News Column

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

August 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 17%. Total assets under our management and the management of our unconsolidated wholly-owned subsidiaries, which includes our managed net investment portfolio, as well as assets serviced for third party investors, were $1,446,000,000 as of June 30, 2014, and $1,330,000,000 and $1,255,849,000 as of December 31, 2013 and June 30, 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 distributions 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 $430,662,000 as of June 30, 2014. We earn referral fees for these activities. All of these servicing activities have been 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. Page 36 of 67



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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. June 30, 2014 March 31, 2014 December 31, 2013 June 30, 2013 Interest Investment



Interest Investment Interest Investment Interest Investment (Dollars in thousands)

Rate (1) Balances Rate (1) Balances Rate (1) Balances Rate (1) Balances Medallion loans New York 3.56 % $ 217,188 3.54 % $ 211,864 3.52 % $ 202,954 3.58 % $ 204,578 Chicago 4.92 41,636 4.93 41,896 4.94 42,175 5.00 39,260 Boston 4.71 27,611 4.77 26,494 4.91 23,622 5.26 21,975 Newark 5.42 24,404 5.45 23,693 5.58 21,681 5.98 19,109 Cambridge 4.87 6,012 5.07 6,000 5.06 6,008 5.40 5,745 Other 6.29 1,122 6.30 1,140 6.52 1,178 6.40 3,279 Total medallion loans 4.01 317,973 4.02 311,087 4.02 297,618 4.12 293,946 Deferred loan acquisition costs 304 255 243 83 Unrealized depreciation on loans - - - - Net medallion loans $ 318,277$ 311,342$ 297,861$ 294,029 Commercial loans Secured mezzanine 11.89 % $ 46,425 11.89 % $ 46,498 11.69 % $ 46,100 12.68 % $ 48,200 Asset based 5.55 4,603 5.22 5,481 5.32 7,803 5.69 7,207 Other secured commercial 9.90 14,691 9.97 13,583 9.89 13,336 9.32 11,822 Total commercial loans 11.00 65,719 10.93 65,562 10.60 67,239 11.34 67,229 Deferred loan acquisition income (30 ) (41 ) (79 ) (40 ) Unrealized depreciation on loans (6,987 ) (6,606 ) (6,992 ) (7,960 ) Net commercial loans $ 58,702$ 58,915$ 60,168$ 59,229 Investment in Medallion Bank and other controlled subsidiaries, net (3) 10.13 % $ 123,456 10.88 % $ 110,266 11.05 % $ 108,623



11.46 % $ 100,343

Equity investments 0.69 % $ 5,286 0.58 % 6,125 0.86 % $ 6,124



0.98 % $ 5,914

Unrealized appreciation on equities 1,928 676 381 825 Net equity investments $ 7,214$ 6,801$ 6,505$ 6,739 Investment securities - % $ - - % $ - - % $ - - % $ - Investments at cost (2) 6.35 % $ 512,434 6.43 % $ 493,040 6.49 % $ 479,604



6.69 % $ 467,432

Deferred loan acquisition costs 274 214 164 43 Unrealized appreciation on equities 1,928 676 381 825 Unrealized depreciation on loans (6,987 ) (6,606 ) (6,992 ) (7,960 ) Net investments (3) $ 507,649$ 487,324$ 473,157$ 460,340Medallion Bank investments Consumer loans 15.18 % $ 424,009 15.49 % $ 373,478 15.67 % $ 353,355 16.22 % $ 311,968 Medallion loans 3.78 388,098 3.78 366,998 3.77 349,015 3.86 343,825 Commercial loans 4.70 43,829 4.73 42,143 4.91 53,786 4.95 65,095 Investment securities 2.59 28,995 2.55 25,108 2.47 24,925 2.45 22,498 Medallion Bank investments at cost (2) 9.25 884,931 9.20 807,727 9.19 781,081 9.10 743,386 Deferred loan acquisition costs 10,162 9,632 9,553 8,524 Unrealized depreciation on investment securities (172 ) (405 ) (803 ) (137 ) Premiums paid on purchased securities 305 326 342 315 Unrealized depreciation on loans (18,116 ) (16,966 ) (16,434 ) (17,290 ) Medallion Bank net investments $ 877,110$ 800,314$ 773,739$ 734,798



(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 8.15%, 8.05%, 8.05%, and

8.03% at June 30, 2014, March 31, 2014, December 31, 2013, and June 30, 2013.

(3) Includes $736, $724, $814, and $869 of unrealized appreciation on Medallion

Hamptons Holdings as of June 30, 2014, March 31, 2014, December 31, 2013, and

June 30, 2013. Page 37 of 67



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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 June 30, Six Months Ended June 30, (Dollars in thousands) 2014 2013 2014 2013 Net investments at beginning of period $ 487,324$ 454,565$ 473,157$ 455,010 Investments originated (1) 39,827 72,075 72,673 134,100 Repayments of investments (1) (23,018 ) (67,895 ) (44,657 ) (131,287 ) Net realized gains (losses) on investments (686 ) 4 (858 ) 81 Net increase in unrealized appreciation (2) 4,179 1,650 7,286 2,570 (Amortization) accretion of origination (costs) fees 23 (59 ) 48 (134 ) Net increase in investments 20,325 5,775 34,492 5,330



Net investments at end of period $ 507,649$ 460,340

$ 507,649$ 460,340 (1) Includes refinancings.



(2) Excludes net unrealized appreciation (depreciation) of ($190) and $190 for

the quarter and six months ended June 30, 2014, and $2,853 and $5,865 for the

comparable 2013 periods, related to foreclosed properties and other assets.

PORTFOLIO SUMMARY Total Portfolio Yield The weighted average yield (which is calculated by dividing the aggregate yield of each investment in the portfolio by the aggregate portfolio balance and does not include expenses and sales load for any offering) of the total portfolio at June 30, 2014 was 6.35% (5.21% for the loan portfolio), a decrease of 14 basis points from 6.49% at December 31, 2013, and a decrease of 34 basis points from 6.69% at June 30, 2013. The weighted average yield of the total managed portfolio at June 30, 2014 was 7.96% (8.15% for the loan portfolio), an increase of 11 basis points from 7.85% at December 31, 2013, and an increase of 12 basis points from 7.84% at June 30, 2013. The slight changes in 2014 reflected changes in the portfolio mix. Medallion Loan Portfolio Our medallion loans comprised 63% of the net portfolio of $507,649,000 at June 30, 2014, compared to 63% of the net portfolio of $473,157,000 at December 31, 2013, and 64% of $460,340,000 at June 30, 2013. Our managed medallion loans of $705,342,000 comprised 56% of the net managed portfolio of $1,267,482,000 at June 30, 2014, compared to 56% of the net managed portfolio of $1,144,596 at December 31, 2013, and 58% of $1,100,518,000 at June 30, 2013. The medallion loan portfolio increased by $20,416,000 or 7% in 2014 (an increase of $59,372,000 or 9% on a managed basis), primarily reflecting loan portfolio growth in all markets and the movement of loans to Medallion Bank. Total medallion loans serviced for third parties were $29,638,000, $24,875,000, and $25,340,000 at June 30, 2014, December 31, 2013, and June 30, 2013. The weighted average yield of the medallion loan portfolio at June 30, 2014 was 4.01%, a decrease of 1 basis point from 4.02% at December 31, 2013, and a decrease of 11 basis points from 4.12% at June 30, 2013. The weighted average yield of the managed medallion loan portfolio at June 30, 2014 was 3.89%, unchanged from December 31, 2013, and a decrease of 9 basis points from 3.98% at June 30, 2013. The decrease in yield primarily reflected the new loan volume and the repricing of the existing portfolio to lower current market interest rates. At June 30, 2014, 32% of the medallion loan portfolio represented loans outside New York, compared to 32% and 30% at December 31, 2013 and June 30, 2013. At June 30, 2014, 25% of the managed medallion loan portfolio represented loans outside New York, compared to 26% at December 31, 2013 and 24% at June 30, 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 13% of the net investment portfolio as of June 30, 2014, December 31, 2013, and June 30, 2013, and were 8%, 10%, and 11% on a managed basis. Commercial loans decreased by $1,466,000 or 2% during 2014 (decreased $11,325,000 or 10% on a managed basis), primarily reflecting loan repayments in the high yield mezzanine and asset-based loan portfolios, partially offset by increases in the other commercial secured loan portfolio, and in the managed loan portfolio by decreases in the asset-based loan portfolio at Medallion Bank . Net commercial loans serviced for third parties were $170,000 at June 30, 2014, secured by third parties were $255,000 at December 31, 2013 and $12,090,000 at June 30, 2013. The weighted average yield of the commercial loan portfolio at June 30, 2014 was 11.00%, an increase of 40 basis points from 10.60% at December 31, 2013, and a decrease of 34 basis points from 11.34% at June 30, 2013. The weighted average yield of the managed commercial loan portfolio at June 30, 2014 was 8.48%, an increase of 41 basis points from 8.07% at December 31, Page 38 of 67



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2013, and an increase of 28 basis points from 8.20% at June 30, 2013. The fluctuations primarily reflect lower yield on mezzanine portfolio. 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 June 30, 2014, variable-rate loans represented approximately 8% of the commercial portfolio, compared to 12% at December 31, 2013 and June 30, 2013, and were 42%, 49%, and 53% 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.



Consumer Loan Portfolio

Our managed consumer loans, all of which are held in the portfolio managed by Medallion Bank, represented 33%, 31%, and 28% of the managed net investment portfolio as of June 30, 2014, December 31, 2013, and June 30, 2013. Medallion Bank originates adjustable rate consumer loans secured by recreational vehicles, boats, motorcycles, and trailers, and also finances small-scale home improvements 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 15.18% at June 30, 2014, compared to 15.67% and 16.22% at December 31, 2013 and June 30, 2013. Adjustable rate loans represented 49%, 68%, and 72% of the managed consumer portfolio at June 30, 2014, December 31, 2013, and June 30, 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. June 30, 2014 March 31, 2014 December 31, 2013 June 30, 2013 (Dollars in thousands) Amount % (1) Amount % (1) Amount % (1) Amount % (1) Medallion loans $ - 0.0 % $ - 0.0 % $ - 0.0 % $ - 0.0 % Commercial loans Secured mezzanine 2,018 0.6 2,018 0.6 2,018 0.6 2,182 0.6

Asset-based receivable 494 0.1 494 0.1 494 0.1 205 0.1 Other secured commercial - 0.0 - 0.0 - 0.0 492 0.1 Total commercial loans 2,512 0.7 2,512 0.7 2,512 0.7 2,879 0.8 Total loans 90 days or more past due $ 2,512 0.7 % $



2,512 0.7 % $ 2,512 0.7 % $ 2,879 0.8 %

Total Medallion Bank loans $ 3,374 0.4 % $



3,721 0.5 % $ 3,817 0.5 % $ 1,198 0.2 %

Total managed loans 90 days or more past due $ 5,886 0.5 % $ 6,233 0.5 % $ 6,329 0.6 % $ 4,077 0.4 %

(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 June 30, 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 Page 39 of 67



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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 June 30, 2014, five of the seven secured borrowers had refinanced their loans in full with third parties, and the related proceeds are held in escrow 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 23 56 79 Total income foregone $ 182 $ 566 $ 748 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 portfolios 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 $7,609,000 were delinquent at June 30, 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. Page 40 of 67



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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 Net change in unrealized Appreciation on investments - - 640 (951 ) (311 ) Depreciation on investments - (394 ) (62 ) 761 305 Reversal of unrealized appreciation (depreciation) related to realized Gains on investments - - - - - Losses on investments - 13 674 - 687 Balance June 30, 2014 $ - ($ 6,987 ) $

1,928 $ 40,595$ 35,536 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 Net change in unrealized Appreciation on investments - - 505 2,853 3,358 Depreciation on investments - (66 ) 273 - 207 Reversal of unrealized appreciation (depreciation) related to realized Gains on investments - - - - - Losses on investments - - - - - Balance June 30, 2013 $ - ($ 7,960 ) $ 825 $ 39,622$ 32,487



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

June 30, March 31, December 31, June 30, (Dollars in thousands) 2014 2014 2013 2013 Total loans Medallion loans $ 318,277$ 311,342$ 297,861$ 294,029 Commercial loans 58,702 58,915 60,168 59,229 Total loans 376,979 370,257 358,029 353,258 Investment in Medallion Bank and other controlled subsidiaries 123,456 110,266 108,623 100,343 Equity investments (1) 7,214 6,801 6,505 6,739 Investment securities - - - - Net investments $ 507,649$ 487,324$ 473,157$ 460,340 Net investments at Medallion Bank and other controlled subsidiaries $ 877,133$ 800,314$ 773,739$ 734,398 Managed net investments $ 1,267,482$ 1,184,257$ 1,144,596$ 1,100,518 Unrealized appreciation (depreciation) on investments Medallion loans $ - $ - $ - $ - Commercial loans (6,987 ) (6,606 ) (6,992 ) (7,960 ) Total loans (6,987 ) (6,606 ) (6,992 ) (7,960 ) Investment in Medallion Bank and other controlled subsidiaries (2) - - - - Equity investments 1,928 676 381 825 Investment securities - - - - Total unrealized depreciation on investments (2) ($ 5,059 ) ($ 5,930 )



($ 6,611 ) ($ 7,135 )

Net unrealized depreciation on investments at Medallion Bank and other controlled subsidiaries ($ 18,288 ) ($ 17,371 ) ($ 17,237 ) ($ 17,427 ) Managed total unrealized depreciation on investments(2) ($ 23,348 ) ($ 23,301 )



($ 23,848 ) ($ 24,562 )

Unrealized appreciation (depreciation) as a % of balances outstanding (3) Medallion loans - % - % - % - % Commercial loans (10.63 ) (10.08 ) (10.40 ) (11.84 ) Total loans (1.82 ) (1.75 ) (1.92 ) (2.20 ) Investment in Medallion Bank and other controlled subsidiaries - - - - Equity investments 36.47 11.04 6.22 13.96 Investment securities - - - - Net investments (0.99 ) (1.20 ) (1.38 ) (1.53 ) Net investments at Medallion Bank and other controlled subsidiaries (2.07 %) (2.15 %) (2.21 %) (2.34 %) Managed net investments (1.82 %) (1.95 %) (2.06 %) (2.20 %)



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

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Table of Contents (2) Excludes $736, $724, $814, and $869 of unrealized appreciation on Medallion

Hamptons Holding, a wholly-owned subsidiary, at June 30, 2014, March 31,

2014, December 31, 2013, and June 30, 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 three and six months ended June 30, 2014 and 2013.

Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands) 2014 2013 2014 2013 Realized gains (losses) on loans and equity investments Medallion loans $ - $ - $ - $ 40 Commercial loans (11 ) 4 (233 ) 41 Total loans (11 ) 4 (233 ) 81 Investment in Medallion Bank and other controlled subsidiaries - - - - Equity investments (674 ) - (625 ) - Investment securities - - - - Total realized gains (losses) on loans and equity investments (685 ) 4 (858 ) 81 Net realized losses on investments at Medallion Bank and other controlled subsidiaries (865 ) (535 ) (2,360 ) (2,444 ) Total managed realized losses on loans and equity investments ($ 1,550 ) ($ 531



) ($ 3,218 ) ($ 2,363 )

Realized gains (losses) as a % of average balances outstanding Medallion loans - % - % - % 0.03 % Commercial loans (0.07 ) 0.02 (0.71 ) 0.12 Total loans (0.01 ) 0.00 (0.13 ) 0.05 Investment in Medallion Bank and other controlled subsidiaries - - - - Equity investments (46.35 ) - (21.15 ) - Investment securities - - - - Net investments (0.54 ) 0.00 (0.35 ) 0.04 Net investments at Medallion Bank and other controlled subsidiaries (0.41 ) (0.30 ) (0.58 ) (0.69 ) Managed net investments (0.50 %) (0.19 %) (0.54 %) (0.44 %)



The table below summarizes components of unrealized and realized gains and losses in the investment portfolio for the three and six months ended June 30, 2014 and 2013.

Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands) 2014 2013 2014 2013 Net change in unrealized appreciation (depreciation) on investments Unrealized appreciation $ 640 $ 505 $ 740 $ 494 Unrealized depreciation (456 ) 207 (187 ) 170 Net unrealized appreciation on investment in Medallion Bank and other controlled subsidiaries 3,306 938 5,733 1,906 Realized gains - - - - Realized losses 687 - 1,000 - Net unrealized gains (losses) on foreclosed properties and other assets (190 ) 2,853 190 5,865 Total $ 3,987$ 4,503$ 7,476$ 8,435 Net realized gains (losses) on investments Realized gains $ - $ - $ - $ - Realized losses (687 ) - (1,000 ) - Other gains - - 49 - Direct recoveries 2 4 93 81 Realized gains on foreclosed properties and other assets - - - - Total ($ 685 ) $ 4 ($ 858 ) $ 81 Page 42 of 67



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Investment in Medallion Bank and Other Controlled Subsidiaries

Investment in Medallion Bank and other controlled subsidiaries represented 24%, 23%, and 22% of our total portfolio at June 30, 2014, December 31, 2013, and June 30, 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 $10,000,000 and $5,000,000 in 2014 and 2013. Separately, Medallion Bank declared dividends to us of $3,000,000 and $6,000,000 in the 2014 second quarter and six months, and $2,500,000 and $5,500,000 in the comparable 2013 periods. 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 June 30, 2014, December 31, 2013, and June 30, 2013. Equity investments were 1% of our total managed portfolio at June 30, 2014, December 31, 2013, and June 30, 2013. Equity investments are comprised of common stock, partnership interests, and warrants.

Investment Securities

Investment securities were 0% of our total portfolio at June 30, 2014, December 31, 2013, and June 30, 2013. Investment securities were 2% of our total managed portfolio at June 30, 2014, December 31, 2013, and June 30, 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. 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 three and six months ended June 30, 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 Six Months Ended Average Average Interest Average Borrowing Interest Average Borrowing (Dollars in thousands) Expense Balance Costs Expense Balance Costs June 30, 2014 Revolving lines of credit $ 597$ 127,599 1.88 % $ 1,215$ 129,118 1.90 % Notes payable to banks 656 94,593 2.78 1,159 81,512 2.87 SBA debentures 634 56,068 4.54 1,292 57,982 4.49 Preferred securities 198 33,000 2.41 394 33,000 2.41 Total $ 2,085$ 311,260 2.69 $ 4,060$ 301,612 2.71 Medallion Bank borrowings $ 1,629$ 736,795 0.89 $ 3,075$ 710,608 0.87 Total managed borrowings $ 3,714$ 1,048,055 1.42 $ 7,135$ 1,012,220 1.42 June 30, 2013 Revolving lines of credit $ 653$ 161,280 1.62 % $ 1,309$ 159,284 1.66 % Notes payable to banks 568 63,474 3.59 1,062 63,288 3.38 SBA debentures 699 58,635 4.78 1,414 59,059 4.83 Preferred securities 201 33,000 2.45 402 33,000 2.46 Total $ 2,121$ 316,389 2.69 $ 4,187$ 314,631 2.68 Medallion Bank borrowings $ 1,280$ 617,896 0.83 $ 2,606$ 606,241 0.87 Total managed borrowings $ 3,401$ 934,285 1.46 $ 6,793$ 920,872 1.49 Page 43 of 67



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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, or 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 June 30, 2014 and 2013, short-term adjustable rate debt constituted 71% and 72% of total debt, and was 21% and 25% 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 and the lack of any new charter issuances since the moratorium's expiration. 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. Page 44 of 67



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