News Column

MEDALLION FINANCIAL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 7, 2014

GENERAL

We are a specialty finance company that has a leading position in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. A wholly-owned portfolio company of ours, Medallion Bank, also originates consumer loans for the purchase of recreational vehicles, boats, motorcycles, and trailers, and to finance small-scale home improvements. Since 1996, the year in which we became a public company, we have increased our taxicab medallion loan portfolio at a compound annual growth rate of 5%, and our commercial loan portfolio at a compound annual growth rate of 2% (10% and 5% on a managed basis when combined with Medallion Bank). Since Medallion Bank acquired a consumer loan portfolio and began originating consumer loans in 2004, it has increased its consumer loan portfolio at a compound annual growth rate of 16%. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which includes assets serviced for third party investors, were $1,363,000,000 as of March 31, 2014, and $1,330,000,000 and $1,212,404,000 as of December 31, 2013 and March 31, 2013, and have grown at a compound annual growth rate of 11% from $215,000,000 at the end of 1996. 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, such as revolving bank facilities, bank certificates of deposit issued to customers, debentures issued to and guaranteed by the SBA, 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-bearing 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 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. Medallion Capital's investments are typically in the form of secured debt instruments with fixed interest rates accompanied by 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. We are a closed-end, management investment company under the 1940 Act. We have elected to be treated as a BDC under the 1940 Act. We have also elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our shareholders as dividends if we meet certain source-of-income and asset diversification requirements. Medallion Bank is not a RIC and must pay corporate-level US federal and state income taxes. Our wholly-owned portfolio company, Medallion Bank, is a bank regulated by the FDIC and the Utah Department of Financial Institutions which originates taxicab medallion, commercial, and consumer loans, raises deposits, and conducts other banking activities. Medallion Bank generally provides us with our lowest cost of funds which it raises through bank certificates of deposit issued to its customers. To take advantage of this low cost of funds, we refer a portion of our taxicab medallion and commercial loans to Medallion Bank, which then originates these loans. However, the FDIC restricts the amount of taxicab medallion loans that Medallion Bank may finance to three times Tier 1 capital, or $390,510,000 as of March 31, 2014. We earn referral fees for these activities. In December 2010, all of these servicing activities were assigned to MSC. As a non-investment company, Medallion Bank is not consolidated with the Company. Realized gains or losses on investments are recognized when the investments are sold or written off. The realized gains or losses represent the difference between the proceeds received from the disposition of portfolio assets, if any, and the cost of such portfolio assets. In addition, changes in unrealized appreciation or depreciation on investments are recorded and represent the net change in the estimated fair values of the portfolio assets at the end of the period as compared with their estimated fair values at the beginning of the period. Generally, realized gains (losses) on investments and changes in unrealized appreciation (depreciation) on investments are inversely related. When an appreciated asset is sold to realize a gain, a decrease in the previously recorded unrealized appreciation occurs. Conversely, when a loss previously recorded as unrealized depreciation is realized by the sale or other disposition of a depreciated portfolio asset, the reclassification of the loss from unrealized to realized causes a decrease in net unrealized depreciation and an increase in realized loss. Our investment in Medallion Bank, as a wholly owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and determine whether any factors give rise to a valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank's inception, by the FDIC and State of Utah, and also by additional marketplace restrictions, such as the ability to transfer industrial bank charters. As a result of this valuation process, we used Medallion Bank's actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future. 37



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Trends in Investment Portfolio

Our investment income is driven by the principal amount of and yields on our investment portfolio. To identify trends in the balances and yields, the following table illustrates our investments at fair value, grouped by medallion loans, commercial loans, equity investments, and investment securities, and also presents the portfolio information for Medallion Bank, at the dates indicated. March 31, 2014 December 31, 2013 March 31, 2013 Interest Investment



Interest Investment Interest Investment (Dollars in thousands)

Rate (1) Balances Rate (1) Balances Rate (1) Balances Medallion loans New York 3.54 % $ 211,864 3.52 % $ 202,954 3.68 % $ 199,509 Chicago 4.93 41,896 4.94 42,175 5.26 40,780 Newark 5.45 23,693 5.58 21,681 6.32 17,934 Boston 4.77 26,494 4.91 23,622 5.22 22,140 Cambridge 5.07 6,000 5.06 6,008 5.46 5,458 Other 6.30 1,140 6.52 1,178 6.72 3,058 Total medallion loans 4.02 311,087 4.02 297,618 4.25 288,879 Deferred loan acquisition costs (income) 255 243 (6 ) Unrealized depreciation on loans - - - Net medallion loans $ 311,342$ 297,861$ 288,873 Commercial loans Secured mezzanine 11.89 % $ 46,498 11.69 % $ 46,100 12.79 % $ 51,939 Asset based 5.22 5,481 5.32 7,803 5.66 7,183 Other secured commercial 9.97 13,583 9.89 13,336 9.31 10,948 Total commercial loans 10.93 65,562 10.60 67,239 11.52 70,070 Deferred loan acquisition income (41 ) (79 ) (80 ) Unrealized depreciation on loans (6,606 ) (6,992 ) (7,894 ) Net commercial loans $ 58,915$ 60,168$ 62,096 Investment in Medallion Bank and other controlled subsidiaries, net(3) 10.88 % $ 110,266 11.05 % $ 108,623 11.62 % $ 98,973 Equity investments 0.58 % 6,125 0.86 % $ 6,124 1.48 % $ 4,576 Unrealized appreciation on equities 676 381 47 Net equity investments $ 6,801$ 6,505$ 4,623 Investments securities - % $ - - % $ - - % $ - Investments at cost (2) 6.43 % $ 493,040 6.49 % $ 479,604 6.90 % $ 462,498 Deferred loan acquisition costs (income) 214 164 (86 ) Unrealized appreciation on equities 676 381 47 Unrealized depreciation on loans (6,606 ) (6,992 ) (7,894 ) Net investments(3) $ 487,324$ 473,157$ 454,565Medallion Bank investments Consumer loans 15.49 % $ 373,478 15.67 % $ 353,355 16.56 % $ 273,849 Medallion loans 3.78 366,998 3.77 349,015 3.93 351,227 Commercial loans 4.73 42,143 4.91 53,786 4.92 67,371 Investment securities 2.55 25,108 2.47 24,925 1.90 20,439 Medallion Bank investments at cost (2) 9.20 807,727 9.19 781,081 8.82 712,886 Deferred loan acquisition costs 9,632 9,553 7,168 Unrealized appreciation (depreciation) on investment securities (405 ) (803 ) 745 Premiums paid on purchased securities 326 342 296 Unrealized depreciation on loans (16,966 ) (16,434 ) (14,192 ) Medallion Bank net investments $ 800,314$ 773,739$ 706,903



(1) Represents the weighted average interest or dividend rate of the respective

portfolio as of the date indicated.

(2) The weighted average interest rate for the entire managed loan portfolio

(medallion, commercial, and consumer loans) was 8.05%, 8.05%, and 7.88% at

March 31, 2014, December 31, 2013, and March 31, 2013.

(3) Includes $724, $814, and $0 of unrealized appreciation on Medallion Hamptons

Holdings as of March 31, 2014, December 31, 2013, and March 31, 2013. 38



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Investment Activity

The following table sets forth the components of investment activity in the investment portfolio for the periods indicated.

Three Months Ended March 31, (Dollars in thousands) 2014 2013



Net investments at beginning of period $ 473,157$ 455,010

Investments originated (1) 32,846



62,025

Repayments of investments (1) (21,639 )



(63,392 )

Net realized gains (losses) on investments (172 )



77

Net increase in unrealized appreciation (2) 3,107



920

Amortization of origination (costs) fees 25



(75 )

Net increase (decrease) in investments 14,167



(445 )

Net investments at end of period $ 487,324$ 454,565 (1) Includes refinancings.



(2) Excludes net unrealized appreciation of $381 and $3,012 for the quarter ended

March 31, 2014 and 2013, related to foreclosed properties and other assets.

PORTFOLIO SUMMARY Total Portfolio Yield The weighted average yield of the total portfolio at March 31, 2014 was 6.43% (5.22% for the loan portfolio), a decrease of 6 basis points from 6.49% at December 31, 2013, and a decrease of 47 basis points from 6.90% at March 31, 2013. The weighted average yield of the total managed portfolio at March 31, 2014 was 7.85% (8.05% for the loan portfolio), unchanged from December 31, 2013, and an increase of 15 basis points from 7.70% at March 31, 2013. The changes in 2014 reflected changes in the portfolio mix.



Medallion Loan Portfolio

Our medallion loans comprised 64% of the net portfolio of $487,324,000 at March 31, 2014, compared to 63% of the net portfolio of $473,157,000 at December 31, 2013, and 63% of $454,565,000 at March 31, 2013. Our managed medallion loans of $677,405,000 comprised 57% of the net managed portfolio of $1,184,257,000 at March 31, 2014, compared to 56% of the net managed portfolio of $1,144,596 at December 31, 2013, and 60% of $1,067,371,000 at March 31, 2013. The medallion loan portfolio increased by $13,481,000 or 5% in 2014 (an increase of $31,435,000 or 5% on a managed basis), primarily reflecting strong portfolio growth in the major markets and increases in loan participations sold. Total medallion loans serviced for third parties were $28,049,000, $24,875,000, and $45,677,000 at March 31, 2014, December 31, 2013, and March 31, 2013. The weighted average yield of the medallion loan portfolio at March 31, 2014 was 4.02%, unchanged from 4.02% at December 31, 2013, and a decrease of 23 basis points from 4.25% at March 31, 2013. The weighted average yield of the managed medallion loan portfolio at March 31, 2014 was 3.89%, unchanged from December 31, 2013, and a decrease of 19 basis points from 4.08% at March 31, 2013. The decrease in yield primarily reflected the new loan volume and the repricing of the existing portfolio to lower current market interest rates, which have been stable in 2014. At March 31, 2014, 32% of the medallion loan portfolio represented loans outside New York, compared to 32% and 31% at December 31, 2013 and March 31, 2013. At March 31, 2014, 26% of the managed medallion loan portfolio represented loans outside New York, compared to 26% at December 31, 2013 and 23% at March 31, 2013. We continue to focus our efforts on originating higher yielding medallion loans outside the New York market.



Commercial Loan Portfolio

Our commercial loans represented 12%, 13%, and 14% of the net investment portfolio as of March 31, 2014, December 31, 2012, and March 31, 2013, and were 8%, 10%, and 12% on a managed basis. Commercial loans decreased by $1,253,000 or 2% during the quarter ended March 31, 2014 (decreased $12,748,000 or 11% on a managed basis), primarily reflecting decreases in the asset-based portfolio. Net commercial loans serviced by third parties were $63,000,000 at March 31, 2014, $255,000 at December 31, 2013, and $12,098,000 at March 31, 2013. The weighted average yield of the commercial loan portfolio at March 31, 2014 was 10.93%, an increase of 33 basis points from 10.60% at December 31, 2013, and a decrease of 59 basis points from 11.52% at March 31, 2013. The weighted average yield of the managed commercial loan portfolio at March 31, 2014 was 8.50%, an increase of 43 basis points from 8.07% at December 31, 2013, and an increase of 22 basis points from 8.28% at March 31, 2013. The increases primarily reflect changes in the portfolio mix and changes in the rates earned. We continue to originate adjustable-rate and floating-rate loans tied to the prime rate to help mitigate our interest rate risk in a rising interest rate environment. At March 31, 2014, variable-rate loans represented approximately 9% of the commercial portfolio, compared to 12% and 12% at December 31, 2013 and March 31, 2013, and were 42%, 49%, and 52% on a managed basis. Although this strategy initially produces a lower yield, we believe that this strategy mitigates interest rate risk by better matching our earning assets to their adjustable-rate funding sources. 39



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Consumer Loan Portfolio

Our managed consumer loans, all of which are held in the portfolio managed by Medallion Bank, represented 31%, 31%, and 25% of the managed net investment portfolio as of March 31, 2014, December 31, 2013, and March 31, 2013. Medallion Bank originates adjustable rate consumer loans secured by recreational vehicles, boats, motorcycles, and trailers located in all 50 states. The portfolio is serviced by a third party subsidiary of a major commercial bank. The weighted average gross yield of the managed consumer loan portfolio was 15.49% at March 31, 2014, compared to 15.67% and 16.56% at December 31, 2013 and March 31, 2013. Adjustable rate loans represented 61% of the managed consumer portfolio at March 31, 2014, compared to 68% and 73% at December 31, 2013 and March 31, 2013.



Delinquency and Loan Loss Experience

We generally follow a practice of discontinuing the accrual of interest income on our loans that are in arrears as to payments for a period of 90 days or more. We deliver a default notice and begin foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the most appropriate course of action under the circumstances. A loan is considered to be delinquent if the borrower fails to make a payment on time; however, during the course of discussion on delinquent status, we may agree to modify the payment terms of the loan with a borrower that cannot make payments in accordance with the original loan agreement. For loan modifications, the loan will only be returned to accrual status if all past due interest and principal payments are brought fully current. For credit that is collateral based, we evaluate the anticipated net residual value we would receive upon foreclosure of such loans, if necessary. There can be no assurance, however, that the collateral securing these loans will be adequate in the event of foreclosure. For credit that is cash flow-based, we assess our collateral position, and evaluate most of these relationships as ongoing businesses, expecting to locate and install a new operator to run the business and reduce the debt. 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 realized gain. Proceeds collected on charged off accounts are recorded as realized gains. All collection, repossession, and recovery efforts are handled on behalf of Medallion Bank by the servicer. The following table shows the trend in loans 90 days or more past due as of the dates indicated. March 31, 2014 December 31, 2013 March 31, 2013 (Dollars in thousands) Amount % (1) Amount % (1) Amount % (1) Medallion loans $ - 0.0 % $ - 0.0 % $ - 0.0 % Commercial loans Secured mezzanine 2,018 0.6 2,018 0.6 2,380 0.7 Asset-based receivable 494 0.1 494 0.1 - 0.0 Other secured commercial - 0.0 - 0.0 - 0.0 Total commercial loans 2,512 0.7 2,512 0.7 2,380 0.7 Total loans 90 days or more past due $ 2,512 0.7 % $ 2,512 0.7 % $ 2,380 0.7 % Total Medallion Bank loans $ 3,721 0.5 % $ 3,817 0.5 % $ 1,007 0.2 %



Total managed loans 90 days or more past due $ 6,233 0.5 % $

6,329 0.6 % $ 3,387 0.3 %



(1) Percentages are calculated against the total or managed loan portfolio, as

appropriate.

A third party finance company sold various participations in asset based loans to Medallion Business Credit and Medallion Bank. At March 31, 2014, the aggregate balance of the participations was approximately $13.8 million, $12.9 million of which were held by Medallion Bank. That amount is divided between seven separate borrowers operating in a variety of industries. In April 2013, the third party finance company became the subject of an involuntary bankruptcy petition filed by its bank lenders. Among other things, the bank lenders alleged that the third party finance company fraudulently misrepresented its borrowing availability under its credit facility with the bank lenders and are seeking the third party finance company's liquidation. In May 2013, the bankruptcy court presiding over the third party finance company's case entered an order converting the involuntary chapter 7 case to a chapter 11 case. We and Medallion Bank have placed these loans on nonaccrual, and reversed interest income. In addition, we have established valuation allowances against the outstanding balances. On May 31, 2013, we commenced an adverse proceeding against the third party finance company and the bank lenders seeking declaratory judgment that our loan participations are true participations and not subject to the bankruptcy estate or to the bank lender's security interest in the third party finance company's assets. The third party finance company and bank lenders are contesting our position. In April 2014, we and Medallion Bank received a decision from the court granting summary judgment in our favor with respect to the issue of whether our loan participations are true participations. The remaining issues are still being litigated. Although we believe the claims raised by the third party finance company and the bank lenders are without merit and will vigorously defend against them, we cannot at this time predict the outcome of this litigation or determine our potential exposure. At March 31, 2014, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow 40



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pending resolution of the bankruptcy proceedings. The two remaining loans are still outstanding. The balances related to the paid off loans have been reclassified to other assets on the consolidated balance sheet. The table below summarizes these receivables and their status with the Company and Medallion Bank. (Dollars in thousands) The Company Medallion Bank Total Loans outstanding $ 289 $ 2,291 $ 2,580 Valuation allowance (145 ) (1,145 ) (1,290 ) Net loans outstanding 144 1,146 1,290 Other receivables 560 10,642 11,202 Valuation allowance (168 ) (3,193 ) (3,361 ) Net other receivables 392 7,449



7,841

Total net outstanding 536 8,595



9,131

Income foregone in 2014 11 28 39 Total income foregone $ 170 $ 538 $ 708 In general, collection efforts since the establishment of our collection department have contributed to the reduction in overall delinquencies of medallion and other secured commercial loans. Other secured commercial loan delinquencies have declined and remained at the same level for recent periods due to consistent collection efforts. Secured mezzanine delinquencies declined as a result of continued collection efforts. The increase in delinquencies in the asset-based and Medallion Bank loan portfolio reflects the status of the loans described in the preceding paragraph. Medallion Bank continued with low levels of delinquency in its consumer loan portfolio. In addition to the delinquencies in the loan portfolio as described above, receivables from bonuses relating to certain investments of $6,848,000 were delinquent at March 31, 2014. We are actively working with each delinquent borrower/obligor to bring them current, and believe that any potential loss exposure is reflected in our mark-to-market estimates on each investment. Although there can be no assurances as to changes in the trend rate and further negative changes in the economy, management believes that any loss exposures are properly reflected in reported asset values. We monitor delinquent loans for possible exposure to loss by analyzing various factors, including the value of the collateral securing the loan and the borrower's prior payment history. Under the 1940 Act, our loan portfolio must be recorded at fair value or "marked-to-market." Unlike other lending institutions, we are not permitted to establish reserves for loan losses. Instead, the valuation of our portfolio is adjusted quarterly to reflect our estimate of the current realizable value of our loan portfolio. Since no ready market exists for this portfolio, fair value is subject to the good faith determination of our Board of Directors. Because of the subjectivity of these estimates, there can be no assurance that in the event of a foreclosure or the sale of portfolio loans we would be able to recover the amounts reflected on our balance sheet. In determining the value of our portfolio, the Board of Directors may take into consideration various factors such as the financial condition of the borrower and the adequacy of the collateral. For example, in a period of sustained increases in market interest rates, the Board of Directors could decrease its valuation of the portfolio if the portfolio consists primarily of long-term, fixed-rate loans. Our valuation procedures are designed to generate values that approximate that which would have been established by market forces, and are therefore subject to uncertainties and variations from reported results. Based upon these factors, net unrealized appreciation or depreciation on investments is determined based on the fluctuations of our estimate of the current realizable value of our portfolio from our cost basis. 41



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The following tables set forth the changes in our unrealized appreciation (depreciation) on investments, other than investments in controlled subsidiaries, for the 2014 and 2013 quarters shown below.

Medallion Commercial Equity Foreclosed (Dollars in thousands) Loans Loans Investments Properties Total Balance December 31, 2013 $ - ($ 6,992 ) $ 381 $ 40,404$ 33,793 Net change in unrealized Appreciation on investments - - 100 - 100 Depreciation on investments - 74 195 381 650 Reversal of unrealized appreciation (depreciation) related to realized Gains on investments - - - - - Losses on investments - 312 - - 312 Balance March 31, 2014 $ - ($ 6,606 ) $ 676 $ 40,785$ 34,855 Medallion Commercial Equity Foreclosed (Dollars in thousands) Loans Loans Investments Properties Total Balance December 31, 2012 $ - ($ 7,844 ) $ 44 $ 33,757$ 25,957 Net change in unrealized Appreciation on investments - - (11 ) 3,012 3,001 Depreciation on investments - (50 ) 14 - (36 ) Reversal of unrealized appreciation (depreciation) related to realized Gains on investments - - - - - Losses on investments - - - - - Balance March 31, 2013 $ - ($ 7,894 ) $ 47 $ 36,769$ 28,922 42



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The following table presents credit-related information for the investment portfolios as of the dates shown.

March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013 Total loans Medallion loans $ 311,342$ 297,861$ 288,873 Commercial loans 58,915 60,168 62,096 Total loans 370,257 358,029 350,969 Investment in Medallion Bank and other controlled subsidiaries 110,266 108,623 98,973 Equity investments (1) 6,801 6,505 4,623 Investment securities - - - Net investments $ 487,324$ 473,157$ 454,565 Net investments at Medallion Bank and other controlled subsidiaries $ 800,314$ 773,739$ 706,903 Managed net investments $ 1,184,257 $



1,144,596 $ 1,067,371

Unrealized appreciation (depreciation) on investments Medallion loans $ - $ - $ - Commercial loans (6,606 ) (6,992 ) (7,894 ) Total loans (6,606 ) (6,992 ) (7,894 ) Investment in Medallion Bank and other controlled subsidiaries (2) - - - Equity investments 676 381 47 Investment securities - - - Total unrealized depreciation on investments (2) ($ 5,930 ) ($



6,611 ) ($ 7,847 )

Net unrealized depreciation on investments at Medallion Bank and other controlled subsidiaries ($ 17,371 ) ($ 17,237 ) ($ 13,447 ) Managed total unrealized depreciation on investments (2) ($ 23,301 ) ($ 23,848 ) ($ 21,294 ) Unrealized appreciation (depreciation) as a % of balances outstanding (3) Medallion loans - % - % - % Commercial loans (10.08 ) (10.40 ) (11.27 ) Total loans (1.75 ) (1.92 ) (2.20 ) Investment in Medallion Bank and other controlled subsidiaries - - - Equity investments 11.04 6.22 1.04 Investment securities - - - Net investments (1.20 ) (1.38 ) (1.70 ) Net investments at Medallion Bank and other controlled subsidiaries (2.15 %) (2.21 %) (1.89 %) Managed net investments (1.95 %) (2.06 %) (1.97 %)



(1) Represents common stock and warrants held as investments.

(2) Excludes $724, $814, and $0 of unrealized appreciation on Medallion Hamptons

Holding, a wholly owned subsidiary, at March 31, 2014, December 31, 2013, and

March 31, 2013.

(3) Unlike other lending institutions, we are not permitted to establish reserves

for loan losses. Instead, the valuation of our portfolio is adjusted

quarterly to reflect estimates of the current realizable value of the

investment portfolio. These percentages represent the discount or premium

that investments are carried on the books at, relative to their par or gross

value.

The following table presents the gain/loss experience on the investment portfolios for the quarters ended March 31, 2014 and 2013.

Three Months Ended March 31, (Dollars in thousands) 2014 2013 Realized gains (losses) on loans and equity investments Medallion loans $ - $ 40 Commercial loans (221 ) 37 Total loans (221 ) 77 Investment in Medallion Bank and other controlled subsidiaries - - Equity investments 49 - Investment securities - - Total realized gains (losses) on loans and equity investments ($ 172 )



$ 77

Net realized losses on investments at Medallion Bank and other controlled subsidiaries ($ 1,496 )



($ 1,909 )

Total managed realized losses on loans and equity investments ($ 1,668 )



($ 1,832 )

Realized gains (losses) as a % of average balances outstanding Medallion loans - % 0.06 % Commercial loans (1.36 ) 0.22 Total loans (0.24 ) 0.09 Investment in Medallion Bank and other controlled subsidiaries - - Equity investments 3.26 - Investment securities - - Net investments (0.14 ) 0.07 Net investments at Medallion Bank and other controlled subsidiaries (0.77 %) (1.11 %) Managed net investments (0.58 %) (0.70 %) 43



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The table below summarizes components of unrealized and realized gains and losses in the investment portfolio for the quarters ended March 31, 2014 and 2013. Three Months Ended March 31, (Dollars in thousands) 2014 2013 Net change in unrealized appreciation (depreciation) on investments Unrealized appreciation $ 100 ($ 11 ) Unrealized depreciation 269 (36 ) Net unrealized appreciation on investment in Medallion Bank and other controlled subsidiaries 2,426 967 Realized gains - - Realized losses 312 - Net unrealized gains on foreclosed properties and other assets 381 3,012 Total $ 3,488$ 3,932 Net realized gains (losses) on investments Realized gains $ - $ - Realized losses (312 ) - Other gains 49 - Direct recoveries 91 77 Realized gains on foreclosed properties and other assets - - Total ($ 172 ) $ 77



Investment in Medallion Bank and Other Controlled Subsidiaries

Investment in Medallion Bank and other controlled subsidiaries were 23%, 23%, and 22% of our total portfolio at March 31, 2014, December 31, 2013, and March 31, 2013. The portfolio company investments primarily represent the wholly-owned unconsolidated subsidiaries of ours, substantially all of which is represented by our investment in Medallion Bank, a non-pass-through, taxpaying entity. In addition, to facilitate maintenance of Medallion Bank's capital ratio requirement and to provide the necessary capital for continued growth, we periodically make capital contributions to Medallion Bank, including $5,000,000 in 2013. Separately, Medallion Bank declared dividends to us of $3,000,000 in each of the 2014 and 2013 first quarters. See Note 3 of the consolidated financial statements for additional information about these investments.



Equity Investments

Equity investments were 1% of our total portfolio at March 31, 2014, December 31, 2013, and March 31, 2013. Equity investments were 1% of our total managed portfolio at March 31, 2014, December 31, 2013, and March 31, 2013. Equity investments are comprised of common stock, partnership interests, and warrants. Investment Securities Investment securities were 0% of our total portfolio at March 31, 2014, December 31, 2013, and March 31, 2013. Investment securities were 2% of our total managed portfolio at March 31, 2014, December 31, 2013, and March 31, 2013. The investment securities are primarily adjustable-rate mortgage-backed securities purchased by Medallion Bank to better utilize required cash liquidity.



Trend in Interest Expense

Our interest expense is driven by the interest rates payable on our short-term credit facilities with banks, bank certificates of deposit, fixed-rate, long-term debentures issued to the SBA, and other short-term notes payable. We established a medallion lending relationship with DZ Bank in December 2008 that provides for growth in the portfolio at generally lower rates than under prior facilities. In addition, Medallion Bank began raising brokered bank certificates of deposit during 2004, which were at our lowest borrowing costs. As a result of Medallion Bank raising funds through certificates of deposit as previously noted, we were able to realign the ownership of some of our medallion loans and related assets to Medallion Bank allowing us and our subsidiaries to use cash generated through these transactions to retire debt with higher interest rates. In addition, Medallion 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 4 to the consolidated financial statements for details on the terms of all outstanding debt. Our debentures issued to the SBA typically have terms of ten years. 44



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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 following table shows the average borrowings and related borrowing costs for the quarters ended March 31, 2014 and 2013. Our average balances decreased reflecting the recent equity offering and Medallion Bank's average balances increased, reflecting the strong growth in the consumer loan portfolio. The decrease in borrowing costs reflected the trend of decreasing interest rates in the economy, and the repricing of term borrowings. Three Months Ended Average Interest Average Borrowing



(Dollars in thousands) Expense Balance Costs

March 31, 2014

Revolving lines of credit $ 618$ 130,654



1.92 %

Notes payable to banks 503 68,284



2.99

SBA debentures 658 59,918



4.45

Preferred securities 196 33,000 2.41 Total $ 1,975$ 291,856 2.74 Medallion Bank borrowings 1,445 684,130



0.86

Total managed borrowings $ 3,420$ 975,986



1.42

March 31, 2013

Revolving lines of credit $ 656$ 157,267



1.69 %

Notes payable to banks 494 63,100



3.17

SBA debentures 714 59,487



4.87

Preferred securities 201 33,000 2.47 Total $ 2,065$ 312,854 2.68 Medallion Bank borrowings 1,327 594,456



0.91

Total managed borrowings $ 3,392$ 907,310



1.52

We will continue to seek SBA funding 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 Small Business Investment Act (SBIA) and SBA regulations. We believe that financing operations primarily with short-term floating rate secured bank debt has generally decreased our interest expense, but has also increased our exposure to the risk of increases in market interest rates, which we mitigate with certain interest rate strategies. At March 31, 2014 and 2013, short-term adjustable rate debt constituted 68% and 70% of total debt, and was 21% and 24% on a fully managed basis including the borrowings of Medallion Bank.



Factors Affecting Net Assets

Factors that affect our net assets include net realized gain or loss on investments and change in net unrealized appreciation or depreciation on investments. Net realized gain or loss on investments is the difference between the proceeds derived upon sale or foreclosure of a loan or an equity investment and the cost basis of such loan or equity investment. Change in net unrealized appreciation or depreciation on investments is the amount, if any, by which our estimate of the fair value of our investment portfolio is above or below the previously established fair value or the cost basis of the portfolio. Under the 1940 Act and the SBIA, our loan portfolio and other investments must be recorded at fair value. Unlike certain lending institutions, we are not permitted to establish reserves for loan losses, but adjust quarterly the valuation of the investment portfolio to reflect our estimate of the current value of the total investment portfolio. Since no ready market exists for our investments, fair value is subject to our Board of Directors' good faith determination. In determining such fair value, our Board of Directors considers factors such as the financial condition of our borrowers and the adequacy of their collateral. Any change in the fair value of portfolio investments or other investments as determined by our Board of Directors is reflected in net unrealized depreciation or appreciation on investments and affects net increase in net assets resulting from operations, but has no impact on net investment income or distributable income. Our investment in Medallion Bank, as a wholly-owned portfolio investment, is also subject to quarterly assessments of fair value. We conduct a thorough valuation analysis as described previously, and also receive an opinion regarding the valuation from an independent third party to assist the Board of Directors in its determination of the fair value of Medallion Bank. We determine whether any factors give rise to valuation different than recorded book value, including various regulatory restrictions that were established at Medallion Bank's inception, by the FDIC and State of Utah, and also by additional regulatory restrictions, such as the prior moratorium imposed by the Dodd-Frank Act on the acquisition of control of an industrial bank by a "commercial firm" (a company whose gross revenues are primarily derived from non-financial activities) which expired in July 2013. Because of these restrictions and other factors, our Board of Directors has determined that Medallion Bank has little value beyond its recorded book value. As a result of this valuation process, we used Medallion Bank's actual results of operations as the best estimate of changes in fair value, and recorded the results as a component of unrealized appreciation (depreciation) on investments, although changes in these restrictions and other applicable factors could change these conclusions in the future. 45



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Source: Edgar Glimpses


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