Please read the full release with accompanying graphs,
sources and details here.
Summary of the release below.
ZimCal Asset Management, LLC, and its affiliates (collectively
“ZimCal”, “We”, “Our”) are one of the largest investors in
Medallion Financial Corp. (the “Company” or “MFIN”) and have been
invested in MFIN for over 3 ½ years. Our singular focus is on
making MFIN better and unlocking the tremendous potential of
Medallion Bank. See www.restoretheshine.com for details on the
recently ended proxy contest to replace 2 incumbent directors,
where, despite insider ownership that gave MFIN a 44% lead, 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 stockholders. We also believe that MFIN’s
management team is overpaid and must be improved. Until we see
positive changes, we will work to hold MFIN’s Board and management
team accountable.
Last October 2023, we first brought up our detailed concerns
about MFIN’s performance with the Board and Andrew Murstein, MFIN’s
President/COO. That extensive analysis formed the foundation of our
detailed, comprehensive “5 Steps to Improvement” white paper, a
version of which we shared with the Company during the proxy
contest. Last year we felt that the Company had adequate time to
course-correct and proactively mitigate high probability and high
impact risks and gave several suggestions on how to do so. However,
MFIN ignored our suggestions and none were implemented. During the
proxy contest MFIN unequivocally dismissed our ideas stating:
“[ZimCal’s] five-step plan” has no actionable benefits
for the Company. No change is needed and based on [its] statements
[ZimCal] would only bring negative change that could derail the
Company’s continued value creation…”
However, a majority of the issues we identified in our analysis
a year ago, and again in our 5 Steps to Improvement plan, appear to
be manifesting themselves. We will touch on a few of the major
concerns we identified in MFIN’s 2Q24 earnings below.
Please read the full release with accompanying graphs, sources
and analysis here.
1. Non-core
recoveries/gains disguised the decline in core (mostly consumer
loans) performance
- Taxi Medallion assets only
represented 0.5% of assets but recoveries distorted earnings and
disguised declines in core earnings and core returns after FYE21.
This was brought to MFIN’s attention in 2023.
- The combination of declining core
performance and non-core earnings distortion is why MFIN’s
quarterly net earnings decreased 50% and 35% year-over-year at 2Q24
and 1Q24.
- The executive team should have been
rewarded for core performance not non-recurring distortions.
- This also shows the unsustainability
of 2022 and 2023 earnings and ROAA/ROAE which MFIN did not
explicitly acknowledge as it touted its various financial
achievements in public filings and the proxy contest. See graphs
here.
- 2Q24 reported quarterly earnings of
$7.1 million were the lowest since 4Q20.
2. Recreation asset
quality is declining and charge-offs may cripple MFIN unless action
is taken NOW
- Recreation loans, and the $525
million in subprime Recreation loans, worry us the most.
- Subprime Recreation originations
doubled in 2Q24 over 1Q24 even though ZimCal believes we are
heading into a likely subprime consumer slowdown with discretionary
spending headwinds.
- In October 2023 and in our recent 5
Step plan, we suggested MFIN reduce exposure to subprime until it
had more clarity on the economy and end-markets and to avoid
“chasing” yield.
- The worsening asset quality trend we
predicted has materialized but of course our preferred outcome
would have been a proactive MFIN in 2023 with the disclosure of key
metrics for the Board and investors to monitor.
- Instead, subprime balances stayed
steady and net charge-offs for Recreation reached an 11-year high
of 4.3% at 4Q23 and worsened to 4.34% at 1Q24. See graphs
here.
- We expected, and saw, a seasonal
improvement in Recreation (and Home Improvement) at 2Q24 but net
charge-offs of 3.0% are still 60% worse than 2Q23 and 500% worse
than 2Q22.
Please read the full release with accompanying graphs, sources
and analysis here.
3. Margins and returns
(ROAE and ROAA) will remain under pressure without decisive
management action
- Net interest margin will remain
under pressure with MFIN having little protection from declining
rates due to its callable, long-maturity loans and brokered CD
funding.
- MFIN’s weighted average maturities
for its CDs was 22 months at 2Q24 and CD rates will be driven by
similar maturity (1 to 3 yr) treasuries. MFIN’s CD rates have
lagged treasuries on the way up and we believe they will lag them
on the way down which will pressure NIM. See graphs here.
- A lowered NIM would be manageable,
except MFIN has higher overhead expenses than it should, and we
believe that its worsening efficiency ratio of 39% at 2Q24 is well
above where it should be.
- Quarterly ROAA has deteriorated to a
3-year low of 1.1% as reported and 0.9% (core) at 2Q24; we warned
about this in October 2023 and in our 5 Step plan.
- This also means that MFIN, in our
view, will probably need to raise expensive debt to fund holding
company expenses that will likely be priced ABOVE MFIN’s
YTD ROAE.
All the issues we have identified are problematic for
MFIN but they are not insurmountable. It just requires
leaders that are willing to acknowledge the truth of the situation
and creatively seek solutions without being paralyzed by their
circumstances or avoiding near-term, but necessary, pain. Andrew
Murstein and the Board have given us no indication that they are
capable of doing so but we hope they prove us wrong. We urge MFIN
to act now to mitigate risk.
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, LLC
ZimCal 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
Disclaimer
ZimCal 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
76,112 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.
Media contact: nicole@nh-consult.com
Medallion Financial (NASDAQ:MFIN)
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