MEDALLION FINANCIAL CORP (MFIN) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 ended December 31, 2024, 2023, and 2022. This section is intended to provide management's perspective of our financial condition and results of operations. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors section on page 19. Additionally, more information about our business activities can be found in “Business.”

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, collector cars, 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 December 31, 2024, our consumer loans represented 95% of our gross loan portfolio, inclusive of loans held for sale, and commercial loans represented 4%. Total assets were $2.9 billion as of December 31, 2024 and $2.6 billion as of December 31, 2023.

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Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, including bank certificates of deposit issued to consumers, debentures issued to and guaranteed by the SBA, privately placed notes, trust preferred securities, and preferred stock of the Bank. Net interest income fluctuates with changes in the yield on our loan portfolios and changes in the cost of borrowed funds, as well as changes in the amount of interest-earning assets and interest-bearing liabilities held by us. Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice, either due to inflation or other factors, on a different basis than our interest-bearing liabilities. We continue to monitor global supply chain disruptions, gas prices, labor shortages, unemployment, and other factors contributing to U.S. inflation and economic health, as well as other factors which contribute to competition and changes in the demand for our loan products. We are taking steps in the event of a potential economic downturn and in light of the current inflationary environment to moderate the pace of our recent growth.

We also provide debt, mezzanine, and equity investment capital to companies in a variety of commercial industries. These investments may be venture capital style investments which may not be fully collateralized. Our investments are typically in the form of secured debt instruments with fixed interest rates accompanied by an equity stake or warrants to purchase an equity interest for a nominal exercise price (such warrants are included in equity investments on the consolidated balance sheets). Interest income is earned on the debt instruments.

The Bank is an industrial bank regulated by the FDIC and the Utah Department of Financial Institutions that originates consumer loans, raises deposits, and conducts other banking activities. The Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit. To take advantage of this low cost of funds, historically we referred a portion of our taxi medallion and commercial loans to the Bank, which originated these loans, and have since been serviced by Medallion Servicing Corp., or MSC. However, other than in connection with dispositions of existing taxi medallion assets, the Bank has not originated any new taxi medallion loans since 2014 (and Medallion Financial Corp. has not originated any new taxi medallion loans since 2015) and is working with MSC to service its remaining portfolio, as it winds down. MSC earns referral and servicing fees for these activities.

In 2019, the Bank launched a strategic partnership program to provide lending and other services to financial technology, or fintech, companies. The Bank entered into an initial partnership in 2020 and began issuing its first loans. The Bank continues to evaluate and launch additional partnership programs with fintech companies.

We continue to consider various alternatives for the Bank, which may include an initial public offering of its common stock, the sale of all or part of the Bank, a spin-off or other potential transaction. We do not have a deadline for its consideration of these alternatives, and there can be no assurance that this process will result in any transaction being announced or consummated.

CRITICAL ACCOUNTING 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 the SEC. According to the SEC, “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.

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 credit losses in future periods, and the inability to collect on outstanding loans could result in increased credit losses.

Provision and Allowance for Credit Losses

The allowance for credit 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 credit losses, the Company uses historical delinquency and actual loss rates with a three-year look-back period for taxi medallion loans and a one-year look-back period for recreation and home improvement loans and 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.

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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 $7.1 million and $4.1 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 $7.1 million and $4.1 million, respectively.

The allowance is maintained at a level estimated by management to absorb probable credit losses inherent in the loan portfolios based on management’s evaluation of the portfolios, the related credit characteristics, and macroeconomic factors affecting the portfolios. As of December 31, 2024 and 2023, the allowance totaled $97.4 million and $84.2 million, which represented 4.12% and 3.80% of total loans held for investment, respectively. The increase in the allowance for credit losses as of December 31, 2024 was primarily driven by the changes in qualitative factors which increased the necessary allowance for credit losses for recreation loans which were partially offset by the decrease in the necessary allowance for home improvement loans. Additionally, growth in our recreation and home improvement loan portfolios required additional allowance commensurate with portfolio growth.

All taxi medallion loans are deemed impaired and have a specific allowance for each loan, such that the underlying net loan has a value no greater than collateral value. The determination of taxi medallion collateral fair value is derived quarterly for each jurisdiction. For taxi medallion loans, delinquent nonperforming loans are valued at collateral value for the most recent quarter. Collateral value for the taxi 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. 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. 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 taxi 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.

Goodwill and Intangible Assets

Goodwill assets arose as a result of the excess of fair value over book value for several of our previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under our 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.

As of December 31, 2024 and 2023, we had goodwill of $150.8 million, all of which related to our recreation and home improvement lending segments. As of December 31, 2024 and 2023, we had intangible assets of $19.1 million and $20.6 million. We recognized $1.4 million of amortization expense on the intangible assets for each of the years ended December 31, 2024, 2023 and 2022.

Management engaged an independent third-party expert to perform a quantitative assessment of goodwill for impairment at December 31, 2024. The third-party expert’s assessment determined that it was more likely than not that the fair value of both the recreation lending and home improvement lending segments individually were not less than the carrying value of each of these segments. Based upon inputs and analysis deemed appropriate by the third-party expert, the third-party expert concluded that a fair value premium existed in excess of carrying value with respect to the recreation and home improvement lending segments.

In evaluating both segments, a combination of an income approach (weighted 50%), an earnings-based market approach (weighted 25%), and a book value-based market approach (weighted 25%) were employed by the third-party expert. For the income approach, a discounted cash flow analysis was used. Key inputs and assumptions used in the discounted cash flow analysis included future projected cash flows, risk-adjusted discount rates, capital requirements, and future economic and market conditions. For both segments, a discount rate was estimated using the risk-free interest rate adjusted for specific risk and size premiums, resulting in a discount rate of 17.5% for the recreation lending segment and 16.5% for the home improvement lending segment. For both segments, growth rates consistent with our plan were employed by the third-party expert for a five year period, and a long-term growth rate of 3% was utilized in determining the terminal fair value.

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Determining the fair value of a lending segment or an indefinite-lived intangible asset involves the use of significant estimates and assumptions. We believe that the fair value estimates determined by the third-party expert were based on reasonable assumptions and appropriate for the purpose of assessing goodwill for impairment. However, as these estimates and assumptions are unpredictable and inherently uncertain, actual future results may differ from these estimates. In addition, we also make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. To the extent that we were unable to grow either the recreation lending or home improvement lending segment at the levels forecasted, if we were unable to issue new loans at rates and terms consistent with current practices, and if our cost of borrowings were to increase significantly from current levels without the ability to pass along those rate increases to new borrowers, the fair value of these segments could deteriorate to a level which would require an impairment of goodwill.

AVERAGE BALANCES AND RATES

The following table presents our 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 ended December 31, 2024, 2023, and 2022.

(1)
Includes deferred financing costs of $8.2 million, $8.5 million, and $7.0 million as of December 31, 2024, 2023, and 2022.

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For the year ended December 31, 2024, our total loans yielded 12.01% as compared to 11.69% for the year ended December 31, 2023. The 32 basis point increase reflects a higher yield on our loan portfolios, as we have increased the rates charged on new consumer originations over the past year as prevailing market interest rates have remained high. We have used the higher interest rate environment as an opportunity to increase the rates on both newly issued recreation and home improvement loans, which is expected to continue to increase the yield on these portfolios over time, as well as increase the credit quality of our new issuances, particularly in our recreation segment, with the average FICO scores, measured at origination, of our total recreation loans outstanding being 685 and 683 as of December 31, 2024 and 2023. We use weighted average FICO scores as an indicator of portfolio risk.

Our debt, with certificates of deposits being our largest source, funds our growing lending business. Our average interest cost for the year ended December 31, 2024 of 3.93% increased 77 basis points from 3.16% for the year ended December 31, 2023, attributable to the current higher interest rate environment, particularly the higher cost associated with our deposits. To the extent that prevailing market interest rates remain at current levels, we expect our cost of funds to continue to increase as we issue new certificates of deposit to replace maturing certificates of deposit and fund our growth. During the year ended December 31, 2024, we issued deposits for three-month certificates at rates as high as 4.89% for both 36 month and 60 month certificates, with the most recent 36 month and 60 month issuances in 2024 at rates of 4.19%. and 4.13%. We have taken, and continue to take, steps to pass along a portion of the interest rate increases on newly originated loans, the process for which is slower than the pace of funding cost increases, thereby compressing our net interest margins.

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 ended December 31, 2024, 2023, and 2022.

For the year ended December 31, 2024, the increase in interest income was mainly driven by the increase in the size of the consumer loan portfolios, as well as an increase in overall yield on interest-earning assets as we issue new loans at interest rates greater than the weighted average rates of our current portfolio. The increase in interest expense was driven by an increase in borrowing costs, primarily due to the increases in deposits as older deposits mature and are replaced at current market rates, as well as an overall increase in borrowings.

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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, trust preferred securities, and has historically included credit facilities with banks and other short-term notes payable. The Bank issues brokered time certificates of deposit, which are, on average, our lowest borrowing costs. The Bank is able to bid on these deposits at a variety of maturity options, which allows for more flexible interest rate management strategies. As further described below, in September 2023, we issued and sold $39.0 million aggregate principal amount of 9.25% senior notes due in September 2028, in June 2024, we amended our senior notes previously issued in December 2023, increasing the aggregate principal amount from $12.5 million to $17.5 million, reducing the interest rate to 8.875% from 9.0%, and extending the maturity date from December 2033 to June 2039, and in August 2024, we issued and sold $5.0 million aggregate principal amount of 8.625% senior notes due in August 2039. The net proceeds were used, in large part, to repurchase and settle, in full, $36.0 million aggregate principal amount of our 8.25% senior notes issued in 2019 and which matured in March 2024, as well as for general corporate purposes.

Our cost of funds is primarily driven by the rates paid on our various borrowings and changes in the levels of average borrowings outstanding. See Note 5 to the consolidated financial statements for details on the terms of our outstanding debt. Our debentures issued to the SBA typically have terms of ten years.

We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities outstanding during the period. The above table presents the average borrowings and related borrowing costs for the years ended December 31, 2024, 2023, and 2022. We expect our borrowing costs to further increase as we take deposits and borrow other funds at the currently higher prevailing rates.

We continue to seek SBA funding through Medallion Capital to the extent it offers attractive rates. SBA financing subjects recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the SBIA and SBA regulations. In July 2023, we obtained a $20.0 million commitment from the SBA, $9.8 million of which has been utilized as of December 31, 2024, with $10.2 million currently drawable. In February 2024, we obtained an $18.5 million commitment from the SBA, with $0.3 million currently drawable, and the balance of $18.2 million drawable upon the infusion of $9.1 million of capital.

At December 31, 2024 and 2023, adjustable rate debt constituted less than 2% of total debt, and was comprised solely of our trust preferred securities borrowings.

LOANS

Loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, which are amortized to interest income over the life of the loan. For the years ended December 31, 2024 and 2023, there was continued growth in the recreation and home improvement segments. The tables below present the activity of the total loan portfolio, inclusive of loans held for sale and loans held for investment.

(1)
Includes loans held for sale and loans held for investment.

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The following table presents the approximate maturities and sensitivity to change in interest rates for our loans as of December 31, 2024.

(1)
Excludes strategic partnership loans.

(2)
Excludes deferred costs.

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is maintained at a level estimated by management to absorb expected future losses in the portfolios. As of December 31, 2024 and 2023, the allowance totaled $97.4 million and $84.2 million, which represented 4.12% and 3.80% of total loans held for investment, respectively. The increase in allowance for credit losses as of December 31, 2024 was primarily driven by rising loss rates, elevated delinquencies, and expected losses in our recreation loans, partially offset by a decrease in expected losses in our home improvement loans.

The following table presents the activity in the allowance for credit losses for December 31, 2024 and 2023.

(1)
As of December 31, 2024, cumulative net charge-offs of loans and loan collateral in process of foreclosure in the taxi medallion portfolio were $165.3 million, including $98.6 million related to loans secured by New York taxi medallions, some of which may represent collection opportunities for us.

The following tables present the gross charge-offs for the years ended December 31, 2024 and 2023, by the year of origination:

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The following tables present the allowance for credit losses for loans held for investment, by type, as of December 31, 2024 and 2023:

The following table presents the trend in loans 90 days or more past due as of the dates indicated.

(1)
Percentages are calculated against the total loan portfolio.

(*) Less than 0.1%.

The following tables present the activity of loan collateral in process of foreclosure for the December 31, 2024 and 2023.

(1)
Collateral valuation adjustments for recreation loans are generally the result of the liquidation of collateral through a repossession process. Due to the short-term nature of the liquidation process, collateral valuation adjustments on recreation loans are recorded as charge-offs to the allowance for credit losses on loans as this is an adjustment to the initial estimate on the fair value, less estimated costs to sell that was initially estimated in the preliminary charge off and amount transferred to collateral in process of foreclosure.

(1)
Collateral valuation adjustments for recreation loans are generally the result of the liquidation of collateral through a repossession process. Due to the short-term nature of the liquidation process, collateral valuation adjustments on recreation loans are recorded as charge-offs to the allowance for credit losses on loans as this is an adjustment to the initial estimate on the fair value, less estimated costs to sell that was initially estimated in the preliminary charge off and amount transferred to collateral in process of foreclosure.

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SEGMENT RESULTS

We manage our financial results under four operating segments; recreation lending, home improvement lending, commercial lending, and taxi medallion lending. We also show results for a non-operating segment, corporate and other investments.

Recreation Lending

Recreation lending is a return-oriented business focused on originating prime and non-prime recreation loans which is a significant source of income for us, accounting for 67%, 67%, and 71% of our interest income for the years ended December 31, 2024, 2023, and 2022.

We maintain relationships with approximately 3,300 dealers and financial service providers, or FSPs, not all of which are active at any one time. FSPs are entities that provide finance and insurance, or F&I, services to small dealers that do not have the desire or ability to provide F&I services themselves. The ability of FSPs to aggregate the financing and relationship management for many small dealers makes them valuable. We receive approximately half of our loan volume from dealers and the other half from FSPs. Our top ten dealer and FSP relationships were responsible for 38% of recreation lending’s new loan originations for the year ended December 31, 2024. The percentage of new loan originations by the top ten dealer and FSP relationships is a measure of concentration, which management uses to determine whether to undertake diversification efforts, and which provides investors with information about origination concentration.

The recreation loan portfolio consists of thousands of geographically distributed loans with an average loan size of approximately $20,000 as of December 31, 2024. The loans are fixed rate with an average term at origination of 14 years. The weighted average maturity of our loans outstanding as of December 31, 2024 is 11 years.

The loans are secured primarily by RVs, boats, collector cars, and trailers, with RV loans making up 55% of the portfolio, boat loans making up 20%, and collector cars making up 11% of the portfolio as of December 31, 2024, compared to 54%, 19%, and 10% as of December 31, 2023. Recreation loans are made to borrowers residing nationwide, with the highest concentrations in Texas and Florida, at 16% and 10% of loans outstanding with no other states at or above 10%. As of December 31, 2024, 2023, and 2022, the weighted average FICO, measured at origination, scores of all recreation loans outstanding were 685 (683 exclusive of loans held for sale), 683, and 671. The weighted average FICO scores at the time of origination for the loans funded in the years ended December 31, 2024, 2023, and 2022 were 685, 686, and 676.

During the year ended December 31, 2024, the recreation portfolio grew 15% from $1.3 billion to $1.5 billion, with the average interest rate increasing 28 basis points to 15.07% from a year ago. Additionally, during the year ended December 31, 2024, the allowance for credit losses increased 24% from December 31, 2023, with the increase reflecting the 15% growth in the portfolio we experienced as well as rising loss rates and various economic factors.

During the year ended December 31, 2024, we originated $526.6 million recreation loans, an increase of $79.6 million compared to the $447.0 million originated in 2023. Originations increased despite more restrictive underwriting standards and management's efforts to mitigate concentration risks. The following table presents quarterly originations for the years ended December 31, 2024, 2023, and 2022.

As of December 31, 2024, 37% of the recreation loan portfolio were non-prime receivables with obligors who do not qualify for conventional consumer finance products as a result of, among other things, adverse credit history. The following table presents non-prime originations in comparison to total originations for the years ended December 31, 2024, 2023, and 2022.

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The following table presents selected financial data and ratios as of and for the years ended December 31, 2024, 2023, and 2022.

(1)
Inclusive of both loans held for investment and loans held for sale.

(2)
Allowance for credit losses as a percent of loans held for investment and excludes loans held for sale.

(3)
Loans 90 days or more past due as a percent of total loans.

(4)
Net charge-offs as a percent of annual average gross loans.

Home Improvement Lending

The home improvement lending segment works with contractors and financial service providers to finance home improvements and is concentrated in roofs, swimming pools, and windows at 36%, 27%, and 13% of total loans outstanding as of December 31, 2024, as compared to 41%, 20%, and 13% as of December 31, 2023, with no other collateral types at or above 10%. Home improvement loans are made to borrowers residing nationwide, with the highest concentrations in Florida and Texas at 12% and 11% of loans outstanding December 31, 2024, with no other states at or above 10%. As of December 31, 2024, 2023, and 2022, the weighted average FICO scores, measured at origination, of our home improvement loans outstanding were 767, 764, and 753. The weighted average FICO scores at the time of origination for the loans funded in the years ended December 31, 2024, 2023, and 2022 were 781, 771, and 758.

A large proportion of our home improvement-financed sales are facilitated by contractor salespeople with limited financing backgrounds rather than by contractor employees who provide F&I services. The result is contractor demand for financing services that facilitate an in-home transaction (e.g., digital tools, including mobile applications for phone or tablet, support for E-SIGN compliant electronic signatures, and extended operating hours), and additional resources for the salesperson throughout the financing process. We currently maintain relationships with approximately 900 contractors and FSPs. Our top ten contractors and FSP relationships were responsible for 48% of home improvement lending’s new loan originations for the years ended December 31, 2024 and 2023. The percentage of new loan originations by the top ten contractor and FSP relationships is a measure of concentration, which management uses to determine whether to undertake diversification efforts, and which provides investors with information about origination concentration.

The home improvement loan portfolio consists of thousands of geographically distributed loans with an average loan size of approximately $20,000 as of December 31, 2024. The loans are fixed rate with an average term at origination of 15 years. The weighted average maturity of our loans outstanding as of December 31, 2024 is 13 years.

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During the year ended December 31, 2024, the home improvement portfolio grew 9% from $760.6 million to $827.2 million, with the allowance for credit losses increasing 10% from a year ago reflecting the growth in our portfolio, offset by improvement in credit performance and various other economic factors. The average interest rate charged on our loans increased 30 basis points to 9.81% from the prior year.

During the year ended December 31, 2024, we originated $298.6 million home improvement loans, compared to $357.4 million in the prior year. The decrease was driven in part by ongoing restrictive underwriting standards and management's continued efforts to mitigate concentration risks. The following table presents quarterly originations for the years ended December 31, 2024, 2023, and 2022.

As of December 31, 2024, less than 1% of the home improvement loan portfolio were non-prime receivables with obligors who do not qualify for conventional consumer finance products as a result of, among other things, adverse credit history. The following table presents non-prime originations in comparison to total originations for the years ended December 31, 2024, 2023, and 2022.

(*) Less than 1%.

The following table presents selected financial data and ratios as of and for the years ended December 31, 2024, 2023, and 2022.

(1)
Allowance for credit losses as a percent of gross loans.

(2)
Loans 90 days or more past due as a percent of total loans.

(3)
Net charge-offs as a percent of annual average gross loans.

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Commercial Lending

We originate both senior and subordinated loans nationwide to businesses in a variety of industries, with California, Wisconsin, and Texas having 28%, 10%, and 10% of the segment portfolio, and no other states having a concentration at or above 10%. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $2.5 million to $6.0 million at origination, and typically include an equity component as part of the financing. These equity components, although a small portion of the overall financing, have the potential to generate significant yield enhancement when the underlying portfolio company enters a capital transaction. During the year ended December 31, 2024, net gains of $6.9 million were recognized with respect to these equity investments. The commercial lending business has concentrations in manufacturing, construction, and wholesale trade that make up 57%, 12%, and 12% of total loans outstanding as of December 31, 2024, as compared to 53%, 13%, and 11% as of December 31, 2023. During the year ended December 31, 2024, we originated $14.3 million of loans, compared to $34.9 million in originations in 2023. As of December 31, 2024, commercial loans totaled $111.3 million.

The following table presents selected financial data and ratios as of and for the years ended December 31, 2024, 2023, and 2022. The commercial segment encompasses the mezzanine lending business, and the other legacy commercial loans (immaterial to total) have been allocated to corporate and other investments.

(1)
Allowance for credit losses as a percent of gross loans.

(2)
Loans 90 days or more past due as a percent of total loans.

(3)
Net charge-offs as a percent of annual average gross loans.

(1)
Includes 11 other states, which were all under 10% as of December 31, 2024 and 13 other states, which were all under 10% as of December 31, 2023.

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Taxi Medallion Lending

The taxi medallion lending segment operates in the New York City metropolitan area. During the year ended December 31, 2024, we continued to utilize a taxi medallion value of $79,500 in the New York City and Newark markets with all other markets being valued at $0 at the end of the year, despite fluctuating transfer prices that have exceeded that value. We continued to not recognize interest income with all loans being placed on nonaccrual as of the third quarter 2020 (except for settled loans with interest being paid in excess of the loan balance), and by transferring underperforming loans from the portfolio to loan collateral in process of foreclosure with charge-offs to collateral value, once loans become more than 120 days past due.

During the year ended December 31, 2024, we collected $12.1 million related to taxi medallion assets, which resulted in net recoveries and gains of $6.9 million and collected $45.2 million related to taxi medallion assets in the prior year, which resulted in net recoveries and gains of $29.6 million. The amount of cash collected as well as recoveries recorded vary greatly from period to period due to a wide variety of circumstances surrounding each of the underlying assets, and while we continue to focus on collection and recovery efforts, future collections will be less than in the prior year.

The following table presents selected financial data and ratios as of and for the years ended December 31, 2024, 2023, and 2022.

(1)
Allowance for credit losses as a percent of gross loans.

(2)
Loans 90 days or more past due as a percent of total loans.

(3)
Net recoveries as a percent of annual average gross loans.

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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, which are not specifically allocated to the operating segments. Additionally, we historically and continue to account for goodwill in this non-operating segment. All goodwill relates to the Bank, specifically the recreation and home improvement segments. Commencing with the 2020 second quarter, the Bank began issuing loans related to the new strategic partnership business, which is 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 partnership loans were $7.4 million and $0.6 million in net loans as of December 31, 2024 and December 31, 2023, with originations of $203.6 million and $118.3 million during the years ended December 31, 2024 and December 31, 2023.

The following table presents selected financial data and ratios as of and for the years ended December 31, 2024, 2023, and 2022.

Summary Consolidated Financial Ratios

The following table presents selected financial data and ratios as of and for the years ended December 31, 2024, 2023, and 2022.

(1)
Includes $68.8 million, related to non-controlling interests in consolidated subsidiaries as of December 31, 2024, 2023, and 2022.

(2)
Excludes deferred financing costs of $8.2 million, $8.5 million, and $7.0 million as of December 31, 2024, 2023, and 2022.

(3)
Net charge-offs as a percent of annual average gross loans.

(4)
Allowance for credit losses as a percentage of loans held for investment. Loans held for sale are carried at the lesser of amortized cost or fair value, do not have an allowance for credit losses, and are excluded from this calculation.

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CONSOLIDATED RESULTS OF OPERATIONS

For the Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

Net income attributable to shareholders was $35.9 million, or $1.52 per share, for the year ended December 31, 2024, compared to $55.1 million, or $2.37 per share, for the year ended December 31, 2023.

Total interest income was $290.7 million for the year ended December 31, 2024, compared to $251.0 million for the year ended December 31, 2023. The increase in interest income reflects continued growth in the recreation and home improvement lending segments, as well as increased rates charged on new loan originations in comparison to the prior year. As of December 31, 2024, the weighted average rate of our recreation, home improvement, and commercial loans were 15.07%, 9.81%, and 12.97% compared to 14.79%, 9.51%, and 12.87% as of December 31, 2023. The yield on interest earning assets was 11.56% for the year ended December 31, 2024, compared to 11.19% for the year ended December 31, 2023, reflecting new originations being priced at higher rates than those rates charged on originations in prior years, given the current interest rate environment. Average interest earning assets were $2.5 billion for the year ended December 31, 2024, an increase from $2.2 billion for the year ended December 31, 2023. In 2024, loan originations were $1.0 billion, up from $960.1 million in 2023, with $526.6 million and $298.6 million of the 2024 originations attributable to recreation and home improvement loans, respectively. Strategic partnership loan originations were $203.6 million in the 2024 year, up 72% from $118.3 million in the 2023 year, reflecting continued efforts to grow our strategic partnership business.

Loans before allowance for credit losses were $2.5 billion as of December 31, 2024, comprised of recreation ($1.5 billion), home improvement ($0.8 billion), commercial ($111.3 million), strategic partnership ($7.4 million) loans, and taxi medallion ($1.9 million). We had an allowance for credit losses as of December 31, 2024 of $97.4 million, which was attributable to the recreation (73%), home improvement (21%), commercial (5%), and taxi medallion (1%) loan portfolios. As of December 31, 2023, loans before allowance for credit losses were $2.2 billion, comprised of recreation ($1.3 billion), home improvement ($0.8 billion), commercial ($114.8 million), taxi medallion ($3.7 million), and strategic partnership ($0.6 million) loans. We had an allowance for credit losses as of December 31, 2023 of $84.2 million, which was attributable to recreation (68%), home improvement (25%), and taxi medallion (2%) loans.

Total loans increased $275.1 million, or 12%, to $2.5 billion as of December 31, 2024 from $2.2 billion as of December 31, 2023 as a result of more than $1.0 billion of loan originations during the year, with $526.6 million of recreation loan originations and $298.6 million of home improvement originations. The allowance for credit losses was $76.5 million for the year ended December 31, 2024 compared to $37.8 million for the year ended December 31, 2023. The current year allowance, related to loans held for investment, included net charge-offs of $63.4 million, of which $54.4 million and $13.9 million related to recreation and home improvement lending. This compares to net-charge offs of $31.1 million, of which $39.1 million and $9.4 million related to recreation and home improvement lending, for the year ended December 31, 2023. Additionally, the 2024 allowance included net recoveries of taxi medallion loans of $5.0 million compared to $18.4 million for the year ended December 31, 2023. Charge-offs in both the recreation and home improvement loan portfolios continued to trend higher in 2024, a reflection of the broader economy. For the year 2024, net charge offs were 3.72% and 1.78% of recreation loans and 1.78% of home improvement loans as compared to 3.04% and 1.33% in the prior year. As of December 31, 2024, current loans (those less than 30 days past due) were 94% and 99% of the recreation and home improvement loan portfolios, compared to 95% and 99% as of December 31, 2023. Charge-off activity and loan delinquency are two of the more prominent indicators of future loss experience and thus have a significant impact on our determination of allowance for credit loss. As of December 31, 2024, the allowance for credit loss on loans held for investment was 5.00% and 2.48% for recreation and home improvement loans, compared to 4.31% and 2.76% a year ago. See Note 4 of the accompanying consolidated financial statements for additional information on loans and allowance for credit losses.

Interest expense was $88.2 million for the year ended December 31, 2024, compared to $62.9 million for the year ended December 31, 2023, reflecting both higher average borrowings and higher average borrowing costs during the year. The average cost of borrowed funds was 3.93% for the year ended December 31, 2024, compared to 3.16% for the year ended December 31, 2023. The average cost of the certificates of deposit was 3.54% during the current year, 83 basis points higher than the 2.71% average cost in the prior year, reflecting a higher rate on newly issued deposits when compared to the maturing deposits which were issued at lower rates in previous years. As we replace upcoming deposit maturities with new issues, we expect our average cost of funds to further increase. During the year ended December 31, 2024, we issued deposits for three-month certificates at rates as high as 4.89% for both 36 month and 60 month certificates, with the most recent 36 month and 60 month issuances at the end of 2024 at rates of 4.19%. and 4.13%. In addition, we expect our interest expense related to SBA borrowings to increase as newly issued SBA debentures carry a higher rate when compared to some of our previously issued debentures. Average debt outstanding was $2.2 billion for the year ended December 31, 2024, up from $2.0 billion for the year ended December 31, 2023, as we issued additional certificates of deposit to fund our loan growth. See page 38 for tables that show average balances and cost of funds for our funding sources.

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Net interest income was $202.5 million for the year ended December 31, 2024, compared to $188.1 million for the year ended December 31, 2023. Net interest margin, excluding the impact of allowance for credit loss, was 8.05% for the year ended December 31, 2024, compared to 8.38%, for the year ended December 31, 2023, reflecting the above, particularly the rising cost of borrowings experienced over the prior year, offset to an extent by higher yields on loans compared to the prior year. With the rates we charge on outstanding loans being fixed, and our cost of funds increasing, our net interest margin has tightened over the prior year as we can only increase our yield through higher rates charged on new originations. We expect this trend of tightening margins to continue to some degree as our cost of funds, particularly on deposits, continues to increase, with the current average rate on deposits of 3.71% being lower than our new issuance costs.

Net other income, which is comprised primarily of net gains related to equity investments, net gains associated with the disposition of taxi medallion assets, prepayment fees, servicing fee income, and late charges, was $11.3 million for both the years ended December 31, 2024 and 2023. Net gains on equity investments were $6.9 million in 2024 and $5.2 million in 2023 and include the realization of two portfolio companies in the current year.

Operating expenses were $74.4 million for the year ended December 31, 2024, up from $75.6 million for the year ended December 31, 2023. Salaries and benefits were $38.3 million for the year ended December 31, 2024, up from $37.6 million for the year ended December 31, 2023, with the increase attributable to a higher head count, annual cost of living increases, and higher long-term performance based equity compensation. Professional fees were a net benefit of $1.4 million for the year ended December 31, 2024, compared to at a cost of $5.9 million for the year ended December 31, 2023. This reflects the recognition of a $5.5 million benefit tied to insurance coverage of legal and professional costs associated with the SEC litigation. In addition, we recorded a charge of $3.0 million for a penalty pursuant to an agreement in principle reached to settle this matter, which remains subject to the approval of the Commissioners of the SEC and the court.

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

For a comparison of the Company’s results of operations for the year ended December 31, 2023 to the year ended December 31, 2022, 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 ended December 31, 2023, which was filed with the Securities and Exchange Commission on March 9, 2024.

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of consumer, commercial, and taxi medallion loans, and investment securities) reprice on a different basis over time in comparison to our interest-bearing liabilities (consisting primarily of bank certificates of deposit, SBA debentures and borrowings, historically credit facilities, and borrowings from banks and other lenders).

Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Abrupt increases in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at the higher prevailing interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning assets and interest-bearing liabilities results in interest rate risk.

The effect of changes in interest rates is mitigated by regular turnover of the 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 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.

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The following table presents our interest rate sensitivity gap at December 31, 2024. 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.