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Marlin Business Services Corp (MRLN)
Q4Â 2019 Earnings Call
Jan 31, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to the Marlin Fourth Quarter and Full Year 2019 Earnings Call. [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 -- Managing Director at ADDO Investor Relations
Good morning and thank you for joining us today for Marlin Business Services 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 headings 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 are 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?
Jeff Hilzinger -- President & Chief Executive Officer
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 origination volume and the favorable capital markets conditions, we sold a $114.5 million in assets during the fourth quarter that generated an immediate net pre-tax gain on sale of $8.8 million.
As a result of these origination and capital markets activities, Marlin's net investment in 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. Contributing 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 continue 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 remain strong, and as we look ahead to 2020, I believe Marlin remains very well positioned for another year of profitable growth.
I'd 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 costs through origination and portfolio growth; third, improving our operating efficiency by better leveraging fixed costs through 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'd like to share with you the progress we've 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. A 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 origination 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 asset syndication 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 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 markets 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 collection to 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 Maslowe, our Chief Risk Officer, to discuss the performance of our portfolio in more detail. Lou?
Lou Maslowe -- Senior Vice President & Chief Risk Officer
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 point 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-offs 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 dealer's 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 have made underwriting adjustments for borrowers of lower credit quality.
Transitioning now to discuss working capital loans; fourth quarter 15-plus days 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 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-off 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 the 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 rates 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's 46-year history.
From a portfolio performance perspective, we monitor a number of leading indicators including PayNet's AbsolutePD outlook which forecasts the commercial loan default rate for small businesses across the U.S., based on current macroeconomic statistics. PayNet's latest data as of October is forecasting relative stability with a small business default rate over the next 12 months that is 5 basis points lower than the forecast from the prior quarter and only 4 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 Bogansky -- Chief Financial Officer
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 7 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 in lower yielding program.
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 7 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 has 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 increase in gains on the sale of assets from the Company's capital market 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 20th, 2020 to shareholders of record as of February 10th, 2020.
As noted on the last earnings call, we will adopt Accounting Standards Update 2016-13 effective January 1st, 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 31st, 2019, we expect to increase our allowance for credit losses by approximately $11 million effective on January 1st, 2020. This transition adjustment for adopting ASU 2016-13 will be recognized through equity and will reduce total stockholders' equity by approximately $8 million, net of deferred income taxes of approximately $3 million.
Based on our expectations for origination volumes and 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 31st, 2020. The increase in the expected provision for credit losses in 2020 is due to the addition of lifetime credit losses in the loss allowance calculation as well as a change in the recognition of the 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 is highly dependent on a variety of factors, including but not limited, to Vintage portfolio performance, the timing of originations, forecasted 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 31st, 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 products; portfolio performance does not deteriorate from year-end 2019 experience and delinquencies and net charge-offs to 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?
Questions and Answers:
Operator
Thanks you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Christopher York with JMP Securities. Please proceed with your question.
Christopher York -- JMP Securities -- Analyst
Hey, good morning, guys. And thanks for taking my questions.
Jeff Hilzinger -- President & Chief Executive Officer
Good morning, Chris.
Michael Bogansky -- Chief Financial Officer
Good morning.
Christopher York -- JMP Securities -- Analyst
So Lou or Mike, could you elaborate specifically on your formal credit guidance. What specifically do you mean by performance is not expected to deteriorate?
Lou Maslowe -- Senior Vice President & Chief Risk Officer
Well, I think if we -- I'll start Mike and if you want to jump in. 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 a 160 basis points to a 190 basis points or so.
I think for small business, we're at the weaker end of a good economy right now, and how it's impacting them. So I put us at the higher end of that range, around 190 basis points, 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 the syndication.
But, I think from my point of view, that's kind of the ballpark that we're looking at.
Christopher York -- JMP Securities -- Analyst
Okay. Just repeat that for me, 190 basis point, what is that referencing?
Lou Maslowe -- Senior Vice President & Chief Risk Officer
So 190 basis point is for equipment finance, it's -- that's 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've talked about for equipment finance.
Christopher York -- JMP Securities -- Analyst
So 190 basis point is for equipment finance, it's -- that's 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've talked about for equipment finance.
Lou Maslowe -- Senior Vice President & Chief Risk Officer
No, that's moving it to CECL, so I'll pass that one to Mike.
Michael Bogansky -- Chief Financial Officer
Yeah. So, Chris, this is Mike. We thought we've guided to an initial CECL impact of $11 million. That's going to bump up the allowance percentage all other things being equal, but the credit environment is not deteriorating. As Lou mentioned, it's really a function of the provision that we would expect throughout 2020.
Christopher York -- JMP Securities -- Analyst
Okay and then reverting back. So, the 190 basis point equipment finance delivers on delinquency, so then -- you know it does not deteriorate, should we expect net charge-offs which ended the year at 2.19% on total finance receivable to be flat?
Michael Bogansky -- Chief Financial Officer
Yeah, so let me clarify my comments earlier, Chris. I was referring to charge off, ultimately that's what hits our financial impact. Yeah, so the range that we talked about for charge-offs was in the 160 basis points to 190 basis points in a pretty stable good economy.
Christopher York -- JMP Securities -- Analyst
Okay, that's helpful. All right, 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 Bogansky -- Chief Financial Officer
Yeah. So, we 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 in the fourth quarter. Tends to be a little bit lower expense rate.
But I think, if you look out into how we've trended from an efficiency ratio over the course of 2019, we would have -- we would expect similar trending and that similar trend in improvement in expense ratio -- or efficiency ratio over the course of 2020.
Christopher York -- JMP Securities -- Analyst
Okay. And then, I mean maybe just digging on the fourth quarter a little bit. You press release mention having expense discipline. So, could you comment on what exactly you did take in the fourth quarter to manage your opex down?
Michael Bogansky -- Chief Financial Officer
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 there's just been a continuous focus on expenses throughout the back half of the year, but a lot of those actions were initiated in the second and third quarters 2019 and they're starting to flow through now.
Christopher York -- JMP Securities -- Analyst
Okay. And then, how much are you investing in your -- in tech and then in the online platform today?
Lou Maslowe -- Senior Vice President & Chief Risk Officer
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 come through 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 offerings.
Christopher York -- JMP Securities -- Analyst
Okay. So then -- I mean how should I or how should investors potentially understand maybe what's causing the lack of efficiency. I mean, I think we thought we were getting to an efficiency ratio of 45% in 2020. I was thinking potentially that could be investing in tech, but what is potentially delaying some of the operational efficiency achievements that you had initially expected?
Jeff Hilzinger -- President & Chief Executive Officer
Yeah, I think -- Chris, this is Jeff. So we guided three years ago to a 45% operating efficiency ratio in 2020. 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 that that investment in digital will ultimately allow us to be able to offer some additional products that sit 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 overtime, offsetting the difference between what we thought was going to be a less digital platform, but yet a better operating efficiency ratio to one where we're investing more in digital than we thought, but that ultimately will have expanded NIM as a result of the digital products that we're intending on introducing.
Christopher York -- JMP Securities -- Analyst
Got it. That makes more sense, OK. On capital, it increased year-over-year and consequently remained above your 15% 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 do you consider to be more optimally managed?
Michael Bogansky -- Chief Financial Officer
Yes, 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 attractive use of our capital at this time and we would continue to view that, especially given today's stock price.
Christopher York -- JMP Securities -- Analyst
Okay. And are there anything else on the capital actions that you could consider to get close to that 15%?
Jeff Hilzinger -- President & Chief Executive Officer
You know we could -- we could hold more assets on balance sheet instead of syndicating them, Chris, but -- I think 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 hit proper size, with a risk profile and the balance sheet.
So, the big issue that faces the Company, the structural issue that faces the Company is 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 in 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 -- JMP Securities -- Analyst
Sure. Yeah, you know that one has existed for a while. So Kind of combining my questions altogether, the top line is essentially in line with expectations, opex has gone higher, been a little bit more -- held more capital. I noticed in your debt [Phonetic], your target return on average equity, which was supposed to hit 2020 of 18% to 20% is 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?
Jeff Hilzinger -- President & Chief Executive Officer
You know we're -- I think that we're -- the way we think about it is that we're going to be digitizing the platform over the next two to three years. And that the combination of comma relief and digitizing the platform and removing the capital and increasing the margin in the business as 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, yes, 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 mitigant [Phonetic] to that in our capital market strategy, but ultimately I think the basic structure of the business needs to change from a comma perspective, the amount of capital that's in the business, and we need to -- we need to really make progress on digitizing the platform, so that we can continue to offer more higher margin products through the platform.
Christopher York -- JMP Securities -- Analyst
Got it. I don't want to hog all your time. I'll ask one last question, then hop back in the queue. So this is toughest, but it is most the important question here. If I take a look back over the last few [Phonetic] years, stock has essentially been flat, you've 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?
Jeff Hilzinger -- President & Chief Executive Officer
That is a good question and I don't have a crisp answer to that. We're repurchasing shares, were removing -- we're 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 leverage that we control very aggressively and we did so last year and we're going to continue to do so next year.
And 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 -- JMP Securities -- Analyst
Got it. Yeah, thanks for the candor Jeff, I know it's not an easy question. I'm just sensing that from investors is that you've been modeling [Phonetic] 2.0 maybe losing confidence and essentially needs to be reassured. So that's it from me. I'll hop back in the queue. Thank you.
Operator
[Operator Instructions] Our next question is a follow-up from Christopher York with JMP Securities. Please proceed with your question.
Christopher York -- JMP Securities -- Analyst
You can't get rid of me.
Jeff Hilzinger -- President & Chief Executive Officer
Welcome back, Chris.
Christopher York -- JMP Securities -- Analyst
Just few follow-up questions, specifically on the quarter. So what are some of the qualitative characteristics that led to some of your comments on lower credit borrowers that drove the pick-up in delinquencies in the second half of the year?
Lou Maslowe -- Senior Vice President & Chief Risk Officer
Yeah, so -- first of all, so that I'm clear this time, it's not just delinquency it's charge-off. But there were are 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 it's multiple industries that we solicit business from, through our dealer partners, and then lastly our broker space.
So, you know, we talked last quarter we've 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 basically completely eliminated owner 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 piece, I think sufficiently well at this point, but still Q4 was weak and we had increased charge-offs there. In terms of the -- 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 than the lower half. So what we've done is we've made some pretty significant changes in terms of those transactions.
The lower grade credits in the past might have been approved without personal guarantees. We're now requiring personal guarantees. And 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 their revolving availability. So the analysis revealed -- helped us identify the steps that we needed to take and we've implemented those changes.
Christopher York -- JMP Securities -- Analyst
Got it. Okay, that's helpful, thanks for that color. Maybe Jeff, here, I am 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. The best way kind of for me to look at an indicator of the competitive pressure is the decline in the weighted average new equipment finance still.
I know your prepared comments talked about -- a little bit about a mix and then obviously the 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?
Jeff Hilzinger -- President & Chief Executive Officer
Sure. So we could talk a little bit about equipment finance and then I can make a couple of comments on working capital too because that market continues to evolve as well. So you know, 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're sort of at late cycle and 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 is credit discipline that the industry is continuing to exercise, but there is 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 particularly is 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-clearing price in those -- 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 regain control of our customers, 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 -- JMP Securities -- Analyst
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?
Jeff Hilzinger -- President & Chief Executive Officer
Yeah in -- I think unlike equipment finance where it's -- there is both a cycle impact and there is 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 hasn't cycled 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 are discovering that they -- the better economic outcome is to reduce price a little bit and be able to increase volume. It's -- the market or the product is really becoming more mainstream. We see it with our customers as well.
It used to be the product of 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 to monthly repayments. You've got deal sizes going up. There is a more specific stratification of credit quality and the way that fin-tech or Alt-lenders are providing that product to 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 viewed as being more mainstream, it just all boats rise as that occurs and there's certainly going to be dog fights and competition and so forth and overtime, 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 a mainstream. It's being viewed and being consumed in a more mainstream way.
Christopher York -- JMP Securities -- Analyst
Interesting, that's great perspective and context. So, 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 my exhaustive list of questions.
Jeff Hilzinger -- President & Chief Executive Officer
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.
Jeff Hilzinger -- President & Chief Executive Officer
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 your day.
Operator
[Operator Closing Remarks]
Duration: 47 minutes
Call participants:
Lasse Glassen -- Managing Director at ADDO Investor Relations
Jeff Hilzinger -- President & Chief Executive Officer
Lou Maslowe -- Senior Vice President & Chief Risk Officer
Michael Bogansky -- Chief Financial Officer
Christopher York -- JMP Securities -- Analyst
