Q4 2020 Marlin Business Services Corp Earnings Call

[music].

Greetings and welcome to Marlin capital solutions fourth quarter, and full year 'twenty and 'twenty earnings call. At this time, all participants are in a listen only mode.

Question and answer session will follow the formal presentation.

If anyone should require operator assistance, please press star zero and your telephone keypad.

Please note this conference is being recorded.

I'll now turn the conference over to your host lots of glass and managing director of Investor Relations. Thank you you may begin.

Good morning, and thank you for joining us today from Marlin business services Corp's, 2024th quarter and full year results conference call.

On the call today is Jeff <unk>, President and Chief Executive Officer, Lou Maslow, Senior Vice President and Chief Risk Officer.

And Mike Bogacki, Senior Vice President and Chief Financial Officer.

Beginning today's call, let me remind you that some of the statements made today will be forward looking and.

And are made under the private Securities Litigation Reform Act of 1995 as further described in slide number two of the Companys quarterly earnings supplemental presentation.

This was posted under events and presentations and the investors section of the company's website at www.

Dot Marlin capital solutions Dotcom.

Such forward looking statements represent only the company's current beliefs regarding future events and.

And are not guarantees of performance or results.

Actual performance or results may differ materially from those projected or implied and such forward looking statements due to a variety of factors. These factors include but are not limited to the factors described under the headings forward looking statements and risk factors and 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 and the investors section of the company's website.

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

During the 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 as well as a reconciliation of such measures to their respective most direct comparable GAAP financial measure.

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

Thank you Oscar good morning, and thank you everyone for joining us for our 2024th quarter and full year results conference call.

My remarks today will focus on and overview of the key highlights from this past quarter and borrowings continued success and mitigating the impact of the COVID-19 pandemic on our business low.

Blue match low 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 fourth quarter financial results.

Despite the unprecedented operating challenges and macroeconomic uncertainty and countered throughout most of 2020 from the COVID-19 pandemic Marlin finished the year with strong results and the fourth quarter.

I am, particularly pleased with the continued improvement and our portfolio performance and outlook, which supported a significant net released and loss reserves established earlier and the year.

The performance of our portfolio improve throughout the fourth quarter with delinquencies and net charge offs. During the month of December trending in line with pre pandemic levels.

While favorable macroeconomic developments and our portfolio's performance during the quarter contributed to a reserve release, we believe our allowance for loan losses of $44 2 million reflects the continuing near term uncertainty of the macroeconomic environment.

In addition to the performance of the portfolio I'm also pleased with the progress we made during the quarter and growing our origination volume as the company's reorganized origination platforms continued to gain traction.

Importantly, the operating results, we deliberate and the fourth quarter increased our book value per share to $16.40 as of December 31st up a dollar and 17 cents or nearly 8% from the prior quarter and our capital position remains strong with a reserve coverage ratio of 5.0 90 per cent and a total risk.

<unk> capital ratio of 24.0 and 4%.

And one of the challenges we faced in 2020 I'm very pleased with how we manage the impact of the pandemic and generated profitability on a full year basis for 2020, which has now allowed us to increasingly focused on growing origination volume.

As we look forward to 2021, given our strong capital position, our improved cost profile and the growing benefits from our digital initiatives and the traction we are achieving and our reorganized origination platforms. We believe marlin is well positioned to resume our trajectory of profitable growth as we emerge from the pandemic and yes.

The small business economy improves.

Since the early days of the COVID-19 health crisis, Marlin has been very proactive and protecting the value of our portfolio of leases and loans by working with our customers whose businesses have been impacted by the pandemic.

Since the pandemic began we have completed approximately 5600 loan and lease modification requests.

At the end of the fourth quarter. The active contracts that were modified totaled 111 million or 12, 8% of total receivables consisting of $104 million of equipment finance contracts and $7 million of working capital loans. This is a 14 per cent reduction from the third quarter were modified contracts totaled 130 million.

Or 14, 3% of total receivables.

While we will provide additional details in his remarks throughout the second half of 2020, we've been very pleased with the performance of our portfolio Jimmy.

Similar to the third quarter, both the modified and non modified portfolio has exceeded our performance expectations during the fourth quarter.

In fact fourth quarter 30, plus day delinquencies were well within our pre Covid range and we anticipate delinquencies will remain stable during the first quarter of 2021.

Net charge offs during the quarter as a percent of average finance receivables were also much better than our expectations. This is particularly true for our working capital loan portfolio, which experienced net charge offs during the quarter debt were relatively in line with our pre COVID-19 expectations.

Similar to the delinquency metrics total net charge off levels have also continued to improve thus far and the new year.

Now moving onto our fourth quarter origination activity, while total sourced origination volume of $84 1 million was well below our year ago results volume did increase by almost 23% from the third quarter.

Much of the sequential quarter increase was driven by seasonally higher demand and the fourth quarter, but we also benefited from a higher approval rate because we began to loosen some of the underwriting restrictions that were put in place during the initial wave of the pandemic.

The decision to begin loosening. These restrictions was driven by the better than expected performance of our portfolio since the inception of the pandemic and the stronger average credit quality of customers that have submitted applications during the pandemic.

And he's underwriting decisions and signaled the initial shift and our priorities from protecting the portfolio and restructuring the business to resuming our growth profile.

However, while we believe that there are still some near term economic uncertainties that could affect our origination volume. We are confident that the restructuring of our front office activities that we executed in 2020.

Will position us as a much stronger competitor that will enable us to better serve our small business customers and the longer run.

Furthermore, we are hopeful that demand for financing will begin to improve as lockdown restrictions on businesses begin to ease in the coming quarters.

Turning to our earnings performance and the release of reserves contributed to the significant quarter over quarter and year over year improvement and net income that we were able to achieve and the fourth quarter and.

As previously mentioned this was driven primarily by our improved portfolio outlook. We also continue to benefit from the cost reduction initiatives that were implemented earlier in the year, resulting in a 6% reduction and GAAP noninterest expenses, and a 17% reduction and non-GAAP noninterest expenses for the full year 2020.

And we will provide additional commentary about our portfolio performance and Mike will expand on expenses and his remarks.

In summary, our results from the second half of the year and particularly the fourth quarter suggest the worst of the pandemic is now behind us while not fully out of the woods, we have protected the value of our portfolio and supported our customers and partners through loan modifications to help them weather the crisis. During this challenging time.

Given our favorable portfolio performance and stabilization of key credit trends and improved outlook for macroeconomic conditions, I am confident and our ability to operate and grow the business and the future.

Looking ahead to 2021, we believe Marlin is well positioned to meet the evolving financing needs of our valued small business customers and partners as the economy recovers and we begin the process and safely and soundly resuming our pre COVID-19 growth trajectory.

With that I'd like to now turn the call over to Lou mass low our chief risk officer to discuss the performance of our portfolio and more detail.

Lou.

And two Jeff and good morning, everyone.

As Jeff mentioned, we are very pleased with the performance of our portfolio and our fourth quarter and we continue to emerge from the pandemic.

Well I mentioned on the third quarter earnings call that we were seeing improving equipment finance delinquency migration trends, and therefore and anticipated better portfolio performance and Q4. The results were even better than we expected. We saw continued improving delinquency and charge off trends during the quarter across industry sectors.

Except for a small tick up in November we've seen delinquency decreased every month since may and charge offs have declined every month since the peak in July and August.

The working capital portfolio also continued to perform extremely well.

Now looking at the key asset quality metrics.

And and finance on book receivables over 30 days delinquent were 1.59% down 54 basis points from the prior quarter and up 19 basis points from the fourth quarter of 2019.

Equipment finance receivables over 60 days delinquent were <unk>, seven and 8% down 64 basis points from the prior quarter and down eight basis points from the fourth quarter of 2019.

Delinquency at the end of December was the lowest we've seen since February of 'twenty, and 'twenty and significantly lower than the peak of 5.61% and Mei.

The decrease and delinquency was driven by improvement and the non modified portfolio and better than expected modified portfolio performance at.

And at year end and non modified portfolio 31, plus day delinquency was one 2% as compared to 1.7% at September 30th while the modified portfolio delinquency was four 2% as compared to four 9% at September 30th.

From a sector perspective, the highest concentration of 31, plus delinquency dollars was and the miscellaneous services and transportation industries, which were two 8% and two 9% respectively and combined represented approximately 38 per cent of total 31, plus delinquent dollars.

Miscellaneous services is comprised and service related S. ICD codes, the largest of which are business services repair services and equipment rental and leasing.

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

Aggregate total finance receivables and net charge offs decreased and the fourth quarter to 2.57% of average finance receivables on an annualized basis as compared to 4.54% and the prior quarter and 3% and the fourth quarter of 2019.

The Clinton and finance net charge offs were 2.46% a decrease of 203 basis points quarter over quarter, and 26 basis points year over year.

Out of five portfolio charge offs were $2 3 million and the fourth quarter, representing 44% of total charge offs and $8 four per cent of the modified portfolio on an annualized basis.

This compares to less than 100000 and in the third quarter from the modified portfolio.

Total non modified portfolio and charge offs were $2 9 million or 1.55% on an annualized basis, a very strong result.

Transitioning now to discuss working capital loans fourth quarter 15, plus day delinquency increased 107 basis points from the prior quarter to 5%, while 30, plus day delinquency increased by 75 basis points to 369%.

Despite the increased delinquency percentage delinquent dollars declined with 30, plus delinquent dollars ending Q4 at 741000 as compared to 777000 and at the end of Q3.

The increase in delinquency percentage is attributed to the modified portfolio, which comprised 35% of total working capital receivables at year end.

The 30, plus delinquency of the modified portfolio was nine 9% as compared to <unk>, 4% of the non modified portfolio.

Many of the delinquent customers continue to make payments, but are unable to keep up with the daily or weekly repayment and frequency.

We will typically charge offs customers have become more than 60 days delinquent and continue to work with those customers to collect the balance owed post charge offs.

Working capital loans net charge offs and the fourth quarter increased to $6 six 9% of average working capital loans on an annualized basis from $6, three 2% and the third quarter and declined from seven nine and 5% and the fourth quarter of 2019.

We continue to be extremely pleased with the performance of the working capital portfolio, which has performed significantly better during this downturn than we anticipated and it has validated our working capital strategy and the intensive underwriting approach that we take.

The risk adjusted return for the working capital product continues to be and excellent.

[noise] modification activity for both equipment finance and working capital continue to diminish in the fourth quarter and we have largely discontinued offering pandemic related modifications to our customers.

The total modified portfolio declined from 14, 3% of total as of the third quarter to 12, 8% at year end <unk>.

Equipment finance modified portfolio declined by 11, 3% to $104 3 million, while the working capital modified portfolio declined 43, three per cent to $6 9 million at year end.

As I mentioned earlier, we maintain a positive credit outlook, while recognizing that economic indicators remain mixed and small business has continued to be impacted by the pandemic. Our positive outlook is driven by the improving portfolio trends that evidence of return towards pre pandemic norms.

Furthermore, we expect portfolio performance to continue to benefit from the underwriting restrictions that were put in place and 2020.

On this last point I would note that the 31 plus delinquency from originations book since April of 'twenty, and 'twenty are trending at or below the lowest levels in two years.

As a result of improving portfolio results and our positive credit outlook. We've continued to remove underwriting restrictions for both equipment finance and working capital to drive higher approval rates.

As a result, our equipment finance approval rate is now trending only one percentage point below the pre pandemic level and the first quarter of 'twenty and 'twenty.

And closing our positive outlook is tempered by the recognition that economic risks remain and given the uncertainty associated with the pandemic.

We will continue to be vigilant and the changes we made to underwriting to drive new business originations and will continue to closely monitor portfolio were trends.

With that I'll turn the call over to our CFO, Mike Bogdanski for a more detailed discussion of our fourth quarter financial performance Mike.

Thank you Lou and good morning, everyone.

Our fourth quarter net income was $15 3 million or $1 28 per diluted share compared with net income of $8 4 million or <unk> 69 per diluted share for the fourth quarter last year.

Our net income and the fourth quarter included a $12 7 million net benefit from loss provision releases, which I will discuss in more detail later in my remarks.

Overall, I am pleased with our improved portfolio performance and outlook earnings growth and ability to increase book value per share from the prior quarter to $16 40 as of December 31.

As Jeff and Lou mentioned delinquencies and charge offs improved during the fourth quarter as the restructured and non restructured portfolios continued to outperform expectations.

Further contributing to the stabilization of the portfolio was the continued decline and active COVID-19 restructures as contracts continued to pay down through the fourth quarter.

And you start and these positive credit performance trends, we released a significant portion of our allowance for credit losses and recognized a $12 7 million net loss provision benefit and the fourth quarter of 2012.

The $12 7 million net loss provision benefit was comprised of a $21 5 million net benefit.

Primarily the result of updated economic forecasts and favorable portfolio performance and was partially offset by a $5 9 million provision from new originations and a $3 million provision from revised qualitative adjustments.

The $21 5 million loss provision benefit was driven by a $17 2 million reduction and the allowance for loan losses from up.

<unk> economic forecasts and assumptions and a $4 3 million favorable variance and expected charge offs as compared to model.

The primary driver of the favorable economic forecast was related to a significant reduction and projected business bankruptcies, which significantly improved at the end of the fourth quarter compared to the third quarter.

Consistent with the results and the first three quarters of the year, our provision for credit losses remains a significant driver of our financial results.

While favorable macroeconomic developments contributed to our reserve released in the quarter.

We believe our allowance for loan losses of 44 million, which reflects various economic forecast continues to contemplate near term macroeconomic uncertainty.

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

Turning to fourth quarter yields yield on total originations was $9 six 3% up 29 basis points from the prior quarter and down 280 basis points from the fourth quarter of 2019.

Sequential quarter increase was relatively modest however, the year over year decline is primarily due to the significant reduction in working capital loan volume as we tightened underwriting in light of the pandemic.

But and finance yields during the fourth quarter were $7, 97% down 80 basis points from the third quarter, reflecting the higher credit quality of originations from borrowers and the mix of originations from larger origination partners and programs.

For the quarter net interest margin or NIM was $8 three 6% down 51 basis points from the prior quarter and down 108 basis points from the fourth quarter of 2019.

The sequential quarter decrease was driven primarily by a decrease and new origination loan and lease yields.

Partially offset by a decrease in interest expense, resulting from lower deposit fees.

The year over year decrease and margin percentage was primarily related to the decrease and new origination loan and lease yields lower fee income and it changed and the presentation of residual income driven by the adoption of Cecil partially offset by a decrease in interest expense, resulting from lower deposit rates.

The company's interest expense as a percent of average total finance receivables was 187 basis points and the fourth quarter of 2020, compared with 203 basis points from the prior quarter and 236 basis points and the fourth quarter of 2019, resulting from lower rates and a shift and mix is higher.

And the rate long term debt paid down.

Non interest income was $4 1 million for the fourth quarter of 2020, compared with $4 2 million and the prior quarter and $13 5 million and the prior year period.

The year over year decrease in non interest income is primarily due to an $8 $8 million decrease and gains from the sale of assets.

Moving to expenses fourth quarter noninterest expenses were $14 8 million from the fourth quarter of 2020, compared with $14 2 million and the prior quarter and $16 4 million and the fourth quarter of 2019.

The sequential quarter increase was primarily due to an increase and general and administrative expenses due to a one 4 million benefit associated with a reduction to our acquisition earn out liability that was reported in the third quarter.

The year over year decrease was primarily due to a $1 3 million reduction and salaries and benefits expenses due to lower employee head count and lower commissions and incentive compensation expenses.

As we have previously mentioned, we proactively implemented cost reduction initiatives and the second and third quarter of this year to reduce operating expenses.

These actions to reorganize our front office reduce head count and lower general and administrative expenses are now yielding meaningful cost savings.

As evidence of the effectiveness of these actions we are targeting annualized run rate cost savings of approximately 10% and used upon 2019 and origination levels.

After we completed the front end restructuring of our sales and processing organizations earlier. This year, we made additional progress on the implementation of our digital initiatives as.

As we previously mentioned, we have reinvested a portion of our cost savings by hiring additional employees to support our digital origination platform.

Moving on to income taxes, our effective tax rate was 23, 9% for the fourth quarter compared with the effective tax rate of 25, 5% for the fourth quarter of 2019.

And the full year ended December 31, 2020, we recorded a $3 5 million income tax benefit, resulting from the cares Act enacted in March.

The cares act reinstated the net operating loss carryback provisions that existed and the tax code prior to the tax cuts and job Act of 2017.

As a result, we are able to carry back our net operating losses to years prior to 2018, where the federal tax rate was 35% as opposed to the current 21%.

Comparatively for the full year ended December 31, 2019, we recorded a $9 7 million tax expense, representing an effective tax rate of 26, 4%.

Our board of directors declared a regular quarterly dividend of <unk> 14 per share payable on February 18th to shareholders of record as of February eight.

We remain very confident and 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.

In conclusion, I am pleased with our financial and operational performance and the fourth quarter against the continuing challenging backdrop of COVID-19.

We were able to cautiously and carefully grow originations on a sequential quarter basis meaningfully reduce expenses improve earnings optimize our organizational structure and stabilize our portfolio performance.

Our solid finish to the year demonstrates the durability and resiliency of our business and we are confident that we have the business model strategy and management team in place to emerge from the pandemic well positioned to drive profitable growth.

And value for our shareholders.

Look forward to building on this momentum in 2021.

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

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There are no questions at this time I would like to turn the conference back over to management for 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 2021 and first quarter results in late April.

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

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.