Marlin Business Services Corp.
Q4 2020 Earnings Call Transcript

Published: 29 Jan 2021

[Operator:]

Greetings and welcome to Marlin Capital Solutions Fourth Quarter and Full Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . Please note this conference is being recorded. I will now turn the conference over to your host Lasse Glassen, Managing Director of Investor Relations. Thank you, you may begin.

[Lasse Glassen:]

Good morning and thank you for joining us today for Marlin Business Services Corp's 2020 fourth quarter and full year results conference call. On the call today is Jeff Hilzinger, President and Chief Executive Officer; Lou Maslowe, Senior Vice President and Chief Risk Officer; and Mike Bogansky, Senior Vice President and Chief Financial Officer.

[Jeff Hilzinger:]

Thank you, Lasse. Good morning and thank you everyone for joining us for our 2020 fourth quarter and full year results conference call. My remarks today will focus on an overview of the key highlights from this past quarter and Marlin’s continued success in mitigating the impact of the COVID-19 pandemic on our business. Lou Maslowe, our Chief Risk Officer, will provide an update on the performance of our portfolio and Mike Bogansky, our Chief Financial Officer will follow with additional details on our fourth quarter financial results. Despite the unprecedented operating challenges and macroeconomic uncertainty encountered throughout most of 2020 from the COVID-19 pandemic, Marlin finished the year with strong results in the fourth quarter. I am particularly pleased with the continued improvement in our portfolio performance and outlook, which supported a significant net release and loss reserves established earlier in the year. The performance of our portfolio improved 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 in our portfolios performance during the quarter contributed to our reserve release, we believe our allowance for loan losses of 44.2 million reflects the continuing near-term uncertainty of the macroeconomic environment.

[Lou Maslowe:]

Thank you, Jeff and good morning everyone. As Jeff mentioned, we are very pleased with the performance of our portfolio in the fourth quarter as we continue to emerge from the pandemic. While I mentioned on the third quarter earnings call that we were seeing improving equipment finance delinquency migration trends and therefore anticipated better portfolio performance in Q4, the results were even better than we expected. We saw a continued improving delinquency in charge -off trends during the quarter across industry sectors. Except for a small pick-up in November, we've seen delinquency decrease 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, equipment finance on book receivables over 30 days delinquent were 1.59% down 54 basis points from the prior quarter and up to 19 basis points from the fourth quarter of 2019. Equipment finance receivables over 60 days delinquent were 0.78%, down 64 basis points from the prior quarter and down 8 basis points from the fourth quarter of 2019. Delinquency at the end of December was the lowest we've seen since February of 2020 and significantly lower than the peak of 5.61% in May. The decrease in delinquency was driven by improvement in the non-modified portfolio and better than expected modified portfolio performance. At year end the non-modified portfolio of 31 plus day delinquency was 1.2%, as compared to 1.7% at September 30th, while the modified portfolio delinquency was 4.2%, as compared to 4.9% at September 30th. From a sector perspective, the highest concentration of 31 plus delinquency dollars was in the miscellaneous services and transportation industries, which were 2.8% and 2.9% respectively, and combined represented approximately 38% of total 31 plus delinquent dollars. Miscellaneous services is comprised of service related SIC codes, the largest of which are business services, repair services, and equipment rental and leasing. The rest of Marlin's 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 decreased in the fourth quarter to 2.57% of average finance receivables on an annualized basis as compared to 4.54% in the prior quarter and 3% in the fourth quarter of 2019. Equipment finance net charge-offs were 2.46%, a decrease of 203 basis points quarter-over-quarter and 26 basis points year-over-year. Modified portfolio charge-offs were 2.3 million in the fourth quarter, representing 44% of total charge-offs and 8.4% of the modified portfolio on an annualized basis. This compares to less than 100,000 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.

[Michael Bogansky:]

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 $0.69 per diluted share for the fourth quarter of last year. Our net income in the fourth quarter included a 12.7 million net benefit from loss prevision 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 31st. As Jeff and Lou mentioned, delinquencies and charge offs improved during the fourth quarter as both the restructured and non-restructured portfolios continued to outperform expectations. Further contributing to the stabilization of the portfolio was the continued decline in active COVID restructures as contracts continued to pay down through the fourth quarter. Based on 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 benefits in the fourth quarter of 2020. The 12.7 million net loss provision benefit was comprised of a 21.5 million net benefit that was primarily the result of updated economic forecasts and favorable portfolio performance that was partially offset by a 5.9 million provision for new originations, and a 3 million provision for revised qualitative adjustment. The 21.5 million loss provision benefit was driven by 17.2 million reduction in the allowance for loan losses from updated 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 forecasts was related to a significant reduction in projected business bankruptcies, which significantly improved at the end of the fourth quarter compared to the third quarter. Consistent with the results through the first three quarters of the year, our provisions for credit losses remains a significant driver of our financial results. While favorable macroeconomic developments contributed to our reserve release in the quarter, we believe our allowance for loan losses of 44 million, which reflects various economic forecasts, 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, the yield on total originations was 9.63%, up 29 basis points from the prior quarter and down 280 basis points from the fourth quarter of 2019. The 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 then 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 8.36%, 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 in new origination loan and lease yield, partially offset by a decrease in interest expense 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 yields, lower fee income, and a change in the presentation of residual income driven by the adoption of CECL 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 in the fourth quarter of 2020, compared with 203 basis points for the prior quarter and 236 basis points in the fourth quarter of 2019, resulting from lower rates and a shift in mix as higher rate long-term debt paid down. Non-interest income was 4.1 million for the fourth quarter of 2020, compared with 4.2 million in the prior quarter and 13.5 million in the prior year period. The year-over-year decrease in non-interest income is primarily due to an 8.8 million decrease in gains from the sale of assets. Moving to expenses, fourth quarter non-interest expenses were 14.8 million for the fourth quarter of 2020, compared to the 14.2 million in the prior quarter and 16.4 million in the fourth quarter of 2019. The sequential quarter increase was primarily due to an increase in general and administrative expenses due to a 1.4 million benefit associated with a reduction to our acquisition earn-out liability that was recorded in the third quarter. The year-over-year decrease was primarily due to a 1.3 million reduction in salaries and benefits expenses due to lower employee head count and lower commission and incentive compensation expenses. As we have previously mentioned, we proactively implemented cost reduction initiatives in the second and third quarter of this year to reduce operating expenses. These actions to reorganize our front office, reduced 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% based upon 2019 origination numbers. 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 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. For 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 in the tax code prior to the Tax Cuts and Jobs Act of 2017. As a result, we are able to carry back our net operating losses two 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 $0.14 per share payable on February 18th to shareholders of record as of February 8th. 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. In conclusion, I am pleased with our financial and operational performance in 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 demonstrate 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. We 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.

[Operator:]

[Jeff Hilzinger:]

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 first quarter results in late April. Thank you again for your time and attention this morning, and please stay safe and healthy.

[Operator:]

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