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Marlin Business Services Corp (NASDAQ:MRLN)
Q1 2020 Earnings Call
May 1, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Marlin Business Services Corp.'s First Quarter 2020 Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Lasse Glassen, Managing Director of Investor Relations. Thank you. Sir, you may begin.

Lasse Glassen -- Managing Director, ADDO Investor Relations

Good morning, and thank you for joining us today for Marlin Business Service Corp.'s 2020 First 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 today's call, 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 results and performance may differ materially from those projected or implied in such forward-looking statements due to a variety of factors, including but not limited to the factors described under the headings Forward-looking Statements and Risk Factors in Marlin's periodic reports filed with the United States Securities and Exchange Commission, including the most recent annual report on Form 10-K and quarterly reports on Form 10-Q, which are available in the Investors section of the Company's website. Investors are cautioned not to place undue reliance on such forward-looking statements.

In 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 respectively 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 and Chief Executive Officer

Thank you, Lasse. As the COVID-19 pandemic continues to significantly impact people's lives across the country, it goes without saying that we are now operating in a very different environment than when I last spoke to you in late January. Given the unprecedented nature of the environment we are now in, my comments today will focus on the key steps we are taking as a company to mitigate the adverse effect of this crisis on our employees, customers and partners, while at the same time maintaining a strong financial profile and continuing to build Marlin for the future.

Lou Maslowe, our Chief Risk Officer, will comment on portfolio performance, and Mike Bogansky, our Chief Financial Officer, will follow with details on our first quarter financial results.

As the COVID-19 crisis began to escalate in early March, we began to execute a series of measures to protect our employees from the effects of the pandemic. We quickly implemented our business continuity plan designed to allow the Company to continue operating as normally as possible under extraordinary circumstances. Since Friday, March 20, Marlin's entire workforce has been working remotely, and all business-related employee travel has been suspended. Through the successful execution of our business continuity plan, we have not experienced any significant interruption of our normal business operations and have continued to lend and support our partners and customers, although at much lower levels of activity.

We did receive some very good news late last month from the Federal Deposit Insurance Corporation when we were notified that they had terminated the capital maintenance and liquidity agreement with Marlin Business Bank and rescinded certain nonstandard conditions in the original order granting federal deposit insurance to the bank. As a result of the termination of this agreement, our consolidated capital maintenance requirements have been reduced going forward to the standard regulatory thresholds. We have been pursuing the termination of this agreement for quite a long time. So this is a very important and timely event because it releases capital within the bank that we were holding to meet the capital requirements, which can now be used to help us better support our partners and customers. As of the end of the quarter, our risk-based capital ratio was approximately 20%, which is almost double the standard for a well-capitalized bank.

In addition to a very strong capital position, we also took advantage of our access to the wholesale deposit market to substantially increase our liquidity during the quarter. The wholesale deposit market has remained open and very functional during the crisis, and we were able to almost double our liquidity position during the quarter at a very low cost. As a result of these capital and liquidity actions, our balance sheet is now very strong and our financial position is stable.

As you would expect given the current situation, our portfolio did experience higher delinquencies and credit losses during the quarter. This was consistent with pre-crisis delinquency trends that were exacerbated by the COVID crisis. We have shifted significant human resources to our servicing platform and continue to closely monitor the portfolio and proactively manage credit performance. Lou will provide additional details about the portfolio in his remarks and Mike will discuss the financial impact that the current environment is having on expected future credit losses in his remarks.

With respect to our current business activity, we are processing about half of the equipment finance application volume as compared to pre-crisis levels, and working capital loan applications have slowed to a trickle as we have significantly reduced solicitation activity for this product. Our equipment finance approval rate is running between 40% and 45%, which is down from our pre-crisis level of approximately 60%. This reduction is due to tightened underwriting standards that we implemented early in the crisis and include limiting origination activities within certain highly impacted industries and with certain higher risk borrowers.

First quarter origination volume of $157.4 million decreased 24.5% year-over-year, driven entirely by lower equipment finance volume. Origination volume for both equipment finance and working capital loans declined significantly throughout March, as the crisis escalated and the combination of reduced demand for equipment and the lower approval rate has caused our current origination volume to fall to approximately one-third of pre-crisis levels.

Also, although we have benefited over the past year from exceptionally strong capital markets execution, first quarter asset sales of $22.9 million were considerably lower than recent prior quarters as investor demand diminished significantly due to the crisis. As a result of these reduced origination and capital markets activities, our net investment in leases and loans stood at $970 million at the end of the quarter and our total managed assets totaled more than $1.3 billion, an increase of 6.8% from the first quarter of last year.

Given the reduced level of business activity, particularly toward the end of the quarter, we did take action to reduce our expenses in order to minimize any negative impact on our capital and liquidity positions. On April 9, we announced the implementation of an employee furlough plan that impacted approximately 120 of our colleagues. We believe this furlough is necessary to temporarily adjust our expense base to keep the Company operating efficiently during the crisis. The furlough period began on April 13, and we currently expect it to continue through the end of May. We also implemented certain reductions in executive compensation and director's fees during the furlough period.

And finally, with respect to our partners and customers, we continue to look for ways to provide support to help them weather this crisis. To date, we have received and are processing over 6,000 requests for payments deferrals. In addition, through Marlin Business Bank, we are a participating lender in the second tranche of funding under the federal government's Paycheck Protection Program. Through our deferral actions and our participation in the Paycheck Protection Program, our intention is to work proactively with our customers to help them survive this crisis.

As we navigate this evolving and uncertain environment, we remain focused on the tasks at hand: supporting our employees, valued customers and partners, while ensuring business continuity and financial stability. This has been a particularly stressful time for our employees, and I want to thank all of my colleagues for their deep commitment to our company and our customers during this unprecedented experience. We look forward to serving our customers and communities during this time of need and emerging from the crisis as a stronger company.

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. Good morning, everyone. Looking at the key asset quality metrics, equipment finance on-book receivables over 30 days delinquent were 1.82%, up 42 basis points from the prior quarter and up 70 basis points from the first quarter of 2019. Equipment finance receivables over 60 days delinquent were 1.05%, up 19 basis points from the prior quarter and up 38 basis points from the first quarter of 2019.

Following modest seasonal increases in January and February, we experienced a spike in March delinquency, following the onset of the COVID-19 crisis with a 22 basis points increase in the 30 days delinquent bucket from February. There were two primary drivers behind the increased delinquency quarter-over-quarter and year-over-year. First, consistent with the observation shared in the Q4 earnings call, there was a disproportionate delinquency increase in the lower credit quality borrowers in our portfolio. Secondly, industries that we have classified as highly impacted due to the COVID-19 crisis showed a larger increase, especially year-over-year. I will discuss more about how we have segmented our portfolio into industry risk tiers later in my prepared remarks.

Aggregate total finance receivables net charge-offs increased in the first quarter to 3.11% of average finance receivables on an annualized basis as compared with 3% in the prior quarter and 1.83% in the first quarter of 2019. Equipment finance net charge-offs increased by 7 basis points quarter-over-quarter and 115 basis points year-over-year to 2.79%. Increased charge-offs were observed across every part of our portfolio and all industry segments.

Transitioning now to discuss working capital loans, first quarter 15 plus day delinquency increased 80 basis points from the prior quarter to 2.55%, while 30 plus day delinquency increased by 28 basis points to 1.14%. The significant increase in 15 plus delinquency is attributed in part to the beginning of the COVID-19 crisis.

Working capital loan net charge-offs in the first quarter increased to 8.13% of average working capital loans on an annualized basis from 7.95% in the fourth quarter and 6.72% in the first quarter of 2019. Working capital loan charge-offs were elevated across industry segments, but there remained a concentration in the transportation industry. In Q4 of 2019, we discontinued offering working capital to new transportation customers as well as owner-operators and significantly tightened criteria for existing transportation customers.

As I noted on the earnings call last quarter, we made underwriting adjustments in response to deteriorating portfolio performance since August of 2019. As a result of the COVID-19 pandemic, we made significant additional underwriting changes in the early days of the crisis and have continued to iterate those changes based upon developments and data. While the pandemic has adversely impacted virtually all small businesses as a class unto itself, it has had a particularly severe impact on small businesses in certain industries.

As a first step, we segmented our portfolio into low, moderate and highly impacted industries utilizing internal and third-party data. Businesses in highly impacted industries were in most cases deemed non-essential by state governments and were therefore subject to mandatory shutdown due to social distancing requirements. Given the broad diversification of our portfolio, there are only four highly impacted equipment finance industry groupings that exceed 5% of our portfolio by net investment, consisting of miscellaneous services at 12%, retail at 8%, restaurants at 8% and medical at 6%. For working capital, the industry groupings exceeding 5% concentration are retail at 11%, miscellaneous services at 8% and restaurants at 8%. Miscellaneous services is an amalgamation of service-related businesses, the largest four-digit SIC code components of which are business services, repair services, and equipment rental and leasing.

The underwriting changes we made both last quarter and in response to COVID-19 have had the desired effect of improving booked new business credit quality by significantly reducing approval rates, especially in the highly impacted industry segment, which declined from 53% in February to 32% in April for equipment finance. Applications in the highly impacted industry segments have averaged approximately 60% of total applications since February.

As Jeff mentioned earlier, we have reallocated resources to support our collections efforts and to assist with the processing of restructure requests. Through April 24, we have received 5,670 equipment finance payment deferral requests totaling $133 million and 515 working capital payment deferrals totaling $21 million on our owned portfolio. We are supporting our customers by approving their restructure request, provided they are current under their existing obligations and can demonstrate that their ability to repay has been impacted by the COVID-19 crisis. I am pleased to note that the number of daily restructure requests peaked in early April and have been declining since then. It is worth noting that approximately 78% of restructures that we have booked to date come from customers in the highly impacted industry segment. In accordance with the interagency statement on loan modifications by financial institutions, working with customers affected by the coronavirus, the contracts being restructured by Marlin will not be classified as troubled debt restructurings.

As of January 1, 2020, Marlin adopted the new allowance for credit losses methodology commonly referred to as CECL, or Current Expected Credit Losses. The adoption of the CECL methodology and the impact of the COVID-19 crisis led to an increase in Marlin's loss allowance from 2.15% as of December 31st to 5.09% of total finance receivables at the end of Q1. Mike will provide additional details in his remarks, including the impact of CECL on Marlin's financial results.

We believe that we have taken the steps necessary to mitigate the impact of the COVID-19 pandemic on our portfolio to the maximum extent possible. We will continue to closely monitor developments by industry and geographic region, and we'll take further action as deemed appropriate.

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

Michael Bogansky -- Chief Financial Officer

Thank you, Lou, and good morning, everyone. First quarter net loss was $11.8 million or $1.00 per diluted share compared with net income of $5.1 million or $0.41 per diluted share for the first quarter last year. Net loss on an adjusted basis was $10 million or $0.84 per diluted share compared with net income on an adjusted basis of $5 million or $0.40 per diluted share a year ago.

Our first quarter's results reflect a number of notable items resulting from the impact of the COVID-19 pandemic, including a substantial increase in our provision for credit losses as we implemented the forward-looking CECL model; a goodwill impairment charge resulting from an interim impairment assessment due to the deteriorating macroeconomic conditions in the latter part of the first quarter; and a tax benefit resulting from the federal stimulus package. I will discuss each of these separately today.

As Lou mentioned, we adopted CECL on January 1, 2020, which resulted in an $11.9 million increase to the beginning balance of the allowance for credit losses. Since the CECL methodology introduces forward-looking economic forecasting into the determination of the allowance for credit losses, our loss provisions were significantly impacted by the economic effects of the COVID-19 pandemic. During the quarter, our expectations for future cash flows on the portfolio changed as we expect COVID-19 to considerably impact the credit environment and economic conditions. This in turn increased our estimated lifetime credit losses under the new CECL standard.

In addition to the $11.9 million increase to the allowance at adoption, during the first quarter, we recorded a $25.1 million provision for credit losses. We utilized unemployment rates and business bankruptcy forecasts as key economic inputs into our CECL model, which have both significantly increased since the end of 2019 as a result of the impacts from the pandemic. In the coming quarters, we will continue to evaluate the economic environment, refine our outlook and update our loss reserves accordingly.

Turning to first quarter yields, the yield on total originations was 12.45%, up 2 basis points from the prior quarter and down 31 basis points from the first quarter of 2019. The low interest rate environment continued to put pressure on yields during the first quarter as the yield on working capital loans was down 235 basis points from the fourth quarter and equipment financial yields were relatively stable, up a modest 4 basis points.

For the quarter, net interest margin, or NIM, was 9.34%, down 10 basis points from the prior quarter and down 25 basis points from the first quarter of 2019. The sequential quarter decrease was driven primarily by lower fee income, offset by lower interest expense and a slight increase in new origination loan and lease yields. In 2019 and prior years, the Company had previously recognized residual income within fee income.

The adoption of CECL results in residual income being captured as a component of the activity and the allowance for credit losses because the Company's estimate of credit losses under CECL takes into consideration all cash flows expected to be received from the underlying loans and leases. During the first quarter of 2019, approximately $1 million of residual income was recognized in fee income, whereas this activity is reflected in the allowance for credit losses in the first quarter of 2020.

The Company's interest expense as a percent of average finance receivable decreased to 2.25% compared with 2.36% for the previous quarter and 2.39% for the first quarter of 2019 due primarily to a decrease in deposit costs from lower interest rates, as well as an effect of the repayment of the securitized portfolio.

Non-interest income was $12.2 million for the first quarter of 2020 compared with $13.5 million for the prior quarter and $12.9 million in the prior year period. The sequential and year-over-year decrease in non-interest income is primarily due to a decrease in gains from the sale of assets.

As Jeff noted, our first quarter assets sales were significantly down from prior quarters due to disruptions in the secondary market resulting from COVID-19, as we sold $22.9 million of assets during the first quarter of 2020 compared with $52.9 million in the first quarter of 2019. Despite the decline in asset sales, we were able to achieve strong gain on sale margins due to the interest rate environment prior to the economic disruption caused by the pandemic.

Moving to expenses, first quarter non-interest expenses were $29.9 million compared to $16.4 million in the prior quarter and $24.8 million in the first quarter last year. Non-interest expenses for the first quarter of 2020 include a $6.7 million charge related to the impairment of goodwill due to the significant decline in Marlin's market value in March as the COVID-19 pandemic escalated and the impacts were felt across the financial services sector. Since we have one reporting unit for the assessment of goodwill impairment, the charge was driven by the fact that the market value of the Company was below book value for a sustained period of time.

As Jeff mentioned, we proactively and aggressively managed our expenses to meet the demands of our operating reality. In April, we announced an employee furlough and certain compensation changes that resulted in an annualized run rate fixed cost savings of approximately $9 million. We will continue to proactively manage the operations as the impact from the pandemic continues to evolve.

Moving on to income taxes for the quarter, we did receive a tax benefit resulting from the CARES Act enacted in March. The CARES Act reinstated the net operating loss carry-back 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 to years prior to 2018 where the federal tax rate was 35% as opposed to the current 21%. This resulted in a $3.3 million tax benefit as we revalued our NOL deferred tax assets.

Despite the challenges we experienced during the first quarter, our capital and liquidity position remained strong. We were able to raise FDIC insured deposits at attractive pricing in March and we ended the first quarter with a total risk-based capital ratio of 19.94%. We expect that the loan and lease portfolio will continue to be stressed in the short-term as the impacts of COVID-19 are felt across the small business community, but we believe that we are in a strong position to endure this environment.

During the first quarter of 2020, we repurchased approximately 264,000 shares of Marlin common stock for an average price of $16.09 per share. As of March 31, we have approximately $4.7 million of remaining authorization available under the stock repurchase program that was announced in August of 2019. We will continue to closely evaluate our capital and liquidity position relative to the capital deployment opportunity that our share repurchase program provides. Additionally, our Board of Directors declared a regular quarterly dividend of $0.14 per share payable on May 21, 2020 to shareholders of record as of May 11, 2020.

Now, turning to our business outlook for the year, given the significant economic impact and market volatility surrounding the COVID-19 pandemic, we have withdrawn our forward-looking financial guidance for the full year ending December 31, 2020. The operating environment is rapidly evolving. And given the high degree of uncertainty surrounding the severity and duration of the pandemic, at this time, we cannot accurately assess the financial impact of COVID-19 on our business. We are continuing to monitor the situation closely, and we will provide an update on our second quarter earnings conference call in August.

In the meantime, we are intently focused on doing what we can to support our employees, customers and partners as they deal with this difficult situation. I believe that we will manage through this difficult period just as we have persevered through difficult periods in the past.

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

Questions and Answers:

Operator

[Operator Instructions]

Lou Maslowe -- Senior Vice President, Chief Risk Officer

This is Lou Maslowe. While we're pulling for questions, I did want to point out that I misspoke when I was referring to the movement in quarter-over-quarter delinquency -- 30 plus delinquency for working capital. I stated that the delinquency for 30 plus had increased by 28 basis points, when in fact, it had decreased by 28 basis points to 1.14%.

Operator

Thank you. Our first question comes from the line of Chris York with JMP Securities. Please proceed with your question.

Christopher York -- JMP Securities -- Analyst

Hi, guys. Good morning.

Jeff Hilzinger -- President and Chief Executive Officer

Good morning, Chris.

Lou Maslowe -- Senior Vice President, Chief Risk Officer

Good morning, Chris.

Christopher York -- JMP Securities -- Analyst

So, a lot to discuss as there were multiple developments this quarter. I want to start on the positive. As you highlighted, Marlin Business Bank received capital relief, and you have about 10% of excess capital. Certainly a good time to have this excess capital. So how should investors expect you to use this additional capital flexibility today and maybe longer term?

Jeff Hilzinger -- President and Chief Executive Officer

Well, I think right now, Chris, that excess capital still resides in Marlin Business Bank, and we're required to file a financial plan with the Federal Reserve within 90 days to talk about what our capital strategy is going forward. So we're working on that as we speak. So, at the moment, it's in the bank. It's going to stay in the bank until we do the financial plan. And hopefully, by the time the financial plan is done and it's submitted, we'll have a better sense as to exactly what the COVID impact on our portfolio will be, and we'll be able to then make sort of longer-term decisions about what to do with that excess capital. Of course, pre-COVID it always -- our intention always was to ultimately either utilize it to support growth or to return it to investors. And I think, when we're on the other side of this, that intention probably won't change.

Christopher York -- JMP Securities -- Analyst

Okay, fair enough. Second question is, what was the monthly total finance origination volume in the quarter, January, February, March and then in April as well?

Jeff Hilzinger -- President and Chief Executive Officer

Mike, I don't have those figures with me.

Michael Bogansky -- Chief Financial Officer

Yes. So as Jeff mentioned, for April, we reduced -- the origination volumes were reduced to about a third. So, we're looking at April origination volume of around $20 million. And I don't have the monthly figures handy with me right now.

Christopher York -- JMP Securities -- Analyst

So another way to ask it is, so with March down a third as well, presumably there wasn't a third decline in January and February. So just trying to understand the decline in March.

Michael Bogansky -- Chief Financial Officer

The decline in March -- go head.

Jeff Hilzinger -- President and Chief Executive Officer

No, I was just going to say that when we talked about the competitive environment during the fourth quarter, Chris, on our last call, we were -- we talked about the fact that they had been increasing price competition during that quarter, and that environment continues in January and February. But obviously, the impact from COVID didn't really impact the origination volume until really the last two weeks in March, and then obviously in April as well.

Christopher York -- JMP Securities -- Analyst

So -- OK, that's an interesting development. So then, the decline in the first quarter could be characterized as more competition-related as opposed to COVID related?

Jeff Hilzinger -- President and Chief Executive Officer

Yes, it's both. It's a combination of the two.

Christopher York -- JMP Securities -- Analyst

Okay. And then, we know that you've invested in your digital infrastructure over the last couple of years. But I'm curious, what you think the approximate percentage of your operation of the platform exists today from employees either working from home and those furloughed versus maybe your platform capacity in January? Said another way, if you were operating at 100% production capacity in January to meet demand, what percentage of your platform is operating today?

Jeff Hilzinger -- President and Chief Executive Officer

The digital part of the platform, Chris, or just the platform in total?

Christopher York -- JMP Securities -- Analyst

Platform in total.

Jeff Hilzinger -- President and Chief Executive Officer

Yeah. So we're -- as we said, we've got the application -- the unit application volume is running at about 55% or 60% of pre-COVID levels. That, combined with the reduced approval rate, gets us to about a third of origination volume. So, the business activity is down significantly, which is one of the reasons why we did the furlough. It was to basically right-size the production capacity of the business to the current reality.

Christopher York -- JMP Securities -- Analyst

Okay. I understand why you've taken that And so, this question would be maybe to Mike. And if you're -- I know you provided annualized $9 million of compensation reduction. Is that roughly about $1.2 million for the second quarter?

Michael Bogansky -- Chief Financial Officer

It would be -- well, it would be the $9 million annualized. So it'd be a little bit more than that, about $2.5 million -- $2.2 million.

Christopher York -- JMP Securities -- Analyst

Okay. I calculated about 48 days from April 13 to May 31. Okay.

Michael Bogansky -- Chief Financial Officer

No. What we wanted to provide there, Chris, was the annualized number of the total actions so that you could correlate that with the duration and severity of the crisis.

Christopher York -- JMP Securities -- Analyst

Okay. I talked a little bit about your historical investment in the digital infrastructure. Does this environment cause you to delay any capex or investment spend?

Jeff Hilzinger -- President and Chief Executive Officer

No, not significantly. I think what we're discovering through this experience is exactly how robust our existing digital capabilities are because by definition, working virtually, the business is being forced to rely much more on its automation tools and its digital tools, at least the ones that are outward [Phonetic] facing to our customers. So I think one of the positive impacts of this is that it's forcing the platform to operate in a different way and to take full advantage of the digital capabilities that we've already built. And I would say also as well, as we look forward, which -- the senior team's perspective sort of pivoted from creating a stable financial profile and business operations to begin looking more forward about two weeks ago. And an important part of that looking forward is determining how we actually potentially accelerate the digitization of the platform -- the complete digitization of the platform.

Christopher York -- JMP Securities -- Analyst

Okay. Moving away from operations, I see that you're a participant in the second round of the PPP, but you weren't first a participant in the first round. So why didn't you participate in the first round?

Jeff Hilzinger -- President and Chief Executive Officer

Well, we have an SBA license with bank and -- but we've never operationalized the SBA license. So, we needed to actually stand the operational platform up to be able to participate. And so, it took us about three weeks to figure out how to do that and do it appropriately and do it in a way that was -- that we were originating consistent with the rules, which were changing a lot during that three-week period. And so, we were counting on the fact that there was going to be a second part to the PPP program. So, even though the initial allocation went quickly, we continued to stand up that -- our platform to be able to take advantage of that program under the belief that there'd be a second piece to it, which there is, and that's what we're originating in now.

Christopher York -- JMP Securities -- Analyst

Makes sense. And then, how does your deferral program work? Is the monthly interest deferral simply due at the end of the 30 or 60-day period? Or are you adding the interest to the principal?

Jeff Hilzinger -- President and Chief Executive Officer

Yeah. We calculate -- the restructure recalculates the payments so that the yield -- the original yield is maintained.

Christopher York -- JMP Securities -- Analyst

Okay. And then, just another question on April. What has the percentage -- and maybe this was provided by Lou or Mike. But what has the percentage of payment deferral been in April?

Lou Maslowe -- Senior Vice President, Chief Risk Officer

So, we're still processing. I think I mentioned in my remarks, Chris, the number of applications that we're processing, I don't have an exact number at the moment as to how many we've done. But we're -- there's still a significant number of restructures in the queue that we've approved. It's just a matter of documenting and booking.

Christopher York -- JMP Securities -- Analyst

Okay. And then, last question on the PPP program here is, I know fraud risk has been reported for those in the first round of the program, and you've occasionally had some fraud in your business recently. So how should we get comfortable that you'll be able to mitigate fraud risk from your participation in the PPP?

Lou Maslowe -- Senior Vice President, Chief Risk Officer

So, I'll take that one. So we -- first of all, I think it's important to note that we're focusing this product offering on our existing customers. So we benefit from the fact that we have an existing relationship and we leverage the data that we have with the customer by doing certain things like verifying the payment instructions that we're getting from the customer with the account that they're using to make payments to us on a monthly basis. And we're verifying the authenticity of the person that we're interacting with. We also make sure that they're the same person that we worked with on our existing transaction. So I have to say, I think, we -- given our approach, we're substantially mitigating the risk, certainly from an identity standpoint. And then we're taking a very robust approach toward reviewing the documentation that they're required to provide and for us to do the good faith review of their payroll information, which is the driver of the loan amount. So I think, we've put in a very robust process that should largely mitigate the risk of fraud.

Christopher York -- JMP Securities -- Analyst

Good color, Lou. Thanks for the clarification on providing PPP loans to your existing customers. It's important to us. Moving to credit, I appreciate the portfolio data that you did disclose on the industry exposure. And there are a lot of moving parts, obviously. But how much of the provision in this quarter was due to economic changes versus maybe portfolio downgrade that you started to see in March?

Michael Bogansky -- Chief Financial Officer

Yeah. So, yeah, I think...

Lou Maslowe -- Senior Vice President, Chief Risk Officer

Go ahead, Mike.

Michael Bogansky -- Chief Financial Officer

No, go ahead Lou.

Lou Maslowe -- Senior Vice President, Chief Risk Officer

I was going to say, we're not talking about the allowance here. We're talking about charge-offs. Is that the question?

Christopher York -- JMP Securities -- Analyst

Allowance. So the provision...

Lou Maslowe -- Senior Vice President, Chief Risk Officer

Allowance?

Christopher York -- JMP Securities -- Analyst

Essentially the allowance.

Lou Maslowe -- Senior Vice President, Chief Risk Officer

Okay. Then I'll pass it to Mike.

Michael Bogansky -- Chief Financial Officer

So Chris, we do -- as you'll see when we file our 10-Q, we do provide a fair amount of detail in the CECL disclosures. But if you split it between the equipment finance, transportation and working capital portfolios, we had an economic adjustment in equipment finance of $10.8 million. And then, we had qualitative adjustments for the transportation and working capital portfolios of $2.9 million and $5.5 million respectively. So of that, it's about $19 million that is due to the changing economic conditions in the first quarter.

Christopher York -- JMP Securities -- Analyst

Great color. And then, I recall a net charge-off ratio target of maybe 300 basis points on equipment finance, 600 basis points on funding stream used in your models. So I'm looking to see if you have any changes in your lifetime credit loss expectations under this now unprecedented condition.

Michael Bogansky -- Chief Financial Officer

Go ahead, Lou.

Lou Maslowe -- Senior Vice President, Chief Risk Officer

I was just going to ask for clarification on the question. Could you give us -- go through that one more time, Chris?

Christopher York -- JMP Securities -- Analyst

Yeah. So, I recall historically, you had a net charge-off ratio target of about 300 basis points on equipment finance and 600 basis points on funding stream. So, I'm looking to see if -- in your lifetime credit loss expectations, in your model, if this condition has changed those expectations.

Lou Maslowe -- Senior Vice President, Chief Risk Officer

Okay. Well, first of all, I would say, I think what we've talked about in the past was the 600 basis points for working capital is on an annualized basis and ranging 180 basis points to 200 basis points for equipment finance on an annualized basis in a good economy. So, both of those are in a good economy situation. Of course, yeah, the whole situation has changed now, and it's very difficult to anticipate, given the nature of this crisis, what it's going to look like. Equipment finance in the great recession -- in the downturn period, we were averaging in the mid-4s. But it's really hard to say if that's going to be similar in this time. There are some similarities and there are some significant differences in terms of the number of industries that have been impacted. There's a lot of speculation. The question is, is this going to be a U or a V? There's a feeling that it's going to be severe in the short term because so many businesses were shut down. But that -- as the economy opens up, there's going to be a faster comeback than we experienced in the great recession. So we're modeling to the best extent that we can, but there's a lot of unknowns.

We've said -- we don't have -- with respect to working capital, we don't have the experience in the downturn like we had with equipment finance, although we've said in the past that we could expect it to be 3 times to 4 times of what it could be in the downturn if we compare metrics in great recession. But that's really -- right now, it's just too soon to say how big an impact this is going to have on the performance, especially in light of all the government support, all of the encouragement for restructures. If you look -- there's a fair number of our restructures that are to the medical community, like dentists. There's a lot of good businesses out there that have requested restructures that we think are businesses that are going to survive, and it's just a matter of getting through this period. So, it's a long way to say there's a lot of unknowns, but we'll have to wait and see a little bit what develops over the next few months.

Christopher York -- JMP Securities -- Analyst

All right. Fair enough, Lou. The color is very helpful. Last question -- I know I've had multiple here, I don't want to hog the queue -- is on competition. Ascentium Capital, which I tended to think was one of your most direct competitors, was recently acquired by Regions in February from Warburg Pincus. So there typically has been a lag effect from increased competition when an independent lessor is acquired by a bank. So how do you expect Ascentium with a new parent to impact your business, especially given the fact that you just said Q1 and -- or January and February origination volume was impacted by competition?

Jeff Hilzinger -- President and Chief Executive Officer

Yeah, I think that -- so, that acquisition just closed two or three weeks ago. And I expect that Ascentium is going to become even a bigger competitor now that they'll have access to retail deposit costs than they have in the past. So, I think it's just a continuing trend of seeing these kinds of platforms becoming parts of banks and marrying the product expertise and the market access with what has proven to be extremely low-cost funds [Phonetic]. So, that is an important structural change in the market, Chris.

Christopher York -- JMP Securities -- Analyst

Okay. Given all those reasons you just described, do those reasons, and then maybe Ascentium's acquisition or even the economic backdrop, change your perception about operating as an independent publicly traded financial company?

Jeff Hilzinger -- President and Chief Executive Officer

We've talked about this in the past. I think that Marlin is always evaluating sort of its capital structure and its ownership and where it can be the most competitive. And certainly, I think as we see this segment of the commercial finance space being acquired by banks, that definitely is something that is having an influence on the way we think about that.

Christopher York -- JMP Securities -- Analyst

Great. And that's it for me. I know it's an unprecedented time with multiple -- or a high-level of uncertainty. So I appreciate your candor.

Lou Maslowe -- Senior Vice President, Chief Risk Officer

Chris, I did want to follow up on the equipment finance restructures. We are now at about 1,700 that have been processed in total. Again, there's still thousands in the queue.

Christopher York -- JMP Securities -- Analyst

Okay, thank you.

Operator

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Jeff Hilzinger -- President and 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 second quarter results in late July. Thanks again, and please stay safe and healthy.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Lasse Glassen -- Managing Director, ADDO Investor Relations

Jeff Hilzinger -- President and Chief Executive Officer

Lou Maslowe -- Senior Vice President, Chief Risk Officer

Michael Bogansky -- Chief Financial Officer

Christopher York -- JMP Securities -- Analyst

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