Q2 2020 Marlin Business Services Corp Earnings Call
Greetings and welcome to Marlins second quarter 2020 earnings call. At this time all participants are in listen only mode of question answer session will follow the presentation.
<unk> operator systems during the conference. Please press Star Zero on your telephone keypad. Please note. This conference is being recorded I would now let's turn the conference or what's your hopes to less aggressive managing director Investor Relations. Thank you may begin.
Good morning, and thank you for joining us today for Marlin business Services Corp.
22nd quarter results conference call.
On the call today is jumped Hilzinger, president and Chief Executive Officer.
<unk> senior Vice President and Chief Risk Officer.
Michael Gansky, Senior Vice President and Chief Financial Officer.
Before beginning today's call, let me remind you that some of the statements made today will be forward looking made under the private Securities Litigation Reform Act of my 290 fives.
Further described in slide two of the company's quarterly earnings supplemental presentation.
This was posted under the events and presentations in the investors section of the company's website at www.
Dot Marlin capital solutions Dot com.
Such forward looking statements represent only the company's current beliefs regarding future events and are not guarantees a performance or results.
Actual performance or results may differ materially from those projected or implied in 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 in Marlins periodic reports filed with the United States Securities Exchange Commission.
Including the most recent annual report on form 10-K, and quarterly reports on form 10-Q, which are also available in investor section of the company's website.
Investors are cautioned not to place undue reliance on such forward looking statements.
During this call Marlin made its got stories 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 the reconciliation of such measures to their most directly comparable GAAP financial measure.
With that it's now my pleasure trying to calibrate moms, President and Chief Executive Officer job building just.
Thank you also.
Good morning, Thank you everyone for joining us to discuss our 2022nd quarter results.
My comments today will focus on an overview of the key highlights from this past quarter and Marlins operational response to mitigate the impact of the cobot 19 pandemic on our business.
Well, Matt slow our chief risk officer will provide an update on the performance of our portfolio.
And Mike began ski our Chief financial Officer will follow with additional details on our second quarter financial results.
During the second quarter, we continued to operate in a challenging and uncertain environment arising from the ongoing cobot 19 health crisis second quarter total sourced origination volume of 67.2 million was well below our your goal results.
During the quarter demand for financing by the small business community continued at the reduced levels. We began experiencing in mid March driven by the challenges facing many industries from widespread quarantine orders implemented across the United States.
Origination volume during during the quarter was also impacted by lower approval rates stemming from prior underwriting criteria that we implemented in late March.
With the syndication markets essentially closed due to disruptions from the crisis, we retained virtually all second quarter origination volume on our balance sheet.
At quarter end, our debt investment in leases in loans was 911 billion down 14.2% from the second quarter last year and our total managed assets stood at approximately 1.2 billion down 5.4% for the same period.
For the quarter, we reported a GAAP loss of 50 cents per diluted share compared with GAAP earnings of 49 cents per diluted share for the second quarter last year.
Profitability in the second quarter was negatively impacted primarily by a significant increase in the allowance for credit losses, driven by the Pandemics expected impact on our portfolio.
We will provide additional details about the portfolio and Mike will discuss the financial impact at the pandemic is having on expected future credit losses in their remarks.
As the pandemic began to escalate and continuing through the second quarter, we took a number of actions to mitigate its impact on our business.
First and perhaps most importantly, we commenced significant and immediate steps to protect the value of our portfolio.
At the onset of the crisis, we shifted significant human resources to our servicing platform and throughout the second quarter. We continue to adjust the underwriting standards that we implemented early on in the crisis, including limiting origination activities within certain highly impacted industries geographies and borrowers.
As a result, our equipment finance approval rate for the quarter was 37%, which was down from pre crisis levels in the mid to high 50% range.
In terms of customer demand and our overall business activity during the second quarter, we processed approximately 40% of the equipment finance application volume as compared to a year ago and working capital loan applications were de Minimis due to a combination of lower customer demand and reduced marketing activity during the quarter.
He's efforts notwithstanding our portfolio did experience higher delinquencies and a significant increase in the allowance for credit losses during the quarter.
As I mentioned previously Lewin, Mike will discuss this in greater detail in their remarks.
With respect to our partners and customers from the onset of a pandemic. We have sought to provide support to help them whether this crisis as of the ended the second quarter. We received approximately 8300 request for payment deferrals their comprised $180 million of our portfolio.
All these requests 133 billion or nearly 75% have agreed to the deferral terms, 18% opted not to accept the deferral and continue to pay under their original obligation, but 7% totaling 13 million of our portfolio did not accept the deferral and are in various stages of delinquency.
In addition through Marlin business Bank, we are up or participating lender under the SBH Paycheck protection program and originated a modest number of P.P.P. loans totaling approximately 4 million in support of our customers.
With each of these programs. Our objective is been to provide liquidity to our customers to help them through the crisis to avoid future charge offs.
We also continue to place a heightened focus on liquidity and capital adequacy in our own company.
During the early days the pandemic, we took advantage of our access to the wholesale deposit market to substantially increase our liquidity.
The wholesale deposit market has remained open at very functional during the crisis, and we were able to significantly improve our liquidity position at a very low cost.
We ended the second quarter, our cash and cash equivalents to total assets ratio stood at 17.7% up from 16.7% last quarter and 10.9% a year ago.
Also as would be under the quarter, our total risk based capital ratio was in excess of 20%, which is approximately double the requirement for a well capitalized bank.
He is liquidity and capital actions continue to fortify our balance sheet and our financial position remains strong and stable.
With respect our operating expenses given the lower levels of business activity. We're currently experiencing we've been very proactive in reducing expenses to mitigate the negative impact of a pandemic on our financial results.
Early in the second quarter, we announced an employee furlough plan that began on April 13th and impacted approximately 120 of our colleagues.
In mid June and again, a mid July we completed permanent reductions in our workforce that affected approximately 80 employees, while returning approximately 40 employees from furlough to active status.
From these actions, we expect to achieve annualized savings of $7 billion to $9 billion.
Another important initiative during the quarter was driven by our decision to use this disrupted time to accelerate the automation and digitization of our origination platform.
Well, we have long known that becoming more digital was an important strategic objective for the company. The pandemic has accelerated the D. The use of digital tools generally and has provided us with the opportunity to accelerate our own digital pivot.
This initiative will be a key focus for the enterprise for the remainder of the year and once completed will allow customers and partners to have a completely digital experience with us.
We believe that by doing this we will be able to offer an easier and more convenient customer and partner experience, while also allowing us to reach scale more efficiently as the economy recovers.
Supported this initiative during the quarter, we took advantage of the Furloughing and restaffing process to restructure and reorganize our origination platform have allocated a small portion of the cost savings to reinvest in this initiative.
Through this initiative and the actions we have taken in support of it we believed that the company will emerge from a pandemic in a competitive position that is even stronger than before the pandemic.
In summary, during these uncertain and volatile times, we remain focused on the fundamentals of our business protecting our portfolio working with our customers maintaining adequate liquidity, reducing costs and prudently preparing for the future.
We're thankful for the support of our shareholders and look forward to serving our customers and communities. During this time of deed in emerging from this crisis as a stronger company.
With that I'd like to now turn the call over to loop as low our chief risk officer to discuss the performance of our portfolio in more detail.
Lou.
I can't Jeff Good morning, everyone.
My comments. This morning, we'll focus on the impact that the koeppen 19 pandemic is having on our portfolio performance and the actions that we're taking him to support our customers. While also minimizing losses during this challenging economic period.
This crisis has particularly impacted small businesses and you will see that as I review, our key asset quality metrics.
Equipment finance on book receivables and over 30 days delinquent were 3.9% up 208 basis points for the prior quarter and up 284 basis points from the second quarter 2019.
Equipment finance receivables over 60 days delinquent were 2.5, 10% up 147 basis points from the prior quarter up 184 basis points from the second quarter of 2019.
The significant increase in delinquency was driven by the sectors in our portfolio most impacted by the pen down including medical restaurant retail and miscellaneous services.
These sectors combined represented 8.4 million a big totaled 13.2 million increase in the 61, plus they pocket quarter over quarter.
[noise] aggregate total finance receivables net charge offs increased in the second quarter to 3.47% of average finance receivables on an annualized basis as compared with 3.11% in a prior quarter and 1.88% in second quarter of 2019.
Equipment finance net charge offs were 3.39% an increase of 60 basis points quarter over quarter, and 164 basis points year over year.
Increased charge offs were observed across every part of our portfolio year over year retire restaurant construction and miscellaneous service says industries being the largest drivers for the increase quarter over quarter.
Transitioning now discuss working capital loans second quarter, 15, plus day delinquency increased 183 basis points from the prior quarter, three or 4.38%, while 30, plus day delinquency increased by 154 basis points to 2.68%.
The significant increase in delinquency is attributed largely to the Coca 19 crisis impact on predominantly the same industries already mentioned for equipment finance.
Working capital loan net charge offs in the second quarter increased to 4.87% of average working capital loans on an annualized basis from 8.13% into first quarter and a slight increase from 4.82% in the second quarter of 2019.
Contributing to the improved charge off results was a significant amount of endemic related restructure activity, which I will address in more detail later in my remarks.
We are anticipating elevated charge offs in July and August due to continued migration of the 61 plus days delinquent customers that are unable to pay and have either not requested more consummated restructures.
As Jeff mentioned earlier, we reallocated additional staff to support our collection efforts and to assist with it for processing a restructure requests.
As of June Thirtyth restructured portfolio consisted of 115.9 million for equipment finance and 17.9 million for working capital.
Representing 12.5% and 42.5% of the portfolios respectively.
It is worth noting that modified contracts are reported in our delinquency data based on their status with respect to their modified terms.
Thus generally presented in current status as of June Thirtyth.
While we observe some improvement recently in early stage migration and payment resolve raise the performance of the restructured portfolio is expected to have a material impact on delinquency and charge offs over the next several months.
[noise] for the equipment finance portfolio, approximately 16% of restructures had a first cost restructure payment due date by the end of June followed by 50% in July and 28% in August.
Approximately 83% of the working capital portfolio had a first <unk> post restructure full payment due by the end of June.
Looking at the Restructures that had a first due date by the end of June as of July 20, poor approximately 24% of the equipment finance contract and 5% of the working capital contracts had reached 31 plus days delinquent bucket.
Our collection scheme as prioritizing its calling efforts on restructured contracts and encouraging borrowers went justified to apply for a second modification.
We're pleased to see that the restructure request activity over the past 60 days has stabilized level significantly below what we experienced in early Q2.
And finally I'd like to update you on our underwriting strategy.
During the first quarter earnings call I described how we segmented our portfolio into low moderate and highly impacted industries and that we devised an underwriting approach for each of these segments.
Recognizing that the impact of the pandemic is changing over time and there's different based on the industry and geographical location of the borrower. We developed the model to assign each industry to a low moderate or highly impacted risk segment for each of the eight geographic clusters, we defined.
[noise] utilizing the model, which is updated with price data every two weeks, we can differentiate our underwriting based on the industry and geographic risks inherent to each specific borrower.
We are confident that this strategy will enable us to stimulate demand and underwrite more aggressively for applicants in industries and geographies that are experiencing an improved business climate, while remaining more conservative for those that remain highly impacted.
I continue to believe that we've taken steps to mitigate the impact of the Kogan 19 pandemic on our portfolio to the maximum extent possible.
We will continue to closely monitored the impact pandemic is having on our prospective and existing customers to ensure that our underwriting as both opportunistic and prudent.
With that I'll turn the call over to our CFO, Mike began asking for more detailed discussion of our second quarter financial performance Mike.
Thank you live and good morning, everyone.
Jeff and Lou both articulated the challenges and uncertainties that we are facing as a result of the ongoing covert 19 health crisis.
Those challenges continue to manifest themselves in our results of operations as our second quarter net loss was 5.9 million worth 50 cents per diluted share compared with net income of 6.1 million or 49 cents per diluted share for the second quarter last year.
Net loss on an adjusted basis was 5.1 million were 43 cents per diluted share compared with net income on an adjusted basis of 6.3 million or 51 cents per diluted share a year ago.
Our second quarter performance was significantly impacted by a variety of factors, including the ongoing cobot 19 pandemic. The operational measures, we swiftly executed to protect our employees and in short business continuity.
The actions, we took to provide financial stability limit the adverse impact on our portfolio and support our customers and partners. During these difficult time.
The continuing effect of a pandemic resulted in lower loan and lease application demand and origination volume as well as substantial increases to both our current provision and allowance for credit losses.
We were able to offset some of these adverse impact with lower operating expenses due to our proactive cost reduction measures.
At the macroeconomic environment continued to deteriorate during the second quarter, we revised our economic assumptions and credit outlook considerably to reflect further impacts from the cobot 19 crisis.
Unemployment rates and business bankruptcy forecast, our key economic inputs that we use for our loss reserve model.
Business bankruptcies have continued to increase in the second quarter and while the unemployment rate has declined from its peak in the second quarter of 2020 is expected to be significantly above the levels predicted as of March 31st 2020.
We use third party forecast that assumed the unemployment rate remained elevated at an average rate of 9.5% for the next 12 month and begins to decline in the second half of 2021.
Furthermore, we expect that the level of business bankruptcy filings peaked at approximately 45000 in the first quarter of 2021.
Under the new Cecil standard forward looking economic forecasting the key factor in determining the allowance for credit losses.
Accordingly, the economic fallout from the covert 19 pandemic significantly increased our estimated lifetime credit losses under Cecil, which drove a substantial increase to our provision for credit losses.
We recorded an 18.8 million provision for credit losses in the second quarter compared to a 4.8 billion a year ago.
In the coming quarters, we will continue to monitor and evaluate the economic environment refine our outlook and update our loss reserves accordingly.
Turning to second quarter yield the yield on total originations was 9.16% down 329 basis points from the prior quarter and down 379 basis points from the second quarter of 2019.
These declines are almost entirely attributable to the significant reduction in working capital loan volume as a result of tightening underwriting standards in the wake up the co at 19 crisis.
Equipment finance yields during the second quarter were 8.8% down 15 basis points from the first quarter and are reflective of an increase in the credit quality of originations from borrowers seeking credit during the crisis.
For the quarter net interest margin or NIM was 8.68% down 66 basis points from the prior quarter and down 70 basis points from the second quarter of 2019.
The sequential quarter decrease was driven primarily by 3% decline in average finance receivables due to greater portfolio run off from the decline in origination activity.
The year over year decrease was due to a 5% decline in average finance receivables as well as lower renewal and residual income, resulting from a change in the presentation of this activity driven by the adoption of diesel.
The company's interest expense as a percent of average total finance receivables was 222 basis points in the second quarter of 2020.
Compared with 225 basis points for the prior quarter and 248 basis points for the second quarter of 2019.
While deposit rates declined in the second quarter of 2020, we maintained additional liquidity given the higher level of economic uncertainty from the effects of covert 19 coming into the second quarter.
We expect liquidity levels continue to decline to pre pandemic levels by the end of year.
Non interest income was 3.8 billion for the second quarter of 2020, compared with 12.2 million in the prior quarter and 7.2 million in the prior year period.
The sequential quarter decrease in noninterest income is primarily due to a 5.9 million decrease in property tax revenue associated with seasonal factors that drive property tax revenue recognition in the first quarter as well as a decreasing gains from the sale of assets.
The year over year decrease is primarily attributable to a $3.3 million decline in gain on sale revenue.
Moving to expenses second quarter noninterest expenses were 13.5 million compared with 29.9 million in the prior quarter, an 18.5 million in the second quarter last year.
Non interest expenses for the first quarter of 2020 included a 6.7 million charge related to goodwill impairment as well as 6 million a property tax expenses of their seasonally high during the first quarter.
During the second quarter of 2020, we recorded 1.1 billion of restructuring related expenses for severance and lease vacancy.
Second quarter expenses also benefited from a 2 million reduction in salary and incentive compensation expenses net of incremental severance expense totaling 900000, resulting from our cost management measures and lower origination volume.
We have taken decisive action to reduce operating expenses and preserve capital.
During June and July we implemented to reductions in force that affected a total of approximately 80 employees.
The majority of the impacted employees were among the approximately 120 employees included in the previously announced for.
As a result of these actions we expect to achieve an annualized run rate fixed cost savings of approximately four to 5 million.
Additionally, runrate variable cost savings are expected to be three to 4 million based on normalized pre crisis origination volume level.
The recent staff reductions were part of a larger reorganization we completed in July.
Its employees return from furlough, they were introduced to a new sales and processing organizational structure to facilitate more efficient and effective interactions with our customers and partners.
We took immediate action in early March to transition our workforce to work remotely to ensure business continuity, we recognize the importance of interacting with our partners and customers digitally.
Capitalize on this reality and apply key learnings from successfully transitioning our entire workforce remotely we made the decision to align our sales and processing structure with a focus on increasing the adoption of our existing digital tools and enhancing the digital experience of our customers and partners.
This effort is primarily a means to capitalize on process improvements and efficiencies at our core go to market strategy has not changed.
Through these enhancements we are focused on optimizing our business processes to be more efficient and cost effective.
Automating routine interactions and reallocating human capital resources to more complex value creation activity.
Moving on to income taxes for the second quarter, our effective tax rate was unusually low at 18.9%.
This was due to gap interim tax reporting requirements that limit our quarterly tax benefit due to our quarterly pre tax loss relative to fully or expectations.
This relates only to the timing of income tax recognition between quarters and we expected. This will normalize in the second half of the year.
Our full year tax rate is expected to be between 36 and 37%.
Despite the difficult operating environment that has persisted through the first half of the year I'm pleased to note our capital and liquidity position remains strong.
Through Marlin business Bank, we have access to diverse funding sources.
As of June Thirtyth 2020, our consolidated entities had 211.7 million in cash and cash equivalents and access to the wholesale deposit market continues to be robot.
In addition, we remain well capitalized at levels significantly above regulatory requirements.
As of June Thirtyth 2020, our consolidated total risk based capital ratio was 20.65% and our consolidated tier one leverage ratio was 15.05%, which were both above the 10% and 5% well capitalize requirements respectively.
Based on these ratios our excess total risk based capital is 55.8 billion over well capitalized levels as of June Thirtyth 2020.
As the economy improves and we put the disruptions of the Cobot 19 health crisis behind US, we would expect to maintain at capital buffer of 1% to 2% above the well capitalize requirement.
Since Marlin business Bank is our primary source of funding most of the company's assets are retained in the subsidiary.
Therefore, a majority of our excess capital also resides here.
Marlin business Bank is a wholly owned subsidiary and the Federal Reserve member Bank and is subject to the federal reserves rules and regulations.
Those regulations require that the federal reserve board approved dividend payment to the parent company to the extent Marlin business Bank does not have capacity.
As of June Thirtyth Marlin business Bank does not have the capacity of the pay dividends without explicit approval from the Federal Reserve Board due to current period losses, and the cumulative dividends paid over the last two years.
This restriction did not impact our corporate dividend as our board of directors declared a regular quarterly dividend of 14 cents per share payable on August Twentyth 2020 to shareholders of record as of August 10th 2020.
Given the careful and prudent management of our liquidity in capital position. We believe that we can manage through the current crisis absorbed future losses should they occur.
During the first half of 2020, our capital has been reduced by approximately 34 million from our net loss adoption of Cecil and capital returns through share repurchases and dividends.
Through the same period, our allowance for credit losses has increased by 34 million and book value per share stand at $15 in 16 cents as of June Thirtyth 2020.
We will continue to closely evaluate our capital position and potential liquidity requirements.
Given the high degree of uncertainty surrounding the pandemic and their related impact on the U.S. economy. It is extremely difficult to predict the ultimate performance of our portfolio and resulting financial performance with a high degree of certainty.
We have increased our allowance for credit losses reduced operating expenses and diligently managed our capital and liquidity.
Furthermore, we believe that the ultimate performance of the restructured loan portfolio will become clear in the third quarter at the revised contractual payments become due.
We are continuing to monitor the situation closely and intend to provide an update on our third quarter earnings conference call.
In the meantime, we remain focused on our business fundamentals and weathering. The crisis I remain confident that we're well positioned to withstand this crisis given the reserves that we have already built our strong capital and liquidity position and our proactive management efforts.
That concludes our prepared remarks, and with that let's open up the call for questions operator.
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We seem to have no questions at this time and I would like to turn the call back over to management for any closing remarks.
Thank you for your support in for joining US on today's call. We look forward to speaking with you again, when we report our 2023rd quarter results in late October. Thank you again for your time and attention. This morning, and please stay safe and healthy.
This concludes todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation I don't have a wonderful day.
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