Marlin Business Services Corp.
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Marlin Business Services Corp.'s First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded and is being webcast simultaneously on the Investor Relations section of Marlin's website at www.marlinfinance.com. The recording of the call will be archived on the website for approximately 45 days. I would like to remind you that this conference call may contain statements that are forward-looking within the meaning of the applicable Federal Securities laws and are based on Marlin Business Services Corp.'s current expectations and assumptions, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ from those anticipated are detailed in the company's Securities and Exchange Commission filings. Listeners are cautioned not to place undue reliance on these forward-looking statements. Such forward-looking statements speak only as of the date of which they are made and the company does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of this call. Speaking to you today will be Dan Dyer, Chief Executive Officer. Also on the call is Lynne Wilson, Chief Financial Officer; and Ed Siciliano, Chief Sales Officer. The company will begin the call with prepared comments and follow-up with a question-and-answer session. It is now my pleasure to introduce your host, Mr. Dan Dyer, CEO of Marlin Business Services Corp. Thank you, Dan. You may begin.

[Dan Dyer:]

Good morning to everyone and welcome to today’s call. Let me begin with a few comments on the core business. 2015 is off to a good start. Sales activity has steadily increased throughout the quarter with applications and volume up by about -- 10% above [ph] this time last year. Yields on new originations are modestly lower for the same period due to competitive reasons and channel mix. We did see an uptick in dealer activity which is encouraging. Approval rates dipped unexpectedly for the quarter on a modestly weaker credit profile. We are pleased to see positive signs unfolding regarding yield with pricing on new business holding steady. This sign is welcoming news, given the breakout of price competition has been going on for the past year or so. Looking forward, we’re optimistic marketing conditions are beginning to turn more favorable based on customer trends to start the year, although recent economic news on slow first quarter GDP growth, there is watching [ph] and its effect on future business sentiment and confidence. Sales hiring was appreciatively higher this quarter and we do plan on additional hiring in support of the core business and our newer initiatives. While there are signs – emerging signs of price stabilization, the supply demand for higher grade credits remain quite intense, a byproduct of the low interest rate environment and abundance of liquidity on lenders’ balance sheets. Right now, we don’t foresee this trend ending any time soon until the Fed begins to move more aggressively with rates. Credit quality remains solid, although we did see a modest split in delinquencies, which we view as temporary. In connection with our ongoing capital management efforts, shares repurchases for the quarter tallied to 112,000, and this quarter marks Marlin’s 15th consecutive quarterly dividend paid to shareholders. As was announced earlier this quarter, we are excited over the launch of a new short-term capital loan product. This new offer fits very nicely with our business model, customer profile and strategic focus on delivering value-oriented products and services tailored for the small business community. Marlin’s large diversified growing customer base is unique and the growth potential to serve customers in new ways is quite compelling to us. Loans leverage Marlin’s expertise in multiple ways that include the areas of credit and risk management, operations and technology. The entrée into small business loans seasoned on the growing gap, many small businesses faced with often limited access to a short-term capital line for many traditional lenders. The loan is to qualify customers in up to $100,000, we estimate an average loan amount of $30,000 and 12 to 15 month term to finance their growth and expansion. With the launch, our initial market focus is aimed to Marlin’s active base of 65,000 customers. Future plans may include alternative distribution alliances such as partnering ventures, similar to our Union Bank relationship allowing banks and others access to our proprietary delivery platform to leverage their customer relationship and together to mutually grow revenue. Over the next 12 to 18 months, we intend to add resources and investments directed to this new venture. On a preliminary debt basis, we estimate the investment will have an impact of $0.04 to $0.06 [ph] a share for 2015 on full year results as we ramp up the infrastructure technology and marketing spend. As noted in today’s press release, Lynne has decided to pursue a new chapter. We wish her the best and continuing success in what lies ahead. On Lynne’s watch, the company has prospered and achieved many milestones, which I am thankful for her leadership and contributions. Lynne will be working closely with me and the entire team during this transition phase over the next 30 days. With that let me turn the call over to Lynne. Lynne?

[Lynne Wilson:]

Thank you, Dan, and good morning to everyone on the call. Let me walk you through some of the key highlights and the key financial metrics for the quarter. We ended the quarter with total managed lease and loan assets of 627 million resulting in a 5% increase in average earning assets year-over-year. The active number of customer accounts grew to 79,000 versus 75,000 a year ago. New lease and loan originations reached 81.6 million in volume in the first quarter, 10% more than first quarter of last year. The average ticket size of our new originations is approximately $14,300. Reflecting our disciplined pricing practices, pricing on new originations across our channels was relatively flat quarter-over-quarter, but on an aggregate basis declined 10 basis points due to channel mix. While some segments remain highly price sensitive, we have begun to see overall level stabilizing, and going forward, we expect to aggregate origination yields to remain in this range give or take 10 basis points. The business continues to generate attractive risk adjusted net interest and fee margins despite the current low interest rate environment. Net interest and fee margin was 12.4% versus 12.5% in the fourth quarter of 2014. Based on current pricing trends, we expect the margin to remain in this range throughout 2015. 60-plus delinquencies were 57 basis points compared to 51 basis points in the fourth quarter of 2014. Charge-offs increased slightly to 1.7% of average net investment versus 1.6% in the fourth quarter but are in line with expected charge-off levels. Going forward, we anticipate charge-offs to range close to current levels. The provision for credit losses was 3.3 million versus 2.6 million in the fourth quarter of 2014. The provision was impacted by a combination of portfolio growth, but slightly higher net charge-offs and the slightly higher delinquency levels. The allowance for credit losses is 1.47% of average total finance receivables and a strong 228% coverage of 60-plus day delinquencies. We would expect the allowance to remain in this range over 2015. Additional information on static pool losses and delinquencies is available on our website. First quarter expenses were $11.2 million versus $11.7 million in the first quarter of 2014. Lower bank commitment fees along with lower variable employee related expenses partially offset the first quarter seasonal spike of payroll taxes and bonus awards and the investment spend mentioned by Dan previously. Also included in that is the impact of additional sales FTEs added during the first quarter of 2015. The number of sales reps has increased by 8 FTEs year-over-year and 10 compared to fourth quarter 2014. Regarding operating spending, our efficiency ratio for the first quarter is 52% versus 54% in the first quarter of 2014 and in line with expectations. Going forward, we expect the efficiency ratio to remain in the range of 50%, reflecting the impact of portfolio growth, margins and investment spend related to a slightly larger salesforce and new product development. Lastly, our capital position remains healthy. With an equity to assets ratio of 22.8%, as previously announced we declared a cash dividend of $0.125 per share. In addition, we repurchased 112,000 shares in the first quarter of 2015. The quarterly dividend coupled with our ongoing stock repurchase plan is consistent with our long-term plan to prudently manage capital levels. With that, I will turn it back over to the operator and we will take your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Bob Napoli of William Blair. Your line is now open.

[Bob Napoli:]

Good morning.

[Dan Dyer:]

Good morning.

[Bob Napoli:]

Glenn, thank you for your help over the last nine years, it's very much appreciated and I wish you the best.

[Lynne Wilson:]

Thank you, Bob, I appreciate. It’s a pleasure working with you as well.

[Bob Napoli:]

Dan, the new businesses and you talked about $0.46 I guess of investment this year. Can you give a little color on the timing, I mean, was there anything in the first quarter related to that $0.46 and how should we ramp that in and then, maybe a little bit of color on what type of loan volume you're expecting out of this year and into 2016?

[Dan Dyer:]

Yeah. So the investment – with some of the new capital loan product, yes, so that effort is actively underway. In the quarter, approximately $0.01 per share was impacted because of investment spending and it's been focused primarily on staffing at the moment. As we announced, Russell Walraven from Kabbage and previously from Equifax, joined us as head of our direct loan marketing effort, heading up that effort. We've also added resources in the technology area and in the credit area. So that investment will continue to ramp up as we add resources, building up the infrastructure. As I mentioned, also we have a fair amount of investment going on in the technology area where we are repurposing our existing technology, but we are building a brand new online customer portal, state-of-the-art customer portal that will support this new initiative so that that investment will ramp up as the year unfolds. In the second half of the year, we will be stepping up our active marketing campaigns as well as we ramp up originations. 2015 is a build-out year, so as far as originations go, as you see, we had just modest originations in the first quarter. We anticipate that growing throughout the year. I won't give you a firm estimate on volume for the year, but we do see it growing quarter-over-quarter and will be actively soliciting our customers, Marlin's customers in the second half of the year. So you should see an uptick quarter-over-quarter as the year unfolds in '15 and '16 being a big ramp up year with new asset production for the loan growth.

[Bob Napoli:]

And what does -- I mean, what type of yields do you get on this loan product and --

[Dan Dyer:]

Yeah, it will vary. So we will have everything from a super prime category. Loan has got a pretty unique customer base, so we have customers that fit to super prime category and there, given their need for quick access to credit, we will get pricing in the 20% range and then it will range depending on term and credit profile as high as 40% to 45%. We guesstimate that the yield will range somewhere about 35% when you balance everything out. And again, this is a short-term capital loan, average term is 12 to 15 months. Many of these customers will renew, take out a second loan as they pay down the first loan. So our credit losses will be little higher, somewhere we estimate in that 8% to 10% range but on a risk adjusted basis, very attractive returns on assets and capital.

[Bob Napoli:]

And you expect to keep all of this on the balance sheet or will you actually kind of, will you sell some of these, some of the lower end loans or --

[Dan Dyer:]

So the good news is, many of our customers, the profile, we’ll keep it on balance sheet and it will be funded through the bank. But we are trying to be a one stop shop for our customer, so as we market to our customer, for one reason though, with the exposure of credit profile, we choose not to keep it on our balance sheet; we'll have syndicate relationships with others out there that will -- that have an appetite for the different credit profile [indiscernible]. So, my guess is about 80% will be on balance sheet, 20% will be through syndicate partners.

[Bob Napoli:]

And last question, would you expect this business to be profitable in 2017, I guess, is that kind of -- ?

[Dan Dyer:]

It will be profitable in 2016; the only thing that would change that equation, if we decided to accelerate our growth and investment in marketing and resources to get a hockey stick approach, then we want to invest more sooner and then it's a trade-off between profitability and short-term results and long-term growth aspirations.

[Bob Napoli:]

So, I mean just for this year, the $0.46, we should think of that as an investment year, $0.46 net of additional expenses to the bottom line this year and then, you're goal is to be -- have to be profitable for the full year next year.

[Dan Dyer:]

Right, right, but to clarify it, it's $0.04 to $0.06.

[Bob Napoli:]

Oh, I'm sorry; I thought you said $0.46.

[Dan Dyer:]

No, $0.04 to $0.06, not $0.46, no, no.

[Bob Napoli:]

That's a little different. It's great to see the investment Dan and look forward to seeing how that progresses.

[Dan Dyer:]

Yeah, okay, thank you.

[Bob Napoli:]

Okay.

[Operator:]

Thank you, and our next question comes from the line of Chris York of JMP Securities. Your line is now open.

[Chris York:]

Good morning Dan and Lynne and thanks for taking my questions.

[Dan Dyer:]

Good morning.

[Chris York:]

Could you talk a little bit more about credit quality, because the $700,000 loan loss reserve, that's a little bit by surprise given below average leading credit quality indicators in the portfolio. So is this kind of a catch up like you alluded to in regards to portfolio growth or does it also include a higher loss expectations from the small business lending product?

[Lynne Wilson:]

Yeah, I would say, no to the second part of that question, it's really is more of a function of quantitative GAAP calculation that we're required to do for our provision. We are a little bit sort of regulated and kind of setting the methodology, without getting into too much detail, it required us to look back six months and then take the six months of charge-offs and delinquency history and project that forward ten months. So whenever you have sort of a little bit of a spike in either delinquencies or charge offs, it's going to reflect and sort of magnify a little bit in that calculation. So you'll see, 60 plus delinquencies are up slightly, charge-offs are up slightly, nothing unusually in relation to our portfolio, however, it did impact our provision and required us to book up a little bit more than we had in the fourth quarter.

[Chris York:]

Okay, yeah, thanks for that core. And then, staying on new products, so what contribution, I mean, I know you talked a little bit about the supply, but do you expect to receive from the small business lending product in 2015, is there any volume expectations that we should think about in regards to hitting your balance sheet.

[Dan Dyer:]

As I mentioned a moment ago, there is volume being booked now, if you look at our supplemental data, there was a modest amount of loans booked, that will grow quarter over quarter for the balance of the year, all right. I'll won't give you a firm number but I think if I was to estimate, it would be in the range of $10 million to $12 million, ’15 [ph] as I said increasing throughout the year and accelerating the second half of the year as we ramp up our marketing campaigns.

[Chris York:]

Yup, got it, okay. And then, so for, maybe taking a look at this, this new lending product, what credit losses should we expect, so if, your net charge-off ratio right now is 1.7%, should we think about this new product as potentially at 7% NCOs?

[Dan Dyer:]

It will probably be on the magnitude of 3x what our -- adjusting credit on per annum basis to leasing. So leasing is just about 2% per annum, it will probably be somewhere, 6% to 7% per annum. Now, keep in mind that it’s very short term in nature, 12 to 14 months, so, it doesn’t have a tail [ph] risk. But again, as I said, yields on this new asset class are appreciably higher, because it serves a different need in the market, but the short-term working capital that is -- there is a big growing gap among many small businesses by banks because they don’t have the technology, they don’t have the focus, they don’t have the wherewithal to meet the growing demand for credit by small businesses. We fill that because banks are just not equipped to do what we’re doing. So, we think we’re well positioned with our history and what we’re good at to really be successful with this new product and I think that growing divide with banks, particularly community banks that are just still equipped to compete in this spaces is a -- will be a growing advantage for us. So, we’re quite excited about its prospects and how it fits with Marlin and its customers and our business model and platform.

[Chris York:]

Sure, yeah, that makes sense. And then, similarly, so, can you talk a little bit maybe about the franchise lending business that announced in 2014? Any new activities there that was included in $81 million in new originations and then any other new franchise relationships that you could announce similarly to the Denny's one that you did last year or last quarter?

[Dan Dyer:]

I’ll turn it over to Ed here.

[Ed Siciliano:]

Yeah, I’ll give some color on that, Chris, but probably won’t get into the actual franchise or concepts that we’re working with because we have more competitors on this call than we have analysts. So, it will hold off on that, but applications have become more steady in franchise. So, we’re pleased with that. We’re shifting our focus a little bit toward store and unit refresh and equipment upgrade opportunities. The franchise based in United States is aging right now. So, what we’ve uncovered is a number of opportunities for upgrades and what I mean by that is, franchise concepts requiring 60 stores or 80 stores to refresh whether it’s a rebranding or an upgrade of equipment. So, we’re spending a lot of our business development time on those projects for obvious reasons. Going after the Bradstreet [ph], and we see substantial volume opportunity inside of those projects. The other thing that’s working for us right now and we’re excited about is, we’ve been able to leverage our manufacture relationships to get inside of some of those opportunities. So, for example, we do business with a lot of very large restaurant equipment manufacturers. They are working with a franchise concepts to make sure that their equipment is the equipment that’s selected for these equipment upgrades and store refresh. So, we’re trying to coming in with them together now; their solid equipment, our attractive equipment financing package to win that business. So, although it takes a little more time to schedule those opportunities, they’re more second half, they’re going to be larger. So, that’s where we’re spending our time right now. In anticipation of that, we’ve added throughout the first quarter a couple of more inside sales resources to process those applications that we’re expecting from some of those projects. So, I mean, overall we’re pleased with the way it’s going and it’s taking a little more time but we still see the potential. Nothing has changed in terms of really good fit for us in this market, Chris.

[Chris York:]

Great, that’s very helpful. Thank you, Ed.

[Ed Siciliano:]

Sure.

[Chris York:]

And then, lastly kind of clarifying, I mean that $0.04 to $0.06 in new investment causes, helpful to clarify versus the $0.46, but so, how should we think about efficiency ratio? So, I mean, the guide was kind of 51% potentially in 2015. So, we were at 52% here in Q1. Are we pumping that up maybe to 52% on a yearly basis?

[Dan Dyer:]

For 2015?

[Chris York:]

Yes, for 2015.

[Dan Dyer:]

Yeah, you know what Chris, how about we take that offline, it’s de minimis in terms of its impact. Well, it will affect the [indiscernible] 2015 against revenue, but we don’t have any visibility on that. Lynne, how about we just follow up?

[Lynne Wilson:]

Well, I did say we stay in the range of 50% to --.

[Dan Dyer:]

50%, okay, so again, I neutralize with the revenue and cost side, okay.

[Chris York:]

Okay, and then, lastly here, I can get this in the queue, but average price of the buybacks during the quarter?

[Dan Dyer:]

It was -- for south of 20, it was probably in the range of what 18, 50 and 60 [ph]?

[Lynne Wilson:]

It’s closer to 19.

[Dan Dyer:]

19, when it was all done, yeah. We see as a great opportunity on the buy side. Yeah, we see our stock is undervalued and it was an opportune time to be actively buying back shares in the market.

[Chris York:]

Got it. Alright. Well, thanks for your time.

[Operator:]

Thank you. [Operator Instructions] And at this time, I am showing there are no further participants in the queue. This will conclude our program. Ladies and gentlemen, thank you for calling in. Have a great day.

[Dan Dyer:]

Thank you.

[Lynne Wilson:]

Thank you.