Marlin Business Services Corp.
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Good morning, ladies and gentlemen. And welcome to the Marlin Business Services Corp.’s Third Quarter 2014 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 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:]

Thank you and good morning to everyone and welcome to this morning’s call. Let me begin with an update on the quarter and our business. As reported, earnings per share are $0.38, compared to $0.36 for the third quarter of 2013. The dividend for the quarter are $0.125 per share, it’s a comparison to $0.11 for the prior year. Our operating and financial fundamentals remained intact and solid with returns on equity for the quarter of 11.5%. Looking at business trends, new origination volume was modestly lower this quarter, in part attributable to the mid-summer slowdown. We have begun to see a pick-up in demand and the expectation it is stronger fourth quarter of new origination growth. Margins are holding steady in the face of intensified price competition as lenders compete for asset growth. As announced earlier, we have launched a franchise lending group with the hiring of season industry veterans. You see the franchise base is a good strategic fit for our core business, which we are excited about, into large diversifying growing market with customer characteristics close to those we do business with today. Our market focused to offer financing solutions, equipment financing and term loans to establish quality concept brands. Turning to credit portfolio, asset quality remains in good share with stable delinquencies and lower default reported this quarter. We continue to adhere to disappoint approach to credit underwriting. With that, let me turn the cal over to Lynne. Lynne?

[Lynne Wilson:]

Thank you, Dan, and good morning to everyone listening on the call. We have solid operating results, with net income of $4.9 million and $0.38 per diluted share. In addition, our earning assets grew 7% year-over-year and our ROE is 11.5% up from 10.3% a year ago. Net interest and fee margins as of September 30th was 12.71% and slightly favorable to the second quarter of 2014, costs of funds remained stable, while fee income increased over the quarter and offset the impact of slightly lower portfolio interest income, which has been impacted by lower yields on new originations. Credit quality remains in line with expectation, 30 plus day delinquencies were 81 basis points versus 79 basis points in the second quarter of 2014. Charge-offs declined to 1.36% of average net investment versus 1.7% in the second quarter. On the year-to-date basis, our (indiscernible) charge-offs are 1.49% of average net investment and right in line with expected charge-off levels. The allowance for credit losses remains strong at 1.36% of average total finance receivables and 254% coverage of 60 plus day delinquencies. Additional information on static pool losses and delinquencies is available on our website. Third quarter expenses were $10.4 million versus $10.7 million in the second quarter of 2014. The decrease is due primarily to prudent management of operating expenses. As a result, our efficiency ratio was 48% versus 50% in the second quarter of 2014 and the same a year ago. Going forward, we anticipate the efficiency ratio to remain in the target range of 48% to 50%. Our effective tax rate was 38% in the third quarter, going forward, we expect the tax rate to remain in that range. Lastly, our capital position remains strong with an equity-to-assets ratio of 23%. In connection with our previously announced stock buyback plan, the company repurchased approximately 98,000 shares of stock in the third quarter, bringing the total repurchases in 2014 to approximately 211,000 shares and on October 30th, we declared the dividend of $0.125 per share. With that, I will turn it over to Q&A.

[Operator:]

(Operator Instructions) Our first question comes from Chris York with JMP Securities. Your line is now open.

[Chris York:]

Good morning guys and thanks for taking my questions. I would like to get a better idea of the monthly lease production in Q2 and what you guys have seen in October?

[Dan Dyer:]

Okay. Hi, this is Dan. Hi Chris. You’re talking about Q3, correct.

[Chris York:]

Yeah. Sorry, yeah, exactly, Q3, yeah.

[Lynne Wilson:]

I’ll have to go find Q2, Chris. How are you doing?

[Chris York:]

I’m good. How about yourself?

[Lynne Wilson:]

Good. Yeah. So the breakdown is as follows. July was $29 million and so we started the summer off pretty strong. We really saw dip in activity in August. So we booked $25 million and that’s much lower than we had anticipated for a few reasons, which I will cover in a second. September has since picked back up or pick back up, I should say $28.4 million. October is not over. It’s almost over. Today is the last day of month. We actually anticipate October being ahead of September, $29 million plus. So it was really the dip in the middle of the summer that has an impact on the quarter and there was a field contributing factors there. The dealer activity was down a bit. So we have less applications coming in the door that was one. The second thing that happened is credit quality in the door actually dropped. And if you noticed we were down 2 percentage points quarter-over-quarter. That actually has about $2.5 million to $3 million impact on book volume in the quarter. But if you know Marlin, we are not going to sacrifice on credit quality. So we stayed strong there and did the right thing with a long-term perspective. And then finally Chris, there was a little more price pressure on certain programs and very profitable programs that we have on board. And we have that in two ways. In some cases, we match price to preserve the relationships and in few cases, we stepped away from that business for we didn’t think it made sense for us. So all of that together had an impact on August. But again it’s looking hell of a lot better right and we would anticipate as Dan mentioned a strong fourth quarter.

[Chris York:]

It’s really good call. I really appreciate all that. And so I mean, you spoke a little bit about the approval rates and has anything changed more recently. How about the, I guess the quality of applications coming in?

[Dan Dyer:]

This is Dan. It ebbs and flows. We have our models. We have our appetite for risk and that’s both absolute risk as well as how it matches up with pricing. So approval rates, if you sort of look at over the last year, year and half, it’s been in a narrow range but from time-to-time it will dip and then it will bounce back. So we don’t see any sort of systemic trend in credit quality, inept quality. It’s just that for a period there in the third quarter, we saw a dip and we didn’t sort of buy into that dip. So we had an impact on approval rates and then the originations for the quarter.

[Chris York:]

Okay. And then just switching gears slightly, you spoke about your franchise finance group, what effect you think that would have on lease production in 2015?

[Dan Dyer:]

Sure. Yeah. Let me give you a little color on what we’re doing there, Chris. We -- the franchise, it’s a natural fit for us. We’d be doing transactions to franchisees for many, many years. We really think this kind of hand in glove for us because we know this market. It’s growing. There is about three quarter of a million units out there. It’s growing -- the market is growing at 4%. We understand the equipment. We understand the ticket sizes in our sweet spot, the credit profile, the franchises, we understand very, very well. So all I could say at this point is we’ve hired some very good talent. They just started now. We’ve started to focus on the franchisor, concepts that we’re going to go after. And we want to turn this into a meaningful talent for us. I don’t have a volume forecast despite a meaningful channel.

[Chris York:]

Okay. That’s helpful. And then just one last question and I will just turn it or hop back in the queue. So fee income increased nicely in the quarter. What's going on there to assets and the yield pressures and driving your fee and interest margins?

[Dan Dyer:]

Yeah. The fee income improvement was in two areas of within our renewal income earned end of term leases as well as late fees, that also kind of ebbs and flows quarter-by-quarter. The fee income yield was 255 basis points. That’s really above the average of what it runs. So nothing in particular, really just more kind of timing and number of days in the market in the quarter and seasonality.

[Chris York:]

Great. Well, thank you for much.

[Operator:]

Thank you. Our next question comes from Brian Hogan with William Blair. Your line is now open.

[Brian Hogan:]

Thank you. Good morning.

[Dan Dyer:]

Good morning.

[Lynne Wilson:]

Good morning.

[Brian Hogan:]

Quick question on credit quality, looks like it was really good in the quarter but you had a relatively healthy reserve build. I guess, what’s behind that or you’ve seen some cracks in the credit quality or just kind of curios there?

[Dan Dyer:]

No. Again, really the kind of the movement of the portfolio, we have had asset growth over time. So it's really just kind of the timing of the delinquencies and portfolio growth and how it runs through our migration. Nothing in particular noteworthy whereas we said actually credit losses are right within the range of where we would expect to be. It’s really just more like timing of delinquencies and charge offs and how they flow through the GAAP calculation.

[Brian Hogan:]

Okay. And then the economic environment, obviously you saw a slowdown in August and the GDP for the third quarter was actually pretty decent. What are you seeing on the front lines of the small businesses there, what you feel of the economic environment?

[Dan Dyer:]

It feels pretty good. I would say it’s on fire. It is in flows. I mean, I think the economy is moving in the right direction but remains choppy. I mean, I think consumer optimism is up. At the same time, there's been some recent news in terms of durable good orders are down in September. So it still remains a mixed picture. I think there are some I think structural headwinds that are impacting businesses in general, rising healthcare costs, uncertainty about rising interest rates, the political election season that’s now in front of us. So we are modestly bullish, although there are some headwinds that businesses and industry in general continue to battle.

[Brian Hogan:]

All right. Competition, can you provide some more -- Lynne, obviously you talked about August, some of it was driven maybe some pricing that you didn’t chase. Are you seeing some aggressive competition more than usual, more than previous quarters or is it from banks or from more of niche players like yourselves or where is the competition from?

[Lynne Wilson:]

Yeah. It’s no different than what we’ve commented in prior quarters. It’s there and it’s really in primarily in the form of price competition. When there is a chasing asset growth within economy that’s modestly growing and businesses or banks’ desire, I should say banks and lenders desire to grow. Price is one lever they can pull in order to compete and win business. And that’s not only impacting us, its impacting lenders not only in our industry but other industries as well. As you see banks reporting earnings, you see margin compression. I do think there is some good news here in that on the pricing front, it’s sort of our opinion, and it’s just an opinion that pricing in all likelihood has troughed, won’t get much lower and we will see when the tide turns. I think the fed has commented that their QE is starting to end, their bond buying is starting to end, and it’s just a question of when interest rates are rising. I think that might perhaps be an inflection point in terms of where pricing heads entering 2015. But we’ve seen a stabilization in pricing our business and there are pockets of our business that are less price competitive, but there are segments that are very, very competitive and those are the ones in this environment that we’re just sort of rationalizing and going away from, which from time to time has an impact on volumes. But we are doing the right thing with respect to generating profitable business with attractive returns on capital. So that’s the disciplined approach of our business that we focused on. But we think pricing is troughed and we think '15 maybe again a turning point with regards to where pricing might head higher, which would be welcome news.

[Dan Dyer:]

And the only color I would add to is exactly what you said. We look at it by channel and last quarter probably enough our national account yields increased, but for example our office technology, it’s been under pressure for five, six quarters. That’s why I really think that channel has reached a level of sobriety going forward. It’s about as low as probably bottomed out in pricing.

[Brian Hogan:]

You actually preempted a couple of my questions there about what direction pricing was going and the impact of the national accounts? And also I guess along with that then healthcare has a lower yield, how was your healthcare efforts going? Is that impacting your overall asset yield?

[Dan Dyer:]

Yeah, that is. Yes that channel Brian has been under pressure. Those are the highest quality assets. There is the banks getting involved in chasing those. And I will tell you some of the price pressure that we had in Q3 was in that channel. And same story, in same cases we matched, in some case it just didn’t make sense for us to chase lowest common denominator.

[Brian Hogan:]

How big is healthcare now?

[Dan Dyer:]

It’s approximately 10%.

[Brian Hogan:]

Is that your largest asset class?

[Dan Dyer:]

No.

[Brian Hogan:]

Which one is?

[Dan Dyer:]

We can talk offline. I think a lot of that information in our Q Brian. I would be happy to share with you offline.

[Brian Hogan:]

Yeah. Sure. Thank you.

[Operator:]

(Operator Instructions) And it looks like we have no more questions at this time. Thank you for participating in today’s conference. This does conclude the program and you may all disconnect.

[Dan Dyer:]

Thank you.