- 4Q24 Medallion Bank earnings continue disturbing downward trend
- Consolidated Medallion Financial Corp earnings have not yet been released
- Due to lower Bank earnings, Medallion Financial may struggle to pay dividends, operating expenses and a possible SEC penalty with existing cash
- Medallion Financial and Andrew Murstein face a looming SEC settlement
- Despite predictable down-trending results, executives were paid record compensation in 2023
- ZimCal believes that Medallion Financial Corp has huge upside with the right governance and leadership
- ZimCal previously provided MFIN with versions of its “5 Steps to Improvement” plan that anticipated current risks and negative trends and urges management to take decisive, proactive action
Full analysis with graphs can be accessed here.
MINNEAPOLIS, Feb. 19, 2025 (GLOBE NEWSWIRE) --
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 flat
If 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 ACL
ACL 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 Recreation
Recreation 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 costs
Quarterly 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 release
Core 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, 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 76,122 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/Qs
ii See www.restoretheshine.com and MFIN 10K/10Qs
iii 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 10K
v 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 MFIN
ix See viii above.
Media contact: nicole@nh-consult.com
