Marlin Business Services Corp.
Q3 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Marlin Business Services Corp.'s third quarter 2013 earnings conference call. (Operator Instructions) 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, Dan Dyer, CEO of Marlin Business Services Corp. Thank you, Dan. You may begin.

[Daniel Dyer:]

Good morning to everyone and thanks for being on this morning's call. To begin, we reported a strong profit quarter and earned $0.36 a share. The company's dividend of $0.11 a share this quarter is its ninth consecutive quarterly dividend. As previously announced, the company also declared a $2 cash dividend per share earlier in September. The decision to make a one-time return of capital to our shareholders was done in recognition of Marlin's strong capital position and earnings generation capacity. Post-dividend, the balance sheet remained very well capitalized, supporting the goals of long-term growth and generating attractive risk adjusted returns. This quarter, the return on capital declined to 10.3%. Compared to this time last year, assets under management grew 22%, while new lease origination production was 5.5% higher. Sequentially, new lease originations were modestly lower this quarter. Combination of factors influencing the quarter included a slight decline in approval rates and softer dealer sales activity. With there being an abundance of liquidity chasing assets at the moment, our focus is adherence to price and credit discipline. Something we've always done in generating high-quality assets. Before turning the call over to Lynne, a brief comment on the announced retirement of George Pelose. As you may know, George has been an integral part of Marlin's history and success. Recently George informed me of a personal decision, that it was time for a change and to pursue new personal and career interest. Reluctantly, we respect his decision. For me, it's been a wonderful partnership, standing 15 years. On behalf of the entire organization, we wish him the very best. Moving forward, George will be working closely with me and the team over these next several months, transitioning his responsibilities. With that, let me turn the call over to Lynne. Lynne?

[Lynne Wilson:]

Thank you, Dan, and good morning to everyone listening on the call. We reported another strong quarter, so let me take you through some of the key highlights. Marlin delivered net income of $4.7 million and EPS of $0.36 per share. Our earning asset base grew 22% year-over-year and 4% sequentially. ROE improved to 10.3% and our efficiency ratio improved to 50%. Net income and fee margin was strong at 13.4%. Let's focus on some of the key drivers. Our earnings assets grew 4% sequentially, resulting from $86 million in new business volume, originated in third quarter 2013, at a 6% increase over the third quarter of 2012. The yield on new originations was 11.86%, down from 12.34% in the second quarter of 2013. The decline in yield is primarily due to channel origination mix within our smaller ticket business and the effect of a greater mix of larger ticket, better credit quality and leases originated in the quarter. Going forward, we anticipate pricing to remain within 10 basis points to 28 basis points of the third quarter origination yield. Net interest and fee margin remain strong at 13.4% and was modestly higher than second quarter. We continue to benefit from higher fee income and lower deposit rate. Our credit metrics continue to be stable. Charge-offs on a dollar basis increased slightly over the prior quarter, but were unchanged as a percentage of net investment. And at the end of the third quarter, delinquencies improved over second quarter 2013. Additional information on static pool losses and delinquencies is available on our website. The efficiency ratio improved to 50% versus 57% a year ago, and is in the expected range of 49% to 50% communicated on our last call. General and administrative expenses were $400,000 lower than second quarter of 2013, primarily due to non-recurring targets incurred in the second quarter related to strategic initiatives and miscellaneous legal activities. In third quarter and early fourth quarter, we received a federal tax refund that related to prior year tax overpayment. The effective tax rate benefited this quarter from one-time additional interest associated with the refund and the mix of rapprochement across jurisdictions. As previously announced we declared one-time cash dividend of $2 per share. The special dividend combined with our recurring quarterly dividend and share repurchase plan is part of the long-term plan to prudently manage capital and return capital to our shareholders. As a result of our capital management initiative and continued growth, our return on average equity improved to 10.3% moving closer towards our long-term goals of the range of 13% to 15%. With that, I will turn it over to Q&A.

[Operator:]

(Operator Instructions) And our first question comes from Bob Napoli from William Blair.

[Bob Napoli:]

Dan, how are you planning on transitioning, are there any thoughts? Are you going to stay internal or are you going to bring in somebody from the outside? What's the strategy around?

[Daniel Dyer:]

Well, the good news here is we've got a lot of able and capable people inside the organization. We have a strong team here. As announced in the press release yesterday, Ed Dietz who has been here at the company and part of the senior team, behind the scenes for a number of years will be stepping up and taking on some of George's responsibility. So we're pleased to have Ed in that capacity. In addition, as we've done throughout Marlin's 16 years history, we'll be looking to add to the team as we continue to grow. And some of George's responsibilities, principally credit collections, I'll report directly to me today, and we'll just take a pause here and see where we go as far as the future in terms of aiding to the team ahead.

[Bob Napoli:]

Thank you for the special dividend. I think that was great and much appreciated. I think that was a great move made and very nice to see on that. Just a question on the originations and being down a little bit, I know there is a little bit of a seasonality, but was that a surprise? And is there more competition out there in the market today? I think your sales reps were down a little bit in the quarter, just few less sources, so what's going on? What's your view on the origination front? Is it economic? And kind of your outlook as you would think to 2014 trying to grow that.

[Edward Dietz:]

Well, sales reps had no bearing on it at all. We're just encouraging at the end of Q3. In fact I have frankly retired four or five reps, so sales rep headcount will be in the range for about 120 or so in Q4. But yes, as Dan stated, we saw some weakness in demand in the quarter, but it was mostly from the smaller dealers, which frankly also had an impact on yield, because we tend to price that smaller dealer business a little bit higher. But going into Q4 here, we're already seeing an uptick heading into the busy season. October results were higher, certainly higher than the average volume in the Q3 both, and yield was a bit higher as well.

[Bob Napoli:]

And is there more competition, are you seeing anymore competition out there, I mean we've heard of few players?

[Daniel Dyer:]

When there is a little less volume to go around, competition does some crazier things. I am trying to undercut some price and we did some things defensively to protect some of our slow dealers. There is not more competition; there is just a little less demand. So more to go around, I would say is what happened in Q3.

[Bob Napoli:]

And then just, credit looks great and it's very better than what we expected, congratulations on that. And do you see, with the delinquencies I would imagine you expect credit to stay pretty stable?

[Daniel Dyer:]

We've always been disciplined on the credit side and we want to keep our metrics fairly stable from where they are today. Actually the third quarter was up from where it's been last year and the early part of this year. So we're hoping for a modest decline in Q4 and returning to sort of where we were in '12 and early part of '13 into '14 and we're paying particularly attention to discipline on both price and credit, how those two match up. Could we do see some signs of change with the economy, what's going on in Washington isn't helping. So the economy is still growing. It's a bit more fragile today than it was earlier in the year. That being said, that's the time to stay discipline on the credit side, and that's what we're doing.

[Bob Napoli:]

And then last question just on, Dan you've been running this business and you guys have been in this industry a long time. It seems like, is there anything different from a technology perspective that you're doing then what you've done? It seems like there are number of players that are focused on small business lending, not necessarily leasing, but they're taking a view that using more technology there is different ways to underwrite, with the social media out there taking into building credit stats and statistics. And I just wondered what kind of changes? Are you doing anything different, and sometimes different isn't necessarily a good thing, I mean you've run this business well for a long-time.

[Daniel Dyer:]

There's two types of technology we focused on. One is technology for productivity and process improvement. And we've always deployed in our business and continue to pursue technology that will advance the operational side of what we do. With respect to the other part of technology that we spend a fair amount of time on over the years, which is sort of played out in terms of how we've underwritten and managed risks is modeling, all right, and how we just get smarter about decision making. And that that employment of that technology, which is critical decision making technology, is built into our models and we're sort of expanding that into other facets of our business, in terms of how we go out and find dealers, which dealers do we prioritized, in terms of how we price that business et cetera. So I won't get too much into it, but using information in a different way through models and how we go about gathering data is something that we're keenly focused on. And we've got a team here that spends, their dedicated time in the modeling area, not only in credit, but in other parts of our business.

[Operator:]

And I am not showing any further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.