Marlin Business Services' (MRLN) CEO Ed Siciliano on Q4 2015 Results - Earnings Call Transcript

| About: Marlin Business (MRLN)

Marlin Business Services Corporation (NASDAQ:MRLN)

Q4 2015 Earnings Conference Call

February 02, 2016 09:00 AM ET

Executives

Ed Siciliano - CSO and Interim CEO

Taylor Kamp - SVP and CFO

Analysts

Brian Hogan - William Blair

Chris York - JMP Securities

Don Destino - Harvest Capital

Operator

Good morning, ladies and gentlemen and welcome to the Marlin Business Services Corp’s Fourth Quarter and Year-End 2015 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 Web site at www.marlinfinance.com. The recording of this call will be archived on the Web site 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 the actual results to differ from those anticipated are detailed in the Company’s Securities and Exchange Commission’s 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 Ed Siciliano, Chief Sales Officer and Interim Chief Executive Officer. Also, on the call is Taylor Kamp, Chief Financial 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. Ed Siciliano of Marlin Business Services Corp. Thank you, Ed. You may begin.

Ed Siciliano

Thank you. Good morning, everyone, and welcome to today’s call. Let me begin by providing some highlights of our progress that we have made during the past year. In 2015, we set out to make deliberate investments in our business that levers three of our most valued Company assets; our bank funding model; our strong capital position; and our enviable small ticket originations platform. We invested in sales headcount, a large market opportunity and in support of two new equipment leasing channels; franchise and transportation. We also entered the small business loan market by developing our funding stream products. In doing so, we are providing working capital to our many small business customers in a fast and convenient manner, just as we have done with our leasing offerings over the past 18 years.

As part of the loan product launch, we introduced a comprehensive and easy to use Web site fundingstream.com, which allows customers to apply for a loan online, while simultaneously and securely moving credit data to our underwriting system. The result is a rapid credit decision for our customers, which is what they have come to expect in this new day of technology-centric product offerings. We are pleased with what we have accomplished during the year, and confident that our investments will not only pay-off, but will be a catalyst for our new multiyear growth plan.

A few comments on our business results, we ended the year with net income of 18.3 million before one-time executive separation charges. Net earnings were impacted by higher yielding asset run-off within our portfolio and by our planned investment spending. Total lease and loan originations grew 13% to $381 million and the year ending net investment in leases and loans grew approximately 8% to 682 million. Credit quality was a bright-spot once again with year ending 50 day delinquencies at 41 basis points, down 10 basis points from a year ago. Early loan results are also strong, as we continue to refine and validate our underwriting models for this new product.

We are particularly pleased with our fourth quarter originations momentum. We booked approximately 108 million in new leases and loans, which is an 18 year quarterly high for Marlin and was 21% higher than the same period a year ago. Yields on new leased business increased 18 basis points from the third quarter and even more dramatically when you include the 3.7 million of new loan volume. Lease yields were driven higher by channel mix and by re-pricing of our under $10,000 tickets. Increasing pricing on our smallest leases was a cautious effort to offset our slightly rising cost of funds.

Looking forward, you can expect a slowing of sales hiring, as we focus on sales productivity, steady originations growth, proving credit underwriting and expense management and an optimization of capital management. The future looks bright and the entire Company is excited about our prospects.

With that, I will turn the call over to Taylor. Taylor?

Taylor Kamp

Thank you, Ed and good morning. As Ed mentioned, Marlin had a strong quarter and a strong finish financially and strategically. We expect to retain some of that momentum into the next quarter and into 2016, although the first quarter will be tempered by seasonality and continued investment in our new initiatives.

We had very solid operating results in the fourth quarter with unadjusted net income of $3 million and EPS of $0.24 per diluted share. As we signalled on our last call, in the fourth quarter we booked a one-time after tax charge of approximately 2 million for the CEO retirement and new CEO search expense. Without this one-time charge, net income would have been 4.9 million and EPS would have been $0.40 per share. Total originations volume including leased loan and syndicated volumes finished at a record $107.9 million for the quarter, up 21% from a year ago. Our net investment in leases and loans grew 3.5% from last quarter and 8.4% year-over-year to 682.4 million.

ROE for the quarter was 7.96, down from 11.21% a year ago excluding one-time charges was 13.26%. For the quarter, net interest margin was 11.52%, 44 basis points below the third quarter. While it is true new business is being booked at better rates than last quarter, there are still headwinds for the portfolio yield due to liquidation of older higher rate business. In addition, cost of funds increased to 98 basis points from 89 basis points last quarter. This is mostly due to increases in marginal rates resulting from the December rate increase and also to the change in leverage resulting from the special dividend and stock buyback activity, which increased the amount of deposits.

Fee income decreased in the quarter primarily due to year-end true-ups and certain fee estimates done earlier in the year and to volatility in residual realization in the quarter. We do not expect either of these two be a reoccurring issue.

As noted in our previous call and as shown in the numbers in our supplemental information, our funding stream product continues to help mitigate NIM compression as new business is originated. On an annual basis, Marlin’s income trend began to improve in the second half from lower than expected results in the first half. Annual net income was 18.3 million excluding one-time charges relating to the CEO and CFO departure expense. Adjusted EPS was 1.44 per diluted share. For reference, second half 2015 adjusted net income was 17% higher than the first half income.

As Ed highlighted, credit quality remained strong in the fourth quarter. 30 plus day delinquencies were 73 basis points versus 75 basis points in the third quarter, increased somewhat to 1.60% of average finance receivables as compared to a much better than planned 1.23% last quarter. Our charge-offs for the year were 1.59% of average finance receivables and well in line with expected annual charge-off levels. For the year-end, the allowance for credit loss reserve was 1.24% of total finance receivables and 266% coverage of 60 plus day delinquencies. Additional information on static pool losses and delinquencies is available on our Investor Relations Web site.

Fourth quarter 2015 expenses were $14.6 million as compared to 10.6 million a year ago. As previously noted, the quarter included 3.2 million of one-time pre-tax cost relating to executive departures. Without this cost, expense would have been in line with the third quarter. The increase from prior year reflects continued investment in new initiatives and higher than planned origination volume in the quarter. Yesterday, we declared a regular dividend of $0.14 per share, and as you are aware, we also declared a special dividend of $2 per share on September 14th.

Consistent with our stock buyback plan announced in 2014, the Company repurchased approximately 188,000 shares of stock in the fourth quarter, bringing the total buyback for the year to almost 600,000 shares at a total cost of about $10 million. Our capital position remained strong, with an equity-to-assets ratio of 19.4%, slightly higher than last quarter. The special dividend and continued execution on our stock repurchase strategy further demonstrate Marlin’s commitment to prudent the capital management.

As previously communicated, we do not expect these capital planning activities to negatively impact our regular dividend practice or impede our growth plans. We will continue to monitor our capital position and consider additional capital management activity by quarter basis. As we communicated, we periodically introduced enhancements to the information we published. This quarter we have added annual supplemental data trending to better facilitate investor analytics.

In closing, while the numbers tend to speak for themselves, it is worth noting again that Marlin had very solid adjusted returns for the fourth quarter and generated positive momentum for originations. We continue to be energized by the performance of our core business, the opportunities for growth in our new products, and for the potential of our prospective strategies.

And with that, I will turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bob Napoli of William Blair. Your line is open.

Bob Napoli

Nice to see the loan growth that you’re getting or the origination growth, within that the -- how much of that is franchise financed versus transportation financed, versus your historical core leasing product?

Ed Siciliano

On the loan side, Bob?

Bob Napoli

No, on the I think the franchise and transportation that’s all in the lease originations, right?

Ed Siciliano

Yes, yes. We don’t have -- we don’t break that out, I can…

Bob Napoli

Is it material I mean is it -- can you give us some idea?

Ed Siciliano

It's becoming more maturing. I'll comment on both channels. First on franchise Bob, based on the early results we're seeing, we've actually expanded that team to seven individuals. We've hired an experienced VP of Sales and we actually took a step to open a small regional office in Portsmouth, New Hampshire because we saw some top franchise talent up in that area. So results are very good, we're investing more in that and we're getting traction. That's all I can say on that right now.

On transportation, we kind of set early drivers up for ourselves and that's also doing -- we're very happy, we entered that market as well. Application volume through the door has exceeded our expectations, but our booked volume has not and the reason for that is these truck dealerships when you first bring them on it kind of tests you. And you don’t necessarily get the best credits in the door. In fact, the transportation channel impact our overall approve rates a little bit because approve rates were lower in that channel. But we'll rectify that as we demonstrate service levels and get the better quality. They're both very important channels for us. They don’t contribute a lot of profitability to 2016, but for our long-term plans, they're right on-track.

Bob Napoli

And then having covered Marlin for more than a decade and one thing that you could as an investor, you could be confident in was that the Company was going to manage credit, what they were not going to make -- the Company was not going to make any big mistakes on the credit side. And I mean with the changes in management how can investors be confident? Who is the Chief Credit Officer today? How are you managing credit? And how can investors be confident that while it's great to see accelerating loan growth that the true downside protection on the credit is still there?

Ed Siciliano

Yes, I mean Bob we've a very seasoned credit management team. We've four seasoned vice presidents that have been with the Company, and many of which from the inception. I would really point to the results. I mean if anything I think folks right now would argue that we're being too tight on credit but still, 60 day delinquencies dropping 10 basis points year-over-year to 41 it is quite-quite tight and responsible. You also look at our volume grew in the fourth quarter, but approve rates declined, so we're clearly not and we've repeated this on multiple calls Bob going to use credit as the accelerator for the business. That is something that we're steadfast on. We've got the right people in place and the results speak for themselves.

I would also comment on the loan side. Look at the loan credit quality results, 0 delinquencies again in the past quarter. We're taking a very disciplined and paced approach to that product. I think we've got now three quarters under our belt on the loan side, so you're going to start to see us accelerate that product a little bit because we've a lot of confidence in the credit underwriting models, but I can assure you that companywide that's one of the tenants that will not change for modeling.

Bob Napoli

Then I guess -- I would love your view that we're dealing with small businesses I think you've a pretty unique view into the economy that may be we don’t get from some other companies. Can you give -- what are your thoughts on the economy? Where do you see strength and where do you see weakness?

Ed Siciliano

Yes, well, I'll say a couple of things, Taylor if you want to add, go ahead. Again, I must point back to the credit quality results. I mean we do consider ourselves a small bellwether to small businesses in the United States. You take a look at -- we take a hard look at delinquencies level both 30 and 60 day and that's performing exceptionally well right now. We've been asked the question, hey, is any of this oil segment impacting Marlin? Of course, we're not in the petroleum asset categories and we're highly diversified. We're keeping an eye on Texas and states that are maybe impacted by that, but thus far we're not seeing much noise there, but we'll watch it very-very closely. But again, when I say diversified, I mean by state, equipment type, SIC Code. We just don’t have any concentrations. So far Bob, things are -- we don’t see noise in the small business community and we're hoping that continues.

The other thing that's on the demand side, we continue to reach new milestones on applications through the door. We’re not approving them all, but it's growing steadily and frankly it should because we’ve made substantial investments in the business. If we didn’t see application volume growing, it’d be an issue. Last year, we almost eclipsed 1 billion, it is 990 million through the door, this year we’ll be in well in excess of 1 billion if we’re doing our job. So demand is still strong.

Bob Napoli

And then do you have a target return on equity that we should think about for Marlin to deliver and would certainly be a target or that management would be thinking about so investors would have a good idea?

Taylor Kamp

Hi Bob this is Taylor, how are you?

Bob Napoli

Hi Taylor.

Taylor Kamp

Generally speaking you saw where our adjusted ROE was in the quarter. And generally speaking, we would target the mid-teens and north of that depending on how we implement our strategy. One of the things that we plan on doing or are doing are trying to generate more non-spread income. Non-spread income in the form of syndication fees and other kinds of fees from servicing and so on and so forth, so sort of capital lite generate the more non-spread income. We haven’t -- we aren’t baking a lot of that into our future thinking from a tangible thinking, but we do plan to do more of that.

Operator

[Operator Instructions] Our next question comes from Chris York of JMP Securities. Your line is open.

Chris York

So one of the biggest residuals to our estimates was the interest income and fee yield, which declined about 50 basis points sequentially, yet the weighted average yield on new leases was up sequentially. Taylor you commented in your prepared remarks that there is still headwinds from these repayments. But I’d like to get kind of may be a little bit more color on your expectation for the future impact to the yield?

Taylor Kamp

Yes, that’s a great question and it is one of the first that I addressed when I came onboard. We came out of a cycle in 2010 through 2013 where we had a unique position in the markets and we were able to put on business that might have been higher than some of our competitors and so on and so forth. And most of that business is liquidated offers liquidating. And as you put new volume on it, it's only a fraction of a percent of the total portfolio each month. And so while we’re starting to see a lift in those new business yields, it's not enough just yet to turn the ship on the overall portfolio. So we would expect that as we progress through 2016, you have some different dynamics there, you have a little bit of an increase in market rates. We would expect our NIM to begin to flatten out in 2016. In addition of that, we have the working capital funding stream product, which has a significantly higher new business yield, which will also help to mitigate that and might turn that ship a little earlier. But we are going in a conservative manner.

Chris York

So kind of just trending it out, we should expect some potential pressure on the yield may be for second quarter see a trough and then expand, and then clearly depending on funding stream product?

Taylor Kamp

I don’t want to give you specific sort of timing of that, but that’s the general shape of the curve.

Chris York

And then maybe I was hoping if you could give some more color on the demand for new equipment leases, specifically in the month of December and January because we noticed that the ELFA January Confidence Index declined significantly month-over-month and year-over-year in January?

Taylor Kamp

Yes I can comment on that Chris. Let me give you the quarter breakdown in terms of the new originations. So, in October we did 32.5 million. It was a lite November it is a very short month with the way the ThanksGiving holiday rolled in at 28.1. But we had a December that was exceptionally large. We did 43, over 43 million in lease business and another 2 million in loan business for a total $45 million. So, that beat our monthly high by a lot over 18 year history. A little color on January, just starting the New Year, but originations were up 20% from a year ago, so the demand has continued. As I was mentioning earlier to Bob, we're not seeing that weaning quite yet and we're at all time highs in applications through the door. Now again, some of that is from the investments that we've made in sales. We've got a larger salesforce and they're working and bringing more application, but we're also seeing demands flow strong for our business for micro ticket.

Operator

We've a follow-up from Bob Napoli of William Blair. Your line is open.

Bob Napoli

Just as we think about '16, do you have -- in the past Marlin has put out some origination targets, do you have an origination target for 2016 we could think about growth rate or dollar target?

Ed Siciliano

We do not, Bob. We had not really given out forward-looking guidance on that. We're just looking for a quarter-over-quarter steady growth in both lease and loan and we hope to see that, we expect to see that. On the loan side, you might see a little more acceleration on that product, so a little color on that, in the fourth quarter we did 3.7%, but we did 2 million of that in December. And then, as I just mentioned in January, we actually did 2 million in loan again and that tends to be kind of a hangover month in our business. The reason for that is, again we've got enough under our belt on the loan side in terms of sales capabilities, our systems, the new technology we have put in place and most importantly, credit underwriting that we -- so we started to initiate much larger marketing efforts in terms of direct mail and e-mail and we're seeing great results from that. And the group by the way that we're focused on is a prequalified base. These are customers that we have already have in-house, that we have credit history on and we're marketing to them and offering them a loan at this point based on some modeling we've done, so we're really expecting that to grow through the year.

Bob Napoli

And now, are you planning on holding all of that on the balance sheet or are you going to sell some of it off and retain servicing or -- to generate some fee income and less pressure on the balance sheet or what are your thoughts on managing that business, it sounds like it could good ramp pretty substantially?

Ed Siciliano

Yes, it's a great question Bob. Initially, we're putting it on balance sheet, and then going out to our best customers. They're great credits that are in need of working capital and we could command a very good yield on that. As the year unfolds, you're spot on we'll look to syndicate some of that business. We've aligned ourselves with some parts and preserved capital in doing so as well as mitigate the risk a little bit.

Bob Napoli

What are you seeing on the competitive -- I'm sorry, go ahead.

Taylor Kamp

Like I say just to sort of finish that out. I think in keeping that the words I said earlier, any option is a possibility as we have increased volume, some of it will stay on balance sheet just like we always have and some of it could go off balance sheet, Bob.

Bob Napoli

Now, what have you seen on the competitive front, broadly in that product is as well as in the your historical core business, I mean obviously there were a lot of start-ups in kind of FinTech, then you have so called FinTech commercial finance origination businesses, a lot of companies hit that market. Have you seen -- what are you seeing -- are you seeing any of those companies disappear? Or are you seeing that there's a lot of room for new players? And are you seeing any change in the competitive environment broadly outside of that the funding stream product?

Taylor Kamp

Yes, I'll start Bob. So you used the term FinTech and of course we use it as well. We're the Fin part of that. A lot of these companies as you well know are technology, that are getting into Fin. We're a Fin that's getting more and using more technology to service to our customers. What we are seeing frankly is those all lenders getting a little more aggressive on the credit side and with pricing. I think they've got some pressures as certainly the public companies do and with all due respect, we think it's a mistake and we're not taking that approach. We came out with this product primarily to service our customers and we think it's working exceptionally well for us. It accounts for less than 10% of our overall originations in our 2016 plan. So, we’re not putting a huge weight towards that. As for those other companies, they’re very aggressive out there right now, but we’re staying clear. We’re not getting in that dogfight.

Bob Napoli

Great, that’s good to hear. It's a marathon not a sprint, and those that are sprinting today will probably not be here tomorrow, or next year.

Taylor Kamp

Couldn’t agree more Bob.

Operator

[Operator Instructions] Our next question comes from Don Destino of Harvest Capital. Your line is open.

Don Destino

I guess I am going to ask kind of a sprinting question referring back to Bob’s last couple of questions. There seem to be just a tremendous amount of demand on the institutional sides for small business very high yielding paper, and you guys obviously have a direct origination salesforce and a tremendous amount of credit history, which really distinguishes you from all these marketplace lenders that you were referring to in the answer to your last question. What is the opportunity there to do something more aggressive than to say, well look there is lots of loans that we don’t want to make for our balance sheet, but we know that there is lots of people with the risk appetite to want to invest in those loans. So why not provide them with that access to our network and raise some outside capital and generate some agency site income that would be very-very accretive to ROE? Is that -- I mean, I know you’re talking about syndications and alike. I mean is that a bridge too far or is that something that we could see?

Ed Siciliano

Yes. No that’s a good question Don. Clearly, because we’re a bank, we have to be prudent in who our partners are and how we do this. And our plans are not to change the demographics and the profile of the assets we put on balance sheet. And many times, we passed on assets that are -- the exposure is too large, or if there is some other attribute that doesn’t make sense for us given our capital. And so we will actively be looking or are looking for and have talked to potential partners that would at least share the funding with and share the upside on those assets. And so, that’s not only syndications but certainly some sort of partnering with facilities and things like that. We will be doing that and you’re absolutely right that there are institutional investors out there that are looking for higher return types of business. And so, we will generate incremental assets to what our core growth plan is and be high being those off in some form or fashion through syndication and/or partnering.

Don Destino

Great, thank you. And next I guess well I have got you here, any update on the CEO search?

Ed Siciliano

Sure Don. Yes our Board has formed a search committee and has interviewed many good candidates with the help of Korn Ferry. There is some great talent available and interested that would complement the current executive team. Things are progressing and hopefully an announcement will be coming later this quarter.

Operator

There are no further questions. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude your program and you may all disconnect. Everyone, have a great day.

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