Q3 2020 Marlin Business Services Corp Earnings Call

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He did not want to introduce your host Mr. clossin, sometimes they say relations. Thank you Sir you may begin.

Good morning, and thank you for joining us today for Marlin business services Corp.'s, 2023rd quarter results Conference call.

On the call today is Chuck <unk>, President and Chief Executive Officer.

Hello.

Senior Vice President and Chief Risk Officer, and Michael Gatzke, 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 for looking and are made under the private Securities Litigation Reform Act of Nike 95.

As further described in slide two of the Companys quarterly earnings supplement presentation, which is posted under the events and presentations in the Investor section of the company's website at Www Dot Marlin capital solutions Dot com.

Such forward looking statements.

Only the company's current beliefs regarding future events and are not guarantees of 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 the factors described under the heading forward looking statements and risk factors in Marlin periodic reports filed with the United States Securities 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 at.

Investors are cautioned not to place undue reliance on such forward looking statements.

During this call Marlin may discuss various non-GAAP financial measures.

Getting 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 as well as a reconciliation of such measures to their most directly comparable GAAP financial measures.

With that it's now my pleasure turn the call over to Marlins, President and CEO, Jeff Jeff.

Thank you I saw good morning, and thank you everyone for joining us to discuss our 2020 so reported results.

My comments today will focus on an overview of the key highlights from this past quarter and borrowings continuing efforts to mitigate the impact of the COVID-19 pandemic on our business.

As well, our chief risk officer will provide an update on the performance of our portfolio.

And Mike the Gansky, our Chief Financial Officer will follow with additional details on our third quarter financial results.

Given the significant challenges we faced in the first half of 2020 arising from a pandemic I'm very pleased with the resiliency of our business and our return to profitability in the third quarter.

You would have significantly improving portfolio performance and outlook, coupled with the benefits from the cost reductions we implemented earlier in the year. We generated net income of 2.7 million or 23 cents per diluted share compared with net income of 7.4 million or 60 cents per diluted share a year ago and net losses.

5.9 billion or 50 cents per diluted share last quarter.

Portfolio performance improved throughout the third quarter and has continued to improve into the fourth quarter as well.

Assumptions underlying our loss reserves should become more informed by our recent experience and our capital position remains strong with a reserve coverage ratio of 6.75% of total risk based capital ratio of 22.49%.

Book value per share a $15.23.

As we look ahead, we believe that our strong balance sheet and the investments we're making in our digital origination platform have put us in a great position to better serve our partners and customers in the future.

To take full advantage of the increased demand for small business financing as the economy recovers.

And she has been the case since the beginning of the COVID-19 health crisis, a top priority for the company has been working with our existing customers to help them, whether this crisis and to protect the value of our portfolio, while limiting the erosion of shareholder capital.

We have provided substantial assistance to our customers over the past six months completing over 56, hundreds loan and lease modification requests.

That's what the end of the third quarter, the modified contracts totaled 130 million or 14.3% of total receivables consisting of $118 million of equipment finance contracts and 12 million of working capital loans.

As we will discuss in more detail in his remarks, we've been very pleased with the performance of both the modified and on modified portfolios.

<unk> significantly exceeding our performance expectations during the quarter.

In fact, that's what the ended the third quarter 30, plus day delinquencies began approaching the high end of our pre cobot range and we expect delinquencies will continue to improve during the fourth quarter.

Net charge offs during the quarter, while elevated were also much better than our expectations.

This is particularly true in our working capital loan portfolio, which experienced net charge offs during the quarter that were consistent with our pre koby plan.

As with delinquencies total net charge off levels have also continued to improve during the fourth quarter.

With improving visibility related to the impact of COVID-19 on the value of our portfolio I want to emphasize that the assumptions underlying our current loss reserves have incorporated our actual experience to date and our capital position remains very strong.

As you will recall, we are required to include our estimated lifetime credit losses in our allowance for credit losses under Cecil.

And our current estimate of 61.3 million is reflected in our book value per share of $15.23 as of September thirtyth.

Additionally, as would be under the quarter, our consolidated total risk based capital ratio of 22.49% remained at more than doubled the requirement for a well capitalized bank holding company.

Turning now to origination activity as anticipated third quarter total source origination volume of 68.5 million was well below our year ago results, which was due to several factors.

First much of the lower volume was directly attributable to actions, we took in the second and third quarters to both reduce cost and to restructure the front end of our business to better facilitate the implementation of our digital initiative.

Well, we knew these actions would negatively impact origination volume in the near term. We also believe that these actions have put us in a much stronger competitive position for the longer term.

Next we observed continuing soft demand for financing by small business borrowers in our markets during the third quarter due to the challenges facing many industries.

And finally, although we've made good progress recently in opening up our initial underwriting response to the pandemic origination volume during the quarter was impacted by lower approval rates stemming from our tighter underwriting criteria during the quarter.

That said approval and booking rates are currently approaching prequaled levels.

Improving portfolio performance allowed us to shift our priorities late in the quarter from protecting and restructuring the business to growing again.

Looking at the bottom line I am very pleased with the quarter over quarter improvement in net income that we were able to achieve in the third quarter.

As I noted earlier this return to profitability was driven primarily by our improved outlook regarding portfolio performance that led to a sharp reduction in the provision for credit losses, compared with the second quarter.

We also began to realize the initial benefits from the cost reductions that were implemented during the second and third quarters, resulting in a 22% reduction in operating expenses during the quarter as compared to the prior year period.

We will provide additional details about the portfolio in his remarks, and Mike will discuss our leaner cost structure in his remarks.

Before turning the call over to Lou I would like to provide a quick update on actions, we are taking to accelerate the automation and digitization of our origination platform.

While becoming more digital has always been part of our longer term strategic road map. The pandemic has accelerated the use of digital tools generally and has provided us with the opportunity to accelerate our own digital pivot.

Our digital platform is being designed to offer an easier and more convenient customer and partner experience, while also allowing us to reach scale more efficiently as the economy recovers.

Our digital pivot is a key corporate initiative for Marlin during the second half of 2020 and the implementation process remains on schedule.

We currently expect to roll out the initial phase of the platform, which we are calling express during the first quarter of 2021.

<unk> platform will offer customers and partners a completely digital experience from application through funding, which will allow us to take advantage of the accelerating adoption of digital financing by our partners and customers.

We look forward to providing updates on our progress on future calls.

In summary, our results this past quarter provide welcome evidence that we are beginning to emerge from this crisis without question. Many challenges remain however, we have returned to profitability and I believe we have positioned the company for sustained profitability in the future.

Looking ahead to the fourth quarter and beyond I Bill.

The borrowing is now in a position to take full advantage of opportunities to serve our partners and customers and to restore growth in our origination volume as the small business economy shows its resilience and continues to adapt and recover from the effects of the pandemic.

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.

Yeah.

Thank you, Jeff and good morning, everyone.

As Jeff mentioned, we're very pleased with the portfolio performance in the third quarter as we begin to emerge from the crisis.

Before I get into the details of the portfolio performance I would like to explain why we are gaining confidence regarding the resiliency of our portfolio and what is motivating our willingness to adjust our underwriting standards to driver cool rates to near pre cobot levels.

I would first note that the delinquency and charge off performance, we have experienced for the total portfolio was much better than our expectations are probably in a pandemic.

This better than expected performance applies to both the modified and non modified portfolios.

Marlins vintage delinquency rates are improving and our trending towards normal post pandemic originations are performing on par or better than early stage vintage delinquency historically and we attribute this to stronger credit quality due to more restrictive underwriting that was implemented shortly after the beginning of the pandemic.

Although we have experienced positive trends there remains prominent risk factors that could cause increasing stress on the portfolio.

The pandemics resurgence could lead to a return of mandated shutdowns on industries, where Marlin has strong concentrations such as restaurants and retail.

Labor market health and federal stimulus will be critical factors to watch as well that pandemics trajectory pardon the macro economy.

We will continue to closely monitor these developments and act proactively just as we've done since the onset of the pandemic.

Now looking at the key asset quality metrics equipment finance on book receivables over 30 days delinquent were 2.13% down 177 basis points from the prior quarter and up 86 basis points from the third quarter of 2019.

Equipment finance receivables over 60 days delinquent were 1.42% down 110 basis points from the prior quarter and up 55 basis points from the third quarter of 2019.

The decrease in delinquency was driven by improvement in the non modified portfolio better than expected modified portfolio performance and elevated charge offs.

The September Thirtyth non modified portfolio 30, plus day delinquency was 1.7%.

As compared to 4.4% at June Thirtyth, while the modified portfolio delinquency was 4.95% as of September thirtyth as compared to <unk>, 0.5% at June Thirtyth.

From a sector perspective, the highest concentration of 31, plus delinquencies dollars was in miscellaneous services, which was 3.4%.

This sector comprised approximately 20% of total 31, plus delinquent dollars.

Miscellaneous service is an amalgamation of service related S. I T codes, the largest of which our business services repair services and equipment rental and leasing.

The rest of Marlins industry sectors exceeding 5% of total portfolio, including restaurants, and retail had delinquency at or below 2% at quarter end.

Aggregate total finance receivables net charge offs increased in the third quarter to 4.54% of average finance receivables on an annualized basis as compared with 3.47% in the prior quarter.

And 1.99% in the second quarter of 2019.

Equipment finance net charge offs were 4.49% an increase of 110 basis points quarter over quarter, and 247 basis points year over year.

As discussed on the Q2 earnings call, we anticipated that Q3 charge offs would be elevated as delinquent customers that either didnt request or failed to consummate an approved modification proved to be unable or unwilling to make scheduled payments.

Less than 100000, a bit Q3 charge offs came from the modified portfolio.

Marlins top industry sectors, each representing greater than 5% of portfolio had elevated charge offs in the quarter.

Annualized charge offs in Q3 for these sectors was 5.1% core miscellaneous services, 7.2% for restaurants, 4.3% from medical and finally, 5.9% for retail.

Transitioning now to discuss working capital loans third quarter 15, plus day delinquency decreased 45 basis points from the prior quarter to 3.93%, while 30, plus day delinquency increased by 26 basis points to 2.94%.

Working capital loan net charge offs in the third quarter increased to 6.32% of average working capital loans on an annualized basis from 4.87% in the second quarter and from 1.42% in the third quarter of 2019, the latter of which benefited from an extraordinary recovery.

In the quarter.

As of quarter end, approximately 46% of the working capital portfolio, it's been modified upwards of 22% remains in the deferral period.

It is important to note that almost all of the working capital modifications require a partial payments.

Overall, we continue to be extremely pleased with the performance of the working capital portfolio, which has performed better during this downturn and we anticipate and it continues to be a highly profitable product.

Modification activity diminished significantly as we received approximately 700 equipment finance and 65 working capital requests for first time or extended modifications in the third quarter as compared to approximately 7805 hundred through the second quarter.

Respectively.

We have largely discontinued offering pandemic related modifications to our customers, but are still evaluating individual request based on the facts and circumstances surrounding the customer.

As of September Thirtyth, 85% of equipment finance modifications were completely out of the deferral period and most of the customers have resumed paying according to their original payment schedule.

The 31, plus delinquency for this cohort is only 4.74%.

Of the remaining 15% of equipment finance modifications totaling $18 million in the deferral period.

Approximately 53% are required to make partial payments.

Substantially all the remaining equipment finance and working capital modify contracts are scheduled to resume their normal payments before December 30, Onest of this year.

Lastly, I'd like to provide an update on our underwriting strategy.

As discussed during the Q2 earnings call, we developed a model to assign each industry to a low moderate were highly impacted risk segment.

Each of the eight geographic clusters, we define.

This model differentiates our underwriting based on the industry and geographic risks inherent to each specific borrower as well as Marlin portfolio performance data for those industries.

Utilizing this model and the improved outlook for portfolio performance. It made adjustments for the fourth quarter that should result in a highest approval rates for both equipment finance and working capital since the pandemic began.

In closing, while we anticipate that equipment finance charge offs in the fourth quarter will decline from the levels experienced in the third quarter.

They will remain elevated in the fourth quarter as compared to pre corporate levels.

As discussed earlier and dynamic related economic risk remain but our portfolio has proven to be resilient, given our significant borrower diversification and prudent underwriting.

With that I will turn the call over to our CFO, Mike the Dansky for a more detailed discussion of our third quarter financial performance Mike.

Thank you Lou and good morning, everyone.

Our third quarter net income was 2.7 million or 23 cents per diluted share compared with net income of 7.4 million or 60 cents per diluted share for the third quarter last year.

Net income on an adjusted basis was 3.2 million or 27 cents per diluted share compared with net income on an adjusted basis of 7.4 million or 60 cents per diluted share a year ago.

As expected our third quarter performance reflects the ongoing impact from COVID-19, but I'm pleased with our return to profitability.

We have benefited from the operational measures we implemented earlier this year to proactively reduce cost protect our portfolio and ensure business continuity and financial stability.

As Jeff mentioned, our origination activity in the quarter was adversely impacted by several factors, including the purposeful actions, we took to reduce our workforce and reposition the front end of the business.

Well the ongoing effect of the pandemic.

Counterbalancing the weakness in origination activity with our improved portfolio performance.

We experienced a notable decrease in delinquency from the prior quarter and the portfolio continued to stabilize at the modified portfolio resumed repayment status.

Given these encouraging trend, we recognized substantially lower loss provisions as compared to the first and second quarters of 2020.

Consistent with the first half of this year, our provision for credit losses remains a significant driver of our financial results.

At the challenging economic conditions persisted through the third quarter, we continued to revise our macroeconomic assumptions and credit outlook reflect the ongoing impact from the COVID-19 crisis.

As we previously noted unemployment rates and business bankruptcy forecasts are two key economic factors that we input into our loss reserve model.

Business bankruptcies have continued to increase in the third quarter and while the unemployment rate has declined from its peak in the second quarter of 2020 is expected to remain significantly above recent historical levels.

Under the Cecil standard forward looking economic forecasting is a key factor in determining the allowance for credit losses.

We recorded a 7.2 million provision for credit losses in the third quarter compared to 18.8 million in the prior quarter.

And $7.7 million in the third quarter of 2019.

Our provision expense for the third quarter of 2020 included approximately 4 million from new origination activity.

And approximately $3 million from updated economic forecasts.

Great and qualitative factors.

The component of the provision relating to changing economic conditions with much less than the first and second quarters as the forecast for business bankruptcies and unemployment, we're only slightly revised.

Furthermore, the impact from COVID-19 were previously reflected in our allowance for credit losses at the end of the second quarter.

We will continue to closely monitor and evaluate the evolving economic environment and refine our outlook and update our loss reserves accordingly.

Turning to third quarter yield the yield on total originations was 9.34% up 18 basis points from the prior quarter and down 404 basis points from the third quarter of 2019.

The sequential quarter increase was relatively modest however, the year over year decline is almost entirely attributable to the significant reduction in working capital loan volume as we tightened underwriting standards in the wake of the COVID-19 crisis.

Equipment finance yields during the third quarter were 8.77% down three basis points from the second quarter.

For the quarter net interest margin or NIM was 8.87% up 19 basis points from the prior quarter and down 60 basis points from the second quarter of 2019.

The sequential quarter increase was driven primarily by an increase in fee income coupled with a decline in our marginal cost of funds, resulting from lower deposit rates.

The year over year decrease in margin percentage was primarily related to the decrease in new origination loan and lease yield and the change in the presentation of residual income driven by the adoption of Cecil that were partially offset by a decrease in interest expense from lower deposit rates.

The company's interest expense as a percent of average total finance receivables was 203 basis points in the third quarter of 2020, compared with 222 basis points for the prior quarter and 250 basis points for the third quarter of 2019.

This decrease was the result of lower rates and a shift in mix as higher rate long term debt pay down.

We expect liquidity levels to continue to decline and normalize back to pre pandemic level by the end of the year.

Noninterest income was $4.2 million for the third quarter of 2020, compared with $3.8 million in the prior quarter and 10.4 million in the prior year period.

The sequential increase in noninterest income is primarily due to uncollectible property tax expense from the prior quarter.

And the year over year decrease is primarily due to a 6.4 million decrease in gain from the sale of assets.

Moving to expenses third quarter non interest expenses were 14.2 million compared with $13.5 million in the prior quarter and $17 million in the third quarter of 2019.

Included in our third quarter noninterest expense with a 1 million dollar intangible asset impairment charge from our acquisition of fleet financing resources and $1 million of expenses associated with our reorganization that were partially offset by a 1.4 million benefit associated with an adjustment to our acquisition earn out liability.

Expenses in the third quarter also reflect higher salaries and benefits expenses as employees return from furlough.

The year over year decrease was primarily due to a reduction in salaries and benefits expenses due to lower head count of 104 employees and lower commission and incentive compensation expenses.

As we discussed last quarter, we proactively reduced operating expenses.

Following our actions to reorganize our front office reduced headcount and lower general and administrative expenses.

We have begun to realize meaningful cost savings.

As a result, we expect to achieve an annualized run rate cost savings of approximately $7 million to $9 million based on normalized pre crisis origination levels.

Moving on to income taxes, our effective tax rate was unusually low at 16.1% for the third quarter.

As you may recall from last quarter. This was due to GAAP interim tax reporting requirements that limit our prior quarterly tax benefit due to our quarterly pre tax loss relative to full year expectations.

This relates only to the timing of income tax recognition between quarters as our effective tax rate for the nine months ended September Thirtyth 2020 was 35.6%.

Our board of directors declared a regular quarterly dividend of 14 cents per share payable on November 19th 2020 to shareholders of record as of November nine 2020.

We remain very confident in the strength of our balance sheet and capital position as well as our ability to withstand any future potential losses should they occur.

We will continue to closely monitor and evaluate our capital position and potential liquidity requirements.

We are pleased with the impact that the operational measures taken earlier. This year have had on our financial results as we return to profitability in the third quarter.

The economic impact of the COVID-19 pandemic continue to be felt by the small business sector across the U.S. However, we have seen positive developments throughout the third quarter and into the fourth quarter.

Assuming that the economic impact from COVID-19 in the U.S. does not further deteriorate from current levels, we expect fourth quarter financial results to be marked by the following.

The decline in charge offs with a further improvement in portfolio delinquencies.

Modest growth in origination volume on a sequential quarter basis.

And continued benefit from our cost reduction initiatives.

As we look ahead, we remain committed to supporting our customers and partners prioritizing the health and safety of our employees and ultimately emerging from this crisis, well positioned to drive profitable sustainable growth and maximize value for our shareholders.

That concludes our prepared remarks, and with that let's open up the call for questions.

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That concludes actually management for closing remarks.

Thank you for your support and for joining us on todays call. We look forward to speaking with you again, when we report our 2024th quarter results in late January.

Thank you again for your time and attention this morning, and please stay safe and healthy.

This concludes today's teleconference. You may now disconnect your lines. Thank.

You for your participation.