Medallion Financial Corp: Form 10-Q for the period ended Mar 31, 2025

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, 2025 and the year ended December 31, 2024. This section is intended to provide management’s perspective of our financial condition and results of operations. In addition, this section contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are described in the Risk Factors section 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, collector cars, and home improvements, and provides loan origination and other services to fintech partners. Medallion Capital is a wholly-owned subsidiary that originates commercial loans through its mezzanine financing business. As of March 31, 2025, our consumer loans represented 95% of our gross loan portfolio, inclusive of loans held for sale, and commercial loans represented 5%. Total assets were $2.85 billion and $2.87 billion as of March 31, 2025 and December 31, 2024.

Our loan-related earnings depend primarily on our level of net interest income. Net interest income is the difference between the total yield on our loan portfolio and the average cost of borrowed funds. We fund our operations through a wide variety of interest-bearing sources, including bank certificates of deposit issued to consumers, debentures issued to and guaranteed by the SBA, privately placed notes, trust preferred securities, and preferred stock of the Bank. Net interest income fluctuates with changes in the yield on our loan portfolios and changes in the cost of borrowed funds, as well as changes in the amount of interest-earning assets and interest-bearing liabilities held by us.

Net interest income is also affected by economic, regulatory, and competitive factors that influence interest rates, loan demand, and the availability of funding to finance our lending activities. We, like other financial institutions, are subject to interest rate risk to the degree that our interest-earning assets reprice, either due to inflation or other factors, on a different basis than our interest-bearing liabilities. We continue to monitor global supply chain disruptions, the impact of tariffs, gas prices, labor shortages, unemployment, and other factors contributing to U.S. inflation, the risk of recession and economic health, as well as other factors which contribute to competition and changes in the demand for our loan products. We have been, and continue to take, steps in the event of a potential economic downturn and in light of the current uncertainties and inflationary environment to moderate the pace of our recent growth.

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

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

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

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

CRITICAL ACCOUNTING 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, 2025, we identified our policies for the allowance for credit losses and goodwill and intangible assets 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, 2024, and there have been no material changes in such policies and estimates since the date of such report.

RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS

In December 2023, the FASB issued ASU 2023-09, Income Taxes, or Topic 740: Improvements to Income Tax Disclosures. The main objective of this update is to improve financial reporting disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments in this update are effective for the annual periods beginning after December 15, 2024. We do not expect this update to have a material impact on the financial statements.

CONTROL STATUTES AND REGULATIONS

Because the Bank is an “insured depository institution” within the meaning of the Federal Deposit Insurance Act and the Change in Bank Control Act as well as Medallion Financial Corp. being 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 the Bank or Medallion Financial Corp., without, in most cases, prior written approval of the FDIC or the Commissioner of the 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 the Bank’s 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: (a) direct or exercise a controlling influence over (i) the management or policies of a financial institution or (ii) the election of a majority of the directors or trustees of an institution; or (b) to vote 25% or more of any class of voting securities of a financial institution. In addition, under Utah law, there is a rebuttable presumption that a person has control of a Utah financial institution if the person has the power, directly or indirectly, or through or in concert with one or more persons, to vote more than 10% but less than 25% of any class of voting securities of a financial institution. 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.

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.

AVERAGE BALANCES AND RATES

The following table presents our consolidated average balance sheets, interest income and expense, and the average interest earning/bearing assets and liabilities, and which reflect the average yield on assets and average costs on liabilities as of and for the three months ended March 31, 2025 and 2024.

(Dollars in thousands)

(1) Includes deferred financing costs of $8.1 million and $8.2 million as of March 31, 2025 and 2024.

For the three months ended March 31, 2025, our total loans yielded 12.04%, as compared to 11.84% for the three months ended March 31, 2024. The 20 basis point increase reflects a higher yield on our loan portfolios, as we have increased the rates charged on new consumer originations over the past year as prevailing market interest rates have remained high. We have continued to use the higher interest rate environment as an opportunity to increase the rates on both newly issued recreation and home improvement loans, as well as seek to increase the credit quality of our new issuances, particularly in our recreation segment, with the weighted average FICO scores, measured at origination, of our outstanding recreation loans being 685 (683 exclusive of loans held for sale) as of March 31, 2025 compared to 684 as of March 31, 2024. We use weighted average FICO scores as an indicator of portfolio risk.

Our debt, with certificates of deposits being our largest source, funds our growing lending business. Our average interest cost for the three months ended March 31, 2025 of 4.16% increased 49 basis points from the three months ended March 31, 2024, attributable to the current higher interest rate environment, particularly the higher cost associated with our deposits. To the extent that prevailing market interest rates remain at current levels, we expect our cost of funds to continue to increase as we issue new certificates of deposit to replace maturing certificates of deposit and fund our growth. During the three months ended March 31, 2025, we issued deposits at rates up to 4.45% and 4.33% for three and five year certificates of deposit, with the most recent three and five year issuances being at rates of 4.15%. As described above, we have taken, and continue to take, steps to pass along a portion of the interest rate increases on newly originated loans, the process for which is slower than the pace of funding cost increases, thereby compressing our net interest margins.

RATE/VOLUME ANALYSIS

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

(Dollars in thousands)

During the three months ended March 31, 2025, the increase in interest income was mainly driven by the increase in the size of the consumer loan portfolios, as well as an increase in overall yield on interest-earning assets as we issue new loans at interest rates greater than the weighted average rates of our current portfolio. The increase in interest expense was driven by an increase in borrowing costs, primarily due to the increases in deposits as older deposits mature and are replaced at current market rates, as well as an overall increase in borrowings.

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

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

We measure our borrowing costs as our aggregate interest expense for all of our interest-bearing liabilities divided by the average amount of such liabilities outstanding during the period. The above table presents the average borrowings and related borrowing costs for the three months ended March 31, 2025 and 2024. We expect our borrowing costs to further increase as we take deposits and borrow other funds at the currently higher prevailing rates.

We continue to seek SBA funding through Medallion Capital to the extent it offers attractive rates. SBA financing subjects recipients to limits on the amount of secured bank debt they may incur. We use SBA funding to fund loans that qualify under the Small Business Investment Act of 1985, as amended, or the SBIA, and SBA regulations. In July 2023, we obtained a $20.0 million commitment from the SBA, all of which has been utilized as of March 31, 2025. In February 2024, we obtained an $18.5 million commitment from the SBA, with $10.3 million currently drawable, and the balance of $8.2 million drawable upon the infusion of $4.1 million of capital.

At March 31, 2025 and 2024, adjustable rate debt constituted less than 2% of total debt, and was comprised solely of our trust preferred securities borrowings.

LOANS

Loans are reported at the principal amount outstanding, inclusive of deferred loan acquisition costs, which primarily includes deferred fees paid to loan originators, which are amortized to interest income over the life of the loan. For the three months ended March 31, 2025, there was continued growth in the recreation and home improvement lending segments as compared to the prior year quarter. The tables below present the activity of the loan portfolio, inclusive of loans held for sale and loans held for investment.

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

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The following table presents the approximate maturities and sensitivity to change in interest rates for our loans as of March 31, 2025.

(Dollars in thousands)

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is maintained at a level estimated by management to absorb expected future losses in the portfolios. As of March 31, 2025 and December 31, 2024, the allowance totaled $100.4 million and $97.4 million, which represented 4.25% and 4.12% of total loans held for investment, respectively. The increase in allowance for credit losses were $22.0 million for the three months ended March 31, 2025 compared to $17.2 million for the three months ended March 31, 2024 as a result of rising loss rates, elevated delinquencies, and expected losses in our recreation loans, partially offset by a decrease in expected losses in our home improvement loans.

The following tables present the activity in the allowance for credit losses for the three months ended March 31, 2025 and 2024.

(Dollars in thousands)

(1) As of March 31, 2025, cumulative net charge-offs of loans and loan collateral in process of foreclosure in the taxi medallion portfolio were $161.7 million, including $95.2 million related to loans secured by New York City taxi medallions, some of which may represent collection opportunities for the Company.

(Dollars in thousands)

The following tables present the gross charge-offs for the three months ended March 31, 2025 and 2024, by the year of origination:

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The following tables present the allowance for credit losses by type as of March 31, 2025 and December 31, 2024.

(1) Does not include loans held for sale which are carried at the lower of amortized cost or fair value for which an allowance for credit loss is not established.

(2) As of March 31, 2025, total allowance for credit losses as a percent of nonaccrual loans was 293.37%.

(1) Does not include loans held for sale which are carried at the lower of amortized cost or fair value for which an allowance for credit loss is not established.

(2) As of December 31, 2024, total allowance for credit losses as a percent of nonaccrual loans was 291.93%.

As of March 31, 2025, the total allowance for credit losses as a percent of loans increased 13 basis points from December 31, 2024.

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

(Dollars in thousands)

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

As of March 31, 2025, taxi medallion loans in the process of foreclosure included 307 taxi medallions in the New York City market, 187 taxi medallions in the Chicago market, 24 taxi medallions in the Newark market, and 31 taxi medallions in various other markets.

SEGMENT RESULTS

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

Recreation Lending

Recreation lending is a return-oriented business focused on originating prime and non-prime recreation loans which is a significant source of income for us, accounting for 67% of our interest income for the three months ended March 31, 2025 and 65% for the three months ended March 31, 2024.

We maintain relationships with approximately 3,300 dealers and financial service providers, or FSPs, not all of which are active at any one time. FSPs are entities that provide finance and insurance, or F&I, services to small dealers that do not have the desire or ability to provide F&I services themselves. The ability of FSPs to aggregate the financing and relationship management for many small dealers makes them valuable to us. 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 39% of recreation lending’s new loan originations for the three months ended March 31, 2025 and 46% for the three months ended March 31, 2024. The percentage of new loan originations by the top ten dealer and FSP relationships is a measure of concentration, which management uses to determine whether to undertake diversification efforts, and which provides investors with information about origination concentration.

The recreation loan portfolio consists of tens of thousands of geographically distributed loans with an average loan size of approximately $21,000 as of March 31, 2025. The loans are fixed rate with an average term at origination of approximately 15 years. The weighted average maturity of our loans outstanding as of March 31, 2025 is approximately 11 years.

The loans are secured primarily by RVs, boats, collector cars, and trailers, with RV loans making up 55% of the portfolio, boat loans making up 19%, and collector cars making up 11% of the portfolio as of March 31, 2025, compared to 54%, 19%, and 10% as of March 31, 2024. Recreation loans are made to borrowers residing nationwide, with the highest concentrations in Texas and Florida at 16% and 10% of loans outstanding, compared to 16% and 10% as of March 31, 2024, and with no other states at or above 10%. As of March 31, 2025 and 2024, the weighted average FICO scores, measured at origination, of our recreation loans outstanding were 685 (683 exclusive of loans held for sale) and 684. The weighted average FICO scores at the time of origination for the loans funded in the three months ended March 31, 2025 and 2024 were 683 and 692.

As of March 31, 2025, the recreation loan portfolio was $1.5 billion, with the average interest rate increasing 21 basis points to 15.01% from a year ago. Additionally, the allowance for credit losses increased 19% from March 31, 2024, reflecting the 13% growth in the portfolio as well as rising loss rates and various economic factors.

During the three months ended March 31, 2025, we originated $86.8 million in recreation loans, compared to $105.8 million in the prior year quarter. The lower origination volumes reflect our restrictive underwriting standards and management's efforts to mitigate concentration risks. The following table presents quarterly originations for 2025, 2024, and 2023.

(Dollars in thousands)

As of March 31, 2025, 37.0% of the recreation loan portfolio were non-prime receivables with obligors who do not qualify for conventional consumer finance products as a result of, among other things, adverse credit history. The following table presents non-prime originations in comparison to total originations for the three months ended March 31, 2025 and years ended December 31, 2024 and 2023.

(Dollars in thousands)

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The following table presents selected financial data and ratios as of and for the three months ended March 31, 2025 and 2024.

(Dollars in thousands)

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

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

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

(4) The charge-off ratio in the recreation lending segment was 4.32% when including loans held for sale.

Home Improvement Lending

The home improvement lending segment works with contractors and FSPs to finance home improvements and is concentrated in roofs, swimming pools, and windows at 35%, 29%, and 13% of total home improvement loans outstanding as of March 31, 2025, as compared to 40%, 20%, and 13% as of March 31, 2024, with no other collateral types at or above 10%. Home improvement loans are made to borrowers residing nationwide, with the highest concentrations in Florida and Texas representing 13% and 11% of loans outstanding as of March 31, 2025, with each state representing 10% as of March 31, 2024 and no other states at or above 10%. As of March 31, 2025 and 2024, the weighted average FICO scores, measured at origination, of our home improvement loans outstanding, measured at origination, were 767 and 764. The weighted average FICO scores at the time of origination for the loans funded in the three months ended March 31, 2025 and 2024 were 783 and 776.

A large proportion of our home improvement-financed sales are facilitated by contractor salespeople with limited financing backgrounds rather than by contractor employees who provide F&I services. The result is contractor demand for financing services that facilitate an in-home transaction (e.g., digital tools, including mobile applications for phone or tablet, support for E-SIGN compliant electronic signatures, and extended operating hours), and additional resources for the salesperson throughout the financing process. We currently maintain relationships with approximately 900 contractors and FSPs. Our top ten contractors and FSP relationships were responsible for 57% of home improvement lending’s new loan originations for the three months ended March 31, 2025. The percentage of new loan originations by the top ten contractor and FSP relationships is a measure of concentration, which management uses to determine whether to undertake diversification efforts, and which provides investors with information about origination concentration.

The home improvement loan portfolio consists of thousands of geographically distributed loans with an average loan size of approximately $22,000 as of March 31, 2025. The loans are fixed rate with an average term at origination, for loans originated in the current year of approximately 15 years. The weighted average maturity of our loans outstanding as of March 31, 2025 is approximately 13 years.

As of March 31, 2025, the home improvement portfolio totaled $812.4 million, with allowance for credit losses increasing 11 basis points to 2.49% from a year ago reflecting higher delinquency and potential losses. The average interest rate charged on our loans increased 23 basis points to 9.83% at March 31, 2025 from a year ago.

During the three months ended March 31, 2025, we originated $48.8 million in home improvement loans, compared to $51.6 million in the prior year quarter. Origination volumes were somewhat lower due in part to ongoing restrictive underwriting standards and management's continued efforts to mitigate concentration risks. The following table presents quarterly originations for 2025, 2024, and 2023.

(Dollars in thousands)

As of March 31, 2025, less than 1% of the home improvement loan portfolio were non-prime receivables with obligors who do not qualify for conventional consumer finance products as a result of, among other things, adverse credit history. The following table presents non-prime originations in comparison to total originations for the three months ended March 31, 2025 and years ended December 31, 2024 and 2023.

(Dollars in thousands)

(*) Less than 1%.

The following table presents selected financial data and ratios as of and for the three months ended March 31, 2025 and 2024.

(Dollars in thousands)

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

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

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

Commercial Lending

We originate both senior and subordinated loans nationwide to businesses in a variety of industries, with California and Illinois having 31% and 10% of the segment portfolio, and no other states having a concentration at or above 10%. These mezzanine loans are primarily secured by a second position on all assets of the businesses and generally range in amount from $2.5 million to $6.0 million at origination, and typically include an equity component as part of the financing. These equity components, although a small portion of the overall financing, have the potential to generate significant yield enhancement when the underlying portfolio company enters a capital transaction. During the three months ended March 31, 2025, net gains of $9.4 million were recognized with respect to these equity investments. The commercial lending business has concentrations in manufacturing, construction, and wholesale trade making up 58%, 13%, and 12%, of the loans outstanding as of March 31, 2025. During the three months ended March 31, 2025, we originated $9.7 million of new commercial loans.

The following table presents selected financial data and ratios as of and for the three months ended March 31, 2025 and 2024. 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.

(Dollars in thousands)

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

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

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

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Taxi Medallion Lending

The taxi medallion lending segment operates in the New York City metropolitan area. During the three months ended March 31, 2025, we continued to utilize a taxi medallion value of $79,500 in the New York City and Newark markets despite fluctuating transfer prices that have exceeded that value, with all other markets being valued at $0 at the end of the quarter. We continued to not recognize interest income with all loans being placed on nonaccrual (except for settled loans with interest being paid in excess of the loan balance), and by transferring underperforming loans from the portfolio to loan collateral in process of foreclosure with charge-offs to collateral value, once loans become more than 120 days past due.

During the three months ended March 31, 2025, we collected $2.6 million related to taxi medallion and related assets, which resulted in net recoveries and gains of $1.7 million in the quarter. The amount of cash collected as well as recoveries recorded vary greatly from period to period due to a wide variety of circumstances surrounding each of the underlying assets, and while we continue to focus on collection and recovery efforts, it is unlikely that there will be future collections at the higher levels experienced in prior years.

The following table presents selected financial data and ratios as of and for the three months ended March 31, 2025 and 2024.

(Dollars in thousands)

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

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

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

Corporate and Other Investments

This non-operating segment relates to our equity and investment securities as well as our legacy commercial business, and other assets, liabilities, revenues, and expenses, which are not specifically allocated to the operating segments. Additionally, we historically have and continue to account for goodwill in this non-operating segment. All goodwill relates to the Bank, specifically the recreation and home improvement lending segments.

This segment includes loans related to our strategic partnership program, which are issued by the Bank. The associated activities of the strategic partnership program are currently limited to originating loans or other receivables facilitated by our strategic partners and selling those loans or receivables to our strategic partners or other third parties, without recourse, within a specified time after origination, such as three business days. Strategic partnership loans were $10.5 million as of March 31, 2025 and $0.9 million as of March 31, 2024, with originations of $136.2 million during the three months ended March 31, 2025 and $15.8 million during the three months ended March 31, 2024.

The following table presents selected financial data and ratios as of and for the three months ended March 31, 2025 and 2024.

(Dollars in thousands)

SUMMARY CONSOLIDATED FINANCIAL DATA

The table below presents our selected financial data for the three months ended March 31, 2025 and 2024.

(Dollars in thousands)

(1) Includes $68.8 million related to non-controlling interests in consolidated subsidiaries as of both March 31, 2025 and 2024.

(2) Excludes deferred financing costs of $8.1 million and $8.5 million as of March 31, 2025 and 2024.

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

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

CONSOLIDATED RESULTS OF OPERATIONS

Three Months Ended March 31, 2025 Compared to the Three Months Ended March 31, 2024

Net income attributable to shareholders was $12.0 million, or $0.50 per diluted share, for the three months ended March 31, 2025, compared to $10.0 million, or $0.42 per diluted share, for the three months ended March 31, 2024.

Total interest income was $75.4 million for the three months ended March 31, 2025, compared to $67.1 million for the three months ended March 31, 2024. The increase in interest income reflects the continued growth in our recreation and home improvement lending segments and increased weighted average interest rates charged on those loans. The yield on interest earning assets was 11.65% for the three months ended March 31, 2025, compared to 11.34% for the three months ended March 31, 2024. The increase reflects higher interest rates on new originations in our recreation and home improvement lending segments, with the yield anticipated to continue to increase as older loans with lower rates amortize and newer originations at the higher current rates continue to become a larger portion of our portfolio. We expect this increased yield to be partially offset by lower originations due to the economic environment and our risk mitigation strategy, as further described below.

Loans, inclusive of both loans held for investment and those held for sale, were $2.4 billion as of March 31, 2025, comprised of recreation ($1.5 billion), home improvement ($812.4 million), commercial ($116.1 million), strategic partnership ($10.5 million), and taxi medallion ($1.7 million) loans. We had an allowance for credit losses as of March 31, 2025 of $100.4 million, which was attributable to recreation (71%), home improvement (20%), commercial (8%), and taxi medallion (1%) loans.

Loans decreased $4.6 million, or less than 1%, from December 31, 2024 and increased $258.0 million from March 31, 2024. Originations during the quarter were $281.7 million and included $136.2 million of originations for loans held for sale in our strategic partnership program and $145.4 million of originations of loans held for investment, as compared to $173.1 million of total originations in the prior year quarter. Originations decreased in both of our consumer segments as we saw a decrease in demand related to the current economic environment. We continue to focus on originating loans that we believe will perform better during economic downturns, as opposed to originating loans at lower credit standards.

The provisions for credit losses were $22.0 million for the three months ended March 31, 2025, compared to $17.2 million in the three months ended March 31, 2024. The current quarter provision included $0.8 million of net loan recoveries in the taxi medallion lending segment and $3.1 million of provisions associated with our commercial lending segment as we increased provisions on loans which have potential exposure to uncertain tariff policies and the related risk of recession. Additionally, the provision reflected $1.2 million and $0.2 million of increased allowance for credit losses on the recreation and home improvement loan portfolios as we adjusted qualitative factors to address uncertainty due to the current economic environment. Net charged off loans of $19.0 million increased from $17.6 million in the prior year quarter, including $16.4 million related to the recreation loan portfolio, compared to $14.6 million in the prior year quarter, and $3.1 million related to the home improvement loan portfolio, compared to $4.0 million in the prior year quarter. Gross charge-offs were $20.2 million and $4.2 million in the recreation and home improvement lending segments, compared to $18.1 million and $4.9 million in the prior year quarter. Charge-offs in the consumer lending segments correlate with delinquency status, which improved from December 31, 2024, consistent with seasonal trends.

Interest expense was $24.0 million for the three months ended March 31, 2025, compared to $19.2 million for the three months ended March 31, 2024, reflecting both higher average borrowings and higher average borrowing costs during the three months ended March 31, 2025, with borrowing costs expected to further increase in the current interest rate environment. The average cost of borrowed funds was 4.16% for the three months ended March 31, 2025, compared to 3.67% for the three months ended March 31, 2024. The increase of 49 basis points over the prior year quarter is largely 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 deposit maturities with new issues, we expect our cost of funds to further increase. During the three months ended March 31, 2025, we issued certificates of deposit at rates up to 4.45% and 4.33% for three and five year certificates of deposits, with the most recent issuances being at rates of 4.15% for three and five year certificates. In addition, we expect our interest expense related to SBA borrowings to increase as newly issued SBA debentures carry a higher rate compared to some of our previously issued debentures. Average debt outstanding was $2.3 billion for the three months ended March 31, 2025, up from $2.1 billion for the three months ended March 31, 2024, as we have increased our borrowings, particularly certificates of deposit to fund our loan growth. See page 36 for tables that present average balances and cost of funds for our funding sources.

Net interest income was $51.4 million for the three months ended March 31, 2025, compared to $47.9 million for the three months ended March 31, 2024. The net interest margin before the impact of the allowance for credit losses was 7.94% for the three months ended March 31, 2025, compared to 8.10% for the three months ended March 31, 2024, reflecting the above, particularly the rising cost of borrowings experienced over the prior year quarter, offset to an extent by higher yields on loans and investments compared to the prior year quarter. With the rates we charge on outstanding loans being fixed, and our cost of funds increasing, our net interest margin has tightened over the prior periods as we can only increase our yield through higher rates charged on new originations. We expect this trend of tightening margins to continue to some degree as our cost of funds, particularly on deposits, continues to increase, with the current average rate on deposits of 3.75% being lower than new issuance costs.

Net other income, which is comprised primarily of gains on equity investments, gains related to and in connection with the disposition of taxi medallion assets, fees associated with our strategic partnership program, as well as including prepayment fees, servicing fee income, and late charges was $11.6 million for the three months ended March 31, 2025, compared to $5.4 million for the three months ended March 31, 2024, and included net equity gains of $9.4 million in the current quarter compared to $4.2 million in the prior year quarter.

Operating expenses were $20.8 million for the three months ended March 31, 2025, compared to $18.2 million for the three months ended March 31, 2024. Salaries and benefits were $10.0 million for the three months ended March 31, 2025, compared to $9.5 million for the three months ended March 31, 2024, primarily reflecting a greater head count at our operating subsidiaries, Medallion Bank and Medallion Capital, and higher equity compensation costs in the current quarter. Legal and professional fees were $1.8 million for the three months ended March 31, 2025, up from $0.8 million in the three months ended March 31, 2024, which included, in the three months ended March 31, 2024, $0.6 million of proxy-related costs and $0.3 million of professional technology costs associated with our loan servicing platform. Additionally loan servicing fees of $2.8 million increased from $2.5 million in the prior year quarter and depreciation expense increased $0.5 million, primarily related to our loan servicing platform.

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

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

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

The effect of changes in interest rates is mitigated by regular turnover of the portfolios. We believe that the average life of our loan portfolios varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment. However, borrowers may prepay for a variety of other reasons, such as to monetize increases in the underlying collateral values. In addition, we manage our exposure to increases in market rates of interest by incurring fixed-rate indebtedness, such as ten year subordinated SBA debentures, and by setting repricing intervals on certificates of deposit, for terms of up to five years.

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

The following table presents our interest rate sensitivity gap at March 31, 2025. 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, 2025 Cumulative Gap (1)

(Dollars in thousands)

(1) The ratio of the cumulative one-year gap to total interest rate sensitive assets was (27%) as of March 31, 2025, and was (18%) as of December 31, 2024.

(2) Excludes federal funds sold and investment securities.

Our interest rate sensitive assets were $2.7 billion and interest rate sensitive liabilities were $2.3 billion at March 31, 2025. The one-year cumulative interest rate gap was a negative $724.4 million, or 27% of interest rate sensitive assets. We actively monitor the level of exposure with the goal that movements in interest rates not adversely and unexpectedly negatively affect future earnings. We use net interest income sensitivity analysis as our primary metric to measure and manage the interest rate sensitivities of our loan and investment securities portfolios.

Our trust preferred securities bare a variable rate of interest of the 90-day Secured Overnight Financing Rate, or SOFR, adjusted by a relevant spread adjustment of approximately 26 basis points.

Liquidity and Capital Resources

Our sources of liquidity include brokered certificates of deposit and other borrowings at the Bank, unfunded commitments to sell debentures to the SBA, loan amortization and prepayments, private and public 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.

In August 2024, we completed a private placement to certain institutional investors of $5.0 million aggregate principal amount of 8.625% unsecured senior notes due August 2039, with interest payable semiannually. We used the net proceeds from the offering for general corporate purposes.

In June 2024, we amended the notes previously issued in a private placement to certain institutional investors in December 2023, increasing the principal amount from $12.5 million to $17.5 million, reducing the interest rate to 8.875% from 9.0%, and extending the maturity date from December 2033 to June 2039. We used the net proceeds from the offering for general corporate purposes, which included the repayment of the remaining 8.25% notes that matured in March 2024 described below.

On February 28, 2024, Medallion Capital accepted a commitment from the SBA for $18.5 million in debenture financing with a ten-year term. Medallion Capital can draw funds under the commitment, in whole or in part, until September 30, 2028. In connection with the commitment, Medallion Capital paid the SBA a leverage fee of $0.2 million, with the remaining $0.4 million of the fee to be paid pro rata as Medallion Capital draws under the commitment.

In September 2023, we completed a private placement to certain institutional investors of $39.0 million aggregate principal amount of 9.25% unsecured senior notes due September 2028, with interest payable semiannually.

In April 2023, the Bank began to originate retail savings deposits through a third-party service provider and, as of March 31, 2025, the Bank had $5.2 million in retail savings deposit balances.

In March 2023, the Bank established a discount window line of credit at the Federal Reserve. As of March 31, 2025, the Bank had $213.4 million in home improvement loans pledged as collateral to the Federal Reserve. The current advance rate on the pledged securities is approximately 46% of book value, for a total of approximately $97.4 million in secured borrowing capacity, of which $65.0 million was utilized as of March 31, 2025.

The Bank has borrowing arrangements with several correspondent banks. These agreements are accommodations that can be terminated at any time, for any reason, and allow the Bank to borrow up to $75.0 million. As of March 31, 2025, there were no outstanding amounts with respect to these arrangements.

The net proceeds from the various private placements were used for general corporate purposes, including repayment of outstanding debt, including repayment of our 9.00% notes at maturity in April 2021 and to pay down other borrowings, including some borrowings at a discount, and to repurchase, repay, and cancel $36.0 million of our 8.25% notes, which matured in March 2024.

Subject to market conditions, the Bank may seek to issue one or more additional series of preferred stock in order to increase capital levels, grow the consumer loan portfolios or, depending on the size and other terms of any such issuance and subject to receipt of any required regulatory approvals, redeem some or all of its outstanding Series F or Series E preferred stock. Any determination to seek to redeem some or all of the Bank’s outstanding preferred stock would be based on its actual and anticipated capital levels and capital deployment opportunities. There can be no assurance that the Bank will issue additional series of preferred stock or, if it does, that it will apply the proceeds to redeem the Series E or Series F preferred stock.

The table below presents the components of our debt as of March 31, 2025, exclusive of deferred financing costs of $8.1 million. See Note 5 to the consolidated financial statements for details of the contractual terms of our borrowings.

(Dollars in thousands)

(1) Percentages may not foot due to rounding.

(2) Weighted average contractual rate as of March 31, 2025.

(3) Balance excludes $4.3 million of strategic partner reserve deposits as of March 31, 2025.

Our contractual obligations expire on or mature at various dates through September 2037. The following table presents our contractual obligations at March 31, 2025.

(Dollars in thousands)

(1) Total debt is exclusive of deferred financing costs of $8.1 million as of March 31, 2025.

(2) Balance excludes $4.3 million of strategic partner reserve deposits as of March 31, 2025.

Approximately $1.4 billion of our borrowings have maturity dates during the next two years, a majority of which are brokered certificates of deposits 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, 2025 by $2.4 million on an annualized basis, and the impact of such an immediate increase of 1% over a one year period would have been a reduction in net income by $2.8 million at March 31, 2025. 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.

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 trust preferred securities and borrowings and their respective end of period weighted average interest rates at March 31, 2025. See Note 5 to the consolidated financial statements for additional information about each borrowing.

(Dollars in thousands)

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

(2) Includes deposits of $4.3 million related to the strategic partnership program and $10.4 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, taxi 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, through our trust preferred securities, and through preferred securities at our subsidiaries 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 out 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 at $0.08 per share. On October 24, 2023, the Company’s board of directors authorized and increased the quarterly dividend to $0.10 per share, on October 25, 2024, authorized and increased the quarterly dividend to $0.11 per share and on April 25, 2025, further authorized and increased the quarterly dividend to $0.12 per share, beginning with the dividend payable on May 30, 2025 to holders of record as of May 15, 2025. The Company currently expects to continue to pay quarterly dividends at the current rate for the foreseeable future. We may, however, re-evaluate the 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 with no expiration date, 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, also with no expiration date. During the three months ended March 31, 2025, the Company repurchased 60,185 shares of its common stock at an aggregate cost of $0.5 million. Accordingly, as of March 31, 2025, up to $14,861,069 of shares remained authorized for repurchase under our stock repurchase program.

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, 2024.

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, 2025 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 quarter ended March 31, 2025 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 quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2024, which was filed with the Securities and Exchange Commission on March 13, 2025.