ZimCal Asset Management, LLC Comments on Medallion Financial Corp.’s First Quarter Results
May 02 2024 - 7:00AM
Business Wire
ZimCal Asset Management, LLC, and its affiliates BIMIZCI Fund
LLC, Warnke Investments LLC and Stephen Hodges (collectively
“ZimCal”) is one of the largest investors in Medallion Financial
Corp. (the “Company” or “MFIN”), has over $15.55 million in debt
and equity investment exposure and has been invested in MFIN for
over 3 years. ZimCal is currently in a proxy contest to replace two
Directors on MFIN’s Board of Directors (the “Board”) with two more
highly qualified individuals. ZimCal is urgently trying to
strengthen the Company by adding current consumer lending and risk
management experience to its Board, precisely two areas where we
believe the current Board is lacking. ZimCal’s Board nominees will
hold management accountable and work tirelessly to improve the
Company so that it can reach its tremendous potential, thrive in
the long-term and reward shareholders.
MFIN’s earnings this morning show that the need for change is
critical. MFIN characterized 1Q24 as a “strong start,” ZimCal
strongly disagrees. The quarter was not terrible, but the earnings
release made it clear that MFIN is managing to the quarter and to
expectations, rather than proactively managing for the long-term.
Earnings were boosted $0.14 or 48% by taxi medallion recoveries and
“gains on equity investments.” Earnings were also boosted by credit
loss provisions that were significantly below 1Q23 and 4Q23
provisions despite a weaker asset quality profile. On almost all
the critical metrics, performance declined. See Table 1 and 2
below. However, our view on the next 1, 2 or 5 years is
overwhelmingly positive if MFIN can get the right governance and
leadership team in place to position the Company for long-term
success.
Click HERE for the complete presentation with graphs.
Despite the years that have passed since the taxi medallion
implosion destroyed 85% of MFIN’s market capitalization in less
than 3 years, MFIN’s President is still in place and we are
concerned that things have not changed much. The tone of the
statements the Company made about 1Q24 are eerily similar to the
statements made about 1Q16, the year the Company charged off $30.6
million in taxi medallion loans and non-performing taxi medallion
loans reached $122 million or 21% of the portfolio. Statements
after 1Q16 earnings included:
“We are extremely pleased with the 2016 first
quarter. While taxi medallion lending continues to have virtually
zero losses…”
“All the important indicators of our business
continue to demonstrate the quality of Medallion’s operations… very
solid credit performance by the portfolios…”
This is what keeps ZimCal awake at night. We obsess over the
downside risk of a ~25% subprime consumer loan portfolio heading
into economic and rate uncertainty, a concern that we repeatedly
shared with MFIN before launching our proxy contest. A NIM of 8% or
9% is meaningless if charge-offs on a $2 billion+ portfolio reach
and remain at 5% – 6% over a sustained period. Quarter to quarter
fluctuations driven by irregular equity gains or non-recurring taxi
medallion recoveries will not mask the pain caused by mass consumer
delinquencies. While we hope that consumers do not default to this
extent and we certainly do NOT expect a repeat of the taxi
medallion implosion, we urge MFIN to demonstrate that it has
thought through this scenario and is tracking and disclosing key
data. Tracking the data and demonstrating concrete actions to
mitigate risk is what ZimCal has pushed for. We have privately
given MFIN’s Board and management suggested metrics to track
including 1. stratification of loan performance by quarterly
vintage, collateral type, prime/non-prime; 2. Disclosures of
loan-to-value or loan-to-cost; 3. Loss-given-default trends; 4.
Prepayment and WAL by prime/non-prime; and 5. Recreation vehicle
wholesale and retail price trends. We have no confidence these
metrics are being tracked by the Board or that MFIN has the
technological capability to generate these reports accurately and
frequently.
Glossing over critical downward trends in key metrics like ROA,
Net Interest Margin, and charge-offs while waxing hopefully about
the future is not a viable management strategy. Table 1 and 2 show
clear and concerning trends. The status quo is unacceptable and
change at MFIN is critical.
Click HERE for the complete presentation with graphs.
Table 1
4Q19
1Q22
2Q22
3Q22
4Q22
1Q23
2Q23
3Q23
4Q23
1Q24
Charge-offs (net Ex. Taxi Medallion)
2.84%
0.96%
0.48%
2.04%
1.80%
2.29%
1.70%
2.21%
3.22%
3.20%
Recreation Charge-offs (net)
3.80%
0.64%
0.56%
1.47%
2.12%
3.29%
1.86%
2.70%
4.30%
4.40%
Home Improvement Charge-offs (net)
0.83%
0.44%
0.42%
0.77%
1.04%
0.79%
1.12%
1.62%
1.71%
2.10%
Table 1: Recreation and Home Improvement charge-offs are at
cyclical highs, have exceeded 4Q19 and are trending worse.
Table 2
1Q22
2Q22
3Q22
4Q22
1Q23
2Q23
3Q23
4Q23
1Q24
ROAA (AT)
2.05%
2.61%
1.42%
2.34%
2.66%
2.33%
1.77%
2.23%
1.80%
ROAA (AT) (Ex. Taxi Medallion)
1.74%
1.89%
1.20%
2.03%
1.58%
1.54%
1.45%
0.89%
1.39%
Net Interest Margin
9.20%
9.07%
8.91%
9.00%
8.71%
8.77%
8.64%
8.66%
8.39%
Net Interest Income
35,928
38,881
42,040
43,587
43,603
46,691
48,784
49,018
47,900
Table 2: NIM has continued to decline and net interest income is
also below the last 2 quarters. While ROAA (Ex. Medallion)
increased from its 4Q23 low, the trend is still down, and core
earnings trends do not look strong. ZimCal computed 1Q24 ROAA
(AT) of 1.54% but will defer to MFIN’s 1.80%.
Visit www.restoretheshine.com to view our nominees and for
important details and to sign up for updates.
Read our letter to MFIN shareholders under “Materials” at
www.restoretheshine.com
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.
Solicitation Information
Stockholders are urged to read ZimCal’s definitive proxy
statement and WHITE proxy card because they contain important
information about the ZimCal nominees and related matters.
Shareholders may obtain a free copy of the definitive proxy
statement and WHITE proxy card and other documents filed by ZimCal
on the web site of the Securities and Exchange Commission (SEC) at
www.sec.gov. Shareholders may also direct a request to ZimCal’s
proxy solicitor, Saratoga, 520 8th Avenue, 14th Floor, New York, NY
10018 (shareholders can e-mail at info@saratogaproxy.com or call
toll-free at (888) 368-0379).
Participants in
Solicitation
The identity of the participants in the solicitation and a
description of their direct or indirect interests, by security
holdings or otherwise is contained in ZimCal’s definitive proxy
statement filed with the SEC on April 26, 2024.
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nicole@nh-consult.com
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