Marlin Business Services Corp.
Q4 2013 Earnings Call Transcript

Published: 6 Feb 2014

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Marlin Business Services Corp’s Fourth Quarter and Year-End 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 the call will be achieved 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 security 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 the anticipation. 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 thanks for being on today's call. Let me begin with the recap and highlights for the year. To begin we are pleased with the solid fundamentals and operating results for 2013, company delivered another supplemental year of favorable growth with adjusted earnings of $1.35 a share and an increase of 46% over 2012. This quarter’s $0.11 per share dividend also marked the company’s 12th consecutive quarterly dividend, the fundamentals of the business are in good shape and lead by strong margins, steady credit performance and attractive returns on assets and capital. Our financial position allows us to return surplus capital to shareholders earlier this year in the form of the special dividend. Looking ahead 2014, the business is well positioned. Our plan for growth remains focused on our core markets lending to small and mid-size businesses. The execution of our core business strategy of [establishing] customer relationships to our personalized selling model, delivering a differentiated product and service offer and lastly maintaining a disciplined operating approach and earnings above average returns on assets and capital. Before turning the call over to Lynne, let me take a moment and talk about the fourth quarter and our observations on general market conditions. Asset growth, rebound us in the soft third quarter which we were pleased to see. Factors influencing the quarter including an uptick in lease conversion rates and a higher average ticket size along the cyclical buying spring we typically see each year-end. We also saw an unusual spike in year-end delinquencies. In high insights some of this uptick may have been tied to the way the holiday schedule fell this past year. Delinquency trends have centric traded back the levels consistent with ‘13 levels. The growing market conditions, we continue to see signs of excess liquidity creating pricing pressure and to a lesser extent credit pressure. While market conditions maybe shifting, we will remain disciplined and focused on driving profitable growth and offering a differentiated financing solution to our customers in the marketplace. 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. Let me repeat some of the key headline numbers for the quarter and the year. Net income for the fourth quarter is $3.4 million or $0.26 per diluted share. On an adjusted basis, net income is $4.7 million or $1.1 million favorable to net income of $3.6 million reported in the fourth quarter of 2012. Net income on an adjusted basis for the year ended 2013 is $17.5 million or $1.35 per share. This is an increase of more than 49% over 2012 net income of $11.7 million. On an adjusted basis, ROE is 10.04% and our efficiency ratio is 51%. Now to focus on some fourth quarter stuff. Our portfolio earning assets grew 25% year-over-year and 3% sequentially. On an adjusted basis ROE is 11.6%, net interest and fee margin is strong at 13.4%. Driving asset growth is new originations which reached $90.9 million in volume in the fourth quarter, 5% more than third quarter and 4% more than fourth quarter a year ago. The yield on new originations for the fourth quarter is 11.65% compared to 11.86% in the third quarter of 2013 and in line with expectations. The reduction in yield is primarily due to channel origination mix within smaller ticket business, the effects of a greater mix of larger tickets, better credit quality leases originated throughout the quarter and competitive pricing. Going forward, we anticipate pricing to remain within 10 basis points to 25 basis points of the fourth quarter origination yield. Net interest and fee margin remain which is defined as interest and fee income less interest expense remains strong at 13.4% for the fourth quarter. We continue to benefit from lower deposit rates funded to our bank subsidiary Marlin Business Bank. Going forward, we expect deposit rates to remain within 5 basis points to 10 basis points of fourth quarter. Considering the trends in pricing of new originations, impact of portfolio run off and a fairly stable cost of funds, we anticipate net interest and fee margin to trend approximately 90 basis points to 100 basis points lower on average in 2014 over Q4, 2013. Credit quality remains in line with expectations. Charge-offs decreased to 1.3% of average net investment versus 1.6% in the third quarter. At the end of the fourth quarter delinquencies increased as a result of expected end of year seasonality, timing of the year end and actual active business days collect on passed due. And as Dan, mentioned in January we saw delinquencies returned to pre-December of 2013 levels. The provision for credit loss has increased in the fourth quarter due to a combination of volume growth portfolio seasoning and the impact of the increase in delinquencies discussed above. Although delinquencies have increased charge-offs are expected remain within the range of 2013 averages. Regarding operating spending our fourth quarter expenses are in line with expectations. Going forward, we expect the efficiency ratio to remain in the range of 50 basis points. Total spending on a dollar basis is expected to increase in the range of 9% to 10% reflecting the impact of volume growth, staffing additional supporting leased originations and increased cost of compliance. Our effective tax rate is 38% for the fourth quarter, reflecting the mix across taxing jurisdictions, interest expense associated with -- interest income associated with the tax refunds and deductions related to the origination of municipal leases. Going forward we expect the tax rate to remain in the range of 38.5% to 39%. Lastly our capital position remains very strong with total risk-based capital at 27.2% and an equity-to-assets ratio of 23%. As previously announced, we declared a cash dividend of $0.11 per share. The quarterly dividend coupled with our stock repurchase plan as part of our long-term plan to prudently manage capital and return capital to our shareholders. 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 Brian Hogan of William Blair. Your line is open, please go ahead.

[Brian Hogan:]

Good morning.

[Lynne Wilson:]

Hey, Brian.

[Dan Dyer:]

Good morning, Brian.

[Brian Hogan:]

Let’s start with a big picture, what are your views on the economy as a whole, but obviously your business is economically sensitive especially you focus on the small businesses this quarter. What's your outlook?

[Lynne Wilson:]

It’s neutral. I mean it’s obviously growing and it’s been growing for the last several years. But optimism sort of kidders back and forth, a lot that sort of dictated by some of the noise and news we hear in the papers and on TV with respect to what’s coming now out of Washington. So we have a neutral to slightly bullish view on the economy and its impact on our business.

[Brian Hogan:]

Alright. And then from there, so that kind of comes into my origination questions, like do you -- what are you looking for ramp up in origination growth? I mean obviously competition has a factor in that and then your comments on competition around that too please.

[Dan Dyer:]

Yeah. I think as I’ve commented in the past we want to obviously grow above market average. I believe in the past I’ve given indications of 15% year-over-year origination growth. I would like to think that that’s achievable. And that’s going to come from how well the economy is doing. I think the ‘14 estimate is GDP growth of 3%.Our industry is estimating growth in the range of -- broad range of somewhere between 3% and 5%. So growth for us in sort of double-digit rates will come through the growing economy and our ability to gain greater share of wallet, greater share of the market as well as expanding into new or adjacent markets, same equipment leasing but new market. So, you put that all together and think we have got a strategy to outpace the broader market and industry averages, which we have done consistently over -- if you look at the company’s history over time, we’ve always sort of done that. So we think we can continue to do that. Ideally we would like a stronger economy with winded our back just to make it a little bit easier.

[Brian Hogan:]

And then on the competition front?

[Dan Dyer:]

Competition, there really isn’t -- the competition today is triple; and I have made comments to this earlier. It’s on price and credit, because of all the excess liquidity in the system, I mean if you sort of look at the bank-to-loan deposit ratio among banks, I mean the loan to deposit ratio is quite low, which is just as a lot of liquidity in the system. So they are chasing assets and they are competing on price and we start to see a little bit of it on the credit side. So Marlin, those who meet discipline, we are going to continue to do that because there is a lot of money chasing assets out there. So that's where we are seeing competition in this phase. Not in the sense of new competitors, there is a few but broadly speaking within our sector, a few in our sectors as well as outside our sector among banks, it’s on the price side.

[Brian Hogan:]

Sure. And then the quality of the flow of business, your approval rate jumped back up to where it was -- the 67%. What is the quality of the flow of business you are seeing?

[Dan Dyer:]

The quality, and we track this very closely, quality has been excellent. Our internal metrics in how we rank order risk has been stable, consistent and very strong. So, we have not seen any degradation or change so to speak in terms of the flow of this business [network,] which we’re pleased to see. I mean that's -- our approval rates sort of reflect that and we get following business from -- we’re national accounts, we’re in a broad diverse range of other industries in parts of the country. So that also obviously contributes to that stable and healthy mix of strong credit quality effort.

[Brian Hogan:]

How much of your business comes from national accounts?

[Lynne Wilson:]

Near about 25%.

[Dan Dyer:]

25%

[Brian Hogan:]

And that's from pretty nicely over the past several years, right?

[Dan Dyer:]

Yes. It has and I think we’ve got a nice niche in the market, I don’t know if you want to comment at all.

[Lynne Wilson:]

Yeah, sure. You’re right Brian, three years ago, three and half years ago it was probably 5%. So we’ve added different channels, our healthcare channel, our major account groups. Our business has shifted a little bit in terms of the sales force and the types of people we’ve hired, distributed, more people distributed around the U.S. now outside of our office here in New Jersey, probably about 20% of our sales force is not here. And those are outside people working and developing major account relationships. So yes, it’s really morphed over the past three years.

[Brian Hogan:]

All right. And then your comments on the asset yield and is that primarily driven by the competition as you said or is that with the mix of business or combination of the two?

[Dan Dyer:]

Yeah. I think Brian, it’s really a combination of both, it’s combination of portfolio mix as well competitive pricing, just to get back in sort of the 2009, ‘10, ‘11 periods when we saw somewhat of downturn yield for significantly higher 14%, 15%. Obviously they have to and both come down from that. So what you’re seeing is the impact of those assets rolling off on the new assets coming on with some competitive pricing in there as well.

[Lynne Wilson:]

The only other thing I would add is ticket size. So it’s definitely channel mix, more toward major accounts. We tend to have programs in place with different pricing which tends to be a little bit lower. Our average ticket has been increasing consistently actually through all fourth quarters of 2013, coming in December probably one of the highest average tickets that we’ve had. And then as Dan mentioned, on the competitive front and on that front, there are times where we’re protecting flow accounts are really best customers. We will adjust pricing based on our low cost of funds; we can do. And we also adjust pricing to win new accounts and we’ll do some of that in 2014 as well. We got a low cost of funds and we can use that to our advantage to win new business over; we are going to do that. Again our NIM is still very strong.

[Dan Dyer:]

Yeah, I mean just to reiterate; we are expecting the cost of fund to change significantly over 2014 and with the average cost of funds under 1% our margins are still very strong even with the reduced origination yield, north of 12%.

[Brian Hogan:]

Sure. And then last question is on staffing, I mean nice jump in the quarter, upto 124 sales reps. But the question is whether your plan is to grow that or is it kind of focus on productivity per sales rep, so you still think, look back and prior to downturn you were getting more productivity out of that sales rep, and obviously there is a ramp up period, I understand that, but I guess thoughts around that please?

[Dan Dyer:]

Yeah. So, Brian, if you look back over the last few years, year-over-year it’s grown about 10% staffing year-over-year, so that would be directionally consistent with where we are today with going into the year. So pacing of new, we’re talking about sales now, 8% to 10% year-over-year is where we would expect staffing growth to be over the course of the next year or so.

[Brian Hogan:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Hugh Miller of Sidoti & Company. Your line is open, please go ahead.

[Hugh Miller:]

Good morning.

[Dan Dyer:]

Good morning.

[Hugh Miller:]

So, I guess, I had a question with regards to your commentary about the decline or the delinquency, 30 day delinquency that rose, that you guys have already kind of mentioned that it’s kind of started to normalize in the first quarter. I guess given the -- can you give us a sense of what that increase, what the influence was on the increase in provisioning during the fourth quarter?

[Dan Dyer:]

Lynne, do you have it?

[Lynne Wilson:]

Yeah. It was with the -- so provisioning is as you know is a factor of both average delinquencies and average charge-off. Approximately about $400,000 to $500,000 of the increase provision was related to the increase in delinquencies.

[Hugh Miller:]

Okay. And is the teams given -- the teams kind of modest in size, but I guess given that situation, should we anticipate that we should see kind of on the reversal or bleed out of that higher provisioning level as we head into 2014?

[Lynne Wilson:]

Yeah, what I would say again is, it is a factor of delinquencies and charge-off and portfolio growth. We do anticipate that our reserve level both [trends] fairly closely to 2013 averages. And that our charge-offs will trend very closely to 2013 and we have only need to do the math on that one.

[Hugh Miller:]

Okay. And with the adjusted efficiency ratio coming in kind of towards the lower-end of what you guys had kind of talked about as a goal and a targeted 47%. I think you guys had mentioned in 2014 what the guidance there and you had anticipated that it would be within 50 basis points of -- is that for the fourth quarter level or for all of 2013?

[Lynne Wilson:]

That would be the overall. Again that would be -- 50 basis points will be the average for 2014.

[Hugh Miller:]

Right, but is that off of the fourth quarter rate or off of the average for 2013? So, should we be thinking about that 47% as the run rate, rough run rate for 2014?

[Lynne Wilson:]

What we're saying is that would average around 50% for 2014. So, there will be a slight increase in that quarterly run rate also.

[Hugh Miller:]

Got you. Okay. That makes sense. And just with regards to the competitive environment and obviously you guys gave us some color about how there is some active competition on the pricing side. If we start to get into an environment where the yield curve shifts up and on the shorter-end of it as well, how do you guys anticipate that your kind of funding source will allow for you guys to potentially hold the line a bit better than maybe some of your competitors that are out there using alternative sources of funding?

[Daniel Dyer:]

Well, I think banks do fund themselves differently than others that we compete against who are indexed off of capital markets rates whether it be the LIBOR or swap rate. So there is a little bit of a disconnection between bank funding and capital market funding and actually we benefit from that today. Given the safety and soundness of bank deposit funding, those rates are obviously extremely attractive at the moment. So, we think that in some ways we need benefit in a rising interest rate environment and that bank CD rates or deposit rates won’t grow or increase at the same pace as the capital markets, which tend to anticipate rising rate. So, I think we’ll benefit there. The other thing that we will benefit from is that the nature of our asset class and its relatively short weighted average life. I think in terms of the longer-end of the curve will probably be impacted more than the shorter-end and how we fund ourselves with CDs. In that one to two year tenure, I think we’ll benefit. We have some insulation from the expectations gain in terms of rising interest rate. So yeah, it will go up, but probably not the same rate or pace as the capital market funding.

[Hugh Miller:]

Okay. And as you think about kind of the competition that you typically line up against, can you give us a rough sense of how much of that is kind of commercial bank funded versus alternative sources?

[Dan Dyer:]

I wish I had crystal ball. I really I can’t -- let’s put it this way, we compete against competitors large and small, many of the small ones are tied to the capital market funding model with respect to some of our larger competitors that are [moving] much big divisions or subsidiaries of banks and financial funding and bank funding model. So, it’s a mix bag. But I do think the smaller players who would do -- depend on the capital markets will be squeezed more rapidly than the [node] we compete against them on the bank side.

[Hugh Miller:]

Okay. Thank you very much.

[Operator:]

Thank you. (Operator Instructions). Our next question comes from the line of Chris York of JMP Securities. Your line is open. Please go ahead.

[Chris York:]

Good morning. Thanks for taking my questions.

[Dan Dyer:]

Good morning.

[Chris York:]

Most of my questions have been asked, but I just wanted to follow-up on one item. So, when a new salesman is hired, how long does it take to duplicate them for them to start producing new leases?

[Ed Siciliano:]

Yeah. Hi Chris, this is Ed. The answer unfortunately depends. It’s probably three to six months for our more junior position, but we mentioned earlier on the call we also have major account channels and that period is a little bit longer. And they are big game hunting if you will and developing a prospect base and expand to develop a better relationship. So, and that's how I would answer that. And Dan already commented on the size of the sales force, I think we are -- we've got the plant headcount that we need for this year, it’s really about productivity heading into this year, we’ve got a lot of capacity. And frankly I feel that the sales force is very strong right now.

[Chris York:]

Okay. So, just clarifying to roughly maybe 6 to 9 months kind of on average I guess for those maybe incremental 9 new hires in this quarter, we should think about that will start being producing new leases?

[Ed Siciliano:]

Yeah, that’s fair enough. Yes.

[Chris York:]

Great. That’s it for me. Thank you.

[Operator:]

Thank you. (Operator Instructions). And with no further questions that will conclude our conference for today. Ladies and gentlemen, thank you for your attendance. You may now disconnect. Have a great rest of your day.