Marlin Business Services: Originations Accelerate in Second Quarter

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Marlin released slightly better-than-expected June-quarter earnings on July 29, adjusted EPS rose 11% year-over-year to $0.38 (versus our $0.37 estimate); upside was primarily driven by lower-than-expected loss provisions and expenses. Return on average equity rose 57 basis points quarter-to-quarter, to 11.88%, and was up 190 basis points year-over-year. We continue to believe Marlin is under-leveraged at 3.2 times debt to equity (2.6 times net debt to equity) and an equity-to-assets ratio of 22.9% (versus management’s target of 19%).

Citing strong June-quarter results and a strong outlook, management raised its quarterly dividend 13.6%, to $0.125 (up from $0.11 per share), and authorized a $15 million share-repurchase program; 0.114 million shares were repurchased in the June quarter. As expected lease originations improved sequentially, rising 20% quarter-toquarter, to $88.9 million ($0.1 million above our estimate); recall poor weather and heightened competition drove an 8.6% year-over-year decline in the March quarter. Management also attributed accelerating growth to various internal business development efforts (e.g., adding more small dealers, more marketing), and growth trends continued into July. Growth in small dealers should place upward pressure on yield, as national accounts generally have lower yield.

Net interest and fee margin fell 39 basis points quarter-to-quarter, to 12.66%, and remains 70 basis points below year-ago levels. Management expects an additional 30- 40 basis points of pressure on net interest and fee margin in the second half of 2014, partially due to lower pricing on new originations, which were 11.35% in the June quarter (versus 11.27% in the March quarter and a peak of 15.8% in the June 2009 quarter). In addition, we attribute pressure to the run-off of higher yielding assets, business mix (more healthcare), and larger transaction size. For perspective, net interest and fee margin peaked at 13.5% in the December 2012 quarter.

Cost of funds rose 1 basis point quarter-to-quarter, to 0.81%, and are down 7 basis points year-over-year; recall Marlin is fully funded with insured deposits. Operating efficiency (operating expenses as a percent of total revenue) continues to improve sequentially; management anticipates 50%-52% going forward. The efficiency ratio (operating expenses as a percent of total revenue) fell 390 basis points quarter-to-quarter, to 50.4%, and remains 260 basis points below year-ago levels. Despite a sequential uptick in charge-offs, credit trends are tracking in line with management’s expectations. In the June quarter charge-offs rose 33 basis points quarter-to-quarter, to 1.71%, marking the highest level since the September 2011 quarter.

Management attributed the increase largely to timing and expressed confidence in the trajectory of trends. The 30-day delinquencies fell 6 basis points quarter-toquarter, to 0.79%, and remain 16 basis points below year-ago levels. Similarly, 60-plus day delinquencies remained relatively stable, rising 1 basis point quarter-to-quarter, to 0.51% of receivables.

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