Marlin Business Services' (MRLN) CEO Dan Dyer on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Marlin Business (MRLN)

Marlin Business Services Corp. (NASDAQ:MRLN)

Q2 2014 Earnings Conference Call

July 30, 2014 9:00 AM ET

Executives

Daniel P. Dyer – President, Chief Executive Officer and Treasurer

Lynne C. Wilson – Senior Vice President and Chief Financial Officer

Edward J. Siciliano – Executive Vice President and Chief Sales Officer

Analysts

Bob P. Napoli – William Blair & Co. LLC

Christopher York – JMP Securities LLC

Hugh M. Miller – Sidoti & Co. LLC

Operator

Good morning, ladies and gentlemen, and welcome to the Marlin Business Services Corp.’s Second 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 by the company 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, you may begin, Dan.

Daniel P. Dyer

Good morning to everyone and welcome to this morning’s call. Let me begin with the brief recap of the quarter. As reported, earnings per share were $0.38; returns on capital were also higher and continue to move closer to our goal of the team returns. I’m pleased to announce an increase to the quarterly dividend to $0.125 on a per share basis, versus the prior dividend of $0.11.

This represents a 13% increase in line with previous dividend changes, a 20% rebound to new sales origination volume is a positive development for the quarter. We are also glad to see an uptick to yields on new business, partially due to mix and partly attributed to the ability to reprice some of our business. This pickup in originations was closely correlated to the increase in the number of dealers; we conduct business with during the quarter.

On a go-forward basis, we anticipate second half growth (indiscernible) to the environment. The trend line and outlook for portfolio asset quality remains very positive with portfolio delinquencies, the lowest they’ve been in the past 12 months.

On the topic of the dividend program, this quarter’s increase and reauthorization to buyback shares is indicative of management and the board’s favorable outlook for the business, along with the desire to prudently manage the company’s well capitalized position to enhance returns to shareholders.

Our strong capital position and bank deposits for Marlin Business Bank offers the financial capacity to grow our business and of course, it’s the flexibility to opportunistically acquire undervalued shares in the open market and continue to grow the dividend program.

With that, let me turn the call over to Lynne. Lynne?

Lynne C. Wilson

Thank you, Dan and good morning to everyone listening on the call. Let me repeat some of the key statistics for the quarter. Net income for the second quarter is $4.9 million, or $0.38 per diluted share. ROE is 11.88%, up from 9.98% from the second quarter of 2013 and trending closer to our mid teen target levels. Our portfolio earning assets grew 11% year-over-year and new lease originations grew 20% representing $88.9 million in new lease volume. The yield on new originations for the second quarter is 11.35% and is up 8 basis points, compared to 11.27% in the first quarter of 2014.

Going forward, we anticipate pricing to be reasonably stable within a range of 10 basis points to 20 basis points of current second quarter yields. Costs of funds remain flat in first quarter 2014 at 81 basis points and in line with expectations. We expect deposit rates to remain relatively steady for the foreseeable future. The business continues to generate attractive risk adjusted net interest and fee margins despite the current low interest rate environment.

As of June 30, 2014, our net interest margin was 12.66%, and we expect net interest and fee margin to trend approximately 30 basis points to 40 basis points lower over the remainder of 2014, as a result of the blended pricing of new business origination. Credit quality remains in line with expectations, 30 plus day delinquencies improved 79 basis points from 85 basis points in the first quarter of 2014.

Charge-offs increased to 1.7% of average net investment, versus 1.38% in the first quarter, due primarily to timing of its few larger charge-offs. On the year-to-date basis, charge-offs are 1.55% of average net investment and right in line with expected charge-off levels. The provision for credit loss has increased in the second quarter due to a combination of volume growth, portfolio seasoning, current charge-offs and the timing of expected development. The allowance for credit losses remains strong at 1.26% of average total finance receivables and 218% coverage of 60 plus day delinquencies. Additional information on static pool losses and delinquencies is available on our website.

Second quarter expenses were $10.7 million, versus $11.7 million in the first quarter of 2014. The decrease is primarily due to the seasonal spike of payroll taxes and annual bonus awards, that occurs in the first quarter, that does not repeat in the second quarter. Our efficiency ratio was 50% versus 53% in the second quarter of 2013.

Going forward, we anticipate the efficiency ratio to remain in the target range of 50% to 52%. Our effective tax rate is 37% in the second quarter, reflecting the positive impact of a change in state tax rate and deductions related to the origination of municipal leases. On the year-to-date basis, the tax rate is 38% and 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%. Adding on to Dan’s comments regarding the dividend increased to $0.125 per share. The company repurchased approximately 114,000 shares of stock in the second quarter through our stock buyback program. and as announced, our board has approved the repurchase of shares, up to $15 million. Our objective is to continue to prudently manage capital to a target range of 19%, driven by growing the business through share repurchases and the dividend program.

And with that, I will turn it over to Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Bob Napoli from William Blair. Your line is now open. Please go ahead.

Bob P. Napoli – William Blair & Co. LLC

Thank you. Good morning.

Daniel P. Dyer

Good morning.

Edward J. Siciliano

Good morning, Bob.

Lynne C. Wilson

Good morning.

Bob P. Napoli – William Blair & Co. LLC

The question, I guess that the strong pickup in volume in the second quarter, a little higher lease yield. what drove the significant improvement in lease volumes from 1Q to 2Q and are you seeing what does the month of July look like?

Daniel P. Dyer

Yes. so it’s a couple of things, Bob. we’ve discussed Q1 and the weather impact and all that, but I think which we opened in Q2 is we had our small dealers come back, become active again, and we added a lot of new dealers through our business development efforts, where we’re seeing that phase continue in July, or at least the Q2 phase. so we’re expecting a similar number and the month not over yet and that should continue through the quarter. the only caveat is, there can be some summer seasonality in July and August, but we’re still expecting the strong quarter and a much stronger quarter in Q4.

Bob P. Napoli – William Blair & Co. LLC

Okay. and I guess the small dealers, what’s driving the small dealers back, is that a marketing effort on your part that’s driving these dealers back, or is there a less competition in that market. I know there have been a few very aggressive competitors?

Daniel P. Dyer

Yes. I’d say it’s a combination of our marketing efforts we have been hitting them with reminders that we’re here and ready to serve them. but I also think on the economic side, things are perhaps, getting a little bit better. Some of these dealers, we only do a single transaction a quarter, or in some cases, this single transaction a year. So they go quiet, we missed that business. they seem to be coming back, so maybe their business is picking up a bit.

Bob P. Napoli – William Blair & Co. LLC

Okay. and then with the buyback, the $15 million, would you expect to execute that, over what timeframe?

Lynne C. Wilson

I won’t give you timeframe, Bob. this was the reauthorization of, we have put a buyback plan in place, believe it was 5 years ago, and we were sort of getting down to the last $2 million, or $2 million or $3 million of that buyback plan. So it makes sense to just to give us the flexibility to buyback shares to reauthorize it.

So as I said in my prepared comments, when we see an investment opportunity with our shares being undervalued, we’re going to take advantage of that as we did in the first quarter. So I won’t give you timeframe, but we have the capital and we have the flexibility to reacquire shares, and when we see opportunities to buy shares that are undervalued, we are going to do that. So I would anticipate that on a quarterly basis, you will see shares have brought back in the open market and recorded.

Bob P. Napoli – William Blair & Co. LLC

Thanks. and then just last question, are you adding – have you been adding any new products and what is the outlook on the products side, or where are you seeing opportunities to expand growth?

Lynne C. Wilson

Yes, a very good question. And we’ve historically done that, and we continue to see opportunities, both within our core leasing business with respect to new equipment markets, and we’re also – we also see opportunities, we’re small business vendor, so we do see opportunities as well as in terms of the new markets, new customer segment as well as new product. We have nothing to announce, but we do see opportunities on the horizon to deploy capital to grow. We like our core leasing business is very profitable, it’s growing, but we do see other opportunities that we are – in the process of taking a close examination in conjunction with the board.

Bob P. Napoli – William Blair & Co. LLC

Thank you.

Operator

Thank you. And our next question comes from Chris York from JMP securities. Your line is now open. Please go ahead.

Christopher York – JMP Securities LLC

Good morning guys.

Daniel P. Dyer

Good morning.

Edward J. Siciliano

Good morning, Chris.

Christopher York – JMP Securities LLC

So could you give us an update with your expectations for new hires for the remainder of the year? Historically, you stated that the sales force may grow about 8% to 10% a year, and is growth in the sales force still expected to occur in 2014?

Daniel P. Dyer

Yes, Chris, as you can see we are flat quarter-over-quarter on the last call, we gave guidance that we’d be in the range of 120 plus or minus 5, that’s pretty much were we ended up this quarter and I think we’ll continue that through Q3. But in the fourth quarter, as we prepare for 2015 growth I think we’ll be adding some heads at that time.

Christopher York – JMP Securities LLC

Got it. That color is helpful.

Daniel P. Dyer

The only thing I’d add Chris is that as you can see from the volume quarter-over-quarter with flat headcount increased volume 20%. We still have capacity with this, size of the current sales force, probably another 20%.

Christopher York – JMP Securities LLC

Okay. And then lastly just a follow-up here. What was the average share price of repurchase in Q2?

Daniel P. Dyer

Yes, the average share price was in like the high 18.

Christopher York – JMP Securities LLC

Great. That’s it from me.

Operator

Thank you. And our next question comes from Hugh Miller from Sidoti & Co. Please go ahead. Your line is now open.

Hugh M. Miller – Sidoti & Co. LLC

Hi, good morning.

Daniel P. Dyer

Good morning, Hugh.

Edward J. Siciliano

Hi, Hugh.

Hugh M. Miller – Sidoti & Co. LLC

So wondered I guess revisit the new lease kind of yields that you’re seeing, and yes, I look back historically and for some reason there has been kind of a seasonal uptick in lease yield between Q1 to Q2 and I’m not sure that’s maybe just seasonal mix issue, you mentioned both mix and the ability to re-price some of your business, just wondering if you could give us some color on both of those aspects?

Daniel P. Dyer

Yes, I think the yields are relatively flat quarter-over-quarter; they’re up a little bit as we said, but I think it’s tied into the small dealers coming back to you. With small dealers we’ve an opportunity to price the business for on a payment basis or convenience basis. So we tend to get a little higher pricing as opposed to our national accounts, which were more prominent in Q1. So I really think that’s the difference.

Hugh M. Miller – Sidoti & Co. LLC

Okay. And then you guys mentioned about the charge-offs seeing kind of maybe an uptick in some larger size credits causing the uptick in that area. But can you remind us again I guess the composition of 2012 lease contingent and why the loss rates on that have been kind of higher than other post recession advantages?

Daniel P. Dyer

Are you referring to – this is Dan speaking. You are referring to this static pool.

Hugh M. Miller – Sidoti & Co. LLC

Yes, yes. And it just looks like a loss rates on the 2012 static pool just remain higher than what we’ve seen in the other one that I’m just getting a sense of maybe what the composition is or what might explain that trend?

Daniel P. Dyer

Yes. I don’t have – just don’t have an answer for you, but they’re in line with our expectation. So maybe you can just follow-up with your clients.

Hugh M. Miller – Sidoti & Co. LLC

Yes, absolutely.

Daniel P. Dyer

We don’t see anything; we don’t see any trend in originations in any year post downturn that are – had aligned with our internal expectations. So and perhaps there is something to do with seasoning. But – is that answer your question, just take it offline.

Hugh M. Miller – Sidoti & Co. LLC

Yes. No problem. And then, we’ve heard some military sources just about the competitive landscape given were rates are right now. But as we think about, maybe next year heading into an environment where rates do held up higher and given that you kind of tend to match funds for durations standpoint. How should maybe thinking about your ability to potentially re-price leases higher for new ones relative to holding deposits somewhat steady in the competitive environment on the deposit side?

Daniel P. Dyer

Yes. Let me answer the question in two parts. One is we are match funded. So we are insulated in the short-term from rising interest rates. Number two is I don’t believe that – we’re fully funded with insured deposits. So I don’t think those rates will move as fast as capital market rates, which are more future based. So I do think those that are funded through the capital market will be expose to the anticipation of higher rates and will neither have to deal with margin compression or raise rates.

So we’ll have the flexibility to pass on higher rates because our competition will obviously do that, but we’ll also maybe afford the opportunity to hold rates, gather market share because our deposits well we don’t think will be priced at the same pace as those that are exposed to the capital market. So I think we’ll have the best of both rolls.

Hugh M. Miller – Sidoti & Co. LLC

Okay. That’s interesting. I guess you guys can pick and choose on whether you are going to grow the portfolio faster or maybe see stronger returns. Okay, and then the last question I had was just with regards to lease portfolio growth and I think previously you guys did mentioned potentially targeting like a 15% growth and I wasn’t sure if that was end of period our average balance sheet, but given that the beginning of the year kind of started of slower. Is that still a reasonable expectation, or what are your thoughts there for growth this year?

Daniel P. Dyer

Well, it will be stronger in the second half of the year. I mean, when you do comparison year-over-year with the abnormal first quarter of the year. This sort of put things out of sink on a comparative basis year-over-year, but our stated goal is to continue to grow year-over-year in double digits, and ideally, mid teens, that’s a byproduct of a number of factors, but we see the market in this opportunity and our position in the market affords us the opportunity to grow what we think above average market rates of growth.

Hugh M. Miller – Sidoti & Co. LLC

Okay. And then just last is, as you look at that growth and the opportunities there. are there subsets of your leasing that you’re seeing stronger demand, and that seemed like, they could be more favorable from a product standpoint?

Edward J. Siciliano

Not really, I mean it’s consistent growth across all channels, if you add that data.

Daniel P. Dyer

Yes, our market is essential, basically essential use equipment, so our demand for equipment is just going to follow new business formation, the economy which helps its growth business optimism. we’re really not in any one sector that I would say is sort of growing at an LP’s rate to the overall sort of market.

Lynne C. Wilson

We are constantly examining new equipment categories, which met, which will have higher growth rate.

Daniel P. Dyer

Right.

Lynne C. Wilson

But that’s a normal part of our business.

Daniel P. Dyer

Right.

Hugh M. Miller – Sidoti & Co. LLC

Yeah, all right. Appreciate the time. Thank you so much.

Daniel P. Dyer

Thanks.

Lynne C. Wilson

Thank you.

Operator

Thank you, again. (Operator Instructions) And I’m not showing any further questions at this time. ladies and gentlemen, thank you for participating in today’s conference. this does conclude your program. You may all disconnect. everyone, have a great day.

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Marlin Business Services (NASDAQ:MRLN): Q2 EPS of $0.38 in-line. Revenue of $20.71M (+16.9% Y/Y) beats by $1.51M.