Medallion Bank (the “Bank”) recently released its 4Q24 earnings.
Medallion Financial Corp (“MFIN” or the “Company”) will be
releasing consolidated earnings shortly, along with important
updates on a possible SEC settlement involving fraud and touting
charges against Andrew Murstein, President and Board Member of
MFIN, that has cost shareholders an estimated $8 million in legal
fees to defend.
The Bank represents approximately 95%i of MFIN’s consolidated
revenues. On almost all metrics, financial performance is down.
Frustratingly, MFIN has lagged in areas that ZimCal Asset
Management LLC (“ZimCal”, “We”, “Our”) predicted almost 16 months
ago.
ZimCal remains one of MFIN’s largest investors and has been
invested for 4 years. Had MFIN and its board listened to us in 2023
and taken proactive steps to mitigate risk, enhance its operations,
resolve the SEC complaint and numerous other detailed suggestions
ZimCal offered to increase enterprise value, we believe MFIN would
be trading at a substantial premium to its current
value.
Against the backdrop of healthy consumer data, and booming stock
and credit markets, we ask MFIN stockholders - are you happy with
such glaring underperformance or do you think the Company can do
better? Are you satisfied with MFIN’s President being sued by the
SEC for alleged fraud and yet earning tens of millions in
compensation even as MFIN’s stock is down, and its unadjusted and
core returns are at their worst in over 4 yearsii?
We will withhold our full analysis until MFIN’s earnings are
released, but we note a few key points about the Bank’s earnings -
divided into positives and negatives.
Full analysis with graphs can be accessed
here.
POSITIVES IN 4Q24 MEDALLION BANK EARNINGS
1. Asset growth is flatIf this is driven by a
reluctance on the Bank’s part to lower underwriting standards
simply to increase growth this is positive. Chasing returns by
recklessly opening the credit box would be a mistake. If this is
driven by constraints on lending because the Bank’s capital ratio
of 15.6% is just above the 15% mandatory minimum, then this is
problematic. For similar reasons, we support a robust loan
origination and sale or securitization strategy to augment interest
income, but we think the 1Q25 loan sales are problematic if they
are driven by an effort to juice near-term earnings and avoid
breaching the Bank’s minimum leverage ratio.
2. Allowance for credit losses (ACL) has been increased
to cover future losses, driven by Recreation ACLACL for
Recreation loans specifically increased to 5.00% at 4Q24 from 4.31%
at 4Q23. Since 2024, charge-offs have also increased, indicating an
effort by the Bank to better recognize the threats of future
charge-offs and provision accordingly. We felt that the Bank
under-provisioned in the last crisis to artificially boost
earnings; we are supportive of their decision to avoid doing so
now.
NEGATIVES IN 4Q24 MEDALLION BANK EARNINGS
1. Consumer credit quality continues to decline, driven
by RecreationRecreation loans made up ~65% of total loans
at 4Q24. Subprime Recreation was an estimated 35% of Recreation
loans or ~$550 million at 4Q24. This borrower demographic will be
more stressed by higher for longer rates, inflation and a
potentially softening labor market. Despite the Bank’s increased
loss allowances, we remain concerned about quarterly consumer
charge-offs, which are now at their highest since 2010 and well
above the most recent peak in 2019 (Figure 1 below or
here). We are concerned that this could get worse.
We have beaten our head against the wall for 16 months urging MFIN
to proactively mitigate these risks (see letter here from October
2023) but without success.
2. Net Interest Margin (NIM) continues to be pressured
by expensive funding costsQuarterly NIM declined to 8.28%
at 4Q24 from 8.75% a year ago at 4Q23. This is the lowest quarterly
NIM since 2019 when we started tracking this for the Bank. This was
mainly driven by higher funding costs and an inability to
materially raise loan yields. As predicted, the Bank’s cost of
funds (almost entirely CD deposits) continued to trend higher and
reached an estimated 3.95% at 4Q24iii. We have noted that a Bank CD
portfolio with a 1.8 year weighted average maturity and 36% of CDs
maturing in 2024 as of 12/31/23iv, would have rates that would lag
benchmark rate increases on the way up (boosting NIM) but would
also lag benchmarks on the way down (hurting NIM). We have tracked
brokered CD rates through one of the largest platforms since
September 2024 and note that while short-term CD (less than 1-year)
rates are down, 1, 2 and 5-year CD rates are UP
since 09/30/24 and 12/31/24. (See Figure 2 below or
here). This shows that NIM pressure will
persist.
3. Earnings have declined YoY despite being boosted by a
“noisy” allowance releaseCore net earnings available to
common stockholders were $10.3 million in 4Q24 after eliminating
$3.9 million in provision reversals and $900,000 in non-core Taxi
Medallion recoveries (adjustment to earnings is after taxes).
Unadjusted earnings were $14 million. If the Bank were a standalone
entity, this would be mediocre but manageable. But when you pile on
high holding company expenses and debt service, this is
unsustainable. The Bank paid a dividend of $6MM to the holding
company in 4Q24 leaving only $4.3MM in core earnings to boost
capital levels and fund future loan growth. As we noted in our last
earnings commentary, quarterly earnings for MFIN in 2024 are the
lowest they have been on an unadjusted and adjusted basis since the
last stages of the Taxi Medallion implosion in 2020. Bank ROAA and
core ROAA (excluding non-core Taxi Medallion recoveries) we
calculated at 2.50% and 1.65% respectively at 4Q24. This core ROAA
is dangerously low for a consumer lender and leaves little room for
error. Lowered earnings are one of the reasons the Bank’s parent
company (MFIN) had to borrow $10 million in 2024 to pay $9.5
million in dividends and share buybacks through 3Q24. The Bank
continues to “carry” the weight of its parent, which is reliant on
the Bank for upstreamed dividends to fund its expenses and pay its
expensive debt.
We believe that Medallion Bank (and MFIN) have tremendous upside
but only with the right Board and leadership. We encourage
investors to review www.restoretheshine.com for details on the 2024
proxy contest to replace 2 incumbent directors, where, despite
insider ownership that gave MFIN a 44% leadv, ZimCal still earned
22% of stockholder votes with over 1 in 4
stockholders voting against MFIN’s compensation plan. We
believe that MFIN’s board of directors (the “Board”) has shown weak
governance and is beholden to the Murstein family rather than to
all stockholdersvi. We also believe that MFIN’s management team is
overpaid and must be improvedvii. We believe that it is ludicrous
to pay MFIN’s President $6.5 million or 19% of MFIN’s core
earningsviii at FYE23, significantly higher than all but one of
MFIN’s self-selected peersix and comparable to the highest paid
Wall Street hedge fund managers. Until we see positive
changes, we will work to hold MFIN’s Board and management team
accountable and believe the potential for the Company is
extraordinary.
Visit www.restoretheshine.com for more information or read our 5
Steps to Improvement.ZimCal will issue ongoing press releases with
updates and details on its plan to “Restore the Shine” to Medallion
Financial Corp.
About ZimCal Asset Management, LLCZimCal Asset
Management is an alternative investment firm focused primarily on
niche, illiquid and complex credit investment opportunities.
ZimCal Asset Management partners with both healthy and
distressed borrowers or issuers and provides customized solutions
that meet their unique needs and circumstances. Over the last 15
years, the founder of ZimCal Asset Management has developed a
specialization investing in FDIC-insured institutions and has
partnered with over 120 bank lenders through investments on both
sides of the balance sheet.
ZimCal usually works in collaboration with bank leadership teams
if required, but on very rare occasions, must insert itself more
forcefully if it believes that leadership is underwhelming and
threatens to undermine stakeholder investments. ZimCal prides
itself on performing extensive, rigorous financial analysis and
research to fully understand the risks of any investment.
Important Information and
DisclaimerZimCal Asset Management, LLC, and its affiliates
BIMIZCI Fund, LLC, Warnke Investments LLC and Stephen Hodges
(collectively, “ZimCal” or “we”), are, directly or indirectly,
owners of securities of Medallion Financial Corp. (the “Company”).
ZimCal currently has combined investment exposure of $15,604,000
million to the Company, comprised of $15 million par value of Trust
Preferred Securities (backed by the Company’s issued debt), and
76,122 shares of the Company. We are not currently engaged in any
solicitation of proxies from stockholders of the Company. ZimCal
intends to monitor the performance and corporate governance of the
Company, as well as the actions of the Company’s management and
board. As ZimCal deems necessary, ZimCal will assert its
stockholder rights.
Except as otherwise set forth herein, the views
expressed reflect ZimCal’s opinions and are based on publicly
available information with respect to the Company. We recognize
that there may be confidential information in the possession of the
Company that could lead it or others to disagree with our
conclusions. ZimCal reserves the right to change any of its
opinions expressed herein at any time as it deems appropriate and
disclaims any obligation to notify the market or any other party of
any such change, except as required by law. We disclaim any
obligation to update the information or opinions contained
herein.
The information herein is being provided merely
as information and is not intended to be, nor should it be
construed as, an offer to sell or a solicitation of an offer to buy
any security.
Some of the information herein may contain
forward-looking statements. All statements contained herein that
are not clearly historical in nature or that depend on future
events are forward-looking. The words “anticipate,” “believe,”
“expect,” “potential,” “could,” “opportunity,” “estimate,” “plan,”
and similar expressions are generally intended to identify
forward-looking statements. There can be no assurance that any
forward-looking statements will prove to be accurate and therefore
actual results could differ materially from those set forth in,
contemplated by, or underlying these forward-looking statements. In
light of the significant uncertainties inherent in forward-looking
statements, the inclusion of such information should not be
regarded as a representation as to future results or that the
objectives and strategic initiatives expressed or implied by such
forward-looking statements will be achieved.
i Source: MFIN 10K/Qsii See www.restoretheshine.com and MFIN
10K/10Qsiii Source: Medallion Bank 4Q24 8K. This is based on the
Bank’s annual average CD rate of 3.57% at 4Q24.iv Source; MFIN 2024
10Kv Source: MFIN DEF14A. Insider ownership derived from recent
disclosures by MFIN. Insiders owned ~7 million shares and total
votes cast were 16 million. We have assumed that all insiders voted
and voted against ZimCal. See here for full SEC filing on
stockholder meeting voting results.vi See www.restoretheshine.com
for why we believe the Board is not fulfilling its fiduciary
responsibilities to stockholders. Also see Section 1 and Section 2
of the plan for further examples.vii See www.restoretheshine.com
for why we believe Management, specifically Andrew Murstein, is
overpaid relative to bank peers, proxy peers and in terms of
absolute performance. Also see Section 1 of the plan for further
examples.viii See www.restoretheshine.com for comparisons to
larger, top performing banks and proxy peers selected by MFINix See
viii above.
Media contact: nicole@nh-consult.com
Medallion Financial (NASDAQ:MFIN)
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Medallion Financial (NASDAQ:MFIN)
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