Marlin reported Q2/18 net income of $6.5 million, up 41.3% from net income of $4.6 million a year ago. Second quarter net income on an adjusted basis was $6.5 million compared with $4.8 million a year ago.

Commenting on the company’s results, Jeffrey A. Hilzinger, Marlin’s president and CEO, said, “Marlin delivered another strong performance this past quarter highlighted by solid growth in origination volume, stable credit quality and expanding profitability. Excluding referral volume, total origination volume was $172.2 million for the quarter compared with $155.5 million last year, resulting in a year-over-year increase of 11%. Growth in the quarter was driven by continued traction in our Direct origination channel which focuses on providing financing to our existing customers. During the quarter, Direct origination volume increased to $36.3 million compared with $23.6 million last year, resulting in a year-over-year increase of 54%. Our investment in leases and loans increased to $963.1 million during the quarter, up 12% from a year ago, and our total managed portfolio grew to $1.1 billion, up 18% from a year ago. We also remained keenly focused on maintaining our disciplined underwriting standards as evidenced by our portfolio performance which remained stable and within expectations during the quarter.”

Hilzinger continued, “Subsequent to the end of the quarter, we successfully completed a $201.7 million asset-backed term securitization which both increases and diversifies our funding capabilities.  Most importantly, the transaction substantially improved our capital efficiency by releasing approximately $25 million of capital through a deeper advance rate against the financed assets which will ultimately lead to higher returns on equity by allowing us to continue to grow and scale within our existing capital base.”

Total origination volume (excluding referral volume) for the second quarter of $172.2 million was up 11% from a year ago. Direct origination volume of $36.3 million in the second quarter was up 54% from $23.6 million in the second quarter of 2017. Indirect origination volume in the second quarter of 2018 was $135.9 million, up slightly from $131.8 million in the same period a year ago. Referral volume totaled $5.6 million, down from $12.3 million in the second quarter last year, largely due to the transition of leases originated by Marlin’s Horizon Keystone Financial division to Marlin’s balance sheet over the past year.

Net interest and fee margin as a percentage of average finance receivables was 10.31% for the second quarter, down 12 basis points from the first quarter of 2018 and down 56 basis points from a year ago. With the execution of the ABS transaction, the company expects the margin to compress slightly.  The company’s interest expense as a percent of average finance receivables increased to 159 basis points compared with 149 basis points for the previous quarter and 125 basis points for the second quarter of 2017, primarily because of the rising interest rate environment.

On an absolute basis, net interest and fee income was $24.1 million for Q2/18 compared with $22.7 million for the second quarter last year. The increase continues to reflect the strong growth in the portfolio and the underlying earnings power of the business as the company continues to grow and scale.

Non-interest income was $4.6 million for Q2/18, compared with $5.2 million in the prior quarter and $4.1 million in the prior year period. The decrease in non-interest income compared to the prior quarter was primarily due to a $0.8 million decrease in gains-on-sale and referral fee income from the company’s capital markets activities due to lower asset sales, partially offset by an increase of $0.2 million in servicing fee income. The year-over-year increase in non-interest income is primarily due to a $0.5 million increase in gains-on-sale, $0.3 million increase in insurance related income and a $0.4 million increase in servicing fee income, partially offset by a decrease of $0.6 million in referral income.

Non-interest expense was $16.0 million for the second quarter of 2018, compared with $16.6 million in the prior quarter and $15.2 million in the second quarter last year. The decrease in non-interest expense compared to the prior quarter was primarily due to long term incentives and other benefit related expense as well as decreases in marketing and legal fees partially offset by increases in the servicing asset expense.  The year-over-year increase in non-interest expense is primarily due to employee related expense increases and an increase in commissions tied to originations and acquisitions as well as an increase in servicing asset expense.

The company’s efficiency ratio for the second quarter was 55.6% compared with 56.7% in the second quarter last year. Excluding acquisition related sales commissions and intangible amortization, the efficiency ratio in the second quarter of 2018 was 54.3% as compared to 55.2% in the second quarter last year. Marlin expects its efficiency ratio to continue to improve as the company leverages its fixed costs through continued portfolio growth and from continued operational efficiencies generated by its various process renewal initiatives.

Marlin recorded an income tax expense of $2.1 million, representing an effective tax rate of 24.1% for the second quarter of 2018, compared with an income tax expense of $2.7 million, representing an effective tax rate of 37.5% for the second quarter of 2017.
Portfolio Performance

Allowance for credit losses as a percentage of total finance receivables was 1.62% at June 30, 2018 compared with 1.68% at March 31, 2018 and 1.46% at June 30, 2017, with the year-over-year increase driven by generally higher portfolio delinquency and net charge-offs.

Finance receivables over 30 days delinquent were 0.96% of the company’s total finance receivables portfolio as of June 30, 2018, down 9 basis points from March 31, 2018 and up 4 basis points from June 30, 2017.

Finance receivables over 60 days delinquent were 0.55% of the company’s total finance receivables portfolio as of June 30, 2018, down 9 basis points from March 31, 2018 and up 3 basis points from June 30, 2017. Annualized second quarter net charge-offs were 1.84% of average total finance receivables versus 1.68% in the first quarter of 2018 and 1.65% a year ago. The overall increase in delinquency and charge-offs year-over-year is attributed to a return to a more normal credit environment.

As of June 30, 2018, the company’s consolidated equity to assets ratio was 17.03%. This compares to 17.17% and 16.67%, in the prior quarter and year ago quarter, respectively.

Corporate Developments

Marlin’s board of directors declared a $0.14 per share quarterly dividend. The dividend is payable August 23, 2018, to shareholders of record on August 13, 2018. Based on the closing stock price on August 1, 2018, the annualized dividend yield on the company’s common stock is 1.82%.

Subsequent to the end of the quarter, Marlin announced that it completed a $201.7 million asset-backed notes term securitization. This transaction was Marlin’s 11th term securitization and its first since 2010.  As with all prior term securitizations, this financing provides the company with fixed-cost borrowing and will be recorded on its balance sheet as a financing transaction.  The notes, which were issued in seven classes, have fixed interest rates ranging from 2.55% to 5.02% (with a weighted averaged fixed interest rate of 3.41%) and legal final maturity dates ranging from July 22, 2019 to May 20, 2025. Marlin intends to use proceeds from the transaction to fund the growth of its portfolio of loans and leases and for general corporate purposes.

Business Outlook

• The company is maintaining guidance for the full year ending December 31, 2018 as follows:
• Total origination volume (including referral volume) is expected to finish approximately 15% to 20% above 2017 levels
• Portfolio performance is expected to remain in-line with the results observed over the past twelve months
• Net interest margin, as a percentage, is expected to be between 9.75% and 10.00%
• ROE is expected to improve in 2018 as the Company continues to improve operating scale
• EPS is expected to be between $2.00 and $2.10 per share

Commenting on Marlin’s business outlook for the full year, Hilzinger said, “Given our origination volume through the first half of 2018, we’ve updated our original guidance of 20% growth to a range of 15% to 20% growth.  The primary driver underlying this change is the near-term impact of open sales positions resulting from several restructuring initiatives that we’ve implemented within our salesforce to better position it for future growth. In addition, due to the lag we are experiencing in passing through increases in base interest rates, our decision to upsize the recent securitization due to better-than-expected execution and updated assumptions regarding product mix, we’ve adjusted our net interest margin guidance from a range of 10.00% to 10.25% to a range of 9.75% to 10.00%. And, finally, as a result of our strong EPS performance during the first half of the year, we have increased the bottom of our guidance range by $0.05 and we now expect full year earnings in a range of $2.00 to $2.10 per share. Overall, we are pleased with our recent performance and anticipate that our continued focus on execution will help drive profitable growth in 2018 and beyond.”