UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
QUARTERLY REPORT
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
September 30, 2020
Commission file number
000-50448
MARLIN BUSINESS SERVICES CORP.
(Exact name of registrant as specified in its charter)
Pennsylvania
38-3686388
300 Fellowship Road
,
Mount Laurel
,
NJ
08054
(Address of principal executive offices)
(Zip code)
(
888
)
479-9111
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 per share
MRLN
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
☑
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
registrant was required to submit such files.)
Yes
☑
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See the definitions of "large accelerated filer,” “accelerated filer", “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☑
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act
.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes
☐
No
☒
At October 23, 2020,
11,974,548
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2020
TABLE OF CONTENTS
Consolidated Statements of Comprehensive Income (Loss) for the three- and nine - month periods ended
................................................................ ................................................................ ...................................... 70
-3-
PART I. Financial Information
Item 1. Consolidated Financial Statements
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30,
December 31,
2020
2019
(Dollars in thousands, except per-share data)
ASSETS
Cash and due from banks
$
5,436
$
4,701
Interest-earning deposits with banks
189,696
118,395
195,132
123,096
Time deposits with banks
8,456
12,927
Restricted interest-earning deposits related to consolidated VIEs
5,771
6,931
Investment securities (amortized cost of $
10.6
11.1
September 30, 2020 and December 31, 2019, respectively)
10,761
11,076
Net investment in leases and loans:
357,500
426,608
550,553
601,607
Net investment in leases and loans, excluding allowance for credit losses (includes $
39.3
$
76.1
VIEs)
908,053
1,028,215
Allowance for credit losses
(61,325)
(21,695)
846,728
1,006,520
Intangible assets
5,846
7,461
Goodwill
0
6,735
Operating lease right-of-use assets
7,729
8,863
Property and equipment, net
8,422
7,888
Property tax receivables, net of allowance
8,580
5,493
Other assets
8,526
10,453
$
1,105,951
$
1,207,443
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
$
823,707
$
839,132
Long-term borrowings related to consolidated VIEs
39,833
76,091
Operating lease liabilities
8,790
9,730
Other liabilities:
5,706
2,678
25,533
34,028
20,032
30,828
923,601
992,487
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $
0.01
5,000,000
0
0
Common Stock, $
0.01
75,000,000
11,974,651
12,113,585
120
121
75,893
79,665
93
58
106,244
135,112
182,350
214,956
$
1,105,951
$
1,207,443
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-4-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
(Dollars in thousands, except per-share data)
Interest income
$
22,398
$
27,708
$
73,111
$
80,673
Fee income
2,803
3,869
8,019
11,418
Interest and fee income
25,201
31,577
81,130
92,091
Interest expense
4,694
6,561
15,802
18,931
Net interest and fee income
20,507
25,016
65,328
73,160
Provision for credit losses
7,204
7,662
51,160
17,781
Net interest and fee income after provision for credit losses
13,303
17,354
14,168
55,379
Non-interest income:
87
6,456
2,426
13,400
2,082
2,230
6,612
6,538
2,044
1,676
11,172
10,573
4,213
10,362
20,210
30,511
Non-interest expense:
8,515
10,897
25,702
34,817
4,717
6,092
24,169
25,514
0
0
6,735
0
1,016
0
1,016
0
14,248
16,989
57,622
60,331
3,268
10,727
(23,244)
25,559
Income tax expense (benefit)
525
3,281
(8,284)
6,857
$
2,743
$
7,446
$
(14,960)
$
18,702
Basic earnings (loss) per share
$
0.23
$
0.61
$
(1.27)
$
1.52
Diluted earnings (loss) per share
$
0.23
$
0.60
$
(1.27)
$
1.51
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-5-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
(Dollars in thousands)
Net income (loss)
$
2,743
$
7,446
$
(14,960)
$
18,702
Other comprehensive income:
10
55
47
179
(3)
(14)
(12)
(46)
Total other comprehensive income
7
41
35
133
$
2,750
$
7,487
$
(14,925)
$
18,835
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-6-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Accumulated
Common
Additional
Other
Total
Common
Stock
Paid-In
Comprehensive
Retained
Stockholders’
Shares
Amount
Capital
Income (Loss)
Earnings
Equity
(Dollars in thousands)
Balance, December 31, 2019
12,113,585
$
121
$
79,665
$
58
$
135,112
$
214,956
(285,593)
(3)
(4,535)
0
0
(4,538)
56,481
1
(1)
0
0
—
—
0
518
0
0
518
—
0
0
(38)
0
(38)
—
0
0
0
(11,821)
(11,821)
(1)
—
0
0
0
(8,877)
(8,877)
Cash dividends paid ($
0.14
—
0
0
0
(1,710)
(1,710)
Balance, March 31, 2020
11,884,473
119
75,647
20
112,704
188,490
14,891
0
120
0
0
120
(1,897)
0
(12)
0
0
(12)
44,780
—
—
—
—
—
—
0
(149)
0
0
(149)
—
0
0
66
0
66
—
0
0
0
(5,882)
(5,882)
Cash dividends paid ($
0.14
—
0
0
0
(1,629)
(1,629)
Balance, June 30, 2020
11,942,247
119
75,606
86
105,193
181,004
(18,446)
0
(149)
0
0
(149)
50,850
1
(1)
0
0
0
—
0
437
0
0
437
—
0
0
7
0
7
—
0
0
0
2,743
2,743
Cash dividends paid ($
0.14
—
0
0
0
(1,692)
(1,692)
Balance, September 30, 2020
11,974,651
$
120
$
75,893
$
93
$
106,244
$
182,350
(1)
Represents the impact of Accounting Standards Update ("ASU") 2016-13 and related ASUs collectively referred to as "CECL". See Note 2.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-7-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Accumulated
Common
Additional
Stock
Other
Total
Common
Stock
Paid-In
Subscription
Comprehensive
Retained
Stockholders’
Shares
Amount
Capital
Receivable
Income (Loss)
Earnings
Equity
(Dollars in thousands)
Balance, December 31, 2018
12,367,724
$
124
$
83,498
$
(2)
$
(44)
$
114,935
$
198,511
(48,857)
(1)
(1,144)
0
0
0
(1,145)
30,209
—
—
—
—
—
—
—
0
861
0
0
0
861
—
0
0
0
40
0
40
—
0
0
0
0
5,141
5,141
Cash dividends paid ($
0.14
—
0
0
0
0
(1,758)
(1,758)
Balance, March 31, 2019
12,349,076
123
83,215
(2)
(4)
118,318
201,650
10,298
0
240
0
0
0
240
(73,360)
0
(1,719)
0
0
0
(1,719)
(450)
—
—
—
—
—
—
—
0
990
0
0
0
990
—
0
0
0
52
0
52
—
0
0
0
0
6,115
6,115
Cash dividends paid ($
0.14
—
0
0
0
0
(1,774)
(1,774)
Balance, June 30, 2019
12,285,564
123
82,726
(2)
48
122,659
205,554
(147,383)
(2)
(3,391)
0
0
0
(3,393)
16,480
1
(1)
0
0
0
0
—
0
894
0
0
0
894
—
0
0
0
41
0
41
—
0
0
0
0
7,446
7,446
Cash dividends paid ($
0.14
—
0
0
0
0
(1,755)
(1,755)
Balance, September 30, 2019
12,154,661
$
122
$
80,228
$
(2)
$
89
$
128,350
$
208,787
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-8-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2020
2019
(Dollars in thousands)
Cash flows from operating activities:
Net (loss) income
$
(14,960)
$
18,702
2,996
3,632
806
2,745
7,751
0
(89)
(121)
51,160
17,781
(7,777)
6,883
9,244
11,008
116
1,331
(2,426)
(13,400)
(4,882)
(46,038)
5,123
47,771
1,365
857
(1,435)
0
(1,642)
(3,465)
(311)
(3,142)
45,039
44,544
Cash flows from investing activities:
4,471
(5,260)
(298,244)
(594,831)
356,133
380,345
25,663
161,566
(176)
(175)
1,567
2,065
(2,266)
(3,492)
432
1,015
87,580
(58,767)
Cash flows from financing activities:
(15,425)
113,481
(36,538)
(58,887)
(180)
(349)
120
240
(4,699)
(6,257)
(5,021)
(5,169)
(61,743)
43,059
Net increase in total cash, cash equivalents and restricted cash
70,876
28,836
Total cash, cash equivalents and restricted cash, beginning of period
130,027
111,201
Total cash, cash equivalents and restricted cash, end of period
$
200,903
$
140,037
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-9-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2020
2019
(Dollars in thousands)
Supplemental disclosures of cash flow information:
$
17,308
$
17,610
(5,005)
2,736
23,460
149,895
Supplemental disclosures of non cash investing activities:
$
0
$
146
2,253
8,432
Reconciliation of Cash, cash equivalents and restricted cash to
the Consolidated Balance Sheets:
Cash and cash equivalents
$
195,132
$
132,461
Restricted interest-earning deposits
5,771
7,576
Cash, cash equivalents and restricted cash at end of period
$
200,903
$
140,037
-10-
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – The Company
Marlin Business Services Corp. (the “Company”) is a nationwide provider of credit products and services to small businesses. The
products and services we provide to our customers include loans and leases for the acquisition of commercial equipment (including
Commercial Vehicle Group (“CVG”) assets which now incorporates Transportation Finance Group (“TFG”)) and working capital
loans. The Company was incorporated in the Commonwealth of Pennsylvania on August 5, 2003. In May 2000, we established
AssuranceOne, Ltd., a Bermuda-based, wholly-owned captive insurance subsidiary (“Assurance One”), which enables us to reinsure
the property insurance coverage for the equipment financed by Marlin Leasing Corporation (“MLC”) and Marlin Business Bank
(“MBB”) for our small business customers. Effective March 12, 2008, the Company opened MBB, a commercial bank chartered by
the State of Utah and a member of the Federal Reserve System. MBB serves as the Company’s primary funding source through its
issuance of Federal Deposit Insurance Corporation (“FDIC”)-insured deposits. In January 2017, we completed the acquisition of
Horizon Keystone Financial (“HKF”), an equipment leasing company which primarily identifies and sources lease and loan contracts
for investor partners for a fee. On September 19, 2018, the Company completed the acquisition of Fleet Financing Resources
(“FFR”), a leading provider of equipment finance credit products specializing in the leasing and financing of both new and used
commercial vehicles, with an emphasis on livery equipment and other types of commercial vehicles used by small businesses.
References to the “Company,” “Marlin,” “Registrant,” “we,” “us” and “our” herein refer to Marlin Business Services Corp. and its
wholly-owned subsidiaries, unless the context otherwise requires.
NOTE 2 – Summary of Significant Accounting Policies
Basis of financial statement presentation.
its wholly-owned subsidiaries. MLC and MBB are managed together as a single business segment and are aggregated for financial
reporting purposes as they exhibit similar economic characteristics, share the same leasing and loan portfolio and have a single
consolidated product offering platform. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements present the Company’s financial position at September 30, 2020 and
the results of operations for the three- and nine -month periods ended September 30, 2020 and 2019, and cash flows for the nine-
month periods ended September 30, 2020 and 2019. In management’s opinion, the unaudited consolidated financial statements
contain all adjustments, which include normal and recurring adjustments, necessary for a fair presentation of the financial position and
results of operations for the interim periods presented. These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and note disclosures included in the Company’s Form 10-K for the year ended
December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020. The consolidated results and
statements of cash flows for these interim financial statements are not necessarily indicative of the results of operations or cash flows
for the respective full years or any other period.
Use of Estimates.
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense s during the reporting period. Estimates are used when accounting for
income recognition, the residual values of leased equipment, the allowance for credit losses, deferred initial direct costs and fees, late
fee receivables, the fair value of financial instruments, estimated losses from insurance program, and income taxes. Actual results
could differ from those estimates.
Income taxes.
Our statutory tax rate was
25.4
% for the three months ended September 30, 2020. For the three-month period ended September 30,
2020, the effective tax rate was
16.1
%, driven by partial recognition of the prior quarter’s interim reporting limitation on the amount
of tax benefits that can be recognized under Accounting Standards Codification (“ASC”) 740,
Income Taxes
.
For the nine-month period ended September 30, 2020, the effective tax rate in recognizing our benefit was
35.6
%, driven by a $
3.2
million discrete benefit, resulting from certain provisions in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
that allow for a remeasurement of our federal net operating losses. The Company filed for a refund of carryback net operating losses
-11-
as permitted under the CARES act and that refund was received in July 2020. The impact to our effective rate from that benefit was
partially offset by the limitation on interim tax benefits, as discussed above.
For the three and nine-month periods ended September 30, 2019, our effective tax rates were
30.6
% and
26.8
%, respectively.
The Company is currently under examination by the IRS for tax years ending December 31, 2013 to 2018, and the Company remains
subject to examination for the year ended December 31, 2019.
Significant Accounting Policies.
There have been no significant changes to our Significant Accounting Policies as described in our
Annual Report on Form 10-K for the year ended December 31, 2019, other than the adoption of ASU 2016-13 as described below.
Recently Adopted Accounting Standards
.
Credit Losses.
Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments
, which changes the methodology for evaluating impairment of most financial instruments.
This guidance was subsequently amended by ASU 2018-19,
Codification Improvements,
Codification Improvements
,
ASU 2019-05,
Targeted Transition Relief,
ASU 2019-10,
Effective Dates,
and ASU 2019-11,
Codification Improvements
. These
ASUs are referred to collectively as “CECL”.
CECL replaces the probable, incurred loss model with a measurement of expected credit losses for the contractual term of the
Company’s current portfolio of loans and leases. Under CECL, an allowance, or estimate of credit losses, is recognized immediately
upon the origination of a loan or lease and will be adjusted in each subsequent reporting period. This estimate of credit losses takes
into consideration all cashflows the Company expects to receive or derive from the pools of contracts, including recoveries after
charge-off, amounts related to initial direct cost and origination costs net of fees deferred, accrued interest receivable and certain
future cashflows from residual assets. The Company had previously recognized residual income within Fee Income in its Consolidated
Statements of Operations; the adoption of CECL results in such residual income being captured as a component of the activity of the
allowance. The Company’s policy for charging off contracts against the allowance, and non-accrual policy are not impacted by the
adoption of CECL.
The provision for credit losses recognized in the Consolidated Statements of Operations under CECL will be primarily driven by
originations, offset by the reversal of the allowance for any contracts sold, plus any amounts of realized cashflows, such as charge-
offs, above or below our modeled estimates, plus adjustments for changes in estimate each subsequent reporting period.
Estimating an allowance under CECL requires the Company to develop and maintain a consistent systematic methodology to measure
the estimated credit losses inherent in its current portfolio, over the entire life of the contracts. The Company assesses the appropriate
collective, or pool, basis to use to aggregate its portfolio based on the existence of similar risk characteristics and determined that its
measurement begins by separately considering segments of financing receivables, which is similar to how it has historically analyzed
its allowance for credit losses: (i) equipment finance lease and loan; (ii) working capital loans; (iii) commercial vehicles “CVG”; and
(iv) Community Reinvestment Act and Paycheck Protection loans. However, these classes of receivables are further disaggregated
into pools of loans based on risk characteristics that may include: lease or loan type, origination channel, and internal credit score
(which is a measurement that combines many risk characteristics, including loan size, external credit scores, existence of a guarantee,
and various characteristics of the borrower’s business).
As part of our analysis of expected credit losses, we may analyze contracts on an individual basis, or create additional pools of
contracts, in situations where such loans exhibit unique risk characteristics and are no longer expected to experience similar losses to
the rest of their pool.
As part of its estimate of expected credit losses, specific to each measurement date, management considers relevant qualitative and
quantitative factors to assess whether the historical loss experience being referenced should be adjusted to better reflect the risk
characteristics of the current portfolio and the expected future loss experience for the life of these contracts. This assessment
incorporates all available information relevant to considering the collectability of its current portfolio, including considering economic
and business conditions, default trends, changes in its portfolio composition, changes in its lending policies and practices, among other
internal and external factors.
-12-
The Company adopted the guidance in these ASUs, effective January 1, 2020, applying changes resulting from the application of the
new standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in
which the guidance is effective (i.e., modified retrospective approach).
The adoption of this standard resulted in the following adjustment to the Company’s Consolidated Balance Sheets:
Balance as of
Balance as of
December 31,
Adoption
January 1,
2019
Impact
2020
(Dollars in thousands)
Assets:
Net investment in leases and loans
$
1,028,215
$
0
$
1,028,215
Allowance for credit losses
(21,695)
(11,908)
(33,603)
Total net investment in leases and loans
1,006,520
994,612
Liabilities:
Net deferred income tax liability
30,828
(3,031)
27,797
Stockholders' Equity:
Retained Earnings
135,112
(8,877)
126,235
See Note 6 – Allowance for Credit Losses, for further discussion of the January 1, 2020 measurement of allowance under CECL, as
well as discussion of the Company’s new Accounting Policy governing its Allowance.
See Note 13 – Stockholders’ Equity, for discussion of the Company’s election to delay for two-years the effect of CECL on regulatory
capital, followed by a three-year phase-in for a five-year total transition.
In addition, as a result of adoption this standard, future measurements of the impairment of our investment securities will incorporate
the guidance in these ASUs, including analyzing any decline in fair value between credit quality-driven factors versus other factors.
There was no impact as of the adoption date to our investment securities.
-13-
NOTE 3 – Non-Interest Income
The following table summarizes non-interest income for the periods presented:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Insurance premiums written and earned
$
2,082
$
2,230
$
6,612
$
6,538
Property tax (loss) income
123
(42)
5,247
5,680
Servicing income
462
395
1,517
1,021
Gain on sale of leases and loans
87
6,456
2,426
13,400
Net gains recognized during the period on equity securities
0
27
89
121
Non-interest income - other than from contracts with customers
2,754
9,066
15,891
26,760
Insurance policy fees
819
688
2,610
2,021
Property tax administrative fees on leases
243
272
713
801
ACH payment fees
35
78
143
238
Referral fees
15
129
123
448
Other
347
129
730
243
Non-interest income from contracts with customers
1,459
1,296
4,319
3,751
Total non-interest income
$
4,213
$
10,362
$
20,210
$
30,511
-14-
NOTE 4 - Investment Securities
The Company had the following investment securities as of the dates presented:
September 30,
December 31,
(Dollars in thousands)
2020
2019
Equity Securities
Mutual fund
$
3,756
$
3,615
Debt Securities, Available for Sale:
Asset-backed securities ("ABS")
3,836
4,332
Municipal securities
3,169
3,129
$
10,761
$
11,076
The following schedule summarizes changes in fair value of equity securities and the portion of unrealized gains and losses for each
period presented:
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in thousands)
2020
2019
2020
2019
Net gains recognized during the period on equity securities
$
0
$
27
$
89
$
121
Less: Net gains recognized during the period
0
0
0
0
Unrealized gains recognized during the reporting period
$
0
$
27
$
89
$
121
-15-
Available for Sale
The following schedule is a summary of available for sale investments as of the dates presented:
September 30, 2020
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
3,776
$
60
$
0
$
3,836
Municipal securities
3,082
88
(1)
3,169
$
6,858
$
148
$
(1)
$
7,005
December 31, 2019
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
4,302
$
33
$
(3)
$
4,332
Municipal securities
3,058
71
0
3,129
$
7,360
$
104
$
(3)
$
7,461
The Company evaluates its available for sale securities in an unrealized loss position for other than temporary impairment on at least a
quarterly basis. The Company did not recognize any other than temporary impairment to earnings for each of the periods ended
September 30, 2020 and September 30, 2019.
The following tables present the aggregate amount of unrealized losses on available for sale securities in the Company’s investment
securities classified according to the amount of time those securities have been in a continuous loss position as of September 30, 2020
and December 31, 2019:
September 30, 2020
Less than 12 months
12 months or longer
Total
Gross
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Unrealized
Fair
Losses
Value
Losses
Value
Losses
Value
(Dollars in thousands)
Municipal securities
(1)
$
0
$
142
$
0
$
0
$
0
$
142
Total available for sale investment
securities
$
0
$
142
$
0
$
0
$
0
$
142
(1) The unrealized loss is immaterial
December 31, 2019
Less than 12 months
12 months or longer
Total
Gross
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Unrealized
Fair
Losses
Value
Losses
Value
Losses
Value
(Dollars in thousands)
ABS
$
0
$
0
$
(3)
$
430
$
(3)
$
430
Total available for sale investment
securities
$
0
$
0
$
(3)
$
430
$
(3)
$
430
-16-
The following table presents the amortized cost, fair value, and weighted average yield of available for sale investments at September
30, 2020, based on estimated average life. Receipt of cash flows may differ from those estimated maturities because borrowers may
have the right to call or prepay obligations with or without penalties:
Distribution of Maturities
1 Year
Over 10
or Less
5 Years
10 Years
Years
Total
(Dollars in thousands)
Amortized Cost:
ABS
$
0
$
2,271
$
1,505
$
0
$
3,776
Municipal securities
15
302
2,623
142
3,082
Total available for sale investments
$
15
$
2,573
$
4,128
$
142
$
6,858
Estimated fair value
$
15
$
2,625
$
4,223
$
142
$
7,005
Weighted-average yield, GAAP basis
4.75%
1.98%
1.99%
2.10%
1.99%
-17-
NOTE 5 – Net Investment in Leases and Loans
Net investment in leases and loans consists of the following:
September 30, 2020
December 31, 2019
(Dollars in thousands)
Minimum lease payments receivable
$
376,649
$
457,602
Estimated residual value of equipment
27,974
29,342
Unearned lease income, net of initial direct costs and fees deferred
(46,708)
(59,746)
Security deposits
(415)
(590)
Total leases
357,500
426,608
Commercial loans, net of origination costs and fees deferred
Working Capital Loans
26,472
60,942
CRA
(1)
1,114
1,398
Equipment loans
(2)
457,627
464,655
CVG
65,340
74,612
Total commercial loans
550,553
601,607
Net investment in leases and loans, excluding allowance
908,053
1,028,215
Allowance for credit losses
(61,325)
(21,695)
Total net investment in leases and loans
$
846,728
$
1,006,520
________________________
(1)
CRA loans are comprised of loans originated under a line of credit to satisfy its obligations under the Community Reinvestment Act of 1977
(“CRA”).
(2)
Equipment loans are comprised of Equipment Finance Agreements, Installment Purchase Agreements and other loans.
In response to COVID-19, starting in mid-March 2020, the Company instituted a payment deferral contract modification program in
order to assist our small-business customers. See Note 6, “Allowance for Credit Losses” for discussion of that program.
At September 30, 2020, $
42.8
backed securitization balance and $
55.0
capacity at the Federal Reserve Discount Window.
The amount of deferred initial direct costs and origination costs net of fees deferred were $
16.1
20.5
September 30, 2020 and December 31, 2019, respectively. Initial direct costs are netted in unearned income and are amortized to
income using the effective interest method. ASU 2016 -02 limited the types of costs that qualify for deferral as initial direct costs for
leases, which reduced the deferral of unit lease costs and resulted in an increase in current period expense. Origination costs are netted
in commercial loans and are amortized to income using the effective interest method. At September 30, 2020 and December 31, 2019,
$
22.2
23.4
Sheets was related to copiers.
-18-
Maturities of lease receivables under lease contracts and the amortization of unearned lease income, including initial direct costs and
fees deferred, were as follows as of September 30, 2020:
Minimum Lease
Payments
Net Income
Receivable
(1)
Amortization
(2)
(Dollars in thousands)
Period Ending December 31,
Remainder of 2020
$
40,682
$
7,503
2021
144,561
20,557
2022
98,671
11,212
2023
57,414
5,177
2024
27,063
1,749
Thereafter
8,258
510
$
376,649
$
46,708
________________________
(1)
Represents the undiscounted cash flows of the lease payments receivable.
(2)
Represents the difference between the undiscounted cash flows and the discounted cash flows.
Portfolio Sales
The Company originates certain lease and loans for sale to third parties, based on their underwriting criteria and specifications. In
addition, the Company may periodically enter into agreements to sell certain leases and loans that were originated for investment to
third parties.
For agreements that qualify as a sale where the Company has continuing involvement through servicing, the Company recognizes a
servicing liability at its initial fair value, and then amortizes the liability over the expected servicing period based on the effective yield
method, within Other income in the Consolidated Statements of Operations. The Company’s sale agreements typically do not contain
a stated servicing fee, so the initial value recognized as a servicing liability is a reduction of the proceeds received and is based on an
estimate of the fair value attributable to that obligation. The Company’s servicing liability was $
1.5
2.5
September 30, 2020, and December 31, 2019, respectively, and is recognized within Accounts payable and accrued expenses in the
Consolidated Balance Sheets. As of September 30, 2020 and December 31, 2019, the portfolio of leases and loans serviced for others
was $
261
340
In addition, the Company may have continuing involvement in contracts sold through any recourse obligations that may include
customary representations and warranties or specific recourse provisions. The Company’s reserve for expected losses from recourse
obligations was $
0.9
0.4
In 2020, the Company was a participating lender, offering loans to its customers that are guaranteed under the Small Business
Administration’s (SBA’s) Paycheck Protection Program (“PPP”). In the three months ended September 30, 2020, the Company sold
its PPP receivable portfolio and recognized an insignificant gain on sale; the Company will have no continuing involvement with
those receivables.
The following table summarizes information related to portfolio sales for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
(Dollars in thousands)
Sales of leases and loans
$
4,286
$
85,425
$
28,342
$
195,932
Gain on sale of leases and loans
87
6,456
2,426
13,400
-19-
NOTE 6 – Allowance for Credit Losses
For 2019 and prior, we maintained an allowance for credit losses at an amount sufficient to absorb losses inherent in our existing lease
and loan portfolios as of the reporting dates based on our estimate of probable incurred net credit losses in accordance with the
Contingencies Topic of the FASB ASC.
Effective January 1, 2020, we
ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments
,
probable, incurred loss model with a measurement of expected credit losses for the contractual term of the Company’s current
portfolio of loans and leases. After the adoption of CECL, an allowance, or estimate of credit losses, is recognized immediately upon
the origination of a loan or lease and will be adjusted in each subsequent reporting period.
See further discussion of the adoption of
this accounting standard and a summary of the Company’s revised Accounting Policy for Allowance for Credit Losses in Note 2,
Summary of Significant Accounting Policies. Detailed discussion of our measurement of allowance under CECL as of the adoption
date and September 30, 2020 is below.
The following tables summarize activity in the allowance for credit losses
:
Three Months Ended September 30, 2020
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
48,550
$
7,962
$
7,132
$
0
$
63,644
(10,509)
(633)
(524)
0
(11,666)
983
101
94
0
1,178
Net charge-offs
(9,526)
(532)
(430)
0
(10,488)
Realized cashflows from Residual Income
965
0
0
0
965
7,226
(3,974)
3,952
0
7,204
Allowance for credit losses, end of period
$
47,215
$
3,456
$
10,654
$
0
$
61,325
Net investment in leases and loans, before allowance
$
803,689
$
26,472
$
76,778
$
1,114
$
908,053
Three Months Ended September 30, 2019
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
13,416
$
1,940
$
1,421
$
0
$
16,777
(5,023)
(417)
(526)
0
(5,966)
457
227
54
0
738
(4,566)
(190)
(472)
0
(5,228)
6,799
346
517
0
7,662
Allowance for credit losses, end of period
$
15,649
$
2,096
$
1,466
$
0
$
19,211
Net investment in leases and loans, before allowance
$
910,046
$
55,794
$
86,415
$
1,454
$
1,053,709
-20-
Nine Months Ended September 30, 2020
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, December 31, 2019
$
18,334
$
1,899
$
1,462
$
0
$
21,695
Adoption of ASU 2016-13 (CECL)
(1)
9,264
(3)
2,647
0
11,908
Allowance for credit losses, January 1, 2020
$
27,598
$
1,896
$
4,109
$
0
$
33,603
(24,723)
(2,598)
(2,157)
0
(29,478)
2,237
156
257
0
2,650
Net charge-offs
(22,486)
(2,442)
(1,900)
0
(26,828)
Realized cashflows from Residual Income
3,390
0
0
0
3,390
38,713
4,002
8,445
0
51,160
Allowance for credit losses, end of period
$
47,215
$
3,456
$
10,654
$
0
$
61,325
Net investment in leases and loans, before allowance
$
803,689
$
26,472
$
76,778
$
1,114
$
908,053
Nine Months Ended September 30, 2019
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
13,531
$
1,467
$
1,102
$
0
$
16,100
(13,863)
(1,692)
(1,200)
0
(16,755)
1,671
298
116
0
2,085
(12,192)
(1,394)
(1,084)
0
(14,670)
14,310
2,023
1,448
0
17,781
Allowance for credit losses, end of period
$
15,649
$
2,096
$
1,466
$
0
$
19,211
Net investment in leases and loans, before allowance
$
910,046
$
55,794
$
86,415
$
1,454
$
1,053,709
__________________
(1)
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments
, which changed our accounting policy and estimated allowance, effective January 1, 2020. See further
discussion in Note 2, “Summary of Significant Accounting Policies”, and below.
Estimate of Current Expected Credit Losses (CECL)
Starting with the January 1, 2020 adoption of CECL, the Company recognizes an allowance, or estimate of credit losses, immediately
upon the origination of a loan or lease, and that estimate will be reassessed in each subsequent reporting period. This estimate of
credit losses takes into consideration all cashflows the Company expects to receive or derive from the pools of contracts, including
recoveries after charge-off, amounts related to initial direct cost and origination costs net of fees deferred, accrued interest receivable
and certain future cashflows from residual assets.
-21-
As part of its estimate of expected credit losses, specific to each measurement date, management considers relevant qualitative and
quantitative factors to assess whether the historical loss experience being referenced should be adjusted to better reflect the risk
characteristics of the current portfolio and the expected future loss experience for the life of these contracts. This assessment
incorporates all available information relevant to considering the collectability of its current portfolio, including considering economic
and business conditions, default trends, changes in its portfolio composition, changes in its lending policies and practices, among other
internal and external factors. As part of the analysis of expected credit losses, we may analyze contracts on an individual basis, or
create additional pools of contracts, in situations where such loans exhibit unique risk characteristics and are no longer expected to
experience similar losses to the rest of their pool.
Current Measurement
The Company selected a vintage loss model as the approach to estimate and measure its expected credit losses for all portfolio
segments and for all pools, primarily because the timing of the losses realized has been consistent across historical vintages, such that
the company is able to develop a predictable and reliable loss curve for each separate portfolio segment. The vintage model assigns
loans to vintages by origination date, measures our historical average actual loss and recovery experience within that vintage, develops
a loss curve based on the averages of all vintages, and predicts (or forecasts) the remaining expected net losses of the current portfolio
by applying the expected net loss rates to the remaining life of each open vintage.
Additional detail specific to the measurement of each portfolio segment under CECL as of January 1, 2020 and September 30, 2020, is
summarized below.
Equipment Finance:
Equipment Finance consists of Equipment Finance Agreements, Installment Purchase Agreements and other leases and loans.
The risk characteristics referenced to develop pools of Equip ment Finance leases and loans are based on internally developed
credit score ratings, which is a measurement that combines many risk characteristics, including loan size, external credit
scores, existence of a guarantee, and various characteristics of the borrower’s business. In addition, the Company separately
measured a pool of true leases so that any future cashflows from residuals could be used to partially offset the allowance for
that pool.
The Company’s measurement of Equipment Finance pools is based on its own historical loss experience. The Company
analyzed the correlation of its own loss data from 2004 to 2019 against various economic variables in order to determine an
approach for reasonable and supportable forecast. The Company then selected certain economic variables to reference for its
forecast about the future, specifically the unemployment rate and growth in business bankruptcy. The Company’s
methodology reverts from the forecast data to its own loss data adjusted for the long-term average of the referenced economic
variables, on a straight-line basis.
At each reporting date, the Company considers current conditions, including changes in portfolio composition or the business
environment, when determining the appropriate measurement of current expected credit losses for the remaining life of its
portfolio. As of the January 1, 2020 adoption date, the Company utilized a 12 -month forecast period and 12-month straight-
line reversion period, based on its initial assessment of the appropriate timing.
However, starting with the March 31, 2020 measurement, the Company adjusted its model to reference a 6-month forecast
period and 12-month straight line reversion period. The change in the length of the reasonable and supportable forecast was
based on observed market volatility in late March, and the Company continues to reference a 6-month forecast period at
September 30, 2020 due to continuing uncertainty of the duration and level of impact of the COVID-19 virus on the
macroeconomic environment and the Company’s portfolio, including uncertainty about the forecasted impact of COVID -19
that was underlying its economic forecasted variables beyond a 6-month period. The forecast adjustment to the Equipment
Finance portfolio segment resulted in the recognition of provision of $
1.2
22.2
months ended September 30, 2020, respectively.
After completing the forecast adjustment, the Company assessed the output of the Equipment Finance reserve estimate and
increased the reserve for a $
0.9
incorporates the current forecasted peak levels of unemployment and business bankruptcy.
-22-
Working Capital:
The risk characteristics referenced to develop pools of Working Capital loans is based on origination channel, separately
considering an estimation of loss for direct-sourced loans versus loans that were sourced from a broker. The Company’s
historical relationship with its direct-sourced customers typically results in a lower level of credit risk than loans sourced
from brokers where the Company has no prior credit relationship with the customer.
The Company’s measurement of Working Capital pools is based on its own historical loss experience. The Company’s
Working Capital loans typically range from 6 – 12 months of duration. For this portfolio segment, due to the short contract
duration, the Company did not define a standard methodology to adjust its loss estimate based on a forecast of economic
conditions. However, the Company will continually assess through a qualitative adjustment whether there are changes in
conditions and the environment that will impact the performance of these loans that should be considered for qualitative
adjustment.
At each reporting date, the Company considers current conditions, inclu ding changes in portfolio composition or the business
environment, when determining the appropriate measurement of current expected credit losses for the remaining life of its
portfolio. As of the January 1, 2020 adoption date, there was no qualitative adjustment to the Working Capital portfolio.
However, starting with its March 31, 2020 measurement, driven by the elevated risk of credit loss driven by market
conditions due to COVID-19, the Company developed alternate scenarios for credit loss based on an analysis of the
characteristics of its portfolio, considering different timing and magnitudes of potential exposures.
During the third quarter, the Company updated its expectation for credit losses for the Working Capital segment based on the
favorable actual portfolio performance during the quarter and a revised forecast based on its current assessment of risks in the
portfolio. Based on that analysis, the Company recognized a reserve reduction of $
3.9
September 30, 2020, bringing the provision associated with qualitative adjustments to $
3.1
September 30, 2020.
Commercial Vehicle Group (CVG):
Transportation-related equipment leases and loans are analyzed as a single pool, as the Company did not consider any risk
characteristics to be significant enough to warrant disaggregating this population.
The Company’s measurement of CVG is based on a combination of its own historical loss experience and industry loss data
from an external source. The Company has limited history of this product, and therefore the Company determined it was
appropriate to develop an estimate based on a combination of internal and industry data. Due to the Company’s limited
history of performance of this segment, and the limited size of the portfolio, the Company did not develop a standard
methodology to adjust its loss estimate based on a forecast of economic conditions. However, the Company will continually
assess through a qualitative adjustment whether there are changes in conditions and the environment that will impact the
performance of these loans that should be considered for qualitative adjustment.
At each reporting date, the Company considers current conditions, including changes in portfolio composition or the business
environment, when determining the appropriate measurement for the remaining life of the current portfolio. As of the
January 1, 2020 adoption date, there were no qualitative adjustment to the CVG portfolio. However, starting with the March
31, 2020 measurement, driven by the elevated risk of credit loss driven by market conditions due to COVID-19, the
Company developed alternate scenarios for expected credit loss for this segment, considering different timing and
magnitudes of potential exposures.
During the third quarter, the Company updated its expectation for credit losses for the CVG segment, including separately
assessing the elevated risks of a population of motor coach industry contracts that are facing prolonged impacts from
COVID-19. Primarily driven by that population, the Company recognized provision related to CVG for the third quarter of
$
3.8
7.0
portfolio segment.
-23-
Community Reinvestment Act (CRA) Loans:
CRA loans are comprised of loans originated under a line of credit to satisfy the Company’s obligations under the CRA. The
Company does not measure an allowance specific to this population because the exposure to credit loss is nominal.
For the three- and nine - months ended September 30, 2020, the Company has recognized $
1.9
36.6
respectively, driven by increasing the allowance for qualitative and forecast adjustments as a result of conditions driven by the
COVID-19 pandemic. The COVID-19 pandemic, business shutdowns and impacts to our customers, is still ongoing, and the extent of
the effects of the pandemic on our portfolio depends on future developments, which are highly uncertain and are difficult to predict.
Further, the Company instituted a Loan modification payment deferral program, as discussed further below, to give payment relief to
customers during this period. As of September 30, 2020, the ultimate performance of loans modified under that program remains
uncertain, due to the timing of the modified loans resuming payment.
Our reserve as of September 30, 2020, and the qualitative and economic adjustments discussed above, were calculated referencing our
historical loss experience, including loss experience through the 2008 economic cycle, and our adjustments to that experience based
on our judgements about the extent of the impact of the COVID -19 pandemic. Those judgements include certain expectations for the
extent and timing of impacts from COVID-19 on unemployment rates and business bankruptcies and are based on our current
expectations of the performance of our portfolio in the current environment. We may recognize credit losses in excess of our reserve,
or revise our estimate of credit losses in the future, and such amounts may be significant, based on (i) the actual performance of our
portfolio, including the performance of the modified portfolio, (ii) any further changes in the economic environment, or (iii) other
developments or unforeseen circumstances that impact our portfolio.
Loan Modification Program:
In response to COVID-19, starting in mid-March 2020, the Company instituted a payment deferral program in order to assist its small-
business customers that requested relief and were current under their existing agreement. The payment deferral program allows for up
to 6 months of fully deferred or reduced payments.
The below table outlines certain data on the modified population with details of count and net investment balance, with all information
as of September 30, 2020.
-24-
Equipment
Working
(Dollars in thousands)
Finance
CVG
Capital
Total
Modified leases and loans receivable
4,437
431
369
5,237
Resolved (payoff, chargeoff)
(1)
230
20
122
372
Total Program, number of contracts
4,667
451
491
5,609
Current Quarter Population Changes:
Q3 - New modification
$
6,689
$
2,468
$
286
$
9,443
Q3 - Extended modification
5,547
8,412
2,458
16,417
Last Modified in Q2 or Q1
79,664
14,892
9,466
104,022
Total Modifications, Net investment receivable
$
91,900
$
25,772
$
12,210
$
129,882
% of total segment receivables
11.4%
33.6%
46.1%
14.3%
Deferral Status:
Out of deferral
$
82,978
$
16,649
$
9,489
$
109,116
In deferral period - partial payment during deferral
6,372
3,163
2,721
12,256
In deferral period - full deferral of payment
2,550
5,960
0
8,510
Total Modifications, Net investment receivable
(2)
$
91,900
$
25,772
$
12,210
$
129,882
Modifications 30+ Days Delinquent:
Out of deferral
$
3,352
$
1,367
$
320
$
5,039
In deferral period, with partial payment during
deferral
639
462
99
1,200
_________________
(1)
Total resolved modifications include
41
574
331
contracts that paid in full.
(2)
Out of the deferral period represents the month in which the contract returns to its regular contract schedule for the entire
month. For loans in deferral period, the deferral may either be full, with zero payment owed during the deferral period, or
partial, with reduced payments during deferral that are primarily
25
%-
50
% of schedule, or the deferral period payment may
be a nominal amount. In all cases, information is presented with respect to the contracts’ current deferral terms as of
September 30, 2020.
As of September 30, 2020, $
109.1
84
% of our total modified contracts are out of the deferral period, and the current
deferral period will expire for substantially all of the remaining modified contracts before December 31, 2020. We are closely
monitoring the performance of the modified contracts as their deferral period expires. As of the end of the third quarter we have
stopped taking new applications for modifications, although we may consider offering extensions in select cases as part of our loss
mitigation strategies.
TDRs are restructurings of leases and loans in which, due to the borrower's financial difficulties, a lender grants a concession that it
would not otherwise consider for borrowers of similar credit quality. In accordance with the interagency guidance as updated in April
2020, that the FASB concurred with, loans modified under the Company’s payment deferral program are not considered TDRs. As of
September 30, 2020 and December 31, 2019, the Company did
0
t have any TDRs.
-25-
Credit Quality
At origination, the Company utilizes an internally developed credit score ratings as part of its underwriting assessment and pricing
decisions for new contracts. The internal credit score is a measurement that combines many risk characteristics, including loan size,
external credit scores, existence of a guarantee, and various characteristics of the borrower’s business. The internal credit score is
used to create pools of loans for analysis in the Company’s Equipment Finance portfolio segment, as discussed further above. We
believe this segmentation allows our loss modeling to properly reflect changes in portfolio mix driven by sales activity and
adjustments to underwriting standards. However, this score is not updated after origination date for analyzing the Company’s
provision.
On an ongoing basis, to monitor the credit quality of its portfolio, the Company primarily reviews the current delinquency of the
portfolio and delinquency migration to monitor risk and default trends. We believe that delinquency is the best factor to use to monitor
the credit quality of our portfolio on an ongoing basis because it reflects the current condition of the portfolio, and is a good predictor
of near term charge-offs and can help with identifying trends and emerging risks to the portfolio.
The following tables provide information about delinquent leases and loans in the Company’s portfolio based on the contract’s status
as-of the dates presented. In particular, contracts that are part of the Loan Modification Program discussed above are presented in the
below delinquency table and the non-accrual information for September 30, 2020 based on their status with respect to the modified
terms. See Loan Modification section above for delinquency data specific to the modified portfolio.
-26-
Portfolio by Origination Year as of September 30, 2020
Total
2020
2019
2018
2017
2016
Prior
Receivables
(Dollars in thousands)
Equipment Finance
30-59
$
837
$
2,103
$
1,387
$
740
$
316
$
71
$
5,454
60-89
520
1,692
1,182
748
315
39
4,496
90+
334
2,789
1,444
1,220
294
42
6,123
Total Past Due
1,691
6,584
4,013
2,708
925
152
16,073
Current
214,104
306,024
158,593
79,064
26,424
3,407
787,616
Total
215,795
312,608
162,606
81,772
27,349
3,559
803,689
Working Capital
30-59
71
328
0
0
0
0
399
60-89
133
18
0
0
0
0
151
90+
6
222
0
0
0
0
228
Total Past Due
210
568
0
0
0
0
778
Current
11,521
13,996
139
38
0
0
25,694
Total
11,731
14,564
139
38
0
0
26,472
CVG
30-59
90
467
73
92
26
0
748
60-89
588
307
336
0
0
0
1,231
90+
0
56
584
50
11
0
701
Total Past Due
678
830
993
142
37
0
2,680
Current
13,971
34,922
15,342
7,447
2,364
52
74,098
Total
14,649
35,752
16,335
7,589
2,401
52
76,778
CRA
Total Past Due
0
0
0
0
0
0
0
Current
1,114
0
0
0
0
0
1,114
Total
1,114
0
0
0
0
0
1,114
Net investment in leases
and loans, before allowance
$
243,289
$
362,924
$
179,080
$
89,399
$
29,750
$
3,611
$
908,053
-27-
Portfolio by Origination Year as of December 31, 2019
Total
2019
2018
2017
2016
2015
Prior
Receivables
(Dollars in thousands)
Equipment Finance
30-59
$
1,420
$
1,755
$
935
$
454
$
169
$
17
$
4,750
60-89
1,023
1,055
685
366
80
4
3,213
90+
947
1,522
1,090
527
163
7
4,256
Total Past Due
3,390
4,332
2,710
1,347
412
28
12,219
Current
424,559
236,068
135,419
55,119
16,461
1,407
869,033
Total
427,949
240,400
138,129
56,466
16,873
1,435
881,252
Working Capital
30-59
566
18
0
0
0
0
584
60-89
16
52
0
0
0
0
68
90+
203
0
0
0
0
0
203
Total Past Due
785
70
0
0
0
0
855
Current
57,706
2,343
38
0
0
0
60,087
Total
58,491
2,413
38
0
0
0
60,942
CVG
30-59
50
126
90
99
0
0
365
60-89
5
15
188
46
0
0
254
90+
0
178
158
53
0
0
389
Total Past Due
55
319
436
198
0
0
1,008
Current
42,536
22,531
13,442
4,976
130
0
83,615
Total
42,591
22,850
13,878
5,174
130
0
84,623
CRA
Total Past Due
0
0
0
0
0
0
0
Current
1,398
0
0
0
0
0
1,398
Total
1,398
0
0
0
0
0
1,398
Net investment in leases
and loans, before allowance
$
530,429
$
265,663
$
152,045
$
61,640
$
17,003
$
1,435
$
1,028,215
Net investments in Equipment Finance and CVG leases and loans are generally charged-off when they are contractually past due for
120 days or more. Income recognition is discontinued when a default on monthly payment exists for a period of 90 days or more.
Income recognition resumes when a lease or loan becomes less than 90 days delinquent. At September 30, 2020 and December 31,
2019, there were
0
-28-
Working Capital Loans are generally placed in non-accrual status when they are 30 days past due and generally charged-off at 60 days
past due. The loan is removed from non-accrual status once sufficient payments are made to bring the loan current and reviewed by
management. At September 30, 2020 and December 31, 2019, there were
0
accruing.
The following tables provide information about non-accrual leases and loans:
September 30,
December 31,
(Dollars in thousands)
2020
2019
Equipment Finance
$
6,345
$
4,256
Working Capital Loans
1,144
946
CVG
886
389
Total Non-Accrual
$
8,375
$
5,591
NOTE 7 - Goodwill and Intangible Assets
Goodwill
The Company’s goodwill balance of $
6.7
1.2
HKF, in January 2017, and $
5.5
purchase price over the Company’s fair value of the assets acquired and is not amortizable but is deductible for tax purposes.
The Company assigns its goodwill to a single, consolidated reporting unit, Marlin Business Services Corp. In the first quarter of 2020,
events or circumstances indicated that it was more likely than not that the fair value of its reporting unit was less than its carrying
amount, driven in part by market capitalization of the Company falling below its book value, and negative current events that impact
the Company related to the COVID-19 economic shutdown. The Company calculated the fair value of the reporting unit, by taking
the average stock price over a reasonable period of time multiplied by shares outstanding as of March 31, 2020 and then further
applying a control premium, and compared it to its carrying amount, including goodwill. The Company concluded that the implied
fair value of goodwill was less than its carrying amount, and recognized impairment equal to the $
6.7
Consolidated Statements of Operations.
The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2020 are as follows:
(Dollars in thousands)
Total Company
Balance at December 31, 2019
$
6,735
Impairment of Goodwill
(6,735)
Balance at September 30, 2020
$
0
Intangible assets
The following table presents details of the Company’s intangible assets:
-29-
(Dollars in thousands)
Gross Carrying
Accumulated
Net
Amount
Amortization
Value
As of September 30, 2020
Vendor relationships
$
7,290
$
1,472
$
5,818
Corporate trade name
60
32
28
$
7,350
$
1,504
$
5,846
As of December 31, 2019
Useful Life
Lender relationships
3
10
years
$
1,630
$
519
$
1,111
Vendor relationships
11
years
7,290
974
6,316
Corporate trade name
7
years
60
26
34
$
8,980
$
1,519
$
7,461
(Dollars in thousands)
FFR
HKF
Total
Beginning Balance, December 31, 2019
$
6,758
$
703
$
7,461
Amortization Expense
(530)
(69)
(599)
Impairment
(1,016)
0
(1,016)
Ending Balance, September 30, 2020
$
5,212
$
634
$
5,846
The Company’s intangible assets consist of definite-lived assets in connection with the January 2017 acquisition of HKF, and definite-
lived intangible assets in connection with the September 2018 acquisition of FFR. The Company has
0
assets.
In the three months ended September 30, 2020, the Company determined that a decrease in projected volumes for its FFR business
and a decrease in the sales team that supports that business resulted in a triggering event that warranted a review of the recoverability
of the related vendor relationship and lender relationship intangible assets. Those assets were evaluated as separate asset groups, as
they generate independent cashflows, such that the vendor relationships relate to the origination of contracts and the lend er
relationships relate to the sale or syndication of contracts. The estimate of fair value was modeled based on an expected cashflow
analysis. As a result of those analyses, there was no impairment related to the FFR vendor relationship intangible, and the Company
recognized $
1.0
impairment in the Consolidated Statement of Operations.
Amortization related to the Company’s definite lived intangible assets was $
0.6
0.7
ended September 30, 2020 and September 30, 2019, respectively.
The Company expects the amortization expense for the next five years will be as follows:
Amortization
(Dollars in thousands)
Expense
Remainder of 2020
$
168
2021
671
2022
671
2023
671
2024
663
-30-
NOTE 8 – Other Assets
Other assets are comprised of the following:
September 30,
December 31,
2020
2019
(Dollars in thousands)
Accrued fees receivable
$
2,816
$
3,509
Prepaid expenses
2,393
2,872
Federal Reserve Bank Stock
1,711
1,711
Other
1,606
2,361
$
8,526
$
10,453
NOTE 9 – Deposits
MBB serves as the Company’s primary funding source. MBB issues fixed-rate FDIC-insured certificates of deposit raised nationally
through various brokered deposit relationships and fixed-rate FDIC-insured deposits received from direct sources. MBB offers FDIC-
insured money market deposit accounts (the “MMDA Product”) through participation in a partner bank’s insured savings account
product. This brokered deposit product has a variable rate, no maturity date and is offered to the clients of the partner bank and
recorded as a single deposit account at MBB. As of September 30, 2020, money market deposit accounts totaled $
52.7
As of September 30, 2020, the scheduled maturities of certificates of deposits are as follows:
Scheduled
Dollars in thousands
Maturities
Period Ending December 31,
Remainder of 2020
$
166,820
2021
312,968
2022
154,949
2023
76,924
2024
42,181
Thereafter
17,934
Total
$
771,776
Certificates of deposits issued by MBB are time deposits and are generally issued in denominations of $
250,000
Product is also issued to customers in amounts less than $
250,000
. The FDIC insures deposits up to $
250,000
weighted average all-in interest rate of deposits at September 30, 2020 was
1.92
%.
NOTE 10 – Debt and Financing Arrangements
Short-Term Borrowings
The Company had a secured, variable rate revolving line of credit in the amount of $
5.0
November 20, 2020
. The line of credit was terminated by mutual agreement with the line of credit provider in July 2020.
Long-term Borrowings
On July 27, 2018, the Company completed a $
201.7
securitization has a fixed term, fixed interest rate and fixed principal amount. At September 30, 2020, outstanding term securitizations
amounted to $
40.0
42.8
5.8
restricted interest-earning deposits. The Company’s term note securitizations are classified as long-term borrowings.
-31-
The balance of long-term borrowings consisted of the following:
September 30,
December 31,
2020
2019
(Dollars in thousands)
Term securitization 2018 -1
$
40,031
$
76,563
Unamortized debt issuance costs
(198)
(472)
$
39,833
$
76,091
The term note securitization is summarized below:
Outstanding Balance as of
Notes
Final
Original
September 30,
December 31,
Originally
Maturity
Coupon
2020
2019
Issued
Date
Rate
(Dollars in thousands)
2018 — 1
$
0
$
0
$
77,400
July, 2019
2.55
%
0
8,013
55,700
October, 2020
3.05
8,391
36,910
36,910
April, 2023
3.36
10,400
10,400
10,400
May, 2023
3.54
11,390
11,390
11,390
June, 2023
3.70
5,470
5,470
5,470
July, 2023
3.99
4,380
4,380
4,380
May, 2025
5.02
Total Term Note Securitizations
$
40,031
$
76,563
$
201,650
3.05
%
(1)(2)
__________________
(1)
Represents the original weighted average initial coupon rate for all tranches of the securitization. In addition to this coupon
interest, term note securitizations have other transaction costs which are amortized over the life of the borrowings as additional
interest expense.
The weighted average coupon rate of the 2018-1 term note securitization will approximate
3.77
% over the remaining term of the
borrowing.
Scheduled principal and interest payments on outstanding borrowings as of September 30, 2020 are as follows:
Principal
Interest
(Dollars in thousands)
Period Ending December 31,
Remainder of 2020
$
7,820
$
358
2021
23,629
813
2022
8,582
159
$
40,031
$
1,330
-32-
NOTE 11 – Fair Value Measurements and Disclosures about the Fair Value of Financial Instruments
Fair Value Measurements
Fair value is defined in GAAP as the price that would be received to sell an asset or the price that would be paid to transfer a liability
on the measurement date. GAAP focuses on the exit price in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants. A three-level valuation hierarchy is required for disclosure of fair value
measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The fair value
hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its
entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
The Company’s balances measured at fair value on a recurring basis include the following as of September 30, 2020 and December
31, 2019:
September 30, 2020
December 31, 2019
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
(Dollars in thousands)
Assets
ABS
$
0
$
3,836
$
0
$
0
$
4,332
$
0
Municipal securities
0
3,169
0
0
3,129
0
Mutual fund
3,756
0
0
3,615
0
0
At this time, the Company has not elected to report any assets and liabilities using the fair value option. There have been no transfers
between Level 1 and Level 2 of the fair value hierarchy for any of the periods presented.
Non-Recurring Measurements
Non-recurring fair value measurements include assets and liabilities that are periodically remeasured or assessed for impairment using
Fair value measurements. Non-recurring measurements include the Company’s evaluation of goodwill and residual assets for
impairment, and the Company’s remeasurement of contingent consideration and assessment of the carrying amount of its servicing
liability.
For the nine months ended September 30, 2020, the Company recognized $
6.7
and nine-months ended September 30, 2020, $
1.0
Goodwill and Intangible Assets. In addition, in the three-and nine-months ended September 30, 2020 the Company updated its fair
value measurement of contingent consideration liability in connection with the 2018 FFR acquisition due to lower forecasted volumes
for that business, resulting in a $
1.4
administrative expense.
For the nine months ended September 30, 2019, there were no significant amounts recognized in the Consolidated Statements of
Operations in connection with non-recurring fair value measurements.
Fair Value of Other Financial Instruments
The following summarizes the carrying amount and estimated fair value of the Company’s other financial instruments, including those
not measured at fair value on a recurring basis:
-33-
September 30, 2020
December 31, 2019
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
195,132
$
195,132
$
123,096
$
123,096
Time deposits with banks
8,456
8,515
12,927
12,970
Restricted interest-earning deposits with banks
5,771
5,771
6,931
6,931
Loans, net of allowance
509,936
517,269
588,688
593,406
Federal Reserve Bank Stock
1,711
1,711
1,711
1,711
Financial Liabilities
$
823,707
$
787,478
$
839,132
$
846,304
39,833
40,344
76,091
76,781
There have been no significant changes in the methods and assumptions used in estimating the fair values of financial instruments, as
outlined in our consolidated financial statements and note disclosures in the Company’s Form 10-K for the year ended December 31,
2019.
-34-
NOTE 12 – Earnings Per Share
The Company’s restricted stock awards are paid non-forfeitable common stock dividends and thus meet the criteria of participating
securities. Accordingly, earnings per share (“EPS”) has been calculated using the two-class method, under which earnings are
allocated to both common stock and participating securities.
Basic EPS has been computed by dividing net income or loss allocated to common stock by the weighted average common shares
used in computing basic EPS. For the computation of basic EPS, all shares of restricted stock have been deducted from the weighted
average shares outstanding.
Diluted EPS has been computed by dividing net income or loss allocated to common stock by the weighted average number of
common shares used in computing basic EPS, further adjusted by including the dilutive impact of the exercise or conversion of
common stock equivalents, such as stock options, into shares of common stock as if those securities were exercised or converted.
The following table provides net income and shares used in computing basic and diluted EPS:
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
(Dollars in thousands, except per-share data)
Basic EPS
Net income (loss)
$
2,743
$
7,446
$
(14,960)
$
18,702
Less: net income allocated to participating securities
(36)
(89)
0
(237)
Net income (loss) allocated to common stock
$
2,707
$
7,357
$
(14,960)
$
18,465
Weighted average common shares outstanding
11,946,549
12,203,086
11,951,375
12,290,906
Less: Unvested restricted stock awards considered participating
securities
(155,408)
(148,142)
(142,186)
(156,116)
Adjusted weighted average common shares used in computing
basic EPS
11,791,141
12,054,944
11,809,189
12,134,790
Basic EPS
$
0.23
$
0.61
$
(1.27)
$
1.52
Diluted EPS
Net income (loss) allocated to common stock
$
2,707
$
7,357
$
(14,960)
$
18,465
Adjusted weighted average common shares used in computing
basic EPS
11,791,141
12,054,944
11,809,189
12,134,790
Add: Effect of dilutive stock-based compensation awards
41,272
113,018
0
94,186
Adjusted weighted average common shares used in computing
diluted EPS
11,832,413
12,167,962
11,809,189
12,228,976
Diluted EPS
$
0.23
$
0.60
$
(1.27)
$
1.51
For the three-month periods ended September 30, 2020 and September 30, 2019, weighted average outstanding stock-based
compensation awards in the amount of
230,428
157,952
, respectively, were considered antidilutive and therefore were not
considered in the computation of potential common shares for purposes of diluted EPS.
For the nine-month periods ended September 30, 2020 and September 30, 2019, weighted average outstanding stock-based
compensation awards in the amount of
286,349
172,473
, respectively, were considered antidilutive and therefore were not
considered in the computation of potential common shares for purposes of diluted EPS.
-35-
NOTE 13 – Stockholders’ Equity
Share Repurchases
During the three-month period ended September 30, 2020, the Company did
0
t purchase any shares of its common stock under any
stock repurchase plan. During the nine-month period ended September 30, 2020, the Company purchased
264,470
common stock under a stock repurchase plan approved by the Company’s Board of Directors on August 1, 2019 (the “2019
Repurchase Plan”) at an average cost of $
16.09
During the three-month period ended September 30, 2019, the Company purchased
144,729
market under a stock repurchase plan approved by the Company’s Board of Directors on May 30, 2017 (the “2017 Repurchase Plan”)
at an average cost of $
23.00
247,500
shares of its common stock under the 2017 Repurchase Plan at an average cost of $
23.24
At September 30, 2020, the Company had $
4.7
In addition to the repurchases described above, participants in the Company’s 2014 Equity Compensation Plan (approved by the
Company’s shareholders on June 3, 2014) (the “2014 Plan”) may have shares withheld to cover income taxes. During the three-month
periods ended September 30, 2020 and September 30, 2019, there were
18,446
2,654
tax withholding under the 2014 Plan at an average cost of $
8.06
23.80
periods ended September 30, 2020 and September 30, 2019, there were
41,466
22,100
withholding in connection with shares granted under the 2014 Plan at average per-share costs of $
10.70
22.87
, respectively.
Regulatory Capital Requirements
Through its issuance of FDIC-insured deposits, MBB serves as the Company’s primary funding source. Over time, MBB may offer
other products and services to the Company’s customer base. MBB operates as a Utah state-chartered, Federal Reserve member
commercial bank, insured by the FDIC. As a state-chartered Federal Reserve member bank, MBB is supervised by both the Federal
Reserve Bank of San Francisco and the Utah Department of Financial Institutions.
The Company and MBB are subject to capital adequacy regulations issued jointly by the federal bank regulatory agencies. These risk-
based capital and leverage guidelines make regulatory capital requirements more sensitive to differences in risk profiles among
banking organizations and consider off -balance sheet exposures in determining capital adequacy. The federal bank regulatory agencies
and/or the U.S. Congress may determine to increase capital requirements in the future due to the current economic environment.
Under the capital adequacy regulation, at least half of a banking organization’s total capital is required to be "Tier 1 Capital" as
defined in the regulations, comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual
preferred stock. The remaining capital, "Tier 2 Capital," as defined in the regulations, may consist of other preferred stock, a limited
amount of term subordinated debt or a limited amount of the reserve for possible credit losses. The regulations establish minimum
leverage ratios for banking organizations, which are calculated by dividing Tier 1 Capital by total average assets. Recognizing that the
risk-based capital standards principally address credit risk rather than interest rate, liquidity, operational or other risks, many banking
organizations are expected to maintain capital in excess of the minimum standards.
The Company and MBB operate under the Basel III capital adequacy standards. These standards require a minimum for Tier 1
leverage ratio of
4
%, minimum Tier 1 risk-based ratio of
6
%, and a total risk-based capital ratio of
8
%. The Basel III capital adequacy
standards established a new common equity Tier 1 risk-based capital ratio with a required
4.5
% minimum (
6.5
% to be considered
well-capitalized). The Company is required to have a level of regulatory capital in excess of the regulatory minimum and to have a
capital buffer above
2.5
%. If a banking organization does not maintain capital above the minimum plus the capital conservation buffer
it may be subject to restrictions on dividends, share buybacks, and certain discretionary payments such as bonus payments.
CMLA Agreement.
On March 25, 2020, MBB received notice from the FDIC that it had approved MBB’s request to rescind certain
nonstandard conditions in the FDIC’s order granting federal deposit insurance issued on March 20, 2007. Furthermore, effective
March 26, 2020, the FDIC, the Company and certain of the Company’s subsidiaries terminated the Capital Maintenance and Liquidity
Agreement (the “CMLA Agreement”) and the Parent Company Agreement, each entered into by and among the Company, certain of
its subsidiaries and the FDIC in conjunction with the opening of MBB. As a result of these actions, MBB is no longer required
-36-
pursuant to the CMLA Agreement to maintain a total risk-based capital ratio above
15
%. Rather, MBB must continue to maintain a
total risk-based capital ratio above 10% in order to maintain “well-capitalized” status as defined by banking regulations, while the
Company must continue to maintain a total risk-based capital ratio as discussed in the immediately preceding paragraph. The
additional capital released by the termination of the CMLA Agreement is held at MBB and is subject to the restrictions outlined in
Title 12 part 208 of the Code of Federal Regulations (12 CFR 208.5), which places limitations on bank dividends, including restricting
dividends for any year to the earnings from the current and prior two calendar years. Any dividends declared above that amount and
any return of permanent capital would require prior approval of the Federal Reserve Board of Governors. As of September 30, 2020,
MBB does not have the capacity to pay dividends to the Company without explicit approval from the Federal Reserve Board of
Governors because of the current period losses and the amount of cumulative dividends paid over the past two years.
MBB’s Tier 1 Capital balance at September 30, 2020 was $
139.4
and qualified MBB for “well-capitalized” status. At September 30, 2020, the Company also exceeded its regulatory capital
requirements and was considered “well-capitalized” as defined by federal banking regulations and as required by the FDIC
Agreement.
CECL Capital Transition.
The Company adopted CECL, or a new measurement methodology for the allowance estimate, on January
1, 2020, as discussed further in Note 2—Summary of Significant Accounting Policies. Rules governing the Company’s regulatory
capital requirements give entities the option of delaying for two years the estimated impact of CECL on regulatory capital, followed
by a three-year transition period to phase out the aggregate amount of capital benefit, or a five-year transition in total. The Company
has elected to avail itself of the five-year transition. For measurements of regulatory capital in 2020 and 2021 , under the two year
delay the Company shall prepare: (i) a measurement of its estimated allowance for credit losses under CECL, as reported in its balance
sheets; and (ii) a measurement of its estimated allowance under the historical incurred loss methodology, as prescribed by the
regulatory calculation. Any amount of provisions under CECL that is in excess of the incurred estimate will be an adjustment the
Company’s capital during the two-year delay. The three-year transition, starting in 2022, will phase in that adjustment straight-line,
such that
25
25
% over each of the next two
years, such that we will have phased in
75
% of the adjustment during year three. At the beginning of year 6 (2025) the Company will
have completely reflected the effects of CECL in its regulatory capital.
-37-
The following table sets forth the Tier 1 leverage ratio, common equity Tier 1 risk-based capital ratio, Tier 1 risk-based capital ratio
and total risk-based capital ratio for Marlin Business Services Corp. and MBB at September 30, 2020.
Minimum Capital
Well-Capitalized Capital
Actual
Requirement
Requirement
Ratio
Amount
Ratio
Amount
Ratio
Amount
(Dollars in thousands)
Tier 1 Leverage Capital
16.92%
$
192,218
4.00%
$
45,443
5.00%
$
56,804
13.26%
$
139,365
4.00%
$
42,053
5.00%
$
52,566
Common Equity Tier 1 Risk-Based Capital
21.17%
$
192,218
4.50%
$
40,860
6.50%
$
59,019
16.88%
$
139,365
4.50%
$
37,147
6.50%
$
53,657
Tier 1 Risk-based Capital
21.17%
$
192,218
6.00%
$
54,479
8.00%
$
72,639
16.88%
$
139,365
6.00%
$
49,530
8.00%
$
66,040
Total Risk-based Capital
22.49%
$
204,185
8.00%
$
72,639
10.00%
$
90,799
18.21%
$
150,285
8.00%
$
66,040
10.00%
$
82,550
Prompt Corrective Action
. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires the federal
regulators to take prompt corrective action against any undercapitalized institution. Five capital categories have been established
under federal banking regulations: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. Well-capitalized institutions significantly exceed the required minimum level for each relevant capital
measure. Adequately capitalized institutions include depository institutions that meet but do not significantly exceed the required
minimum level for each relevant capital measure. Undercapitalized institutions consist of those that fail to meet the required minimum
level for one or more relevant capital measures. Significantly undercapitalized characterizes depository institutions with capital levels
significantly below the minimum requirements for any relevant capital measure. Critically undercapitalized refers to depository
institutions with minimal capital and at serious risk for government seizure.
Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the
institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions,
including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized.
Institutions that are adequately capitalized but not well-capitalized cannot accept, renew or roll over brokered deposits except with a
waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized
institutions may not accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions
falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective
powers include, among other things:
• prohibiting the payment of principal and interest on subordinated debt;
• prohibiting the holding company from making distributions without prior regulatory approval;
• placing limits on asset growth and restrictions on activities;
• placing additional restrictions on transactions with affiliates;
• restricting the interest rate the institution may pay on deposits;
-38-
• prohibiting the institution from accepting deposits from correspondent banks; and
• in the most severe cases, appointing a conservator or receiver for the institution.
A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted
unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such
guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
MBB’s total risk-based capital ratio of
18.21
% at September 30, 2020 exceeded the threshold for “well capitalized” status under the
applicable laws and regulations.
Dividends
. The Federal Reserve Board has issued policy statements requiring insured banks and bank holding companies to have an
established assessment process for maintaining capital comm ensurate with their overall risk profile. Such assessment process may
affect the ability of the organizations to pay dividends. Although generally organizations may pay dividends only out of current
operating earnings, dividends may be paid if the distribution is prudent relative to the organization’s financial position and risk profile,
after consideration of current and prospective economic conditions. As mentioned above, MBB’s ability to pay dividends to the
Company is subject to various regulatory requirements, including Title 12 part 208 of the Code of Federal Regulations (12 CFR
208.5), which places limitations on bank dividends. Furthermore, as a bank holding company, the Company’s ability to pay dividends
to its shareholders is also subject to various regulatory requirements, including Supervisory Letter SR 09-4,
Applying Supervisory
Guidance and Regulations on the Payment of Dividends, Stock Redemptions and Stock Repurchases at Bank Holding Companies
.
NOTE 14 – Stock-Based Compensation
Awards for Stock-Based Compensation are governed by the Company’s 2003 Equity Compensation Plan, as amended (the “2003
Plan”), the Company’s 2014 Equity Compensation Plan (approved by the Company’s shareholders on June 3, 2014) (the “2014 Plan”)
and the Company’s 2019 Equity Compensation Plan (approved by the Company’s shareholders on May 30, 2019) (the “2019 Plan”
and, together with the 2014 Plan and the 2003 Plan, the “Equity Compensation Plans”). Under the terms of the Equity Compensation
Plans, employees, certain consultants and advisors and non-employee members of the Company’s Board of Directors have the
opportunity to receive incentive and nonqualified grants of stock options, stock appreciation rights, restricted stock and other equity-
based awards as approved by the Company’s Board of Directors. These award programs are used to attract, retain and motivate
employees and to encourage individuals in key management roles to retain stock. The Company has a policy of issuing new shares to
satisfy awards under the Equity Compensation Plans. The aggregate number of shares under the 2019 Plan that may be issued for
Grants is
826,036
. There were
546,070
Total stock-based compensation expense was $
0.4
0.9
September 30, 2019, respectively. Total stock-based compensation expense was $
0.8
2.8
periods ended September 30, 2020 and September 30, 2019, respectively. Excess tax deficits from stock-based payment arrangements
were $
0.6
0.1
Stock Options
Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of the grant
and have
7
Company and provide for accelerated vesting if there is a change in control as defined in the Equity Compensation Plans. Employee
stock options generally vest over
three
four years
.
There were
0
respectively.
The expected life for options is estimated based on their vesting and contractual terms and was determined by applying the simplified
method as defined by the SEC’s Staff Accounting Bulletin No. 107 (“SAB 107”). The risk-free interest rate reflected the yield on
zero-coupon Treasury securities with a term approximating the expected life of the stock options. The expected volatility was
determined using historical volatilities based on historical stock prices
-39-
.
A summary of option activity for the nine-month period ended September 30, 2020 follows:
Weighted
Average
Number of
Exercise Price
Options
Shares
Per Share
Outstanding, December 31, 2019
135,159
$
26.79
0
0
0
0
(3,929)
27.31
(16,648)
26.19
Outstanding, September 30, 2020
114,582
26.87
The Company recognized $
0.1
September 30, 2020. The Company recognized $
0.1
0.3
three and nine-month periods ended September 30, 2019.
There were
0
The following table summarizes information about the stock options outstanding and exercisable as of September 30, 2020:
Options Outstanding
Weighted
Weighted
Aggregate
Weighted
Weighted
Average
Average
Intrinsic
Average
Average
Range of
Number
Remaining
Exercise
Value
Number
Remaining
Exercise
Exercise Prices
Outstanding
Life (Years
)
Price
(In thousands)
Exercisable
Life (Years
)
Price
(In thousands)
$
25.75
63,440
3.5
$
25.75
$
0
63,440
3.5
$
25.75
0
$
28.25
51,142
4.5
$
28.25
$
0
34,092
4.5
$
28.25
$
0
114,582
3.9
$
26.87
$
0
97,532
3.8
$
26.62
$
0
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock
price of $
7.05
options as of that date.
As of September 30, 2020, there was $
0.1
recognized in the Consolidated Statements of Operations scheduled to be recognized over a weighted average period of
0.5
Restricted Stock Awards
The Company’s restricted stock awards provide that, during the applicable vesting periods, the shares awarded may not be sold or
transferred by the participant. The vesting period for restricted stock awards generally ranges from
three
seven years
. All awards
issued contain service conditions based on the participant’s continued service with the Company and may provide for accelerated
vesting if there is a change in control as defined in the Equity Compensation Plans.
The vesting of certain restricted shares may be accelerated to a minimum of
three years
performance measures. Acceleration of expense for awards based on individual performance factors occurs when the achievement of
the performance criteria is determined.
Vesting was accelerated in 2019 on certain awards based on the achievement of certain performance criteria determined annually, as
-40-
described below.
The Company also issues restricted stock to non-employee independent directors. These shares generally vest in
seven years
grant date or
six months
The following table summarizes the activity of non-vested restricted stock for the nine-month period ended September 30, 2020:
Weighted
Average
Grant-Date
Non-vested restricted stock
Shares
Outstanding at December 31, 2019
143,935
$
21.88
45,830
8.64
(37,734)
23.04
(2,750)
25.84
Outstanding at September 30, 2020
149,281
17.45
During the three-month period ended September 30, 2020, the Company did
0
t grant any restricted stock awards. During the three-
month period ended September 30, 2019, the Company granted restricted stock awards with grant-date fair values totaling $
0.4
million. During the nine-month periods ended September 30, 2020 and September 30, 2019, the Company granted restricted stock
awards with grant-date fair values totaling $
0.4
0.4
As vesting occurs, or is deemed likely to occur, compensation expense is recognized over the requisite service period and additional
paid-in capital is increased. The Company recognized $
0.1
0.2
stock for the three-month periods ended September 30, 2020 and September 30, 2019, respectively. The Company recognized $
0.3
million and $
0.7
September 30, 2019, respectively.
Of the $
0.3
0
expense was related to accelerated vesting based on achievement of certain performance criteria determined annually. Of the $
0.7
million total compensation expense related to restricted stock for the nine-month period ended September 30, 2019 , approximately
$
0.1
performance criteria determined annually.
As of September 30, 2020, there was $
1.4
compensation scheduled to be recognized over a weighted average period of
4.8
The fair value of shares that vested during the three-month periods ended September 30, 2020 and September 30, 2019 was $
0.1
million and $
0.2
and September 30, 2019 was $
0.4
1.3
Restricted Stock Units
Restricted stock units (“RSUs”) are granted with vesting conditions based on fulfillment of a service condition (generally three to four
years from the grant date), and may also require achievement of certain operating performance criteria, achievement of certain market-
based targets associated with the Company’s stock price or relative total shareholder return, or a combination of both performance
criteria and market-based targets.
For those awards subject to achievement of certain market performance criteria, the market-based
target measurement period begins
one year
three years
awards with market and performance conditions is recognized over the performance period based on the grant-date fair value of the
award for those awards which are expected to be earned.
-41-
The following tables summarize restricted stock unit activity for the nine-month period ended September 30, 2020:
Weighted
Average
Number of
Grant-Date
Performance-based & market-based RSUs
RSUs
Outstanding at December 31, 2019
257,476
$
18.00
Granted
95,758
17.55
Forfeited
(5,081)
23.99
Converted
(65,810)
12.89
Cancelled due to non-achievement of market condition
(56,390)
18.19
Outstanding at September 30, 2020
225,953
19.12
Service-based RSUs
Outstanding at December 31, 2019
99,951
$
23.59
Granted
69,422
20.43
Forfeited
(24,016)
22.07
Converted
(39,879)
24.30
Outstanding at September 30, 2020
105,478
21.59
There were
0
September 30, 2020 and September 30, 2019, respectively.
The weighted average grant-date fair value of RSUs with both performance and market-based vesting conditions granted during the
nine-month periods ended September 30, 2020 and September 30, 2019 was $
12.90
12.91
average grant date fair value of these performance and market-based RSUs was estimated using a Monte Carlo simulation valuation
model with the following assumptions:
Nine Months Ended September 30,
2020
2019
Grant date stock price
$
20.43
$
21.50
Risk-free interest rate
1.40
%
2.16
Expected volatility
26.18
%
26.68
Dividend yield
0
0
The risk free interest rate reflected the yield on zero coupon Treasury securities with a term approximating the expected life of the
RSUs. The expected volatility was based on historical volatility of the Company’s common stock. Dividend yield was assumed at zero
as the grant assumes dividends distributed during the performance period are reinvested. When valuing the grant, we have assumed a
dividend yield of zero, which is mathematically equivalent to reinvesting dividends in the issuing entity.
There were
0
During the nine-month periods ended September 30, 2020 and September 30, 2019, the Company granted RSUs with grant-date fair
values totaling $
3.1
3.4
stock during the nine-month periods ended September 30, 2020 and September 30, 2019 was $
1.1
0.8
respectively.
-42-
The Company recognized $
0.3
0.6
September 30, 2020 and September 30, 2019, respectively. The Company recognized $
0.3
1.7
expense related to RSUs for the nine-month periods September 30, 2020 and September 30, 2019, respectively. During the nine-month
period ended September 30, 2020 the Company reversed $
0.7
based on the adjustment of the most probable performance assumptions related to certain non-market performance awards. As of
September 30, 2020, there was $
1.7
weighted average period of
1.4
targets are achieved, an additional $
8.1
1.5
years. As of September 30, 2020,
3,960
probable performance assumptions. In the event maximum performance targets are achieved,
428,917
convert to shares of common stock.
NOTE 15 – Subsequent Events
The Company declared a dividend of $
0.14
dividend payment of approximately $
1.7
November 19, 2020
of business on
November 9, 2020
. It represents the Company’s thirty-seventh consecutive quarterly cash dividend. The payment of
future dividends will be subject to satisfaction of regulatory requirements applicable to bank holding companies and approval by the
Company’s Board of Directors.
-43-
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
Consolidated Financial Statements and the related notes thereto in our Form 10-K for the year ended December 31, 2019 filed with
the SEC.
This discussion contains certain statements of a forward -looking nature that involve risks and uncertainties.
F
ORWARD
-L
OOKING
S
TATEMENTS
Certain statements in this document may include the words or phrases “can be,” “expects,” “plans,” “may,” “may affect,” “may
depend,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “if” and similar words and phrases that constitute “forward-
looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Investors are cautioned not to place undue reliance on these
forward-looking statements. Forward-looking statements are subject to various known and unknown risks and uncertainties and the
Company cautions that any forward-looking information provided by or on its behalf is not a guarantee of future performance.
Statements regarding the following subjects are forward-looking by their nature: (a) our business strategy; (b) our projected operating
results; (c) our ability to obtain external deposits or financing; (d) our understanding of our competition; and (e) industry and market
trends. The Company’s actual results could differ materially from those anticipated by such forward-looking statements due to a
number of factors, some of which are beyond the Company’s control, including, without limitation:
◾
availability, terms and deployment of funding and capital;
◾
changes in our industry, interest rates, the regulatory environment or the general economy resulting in changes to our
business strategy;
◾
the degree and nature of our competition;
◾
availability and retention of qualified personnel;
◾
general volatility of the capital markets;
◾
the effects of the COVID-19 pandemic; and
◾
the factors set forth in the section captioned “Risk Factors” in Item 1 of our Form 10-K for the year ended December 31,
2019 and in Part II—Item 1A of this Form 10-Q.
Forward-looking statements apply only as of the date made and the Company is not required to update forward-looking statements for
subsequent or unanticipated events or circumstances.
For any forward-looking statements contained in any document, we claim the
protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. As
used herein, the terms “Company,” “Marlin,” “Registrant,” “we,” “us” or “our” refer to Marlin Business Services Corp. and its
subsidiaries.
O
VERVIEW
Founded in 1997, we are a nationwide provider of credit products and services to small and mid-sized businesses. The products and
services we provide to our customers include loans and leases for the acquisition of commercial equipment (including Commercial
Vehicle Group (“CVG”) assets) and working capital loans. In May 2000, we established AssuranceOne, Ltd., a Bermuda-based,
wholly-owned captive insurance subsidiary (“Assurance One”), which enables us to reinsure the property insurance coverage for the
equipment financed by Marlin Leasing Corporation (“MLC”) and Marlin Business Bank (“MBB”) for our small business customers.
In 2008, we opened MBB, a commercial bank chartered by the State of Utah and a member of the Federal Reserve System. MBB
serves as the Company’s primary funding source through its issuance of Federal Deposit Insurance Corporation (“FDIC”)-insured
deposits. In January 2017, we completed the acquisition of Horizon Keystone Financial (“HKF”), an equipment leasing company
which primarily identifies and sources lease and loan contracts for investor partners for a fee, and in September 2018, we completed
the acquisition of Fleet Financing Resources (“FFR”), an company specializing in the leasing and financing of both new and used
commercial vehicles, with an emphasis on livery equipment and other types of commercial vehicles used by small businesses.
We access our end user customers primarily through origination sources consisting of independent commercial equipment dealers,
various national account programs, through direct solicitation of our end user customers and through relationships with select lease
and loan brokers. We use both a telephonic direct sales model and, for strategic larger accounts, outside sales executives to market to
our origination sources and end user customers. Through these origination sources, we are able to cost-effectively access end user
customers while also helping our origination sources obtain financing for their customers.
-44-
We fund our business primarily through the issuance of fixed and variable-rate FDIC-insured deposits and money market demand
accounts raised nationally by MBB, sales of pools of leases or loans, as well as, from time to time, fixed-rate asset backed
securitization transactions.
E
XECUTIVE
S
UMMARY
Through the third quarter, the impacts of the COVID-19 pandemic continued to be experienced by our business. We recognized $ 2.7
million Net income for the third quarter, returning to profitability after Net losses of $11.8 million and $5.9 million in the first and
second quarters of 2020, respectively. For the third quarter, our provision for credit losses related to the changing economic
conditions was $1.9 million, whereas we had significant reserve building in the first and second quarters of 2020 related to changing
economic conditions primarily resulting from the effects of COVID-19 of $19.2 million and $15.5 million, respectively. Our third
quarter results also reflected the positive effects of our cost reduction efforts, as we reduced Salary and benefits expense by $2.4
million and General and administrative expenses by $1.4 million as compared to the third quarter of 2019. We continue to assess all
other aspects of our expense base in order to stabilize our operations and minimize the negative impacts of the ongoing pandemic.
As has been the case since the beginning of the COVID-19 crisis, one primary operational priority has been working with existing
customers to protect the value of our portfolio and limiting the erosion of shareholder capital. As such, we have been intentionally
operating out of a more defensive position since the pandemic began. As anticipated, third quarter total sourced origination volume of
$68.5 million was well below our volume from last year due to a variety of factors, which include: (i) the purposeful actions we took
in the second and third quarters to reduce our workforce and re-position the frontend of our business; (ii) the continuing soft demand
for financing by the small business community due to challenges facing many industries resulting from the continued economic fallout
of COVID-19 across much of the United States; and (iii) lower approval rates stemming from our tighter underwriting criteria. We
expect our origination volumes for the remainder of 2020 will be negatively impacted as the effects of the pandemic continue and this
period of uncertainty continues to impact the macroeconomic environment. Given the ongoing health crisis in the United States, any
return to pre-pandemic levels of activity remains uncertain.
As of September 30, 2020, $129.9 million of net investment, or 14.3%, have been part of our payment deferral contract modification
program that was instituted in March to assist our customers who have experienced difficulty from the economic impacts of COVID-
19. In the third quarter, we completed new modifications or extended modified terms for 725 contracts totaling $25.9 million net
investment, bringing our total modified portfolio to $129.8 million, or 14.3% of our net investment at the end of the third quarter. As
of the end of the third quarter we have stopped taking new applications for modifications, although we may consider offering
extensions in select cases as part of our loss mitigation strategies.
As of September 30, 2020 84% of our modified contracts are out of the deferral period, and the current deferral period will expire for
substantially all of the remaining modified contracts before December 31, 2020. We are closely monitoring the payment performance
of our customers as their post-deferral obligations become due.
Our allowance as a percent of receivables has increased for Equipment Finance to 6.57% from 2.09% at December 31, 2019, and
increased for Working Capital to 13.06% from 3.14% at December 31, 2019. Our total Allowance of $ 61.3 million as of September
30, 2020 incorporates all of our current judgments about the impact of the COVID-19 pandemic on our portfolio. We remain very
confident in the strength of our balance sheet and capital position, as well as our ability to withstand any future potential losses, should
they occur. We will continue to closely monitor and evaluate our capital position and potential liquidity requirements as economic
conditions continue to change. See further information about this estimate in “—Portfolio and Asset Quality” below.
Through the third quarter, our employees continue to work remotely, and we have not experienced any significant interruption to our
operations from that transition. We continue to assess how to best evolve our operations and how to best serve our customers in this
changing environment.
-45-
F
INANCE
R
ECEIVABLES AND
A
SSET
Q
UALITY
The following table summarizes certain portfolio statistics for the periods presented:
September 30,
June 30,
December 31,
September 30,
2020
2020
2019
2019
(Dollars in thousands)
Finance receivables:
End of period
$
908,053
$
974,679
$
1,007,706
(1)
$
1,032,868
(1)
Average for the quarter
(1)
924,635
979,313
1,034,464
1,048,798
Origination Volume - three months
(6)
67,117
65,419
218,161
181,028
Origination Volume - nine months, through Sept. 30
284,117
—
—
583,785
Assets Sold - three months
4,286
1,127
114,483
85,425
Assets Sold - nine months, through Sept. 30
28,342
—
—
195,932
Leases and Loans Modified:
(3)
Payment deferral program
(2)
End of period
$
129,882
$
133,817
—
—
As a % of end of period receivables
(1)
14.3%
13.7%
—
—
Other Restructured leases and loans, end of period
$
1,035
$
1,751
$
2,668
$
2,323
Allowance for credit losses :
(4)
End of period
$
61,325
$
63,644
$
21,695
$
19,211
As a % of end of period receivables
(1)
6.75%
6.53%
2.15%
1.86%
Annualized net charge-offs
(1)
4.54%
3.47%
3.00%
1.99%
Delinquencies, end of period:
(3)(5)
Equipment Finance and CVG:
Greater than 60 days past due, $
$
12,551
$
23,353
$
8,112
$
8,515
Greater than 60 days past due, %
1.43%
2.52%
0.86%
0.87%
Working Capital:
Greater than 30 days past due, $
$
777
$
1,130
$
855
$
740
Greater than 30 days past due, %
2.94%
2.68%
1.42%
1.34%
__________________
(1)
For purposes of asset quality and allowance calculations, the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees
deferred are excluded.
(2)
Contracts that are part of our Payment-deferral modification program , that allows for either full or partial payment deferral, will appear in our
Delinquency and Non-Accrual measures based on their performance against their modified terms. See further discussion of our Loan modification
program below.
(3)
No renegotiated leases or loans met the definition of a Troubled Debt Restructuring for any period presented, including our payment deferral
modifications, as discussed further below.
(4)
The December 31, 2019 end of period allowance and % of receivables were $33,603 and 3.27% after the January 1, 2020 adoption of CECL. See
further discussion below.
(5)
Calculated as a percentage of net investment in leases and loans.
(6)
Amount of originations for the three months ended September 30, 2020 and June 30, 2020 presented above exclude $0.2 million and $4.2 million,
respectively, of loans originated under the Paycheck Protection Program (PPP). In the third quarter of 2020, the Company sold the PPP portfolio
and will have no continuing involvement with those receivables.
-46-
For three and nine-months ended September 30, 2020, we have recognized $ 7.2 and $ 51.2 of provision for credit losses, respectively,
primarily driven by qualitative and forecast adjustments to the allowance for credit losses as a result of the economic impact of the
COVID-19 pandemic. The COVID-19 pandemic, business shutdowns and impacts to our customers, are still ongoing, and the extent
of the effects of the pandemic on our portfolio depends on future developments, which are highly uncertain and are difficult to predict.
Further, we instituted a Loan modification payment deferral program, as discussed further below, to give payment relief to customers
during this period.
Our reserve as of September 30, 2020, and the qualitative and economic adjustments outlined below in our Provision discussion, were
calculated referencing our historical loss experience, including loss experience through the 2008 economic cycle, and our adjustments
to that experience based on our judgements about the expected impact of the COVID-19 pandemic. Those judgements include certain
expectations for the extent and timing of impacts from COVID-19 on unemployment rates and business bankruptcies and are based on
our current expectations of the performance of our portfolio in the current environment. We may recognize credit losses in excess of
our reserve, or revise our estimate of expected credit losses in the future, and such amounts may be significant, based on: (i) the actual
performance of our portfolio, including the performance of the modified portfolio; (ii) any further changes in the economic
environment; or (iii) other developments or unforeseen circumstances that impact our portfolio.
Loan Modification Program.
In response to COVID-19, starting in mid-March 2020, we instituted a payment deferral program in order to assist our small -business
customers that request relief who are current under their existing obligations. Our COVID-19 modification program allows for up to 6
months of deferred payments.
The below table outlines certain data on the modified population based on the net investment balance and status as of September 30,
2020.
-47-
Equip.Fin
Working
and CVG
Capital
Total
(Dollars in thousands)
Number of Modifications:
Modified leases and loans receivable
4,868
369
5,237
Resolved modifications
(2)
250
122
372
Total Program, number of contracts
5,118
491
5,609
Current Quarter Population Changes:
Q3 - New modification
$
9,157
$
286
$
9,443
Q3 - Extended modification
13,959
2,458
16,417
Last Modified in Q1 or Q2
94,556
9,466
104,022
Total Modifications, Net investment receivable
$
117,672
$
12,210
$
129,882
% of total segment receivables
13.0%
46.1%
14.3%
Deferral Status:
Out of deferral
$
99,627
$
9,489
$
109,116
In deferral period - partial payment during deferral
9,535
2,721
12,256
In deferral period - full deferral of payment
8,510
—
8,510
Total Modifications, Net investment receivable
(3)
$
117,672
$
12,210
$
129,882
Total Interest income recognized on modified loans:
Third quarter of 2020
(1)
$
2,588
$
1,190
$
3,778
Second and third quarters of 2020
4,883
2,823
7,706
_________________
(1)
We did not account for these modifications as TDR, as allowed by interagency guidance issued in April 2020. As such these loans were
not put on non-accrual upon modification. The amount presented for interest income reflects total income recognized for the three months,
for any loan that was modified in the quarter.
(2)
Resolved population through September 30, 2020 includes: for Equipment Finance, 230 loans paid in full and 20 charge-offs with $91
thousand realized loss, and for Working Capital, 101 loans paid in full and 21 charge-offs with $483 thousand realized loss.
(3)
Out of the deferral period represents the month in which the contract returns to its regular contract schedule for the entire month. For loans
in deferral period, the deferral may either be full, with zero payment owed during the deferral period, or partial, with reduced payments
during deferral that are primarily 25%-50% of schedule, or the payment during deferral may be a nominal amount. In all cases, information
is presented with respect to the contracts’ current deferral terms as of September 30, 2020.
As of September 30, 2020, $109.1 million, or 84%, of our total modified contracts are out of the deferral period, and the current
deferral period will expire for substantially all of the remaining modified contracts before December 31, 2020. We are closely
monitoring the performance of the modified contracts as thei r deferral period expires.
As of September 30, 2020, the Company is not actively taking new applications for modifications under its COVID deferral program.
However, the Company is continuing to assess a population of receivables that have prolonged industry - specific risk resulting from
COVID. As part of our loss mitigation strategies, we may process select deferrals beyond 6 months, which may be categorized as
TDRs. The total receivables that are currently part of that risk assessment are approximately $13 million net investment, and the
Company evaluated the estimate of credit loss for the population separately when establishing its allowance at the end of the third
quarter.
-48-
Portfolio Trends
During the three months ended September 30, 2020 , we generated 3,410 new Equipment Finance leases and loans with equipment
costs of $65.8 million, compared to 6,836 new Equipment Finance leases and loans with equipment costs of $154.8 million generated
for the three months ended September 30, 2019. Working Capital loan originations were $1.3 million during the three-month period
ended September 30, 2020, compared to $26.2 million for the three-month period ended September 30, 2019.
Overall, our average net investment in total finance receivables for the three-month period ended September 30, 2020 decreased
11.8% to $924.6 million, compared to $1,048.8 million for the three-month period ended September 30, 2019. Our origination
volumes in the three months ended September 30, 2020 were lower than our historical norms, primarily driven by decreased demand
attributable to COVID-19 related business shutdowns and other macroeconomic factors, as well as our actions to reduce the workforce
in the second and third quarters of this year. We expect our origination volumes for the fourth quarter of 2020 will continue to be
negatively impacted by these factors, and our portfolio of receivables may continue to decline as long as our origination volumes are
less than portfolio runoff. Given the ongoing health crisis in the United States, any returns to pre-pandemic levels of activity remains
uncertain.
The following table outlines the delinquency status of the Company’s portfolio as of September 30, 2020, including information on
the population of restructured contracts, and contracts with restructure requests:
Net Investment (in thousands)
Delinquency Rate by population
30
60
90+
Current
Total
30
60
90+
Current
Total
Equipment Finance
Out of deferral period
(1)
$1,402
$1,646
$1,672
$94,905
$99,625
1.41%
1.65%
1.68%
95.26%
100%
In deferral period
371
733
—
16,943
18,047
2.06%
4.06%
—
93.88%
100%
Restructured Portfolio
1,773
2,379
1,672
111,848
117,672
1.51%
2.02%
1.42%
95.05%
100%
Non-Restructured
4,430
3,348
5,148
749,869
762,795
0.58%
0.44%
0.67%
98.31%
100%
Total Equipment Finance
$6,203
$5,727
$6,820
$861,717
$880,467
0.70%
0.65%
0.77%
97.87%
100%
Net Investment (in thousands)
Delinquency Rate by population
15
30
60+
Current
Total
15
30
60+
Current
Total
Working Capital
Out of deferral period
(1)
$185
$207
$276
$8,820
$9,488
1.95%
2.18%
2.91%
92.96%
100%
In deferral period
(1)
38
65
34
2,585
2,722
1.40%
2.39%
1.25%
94.96%
100%
Restructured Portfolio
223
272
310
11,405
12,210
1.83%
2.23%
2.54%
93.40%
100%
Non-Restructured
41
127
68
14,026
14,262
0.29%
0.89%
0.48%
98.34%
100%
Total Working Capital
$264
$399
$378
$25,431
$26,472
1.00%
1.51%
1.43%
96.06%
100%
_________________
(1)
Out of modification period represents loans that have resumed their regular payment schedule for at least 1 month prior to September 30,
2020.
Contracts that are part of the payment deferral modification program will be reflected in our Delinquency and Non-Accrual measures
based on their performance against their modified terms.
-49-
Equipment Finance receivables over 30 days delinquent were 213 basis points as of September 30, 2020, down 177 basis points from
June 30, 2020, but up 86 basis points from September 30, 2019. Working Capital receivables over 15 days delinquent were 393 basis
points as of September 30, 2020, down 45 basis points from June 30, 2020, but up 204 basis points from September 30, 2019.
Equipment Finance leases and loans are generally charged -off when they are contractually past due for 120 days or more. Working
Capital loans are generally charged-off at 60 days past due. Annualized second quarter total net charge -offs were 4.54% of average
total finance receivables versus 3.47% in the second quarter of 2020 and 1.99% a year ago.
In accordance with interagency guidance as amended in April 2020, as affirmed by the FASB, we are not accounting for our payment-
deferral modified loans as TDRs, and we are continuing to accrue interest on those loans. For the three months ended September 30,
2020, we recognized total Interest income of $3.8 million on loans in our COVID-19 loan modification program.
The following table summarizes non-accrual leases and loans in the Company’s portfolio:
September 30,
June 30,
December 31
September 30,
2020
2020
2019
2019
(Dollars in thousands)
$
6,345
$
9,205
$
4,256
$
3,494
1,144
1,189
946
284
886
637
389
199
$
8,375
$
11,031
$
5,591
$
3,977
Through September 30, 2020, the increase in leases and loans on non-accrual reflects the growth in delinquencies in our portfolio.
Income recognition is discontinued on Equipment Finance leases or loans, including CVG loans, when a default on monthly payment
exists for a period of 90 days or more. Income recognition resumes when the lease or loan becomes less than 90 days delinquent.
Working Capital Loans are generally placed in non-accrual status when they are 30 days past due. The loan is removed from non-
accrual status once sufficient payments are made to bring the loan current and evidence of a sustained performance period as reviewed
by management. The Company has no loans 90 days or more past due that were still accruing interest for any of the periods
presented.
Portfolio Concentration.
The following table summarizes the concentrations of our portfolio of net investment in leases and loans as of September 30, 2020 by
state and industry:
-50-
Top 10 Industries, by Borrower SIC Code
Top 10 States
Equipment
Equipment
Finance
Working
Finance
Working
and CVG
Capital
and CVG
Capital
Medical
13.5
%
8.6
%
CA
14.1
%
10.5
%
Misc. Services
12.0
8.2
TX
11.6
11.3
Retail
10.2
13.6
FL
9.5
8.7
Construction
8.7
11.2
NY
6.9
5.8
Restaurants
7.1
7.8
NJ
4.6
7.1
Professional Services
6.6
6.3
PA
3.5
5.4
Manufacturing
5.9
9.9
GA
3.4
4.2
Transportation
5.4
3.2
IL
3.3
4.6
Trucking
4.3
2.3
NC
3.1
2.3
Automotive
3.3
6.1
MA
3.1
2.1
All Other
23.0
22.8
All Other
36.9
38.0
Total
100
%
100
%
Total
100
%
100
%
As a result of the COVID-19 pandemic, we have been continually assessing the risks to our portfolio, including consideration of high-
risk industries and geographic locations that are being more significantly impacted by the spread of COVID-19.
While we are attempting to mitigate the impact of the COVID -19 pandemic on our portfolio, by tightening underwriting standards for
areas of elevated risk and by assisting borrowers that have been negative ly impacted, the extent of the impacts of COVID-19 on our
portfolio remains uncertain.
Allowance for credit losses.
The following table provides a rollforward of our Allowance for credit loss:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
(Dollars in thousands)
Allowance for credit losses, December 31, 2019
$
21,695
Adoption of ASU 2016-13 (CECL)
11,908
Allowance for credit losses, beginning of period
$
63,644
$
16,777
33,603
$
16,100
Provision for credit losses
7,204
7,662
51,160
17,781
Net Charge-offs:
Equipment Finance
(9,526)
(4,566)
(22,486)
(12,192)
Working Capital
(532)
(190)
(2,442)
(1,394)
CVG
(430)
(472)
(1,900)
(1,084)
(10,488)
(5,228)
(26,828)
(14,670)
Realized cashflows from Residual Income
965
—
3,390
—
Allowance for credit losses, end of period
$
61,325
$
19,211
$
61,325
$
19,211
-51-
The allowance for credit losses as a percentage of total finance receivables increased to 6.75% as of September 30, 2020 , from 2.15%
as of December 31, 2019. This increase in reserve coverage is primarily driven by an $11.9 million increase from the January 1, 2020
adoption of CECL, and $36.6 million of Provision for credit losses recognized as a result of qualitative and forecast adjustments in the
nine-months ended September 30, 2020 as a result of the estimated impact to the portfolio from the COVID-19 pandemic, as discussed
further below.
Provision for credit losses
.
The provision for credit losses recognized after the adoption of CECL is primarily driven by origination volumes, offset by the
reversal of the allowance for any contracts sold, plus adjustments for changes in estimate each subsequent reporting period. For
2020, given the wide changes in the macroeconomic environment driven by COVID-19, the changes in estimate is the most
significant driver of provision. In contrast, the allowance estimate recognized in 2019 under the probable, incurred model was
based on the current estimate of probable net credit losses inherent in the portfolio.
For the three months ended September 30, 2020 the $ 7.2 million provision for credit losses recognized was $ 0.5 million less
than the $ 7.7 million provision recognized for the three months ended September 30, 2019. Provision for the three months ended
September 30, 2020 includes $2.0 million related to COVID from updates to both the economic forecast and qualitative
adjustments to incorporate timing adjustments, $4.2 million from originations, and $1.0 million for other updates, primarily
driven by updating the model loss curves.
For the nine-months ended September 30, 2020, the $ 51.2 million provision for credit losses recognized was $ 33.4 million
greater than the $ 17.8 million provision recognized for same period of 2019. Provision for the nine-months ended September
30, 2020 includes $36.6 million related to COVID from updates to both the economic forecast and qualitative adjustments to
incorporate timing adjustments, $13.0 million from originations, and $1. 6 million for other updates, primarily driven by updating
the model loss curves.
For the Equipment Finance portfolio, our estimate of elevated COVID-related losses is primarily driven by updates to a
reasonable and supportable forecast based on the modeled correlation of changes in the loss experience of the our portfolio to
certain economic statistics, specifically changes in the unemployment rate and changes in the number of business bankruptcies.
Starting in the first quarter, we are using a 6-month period for applying the economic statistics due to the uncertainty in the
current economic environment. For Equipment Finance, we recognized forecast and qualitative adjustments for the three and
nine-months ended September 30, 2020 of $2.1 million and $26.5 million, respectively, related to COVID based on applying the
economic forecast adjustment, and from incorporating timing adjustments.
For the CVG and Working Capital portfolio segments, our estimate of increased losses is based on qualitative adjustments, taking
into consideration alternative scenarios to determine the Company’s estimate of the probable impact of the economic shutdown.
For CVG, we recognized qualitative provision for the three and nine-months ended September 30, 2020 of $3.7 million and $7.0
million, respectively. For the third quarter, qualitative adjustments primarily are driven by sub-segmenting a population of motor
coach receivables that have prolonged industry-specific risks. For both periods of 2020, the reserve includes adjustments to
incorporate economic risk. For Working Capital, we recognized qualitative provision based on our risk assessment of the
expected performance of this segment in the current economic environment. For the three ended September 30, 2020 that
includes a credit, or provision reversal, of $3.9 million related to refining our risk assessment of this portfolio segment due to
positive performance in the third quarter. That credit brings the Working Capital qualitative provision for the nine-months ended
September 30, 2020 to $3.1 million.
The qualitative and economic adjustments to our allowance take into consideration information and our judgments as of
September 30, 2020, and are based in part on an expectation for the extent and timing of impacts from COVID-19 on
unemployment rates and business bankruptcies, and are based on our current expectations of the performance of our portfolio in
the current environment. The COVID-19 pandemic, and related business shutdowns, is still ongoing, and the extent of the effects
of the pandemic on our portfolio depends on future developments, which are highly uncertain and are difficult to predict. We
may recognize credit losses in excess of our reserve, or increases to our credit loss estimate, in the future, and such increases may
be significant, based on future developments.
Net Charge-offs.
Equipment Finance and TFG receivables are generally charged -off when they are contractually past due for 120 days or more.
Working Capital receivables are generally charged-off at 60 days past due.
-52-
Total portfolio net charge-offs for the three months ended September 30, 2020 were $10.5 million (4.54%) of average total
finance receivables on an annualized basis), compared to $8.5 million (3.47%) for the quarter ended June 30, 2020, and $5.2
million (1.99%) for the three months ended September 30, 2019. Compared to the same quarter of the prior year, the Company is
experiencing elevated net charge-offs, due primarily to the economic impacts resulting from the COVID -19 pandemic.
As of September 30, 2020, our portfolio delinquency rates have improved to 2.15% for 30+ past due, compared to 3.83% at June
30, 2020, but still elevated compared to 1.27% in the same quarter of 2019.
A large portion of our portfolio was part of the payment deferral modification program, as discussed above. While 84% of those
contracts are back to full scheduled payment levels by September 30, 2020, the performance of the modified portfolio remains
uncertain. We are continually monitoring the performance of our portfolio and assessing all related risks to ensure that our
allowance estimate is sufficient to cover the expected losses from COVID-19. See further discussion with the Provision above
about the risks to our reserve estimate, and discussion with Portfolio Trends above about current delinquency levels.
Residual Income.
Residual income includes income from lease renewals and gains and losses on the realization of residual values of leased
equipment disposed at the end of term
In 2019 and prior years, t
he Company had previously recognized residual income within
Fee Income in its Consolidated Statements of Operations; the adoption of CECL results in any realized amounts of residual
income being captured as a component of the activity of the allowance because the Company’s estimate of credit losses under
CECL takes into consideration all cashflows the Company expects to receive or derive from the pools of contracts.
Adoption of ASU 2016-13 / CECL.
Effective January 1, 2020, we adopted new guidance for accounting for our allowance, or ASU 2016-13, Financial Instruments -
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”). CECL replaces the probable/
incurred loss model that we historically used to measure our allowance, with a measurement of expected credit losses for the
contractual term of our current portfolio of loans and leases. Under CECL, an allowance, or estimate of credit losses, will be
recognized immediately upon the origination of a loan or lease, and will be adjusted in each subsequent reporting period. This
estimate of credit losses takes into consideration all remaining cashflows the Company expects to receive or derive from the pools
of contracts, including recoveries after charge-off, accrued interest receivable and certain future cashflows from residual assets.
The provision for credit losses recognized in our Consolidated Statements of Operations under CECL, starting in 2020, will be
primarily driven by origination volumes, offset by the reversal of the allowance for any contracts sold, plus adjustments for
changes in estimate each subsequent reporting period, including adjustments for economic forecasts within a reasonable and
supportable time period.
The impact of adopting CECL effective January 1, 2020 included a $11.9 million increase to the allowance, an $8.9 million
decrease to Retained earnings and $3.0 million impact to our Net deferred income tax liability. See Note 2 –
Summary of
Significant Accounting Policies
, for further discussion of the adoption of this accounting standard, and see Note 6 –
Allowance for
Credit Losses
, for further discussion of the Company’s methodology for measuring its allowance as of the adoption date. Also,
see –
Executive Summary
Stockholders’ Equity
, for discussion of our election to delay for two-years the effect of
CECL on regulatory capital, followed by a three-year phase -in, or a five-year total transition.
Our recorded allowance reflects our current estimate of the expected credit losses of all contracts currently in portfolio based on our
current assessment of information regarding the risks of our current portfolio, default and collection trends, a reasonable and
supportable forecast of economic factors, qualitative adjustments based on our best estimate of expected losses for certain portfolio
segments, among other internal and external factors. Our allowance measurement is an estimate, is inherently uncertain, and is
reassessed at each measurement date. Actual performance of our portfolio and updates to other information involved in our
assessment may drive changes in modeled assumptions, may cause management to adjust the allowance estimate through qualitative
adjustments and/or may result in actual losses that vary significantly from of our current estimate.
-53-
R
ESULTS OF
O
PERATIONS
Comparison of the Three-Month Periods Ended September 30, 2020 and September 30, 2019
Net income.
Net income of $2.7 million was reported for the three-month period ended September 30, 2020, resulting in diluted EPS per share of
$0.23, compared to net income of $7.4 million and diluted EPS of $0.60 for the three-month period ended September 30, 2019. This
$4.7 million decrease in Net income was primarily driven by:
-
$6.4 million decrease in Interest and fee income, driven primarily by a decline in the size of our finance receivable portfolio
;
-
$6.4 million decrease in gains on leases and loans sold due to a decrease in assets sold resulting from disruptions in the
capital markets during this current economic environment;
-
$1.9 million decrease in interest expense due to a decline in the deposit balance as well as continuing reduction of long-term
debt;
-
$2.4 million decrease in Salaries and benefits, driven primarily by lower Commissions, Incentives and the Company’s
proactive cost reduction measures.
Average balances and net interest margin.
The following table summarizes the Company’s average balances, interest income,
interest expense and average yields and rates on major categories of interest-earning assets and interest-bearing liabilities for the three-
month periods ended September 30, 2020 and September 30, 2019.
-54-
Three Months Ended September 30,
2020
2019
(Dollars in thousands)
Average
Average
Average
Yields/
Average
Yields/
Balance
(1)
Interest
Rates
(2)
Balance
(1)
Interest
Rates
(2)
Interest-earning assets:
Interest-earning deposits with banks
$
165,257
$
30
0.07
%
$
135,262
$
793
2.35
%
Time Deposits
10,069
42
1.72
12,815
83
2.59
Restricted interest-earning deposits with banks
6,487
-
0.01
9,898
23
0.91
Securities available for sale
10,755
50
1.85
10,405
65
2.48
Net investment in leases
(3)
851,683
19,010
8.93
951,309
21,513
9.05
Loans receivable
(3)
72,952
3,266
17.91
97,490
5,231
21.46
1,117,203
22,398
8.02
1,217,179
27,708
9.11
Non-interest-earning assets:
Cash and due from banks
5,515
5,592
Allowance for loan and lease losses
(61,470)
(17,567)
Intangible assets
6,982
7,841
Goodwill
-
6,735
Operating lease right-of-use assets
8,070
8,834
Property and equipment, net
8,580
5,006
Property tax receivables
8,949
6,924
Other assets
(4)
28,390
31,754
5,016
55,120
$
1,122,219
$
1,272,299
Interest-bearing liabilities:
Certificate of Deposits
(5)
$
784,056
$
4,149
2.12
%
875,904
$
5,398
2.47
%
Money Market Deposits
(5)
51,563
38
0.30
21,664
126
2.33
Long-term borrowings
(5)
45,594
507
4.45
101,594
1,037
4.08
881,213
4,694
2.13
999,162
6,561
2.63
Non-interest-bearing liabilities:
Sales and property taxes payable
6,340
6,912
Operating lease liabilities
9,015
9,373
Accounts payable and accrued expenses
20,893
24,864
Net deferred income tax liability
21,865
27,711
58,113
68,860
939,326
1,068,022
Stockholders’ equity
182,893
204,277
$
1,122,219
$
1,272,299
Net interest income
$
17,705
$
21,147
Interest rate spread
(6)
5.89
%
6.48
%
Net interest margin
(7)
6.34
%
6.95
%
Ratio of average interest-earning assets to
126.78
%
121.82
%
__________________
(1)
Average balances were calculated using average daily balances.
-55-
(2)
Annualized.
(3)
Average balances of leases and loans include non-accrual leases and loans, and are presented net of unearned income. The average balances of
leases and loans do not include the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred.
(4)
Includes operating leases.
(5)
Includes effect of transaction costs. Amortization of transaction costs is on a straight-line basis, resulting in an increased average rate whenever
average portfolio balances are at reduced levels.
(6)
Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.
(7)
Net interest margin represents net interest income as an annualized percentage of average interest-earning assets.
Changes due to volume and rate.
The following table presents the components of the changes in net interest income by volume and
rate.
Three Months Ended September 30, 2020 Compared To
Three Months Ended September 30, 2019
Increase (Decrease) Due To:
Volume
(1)
Rate
(1)
Total
(Dollars in thousands)
Interest income:
Interest-earning deposits with banks
$
144
$
(907)
$
(763)
Time Deposits
(15)
(25)
(40)
Restricted interest-earning deposits with banks
(6)
(17)
(23)
Securities available for sale
2
(17)
(15)
Net investment in leases
(2,227)
(276)
(2,503)
Loans receivable
(1,185)
(780)
(1,965)
(2,165)
(3,144)
(5,309)
Interest expense:
Certificate of Deposits
(532)
(717)
(1,249)
Money Market Deposits
81
(169)
(88)
Long-term borrowings
(615)
85
(530)
(718)
(1,149)
(1,867)
Net interest income
(1,663)
(1,779)
(3,442)
__________________
(1)
Changes due to volume and rate are calculated independently for each line item presented rather than presenting vertical subtotals for the
individual volume and rate columns.
Changes attributable to changes in volume represent changes in average balances multiplied by the
prior period’s average rates. Changes attributable to changes in rate represent changes in average rates multiplied by the prior year’s
average balances. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to
volume and the change due to rate.
-56-
Net interest and fee margin.
The following table summarizes the Company’s net interest and fee income as an annualized percentage
of average total finance receivables for the three-month periods ended September 30, 2020 and September 30, 2019.
Three Months Ended September 30,
2020
2019
(Dollars in thousands)
Interest income
$
22,398
$
27,708
Fee income
2,803
3,869
25,201
31,577
Interest expense
4,694
6,561
$
20,507
$
25,016
Average total finance receivables
(1)
$
924,635
$
1,048,798
Annualized percent of average total finance receivables:
Interest income
9.69
%
10.57
%
Fee income
1.21
1.48
10.90
12.05
Interest expense
2.03
2.50
8.87
%
9.55
%
__________________
(1)
Total finance receivables include net investment in leases and loans. For the calculations above, the effects of (i) the allowance for credit losses
and (ii) initial direct costs and fees deferred are excluded.
Net interest and fee income decreased $4.5 million, or 18.0%, to $20.5 million for the three months ended September 30, 2020 from
$25.0 million for the three months ended September 30, 2019. The annualized net interest and fee margin decreased 68 basis points to
8.87% in the three-month period ended September 30, 2020 from 9.55% for the corresponding period in 2019.
Interest income, net of amortized initial direct costs and fees, was $22.4 million and $27.7 million for the three-month periods ended
September 30, 2020 and September 30, 2019, respectively. Average total finance receivables decreased $124.2 million, or 11.8%, to
$924.6 million at September 30, 2020 from $1,048.8 million at September 30, 2019. The decrease in average total finance receivables
was primarily due to lower origination volume along with the customary loan repayments and charge-offs. The average yield on the
portfolio decreased 88 basis points to 9.69% from 10.57% in the prior year quarter. The weighted average implicit interest rate on
new finance receivables originated decreased 404 basis points to 9.34% for the three-month period ended September 30, 2020
compared to 13.38% for the three-month period ended September 30, 2019. That decrease was primarily driven by a shift in the mix
of originations as higher-yield Working Capital originations comprised 2% of our originations for the three months ended September
30, 2020, compared to 15% in 2019. The reduction in Working Capital volume is driven by our tightening of underwriting standards
in the third quarter in response to the uncertain macroeconomic environment . Given the ongoing health crisis in the United States,
especially the COVID-19 flare-ups in the south and west, any returns to pre-pandemic levels of origination activity, and our ability to
replenish or grow our portfolio, remains uncertain.
Fee income was $2.8 million and $3.9 million for the three-month periods ended September 30, 2020 and September 30, 2019,
respectively. Fee income included approximately $1.0 million of net residual income for the three-month period ended September 30,
2019. For 2020, after the adoption of CECL, all future cashflows from the Company’s pools of loans are included in the measurement
of the allowance, including future cashflows from net residual income. Amounts of residual income are presented within the
rollforward of the Allowance, as discussed further in “—Finance Receivables and Asset Quality”
Fee income also included approximately $1.7 million and $2.0 million in late fee income for the three-month periods ended September
30, 2020 and September 30, 2019, respectively. Late fees remained the largest component of fee income at 0.68% as an annualized
percentage of average total finance receivables for the three-month period ended September 30, 2020, compared to 0.81% for the
three-month period ended September 30, 2019.
-57-
Interest expense decreased $1.9 million to $4.7 million for the three-month period ended September 30, 2020 from $6.6 million for the
corresponding period in 2019, primarily due to a decrease of $1.2 million on lower deposit balances as well as a decrease of $0.5
million due to the continuing reduction of long-term debt. Interest expense, as an annualized percentage of average total finance
receivables, decreased 47 basis points to 2.03% for the three -month period ended September 30, 2020, from 2.50% for the
corresponding period in 2019. The average balance of deposits was $835.6 million and $897.6 million for the three-month periods
ended September 30, 2020 and September 30, 2019, respectively.
For the three-month period ended September 30, 2020 , average term securitization borrowings outstanding were $45.6 million at a
weighted average coupon of 4.45%. For the three-month period ended September 30, 2019, average term securitization borrowings
outstanding were $101.6 million at a weighted average coupon of 4.08%.
Our wholly-owned subsidiary, MBB, serves as our primary funding source. MBB raises fixed -rate and variable-rate FDIC-insured
deposits via the brokered certificates of deposit market, on a direct basis, and through the brokered MMDA Product. At September 30,
2020, brokered certificates of deposit represented approximately 53% of total deposits, while approximately 41% of total deposits
were obtained from direct channels, and 6% were in the brokered MMDA Product.
Gain on Sale of Leases and Loans.
Gain on sale of leases and loans was $ 0.1 million for the three -month period ended September
30, 2020, compared to $ 6.5 million for the three-month period ended September 30, 2019. Assets sold decreased to $4.3 million for
the three months ended September 30, 2020, compared to $85.4 million for the three months ended September 30, 2019. In the third
quarter of 2020, we continue to see a lack of buyer demand in the syndication market and we retained substantially all of our
origination volume on our balance sheet. Our sales for the three months ended September 30, 2020 consisted primarily of our PPP
Loan portfolio; we will not have continuing involvement in servicing those receivables.
Our sales execution decisions, including the timing, volume and frequency of such sales, depend on many factors including our
origination volumes, the characteristics of our contracts versus market requirements, our current assessment of our balance sheet
composition and capital levels, and current market conditions, among other factors. In the current slowing economy resulting from the
COVID-19 pandemic, we may have difficulty accessing the capital market and may find decreased interest and ability of
counterparties to purchase our contracts, or we may be unable to negotiate terms acceptable to us.
Insurance premiums written and earned.
Insurance premiums written declined slightly to $ 2.1 million for the three -month period
ended September 30, 2020, compared to $ 2.2 million for the three-month period ended September 30, 2019.
Other income.
September 30, 2019, respectively. The increase in other income was primarily driven by increased insurance policy and other
miscellaneous fees.
Salaries and benefits expense.
Three Months Ended September 30,
2020
2019
(Dollars in thousands)
Salary, benefits and payroll taxes
$
6,825
$
7,204
Incentive compensation
1,632
2,144
Commissions
58
1,549
$
8,515
$
10,897
Salaries and benefits expense decreased $ 2.4 million, or 21.9%, to $ 8.5 million for the three-month period ended September 30, 2020
from $ 10.9 million for the corresponding period in 2019 . In June and July 2020, as part of our efforts to tighten our expense base in
response COVID-19, we took steps to permanently reduce our work force by approximately 80 employees, which reduced our
headcount to approximately 250 employees at the end of September, down from approximately 350 employees as of September 30,
2019. As such, our salary, benefits and payroll tax expense was $ 0.4 million lower than the three months ended September 30, 2019,
primarily driven by reduced headcount, partially offset by $0.8 million of additional severance recognized in the third quarter of 202 0.
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Incentive compensation decreased $ 0.5 million, driven by lower recognized bonus and share-based compensation amounts driven by
the Company’s operating results. The decrease in Commissions for the three months ended September 30, 2020 reflects a lower
amount of commission earned driven by 63% lower origination volumes, along with a reduction in Commission driven by an update
to our commission program structure.
General and administrative expense.
Three Months Ended September 30,
2020
2019
(Dollars in thousands)
Occupancy and depreciation
$
1,483
$
1,405
Professional fees
910
861
Information technology
972
909
Marketing
162
280
Acquisition-related contingent payment fair value adjustment
(1,435)
—
Other G&A
2,625
2,637
$
4,717
$
6,092
General and administrative expense decreased $ 1.4 million, or 22.6%, to $ 4.7 million for the three months ended September 30, 2020
from $ 6.1 million for the corresponding period in 2019 . The primary driver of the change was a $1.4 million reduction to the fair
value of the contingent consideration earn out liability related to our 2018 acquisition of the FFR business, driven by a forecasted
decrease in projected volumes, which decreases the liability for estimated payments. In addition, the Company recognized $0.2
million in Occupancy expense in the three months ended September 30, 2020 in connection with a planned facility exit.
General and administrative expense as an annualized percentage of average total finance receivables was 2.04% for the three-month
period ended September 30, 2020, compared to 2.32% for the three-month period ended September 30, 2019.
balance.
Intangible impairment.
In the third quarter of 2020, driven by an update to forecasted volumes of its FFR business, combined with
reductions in headcount in its salesforce, we determined we had a triggering event that required us to compare the book value of FFR
vendor and lender intangibles against their current fair value. As a result of that analysis, we fully impaired the lender intangibles,
recognizing $1.0 million of expense. The vendor intangibles were not impaired.
Provision for income taxes.
Income tax expense of $0.5 million was recorded for the three-month period ended September 30, 2020,
compared to expense of $3.3 million for the three-month period ended September 30, 2019. Our effective tax rate was 16.1 % for the
three-month period ended September 30, 2020, driven by partial recognition of prior quarter’s interim reporting limitation on the
amount of tax benefits that can be recognized under Accounting Standards Codification (“ASC”) 740,
Income Taxes
.
-59-
Comparison of the Nine-Month Periods Ended September 30, 2020 and September 30, 2019
Net income/loss.
Net loss of $15.0 million was reported for the nine-month period ended September 30, 2020, resulting in diluted loss per share of
$1.27, compared to net income of $18.7 million and diluted EPS of $1.51 for the nine-month period ended September 30, 2019. This
$33.7 million decrease in Net income was primarily driven by:
-
($33.4 million) increase in Provision for credit losses, primarily driven by updates to the Company’s estimate, reflecting
forecasted economic conditions from COVID-19 pandemic. The Company adopted CECL on January 1, 2020 which
substantially changed its methodology for measuring the estimate of credit loss. See further discussion of the Provision and
the change in measurement in the prior section “—
Finance Receivables and Asset Quality”;
-
($6.7 million)
impairment of Goodwill, driven by declines in the fair value of its reporting unit;
-
$11.0 million decrease in gains on leases and loans sold due to a decrease in assets sold resulting from the negative impact of
the COVID-19 pandemic on capital markets activity;
-
3.2 million benefit recognized in Income tax (benefit) from the remeasurement of the federal net operating losses driven by
provisions of the CARES Act;
-
$9.1 million decrease in Salaries and benefits, driven primarily by lower Commissions, Incentives and the Company’s
proactive cost reduction measures.
Average balances and net interest margin.
The following table summarizes the Company’s average balances, interest income,
interest expense and average yields and rates on major categories of interest-earning assets and interest-bearing liabilities for the nine-
month periods ended September 30, 2020 and September 30, 2019.
-60-
Nine Months Ended September 30,
2020
2019
(Dollars in thousands)
Average
Average
Average
Yields/
Average
Yields/
Balance
(1)
Interest
Rates
(2)
Balance
(1)
Interest
Rates
(2)
Interest-earning assets:
Interest-earning deposits with banks
$
161,528
$
388
0.32
%
$
129,144
$
2,318
2.39
%
Time Deposits
11,942
167
1.87
11,665
216
2.47
Restricted interest-earning deposits with banks
7,189
9
0.17
13,396
81
0.81
Securities available for sale
10,671
159
1.99
10,600
207
2.60
Net investment in leases
(3)
880,571
58,515
8.86
937,494
64,004
9.10
Loans receivable
(3)
90,353
13,873
20.47
89,174
13,847
20.70
1,162,254
73,111
8.39
1,191,473
80,673
9.02
Non-interest-earning assets:
Cash and due from banks
5,547
5,503
Allowance for loan and lease losses
(47,253)
(17,031)
Intangible assets
7,189
7,921
Goodwill
2,221
6,937
Operating lease right-of-use assets
8,459
6,557
Property and equipment, net
8,387
4,428
Property tax receivables
9,270
7,339
Other assets
(4)
31,276
33,137
25,096
54,791
$
1,187,350
$
1,246,264
Interest-bearing liabilities:
Certificate of Deposits
(5)
$
829,792
$
13,747
2.21
%
$
834,727
$
14,887
2.38
%
Money Market Deposits
(5)
42,883
196
0.61
22,842
425
2.48
Long-term borrowings
(5)
57,434
1,859
4.32
120,834
3,619
3.99
930,109
15,802
2.27
978,402
18,931
2.58
Non-interest-bearing liabilities:
Sales and property taxes payable
6,435
6,835
Operating lease liabilities
9,354
8,119
Accounts payable and accrued expenses
22,079
26,452
Net deferred income tax liability
25,959
25,088
63,827
66,494
993,936
1,044,897
Stockholders’ equity
193,414
201,367
$
1,187,350
$
1,246,264
Net interest income
$
57,309
$
61,742
Interest rate spread
(6)
6.12
%
6.44
%
Net interest margin
(7)
6.57
%
6.91
%
Ratio of average interest-earning assets to
124.96
%
121.78
%
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_________________
(1)
Average balances were calculated using average daily balances.
(2)
Annualized.
(3)
Average balances of leases and loans include non-accrual leases and loans, and are presented net of unearned income. The average balances of leases and
loans do not include the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred.
(4)
Includes operating leases.
(5)
Includes effect of transaction costs. Amortization of transaction costs is on a straight-line basis, resulting in an increased average rate whenever average
portfolio balances are at reduced levels.
(6)
Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.
(7)
Net interest margin represents net interest income as an annualized percentage of average interest-earning assets.
The following table presents the components of the changes in net interest income by volume and rate.
Nine Months Ended September 30, 2020 Compared To
Nine Months Ended September 30, 2019
Increase (Decrease) Due To:
Volume
(1)
Rate
(1)
Total
(Dollars in thousands)
Interest income:
Interest-earning deposits with banks
$
468
$
(2,398)
$
(1,930)
Time Deposits
5
(54)
(49)
Restricted interest-earning deposits with banks
(27)
(45)
(72)
Securities available for sale
1
(49)
(48)
Net investment in leases
(3,814)
(1,675)
(5,489)
Loans receivable
182
(156)
26
(1,942)
(5,620)
(7,562)
Interest expense:
Certificate of Deposits
(88)
(1,052)
(1,140)
Money Market Deposits
222
(451)
(229)
Long-term borrowings
(2,032)
272
(1,760)
(902)
(2,227)
(3,129)
Net interest income
(1,489)
(2,944)
(4,433)
__________________
(1)
Changes due to volume and rate are calculated independently for each line item presented rather than presenting vertical subtotals for the individual
volume and rate columns.
Changes attributable to changes in volume represent changes in average balances multiplied by the prior period’s average
rates. Changes attributable to changes in rate represent changes in average rates multiplied by the prior year’s average balances. Changes attributable to
the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate.
-62-
Net interest and fee margin.
The following table summarizes the Company’s net interest and fee income as an annualized percentage
of average total finance receivables for the nine-month periods ended September 30, 2020 and 2019.
Nine Months Ended September 30,
2020
2019
(Dollars in thousands)
Interest income
$
73,111
$
80,673
Fee income
8,019
11,418
81,130
92,091
Interest expense
15,802
18,931
$
65,328
$
73,160
Average total finance receivables
(1)
$
970,924
$
1,026,668
Percent of average total finance receivables:
Interest income
10.04
%
10.48
%
Fee income
1.10
1.48
11.14
11.96
Interest expense
2.17
2.46
8.97
%
9.50
%
__________________
(1)
Total finance receivables include net investment in leases and loans. For the calculations above, the effects of (i) the allowance for credit losses and (ii)
initial direct costs and fees deferred are excluded.
Net interest and fee income decreased $7.9 million, or 10.8%, to $65.3 million for the nine-month period ended September 30, 2020
from $73.2 million for the nine-month period ended September 30, 2019. The annualized net interest and fee margin decreased 53
basis points to 8.97% in the nine-month period ended September 30, 2020 from 9.50% for the corresponding period in 2019 .
Interest income, net of amortized initial direct costs and fees, decreased $7.6 million, or 9.4%, to $73.1 million for the nine -month
period ended September 30, 2020 from $80.7 million for the nine-month period ended September 30, 2019. The decrease in interest
income was principally due to a decrease in average yield of 44 basis points and by a 5.4% decrease in average total finance
receivables, which decreased $55.8 million to $970.9 million for the nine-months ended September 30, 2020 from $1,026.7 million for
the nine-months ended September 30, 2019. The decrease in average total finance receivables was primarily due to lower origination
volume along with the customary loan repayments and charge -offs. The weighted average implicit interest rate on new finance
receivables originated decreased 206 basis points to 10.96% for the nine-month period ended September 30, 2020 , compared to
13.02% for the nine-month period ended September 30, 2019. That decrease was primarily driven by a shift in the mix of originations
as higher-yield Working Capital originations comprised 9% of our originations for the nine months ended September 30, 2020,
compared to 13% in 2019. As our origination volumes have been negatively impacted by the COVID -19 pandemic, our portfolio of
finance receivables and related incomes may continue to decline. Any returns to normal levels of origination activity, and our ability
to replenish or grow our portfolio, remains uncertain.
Fee income was $8.0 million and $11.4 for the nine-month periods ended September 30, 2020 and September 30, 2019, respectively.
Fee income included approximately $2.9 million of residual income for the nine-month period ended September 30, 2019. For 2020,
after the adoption of CECL, all future cashflows from the Company’s pools of loans are included in the measurement of the
allowance, including future cashflows from net residual income. Amounts of residual income are presented within the rollforward of
the Allowance, as discussed further in “—Finance Receivables and Asset Quality”.
-63-
Fee income also included approximately $5.6 million in late fee income for the nine-month period ended September 30, 2020 , which
decreased 11.1% from $6.3 million for the nine -month period ended September 30, 2019. Late fees remained the largest component of
fee income at 0.74% as an annualized percentage of average total finance receivables for the nine-month period ended September 30,
2020, compared to 0.85% for the nine-month period ended September 30, 2019.
Interest expense decreased $3.1 million to $15.8 million for the nine -month period ended September 30, 2020 from $18.9 for the
corresponding period in 2019. The decrease of $3.1 million was primarily due to a $1.5 million decrease in term securitization interest,
and a $1.1 million decrease in interest on lower deposit balances. Interest expense, as an annualized percentage of average total
finance receivables, decreased 29 basis points to 2.17% for the nine-month period ended September 30, 2020, from 2.46% for the
corresponding period in 2019. The average balance of deposits was $872.7 million and $857.6 million for the nine-month periods
ended September 30, 2020 and September 30, 2019, respectively.
For the nine-month period ended September 30, 2020, average term securitization borrowings outstanding were $57.4 million at a
weighted average coupon of 4.32%. For the nine-month period ended September 30, 2019, average term securitization borrowings
outstanding were $120.8 million at a weighted average coupon of 3.99%
Our wholly-owned subsidiary, MBB, serves as our primary funding source. MBB raises fixed -rate and variable-rate FDIC-insured
deposits via the brokered certificates of deposit market, on a direct basis, and through the brokered MMDA Product. At September 30,
2020, brokered certificates of deposit represented approximately 53% of total deposits, while approximately 41% of total deposits
were obtained from direct channels, and 6% were in the brokered MMDA Product.
Gain on Sale of Leases and Loans.
Gain on sale of leases and loans was $ 2.4 million for the nine -month period ended September
30, 2020, compared to $ 13.4 million for the nine-month period ended September 30, 2019, due to a decline in assets sold to $28.3
million for the nine-month period ended September 30, 2020 from $195.9 million for the same period of 2019. Our sales in 2020
primarily occurred in the first quarter; for the second and third quarters, we have experienced a lack of buyer demand in the
syndication market and we retained substantially all of our origination volume on our balance sheet. Our sales execution decisions,
including the timing, volume and frequency of such sales, depend on many factors including our origination volumes, the
characteristics of our contracts versus market requirements, our current assessment of our balance sheet composition and capital
levels, and current market conditions, among other factors. In the current slowing economy resulting from the COVID-19 pandemic,
we may have difficulty accessing the capital market and may find decreased interest and ability of counterparties to purchase our
contracts, or we may be unable to negotiate terms acceptable to us.
Insurance premiums written and earned.
Insurance premiums written and earned remained relatively consistent, at $ 6.6 million for
the nine-month period ended September 30, 2020, from $ 6.5 million for the same period of 2019.
Other income.
September 30, 2019, respectively. The increase in other income was driven by $0.6 million increase in insurance policy fees.
Salaries and benefits expense.
Nine Months Ended September 30,
2020
2019
(Dollars in thousands)
Salary, benefits and payroll taxes
$
21,248
$
22,196
Incentive compensation
3,343
7,365
Commissions
1,111
5,256
$
25,702
$
34,817
Salaries and benefits expense decreased $ 9.1 million, or 26.2%, to $ 25.7 million for the nine-month period ended September 30,
2020 from $ 34.8 million for the corresponding period in 2019 . In mid-April 2020, we began efforts to tighten our expense base in
response COVID-19, putting approximately 120 employees on furlough. In June and July 2020, we took steps to permanently reduce
our work force by approximately 80 employees, which reduced our headcount to approximately 250 employees at the end of
September, down from approximately 350 employees as of September 30, 2019. Our salary, benefits and payroll tax expense was $
-64-
1.0 million lower for the nine-months ended September 30, 2020 than for the same period of 2019, primarily driven by reduced
headcount from the furlough and headcount reductions, partially offset by $1.3 million higher severance recognized in 2020 as
compared to 2019.
Incentive compensation decreased $ 4.1 million, driven by lower recognized bonus and share-based compensation amounts driven by
the Company’s operating results, including reversing $0.7 million of expense associated with performance -based RSU awards that are
now assessed as not probable of achievement. Commissions decreased $ 4.2 million primarily driven by a 51 % decrease in
origination volume.
General and administrative expense.
Nine Months Ended September 30,
2020
2019
(Dollars in thousands)
Property taxes
$
6,178
$
6,273
Occupancy and depreciation
4,218
3,860
Professional fees
2,994
3,092
Information technology
2,953
2,869
Marketing
870
1,375
FDIC Insurance
1,089
380
Acquisition-related contingent payment fair value adjustment
(1,435)
—
Other G&A
7,302
7,665
$
24,169
$
25,514
General and administrative expense of $ 24.2 million for the nine-months ended September 30, 2020 was a decrease of $ 1.3 million
from the same period in 2019. In 2020, the Company recognized a $1.4 million reduction to the fair value of the contingent
consideration earn out liability related to our 2018 acquisition of the FFR business, driven by a forecasted decrease in projected
volumes, which decreases the liability for estimated payments. In addition, the Company recognized $0.4 million in Occupancy
expense in the nine-months ended September 30, 2020 in connection the planned exits of two facilities. FDIC Insurance was $0.7
million lower for the nine-months ended September 30, 2019 due to a one-time adjustment to true-up that balance.
Goodwill impairment.
In the first quarter of 2020, driven by negative current events related to the COVID-19 economic shutdown,
our market capitalization falling below book value and other related impacts, we analyzed goodwill for impairment. We concluded
that the implied fair value of goodwill was less than it’s carrying amount, and recognized impairment equal to the entire $6.7 million
balance in the nine-months ended September 30, 2020 .
Intangible impairment.
In the third quarter of 2020, driven by an update to forecasted volumes of its FFR business, combined with
reductions in headcount in its salesforce, we determined we had a triggering event that required us to check the book value of FFR
vendor and lender intangibles against their current fair value. As a result of that analysis, we fully impaired the lender intangibles,
recognizing $1.0 million of expense. The vendor intangibles were not impaired.
Provision for income taxes.
Income tax benefit of 8.3 million was recorded for the nine-month period ended September 30, 2020,
compared to expense of $6.9 million for the nine-month period ended September 30, 2019.
Our effective tax rate from measuring our benefit for the nine months ended September 30, 2020 was 35.6%, driven by a $3.2 million
discrete benefit from certain provisions in the CARES Act that allowed for remeasuring our federal net operating losses. The impact to
our effective rate from that benefit was partially offset by a limitation on the amount of tax benefits that can be recognized in an
interim period under ASC 740.
-65-
L
IQUIDITY AND
C
APITAL
R
ESOURCES
Our business requires a substantial amount of liquidity and capital to operate and grow. Our primary liquidity need is to fund new
originations; however, we also utilize liquidity for our financing needs (including our deposits and long term deposits), to fund
infrastructure and technology investment, to pay dividends and to pay administrative and other non-interest expenses.
As a result of the uncertainties surrounding the actual and potential impacts of COVID-19 on our business and financial condition, in
the first quarter of 2020 we raised additional liquidity through the issua nce of FDIC-insured deposits and we increased our borrowing
capacity at the Federal Reserve Discount Window.
We are dependent upon the availability of financing from a variety of funding sources to satisfy these liquidity needs. Historically, we
have relied upon five principal types of external funding sources for our operations:
•
FDIC-insured deposits issued by our wholly-owned subsidiary, MBB;
Deposits issued by MBB represent our primary funding source for new originations, primarily through the issuance of FDIC insured
deposits.
MBB also offers an FDIC-insured MMDA Product as another source of deposit funding. This product is offered through participation
in a partner bank’s insured savings account product to clients of that bank. It is a brokered account with a variable interest rate,
recorded as a single deposit account at MBB. Over time, MBB may offer other products and services to the Company’s customer base.
MBB is a Utah state-chartered, Federal Reserve member commercial bank. As such, MBB is supervised by both the Federal Reserve
Bank of San Francisco and the Utah Department of Financial Institutions.
We declared a dividend of $0.14 per share on July 30, 2020. The quarterly dividend was paid on August 20, 2020 to shareholders of
record on the close of business on August 10, 2020 , which resulted in a dividend payment of approximately $1.7 million. It
represented the Company’s thirty -sixth consecutive quarterly cash dividend.
At September 30, 2020, we had approximately $25.0 million of available borrowing capacity from a federal funds line of credit with a
correspondent bank in addition to available cash and cash equivalents of $195.1 million. This amount excludes additional liquidity that
may be provided by the issuance of insured deposits through MBB.
Our debt to equity ratio was 4.74 to 1 at September 30, 2020 and 4.26 to 1 at December 31, 2019.
Net cash provided by investing activities was $87.6 million for the nine-month period ended September 30, 2020, compared to net
cash used in investing activities of $58.8 million for the nine -month period ended September 30, 2019. The increase in cash from
investing activities is primarily due to a decrease of $296.6 million for purchases of equipment for lease contracts partially offset by a
reduction of $135.9 million in proceeds from sales of leases originated for investment. The decrease in purchases of equipment was
driven by lower origination volumes for the nine months ended September 30, 2020 compared to the corresponding period of 2019,
and the reduction in proceeds from sales was driven by lower volumes of sales.
Net cash used financing activities was $61.7 million for the nine-month period ended September 30, 2020, compared to net cash
provided by financing activities of $43.1 million for the nine -month period ended September 30, 2019. The decrease in cash flows
from financing activities is primarily due to a decrease of $128.9 million in deposits partially offset by a decrease of $22.3 million of
term securitization repayments. Financing activities also include transactions related to the Company’s payment of dividends.
Net cash provided by operating activities was $45.0 million for the nine-month period ended September 30, 2020, compared to net
cash provided by operating activities of $44.5 million for the nine-month period ended September 30, 2019. Adjustments to reconcile
net income or loss to net cash provided by operating activities including goodwill impairment, provision for credit losses, changes in
deferred income tax liability and leases originated for sale and proceeds thereof are discussed in detail in the notes to the Consolidated
Financial Statements.
-66-
We expect cash from operations, additional borrowings on existing and future credit facilities and funds from deposits issued through
brokers, direct deposit sources, and the MMDA Product to be adequate to support our operations and projected growth for the next 12
months and the foreseeable future.
Total Cash and Cash Equivalents.
Our objective is to maintain an adequate level of cash, investing any free cash in leases and loans.
We primarily fund our originations and growth using FDIC-insured deposits issued through MBB. Total cash and cash equivalents
available as of September 30, 2020 totaled $195.1 million, compared to $123.1 million at December 31, 2019.
Time Deposits with Banks.
Time deposits with banks are primarily composed of FDIC-insured certificates of deposits that have
original maturity dates of greater than 90 days. Generally, the certificates of deposits have the ability to redeem early, however, early
redemption penalties may be incurred. Total time deposits as of September 30, 2020 and December 31, 2019 totaled $8.5 million and
$12.9 million, respectively.
Restricted Interest-Earning Deposits with Banks
. As of September 30, 2020 and December 31, 2019, we had $5.8 million and $6.9
million, respectively, of cash that was classified as restricted interest-earning deposits with banks. Restricted interest-earning deposits
with banks consist primarily of various trust accounts related to our secured debt facilities. Therefore, these balances generally decline
as the term securitization borrowings are repaid.
Borrowings.
Our primary borrowing relationship requires the pledging of eligible lease and loan receivables to secure amounts
advanced. Our secured borrowings amounted to $40.0 million at September 30, 2020 and $76.6 million at December 31, 2019.
Information pertaining to our borrowing facilities is as follows:
For the Nine Months Ended September 30, 2020
As of September 30, 2020
Maximum
Maximum
Month End
Average
Weighted
Weighted
Facility
Amount
Amount
Average
Amount
Average
Unused
Amount
Outstanding
Outstanding
Rate
(3)
Outstanding
Rate
(2)
Capacity
(1)
(Dollars in thousands)
Federal funds purchased
$
25,000
$
—
$
—
—
%
$
—
—
%
$
25,000
Term note securitizations
(4)
—
71,721
69,751
4.24
%
40,031
3.77
%
���
Revolving line of credit
(5)
—
—
—
—
%
—
—
%
—
$
25,000
$
71,721
$
69,751
4.24
%
$
40,031
3.77
%
$
25,000
__________________
(1) Does not include MBB’s access to the Federal Reserve Discount Window, which is based on the amount of assets MBB chooses to pledge.
Based on assets pledged at September 30, 2020, MBB had $49.3 million in unused, secured borrowing capacity at the Federal Reserve Discount
Window. Additional liquidity that may be provided by the issuance of insured deposits is also excluded from this table.
-67-
Federal Funds Line of Credit with Correspondent Bank
MBB has established a federal funds line of credit with a correspondent bank. This line allows for both selling and purchasing of
federal funds. The amount that can be drawn against the line is limited to $25.0 million.
Federal Reserve Discount Window
In addition, MBB has received approval to borrow from the Federal Reserve Discount Window based on the amount of assets MBB
chooses to pledge. MBB had $49.3 million in unused, secured borrowing capacity at the Federal Reserve Discount Window , based on
$55.0 million of net investment in leases pledged at September 30, 2020.
Term Note Securitizations
On July 27, 2018 we completed a $201.7 million asset-backed term securitization. It provides the company with fixed-cost borrowing
with the objective of diversifying its funding sources and is recorded in long-term borrowings in the Consolidated Balance Sheet.
In connection with this securitization transaction, we transferred leases to our bankruptcy remote special purpose wholly-owned
subsidiary (“SPE”) and issued term debt collateralized by such commercial leases to institutional investors in a private securities
offering. The SPE is considered variable interest entit y (“VIE”) under U.S. GAAP. We continue to service the assets of our VIE and
retain equity and/or residual interests. Accordingly, assets and related debt of the VIE is included in the accompanying Consolidated
Balance Sheets. At September 30, 2020 and December 31, 2019 outstanding term securitizations amounted to $ 39.8 million and $
76.1 million, respectively and the Company was in compliance with terms of the term note securitization agreement. See Note 10 –
Debt and Financing Arrangements in the accompanying Consolidated Financial Statements for detailed information regarding of our
term note securitization
Bank Capital and Regulatory Oversight
We are subject to regulation under the Bank Holding Company Act and we and all of our subsidiaries may be subject to examination
by the Federal Reserve Board and the Federal Reserve Bank even if not otherwise regulated by the Federal Reserve Board. We and
MBB are also subject to comprehensive federal and state regulations dealing with a wide variety of subjects, including minimum
capital standards, reserve requirements, terms on which a bank may engage in transactions with its affiliates, restrictions as to dividend
payments and numerous other aspects of operations. These regulations generally have been adopted to protect depositors and
creditors rather than shareholders.
At September 30, 2020, Marlin Business Service Corp and MBB’s Tier 1 leverage ratio, common equity Tier 1 risk-based ratio, Tier 1
risk-based capital ratio and total risk-based capital ratios exceeded the requirements for well-capitalized status.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Executive Summary” for discussion
of updates to our capital requirements driven by the termination of the CMLA Agreement and driven by our election to utilize the five-
year transition related to the adoption of the CECL accounting standard. In addition, see Note 13—Stockholders’ Equity in the Notes
to Consolidated Financial Statements for additional information regarding these ratios and our levels at September 30, 2020.
Information on Stock Repurchases
Information on Stock Repurchases is provided in “Part II. Other Information, Item 2, Unregistered Sales of Equity Securities and Use
of Proceeds” herein.
Items Subsequent to September 30, 2020
The Company declared a dividend of 0.14 per share on October 29, 2020. The quarterly dividend, which is expected to result in a
dividend payment of approximately 1.7 million, is scheduled to be paid on November 19, 2020 to shareholders of record on the close
of business on November 9, 2020. It represents the Company’s thirty -seventh consecutive quarterly cash dividend. The payment of
future dividends will be subject to satisfaction of regulatory requirements applicable to bank holding companies and approval by the
Company’s Board of Directors.
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MARKET INTEREST RATE RISK AND SENSITIVITY
Market risk is the risk of losses arising from changes in values of financial instruments. We engage in transactions in the normal
course of business that expose us to market risks. We attempt to mitigate such risks through prudent management practices and
strategies such as attempting to match the expected cash flows of our assets and liabilities.
We are exposed to market risks associated with changes in interest rates and our earnings may fluctuate with changes in interest rates.
The lease and loan assets we originate are almost entirely fixed -rate. Accordingly, we generally seek to finance these assets primarily
with fixed interest certificates of deposit issued by MBB, and to a lesser extent through the variable rate MMDA Product at MBB.
C
RITICAL
A
CCOUNTING
P
OLICIES
There have been no significant changes to our Critical Accounting Policies as described in our Form 10-K for the year ended
December 31, 2019, other than as discussed below.
Allowance for credit losses.
For 2019 and prior, we maintained an allowance for credit losses at an amount sufficient to absorb losses inherent in our existing lease
and loan portfolios as of the reporting dates based on our estimate of probable incurred net credit losses in accordance with the
Contingencies Topic of the FASB ASC. See further discussion of our policy under the incurred model in the “Critical Accounting
Policy” section of our 2019 Form 10-K.
Effective January 1, 2020, we adopted ASU 2016 -13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“CECL”), which changed our accounting policy and estimated allowance. CECL replaces the
probable, incurred loss model with a measurement of expected credit losses for the contractual term of the Company’s current
portfolio of loans and leases. After the adoption of CECL, an allowance, or estimate of credit losses, will be recognized immediately
upon the origination of a loan or lease, and will be adjusted in each subsequent reporting period
We maintain an allowance for credit losses at an amount that takes into consideration all future cashflows that we expect to receive or
derive from the pools of contracts, including recoveries after charge-off, amounts related to initial direct cost and origination costs net
of fees deferred, and certain future cashflows from residual assets. A provision is charged against earnings to maintain the allowance
for credit losses at the appropriate level.
We developed a consistent, systematic methodology to measure our estimate of the credit losses inherent in our current portfolio, over
the entire life of the contracts. We made certain key decisions that underlie our methodology, including our decisions of how to
aggregate our portfolio into pools for analysis based on similar risk characteristics, the selection of appropriate historical loss data to
reference in the model, our selection of a model to calculate the estimate, a reasonable and supportable forecast, and the length of our
forecast and approach to reverting to historical loss data.
For our Equipment Finance segment, we determine our reasonable and supportable forecast based on certain economic variables that
were selected based on a statistical analysis of our own historical loss experience, going back to 2004. We selected unemployment rate
and changes in the number of business bankruptcies as our economic variables , based on an analysis of the correlation of changes in
those variables to our loss experience over time.
As part of our estimate of expected credit losses, specific to each measurement date, management considers relevant qualitative and
quantitative factors to assess whether the historical loss experience being referenced should be adjusted to better reflect the risk
characteristics of the current portfolio and the expected future loss experience for the life of these contracts. This assessment
incorporates all available information relevant to considering the collectability of our current portfolio, including considering
economic and business conditions, default trends, changes in portfolio composition, changes in lending policies and practices, among
other internal and external factors. Further, each measurement period we determine whether to separate any loans from their current
pool for individual analysis based on their unique risk characteristics. Our approach to estimating qualitative adjustments takes into
consideration all significant current information we believe appropriate to reflect the changes and risks in the portfolio or environment
and involves significant judgment.
-69-
Our estimates of expected net credit losses are inherently uncertain, and as a result we cannot predict with certainty the amount of
such losses. We may recognize credit losses in excess of our reserve, or a significant increa se to our credit loss estimate, in the future,
driven by the update of assumptions and information underlying our estimate and/or driven by the actual amount of realized losses.
Our estimate of credit losses will be revised each period to reflect current information, including current forecasts of economic
conditions, changes in the risk characteristics and composition of the portfolio, and emerging trends in our portfolio, among other
factors, and these updates for current information could drive a significant adjustment to our reserve. Further, actual credit losses may
exceed our estimated reserve, and such excess may be significant, if the actual performance of our portfolio differs significantly from
the current assumptions and judgements, including those underlying our forecast and qualitative adjustments, as of any given
measurement date.
R
ECENTLY
I
SSUED
A
CCOUNTING
S
TANDARDS
Information on recently issued accounting pronouncements and the expected impact on our financial statements is provided in Note 2,
Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements.
R
ECENTLY
A
DOPTED
A
CCOUNTING
S
TANDARDS
Information on recently adopted accounting pronouncements and the expected impact on our financial statements is provided in Note
2, Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements.
-70-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information appearing in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Market Interest Rate Risk and Sensitivity” under Item 2 of Part I of this Form 10-Q is incorporated herein by reference.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures as of the end of the period covered
by this report are designed and operating effectively to provide reasonable assurance that the information required to be disclosed by
us in reports filed under the 1934 Act is (i) recorded, processed, summarized and reported within the time periods specified in the
SEC's rules and forms and (ii) accumulated and communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with management’s
evaluation that occurred during the Company's third fiscal quarter of 2020 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
We are party to various legal proceedings, which include claims and litigation arising in the ordinary course of business. In the
opinion of management, these actions will not have a material impact on our business, financial condition, results of operations or
cash flows.
Item 1A. Risk Factors
There have been no material changes in the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2019,
other than as discussed below.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our
business, results of operations and financial condition, and such effects will depend on future developments, which are highly
uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus
have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and
-71-
reduced economic activity. The pandemic has resulted in authorities implementing numerous measures to try to contain the virus, such
as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such
measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The
United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus,
including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results
in a timely fashion. We continue to monitor and evaluate newly enacted and proposed government and banking regulations issued in
response to the COVID-19 pandemic; further changes in regulation that impact our business or that impact our customers could have a
significant impact on our future operations and business strategies.
Our operations and financial results have already been negatively impacted as a result of COVID-19 pandemic, as discussed further in
“Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Overview” and ”—
Results of Operations”. The pandemic, reduction in economic activity, and current business limitations and shutdowns have increased
risks to our business that include, but are not limited to:
●
Credit Risk.
susceptible to business limitations, shutdowns and possible recessions and may be unable to make scheduled lease or loan
payments during these periods and may be at risk of discontinuing their operations. As a result, our delinquencies and credit
losses may substantially increase. Our risk and exposure to future losses may be amplified to the extent economic activity
remains shutdown for an extended period, or to the extent businesses have limited operations or are unable to return to
normal levels of activity after the restrictions are lifted.
Our estimate of expected future credit losses recognized within our allowance as of September 30, 2020 is based on certain
assumptions, forecasts and estimates about the impact of current economic conditions on our portfolio of receivables based
on information known as of September 30, 2020, including certain expectations about the extent and timing of impacts from
COVID-19. If those assumptions, forecasts or estimates underlying our financial statements are incorrect, we may
experience significant losses as the ultimate realization of value, or revisions to our estimates, may be materially different
than the amounts reflected in our consolidated statement of financial position as of any particular date.
●
Portfolio Risk.
the COVID-19 pandemic, and we have limited visibility to the future recovery of such demand.
We have shifted the focus of portions of our operations and certain personnel to implement specific programs and new
products in response to the pandemic. In particular, we have focused efforts on loan modifications and a payment deferral
program, implemented a new PPP loan product, and increased customer service efforts to respond to our borrower’s needs.
There can be no assurances that such efforts will be successful in mitigating any risk of credit loss.
●
Liquidity and Capital Risk.
As of September 30, 2020, all of our capital ratios, and our subsidiary bank’s capital ratios,
were in excess of all regulatory requirements. While we currently have sufficient capital, our reported and regulatory capital
ratios could be adversely impacted by further credit losses and other COVID-19 related impacts on our operations. We are
managing the evolving risks of our business while closely monitoring and forecasting the potential impacts of COVID-19 on
our future operations and financial position, including capital levels. However, given the uncertainty about future
developments and the extent and duration of the impacts of COVID -19 on our business and future operations, we face
elevated risks to our ability to forecast and estimate future capital levels. If we fail to meet capital requirements in the future,
our business, financial condition or results of operations may be adversely affected.
We have historically returned capital to shareholders through normal dividends, special dividends and share repurchases.
There can be no assurances that these forms of capital returns are the optimal use of our capital or that they will continue in
the future.
●
Operational Risk.
The spread of COVID-19 has caused us to modify our business practices (including implementing certain
business continuity plans, and developing work from home and social distancing plans for our employees), and we may take
further actions as may be required by government authorities or as we determine are in the best interests of our employees,
customers and business partners. We face increased risk of any operational or procedural failures due to changes in our
normal business practices necessitated by the pandemic.
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of
operations and financial condition even after the COVID-19 pandemic has subsided.
-72-
The extent to which the coronavirus pandemic impacts our business, results of operations and financial condition will depend on
future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of
the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and
operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse
impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our
liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have,
and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of
the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on
our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form
10-K for the year ended December 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information on Stock Repurchases
On August 1, 2019, the Company’s Board of Directors approved a stock repurchase plan (the “2019 Repurchase Plan”) under which
the Company is authorized to repurchase up to $10 million in value of its outstanding shares of common stock. This authority may be
exercised from time to time and in such amounts as market conditions warrant. Any shares purchased under this plan are returned to
the status of authorized but unissued shares of common stock. The repurchases may be made on the open market, in block trades or
otherwise. The stock repurchase program does not obligate the Company to acquire any particular amount of common stock, and it
may be suspended at any time at the Company's discretion. The repurchases are funded using the Company’s working capital.
The Company did not repurchase any of its common stock during the three months ended September 30, 2020. As of September 30,
2020, the Company had $4.7 million remaining in the 2019 Repurchase Plan.
Pursuant to the 2014 Equity Compensation Plan, participants may have shares withheld to cover income taxes. There were 18,446
shares repurchased to cover income tax withholding in connection with the shares granted under the 2014 Equity Compensation Plan
during the three-month period ended September 30, 2020 , at an average cost of $8.06 per share.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None
-73-
Exhibit
Number
Description
3.1
(1)
3.2
(2)
3.3
(3)
31.1
31.2
32.1
101 Financial statements from the Quarterly Report on Form 10-Q of Marlin Business Services Corp. for the period ended
September 30, 2020, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of
Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of
Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Unaudi ted Consolidated
Financial Statements. (Submitted electronically with this report)
__________________
(1)
Previo
usly filed with the SEC as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed
on March 5, 2008, and incorporated by reference herein.
(2)
Previously filed with the SEC as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 20, 2016, and incorporated by
reference herein.
(3)
Previously filed with the SEC as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 24, 2020, and incorporated by
reference herein.
-74-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MARLIN BUSINESS SERVICES CORP.
(Registrant)
By: /s/ Jeff Hilzinger
Chief Executive Officer
(Principal Executive Officer)
By:
/s/ Michael R. Bogansky
Michael R. Bogansky
Chief Financial Officer & Senior Vice
President
Date: October 30, 2020