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Marlin Business Services Corp  (NASDAQ:MRLN)
Q4 2018 Earnings Conference Call
Feb. 01, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Greetings and welcome to the Marlin Business Services Corp.'s Fourth Quarter 2018 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. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Lasse Glassen, Managing Director, Investor Relations. Thank you. You may begin.

Lasse Glassen -- Managing Director and Investor Relations

Good morning and thank you for joining us today for Marlin Business Services Corp.'s 2018 Fourth Quarter and Full Year Earnings Conference Call. On today's call is Jeff Hilzinger President and Chief Executive Officer along with Lou Maslowe, Senior Vice President and Chief Risk Officer.

Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to Marlin's recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial conditions. With that, it's now my pleasure to turn the call over to Marlin's President and CEO, Jeff Hilzinger, Jeff?

Jeffrey A. Hilzinger -- Chief Executive Officer

Thank you, Lasse. Good morning and thank you everyone for joining us to discuss our 2018 fourth quarter and full year results.

I will begin with an overview of our fourth quarter and full year highlights as well as a progress update on our Marlin 2.0 strategy that continues to transform our Company from a micro-ticket equipment lessor into a broader provider of credit products and services to small businesses. Lou Maslowe, our Chief Risk Officer, will comment on credit quality. After Lou's remarks, I will provide additional detail on our fourth quarter financial results and business outlook.

We completed the year with a strong fourth quarter driven by solid origination volume and overall portfolio performance. Our efforts led to net investment in leases and loans reaching a record level along with excellent year-over-year growth in adjusted net income.

Fourth quarter Total Sourced Origination volume was $216.3 million compared with $186.5 million last year, resulting in a year-over-year improvement of 15.9%. This increase was fueled by strong growth from both our Equipment Finance and Working Capital Loan products. In addition, as part of Marlin's capital markets initiatives, we referred or sold $62.6 million of leases and loans. Due to these origination and capital markets activities, our net investment in leases and loans increased 9.4% from a year ago and surpassed the $1 billion milestone for the first time in Company history. At the same time, total managed assets grew to nearly $1.2 billion, an increase of 17.8% from a year ago.

While the overall performance of our portfolio remains strong, charge-offs during the fourth quarter were elevated due primarily to fraudulent activity by a single vendor. Outside of this incident and as Lou will discuss further in his comments, portfolio performance was stable and importantly, we continue to expect our overall portfolio performance to remain stable and within our targeted range during 2019.

At the bottom line, we reported GAAP earnings of $0.51 per diluted share compared with $1.27 per diluted share for the fourth quarter last year. As you may recall, fourth quarter 2017 earnings included a net tax benefit resulting from the Tax Cuts and Jobs Act of 2017, which required the Company to revalue its deferred tax assets and liabilities and resulted in a $10.2 million one-time benefit recorded in the quarter. Excluding the impact of this and other non-recurring items, 2018 fourth quarter adjusted net income of $6.4 million or $0.51 per diluted share was up nearly 9% compared with adjusted net income of $5.9 million or $0.47 per diluted share a year ago.

And for the full year 2018, adjusted net income of $25.4 million or $2.04 per diluted share increased nearly 35% from $18.9 million or $1.50 per diluted share in 2017. Excluding the fraud, adjusted earnings per share for 2018 would have been $2.11. A reconciliation of GAAP to adjusted basis net income is available in the press release issued yesterday afternoon.

We also recently announced a key addition to Marlin's senior leadership team with the hiring of Mike Bogansky as Senior Vice President and Chief Financial Officer. Next Monday will be Mike's first day with the Company and I look forward to introducing him in person on our next earnings call. As CFO, he will have responsibility for managing all of Marlin's accounting, financial reporting and planning, treasury, tax and investor relations activities. Before joining Marlin, Mike was CFO of PHH Corporation, a publicly traded mortgage origination and servicing company, which merged recently with Ocwen Financial Corporation. I am very confident that Mike is the right person to lead Marlin's finance and accounting activities at an increasingly strategic level, which is necessary given Marlin's recent growth and increasing complexity and I know Mike looks forward to meeting and speaking with many of you soon.

I'd now like to switch gears and provide an update on our business transformation initiative that we refer to as Marlin 2.0. Through Marlin 2.0, we expect to drive growth and improve returns on equity by first, strategically expanding our target market; second, better leveraging the Company's capital base and fixed cost through origination and portfolio growth; third, improving our operating efficiency by better leveraging fixed cost through scale and through operational improvements to reduce unit processing costs; and fourth, proactively managing the Company's risk profile to be consistent with our risk appetite.

I'd like to share with you the progress we've made in each of these areas since our last call. First, with respect to our strategic market expansion, under the Marlin 2.0 strategy, rather than thinking of ourselves as solely an equipment lessor, we are focused on providing multiple products and developing financing solutions to help small businesses grow. As part of this, we have also broadened our go-to market strategy by not only continuing to originate through our equipment vendor partners, but also directly with our end-user customers.

While our core Equipment Finance business continues its growth trajectory, we're also pleased with the consistently strong performance of our Working Capital Loan product. Fourth quarter Working Capital Loan origination volume expanded by nearly 20% year-over-year to $19.8 million. For the full year, Working Capital Loan origination volume was $74.2 million, increased nearly 26% over the prior year. We also remained pleased with our efforts to provide financing solutions directly to our end-user customers. A key part of our go-to market strategy is leveraging our relationships with our end-user customers including our approximately 80,000 active small business customers and the 2,500-plus new customer relationships we originate each month.

The objective under our direct strategy is to identify additional financing opportunities with these existing customers by offering multiple products and to create ongoing relationships with these customers by meeting a broader set of their financing needs. During the quarter, direct origination volume increased to $40.4 million, up from $31.6 million in the fourth quarter last year and resulting in a year-over-year increase of 28%. For the full year, direct origination volume of $143.1 million, increased almost 57% over the prior year. Going forward, we expect both indirect and direct origination momentum to be further enhanced through a new Marlin branding campaign that we will be rolling out within the next several weeks. So please stay tuned.

And finally, the fourth quarter marked the first full quarter of contributions from our recent acquisition of Fleet Financing Resources or FFR, which closed late in the third quarter. As you may recall, FFR is focused on financing commercial transportation equipment with an emphasis currently on livery equipment such as motor coaches, buses, shuttle buses and other equipment used in the movement of people.

During the fourth quarter, we completed the integration of FFR and renamed the platform Marlin's Commercial Vehicle Group. The Commercial Vehicle Group will continue to pursue our previously stated vocational transportation equipment strategy, which focuses on financing transportation equipment used by small businesses rather than equipment used primarily by transportation companies. With FFR now fully integrated, our Commercial Vehicle Group brings to bear significant domain expertise across the entire vocational transportation equipment spectrum while also accelerating growth and providing additional scale to the platform.

During the quarter, FFR originated $15.8 million with origination volume expected to exceed $90 million during 2019. We look forward to updating you on the progress of our Commercial Vehicle Group in the coming quarters.

We also made good progress during this past year on our second key priority, which focuses on leveraging Marlin's capital and fixed cost through growth. Thanks to strong origination volume and solid portfolio growth during the quarter and full year, we were able to reduce Marlin's equity to assets ratio to 17% from 17.3% at the end of last year.

Also during the fourth quarter and into the first quarter of 2019, we repurchased 1.5 million of Marlin common stock, which we believe was a compelling use of our capital. In addition, we continued to manage the size and composition of our balance sheet through our capital markets activities.

Along with providing Marlin with another source of funding, we view these transactions as a way to optimize our portfolio by better managing its overall size and composition in terms of returns, credit risk and exposure levels to particular industries, geographies and asset classes. During the fourth quarter, we sold a total of $58 million in assets that generated an immediate net pre-tax gain on sale of approximately $3.5 million.

Overall, fourth quarter asset sales were higher than previous quarters as a result of strong investor demand for Marlin's product and also due to the production contributed by FFR, a large portion of which was originated for sale.

Looking at our third area of focus, we also continue to make strides in better leveraging the Company's fixed cost through growth and by improving operational efficiencies through ongoing process improvements. After adjusting for temporary acquisition-related costs and the reclassification of servicing asset amortization that was implemented in mid-2018, our non-GAAP operating efficiency ratio for the full year improved to 53.2% from 55% last year and our non-GAAP non-interest expense as a percentage of average managed finance receivables for the full year improved to 5.9% from 6.7% in 2017. Overall, I am pleased with both the measurable progress we have made in streamlining and automating our business processes.

We expect our adjusted efficiency ratio to continue to improve in the future as we further leverage our fixed cost and portfolio growth and operate more efficiently through our various process renewal initiatives.

Our fourth and final key area of focus is proactively managing the Company's risk profile to be commensurate with our risk appetite. Throughout 2018, we work to fine-tune our enterprisewide risk management program that defines the aggregate level and types of risk Marlin is willing to assume to achieve our strategic growth and profitability objectives.

While this has been an ongoing effort, our work is yielding good results. However, as I mentioned earlier, charge-offs during the fourth quarter were elevated due primarily to fraudulent activity by a single vendor. Lou will speak in more detail about the actions we have taken to mitigate future fraud activity in his remarks, but overall, we expect our portfolio performance to continue to be stable and remain within our targeted range.

In summary, we enjoyed a strong fourth quarter notwithstanding the elevated charge-offs from fraud, which we view as a non-recurring event. Looking-forward, we're expecting another good year in 2019 and I strongly believe that we are very well positioned to pursue the many opportunities that exist in our market.

With that, I'd like to now turn the call over to Lou Maslowe, our Chief Risk Officer to discuss the performance of our portfolio in more detail. Lou?

Louis E. Maslowe -- Senior Vice President and Chief Risk Officer

Thank you, Jeff, and good morning, everyone. Looking at the key asset quality metrics, Equipment Finance receivables over 30 days delinquent were 1.08%, up 6 basis points from the prior quarter and 4 basis points from the fourth quarter of 2017.

Equipment Finance receivables over 60 days delinquent was 0.65%, up 8 basis points from the third quarter and up 9 basis points from the fourth quarter of last year. The gradually increasing delinquency we continue to experience is consistent with industry trend. A benchmark that we utilize is the PayNet 31- to 90-day small business delinquency index, which increased year-over-year by 8 basis points, while Marlin's comparable delinquency increased 4 basis points. This modest increase in the delinquency levels is still within our expected range.

Aggregate net charge-offs increased in the fourth quarter to 2.3% of average finance receivables on an annualized basis as compared with 1.9% in the prior quarter and 1.87% in the fourth quarter of 2017. Equipment Finance charge-offs increased by 38 basis points quarter-over-quarter and 37 basis points year-over-year. As Jeff mentioned, the quarter-over-quarter increase was primarily due to $1.2 million in charge-offs during the fourth quarter, due to fraudulent activity by a single vendor. Excluding the vendor fraud, Equipment Finance charge-offs for the quarter would have been 1.69%, the lowest since Q1 of 2018.

As mentioned in the earnings call last quarter, Marlin has been experiencing increased fraud activity. It is important to recognize that fraud has always been a risk inherent to the Equipment Finance business, especially in the small ticket market. And based on recent discussions with other small ticket risk management leaders, the entire industry is dealing with increased fraud. Fraud is an operational risk that is track against limits defined in Marlin's risk appetite statement, and our objective is to manage the amount of risk within these tolerances because our business model assumes a certain level of fraud based on historical experience.

While fraud can take many forms, the most common transactional fraud that we are seeing is identity theft, both of the vendor and the end-user. However, the most dangerous fraud risk from Marlin's business model is fraud perpetrated by a vendor, because it can impact an entire portfolio of transaction. As stated earlier, it was a vendor fraud that led to $1.2 million charge-off in Q4.

To be clear, we view this fraud event as unacceptable and well above our risk appetite. We also believe it to be an extraordinary, nonrecurring event given the actions we have taken over the past year to strengthen our fraud defenses against the increase in both transactional and vendor fraud accounts. These actions to combat fraud risk include the implementation of new anti-fraud tool, increase vendor surveillance staff and enhancements to procedures.

Some specific examples include; our data science team developed a model of utilizing Marlin's historical data to identify applications that have attributes indicating a higher-risk of fraud. We've implemented fraud detection tools to identify high-risk email and IP addresses. We've tightened our electronic documents requirements, making identity theft even more difficult. We've increased fraud prevention training throughout the organization, since fraud can be detected at almost every step in the customer onboarding process. And we've enhanced our vendor surveillance resources and procedures, focused on identifying programs that have high-risk characteristics.

Fraud prevention will continue to be a top priority for the Company, and we will continue to identify and implement state-of-the-art tools and technological solutions to ensure that we keep progress within our risk appetite.

Transitioning now to discuss working capital loans. Both 15-plus and 30-plus delinquency increased during the fourth quarter. While the number of delinquent loans increased, the main driver behind the increase was a small number of larger accounts in the 30-plus delinquent bucket. As discussed on prior calls, working capital loan delinquency is more volatile than Equipment Finance given the larger balances and smaller number of contracts in the portfolio, but it remains within an accessible range. Working Capital Loan charge-offs in the fourth quarter increased to 5.28% of average finance receivables on an annualized basis from 4.42% in the third quarter. As I have mentioned on previous calls, we target an annual charge-off rate of 6% for this product in the current economic environment. So while Working Capital Loan charge-offs were up a bit higher sequentially, asset quality remains within an acceptable range.

The allowance for credit losses was 1.62% of average finance receivables, down 3 basis points in the fourth quarter. This improvement was driven by a decrease in the Equipment Finance allowance from 1.55% to 1.52% due to better-than-expected performance in our legacy transportation portfolio. We also experienced 20 basis point improvement for the working capital loan product from 4.22% to 4.02% due to better-than-expected portfolio performance.

Looking back over 2018, we are pleased with our overall portfolio performance, notwithstanding the fraud experienced in Q4, which, as previously noted, we view as a nonrecurring event. The Equipment Finance net charge-offs, excluding fraud, were right in line with our expectations, and the working capital loan portfolio continued to perform better than target.

Looking ahead, we continue to expect the credit environment to remain stable through 2019. We monitor small business sentiment, utilizing indices published by the National Federation of Independent Businesses and Thomson Reuters PayNet. And although small business optimism has tempered somewhat in recent months, the indices both remained at historically high levels.

With that, I'll turn the call back over to Jeff for a more detailed discussion of our fourth quarter financial performance. Jeff?

Jeffrey A. Hilzinger -- Chief Executive Officer

Thank you, Lou. Through the quarter, yield on total originations was 12.36%, down 41 basis points from the prior quarter and up 77 basis points from the fourth quarter of 2017. Fourth quarter yield on direct originations was 21.79%, down 60 basis points from the prior quarter due primarily to product mix, but up 257 basis points from a year ago, reflecting the Company's ability to passthrough base rate increases in this channel.

The yield on indirect originations for the quarter was 9.97%, down 32 basis points from the third quarter due primarily to continued changes in our origination mix to our platforms that have generally lower yields, but with commensurate lower credit risk.

For the quarter, net interest margin, or NIM, was 9.76%, down 18 basis points from the prior quarter and down 81 basis points from the fourth quarter of 2017. The decrease in NIM on a year-over-year basis was primarily a result of an increase in interest expense, partially offset by an increase of 77 basis points in the yield on new origination volume over last year. As we've discussed previously, we continue to passthrough increases in our cost of funds, due to increasing base interest rates as aggressively as the market will allow.

The Company's interest expense as a percent of average finance receivables increased to 220 basis points compared with 207 basis points for the previous quarter, due exclusively to the securitization completed in the third quarter. Interest expense as a percent of average finance receivables increased from 145 basis points from the fourth quarter of 2017, due primarily to the impact on funding costs from the recent securitization and to a lesser extent, an increase in deposit rates. It is important to note that the increased interest expense on the securitized assets is more than offset by the increased leverage that was generated with the net result being significantly accretive to ROE over time as the Company fully leverages the capital released from the securitization.

Fourth quarter non-interest expenses were $16.4 million compared with $15.7 million in the prior quarter and $15.4 million in the fourth quarter last year. The year-over-year increase was primarily due to a $1 million increase in sales commissions driven by the increase in year-over-year origination volume. Non-interest income was $7.1 million for the fourth quarter compared with $4.4 million in the prior quarter and $5.3 million in the prior year period. The year-over-year increase in non-interest income was primarily due to a $1.6 million increase in syndication income from the increase in year-over-year asset sales.

During the fourth quarter and into the first quarter of 2019, we repurchased approximately 62,000 shares of Marlin common stock for an average price of approximately $23 per share. We believe the current share price is not indicative of Marlin's long-term intrinsic value, and that these repurchases highlight our confidence in the Company, and we see it as both a timely and appropriate use of our capital. As of today, $5 million of the $10 million stock repurchase program announced on May 30, 2017 remains available for future purchases.

And finally, our Board of Directors declared a regular quarterly dividend of $0.14 per share payable on February 21, 2019 to shareholders of record as of February 11, 2019.

Now turning to our business outlook for 2019. Total Sourced Origination volume is expected to increase approximately 20% above 2018 levels. Excluding the vendor fraud experienced in the fourth quarter of 2018, portfolio performance is expected to remain in line with the results observed over the past 12 months. Net interest and fee margin as a percentage of average finance receivables is expected to be between 9.5% and 10%. ROE is expected to continue to improve in 2019 as the Company continues to improve operating scale. And lastly, earnings per share is expected to be between $2.30 and $2.40.

That concludes our prepared remarks. And with that, let's open up the call for questions. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Chris York with JMP Securities. Please proceed with your question.

Christopher York -- JMP Securities -- Analyst

Hi, guys. Good morning.

Jeffrey A. Hilzinger -- Chief Executive Officer

Good morning.

Christopher York -- JMP Securities -- Analyst

So Jeff, I know as Mike join next week, but I'm curious, did you weigh in over the last the 2019 outlook?

Jeffrey A. Hilzinger -- Chief Executive Officer

No. He participated in the last set of board meetings, Chris, to meet the board and to experience the rhythm of governance process, but he hasn't yet commented specifically or contributed specifically to the guidance.

Christopher York -- JMP Securities -- Analyst

Got it. Okay. And then, Jeff, how would you characterize the competitive environment today, as we've heard, anecdotally that many new entrants have targeted your lending niche?

Jeffrey A. Hilzinger -- Chief Executive Officer

We continue to see -- I think if you segment the flows, Chris, between credit quality and transaction size, the typical Marlin market were lower -- smaller transaction sizes and lower credit quality. We continue to compete against sort of the traditional set of competitors that we always have, and we don't necessarily see a concerted increase in competition at that point. I think when you start to get to the larger transaction sizes and the better credits, we begin to touch the sort of the market adjacency with a lot of small banks. And so we are feeling increased competition, I think, for the higher credit quality, higher transaction sizes than we did a year ago or a year before that.

Christopher York -- JMP Securities -- Analyst

Okay. Looking down on the income statement, your reported interest income yield declined appears to be 9 basis points sequentially. Is there anything occurring within the portfolio mix or within pricing specifically, that could explain that change?

Jeffrey A. Hilzinger -- Chief Executive Officer

Yes. It's -- as I said in my comments, we continue to try to pass through the increase in our cost of funds from base rate increases as aggressively as possible. But the price sensitivity within those flows can be very different between, again, high credit quality customers with large transaction requirements versus lower credit quality customers with smaller transaction requirements. So there's -- some of the NIM compression is from that. And then also, I think we've got a shift in mix that continues to happen away from the sort of legacy Equipment Finance business that Marlin has into platforms that generally have lower yields, but also have lower lifetime credit losses as well.

Christopher York -- JMP Securities -- Analyst

Got it. Makes sense. And then last question here, as I look out to 2020, it appears you may still be in a position of excess capital. And withstanding any capital structure changes that could put pressure on your '20 ROE guidance. So what levers are you thinking about today to potentially optimize your capital position and is the pursuit of tuck-in acquisitions still a consideration?

Jeffrey A. Hilzinger -- Chief Executive Officer

Yes. It is still a consideration. I mean, the good news for the company is that we do generate a lot of capital in any given year, and we're going to continue to generate a lot of capital over the next two to three years. And I think as we've shown with HKF and then with FFR that there are opportunities for us to be able to grow inorganically, and I think that that's something that we're going to continue to pursue and will take advantage of as we find platforms that are -- make strategic sense and are accretive to earnings. We are actively in the market repurchasing shares. We were in the fourth quarter until the beginning of the first quarter. We continue to see that as a good use of capital, particularly in today's market environment. And we've got pretty significant organic growth opportunities as well. So I think that the capital use is going to be a function of those sort of three drivers.

Christopher York -- JMP Securities -- Analyst

Got it. That's it for me. Thanks, Jeff.

Jeffrey A. Hilzinger -- Chief Executive Officer

Thanks, Chris.

Operator

Thank you. Our next question comes from the line of Brian Hogan with William Blair. Please proceed with your question.

Brian Hogan -- William Blair & Company, LLC -- Analyst

Hey, good morning.

Jeffrey A. Hilzinger -- Chief Executive Officer

Good morning, Brian.

Brian Hogan -- William Blair & Company, LLC -- Analyst

First, a question on the originations. 20% year-over-year growth guidance in 2019 for the sourced originations. One, what is your confidence in that level in today's, shall we say, economic environment that's maybe a little more uncertain given the political environment and the global economy and what have you -- what's the confidence in that level? And then, how do you get there from a mix perspective like owned versus, originated for sale in referral and what have you?

Jeffrey A. Hilzinger -- Chief Executive Officer

Yes. That's -- so the -- I think in terms of the macro environment, Brian, we're -- that guidance is assuming that we continue to stay in the same sort of basic kind of economic environment that we're in now. So if the economic environment changes and demand for equipment or demand by small businesses for capital declines, then that's going to affect our ability to be able to grow at that level. The total sourced origination growth guidance of 20% does include FFR, which we're expecting in 2019 to originate around $90 million. So it's -- the increase in origination growth or in origination volume is a function of sort of historical growth rate that we've had in our organic originations and then the full year impact of FFR. But there is -- we will continue -- we continue to believe that these quarterly asset sales and the way that we could use them to optimize the composition of portfolio is a really strong capability for us. So we're expecting that asset sale levels will continue at the sort of the same rate that they've been in 2018. But if you recall in FFR's case, they're -- about 80% of their origination volume will be originated for sale because we're using the gain on sale to help offset the supplemental commission that we're paying as part of the transaction -- the acquisition structure. And then unlike in HKF's case, there's a lot more out-of-work concentration issues within FFR because they do a lot more repeat business with a smaller number of customers. So even when we're through the supplemental commission period, there will most likely always be in the core FFR business a lot of referral volume, syndication volume as we use that as a way to let the platform originate at its optimal level, serving all of its customers the most it can, but also managing and controlling out-of-work concentration risk.

Brian Hogan -- William Blair & Company, LLC -- Analyst

All right. Then when you say some of the sale volume, the syndication volume benefit -- increasing from FFR, but you said otherwise be stable with 2018, I guess syndication volume of $139 million in 2018. So help me understand next in 2019 syndication volume, you're expecting that to be up because of FFR or -- just clarify that, please?

Jeffrey A. Hilzinger -- Chief Executive Officer

Yes. So the $139 million, that is actual syndication activity that's off our balance sheet. So the FFR referral volume, in most cases, those transactions don't like even touch our balance sheet. They're originated, and then we have a place to actually fund them before they hit our balance sheet. So the way you should think about it is sort of a similar amount of syndicated volume, $135 million, $140 million in 2019 on a quarterly rhythm, and then about 80% of the $90 million from FFR would be in addition to that.

Brian Hogan -- William Blair & Company, LLC -- Analyst

Okay. That's helpful. Thank you. And then I guess hitting on operating efficiency because I think that's a big part of the story, but it's kind of remained stable and higher. I know you anticipating getting an improvement in 2019, but I guess what steps are you taking to improve that? I just -- the year-over-year improvement doesn't seem to come in as maybe anticipated like you haven't hit that inflection point or something like that?

Jeffrey A. Hilzinger -- Chief Executive Officer

Yes. I think we're -- we improved on -- when you adjusted for the temporary commissions for HKF and FFR, it increased by a couple of hundred basis points. And I think what we're doing is we're finding opportunities. We're investing in growth engines, whether it's adding additional salespeople or acquiring companies like FFR or HKF, and then I think also taking advantage of some of additional capabilities in the company like data science and product development and digital marketing. We're definitely deciding or choosing to make some investments in those areas so that we maintain to make sure that we have multiple growth drivers in the business. So we expect the operating efficiency and the ROE to continue to improve in 2019, probably in the same level of improvement as we experienced from '17 to '18.

Brian Hogan -- William Blair & Company, LLC -- Analyst

Sure. And then on credit, have you done any tightening? I mean, what are your views on the economy? I mean, is that -- have you tightened because of the economic outlook? Or is it just -- I know you've outlined your credit loss assumptions for 2019 being relatively stable. I mean, I understand that, but have you done any tightening?

Jeffrey A. Hilzinger -- Chief Executive Officer

Let me ask Lou and take a shot at that.

Louis E. Maslowe -- Senior Vice President and Chief Risk Officer

Yes. I would say that we have not tightened across the board. We're always monitoring portfolio performance and slicing and dicing by branch, dollar size and looking at the portfolio performance in a variety of ways. So we're constantly making adjustments. But right now, based on how our portfolio is performing, it's not -- we don't see a need, and it's not our intent to kind of wide scale adjustment to become more conservative.

Brian Hogan -- William Blair & Company, LLC -- Analyst

Sure. And then your views on the economy?

Louis E. Maslowe -- Senior Vice President and Chief Risk Officer

I think that there are concerns out there, there are headwinds. I'm not trying to be an economist, but there's still a lot of predictions for recession in 2020. So we watch our metrics closely. We also watch closely the metrics -- macroeconomic indicators. One of the items that I keep an eye on is PayNet does forward-looking absolute PD analysis that forecast utilizing macroeconomic variables, default experience in the next 12 months. And they showed some increases in the past year, and the forecast for the next year is up about 8 basis points, an increase in default rate by about 8 basis points, which for them is from the -- at 2.37%. So I think it's a modest increase. It's probably in line with what we can expect. There's some very gradual increase and default levels, but nothing material and nothing that would cause us to make a change to our current underwriting strategy.

Jeffrey A. Hilzinger -- Chief Executive Officer

Yes. I would say to that, Brian, that our crystal ball is no better than anybody else's, but I think we all believe that the only thing we know for sure is that we're one day closer to a downturn today than we were yesterday. So it's on our minds. We're watching the portfolio closely. We're using our data science team to help us understand if there are trends or emerging trends that would help inform us as to whether we should be changing our underwriting standards. But at this point, based upon -- as Lou said, based upon the portfolio's performance, we're -- we haven't made any of those changes yet.

Brian Hogan -- William Blair & Company, LLC -- Analyst

Sure. The gain on sale yield was roughly 6% in the quarter. Do you think that's a good run rate? I mean, it's bounced up a little bit from the prior quarter, but what do you think a good run rate is?

Jeffrey A. Hilzinger -- Chief Executive Officer

Yes. I think that's -- I think 600 basis points is a good number.

Brian Hogan -- William Blair & Company, LLC -- Analyst

All right. And then in previous calls we talked about the longer term ROE outlook. Has that changed at all? And how soon do you get there?

Jeffrey A. Hilzinger -- Chief Executive Officer

There's nothing that we see in the business that would cause us to think that the ROE potential of the business, Brian, is different today than we thought it was a year or two ago. I think we're -- as we're evolving the business and as we're developing new products, I think that the way we deliver those products are going to likely change over time, a more digital approach, which I think also helps operating efficiency and helps leverage fixed cost, but also I think make sure that we're delivering our products and services in a way that the changing demographic of our customers want to be able to access those. So I think probably what will happen here is that the operating efficiency will not improve quite as much as we thought because we'll be investing more in the business, but we'll -- it'll be resulting in a faster growth of products that have higher yields and look more like our working capital loan product, which will more than offset that, while allowing the Company to sort of make sure that we're staying current in the way that we interface with our customers in the market.

Brian Hogan -- William Blair & Company, LLC -- Analyst

All right. Thank you for your time.

Jeffrey A. Hilzinger -- Chief Executive Officer

Thank you.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Hilzinger for any closing remarks.

Jeffrey A. Hilzinger -- Chief Executive Officer

Thank you for your attention and for joining us on today's call. I'd also like to thank our shareholders for their continued support as well as our world class employees for their tireless efforts and dedication this past year. We enjoyed a strong fourth quarter and a great year in 2018, highlighted by excellent adjusted earnings growth and accelerating origination volume in the second half of the year.

With the momentum we carry into 2019, Marlin is poised for another terrific year of profitable growth and we look forward to speaking with you again, when we report our 2019 first quarter results in early May. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Duration: 42 minutes

Call participants:

Lasse Glassen -- Managing Director and Investor Relations

Jeffrey A. Hilzinger -- Chief Executive Officer

Louis E. Maslowe -- Senior Vice President and Chief Risk Officer

Christopher York -- JMP Securities -- Analyst

Brian Hogan -- William Blair & Company, LLC -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.