Q4 2019 Earnings Call
Greetings and welcome to the Marlin fourth quarter and full year 2019 earnings call.
At this time, all participants are not listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone Keypad. As reminder, this conference is being recorded and it's now my pleasure to introduce your host Wassa glass and without all Investor Relations. Thank you you may begin good morning, and thank you for.
Joining us today for Marlin business services score.
2019 fourth quarter results conference call.
On the call today is just feels like <unk>, President and Chief Executive Officer Loom, as low senior Vice President and Chief Risk Officer, and Mike Boguski, Senior Vice President and Chief Financial Officer.
Before beginning the call today, let me remind you that some of the statements made today will be forward looking information under the private Securities Litigation Reform Act of my 295.
Such forward looking statements represent only the companys current beliefs regarding future events that are not guarantees of performance would result.
Actually performance or results may differ materially from those projected or implied.
Such forward looking statements due to a variety of factors, including but not limited to factors described under the headings forward looking statements and risk factors and more Marlins periodic reports filed with the United States Security and Exchange Commission.
Including the most recent annual report on Form 10-K , and quarterly reports on Form 10-Q .
Which are also available in the investors section of the company's website.
Investors are cautioned not to place undue reliance on such forward looking statements.
During this call Marlin may discuss various non-GAAP financial measures, including adjusted earnings per share and adjusted operating efficiency ratio.
Please refer to our earnings release for a description of these and other non-GAAP financial measures.
Well as a reconciliation of such measures to their respective most directly comparable GAAP financial measures.
With that it's now my pleasure to turn the call over to Marlins, President and CEO , Jeff Hilzinger, Jeff.
Thank you Wassa good morning, and thank you everyone for joining us to discuss our 2019 fourth quarter results.
I'll begin with an overview of the key highlights from this past quarter, along with an update on the continued execution of our strategy that has successfully transformed marlin from a micro ticket equipment less or into a nationwide provider of capital solutions to small businesses.
So our chief risk officer will comment on portfolio performance and Mike Gansky, Our Chief Financial Officer will follow with additional details on our financial results as well as our business outlook and financial guidance for the upcoming year.
Borrowing concluded 2019 with a strong performance in the fourth quarter highlighted by record origination volume disciplined expense management and excellent earnings growth.
Total origination volume of 236.5 million increased 9.3% year over year, driven by increasing customer demand for both our equipment finance and working capital loan products as well as solid growth in our direct origination channel.
For the four year total origination volume of 877.9 billion grew 18.7% year over year more than doubled the prior years' growth rate.
Well the origination growth, we experienced demonstrates the significant demand that exists for our financing products market conditions. During the fourth quarter created both an increasingly competitive pricing environment and a favorable capital markets environment.
To this end these market conditions enabled us to offset the continued yield compression we experienced in our equipment finance product with exceptionally strong capital markets execution.
Given our strong origination volume and a favorable capital markets conditions, we sold 114.5 million in assets during the fourth quarter that generated an immediate net pre tax gain on sale of 8.8 million.
As a result of these origination and capital markets activities.
I mentioned that investment and leases in loans stood at just over 1 billion at year end and our total managed assets expanded to more than 1.3 billion, an increase of 17.7% from the fourth quarter last year.
At the bottom line fourth quarter net income increased by 31% year over year with earnings growing to 69 cents per diluted share compared with 51 cents per diluted share for the fourth quarter last year.
Contributing to our strong earnings performance in the quarter, which our ability to carefully manage noninterest expense as evidenced by the significant year over year improvement in our adjusted operating efficiency ratio.
Notwithstanding this our portfolio did experience higher delinquencies and credit losses during the quarter and we continue to closely monitor the portfolio and proactively manage credit performance.
For the full year net income of 27.1 million increased by 8.6% from 25 million a year ago and earnings per diluted share of $2.20 was that the high end of our most recently issued guidance.
Overall I continue to believe that the fundamentals of our business remains strong and as we look ahead to 2020, I believe Marlin remains very well positioned for another year of profitable growth.
I'd now like to move to an update on our key business transformation initiatives, which are focused on driving growth and improve returns on equity by first strategically expanding our target market second better leveraging the company's capital base in fixed cost were origination and portfolio growth.
Third improving our operating efficiency by better leveraging fixed costs through scale and through operational improvements to reduce unit processing costs.
And fourth proactively managing the company's risk profile to be consistent with our risk appetite.
I'd like to share with you the progress we've made in each of these areas since our last call.
First in terms of expanding our addressable market, we remain focused on providing multiple products and developing financing solutions to help small businesses grow.
As part of this we have also broadened our go to market strategy might not only continuing to originate to our equipment vendor partners, but also directly with our end user customers.
Well our equipment finance business continues to grow we're particularly pleased with the consistently strong performance of our working capital loan product.
Fourth quarter, working capital loan origination volume expanded by 58% year over year to 31.3 million.
For the full year working capital loan origination volume of 108.7 million increased nearly 46% over the prior year.
We also remain pleased with our efforts to provide financing solutions directly to our end user customers.
A key part of our go to market strategy is leveraging our relationships with our end user customers, including approximately 200000, so whats suitable relationships. The company is built within small business customers overtime.
Our direct strategy identifies additional financing opportunities with these existing customers by offering multiple products that meet a broader set of their financing needs.
During the fourth quarter direct origination volume increased to 50.4 million up from 40.4 billion in the fourth quarter last year and resulted in a year over year increase of nearly 25%.
This wrapped up a solid year for our direct business with the origination volume of 184.6 million, which wasn't increase of 29% over the prior year.
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In addition, we continue to make headway on our second key priority, which focuses on leveraging marlins capital and fixed costs through growth.
Thanks to the strong origination growth we generated in the fourth quarter, along with very favorable capital markets conditions, we follow through on the assets syndication guidance, we provided last quarter.
Overall, we see asset sales as an opportunity to not only use our capital more productively, but also as a way to compete effectively in markets, where the pricing does not meet our return requirements on a hate basis.
Allowing us to monetize the bulk of the net interest margin, while simultaneously transferring the credit risk others and releasing the capital and lost reserves held against both the sold assets.
Asset sales also helped to further diversify our funding sources as well as providing an efficient way to optimize our portfolio composition in terms of return credit risk and exposure to particular industries.
Her fees and asset classes.
Finally, and most importantly from a strategic perspective asset sales allow us to continue to take full advantage of our total origination opportunity and to meet the financing needs of our customers by allowing us to intermediates or retain assets to our maximum advantage well also retaining servicing and the customer relation.
You shipped in support of our direct business.
During this past year are growing origination volume combined with strong investor demand and favorable market conditions allowed us to sell 310.4 million in assets that generated an immediate net pre tax gain on sale of approximately 22.2 million.
Importantly, and as I mentioned previously we continue to service nearly all of these assets, which allows us to maintain an ongoing relationship with these customers in support of our direct strategy.
In total we are now servicing approximately 341 million in assets for our capital markets partners.
Turning to our third area of focus we continue to make strides and better leveraging the company's fixed costs through portfolio and revenue growth and by improving operating efficiencies through ongoing process improvements and automation.
On a GAAP basis, the company's efficiency ratio was 43.2% for the fourth quarter versus 53.1% for the same period last year.
And 54.2% for the full year in 2019 versus 55.3% in 2018.
Moreover, the Companys adjusted operating efficiency ratio improved to 40.2% for the fourth quarter versus 50.9% for the same period last year and improved to 49.4% for the full year in 2019 versus 53.2% in 2018.
Looking ahead to 2020 and beyond we will continue to leverage our fixed costs through portfolio and revenue growth and look for ways to operate more efficiently through our various process renewal and automation initiatives.
And finally, we remain focused on proactively managing the company's risk profile such that it is commensurate with our risk appetite.
As I noted earlier, we did experience higher delinquencies and credit losses in the quarter, which is a trend that broader industry has also been experiencing.
In response, we are making underwriting adjustments to address underperforming areas of the portfolio and have also added collections resources in response to the upward pressure on delinquency that we and the industry are experiencing.
We will provide more color on these activities in his remarks.
In summary, we wrapped up 2019 with a strong fourth quarter during the quarter and throughout the year. We made good progress on both our near term financial goals and longer term strategic objectives.
We look ahead, we anticipate another year of profitable growth for Marlin in 2020, and I strongly believe that we are well positioned to pursue the many opportunities that exist in the marketplace and to unlock value for our shareholders.
With that I'd like to now turn the call over to loom as well, our chief risk officer to discuss the performance of our portfolio in more detail.
Uhhuh.
Thank you Jeff good morning, everyone.
Before I begin discussing the portfolio metrics for the quarter I want to know that I will provide statistics for both the on book portfolio as well as the managed portfolio.
The managed portfolio metrics are considered more indicative of aggregate portfolio performance and credit quality trends due to the 310 million of asset sales in 2019.
Looking at the key asset quality metrics equipment finance on both receivables over 30 days delinquent were 1.41% up 13 basis points from the prior quarter and up 33 basis points from the fourth quarter of 2018.
Equipment finance receivables over 60 days delinquent were 0.87% down one basis point from the prior quarter and up 22 basis points from the fourth quarter of 2018.
The managed portfolio receivables over 30 days were 1.22% up six basis points from the prior quarter and 21 basis points from the fourth quarter of 2018.
The managed portfolio over 60 days were 0.73% down four basis points from the prior quarter end up 14 basis points year over year.
Our benchmark purposes. The November 31 denied the day pain at small business delinquency index, which was the latest available increased three basis points since August in 18 basis points since December 2018.
Aggregate total finance receivables net charge offs increased in the fourth quarter to 3% of average finance receivables on an annualized basis as compared with 1.99% in the prior quarter and 2.3% in the fourth quarter 2018.
Equipment finance net charge offs increased by 70 basis points quarter over quarter, and 53 basis points year over year to 2.72%.
On a managed portfolio basis equipment finance net charge offs in Q4 were 2.44% up 60 basis points from the prior quarter included in fourth quarter charge offs was 900000 that was specifically reserved during the third quarter, thereby eliminating the entire allowance related to the fraudulent activities within it.
Pacific dealers portfolio.
Benchmark purposes, the November pain at small business default index was 2.11% up five basis points from August and 24 basis points from December 2018.
Based on our experience benchmark data as well as discussions with other lenders. We believe that very small businesses have been disproportionately impacted by the economic headwinds observed in the second half of 2019.
Due to continued increasing delinquency and charge offs in the third quarter and fourth quarters, we performed a deep analysis into the drivers of the weakening portfolio performance. Our analysis revealed that there was a much larger increase in delinquency and charge offs. During the second half of 2019 from the lower credit quality borrowers in our portfolio.
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Based on our analysis, we've made underwriting adjustments for borrowers have lower credit quality.
Transitioning out to discuss working capital loans fourth quarter 15, plus day delinquency decreased 14 basis points from the prior quarter to 1.75% well 30, plus day delinquency increased by eight basis points to 1.42%.
Working capital loan net charge offs in the fourth quarter increased to 7.95% of average working capital loans on an annualized basis from 1.42% in the third quarter and 5.28% in the fourth quarter of 2018.
As noted on the earnings call last quarter. The Q3 net charge off were extraordinarily low and as we've noted in the past losses in this product remain volatile from quarter to quarter.
While the results in Q4 exceeded our target of 6% the results remain highly accretive to earnings given the high yield of the product. We will continue to monitor results closely and make underwriting adjustments as needed to ensure a satisfactory portfolio performance.
The allowance for credit losses, with 2.15% of average finance receivables up 29 basis points in the fourth quarter from the prior quarter.
The increase in the equipment finance allowance percentage is mainly attributable to higher delinquency and charge off migration rates in the quarter fourth quarter.
Marlin will adopt the new allowance for credit losses methodology, commonly referred to a c. So were current expected credit losses, beginning January one 2020.
Mike will provide additional details in his remarks, including an estimated impact of Cecil on our projected 2020 results.
In terms of our credit outlook, we monitor small business sentiment utilizing the national Federation of independent small business optimism index, which while declining slightly in December remains in the top 20% of all readings in the indexes 46 year history.
From a portfolio performance perspective, we monitor a number of leading indicators, including paying that absolute PD outlook, which forecast the commercial loan default rate for small businesses across the U.S. based on current economic macroeconomic statistics.
Paying its latest data as of October is forecasting relative stability for the small business default rate over the next 12 months that is five basis points lower than the forecast from the prior quarter and only four basis points higher than the prior 12 months forecast.
Given the market data I noted, we expect portfolio performance to stabilize we will monitor closely the changes that we have made to underwriting over the past six months to see that they have the desired effect.
With that I'll turn the call over to our CFO , Mike the Gansky for more detailed discussion of our fourth quarter financial performance Mike.
Thank you Lou and good morning, everyone.
Fourth quarter net income was 8.4 million were 69 cents per diluted share compared with 6.4 million were 51 cents per diluted share for the fourth quarter last year.
For the quarter yield on total originations was 12.43% down 95 basis points from the prior quarter and up seven basis points from the fourth quarter of 2018.
Fourth quarter yield on direct originations was 23.2% down 118 basis points from the prior quarter, primarily due to lower yields on working capital loans.
The yield on indirect originations for the quarter was 9.19% down 91 basis points from the third quarter due to competitive pricing pressure and the lower interest rate environment as well as the mix of our originations in lower yielding programs.
For the quarter net interest margin or NIM was 9.44% down 11 basis points from the prior quarter and down 32 basis points from the fourth quarter of 2018.
Sequential quarter decrease was driven primarily by lower fee income and a decrease in new origination loan and lease yield partially offset by lower interest expense.
The year over year decrease in margin percentage was primarily a result of an increase in interest expense, resulting from higher deposit rates and lower fee income, partially offset by an increase of seven basis points in new origination loan and lease yield.
We continue to experience an increasingly competitive pricing environment and we expect that this will persist at least through the first quarter of 2020.
The current market conditions, leading to competitive pricing pressures has also caused favorable capital markets execution, and we will continue to evaluate alternatives to optimize risk adjusted returns.
Companies interest expense as a percent of average finance receivables decreased to 2.36% compared with 2.5% for the previous quarter.
Interest expense as a percent of average finance receivables increased from 2.2% for the fourth quarter of 2018, due primarily to higher deposit costs.
Noninterest income was 13.5 billion for the fourth quarter of 2019, compared with 10.4 million in the prior quarter and 7.1 million in the prior year period.
The year over year end quarter over quarter increase in noninterest interest income is primarily due to an increasing gains on the sale of assets from the company's capital markets activities.
We sold 114.5 million of assets during the fourth quarter of 2019, and we realized strong execution gains driven by the current market conditions.
As Jeff noted this was the result of strong origination growth in lower yielding programs and it enabled us to offset some of the yield compression that we've experienced.
Moving to expenses fourth quarter noninterest expenses were 16.4 million compared with 17 million in the prior quarter and 16.4 million in the fourth quarter last year.
We were able to achieve a relatively flat to declining expense base, despite a 17% sequential quarter increase and a 9% year over year increase in origination volume respectively.
During the fourth quarter of 2019, we repurchased approximately 47200 shares at Marlin common stock for an average price of $22.26 per share.
As of December 30, Onest, we have approximately 9 million of remaining authorization available under the stock repurchase program that was announced in August of 2019.
As we have previously communicated we routinely evaluate capital allocation alternatives and we continue to believe that share repurchases are an appropriate use of capital at this time.
Additionally, our board of directors declared a regular quarterly dividend 14 cents per share payable on February 20, as 2022 shareholders of record as of February 10th 2020.
As noted on the last earnings call, we will adopt accounting standards update 2016 Das 13 effective January one 2020.
Ask you 2016, dashed 13 replaces the current incurred loss accounting model for credit losses with them or forward looking current expected credit loss model, commonly referred to as diesel.
Based on our portfolio sizing composition as of December 30, Onest 2019, we expect to increase our allowance for credit losses by approximately $11 million effective on January one 2020.
This transition adjustment for adopting ASU 2016, that's 13 will be recognized through equity and will reduce told her stockholders' equity by approximately 8 million net of deferred income taxes of approximately 3 million.
Based on our expectations for origination volumes in the credit environment in 2020, we estimate that the adoption of Cecil could negatively impact EPS by up to 25 cents per share for the full year ending December 30, Onest 2020.
The increase in the expected provision for credit losses in 2020 is due to the addition of lifetime credit losses in the loss allowance calculation as well as a change in the recognition of end of term income for leases with residual values.
The ongoing earnings impact from the adoption of asked you 2016 that 13 is expected to be larger in periods of portfolio growth, but it's highly dependent on a variety of factors, including but not limited to vintage portfolio performance the timing of originations forecasted economic conditions, the volume of our syndication activity and pre pay.
I'm in speeds.
Now turning to our business outlook for 2020, which reflects our adoption of the Cecil County model. We are initiating earnings guidance for the full year ending December 30, Onest 2020.
We expect adjusted earnings per share to be between $2.17 and $2.27.
As I said before this reflects the impact from the adoption of the C., So accounting model, which could negatively impact earnings per share by up to 25 cents per share.
Our earnings guidance is based on the following assumptions.
Total sourced origination volume growth of approximately 20% from 2019 levels with continued disproportionate growth in our working capital loan product.
Portfolio performance does not deteriorate from year end 2019 experience and delinquencies and net charge offs remain at the higher end of our expected range.
Net interest and fee margin as a percentage of average finance receivables of between 9.25% and 9.75%.
That concludes our prepared remarks, and with that let's open up the call for questions operator.
Thank you will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad.
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My first question comes from the line of Christopher York with JMP Securities. Please proceed with your question.
Hey, good morning, guys and thanks for taking my questions.
Good morning Crit line.
So low or might.
Elaborate specifically on your formal credit guidance.
What specifically do you mean by performance.
It's not expected to deteriorate.
Well I think if we I'll start my can if you want to jump in.
No the performance that we saw particularly over the last two quarters was higher than than the first half. So as I look at at the performance Q4 was particularly high which I can be my view is higher than I would expect.
For 2020, so we've talked about our range being in a good economy from 160 to 190 basis points and so.
Yeah, I think for small business, where at the weaker end of a good economy right now and how it's impacting them.
So I put us at that you know the higher end to that range around 190, which is probably from a calculation perspective.
Maybe even a little bit higher that when you take into consideration the actual mass associated with the syndications, but I think from my point of view, that's that's kind of be the ballpark that we're looking at.
Okay, just repeat that from a one nine do you what is that referencing.
So one ideas for equipment finance is actually upper end of the range that we've talked about in a good economy.
So I think we're going to be you know in that higher end range that we've talked about for equipment finance.
Okay, and then maybe on the allowance so you know.
It does not deteriorate so should we expect.
You know an allowance for loan losses, which ended the year at 2.11% to be flat throughout 2020.
Now that's moving it to see so I'll pass that went to Mike So Chris as Mike. We we thought we guided to an initial cecil impact of $11 million, that's going to bump up the allowance percentage all the things being equal, but the Ella I think the credit environment not deteriorating as Lou mentioned.
Is really a function of.
The provision that we would expect throughout 2020.
Okay, and then reverting back so the 190 equipment finance leave us on delinquencies. So then not does not deteriorate should we expect net charge offs, which ended the year at 2.19% on total finance receivables to be flat.
Yeah. So let me clarify my comments earlier, Chris I was referring to charge offs.
No not at that hits, our financial impact, yes. So the range that we talked about for charge offs was in the one six to 190.
In a pretty stable good economy.
Okay. Okay. That's helpful. Alright are staying on expenses, how how should we think about your opex in 2020.
As you chose not to provide formal guidance on that line, but expenses have historically been volatile over the last couple of years.
When it was projected to represent an efficiency ratio, 45% in 2020.
Yes, so we provided the adjusted efficiency ratio in 2019 due to.
The impact that the leasing standard had on the gross up of our property tax uncollectible expenses. So obviously.
Our expenses do tend to be I'm, a little volatile in the fourth quarter.
Tends to be a little bit lower expense rate, but I think if you look out into how we trended from an efficiency ratio over the course of 2019.
We would have it we would expect similar trending and yeah that similar trend and improvements in the expense ratio or efficiency ratio over the course of 2020.
Okay, and then I mean, maybe just taking on the fourth quarter a little bit.
Your press release mentioned, having its been disciplined so can you comment on what exactly did take in the fourth quarter to manage Opex is down.
Well the blends the expense discipline that manifested in the fourth quarter is really a result of the actions that we spoke earlier in the year and they are making their way through the expense base now so.
We did announce certain actions at the end of the second quarter.
And there's just been a continuous focus on expenses throughout the back half of the year, but a lot of those actions were initiated.
In the second third quarters in 2019, and they're starting to flow.
Okay and then.
How much are you investing your intact and then the online platform.
Today.
I mean, we're continuing to make a investments in our digital offering I would say, they're at a more measured pace, but we know we initiated a or we installed.
Salesforce Dot com a couple of years ago, and we're continuing to make enhancements to that platform, we're continuing to make enhancements to our digital application offering.
So you see those investments coming through.
Yeah come through the investment the investment line in the financial statements and I would say that we would.
Set to continue at that same pace throughout 2020, as we as we continue to refine our digital offerings.
Okay.
So then I mean, how should I be or how should investors potentially.
I understand maybe what's causing that.
Or the lack of efficiency and I think we thought we were getting to the efficiency ratio of 45% in 2020, no I was thinking potentially that could be adapting intact.
But what what is potentially delaying some of the operational efficiency achievement that you wouldn't there should we expect it.
Yeah, I think Chris is just so I.
We guided three years ago too as you know a 45% operating efficiency ratio in 2020.
I think we're going to end up being in the high Fortys.
When it's all said and done and I think the reason for that is because of the investment that we're making a in in digital I think what's going to happen is that that investment digital will ultimately allow us to be able to offer some additional products that sit somewhere between our equipment finance product in our working capital on product they can only be offered.
In a digital way, because they're operationally complex and and that will end up being accretive to our NIM.
Overtime offsetting the difference between what we thought was gonna be.
A less digital platform, but at a better operating efficiency ratio to one where we're investing more in digital than we thought but that ultimately will have expanded NIM as a result in the digital products that were intending on introducing.
Got it makes more sense, okay on capital increased year over year, and consequently remains above your 15% equity the assets target. So do you expect to be more active.
In share repurchases and you've historically been or what other capital actions could you considered to be more optimally manage.
Yes. So we were yeah, we did repurchase a lot of shares in in 2019, and we have $9 million of remaining authorization under our latest authorization. So as I said in the prepared remarks, we do you share repurchases.
As an attractive use of our capital at this time and yeah, we would continue to view that especially given state stock price.
Okay is there anything else on the capital actions that you could consider to get closer to that 15%.
You know, we could we get hold more assets on balance sheet instead of seven cents syndicating them, Chris but I you know I think the goal here isn't to use the access capital in a way that isn't accretive to our OE is trying to figure out how to get the capital in the business to be the proper size.
The risk profile the balance sheet.
So you know the big issue that faces to compete structural issues facing the company's we've got this this capital limitation agreement with the FDIC, which requires us to hold 50% capital at the back and you know if you look at the capital the economic capital. It was required in the securitization we did last year.
It was much much less than 15%. So I think the goal here is to try to get a that actual capital in the business down to the due to a level that that more proximate to what the economic capital should be but you know, we're not going to be able to make significant progress on that until we get relief from the capital limitation agreement, which is.
She's a very very important strategic objective for the company, but it's not one that we control.
Sure Yeah, no that one that's existed for awhile.
We're kind of combining my questions all together no topline as it's been essentially in line with expectation.
Opex is run higher.
A bit more.
Hello, more capital you know I noticed your dad your target return on average equity.
Which was supposed to be hit 2020 of 18% to 20% is now can change during the on identified long term target. So how should investors think about the expectation for timing for this achievement to be it.
You know are you were.
I think that were the way we think about it is that you know we're going to be digitizing the platform over the next two to three years.
And that the combination of common relief and digitizing the platform and removing the capital and increasing the margin in the business as a result of being able to offer. These digital products I think will ultimately get us to where the guidance was that we provided three years ago, but yes.
No. We're in a we're in a much more competitive environment in the equipment finance business than we thought we were going to be when we provided that guidance to begin with we think we have a really good mitigant to that in our capital market strategy, but ultimately I think the the basic structure of the business needs to change from a karma perspective, the amount of capital it's in that business and we need to.
We need to really make progress on digitizing the platform. So that we can continue to offer more higher margin products through the platform.
Got it I don't want to Hog all your time I'll ask one last question then I'll hop back into queue. So this is the toughest but it is the most important question here is.
It'll take a look back over the last three years in stocks essentially flat done a nice job on execution throughout multiple initiatives with Marlin 2.0, but no why should investors expect any further execution to lead to a higher stock price what else is in your control to improve stock performance.
Oh, you know that that is a good question and you know I don't have of course, the answer to that were repurchasing shares were removing a movie we're working to remove the capital limit agreement.
We reduced expenses dramatically, we've got capital markets in place to mitigate a changing price environment.
So yeah I brought from our perspective I think we're you know we're managing the levers that we control very aggressively and we did so last year and we're going to continue to do so you know next year as to the study the stock price.
Obviously viewed as being significantly below the intrinsic value business.
And it gets a huge topic of conversation both in the management team with the board. So it's a it's it's something that's that were that we're thinking about and working to improve all the time.
Got it yeah. Thanks to the candor Jaffrey no. It's not any question [laughter] I mean, something that's an industry that you can marlin 2.0, maybe you're pretty confident.
Be reassured.
So that's that's it for me I'll hop back in Q.
Thank you once again as a reminder, if he would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star keys.
Our next question is a follow up from Christopher you work with JMP Securities. Please proceed with your question.
You can't get rid of me.
[laughter] welcome back.
Just two follow up questions, just specifically on the quarter. So.
You know what are some of the qualitative characteristics that led to December your comments on lower credit borrowers that ROE the pickup in delinquencies in the second half figure.
Yeah. So first of all so that unclear at this time, but it's not just delinquency its charge offs, but you know there were three parts of our portfolio that showed particular weakness a in Q3 and even more so in Q4 that with transportation, our broad based retail business.
Yes, we refer to it as retail, but it's a multiple industries that we solicit business from a threw out our dealer partners and and then lastly, our broker space. So.
No we talked last quarter, we'd made changes to our transportation underwriting guidelines. We've continued to see deterioration as that market still is suffering from lower freight volume lower freight rates higher insurance costs. So we've made we've tightened even further the transportation sector, we basically completely eliminate.
It owner operators, we've limited transportation business to our commercial vehicle group and two two large partners, whose portfolios are performing well much of which is vocational anyhow. So so we've really tightened up on the transportation piece I think sufficiently well at this point, but still Q4 was with weak and we had increased.
Charge offs, there in terms of the our retail business and our broker business.
As we did a deep analysis into that portfolio. We really saw a marked difference between the better half I would say up our credit quality in terms of the movement of the higher delinquency and charge offs and the lower half. So what we've done is a we've pretty made some pretty significant changes in terms of those transactions lower grade credits.
In the past might have been approved without personal guarantees where now requiring personal garett tree guarantees, but we've also increased very requirements in terms of the quality of those guarantors. Both in terms of their credit scores or personal credit scores and their revolving availability. So the analysis revealed the helped us I'd.
On a five steps we needed to take and we've implemented those changes.
Yes.
Got it okay. That's helpful. Thanks for that color you know maybe Jeff here.
I'm trying to ascertain a little bit more of your comments on the competitive.
Pastures, maybe you could just qualitatively talk about what you're experiencing there and then equipment finance that that's way kind of from need to look at.
Indicator of the competitive pressure is the decline in the weighted average you equipment finance Joel.
I know you're prepared comments talked about a little bit about a mix and then obviously a competitive pressures. So could you just help me understand a little bit more qualitatively, what's going on in equipment finance from a competition standpoint.
Sure I'm, sorry, we can talk a little bit about equipment finance and then and then I can make a couple of comments on working capital to because that that market continues to evolve as well. So you know so fourth quarter is always a the most competitive quarter, regardless of what kind of broader competitive environment yearend.
But in the third and fourth quarter, we definitely saw.
The increase price competition and its you know I think it's we're sort of it late cycle and you know late cycle competitive changes usually occur first with pricing and then with credit we haven't seen the credit piece yet so it's it feels to us like there's quite a discipline that the industry's continuing to exercise.
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There's no question that you know is.
As platforms are trying to grow and trying to find a way to to better serve their customers that there is margin compression that's occurring at its you know I think is particularly as as banks with a low marginal deposit costs.
Continued to enter the equipment finance space and they continue to move you know down market that that's definitely you know I think having an impact on on the had an impact on on the pricing that we experienced in the third and fourth quarter and we we made the cost conscious decision in the fourth quarter to meet the market clearing.
Rice in those and those platforms, where we felt at the most.
So its a.
We believe that you know because we have the capital markets capability, we can compete on that basis, because ultimately we're just intermediating the assets to a bank's balance sheet anyway, and so it allows us to be able to retain control of our customers to be able to service their needs and it allows us to remain competitive independent.
Of our cost of funds relative to you know our competitors.
It's a it's it's not the perfect solution, a buddy but it's a it's a good solutions.
Yeah greed, and then maybe just any comments on working capital and what you're seeing there you got a confluence of potential competitors, so and any comments on qualitative competitive pricing or or or pressure.
Yeah, Hi Inn in Oh, I think unlike equipment finance, where you know it's a there's bofa cycle impact and there's also potentially a structural impact as these banks moved down market.
In the working capital case, what we're seeing is just the market is really maturing.
And I think there's while the product hasn't cycles, yet I think a lot other competitors in that market are so data driven.
And they have they really have a lot of data that they have accumulated over the last two or three years.
And there are discovering that you know they see the better economic outcome is to reduce price a little bit and be able to increase volume, it's the mark to market or the product is really becoming more mainstream.
We see it with our customers as well it used to be the product of last resort.
And we don't see that anymore and so you've got it you know you got tenders, extending you've got going from daily and weekly repayments the monthly repayments.
Got deal size is going up there's there's a there's a more specific stratification of credit quality and the way that that that fintech or all lenders are providing that product to market. So I don't think it's necessarily a bad thing.
And I think we're in a really good place to be able to evolve with it and to take advantage of it because I think you know the tailwinds that come from having the market or having a product viewed as being you know more mainstream it just all both rises that is that occurs and so there is certainly going to be dog twice and competition and so forth and.
Over time as everybody tries to settle into the place that they want to compete in that environment, but there. There is there there is good tailwinds in the when the working capital product because it is becoming a warm age it's being viewed and consumed in a more mainstream way.
Interesting that's great perspective in context, so thanks for all that especially in the industry in the market as well.
I think that's it for me so thank you for pain patients in taking by my that exhaustive list of questions.
Our pleasure Chris Thank you.
Thank you we have reached the end of our question and answer session I'd like to turn the call back over to Mr. Hilzinger for any closing remarks.
Thank you for your support and for joining US on today's call. We look forward to speaking with you again, when we report our 2021st quarter results in late April Thanks, again, and I Hope you have a great rescue day.
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