Marlin Business Services Corp. (MRLN) CEO Jeff Hilzinger on Q4 2019 Results – Earnings Call Transcript


Marlin Business Services Corp. (NASDAQ:MRLN) Q4 2019 Earnings Conference Call January 31, 2019 9:00 AM ET

Company Participants

Lasse Glassen – ADDO Investor Relations

Jeffrey A. Hilzinger – President and CEO

Lou Maslowe – SVP and Chief Risk Officer

Michael R. Bogansky – SVP and CFO

Conference Call Participants

Christopher York – JMP Securities

Operator

Greetings and welcome to the Marlin Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lasse Glassen, with ADDO Investor Relations. Thank you. You may begin.

Lasse Glassen

Good morning and thank you for joining us today for Marlin Business Service Corp’s 2019 fourth quarter 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.

Before beginning the call today, let me remind you that some of the statements made today will be forward-looking, and are made under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements represent 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 factors described under the heading forward-looking statements and risk factors in Marlin’s periodic reports filed with the United States Security and Exchange Commission including the most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q which were also available in the Investors section of the company’s website. Investors are cautioned not to place undue reliance on such forward-looking statements.

During this call Marlin may discuss various non-GAAP financial measures including adjusted earnings per share and adjusted operating efficiency ratio. Please refer to our earnings release for a description of these and other non-GAAP financial measures as well as a reconciliation of such measures to their respective, most directly comparable GAAP financial measures. With that, it’s now my pleasure to turn the call over to Marlin’s President and CEO, Jeff Hilzinger. Jeff?

Jeffrey A. Hilzinger

Thank you Lasse. Good morning and thank you everyone for joining us to discuss our 2019 fourth quarter results. I’ll begin with an overview of the key highlights from this past quarter, along with an update on the continued execution of our strategy that has successfully transformed Marlin from a micro ticket equipment lessor into a nationwide provider of capital solutions to small businesses. Lou Maslowe, our Chief Risk Officer will comment on portfolio performance and Mike Bogansky, our Chief Financial Officer will follow with additional details on our financial results as well as our business outlook and financial guidance for the upcoming year.

Marlin concluded 2019 with a strong performance in the fourth quarter highlighted by record origination volume, disciplined expense management, and excellent earnings growth. Total origination volume of 236.5 million increased 9.3% year-over-year driven by increasing customer demand for both our equipment finance and working capital loan products as well as solid growth in our direct origination channel. For the full year total origination volume of 877.9 million grew 18.7% year-over-year, more than double the prior year’s growth rate.

While the origination growth we experienced demonstrates the significant demand that exists for our financing products, market conditions during the fourth quarter created both an increasingly competitive pricing environment and a favorable capital markets environment. To this end these market conditions enabled us to offset the continued yield compression we experienced in our equipment finance product with exceptionally strong capital markets execution. Given our strong originations volume and a favorable capital markets conditions we sold a 114.5 million assets during the fourth quarter that generated an immediate net pretax gain on sale of 8.8 million.

As a result of these origination and capital markets activities Marlin’s net investment and leases and loans stood at just over 1 billion at year end and our total managed assets expanded to more than 1.3 billion, an increase of 17.7% from the fourth quarter last year. at the bottom line fourth quarter net income increased by 31% year-over-year with earnings growing to $0.69 per diluted share compared with $0.51 per diluted share for the fourth quarter last year. Intervening to our strong earnings performance in the quarter was our ability to carefully manage non-interest expense as evidenced by the significant year-over-year improvement in our adjusted operating efficiency ratio. Notwithstanding this our portfolio did experience higher delinquencies and credit losses during the quarter and we continued to closely monitor the portfolio and proactively manage credit performance.

For the full year net income of 27.1 million increased by 8.6% from 25 million a year ago and earnings per diluted share of $2.20 was at the high end of our most recently issued guidance. Overall I continue to believe that the fundamentals of our business remains strong and as we look ahead to 2020 I believe Marlin remains very well positioned for another year of profitable growth.

I would now like to move to an update on our key business transformation initiatives which are focused on driving growth and improve returns on equity by first, strategically expanding our target market; second, better leveraging the company’s capital base and fixed cost origination and portfolio growth; third, improving our operating efficiency by better leveraging fixed cost and scale and through operational improvements to reduce unit processing costs; and fourth, proactively managing the company’s risk profile to be consistent with our risk appetite.

I would like to share with you the progress we have made in each of these areas since our last call. First, in terms of expanding our addressable market we remain focused on providing multiple products and developing financing solutions to help small businesses grow. As part of this we have also broadened our go to market strategy by not only continuing to originate through our equipment vendor partners, but also directly with our end-user customers. While our equipment finance business continues to grow, we are particularly pleased with the consistently strong performance of our working capital loan product. Fourth quarter working capital loan origination volume expanded by 58% year-over-year to 31.3 million. For the full year working capital loan origination volume of 108.7 million increased nearly 46% over the prior year.

We also remain pleased with our efforts to provide financing solutions directly to our end-user customers. The key part of our go to market strategy is leveraging our relationships with our end-user customers including approximately 200,000 solicitable relationships the company has built with its small business customers over time. Our direct strategy identifies additional financing opportunities with these existing customers by offering multiple products that meet a broader set of their financing needs. During the fourth quarter direct originations volume increased to 50.4 million up from 40.4 million in the fourth quarter last year and resulted in a year-over-year increase of nearly 25%. This wrapped up a solid year for our direct business with origination volume of 184.6 million which was an increase of 29% over the prior year.

In addition, we continue to make headway on our second key priority, which focuses on leveraging Marlin’s capital and fixed costs through growth. Thanks to the strong origination growth we generated in the fourth quarter, along with very favorable capital markets conditions we followed through on the assets indication guidance we provided last quarter. Overall, we see asset sales as an opportunity to not only use our capital more productively, but also as a way to compete effectively in markets where the pricing does not meet our return requirements on a whole basis by allowing us to monetize the bulk of the net interest margin while simultaneously transferring the credit risk to others and releasing the capital and loss reserves held against the sold assets.

Asset sales also helped to further diversify our funding sources, as well as provide an efficient way to optimize our portfolio composition in terms of returns, credit risk, and exposure to particular industries, geographies, and asset classes. Finally, and most importantly, from a strategic perspective, asset sales allow us to continue to take full advantage of our total origination opportunity and to meet the financing needs of our customers by allowing us to intermediate or retain assets to our maximum advantage while also retaining servicing and the customer relationships in support of our direct business.

During this past year, our growing origination by volume combined with strong investor demand and favorable market conditions, allowed us to sell 310.4 million in assets that generated an immediate net pre-tax gain on sale of approximately 22.2 million. Importantly, and as I mentioned previously, we continue to service nearly all of these assets, which allows us to maintain an ongoing relationship with these customers in support of our direct strategy. In total, we are now servicing approximately 341 million in assets for our capital market partners.

Turning to our third area of focus, we continue to make strides in better leveraging the company’s fixed costs through portfolio and revenue growth and by improving operating efficiencies through ongoing process improvements and automation. On a GAAP basis, the company’s efficiency ratio was 43.2% for the fourth quarter versus 53.1% for the same period last year and 54.2% for the full year in 2019 versus 55.3% in 2018. Moreover the company’s adjusted operating efficiency ratio improved to 40.2% for the fourth quarter versus 50.9% for the same period last year and improved to 49.4% for the full year in 2019 versus 53.2% in 2018. Looking ahead to 2020 and beyond, we will continue to leverage our fixed costs through portfolio and revenue growth and look for ways to operate more efficiently through our various process renewal and automation initiatives.

And finally, we remain focused on proactively managing the company’s risk profile, such that it is commensurate with our risk appetite. As I noted earlier, we did experience higher delinquencies and credit losses in the quarter, which is a trend the broader industry has also been experiencing. In response, we are making underwriting adjustments to address underperforming areas of the portfolio and have also added collections resources in response to the upward pressure on delinquency that we and the industry are experiencing. Lou will provide more color on these activities in his remarks.

In summary, we wrapped up 2019 with a strong fourth quarter. During the quarter and throughout the year, we made good progress on both our near-term financial goals and longer-term strategic objectives. As we look ahead, we anticipate another year of profitable growth for Marlin in 2020 and I strongly believe that we are well-positioned to pursue the many opportunities that exist in the marketplace and to unlock value for our shareholders. With that, I’d like to now turn the call over to Lou Maslow, our Chief Risk Officer to discuss the performance of our portfolio in more detail. Lou.

Lou Maslowe

Thank you, Jeff and good morning everyone. Before I begin discussing the portfolio metrics for the quarter, I want to note that I will provide statistics for both the on book portfolio as well as the managed portfolio. The managed portfolio metrics are considered more indicative of aggregate portfolio performance and credit quality trends due to the 310 million of asset sales in 2019. Looking at the key asset quality metrics, equipment finance on book receivables over 30 days delinquent were 1.41%, up 13 basis points from the prior quarter and up 33 basis points from the fourth quarter of 2018. Equipment finance receivables over 60 days delinquent were 0.87%, down 1 basis points from the prior quarter and up 22 basis points from the fourth quarter of 2018. The managed portfolio receivables over 30 days were 1.22%, up 6 basis points from the prior quarter and 21 basis points from the fourth quarter of 2018. The managed portfolio over 60 days were 0.73%, down 4 basis points from the prior quarter and up 14 basis points year-over-year. For benchmark purposes, the November 31 to 90 day PayNet small business delinquency index, which was the latest available increased 3 basis points since August, and 18 basis points since December 2018.

Aggregate total finance receivables net charge off increased in the fourth quarter to 3% of average finance receivables on an annualized basis as compared with 1.99% in the prior quarter and 2.3% in the fourth quarter of 2018. Equipment finance net charge offs increased by 70 basis points quarter-over-quarter and 53 basis points year-over-year to 2.72%. On a managed portfolio basis equipment finance net charge offs in Q4 were 2.44%, up 60 basis points from the prior quarter. Included in fourth quarter charge offs was 900,000 that was specifically reserved during the third quarter, thereby eliminating the entire allowance related to the fraudulent activities within a specific dealers portfolio.

For benchmark purposes the November PayNet small business default index was 2.11%, up 5 basis points from August and 24 basis points from December 2018. Based on our experience benchmark data, as well as discussions with other lenders, we believe that very small businesses have been disproportionately impacted by the economic headwinds observed in the second half of 2019. Due to continued increasing delinquency and charge offs in the third quarter and fourth quarters, we performed a deep analysis into the drivers of the weakening portfolio performance. Our analysis revealed that there was a much larger increase in delinquency and charge offs during the second half of 2019 from the lower credit quality borrowers in our portfolio. Based on our analysis we’ve made underwriting adjustments for borrowers of lower credit quality.

Transitioning now to discuss working capital loans, fourth quarter 15 plus day delinquency decreased 14 basis points from the prior quarter to 1.75%, while 30 plus day delinquency increased by 8 basis points to 1.42%. Working capital loan net charge offs in the fourth quarter increased to 7.95% of average working capital loans on an annualized basis from 1.42% in the third quarter and 5.28% in the fourth quarter of 2018. As noted on the earnings call last quarter, the Q3 net charge offs were extraordinarily low and as we’ve noted in the past, losses in this product remain volatile from quarter-to-quarter. While the results in Q4 exceeded our target of 6%, the results remain highly accretive to earnings given the high yield of the product. We will continue to monitor results closely and make underwriting adjustments as needed to ensure satisfactory portfolio performance.

The allowance for credit losses was 2.15% of average finance receivables, up 29 basis points in the fourth quarter from the prior quarter. The increase in the equipment finance allowance percentage is mainly attributable to higher delinquency and charge off migration rate in the fourth quarter. Marlin will adopt the new allowance for credit losses methodology commonly referred to as CECL or current expected credit losses beginning January 1, 2020. Mike will provide additional details in his remarks, including an estimated impact of CECL on our projected 2020 results.

In terms of our credit outlook, we monitor small business sentiment utilizing the National Federation of Independent Small Business Optimism Index which while declining slightly in December remains in the top 20% of all readings in the index of 46 year history. From a portfolio performance perspective, we monitor a number of leading indicators, including PayNet’s absolute PD Outlook, which forecasts a commercial loan default rate for small businesses across the U.S. based on current macro economic statistics. PayNet’s latest data as of October is forecasting relative stability with the small business fault rate over the next 12 months that is five basis points lower than the forecast from the prior quarter and only four basis points higher than the prior 12 months forecast.

Given the market data I noted we expect portfolio performance to stabilize. We will monitor closely the changes that we have made to underwriting over the past six months to see that they have the desired effect. With that, I’ll turn the call over to our CFO, Mike Bogansky, for a more detailed discussion of our fourth quarter financial performance. Mike?

Michael R. Bogansky

Thank you, Lou and good morning everyone. Fourth quarter net income was 8.4 million or $0.69 per diluted share compared with 6.4 million or $0.51 per diluted share for the fourth quarter last year. For the quarter, yield on total originations was 12.43%, down 95 basis points from the prior quarter and up seven basis points from the fourth quarter of 2018. Fourth quarter yield on direct originations was 23.2%, down 118 basis points from the prior quarter, primarily due to lower yields on working capital loan. Yield on indirect originations for the quarter was 9.19%, down 91 basis points from the third quarter due to competitive pricing pressure and the lower interest rate environment, as well as the mix of our originations and lower yielding programs.

For the quarter, net interest margin, or NIM, was 9.44%, down 11 basis points from the prior quarter and down 32 basis points from the fourth quarter of 2018. Sequential quarter decrease was driven primarily by lower fee income and a decrease in new origination loan and lease yield, partially offset by lower interest expense. The year-over-year decrease in margin percentage was primarily a result of an increase in interest expense resulting from higher deposit rates and lower fee income, partially offset by an increase of seven basis points in new origination loan and lease yield.

We continue to experience an increasingly competitive pricing environment and we expect that this will persist at least through the first quarter of 2020. The current market conditions leading to competitive pricing pressures have also caused favorable capital markets execution and we will continue to evaluate our alternatives to optimize risk adjusted returns. Company’s interest expense as a percent of average finance receivables decreased to 2.36%, compared with 2.5% for the previous quarter. Interest expense as a percent of average finance receivables increased from 2.2% for the fourth quarter of 2018 due primarily to higher deposit costs.

Non-interest income was 13.5 million for the fourth quarter of 2019, compared with 10.4 million in the prior quarter and 7.1 million in the prior year period. The year-over-year and quarter-over-quarter increase in non-interest income is primarily due to an increasing gains on the sale of assets from the company’s capital markets activities. We sold 114.5 million of assets during the fourth quarter of 2019 and we realized strong execution gains driven by the current market conditions. As Jeff noted, this was a result of strong origination growth in lower yielding programs and it enabled us to offset some of the yield compression that we have experienced.

Moving to expenses, fourth quarter non-interest expenses were 16.4 million, compared with 17 million in the prior quarter and 16.4 million in the fourth quarter last year. We were able to achieve a relatively flat to declining expense base despite a 17% sequential quarter increase and a 9% year-over-year increase in origination volume respectively. During the fourth quarter of 2019, we repurchased approximately 47,200 shares of Marlin common stock for an average price of $22.26 per share. As of December 31st, we have approximately 9 million of remaining authorization available under the stock repurchase program that was announced in August of 2019. As we have previously communicated, we routinely evaluate capital allocation alternatives and we continue to believe that share repurchases are an appropriate use of capital at this time. Additionally, our Board of Directors declared a regular quarterly dividend of $0.14 per share payable on February 20, 2020 to shareholders of record as of February 10, 2020.

As noted on the last earnings call, we will adopt accounting standards update 2016-13 effective January 1, 2020. ASU 2016-13 replaces the current incurred loss accounting model for credit losses with a more forward-looking current expected credit loss model commonly referred to as CECL. Based on our portfolio size and composition as of December 31, 2019. We expect to increase our allowance for credit losses by approximately $11 million effective on January 1, 2020. This transition adjustment for adopting ASU 2016-13 will be recognized through equity and we’ll reduce total stockholders’ equity by approximately 8 million net of deferred income taxes of approximately 3 million.

Based on our expectations for origination volumes in the credit environment in 2020, we estimate that the adoption of CECL could negatively impact EPS by up to $0.25 per share for the full year ending December 31, 2020. The increase in the expected provision for credit losses in 2020 is due to the addition of lifetime credit losses and the loss allowance calculation, as well as a change in the recognition of end of term income for leases with residual value. The ongoing earnings impact from the adoption of ASU 2016-13 is expected to be larger in periods of portfolio growth, but it’s highly dependent on a variety of factors including but not limited to vintage portfolio performance, the timing of originations, forecast with economic conditions, the volume of our syndication activity, and prepayment speeds.

Now, turning to our business outlook for 2020, which reflects our adoption of the CECL accounting model, we are initiating earnings guidance for the full year ending December 31, 2020. We expect adjusted earnings per share to be between $2.17 and $2.27. As I said before, this reflects the impact from the adoption of the CECL accounting model, which could negatively impact earnings per share by up to $0.25 per share. Our earnings guidance is based on the following assumptions, total sourced origination volume growth of approximately 20% from 2019 levels with continued disproportionate growth in our working capital loan product. Portfolio performance does not deteriorate from the year-end 2019 experience and delinquencies and net charge offs remain at the higher end of our expected range. Net interest and fee margin as a percentage of average finance receivables of between 9.25% and 9.75%. That concludes our prepared remarks and with that, let’s open up the call for questions. Operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of Christopher York with JMP Securities. Please proceed with your question.

Christopher York

Hey, good morning guys and thanks for taking my questions.

Lou Maslowe

Good morning Chris.

Christopher York

So, Lou or Mike, could you elaborate specifically on the formal credit guidance, what specifically do you mean by performance is not expected to deteriorate?

Lou Maslowe

Well, I think if we, I will start Mike and if you want to jump in, you know the performance that we saw particularly over the last two quarters was higher than the first half. So as I look at the performance, Q4 was particularly high, which in my view is higher than I would expect for 2020. So, we’ve talked about our range being in a good economy from 160 to 190 basis points or so. I think the small business were at the weaker end of a good economy right now and how it’s impacting them. So I predict that the higher end of that range around 190, which is probably from a calculation perspective, maybe even a little bit higher than that when you take into consideration the actual math associated with this indication. But I think from my point of view that’s kind of the ballpark that we’re looking at.

Christopher York

Okay, just repeat that for me, 190, what is that referencing?

Lou Maslowe

So 190 is for equipment finance, because that is the upper end of the range that we’ve talked about in a good economy. So, I think we’re going to be in that higher end range that we talked about for equipment finance.

Christopher York

Okay, and then maybe on the allowance so, it does not deteriorate, so should we expect an allowance for loan losses which ended the year at 2.11% to be flat throughout 2020?

Lou Maslowe

Now that’s moving it to CECL, so I will pass that one to Mike.

Michael R. Bogansky

Yes, so Chris this is Mike. We thought we guided to an initial CECL impact of $11 million, that’s going to bump up the allowance percentage. All the things being thought but the credit environment not deteriorating, as Lou mentioned, is really a function of the provision that we would expect throughout 2020.

Christopher York

Okay, then reverting back to the 190 equipment finance delivered on delinquency, so then it does not deteriorate, should we expect net charge offs which ended the year at 2.19% on total finance receivables to be flat?

Lou Maslowe

Yes, so let me clarify my comments earlier, Chris. I was referring to charge off. Ultimately, you added that it’s our financial impact. Yes, so the range that we talked about for charge offs was in the 160 to 190 in pretty stable, good economy.

Christopher York

Okay, okay, that’s helpful. Alright, staying on expenses how should we think about your OPEX in 2020 as you chose not to provide formal guidance on that line but expenses have historically been volatile over the last couple of years, and then it was projected to represent an efficiency ratio of 45% in 2020?

Michael R. Bogansky

Yes, so we’ve provided the adjusted efficiency ratio in 2019 due to the impact that the leasing standard had on the gross up of our property tax on collectible expenses. So obviously our expenses do tend to be a little volatile and the fourth quarter tends to be a little bit lower expense rate. But I think if you look out into how we expanded from an efficiency ratio over the course of 2019 we would expect similar trending and that similar kind of an improvement in expense ratio or efficiency ratio over the course of 2020.

Christopher York

Okay, and then I mean, maybe just digging on the fourth quarter a little bit your press release mentions, having expense discipline so could you comment on what exactly you did take in the fourth quarter to manage OPEXs down?

Lou Maslowe

Well, the expense discipline that manifested in the fourth quarter is really a result of the actions that we took earlier in the year, and they are making their way through the expense base now. So we did announce certain actions at the end of the second quarter and it’s just been a continuous focused on expenses throughout the back half of the year. But a lot of those actions were initiated in the second, third quarters of 2019, and they’re starting to flow.

Christopher York

Okay, and then how much are you investing in your impact in then the online platform today?

Lou Maslowe

I mean, we’re continuing to make investments in our digital offering. I would say they’re at a more measured pace, but we initiated or reinstalled Salesforce.com a couple of years ago and we’re continuing to make enhancements to that platform. We’re continuing to make enhancements to our digital application offering. So you see those investments coming through, come through the investment — the investment line in the financial statements and I would say that we would expect to continue at that same pace throughout 2020 as we continue to refine our digital offering.

Christopher York

Okay, so then I mean, how should I or how should investors potentially understand maybe what’s causing the lack of efficiency and I think we thought we were getting efficiency ratio of 45% in 2020. Now I was thinking potentially that could be investing in tech. But what is potentially delaying some of the operational efficiency achievements that you initially expected?

Jeffrey A. Hilzinger

Yeah, I think, Chris this is Jeff, so we guided three years ago to a 45% operating efficiency ratio in 2020. You know, I think we’re going to end up being in the high 40s when it’s all said and done and I think the reason for that is because of the investment that we’re making in digital. I think what’s going to happen is, is that that investment in digital will ultimately allow us to be able to offer some additional products that sits somewhere between our equipment finance product and our working capital loan product. They can only be offered in a digital way because they’re operationally complex and that will end up being accretive to our NIM over time offsetting the difference between what we thought was going to be, a less digital platform, but at a better operating efficiency ratio to one where we’re investing more in digital than we thought. But that ultimately will have an expanded NIM as a result of the digital products that we are intending on introducing.

Christopher York

Okay, it makes more sense. Okay, on capital it increased year-over-year and consequently remains above your 50% equity to assets target. So do you expect to be more active in share repurchases than you’ve historically been or what other capital actions you consider to be more optimally managed?

Jeffrey A. Hilzinger

So we were — we did repurchase a lot of shares in 2019 and we have $9 million of remaining authorization under our latest authorization. So as I said in the prepared remarks, we do view share repurchases as an effective use of our capital at this time and we would continue to view that, especially given safe stack price.

Christopher York

Okay, and is there anything else on the capital actions that you consider to get close to that 15%?

Jeffrey A. Hilzinger

You know, we could hold more assets on balance sheet instead of syndicating them Chris but I think that the goal here isn’t to use the excess capital in a way that isn’t accretive to ROE, it’s trying to figure out how to get the capital in the business to be the proper size for the risk profile of the balance sheet. So, the big issue that faces the company is structural issue that based companies we’ve got this capital limitation agreement with the FDIC, which requires us to hold 15% capital at the bank. And if you look at the capital, the economic capital that was required and the securitization we did last year, it was much, much less than 15%. So I think the goal here is to try to get the actual capital and the business down to a level that’s more approximate to what the economic capital should be. But, we’re not going to be able to make significant progress on that until we get relief from the capital limitation agreement, which is a very, very important strategic objective for the company but it’s not one that we control.

Christopher York

Sure, yep and no doubt, that one’s existed for a while. Kind of combining my questions all together, the top line has been essentially in line with expectations, OPEX is on the higher with a little bit more help, more capital. I noticed your debt, your target return on average equity, which was supposed to be hitting 2020 at 18% to 20%, has now been changed to an unidentified long-term target. So how should investors think about that expectation for timing for this achievement to be hit?

Jeffrey A. Hilzinger

You know, I think that we are, with the way we think about it is that, you know, we’re going to be digitizing the platform over the next two to three years. And that the combination of common relief and digitizing the platform and removing the capital and increasing the margin in the business is a result of being able to offer these digital products, I think will ultimately get us to where the guidance was that we provided three years ago. But it’s, we’re in a much more competitive environment in the equipment finance business than we thought we were going to be when we provided that guidance to begin with. We think we have a really good litigant in our capital market strategy. But ultimately, I think the basic structure of the business needs to change from a calmer perspective to the amount of capital that’s in the business and we need to really make progress on digitizing the platform so that we can continue to offer more higher margin products to the platform.

Christopher York

Got it, and I don’t want to hog all your time. I’ll ask one last question and then hop back in the queue. So this is the toughest, but it is most important question here. If I take a look back, over the last few years, stocks essentially been flat, you have done a nice job on execution throughout multiple initiatives with Marlin 2.0. But why should investors expect any further execution to lead to a higher stock price and what else is in your control to improve stock performance?

Jeffrey A. Hilzinger

You know that is a good question. And, I don’t have a crisp answer to that. We’re repurchasing shares, we are removing — we are working to remove the capital limit agreement. We reduced expenses dramatically. We’ve got capital markets in place to mitigate the changing price environment. So, from our perspective I think we’re managing the levers that we control very aggressively. And we did so last year and we’re going to continue to do so next year. As to the stock price, we obviously view it as being significantly below the intrinsic value of the business. And it’s a huge topic of conversation both in the management team and with the Board. So it’s something that we’re thinking about and working to improve all the time.

Christopher York

Got it, yeah. Thanks for the candor, Jeff. I know it’s not an easy question. I’m sensing that some investors that you’ve been modeling 2.0, maybe losing confidence essentially will be reassured. So that’s it for me. I’ll hop back in the queue.

Operator

[Operator Instructions]. Our next question is a follow-up from Christopher York with JMP Securities. Please proceed with your question.

Christopher York

You can’t get rid of me. Just two follow up questions just specifically on the quarter. So, what are some of the qualitative characteristics that led to some of your comments on lower credit borrowers that throw the pickup in delinquencies in the second half of the year?

Lou Maslowe

Yeah, so first of all so that I’m clear this time it’s not just delinquency it’s charge offs. But, there were three parts of our portfolio that showed particular weakness in Q3 and even more so in Q4 that was transportation. Our broad based retail business, we refer to it as retail but its multiple industries that we solicit business from through our dealer partners and then lastly, our broker space. So, we talked last quarter we’d made changes to our transportation underwriting guidelines. We’ve continued to see deterioration as that market still is suffering from lower freight volume, lower freight rates, higher insurance costs. So we’ve made — we’ve tightened even further the transportation sector. We have basically completely eliminated other operators. We’ve limited transportation business to our commercial vehicle group and to two large partners whose portfolios are performing well, much of which is vocational anyhow. So we’ve really tightened up on the transportation fees I think sufficiently well at this point. But still, Q4 was weak and we had increased charge offs there.

In terms of our retail business and our broker business, as we did a deep analysis into that portfolio, we really saw a marked difference between the better half I would say of our credit quality in terms of the movement of the higher delinquency and charge offs in the lower half. So what we’ve done is we’ve made some pretty significant changes in terms of those transactions, lower grade credits that in the past might have been approved without personal guarantees, were now requiring personal guarantees. We’ve also increased the requirements in terms of the quality of those guarantors, both in terms of their credit scores, their personal credit scores and the revolving availability. So the analysis revealed to help us identify the steps we needed to take and we’ve implemented those changes.

Christopher York

Got it, okay, that’s helpful. Thanks for that color. Maybe Jeff, I’m trying to ascertain a little bit more of your comments on the competitive pressures. Maybe you could just qualitatively talk about what you’re experiencing there in equipment finance, if that’s the way kind of for me to look at an indicator of the competitive pressures, the decline in the weighted average new equipment finance still, I know your prepared comments talked a little bit about a mix and then obviously competitive pressures, so could you just help me understand a little bit more qualitatively what’s going on in equipment finance from a competition standpoint?

Jeffrey A. Hilzinger

Sure. So we could talk a little bit about equipment financing and then I could make a couple of comments on working capital as that market continues to evolve as well. So, the fourth quarter is always the most competitive quarter regardless of what kind of broader competitive environment you’re in. But in the third and fourth quarter, we definitely felt increased price competition and it’s — I think it’s — we saw in that late cycle, and the late cycle competitive changes usually occur first with pricing and then with credit. We haven’t seen the credit piece yet so it feels to us like there’s credit discipline that the industry is continuing exercise. But there’s no question that as platforms are trying to grow and trying to find a way to better serve their customers that there is margin compression that’s occurring. And it’s I think it’s particularly as banks with low marginal deposit costs continue to enter the equipment finance space and they continue to move down market.

That’s definitely I think having an impact on the — had an impact on the pricing that we experienced in the third and fourth quarter. And we made the conscious decision in the fourth quarter to beat the market current price in those platforms where we felt it the most. So it’s — we believe that because we have the capital markets capability, we can compete on that basis because ultimately we’re just intermediating the assets to a bank’s balance sheet anyway. And so it allows us to be able to retain control of our customers, to be able to service their needs, and it allows us to remain competitive, independent of our cost of funds relative to our competitors. So it’s not the perfect solution, but it’s a good solution.

Christopher York

Yeah agreed. And then maybe just comments on working capital and what you’re seeing there, you’ve got a confluence of potential competitors, so any comments on qualitative competitive pricing or pressure?

Jeffrey A. Hilzinger

Yeah. I think unlike equipment finance where it’s — there’s both a cycle impact and there’s also potentially a structural impact as these banks move down market, in the working capital case what we’re seeing is just the market is really maturing and I think there is while the product has it cycles yet, I think a lot of the competitors in that market are so data driven and they have — they really have a lot of data that they’ve accumulated over the last two or three years. And they’re discovering that, the better economic outcome is to reduce price a little bit and be able to increase volume. The market or the product is really becoming more mainstream. We see it with our customers as well. It used to be the product, the last resort, and we don’t see that anymore. And so you’ve got it, you’ve got tenders extending, you’ve got going from daily and weekly repayments, monthly repayments. You’ve got deal sizes going up. There’s a more specific stratification of credit quality and the way that fintech or all lenders are providing that product in the market.

So I don’t think it’s necessarily a bad thing. And I think we’re in a really good place to be able to evolve with it and to take advantage of it, because I think, the tailwinds that come from having the market or having the product use being more mainstream, it just all both rise is that as that occurs and there’s certainly going to be dog fights and competition and so forth. And, over time as everybody tries to settle into the place that they want to compete in that environment but there is good tailwinds in the working capital product because it is becoming a more — it’s being viewed and consumed in a more mainstream way.

Christopher York

Interesting, its great perspective and context. Thanks for all that especially on the industry and the market as well. I think that’s it for me. So thank you for being patient and taking by my exhaustive list of questions.

Jeffrey A. Hilzinger

Our pleasure, Chris. Thank you.

Operator

Thank you, we have reached the end of our question-and-answer session. I’d like to turn the call back over to Mr. Hilzinger for any closing remarks.

Jeffrey A. 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 2020 first quarter results in late April. Thanks again and I hope you have a great rest of the day.

Operator

Thank you. This concludes today’s teleconference, you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.





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