total liabilities$ 405,311 $ 247,965 $ 339,648 $ 179,798 $ 194,779 $ -$ 109,750 $ 1,477,251 Interest rate gap$ (230,601 ) $ (225,206 ) $ (314,432 ) $ (121,250 ) $ (116,321 ) $ 67,460 $ 1,093,889 $ 153,539 Cumulative interest rate gap$ (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 $ - December 31, 2019 (2)$ (260,024 ) $ (500,953 ) $ (651,546 ) $ (689,819 ) $ (748,187 ) $ (706,935 ) $ 83,402 $ - (1) The ratio of the cumulative one year gap to total interest rate sensitive assets was (14%), (27%), and (21%) as ofDecember 31, 2021 , 2020, and 2019. (2) Excludes federal funds sold and investment securities. Our interest rate sensitive assets were$1,630.8 million and interest rate sensitive liabilities were$1,477.3 million atDecember 31, 2021 . The one-year cumulative interest rate gap was a negative$230.6 million or (14%) of interest rate sensitive assets. We seek to manage interest rate risk by originating adjustable-rate loans, by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, 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 lendings 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 (0.21% atDecember 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.
Cash 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 fromMedallion Capital and the Bank, and are subject to compliance with regulatory ratios. As ofDecember 31, 2021 , we had unfunded commitments from the SBA of$9.5 million , all of which required the infusion of$4.8 million of capital from either the capitalization of retained earnings or a capital infusion from the Company. 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$45.0 million available under Fed Funds lines with several commercial banks. InFebruary 2021 , we completed a private placement to certain institutional investors of$25.0 million aggregate principal amount of 7.25% unsecured senior notes dueFebruary 2026 , with interest payable semiannually. Follow-on offerings of these notes in March andApril 2021 raised an additional$3.3 million and$3.0 million . InDecember 2020 , we completed a private placement to certain institutional investors of$33.6 million aggregate principal amount of 7.50% unsecured senior notes dueDecember 2027 , with interest payable semiannually. Follow-on offerings of these notes in February andMarch 2021 raised an additional$8.5 million . InApril 2021 , we raised an additional$11.7 million in a follow-on offering, and repaid substantially all of our remaining bank borrowings. 47 -------------------------------------------------------------------------------- The net proceeds from theDecember 2020 ,February 2021 ,March 2021 andApril 2021 private placements have been used for general corporate purposes, including repayment of outstanding debts, including repayment of our 9.00% retail notes at maturity inApril 2021 and to pay down other borrowings, including some borrowings at a discount. InDecember 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 excludingApril 1, 2025 , at a rate of 8% per annum, and from and includingApril 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.
In
The table below presents the components of our debt were as ofDecember 31, 2021 , exclusive of deferred financing costs of$7.1 million . See Note 4 to the consolidated financial statements for details of the contractual terms of our borrowings. (Dollars in thousands) Balance Percentage Rate (1) Deposits (2)$ 1,254,038 85 % 1.20 % Retail and privately placed notes 121,000 8 7.66 SBA debentures and borrowings 69,963 5 2.72 Preferred securities 33,000 2 2.31 Total outstanding debt$ 1,478,001 100 % 1.82 % (1)
Weighted average contractual rate at
Our contractual obligations expire on or mature at various dates throughSeptember 2037 . The following table shows all contractual obligations atDecember 31, 2021 . Payments due by period Less than 1 - 2 2 - 3 3 - 4 4 - 5 More than
(Dollars in thousands) 1 year years years years years 5 years Total (1) Borrowings Deposits (2)$ 405,311 $ 242,965 $ 289,685 $ 165,798 $ 149,529 $ -$ 1,253,288 Retail and privately placed notes - - 36,000 - 31,250 53,750 121,000 SBA debentures and borrowings - 5,000 13,963 14,000 14,000 23,000 69,963 Preferred securities - - - - - 33,000 33,000 Total outstanding borrowings 405,311 247,965 339,648 179,798 194,779 109,750 1,477,251 Operating lease obligations 2,439 2,356 2,373 2,390 2,408 1,164 13,130 Total contractual obligations$ 407,750 $ 250,321 $ 342,021 $ 182,188 $ 197,187 $ 110,914 $ 1,490,381 (1)
Total debt excludes deferred financing costs of
Approximately
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 ofDecember 31, 2021 by$1.3 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$0.8 million atDecember 31, 2021 . Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net income from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates. 48 -------------------------------------------------------------------------------- From time to time, we work with investment banking firms and other financial intermediaries to investigate the viability of several other financing options which include, among others, the sale or spinoff of certain assets or divisions, the development of a securitization conduit program, and other independent financing for certain subsidiaries or asset classes. These financing options would also provide additional sources of funds for both external expansion and continuation of internal growth. The following table illustrates sources of available funds for us and each of our subsidiaries, and amounts outstanding under credit facilities and their respective end of period weighted average interest rates atDecember 31, 2021 . See Note 5 to the consolidated financial statements for additional information about each credit facility. Medallion Financial December 31, December 31, (Dollars in thousands) Corp. MFC MCI FSVC MB All Other 2021(1) 2020(1) Cash, cash equivalents (1) (2) (2) and federal funds sold$ 40,540 $ 258 $ 22,124 $ 226 $ 61,302 $ 34 $ 124,484 $ 112,040 Bank Loans - 31,261 Average interest rate NA 3.67 % Maturity NA 2/21-12/23 Preferred Securities 33,000 33,000 33,000 Average interest rate 2.31 % 2.31 % 2.35 % Maturity 9/37 9/37 9/37 Retailed notes and privately placed borrowings 121,000 121,000 103,225 Average interest rate 7.66 % 7.66 % 8.25 % Maturity 3/24-12/27 3/24-12/27 4/21-12/27 SBA debentures & borrowings 70,500 8,963 79,463 93,008 Amounts available 9,500 9,500 25,000 Amounts outstanding 61,000 8,963 69,963 68,008 Average interest rate 2.64 % 3.25 % 2.72 % 3.36 % Maturity 3/23- 3/32 45,412 3/23- 3/32 3/21-9/30 Brokered CD's & other (3) funds borrowed 1,254,038 1,254,038 1,068,072 Average interest rate 1.20 % 1.20 % 1.71 % Maturity 1/22-12/26 1/22-12/26 1/21-12/25 Other borrowings - 8,689 Average interest rate NA 1.91 % Maturity NA 12/21-6/25 Total Cash$ 40,540 $ 258 $ 22,124 $ 226 $ 61,302 $ 34 $ 124,484 $
112,040
Total outstanding debt
$ 8,963 $ 1,254,038 $ -$ 1,478,001 $ 1,312,255 (1) Excludes deferred financing costs of$7.1 million and$5.8 million as ofDecember 31, 2021 and 2020. (2) Cash resides in the applicable SBIC and is generally not available for corporate use. (3) Balance includes$0.8 million of strategic partner reserve deposits and$8.7 million related to listing services. 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, through the issuance of SBA debentures, the issuance of privately placed notes and historically through borrowing arrangements with other banks, 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 actively seek additional sources of liquidity; however, given 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.
Recently issued accounting standards
InJune 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 afterDecember 15, 2019 for public entities, with early adoption permitted. InNovember 2019 , the FASB issued ASU 2019-10 to defer implementation of the standard for smaller reporting companies, such us, to fiscal years beginning afterDecember 15, 2022 . We are assessing the impact the update will have on our financial statements, and expect the update to have a material impact on our accounting for estimated credit losses on our loans. 49
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InAugust 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 certainSEC 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 of the update and determined it does not have a material impact on the accompanying financial statements.
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