Marlin Business Services Corp.
Q4 2014 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Marlin Business Services Corp.'s Fourth Quarter and Year-End 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 webcast simultaneously on Investor Relations section of the 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 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. Dan, you may begin sir.

[Daniel Dyer:]

Thank you and good morning again to everyone and welcome to today's call. Let me begin with a few thoughts on 2014 along with the outlook for the upcoming year. Our core lease business delivered a solid year of financial performance and an income from core operations grew 10%. The growth in earnings per share to a $1.49 in a full year dividend of $0.47 per share. The return on equity of 11.5% grew as well and closer to our goal of mid-teen returns. In connection with the company's capital management program, we repurchased approximately 211,000 shares of approximately 1.5% of common shares outstanding and for the third consecutive year, the quarterly dividend paid to shareholders increase growing 13% over 2013. Looking at the business managed portfolio assets increased 12% year-over-year, new asset origination growth was lower than anticipated some of which had to do with the competitive and pricing environment contributing to margin return compressions and certain segments of the business. And other areas of the business the portfolio of credit performance remain strong and stable and we improve the operating efficiency ratio year-over-year. Marlin Business Bank continues to be the primary funding vehicle with the positive price very attractive rates. Looking ahead to 2015, our focus is to more actively invest in our high return lease business having seen recent evidence market conditions are strengthening with small businesses consistently [ph] growing in confidence and more willing to hire and invest in their business including purchasing capital equipment. Our own lease business have seen a recent uptick in sales activity. The consensus for higher borrowing rates in 2015 we believe will also be a net positive for our business both from a pricing and competitive positioning standpoint. Beyond our core lease business franchise we are bullish on the long-term growth prospects from franchise lending. It's a large diversified market that fits well with small business and our equipment leasing business and also offers an opportunity to expand into working capital wounds to high grade franchise concepts. In addition to our on training to franchise lending we are actively pursuing new value added products and services tailored to small business and Marlin's active base of 65,000 customer accounts. The anticipated having more to share on these new initiatives during the upcoming year. With that let me turn the call over to Lynne.

[Lynne Wilson:]

Thank you Dan and good morning to everyone 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 $4.9 million or $0.38 per diluted share which is $1.5 million favorable to net income of $3.4 million reported in the fourth quarter of 2013. Looking at the total year, net income for the year ended 2014 is $19.4 million or a $1.49 per diluted share. This is an increase of 19% over 2013 net income of $16.2 million. Average total finance receivables grew 12%, ROE is 11.5% and our efficiency ratio is 50%. In addition, we repurchased approximately 211,000 shares of stock as part of our stock repurchase program. Now to focus on some fourth quarter stuff. For the fourth quarter, our average earning assets grew 7% over fourth quarter of last year. ROE is 11.2%, net interest and fee margin is strong at 12.5%. New originations reached $89.5 million in volume in the fourth quarter, 8% more than third quarter. Net interest and fee margin was 12.5% versus 12.7% in the third quarter of 2014. The margin was impacted primarily by lower portfolio interest income resulting from lower yields on new originations. Credit quality remains in line with expectations 30 plus delinquencies were 85 basis points compared to 81 basis points in the third quarter of 2014 and compares favorably to a 108 basis points in the fourth quarter of last year. Charge-offs increased slightly to 1.56% of average net investment versus 1.36% in the third quarter but are in line with expected charge-offs levels. On a year-to-date basis, the net charge-offs are 1.5% of average net investment compared to 1.42% last year. The allowance for credit losses remained at 1.36% of average total finance receivables and 237% coverage of 60 plus day delinquency. Additional information on data pool [ph] losses and delinquencies is available on our website. Regarding operating spending, our efficiency ratio for the fourth quarter is 49% and in line with expectations. Going forward we expect the efficiency ratio to remain in the range of 50%. Lastly, our capital position remains healthy with an equity to assets ratio of 22.9%. As previously announced, we declared a cash dividend of $12.5 per share. The quarterly dividend coupled with our ongoing stock repurchase plan is part of our long-term plan to prudently manage capital levels. With that, I will turn it back over to the operator and we will take your questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Brian Hogan of William Blair & Company. Your line is now opened.

[Brian Hogan:]

Good morning.

[Daniel Dyer:]

Good morning, Brian.

[Edward Siciliano:]

Good morning, Brian.

[Brian Hogan:]

One question is real quick one probably, cost of funds it's been creeping higher and just kind of wanted some clarity around that because I mean the yield curve hasn’t moved much I mean historically we like match funded or you’re at least durations being increased to extend the maturities a little bit there. I just kind of curious with the creep in the cost of fund I mean it’s not much but it is. Thank you.

[Daniel Dyer:]

You know interest rates are creeping a little bit higher not much but somewhat the yield, the deposit curve is fairly flat on the low end it does creep up it is [indiscernible] point between two year and three year CDs so we are kind of little bit longer in our deposit book and that is the contributing factor to slightly higher deposit cost. So we are raising a little bit more two and a half, three year money as compared to two year money.

[Brian Hogan:]

Okay, it makes sense. And the next question since the growth of the portfolio and you're doing a lot of interesting things with the franchise finance, a little more color on but also I was just kind of broadly thinking back in the '06, '07 timeframe, rough with the same size portfolio and I know times are different but you're generating at that point mid-teens, mid to high teens growth in your portfolio.

[Daniel Dyer:]

Right.

[Brian Hogan:]

And currently, your growth is kind of mid-single-digits again economies change a little bit different I mean is a competition like how can you get the growth backup or is it possible to get the growth up into the mid-teens?

[Daniel Dyer:]

Well I think it will come from let me make a comment and then I’ll turn to Ed. But just to start out with as I mentioned in my opening remarks we are going to continue to invest in our core business. If you sort of look at the numbers growth slowdown in 2014, there is some recognition there. Now some of that had to do is that we mentioned throughout the year and in a more heated competitive environment and as a results of that there was some excessive we feel at least was some excessive price competition existing and in certain segments of our business we pulled back meaning we did not engage in matching price per price we just didn't feel it met our return hurdles. So, as a result that did impact a new asset origination growth and in return portfolio growth. We do believe that price competition can’t go on and definitely and we have seen as we remarked on last call some stabilization and we feel that 2015 will be a year where people will begin to rationalize their decisions and first stabilize and then increase rates. We also feel that sometime in '15 interest rates are going to rise and while rising interest rates may not always be viewed as a good thing we think it’s a positive for our business in a number ways one is it will give us an opportunity to raise rates if we so decide. And also it will put margin and profitability pressure on some of our competitors. None of all not all of which fund their book through deposits but through capital market rates and as we know those rates more will likely move with future rates which will put pressure on their borrowing cost maybe in a more heightened way than it would for a bank such as ours.

[Brian Hogan:]

Do you want to add to that?

[Daniel Dyer:]

Yeah sure.

[Edward Siciliano:]

Hey Brian - Dan covered the fact that pricing will stabilize. And we're seeing heading into 2015 all small business economic indicators are up. We're seeing dealer demand already take up a little bit in fact if you look back at the past four quarters we kept the size of the sales force very, very flat it's 117, 115. This year we're confident enough to be adding to the size of sales force probably 10% this year and that's based on some of the factors that I mentioned to you. Early indicator is January application activities up 15% year-over-year that's a strong indicator for us kind of validating that we're going to be investing in the business of course we've had some good weather that we have last year which held us back. You also asked about franchise, so some of it is core business growth but we're also getting it to new markets and franchise being one of them. We're making very good progress on the business development efforts and franchise so far. We have a couple of strong BD guys but we've been adding talent to that team. We started booking business in December. And I can mention just one example, we have a new program running with the Denny's ph] has been in the restaurant space. It's a very tight relationship which is what we're looking for they've shared their franchise list with us. We're doing some joint marketing we just dropped a 1500 pieces of mail jointly with the Denny's concept and now we'll start to work with the store owners. And then that's the model and then we'll repeat that through the year. So we're really pleased with that progress. So it things like that but again it's really confident for growth this year.

[Brian Hogan:]

And then I guess with that I mean Dan did you care to and maybe put a target of growth this year roughly I mean not holding to any number obviously we would.

[Daniel Dyer:]

No I don't give you. One point just we're confident that we're going to achieve growth higher in '15 than '14 through the comments that Ed made. Let me also mention in addition to the franchise market where there is some new markets that we're going to be entering in our core business. The commercial specialty transportation sector titled vehicles, specialty vehicles to small business. That's the new market that we'll be entering in 2015. We did a lot of market research in '13 and '14 and we're going to enter that market in '15 as well. And then in addition and not at liberty to talk more about it other than to say in addition to our equipment leasing product to small business there are other products and services that we are looking to launch in ’15 which will be complementary to what we do on the leasing side focused on small business which second-half of ’15 and ’16 will be accelerators to growth.

[Brian Hogan:]

Okay, thank you. And then you mentioned all this competition and all the competition didn’t have deposits so I guess who are the - where is the competition coming from?

[Daniel Dyer:]

Everybody that has excess liquidity.

[Edward Siciliano:]

Yeah, so it’s banks its independence.

[Brian Hogan:]

Yeah.

[Daniel Dyer:]

Direct competition and indirect competition. Brian there is just in a bunch of liquidity out there and those with excess liquidity lender investors are seeking yield and whether it's and that's the point, it's not new entrance into the market it’s just the abundance of liquidity in the system as compress deal not just in our industry but across the board and consumer and commercial asset classes so, we try to rationalize our decisions in terms of pricing and profitability and well we need to be competitive we also need to stay rational in our approach to growth and profitable growth and generating returns on capital.

[Brian Hogan:]

And then, one last one for right now. The efficiency ratio you mentioned is going to stay right around the 50% with - I imagine a little bit of scale advantage I just kind of curious your thoughts around roughly 50% so is it due to the headcount growth?

[Daniel Dyer:]

Yeah, for me it’s commonly just pairing up expenses with revenue 50% by any sport lending measure is quite good so we feel confident that achieving 50% or perhaps getting a little better than that would be will put us in the upper quartile so.

[Brian Hogan:]

Yeah, right so I was thinking back in the 2007 you were in that kind of low 40s range and the brokerage channel I was just kind of curious.

[Daniel Dyer:]

So I think it’s a more byproduct margins, margins were higher back then.

[Brian Hogan:]

Sure.

[Daniel Dyer:]

Right. So it just more function of the revenue side of the equation is basically the expense side.

[Brian Hogan:]

Okay. Thank you.

[Daniel Dyer:]

Alright, thanks Brian.

[Edward Siciliano:]

Thank you, Brian.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Hannah Kim of JMP Securities. Your line is now open.

[Hannah Kim:]

Hi, good morning, Thanks for my questions. I am calling for Chris York this morning. So just wanted to start off by talking about the ROE it has been a really nice improving trend to see ROE improving year-over-year and for this to continue we see that more leverage used to take place. So I was wondering if you can elaborate or comment on if you think you can prudently blow your assets to get your ROE towards your long-term goal.

[Daniel Dyer:]

Yes, so thanks for the question Hannah. So ROE has grown I think it was like 9.5% in 13 grew to 11.5% so, again our stated goal is that 13% to 15% ROE so to get there clearly high return growth profitable growth is our first priority but in addition to that we do have excess capital. So we will continue our share buyback plan and as we have done consistently over the last three years if history is any guide continue with the dividend program and we think a combination of profitable growth in earnings, the dividend program and the share buyback program our returns on equity will grow. Also our excess capital puts us in a position to also be acquisitive if we see an opportunity to a target company that would fit either our core business or something that is of interest in the small business lending space. So that would also clearly be acquisitive to earnings and to ROE. So, that’s how we think about growth in returns on capital.

[Hannah Kim:]

Great, thanks. And then my next question is regarding given the volatility that energy market. So I was wondering if you can comment on what kind of impact does following oil prices has on your portfolio?

[Daniel Dyer:]

Given the nature of the equipment that we finance, it’s negligible I think presenting impact it would be a positive one in the sense that there is more disposable income for businesses and consumers that all healthy economy I know there is other sectors that are perhaps more impacted by the energy sector but it’s not influential on how we look at our business.

[Hannah Kim:]

Great, thank you. And my last question is going to be related is more of a modeling question. We see that the repayment as a percentage of your leasing portfolio actually has been increasing slightly over the past three quarters, it’s being readily somewhere between 12% to 30% and going forward how should we think about this and will this trend continue?

[Lynne Wilson:]

Yeah Hannah I will be happy to talk to you offline to with that one. But I mean generally we've been in that 12% range I don’t know that we have seen necessary the same increase than I would expect to kind of continue along those range, 11% and 12%, 12.5% range.

[Hannah Kim:]

Okay, yeah. It's a very small increase.

[Lynne Wilson:]

Yeah.

[Hannah Kim:]

Just because it's a trend that I see there so just wanted to see how we should think about it going forward?

[Lynne Wilson:]

Yeah, I would consider I would expect consistent trends what you're seeing in fourth quarter.

[Hannah Kim:]

Got it. Okay, great. Thank you and that is all for me today.

[Lynne Wilson:]

Thank you.

[Daniel Dyer:]

Thank you, Hanna.

[Operator:]

Thank you. At this time, I am not showing any further questions. This does conclude our question-and-answer session. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.