Marlin Business Services Corp.
Q1 2013 Earnings Call Transcript

Published: 1 May 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Marlin Business Services Corp.’s First Quarter 2013 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 this 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 George Pelose, Chief Operating Officer; 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:]

Thank you, and good morning to everyone. Let me begin with a recap of the quarter. As reported, the company earned $0.28 a share compared to $0.13 a share for the first quarter of 2012. I’d like to start with solid asset growth with quarterly new origination growth up 12% year-over-year. Dealer activity remains active as to sales hiring in our new business development efforts. Deposit funding continues to drive lower borrowing rates. Looking at asset quality, the trend line on portfolio performance remains in good shape. On new business flow we continue to see a stable quality mix of credit across all our sales channels. To recap where we are on our current priorities we’ll have to believe the delivery of quality, customized point-of-sale, financing and marketing solutions to the small ticket equipment dealer market is what our customers are looking for in a partner. Our convenience oriented credit offer is appealing to the small and mid-sized business who oftentimes is neglected by the traditional bank provider. Our priorities are to continue to invest for growth by add to the sales force and building on the momentum in the dealer space. We’re also of the belief our business platform in value-added proposition uniquely positions the company to gain additional market share. Before turning the call over to Lynne I’m pleased to announce the declaration of a quarterly dividend of $0.10 a share, reflective of the company’s solid profit performance and strong capital position. With that, I’ll turn it over to Lynne. Lynne?

[Lynne Wilson:]

Thank you, Dan, and good morning to everyone listening on the call. To recap, Marlin delivered net income of $3.7 million and EPS of $0.28 per share. Let me take you through some of the key highlights of the quarter. In connection with the continuing growth and lease origination volumes, earning assets grew for the eighth consecutive quarter reaching $525 million representing 5% growth over fourth quarter of 2012 and 27% growth over first quarter of last year. Moving on to the margin, our net interest and fee margin remained at 13.5%, benefiting from a continuing reduction in cost of funds, offsetting the impact of portfolio mix and fees on the interest yield. Bank deposits now account for 99% of our overall funding compared to 76% a year ago. Therefore, our overall cost of borrowing is continuing to benefit from lower cost deposit rate which has now averaging 0.5% compared to 0.8% a year ago. Now moving on to credit quality. Our credit metrics continue to be very strong. Although slightly higher than the fourth quarter of 2012, current delinquencies reflect the impact of portfolio and seasoning. In addition, charge-offs at 1.25% are flat from the fourth quarter and in line with expectations. The allowance for credit losses represents 207% of 60-day past due leases. Based on current trends, we expect the allowance as a percent of average net investment to remain within the range of today’s levels. For additional information on static pool losses and delinquencies, I refer you to the schedules on our website. Regarding operating spending, higher first quarter expenses reflect the seasonal impact of taxes infringes and restructured stock. The efficiency ratio continues to improve. Our current efficiency ratio is 55% versus 72% a year ago. As earning assets continue to grow the expectation is the efficiency ratio will move closer in line with our target range of 50%. Our effective tax rate was approximately 39% for the first quarter, up slightly from 2012 annualized rate and reflecting slight changes in the mix of pre-tax book income across our jurisdictions and entities. Over the course of 2013, we expect the tax rate to remain in the range of 39% to 40%. Lastly our capital position remains very strong with total risk-based capital at 32% and an equity-to-assets ratio of 28%. With that, I will go ahead and turn it over to Q&A.

[Operator:]

(Operator Instructions) Our first question comes from Bob Napoli from William Blair. Your line is open.

[Bob Napoli:]

Hey, everybody. Just a question on what you’re seeing economically and do you – and you’re looking at your small company base how do you feel the economy is doing? And how does that play into your addition of sales reps and growth outlook?

[Dan Dyer:]

We think the economy is stable, Bob. But at the turn of the year, a few additional unknowns with the fiscal cliff talks, et cetera, so I think that was a hangover. That is sort of somewhat anticipated from the headlines in the news I’d just characterize it as a status quo. It’s not picking up momentum but I don’t believe it’s going backwards. I do think with all the legislative battles going on in Washington, it does create a degree of uncertainty among small business, which in turn could hold back pent-up demand for equipment. So, we’re not bearish, we’re not bullish. It’s sort of business as usual. We were a little bit more concerned in the earlier part of the year, but as I said a moment ago, that has sort of quieted down. In terms of its impact on our ability to grow, we just think that we’re in a great position to continue to gain market share in our space. I mean, there are just fewer competitors just doing what we do, and we just gain strength as a business. So we’re not seeing any new competitors. And in addition, we think that there continues to be turmoil among, what I would call, the traditional bank providers. So we think combination of what we do really well in the vendor space, combined with what we think we can do for the small business borrow on a direct basis against vis-à-vis banks puts us in a really good position to continue to sustain growth beyond what we see in terms of market averages.

[Bob Napoli:]

Did growth picked up during the quarter or did volumes – I mean, how do they trend through the quarter and into April?

[Dan Dyer:]

Growth picked up sequentially month by month throughout the quarter. January is a little soft, and I think that was a combination of what I just mentioned a moment ago on the fiscal cliff plus, so it was a little bit of a blow out in December. Because as part of the fiscal cliff talks, they extended Section 179, just what that was is the accelerated depreciation or write-off of equipment. And we thought that was going to expire at the end of 2012. Well, that was extended so there was this mad rush to get your equipment purchased by the end of the year. So that benefited us in 2012.

[Bob Napoli:]

Right.

[Dan Dyer:]

And I think starting in 2013, the fiscal cliff talks, just put everybody in a quagmire. But like I said, that seems to have quieted down.

[Bob Napoli:]

So that continued into April then the improvements...

[Dan Dyer:]

Yeah.

[Bob Napoli:]

Then on the margin, where do you think the margin – I mean, cost of funds has come down quite a bit more but not a ton left to go on the cost of fund side. I mean, where do you see the margin going?

[Dan Dyer:]

Yeah. I think if you’d have sort of looked out, I’m not going to do it by quarter-by-quarter, but 2013/2014, it’ll drift modestly lower because of mix, not because of pricing pressure per se in our channels but mix, there are some channels that we’re in that are a little bit more price competitive. At the same time, they had a different risk profile, meaning, a lower risk profile. So what you may give up in modestly lower margins, you pick up an improvement or reductions in credit quality. In addition, there will be some benefits in terms of, what I would call, the sales productivity...

[Bob Napoli:]

Right.

[Dan Dyer:]

For the equation, so efficiency ratio, cost of origination would decline as well. So for us, it’s all about optimization. So we don’t just look at margin, we look at it holistically with risk, sales productivity and margin and how that – all pieces together. But with respect to pricing in the market in general, while it is competitive, I wouldn’t say it’s uber-competitive, and I think that’s just a reflection of less competition today than, say, four or five years ago.

[Bob Napoli:]

You really haven’t seen the regional banks come back into this business or the banks are disposing.

[Dan Dyer:]

No. It’s been spotting, nobody has really made a big splash, because we’re just in a – we’re an unique business.

[Bob Napoli:]

Yes.

[Dan Dyer:]

It’s hard to replicate. Indirect lending models aren’t what many banks are comfortable with or whether it be how we deliver our products, our ability to underwrite the risk. We just don’t feel threat from, what I would call, the traditional bank.

[Bob Napoli:]

And then, last question on the credit side. Where do you think – where should your credit losses go over the next – how do you feel about credit now as far as the trend as we move through 2013? And what do you view as both normalized credit losses under your current business model?

[Dan Dyer:]

Yeah. Let’s start with delinquencies. Probably on the delinquency side, 30-day delinquency in that 90 to – hovering at 90 to 100 basis point range and 60-day delinquencies in the 50 to 60 basis point range. Right now with our current mix, it would be about somewhere between $1.25 and $1.35 on a constant basis. Now, as I said a moment ago, that could change and could drip lower depending on mix and how that interplays with margin.

[Bob Napoli:]

Great, Thank you very much. Nice job.

[Dan Dyer:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from Greg Cole with Sidoti & Company. Your line is open.

[Greg Cole:]

Good morning. Thanks for having me.

[Dan Dyer:]

Good morning, Greg.

[Greg Cole:]

Can you just talk a little bit about your different channels and how, I guess, how does it perform this year?

[Dan Dyer:]

I’ll just talk about them broadly. I won’t get into specifics, which is sort of information we rather not share on the call, and perhaps offline we can talk to you. But we’re in – we have five major channels that we’re in. We have a healthcare group, we have an office equipment group, we also have a national account group which focuses on specific verticals. As announced last quarter, we launched a C&I, commercial and industrial group. And lastly, we have what we call our general group, which spans a wide variety or list of markets that aren’t – we don’t have a vertical focus. And where we want to focus is in markets and where we try to pick niches within those markets where, again, we add value where service is a big component to what we do. So we don’t necessarily want to go after the very large dealer markets, which tend to be commoditized and attract a lot of competition. We’re going after the smaller and mid-sized dealer market predominantly. Now, on the national account side, we have had some really strong traction with respect to lending larger accounts. And again, they tend to be concentrated in certain equipment verticals. But again, their service is an integral component of the targets that we go after.

[Greg Cole:]

Okay. And you mentioned you don’t want to get to – into it. But I guess, is there anything in particular that’s performing a little bit stronger than any of the others?

[Dan Dyer:]

Let me just say this. We expect and we have seen all our channels growing, right. So we’re in channels that – in markets that we believe there’s opportunity for growth and where we expect to grow.

[Greg Cole:]

Okay. And then obviously you aren’t exactly like the MLF-ELFA survey that’s publicly out there, but that’s seen a little bit of pressure recently. I guess, can you comment, you mentioned that it’s kind of status quo out there? But I guess, can you talk a little bit about how you plan on growing if capital equipment, there’s I guess a lack of demand for capital equipment over the next year?

[Dan Dyer:]

It will be a combination of quite three factors. One is, taking additional market share. We just think we’re better at it than many of our competitors, just saying that modestly. Second, we’re seeing there are opportunities in markets that we’re not currently in. And lastly, ticket size, we tend to focus on the lower end of the market that we’re in, and we see that there’s an opportunity to gain greater wallet share from existing customers in terms of ticket size. So, irrespective of what rate the economy grows, we think that a combination of what I just mentioned here will be catalyst to support growth far in excess of will it be the economy or the industry averages.

[Greg Cole:]

Okay. Thank you very much for having me.

[Operator:]

(Operator Instructions) Our next question comes from David Dusenbury with Dalton Greiner. Your line is open.

[Dave Dusenbury:]

Good morning, everybody. Just remind me again, where do you want – where do you see normalized capital levels?

[Dan Dyer:]

Hi, Dave. How are you doing?

[Dave Dusenbury:]

Good, thanks.

[Dan Dyer:]

Good. Obviously we’re a little higher than where we want our target to be. Such regulatory, we have to maintain 15% minimum capital. So in terms of the target range, it would be somewhere in the range of 18% to 20%, all right? And so, getting from where we are today to where we want to be would be a combination of revisiting our existing dividend program and/or growth through other means of accelerated growth and/or could be a stock buyback. So, we’ve got various tools. I think our first priority would be to seek to grow within our core business focus.

[Dave Dusenbury:]

And as your profitability continues to grow, you certainly are growing the balance sheet at a nice cliff.

[Dan Dyer:]

Yes.

[Dave Dusenbury:]

So I’m not just suggesting you have to step on the pedal to grow faster, but where do you see that hitting – like in terms of timing, is this a year two, three years out?

[Dan Dyer:]

We don’t really have any timing. It has come down, as you’ve seen, over the last...

[Dave Dusenbury:]

Yes.

[Dan Dyer:]

Year or two. And as announced last quarter, our dividend was increased from $0.08 to $0.10 a share, all right? So I think, directionally I think that’s just something in terms of this current view in terms of how to put excess capital to work. But, again, as I’ve said last quarter, having some dry powder is not necessarily – you’ll see that as a position of strength. Now, understand the balance between returns and capital level. So that’s something that we continue to examine.

[Dave Dusenbury:]

Okay, I appreciate it. And then just back on the question that’s asked earlier in terms of margin expansion going forward, do you have any chunks of CDs that are rolling over and re-pricing and can you put a little framework around that?

[Dan Dyer:]

Well, we do all the time. I mean, I will say that over the last couple of years, as interest rates have sort of declined and our CDs mature, we’ve repriced into lower cost CD rates.

[Dave Dusenbury:]

No, I guess, what I’m asking is, do you have any five-year CDs that are probably noticeably higher or three-year CDs, what would the delta be?

[Dan Dyer:]

We don’t really sort of go out and mismatch our – I don’t want to get too much into our deposit strategy, but we try to – we maintain it within, what I would call, the band. And we don’t go too far out on the CD term curve to raise money. So, our asset is a two-year asset. So there’s a sweet spot in there that we can basically match fund our deposit book with our asset maturities.

[Dave Dusenbury:]

That’s okay. Thanks a lot.

[Operator:]

(Operator Instructions) I’m currently showing no further questions at this time. I will now turn the call back over to management for further remarks.

[Dan President:]

Yes. Thanks for being on the call today. And again as I mentioned, we feel that business is solidly positioned for growth, one to both capture additional market share in the space we’re in, and also to provide an offering to small business that often times is neglected by traditional bank providers. We’re optimistic about the future and look forward to talking to you next quarter. Thank you.

[Lynne Wilson:]

Thank you.

[Operator:]

Thank you, ladies and gentlemen. That does conclude today’s conference. You may all disconnect and have a wonderful day.