- 2Q24 results show worrying trends that must be addressed immediately.
- Core charge-offs (YoY), ROAA, ROAE and holding company cash-burn trended poorly.
- Quarterly earnings, ROAA and core ROAA (Ex. Taxi Medallion) are at 3-year lows.
- Low Price/Tangible Book Value multiple may be an indication of market skepticism despite Russell 3000 inclusion.
- ZimCal believes that Medallion Financial Corp. has tremendous upside with the right governance and leadership.
- ZimCal previously provided MFIN with a version of its “5 Steps to Improvement” plan that anticipated current risks and negative trends and urges management to take decisive, proactive action.
MINNEAPOLIS, Aug. 20, 2024 (GLOBE NEWSWIRE) --
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.
