Marlin Business Services Corp.
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Good morning, ladies and gentlemen. And welcome to the Marlin Business Services Corp. Third 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 Ed Siciliano, Chief Sales Officer and Interim Chief Executive Officer. Also, on the call is Taylor Kamp, Chief Financial 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. Ed Siciliano of Marlin Business Services Corp. Thank you, Ed. You may begin.

[Ed Siciliano:]

Thank you, Michelle. Good morning, everyone, and welcome to today’s call. Let me begin with a few comments about our general business and the momentum that we have been building in 2015. To start, application volume has been very strong and it’s being driven by a larger sales force, larger tickets and new products. This robust application flow converted into over 100 million in total new originations in the third quarter, a 22% increase compared to last year. Quarter ending investment in leases and loans also increased, ending at $659 million, up approximately 7% from a year ago. Yields on new originations declined 10 basis points as a result of a few factors, including channel mix, which lean toward major account channels in the quarter. Major account channels tend to have higher average tickets and lower pricing, along with higher credit quality. We view the price, credit quality trade-off as good one for our business. The yield decline was largely offset by the yields generated on our capital loan products, which I will discuss shortly. We continue to execute on our hiring plan and we are on track to reach a sales force of approximately 135 reps by year end. Our hiring for the remainder of 2015 will be focused on our newer initiatives by capital loan, franchise and transportation. With respect to transportation, we have formed the team of experienced commercial truck and specialty vehicle professionals focused on serving small business customers. We saw an opportunity in an underserved market, which matched our ticket, pricing and credit risk appetite. In the quarter we booked $2.3 million in capital loans at a 36% yield. We are encouraged by the high demand from our existing customers for our FundingStream product, which allows businesses to conveniently and expeditiously fund and accelerate their growth. The infrastructure build-out for the product is largely behind us now, with very strong credit underwriting in place. At this point, we're well-positioned to increase FundingStream origination, but we will continue do so at a discipline pace. Credit quality remains strong, with 30 plus day delinquencies of 75 basis points and charge-offs at 1.23%. Taylor will discuss our credit performance in greater detail in just a moment. It was a good quarter and we're excited about our business prospect heading into Q4 and beyond. Our core channels are growing, loan and other new initiatives are contributing, and we will continue to add offering that leverage our infrastructure, improving credit and operation expertise to generate attractive risk-adjusted returns. Lastly, and on a personal note, on behalf of the entire Marlin family, I'd like to extend our sincere gratitude to Dan Dyer, who recently retired as CEO and Director, for his leadership and countless contributions over 18 months. Thank you, Dan. With that, I will turn the call over to Taylor. Taylor?

[Taylor Kamp:]

Thank you, Ed, and good morning. As many of you are aware, I have been with Marlin now for about 12 weeks, and I can say without any reservation that I am extremely excited to be here. Marlin’s fundamentals and management are strong and its unique platform provides an attractive opportunity for growth as we fulfill the financial needs of small businesses. I would like to first -- I would first like to cover some of the more traditional headline metrics for the quarter and year-to-date, but I also want to discuss how Marlin will from time-to-time supplement these data with other information about the company's performance. We had very solid operating results in the third quarter with net income of $4.8 million and EPS of $0.38 per diluted share. Total origination volume came in at $101.9 million for the quarter, up 22% from a year ago. Our net investment in leases and loans grew 6.6% year-over-year to $659.2 million and our ROE was 10.95%, down from 11.5% a year ago. Note that the 10.95% does not yet fully reflect the positive impact of recent capital planning activities. Our business continues to generate an attractive net interest and fee margin. For the quarter, NIM was 11.96%, a bit lower than the second quarter of 2015. Cost of funds increased slightly to 89 basis points, while fee income improved in the quarter both in absolute dollars and in percentage. It is important to note, and as presented in our supplemental information, our FundingStream product is helping to improve our overall NIM. As Ed indicated, credit quality remained strong. 30-plus day delinquencies were 75 basis points versus 70 basis points in the second quarter. Charge-offs declined to 1.23% of average finance receivables versus 1.84% last quarter. On a year-to-date basis, our Coincident charge-offs were 1.59% of average finance receivables and in line with expected charge-off levels. The allowance for credit losses remained robust at 1.31% of average total finance receivables and 269.6% coverage of 60-plus day receivables. Additional information on static pool losses and delinquencies is available on our Investor Relations website. Third quarter 2015 expenses were $11.4 million versus $11.6 million in the second quarter, even as we continue to make investments in new initiatives in the third quarter. Yesterday, we declared a regular dividend of $0.14 per share. As you're aware, we also declared a special dividend of $2 per share on September 14. In addition and in keeping with our stock buyback plan announced in 2014, the company repurchased approximately 196,000 shares of stock in the third quarter, bringing the total year-to-date Q3 repurchases to approximately 407,000 shares at a total cost of about $7 million. Our capital position remained strong with an equity to assets ratio of 19%. The special dividend and continued execution on our stock repurchase strategy further demonstrate Marlin’s commitment to prudent capital management. As previously communicated, we do not expect these capital planning activities to negatively impact our regular dividend practice or impede our growth plans. In my introductory remarks, I noted our intention now and in the future to introduce enhancements to the data we publish by providing additional information on certain initiatives and other discrete events. To that end, this quarter we segregated certain financial and performance data about our FundingStream loan product in the supplemental information in this quarter's earnings release. And with that, I will turn the call over to the operator for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Brian Hogan of William Blair. Your line is open.

[Brian Hogan:]

Good morning.

[Ed Siciliano:]

Good morning, Brian. How are you?

[Brian Hogan:]

Doing well.

[Taylor Kamp:]

Hi, Brian.

[Brian Hogan:]

Good morning. Just initial question is Dan leaving seemed a little sudden and surprised and retiring being on Board for almost a year I guess post this, but why now and what are you looking for in the new CEO?

[Ed Siciliano:]

Yeah. So in regard to Dan’s retirement, Brian, public company boards and management are always working on succession planning as you know, Marlin is no different. Dan and the Board agreed that this was the right time, it’s probably no perfect time, but I thought this was the right time. You're probably aware that Dan has agreed to be a consultant to the company for the next year, which provides us a lot of comfort as we transition through the period. Again, as mentioned earlier, we’re extremely grateful to Dan for his 18 years of service in dedication. Having said that, we’re very confident with the team in place, we have a deep talent bench of pool, tenure and new leadership here at Marlin. So we’re going to be executing on the new growth plans.

[Taylor Kamp:]

I have much of a comment since we’re looking for somebody with excellent development of the talent that we already have in-house in terms of the new CEO is what we’re looking for.

[Brian Hogan:]

Okay. Moving to originations, you said there is kind of a channel mix changes that’s more to the national, which obviously brings us down to the year a little bit. But what is your -- and I’m sure it moves around by quarter but what is your outlook going forward by channel?

[Ed Siciliano:]

Yes. That’s fine. So in the third, early in third quarter, we had a particularly large engineering software company run a kind of a leasing special. We did a lot of business with them early in the summer, very, very high quality business, lower yields. We are opportunistic. We took that business. It was good for us and that reveals on lease origination down a bit through the quarter. Looking forward, I think yields have generally stabilized by channel but channel mix will probably be similar in the fourth quarter to what it was in third quarter, little more from major account channels. In the fourth quarter, we do see a little more competitive pressure. Its funding sources are trying to finish up 30 years strong and put volume on. It will get little more competitive on pricing but again it will be opportunistic. If we have a chance to grow good credit quality in the fourth quarter, we’re going to do that the same as we did in the fourth quarter. So the guidance I would give, I would imagine yields on our leasing business will be very consistent, Q3 to Q4.

[Brian Hogan:]

And the demand, we mentioned competition be little stepped up in the fourth quarter but as demand there, economy seems to be a little bit of, say, uncertain and at least from our point of view and from what I love your perspective on the economy from your small business perspective?

[Ed Siciliano:]

Yeah. Sure Brian. Demand is actually very strong. It has been all year and that’s continued our share even into the fourth quarter. So input, the lead indicator to our business is applications in the door. And in the month of October, we actually had our strongest application flow through the door in the past 12 months. So that’s an indicator to us. So a couple things, our new channel franchise, transportation loan are accelerating. But also generally, demand is very strong. We hope that continues through the fourth quarter. We would expect that it would. Our applications in the door are on everything and you’ve got to have good application quality through the door. You’ve got to prove it when the person has the book but again the lead indicator is the raw number I’ve asked through the door which has been very strong.

[Brian Hogan:]

So in the capital loan originations, obviously in ramp up mode, what do you think -- I mean, how fast is it going to ramp and what levels do you think are you comfortable with originating per quarter?

[Ed Siciliano:]

Yeah. It’s a good question. So our current run rate is positive. We are optimistic that it’s going to continue on a good trajectory through Q4 into 2016. As mentioned in my earlier, comments, demand from our customers has been very, very strong. But what you’re going to expect is measured growth, solid credit underwriting and an increased contribution to the bottom line. We’re working on 2016 forecast now in terms of what we’re going to spend on the marketing side to accelerate that product. But it’s going to be accretive to earnings sooner than later based on what we’re seeing, based on what our customers are in need of.

[Brian Hogan:]

And the credit outlook for the personal loan and obviously, [DFL] [ph] as well, I mean the 1.65% charge-off rate for the personal loan product is obviously very early but considering the yield of 36%, that’s pretty good?

[Ed Siciliano:]

Yeah. It is. We’re taking it slow. We’re calibrating credit models. We feel like we’ve got that locked down at this point. So its time we turn on the business a little bit. You can expect that to increase the bid as the product matures but we’re going to look at guidelines that we set for ourselves.

[Taylor Kamp:]

Hi Brian. It’s Taylor. I would say that in the early days but working capital product, a single charge-off can be chunkier or lumpy. And so that’s really what drove that. We just wouldn’t expect that kind of metric going forward as the portfolio gets larger.

[Brian Hogan:]

And what is a typical run rate charge-off rate are you looking for or modeling to, I guess?

[Taylor Kamp:]

Yeah. 6% to 7%.

[Brian Hogan:]

All right. Thanks.

[Taylor Kamp:]

Thank you.

[Brian Hogan:]

The expenses for the capital and is mostly behind you and so for the expense ratio, efficiency ratio going forward with respect to kind of a step down into the low 50s from here?

[Ed Siciliano:]

As we move forward with that product, obviously the revenue line is relatively higher than the lease product. And so, I'm not sure we have a benchmark yet for what the efficiency ratio would be in that product. But you would expect that to be significantly lower than the lease product, just because of the -- the denominator will have a much bigger impact.

[Brian Hogan:]

Right. All right. And then the insurance product that you announced, what’s the initial feedback from that, how go-to market on that, what’s the ramp on that?

[Ed Siciliano:]

Yeah. So the program with the Hartford is an ancillary offering we are providing to our customers in order for all of them to be in kind of a one-stop for a small business customers. But I would say, Brian, the program’s very recently launched. We need to get some performance data under our belt to determine its full potential. So, we'd be happy to share more on the next call. We’ve just literally just launched that.

[Brian Hogan:]

Sure. And then one last question for me is obviously, you paid a special dividend and you bought back some stocks. Your TCE ratio number is down to 19% or so thereabout. What are your capital plans, will you still continue to buyback stocks and where does your TC ratio go, where you are comfortable with?

[Ed Siciliano:]

Yeah. That’s a good question. Leading into this capital planning, both on the buyback and on the dividend, of course our analysis included overlaying present and future capital and cash needs on top of available capital and cash and that’s how we derived the numbers that we wanted to accomplish. And so, I would say that going forward, our capital plan will dictate the availability of capital and cash and so like any other capital planning alternative though that could be in the works but right now, we think we are in a good spot for both, for our organic and inorganic growth if that happens.

[Brian Hogan:]

Okay. Thanks guys.

[Ed Siciliano:]

Thank you.

[Operator:]

Our next question comes from Chris York of JMP Securities. Your line is open.

[Chris York:]

Good morning, guys and thanks for taking my questions.

[Ed Siciliano:]

How you doing?

[Chris York:]

Good. Could you provide a little bit more detail on asset production, potentially by month during the quarter and then potentially production numbers in the month of October?

[Ed Siciliano:]

We’d be happy to, Chris. So, July’s production was $33.4 million and again, July is the beginning of the summer. Typically, we fall off in new originations. But as I mentioned, we had a particularly large software vendor do a fair amount of business in that month that were ending in promotion, so $33.4 million in July. August was $32.1 million and September was $32.8 million. And that’s -- what I’m quoting is really lease production and that’s $98.3 million for those three months in lease then you need to go into that loan and syndication.

[Chris York:]

Helpful. And then the trend in October as well?

[Ed Siciliano:]

Yeah. So, October is still settling in but it looks like we've done $32.5 million. But what’s really encouraging about October was the number of applications we’ve taken through the door in October. That is quite important because that’s our November and December and kind of starts that fourth quarter ramp. As you know, we usually finish the year very, very strong. Our vendors are closing their years. We’ve had IRS 179 that kicks in and it’s usually a pretty robust period for us to work. So, we are expecting growth quarter-over-quarter as a result of those factors.

[Chris York:]

Great. That additional color is very hopeful. Thanks, Ed. And then maybe I will talk about the competitive environment for leases specifically maybe on banks and Captives? And then how you guys are thinking about the exit from GE Capital and the business and potentially what you're seeing there? Maybe that’s showing up in applications but curious on how you’re thinking about the competitive environment?

[Ed Siciliano:]

Yeah. So, I mean the competitive environment -- with the big news -- the exception of the big news around GE’s has been pretty much the same. It is competitive out there based on this protracted period of excess capital and low interest rates. We’re being a little more opportunistic and flexible where we see the opportunities to create some volume. There is a lot of opportunities for Marlin, given our bank depository, our low cost of funds, we’ve got a strong technology platform in place right now and of course, our credit and operational platforms. And that’s one of the reasons we got into transportation. There is some market where GE plays. We spend just a couple of minutes on that. So for this new market, we went ahead and hired a new VP, following our transportation funding group about 90 days ago and we’ve been building out a team. It’s a dealer-based model with our team calling our regional truck dealers, new and used vehicles, kind of specialty vehicles with average tickets that are above our standard about $70,000 to $80,000. And of course, AMB credit is what we’re looking for. Now, GE and Wells Fargo are happy to be in that space. They do floor planning and they're looking for the multi-unit, multi-truck opportunities in that $0.25 million to $2 million range and we’re going to operate below that. So it’s an example of kind of playing where in a market that’s just below where GE and some of the bigger guys are playing, Chris. But we feel like it’s a great opportunity for us. And we’re going to continue to look for more opportunities like that to expand our business and the channels that make sense for us. GE by the way is also -- I think there is some talent on the street as a result of what’s going on with General Electric and we have three full time recruiters and I will share that we are talking to a number of GE folks that are searching for a permanent home given the disruption there.

[Chris York:]

Sure. Great. That color is helpful. And then -- so, I mean within transportation, we saw the average ticket size increased nicely in the quarter. And so was there a contribution from transportation in the current numbers? And then maybe how you guys are thinking about the potential expansion and the average ticket size for your portfolio over time?

[Ed Siciliano:]

Yeah. It’s a good question. So just in comparison to the second quarter, our average ticket was $14.6 thousand and in the third quarter was $15.7 thousand, and that’s a pretty sizable jump. That means that we’re doing some larger tickets mixing with our core business, which will always be there that, there are small tickets. And really what’s driving that, Chris, is our franchise tickets are higher. We did do some transportation that just ramping up now, expect a much bigger contribution in Q4 and then certainly as we head into 2016 and then our major accounts, that software business that I was alluding to earlier, those are $100,000 average tickets, but they’re really large companies with exceptional credit. So I think that migrations to larger tickets, it will impact yields on lease originations slightly lower, but I think that’s going to give us a lift in the portfolio that we’re looking for, add-on fees, add-on syndication fees and we’re looking to drive EPS that way.

[Chris York:]

Okay. Thanks. Switching gears a little bit, maybe on FundingStream, so we have the monthly numbers here for leases in the quarter? You had a good quarter in terms of production for leases or, excuse me, for loans small, but it did beat your guys’ previous estimate? So maybe on the acceptance of the new product for your current customer base and then non-Marlin customers, and then potentially, if you could update us on your expectations, I mean, previously we received $50 million could be achievable in ’16 and kind of would like to get your thoughts on momentum?

[Ed Siciliano:]

Yeah. That’s good question. To reiterate, demand from our existing customers, that robust set of small business customers that we've done business with overtime, it’s been very, very strong. And we knew this was going to be the case, because we are well aware before getting into loan that these same customers were looking at alternatives financial loans through our competitors. The majority of the business that we are putting on the books right now is from our existing customers and a small amount from some broker relationships that we have that are long standing trusted broker relationships that we’ve had. We’ve not done really outside of our customer base yet nor have we really turned our marketing with inside of our customer base. We want to make sure the credit underwriting staff is in place. Operationally we were said the FundingStream website is working well, all those things we feel very, very confident about. So starting in the fourth quarter, we are going to turn out marketing on our existing customer base and I think we look to getting some non-customers in 2016. I will comment on the $50 million, but we do see a lot of potential for this product. But I think its best that we pace ourselves, from a credit perspective do the right thing, make sure underwriting is highly calibrated and we are going to maintain with the loss property and grow the business that way, that’s really what I can share with you, Chris.

[Chris York:]

Got it. And then lastly, let’s see expenses, so what are your expectations for one-time charges related to Dan’s severance? And then potentially search fees related to the new search. And will that all be taken in Q4 or was some of that sprinkle in maybe in Q1. How you guys do think about that?

[Taylor Kamp:]

Yes. It is a good question Chris. Clearly, as we move forward looking for new CEO, there will be expense associated with finding that CEO. The amounts -- a portion of the search will come in the fourth quarter. It’s about $400,000 pretax and about $300,000 aftertax rounding. As far as the expenses relating to Dan's retirement, it’s about $2.7 million pretax and $1.7 million aftertax and that will be taken in the fourth quarter.

[Chris York:]

Helpful. Thanks Taylor. Thanks Ed.

[Ed Siciliano:]

Thank you.

[Operator:]

Our next question comes from Brian Holland of Sidoti. Your line is open.

[Brian Holland:]

Good morning, guys and thanks for taking my call.

[Ed Siciliano:]

Sure Brian.

[Brian Holland:]

How the rising interest rate environment affect your business and how long of the lag would the impact take either drive volume or widen the net interest margin on your portfolio?

[Taylor Kamp:]

Yes. Brian, I’ll take a shot at that. Clearly, we are very aware of an anticipatory around the interest rate environment. And you’ve seen a little bit of the impact of that in our margins as well as our cost of funds. For instance, this quarter increased a little bit. Now clearly, we’re match funded. And so as we put new business on and we have new deposits we’re trying to match -- we will match fund those. But we will -- have baked in to our forward-looking planning some increase with some NIM compression but slightly so. And we expect that the working capital product to help mitigate that a little bit. But we are expecting some increase in interest rates.

[Ed Siciliano:]

Yes. From a sales perspective, as I mentioned earlier, yields have generally stabilized by channel. If rates go up, we are very confident because it’s in the nature of our business kind of serving the underserved that we are going to able to pass on those increase through our customers. And truth as we favor interest rate a little higher than they are today, that’s also going to level the playing field on the competitive front.

[Brian Holland:]

All right. Thank you.

[Taylor Kamp:]

Thank you.

[Operator:]

I am showing no further question at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

[Ed Siciliano:]

Thank you.

[Operator:]

You're welcome.