Q1.  Why did you challenge Medallion Financial Corp. (“MFIN” or the “Company”) through a proxy contest?

We are long-term investors with substantial investment exposure to MFIN and have been invested for over 3 years. After closely analyzing 2023 SEC filings by MFIN, by 2Q23 we detected several worrying trends and felt that MFIN was heading down the wrong path. Our analysis led us to believe that there was a high probability of a substantial decline in the value of MFIN’s debt and equity if it didn’t make important changes to its governance approach and management team and focus on improving CORE⁹ business performance, which had declined. We fundamentally believe that MFIN has a business that can thrive and create tremendous shareholder value in the long run if it is run the right way. If that happens, we plan on increasing our equity ownership over time.

Q2.  Couldn’t you have privately tried to find a solution with MFIN?

That was our preferred approach. We first raised our concerns in October 2023 in a 28-page analysis we shared with management and the board. We provided supporting data and asked for feedback to correct anything inaccurate. That analysis forms the basis of our “5 Steps to Improvement”. After 2 months of fruitless conversations with MFIN, we told them that we were still very concerned about the Company’s future (1 to 5 years out) and that the only option we saw to implement change was via board representation through a proxy contest. We began acquiring common stock in December 2023. We did not go public with any of our concerns, or with our notice that we intended to nominate alternative directors, because we wanted to maintain a collaborative dialogue with management which we told MFIN repeatedly in late December 2023/early January 2024. Management instead informed us on February 1, 2024 that our actions were viewed as “hostile” and that MFIN did not “intend to continue those discussions unless and until the notice is withdrawn.” We eventually went public with our campaign for change on April 12, 2024, 6 months after we first approached MFIN.

Q3.  But you’re a large debt holder AND an equity holder, are you really looking out for shareholder interests?

Our goal is for MFIN to be wildly successful and increase in value. We are absolutely aligned with shareholder interests through both our debt and equity investment into MFIN.  Our combined debt and equity investment in MFIN makes us one of the single largest investors in MFIN.  Our debt is the most subordinated debt MFIN has or the “lowest in the capital stack”.  Which means that we are the first lender to lose money if losses are catastrophic.  In almost every bank failure in the last 17 years, all subordinated debt and equity has been wiped out. Our debt also has a very long maturity (2037).  Because of both of those factors, the value of our debt, just like the value of your equity, is very sensitive to company performance.  If the company loses money or becomes riskier because of poor business decisions, the value of our debt and the value of our equity goes down just as it does for other stockholders. 

Q4. But aren’t the Mursteins also large shareholders?

Yes they are. Andrew Murstein and Alvin Murstein currently own 10% and 7.8% of outstanding shares, which would suggest aligned interests with the broader shareholder group. However, we believe that their substantial cumulative CASH compensation ($26.6 million and $14.2 million respectively from 2015 through 2023) and high cash/non-cash compensation ratio (~85% cash/non-cash over that period) combined with weak MFIN stock performance (down 26% the last 10 years through 07/31/24) shows they have been able to comfortably rely on salaries and bonuses, and have been less focused on creating long-term shareholder value.¹ 

Q5.  Wasn’t the drop in MFIN’s value back in 2015 – 2018 due to short sellers?

The decline in MFIN’s value was because it had huge charge-offs due to weak loans on its balance sheet. Short sellers might have thrown gas on the fire, but the fire was already burning.  Uber came on the scene in 2011 and by 2014/5 was already a formidable rival to taxi cabs.  Taxi medallion prices in NYC almost doubled from 2008 to 2014, then plummeted from their peak of over $1 million per medallion to ~$700,000 at FYE15 to under $500,000 at FYE16.¹⁶ Already stretched taxi medallion owners defaulted and since MFIN had substantial exposure to Taxi Medallion assets, it almost failed.¹⁷ In December 2014, 2 years before MFIN started writing down its Taxi Medallion loans, one short seller and several publications almost perfectly predicted the issues MFIN would face but rather than acknowledge the obvious, Andrew Murstein attacked and blamed the short sellers.¹⁸ He could have disagreed with their tactics, but he should not have disagreed with the risks they exposed. MFIN’s Taxi Medallion loans made up over 50% of their total loan book exposing them to massive concentration risk. In MFIN’s May 10, 2016 8K they stated: “…taxi medallion lending continues to have virtually zero losses…” and “[a]ll the important indicators of our business continue to demonstrate the quality of Medallion’s operations… very solid credit performance by the portfolios…” In MFIN’s November 7, 2016 8K summarizing 3Q16 results they stated: “We believe the NYC medallion industry is stabilizing” and . "To date, our combined actual losses in medallion lending have been just 75 basis points or $3.6 million in 2016 and were de minimis in prior years…” 55 days after their 3Q16 8K, MFIN had charged off $30.6 million in Taxi Medallion loans and non-performing Taxi Medallion loans were 21% of the portfolio.

Q6. Are you concerned about the share price of MFIN?

We are very much concerned about the share price of MFIN which, at $8.14, was down 17% YTD and 30% the last 10 years through 09/30/24. There are very few direct public companies similar to MFIN but since Medallion Bank is ~95% of consolidated revenues and the bank is FDIC- insured, an appropriate comparison would be other banks, even though they are less risky and volatile than a consumer lender.  Over the last 10 years, the Russell 2000 was up 102%; the KBW Regional Bank Index was up 49%; MFIN’s Peer Group Bank stocks (205 public FDIC-insured banks between $1BN and $5BN) were up 72%²; and MFIN’s own Compensation Peer Group was up (a median) 55%.³ MFIN currently trades just above tangible book value⁴ but we fear it may go below book if its loan quality issues continue. Price trends over time and MFIN’s ability to generate sustainable profits are what concern us the most because on these measures, the company is currently doing very poorly.⁵

Q7.  What are the biggest risks the company is facing?

We believe that the biggest risk MFIN faces is in the subprime portion of its Recreation portfolio, which could have echoes of the Taxi Medallion loan crisis, unless the Board and management take decisive, proactive steps.  Recreation loans were 63% of total loans and subprime Recreation loans were $545 million or 35% of total Recreation loans at 3Q24. We have asked for details on prime versus subprime performance and MFIN has declined to provide the information to us or through their SEC filings, but the entire Recreation segment’s charge-off rate hit a 12 year high of 4.34% or $58.2 million annualized at 1Q24 which is well ABOVE the recent cyclical peak of 3.8% at 4Q19 and is trending poorly (Figure 3 and 4 below). Quarterly charge-offs in each quarter for 2024 have exceeded their prior quarterly highs (Figure 4). The company is also facing more expensive funding, mostly through its brokered CDs, but has not been able to raise its average loan yields by much, which has reduced Net Interest Margin (“NIM”) and will hurt profits (Figure 2 below).¹⁹ MFIN must ACT NOW and work to to address these risks.

Recreation charge-offs

Q8.  Why is the Board so important?

The right leadership at any public company starts with having the right Board of Directors.  The Board should ideally be able to provide expertise to the company to help it improve. But most importantly, the Board has a responsibility to look out for shareholders and to hold company leadership accountable.  MFIN does need to appoint our nominees; we would be happy with any candidates with relevant and current skills, who are independent and who are looking out for stockholders’ interests first. We believe that MFIN and the Board do not have the necessary consumer lending and banking experience to thrive in this new consumer lending world, which is data driven, technologically-forward, constantly changing and extremely competitive.  The current average Board age 75 with 3 of 8 directors Murstein family members .

Q11. What is an example of what the Board is not doing well?

We believe the Board is failing MFIN’s shareholders on multiple fronts.    One of the most egregious failures is the Board’s inaction in the face of what we believe to be well-documented violations of MFIN’s own policies and procedures, most of which only came to light through the SEC complaint.⁶  Andrew Murstein put MFIN in a very serious and costly situation and yet MFIN’s public filings/statements seem to downplay the seriousness of the complaint.⁶  In order to show their independence, we believe that the Board should have immediately authorized an independent, outside firm to investigate Andrew Murstein’s actions and if he was in violation, the Board could have considered replacing Andrew Murstein or used its authority under MFIN’s Compensation Recoupment Policy to clawback incentive compensation in the event of an “officer’s detrimental conduct.” Instead the Board spent millions of dollars fighting an expensive, ongoing legal battle with the SEC.

Q12.  But profits were up in 2021 through 2023, what seems to be the problem?

Yes.  Profits were up in 2021 through 2023.  But they were not up due to improved profit margins and returns in the company’s core businesses.  The answer is more complicated. 2021 was a good year for most lenders because rates were near record lows.  Consumers were flush with cash and so defaults and charge-offs were at all-time lows. However, as rates rose in 2022 and 2023, MFIN made less money in its core business because:

1. The interest it charged on its loans stayed about the same but the interest it paid on its CDs and its debt increased;

2. Its borrowers started to struggle to make payments which meant MFIN had to reserve more for future losses and had to charge-off more loans;

3. There were non-recurring Taxi Medallion loan recoveries that padded its profits and disguised down-trending core performance.⁹. 

As you can see from the graphs below, Taxi Medallion assets were 0.5% of total assets and yet, mostly due to one-off recoveries, were responsible for 36% of pre-tax operating income in 2023.⁷

Taxi Medallion Assets’ Outsized Contribution to Pre-Tax Operating Profit vs. Core Profits FYE23

Q13. What are Taxi Medallion loan charge-offs and recoveries and why do they matter?

Taxi Medallion loan balances at 12/31/15, right before the huge losses, were ~$650 million or 47% of total loans and were MFIN’s biggest loan category.  As more and more borrowers started to default and the values of the taxi medallions that secured the loans plunged, MFIN ended up writing down the loans which caused substantial losses.  Eventually MFIN was able to recover a small portion of the money it lost.  Those recoveries boosted income, which boosted profits.  But they aren’t “core” profits and because they are non-recurring and unpredictable, investors discount them from an organization’s value.  MFIN had charged off (net of recoveries) $267 million at 3Q24 or 41% of the original balance.⁸ 

Source: MFIN 10K/10Qs
FIGURE 4: This shows the material impact of non-recurring Taxi Medallion loan recoveries on earnings. CORE earnings declined to $33.6 million (FYE23) from $35.7 million (FYE22). The “noise” from the Taxi Medallion impact (mostly recoveries) increased earnings 22% in 2022 and 65% in 2023.⁹ Footnote 9 has a detailed breakdown of Taxi Medallion adjustments. Net profits were down YOY and sequential QoQ PRECISELY because Taxi Medallion recoveries diminished. MFIN insisted on reporting its “record” performance with the Taxi Medallion impact which distorted performance.

Source: MFIN 10K/Qs
FIGURE 5: This shows the impact of Taxi Medallion loan recoveries on ROAA, arguably the most important metric. We see that CORE quarterly ROAA has been declining materially over the last 4 quarters to below 1% at 3Q24.⁹ 1Q24 had a slight uptick on ROAA driven by lower than historic core provisions and an unusual “gains on equity investment”. Overall, the downward trend is material and persistent. Footnote 9 has a detailed breakdown of Taxi Medallion adjustments. MFIN’s reported headline ROAA has also declined but still disguises the true extent of the decline in the core business.

Q14. Do you think management is getting paid too much?

Absolutely.  We believe that the compensation of executives at MFIN is much too high and deeply unfair to both shareholders as well as lower-level employees.  At FYE23, the top paid 5 employees had total compensation equal to 66% of what the other 164 MFIN employees made. They made 54% in FYE22. Figures 7, 8 and 10 show comparisons to the peer compensation group selected by MFIN. MFIN (Andrew Murstein’s compensation) compares poorly to these proxy peers¹² even though these are not ideal comparisons since these companies are in a variety of businesses that are very different to MFIN. MFIN should be mostly compared to FDIC-insured institutions since 94% of its revenues are generated by its FDIC-insured Medallion Bank subsidiary, the FDIC and Utah DFI regulate Medallion Bank, govern what business lines they can enter, and regulate Medallion Bank’s capital levels and dividend choices (Figure 6 shows comparison banks). MFIN’s performance was much worse against true bank peers and yet Andrew Murstein was paid more than the top paid executives of banks over 30x times larger by assets (see Figure 6 and Figure 9 below) with high capital ratios, consistent profits and consistent returns.¹¹ He is also paid significantly more than the top paid executives at the highest capitalized, top performing $2BN to $5BN asset banks in the country.¹² Our favorite comparison is with Synchrony Financial, a consumer-focused FDIC-insured lender whose President was paid $5.6 million in cash comp in 2023 and $55 million in cumulative total comp. (cash and stock) from 2018-2023 after generating $17.3 billion in cumulative profits from 2018-2023. Mr. Murstein was paid $4.7 million in cash comp in 2023 and $25 million in cumulative total comp. from 2018-2023 after generating only $77 million in profits from 2018-2023¹³. Half the cumulative compensation for 0.44% of the profits….

Source: S&P Capital IQ, DEF14A, 10K/Q. FYE23 is the most recent compensation data provided by ALL comparable companies.

FIGURE 6: Andrew Murstein, MFIN's President, was paid more in cash compensation than the highest paid executive of every comparison bank except Synchrony Financial which is also 45x larger. Comparison banks were chosen for their top performance metrics.¹² Synchrony Financial was included as a comparison because it is a large, consumer-focused FDIC-insured industrial bank. Compared to banks that are significantly larger/more complex, and banks that are similar in size but more consistently profitable, Mr. Murstein was paid substantially more in cash compensation, total compensation and cumulative 5 year compensation (relative to profits and returns)¹².

Source: S&P Capital IQ, Companies DEF14A
FIGURE 8: Shows the CASH compensation paid to Andrew Murstein in FYE23 as a percentage of profits generated for stockholders compared to proxy peers. Mr. Murstein was the 2nd highest paid in FYE23 AND FYE22.