MEDALLION FINANCIAL CORP - Quarter Report: 2023 March (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-37747

MEDALLION FINANCIAL CORP.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

04-3291176

(State of Incorporation)

(IRS Employer

Identification No.)

437 MADISON AVENUE, 38th Floor

NEW YORK, New York 10022

(Address of Principal Executive Offices) (Zip Code)

(212) 328-2100

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbols

Name of each exchange

on which registered

Common Stock, par value $0.01 per share

MFIN

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒

Emerging growth company	☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

The number of outstanding shares of registrant’s Common Stock, par value $0.01, as of May 5, 2023, was 23,321,523.

MEDALLION FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS


		Page
PART I – FINANCIAL INFORMATION		3

ITEM 1. FINANCIAL STATEMENTS		3

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		31

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		49

ITEM 4. CONTROLS AND PROCEDURES		49

PART II—OTHER INFORMATION		49

ITEM 1. LEGAL PROCEEDINGS		49

ITEM 1A. RISK FACTORS		49

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		49

ITEM 6. EXHIBITS		50

SIGNATURES		51

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with our financial statements and the notes to those statements and other financial information appearing elsewhere in this report.

This report contains forward-looking statements relating to future events and future performance applicable to us within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words expects, anticipates, intends, believes, or similar language. In connection with certain forward-looking statements contained in this Form 10-Q and those that may be made in the future by or on behalf of the Company, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward-looking statements contained in this Form 10-Q were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict, and many of which are beyond control of the Company. In particular, any forward-looking statements are subject to the risks and great uncertainties associated with the pending litigation with the Securities and Exchange Commission as well as the U.S. and global economies, including the current inflationary environment and the risk of recession.

All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statements. The statements have not been audited by, examined by, compiled by, or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Form 10-Q should consider these facts in evaluating the information contained herein. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-Q. The inclusion of the forward-looking statements contained in this Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Form 10-Q will be achieved.

In light of the foregoing, readers of this Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein. You should consider these risks and those described under Risk Factors in the Company’s Annual Report on Form 10-K and others that are detailed in the other reports that the Company files from time to time with the Securities and Exchange Commission.

Page 2 of 51

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASIS OF PREPARATION

We, Medallion Financial Corp., or the Company, are a specialty finance company organized as a Delaware corporation. Our strategic focus is growing our consumer finance and commercial lending businesses. Our total assets were $2.4 billion and $2.3 billion as of March 31, 2023 and December 31, 2022, respectively.

We conduct our business through various wholly-owned subsidiaries including:

•

Medallion Bank, or the Bank, a Federal Deposit Insurance Corporation, or FDIC, insured industrial bank that originates consumer loans, raises deposits and conducts other banking activities;

•

Medallion Capital, Inc., or Medallion Capital, a Small Business Investment Company, or SBIC, which conducts a mezzanine financing business;

•

Medallion Funding LLC, or Medallion Funding, an SBIC, historically our primary taxi medallion lending company; and

•

Freshstart Venture Capital Corp., or Freshstart, an SBIC which historically originated and serviced taxi medallion and commercial loans.

Our consolidated balance sheet as of March 31, 2023, and the related consolidated statements of operations, consolidated statements of other comprehensive income, consolidated statements of stockholders’ equity and cash flows for the three months then ended included in Item 1 have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly our consolidated financial position and results of operations. The results of operations for the three months ended March 31, 2023 may not be indicative of future performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Page 3 of 51

MEDALLION FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(Dollars in thousands, except share and per share data)	March 31, 2023			December 31, 2022
Assets
Cash and cash equivalents	$	20,778		$	33,172
Federal funds sold		111,604			72,426
Investment securities		48,529			48,492
Equity investments		10,653			10,293
Loans		1,984,180			1,916,953
Allowance for credit losses		(70,280	)		(63,845	)
Net loans receivable		1,913,900			1,853,108
Goodwill		150,803			150,803
Intangible assets, net		21,675			22,035
Loan collateral in process of foreclosure (1)		20,467			21,819
Property, equipment, and right-of-use lease asset, net		13,401			13,168
Accrued interest receivable		12,235			12,613
Income tax receivable		—			2,095
Other assets		27,625			19,855
Total assets	$	2,351,670		$	2,259,879
Liabilities
Deposits (2)	$	1,695,300		$	1,607,110
Long-term debt (3)		175,864			214,320
Deferred tax liabilities, net		26,205			26,753
Operating lease liabilities		8,168			8,408
Short-term borrowings		38,500			5,000
Accrued interest payable		4,039			4,790
Income tax payable		1,113			—
Accounts payable and accrued expenses (4)		27,328			22,974
Total liabilities		1,976,517			1,889,355
Commitments and contingencies (5)
Stockholders’ equity
Preferred stock (1,000,000 shares of $0.01 par value stock authorized-none outstanding)		—			—
Common stock (50,000,000 shares of $0.01 par value stock authorized - 28,912,147 shares at March 31, 2023 and 28,663,827 shares at December 31, 2022 issued)		289			287
Additional paid in capital		284,221			283,663
Treasury stock (5,602,154 shares at March 31, 2023 and December 31, 2022)		(45,538	)		(45,538	)
Accumulated other comprehensive income (loss)		(2,843	)		(3,349	)
Retained earnings		70,236			66,673
Total stockholders’ equity		306,365			301,736
Non-controlling interest in consolidated subsidiaries		68,788			68,788
Total equity		375,153			370,524
Total liabilities and equity	$	2,351,670		$	2,259,879
Number of shares outstanding		23,309,993			23,061,673
Book value per share	$	13.14		$	13.08

(1)

Includes financed sales of this collateral to third parties that are reported separately from the loan portfolio, of $7.2 million as of March 31, 2023 and $7.5 million as of December 31, 2022.

(2)

Includes $3.8 million of deferred financing costs as of both March 31, 2023 and December 31, 2022. Refer to Note 5 for more details.

(3)

Includes $3.0 million and $3.2 million of deferred financing costs as of March 31, 2023 and December 31, 2022. Refer to Note 5 for more details.

(4)

Includes the short-term portion of lease liabilities of $2.2 million as of both March 31, 2023 and December 31, 2022. Refer to Note 6 for more details.

(5)

Refer to Note 10 for details.

The accompanying notes should be read in conjunction with these consolidated financial statements.

Page 4 of 51

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended March 31,
(Dollars in thousands, except share and per share data)	2023			2022
Interest and fees on loans	$	55,169		$	43,064
Interest and dividends on investment securities		674			239
Total interest income (1)		55,843			43,303
Interest on deposits		8,599			4,154
Interest on long-term debt		2,853			3,221
Interest on short-term borrowings		788			—
Total interest expense		12,240			7,375
Net interest income		43,603			35,928
Provision for credit losses		4,038			3,240
Net interest income after provision for credit losses		39,565			32,688
Other income (loss)
Gain on sale of loans and medallion		1,855			1,876
Write-down of loan collateral in process of foreclosure		(252	)		(386	)
Loss on equity investments		(90	)		(133	)
Other income		570			172
Total other income, net		2,083			1,529
Other expenses
Salaries and employee benefits		8,836			7,568
Loan servicing fees		2,222			1,953
Professional fees		1,707			3,992
Collection costs		1,538			1,343
Rent expense		623			645
Regulatory fees		682			451
Amortization of intangible assets		360			360
Other expenses		2,425			1,721
Total other expenses		18,393			18,033
Income before income taxes		23,255			16,184
Income tax provision		6,382			4,831
Net income after taxes		16,873			11,353
Less: income attributable to the non-controlling interest		1,512			1,512
Total net income attributable to Medallion Financial Corp.	$	15,361		$	9,841
Basic net income per share	$	0.69		$	0.40
Diluted net income per share	$	0.67		$	0.39
Weighted average common shares outstanding
Basic		22,342,911			24,770,134
Diluted		22,975,457			25,083,566

(1)

Included in interest income is $0.3 million of paid-in-kind interest for the three months ended March 31, 2023 and $0.2 million for the three months ended March 31, 2022.

The accompanying notes should be read in conjunction with these consolidated financial statements.

Page 5 of 51

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended March 31,
(Dollars in thousands)	2023		2022
Net income after taxes	$	16,873	$	11,353
Other comprehensive (loss) income, net of tax		506		(1,717	)
Total comprehensive income		17,379		9,636
Less comprehensive income attributable to the non-controlling interest		1,512		1,512
Total comprehensive income attributable to Medallion Financial Corp.	$	15,867	$	8,124

The accompanying notes should be read in conjunction with these consolidated financial statements.

Page 6 of 51

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


(Dollars in thousands)	Common Stock Shares			Common Stock		Capital in Excess of Par			Treasury Stock Shares			Treasury Stock			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity			Non- controlling Interest			Total Equity
Balance at December 31, 2022		28,663,827		$	287	$	283,663			(5,602,154	)	$	(45,538	)	$	66,673		$	(3,349	)	$	301,736		$	68,788		$	370,524
Adoption of ASU 2016-13, net of tax		—			—		—			—			—			(9,935	)		—			(9,935	)		—			(9,935	)
Balance at January 1, 2023		28,663,827			287		283,663			(5,602,154	)		(45,538	)		56,738			(3,349	)		291,801			68,788			360,589
Net income		—			—		—			—			—			15,361			—			15,361			1,512			16,873
Distributions to non-controlling interest		—			—		—			—			—			—			—			—			(1,512	)		(1,512	)
Stock-based compensation		—			2		1,034			—			—			—			—			1,036			—			1,036
Issuance of restricted stock		304,749			—		—			—			—			—			—			—			—			—
Withheld restricted stock for employees' tax obligations		(91,169	)		—		(768	)		—			—			—			—			(768	)		—			(768	)
Forfeiture of restricted stock, net		(9,843	)		—		—			—			—			—			—			—			—			—
Issuance of restricted stock units, net		—			—		—			—			—			—			—			—			—			—
Exercise of stock options		44,583			—		292			—			—			—			—			292			—			292
Purchase of common stock		—			—		—			—			—			—			—			—			—			—
Dividends paid on common stock ($0.08 per share)		—			—		—			—			—			(1,863	)		—			(1,863	)		—			(1,863	)
Net change in unrealized gains on investments, net of tax		—			—		—			—			—			—			506			506			—			506
Balance at March 31, 2023		28,912,147		$	289	$	284,221			(5,602,154	)	$	(45,538	)	$	70,236		$	(2,843	)	$	306,365		$	68,788		$	375,153


(Dollars in thousands)	Common Stock Shares			Common Stock		Capital in Excess of Par		Treasury Stock Shares			Treasury Stock			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity			Non- controlling Interest			Total Equity
Balance at December 31, 2021		28,124,629		$	281	$	280,038		(2,951,243	)	$	(24,919	)	$	30,606		$	1,034		$	287,040		$	68,788		$	355,828
Net income		—			—		—		—			—			9,841			—			9,841			1,512			11,353
Distributions to non-controlling interest		—			—		—		—			—			—			—			—			(1,512	)		(1,512	)
Stock-based compensation expense		—			4		594		—			—			—			—			598			—			598
Issuance of restricted stock, net		383,925			—		—		—			—			—			—			—			—			—
Forfeiture of restricted stock, net		(5,730	)		—		—		—			—			—			—			—			—			—
Exercise of stock options		23,192			—		152		—			—			—			—			152			—			152
Purchase of common stock		—			—		—		(67,660	)		(617	)		—			—			(617	)		—			(617	)
Dividends paid on common stock ($0.08 per share)		—			—		—		—			—			(2,044	)		—			(2,044	)		—			(2,044	)
Other comprehensive loss, net of tax		—			—		—		—			—			—			(1,717	)		(1,717	)		—			(1,717	)
Balance at March 31, 2022		28,526,016		$	285	$	280,784		(3,018,903	)	$	(25,536	)	$	38,403		$	(683	)	$	293,253		$	68,788		$	362,041

The accompanying notes should be read in conjunction with these consolidated financial statements.

Page 7 of 51

MEDALLION FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income resulting from operations	$	16,873		$	11,353
Adjustments to reconcile net income resulting from operations to net cash provided by operating activities:
Provision for credit losses		4,038			3,240
Paid-in-kind interest income		(264	)		(172	)
Depreciation and amortization		1,300			1,640
Amortization of origination fees, net		2,173			2,119
Increase in deferred and other tax liabilities, net		6,437			4,170
Net change in value of loan collateral in process of foreclosure		2,330			1,396
Net realized loss on sale of investments		90			241
Net change in unrealized (appreciation) depreciation on investments		(28	)		—
Stock-based compensation expense		1,036			598
(Increase) decrease in accrued interest receivable		378			18
Increase in other assets		(8,605	)		(2,455	)
Increase in accounts payable and accrued expenses		4,120			2,833
Decrease in accrued interest payable		(751	)		(327	)
Net cash provided by operating activities		29,127			24,654
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated		(230,846	)		(217,495	)
Proceeds from principal receipts, sales, and maturities of loans		143,891			129,121
Purchases of investments		(450	)		(8,407	)
Proceeds from principal receipts, sales, and maturities of investments		438			3,856
Proceeds from the sale and principal payments on loan collateral in process of foreclosure		5,526			5,240
Net cash used for investing activities		(81,441	)		(87,685	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from time deposits and funds borrowed		240,056			200,528
Repayments of time deposits and funds borrowed		(157,100	)		(119,226	)
Cash dividends paid on common stock		(1,870	)		(1,984	)
Distributions to non-controlling interests		(1,512	)		(1,512	)
Payment of withholding taxes on net settlement of vested stock		(768	)		—
Treasury stock repurchased		—			(617	)
Proceeds from the exercise of stock options		292			152
Net cash provided by financing activities		79,098			77,341
NET INCREASE IN CASH AND CASH EQUIVALENTS		26,784			14,310
Cash and cash equivalents beginning of period (1)		105,598			124,484
Cash and cash equivalents, end of period (1)	$	132,382		$	138,794
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest	$	12,372		$	7,056
Cash paid during the period for income taxes		143			12
NON-CASH INVESTING
Loans transferred to loan collateral in process of foreclosure, net	$	6,504		$	3,040

(1)

Includes Federal Funds Sold.

The accompanying notes should be read in conjunction with these consolidated financial statements.

Page 8 of 51

MEDALLION FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES

Medallion Financial Corp., or the Company, is a specialty finance company organized as a Delaware corporation that reports as a bank holding company, but is not a bank holding company for regulatory purposes. The Company conducts its business through various wholly-owned subsidiaries including its primary operating company, Medallion Bank, or the Bank, a Federal Deposit Insurance Corporation, or FDIC, insured industrial bank that originates consumer loans, raises deposits, and conducts other banking activities. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies, and undergoes examinations by those agencies. The Bank was formed in May 2002 for the purpose of obtaining an industrial bank charter pursuant to the laws of the State of Utah. The Bank originates consumer loans on a national basis for the purchase of recreational vehicles, or “RVs”, boats and other consumer recreational equipment and to finance home improvements such as roofs, swimming pools, and windows. Prior to 2015, the Bank originated commercial loans to finance the purchase of taxi medallions, all of which are serviced by the Company. The loans are financed primarily with time certificates of deposit which are originated nationally through a variety of brokered deposit relationships. In 2019, the Bank began building a strategic partnership program that targets relationships with financial technology, or fintech, companies to offer loans and other financial services to customers. The Bank entered into an initial partnership in 2020 and continues to evaluate and launch additional partnerships.

The Company also conducts business through its subsidiaries Medallion Capital, Inc., or MCI, a Small Business Investment Company, or SBIC, which conducts a mezzanine financing business; Medallion Funding LLC, or MFC, an SBIC, which historically was the Company's primary taxi medallion lending company; and Freshstart Venture Capital Corp., or FSVC, an SBIC that historically originated and serviced medallion and commercial loans. MCI, MFC, and FSVC, as SBICs, are regulated by the Small Business Administration, or SBA. MCI and FSVC are financed in part by the SBA.

The Company established a wholly-owned subsidiary, Medallion Financing Trust I, or Fin Trust, for the purpose of issuing unsecured preferred securities to investors. Fin Trust is a separate legal and corporate entity with its own creditors who, in any liquidation of Fin Trust, will be entitled to be satisfied out of Fin Trust’s assets prior to any value in Fin Trust becoming available to Fin Trust’s equity holders. The assets of Fin Trust, aggregating $34.0 million at March 31, 2023, are not available to pay obligations of its affiliates or any other party, and the assets of affiliates or any other party are not available to pay obligations of Fin Trust.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S., or GAAP, requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and assumptions are those that management considers to be the most critical to an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. All of these estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions change, it is reasonably possible that the judgments and estimates could change, which may result in future impairments of loans and loan collateral in process of foreclosure, goodwill and intangible assets, and investments, among other effects.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its wholly-owned and controlled subsidiaries. All significant intercompany transactions, balances, and profits (losses) have been eliminated in consolidation.

The consolidated financial statements have been prepared in accordance with GAAP. The Company consolidates all entities it controls through a majority voting interest, a controlling interest through other contractual rights, or as being identified as the primary beneficiary of VIEs. The primary beneficiary is the party who has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (2) an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third-party's holding is recorded as non-controlling interest.

Page 9 of 51

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original purchased maturity of three months or less to be cash equivalents. Cash balances are generally held in accounts at large national or regional banking organizations in amounts that exceed the federally insured limits. As of March 31, 2023, cash includes $1.3 million of interest-bearing funds deposited in other banks, that are mainly callable, with original terms of 3 to 5 years.

Fair Value of Assets and Liabilities

The Company follows the Financial Accounting Standards Board, or FASB, FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, or FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as an exit price (i.e., a price that would be received to sell, as opposed to acquire, an asset or transfer a liability), and emphasizes that fair value is a market-based measurement. It establishes a fair value hierarchy that distinguishes between assumptions developed based on market data obtained from independent external sources and the reporting entity’s own assumptions. Further, it specifies that fair value measurement should consider adjustment for risk, such as the risk inherent in the valuation technique or its inputs. See also Notes 12 and 13 to the consolidated financial statements.

Equity Investments

The Company follows FASB ASC Topic 321, Investments – Equity Securities, or ASC 321, which requires all applicable investments in equity securities with a readily determinable fair value to be valued as such, and those without a readily determinable fair value, are measured at cost, less any impairment plus or minus any observable price changes. Equity investments of $10.7 million and $10.3 million at March 31, 2023 and December 31, 2022, comprised mainly of nonmarketable stock and stock warrants, are recorded at cost less any impairment plus or minus observable price changes. As of March 31, 2023, cumulative impairment of $2.5 million had been recorded with respect to these investments.

During 2021, the Company purchased $2.0 million of equity securities with a readily determinable fair value. As a result, all unrealized gains and losses are included in gain (loss) on equity investments. As of March 31, 2023 and December 31, 2022, the fair value of these securities were $1.8 million and $1.7 million and are included in other assets on the consolidated balance sheet.

The following table presents the unrealized portion related to the equity securities held.


	Three Months Ended March 31,
(Dollars in thousands)	2023		2022
Net gains (losses) recognized during the period on equity securities	$	28	$	(91	)
Less: Net gains (losses) recognized during the period on equity securities sold during the period		—		—
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	28	$	(91	)

Investment Securities

The Company follows FASB ASC Topic 320, Investments – Debt Securities, or ASC 320, which requires that all applicable investments in debt securities be classified as trading securities, available-for-sale securities, or held-to-maturity securities. Investment securities are purchased from time-to-time in the open market at prices that are greater or lesser than the par value of the investment. The resulting premium or discount is deferred and recognized on a level yield basis as an adjustment to the yield of the related investment. The net premium on investment securities totaled $0.1 million at both March 31, 2023 and December 31, 2022, and less than $0.1 million was amortized to interest income for each of the three months ended March 31, 2023 and 2022. ASC 320 further requires that held-to-maturity securities be reported at amortized cost and available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings at the date of the consolidated financial statements, and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity, net of the effect of income taxes, until they are sold. At the time of sale, any gains or losses, calculated by the specific identification method, will be recognized as a component of operating results and any amounts previously included in stockholders’ equity, which were recorded net of the income tax effect, will be reversed. In accordance with ASC 326, we do not maintain an allowance for credit losses for accrued interest receivable.

Page 10 of 51

Loans

The Company’s loans are currently reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, and which is amortized to interest income over the life of the loan.

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield of the related loans. At March 31, 2023 and December 31, 2022, net loan origination costs were $36.3 million and $34.9 million. Net amortization to income for the three months ended March 31, 2023 was $1.9 million and was $2.1 million for the three months ended March 31, 2022.

Interest income is recorded on the accrual basis. Medallion and commercial loans are placed on nonaccrual status, and all uncollected accrued interest is reversed, when there is doubt as to the collectability of interest or principal, or if loans are 90 days or more past due, unless management has determined that they are both well-secured and in the process of collection. Interest income on nonaccrual loans is generally recognized when cash is received unless a determination has been made to apply all cash receipts to principal. The consumer loan portfolio has different characteristics, typified by a larger number of smaller dollar loans that have similar characteristics. A loan is considered to be impaired, or nonperforming, when based on current information and events, it is unlikely the Company will be able to collect all amounts due according to the contractual terms of the original loan agreement. Consumer loans are placed on nonaccrual when they become 90 days past due and are charged-off in their entirety when deemed uncollectible, or when they become 120 days past due, whichever occurs first, at which time appropriate recovery efforts against both the borrower and the underlying collateral are initiated. For the recreation loan portfolio, the process to repossess the collateral is started at 60 days past due. If the collateral is not located and the account reaches 120 days delinquent, the account is charged-off. If the collateral is repossessed, a loss is recorded by writing the collateral down to its fair value less selling costs, and the collateral is sent to auction. When the collateral is sold, the net auction proceeds are applied to the account, and any remaining balance is written off. Proceeds collected on charged-off accounts are recorded as recoveries. Total loans 90 days or more past due were $4.7 million at March 31, 2023, or 0.24% of the total loan portfolio, compared to $8.9 million, or 0.47%, at December 31, 2022. Beginning in the first quarter of 2023, the Company began charging off recreation loans where borrowers have filed for bankruptcy. This change resulted in $2.5 million of loans being charged off in the three months ended March 31, 2023 and reduced the loans 90 days past due from December 31, 2022.

The Company may modify the contractual cash flow of loans in situations where borrowers are experiencing financial difficulties. The Company strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before they reach nonaccrual status. These modified terms may include interest rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize the economic loss to the Company and to avoid foreclosure or repossession of the collateral. For modifications where the Company forgives principal, the entire amount of such principal forgiveness is immediately charged off. Modified loans are considered impaired loans.

Loan collateral in process of foreclosure primarily includes medallion loans that have reached 120 days past due and have been charged-down to their net realizable value, in addition to consumer repossessed collateral in the process of being sold. For New York City medallion loans in the process of foreclosure, the Company continued to utilize a net value of $79,500 when assessing net realizable value for these medallion loans, despite fluctuating current transfer prices which may exceed that level from time to time. The "loan collateral in the process of foreclosure" designation reflects that the collection activities on these loans have transitioned from working with the borrower, to the liquidation of the collateral securing the loans.

The Company accounts for its sales of loans in accordance with FASB Accounting Standards Codification Topic 860, Transfers and Servicing, or FASB ASC 860, which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with FASB ASC 860, the Company had elected the fair value measurement method for its servicing assets and liabilities. The principal portion of loans serviced for others by the Company and its affiliates was $19.0 million and $19.5 million at March 31, 2023 and December 31, 2022. The Company has evaluated the servicing aspect of its business in accordance with FASB ASC 860 and determined that no material servicing asset or liability existed as of March 31, 2023 and December 31, 2022.

Allowance for Credit Losses

On January 1, 2023, the Company adopted Accounting Standards Update 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", or ASC 326, which replaced the incurred loss methodology that delayed recognition until it was probable a loss had been incurred with a lifetime expected loss methodology using "reasonable and supportable" expectations about the future, referred to as the current expected credit loss (“CECL”) methodology. For consumer loans, the Company uses historical delinquency and actual loss rates modified by quantitative adjustments based on macroeconomic factors over a twelve-month reasonable and supportable forecast period. For commercial loans, the Company assesses the historical impact that macroeconomic indicators have had on the loan portfolio, to determine an approximate allowance for credit loss. Unlike consumer loans, where loans may have similar performing characteristics, each commercial loan is unique. The Company evaluates each commercial loan for specific impairment with additional allowance for credit losses recognized as necessary. For medallion loans, the Company maintains specific reserves adjusting the carrying amount of loans down to net collateral value. The allowance is evaluated on a quarterly basis by management based on the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, prevailing economic

Page 11 of 51

conditions, and excess concentration risks. This evaluation is inherently subjective, as it requires estimates, including those based on changes in economic conditions, that are susceptible to significant revision as more information becomes available. Credit losses are deducted from the allowance, and subsequent recoveries are added back to the allowance.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after December 15, 2022 are presented under ASC 326. The transition to the CECL methodology on January 1, 2023 resulted in an increase of $13.7 million to the Company's allowance for credit losses on loans (“ACL”) and a negative net-of-tax cumulative-effect adjustment of $9.9 million to the beginning balance of retained earnings. The CECL methodology transition effects on the allowance for credit losses are shown in the following table:


(Dollars in thousands)	December 31, 2022 Pre-Topic 326 Adoption		Effect of ASC 326 Adoption (Transition Amounts)		January 1, 2023 Post-ASC 326 Adoption
Assets:
Loans:
Recreation	$	41,966	$	10,037	$	52,003
Home improvement		11,340		1,518		12,858
Commercial		1,049		2,157		3,206
Medallion		9,490		—		9,490
Strategic partnership		—		—		—
Allowance for credit losses on loans	$	63,845	$	13,712	$	77,557

Prior to January 1, 2023, the Company used historical delinquency and actual loss rates with a three-year look-back period for medallion loans and a one-year look-back period for recreation and home improvement loans and used historical loss experience and other projections for commercial loans. The allowance was evaluated on a quarterly basis by management based on the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. This evaluation was inherently subjective, as it required estimates that were susceptible to significant revision as more information became available.

Goodwill and Intangible Assets

The Company’s goodwill and intangible assets arose as a result of the excess of fair value over book value for several of the Company’s previously unconsolidated portfolio investment companies as of April 2, 2018. This fair value was brought forward under the Company’s new reporting, and was subject to a purchase price accounting allocation process conducted by an independent third-party expert to arrive at the current categories and amounts. Goodwill is not amortized, but is subject to quarterly review by management to determine whether additional impairment testing is needed, and such testing is performed at least on an annual basis. Intangible assets are amortized over their useful life of approximately 20 years. As of March 31, 2023 and December 31, 2022, the Company had goodwill of $150.8 million, all of which related to the Bank. As of March 31, 2023 and December 31, 2022, the Company had intangible assets of $21.7 million and $22.0 million. Amortization expense on the intangible assets for the three months ended March 31, 2023 and 2022 was $0.4. Management performed a step 0 analysis in assessing the goodwill and intangibles for impairment at December 31, 2022, concluding that there was no impairment of these assets.

The following table details the intangible assets as of the dates presented:


(Dollars in thousands)	March 31, 2023		December 31, 2022
Brand-related intellectual property	$	16,500	$	16,775
Home improvement contractor relationships		5,175		5,260
Total intangible assets	$	21,675	$	22,035

Fixed Assets

Fixed assets are carried at cost less accumulated depreciation and amortization, and are depreciated on a straight-line basis over their estimated useful lives of 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated economic useful life of the improvement. Depreciation and amortization expense was $0.1 million for the three months ended March 31, 2023 and 2022.

Deferred Costs

Deferred financing costs represent costs associated with obtaining the Company’s borrowing facilities, and are amortized on a straight-line basis over the lives of the related financing agreements and life of the respective pool. Amortization expense was $0.8 million for the three months ended March 31, 2023 and was $0.6 million for the three months ended March 31, 2022. In addition, the Company capitalizes certain costs for transactions in the process of completion (other than business combinations), including those for potential investments, and the sourcing of other financing alternatives. Upon completion or termination of the transaction, any accumulated amounts will be amortized against income over an appropriate period, or written off. The amount on the Company’s balance sheet for all of these purposes were $6.7 million and $7.0 million as of March 31, 2023 and December 31, 2022.

Page 12 of 51

Income Taxes

Income taxes are accounted for using the asset and liability approach in accordance with FASB ASC Topic 740, Income Taxes, or ASC 740. Deferred tax assets and liabilities reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are also recorded for net operating losses, capital losses and any tax credit carryforwards. A valuation allowance is provided against a deferred tax asset when it is more likely than not that some or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether a valuation allowance for deferred tax assets is needed. Items considered in determining the Company’s valuation allowance include expectations of future earnings of the appropriate tax character, recent historical financial results, tax planning strategies, the length of statutory carryforward periods and the expected timing of the reversal of temporary differences. The Company recognizes tax benefits of uncertain tax positions only when the position is more likely than not to be sustained assuming examination by tax authorities. The Company records income tax related interest and penalties, if applicable, within current income tax expense.

Earnings Per Share (EPS)

Basic earnings per share are computed by dividing net income resulting from operations available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if option contracts to issue common stock were exercised, or if restricted stock vests, and has been computed after considering the weighted average dilutive effect of the Company’s stock options and restricted stock. The Company uses the treasury stock method to calculate diluted EPS, which is a method of recognizing the use of proceeds that could be obtained upon exercise of options and warrants, including unvested compensation expense related to the shares, in computing diluted EPS. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. The table below shows the calculation of basic and diluted EPS.


	Three Months Ended March 31,
(Dollars in thousands, except share and per share data)	2023		2022
Net income available to common stockholders	$	15,361	$	9,841
Weighted average common shares outstanding applicable to basic EPS		22,342,911		24,770,134
Effect of dilutive stock options		149,117		89,507
Effect of restricted stock grants		483,429		223,925
Adjusted weighted average common shares outstanding applicable to diluted EPS		22,975,457		25,083,566
Basic net income per share	$	0.69	$	0.40
Diluted net income per share		0.67		0.39

Potentially dilutive common shares excluded from the above calculations aggregated 9,000 and 466,867 shares as of March 31, 2023 and 2022.

Stock Compensation

The Company follows FASB ASC Topic 718, or ASC 718, Compensation – Stock Compensation, for its equity incentive, stock option, and restricted stock plans, and accordingly, the Company recognizes the expense of these grants as required. Stock-based employee compensation costs pertaining to stock options are reflected in net income resulting from operations for any new grants using the fair values established by usage of the Black-Scholes option pricing model, expensed over the vesting period of the underlying option. Stock-based employee compensation costs pertaining to restricted stock are reflected in net income resulting from operations for any new grants using the grant date fair value of the shares granted, expensed over the vesting period of the underlying stock.

During the three months ended March 31, 2023 and 2022, the Company issued 304,749 and 383,925 restricted shares of stock-based compensation awards and no restricted stock units or shares of other stock-based compensation awards. The Company recognized $1.0 million, or $0.05 per share, for the three months ended March 31, 2023, and $0.6 million, or $0.02 per diluted common share, for the three months ended March 31, 2022, of non-cash stock-based compensation expense related to the grants. As of March 31, 2023, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock was $5.2 million, which is expected to be recognized over the next 12 quarters.

Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the bank regulators about components, risk weightings, and other factors.

Page 13 of 51

FDIC-insured banks, including the Bank, are subject to certain federal laws, which impose various legal limitations on the extent to which banks may finance or otherwise supply funds to certain of their affiliates. In particular, the Bank is subject to certain restrictions on any extensions of credit to, or other covered transactions with, such as certain purchases of assets, the Company or its affiliates.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below). Additionally, as conditions of granting the Bank’s application for federal deposit insurance, the FDIC ordered that the Tier 1 leverage capital to total assets ratio, as defined, be not less than 15%, a level which could preclude its ability to pay dividends to the Company, and that an adequate allowance for credit losses be maintained. As of March 31, 2023, the Bank’s Tier 1 leverage ratio was 16.4%. The Bank’s actual capital amounts and ratios, and the regulatory minimum ratios are presented in the following table.


	Regulatory
(Dollars in thousands)	Minimum			Well-Capitalized			March 31, 2023			December 31, 2022
Common equity tier 1 capital							$	254,883		$	242,049
Tier 1 capital								323,671			310,837
Total capital								348,536			334,913
Average assets								1,969,659			1,917,904
Risk-weighted assets								1,948,398			1,888,530
Leverage ratio (1)		4.0	%		5.0	%		16.4	%		16.2	%
Common equity tier 1 capital ratio (2)		7.0			6.5			13.1			12.8
Tier 1 capital ratio (3)		8.5			8.0			16.6			16.5
Total capital ratio (3)		10.5			10.0			17.9			17.7

(1)

Calculated by dividing Tier 1 capital by average assets.

(2)

Calculated by subtracting preferred stock or non-controlling interest from Tier 1 capital and dividing by risk-weighted assets.

(3)

Calculated by dividing Tier 1 or total capital by risk-weighted assets. With the adoption of CECL on January 1, 2023 the Bank elected to phase in the regulatory capital effects of the transition amount, which reduced the capital impact by $6.2 million and increased the Tier 1 capital ratio by 27 basis points.

In the table above, the minimum risk-based ratios as of March 31, 2023 and December 31, 2022 reflect the capital conservation buffer of 2.5%. The minimum regulatory requirements, inclusive of the capital conservation buffer, were the binding requirements for the risk-based requirements, and the “well-capitalized” requirements were the binding requirements for Tier 1 leverage capital as of both March 31, 2023 and December 31, 2022.

Recently Issued and Adopted Accounting Standards

On January 1, 2023, the Company adopted ASC 326. Please refer to Allowance for Credit Losses, within this footnote, for the impact of adopting this standard.

Reclassifications

Certain reclassifications have been made to prior year balances to conform with the current year presentation. These reclassifications have no effect on the previously reported results of operations.

(3) INVESTMENT SECURITIES

The following tables present details of fixed maturity securities available for sale as of March 31, 2023 and December 31, 2022:


March 31, 2023 (Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Mortgage-backed securities, principally obligations of U.S. federal agencies	$	42,773	$	1	$	(4,353	)	$	38,421
State and municipalities		10,862		46		(800	)		10,108
Total	$	53,635	$	47	$	(5,153	)	$	48,529

December 31, 2022 (Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Mortgage-backed securities, principally obligations of U.S. federal agencies	$	43,286	$	—	$	(4,933	)	$	38,353
State and municipalities		11,015		13		(889	)		10,139
Total	$	54,301	$	13	$	(5,822	)	$	48,492

Page 14 of 51

The amortized cost and estimated market value of investment securities at March 31, 2023 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


March 31, 2023 (Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	44	$	44
Due after one year through five years		9,554		9,209
Due after five years through ten years		9,186		8,193
Due after ten years		34,851		31,083
Total	$	53,635	$	48,529

The following tables show information pertaining to securities with gross unrealized losses at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position.


	Less than Twelve Months					Twelve Months and Over
March 31, 2023 (Dollars in thousands)	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
Mortgage-backed securities, principally obligations of U.S. federal agencies	$	(160	)	$	4,917	$	(4,194	)	$	33,354
State and municipalities		—			44		(799	)		8,014
Total	$	(160	)	$	4,961	$	(4,993	)	$	41,368

	Less than Twelve Months					Twelve Months and Over
December 31, 2022 (Dollars in thousands)	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
Mortgage-backed securities, principally obligations of U.S. federal agencies	$	(731	)	$	12,321	$	(4,202	)	$	26,023
State and municipalities		(286	)		4,628		(603	)		3,502
Total	$	(1,017	)	$	16,949	$	(4,805	)	$	29,525

As of March 31, 2023 and December 31, 2022, the Company had 56 and 57 securities with unrealized losses that have not been recognized in income. The investments are mortgage-backed securities and similar instruments with conservative characteristics, consistent with behaviors relative to the market rate movements. The decline in value is due to the rapid increase in market rates during 2022 and into 2023, not the underlying asset credit performance. As longer term market rates have settled from previous highs, the fair values have recovered and the Company expects this to continue as the bonds approach the maturity date. The Company regularly reviews investment securities for impairment resulting from credit loss using both qualitative and quantitative criteria, as necessary based on the composition of the portfolio at period end. Based on our assessment, no material impairments for credit losses were recognized during the period. We presently do not intend to sell our investment securities that are in an unrealized loss position and believe that it is not more likely than not that we will be required to sell these securities before recovery of our amortized cost.

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES

The following table shows the major classification of loans, inclusive of capitalized loan origination costs, as of March 31, 2023 and December 31, 2022.


	March 31, 2023						December 31, 2022
(Dollars in thousands)	Amount			As a Percent of Gross Loans			Amount			As a Percent of Gross Loans
Recreation	$	1,213,380			61	%	$	1,183,512			62	%
Home improvement		669,642			34			626,399			33
Commercial		95,329			5			92,899			5
Medallion		4,059		*				13,571			1
Strategic partnership		1,770		*				572		*
Total gross loans		1,984,180			100	%		1,916,953			100	%
Allowance for credit losses		(70,280	)					(63,845	)
Total net loans	$	1,913,900					$	1,853,108

(*) Less than 1%.

Page 15 of 51

The following tables show the activity of the gross loans for the three months ended March 31, 2023 and 2022.


Three Months Ended March 31, 2023 (Dollars in thousands)	Recreation			Home Improvement			Commercial			Medallion			Strategic Partnership			Total
Gross loans – December 31, 2022	$	1,183,512		$	626,399		$	92,899		$	13,571		$	572		$	1,916,953
Loan originations		101,681			94,981			3,000			623			27,006			227,291
Principal payments, sales, maturities, and recoveries		(56,217	)		(49,855	)		(834	)		(4,395	)		(25,808	)		(137,109	)
Charge-offs		(12,590	)		(1,914	)		—			(3,593	)		—			(18,097	)
Transfer to loan collateral in process of foreclosure, net		(4,357	)		—			—			(2,147	)		—			(6,504	)
Amortization of origination costs		(2,759	)		586			—			—			—			(2,173	)
FASB origination costs, net		4,110			(555	)		—			—			—			3,555
Paid-in-kind interest		—			—			264			—			—			264
Gross loans – March 31, 2023	$	1,213,380		$	669,642		$	95,329		$	4,059		$	1,770		$	1,984,180


Three Months Ended March 31, 2022 (Dollars in thousands)	Recreation			Home Improvement			Commercial			Medallion			Strategic Partnership			Total
Gross loans – December 31, 2021	$	961,320		$	436,772		$	76,696		$	14,046		$	90		$	1,488,924
Loan originations		114,406			89,820			4,400			92			5,009			213,727
Principal payments, sales, maturities, and recoveries		(65,116	)		(52,164	)		(1,817	)		(85	)		(4,873	)		(124,055	)
Charge-offs		(5,067	)		(1,060	)		(1,584	)		(75	)		—			(7,786	)
Transfer to loan collateral in process of foreclosure, net		(2,911	)		—			—			(129	)		—			(3,040	)
Amortization of origination costs		(2,439	)		320			—			—			—			(2,119	)
Amortization of loan premium		(60	)		(90	)		—			—			—			(150	)
FASB origination costs, net		3,958			(190	)		—			—			—			3,768
Paid-in-kind interest		—			—			172			—			—			172
Gross loans – March 31, 2022	$	1,004,091		$	473,408		$	77,867		$	13,849		$	226		$	1,569,441

The following table sets forth the activity in the allowance for credit losses for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Allowance for credit losses – beginning balance (1)	$	63,845		$	50,166
CECL transition amount upon ASU 2016-13 adoption		13,712			—
Charge-offs
Recreation		(12,590	)		(5,067	)
Home improvement		(1,914	)		(1,060	)
Commercial		—			(1,584	)
Medallion		(3,593	)		(75	)
Total charge-offs		(18,097	)		(7,786	)
Recoveries
Recreation		2,771			3,510
Home improvement		632			559
Commercial		10			34
Medallion		3,369			963
Total recoveries		6,782			5,066
Net recoveries (charge-offs) (2)		(11,315	)		(2,720	)
Provision (benefit) for credit losses		4,038			3,240
Allowance for credit losses – ending balance (3)	$	70,280		$	50,686

(1)

Represents allowance prior to the adoption of ASU 2016-13.

(2)

As of March 31, 2023, cumulative net charge-offs of loans and loan collateral in process of foreclosure in the medallion loan portfolio were $237.3 million, some of which may represent collection opportunities for the Company.

(3)

As of March 31, 2023 and March 31, 2022, there were no allowance for credit losses and net charge-offs related to the strategic partnership loans.

With the adoption of ASC 326, the Company has also adopted ASU 2022-02, Financial Instruments – Credit Losses, or Topic 326: Troubled Debt Restructurings and Vintage Disclosures. Under this standard, the Company is required to disclose current period gross write-offs, by year of origination, for financing receivables. The following table sets forth the gross charge-offs, as of March 31, 2023, by the year of origination:


(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Total
Recreation	$	—	$	3,608	$	3,070	$	1,671	$	1,554	$	2,687	$	12,590
Home improvement		—		904		628		143		131		108		1,914
Commercial		—		—		—		—		—		—		—
Medallion		—		—		—		—		—		3,593		3,593
Total	$	—	$	4,512	$	3,698	$	1,814	$	1,685	$	6,388	$	18,097

Page 16 of 51

The following tables set forth the allowance for credit losses by type as of March 31, 2023 and December 31, 2022.


March 31, 2023 (Dollars in thousands)	Amount		Percentage of Allowance			Allowance as a Percent of Loan Category			Allowance as a Percent of Nonaccrual
Recreation	$	49,938		71	%		4.12	%		277.53	%
Home improvement		14,656		21			2.19			81.45
Commercial		3,532		5			3.71			19.63
Medallion		2,154		3			53.07			11.97
Total	$	70,280		100	%		3.54	%		390.57	%


December 31, 2022 (Dollars in thousands)	Amount		Percentage of Allowance			Allowance as a Percent of Loan Category			Allowance as a Percent of Nonaccrual
Recreation	$	41,966		66	%		3.55	%		130.60	%
Home improvement		11,340		18			1.81			35.29
Commercial		1,049		1			1.13			3.26
Medallion		9,490		15			69.93			29.53
Total	$	63,845		100	%		3.33	%		198.69	%

The following table presents total nonaccrual loans and foregone interest. The fluctuation in nonaccrual interest foregone is due to past due loans and market conditions.


(Dollars in thousands)	March 31, 2023			December 31, 2022
Total nonaccrual loans	$	17,994		$	32,133
Interest foregone year to date		355			1,267
Amount of foregone interest applied to principal for the year		78			375
Interest foregone life-to-date		2,472			2,419
Amount of foregone interest applied to principal life-to-date		813			1,204
Percentage of nonaccrual loans to gross loan portfolio		0.9	%		1.7	%
Percentage of allowance for credit losses to nonaccrual loans		354.8	%		198.7	%

The following tables present the performance status of loans as of March 31, 2023 and December 31, 2022.


March 31, 2023 (Dollars in thousands)	Performing		Nonperforming		Total		Percentage of Nonperforming to Total
Recreation	$	1,208,591	$	4,789	$	1,213,380		0.39	%
Home improvement		669,203		439		669,642		0.07
Commercial		86,622		8,707		95,329		9.13
Medallion		—		4,059		4,059		100.00
Strategic partnership		1,770		—		1,770		—
Total	$	1,966,186	$	17,994	$	1,984,180		0.91	%

December 31, 2022 (Dollars in thousands)	Performing		Nonperforming		Total		Percentage of Nonperforming to Total
Recreation	$	1,173,846	$	9,666	$	1,183,512		0.82	%
Home improvement		625,820		579		626,399		0.09
Commercial		84,165		8,734		92,899		9.40
Medallion		—		13,571		13,571		100.00
Strategic partnership		572		—		572		—
Total	$	1,884,403	$	32,550	$	1,916,953		1.70	%

For those loans aged under 90 days past due, there is a possibility that their delinquency status will continue to deteriorate and they will subsequently be placed on nonaccrual status and be reserved for, and as such, deemed nonperforming.

Page 17 of 51

The following tables provide additional information on attributes of the nonperforming loan portfolio as of March 31, 2023 and December 31, 2022, all of which had an allowance recorded against the principal balance.


	March 31, 2023						December 31, 2022
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With an allowance recorded
Recreation	$	4,789	$	4,789	$	197	$	9,666	$	9,666	$	343
Home improvement		439		439		10		579		579		10
Commercial		8,707		8,801		1,528		8,734		8,823		963
Medallion		4,059		4,778		2,154		13,571		14,686		9,490
Total nonperforming loans with an allowance	$	17,994	$	18,807	$	3,889	$	32,550	$	33,754	$	10,806


	Three Months Ended March 31,
	2023				2022
(Dollars in thousands)	Average Investment Recorded		Interest Income Recognized		Average Investment Recorded		Interest Income Recognized
With an allowance recorded
Recreation	$	4,656	$	13	$	5,207	$	129
Home improvement		441		1		298		1
Commercial		5,652		—		16,368		—
Medallion		6,093		—		15,943		—
Total nonperforming loans with an allowance	$	16,842	$	14	$	37,816	$	130

The following tables show the aging of all loans as of March 31, 2023 and December 31, 2022.


March 31, 2023	Days Past Due												Recorded Investment 90 Days and
(Dollars in thousands)	30-59		60-89		90 +		Total		Current		Total (1)		Accruing
Recreation	$	26,576	$	7,859	$	4,211	$	38,646	$	1,135,968	$	1,174,614	$	—
Home improvement		3,073		936		441		4,450		667,639		672,089		—
Commercial		—		—		74		74		97,025		97,099		—
Medallion		—		385		—		385		3,674		4,059		—
Strategic partnership		—		—		—		—		1,770		1,770		—
Total	$	29,649	$	9,180	$	4,726	$	43,555	$	1,906,076	$	1,949,631	$	—

(1)

Excludes $36.3 million of capitalized loan origination costs.


December 31, 2022	Days Past Due												Recorded Investment 90 Days and
(Dollars in thousands)	30-59		60-89		90 +		Total		Current		Total (1)		Accruing
Recreation	$	31,781	$	11,877	$	7,365	$	51,023	$	1,095,072	$	1,146,095	$	—
Home improvement		3,266		1,256		579		5,101		623,776		628,877		—
Commercial		—		—		74		74		93,396		93,470		—
Medallion		142		393		885		1,420		12,151		13,571		—
Strategic partnership		—		—		—		—		572		572		—
Total	$	35,189	$	13,526	$	8,903	$	57,618	$	1,824,967	$	1,882,585	$	—

(1)

Excludes $34.9 million of capitalized loan origination costs.

The Company estimates that the weighted average loan-to-value ratio of the medallion loans was approximately 200% and 339% as of March 31, 2023 and December 31, 2022.

The following table shows the TDRs which the Company entered into during the three months ended March 31, 2022.


(Dollars in thousands)	Number of Loans		Pre- Modification Investment		Post- Modification Investment
Recreation loans		10		129		129
Medallion loans		2		252		252

During the twelve months ended March 31, 2022 there were no medallion loans modified as TDRs in default as of March 31, 2022, 24 recreation loans modified as TDRs were in default and had an investment value of $0.3 million as of March 31, 2022, and no commercial loans modified as TDRs were in default.

Page 18 of 51

The following tables show the activity of loan collateral in process of foreclosure, which relate only to the recreation and medallion loans, for the three months ended March 31, 2023 and 2022.


Three Months Ended March 31, 2023 (Dollars in thousands)	Recreation			Medallion			Total
Loan collateral in process of foreclosure – December 31, 2022	$	1,376		$	20,443		$	21,819
Transfer from loans, net		4,357			2,147			6,504
Sales		(2,195	)		(15	)		(2,210	)
Cash payments received		—			(3,317	)		(3,317	)
Collateral valuation adjustments		(2,077	)		(252	)		(2,329	)
Loan collateral in process of foreclosure – March 31, 2023	$	1,461		$	19,006		$	20,467


Three Months Ended March 31, 2022 (Dollars in thousands)	Recreation			Medallion			Total
Loan collateral in process of foreclosure – December 31, 2021	$	1,720		$	35,710		$	37,430
Transfer from loans, net		2,911			129			3,040
Sales		(2,252	)		(116	)		(2,368	)
Cash payments received		—			(2,872	)		(2,872	)
Collateral valuation adjustments		(1,010	)		(386	)		(1,396	)
Loan collateral in process of foreclosure – March 31, 2022	$	1,369		$	32,465		$	33,834

As of March 31, 2023, medallion loans in the process of foreclosure included 455 medallions in the New York City market, 261 medallions in the Chicago market, 53 medallions in the Newark market, and 39 medallions in other markets.

(5) FUNDS BORROWED

The following table presents outstanding balances of funds borrowed.


	Payments Due for the Twelve Months Ending March 31,
(Dollars in thousands)	2024		2025		2026		2027		2028		Thereafter		March 31, 2023(1)		December 31, 2022(1)		Interest Rate (2)
Deposits (3)	$	564,685	$	496,933	$	365,666	$	159,901	$	109,880	$	—	$	1,697,065	$	1,609,672		2.35	%
Privately placed notes		36,000		—		31,250		—		53,750		—		121,000		121,000		7.66
SBA debentures and borrowings		2,500		15,075		15,500		4,500		—		25,750		63,325		68,512		3.13
Preferred securities		—		—		—		—		—		33,000		33,000		33,000		7.11
Total	$	603,185	$	512,008	$	412,416	$	164,401	$	163,630	$	58,750	$	1,914,390	$	1,832,184		2.79	%

(1)

Excludes deferred financing costs of $6.7 million and $7.0 million as of March 31, 2023 and December 31, 2022.

(2)

Weighted average contractual rate as of March 31, 2023.

(3)

Balance excludes $2.0 million and $1.3 million of strategic partner reserve deposits as of March 31, 2023 and December 31, 2022.

(A) DEPOSITS

Substantially all deposits are raised through the use of investment brokerage firms that package time deposits in denominations of less than $250,000 qualifying for FDIC insurance into larger pools that are sold to the Bank. The rates paid on the deposits are highly competitive with market rates paid by other financial institutions. Additionally, a brokerage fee is paid, depending on the maturity of the deposits, which averages less than 0.15%. Interest on the deposits is accrued daily and paid monthly, quarterly, semiannually, or at maturity. In October 2020, the Bank began to originate time deposits through internet listing services. These deposits are from other financial institutions and, as of March 31, 2023 and December 31, 2022, the Bank had $10.6 million and $12.4 million in listing service deposit balances. The following table presents the maturity of the deposit pools, which excludes strategic partner reserve deposits, as of March 31, 2023.


(Dollars in thousands)	March 31, 2023
Three months or less	$	147,179
Over three months through six months		138,645
Over six months through one year		278,861
Over one year		1,132,380
Total deposits	$	1,697,065

Page 19 of 51

(B) PRIVATELY PLACED NOTES

In February 2021, the Company completed a private placement to certain institutional investors of $25.0 million aggregate principal amount of 7.25% unsecured senior notes due February 2026, with interest payable semiannually. In March 2021, an additional $3.3 million principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $3.0 million principal amount of such notes was issued to certain institutional investors. The Company used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.

In December 2020, the Company completed a private placement to certain institutional investors of $33.6 million aggregate principal amount of 7.50% unsecured senior notes due December 2027, with interest payable semiannually. In February and March 2021, an additional $8.5 million principal amount of such notes was issued to certain institutional investors. Subsequently in April 2021, an additional $11.7 million principal amount of such notes was issued to certain institutional investors. The Company used the net proceeds from the offering for general corporate purposes, including repayment of outstanding debt.

In March 2019, the Company completed a private placement to certain institutional investors of $30.0 million aggregate principal amount of 8.25% unsecured senior notes due 2024, with interest payable semiannually. The Company used the net proceeds from the offering for general corporate purposes, including repaying certain borrowings under its notes payable to banks at a discount which led to a gain of $4.1 million in 2019. In August 2019, an additional $6.0 million principal amount of such notes was issued to certain institutional investors.

Over the years, the SBA has approved commitments for MCI and FSVC, typically for a four-and-a-half year term and a 1% fee, which fee was paid. During 2017, the SBA restructured FSVC’s debentures with SBA totaling $33.5 million in principal into a new loan by the SBA to FSVC in the principal amount of $34.0 million, or the SBA Loan. In connection with the SBA Loan, FSVC executed a Note, or the SBA Note, with an effective date of March 1, 2017, in favor of SBA, in the principal amount of $34.0 million. The SBA Loan bears interest at a rate of 3.25% and all remaining unpaid principal and interest are due on April 30, 2024, the maturity date. As of March 31, 2023, there were $4.8 million commitments available, and $63.3 million was outstanding, including $2.6 million under the SBA Note.

On July 31, 2020, MCI accepted a commitment from the SBA for $25.0 million in debenture financing. As part of the acceptance, MCI paid the SBA a 1% commitment fee. The commitment expires September 24, 2024. As of March 31, 2023, $20.2 million of the commitment had been drawn and $4.8 million remain available.

(D) PREFERRED SECURITIES

In June 2007, the Company issued and sold $36.1 million aggregate principal amount of unsecured junior subordinated notes to Fin Trust which, in turn, sold $35.0 million of preferred securities to Merrill Lynch International and issued 1,083 shares of common stock to the Company. The notes bear a variable rate of interest of 90-day LIBOR (5.19% at March 31, 2023) plus 2.13%. With the cessation of LIBOR in June 2023, interest will be calculated using the Secured Overnight Financing Rate (SOFR) adjusted by a relevant spread adjustment of approximately 43 basis points, plus 2.13%. The notes mature in September 2037 and are prepayable at par. Interest is payable quarterly in arrears. The terms of the preferred securities and the notes are substantially identical. In December 2007, $2.0 million of the preferred securities were repurchased from a third-party investor. As of March 31, 2023, $33.0 million was outstanding on the preferred securities.

(E) COVENANT COMPLIANCE

From time to time the Company may enter into debt agreements which may contain restrictions that require the Company and its subsidiaries to maintain certain financial ratios and minimum net worth. As of March 31, 2023, the Company did not have any borrowing agreements that contained any such restrictions.

Page 20 of 51

(6) LEASES

The Company has leased premises that expire at various dates through November 30, 2030 subject to various operating leases. The Company has implemented ASC Topic 842 under a modified retrospective approach in which no adjustments have been made to the prior year balances.

The following table presents the operating lease costs and additional information for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Operating lease costs	$	597		$	590
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		623			645
Right-of-use asset obtained in exchange for lease liability		(56	)		(45	)

The following table presents the breakout of the operating leases as of March 31, 2023 and December 31, 2022.


(Dollars in thousands)	March 31, 2023			December 31, 2022
Operating lease right-of-use assets	$	9,511		$	9,723
Other current liabilities		2,214			2,239
Operating lease liabilities		8,168			8,408
Total operating lease liabilities		10,382			10,647
Weighted average remaining lease term	5.3 years			5.5 years
Weighted average discount rate		5.66	%		5.66	%

At March 31, 2023, maturities of the lease liabilities were as follows:


(Dollars in thousands)
Remainder of 2023	$	1,876
2024		2,508
2025		2,492
2026		2,440
2027		1,213
Thereafter		1,290
Total lease payments		11,819
Less imputed interest		1,437
Total operating lease liabilities	$	10,382

(7) INCOME TAXES

The Company is subject to federal and applicable state corporate income taxes on its taxable ordinary income and capital gains. As a corporation taxed under Subchapter C of the Internal Revenue Code, the Company is able, and intends, to file a consolidated federal income tax return with corporate subsidiaries, in which it holds 80% or more of the outstanding equity interest measured by both vote and fair value.

The following table sets forth the significant components of the Company's deferred and other tax assets and liabilities as of March 31, 2023 and December 31, 2022.


(Dollars in thousands)	March 31, 2023			December 31, 2022
Goodwill and other intangibles	$	(43,306	)	$	(43,397	)
Provision for credit losses		11,445			9,945
Net operating loss carryforwards (1)		3,730			3,730
Accrued expenses, compensation, and other assets		3,041			3,819
Unrealized gains on other investments		1,180			1,445
Total deferred tax liability		(23,910	)		(24,458	)
Valuation allowance		(2,295	)		(2,295	)
Deferred tax liability, net	$	(26,205	)	$	(26,753	)

(1)

As of March 31, 2023, the Company had an estimated $11.1 million of net operating loss carryforwards, $1.7 million of which expires at various dates between December 31, 2026 and December 31, 2035, which had a net carrying value of $1.4 million as of March 31, 2023.

Page 21 of 51

The following table shows the components of the Company's tax provision for the three months ended March 31, 2023 and 2022 as follows:


	Three Months Ended March 31,
(Dollars in thousands)	2023		2022
Current
Federal	$	2,583	$	504
State		789		322
Deferred
Federal		2,246		3,220
State		764		785
Net provision for income taxes	$	6,382	$	4,831

The following table presents a reconciliation of statutory federal income tax provision to consolidated actual income tax provision reported for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Statutory Federal income tax provision at 21%	$	4,884		$	3,399
State and local income taxes, net of federal income tax		955			665
Non-deductible expenses		1,058			713
Other		(515	)		54
Total income tax provision	$	6,382		$	4,831

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible pursuant to ASC 740. The Company considers the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company’s evaluation of the realizability of deferred tax assets must consider both positive and negative evidence. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. Based upon these considerations, the Company determined the necessary valuation allowance as of March 31, 2023.

The Company has filed tax returns in many states. Federal, New York State, New York City, and Utah state tax filings of the Company for the tax years 2019 through the present are the more significant filings that are open for examination.

(8) STOCK OPTIONS AND RESTRICTED STOCK

The Company’s Board of Directors approved the 2018 Equity Incentive Plan, or the 2018 Plan, which was approved by the Company’s stockholders on June 15, 2018. The terms of 2018 Plan provide for grants of a variety of different type of stock awards to the Company’s employees and non-employee directors, including options, restricted stock, restricted stock units, and stock appreciation rights, etc. On April 22, 2020, the Company’s Board of Directors approved an amendment to the 2018 Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder, which was approved by the Company’s stockholders on June 19, 2020, and subsequently on April 26, 2022, the Company’s Board of Directors approved an additional amendment to the 2018 Plan to further increase the number of shares of the Company’s common stock authorized for issuance thereunder, which was approved by the Company’s stockholders on June 14, 2022. A total of 5,710,968 shares of the Company’s common stock are issuable under the 2018 Plan, and 3,014,586 remained issuable as of March 31, 2023. Awards under the 2018 Plan are subject to certain limitations as set forth in the 2018 Plan, which will terminate when all shares of common stock authorized for delivery have been delivered and the forfeiture restrictions on all awards have lapsed, or by action of the Board of Directors pursuant to the 2018 Plan, whichever occurs first.

The Company had a stock option plan, or the 2006 Stock Option Plan, available to grant both incentive and nonqualified stock options to employees. The 2006 Stock Option Plan, which was approved by the Board of Directors on February 15, 2006 and shareholders on June 16, 2006, provided for the issuance of a maximum of 800,000 shares of common stock of the Company. No additional shares are available for issuance under the 2006 Stock Option Plan. The 2006 Stock Option Plan was administered by the Compensation Committee of the Board of Directors. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. The term and vesting periods of the options were determined by the Compensation Committee, provided that the maximum term of an option could not exceed a period of ten years.

Page 22 of 51

The Company’s Board of Directors approved the 2015 Non-Employee Director Stock Option Plan, or the 2015 Director Plan, on March 12, 2015, which was approved by the Company’s shareholders on June 5, 2015, and on which exemptive relief to implement the 2015 Director Plan was received from the SEC on February 29, 2016. A total of 300,000 shares of the Company’s common stock were issuable under the 2015 Director Plan, and 258,334 remained issuable as of June 15, 2018. Effective June 15, 2018, the 2018 Plan was approved, and these remaining shares were rolled into the 2018 Plan. Under the 2015 Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the 2015 Director Plan, the Company granted options to purchase 12,000 shares of the Company’s common stock to a non-employee director upon election to the Board of Directors, with an adjustment for directors who were elected to serve less than a full term. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. Options granted under the 2015 Director Plan are exercisable annually, as defined in the 2015 Director Plan. The term of the options could not exceed ten years.

The Company’s Board of Directors approved the First Amended and Restated 2006 Director Plan, or the Amended Director Plan, on April 16, 2009, which was approved by the Company’s shareholders on June 5, 2009, and on which exemptive relief to implement the Amended Director Plan was received from the SEC on July 17, 2012. A total of 200,000 shares of the Company’s common stock were issuable under the Amended Director Plan. No additional shares are available for issuance under the Amended Director Plan. Under the Amended Director Plan, unless otherwise determined by a committee of the Board of Directors comprised of directors who are not eligible for grants under the Amended Director Plan, the Company would grant options to purchase 9,000 shares of the Company’s common stock to an Eligible Director upon election to the Board of Directors, with an adjustment for directors who were elected to serve less than a full term. The option price per share could not be less than the current market value of the Company’s common stock on the date the option was granted. Options granted under the Amended Director Plan are exercisable annually, as defined in the Amended Director Plan. The term of the options could not exceed ten years.

Additional shares are only available for future issuance under the 2018 Plan. At March 31, 2023, 992,072 options on the Company’s common stock were outstanding under the Company’s plans, of which 729,812 options were exercisable. Additionally, there were 906,204 unvested restricted shares, 116,142 unvested restricted stock units, and 62,277 vested restricted stock units under the 2018 Plan.

The fair value of each restricted stock grant is determined on the date of grant by the closing market price of the Company’s common stock on the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted during the three months ended March 31, 2023 and 2022. The following assumption categories are used to determine the value of any option grants.

The following table presents the activity for the stock option programs for the 2023 first quarter and the 2022 full year.


	Number of Options				Exercise Price Per Share		Weighted Average Exercise Price
Outstanding at December 31, 2021		1,111,687		$	2.14-12.55		$	6.41
Granted		—				—		—
Cancelled		(26,093	)		4.89 - 12.55			7.08
Exercised (1)		(23,745	)		4.89 - 7.25			6.51
Outstanding at December 31, 2022 (2)		1,061,849		$	2.14 - 9.38		$	6.51
Granted		—				—		—
Cancelled		(25,194	)		4.89 - 9.38			6.97
Exercised (1)		(44,583	)		4.89 - 7.25			6.55
Outstanding at March 31, 2023 (2)		992,072		$	2.14 - 9.38		$	6.53
Options exercisable at:
December 31, 2022		548,426			2.14 - 9.38		$	6.51
March 31, 2023		729,812		$	2.14 - 9.38		$	6.50

(1)

The aggregate intrinsic value of exercised options, which represents the difference between the price of the Company’s common stock at the exercise date and the related exercise price of the underlying options, was $0.1 million and less than $0.1 million for the three months ended March 31, 2023 and 2022.

(2)

The aggregate intrinsic value of outstanding options, which represents the difference between the price of the Company’s common stock at March 31, 2023 and the related exercise price of the underlying options, was $1.2 million for outstanding options and $0.9 million for exercisable options as of March 31, 2023. The remaining contractual life was 6.9 years for outstanding options and 6.6 years for exercisable options at March 31, 2023.

Page 23 of 51

The following table presents the activity for the restricted stock programs for the 2023 first quarter and the 2022 full year.


	Number of Shares				Grant Price Per Share		Weighted Average Grant Price
Outstanding at December 31, 2021 (2)		493,326		$	4.89 - 7.25		$	6.87
Granted		522,475			6.86 -7.68			7.46
Cancelled		(29,373	)		4.89 - 8.40			7.32
Vested (1)		(129,140	)		4.89 - 7.25			6.53
Outstanding at December 31, 2022		857,288		$	4.89 - 7.25		$	7.27
Granted		304,749				8.08		8.08
Cancelled		(9,843	)		4.89 - 8.40			7.18
Vested (1)		(245,990	)		4.89 - 7.68			7.12
Outstanding at March 31, 2023 (2)		906,204		$	4.89 - 8.40		$	7.58

(1)

The aggregate fair value of the restricted stock vested was $2.1 million for the three months ended March 31, 2023 and was $1.0 million for the year ended December 31, 2022.

(2)

The aggregate fair value of the restricted stock was $7.0 million as of March 31, 2023. The remaining vesting period was 2.9 years at March 31, 2023.

During the three months ended March 31, 2023, the Company did not grant any restricted stock units (RSUs) and during the year ended December 31, 2022, granted 129,638 RSUs with a vesting date of June 14, 2023 with a grant price of $6.75. For the RSUs granted in 2022, unitholders had the option of deferring settlement until a future date if the recipient makes a formal election under the guidelines of IRC Section 409A. As of March 31, 2023, there were 178,419 RSUs outstanding, including 62,277 of which had previously vested.

The following table presents the activity for the unvested options outstanding under the plans for the 2023 first quarter.


	Number of Options				Exercise Price Per Share		Weighted Average Exercise Price
Outstanding at December 31, 2022		513,423		$	4.89 - 7.25		$	6.52
Granted		—				—		—
Cancelled		(2,951	)		4.89 - 7.25			5.53
Vested		(248,212	)		4.89 - 7.25			6.55
Outstanding at March 31, 2023		262,260		$	4.89 - 7.25		$	6.49

The intrinsic value of the options vested was $0.4 million for the three months ended March 31, 2023.

(9) SEGMENT REPORTING

The Company has five business segments, which include four lending and one non-operating segment, which are reflective of how Company management makes decisions about its business and operations.

The four lending segments reflect the main types of lending performed at the Company, which are recreation, home improvement, commercial, and medallion. The recreation and home improvement lending segments are operated by the Bank and loans are made to borrowers residing nationwide. The highest concentrations of recreation loans are in Texas and Florida at 15% and 10% of loans outstanding and with no other states over 10% as of March 31, 2023. The recreation lending segment is a consumer finance business that works with third-party dealers and financial service providers for the purpose of financing RVs, boats, and other consumer recreational equipment, of which RVs, boats, and trailers make up 58%, 19%, and 13% of the segment portfolio, with no other product lines exceeding 10%, as of March 31, 2023. The home improvement lending segment works with contractors and financial service providers to finance residential home improvement with the largest product lines being roofs, swimming pools, and windows at 40%, 21%, and 13% of total home improvement loans outstanding, and with no other product lines exceeding 10% as of March 31, 2023. The highest concentrations of home improvement loans are in Texas and Florida at 10% and 10% of loans outstanding and with no other states over 9% as of March 31, 2023. The commercial lending segment focuses on enterprise-wide industries, including manufacturing services, and various other industries, in which 42% of these loans are made in the Midwest as of March 31, 2023. The medallion lending segment arose in connection with the financing of taxi medallions, taxis, and related assets, primarily all of which are located in the New York City metropolitan area as of March 31, 2023.

The Company's corporate and other investments segment is a non-operating segment that includes items not allocated to the Company's operating segments such as investment securities, equity investments, intercompany eliminations, and other corporate elements.

As part of segment reporting, capital ratios for all operating segments have been normalized as a percentage of consolidated total equity divided by total assets, with the net adjustment applied to corporate and other investments. In addition, the commercial segment primarily represents the mezzanine lending business, with certain legacy commercial loans (immaterial to total) allocated to corporate and other investments.

Page 24 of 51

The following table presents segment data as of and for the three months ended March 31, 2023.


Three Months Ended March 31, 2023	Consumer Lending
(Dollars in thousands)	Recreation			Home Improvement			Commercial Lending			Medallion Lending			Corporate and Other Investments			Consolidated
Total interest income	$	37,899		$	13,649		$	2,701		$	310		$	1,284		$	55,843
Total interest expense		5,904			3,279			809			67			2,181			12,240
Net interest income (loss)		31,995			10,370			1,892			243			(897	)		43,603
Provision (benefit) for credit losses		7,751			3,081			327			(7,084	)		(37	)		4,038
Net interest income (loss) after loss provision		24,244			7,289			1,565			7,327			(860	)		39,565
Other expense, net		(7,803	)		(3,993	)		(149	)		(408	)		(3,957	)		(16,310	)
Net income (loss) before taxes		16,441			3,296			1,416			6,919			(4,817	)		23,255
Income tax (provision) benefit		(4,513	)		(905	)		(389	)		(1,899	)		1,324			(6,382	)
Net income (loss) after taxes	$	11,928		$	2,391		$	1,027		$	5,020		$	(3,493	)	$	16,873
Income attributable to the non-controlling interest																	1,512
Total net income attributable to Medallion Financial Corp.																$	15,361
Balance Sheet Data
Total loans	$	1,213,380		$	669,642		$	95,329		$	4,059		$	1,770		$	1,984,180
Total assets		1,179,965			660,846			101,392			20,335			389,132			2,351,670
Total funds borrowed		960,305			537,824			82,517			16,549			316,694			1,913,889
Selected Financial Ratios
Return on average assets		4.14	%		1.52	%		4.11	%		90.52	%		(3.79	)%		2.99	%
Return on average equity		25.63			9.37			25.39			558.90			(23.42	)		18.50
Return on average stockholders' equity	*			*			*			*			*				20.72
Interest yield		12.87			8.54			11.53			11.78		N/A				10.78
Net interest margin, gross		10.86			6.49			8.08			9.23		N/A				8.42
Net interest margin, net of allowance		11.33			6.62			8.32			28.89		N/A				8.71
Reserve coverage		4.12			2.19			3.71			53.07		N/A				3.54
Delinquency status (1)		0.36			0.07			0.08			—		N/A				0.24
Charge-off ratio (2)		3.48			0.82			(0.16	)		29.84		N/A				2.35

(1)

Loans 90 days or more past due.

(2)

Negative balances indicate net recoveries for the period.

(*) Line item is not applicable to segments.

The following table presents segment data as of and for the three months ended March 31, 2022.


Three Months Ended March 31, 2022	Consumer Lending
(Dollars in thousands)	Recreation			Home Improvement			Commercial Lending			Medallion Lending			Corporate and Other Investments			Consolidated
Total interest income	$	31,135		$	9,700		$	1,930		$	146		$	392		$	43,303
Total interest expense		3,601			1,341			722			153			1,558			7,375
Net interest income (loss)		27,534			8,359			1,208			(7	)		(1,166	)		35,928
Provision (benefit) for credit losses		1,680			1,204			1,255			(869	)		(30	)		3,240
Net interest income (loss) after loss provision		25,854			7,155			(47	)		862			(1,136	)		32,688
Other expense, net		(6,820	)		(2,896	)		(1,330	)		(806	)		(4,652	)		(16,504	)
Net income (loss) before taxes		19,034			4,259			(1,377	)		56			(5,788	)		16,184
Income tax (provision) benefit		(5,681	)		(1,271	)		411			(17	)		1,727			(4,831	)
Net income (loss) after taxes	$	13,353		$	2,988		$	(966	)	$	39		$	(4,061	)	$	11,353
Income attributable to the non-controlling interest																	1,512
Total net income attributable to Medallion Financial Corp.																$	9,841
Balance Sheet Data
Total loans	$	1,004,091		$	473,408		$	77,867		$	13,849		$	226		$	1,569,441
Total assets		984,535			469,886			86,461			37,752			387,991			1,966,625
Total funds borrowed		780,621			372,565			68,553			29,933			307,632			1,559,304
Selected Financial Ratios
Return on average assets		5.62	%		2.66	%		(4.58	)%		0.25	%		(4.80	)%		2.41	%
Return on average equity		29.27			13.84			(21.51	)		1.30			(28.31	)		12.77
Return on average stockholders' equity	*			*			*			*			*				13.70
Interest yield		12.91			8.66			9.99			4.26		N/A				10.74
Net interest margin, gross		11.41			7.46			6.26			(0.20	)	N/A				8.91
Net interest margin, net of allowance		11.80			7.59			6.34			(0.60	)	N/A				9.20
Reserve coverage		3.24			1.70			1.06			66.73		N/A				3.23
Delinquency status (1)		0.39			0.06			0.09			—		N/A				0.27
Charge-off ratio (2)		0.67			0.45			8.13			(76.14	)	N/A				0.72

(1)

Loans 90 days or more past due.

(2)

Negative balances indicate net recoveries for the period.

(*) Line item is not applicable to segments.

Page 25 of 51

(10) COMMITMENTS AND CONTINGENCIES

(A) EMPLOYMENT AGREEMENTS

The Company has employment agreements with certain key officers, including Mr. Alvin Murstein and Mr. Andrew Murstein, for either a one-, two-, three- or five-year term. Annually, the contracts with a five-year term will renew for new five-year terms unless prior to the end of the first year of each five-year term, either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current five-year term. Typically, the contracts with a one- or two-year term will renew for new one- or two-year terms unless prior to the term either the Company or the executive provides notice to the other party of its intention not to extend the employment period beyond the current one or two-year term (as applicable); however, there is currently one agreement that renews after two years for additional one-year terms and one agreement with a three-year term that does not have a renewal period. In the event of a change in control, as defined, during the employment period, the agreements provide for severance compensation to the executive in an amount equal to the balance of the salary, bonus, and value of fringe benefits which the executive would be entitled to receive for the remainder of the employment period.

On April 25, 2023, Mr. Alvin Murstein, the Company’s Chairman of the Board and Chief Executive Officer, notified the Company of his election not to renew the term of his employment pursuant to the First Amended and Restated Employment Agreement, dated May 29, 1998, as amended, between him and the Company. Accordingly, the term of his employment as Chief Executive Officer of the Company will expire on May 28, 2027, unless sooner terminated in accordance with the provisions thereof.

In addition, on April 27, 2023, Mr. Andrew Murstein, the Company’s President and Chief Operating Officer, entered into an amendment to the First Amended and Restated Employment Agreement, dated May 29, 1998, as amended, between him and the Company. Pursuant to such amendment, effective as of May 29, 2023, (i) the expiration of his then current term of employment shall be revised to end on May 28, 2027, and (ii) on May 29, 2024, and on each May 29 thereafter, such term of employment shall automatically renew each year for a three-year term unless, prior to the end of the first year of the then-applicable three-year term, either Mr. Murstein or the Company provides at least 30 days’ advance notice to the other party of its intention not to renew the then term of employment for a new three-year term, in each case unless such employment term is otherwise terminated pursuant to the terms thereof.

As of March 31, 2023, employment agreements expire at various dates through 2027, with future minimum payments under these agreements of approximately $12.0 million.

(B) OTHER COMMITMENTS

As of March 31, 2023, the Company had no other commitments. Generally, any commitments would be on the same terms as loans to or investments in existing borrowers or investees, and generally have fixed expiration dates. Since some commitments would be expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

On December 29, 2021, the SEC filed a civil complaint in the U.S. District Court for the Southern District of New York against the Company and its President and Chief Operating Officer alleging certain violations of the antifraud, books and records, internal controls and anti-touting provisions of the federal securities laws. The litigation relates to certain issues that occurred during the period 2015 to 2017, including (i) the Company’s retention of third parties in 2015 and 2016 concerning posting information about the Company on certain financial websites and (ii) the Company’s financial reporting and disclosures concerning certain assets, including Medallion Bank, in 2016 and 2017, a period when the Company had previously reported as a business development company (BDC) under the Investment Company Act of 1940. Since April 2018, the Company does not report as a BDC, and has not worked with such third parties since 2016. The Company does not expect to change previously reported financial results. The Company filed a motion to dismiss the complaint on March 22, 2022, the SEC filed an amended complaint on April 26, 2022 and the Company filed a motion to dismiss the amended complaint on August 5, 2022.

The SEC is seeking injunctive relief, disgorgement plus pre-judgment interest and civil penalties in amounts unspecified, as well as an officer and director bar against the Company’s President and Chief Operating Officer. The Company and its President and Chief Operating Officer intend to defend themselves vigorously and believe that the SEC will not prevail on its claims. Nevertheless, depending on the outcome of the litigation, the Company could incur a loss and other penalties that could be material to the Company, its results of operations and/or financial condition, as well as a bar against its President and Chief Operating Officer. In addition, the Company has and expects to further incur significant legal fees and expenses in defending such charges by the SEC and the Company may be subject to shareholder litigation relating to these SEC matters.

Page 26 of 51

(D) OTHER LITIGATION AND REGULATORY MATTERS

The Company and its subsidiaries are subject to inquiries from certain regulators and are currently involved in various legal proceedings incident to the normal course of business, including collection matters with respect to certain loans. The Company intends to vigorously defend any outstanding claims and pursue its legal rights. In the opinion of management, based on the advice of legal counsel, except for the pending SEC litigation, as described above, there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision could result in a material adverse impact on the financial condition or results of operations of the Company.

(11) RELATED PARTY TRANSACTIONS

Certain directors, officers, and stockholders of the Company are also directors and officers of its main consolidated subsidiaries, MFC, MCI, FSVC, and the Bank, as well as other subsidiaries. Officer salaries are set by the Board of Directors of the Company.

Jeffrey Rudnick, the son of one of the Company’s directors, serves as the Company’s Senior Vice President at a salary of $250,950 per year, an increase from $239,000 per year in 2022. Mr. Rudnick received an annual cash bonus of $85,000 and $75,000 as well as an equity bonus in the amount of $50,000 and $45,019, during the three months ended March 31, 2023 and 2022.

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 825, “Financial Instruments,” requires disclosure of fair value information about certain financial instruments, whether assets, liabilities, or off-balance-sheet commitments, if practicable. The following methods and assumptions were used to estimate the fair value of each class of financial instrument. Fair value estimates that were derived from broker quotes cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

(a) Cash and cash equivalents – Book value equals fair value.

(b) Equity securities – The Company’s equity securities are recorded at cost less impairment plus or minus observable price changes.

(d) Loans receivable – The Company’s loans are recorded at book value which approximates fair value.

(e) Floating rate borrowings – Due to the short-term nature of these instruments, the carrying amount approximates fair value.

(f) Commitments to extend credit – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, considering the remaining terms of the agreements and present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also includes a consideration of the difference between the current levels of interest rates and the committed rates. At March 31, 2023 and December 31, 2022, the estimated fair value of these off-balance-sheet instruments was not material.

(g) Fixed rate borrowings – The fair value of the debentures payable to the SBA is estimated based on current market interest rates for similar debt.


	March 31, 2023				December 31, 2022
(Dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash, cash equivalents, and federal funds sold (1)	$	132,382	$	132,382	$	105,598	$	105,598
Equity investments		10,653		10,653		10,293		10,293
Investment securities		48,529		48,529		48,492		48,492
Loans receivable		1,913,900		1,913,900		1,853,108		1,853,108
Accrued interest receivable (2)		12,235		12,235		12,613		12,613
Equity securities (3)		1,752		1,752		1,724		1,724
Financial liabilities
Funds borrowed		1,916,390		1,916,390		1,833,484		1,833,484
Accrued interest payable (2)		4,039		4,039		4,790		4,790

(1)

Categorized as level 1 within the fair value hierarchy, excluding $1.3 million in interest bearing deposits categorized as level 2 as of March 31, 2023 and $1.3 million as of December 31, 2022. See Note 13.

(2)

Categorized as level 3 within the fair value hierarchy. See Note 13.

(3)

Included within other assets on the balance sheet.

Page 27 of 51

(13) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.

In accordance with FASB ASC 820, the Company has categorized its assets and liabilities measured at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The Company's assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.

As required by FASB ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a level 3 fair value measurement may include inputs that are observable (levels 1 and 2) and unobservable (level 3). Therefore, gains and losses for such assets and liabilities categorized within the level 3 table below may include changes in fair value that are attributable to both observable inputs (levels 1 and 2) and unobservable inputs (level 3).

Assets and liabilities measured at fair value, recorded on the consolidated balance sheets, are categorized based on the inputs to the valuation techniques as follows:

Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most U.S. Government and agency securities, and certain other sovereign government obligations).

Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);

Quoted price for identical or similar assets or liabilities in non-active markets (for example, corporate and municipal bonds, which trade infrequently);

Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, and certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur.

Equity investments were recorded at cost less impairment plus or minus observable price changes. The Company measures equity investments at fair value on a non-recurring basis.

Page 28 of 51

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022.


March 31, 2023 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Interest-bearing deposits	$	—	$	1,250	$	—	$	1,250
Available for sale investment securities		—		48,529		—		48,529
Equity securities		1,752		—		—		1,752
Total (1)	$	1,752	$	49,779	$	—	$	51,531

(1)

Total unrealized gains of $0.5 million, net of tax, was included in other comprehensive income for the three months ended March 31, 2023 related to these assets.


December 31, 2022 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Interest-bearing deposits	$	—	$	1,250	$	—	$	1,250
Available for sale investment securities		—		48,492		—		48,492
Equity securities		1,724		—		—		1,724
Total (1)	$	1,724	$	49,742	$	—	$	51,466

(1)

Total unrealized losses of $4.4 million, net of tax, was included in other comprehensive loss for the year ended December 31, 2022 related to these assets.

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2023 and December 31, 2022.


March 31, 2023 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Equity investments	$	—	$	—	$	10,653	$	10,653
Impaired loans		—		—		17,994		17,994
Loan collateral in process of foreclosure		—		—		20,467		20,467
Total	$	—	$	—	$	49,114	$	49,114


December 31, 2022 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Equity investments	$	—	$	—	$	10,293	$	10,293
Impaired loans		—		—		32,133		32,133
Loan collateral in process of foreclosure		—		—		21,819		21,819
Total	$	—	$	—	$	64,245	$	64,245

Significant Unobservable Inputs

ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as level 3 within the fair value hierarchy. The tables below are not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.

Page 29 of 51

The valuation techniques and significant unobservable inputs used in non-recurring level 3 fair value measurements of assets and liabilities as of March 31, 2023 and December 31, 2022.


(Dollars in thousands except per share amounts)	Fair Value at March 31, 2023		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Equity investments	$	10,380	Investee financial analysis	Financial condition and operating performance of the borrower (1)	N/A
				Collateral support	N/A
		273	Precedent market transaction	Offering price	$8.73 / share
Impaired loans		17,994	Market approach	Historical and actual loss experience	0.00% - 7.38%
				Transfer prices (2)	$0.0 - 79.5
				Collateral value	N/A
Loan collateral in process of foreclosure		20,467	Market approach	Transfer prices (2)	$0.0 - 79.5
				Collateral value (3)	$1.6 - $54.1

(1)

Includes projections based on revenue, EBITDA, leverage, and liquidation amounts. These assumptions are based on a variety of factors, including economic conditions, industry, and market developments, market valuations of comparable companies, and company-specific developments, including exit strategies and realization opportunities.

(2)

Represents amount net of liquidation costs.

(3)

Relates to the recreation portfolio.


(Dollars in thousands except per share amounts)	Fair Value at December 31, 2022		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Equity investments	$	10,020	Investee financial analysis	Financial condition and operating performance of the borrower (1)	N/A
				Collateral support	N/A
		273	Precedent market transaction	Offering price	$8.73 / share
Impaired loans		32,133	Market approach	Historical and actual loss experience	0.00% - 6.55%
					60% of balance
				Transfer prices (2)	$0.0 - 79.5
				Collateral value	N/A
Loan collateral in process of foreclosure		21,819	Market approach	Transfer prices (2)	$0.0 - 79.5
				Collateral value (3)	$2.5 - 54.1

(1)

(2)

Represents amount net of liquidation costs.

(3)

Relates to the recreation portfolio.

(14) MEDALLION BANK PREFERRED STOCK (Non-controlling interest)

On December 17, 2019, the Bank closed an initial public offering of 1,840,000 shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, with a $46.0 million aggregate liquidation amount, yielding net proceeds of $42.5 million, which were recorded in the Bank’s shareholders’ equity. Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.

On July 21, 2011, the Bank issued, and the U.S. Treasury purchased, 26,303 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series E for an aggregate purchase price of $26.3 million under the Small Business Lending Fund Program, or SBLF, with a liquidation amount of $1,000 per share. The SBLF is a voluntary program intended to encourage small business lending by providing capital to qualified smaller banks at favorable rates. The Bank pays a dividend rate of 9% on the Series E.

(15) SUBSEQUENT EVENTS

The Company has evaluated the effects of events that have occurred subsequent to March 31, 2023 through the date of financial statement issuance for potential recognition or disclosure. As of such date, there was one subsequent event that required disclosure.

On April 12, 2023, the Company and the Bank were notified by a correspondent bank that a $40.0 million unsecured line of credit had been terminated. The correspondent bank took this action with all of its correspondent relationships nationally and did not single out the Company or the Bank. In response, the Bank transferred $23.8 million in investment securities from the correspondent bank and other correspondent banks to the Federal Reserve for safekeeping, pledging them as collateral for discount window access. The current advance rate on the pledged securities is 100% of book value, resulting in total short-term borrowing capacity with the Federal Reserve of $37.4 million. At April 30, 2023, the Company had short-term-borrowing lines of $35.0 million unsecured and $37.4 million secured, for a total of $72.4 million as compared to the March 31, 2023 short-term borrowing lines of $75.0 million unsecured and $13.6 million secured, a total of $88.6 million. Given the relative stability of our brokered deposits, management believes this to be sufficient for the Company's needs.

Page 30 of 51

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes thereto for the three months ended March 31, 2023 and the year ended December 31, 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 in our Annual Report on Form 10-K.

COMPANY BACKGROUND

We are a specialty finance company whose focus and growth has been our consumer finance and commercial lending businesses operated by Medallion Bank, or the Bank, and Medallion Capital, Inc., or Medallion Capital. The Bank is a wholly-owned subsidiary, that originates consumer loans for the purchase of recreational vehicles, boats, and home improvements, and provides loan origination and other services to fintech partners. Medallion Capital is a wholly-owned subsidiary that originates commercial loans through its mezzanine financing business. As of March 31, 2023, our consumer loans represented 95% of our gross loan portfolio, and commercial loans represented 5%. Total assets were $2.4 billion and $2.3 billion as of March 31, 2023 and December 31, 2022, respectively.

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

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

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

In 2019, the Bank 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 POLICIES AND ESTIMATES

Our accounting policies are fundamental to understanding management's discussion and analysis of its financial condition and results of operations. At March 31, 2023, we identified our policies for the allowance for credit losses, goodwill and intangible assets, and deferred taxes, to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Our critical accounting policies are described in detail in Part I, Item 7 in Medallion Financial Corp.'s Annual Report on Form 10-K for the year ended December 31, 2022, and there have been no material changes in such policies and estimates since the date of such report.

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RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS

On January 1, 2023, we adopted Accounting Standards Update 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", or ASC 326, which replaced the incurred loss methodology that delayed recognition until it was probable a loss had been incurred with a lifetime expected loss methodology using "reasonable and supportable" expectations about the future, referred to as the current expected credit loss (“CECL”) methodology. For consumer loans, we use historical delinquency and actual loss rates modified by quantitative adjustments based on macroeconomic factors over a twelve-month reasonable and supportable forecast period. For commercial loans, we assess the historical impact that macroeconomic indicators have had on the loan portfolio, to determine an approximate allowance for credit loss. Unlike consumer loans, where loans may have similar performing characteristics, each commercial loan is unique. We evaluate each commercial loan for specific impairment with additional allowance for credit losses recognized as necessary. For medallion loans, we maintain specific reserves adjusting the carrying amount of loans down to net collateral value. The allowance is evaluated on a quarterly basis by management based on the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect the borrowers' 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, including those based on changes in economic conditions, that are susceptible to significant revision as more information becomes available. Credit losses are deducted from the allowance, and subsequent recoveries are added back to the allowance.

We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after December 15, 2022 are presented under ASC 326. The transition to the CECL methodology on January 1, 2023 resulted in an increase of $13.7 million to our allowance for credit losses on loans (“ACL”) and a negative net-of-tax cumulative-effect adjustment of $9.9 million to the beginning balance of retained earnings. The CECL methodology transition effects on the allowance for credit losses are shown in the following table:


(Dollars in thousands)	December 31, 2022 Pre-Topic 326 Adoption		Effect of ASC 326 Adoption (Transition Amounts)		January 1, 2023 Post-ASC 326 Adoption
Assets:
Loans:
Recreation	$	41,966	$	10,037	$	52,003
Home improvement		11,340		1,518		12,858
Commercial		1,049		2,157		3,206
Medallion		9,490		—		9,490
Strategic partnership		—		—		—
Allowance for credit losses on loans	$	63,845	$	13,712	$	77,557

Prior to January 1, 2023, we used historical delinquency and actual loss rates with a three-year look-back period for medallion loans and a one-year look-back period for recreation and home improvement loans and used historical loss experience and other projections for commercial loans. The allowance was evaluated on a quarterly basis by management based on the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and excess concentration risks. This evaluation was inherently subjective, as it required estimates that were susceptible to significant revision as more information became available.

CONTROL STATUTES

Because the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act and we are a “financial institution holding company” within the meaning of the Utah Financial Institutions Act, federal and Utah law and regulations prohibit any person or company from acquiring control of us and, indirectly, the Bank, without, in most cases, prior written approval of the FDIC or the Commissioner of Utah Department of Financial Institutions, as applicable. Under the Change in Bank Control Act, control is conclusively presumed if, among other things, a person or company acquires 25% or more of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10% or more of any class of voting stock and is subject to a number of specified “control factors” as set forth in the applicable regulations. Although the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act, your investment in the Company is not insured or guaranteed by the FDIC, or any other agency, and is subject to loss. Under the Utah Financial Institutions Act, control is defined as the power directly or indirectly or through or in concert with one or more persons to (1) direct or exercise a controlling influence over the management or policies of us or the election of a majority of the directors of us, or (2) to vote 20% or more of any class of our voting securities by an individual or to vote more than 10% of any class of our voting securities by a person other than an individual. If any holder of any series of the Bank’s preferred stock is or becomes entitled to vote for the election of the Bank’s directors, such series will be deemed a class of voting stock, and any other person will be required to obtain the non-objection of the FDIC under the Change in Bank Control Act to acquire or maintain 10% or more of that series. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval.

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In addition to the regulations detailed above, our operations are subject to supervision and regulation by other federal, state, and local laws and regulations. Additionally, our operations may be subject to various laws and judicial and administrative decisions. This oversight may serve to:

•

regulate credit granting activities, including establishing licensing requirements, if any, in various jurisdictions;

•

establish maximum interest rates, finance charges and other charges;

•

require disclosures to customers;

•

govern secured transactions;

•

set collection, foreclosure, repossession, and claims handling procedures and other trade practices;

•

prohibit discrimination in the extension of credit and administration of loans; and

•

regulate the use and reporting of information related to a borrower’s credit experience and other data collection.

Changes to laws of states in which we do business could affect the operating environment in substantial and unpredictable ways. We cannot predict whether such changes will occur or, if they occur, the ultimate effect they would have upon our financial condition or results of operations.

COVID-19

For our medallion portfolio, in response to the COVID-19 pandemic, we determined that anticipated payment activity on our medallion portfolio was impossible to quantify, and therefore all medallion loans were deemed impaired, placed on nonaccrual status, and written down to each market’s net collateral value in 2020, with additional write-offs taken during 2021 and 2022. There were no additional write-offs in 2023. We continue to monitor our medallion portfolio and related assets, which may result in additional write-downs, charge-offs or impairments.

In addition to modifying payment policies, we took steps to accommodate remote work, some of which is still in place today, and implemented several cost-cutting measures, such as reducing employee headcount at our parent company, Medallion Financial Corp., and closing satellite offices in Long Island City, New York; Chicago, Illinois; and Boston, Massachusetts.

The potential future effects of COVID-19, or any new potential variants, on our loan portfolios and businesses remain uncertain, and we could suffer losses on our loan portfolios as a result of the effects on the ability of our borrowers to repay their loans as well as the demand for our loans.

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AVERAGE BALANCES AND RATES

The following table shows our consolidated average balance sheet, interest income and expense, and the average interest earning/bearing assets and liabilities, and which reflects the average yield on assets and average costs on liabilities for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
	2023								2022
(Dollars in thousands)	Average Balance			Interest		Average Yield/Cost			Average Balance			Interest		Average Yield/Cost
Interest-earning assets
Interest earning cash equivalents	$	22,001		$	40		0.74	%	$	4,276		$	46		4.36	%
Federal funds sold		81,326			236		1.18			63,606			15		0.10
Investment securities		48,289			366		3.07			44,434			219		2.00
Loans
Recreation		1,194,275			37,899		12.87			978,267			31,135		12.91
Home improvement		648,088			13,649		8.54			454,246			9,700		8.66
Commercial		94,974			3,194		13.64			78,323			2,028		10.50
Medallion		10,676			381		14.47			13,899			146		4.26
Strategic partnerships		1,326			78		23.86			180			14		31.54
Total loans		1,949,339			55,201		11.48			1,524,915			43,023		11.44
Total interest-earning assets, before allowance		2,100,955					10.78			1,637,231					10.74
Allowance for credit losses		(71,563	)							(50,019	)
Total interest-earning assets, net of allowance		2,029,392			55,843		11.16	%		1,587,212			43,303		11.08	%
Non-interest-earning assets
Cash		4,925								56,823
Equity investments		10,585								10,063
Loan collateral in process of foreclosure (1)		20,779								35,602
Goodwill and intangible assets		172,660								174,105
Other assets		50,887								44,275
Total non-interest-earning assets		259,836								320,868
Total assets	$	2,289,228							$	1,908,080
Interest-bearing liabilities
Deposits	$	1,640,552		$	8,599		2.13	%	$	1,279,429		$	4,154		1.32	%
Retail and privately placed notes		121,000			2,501		8.38			121,000			2,498		8.37
SBA debentures and borrowings		65,915			561		3.45			69,840			523		3.04
Preferred securities		33,000			579		7.12			33,000			200		2.46
Total interest-bearing liabilities		1,860,467			12,240		2.67			1,503,269			7,375		1.99
Non-interest-bearing liabilities
Deferred tax liability		24,355								18,875
Other liabilities (2)		34,511								25,491
Total non-interest-bearing liabilities		58,866								44,366
Total liabilities		1,919,333								1,547,635
Non-controlling interest		69,166								69,166
Total stockholders’ equity		300,729								291,279
Total liabilities and stockholders’ equity	$	2,289,228							$	1,908,080
Net interest income				$	43,603							$	35,928
Net interest margin, gross							8.42								8.91
Net interest margin, net of allowance							8.71	%							9.20	%

(1)

Includes financed sales of this collateral to third parties reported separately from the loan portfolio, and that are conducted by Medallion Bank of $7.2 million and $7.7 million as of March 31, 2023 and 2022.

(2)

Includes deferred financing costs of $6.7 million and $7.2 million as of March 31, 2023 and 2022.

For the three months ended March 31, 2023, our loans receivable yielded 11.48%, as compared to 11.44% for the three months ended March 31, 2022. The 4 basis point increase reflects a higher yield on our commercial portfolio, partially offset by a slight decrease in yield on our recreation and home improvement portfolios. We have used the increasing rate environment as an opportunity to both increase the rates on newly issued recreation and home improvement loans, which is expected 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 of our recreation loans outstanding being 671 as of March 31, 2023 compared to 669 as of March 31, 2022.

Our debt, comprised primarily of certificates of deposits, funds our growing lending business. Our average interest cost for the three months ended March 31, 2023 of 2.67% increased 68 basis points from March 31, 2022, reflecting rising costs associated with our borrowings, primarily our certificate of deposits, which is attributable to the current interest rate environment.

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RATE/VOLUME ANALYSIS

The following table presents the change in interest income and expense due to changes in the average balances (volume) and average yield/cost, calculated for the periods indicated.


	Three Months Ended March 31,
	2023								2022
(Dollars in thousands)	Increase (Decrease) In Volume			Increase (Decrease) In Rate			Net Change		Increase (Decrease) In Volume			Increase (Decrease) In Rate			Net Change
Interest-earning assets
Interest earning cash and cash equivalents	$	95		$	120		$	215	$	18		$	20		$	38
Investment securities		29			118			147		12			5			17
Loans
Recreation		6,855			(91	)		6,764		5,634			(1,941	)		3,693
Home improvement		4,082			(133	)		3,949		2,484			(702	)		1,782
Commercial		560			606			1,166		422			46			468
Medallion		(115	)		350			235		(223	)		438			215
Strategic partnerships		67			(3	)		64		12			(2	)		10
Total loans	$	11,449		$	729		$	12,178	$	8,329		$	(2,161	)	$	6,168
Total interest-earning assets	$	11,573		$	967		$	12,540	$	8,359		$	(2,136	)	$	6,223
Interest-bearing liabilities
Deposits	$	1,893		$	2,552		$	4,445	$	760		$	(1,317	)	$	(557	)
Retail and privately placed notes		—			3			3		(90	)		(44	)		(134	)
SBA debentures and borrowings		(33	)		71			38		36			(85	)		(49	)
Notes payable to banks		—			—			—		—			(258	)		(258	)
Preferred securities		—			379			379		—			7			7
Other borrowings		—			—			—		—			(41	)		(41	)
Total interest-bearing liabilities	$	1,860		$	3,005		$	4,865	$	706		$	(1,738	)	$	(1,032	)
Net	$	9,713		$	(2,038	)	$	7,675	$	7,653		$	(398	)	$	7,255

During the three months ended March 31, 2023, the increase in interest was mainly driven by the increase in volume of consumer loans and to a lesser extent, an increase in overall yield on interest-earning assets, primarily in the commercial portfolio. The increase in interest expense was driven by an increase in borrowings, primarily increases in deposits which are used to fund our growing loan portfolio, as well as an increase in our overall cost of funds during the quarter.

Our interest expense is driven by the interest rates payable on our bank certificates of deposit, privately placed notes, fixed-rate, long-term debentures issued to the SBA, 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.

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

We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities outstanding during the period. The above table shows the average borrowings and related borrowing costs for the three months ended March 31, 2023 and 2022. We expect our borrowing costs to further increase as prevailing interest rates continue at, or rise from, these levels.

We continue to seek SBA funding through Medallion Capital, Inc., to the extent it offers attractive rates. SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the Small Business Investment Act of 1985, as amended, or the SBIA, and SBA regulations. In July 2020, we obtained a $25.0 million commitment from the SBA. At March 31, 2023 and 2022, adjustable rate debt constituted just 2% of total debt.

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LOANS

Loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to or received from loan originators, and which are amortized to interest income over the life of the loan. During the three months ended March 31, 2023, there was continued growth in the recreation and home improvement segments, as well as, and to a lesser extent, in the commercial segment.


Three Months Ended March 31, 2023 (Dollars in thousands)	Recreation			Home Improvement			Commercial			Medallion			Strategic Partnership			Total
Gross loans – December 31, 2022	$	1,183,512		$	626,399		$	92,899		$	13,571		$	572		$	1,916,953
Loan originations		101,681			94,981			3,000			623			27,006			227,291
Principal payments, sales, maturities, and recoveries		(56,217	)		(49,855	)		(834	)		(4,395	)		(25,808	)		(137,109	)
Charge-offs		(12,590	)		(1,914	)		—			(3,593	)		—			(18,097	)
Transfer to loan collateral in process of foreclosure, net		(4,357	)		—			—			(2,147	)		—			(6,504	)
Amortization of origination costs		(2,759	)		586			—			—			—			(2,173	)
FASB origination costs, net		4,110			(555	)		—			—			—			3,555
Paid-in-kind interest		—			—			264			—			—			264
Gross loans – March 31, 2023	$	1,213,380		$	669,642		$	95,329		$	4,059		$	1,770		$	1,984,180


Three Months Ended March 31, 2022 (Dollars in thousands)	Recreation			Home Improvement			Commercial			Medallion			Strategic Partnership			Total
Gross loans – December 31, 2021	$	961,320		$	436,772		$	76,696		$	14,046		$	90		$	1,488,924
Loan originations		114,406			89,820			4,400			92			5,009			213,727
Principal payments, sales, maturities, and recoveries		(65,116	)		(52,164	)		(1,817	)		(85	)		(4,873	)		(124,055	)
Charge-offs		(5,067	)		(1,060	)		(1,584	)		(75	)		—			(7,786	)
Transfer to loan collateral in process of foreclosure, net		(2,911	)		—			—			(129	)		—			(3,040	)
Amortization of origination costs		(2,439	)		320			—			—			—			(2,119	)
Amortization of loan premium		(60	)		(90	)		—			—			—			(150	)
FASB origination costs, net		3,958			(190	)		—			—			—			3,768
Paid-in-kind interest		—			—			172			—			—			172
Gross loans – March 31, 2022	$	1,004,091		$	473,408		$	77,867		$	13,849		$	226		$	1,569,441

The following table presents the approximate maturities and sensitivity to changes in interest rates for our loans as of March 31, 2023.


	Loan Maturity
(Dollars in thousands)	Within 1 year		After 1 to 5 years		After 5 to 15 years		After 15 years		Total
Fixed-rate	$	16,385	$	240,631	$	1,540,229	$	147,889	$	1,945,134
Recreation		1,938		118,504		1,033,121		18,324		1,171,887
Home improvement		11,051		32,088		499,385		129,565		672,089
Commercial		1,845		87,531		7,723		—		97,099
Medallion		1,551		2,508		—		—		4,059
Adjustable-rate	$	2,335	$	392	$	—	$	—	$	2,727
Recreation		2,335		392		—		—		2,727
Home improvement		—		—		—		—		—
Commercial		—		—		—		—		—
Medallion		—		—		—		—		—
Total loans (1)	$	18,720	$	241,023	$	1,540,229	$	147,889	$	1,947,861

(1)

Excludes strategic partnership loans.

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PROVISION AND ALLOWANCE FOR CREDIT LOSSES

The allowance is maintained at a level estimated by management to absorb probable credit losses inherent in the loan portfolios based on management’s quarterly evaluation of the portfolios, the related credit characteristics, and macroeconomic factors affecting the portfolios. As of March 31, 2023 and December 31, 2022 the allowance totaled $70.3 million and $63.8 million, which represented 3.5% and 3.3% of total loans, respectively. The increase in the allowance for credit losses as of March 31, 2023 was primarily driven by the adoption of the CECL accounting standard, changes in our medallion loan portfolio and growth in our larger recreation and home improvement loan portfolio.

The following table sets forth the activity in the allowance for credit losses for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Allowance for loan losses – beginning balance (1)	$	63,845		$	50,166
CECL transition amount upon ASU 2016-13 adoption		13,712			—
Charge-offs
Recreation		(12,590	)		(5,067	)
Home improvement		(1,914	)		(1,060	)
Commercial		—			(1,584	)
Medallion		(3,593	)		(75	)
Total charge-offs		(18,097	)		(7,786	)
Recoveries
Recreation		2,771			3,510
Home improvement		632			559
Commercial		10			34
Medallion		3,369			963
Total recoveries		6,782			5,066
Net charge-offs (recoveries) (2)		(11,315	)		(2,720	)
Provision for credit losses		4,038			3,240
Allowance for credit losses – ending balance (3)	$	70,280		$	50,686

(1)

Represents allowance prior to the adoption of ASU 2016-13.

(2)

As of March 31, 2023, cumulative net charge-offs of loans and loan collateral in process of foreclosure in the medallion portfolio were $237.3 million, some of which may represent collection opportunities for us.

(3)

As of March 31, 2023, there was no allowance for credit loss and net charge-offs related to the strategic partnership loans.

With the adoption of ASC 326, we also adopted ASU 2022-02, Financial Instruments – Credit Losses, or Topic 326: Troubled Debt Restructurings and Vintage Disclosures. Under this standard, the Company is required to disclose current period gross write-offs, by year of origination, for financing receivables. The following table sets forth the gross charge-offs, as of March 31, 2023, by the year of origination:


(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Total
Recreation	$	—	$	3,608	$	3,070	$	1,671	$	1,554	$	2,687	$	12,590
Home improvement		—		904		628		143		131		108		1,914
Commercial		—		—		—		—		—		—		—
Medallion		—		—		—		—		—		3,593		3,593
Total	$	—	$	4,512	$	3,698	$	1,814	$	1,685	$	6,388	$	18,097

The following tables set forth the allowance for credit losses by type as of March 31, 2023 and December 31, 2022.


March 31, 2023 (Dollars in thousands)	Amount		Percentage of Allowance			Allowance as a Percent of Loan Category			Allowance as a Percent of Nonaccrual
Recreation	$	49,938		71	%		4.12	%		277.53	%
Home improvement		14,656		21			2.19			81.45
Commercial		3,532		5			3.71			19.63
Medallion		2,154		3			53.07			11.97
Total	$	70,280		100	%		3.54	%		390.57	%


December 31, 2022 (Dollars in thousands)	Amount		Percentage of Allowance			Allowance as a Percent of Loan Category			Allowance as a Percent of Nonaccrual
Recreation	$	41,966		66	%		3.55	%		130.60	%
Home improvement		11,340		18			1.81			35.29
Commercial		1,049		1			1.13			3.26
Medallion		9,490		15			69.93			29.53
Total	$	63,845		100	%		3.33	%		198.69	%

As of March 31, 2023, the total allowance rate for credit losses increased 21 basis points from December 31, 2022, due to the adoption of CECL which resulted in higher allowances for recreation, home improvement, and commercial loans, offset by a reduction in the allowance for medallion loans due to recoveries and structured settlements entered into during the quarter.

Page 37 of 51

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


	March 31, 2023					December 31, 2022
(Dollars in thousands)	Amount		% (1)			Amount		% (1)
Recreation	$	4,211		0.2	%	$	7,365		0.4	%
Home improvement		441	*				579	*
Commercial		74	*				74	*
Medallion		—	*				885	*
Total loans 90 days or more past due	$	4,726		0.2	%	$	8,903		0.5	%

(1)

Percentages are calculated against the total loan portfolio.

(*) Less than 0.1%

Recreation and medallion loans that reach 120 days past due are charged down to collateral value and reclassified to loan collateral in process of foreclosure. The following tables show the activity of loan collateral in process of foreclosure for the three months ended March 31, 2023 and 2022.


Three Months Ended March 31, 2023 (Dollars in thousands)	Recreation			Medallion			Total
Loan collateral in process of foreclosure – December 31, 2022	$	1,376		$	20,443		$	21,819
Transfer from loans, net		4,357			2,147			6,504
Sales		(2,195	)		(15	)		(2,210	)
Cash payments received		—			(3,317	)		(3,317	)
Collateral valuation adjustments		(2,077	)		(252	)		(2,329	)
Loan collateral in process of foreclosure – March 31, 2023	$	1,461		$	19,006		$	20,467


Three Months Ended March 31, 2022 (Dollars in thousands)	Recreation			Medallion			Total
Loan collateral in process of foreclosure – December 31, 2021	$	1,720		$	35,710		$	37,430
Transfer from loans, net		2,911			129			3,040
Sales		(2,252	)		(116	)		(2,368	)
Cash payments received		—			(2,872	)		(2,872	)
Collateral valuation adjustments		(1,010	)		(386	)		(1,396	)
Loan collateral in process of foreclosure – March 31, 2022	$	1,369		$	32,465		$	33,834

Page 38 of 51

SEGMENT RESULTS

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

Recreation Lending

Recreation lending is a high-growth business focused on originating prime and non-prime recreation loans which is a significant source of income for us, accounting for 68% and 72% of our interest income for the three months ended March 31, 2023 and 2022.

We maintain relationships with approximately 3,000 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 43% of recreation lending’s new loan originations for the three months ended March 31, 2023. 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 $18,400 as of March 31, 2023. The loans are fixed rate with an average term at origination of 11.0 years. The weighted average maturity of our loans outstanding as of March 31, 2023 is 9.5 years.

The loans are secured primarily by RVs, boats, and trailers, with RV loans making up 58% of the portfolio, boat loans making up 19% of the portfolio, and trailer loans 13% as of March 31, 2023, compared to 59%, 19% and 8% as of March 31, 2022. Recreation loans are made to borrowers residing nationwide, with the highest concentrations in Texas and Florida at 15% and 10% of loans outstanding, compared to 10% and 16% as of March 31, 2022, and with no other states over 10%. As of March 31, 2023 and 2022, the weighted average FICO scores of our recreation loans outstanding were 671 and 669.

During the three months ended March 31, 2023, the recreation portfolio grew, with the average interest rate increasing 6 basis points to 14.42% from a year ago. Additionally, reserve rates increased 88 basis points from March 31, 2022 reflecting an increase in reserves due to the adoption of CECL.

The following table presents certain financial data and ratios as of and for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Selected Earnings Data
Total interest income	$	37,899		$	31,135
Total interest expense		5,904			3,601
Net interest income		31,995			27,534
Provision for credit losses		7,751			1,680
Net interest income after loss provision		24,244			25,854
Other income (expense), net		(7,803	)		(6,820	)
Net income before taxes		16,441			19,034
Income tax provision		(4,513	)		(5,681	)
Net income after taxes	$	11,928		$	13,353
Balance Sheet Data
Total loans, gross	$	1,213,380		$	1,004,091
Total credit allowance		49,938			32,558
Total loans, net		1,163,442			971,533
Total assets		1,179,965			984,535
Total borrowings		960,305			780,621
Selected Financial Ratios
Return on average assets		4.14	%		5.62	%
Return on average equity		25.63			29.27
Interest yield		12.87			12.91
Net interest margin		10.86			11.80
Reserve coverage		4.12			3.24
Delinquency status (1)		0.36			0.39
Charge-off ratio		3.48			0.67

(1)

Loans 90 days or more past due.

Page 39 of 51

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 40%, 21%, and 13% of total loans outstanding as of March 31, 2023, as compared to 33%, 26%, and 12% as of March 31, 2022, with no other collateral types over 10%. Home improvement loans are made to borrowers residing nationwide, with the highest concentrations in Texas and Florida, each representing 10% of loans outstanding March 31, 2023, compared to 12% and 10% as of March 31, 2022, with no other states over 10%. As of March 31, 2023 and 2022, the weighted average FICO scores of our home improvement loans outstanding were 753.

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 1,000 contractors and FSPs. Our top ten contractors and FSP relationships were responsible for 61% of home improvement lending’s new loan originations for the three months ended March 31, 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 $19,500 as of March 31, 2023. The loans are fixed rate with an average term at origination of 13.6 years. The weighted average maturity of our loans outstanding as of March 31, 2023 is 12.4 years.

During the three months ended March 31, 2023, the home improvement lending segment continued to grow. Reserve coverage rates increased 49 basis points from a year ago reflecting an increase in reserves due to the adoption of CECL. The average interest rate increased 36 basis points to 8.83% from the prior year.

The following table presents certain financial data and ratios as of and for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Selected Earnings Data
Total interest income	$	13,649		$	9,700
Total interest expense		3,279			1,341
Net interest income		10,370			8,359
Provision for credit losses		3,081			1,204
Net interest income after loss provision		7,289			7,155
Other income (expense), net		(3,993	)		(2,896	)
Net income before taxes		3,296			4,259
Income tax provision		(905	)		(1,271	)
Net income after taxes	$	2,391		$	2,988
Balance Sheet Data
Total loans, gross	$	669,642		$	473,408
Total credit allowance		14,656			8,059
Total loans, net		654,986			465,349
Total assets		660,846			469,886
Total borrowings		537,824			372,565
Selected Financial Ratios
Return on average assets		1.52	%		2.66	%
Return on average equity		9.37			13.84
Interest yield		8.54			8.66
Net interest margin		6.49			7.59
Reserve coverage		2.19			1.70
Delinquency status (1)		0.07			0.06
Charge-off ratio		0.82			0.45

(1)

Loans 90 days or more past due.

Page 40 of 51

Commercial Lending

We originate both senior and subordinated loans nationwide to businesses in a variety of industries, more than 42% of which are located in the Midwest region, 23% located in California, and the rest scattered across the country. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $2,000,000 to $5,000,000 at origination, and typically include an equity component as part of the financing. The commercial lending business has concentrations in manufacturing, wholesale trade, administrative and support services, and construction making up 51%, 13%, 11%, and 10% of the loans outstanding as of March 31, 2023.

During the three months ended March 31, 2023, the commercial portfolio grew to $95.3 million, representing $3.0 million of new loan originations, offset by payoffs and charge-offs. Additionally, reserve rates increased, reflecting specific reserves on aged investments.

The following table presents certain financial data and ratios as of and for the three months ended March 31, 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.


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Selected Earnings Data
Total interest income	$	2,701		$	1,930
Total interest expense		809			722
Net interest income		1,892			1,208
Provision for credit losses		327			1,255
Net interest (expense) income after loss provision		1,565			(47	)
Other income (expense), net		(149	)		(1,330	)
Net income (loss) before taxes		1,416			(1,377	)
Income tax (provision) benefit		(389	)		411
Net (loss) income after taxes	$	1,027		$	(966	)
Balance Sheet Data
Total loans, gross	$	95,329		$	77,867
Total credit allowance		3,532			828
Total loans, net		91,797			77,039
Total assets		101,392			86,461
Total borrowings		82,517			68,553
Selected Financial Ratios
Return on average assets		4.11	%		(4.58	)%
Return on average equity		25.39			(21.51	)
Interest yield		11.53			9.99
Net interest margin		8.08			6.34
Reserve coverage (1)		3.71			1.06
Delinquency status (1) (2)		0.08			0.09
Charge-off (recovery) ratio (3)		(0.16	)		8.13

(1)

Ratio is based off of total commercial balances and relates solely to the legacy commercial loan balances.

(2)

Loans 90 days or more past due.

(3)

Ratio is based on total commercial lending balances and relates to the total loan business.


	As of March 31,
	2023					2022
Geographic Concentrations	Total Gross Loans		% of Market			Total Gross Loans		% of Market
California	$	21,720		23	%	$	10,072		13	%
Illinois		12,880		14			13,109		17
Minnesota		11,269		12			9,583		12
Texas		9,864		10			5,570		7
Other (1)		39,596		41			39,533		51
Total	$	95,329		100	%	$	77,867		100	%

(1)

Includes 12 other states, which were all under 10% as of March 31, 2023, and 13 other states, all under 10% as of March 31, 2022.

Page 41 of 51

Medallion Lending

The medallion lending segment operates primarily in New York City, and to a lesser extent in Newark, Chicago and other markets. During the three months ended March 31, 2023, taxi medallion values remained consistent in the New York City market. 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. All the loans are secured by taxi medallions and enhanced by personal guarantees of the shareholders and owners.

The following table presents certain financial data and ratios as of and for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Selected Earnings Data
Total interest income	$	310		$	146
Total interest expense		67			153
Net interest (loss) income		243			(7	)
Provision (recoveries) for credit losses		(7,084	)		(869	)
Net interest income (loss) after loss provision		7,327			862
Other income (expense), net		(408	)		(806	)
Net income before taxes		6,919			56
Income tax benefit		(1,899	)		(17	)
Net income after taxes	$	5,020		$	39
Balance Sheet Data
Total loans, gross	$	4,059		$	13,849
Total credit allowance		2,154			9,241
Total loans, net		1,905			4,608
Total assets		20,335			37,752
Total borrowings		16,549			29,933
Selected Financial Ratios
Return on average assets		90.52	%		0.25	%
Return on average equity		558.90			1.30
Interest yield		11.78			4.26
Net interest margin		9.23			(0.60	)
Reserve coverage		53.07			66.73
Delinquency status (1)		—			—
Charge-off (recovery) ratio		29.84			(76.14	)

(1)

Loans 90 days or more past due.


	As of March 31,
	2023					2022
Geographic Concentration	Total Gross Loans		% of Market			Total Gross Loans		% of Market
New York City	$	3,196		79	%	$	12,540		91	%
Newark		842		21			1,265		9
All Other		21	*				44	*
Total	$	4,059		100	%	$	13,849		100	%

(*) Less than 1%.


	As of March 31,
	2023					2022
Geographic Concentration	Total Loan Collateral in Process of Foreclosure		% of Market			Total Loan Collateral in Process of Foreclosure		% of Market
New York City	$	15,886		84	%	$	26,902		83	%
Newark		2,665		14			3,959		12
Chicago		428		2			1,411		4
All Other		27	*				193		1
Total	$	19,006		100	%	$	32,465		100	%

(*) Less than 1%.

Page 42 of 51

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. Commencing with the 2020 second quarter, the Bank began issuing loans related to the new strategic partnership business, which is currently included within this segment. The associated activities of the strategic partnership business are currently limited to originating loans or other receivables facilitated by our strategic partners and selling those loans or receivables to our strategic partners or other third parties, without recourse, within a specified time after origination, such as three business days. Strategic partnerships represent $1.8 million in net loans as of March 31, 2023, compared to $0.2 million as of March 31, 2022, with originations of $27.0 million during the three months ended March 31, 2023 and $5.0 million during the three months ended March 31, 2022.

The following table presents certain financial data and ratios as of and for the three months ended March 31, 2023 and 2022.


(Dollars in thousands)	Three Months Ended March 31,
	2023			2022
Selected Earnings Data
Total interest income	$	1,284		$	392
Total interest expense		2,181			1,558
Net interest loss		(897	)		(1,166	)
Total interest (income) expense		(37	)		(30	)
Net interest loss		(860	)		(1,136	)
Other income (expense), net		(3,957	)		(4,652	)
Net loss before taxes		(4,817	)		(5,788	)
Income tax benefit		1,324			1,727
Net loss after taxes	$	(3,493	)	$	(4,061	)
Balance Sheet Data
Total loans, gross	$	1,770		$	226
Total credit allowance		—			—
Total loans, net	$	1,770		$	226
Total assets		389,132			387,991
Total borrowings		316,694			307,632
Selected Financial Ratios
Return on average assets		(3.79	)%		(4.80	)%
Return on average equity		(23.42	)		(28.31	)

SUMMARY CONSOLIDATED FINANCIAL DATA

The table below presents our selected financial data for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Return on average assets		2.99	%		2.41	%
Return on average equity		18.50			12.77
Return on average stockholders' equity		20.72			13.70
Net interest margin		8.42			8.91
Equity to assets (1)		15.95			18.41
Debt to equity (1) (2)	5.1x			4.3x
Net loans receivable to assets		81	%		77	%
Net charge-offs	$	11,315		$	2,720
Net charge-offs as a % of average loans receivable		2.35	%		0.75	%
Allowance coverage ratio		3.54			3.23

(1)

Includes $68.8 million related to non-controlling interests in consolidated subsidiaries as of March 31, 2023 and 2022.

(2)

Excludes deferred financing costs of $6.7 million and $7.2 million as of March 31, 2023 and 2022.

Page 43 of 51

CONSOLIDATED RESULTS OF OPERATIONS

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

Net income attributable to shareholders was $15.4 million, or $0.67 per share, for the three months ended March 31, 2023, compared to $9.8 million, or $0.39 per share, for the three months ended March 31, 2022.

Total interest income was $55.8 million for the three months ended March 31, 2023 compared to $43.3 million for the three months ended March 31, 2022. The increase in interest income reflects the continued growth in our lending segments, primarily recreation and home improvement. The yield on interest earning assets was 10.78% for the three months ended March 31, 2023, compared to 10.74% for the three months ended March 31, 2022. The 4 basis point increase reflects our efforts over the past year to increase interest rates on new originations in our recreation, home improvement and commercial segments, with the yield anticipated to increase as older loans with lower rates amortize and newer originations become a larger portion of our portfolio.

Loans before allowance for credit losses were $2.0 billion as of March 31, 2023, comprised of recreation ($1.2 billion), home improvement ($669.6 million), commercial ($95.3 million), medallion ($4.1 million), and strategic partnership loans ($1.8 million). We had an allowance for credit losses as of March 31, 2023 of $70.3 million, which was attributable to the recreation (71%), home improvement (21%), commercial (5%) loans, and medallion (3%), and included the impact of our CECL adoption on January 1, 2023, which resulted in an increase in allowance of $13.7 million.

Loans increased $67.2 million, or 4%, from December 31, 2022 as a result of $227.3 million of loan originations, offset primarily by principal payments, and to a lesser extent charge-offs and transfers, to loan collateral in process of foreclosure and net charge-offs. The provision for credit losses was $4.0 million for the three months ended March 31, 2023, compared to $3.2 million in the three months ended March 31, 2022. The provision for credit loss in the current period included a $7.1 million benefit with respect to the medallion lending segment, reflecting continued recovery efforts with the impaired portfolio, while net charge offs in the recreation and home improvement segments increased to more normalized levels from the historically low levels experienced in the prior year. Recoveries in the medallion lending segment are closely tied to our collection efforts and fluctuate significantly from quarter to quarter. Collections for the quarter ended March 31, 2023 were substantially higher than normal, which we do not expect to occur on a recurring basis. We expect the normalization in charge-off expense in both of our consumer segments to continue and may further increase, depending on, among other things, the state of the economy.

Interest expense was $12.2 million for the three months ended March 31, 2023, compared to $7.4 million for the three months ended March 31, 2022, reflecting higher average borrowings, as well as a higher average borrowing costs in the current quarter, which we expect to further increase in the current inflationary environment. The average cost of borrowed funds was 2.67% for the three months ended March 31, 2023, compared to 1.99% for the three months ended March 31, 2022. The increase of 68 basis points from the prior year quarter is attributable to the increased cost of newly issued certificates of deposit used both to fund our growth and to replace older maturing vintages with lower rates. As we replace upcoming maturities with new issues, we expect our cost of funds to further increase. Average debt outstanding was $1.9 billion for the three months ended March 31, 2023, up from $1.5 billion for the three months ended March 31, 2022, as we issued additional certificates of deposits to increase our liquidity and fund our loan growth. See page 34 for tables that show average balances and cost of funds for our funding sources.

Net interest income was $43.6 million for the three months ended March 31, 2023, compared to $35.9 million for the three months ended March 31, 2022. The net interest margin before the impact of the allowance for credit losses was 8.42% for the three months ended March 31, 2023, compared to 8.91% for the three months ended March 31, 2022, reflecting the above. With the rates we charge on loans and our cost of funds both increasing due to inflation, we expect our net interest margin to continue to tighten.

Net other income, which is comprised primarily of gains on the sale of loans and medallions, gain (losses) on equity investments, prepayment fees, servicing fee income, late charges, and write-downs of loan collateral was $2.1 million for the three months ended March 31, 2023, primarily due to collections on the medallion loans which generated gains of $1.9 million for the three months ended March 31, 2023 compared to $1.5 million of other income for the three months ended March 31, 2022.

Page 44 of 51

Operating expenses were $18.4 million for the three months ended March 31, 2023, compared to $18.0 million for the three months ended March 31, 2022. Salaries and benefits were $8.8 million for the three months ended March 31, 2023, compared to $7.6 million for the three months ended March 31, 2022, primarily reflecting a greater head count to facilitate our growing consumer lending segments. Professional fees were $1.7 million for the three months ended March 31, 2023, down from $4.0 million for the three months ended March 31, 2022, primarily reflecting lower legal and professional costs during the quarter for a variety of corporate matters inclusive of the SEC litigation.

Total income tax expense was $6.4 million for the three months ended March 31, 2023, compared to $4.8 million for the three months ended March 31, 2022.

Loan collateral in process of foreclosure was $20.5 million at March 31, 2023, a decline from $21.8 million at December 31, 2022. The decrease primarily reflects cash payments received and structured settlements during the period.

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

We, like other financial institutions, are subject to interest rate risk to the extent that our interest-earning assets (consisting of consumer, commercial, and medallion loans, and investment securities) reprice on a different basis over time in comparison to our interest-bearing liabilities (consisting primarily of bank certificates of deposit, SBA debentures and borrowings, and 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 portfolio. We believe that the average life of our loan portfolio varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment. However, borrowers may prepay for a variety of other reasons, such as to monetize increases in the underlying collateral values. In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years.

A relative measure of interest rate risk can be derived from our interest rate sensitivity gap. The interest rate sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities, and negative when repriceable liabilities exceed repriceable assets. A relative measure of interest rate sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets.

Page 45 of 51

The following table presents our interest rate sensitivity gap at March 31, 2023. 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.


March 31, 2023 Cumulative Rate Gap (1)
(Dollars in thousands)	Less Than 1 Year			More Than 1 and Less Than 2 Years			More Than 2 and Less Than 3 Years			More Than 3 and Less Than 4 Years			More Than 4 and Less Than 5 Years			More Than 5 and Less Than 6 Years			Thereafter		Total
Earning assets
Fixed-rate	$	16,384		$	30,397		$	35,357		$	73,360		$	101,518		$	61,546		$	1,626,573	$	1,945,135
Adjustable rate		2,335			392			—			—			—			—			—		2,727
Investment securities		1,914			4,436			3,864			1,977			4,227			3,954			35,581		55,953
Cash and cash equivalents		119,641			—			500			750			—			—			—		120,891
Total earning assets	$	140,274		$	35,225		$	39,721		$	76,087		$	105,745		$	65,500		$	1,662,154	$	2,124,706
Interest bearing liabilities
Deposits	$	564,685		$	496,933		$	365,666		$	159,901		$	109,880		$	—		$	—	$	1,697,065
Privately placed notes		36,000			—			31,250			—			53,750			—			—		121,000
SBA debentures and borrowings		2,500			15,075			15,500			4,500			—			—			25,750		63,325
Preferred securities		—			—			—			—			—			—			33,000		33,000
Total liabilities	$	603,185		$	512,008		$	412,416		$	164,401		$	163,630		$	—		$	58,750	$	1,914,390
Interest rate gap	$	(462,911	)	$	(476,783	)	$	(372,695	)	$	(88,314	)	$	(57,885	)	$	65,500		$	1,603,404	$	210,316
Cumulative interest rate gap	$	(462,911	)	$	(939,694	)	$	(1,312,389	)	$	(1,400,703	)	$	(1,458,588	)	$	(1,393,088	)	$	210,316	$	—
December 31, 2022 (2)	$	(367,803	)	$	(807,687	)	$	(1,158,706	)	$	(1,283,654	)	$	(1,372,105	)	$	(1,314,604	)	$	222,536	$	—
December 31, 2021 (2)	$	(230,601	)	$	(455,807	)	$	(770,239	)	$	(891,489	)	$	(1,007,810	)	$	(940,350	)	$	153,539	$	—

(1)

The ratio of the cumulative one-year gap to total interest rate sensitive assets was (22%) as of March 31, 2023, and was (18%) as of December 31, 2022

(2)

Excludes federal funds sold and investment securities.

Our interest rate sensitive assets were $2.1 billion and interest rate sensitive liabilities were $1.9 billion at March 31, 2023. The one-year cumulative interest rate gap was a negative $462.9 million or 22% of interest rate sensitive assets. We seek to manage interest rate risk by incurring fixed-rate indebtedness, by evaluating appropriate derivatives, pursuing securitization opportunities, by originating adjustable-rate loans, and by other options consistent with managing interest rate risk.

LIBOR is set to terminate on June 30, 2023. We do not have loans tied to LIBOR and do not expect an impact on our loans. Our trust preferred securities bear a variable rate of interest of 90-day LIBOR (5.19% at March 31, 2023) plus 2.13%. For these borrowings, the Secured Overnight Financing Rate (SOFR) adjusted by a relevant spread adjustment of approximately 43 basis points will replace LIBOR upon its termination. We do not expect this change to have a material impact on our borrowings.

Liquidity and Capital Resources

Our sources of liquidity include brokered certificates of deposit, unfunded commitments to sell debentures to the SBA, loan amortization and prepayments, private issuances of debt securities, participations or sales of loans to third parties, issuances of preferred securities at our subsidiaries, and the disposition of our other assets. Additionally, as of March 31, 2023, the Bank has up to $75.0 million available under Fed Funds lines with several commercial banks, and we had unfunded commitments from the SBA of $4.8 million.

In February 2021, we completed a private placement to certain institutional investors of $25.0 million aggregate principal amount of 7.25% unsecured senior notes due February 2026, with interest payable semiannually. Follow-on offerings of these notes in March and April 2021 raised an additional $3.3 million and $3.0 million.

In December 2020, we completed a private placement to certain institutional investors of $33.6 million aggregate principal amount of 7.50% unsecured senior notes due December 2027, with interest payable semiannually. Follow-on offerings of these notes in February and March 2021 raised an additional $8.5 million. In April 2021, we raised an additional $11.7 million in a follow-on offering, and repaid substantially all of our remaining bank borrowings.

The net proceeds from the December 2020, February 2021, March 2021 and April 2021 private placements were used for general corporate purposes, including repayment of outstanding debt, including repayment of our 9.00% retail notes at maturity in April 2021 and to pay down other borrowings, including some borrowings at a discount.

In December 2019, the Bank closed an initial public offering of 1,840,000 shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, with a $46.0 million aggregate liquidation amount, yielding net proceeds of $42.5 million, which were recorded in the Bank’s shareholders’ equity. Dividends are payable quarterly from the date of issuance to, but excluding April 1, 2025, at a rate of 8% per annum, and from and including April 1, 2025, at a floating rate equal to a benchmark rate (which is expected to be three-month Secured Overnight Financing Rate, or SOFR) plus a spread of 6.46% per annum.

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In March 2019, we completed a private placement to certain institutional investors of $30.0 million aggregate principal amount of 8.25% unsecured notes due 2024, with interest payable semiannually. A follow-on offering of these notes in the 2019 third quarter raised an additional $6.0 million.

The table below presents the components of our debt and preferred securities as of March 31, 2023, exclusive of deferred financing costs of March 31, 2023. See Note 5 to the consolidated financial statements for details of the contractual terms of our borrowings.


(Dollars in thousands)	Balance		Percentage			Rate (1)
Deposits (2)	$	1,697,065		89	%		2.35	%
Privately placed notes		121,000		6			7.66
SBA debentures and borrowings		63,325		3			3.13
Preferred securities		33,000		2			7.11
Total outstanding debt	$	1,914,390		100	%		2.79	%

(1)

Weighted average contractual rate as of March 31, 2023.

(2)

Balance includes $2.0 million of strategic partner reserve deposits as of March 31, 2023.

Our contractual obligations expire on or mature at various dates through September 2037. The following table shows our contractual obligations at March 31, 2023.


	Payments due by period
(Dollars in thousands)	Less than 1 year		1 – 2 years		2 – 3 years		3 – 4 years		4 – 5 years		More than 5 years		Total (1)
Borrowings
Deposits (2)	$	564,685	$	496,933	$	365,666	$	159,901	$	109,880	$	—	$	1,697,065
Privately placed notes		36,000		—		31,250		—		53,750		—		121,000
SBA debentures and borrowings		2,500		15,075		15,500		4,500		—		25,750		63,325
Preferred securities		—		—		—		—		—		33,000		33,000
Total outstanding borrowings		603,185		512,008		412,416		164,401		163,630		58,750		1,914,390
Operating lease obligations		1,876		2,508		2,492		2,440		1,213		1,290		11,819
Total contractual obligations	$	605,061	$	514,516	$	414,908	$	166,841	$	164,843	$	60,040	$	1,926,209

(1)

Total debt is exclusive of deferred financing costs of $6.7 million as of March 31, 2023.

(2)

Balance excludes $2.0 million of strategic partner reserve deposits as of March 31, 2023.

Approximately $1.1 billion of our borrowings have maturity dates during the next two years, a majority of which are brokered CDs that have no right of voluntary withdrawal.

In addition, the illiquidity of portions of our loan portfolio and investments may adversely affect our ability to dispose of them at times when it may be advantageous for us to liquidate such portfolio or investments. In addition, if we were required to liquidate some or all of our portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net interest income.

We use a combination of long-term and short-term borrowings and equity capital to finance our lending and investing activities. Our long-term fixed-rate investments are financed primarily with fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. We have analyzed the potential impact of changes in interest rates on net interest income. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity a hypothetical immediate 1% increase in interest rates would result in an increase to net income as of March 31, 2023 by $1.2 million on an annualized basis, and the impact of such an immediate increase of 1% over an one year period would have been a reduction in net income by $1.6 million at March 31, 2023. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size, and composition of the assets on the balance sheet, and other business developments that could affect net income from operations in a particular quarter or for the year taken as a whole. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by these estimates.

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From time to time, we work with investment banking firms and other financial intermediaries to investigate the viability of several other financing options which include, among others, the sale or spinoff of certain assets or divisions, the development of a securitization conduit program, and other independent financing for certain subsidiaries or asset classes. These financing options would also provide additional sources of funds for both external expansion and continuation of internal growth.

The following table illustrates sources of available funds for us and each of our subsidiaries, and amounts outstanding under preferred securities and borrowings and their respective end of period weighted average interest rates at March 31, 2023. See Note 5 to the consolidated financial statements for additional information about each borrowing.


(Dollars in thousands)	Medallion Financial Corp.			MFC		MCI				FSVC				MB				March 31, 2023			December 31, 2022
Cash, cash equivalents and federal funds sold	$	14,784		$	177	$	4,120		(1)	$	145		(1)	$	113,156			$	132,382		$	105,598
Preferred Securities		33,000																	33,000			33,000
Average interest rate		7.11	%																7.11	%		6.86	%
Maturity	9/37																	9/37			9/37
Retail notes and privately placed borrowings		121,000																	121,000			121,000
Average interest rate		7.66	%																7.66	%		7.66	%
Maturity	3/24-12/27																	3/24-12/27			3/24-12/27
SBA debentures & borrowings
Amounts available							4,750												4,750			4,750
Amounts outstanding							60,750				2,575								63,325			68,512
Average interest rate							3.12	%			3.25	%							3.13	%		3.08	%
Maturity						3/24 - 3/33				4/24								3/23 - 3/33			3/23 - 3/33
Brokered CDs & other funds borrowed															1,699,065		(2)		1,699,065			1,610,922
Average interest rate															2.35	%			2.35	%		1.91	%
Maturity														4/23-1/28				4/23-1/28			1/23-12/27
Total Cash	$	14,784		$	177	$	4,120			$	145			$	113,156			$	132,382		$	105,598
Total debt outstanding	$	154,000		$	—	$	60,750			$	2,575			$	1,699,065			$	1,916,390		$	1,833,434

(1)

Cash resides in the applicable SBIC and is generally not available for corporate use.

(2)

Includes deposits of $2.0 million related to the strategic partnership business and $10.6 million related to listing services.

Loan amortization, prepayments, and sales also provide a source of funding for us. Prepayments on loans are influenced significantly by general interest rates, medallion loan market values, economic conditions, and competition.

We also generate liquidity through deposits generated at the Bank, the offering of privately placed notes, through the issuance of SBA debentures, and through our preferred securities, and have utilized borrowing arrangements with other banks in the past, as well as from cash flow from operations. In addition, we may choose to participate a greater portion of our loan portfolio to third parties. We regularly seek additional sources of liquidity; however, given current market conditions, there can be no assurance that we will be able to secure additional liquidity on terms favorable to us or at all. If that occurs, we may decline to underwrite lower yielding loans in order to conserve capital until credit conditions in the market become more favorable; or we may be required to dispose of assets when we would not otherwise do so, and at prices which may be below the net book value of such assets in order for us to repay indebtedness on a timely basis.

Dividends and Stock Repurchases

Beginning in March 2022, the Company's board of directors reinstated our quarterly dividend. A dividend of $0.08 per share was paid in March 2023. We may, however, re-evaluate the new dividend policy in the future depending on market conditions. There can be no assurance that we will continue to pay any cash distributions, as we may retain our earnings to facilitate the growth of our business, to finance our investments, to provide liquidity, or for other corporate purposes.

On April 29, 2022, our board of directors authorized a new stock repurchase program, pursuant to which we were authorized to repurchase up to $35 million of our shares, which was increased to $40 million on August 10, 2022. Such new repurchase program replaced the previous one, which was terminated. The Company did not repurchase shares of common stock during the three months ended March 31, 2023. Accordingly, as of March 31, 2023, up to $19,998,012 of shares remain authorized for repurchase under our stock repurchase program.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in disclosure regarding quantitative and qualitative disclosures about market risk since we filed our Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a—15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, and have concluded that they are effective as of March 31, 2023 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our internal control over financial reporting to determine whether any changes occurred during the 2023 first quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, and have concluded that there have been no changes that occurred during the 2023 first quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 10 “Commitments and Contingencies” subsections (c) and (d) to the consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for details of the Company’s legal proceedings.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the Securities and Exchange Commission on March 10, 2023.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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ITEM 6. EXHIBITS

EXHIBITS


Number		Description

10.1		Amendment No. 3 to First Amended and Restated Employment Agreement, dated April 27, 2023, by and between Medallion Financial Corp. and Andrew Murstein. Filed herewith.

31.1		Certification of Alvin Murstein pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

31.2		Certification of Antony N. Cutrone pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

32.1		Certification of Alvin Murstein pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

32.2		Certification of Anthony N. Cutrone pursuant to 18 USC. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


MEDALLION FINANCIAL CORP.


Date:	May 8, 2023

By:	/s/ Alvin Murstein
	Alvin Murstein
	Chairman and Chief Executive Officer

By:	/s/ Anthony N. Cutrone
	Anthony N. Cutrone
	Executive Vice President and Chief Financial Officer

	Signing on behalf of the registrant as principal financial and accounting officer.

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