UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2019March 31, 2020
Commission file number000-50448
MARLIN BUSINESS SERVICES CORP.
(Exact name of registrant as specified in its charter)
Pennsylvania | 38-3686388 | |
(State of incorporation) | (I.R.S. Employer Identification Number) |
300 Fellowship Road, Mount Laurel, NJ 08054
(Address of principal executive offices) (Zip
(Zip code)
(888)(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 |
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 RegulationRegulation 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, anon-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 RuleRule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ||||
Non-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 RuleRule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ☑
At July 26, 2019, 12,240,635April 23, 2020, 11,884,174 shares of Registrant’s common stock, $.01 par value, were outstanding.
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
Quarterly Report on FormForm 10-Q
for the Quarter Ended June 30, 2019March 31, 2020
Page No. | ||||||
3 | ||||||
Item 1 | Consolidated Financial Statements (Unaudited) | 3 | ||||
Consolidated Balance Sheets at | 3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 42 | ||||
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | |||||
Item 4 | Controls and Procedures | |||||
Item 1 | Legal Proceedings | �� | ||||
Item 1A | Risk Factors | |||||
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 65 | ||||
Item 3 | Defaults upon Senior Securities | 65 | ||||
Item 4 | Mine Safety Disclosures | 65 | ||||
Item 5 | Other Information | |||||
Item 6 | Exhibits | |||||
Item 1. Consolidated Financial Statements
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
(Unaudited)
June 30, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Dollars in thousands, except per-share data) | (Dollars in thousands, except per-share data) | |||||||||||||||
ASSETS | ||||||||||||||||
Cash and due from banks | $ | 5,170 | $ | 5,088 | $ | 5,261 | $ | 4,701 | ||||||||
Interest-earning deposits with banks | 134,561 | 92,068 | 205,809 | 118,395 | ||||||||||||
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Total cash and cash equivalents | 139,731 | 97,156 | 211,070 | 123,096 | ||||||||||||
Time deposits with banks | 12,679 | 9,659 | 13,664 | 12,927 | ||||||||||||
Restricted interest-earning deposits (includes $8.1 million and $10.0 million at June 30, 2019 and December 31, 2018, respectively related to consolidated VIEs) | 8,152 | 14,045 | ||||||||||||||
Investment securities (amortized cost of $10.7 million and $11.2 million at June 30, 2019 and December 31, 2018, respectively) | 10,633 | 10,956 | ||||||||||||||
Restricted interest-earning deposits (includes $6.5 million and $6.9 million at March 31, 2020 and December 31, 2019, respectively related to consolidated VIEs) | 6,474 | 6,931 | ||||||||||||||
Investment securities (amortized cost of $10.6 million and $11.1 million at March 31, 2020 and December 31, 2019, respectively) | 10,480 | 11,076 | ||||||||||||||
Net investment in leases and loans: | ||||||||||||||||
Leases | 478,068 | 489,299 | 407,148 | 426,608 | ||||||||||||
Loans | 600,980 | 527,541 | 614,988 | 601,607 | ||||||||||||
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Net investment in leases and loans, excluding allowance for credit losses (includes $109.8 million and $150.2 million at June 30, 2019 and December 31, 2018, respectively, related to consolidated VIEs) | 1,079,048 | 1,016,840 | ||||||||||||||
Net investment in leases and loans, excluding allowance for credit losses (includes $62.0 million and $76.1 million at March 31, 2020 and December 31, 2019, respectively, related to consolidated VIEs) | 1,022,136 | 1,028,215 | ||||||||||||||
Allowance for credit losses | (16,777 | ) | (16,100 | ) | (52,060 | ) | (21,695 | ) | ||||||||
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Total net investment in leases and loans | 1,062,271 | 1,000,740 | 970,076 | 1,006,520 | ||||||||||||
Intangible assets | 7,920 | 7,912 | 7,261 | 7,461 | ||||||||||||
Goodwill | 6,735 | 7,360 | — | 6,735 | ||||||||||||
Operating leaseright-of-use assets | 8,626 | — | 8,618 | 8,863 | ||||||||||||
Property and equipment, net | 4,014 | 4,317 | 8,138 | 7,888 | ||||||||||||
Property tax receivables, net of allowance | 8,070 | 5,245 | 10,291 | 5,493 | ||||||||||||
Other assets | 11,152 | 9,656 | 17,465 | 10,453 | ||||||||||||
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Total assets | $ | 1,279,983 | $ | 1,167,046 | $ | 1,263,537 | $ | 1,207,443 | ||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Deposits | $ | 888,561 | $ | 755,776 | $ | 941,996 | $ | 839,132 | ||||||||
Long-term borrowings related to consolidated VIEs | 109,637 | 150,055 | 62,193 | 76,091 | ||||||||||||
Operating lease liabilities | 9,074 | — | 9,487 | 9,730 | ||||||||||||
Other liabilities: | ||||||||||||||||
Sales and property taxes payable | 7,827 | 3,775 | 7,267 | 2,678 | ||||||||||||
Accounts payable and accrued expenses | 32,597 | 36,369 | 28,427 | 34,028 | ||||||||||||
Net deferred income tax liability | 26,733 | 22,560 | 25,677 | 30,828 | ||||||||||||
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Total liabilities | 1,074,429 | 968,535 | 1,075,047 | 992,487 | ||||||||||||
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Commitments and contingencies (Note 10) | ||||||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred Stock, $0.01 par value; 5,000,000 shares authorized; none issued | — | — | — | — | ||||||||||||
Common Stock, $0.01 par value; 75,000,000 shares authorized; 12,285,564 and 12,367,724 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | 123 | 124 | ||||||||||||||
Common Stock, $0.01 par value; 75,000,000 shares authorized; 11,884,473 and 12,113,585 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 119 | 121 | ||||||||||||||
Additionalpaid-in capital | 82,726 | 83,498 | 75,647 | 79,665 | ||||||||||||
Stock subscription receivable | (2 | ) | (2 | ) | ||||||||||||
Accumulated other comprehensive loss | 48 | (44 | ) | |||||||||||||
Accumulated other comprehensive income (loss) | 20 | 58 | ||||||||||||||
Retained earnings | 122,659 | 114,935 | 112,704 | 135,112 | ||||||||||||
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Total stockholders’ equity | 205,554 | 198,511 | 188,490 | 214,956 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 1,279,983 | $ | 1,167,046 | $ | 1,263,537 | $ | 1,207,443 | ||||||||
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The accompanying notes are an integral part of the unaudited consolidated financial statements.
-3-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
(Dollars in thousands, exceptper-share data) | (Dollars in thousands, except per-share data) | |||||||||||||||||||||||
Interest income | $ | 27,082 | $ | 23,964 | $ | 52,965 | $ | 47,243 | $ | 26,465 | $ | 25,883 | ||||||||||||
Fee income | 3,507 | 3,876 | 7,549 | 7,835 | 2,766 | 4,042 | ||||||||||||||||||
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Interest and fee income | 30,589 | 27,840 | 60,514 | 55,078 | 29,231 | 29,925 | ||||||||||||||||||
Interest expense | 6,408 | 3,711 | 12,370 | 7,110 | 5,680 | 5,962 | ||||||||||||||||||
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Net interest and fee income | 24,181 | 24,129 | 48,144 | 47,968 | 23,551 | 23,963 | ||||||||||||||||||
Provision for credit losses | 4,756 | 4,256 | 10,119 | 8,868 | 25,150 | 5,363 | ||||||||||||||||||
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Net interest and fee income after provision for credit losses | 19,425 | 19,873 | 38,025 | 39,100 | (1,599 | ) | 18,600 | |||||||||||||||||
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Non-interest income: | ||||||||||||||||||||||||
Gain on leases and loans sold | 2,282 | 3,612 | ||||||||||||||||||||||
Insurance premiums written and earned | 2,176 | 1,993 | 4,308 | 3,932 | 2,282 | 2,132 | ||||||||||||||||||
Other income | 5,025 | 2,634 | 15,841 | 5,929 | 7,639 | 7,204 | ||||||||||||||||||
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Non-interest income | 7,201 | 4,627 | 20,149 | 9,861 | 12,203 | 12,948 | ||||||||||||||||||
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Non-interest expense: | ||||||||||||||||||||||||
Salaries and benefits | 12,469 | 9,527 | 23,920 | 19,550 | 9,519 | 11,451 | ||||||||||||||||||
General and administrative | 6,068 | 6,449 | 19,422 | 13,020 | 13,605 | 13,354 | ||||||||||||||||||
Goodwill impairment | 6,735 | — | ||||||||||||||||||||||
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Non-interest expense | 18,537 | 15,976 | 43,342 | 32,570 | 29,859 | 24,805 | ||||||||||||||||||
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Income before income taxes | 8,089 | 8,524 | 14,832 | 16,391 | ||||||||||||||||||||
Income tax expense | 1,974 | 2,057 | 3,576 | 3,739 | ||||||||||||||||||||
(Loss) income before income taxes | (19,255 | ) | 6,743 | |||||||||||||||||||||
Income tax (benefit) expense | (7,434 | ) | 1,602 | |||||||||||||||||||||
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Net income | $ | 6,115 | $ | 6,467 | $ | 11,256 | $ | 12,652 | ||||||||||||||||
Net (loss) income | $ | (11,821 | ) | $ | 5,141 | |||||||||||||||||||
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Basic earnings per share | $ | 0.50 | $ | 0.52 | $ | 0.91 | $ | 1.02 | ||||||||||||||||
Diluted earnings per share | $ | 0.49 | $ | 0.52 | $ | 0.91 | $ | 1.01 | ||||||||||||||||
Basic (loss) earnings per share | $ | (1.00 | ) | $ | 0.42 | |||||||||||||||||||
Diluted (loss) earnings per share | $ | (1.00 | ) | $ | 0.41 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-4-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income | $ | 6,115 | $ | 6,467 | $ | 11,256 | $ | 12,652 | ||||||||
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Other comprehensive income (loss): | ||||||||||||||||
Reclassification due to adoption of ASU2016-01, ASU2018-02 and ASU2018-03 | — | — | — | 107 | ||||||||||||
Increase (decrease) in fair value of debt securities available for sale | 69 | 33 | 123 | (46 | ) | |||||||||||
Tax effect | (17 | ) | (8 | ) | (31 | ) | (38 | ) | ||||||||
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Total other comprehensive income (loss) | 52 | 25 | 92 | 23 | ||||||||||||
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Comprehensive income | $ | 6,167 | $ | 6,492 | $ | 11,348 | $ | 12,675 | ||||||||
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Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Net (loss) income | $ | (11,821 | ) | $ | 5,141 | |||
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Other comprehensive income (loss): | ||||||||
(Decrease) increase in fair value of debt securities available for sale | (51 | ) | 54 | |||||
Tax effect | 13 | (14 | ) | |||||
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Total other comprehensive (loss) income | (38 | ) | 40 | |||||
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Comprehensive (loss) income | $ | (11,859 | ) | $ | 5,181 | |||
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The accompanying notes are an integral part of the unaudited consolidated financial statements.
-5-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Common Shares | Common Stock Amount | Additional Paid-In Capital | Stock Subscription Receivable | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total Stockholders’ Equity | Common Shares | Common Stock Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance,December 31, 2018 | 12,367,724 | $ | 124 | $ | 83,498 | $ | (2 | ) | $ | (44 | ) | $ | 114,935 | $ | 198,511 | |||||||||||||||||||||||||||||||||||||
Repurchase of common stock | (48,857 | ) | (1 | ) | (1,144 | ) | — | — | — | (1,145 | ) | |||||||||||||||||||||||||||||||||||||||||
Stock issued in connection with restricted stock and RSU’s, net of forfeitures | 30,209 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation recognized | — | — | 861 | — | — | — | 861 | |||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized gain/loss on securities available for sale, net of tax | — | — | — | — | 40 | — | 40 | |||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 5,141 | 5,141 | |||||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid ($0.14 per share) | — | — | — | — | — | (1,758 | ) | (1,758 | ) | |||||||||||||||||||||||||||||||||||||||||||
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Balance,March 31, 2019 | 12,349,076 | 123 | 83,215 | (2 | ) | (4 | ) | 118,318 | 201,650 | |||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock | 10,298 | — | 240 | — | — | — | 240 | |||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | 12,367,724 | 124 | 83,496 | (44 | ) | 114,935 | $ | 198,511 | ||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common stock | (73,360 | ) | — | (1,719 | ) | — | — | — | (1,719 | ) | (48,857 | ) | (1 | ) | (1,144 | ) | — | — | (1,145 | ) | ||||||||||||||||||||||||||||||||
Stock issued in connection with restricted stock and RSUs, net of forfeitures | (450 | ) | — | — | — | — | — | — | 30,209 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation recognized | — | — | 990 | — | — | — | 990 | — | — | 861 | — | — | 861 | |||||||||||||||||||||||||||||||||||||||
Net change in unrealized gain/loss on securities available for sale, net of tax | — | — | — | — | 52 | — | 52 | — | — | — | 40 | — | 40 | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 6,115 | 6,115 | — | — | — | — | 5,141 | 5,141 | |||||||||||||||||||||||||||||||||||||||
Cash dividends paid ($0.14 per share) | — | — | — | — | — | (1,774 | ) | (1,774 | ) | — | — | — | — | (1,758 | ) | (1,758 | ) | |||||||||||||||||||||||||||||||||||
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Balance,June 30, 2019 | 12,285,564 | $ | 123 | $ | 82,726 | $ | (2 | ) | $ | 48 | $ | 122,659 | $ | 205,554 | ||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2019 | 12,349,076 | $ | 123 | $ | 83,213 | $ | (4 | ) | $ | 118,318 | $ | 201,650 | ||||||||||||||||||||||||||||||||||||||||
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Balance, December 31, 2019 | 12,113,585 | 121 | 79,665 | 58 | 135,112 | 214,956 | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common stock | (285,593 | ) | (3 | ) | (4,535 | ) | — | — | (4,538 | ) | ||||||||||||||||||||||||||||||||||||||||||
Stock issued in connection with restricted stock and RSUs, net of forfeitures | 56,481 | 1 | (1 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation recognized | — | — | 518 | — | — | 518 | ||||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized gain/loss on securities available for sale, net of tax | — | — | — | (38 | ) | — | (38 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net (loss) | — | — | — | — | (11,821 | ) | (11,821 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Impact of adoption of new accounting standards(1) | — | — | — | — | (8,877 | ) | (8,877 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid ($0.14 per share) | — | — | — | — | (1,710 | ) | (1,710 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Balance, March 31, 2020 | 11,884,473 | $ | 119 | $ | 75,647 | $ | 20 | $ | 112,704 | $ | 188,490 | |||||||||||||||||||||||||||||||||||||||||
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(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.
-6-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ EquityCash Flows
(Unaudited)
Common Shares | Common Stock Amount | Additional Paid-In Capital | Stock Subscription Receivable | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Balance, December 31, 2017 | 12,449,458 | $ | 124 | $ | 82,588 | $ | (2 | ) | $ | (96 | ) | $ | 97,035 | $ | 179,649 | |||||||||||||
Repurchase of common stock | (37,026 | ) | — | (1,000 | ) | — | — | — | (1,000 | ) | ||||||||||||||||||
Stock issued in connection with restricted stock and RSU’s, net of forfeitures | 6,065 | — | — | — | — | — | — | |||||||||||||||||||||
Stock-based compensation recognized | — | — | 921 | — | — | — | 921 | |||||||||||||||||||||
Net change in unrealized gain/loss on securities available for sale, net of tax | — | — | — | — | (59 | ) | — | (59 | ) | |||||||||||||||||||
Net income | — | — | — | — | — | 6,185 | 6,185 | |||||||||||||||||||||
Impact of adoption of new accounting standards(1) | — | — | — | — | 57 | (57 | ) | — | ||||||||||||||||||||
Cash dividends paid ($0.14 per share) | — | — | — | — | — | (1,769 | ) | (1,769 | ) | |||||||||||||||||||
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Balance, March 31, 2018 | 12,418,497 | 124 | 82,509 | (2 | ) | (98 | ) | 101,394 | 183,927 | |||||||||||||||||||
Issuance of common stock | 9,101 | — | 211 | — | — | — | 211 | |||||||||||||||||||||
Repurchase of common stock | (1,121 | ) | — | (32 | ) | — | — | — | (32 | ) | ||||||||||||||||||
Exercise of stock options | 909 | — | 23 | — | — | — | 23 | |||||||||||||||||||||
Stock issued in connection with restricted stock and RSUs, net of forfeitures | 11,545 | — | — | — | — | — | — | |||||||||||||||||||||
Stock-based compensation recognized | — | — | 763 | — | — | — | 763 | |||||||||||||||||||||
Net change in unrealized gain/loss on securities available for sale, net of tax | — | — | — | — | 25 | — | 25 | |||||||||||||||||||||
Net income | — | — | — | — | — | 6,467 | 6,467 | |||||||||||||||||||||
Cash dividends paid ($0.14 per share) | — | — | — | — | — | (1,742 | ) | (1,742 | ) | |||||||||||||||||||
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Balance, June 30, 2018 | 12,438,931 | $ | 124 | $ | 83,474 | $ | (2 | ) | $ | (73 | ) | $ | 106,119 | $ | 189,642 | |||||||||||||
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See Note 2 to the consolidated financial statements for more information
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (11,821 | ) | $ | 5,141 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,057 | 1,209 | ||||||
Stock-based compensation | 518 | 861 | ||||||
Goodwill impairment | 6,735 | — | ||||||
Change in fair value of equity securities | (58 | ) | (43 | ) | ||||
Provision for credit losses | 25,150 | 5,363 | ||||||
Change in net deferred income tax liability | (2,107 | ) | 1,364 | |||||
Amortization of deferred initial direct costs and fees | 3,413 | 3,563 | ||||||
Loss on equipment disposed | — | 389 | ||||||
Gain on leases sold | (2,282 | ) | (3,612 | ) | ||||
Leases originated for sale | (3,693 | ) | (10,675 | ) | ||||
Proceeds from sale of leases originated for sale | 3,874 | 11,052 | ||||||
Noncash lease expense | 324 | 275 | ||||||
Effect of changes in other operating items: | ||||||||
Other assets | (12,002 | ) | (4,982 | ) | ||||
Other liabilities | 1,083 | 2,559 | ||||||
|
|
|
| |||||
Net cash provided by operating activities | 10,191 | 12,464 | ||||||
|
|
|
| |||||
Cash flows from investing activities: | ||||||||
Net change in time deposits with banks | (737 | ) | (1,580 | ) | ||||
Purchases of equipment for lease contracts and funds used to originate loans | (156,145 | ) | (197,168 | ) | ||||
Principal collections on leases and loans | 129,810 | 122,871 | ||||||
Proceeds from sale of leases originated for investment | 21,337 | 45,428 | ||||||
Security deposits collected, net of refunds | (78 | ) | (76 | ) | ||||
Proceeds from the sale of equipment | 840 | 696 | ||||||
Acquisitions of property and equipment | (796 | ) | (376 | ) | ||||
Principal payments received on securities available for sale | 594 | 372 | ||||||
|
|
|
| |||||
Net cash (used in) investing activities | (5,175 | ) | (29,833 | ) | ||||
|
|
|
| |||||
Cash flows from financing activities: | ||||||||
Net change in deposits | 102,864 | 84,391 | ||||||
Term securitization repayments | (14,008 | ) | (21,104 | ) | ||||
Business combinations earn-out consideration payments | (132 | ) | (121 | ) | ||||
Repurchases of common stock | (4,538 | ) | (1,145 | ) | ||||
Dividends paid | (1,685 | ) | (1,727 | ) | ||||
|
|
|
| |||||
Net cash provided by financing activities | 82,501 | 60,294 | ||||||
|
|
|
| |||||
Net increase in total cash, cash equivalents and restricted cash | 87,517 | 42,925 | ||||||
Total cash, cash equivalents and restricted cash, beginning of period | 130,027 | 111,201 | ||||||
|
|
|
| |||||
Total cash, cash equivalents and restricted cash, end of period | $ | 217,544 | $ | 154,126 | ||||
|
|
|
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-7-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 11,256 | $ | 12,652 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,390 | 2,228 | ||||||
Stock-based compensation | 1,851 | 1,684 | ||||||
Change in fair value of equity securities | (94 | ) | 81 | |||||
Provision for credit losses | 10,119 | 8,868 | ||||||
Net deferred income taxes | 4,142 | 3,868 | ||||||
Amortization of deferred initial direct costs and fees | 7,252 | 6,517 | ||||||
Loss on equipment disposed | 911 | 604 | ||||||
Gain on leases sold | (6,944 | ) | (2,616 | ) | ||||
Leases originated for sale | (29,036 | ) | (2,063 | ) | ||||
Proceeds from sale of leases originated for sale | 30,062 | 2,104 | ||||||
Operating lease liability payments | (199 | ) | — | |||||
Effect of changes in other operating items: | ||||||||
Other assets | (4,549 | ) | 5,427 | |||||
Other liabilities | (142 | ) | 5,025 | |||||
|
|
|
| |||||
Net cash provided by operating activities | 27,019 | 44,379 | ||||||
|
|
|
| |||||
Cash flows from investing activities: | ||||||||
Net change in time deposits with banks | (3,020 | ) | (304 | ) | ||||
Funds used to originate leases and loans | (409,915 | ) | (339,701 | ) | ||||
Principal collections on leases and loans | 248,563 | 235,669 | ||||||
Proceeds from sale of leases originated for investment | 87,390 | 40,383 | ||||||
Security deposits collected, net of refunds | (130 | ) | (141 | ) | ||||
Proceeds from the sale of equipment | 1,409 | 1,731 | ||||||
Acquisitions of property and equipment | (816 | ) | (543 | ) | ||||
Principal payments received on securities available for sale | 529 | 632 | ||||||
|
|
|
| |||||
Net cash (used in) investing activities | (75,990 | ) | (62,274 | ) | ||||
|
|
|
| |||||
Cash flows from financing activities: | ||||||||
Net change in deposits | 132,785 | 54,253 | ||||||
Term securitization repayments | (40,829 | ) | — | |||||
Business combinationsearn-out consideration payments | (223 | ) | — | |||||
Issuances of common stock | 240 | 211 | ||||||
Repurchases of common stock | (2,864 | ) | (1,032 | ) | ||||
Dividends paid | (3,456 | ) | (3,479 | ) | ||||
Exercise of stock options | — | 23 | ||||||
|
|
|
| |||||
Net cash provided by financing activities | 85,653 | 49,976 | ||||||
|
|
|
| |||||
Net increase in total cash, cash equivalents and restricted cash | 36,682 | 32,081 | ||||||
Total cash, cash equivalents and restricted cash, beginning of period | 111,201 | 67,146 | ||||||
|
|
|
| |||||
Total cash, cash equivalents and restricted cash, end of period | $ | 147,883 | $ | 99,227 | ||||
|
|
|
|
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest on deposits and borrowings | $ | 5,420 | $ | 5,204 | ||||
Net cash paid (refunds received) for income taxes | 1,797 | 1,371 | ||||||
Leases transferred into held for sale from investment | 19,235 | 42,193 | ||||||
Supplemental disclosures of non cash investing activities: | ||||||||
Business combinations assets acquired | $ | — | $ | 146 | ||||
Purchase of equipment for lease contracts and loans originated | 3,773 | 6,979 | ||||||
Reconciliation of Cash, cash equivalents and restricted cash tothe Consolidated Balance Sheets: | ||||||||
Cash and cash equivalents | $ | 211,070 | $ | 140,952 | ||||
Restricted interest-earning deposits | 6,474 | 13,174 | ||||||
|
|
|
| |||||
Cash, cash equivalents and restricted cash at end of period | $ | 217,544 | $ | 154,126 | ||||
|
|
|
|
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)
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest on deposits and borrowings | $ | 11,504 | $ | 6,805 | ||||
Net cash paid (refunds received) for income taxes | $ | 1,362 | $ | (8,051 | ) | |||
Leases transferred into held for sale from investment | $ | 81,472 | $ | 37,808 | ||||
Supplemental disclosures of non cash investing activities: | ||||||||
Business combinations assets acquired | $ | 146 | $ | — | ||||
Purchase of equipment for lease contracts and loans originated | $ | 7,038 | $ | 9,294 | ||||
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets | ||||||||
Cash and cash equivalents | $ | 139,731 | $ | 99,227 | ||||
Restricted Cash | 8,152 | — | ||||||
|
|
|
| |||||
Cash, cash equivalents and restricted cash at end of period | $ | 147,883 | $ | 99,227 | ||||
|
|
|
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-9-
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 end usersmall 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.
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. This acquisition is consistent with our strategy of augmenting organic growth with strategic acquisitions that extend our existing equipment finance business into new and attractive markets. The Company paid $10.0 million in cash for FFR and incurred an immaterial amount of acquisition-related cost. In addition, if FFR generates volume of up to $542 million from the closing date through September 30, 2026, we have agreed to pay the seller up to an additional $5.5 million in cash inearn-out consideration. Thisearn-out consideration will be calculated quarterly based on a sliding scale of percentage of revenue volume that increases as successively greater tiers of volume are attained, and if the maximumearn-out consideration is earned, the total consideration paid for FFR will be $15.5 million. The valuation of thisearn-out will be evaluated in the fourth quarter of each year and more frequently if warranted, and the difference between the revised fair value estimate and theearn-out liability will be recorded in earnings. The Company completed the purchase price allocation in the first quarter of 2019 with $5.6 million recorded to goodwill and $7.6 million recorded to intangible assets for vendor relationships and lender relationships, offset by a contingent consideration liability of $3.2 million representing the estimated fair value of theearn-out. See Note 7 for additional information regarding the identified intangible assets acquired. The acquisition has been accounted for using the acquisition method of accounting. The unaudited pro forma financial information disclosed in the following sentence is for informational purposes only and is not indicative of future operations or results. If the acquisition had occurred at the beginning of 2018, the Company’s Interest and fee income,Non-interest income and net income for thesix-month period ending June 30, 2018, would have been approximately $57.8 million, $10.0 million and $13.3 million, respectively.
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. The unaudited consolidated financial statements include the accounts of the Company and 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 onea single consolidated product offering.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 June 30, 2019March 31, 2020 and the results of operations for the three- andsix-monththree-month periods ended June 30,March 31, 2020 and 2019, and 2018, and cash flows for thesix-month three-month periods ended June 30, 2019March 31, 2020 and 2018.2019. In Management’smanagement’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 FormForm 10-K for the year ended December 31, 2018,2019, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2019.13, 2020. The consolidated results of operations for the three- andsix-month periods ended June 30, 2019 and 2018 and the consolidated statements of cash flows for thesix-month periods ended June 30, 2019 and 2018these 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. These unaudited consolidated financial statements require management to make estimates and assumptions that 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 expenses 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.
Provision for income taxes.Income tax benefit of $7.4 million was recorded for the three-month period ended March 31, 2020, compared to expense of $1.6 million for the three-month period ended March 31, 2019. For the three-month period ended March 31, 2020, the income tax benefit includes a $3.2 million discrete benefit, related to remeasuring our federal net operating losses, driven by certain provisions in the CARES Act. Our statutory tax rate, which is a combination of federal and state income tax rates, was approximately 23.9% for both periods. However, our effective tax rate was 38.6% for the three-month period ended March 31, 2020, driven by the recognition of the discrete benefit.
Significant Accounting Policies.There have been no significant changes to our Significant Accounting Policies as described in our 20182019 Annual Report on Form10-K other than the adoption of ASU2016-022016-13 as described below.
-10--9-
Recently IssuedAdopted Accounting StandardsStandards..
Fair Value.In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurementwhich modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of such transfers and the valuation process for Level 3 fair value measurements. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The adoption of this new requirement is not expected to have a material impact on the consolidated earnings, financial position or cash flows of the company.
Intangibles—Goodwill.In August 2018, the FASB issued ASU2018-15,Intangibles – Goodwill and Other –Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contractto clarify the accounting treatment for implementation costs for cloud computing arrangements The ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The adoption of this new requirement is not expected to have a material impact on the consolidated earnings, financial position or cash flows of the company.
Credit Losses. In June 2016, the FASB issued ASU2016-13,Financial Instruments—Instruments - Credit Losses (Topic 326): Measurement ofCredit Losses on Financial Instruments,, which changes the methodology for evaluating impairment of most financial instruments. TheThis guidance was subsequently amended by ASU2018-19,Codification Improvements, ASU2019-04,Codification Improvements, ASU2019-05,Targeted Transition Relief,ASU2019-10,Effective Dates,and ASU2019-11,Codification Improvements. These ASUs are referred to collectively as “CECL”.
CECL replaces the currently usedprobable, incurred loss model with a forward-lookingmeasurement of expected credit losses for the contractual term of the Company’s current expected loss model whichportfolio of loans and leases. After the adoption of CECL, an allowance, or estimate of credit losses, will generally resultbe recognized immediately upon the origination of a loan or lease, and will be adjusted in more timely recognitioneach subsequent reporting period. This estimate of losses. In April 2019,credit losses takes into consideration all cashflows the FASB issued ASUCompany expects to receive or derive from the pools of contracts, including recoveries after2019-04,charge-off,Codification Improvements, which provides guidance on accounting 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, andnon-accrual policy are not impacted by the adoption of CECL.
The provision for credit losses on accrued interest receivable balancesrecognized 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 guidance on including recoveries when estimatingmaintain a consistent systematic methodology to measure the allowance. In May 2019,estimated credit losses inherent in its current portfolio, over the FASB issued ASU2019-05,Targeted Transition Relief,which allows entities with an option to elect fair value for certain instruments upon adoptionentire life of Topic 326.
The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.the contracts. The Company has formed a cross functional implementation teamassesses the appropriate collective, or pool, basis to review the requirements of ASU2016-13. The Company is still evaluating the impact the adoption of this ASU will have on our consolidated financial statements.
Recently Adopted Accounting Standards.
Leases.In February 2016, the FASB issued ASU2016-02,Leases (Topic 842)use to increase transparency and comparability among organizations recognizing lease assets and lease liabilitiesaggregate its portfolio based on the balance sheet. The ASU will require lesseesexistence of similar risk characteristics and determined that its measurement begins by separately considering segments of financing receivables, which is similar to recognizehow 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. 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 aright-of-use (ROU) asset for 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 rightestimate of expected credit losses, specific to useeach measurement date, management considers relevant qualitative and quantitative factors to assess whether the underlying assethistorical loss experience being referenced should be adjusted to better reflect the risk characteristics of the current portfolio and a lease liabilitythe expected future loss experience for the corresponding lease obligation for leases with termslife of more than twelve months. Accounting by lessors will remain largely unchanged fromthese contracts. This assessment incorporates all available information relevant to considering the collectability of its current U.S. GAAP. The ASU also requires expanded quantitativeportfolio, including considering economic and qualitative disclosures for both lesseesbusiness conditions, default trends, changes in its portfolio composition, changes in its lending policies and lessors. In July 2018, the FASB issued ASU2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an additional (and optional) transition method in which the entity applies the new leases standard at the adoption datepractices, among other internal and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has applied the new transition method upon adoption. In December 2018, the FASB issued ASU2018-20Leases (Topic 842): Narrow Scope Improvements for Lessors,which clarifies the treatment of sales taxes and other taxes collected from lessees, lessor costs paid directly by lessees, and recognition of variable payments for contracts with lease andnon-lease components. In March 2019, the FASB issued ASU2019-01, Leases (Topic 842): Codification Improvements, which aligned the new lease guidance with the existing guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers. It also clarified an exemption for lessors and lessees from a certain interim disclosure requirement associated with adopting the board’s new lease accounting standard.external factors.
The Company adopted the guidance in these ASUs, oneffective January 1, 2019. As2020, applying changes resulting from the application of the new standard’s provisions as a result, the Company recordedright-of-use assets of $9.1 million and lease liabilities of $9.1 million. At January 1, 2019, there was nocumulative-effect adjustment to opening retained earnings. The Company,earnings as a Lessor, will record property tax income and expense associated with leasing on a gross basisof the beginning of the first reporting period in which the Consolidatedguidance is effective (i.e., modified retrospective approach).
-11--10-
StatementsThe adoption of Operations. The property tax income and expense are recordedthis standard resulted in the same periodfollowing adjustment to the Company’s Consolidated Balance Sheets:
Balance as of December 31, 2019 | Adoption Impact | Balance as of January 1, 2020 | ||||||||||
(Dollars in thousands) | ||||||||||||
Assets: | ||||||||||||
Net investment in leases and loans | $ | 1,028,215 | $ | — | $ | 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 earned and incurred, andwell as discussion of the Company recognizesCompany’s new Accounting Policy governing its Allowance.
See Note 13 –Stockholders’ Equity, for discussion of the Company’s election to delay fortwo-years the effect of CECL on regulatory capital, followed by a provisionthree-yearphase-in for uncollectible property tax revenue as contra-revenue when a loss is probable and collectability is not reasonably assured. five-year total transition.
In addition, ASU2016-02 limitsas a result of adoption this standard, future measurements of the typesimpairment of direct lease origination costs that are ableour 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 be deferred, which will reduce prospective deferred lease origination costs on a unit basis.our investment securities.
-12--11-
NOTE 3 –Non-Interest Income
The Company earns revenue including interest and fees from customers as well as revenues fromnon-customers. The Company recognizes revenue when the performance obligations related to the transfer of goods or services under the terms of the contract are satisfied. Some obligations are satisfied at a point in time while others are satisfied over a period of time related to the specific obligation. Revenue is recognized as the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. When consideration includes a variable component, the amount of consideration attributable to variability is included in the transaction price only to the extent it is probable that significant revenue recognized will not be reversed when uncertainty associated with the variable consideration is subsequently resolved. Generally, the variability relating to the consideration is explicitly stated in the contracts, but may also arise from the Company’s customer business practice, for example, waiving certain fees. The Company’s contracts generally do not contain terms that require significant judgement to determine the variability impacting the transaction price.
The majority of the Company’s revenue-generating transactions are not subject to ASC 606,Revenue from Contracts with Customers, including revenue generated from financial instruments, such as our leases and loans, investment securities, as well as revenue related to our gain on sale of leases and loans, servicing income, and insurance premiums written and earned. Revenue-generating activities that the Company accounts for under ASC 606, which are presented in our income statements as components ofnon-interest income, include certain fees such as property tax administrative fees on leases, ACH payment fees, insurance policy fees outside of the scope of ASC 944, broker fees earned for referring leases and loans to other funding partners, and other fees. The Company has included the following table regarding the Company’ssummarizesnon-interest income for the periods presented.presented:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(Dollars in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Insurance premiums written and earned | $ | 2,176 | $ | 1,993 | $ | 4,308 | $ | 3,932 | $ | 2,282 | $ | 2,132 | ||||||||||||
Gain on sale of leases and loans | 3,332 | 936 | 6,944 | 2,616 | 2,282 | 3,612 | ||||||||||||||||||
Other income: | ||||||||||||||||||||||||
Property tax income | 5,504 | 5,643 | ||||||||||||||||||||||
Servicing income | 339 | 677 | 626 | 1,174 | 566 | 287 | ||||||||||||||||||
Property tax income | 79 | — | 5,722 | — | ||||||||||||||||||||
Net gains (losses) recognized during the period on equity securities | 50 | (26 | ) | 94 | (81 | ) | ||||||||||||||||||
Net gain (loss) recognized on equity securities | 58 | 43 | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Non-interest income within the scope of other GAAP topics | 5,976 | 3,580 | 17,694 | 7,641 | 10,692 | 11,717 | ||||||||||||||||||
|
|
|
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|
| |||||||||||||||||||
Other income: | ||||||||||||||||||||||||
Insurance policy fees | 918 | 668 | ||||||||||||||||||||||
Property tax administrative fees on leases | 261 | 190 | 529 | 381 | 234 | 268 | ||||||||||||||||||
ACH payment fees | 74 | 83 | 160 | 168 | 72 | 86 | ||||||||||||||||||
Insurance policy fees | 666 | 514 | 1,334 | 1,025 | ||||||||||||||||||||
Referral fees | 164 | 210 | 318 | 493 | 94 | 155 | ||||||||||||||||||
Other | 60 | 50 | 114 | 153 | 193 | 54 | ||||||||||||||||||
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|
|
|
| |||||||||||||||||||
Non-interest income from contracts with customers | 1,225 | 1,047 | 2,455 | 2,220 | 1,511 | 1,231 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Totalnon-interest income | $ | 7,201 | $ | 4,627 | $ | 20,149 | $ | 9,861 | $ | 12,203 | $ | 12,948 | ||||||||||||
|
|
|
|
|
|
-13--12-
NOTE 4 – Investment Securities
Debt Securities, Available for Sale are recorded at fair value and unrealized gains and losses are reported, netThe Company has the following investment securities as of taxes, in accumulated other comprehensive income (loss) included in stockholders’ equity unless management determines that an investment is other-than-temporarily impaired (OTTI). Changesthe periods presented:
March 31, 2020 | December 31, 2019 | |||||||
(Dollars in thousands) | ||||||||
Equity Securities | ||||||||
Mutual fund | $ | 3,692 | $ | 3,615 | ||||
Debt Securities, Available for Sale: | ||||||||
Asset-backed securities (“ABS”) | 4,135 | 4,332 | ||||||
Municipal securities | 2,653 | 3,129 | ||||||
|
|
|
| |||||
Total investment securities | $ | 10,480 | $ | 11,076 | ||||
|
|
|
|
The following schedule summarizes changes in fair value of equity securities are recorded throughand the Consolidated Statementsportion of Operations. The amortized cost and estimated fair value of investments, with gross unrealized gains and losses were as follows as of June 30, 2019 and December 31, 2018:for each period presented:
June 30, 2019 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Debt Securities, Available for Sale: | ||||||||||||||||
Asset-backed securities (“ABS”) | $ | 4,607 | $ | 29 | $ | (21 | ) | $ | 4,615 | |||||||
Municipal securities | 2,375 | 79 | — | 2,454 | ||||||||||||
Equity Securities | ||||||||||||||||
Mutual fund | 3,672 | — | (108 | ) | 3,564 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investment securities | $ | 10,654 | $ | 108 | $ | (129 | ) | $ | 10,633 | |||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2018 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Debt Securities, Available for Sale: | ||||||||||||||||
ABS | $ | 4,934 | $ | 20 | $ | (39 | ) | $ | 4,915 | |||||||
Municipal securities | 2,629 | 3 | (20 | ) | 2,612 | |||||||||||
Equity Securities | ||||||||||||||||
Mutual fund | 3,631 | — | (202 | ) | 3,429 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investment securities | $ | 11,194 | $ | 23 | $ | (261 | ) | $ | 10,956 | |||||||
|
|
|
|
|
|
|
|
Three months ended | ||||||||
(Dollars in thousands) | March 31, 2020 | March 31, 2019 | ||||||
Net gains and (losses) recognized during the period on equity securities | $ | 58 | $ | 43 | ||||
Less: Net gains and (losses) recognized during the period on equity securities sold during the period | — | — | ||||||
|
|
|
| |||||
Unrealized gains and (losses) recognized during the reporting period on equity securities still held at the reporting date | $ | 58 | $ | 43 | ||||
|
|
|
|
-13-
Available for Sale
The following schedule is a summary of available for sale investments for the periods presented:
March 31, 2020 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
ABS | $ | 4,074 | $ | 61 | $ | — | $ | 4,135 | ||||||||
Municipal securities | 2,664 | 14 | (25 | ) | 2,653 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Debt Securities, Available for Sale | $ | 6,738 | $ | 75 | $ | (25 | ) | $ | 6,788 | |||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2019 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
ABS | $ | 4,302 | $ | 33 | $ | (3 | ) | $ | 4,332 | |||||||
Municipal securities | 3,058 | 71 | — | 3,129 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Debt Securities, Available for Sale | $ | 7,360 | $ | 104 | $ | (3 | ) | $ | 7,461 | |||||||
|
|
|
|
|
|
|
|
-14-
The Company had $3.6 millionevaluates 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 March 31, 2020 and $3.4 million in equity securities recorded at fair value at June 30, 2019 and DecemberMarch 31, 2018, respectively. The following schedule is a summary of fair value changes recognized in net income on equity securities during the three and six months ended June 30, 2019:2019.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net gains (losses) recognized during the period on equity securities | $ | 50 | $ | (26 | ) | $ | 94 | $ | (81 | ) | ||||||
Less: Net gains (losses) recognized during the period on equity securities sold during the period | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date | $ | 50 | $ | (26 | ) | $ | 94 | $ | (81 | ) | ||||||
|
|
|
|
|
|
|
|
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 June 30, 2019March 31, 2020 and December 31, 2018:2019:
June 30, 2019 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Debt Securities, Available for Sale: | ||||||||||||||||||||||||
ABS | $ | — | $ | — | $ | (21 | ) | $ | 1,433 | $ | (21 | ) | $ | 1,433 | ||||||||||
Equity Securities Mutual fund | — | — | (108 | ) | 3,564 | (108 | ) | 3,564 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total investment securities | $ | — | $ | — | $ | (129 | ) | $ | 4,997 | $ | (129 | ) | $ | 4,997 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Debt Securities, Available for Sale: | ||||||||||||||||||||||||
ABS | $ | — | $ | — | $ | (39 | ) | $ | 3,340 | $ | (39 | ) | $ | 3,340 | ||||||||||
Municipal securities | (16 | ) | 1,436 | (4 | ) | 408 | (20 | ) | 1,844 | |||||||||||||||
Equity Securities Mutual fund | — | — | (202 | ) | 3,429 | (202 | ) | 3,429 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total investment securities | $ | (16 | ) | $ | 1,436 | $ | (245 | ) | $ | 7,177 | $ | (261 | ) | $ | 8,613 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Municipal securities | $ | (25 | ) | $ | 1,834 | $ | — | $ | — | $ | (25 | ) | $ | 1,834 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total available for sale investment securities | $ | (25 | ) | $ | 1,834 | $ | — | $ | — | $ | (25 | ) | $ | 1,834 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
December 31, 2019 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
ABS | $ | — | $ | — | $ | (3 | ) | $ | 430 | $ | (3 | ) | $ | 430 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total available for sale investment securities | $ | — | $ | — | $ | (3 | ) | $ | 430 | $ | (3 | ) | $ | 430 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
-15-
The following table presents the amortized cost, fair value, and weighted average yield of investments in debt securities available for sale investments at June 30, 2019, by remaining contractual maturity, with the exception of ABS and municipal securities, which areMarch 31, 2020, based on estimated average life. Receipt of cash flows may differ from contractualthose estimated maturities because borrowers may have the right to call or prepay obligations with or without penalties:
June 30, 2019 | ||||||||||||||||||||
1 Year or Less | 1-5 Years | 5-10 Years | After 10 Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Amortized Cost: | ||||||||||||||||||||
Debt Securities, Available for Sale: | ||||||||||||||||||||
ABS | $ | — | $ | 2,776 | $ | 1,863 | $ | — | $ | 4,639 | ||||||||||
Municipal securities | — | 521 | 1,854 | — | 2,375 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total debt securities available for sale | $ | — | $ | 3,297 | $ | 3,717 | $ | — | $ | 7,014 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Estimated fair value | $ | — | $ | 3,327 | $ | 3,774 | $ | — | $ | 7,101 | ||||||||||
Weighted-average yield, GAAP basis | — | 2.34 | % | 2.72 | % | — | 2.55 | % |
OTTI
The Company evaluates all investment securities in an unrealized loss position for OTTI on at least a quarterly basis. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The OTTI assessment is a subjective process requiring the use of judgments and assumptions. During the securities-level assessments, consideration is given to (1) the intent not to sell and probability that the Company will not be required to sell the security before recovery of its cost basis to allow for any anticipated recovery in fair value, (2) the financial condition and near-term prospects of the issuer, as well as company news and current events, and (3) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows may include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average Fair Isaac Corporation (“FICO®”) scores and weighted average LTV ratio, rating or scoring, credit ratings and market spreads, as applicable.
According to accounting guidance for debt securities in an unrealized loss position, the Company is required to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met the Company must recognize an other than temporary impairment with the entire unrealized loss being recorded through earnings. For debt securities in an unrealized loss position not meeting these conditions, the Company assesses whether the impairment of a security is other than temporary. If the impairment is deemed to be other than temporary, the Company must separate the other than temporary impairment into two components: the amount representing the credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses is recorded in other comprehensive income, net of taxes. The Company did not recognize any OTTI in earnings related to its investment securities for the six months ended June 30, 2019 and June 30, 2018.
Distribution of Maturities | ||||||||||||||||||||
1 Year or Less | Over 1 to 5 Years | Over 5 to 10 Years | Over 10 Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Amortized Cost: | ||||||||||||||||||||
ABS | $ | — | $ | 2,427 | $ | 1,647 | $ | — | $ | 4,074 | ||||||||||
Municipal securities | 15 | 34 | 756 | 1,859 | 2,664 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total available for sale investments | $ | 15 | $ | 2,461 | $ | 2,403 | $ | 1,859 | $ | 6,738 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Estimated fair value | $ | 15 | $ | 2,501 | $ | 2,413 | $ | 1,859 | $ | 6,788 | ||||||||||
Weighted-average yield, GAAP basis | 4.75 | % | 2.02 | % | 1.81 | % | 2.58 | % | 2.42 | % |
-16-
NOTE 5 – Net Investment in Leases and Loans
The Company’s lease portfolio is comprised entirely of sales type leases whose terms generally range from 36 to 72 months. At the time of application, small business customers can select a purchase option that will allow them to purchase the equipment at the end of the contract term for either one dollar, the fair market value of the equipment or a specified percentage of the original equipment cost. Alternatively, the customers can continue leasing or return the equipment. We estimate the residual value of the equipment which is recorded as an asset on our balance sheet. Realization of residual values depends on numerous factors including: the general market conditions at the time of expiration of the lease; the customer’s election to enter into a renewal period; the cost of comparable new equipment; the obsolescence of the leased equipment; any unusual or excessive wear and tear on or damage to the equipment; the effect of any additional or amended government regulations; and the foreclosure by a secured party of our interest in a defaulted lease.
The Company’s loan portfolio is comprised of Working Capital loans, loans under the Community Reinvestment Act of 1977 (CRA), and Equipment loans. Working Capital loans generally have 6 to 24 month terms with repayment terms that can vary from daily, weekly or monthly. Equipment loans are comprised of Equipment Finance Agreements, Installment Purchase Agreements, and other loans.
Net investment in leases and loans consists of the following:
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Minimum lease payments receivable | $ | 518,005 | $ | 530,867 | $ | 434,841 | $ | 457,602 | ||||||||
Estimated residual value of equipment | 28,688 | 27,646 | 29,464 | 29,342 | ||||||||||||
Unearned lease income, net of initial direct costs and fees deferred | (67,917 | ) | (68,376 | ) | (56,645 | ) | (59,746 | ) | ||||||||
Security deposits | (708 | ) | (838 | ) | (512 | ) | (590 | ) | ||||||||
|
|
|
| |||||||||||||
Total leases | 478,068 | 489,299 | 407,148 | 426,608 | ||||||||||||
Commercial loans, net of origination costs and fees deferred Working Capital Loans | 51,748 | 36,856 | ||||||||||||||
Commercial loans, net of origination costs and fees deferred | ||||||||||||||||
Working Capital Loans | 59,012 | 60,942 | ||||||||||||||
CRA(1) | 1,493 | 1,466 | 1,410 | 1,398 | ||||||||||||
Equipment loans(2) | 469,367 | 423,168 | 481,000 | 464,655 | ||||||||||||
CVG | 78,372 | 66,051 | 73,566 | 74,612 | ||||||||||||
|
|
|
| |||||||||||||
Total commercial loans | 600,980 | 527,541 | 614,988 | 601,607 | ||||||||||||
Net investment in leases and loans, excluding allowance | 1,022,136 | 1,028,215 | ||||||||||||||
Allowance for credit losses | (16,777 | ) | (16,100 | ) | (52,060 | ) | (21,695 | ) | ||||||||
|
|
|
| |||||||||||||
$ | 1,062,271 | $ | 1,000,740 | $ | 970,076 | $ | 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. |
(2) | Equipment loans are comprised of Equipment Finance Agreements, Installment Purchase Agreements and other loans. |
At June 30, 2019, $109.8March 31, 2020, $62.0 million in net investment in leases were pledged as collateral for the Company’s outstanding asset-backed securitization balance and $35.6$55.1 million in net investment in leases were pledged as collateral for the secured borrowing capacity at the Federal Reserve Discount Window.
The amount of deferred initial direct costs and origination costs net of deferred fees deferred were $21.3$19.5 million and $20.5 million as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. Initial direct costs are netted in unearned income and are amortized to income using the effective interest method. ASU2016-02 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 June 30, 2019March 31, 2020 and December 31, 2018, $24.22019, $23.5 million and $23.6$23.4 million, respectively, of the estimated residual value of equipment retained on our Consolidated Balance Sheets was related to copiers.
-17-
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 June 30, 2019:March 31, 2020:
-17-
Minimum Lease Payments Receivable(1) | Net Income Amortization (2) | Minimum Lease Payments Receivable(1) | Net Income Amortization (2) | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Period Ending December 31, | ||||||||||||||||
Remainder of 2019 | $ | 112,557 | $ | 19,216 | ||||||||||||
2020 | 175,405 | 25,906 | ||||||||||||||
Remainder of 2020 | $ | 132,867 | $ | 22,664 | ||||||||||||
2021 | 118,603 | 13,913 | 137,907 | 18,737 | ||||||||||||
2022 | 69,111 | 6,326 | 90,158 | 9,728 | ||||||||||||
2023 | 33,751 | 2,131 | 49,519 | 4,107 | ||||||||||||
2024 | 20,660 | 1,140 | ||||||||||||||
Thereafter | 8,578 | 425 | 3,730 | 269 | ||||||||||||
|
|
|
| |||||||||||||
$ | 518,005 | $ | 67,917 | $ | 434,841 | $ | 56,645 | |||||||||
|
|
|
|
(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 $2.3 million and $2.5 million as follows:of March 31, 2020 and December 31, 2019, respectively, and is recognized within Accounts payable and accrued expenses in the Consolidated Balance Sheets. As of March 31, 2020 and December 31, 2019, the portfolio of leases and loans serviced for others was $328 million and $340 million, respectively.
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 expected losses from recourse obligations was $1.2 million as of March 31, 2020 and was $0.4 million as of December 31, 2019.
The following table summarizes information related to portfolio sales for the periods presented:
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Selling Profit(1) | $ | — | $ | — | $ | — | $ | — | ||||||||
Interest Income | $ | 10,730 | $ | 12,482 | $ | 21,691 | $ | 25,478 |
|
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Sales of leases and loans | $ | 22,929 | $ | 52,867 | ||||
Gain on sale of leases and loans | 2,282 | 3,612 |
-18-
NOTE 6 – Allowance for Credit Losses
In accordance with the ContingenciesFor 2019 and Receivables Topics of the FASB ASC,prior, we maintainmaintained 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.losses in accordance with the Contingencies Topic of the FASB ASC.
Effective January 1, 2020, we adopted ASU2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of CreditLosses 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. 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 March 31, 2020 is below.
The following tables which follow providesummarize activity in the allowance for credit losses and asset quality statistics.losses:
Three Months Ended June 30, 2019 | Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||
Commercial Lease and Loans | Commercial Leases and Loans | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Working Capital Loans | CRA | Equipment Finance(2) | CVG | Total | Equipment Finance | Working Capital Loans | CVG | CRA | Total | ||||||||||||||||||||||||||||||
Allowance for credit losses, beginning of period | $ | 1,684 | $ | — | $ | 13,975 | $ | 1,223 | $ | 16,882 | ||||||||||||||||||||||||||||||
Allowance for credit losses, December 31, 2019 | $ | 18,334 | $ | 1,899 | $ | 1,462 | $ | — | $ | 21,695 | ||||||||||||||||||||||||||||||
Adoption of ASU2016-13 (CECL)(1) | 9,264 | (3 | ) | 2,647 | — | 11,908 | ||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Allowance for credit losses, January 1, 2020 | $ | 27,598 | $ | 1,896 | $ | 4,109 | $ | — | $ | 33,603 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Charge-offs | (602 | ) | — | (4,508 | ) | (345 | ) | (5,455 | ) | (6,490 | ) | (1,279 | ) | (729 | ) | — | (8,498 | ) | ||||||||||||||||||||||
Recoveries | 51 | — | 482 | 61 | 594 | 525 | 38 | 89 | — | 652 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net charge-offs | (551 | ) | — | (4,026 | ) | (284 | ) | (4,861 | ) | |||||||||||||||||||||||||||||||
Net chargeoffs | (5,965 | ) | (1,241 | ) | (640 | ) | — | (7,846 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Realized cashflows from Residual Income | 1,153 | — | — | — | 1,153 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Provision for credit losses | 807 | — | 3,467 | 482 | 4,756 | 14,988 | 6,545 | 3,617 | — | 25,150 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Allowance for credit losses, end of period | $ | 1,940 | $ | — | $ | 13,416 | $ | 1,421 | $ | 16,777 | $ | 37,774 | $ | 7,200 | $ | 7,086 | $ | — | $ | 52,060 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Ending lease or loan balance(1,3) | $ | 51,223 | $ | 1,493 | $ | 921,709 | $ | 83,301 | $ | 1,057,726 | ||||||||||||||||||||||||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
Commercial Lease and Loans | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Working Capital Loans | CRA | Equipment Finance(2) | CVG | Total | |||||||||||||||||||||||||||||||||||
Allowance for credit losses, beginning of period | $ | 1,310 | $ | — | $ | 13,140 | $ | 1,170 | $ | 15,620 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Charge-offs | (499 | ) | — | (4,190 | ) | (243 | ) | (4,932 | ) | |||||||||||||||||||||||||||||||
Recoveries | 43 | — | 580 | 3 | 626 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Net charge-offs | (456 | ) | — | (3,610 | ) | (240 | ) | (4,306 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Provision for credit losses | 480 | — | 3,482 | 294 | 4,256 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Allowance for credit losses, end of period | $ | 1,334 | $ | — | $ | 13,012 | $ | 1,224 | $ | 15,570 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Ending lease or loan balance(1) | $ | 30,880 | $ | 1,445 | $ | 870,366 | $ | 56,761 | $ | 959,452 | ||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | $ | 545 | $ | — | $ | 545 | ||||||||||||||||||||||||||||||
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|
|
|
| ||||||||||||||||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 30,880 | $ | 1,445 | $ | 869,821 | $ | 56,761 | $ | 958,907 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Net investment in leases and loans, before allowance | $ | 877,199 | $ | 59,012 | $ | 84,515 | $ | 1,410 | $ | 1,022,136 |
-19-
Six Months Ended June 30, 2019 | Three Months Ended March 31, 2019 | |||||||||||||||||||||||||||||||||||||||
Commercial Lease and Loans | Commercial Leases and Loans | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Working Capital Loans | CRA | Equipment Finance(2) | CVG | Total | Equipment Finance | Working Capital Loans | CVG | CRA | Total | ||||||||||||||||||||||||||||||
Allowance for credit losses, beginning of period | $ | 1,467 | $ | — | $ | 13,531 | $ | 1,102 | $ | 16,100 | $ | 13,531 | $ | 1,467 | $ | 1,102 | $ | — | $ | 16,100 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Charge-offs | (1,275 | ) | — | (8,840 | ) | (673 | ) | (10,788 | ) | (4,333 | ) | (673 | ) | (328 | ) | — | (5,334 | ) | ||||||||||||||||||||||
Recoveries | 71 | — | 1,214 | 61 | 1,346 | 734 | 19 | — | — | 753 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net charge-offs | (1,204 | ) | — | (7,626 | ) | (612 | ) | (9,442 | ) | (3,599 | ) | (654 | ) | (328 | ) | — | (4,581 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Provision for credit losses | 1,677 | — | 7,511 | 931 | 10,119 | 4,043 | 871 | 449 | — | 5,363 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Allowance for credit losses, end of period | $ | 1,940 | $ | — | $ | 13,416 | $ | 1,421 | $ | 16,777 | $ | 13,975 | $ | 1,684 | $ | 1,223 | $ | — | $ | 16,882 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Ending lease or loan balance(1,3) | $ | 51,223 | $ | 1,493 | $ | 921,709 | $ | 83,301 | $ | 1,057,726 | ||||||||||||||||||||||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
Commercial Lease and Loans | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Working Capital Loans | CRA | Equipment Finance(2) | CVG | Total | |||||||||||||||||||||||||||||||||||
Allowance for credit losses, beginning of period | $ | 1,036 | $ | — | $ | 12,663 | $ | 1,152 | $ | 14,851 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Charge-offs | (728 | ) | — | (8,219 | ) | (400 | ) | (9,347 | ) | |||||||||||||||||||||||||||||||
Recoveries | 49 | — | 1,108 | 41 | 1,198 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Net charge-offs | (679 | ) | — | (7,111 | ) | (359 | ) | (8,149 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Provision for credit losses | 977 | — | 7,460 | 431 | 8,868 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Allowance for credit losses, end of period | $ | 1,334 | $ | — | $ | 13,012 | $ | 1,224 | $ | 15,570 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Ending lease or loan balance(1) | $ | 30,880 | $ | 1,445 | $ | 870,366 | $ | 56,761 | $ | 959,452 | ||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | — | $ | 545 | $ | — | $ | 545 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 30,880 | $ | 1,445 | $ | 869,821 | $ | 56,761 | $ | 958,907 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Year ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Commercial Lease and Loans | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Working Capital Loans | CRA | Equipment Finance(2) | CVG | Total | |||||||||||||||||||||||||||||||||||
Allowance for credit losses, beginning of period | $ | 1,036 | $ | — | $ | 12,663 | $ | 1,152 | $ | 14,851 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Charge-offs | (1,537 | ) | — | (18,149 | ) | (907 | ) | (20,593 | ) | |||||||||||||||||||||||||||||||
Recoveries | 60 | — | 2,199 | 61 | 2,320 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Net charge-offs | (1,477 | ) | — | (15,950 | ) | (846 | ) | (18,273 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Provision for credit losses | 1,908 | — | 16,818 | 796 | 19,522 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Allowance for credit losses, end of period | $ | 1,467 | $ | — | $ | 13,531 | $ | 1,102 | $ | 16,100 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Ending lease or loan balance(1,3) | $ | 36,478 | $ | 1,466 | $ | 890,785 | $ | 67,654 | $ | 996,383 | ||||||||||||||||||||||||||||||
Net investment in leases and loans, before allowance | $ | 915,556 | $ | 43,210 | $ | 79,830 | $ | 1,476 | $ | 1,040,072 |
(1) | The Company adopted ASU2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses onFinancial 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 aftercharge-off, amounts related to initial direct cost and origination costs net of fees deferred, accrued interest receivable and certain future cashflows from residual assets.
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.
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 March 31, 2020 is summarized below.
-20-
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 Equipment Finance |
|
For thesix-month periods ended June 30, 2019 and June 30, 2018, the Company sold $110.5 million of leases and loans from its portfolio for a gain on sale of $6.9 million and $38.8 million of leases and loans from its portfolio for a gain on sale of $2.6 million, respectively. For the year ended December 31, 2018, the Company sold $139.0 million of leases and loans from its portfolio for a gain on sale of $8.4 million.
Credit Quality Indicators
The Company’s credit review process includes a risk classification of all leases and loans that includes pass, special mention, substandard, doubtful, and loss. The classification of a lease or loan may change based on changes in the creditworthiness of the borrower. The description of the risk classifications are as follows:
Pass:A lease or loan is classified as pass when payments are current and it is performing under the original contractual terms.
Special Mention:A lease or loan is classified as special mention when the borrower exhibits potential credit weakness or a downward trend which, if not checked or corrected, will weaken the asset or inadequately protect the Company’s position. While potentially weak, the borrower is currently marginally acceptable; no loss of principal or interest is envisioned.
Substandard:A lease or loan is classified as substandard when the borrower has a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt. A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor, normal repayment from this borrower is in jeopardy, and there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected.
Doubtful:A lease or loan is classified as doubtful when a borrower has all weaknesses inherent in a loan classified as substandard with the added provision that: (1) the weaknesses make collection of debt in full on the basis of currently existing facts, conditions and values highly questionable and improbable; (2) serious problems exist to the point where a partial loss of principal is likely; and (3) the possibility of loss is extremely high, but because of certain important, reasonably specific pending factors which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens and additional refinancing plans.
Loss: A lease or loan is classified as loss when uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.
The Companycharges-off the collateral or discounted cash flow deficiency on all loans onnon-accrual status. In all cases, leases and loans are placedbased 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 anon-accrual12-month forecast period and12-month straight-line reversion period, based on its initial assessment of the appropriate timing.
However, for its March 31, 2020 measurement, the Company adjusted its model to reference a6-month forecast period and12-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 uncertainty of the duration and level of impact of theCOVID-19 virus on the macroeconomic environment and the Company’s portfolio, including uncertainty about the forecasted impact ofCOVID-19 that was underlying its economic forecasted variables beyond a6-month period. The forecast adjustment to the Equipment Finance portfolio segment resulted in a $10.8 million increase to the provision for the three months ended March 31, 2020.
The Company qualitatively assessed the output of the Equipment Finance calculated allowance after adjusting the forecast period, and determined the resulting credit loss estimate to properly reflect its estimate of expected net cashflows of this portfolio segment over the remaining contract term.
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, including changes in portfolio composition or the business environment, when 90 days pastdetermining 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, for the March 31, 2020 measurement, driven by the elevated risk of credit loss driven by market conditions due or earlier if collectiontoCOVID-19, the Company developed alternate scenarios for credit loss based on an analysis of principal or interest is considered doubtful.the characteristics of its portfolio, considering different timing and magnitudes of potential exposures. The Company determined its most likely expectation for credit losses for the Working Capital segment for the remaining nine months of 2020, based on the increased risk to its borrowers and increased risk to the collectability of its portfolio fromCOVID-19, and increased the reserve by a $5.5 million qualitative adjustment for that loss estimate.
-21-
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 following tables presentCompany’s measurement of CVG pools 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 segmentsCompany determined it was appropriate to develop an estimate based on a combination of data. Due to the Company’s limited history of performance of this segment, and the limited size of the loan 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 which a formal risk weighting system is utilized summarizedconditions 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 of 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, for the March 31, 2020 measurement, driven by the categorieselevated risk of “pass”credit loss driven by market conditions due toCOVID-19, the Company developed alternate scenarios for expected credit loss for this segment, considering different timing and “special mention”,magnitudes of potential exposures. The Company determined its most likely expectation for credit losses for the CVG segment for the remaining nine months of 2020 based on the increased risk to its borrowers and increased risk to the classified categoriescollectability of “substandard”, “doubtful”,its portfolio fromCOVID-19, and “loss” withinincreased the reserve by a $2.9 million qualitative adjustment for that loss estimate.
Community Reinvestment Act (CRA):
CRA loans are comprised of loans originated under a line of credit to satisfy the Company’s risk rating system at June 30, 2019obligations under the Community Reinvestment Act of 1977. The Company does not measure an allowance specific to this portfolio segment because the exposure to credit loss is nominal.
In response toCOVID-19, starting inmid-March 2020, the Company instituted a payment deferral program in order to assist its small-business customers that request relief who are current under their existing obligations and Decembercan demonstrate that their ability to repay has been impacted by the COVID-19 crisis. Through March 31, 2018. The data within2020, the tables reflectCompany had processed payment deferral modifications for 520 contracts, or $19.5 million net investment excluding deferred feesin leases and costloans, where the typical modification included a60-day deferral of payments for Working Capital loans and allowance:90-day deferral of payments for other customers, with such payments added to the end of the contract term. The modifications for each portfolio segment were $8.5 million of Equipment Finance, $7.0 million of Working Capital, and $4.0 million of CVG net investment in leases and loans. The Company did not adjust its estimate of credit losses for any portfolio segment based on whether or not contracts were modified; the Company’s allowance estimate assesses the risk of credit loss for modified loans to be equal to loans that were not modified as of March 31, 2020.
Subsequent toquarter-end, through April 24, 2020, the Company has approved the payment deferral modification application for contracts representing an additional $134.5 million net investment in leases and loans. A portion of these modifications are subject to the completion of final processing and documentation.
June 30, 2019 | ||||||||||||||||||||
Commercial Leases and Loans | ||||||||||||||||||||
(Dollars in thousands) | Working Capital Loans | CRA | Equipment Finance | CVG | Total | |||||||||||||||
Pass | $ | 50,465 | $ | 1,493 | $ | 910,157 | $ | 81,709 | $ | 1,043,824 | ||||||||||
Special Mention | 267 | — | 4,406 | 347 | 5,020 | |||||||||||||||
Substandard | 243 | — | 3,351 | 719 | 4,313 | |||||||||||||||
Doubtful | 248 | — | 2,265 | 368 | 2,881 | |||||||||||||||
Loss | — | — | 1,530 | 158 | 1,688 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 51,223 | $ | 1,493 | $ | 921,709 | $ | 83,301 | $ | 1,057,726 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
December 31, 2018 | ||||||||||||||||||||
Commercial Leases and Loans | ||||||||||||||||||||
(Dollars in thousands) | Working Capital Loans | CRA | Equipment Finance | CVG | Total | |||||||||||||||
Pass | $ | 35,793 | $ | 1,466 | $ | 879,275 | $ | 66,463 | $ | 982,997 | ||||||||||
Special Mention | 47 | — | 4,373 | 146 | 4,566 | |||||||||||||||
Substandard | 145 | — | 3,460 | 660 | 4,265 | |||||||||||||||
Doubtful | 300 | — | 2,353 | 158 | 2,811 | |||||||||||||||
Loss | 193 | — | 1,324 | 227 | 1,744 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 36,478 | $ | 1,466 | $ | 890,785 | $ | 67,654 | $ | 996,383 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings 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 issued in March 2020, that the Financial Accounting Standards Board concurred with, loans modified under the Company’s payment deferral program are not considered troubled debt restructurings. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company did not have any troubled debt restructurings.
Loan DelinquenciesAs 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 of March 31, 2020 and January 1, 2020, there were no contracts subject to specific analysis outside of the portfolio segments and pools that are outlined above.
-22-
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.
-23-
The following tables provide information about delinquent leases and loans in the Company’s portfolio based on the contract’s statusNon-Accrualas-of Leases and Loansthe dates presented:
Portfolio by Origination Year as of March 31, 2020 | ||||||||||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total Receivables | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Equipment Finance | ||||||||||||||||||||||||||||
30-59 | $ | 179 | $ | 2,952 | $ | 1,803 | $ | 1,368 | $ | 512 | $ | 167 | $ | 6,981 | ||||||||||||||
60-89 | — | 1,428 | 1,304 | 767 | 319 | 73 | 3,891 | |||||||||||||||||||||
90+ | — | 2,157 | 1,629 | 1,046 | 387 | 138 | 5,357 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Past Due | 179 | 6,537 | 4,736 | 3,181 | 1,218 | 378 | 16,229 | |||||||||||||||||||||
Current(1) | 110,762 | 372,522 | 207,521 | 114,189 | 44,511 | 11,465 | 860,970 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | 110,941 | 379,059 | 212,257 | 117,370 | 45,729 | 11,843 | 877,199 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Working Capital | ||||||||||||||||||||||||||||
30-59 | — | 609 | — | — | — | — | 609 | |||||||||||||||||||||
60-89 | — | 16 | — | — | — | — | 16 | |||||||||||||||||||||
90+ | — | 23 | 26 | — | — | — | 49 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Past Due | — | 648 | 26 | — | — | — | 674 | |||||||||||||||||||||
Current(1) | 21,388 | 35,947 | 965 | 38 | — | — | 58,338 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | 21,388 | 36,595 | 991 | 38 | — | — | 59,012 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
CVG | ||||||||||||||||||||||||||||
30-59 | — | 126 | 178 | 106 | 30 | — | 440 | |||||||||||||||||||||
60-89 | — | 182 | 84 | 49 | — | — | 315 | |||||||||||||||||||||
90+ | — | 276 | 75 | 211 | 31 | — | 593 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Past Due | — | 584 | 337 | 366 | 61 | — | 1,348 | |||||||||||||||||||||
Current(1) | 8,755 | 39,679 | 19,750 | 11,054 | 3,833 | 96 | 83,167 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | 8,755 | 40,263 | 20,087 | 11,420 | 3,894 | 96 | 84,515 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
CRA | ||||||||||||||||||||||||||||
Total Past Due | — | — | — | — | — | — | — | |||||||||||||||||||||
Current | 1,410 | — | — | — | — | — | 1,410 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | 1,410 | — | — | — | — | — | 1,410 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net investment in leases and loans, before allowance | $ | 142,494 | $ | 455,917 | $ | 233,335 | $ | 128,828 | $ | 49,623 | $ | 11,939 | $ | 1,022,136 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-24-
Portfolio by Origination Year as of December 31, 2019 | ||||||||||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | Prior | Total 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 | |||||||||||||||||||||
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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 | |||||||||||||||||||||
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Total | 427,949 | 240,400 | 138,129 | 56,466 | 16,873 | 1,435 | 881,252 | |||||||||||||||||||||
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Working Capital | ||||||||||||||||||||||||||||
30-59 | 566 | 18 | — | — | — | — | 584 | |||||||||||||||||||||
60-89 | 16 | 52 | — | — | — | — | 68 | |||||||||||||||||||||
90+ | 203 | — | — | — | — | — | 203 | |||||||||||||||||||||
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Total Past Due | 785 | 70 | — | — | — | — | 855 | |||||||||||||||||||||
Current | 57,706 | 2,343 | 38 | — | — | — | 60,087 | |||||||||||||||||||||
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Total | 58,491 | 2,413 | 38 | — | — | — | 60,942 | |||||||||||||||||||||
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CVG | ||||||||||||||||||||||||||||
30-59 | 50 | 126 | 90 | 99 | — | — | 365 | |||||||||||||||||||||
60-89 | 5 | 15 | 188 | 46 | — | — | 254 | |||||||||||||||||||||
90+ | — | 178 | 158 | 53 | — | — | 389 | |||||||||||||||||||||
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Total Past Due | 55 | 319 | 436 | 198 | — | — | 1,008 | |||||||||||||||||||||
Current | 42,536 | 22,531 | 13,442 | 4,976 | 130 | — | 83,615 | |||||||||||||||||||||
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Total | 42,591 | 22,850 | 13,878 | 5,174 | 130 | — | 84,623 | |||||||||||||||||||||
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CRA | ||||||||||||||||||||||||||||
Total Past Due | — | — | — | — | — | — | — | |||||||||||||||||||||
Current | 1,398 | — | — | — | — | — | 1,398 | |||||||||||||||||||||
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Total | 1,398 | — | — | — | — | — | 1,398 | |||||||||||||||||||||
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Net investment in leases and loans, before allowance | $ | 530,429 | $ | 265,663 | $ | 152,045 | $ | 61,640 | $ | 17,003 | $ | 1,435 | $ | 1,028,215 | ||||||||||||||
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(1) | Current receivables include leases and loans that are in payment deferral status as part of the Company’sCOVID-19 modification program. See further discussion above. |
-25-
Net investments in Equipment Finance and CVG leases and loans are generallycharged-off when they are contractually past due for 120 days or more. Income recognition is discontinued on leases or loans 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 June 30, 2019March 31, 2020 and December 31, 2018,2019, there were no finance receivables past due 90 days or more and still accruing.
Working Capital Loans are generally placed innon-accrual status when they are 30 days past due and generallycharged-off at 60 days past due. The loan is removed fromnon-accrual status once sufficient payments are made to bring the loan current and reviewed by management. At June 30, 2019March 31, 2020 and December 31, 2018,2019, there were no Working Capital Loans past due 30 days or more and still accruing.
-22-
Management further monitors the performance and credit quality of the loan portfolio as determined by the length of time a recorded payment is due.
The following tables provide information about delinquent andnon-accrual leases and loans in the Company’s portfolio as of June 30, 2019 and December 31, 2018:loans:
June 30, 2019 (Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | >90 Days Past Due | Total Past Due | Current | Total Finance Receivables | Non- Accruing | |||||||||||||||||||||
Working Capital Loans | $ | 240 | $ | — | $ | — | $ | 240 | �� | $ | 50,983 | $ | 51,223 | $ | 248 | |||||||||||||
CRA | — | — | — | — | 1,493 | 1,493 | — | |||||||||||||||||||||
Equipment Finance(1) | 4,287 | 3,030 | 3,817 | 11,134 | 1,037,233 | 1,048,367 | 3,817 | |||||||||||||||||||||
CVG | 381 | 374 | 465 | 1,220 | 96,424 | 97,644 | 465 | |||||||||||||||||||||
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Total Leases and Loans(2) | $ | 4,908 | $ | 3,404 | $ | 4,282 | $ | 12,594 | $ | 1,186,133 | $ | 1,198,727 | $ | 4,530 | ||||||||||||||
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December 31, 2018 (Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | >90 Days Past Due | Total Past Due | Current | Total Finance Receivables | Non- Accruing | |||||||||||||||||||||
Working Capital Loans | $ | 300 | $ | 51 | $ | 141 | $ | 492 | $ | 35,986 | $ | 36,478 | $ | 492 | ||||||||||||||
CRA | — | — | — | — | 1,466 | 1,466 | — | |||||||||||||||||||||
Equipment Finance(1) | 4,537 | 3,123 | 3,529 | 11,189 | 1,001,363 | 1,012,552 | 3,529 | |||||||||||||||||||||
CVG | 166 | 257 | 191 | 614 | 78,407 | 79,021 | 191 | |||||||||||||||||||||
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Total Leases and Loans(2) | $ | 5,003 | $ | 3,431 | $ | 3,861 | $ | 12,295 | $ | 1,117,222 | $ | 1,129,517 | $ | 4,212 | ||||||||||||||
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(Dollars in thousands) | March 31, 2020 | December 31, 2019 | ||||||
Equipment Finance | $ | 5,357 | $ | 4,256 | ||||
Working Capital Loans | 755 | 946 | ||||||
CVG | 593 | 389 | ||||||
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TotalNon-Accrual | $ | 6,705 | $ | 5,591 | ||||
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-23--26-
NOTE 7 – Goodwill and Intangible Assets
Goodwill
The Company’s goodwill balance of $7.4$6.7 million at December 31, 20182019 included $1.2 million from the Company’s acquisition of Horizon Keystone Financial, an equipment company (‘HKF”), in January 2017, and $6.2$5.5 million from the preliminary allocation of the purchase price of the Company’sSeptember 2018 acquisition of FFR in September 2018. The Company completed the purchase price allocation in the first quarter of 2019 upon receiving clarification of certain outstanding matters and established a final goodwill valuation of $5.6 million resulting in a goodwill reduction of $0.6 million in the first quarter of 2019.FFR. The goodwill balance represents the excess purchase price over the Company’s fair value of the assets acquired and is not amortizable but is deductible for tax purposes. Impairment testing will be performed in the fourth quarter of each year and more frequently as warranted in accordance with the applicable accounting guidance.
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 theCOVID-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 million balance in General and administrative expense in the Consolidated Statements of Operations.
The changes in the carrying amount of goodwill for the sixthree- month period ended June 30, 2019March 31, 2020 are as follows:
(Dollars in thousands) | Total Company | |||
Balance at December 31, 2018 | $ | 7,360 | ||
Changes | (625 | ) | ||
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Balance at June 30, 2019 | $ | 6,735 | ||
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(Dollars in thousands) | Total Company | |||
Balance at December 31, 2019 | $ | 6,735 | ||
Impairment of Goodwill | (6,735 | ) | ||
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Balance at March 31, 2020 | $ | — | ||
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Intangible assets
During the first quarterThe Company’s intangible assets consist of 2017,$1.3 million of definite-lived assets with a weighted-average amortization period of 8.7 years that were recognized in connection with the January 2017 acquisition of HKF, the Company acquired certainand $7.6 million of definite-lived intangible assets with a total cost of $1.3 million and a weighted averageweighted-average amortization period of 8.7 years. During the third quarter of 2018,10.8 years that were recognized in connection with the September 2018 acquisition of FFR, the Company acquired certain definite-lived intangible assets with a total cost of $7.2 million based on a preliminary evaluation.FFR. The Company subsequently completed the purchase price allocation in the first quarter of 2019 and established a cost of $7.6 million for the acquired intangible assets and a weighted average amortization period of 10.8 years. The Company hadhas no indefinite-lived intangible assets at June 30, 2019.assets.
The following table presents details of the Company’s intangible assets as of June 30, 2019:March 31, 2020:
(Dollars in thousands) Description | Useful Life | Cost | Accumulated Amortization | Net Value | Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Value | ||||||||||||||||||||||||
Lender relationships | 3 to 10 years | $ | 1,630 | $ | 395 | $ | 1,235 | 3 to 10 years | $ | 1,630 | $ | 551 | $ | 1,079 | ||||||||||||||||||
Vendor relationships | 11 years | 7,290 | 644 | 6,646 | 11 years | 7,290 | 1,140 | 6,150 | ||||||||||||||||||||||||
Corporate trade name | 7 years | 60 | 21 | 39 | 7 years | 60 | 28 | 32 | ||||||||||||||||||||||||
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$ | 8,980 | $ | 1,060 | $ | 7,920 | $ | 8,980 | $ | 1,719 | $ | 7,261 | |||||||||||||||||||||
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There was no impairment of these assets in the secondfirst quarter of 2020 or six months of 2019 or 2018.2019. Amortization related to the Company’s definite lived intangible assets was $0.5$0.2 million and $0.1$0.2 million for thesix-month three-month periods ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, respectively.
-24--27-
The Company expects the amortization expense for the next five years will be as follows:
(Dollars in thousands) | ||||||||
Remainder of 2019 | $ | 459 | ||||||
2020 | 798 | |||||||
Remainder of 2020 | $ | 599 | ||||||
2021 | 798 | 798 | ||||||
2022 | 798 | 798 | ||||||
2023 | 798 | 798 | ||||||
2024 | 790 |
NOTE 8 – Other Assets
Other assets are comprised of the following:
June 30, 2019 | December 31, 2018 | |||||||
(Dollars in thousands) | ||||||||
Accrued fees receivable | $ | 3,339 | $ | 3,354 | ||||
Prepaid expenses | 2,956 | 2,447 | ||||||
Income taxes receivable | 754 | — | ||||||
Federal Reserve Bank Stock | 1,711 | 1,711 | ||||||
Other | 2,392 | 2,144 | ||||||
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$ | 11,152 | $ | 9,656 | |||||
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NOTE 9 – Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating leaseright-of-use (“ROU”) assets and operating lease liabilities on our consolidated balance sheets. ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, in order to determine the present value of future payments for office leases we use an incremental borrowing rate based on the information available through real estate databases for similar locations and for the present value of future payments for equipment leases we use the average rate of our term note securitization which is collateralized by similar equipment. The ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
As of June 30, 2019, the Company leases all six of its office locations including its executive offices in Mt. Laurel, New Jersey, and its offices in or near Salt Lake City, Utah; Portsmouth, New Hampshire; Highlands Ranch, Colorado; Riverside, California; and Philadelphia, Pennsylvania. The Company has elected not to recognize ROU assets and lease liabilities for three office leases whose terms are twelve months or less and are considered short-term leases. Three of the office leases include options to extend for terms of three to ten years. These options have not been recognized as part of our ROU assets and lease liabilities as the Company is not reasonably certain to exercise these options. The Company has also entered into two leases for office equipment for which ROU assets and lease liabilities have been recognized. All the aforementioned leases have been accounted for as operating leases.
March 31, 2020 | December 31, 2019 | |||||||
(Dollars in thousands) | ||||||||
Accrued fees receivable | $ | 3,683 | $ | 3,509 | ||||
Prepaid expenses | 2,853 | 2,872 | ||||||
Income taxes receivable(1) | 6,877 | — | ||||||
Federal Reserve Bank Stock | 1,711 | 1,711 | ||||||
Other | 2,341 | 2,361 | ||||||
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| |||||
$ | 17,465 | $ | 10,453 | |||||
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-25-
The components of lease expense were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Operating lease cost | $ | 333 | $ | 283 | $ | 556 | $ | 559 | ||||||||
Finance lease costs | — | 2 | — | 4 | ||||||||||||
Short-term lease cost | 35 | — | 74 | — | ||||||||||||
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Total lease cost | $ | 368 | $ | 285 | $ | 630 | $ | 563 | ||||||||
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Supplemental information related to leases was as follows:
(Dollars in thousands) | Six Months Ended June 30, 2019 | |||
Supplemental balance sheet information | ||||
Operating leaseright-of-use assets(1) | $ | 8,626 | ||
Operating lease liabilities | 9,074 | |||
Weighted average remaining lease term | 12.4 | Years | ||
Weighted average discount rate | 3.30 | % | ||
Supplemental cash flow information | ||||
Operating cash flows from operating leases | $ | 199 | ||
Right-of-use assets obtained in exchange for lease obligations | 8,626 |
(1) |
|
Maturities of lease liabilities were as follows:
Operating Leases | ||||
Period Ending December 31, | (Dollars in thousands) | |||
Remainder of 2019 | $ | 210 | ||
2020 | 1,098 | |||
2021 | 886 | |||
2022 | 791 | |||
2023 | 806 | |||
Thereafter | 7,378 | |||
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Total lease payments | $ | 11,169 | ||
Less: imputed interest | (2,095 | ) | ||
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Total | $ | 9,074 | ||
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-26--28-
NOTE 10 – Commitments and Contingencies
MBB is a member bank in anon-profit, multi-financial institution Community Development Financial Institution (“CDFI”) organization. The CDFI serves as a catalyst for community development by offering flexible financing for affordable, quality housing tolow- and moderate-income residents, helping MBB meet its Community Reinvestment Act (“CRA”) obligations. Currently, MBB receives approximately 1.2% participation in each funded loan which is collateral for the loan issued to the CDFI under the program. MBB records loans in its financial statements when they have been funded or become payable. Such loans help MBB satisfy its obligations under the Community Reinvestment Act of 1977. At June 30, 2019, MBB had an unfunded commitment of $0.5 million for this activity. MBB’sone-year commitment to the CDFI will expire in September 2019 at which time the commitment may be renewed for another year based on the Company’s discretion.
The Company is involved in legal proceedings, which include claims, litigation and suits arising in the ordinary course of business. In the opinion of management, these actions will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
Banking institutions are subject to periodic reviews and examinations from banking regulators. In 2017, one of MBB’s regulatory agencies communicated findings in connection with the timing of certain aspects of payment application processes in effect prior to February 2016 related to the assessment of late fees. The Company agreed to pay restitution to customers in the amount $4.0 million to resolve this matter, and the Company established a liability for such amount in the first quarter of 2017. In the second quarter of 2019, the Company remitted the $4.0 million into a fund that will process the restitution and resolve its obligation for this matter.
NOTE 119 – 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 June 30, 2019,March 31, 2020, money market deposit accounts totaled $22.6$51.6 million.
As of June 30, 2019,March 31, 2020, the scheduled maturities of certificates of deposits are as follows:
Scheduled Maturities | Scheduled Maturities | |||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||
Period Ending December 31, | ||||||||
Remainder of 2019 | $ | 209,179 | ||||||
2020 | 277,081 | |||||||
Remainder of 2020 | $ | 387,922 | ||||||
2021 | 202,896 | 265,743 | ||||||
2022 | 105,523 | 134,233 | ||||||
2023 | 45,873 | 66,915 | ||||||
2024 | 28,046 | |||||||
Thereafter | 25,062 | 6,927 | ||||||
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Total | $ | 865,614 | $ | 889,786 | ||||
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Certificates of deposits issued by MBB are time deposits and are generally issued in denominations of $250,000 or less. The MMDA Product is also issued to customers in amounts less than $250,000. The FDIC insures deposits up to $250,000 per depositor. The weighted averageall-in interest rate of deposits at June 30, 2019March 31, 2020 was 2.44%2.15%.
-27-
NOTE 1210 – Debt and Financing Arrangements
Short-Term Borrowings
On November 20, 2018, theThe Company closed onhas a secured, variable rate revolving line of credit in the amount of $5.0 million that expires on November 20, 2019.2020. As of June 30, 2019,March 31, 2020, the Company was in compliance with all debt covenants required under this line of credit and there were no outstanding balances on this line of credit as of June 30, 2019March 31, 2020 and December 31, 2018.2019.
Long-term Borrowings
On July 27, 2018, the Company completed a $201.7 million asset-backed term securitization. Each tranche of the term note securitization has a fixed term, fixed interest rate and fixed principal amount. At June 30, 2019,March 31, 2020, outstanding term securitizations amounted to $110.4$62.6 million and are collateralized by $124.0$68.5 million of minimum lease and loan payments receivable and $8.1$6.5 million of restricted interest-earning deposits. The Company’s term note securitizations are classified as long-term borrowings.
The Company’sbalance of long-term borrowings consisted of the following:
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Term securitization2018-1 | $ | 110,405 | $ | 151,233 | $ | 62,555 | $ | 76,563 | ||||||||
Unamortized debt issuance costs | (768 | ) | (1,178 | ) | (362 | ) | (472 | ) | ||||||||
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$ | 109,637 | $ | 150,055 | $ | 62,193 | $ | 76,091 | |||||||||
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-29-
The July 27, 2018 term note securitization is summarized below:
Notes | Final | Original | ||||||||||||||||||||||||||||||||||||||
Outstanding Balance as of | Originally | Maturity | Coupon | Outstanding Balance as of | Notes | Final | Original | |||||||||||||||||||||||||||||||||
June 30, 2019 | December 31, 2018 | Issued | Date | Rate | March 31, 2020 | December 31, 2019 | Originally Issued | Maturity Date | Coupon Rate | |||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
2018 — 1 | ||||||||||||||||||||||||||||||||||||||||
Class A-1 | $ | — | $ | 26,983 | $ | 77,400 | July, 2019 | 2.55 | % | $ | — | $ | — | $ | 77,400 | July, 2019 | 2.55 | % | ||||||||||||||||||||||
Class A-2 | 41,855 | 55,700 | 55,700 | October, 2020 | 3.05 | — | 8,013 | 55,700 | October, 2020 | 3.05 | ||||||||||||||||||||||||||||||
Class A-3 | 36,910 | 36,910 | 36,910 | April, 2023 | 3.36 | 30,915 | 36,910 | 36,910 | April, 2023 | 3.36 | ||||||||||||||||||||||||||||||
Class B | 10,400 | 10,400 | 10,400 | May, 2023 | 3.54 | 10,400 | 10,400 | 10,400 | May, 2023 | 3.54 | ||||||||||||||||||||||||||||||
Class C | 11,390 | 11,390 | 11,390 | June, 2023 | 3.70 | 11,390 | 11,390 | 11,390 | June, 2023 | 3.70 | ||||||||||||||||||||||||||||||
Class D | 5,470 | 5,470 | 5,470 | July, 2023 | 3.99 | 5,470 | 5,470 | 5,470 | July, 2023 | 3.99 | ||||||||||||||||||||||||||||||
Class E | 4,380 | 4,380 | 4,380 | May, 2025 | 5.02 | 4,380 | 4,380 | 4,380 | May, 2025 | 5.02 | ||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||
Total Term Note Securitizations | $ | 110,405 | $ | 151,233 | $ | 201,650 | 3.05 | %(1)(2) | $ | 62,555 | $ | 76,563 | $ | 201,650 | 3.05 | %(1)(2) | ||||||||||||||||||||||||
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(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. |
(2) | The weighted average coupon rate of the2018-1 term note securitization will approximate |
-28-
Scheduled principal and interest payments on outstanding borrowings as of June 30, 2019March 31, 2020 are as follows:
Principal | Interest | Principal | Interest | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Period Ending December 31, | ||||||||||||||||
Remainder of 2019 | $ | 32,994 | $ | 1,656 | ||||||||||||
2020 | 45,200 | 1,993 | ||||||||||||||
Remainder of 2020 | $ | 30,344 | $ | 1,342 | ||||||||||||
2021 | 23,629 | 813 | 23,629 | 813 | ||||||||||||
2022 | 8,582 | 159 | 8,582 | 159 | ||||||||||||
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| |||||||||||||
$ | 110,405 | $ | 4,621 | $ | 62,555 | $ | 2,314 | |||||||||
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-29--30-
NOTE 1311 – Fair Value Measurements and Disclosures about the Fair Value of Financial Instruments
Fair Value Measurements
The Fair Value Measurements and Disclosures Topic of the FASB ASC establishes a framework for measuring fair value and requires certain disclosures about fair value measurements. Its provisions do not apply to fair value measurements for purposes of lease classification and measurement, which is addressed in the Leases Topic of the FASB ASC.
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 three levels are defined as follows:
Level 1 – Inputs to the valuation are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs to the valuation may include quoted prices for similar assets and liabilities in active or inactive markets, and inputs other than quoted prices, such as interest rates and yield curves, which are observable for the asset or liability for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation are unobservable and significant to the fair value measurement. Level 3 inputs shall be used to measure fair value only to the extent that observable inputs are not available.
The Company characterizes active markets as those where transaction volumes are sufficient to provide objective pricing information, such as an exchange traded price. Inactive markets are typically characterized by low transaction volumes, and price quotations that vary substantially among market participants or are not based on current information.
The Company’s balances measured at fair value on a recurring basis include the following as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
June 30, 2019 Fair Value Measurements Using | December 31, 2018 Fair Value Measurements Using | March 31, 2020 Fair Value Measurements Using | December 31, 2019 Fair Value Measurements Using | |||||||||||||||||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
ABS | $ | — | $ | 4,615 | $ | — | $ | — | $ | 4,915 | $ | — | $ | — | $ | 4,135 | $ | — | $ | — | $ | 4,332 | $ | — | ||||||||||||||||||||||||
Municipal securities | — | 2,454 | — | — | 2,612 | — | — | 2,653 | — | — | 3,129 | — | ||||||||||||||||||||||||||||||||||||
Mutual fund | 3,564 | — | — | 3,429 | — | — | 3,692 | — | — | 3,615 | — | — |
At this time, the Company has not elected to report any assets orand liabilities using the fair value option available under the Financial Instruments Topic of the FASB ASC.option. There have been no transfers between Level 1 and Level 2 of the fair value hierarchy.hierarchy for any of the periods presented.
Disclosures about the Fair Value of Financial InstrumentsNon-Recurring Measurements
The Financial Instruments TopicNon-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 FASB ASC requirescarrying amount of its servicing liability.
For the disclosurethree months ended March 31, 2020, the Company recognized $6.7 million for the impairment of goodwill in General and administrative expense in the estimatedConsolidated Statements of Operations, as discussed further in Note 7, Goodwill and Intangible Assets. For the three months ended March 31, 2019, there were no significant amounts recognized in the Consolidated Statements of Operations in connection withnon-recurring fair value of financial instruments including those financial instruments not measured at fair value on a recurring basis. This requirement excludes certain instruments, such as the net investment in leases and all nonfinancial instruments.
The fair values shown below have been derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Valuation techniques involve uncertainties and require assumptions and judgments regarding prepayments, credit risk and discount rates. Changes in these assumptions will result in different valuation estimates. The fair values presented would not necessarily be realized in an immediate sale. Derived fair value estimates cannot necessarily be substantiated by comparison to independent markets or to other companies’ fair value information.measurements.
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Fair Value of Other Financial Instruments
The following summarizes the carrying amount and estimated fair value of the Company’s other financial instruments, that areincluding those not recorded on the consolidated balance sheetmeasured at fair value as of June 30, 2019 and December 31, 2018:on a recurring basis:
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 139,731 | $ | 139,731 | $ | 97,156 | $ | 97,156 | $ | 211,070 | $ | 211,070 | $ | 123,096 | $ | 123,096 | ||||||||||||||||
Time deposits with banks | 12,679 | 12,210 | 9,659 | 9,614 | 13,664 | 13,094 | 12,927 | 12,970 | ||||||||||||||||||||||||
Restricted interest-earning deposits with banks | 8,152 | 8,152 | 14,045 | 14,045 | 6,474 | 6,474 | 6,931 | 6,931 | ||||||||||||||||||||||||
Loans, net of allowance | 590,973 | 596,755 | 518,697 | 515,754 | 580,244 | 558,584 | 588,688 | 593,406 | ||||||||||||||||||||||||
Federal Reserve Bank Stock | 1,711 | 1,711 | 1,711 | 1,711 | 1,711 | 1,711 | 1,711 | 1,711 | ||||||||||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||||||||||
Deposits | $ | 888,561 | $ | 868,564 | $ | 755,776 | $ | 722,682 | $ | 941,996 | $ | 952,958 | $ | 839,132 | $ | 846,304 | ||||||||||||||||
Long-term borrowings | 109,637 | 110,532 | 150,055 | 149,912 | 62,193 | 62,841 | 76,091 | 76,781 | ||||||||||||||||||||||||
Servicing Liability | 1,794 | 1,794 | 1,352 | 1,352 |
The paragraphs which follow describeThere have been no significant changes in the methods and assumptions used in estimating the fair values of financial instruments.
Cashinstruments, as outlined in our consolidated financial statements and Cash Equivalents
The carrying amounts ofnote disclosures in the Company’s cash and cash equivalents approximate fair value as of June 30, 2019 andForm10-K for the year ended December 31, 2018, because they bear interest at market rates and had maturities of less than 90 days at the time of purchase. The cash equivalents include a money market fund with a balance of $34.3 million that the Company considers operating cash and has no reportable gross unrealized gains or losses. The fair value measurement of cash and cash equivalents is classified as Level 1.
Time Deposits with Banks
Fair value of time deposits is estimated by discounting cash flows of current rates paid by market participants for similar time deposits of the same or similar remaining maturities. This fair value measurement is classified as Level 2.
Restricted Interest-Earning Deposits with Banks
The company maintains interest-earning trust accounts pledged as collateral for our secured debt facilities. The book value of such accounts is included in restricted interest-earning deposits with banks on the accompanying Consolidated Balance Sheet. These accounts earn a floating market rate of interest which results in a fair value approximating the carrying amount at June 30, 2019 and December 31, 2018. This fair value measurement is classified as Level 1.
Loans
The loan balances are comprised of three types of loans. Loans made as a member bank in anon-profit, multi-financial institution CDFI serve as a catalyst for community development by offering financing for affordable, quality housing tolow- and moderate-income residents. Such loans help MBB satisfy its obligations under the Community Reinvestment Act of 1977. The fair value of these loans approximates the carrying amount at June 30, 2019 and December 31, 2018 as it is based on recent comparable sales transactions with consideration of current market rates. This fair value measurement is classified as Level 2. The Company also invests in a small business loan product tailored to the small business market. Fair value for these loans is estimated by discounting cash flows at an imputed market rate for similar loan products with similar characteristics. This fair value measurement is classified as Level 2. The Company invests in loans to our customers in the franchise finance channel. These loans may be secured by equipment being acquired, blanket liens on personal property, or specific equipment already owned by the customer. The fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans would be made to borrowers with similar credit, collateral, and for the same remaining maturities. This fair value measurement is classified as Level 2.
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Federal Reserve Bank Stock
Federal Reserve Bank Stock arenon-marketable equitable equity securities and are reported at their redeemable carrying amounts, which approximates fair value. This fair value measurement is classified as Level 2.
Deposits
Deposit liabilities with no defined maturity such as MMDA deposits have a fair value equal to the amount payable on demand at the reporting date (i.e., their carrying amount). Fair value for certificates of deposits is estimated by discounting cash flows at current rates paid by the Company for similar certificates of deposit of the same or similar remaining maturities. This fair value measurement is classified as Level 2.
Long-Term Borrowings
The fair value of the Company’s secured borrowings is estimated by discounting cash flows at indicative market rates applicable to the Company’s secured borrowings of the same or similar maturities. This fair value measurement is classified as Level 2.
Servicing Liability
Servicing liabilities do not trade in an active market with readily observable prices. Accordingly, we determined fair value based on a discounted cash flow model which uses various inputs related to the estimated net servicing income, if any, and costs to service discounted back at a discount rate. There were no changes to the valuation techniques for the periods presented. Fair value measurements of our servicing liabilities use unobservable inputs, and accordingly we classify our servicing liability as Level 3.2019.
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NOTE 1412 – Earnings Per Share
The Company’s restricted stock awards are paidnon-forfeitable common stock dividends and thus meet the criteria of participating securities. Accordingly, earnings per share (“EPS”) has been calculated using thetwo-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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
(Dollars in thousands, exceptper-share data) | (Dollars in thousands, exceptper-share data) | |||||||||||||||||||||||
Basic EPS | ||||||||||||||||||||||||
Net income | $ | 6,115 | $ | 6,467 | $ | 11,256 | $ | 12,652 | ||||||||||||||||
Net (loss) income | $ | (11,821 | ) | $ | 5,141 | |||||||||||||||||||
Less: net income allocated to participating securities | (74 | ) | (115 | ) | (147 | ) | (235 | ) | — | (72 | ) | |||||||||||||
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Net income allocated to common stock | $ | 6,041 | $ | 6,352 | $ | 11,109 | $ | 12,417 | ||||||||||||||||
Net (loss) income allocated to common stock | $ | (11,821 | ) | $ | 5,069 | |||||||||||||||||||
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Weighted average common shares outstanding | 12,333,383 | 12,419,955 | 12,335,545 | 12,427,501 | 12,014,396 | 12,337,730 | ||||||||||||||||||
Less: Unvested restricted stock awards considered participating securities | (148,387 | ) | (220,866 | ) | (160,170 | ) | (233,475 | ) | (138,249 | ) | (172,084 | ) | ||||||||||||
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Adjusted weighted average common shares used in computing basic EPS | 12,184,996 | 12,199,089 | 12,175,375 | 12,194,026 | 11,876,147 | 12,165,646 | ||||||||||||||||||
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Basic EPS | $ | 0.50 | $ | 0.52 | $ | 0.91 | $ | 1.02 | ||||||||||||||||
Basic (loss) earnings per share | $ | (1.00 | ) | $ | 0.42 | |||||||||||||||||||
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Diluted EPS | ||||||||||||||||||||||||
Net income allocated to common stock | $ | 6,041 | $ | 6,352 | $ | 11,109 | $ | 12,417 | ||||||||||||||||
Net (loss) income allocated to common stock | $ | (11,821 | ) | $ | 5,069 | |||||||||||||||||||
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Adjusted weighted average common shares used in computing basic EPS | 12,184,996 | 12,199,089 | 12,175,375 | 12,194,026 | 11,876,147 | 12,165,646 | ||||||||||||||||||
Add: Effect of dilutive stock-based compensation awards | 81,855 | 70,900 | 84,624 | 61,473 | — | 86,470 | ||||||||||||||||||
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Adjusted weighted average common shares used in computing diluted EPS | 12,266,851 | 12,269,989 | 12,259,999 | 12,255,499 | 11,876,147 | 12,252,116 | ||||||||||||||||||
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Diluted EPS | $ | 0.49 | $ | 0.52 | $ | 0.91 | $ | 1.01 | ||||||||||||||||
Diluted (loss) earnings per share | $ | (1.00 | ) | $ | 0.41 | |||||||||||||||||||
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For each of the three-month periods ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, outstanding stock-basedstock based compensation awards in the amount of 174,458359,035 and 135,265,188,583, respectively, were considered antidilutive and therefore were not considered in the computation of potential common shares for purposes of diluted EPS.
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For thesix-month periods ended June 30, 2019 and June 30, 2018, outstanding stock-based compensation awards in the amount of 187,093 and 125,166, respectively, were considered antidilutive and therefore were not considered in the computation of potential common shares for purposes of diluted EPS.
NOTE 1513 – Stockholders’ Equity
Stockholders’ EquityShare Repurchases
On May 30, 2017, the Company’s Board of Directors approved a stock repurchase plan (the “2017 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 program may be suspended or discontinued at any time. The repurchases are funded using the Company’s working capital.
During the three-month period ended June 30,March 31, 2020, the Company purchased 264,470 shares of its common stock in the open market under the 2019 Repurchase Plan at an average cost of $16.09 per share. During the three-month period ended March 31, 2019, the Company purchased 72,82429,947 shares of its common stock in the open market under the 2017 Repurchase Plan at an average cost of $ 23.44 per share. During thesix-month period ended June 30, 2019, the Company purchased 102,771 shares of its common stock under the 2017 Repurchase Plan at an average cost of $ 23.57 per share. During the three-month period ended June 30, 2018 the Company did not purchase any its common stock in the open market under the 2017 Repurchase Plan. During thesix-month period ended June 30, 2018, the Company purchased 17,725 shares of its common stock under the 2017 Repurchase Plan at an average cost of $ 28.21$23.86 per share. At June 30, 2019,March 31, 2020, the Company had $ 3.3$4.7 million remaining in the 20172019 Repurchase Plan.
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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. ThereDuring the three-month periods ended March 31, 2020 and March 31, 2019, there were 53621,123 shares and 19,44618,910 shares repurchased to cover income tax withholding in connection with shares granted under the 2014 Plan during each of the three- andsix-month periods ended June 30, 2019, at an averageper-share costs cost of $ 22.8113.38 per share and $ 22.74, respectively. There were 1,121 and 20,422 shares repurchased to cover income tax withholding in connection with shares granted under the 2014 Plan during the three- andsix-month periods ended June 30, 2018, at averageper-share costs of $ 29.13 and $ 26.09,$22.74 per share, 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 consideroff-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 ofnon-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 1.875% for 2018, and 2.5% for 2019 and thereafter. 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.
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TheCMLA 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 plans to provideand certain of the necessary capital to maintain MBB at “well-capitalized” status as defined by banking regulationsCompany’s subsidiaries terminated the Capital Maintenance and as required by an agreementLiquidity Agreement (the “CMLA Agreement”) and the Parent Company Agreement, each entered into by and among MBB, MLC, Marlin Business Services Corp.the Company, certain of its subsidiaries and the FDIC in conjunction with the opening of MBB. As a result of these actions, MBB (the “FDIC Agreement”)is no longer required 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.
MBB’s Tier 1 Capital balance at June 30, 2019March 31, 2020 was $146.3$139.2 million, which met all capital requirements to which MBB is subject and qualified MBB for “well-capitalized” status. At June 30, 2019,March 31, 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
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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 thetwo-year delay. The three-year transition, starting in 2022, will phase in that adjustment straight-line, such that 25 percent of the transitional amounts will be included in the first year, and an additional 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.
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 June 30, 2019.March 31, 2020.
Actual | Minimum Capital Requirement | Well-Capitalized Capital Requirement | ||||||||||||||||||||||
Ratio | Amount | Ratio (1) | Amount | Ratio | Amount | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Tier 1 Leverage Capital | ||||||||||||||||||||||||
Marlin Business Services Corp. | 15.24 | % | $ | 190,851 | 4 | % | $ | 50,084 | 5 | % | $ | 62,605 | ||||||||||||
Marlin Business Bank | 13.76 | % | $ | 146,293 | 5 | % | $ | 53,146 | 5 | % | $ | 53,146 | ||||||||||||
Common Equity Tier 1 Risk-Based Capital | ||||||||||||||||||||||||
Marlin Business Services Corp. | 17.01 | % | $ | 190,851 | 4.5 | % | $ | 50,497 | 6.5 | % | $ | 72,939 | ||||||||||||
Marlin Business Bank | 15.05 | % | $ | 146,293 | 6.5 | % | $ | 68,053 | 6.5 | % | $ | 68,053 | ||||||||||||
Tier 1 Risk-based Capital | ||||||||||||||||||||||||
Marlin Business Services Corp. | 17.01 | % | $ | 190,851 | 6 | % | $ | 67,329 | 8 | % | $ | 89,772 | ||||||||||||
Marlin Business Bank | 15.05 | % | $ | 146,293 | 8 | % | $ | 82,635 | 8 | % | $ | 82,635 | ||||||||||||
Total Risk-based Capital | ||||||||||||||||||||||||
Marlin Business Services Corp. | 18.26 | % | $ | 204,912 | 8 | % | $ | 89,772 | 10 | % | $ | 112,215 | ||||||||||||
Marlin Business Bank | 16.30 | % | $ | 158,476 | 15 | % | $ | 145,827 | 10 | %(1) | $ | 102,079 |
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Actual | Minimum Capital Requirement | Well-Capitalized Capital Requirement | ||||||||||||||||||||||
Ratio | Amount | Ratio | Amount | Ratio | Amount | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Tier 1 Leverage Capital | ||||||||||||||||||||||||
Marlin Business Services Corp. | 16.18 | % | $ | 194,700 | 4 | % | $ | 48,137 | 5 | % | $ | 60,171 | ||||||||||||
Marlin Business Bank | 13.27 | % | $ | 139,242 | 4 | % | $ | 41,961 | 5 | % | $ | 52,451 | ||||||||||||
Common Equity Tier 1 Risk-Based Capital | ||||||||||||||||||||||||
Marlin Business Services Corp. | 18.64 | % | $ | 194,700 | 4.5 | % | $ | 47,004 | 6.5 | % | $ | 67,894 | ||||||||||||
Marlin Business Bank | 14.86 | % | $ | 139,242 | 4.5 | % | $ | 42,163 | 6.5 | % | $ | 60,902 | ||||||||||||
Tier 1 Risk-based Capital | ||||||||||||||||||||||||
Marlin Business Services Corp. | 18.64 | % | $ | 194,700 | 6 | % | $ | 62,672 | 8 | % | $ | 83,562 | ||||||||||||
Marlin Business Bank | 14.86 | % | $ | 139,242 | 6 | % | $ | 56,217 | 8 | % | $ | 74,957 | ||||||||||||
Total Risk-based Capital | ||||||||||||||||||||||||
Marlin Business Services Corp. | 19.94 | % | $ | 208,238 | 8 | % | $ | 83,562 | 10 | % | $ | 104,453 | ||||||||||||
Marlin Business Bank | 16.16 | % | $ | 151,425 | 8 | % | $ | 74,957 | 10 | % | $ | 93,696 |
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.
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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.
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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;
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.
Pursuant to the FDIC Agreement entered into in conjunction with the opening of MBB, MBB must keep its total risk-based capital ratio above 15%. MBB’s total risk-based capital ratio of 16.30%16.16% at June 30, 2019March 31, 2020 exceeded the threshold for “well capitalized” status under the applicable laws and regulations, and also exceeded the 15% minimum total risk-based capital ratio required in the FDIC Agreement.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 commensurate 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.
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NOTE 1614 – 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 andnon-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 (collectively referred to as “Grants”) 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 826,036573,981 shares available for future awardsgrants under the 2019 Plan as of June 30, 2019.March 31, 2020.
Total stock-based compensation expense was $1.0$0.5 million and $0.7$0.9 million for the three-month periods ended June 30,March 31, 2020 and
March 31, 2019, and June 30, 2018, respectively. Total stock-based compensation expense was $1.9 million and $1.7 million for thesix-month periods ended June 30, 2019 and June 30, 2018, respectively. Excess tax benefits from stock-based payment arrangements was $0.1 million and $0.2 milliondeficit for thesix-month periods three-month period ended June 30,March 31, 2020 was $0.4 million. Excess tax benefits for the three-month period ended March 31, 2019 and June 30, 2018, respectively.was less than $0.1 million.
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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 seven7 year contractual terms. All options 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. Employee stock options generally vest over three to four years.
The Company may also issue stock options tonon-employee independent directors. These options generally vest in one year.
There were no stock options granted during the three-month and six-month periods ended June 30,March 31, 2020 and March 31, 2019, respectively. There were no stock options and 68,689 stock options granted during the three-month and six-month periods ended June 30, 2018, respectively. The fair value of stock options granted during the six-month period ended June 30, 2018 was $7.21. The fair value was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:
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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 onzero-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.
A summary of option activity for thesix-month three-month period ended June 30, 2019March 31, 2020 follows:
Options | Number of Shares | Weighted Average Exercise Price Per Share | Number of Shares | Weighted Average Exercise Price Per Share | ||||||||||||
Outstanding, December 31, 2018 | 146,431 | $ | 26.77 | |||||||||||||
Outstanding, December 31, 2019 | 135,159 | $ | 26.79 | |||||||||||||
Granted | — | — | — | — | ||||||||||||
Exercised | — | — | — | — | ||||||||||||
Forfeited | — | — | (3,929 | ) | 27.31 | |||||||||||
Expired | (3,175 | ) | 25.75 | (7,097 | ) | 26.36 | ||||||||||
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Outstanding, June 30, 2019 | 143,256 | 26.80 | ||||||||||||||
Outstanding, March 31, 2020 | 124,133 | 26.80 | ||||||||||||||
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TheDuring each three-month period ended March 31, 2020 and March 31, 2019, the Company recognized $0.1 million and $0.2 million of compensation expense related to options during the three andsix-month periods ended June 30, 2019. The Company recognizedof $0.1 million and $0.1 million of compensation expense related to options during the three andsix-month periods ended June 30, 2018.million.
There were no stock options exercised during the three-month periodperiods ended June 30,March 31, 2020 and March 31, 2019. There were 909 stock options exercised during the three-month period ended June 30, 2018.
The total pretax intrinsic values of stock options exercised was $0.1 million for thesix-month period ended June 30, 2018.
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The following table summarizes information about the stock options outstanding and exercisable as of June 30, 2019:March 31, 2020.
Options Outstanding | Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | Number Exercisable | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | Number Outstanding | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | Number Exercisable | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | Aggregate Intrinsic Value (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||
$25.75 | 83,235 | 4.8 | $ | 25.75 | $ | — | 55,165 | 4.8 | $ | 25.75 | — | 71,766 | 4.0 | $ | 25.75 | $ | — | 71,766 | 4.0 | $ | 25.75 | — | ||||||||||||||||||||||||||||||||||||||
$28.25 | 60,021 | 5.7 | $ | 28.25 | $ | — | 20,001 | 5.7 | $ | 28.25 | $ | — | 52,367 | 5.0 | $ | 28.25 | $ | — | 35,317 | 5.0 | $ | 28.25 | $ | — | ||||||||||||||||||||||||||||||||||||
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143,256 | 5.2 | $ | 26.80 | $ | — | 75,166 | 5.0 | $ | 26.42 | $ | — | 124,133 | 4.4 | $ | 26.80 | $ | — | 107,083 | 4.3 | $ | 26.57 | $ | — | |||||||||||||||||||||||||||||||||||||
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The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $24.93$11.17 as of June 30, 2019,March 31, 2020, which would have been received by the option holders had all option holders exercised their options as of that date.
As of June 30, 2019,March 31, 2020, there was $0.4$0.1 million of unrecognized compensation cost related tonon-vested stock options not yet recognized in the Consolidated Statements of Operations scheduled to be recognized over a weighted average period of 1.1 years.1.0 year.
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 to 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 based on achievement of various individual performance measures. Acceleration of expense for awards based on individual performance factors occurs when the achievement of the performance criteria is determined.
Of the total restricted stock awards granted during thesix-month period ended June 30, 2019, no shares may be subject to accelerated vesting based on individual performance factors; no shares have vesting contingent upon performance factors. Vesting was accelerated in 2019 and 2018 on certain awards based on the achievement of certain performance criteria determined annually, as described below.
The Company also issues restricted stock tonon-employee independent directors. These shares generally vest in seven years from the grant date or six months following the director’s termination from Board of Directors service.
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The following table summarizes the activity of thenon-vested restricted stock during thesix-month three-month period ended June 30, 2019:March 31, 2020:
Non-vested restricted stock | Shares | Weighted Average Grant-Date Fair Value | ||||||
Outstanding at December 31, 2018 | 186,603 | $ | 19.91 | |||||
Granted | 1,100 | 23.05 | ||||||
Vested | (46,492 | ) | 15.37 | |||||
Forfeited | (1,850 | ) | 22.79 | |||||
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Outstanding at June 30, 2019 | 139,361 | 21.41 | ||||||
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Non-vested restricted stock | Shares | Weighted Average Grant-Date Fair Value | ||||||
Outstanding at December 31, 2019 | 143,935 | $ | 21.88 | |||||
Granted | — | 0.00 | ||||||
Vested | (11,973 | ) | 18.83 | |||||
Forfeited | (550 | ) | 25.88 | |||||
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Outstanding at March 31, 2020 | 131,412 | 22.14 | ||||||
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During the three-month periodsperiod ended June 30,March 31, 2020 there were no restricted stock awards granted. During the three-month period ended March 31, 2019, and June 30, 2018, the Company granted restricted stock awards with grant-datea grant date fair values totaling less than $0.1 million and $0.5 million, respectively. During thesix-month periods ended June 30, 2019 and June 30, 2018, the Company granted restricted stock awards with grant-date fair values totaling less than $0.1 million and $0.5 million, respectively.million.
As vesting occurs, or is deemed likely to occur, compensation expense is recognized over the requisite service period and additionalpaid-in capital is increased. The Company recognized $0.2$0.1 million and $0.2$0.3 million of compensation expense related to restricted stock for the three-month periods ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, respectively. The Company recognized $0.5 million and $0.8 million of compensation expense related to restricted stock for thesix-month periods ended June 30, 2019 and June 30, 2018, respectively.
Of the $0.5$0.1 million total compensation expense related to restricted stock for thesix-month three-month period ended June 30, 2019, approximately $0.1 millionMarch 31, 2020, no expense was related to accelerated vesting during the first quarter of 2019, based on achievement of certain performance criteria determined annually. Of the $0.8$0.3 million total compensation expense related to restricted stock for thesix-month three-month period ended June 30, 2018,March 31, 2019, approximately $0.3$0.1 million related to accelerated vesting during the first quarter of 2018, which was also based on the achievement of certain performance criteria determined annually.
As of June 30, 2019,March 31, 2020, there was $1.5$1.3 million of unrecognized compensation cost related tonon-vested restricted stock compensation scheduled to be recognized over a weighted average period of 3.64.3 years. As of June 30, 2019, there were no restricted stock awards outstanding for which vesting may be accelerated based on achievement of individual performance measures.
The fair value of shares that vested during the three-month periods ended June 30,March 31, 2020 and March 31, 2019 and June 30, 2018 was $0.3$0.2 million and $0.6$0.7 million, respectively. The fair value of shares that vested during thesix-month periods ended June 30, 2019 and June 30, 2018 was $1.1 million and $1.8 million, respectively.
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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 or achievement of certain market-based targets associated with the Company’s stock price or relative total shareholder return, or a combinationprice. For those awards subject to achievement of bothcertain market performance criteria, the market based target measurement period begins one year from the grant date and market-based targets.ends three years from the grant date. Expense for equity based awards with market and performanceservice conditions is recognized over the performanceservice period based on the grant-date fair value of the award for those awards which are expected to be earned.award.
In the second quarter of 2018, the Company modified the terms of the portion of certain outstanding 2017 performance based RSUs that are based on actual versus targeted operating performance criteria over the performance period. The modification eliminated the tax benefit that arose from the Tax Cuts and Jobs Act enacted in December of 2017. This modification did not result in any incremental compensation costs.
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The following tables summarize restricted stock unit activity for thesix-month three-month period ended June 30, 2019:March 31, 2020:
Performance-based & market-based RSUs | Number of RSUs | Weighted Average Grant-Date Fair Value | Number of RSUs | Weighted Average Grant-Date Fair Value | ||||||||||||
Outstanding at December 31, 2018 | 191,921 | $ | 17.43 | |||||||||||||
Outstanding at December 31, 2019 | 257,476 | $ | 18.00 | |||||||||||||
Granted | 95,408 | 18.37 | 95,758 | 17.55 | ||||||||||||
Forfeited | — | 0.00 | (5,081 | ) | 23.99 | |||||||||||
Converted | (8,000 | ) | 9.47 | (13,810 | ) | 25.75 | ||||||||||
Cancelled due tonon-achievement of market condition | (4,000 | ) | 9.47 | |||||||||||||
Cancelled due tonon-achievement of performance condition | (30,390 | ) | 25.65 | |||||||||||||
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Outstanding at June 30, 2019 | 275,329 | 18.10 | ||||||||||||||
Outstanding at March 31, 2020 | 303,953 | 16.64 | ||||||||||||||
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Outstanding at December 31, 2018 | 61,256 | $ | 27.61 | |||||||||||||
Outstanding at December 31, 2019 | 99,951 | $ | 23.59 | |||||||||||||
Granted | 74,620 | 21.50 | 69,422 | 20.43 | ||||||||||||
Forfeited | — | 0.00 | (4,480 | ) | 23.69 | |||||||||||
Converted | (22,509 | ) | 27.47 | (39,879 | ) | 24.30 | ||||||||||
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Outstanding at June 30, 2019 | 113,367 | 23.62 | ||||||||||||||
Outstanding at March 31, 2020 | 125,014 | 21.61 | ||||||||||||||
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There were no RSUs with vesting conditions based solely on market conditions granted during the three-month periods ended March 31, 2020 and March 31, 2019, respectively. The weighted average grant-date fair value of RSUs with both performance and market-basedmarket based vesting conditions granted during thesix-month period three-month periods ended June 30,March 31, 2020 and March 31, 2019 was $12.91$12.90 and 12.91 per unit.unit, respectively. The weighted average grant date fair value of these performance and market-basedmarket based RSUs was estimated using a Monte Carlo simulation valuation model with the following assumptions:
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Grant date stock price | $ | 21.50 | — | |||||
Risk-free interest rate | 2.16 | % | — | |||||
Expected volatility | 26.68 | % | — | |||||
Dividend yield | — | — |
There were no RSUs with vesting conditions based solely on market conditions granted during thesix-month periods ended June 30, 2019. There were no RSU’s granted during thesix-month period ended June 30, 2018.
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Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Grant date stock price | $ | 20.43 | $ | 21.50 | ||||
Risk-free interest rate | 1.40 | % | 2.16 | % | ||||
Expected volatility | 26.18 | % | 26.68 | % |
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 no RSUs granted during the three-month period ended June 30, 2019.
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During the three-month periodthree month periods ended June 30, 2018,March 31, 2020 and March 31, 2019, the Company granted RSUs with grant-date fair values totaling $0.1 million. During thesix-month periods ended June 30, 2019 and June 30, 2018, the Company granted RSUs with grant-date fair values totaling $3.4$3.1 million and $2.4$3.4 million, respectively. The Company recognized $0.7$0.3 million and $0.4$0.5 million of compensation expense related to RSUs for the three-monththree month periods ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, respectively. The Company recognized $1.1 million and $0.7 millionfair value of compensation expense relatedrestricted stock units that converted to RSUs forshares of common stock during both thesix-month three month periods ended June 30,March 31, 2020 and March 31, 2019 and June 30, 2018,was $0.6 million, respectively. As of June 30, 2019,March 31, 2020, there was $4.7 million of unrecognized compensation cost related to RSUs scheduled to be recognized over a weighted average period of 1.71.9 years based on the most probable performance assumptions. In the event maximum performance targets are achieved, an additional $3.7$5.0 million of compensation cost would be recognized over a weighted average period of 1.92.3 years. As of June 30, 2019, 210,211March 31, 2020 182,181 performance units are expected to convert to shares of common stock based on the most probable performance assumptions. In the event maximum performance targets are achieved 450,107514,957 performance units would convert to shares of common stock.
NOTE 1715 – Subsequent Events
The Company declared a dividend of $0.14 per share on August 1, 2019.April 30, 2020. The quarterly dividend, which is expected to result in a dividend payment of approximately $1.7 million, is scheduled to be paid on August 22, 2019May 21, 2020 to shareholders of record on the close of business on August 12, 2019.May 11, 2020. It represents the Company’s thirty-secondthirty-fifth consecutive quarterly cash dividend. The payment of future dividends will be subject to approval by the Company’s Board of Directors.
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 authorization is inIn addition, to the $3.3 million remaining authorization under the 2017 Repurchase Plan. The repurchase may be made on the open market, in block trades through privately negotiated transactions or plans, pursuant to instructions or contracts established under Rule 10b5-1 under the Securities Exchange Act of 1934, or otherwise in accordance with applicable laws, rules and regulations. No time limit has been setsee Note 6—Allowance for the completionCredit Losses for discussion of the program. The stock repurchase program does not obligate the Companyvolume of payment deferral contract modification requests approved subsequent to acquire any particular amount of common stock, and it may be suspended at any time at the Company’s discretion. The stock repurchase will be funded using the Company’s working capital. Any shares purchased under this program will be returned to the status of authorized but unissued shares of common stock.March 31, 2020.
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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 Form10-K for the year ended December 31, 20182019 filed with the SEC. This discussion contains certain statements of a forward-looking nature that involve risks and uncertainties.
FORWARD-LOOKING STATEMENTSFORWARD-LOOKING STATEMENTS
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 theCOVID-19 pandemic; and
the factors set forth in the section captioned “Risk Factors” in Item 1 of our Form10-K for the year ended December 31, 2018 filed with the SEC.2019 and in PartII--Item 1A of this Form10-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.
OVERVIEWOVERVIEW
Founded in 1997, we are a nationwide provider of credit products and services to small andmid-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. We acquireIn 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 by offering equipment financing through origination sources consisting of independent commercial equipment dealers, and various national account programs, through direct solicitation of our small businessend user customers and through relationships with select lease and loan brokers. We also extend financing throughuse both a telephonic direct solicitation ofsales model and, for strategic larger accounts, outside sales executives to market to our existing small businessorigination sources and end user customers. Through these origination partners,sources, we are able to cost-effectively access small businessend user customers while also helping our origination partnerssources obtain financing for their customers.
Our leases and loans are fixed-rate transactions with terms generally ranging from 36 to 60 months. At June 30, 2019, our lease and loan portfolio consisted of 94,088 accounts, excluding Working Capital Loans, with an average original term of 49 months and average original transaction size of approximately $17,000.
MBB offers a flexible loan program called Working Capital Loans (formerly called Funding Stream.) Working Capital Loans is tailored to the small business market to provide customers access to capital to help grow their businesses. As of June 30, 2019, the Company had approximately $51.7 million, not including the allowance for credit losses allocated to loans of $1.9 million, of small business loans on the balance sheet. Generally, these loans range from $5,000 to $200,000, have flexible 6 to 24 month terms, and have automated daily, weekly and monthly payback.
At June 30, 2019, we had $1.28 billion in total assets. Our assets are substantially comprised of our net investment in leases and loans which totaled $1.06 billion at June 30, 2019.
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Our revenue consists of interest and fees from our leases and loans, interest income from our interest earning cash and investments and, to a lesser extent,non-interest income from insurance premiums written and earned and other income. Our expenses consist of interest expense andnon-interest expense, which include salaries and benefits and general and administrative expenses. As a credit lender, our earnings are also impacted by credit losses. For the quarter ended June 30, 2019, our annualized net credit losses were 1.88% of our average total finance receivables. We establish reserves for credit losses which require us to estimate inherent losses in our portfolio as of the reporting date.
Our leases are classified under U.S. GAAP as sales type leases, and we recognize interest income over the term of the lease. Sales type leases transfer substantially all of the benefits and risks of ownership to the equipment lessee. Net investment in leases consists of the sum of total minimum lease payments receivable and the estimated residual value of leased equipment, less unearned lease income. Unearned lease income consists of the excess of the total future minimum lease payments receivable plus the estimated residual value expected to be realized at the end of the lease term plus deferred net initial direct costs and fees less the cost of the related equipment. Approximately 59% of our lease portfolio at June 30, 2019 amortizes over the lease term to a $1 residual value. For the remainder of the portfolio, we must estimate end of term residual values for the leased assets. Failure to correctly estimate residual values could result in losses being realized on the disposition of the equipment at the end of the lease term.
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.
EXECUTIVE SUMMARY
Summary
TheCOVID-19 pandemic rapidly escalated bymid-March, and we shifted our business focus towards mitigating the adverse effect of this crisis on our employees, customers and partners, while at the same time maintaining the stability of our operations. We anticipate that FDIC-insured deposits issued by MBB will continueimplemented our business continuity plan inmid-March to representallow our primary sourceemployees to work remotely, and we have not experienced any significant interruption of fundsour operations.
Origination volumes for both equipment finance and working capital loans declined significantly through March, and we ended the quarter with $157.4 million origination volume, a 22.6% decline from the first quarter of 2019. Our assets sales in the first quarter of 2020 were $22.9 million, which is considerably lower than recent prior quarters, due in part to weaker overall investor demand. As we observe the impact of the slowing economy on small businesses, through the end of March we tightened our underwriting standards for both our equipment finance and working capital products. We expect our origination volumes for the foreseeable future. Insecond quarter of 2020 will be negatively impacted by these factors, and any returns to normal levels of activity remains uncertain.
We implemented a payment deferral program to assist our customers who, during this period of economic decline, are current under their existing obligations and can demonstrate that their ability to repay has been impacted by the future MBB may electCOVID-19 crisis. The program generally provides for 90 day deferrals for equipment finance customers, and 60 days deferrals for working capital loans. Through March 31, we processed modifications representing $19.5 million net investment in leases and loans, and subsequent to offer other productsquarter-end, through April 24, we have approved the modification application for contracts representing an additional $134.5 million net investment in leases and servicesloans. A portion of these modifications are subject to the Company’s customer base. As a Utah state-chartered Federal Reserve member bank, MBB is supervised by both the Federal Reserve Bankcompletion of San Franciscofinal processing and the Utah Departmentdocumentation.
The estimate of Financial Institutions. As of June 30, 2019, total MBB deposits were $888.6 million, compared to $755.8 million at December 31, 2018. We had $109.6 million of outstanding secured borrowings as of June 30, 2019 and $150.1credit losses for our portfolio increased $30.4 million as of March 31, 2020 compared to December 31, 2018.2019, driven both by the recognition of an $11.9 million increase to our allowance as a result of the January 1, 2020 adoption of CECL and by a $25.1 million Provision for loan losses for the three months ended March 31, 2020. The provision recognized included approximately $19.2 million of increases based on our current assessment of the probable economic impacts from theCOVID-19 pandemic, based on information known as of March 31st.
Our estimate of credit losses is based on our assessment of the risks to our portfolio, including certain economic assumptions driven by forecasted unemployment and business bankruptcy levels, our expectations regarding the performance of our portfolio under these economic conditions, and such estimates are driven by limited information regarding the extent and timeline of impacts fromCOVID-19. All of the assumptions and expectations underlying our estimate of credit loss depend largely on future developments, and these estimates are highly uncertain. We may experience significant credit losses in future periods as we refine our estimates or realize the actual performance of our portfolio.
Our modification program, the adoption of CECL, the provision for credit losses, and the elevated risks to our portfolio are discussed further below under “—Finance Receivables and Asset Quality”.
In addition, see further discussion of the risks to our business from theCOVID-19 pandemic in “–Item 1A. Risk Factors— The ongoingCOVID-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.”
Capital Update
On January 13, 2009, Marlin Business Services Corp. becameMarch 25, 2020, we received notice that the FDIC approved MBB’s request to rescind certain nonstandard conditions that had been in effect since the bank was formed in 2007. In addition, 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, effective March 26, 2020. As a bank holding company andresult of these actions, MBB is subjectno longer required pursuant to the Bank HoldingCMLA 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 Actmust continue to maintain a total risk-based capital ratio above 10.5% in order to avoid restrictions on capital returns to shareholders and supervised by the Federal Reserve Bank of Philadelphia. On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of Marlin Business Services Corp.’s election to become a financial holding company (while remaining a bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section 225.82 of the Federal Reserve Board’s Regulation Y. Such election permits Marlin Business Services Corp. to engage in activities that are financial in nature or incidental to a financial activity, including the maintenance and expansion of the reinsurance activities conducted through its wholly-owned subsidiary, AssuranceOne, Ltd. On September 19, 2018, we acquired Fleet Financing Resources (“FFR”), an equipment financing and leasing company specializing in both new and used commercial vehicles. This acquisition will augment our organic growth by extending our existing equipment finance business into new and attractive markets.certain discretionary payments such as
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RESULTS OF OPERATIONS
Comparisonbonuses. The additional capital released by the termination of the Three-Month Periods Ended June 30, 2019CMLA Agreement is held at MBB and June 30, 2018is 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.
Net income. Net incomeRules governing our regulatory capital requirements give entities the option of $6.1 million was reporteddelaying 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. We have elected to avail ourselves of the five-year transition option. See our current measurements of capital and further discussion of the measurements of regulatory capital during the delay and transition periods in Note 14, Stockholders’ Equity in the accompanying condensed consolidated financial statements. At March 31, 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.
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FINANCE RECEIVABLESAND ASSET QUALITY
The following table summarizes certain portfolio statistics for the three-month period ended June 30, 2019, resultingperiods presented:
Three Months Ended March 31, | Year Ended December 31, | |||||||||||
2020 | 2019 | 2019 | ||||||||||
(Dollars in thousands) | ||||||||||||
Finance receivables: | ||||||||||||
End of period(1) | $ | 1,022,135 | $ | 1,019,311 | $ | 1,007,706 | ||||||
Average for the period(1) | $ | 1,008,823 | $ | 999,432 | $ | 1,028,617 | ||||||
Origination Volume | $ | 157,391 | $ | 208,355 | $ | 877,913 | ||||||
Assets Sold | $ | 22,929 | $ | 52,867 | $ | 310,415 | ||||||
Allowance for credit losses : | ||||||||||||
End of period | $ | 52,060 | $ | 16,882 | $ | 21,695 | ||||||
As a % of end of period receivables(1) | 5.09 | % | 1.66 | % | 2.15 | % | ||||||
Loans modified, in payment deferral: | ||||||||||||
End of period | $ | 19,518 | $ | — | $ | — | ||||||
As a % of end of period receivables(1) | 1.91 | % | — | — | ||||||||
Delinquencies, end of period:(2) | ||||||||||||
Equipment Finance and CVG: | ||||||||||||
Greater than 60 days past due, $ | $ | 10,156 | $ | 8,112 | $ | 6,518 | ||||||
Greater than 60 days past due, % | 1.05 | % | 0.86 | % | 0.67 | % | ||||||
Working Capital: | ||||||||||||
Greater than 30 days past due, $ | $ | 673 | $ | 855 | $ | 284 | ||||||
Greater than 30 days past due, % | 1.14 | % | 1.42 | % | 0.66 | % | ||||||
Other Renegotiated leases and loans, end of period(3) | $ | 3,095 | $ | 3,008 | $ | 2,668 | ||||||
Annualized net charge-offs to average total finance receivables(1) | 3.11 | % | 1.83 | % | 2.18 | % |
(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) | Calculated as a percentage of total minimum lease payments receivable for leases and as a percentage of principal outstanding for loans. |
(3) | No renegotiated leases or loans met the definition of a Troubled Debt Restructuring for any period presented. |
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Loan Modification Program.
In response toCOVID-19, starting in diluted EPSmid-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 and can demonstrate that their ability to repay has been impacted by the COVID-19 crisis. Through March 31, 2020, we processed payment deferral modifications for 520 contracts, or $19.5 million net investment in leases and loans, where the typical modification included a60-day deferral of $0.49, comparedpayments for Working Capital loans and90-day deferral of payments for other customers, with such payments added to the end of the contract term. The modifications for each portfolio segment were $8.5 million of Equipment Finance, $7.0 million of Working Capital, and $4.0 million of CVG net incomeinvestment in leases and loans. The Company did not adjust its estimate of $6.5 million and diluted EPS of $0.52 for the three-month period ended June 30, 2018. This decrease was primarily due to an increase in interest expense of $2.7 million due to interest payments on deposits as well as the interest on the asset backed securitization completed in the third quarter of 2018 and an increase in the provision for credit losses based on whether or not contracts were modified; the Company’s allowance estimate assesses the risk of $0.5credit loss for modified loans to be equal to loans that were not modified as of March 31, 2020.
Subsequent toquarter-end, through April 24, 2020, we have approved the payment deferral modification application for contracts representing an additional $134.5 million on a larger portfolio.net investment in leases and loans. A portion of these modifications are subject to final processing and documentation.
Return on average assets was 1.94% for the three-month period ended June 30, 2019, compared to a return of 2.41% for the three-month period ended June 30, 2018. Return on average equity was 12.05% for the three-month period ended June 30, 2019, compared to a return of 13.93% for the three-month period ended June 30, 2018.Changes in Portfolio.
Overall, our average net investment in total finance receivables for the three-month period ended June 30, 2019March 31, 2020 increased 10.2%0.9% to $1,031.8$1,008.8 million, compared to $936.0$999.4 million for the three-month period ended June 30, 2018. This change was primarily due to origination volume exceeding lease and loan repayments, sales and charge-offs.March 31, 2019. Theend-of-period net investment in total finance receivables at June 30, 2019March 31, 2020 was $1,062.3$970.1 million, an increasea decrease of $61.6$36.4 million, or 6.2%3.6%, from $1,000.7$1,006.5 million at December 31, 2018.2019.
During the three months ended June 30, 2019,March 31, 2020, we generated 7,6485,863 new equipment finance leases and loans with equipment costs of $181.8$127.7 million, compared to 8,2387,467 new equipment finance leases and loans with equipment costs of $155.4$169.8 million generated for the three months ended June 30, 2018.March 31, 2019. Working Capital loan originations were $27.5$26.2 million during the three-month period ended June 30, 2019,March 31, 2020, an increase of $10.7$6.7 million, or 63.5%34.1%, as compared to the three-month period ended JuneMarch 31, 2019.
In response to the potential impacts of theCOVID-19 pandemic and the slowing economy in the latter part of the first quarter, we tightened our underwriting standards for both our equipment finance and working capital products. We expect our origination volumes for the second quarter of 2020 will be negatively impacted by these factors, and any returns to normal levels of activity remains uncertain.
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Portfolio Concentration.
The following table summarizes the concentrations of our portfolio of net investment in leases and loans as of March 31, 2020 by state and industry:
Top 10 Industries, by Borrower SIC Code | Top 10 States | |||||||||||||||||
Equipment Finance and CVG | Working Capital | Equipment Finance and CVG | Working Capital | |||||||||||||||
Medical | 12.7 | % | 8.5 | % | CA | 13.8 | % | 11.6 | % | |||||||||
Misc. Services | 12.4 | 8.0 | TX | 11.7 | 11.0 | |||||||||||||
Retail | 10.3 | 12.8 | FL | 9.8 | 9.1 | |||||||||||||
Construction | 8.5 | 13.5 | NY | 6.8 | 5.2 | |||||||||||||
Restaurants | 7.7 | 7.6 | NJ | 4.5 | 6.2 | |||||||||||||
Professional Services | 6.5 | 5.0 | PA | 3.6 | 4.6 | |||||||||||||
Manufacturing | 5.8 | 8.3 | GA | 3.4 | 4.7 | |||||||||||||
Transportation | 5.3 | 3.3 | IL | 3.3 | 3.9 | |||||||||||||
Trucking | 4.5 | 2.4 | NC | 3.1 | 2.9 | |||||||||||||
Auto Repair Shops | 3.3 | 6.6 | MA | 3.0 | 2.3 | |||||||||||||
All Other | 23.0 | 24.0 | All Other | 37.0 | 38.5 | |||||||||||||
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Total | 100 | % | 100 | % | Total | 100 | % | 100 | % | |||||||||
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As a result of theCOVID-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 ofCOVID-19.
While we are attempting to mitigate the impact of theCOVID-19 pandemic on our portfolio, by tightening underwriting standards for areas of elevated risk and by assisting borrowers that have been negatively impacted, the extent of the impacts ofCOVID-19 on our portfolio remains uncertain.
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Allowance for credit losses.
The following table provides a rollforward of our Allowance for credit loss:
Three Months Ended March 31, | Year Ended December 31, | |||||||||||
2020 | 2019 | 2019 | ||||||||||
(Dollars in thousands) | ||||||||||||
Allowance for credit losses, December 31, 2019 | $ | 21,695 | ||||||||||
Adoption of ASU2016-13 (CECL) | 11,908 | |||||||||||
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Allowance for credit losses, beginning of period | 33,603 | $ | 16,100 | $ | 16,100 | |||||||
Provision for credit losses | 25,150 | 5,363 | 28,036 | |||||||||
Net Charge-offs: | ||||||||||||
Equipment Finance | (5,959 | ) | (3,599 | ) | (18,164 | ) | ||||||
Working Capital | (1,243 | ) | (654 | ) | (2,531 | ) | ||||||
CVG | (644 | ) | (328 | ) | (1,746 | ) | ||||||
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Net Charge-offs | (7,846 | ) | (4,581 | ) | (19,811 | ) | ||||||
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Realized cashflows from Residual Income | 1,153 | — | — | |||||||||
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Allowance for credit losses, end of period | $ | 52,060 | $ | 16,882 | $ | 21,695 | ||||||
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The allowance for credit losses as a percentage of total finance receivables increased to 5.19% as of March 31, 2020, from 2.15% as of December 31, 2019. This increase in reserve coverage is driven by the Company’s January 1, 2020 adoption of CECL, and an elevated Provision for credit losses recognized for the three months ended March 31, 2020, primarily as a result of the estimated impact to the portfolio from theCOVID-19 pandemic. See further discussion below.
Adoption of ASU2016-13 / CECL.
Effective January 1, 2020, we adopted new guidance for accounting for our allowance, or ASU2016-13, 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 aftercharge-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.
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See –Executive Summary and Note 13 –Stockholders’ Equity, for discussion of our election to delay fortwo-years the effect of CECL on regulatory capital, followed by a three-yearphase-in, or a five-year total transition.
Provision for credit losses.
For 2020, the provision for credit losses recognized under 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. In contrast, the allowance estimate recognized 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 March 31, 2020, the $25.2 million provision for credit losses recognized was $19.8 million greater than the $5.4 million provision recognized for the three months ended March 31, 2019. The provision for the first quarter of 2020 included $19.1 million of additions to the provision driven by updates to the Company’s estimate driven by changes in economic conditions related toCOVID-19. In particular, the Company’s estimate of increased losses in its Equipment Finance portfolio is driven by updates to a reasonable and supportable forecast based on the modeled correlation of changes in the loss experience of the Company’s portfolio to certain economic statistics, specifically changes in the unemployment rate and changes in the number of business bankruptcies. For the CVG and Working Capital portfolio segments, the Company’s estimate of increased losses was based on qualitative adjustments, taking into consideration alternative scenarios to determine the Company’s estimate of the probable impact of the economic shutdown.
TheCOVID-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. The qualitative and economic adjustments to our allowance take into consideration information and our judgments as of March 31, 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. 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 generallycharged-off when they are contractually past due for 120 days or more. Working Capital receivables are generallycharged-off at 60 days past due.
Total portfolio net charge-offs for the three months ended March 31, 2020 were $7.8 million (3.11% of average total finance receivables on an annualized basis), compared to $5.6 million (3.00%) for the three months ended December 31, 2019, and $4.6 million (1.83%) for the three months ended March 31, 2019. In the second half of 2019 and early in the first quarter of 2020, we observed certain economic headwinds that were disproportionally impacting the small business and lower credit quality borrowers in our portfolio. Those economic conditions deteriorated significantly driven by the end of March 2020, as the impact ofCOVID-19 developed; as a result, the Company is experiencing elevated net-chargeoffs compared to the same quarter in the prior year.
As discussed above, we implemented a payment deferral modification program in March 2020, to respond to our borrower’s needs related to the impacts ofCOVID-19. There can be no assurances that such efforts to modify contracts will be successful in mitigating any risk of credit loss or futurecharge-off of such contracts.
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, the 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.
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
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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.
Non-Accrual.
The following table summarizesnon-accrual leases and loans in the Company’s portfolio:
Three Months Ended March 31, | Year Ended December 31, 2019 | |||||||||||
2020 | 2019 | |||||||||||
(Dollars in thousands) | ||||||||||||
Equipment finance | $ | 5,357 | $ | 3,494 | $ | 4,256 | ||||||
Working capital | 755 | 284 | 946 | |||||||||
CVG | 593 | 199 | 389 | |||||||||
CRA | — | — | — | |||||||||
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Totalnon-accrual leases and loans | $ | 6,705 | $ | 3,977 | $ | 5,591 | ||||||
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Net investments in finance receivables are generallycharged-off when they are contractually past due for 120 days or more. 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 innon-accrual status when they are 30 2018. Approval rates decreaseddays past due. The loan is removed fromnon-accrual status once sufficient payments are made to bring the loan current and evidence of a sustained performance period as reviewed by 1% to 55%management.
The Company has no loans 90 days or more past due that were still accruing interest for any of the periods presented above.
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RESULTSOF OPERATIONS
Comparison of the Three-Month Periods Ended March 31, 2020 and March 31, 2019
Net income.
Net loss of $11.8 million was reported for the three-month period ended June 30, 2019,March 31, 2020, resulting in diluted loss per share of $1.00, compared to 56%net income of $5.1 million and diluted EPS of $0.41 for the three-month period ended June 30, 2018.March 31, 2019. This $16.9 million decrease in Net income was primarily driven by:
• | ($19.7 million) increase in Provision for credit losses, primarily driven by updates to the Company’s estimate, reflecting forecasted economic conditions fromCOVID-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;
$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;
$1.9 million decrease in Salaries and benefits, driven primarily by lower Commissions and Incentives as a result of Company performance.
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 June 30, 2019March 31, 2020 and June 30, 2018.March 31, 2019.
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Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Average Balance(1) | Interest | Average Yields/ Rates(2) | Average Balance(1) | Interest | Average Yields/ Rates(2) | Average Balance(1) | Interest | Average Yields/ Rates(2) | Average Balance(1) | Interest | Average Yields/ Rates(2) | |||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning deposits with banks | $ | 129,210 | $ | 752 | 2.33 | % | $ | 77,957 | $ | 320 | 1.64 | % | $ | 100,582 | $ | 327 | 1.30 | % | $ | 126,798 | $ | 773 | 2.44 | % | ||||||||||||||||||||||||
Time Deposits | 11,715 | 72 | 2.46 | 8,706 | 39 | 1.77 | 13,507 | 63 | 1.88 | 10,466 | 61 | 2.35 | ||||||||||||||||||||||||||||||||||||
Restricted interest-earning deposits with banks | 14,671 | 28 | 0.77 | — | — | — | 8,033 | 9 | 0.44 | 15,620 | 30 | — | ||||||||||||||||||||||||||||||||||||
Securities available for sale | 10,674 | 74 | 2.76 | 10,850 | 60 | 2.21 | 10,778 | 58 | 2.14 | 10,720 | 69 | 2.56 | ||||||||||||||||||||||||||||||||||||
Net investment in leases(3) | 942,517 | 21,556 | 9.15 | 874,877 | 20,517 | 9.38 | 904,548 | 20,269 | 8.96 | 918,655 | 20,934 | 9.12 | ||||||||||||||||||||||||||||||||||||
Loans receivable(3) | 89,257 | 4,600 | 20.61 | 61,131 | 3,028 | 19.82 | 104,275 | 5,739 | 22.02 | 80,776 | 4,016 | 19.89 | ||||||||||||||||||||||||||||||||||||
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Total interest-earning assets | 1,198,044 | 27,082 | 9.04 | 1,033,521 | 23,964 | 9.27 | 1,141,723 | 26,465 | 9.27 | 1,163,035 | 25,883 | 8.90 | ||||||||||||||||||||||||||||||||||||
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Non-interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 5,319 | 3,989 | 5,470 | 5,600 | ||||||||||||||||||||||||||||||||||||||||||||
Intangible assets | 8,070 | 1,056 | 7,392 | 7,852 | ||||||||||||||||||||||||||||||||||||||||||||
Goodwill | 6,735 | 1,160 | 6,663 | 7,340 | ||||||||||||||||||||||||||||||||||||||||||||
Operating leaseright-of-use assets | 6,935 | — | 8,776 | 3,903 | ||||||||||||||||||||||||||||||||||||||||||||
Property and equipment, net | 3,996 | 4,054 | 8,094 | 4,282 | ||||||||||||||||||||||||||||||||||||||||||||
Property tax receivables | 8,479 | 9,650 | 8,886 | 6,614 | ||||||||||||||||||||||||||||||||||||||||||||
Other assets(4) | 21,042 | 22,115 | 1,811 | 17,002 | ||||||||||||||||||||||||||||||||||||||||||||
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Totalnon-interest-earning assets | 60,576 | 42,024 | 47,092 | 52,593 | ||||||||||||||||||||||||||||||||||||||||||||
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Total assets | $ | 1,258,620 | $ | 1,075,545 | $ | 1,188,815 | $ | 1,215,628 | ||||||||||||||||||||||||||||||||||||||||
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Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Certificate of Deposits(5) | $ | 842,274 | $ | 5,042 | 2.39 | % | 814,524 | $ | 3,556 | 1.75 | % | $ | 814,178 | $ | 4,856 | 2.39 | % | 793,665 | $ | 4,447 | 2.24 | % | ||||||||||||||||||||||||||
Money Market Deposits(5) | 23,715 | 158 | 2.66 | 30,091 | 155 | 2.06 | 24,322 | 85 | 1.40 | 23,236 | 142 | 2.44 | ||||||||||||||||||||||||||||||||||||
Long-term borrowings(5) | 120,407 | 1,208 | 4.01 | — | — | — | 69,751 | 739 | 4.24 | 140,500 | 1,373 | 3.91 | ||||||||||||||||||||||||||||||||||||
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Total interest-bearing liabilities | 986,396 | 6,408 | 2.59 | 844,615 | 3,711 | 1.76 | 908,251 | 5,680 | 2.51 | 957,401 | 5,962 | 2.49 | ||||||||||||||||||||||||||||||||||||
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Non-interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales and property taxes payable | 8,213 | 7,451 | 5,890 | 5,380 | ||||||||||||||||||||||||||||||||||||||||||||
Operating lease liabilities | 9,094 | — | 9,644 | 5,890 | ||||||||||||||||||||||||||||||||||||||||||||
Accounts payable and accrued expenses | 27,315 | 18,402 | 27,726 | 27,185 | ||||||||||||||||||||||||||||||||||||||||||||
Net deferred income tax liability | 24,601 | 19,316 | 29,468 | 22,947 | ||||||||||||||||||||||||||||||||||||||||||||
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Totalnon-interest-bearing liabilities | 69,223 | 45,169 | 72,728 | 61,402 | ||||||||||||||||||||||||||||||||||||||||||||
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Total liabilities | 1,055,619 | 889,784 | 980,979 | 1,018,803 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 203,001 | 185,761 | 207,836 | 196,825 | ||||||||||||||||||||||||||||||||||||||||||||
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Total liabilities and stockholders’ equity | $ | 1,258,620 | $ | 1,075,545 | $ | 1,188,815 | $ | 1,215,628 | ||||||||||||||||||||||||||||||||||||||||
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Net interest income | $ | 20,674 | $ | 20,253 | $ | 20,785 | $ | 19,921 | ||||||||||||||||||||||||||||||||||||||||
Interest rate spread(6) | 6.45 | % | 7.51 | % | 6.76 | % | 6.41 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin(7) | 6.90 | % | 7.84 | % | 7.28 | % | 6.85 | % | ||||||||||||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 121.46 | % | 122.37 | % | 125.71 | % | 121.48 | % |
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(1) | Average balances were calculated using average daily balances. |
(2) | Annualized. |
(3) | Average balances of leases and loans includenon-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 June 30, 2019 Compared To Three Months Ended June 30, 2018 | Three Months Ended March 31, 2020 Compared To Three Months Ended March 31, 2019 | |||||||||||||||||||||||
Increase (Decrease) Due To: | Increase (Decrease) Due To: | |||||||||||||||||||||||
Volume(1) | Rate(1) | Total | Volume(1) | Rate(1) | Total | |||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Interest-earning deposits with banks | $ | 264 | $ | 168 | $ | 432 | $ | (137 | ) | $ | (309 | ) | $ | (446 | ) | |||||||||
Time Deposits | 16 | 17 | 33 | 16 | (14 | ) | 2 | |||||||||||||||||
Restricted interest-earning deposits with banks | 28 | — | 28 | (11 | ) | (10 | ) | (21 | ) | |||||||||||||||
Securities available for sale | (1 | ) | 15 | 14 | — | (11 | ) | (11 | ) | |||||||||||||||
Net investment in leases | 1,557 | (518 | ) | 1,039 | (319 | ) | (346 | ) | (665 | ) | ||||||||||||||
Loans receivable | 1,445 | 127 | 1,572 | 1,260 | 463 | 1,723 | ||||||||||||||||||
Total interest income | 3,732 | (614 | ) | 3,118 | (480 | ) | 1,062 | 582 | ||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Certificate of Deposits | 125 | 1,361 | 1,486 | 117 | 292 | 409 | ||||||||||||||||||
Money Market Deposits | (37 | ) | 40 | 3 | 6 | (63 | ) | (57 | ) | |||||||||||||||
Long-term borrowings | 1,208 | — | 1,208 | (741 | ) | 107 | (634 | ) | ||||||||||||||||
Total interest expense | 700 | 1,997 | 2,697 | (307 | ) | 25 | (282 | ) | ||||||||||||||||
Net interest income | 3,004 | (2,583 | ) | 421 | (370 | ) | 1,233 | 863 |
(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. |
-46--53-
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 June 30, 2019March 31, 2020 and June 30, 2018.March 31, 2019.
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Interest income | $ | 27,082 | $ | 23,964 | $ | 26,465 | $ | 25,883 | ||||||||
Fee income | 3,507 | 3,876 | 2,766 | 4,042 | ||||||||||||
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| |||||||||||||
Interest and fee income | 30,589 | 27,840 | 29,231 | 29,925 | ||||||||||||
Interest expense | 6,408 | 3,711 | 5,680 | 5,962 | ||||||||||||
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Net interest and fee income | $ | 24,181 | $ | 24,129 | $ | 23,551 | $ | 23,963 | ||||||||
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Average total finance receivables(1) | $ | 1,031,774 | $ | 936,007 | $ | 1,008,823 | $ | 999,432 | ||||||||
Annualized percent of average total finance receivables: | ||||||||||||||||
Interest income | 10.50 | % | 10.24 | % | 10.49 | % | 10.36 | % | ||||||||
Fee income | 1.36 | 1.66 | 1.10 | 1.62 | ||||||||||||
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|
| |||||||||||||
Interest and fee income | 11.86 | 11.90 | 11.59 | 11.98 | ||||||||||||
Interest expense | 2.48 | 1.59 | 2.25 | 2.39 | ||||||||||||
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| |||||||||||||
Net interest and fee margin | 9.38 | % | 10.31 | % | 9.34 | % | 9.59 | % | ||||||||
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(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 increased $0.1decreased $0.4 million, or 0.4%1.7%, to $24.2$23.6 million for the three months ended June 30, 2019March 31, 2020 from $24.1$24.0 million for the three months ended June 30, 2018.March 31, 2019. The annualized net interest and fee margin decreased 9325 basis points to 9.38%9.34% in the three-month period ended June 30, 2019March 31, 2020 from 10.31%9.59% for the corresponding period in 2018.2019.
Interest income, net of amortized initial direct costs and fees, was $27.1$26.5 million and $24.0$25.9 million for the three-month periods ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, respectively. Average total finance receivables increased $95.8$9.4 million, or 10.2%0.9%, to $1,031.8$1,008.8 million at June 30, 2019March 31, 2020 from $936.0$999.4 million at June 30, 2018.March 31, 2019. The increase in average total finance receivables was primarily due to origination volume continuing to exceedexceeding lease and loan repayments, sales and charge-offs. The average yield on the portfolio increased 2613 basis points to 10.50%10.49% from 10.24%10.36% in the prior year quarter. The weighted average implicit interest rate on new finance receivables originated was 12.95%12.45% and 12.24%12.76% for the three-month periods ended June 30,March 31, 2020, and March 31, 2019, respectively. As our origination volumes have been negatively impacted by theCOVID-19 pandemic, our portfolio of finance receivables and June 30, 2018, respectively.related incomes may decline in the second quarter of 2020. Any returns to normal levels of origination activity, and our ability to replenish or grow our portfolio, remains uncertain.
Fee income was $3.5$2.8 million and $3.9$4.0 million for the three-month periods ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, respectively. Fee income included approximately $0.9$1.0 million of net residual income for eachthe three-month period ended March 31, 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 three-month periods ended June 30, 2019allowance, 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 June 30, 2018, respectively.Asset Quality”
Fee income also included approximately $2.0$2.1 million and $2.3 million in late fee income for the three-month periods ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, respectively.
Fee income, as an annualized percentage of average total finance receivables, decreased 30 basis points to 1.36% for the three-month period ended June 30, 2019 from 1.66% for the corresponding period in 2018. Late fees remained the largest component of fee income at 0.76%0.85% as an annualized percentage of average total finance receivables for the three-month period ended June 30, 2019,March 31, 2020, compared to 0.97%0.94% for the three-month period ended June 30, 2018. As an annualized percentage of average total finance receivables, net residual income was 0.34% for the three-month period ended June 30, 2019, compared to 0.39% for the three-month period ended June 30, 2018.March 31, 2019.
-47--54-
Interest expense increased $2.7decreased $0.3 million to $6.4$5.7 million for the three-month period ended June 30, 2019March 31, 2020 from $3.7$6.0 million for the corresponding period in 2017. A significant component of the increase was $1.2 million attributable to our long-term borrowings related to our 2018 asset-backed term securitization. The remaining increase of $1.5 million represented $5.2 million interest expense or 2.40% as an annualized percentage of average deposits for the three-month period ended June 30, 2019, from $3.7 million, or 1.76% as an annualized percentage of average deposits for the three-month period ended June 30, 2018. The increase was primarily due to a decrease in interest expense of $0.6 million on lower outstanding long-term borrowings offset by an increase in the rate paidof $0.3 million on interest bearing liabilities and to a lesser degree, the increase in the average balances of interest bearing liabilities.higher deposit balances. Interest expense, as an annualized percentage of average total finance receivables, increased 89decreased 14 basis points to 2.48%2.25% for the three-month period ended June 30, 2019,March 31, 2020, from 1.59%2.39% for the corresponding period in 2018.2019. The average balance of deposits was $866.0$838.5 million and $844.6$816.9 million for the three-month periods ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, respectively.
For the three-month period ended June 30,March 31, 2020, average term securitization borrowings outstanding were $69.8 million at a weighted average coupon of 4.24%. For the three-month period ended March 31, 2019, average term securitization borrowings outstanding were $120.4$140.5 million at a weighted average coupon of 4.01%3.91%. There were no outstanding borrowings for the period ended June 30, 2018.
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 June 30, 2019,March 31, 2020, brokered certificates of deposit represented approximately 49%52% of total deposits, while approximately 48%42% of total deposits were obtained from direct channels, and 3%6% were in the brokered MMDA Product.
Gain on Sale of Leases and Loans.Gain on sale of leases and loans was $2.3 million for the three-month period ended March 31, 2020, compared to $3.6 million for the three-month period ended March 31, 2019. Assets sold decreased to $22.9 million, for the first quarter of 2020 compared to $52.9 million for the first quarter of 2019, a 57% decrease. The amount of gain recognized declined by only 35%, reflecting a stronger margin realized on sales executed in the first quarter of 2020.
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 theCOVID-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 increased $0.2 million to $2.2$2.3 million for the three-month period ended June 30, 2019,March 31, 2020, from $2.0$2.1 million for the three-month period ended June 30, 2018,March 31, 2019, primarily due to an increase in the number of contracts enrolled in the insurance program as well as higher average ticket size.size driving higher premiums.
Other income. Other income was $5.0$7.6 million and $2.6$7.2 million for the three-month periods ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, respectively. Other income also includes various administrative transaction fees and fees received from referral of leases to third parties, gain on sale of leases and servicing fee income, recognized as earned. Selected major components ofThe increase in other income was primarily driven by a $0.3 million increase in servicing income, driven by a higher portfolio serviced for the three-month period ended June 30, 2019 included $3.8 million in income attributed to capital markets related activities, including gain on sale, servicing revenue and referral fee income, and $0.7 million of insurance policy fees. In comparison, selected major components of other income for the three-month period ended June 30, 2018 included $1.8 million in income attributed to capital markets related activities, including gain on sale, servicing revenue and referral fee income and $0.5 million of insurance policy fees.others.
Salaries and benefits expense. The following table summarizes the Company’s Salary and benefits expense:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Salary, benefits and payroll taxes | $ | 7,555 | $ | 7,352 | ||||
Incentive compensation | 905 | 2,438 | ||||||
Commissions | 1,059 | 1,661 | ||||||
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|
|
| |||||
Total | $ | 9,519 | $ | 11,451 | ||||
|
|
|
|
Salaries and benefits expense increased $3.0decreased $2.0 million, or 31.6%17.4%, to $12.5$9.5 million for the three-month period ended June 30, 2019March 31, 2020 from $9.5$11.5 million for the corresponding period in 2018. This increase was due to higher compensation costs related to increases in personnel, bonuses, commissions on higher origination volume and reduced salary deferrals due to changes in the accounting treatment of initial direct costs under ASC 842 – Leases. Salaries and benefits expense, as an annualized percentage of average total finance receivables, was 4.83% for the three-month period ended June 30, 2019 compared with 4.07% for the corresponding period in 2018.2019. Total personnel increaseddecreased to 356339 at June 30, 2019March 31, 2020 from 320352 at June 30, 2018.March 31, 2019. Incentive compensation decreased $1.5 million, driven by lower recognized bonus and share-based compensation amounts primarily driven by the Company’s operating results. Commissions decreased $0.6 million, or 36% primarily driven by a 24% decrease in origination volume.
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As previously announced, subsequent to quarter end, in April 2020, the Company temporarily reduced the salaries of certain executives and furloughed approximately 120 employees as part of a plan to adjust the Company’s expense base and ensure operating efficiency during theCOVID-19 crisis. The furlough period began on April 13, 2020 and is currently expected to continue through May 31, 2020.
General and administrative expense. The following table summarizes General and administrative expense:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Property taxes | $ | 6,012 | $ | 6,241 | ||||
Occupancy and depreciation | 1,320 | 1,232 | ||||||
Professional fees | 1,219 | 1,300 | ||||||
Information technology | 986 | 1,059 | ||||||
Marketing | 502 | 597 | ||||||
FDIC Insurance | 274 | 130 | ||||||
Other G&A | 3,292 | 2,795 | ||||||
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|
|
| |||||
Total | $ | 13,605 | $ | 13,354 | ||||
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|
|
General and administrative expense decreased $0.3increased $0.2 million, or 4.7%1.5%, to $6.1$13.6 million for the three months ended June 30, 2019March 31, 2020 from $6.4$13.4 million for the corresponding period in 2018. 2019.
General and administrative expense as an annualized percentage of average total finance receivables was 2.35%5.39% for the three-month period ended June 30, 2019,March 31, 2020, compared to 2.76%5.34% for the three-month period ended June 30, 2018. Selected major components of general and administrative expense for the three-month period ended June 30, 2019 included $1.1 million of premises and occupancy expense, $0.4 million of audit and tax compliance expense, $0.9 million of data processing expense, $0.5 million of marketing expense, and $0.3 million of insurance-related expenses. In comparison, selected major components of general and administrative expense for the three-month period ended June 30, 2018 included $0.9 million of premises and occupancy expense, $0.5 million of audit and tax compliance expense, $0.9 million of data processing expense, $0.4 million of marketing expense and $0.3 million of insurance-related expenses.March 31, 2019.
Provision for credit losses.Goodwill impairment.The provision for credit losses was $4.8 million for the three-month period ended June 30, 2019 compared to $4.3 million for the three-month period ended June 30, 2018. Equipment Finance portfolio losses tend to follow patterns based on the mix of origination vintages comprising the portfolio. The anticipated credit losses from the inception of a particular Equipment Finance origination vintage tocharge-off generally follow a pattern of lower losses forIn the first few months, followedquarter of 2020, driven by increased losses in subsequent months, then lower losses duringnegative current events related to the later periodsCOVID-19 economic shutdown, the Company’s market capitalization falling below book value and other related impacts, the Company analyzed its goodwill for impairment. The Company concluded that the implied fair value of the lease term. The higher provision is reflective of higher charge-offsgoodwill was less than it’s carrying amount, and increasing portfolio size and the seasoning, or mix of origination vintages, of the portfolio affects the timing and amount of anticipated probable and estimable credit losses.
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The $0.5 million increase in the provision for credit losses was attributablerecognized impairment equal to the increases in the Working Capital Loans and CVG portfolios of $0.3entire $6.7 million and $0.2 million, respectively, for the three-month period ended June 30, 2019 as compared to the three-month period ended June 30, 2018.
Total portfolio net charge-offs were $4.9 million for the three-month period ended June 30, 2019, compared to $4.3 million for the corresponding period in 2018. The increase incharge-off rate is primarily due to the ongoing seasoning of the Equipment Finance portfolio as reflected in the mix of origination vintages and the mix of credit profiles, as well as the increased portfolio balances. Total portfolio net charge-offs as an annualized percentage of average total finance receivables increased to 1.88% during the three-month period ended June 30, 2019, from 1.84% for the corresponding period in 2018. The allowance for credit losses increased to approximately $16.8 million at June 30, 2019, an increase of $0.7 million from $16.1 million at December 31, 2018.
Additional information regarding asset quality is included herein in the section “Finance Receivables and Asset Quality.”balance.
Provision for income taxes.Income tax expensebenefit of $2.0 million and $2.1$7.4 million was recorded for the three-month periodsperiod ended June 30, 2019 and June 30, 2018, respectively.March 31, 2020, compared to expense of $1.6 million for the three-month period ended March 31, 2019. For the three-month period ended March 31, 2020, the income tax benefit includes a $3.2 million discrete benefit, related to remeasuring our federal net operating losses, driven by certain provisions in the CARES Act. Our effectivestatutory tax rate, which is a combination of federal and state income tax rates, was approximately 24.4% and 24.1%23.9% for both periods. However, our effective tax rate was 38.6% for the three-month periods ended June 30, 2019 and June 30, 2018, respectively.
Comparison of theSix-Month Periods Ended June 30, 2019 and June 30, 2018
Net income. Net income of $11.3 million was reported for thesix-monthperiod ended June 30, 2019, resulting in diluted EPS of $0.91, compared to net income of $12.7 million and diluted EPS of $1.01 forMarch 31, 2020, driven by thesix-month period ended June 30, 2018. The decrease is primarily due to increased interest expense of $5.3 million offset by interest and fee income of $5.4 million, an increase in provision for credit losses of $1.3 million, an increase in salary and benefits expense of $4.3 million and an increased gain on sale in capital market activities of $4.3 million.
Return on average assets was 1.82% for thesix-month period ended June 30, 2019, compared to a return of 2.39% for thesix-month period ended June 30, 2018. Return on average equity was 11.26% for thesix-month period ended June 30, 2019, compared to a return of 13.81% for thesix-month period ended June 30, 2018.
Overall, our average net investment in total finance receivables for thesix-month period ended June 30, 2019 increased 9.8% to $1,015.6 million, compared to $924.9 million for thesix-month period ended June 30, 2018. This change was primarily due to origination volume continuing to exceed lease repayments. Theend-of-period net investment in total finance receivables at June 30, 2019 was $1,062.3 million, an increase of $61.6 million, or 6.2%, from $1,000.7 million at December 31, 2018.
During the six months ended June 30, 2019, we generated 15,115 new leases with equipment cost of $351.7 million, compared to 16,002 new leases with equipment cost of $297.0 million generated for the six months ended June 30, 2018. Approval rates were 57% for thesix-month period ended June 30, 2019, compared to 56% for thesix-month period ended June 30, 2018.
For thesix-month period ended June 30, 2019 compared to thesix-month period ended June 30, 2018, net interest and fee income increased $0.2 million, or 0.3%. The provision for credit losses increased $1.2 million, or 13.5%, to $10.1 million for thesix-month period ended June 30, 2019 from $8.9 million for the same period in 2018, due to an increase in delinquency and charge-offs which is attributed to a return to a more normal credit environment.
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 thesix-month periods ended June 30, 2019 and June 30, 2018.
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Six Months Ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Average Balance(1) | Interest | Average Yields/ Rates(2) | Average Balance(1) | Interest | Average Yields/ Rates(2) | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Interest-earning deposits with banks | $ | 126,084 | $ | 1,525 | 2.42 | % | $ | 74,204 | $ | 569 | 1.53 | % | ||||||||||||
Time Deposits | 11,090 | 133 | 2.41 | 8,309 | 67 | 1.62 | ||||||||||||||||||
Restricted interest-earning deposits with banks | 15,146 | 58 | 0.77 | — | — | — | ||||||||||||||||||
Securities available for sale | 10,697 | 142 | 2.66 | 11,026 | 102 | 1.86 | ||||||||||||||||||
Net investment in leases(3) | 930,586 | 42,491 | 9.13 | 866,643 | 40,659 | 9.38 | ||||||||||||||||||
Loans receivable(3) | 85,017 | 8,616 | 20.27 | 58,262 | 5,846 | 20.07 | ||||||||||||||||||
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| |||||||||||||||||
Total interest-earning assets | 1,178,620 | 52,965 | 8.99 | 1,018,444 | 47,243 | 9.27 | ||||||||||||||||||
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Non-interest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 5,459 | 4,493 | ||||||||||||||||||||||
Intangible assets | 7,961 | 1,083 | ||||||||||||||||||||||
Goodwill | 7,038 | 1,160 | ||||||||||||||||||||||
Operating leaseright-of-use assets | 5,419 | — | ||||||||||||||||||||||
Property and equipment, net | 4,139 | 4,124 | ||||||||||||||||||||||
Property tax receivables | 7,546 | 8,874 | ||||||||||||||||||||||
Other assets(4) | 17,393 | 20,487 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Totalnon-interest-earning assets | 54,955 | 40,221 | ||||||||||||||||||||||
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|
| |||||||||||||||||||||
Total assets | $ | 1,233,575 | $ | 1,058,665 | ||||||||||||||||||||
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|
| |||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Certificate of Deposits(5) | $ | 814,466 | $ | 9,489 | 2.33 | % | $ | 804,596 | $ | 6,802 | 1.69 | % | ||||||||||||
Money Market Deposits(5) | 23,430 | 299 | 2.56 | 32,986 | 308 | 1.86 | ||||||||||||||||||
Long-term borrowings(5) | 130,454 | 2,582 | 3.96 | — | — | — | ||||||||||||||||||
|
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|
|
|
|
| |||||||||||||||||
Total interest-bearing liabilities | 968,350 | 12,370 | 2.56 | 837,582 | 7,110 | 1.70 | ||||||||||||||||||
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| |||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Sales and property taxes payable | 6,796 | 5,711 | ||||||||||||||||||||||
Operating lease liabilities | 7,492 | — | ||||||||||||||||||||||
Accounts payable and accrued expenses | 27,251 | 13,803 | ||||||||||||||||||||||
Net deferred income tax liability | 23,773 | 18,307 | ||||||||||||||||||||||
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|
|
| |||||||||||||||||||||
Totalnon-interest-bearing liabilities | 65,312 | 37,821 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities | 1,033,662 | 875,403 | ||||||||||||||||||||||
Stockholders’ equity | 199,913 | 183,262 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,233,575 | $ | 1,058,665 | ||||||||||||||||||||
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| |||||||||||||||||||||
Net interest income | $ | 40,595 | $ | 40,133 | ||||||||||||||||||||
Interest rate spread(6) | 6.43 | % | 7.57 | % | ||||||||||||||||||||
Net interest margin(7) | 6.89 | % | 7.88 | % | ||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 121.71 | % | 121.59 | % |
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The following table presents the components recognition of the changes in net interest income by volume and rate.
Six Months Ended June 30, 2019 Compared To Six Months Ended June 30, 2018 | ||||||||||||
Increase (Decrease) Due To: | ||||||||||||
Volume(1) | Rate(1) | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest income: | ||||||||||||
Interest-earning deposits with banks | $ | 523 | $ | 433 | $ | 956 | ||||||
Time Deposits | 27 | 39 | 66 | |||||||||
Restricted interest-earning deposits with banks | 58 | — | 58 | |||||||||
Securities available for sale | (3 | ) | 43 | 40 | ||||||||
Net investment in leases | 2,941 | (1,109 | ) | 1,832 | ||||||||
Loans receivable | 2,711 | 59 | 2,770 | |||||||||
Total interest income | 7,236 | (1,514 | ) | 5,722 | ||||||||
Interest expense: | ||||||||||||
Certificate of Deposits | 84 | 2,602 | 2,687 | |||||||||
Money Market Deposits | (104 | ) | 95 | (9 | ) | |||||||
Long-term borrowings | 2,582 | — | 2,582 | |||||||||
Total interest expense | 1,242 | 4,018 | 5,260 | |||||||||
Net interest income | 5,870 | (5,408 | ) | 462 |
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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 thesix-month periods ended June 30, 2019 and 2018.
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Interest income | $ | 52,965 | $ | 47,243 | ||||
Fee income | 7,549 | 7,835 | ||||||
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Interest and fee income | 60,514 | 55,078 | ||||||
Interest expense | 12,370 | 7,110 | ||||||
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Net interest and fee income | $ | 48,144 | $ | 47,968 | ||||
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Average total finance receivables(1) | $ | 1,015,603 | $ | 924,906 | ||||
Percent of average total finance receivables: | ||||||||
Interest income | 10.43 | % | 10.22 | % | ||||
Fee income | 1.49 | 1.69 | ||||||
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Interest and fee income | 11.92 | 11.91 | ||||||
Interest expense | 2.44 | 1.54 | ||||||
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Net interest and fee margin | 9.48 | % | 10.37 | % | ||||
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Net interest and fee income increased $0.1 million, or 0.2%, to $48.1 million for thesix-month period ended June 30, 2019 from $48.0 million for thesix-month period ended June 30, 2018. The annualized net interest and fee margin decreased 89 basis points to 9.48% in thesix-month period ended June 30, 2019 from 10.37% for the corresponding period in 2018.
Interest income, net of amortized initial direct costs and fees, increased $5.8 million, or 12.3%, to $53.0 million for thesix-month period ended June 30, 2019 from $47.2 million for thesix-month period ended June 30, 2018. The increase in interest income was principally due to an increase in average yield of 21 basis points and by a 9.8% increase in average total finance receivables, which increased $90.7 million to $1,015.6 million for thesix-months ended June 30, 2019 from $924.9 million for thesix-months ended June 30, 2018. The increase in average total finance receivables was primarily due to origination volume continuing to exceed lease repayments. The average yield on the portfolio increased, due to higher yields on the new leases compared to the yields on the leases repaying. The weighted average implicit interest rate on new finance receivables originated increased 52 basis points to 12.86% for thesix-month period ended June 30, 2019, compared to 12.34% for thesix-month period ended June 30, 2018.
Fee income decreased $0.3 million to $7.5 million for thesix-month period ended June 30, 2019, compared to $7.8 million for thesix-month period ended June 30, 2018. Fee income included approximately $1.9 million of net residual income for thesix-month period ended June 30, 2019 and $1.8 million for thesix-month period ended June 30, 2018.
Fee income also included approximately $4.3 million in late fee income for thesix-month period ended June 30, 2019, which decreased 10.4% from $4.8 million for thesix-month period ended June 30, 2018.
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Fee income, as an annualized percentage of average total finance receivables, decreased 20 basis points to 1.49% for thesix-month period ended June 30, 2019 from 1.69% for thesix-month period ended June 30, 2018. Late fees remained the largest component of fee income at 0.85% as an annualized percentage of average total finance receivables for thesix-month period ended June 30, 2019, compared to 1.03% for thesix-month period ended June 30, 2018. As an annualized percentage of average total finance receivables, net residual income was 0.37% for thesix-month period ended June 30, 2019, compared to 0.39% for thesix-month period ended June 30, 2018.
Interest expense increased $5.3 million to $12.4 million for thesix-month period ended June 30, 2019 from $7.1 for the corresponding period in 2018. The components of the increase were $2.6 million attributable to our long-term borrowings related to our 2018 asset-backed term securitization and $2.7 million representing $9.8 million interest expense, or 2.34% as an annualized percentage of average deposits for thesix-month period ended June 30, 2019, from $7.1 million, or 1.70% as an annualized percentage of average deposits for thesix-month period ended June 30, 2018. The increase was primarily due to an increase in the rate paid on interest bearing liabilities and to a lesser degree, the increase in the average balances of interest bearing liabilities. Interest expense, as an annualized percentage of average total finance receivables, increased 90 basis points to 2.44% for thesix-month period ended June 30, 2019, from 1.54% for the corresponding period in 2018. The average balance of deposits was $837.9 million and $837.6 million for the six-month periods ended June 30, 2019 and June 30, 2018, respectively.
For thesix-month period ended June 30, 2019, average term securitization borrowings outstanding were $130.5 million at a weighted average coupon of 3.96%. There were no outstanding borrowings for the period ended June 30, 2018.
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 June 30, 2019, brokered certificates of deposit represented approximately 49% of total deposits, while approximately 48% of total deposits were obtained from direct channels, and 3% were in the brokered MMDA Product.
Insurance premiums written and earned.Insurance premiums written and earned increased $0.4 million to $4.3 million for thesix-month period ended June 30, 2019, from $3.9 million for thesix-month period ended June 30, 2018, primarily due to an increase in the number of contracts enrolled in the insurance program as well as higher average ticket size.
Other income. Other income was $15.8 million and $5.9 million for thesix-month periods ended June 30, 2019 and June 30, 2018, respectively. A major component of the $9.9 million increase in other income is property tax income that was previously netted against property tax expense in fiscal 2018 but is presented as a separate component of revenue in fiscal 2019 as a result of the adoption of ASU2016-02 and related ASUs. Other income also includes various administrative transaction fees and fees received from referral of leases to third parties, gain on sale of leases and servicing fee income, recognized as earned. Selected major components of other income for thesix-month period ended June 30, 2019 included $5.7 million in property tax income, $7.8 million in income attributed to capital markets related activities, including gain on sale, servicing revenue and referral fee income, and $1.3 million of insurance policy fees. In comparison, selected major components of other income for thesix-month period ended June 30, 2018 included $4.2 million in income attributed to capital markets related activities, including gain on sale, servicing revenue and referral fee income, and $1.0 million of insurance policy fees.
Salaries and benefits expense.Salaries and benefits expense increased $4.3 million, or 21.9%, to $23.9 million for thesix-month period ended June 30, 2019 from $19.6 million for the corresponding period in 2018. The increase was due to higher compensation costs related to increases in personnel, bonuses, commissions on higher origination volume and reduced salary deferrals due to changes in the accounting treatment of initial direct costs under ASC 842 – Leases. Salaries and benefits expense, as an annualized percentage of average total finance receivables, was 4.71% for thesix-month period ended June 30, 2019 compared with 4.23% for the corresponding period in 2018.
Total personnel increased to 356 at June 30, 2019 from 320 at June 30, 2018.
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General and administrative expense.General and administrative expense increased $6.4 million, or 49.2%, to $19.4 million for thesix-month period ended June 30, 2019 from $13.0 million for the corresponding period in 2018. A major component of the increase is property tax expense that was previously netted against property tax income in fiscal 2018 but is presented on a gross basis in in fiscal 2019 as a result of the adoption of ASU2016-02 and related ASUs. General and administrative expense as an annualized percentage of average total finance receivables was 3.82% for thesix-month period ended June 30, 2019, compared to 2.82% for thesix-month period ended June 30, 2018. Selected major components of general and administrative expense for thesix-month period ended June 30, 2019 included $6.2 million on property tax expense, $2.1 million of premises and occupancy expense, $0.7 million of audit and tax compliance expense, $2.0 million of data processing expense and $1.1 million of marketing expense. In comparison, selected major components of general and administrative expense for thesix-month period ended June 30, 2018 included $1.8 million of premises and occupancy expense, $0.9 million of audit and tax compliance expense, $1.8 million of data processing expense, and $1.0 million of marketing expense, and $0.7 million of insurance-related expenses.
Provision for credit losses.The provision for credit losses increased $1.2 million, or 13.5%, to $10.1 million for thesix-month period ended June 30, 2019 from $8.9 million for the corresponding period in 2018. Equipment Finance portfolio losses tend to follow patterns based on the mix of origination vintages comprising the portfolio. The anticipated credit losses from the inception of a particular Equipment Finance origination vintage tocharge-off generally follow a pattern of lower losses for the first few months, followed by increased losses in subsequent months, then lower losses during the later periods of the lease term. The higher provision is reflective of higher charge-offs and increasing portfolio size and the seasoning, or mix of origination vintages, of the portfolio affects the timing and amount of anticipated probable and estimable credit losses.
The provision for credit losses for the Working Capital Loans, Equipment Finance and CVG portfolios increased by $0.7 million, $0.1 million and $0.5 million respectively, for thesix-month period ended June 30, 2019 as compared to thesix-month period ended June 30, 2018.
The increase in our provision for credit losses resulted from increased delinquency and charge-offs and to a lesser extent growth in the portfolio.
Total portfolio net charge-offs were $9.4 million for thesix-month period ended June 30, 2019, compared to $8.1 million for the corresponding period in 2018. The increase incharge-off rate is primarily due to the ongoing seasoning of the Equipment Finance portfolio as reflected in the mix of origination vintages and the mix of credit profiles as well as the increased portfolio balances. Net charge-offs as an annualized percentage of average total finance receivables increased to 1.86% during thesix-month period ended June 30, 2019, from 1.76% for the corresponding period in 2018. The allowance for credit losses increased to approximately $16.8 million at June 30, 2019, an increase of $0.7 million from $16.1 million at December 31, 2018.
Additional information regarding asset quality is included herein in the section “Finance Receivables and Asset Quality.”
Provision for income taxes.Income tax expense of $3.6 million was recorded for thesix-month period ended June 30, 2019, compared to an expense of $3.7 million for the corresponding period in 2018. Our effective tax rate, which is a combination of federal and state income tax rates, was approximately 24.1% for thesix-month period ended June 30, 2019, compared to 22.8% for thesix-month period ended June 30, 2018.
FINANCE RECEIVABLES AND ASSET QUALITY
Our net investment in leases and loans increased $61.6 million, or 6.2%, to $1,062.3 million at June 30, 2019 from $1,000.7 million at December 31, 2018. We continue to monitor our credit underwriting guidelines in response to current economic conditions, and we continue to develop our sales organization and origination strategies to increase originations.
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The chart which follows provides our asset quality statistics for each of the three and six month periods ended June 30, 2019 and June 30, 2018, and the year ended December 31, 2018:
Three Months Ended June 30, | Six Months Ended June 30, | Year Ended December 31, | ||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2018 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Allowance for credit losses, beginning of period | $ | 16,882 | $ | 15,620 | $ | 16,100 | $ | 14,851 | $ | 14,851 | ||||||||||
Provision for credit losses | 4,756 | 4,256 | 10,119 | 8,868 | 19,522 | |||||||||||||||
Charge-offs | ||||||||||||||||||||
Commercial lease and loans: | ||||||||||||||||||||
Working Capital Loans | (602 | ) | (499 | ) | (1,275 | ) | (728 | ) | (1,537 | ) | ||||||||||
CRA | — | — | — | — | — | |||||||||||||||
Equipment Finance | (4,508 | ) | (4,190 | ) | (8,840 | ) | (8,219 | ) | (18,149 | ) | ||||||||||
CVG | (345 | ) | (243 | ) | (673 | ) | (400 | ) | (907 | ) | ||||||||||
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Total Charge-offs | (5,455 | ) | (4,932 | ) | (10,788 | ) | (9,347 | ) | (20,593 | ) | ||||||||||
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Recoveries | ||||||||||||||||||||
Commercial lease and loans: | ||||||||||||||||||||
Working Capital Loans | 51 | 43 | 71 | 49 | 60 | |||||||||||||||
CRA | — | — | — | — | — | |||||||||||||||
Equipment Finance | 482 | 580 | 1,214 | 1,108 | 2,199 | |||||||||||||||
CVG | 61 | 3 | 61 | 41 | 61 | |||||||||||||||
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Total Recoveries | 594 | 626 | 1,346 | 1,198 | 2,320 | |||||||||||||||
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Net charge-offs | (4,861 | ) | (4,306 | ) | (9,442 | ) | (8,149 | ) | (18,273 | ) | ||||||||||
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Allowance for credit losses, end of period(1) | $ | 16,777 | $ | 15,570 | $ | 16,777 | $ | 15,570 | $ | 16,100 | ||||||||||
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Annualized net charge-offs to average total finance receivables(2) | 1.88 | % | 1.84 | % | 1.86 | % | 1.76 | % | 1.93 | % | ||||||||||
Allowance for credit losses to total finance receivables, end of period(2) | 1.59 | % | 1.62 | % | 1.59 | % | 1.62 | % | 1.62 | % | ||||||||||
Average total finance receivables(2) | $ | 1,031,774 | $ | 936,007 | $ | 1,015,603 | $ | 924,906 | $ | 944,588 | ||||||||||
Total finance receivables, end of period(2) | $ | 1,057,727 | $ | 959,452 | $ | 1,057,727 | $ | 959,452 | $ | 996,383 | ||||||||||
Delinquencies greater than 60 days past due | $ | 7,686 | $ | 6,007 | $ | 7,686 | $ | 6,007 | $ | 7,292 | ||||||||||
Delinquencies greater than 60 days past due(3) | 0.64 | % | 0.55 | % | 0.64 | % | 0.55 | % | 0.65 | % | ||||||||||
Allowance for credit losses to delinquent accounts greater than 60 days past due(3) | 218.28 | % | 259.20 | % | 218.28 | % | 259.20 | % | 220.79 | % | ||||||||||
Non-accrual leases and loans, end of period | $ | 4,530 | $ | 3,358 | $ | 4,530 | $ | 3,358 | $ | 4,353 | ||||||||||
Renegotiated leases and loans, end of period(4) | $ | 3,122 | $ | 3,747 | $ | 3,122 | $ | 3,747 | $ | 3,636 | ||||||||||
Accruing leases and loans past due 90 days or more | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Interest income included onnon-accrual leases and loans(5) | $ | 55 | $ | 39 | $ | 175 | $ | 127 | $ | 410 | ||||||||||
Interest income excluded onnon-accrual leases and loans(6) | $ | 80 | $ | 53 | $ | 104 | $ | 68 | $ | 130 |
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Delinquent accounts 60 days or more past due (as a percentage of minimum lease payments receivable for leases and as a percentage of principal outstanding for loans) were 0.64% at June 30, 2019 and 0.65% at December 31, 2018, compared to 0.55% at June 30, 2018.
In accordance with the Contingencies and Receivables Topics of the FASB ASC, we maintain 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 projection of probable net credit losses. The factors and trends discussed above were included in the Company’s analysis to determine its allowance for credit losses. (See “Critical Accounting Policies” in ourForm10-K for the year ended December 31, 2018.)
The following tables provide information about delinquent andnon-accrual leases and loans in the Company’s portfolio for each of the six month periods ended June 30, 2019 and June 30, 2018, and the year ended December 31, 2018.
Six Months Ended | Year Ended | |||||||||||
June 30, | December 31 | |||||||||||
2019 | 2018 | 2018 | ||||||||||
(Dollars in thousands) | ||||||||||||
Non-accrual leases and loans: | ||||||||||||
Commercial leases and loans: | ||||||||||||
Working Capital Loans | $ | 248 | $ | 147 | $ | 492 | ||||||
CRA | — | — | — | |||||||||
Equipment Finance(1) | 3,817 | 2,986 | 3,529 | |||||||||
CVG | 465 | 225 | 191 | |||||||||
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Totalnon-accrual leases and loans | $ | 4,530 | $ | 3,358 | $ | 4,212 | ||||||
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Net investments in finance receivables are generallycharged-off when they are contractually past due for 120 days or more. 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 innon-accrual status when they are 30 days past due. The loan is removed fromnon-accrual status once sufficient payments are made to bring the loan current and evidence of a sustained performance period as reviewed by management.
The allowance for credit losses as a percentage of total finance receivables decreased to 1.59% at June 30, 2019 from 1.62% at December 31, 2018. The decrease is primarily due to a modest decrease in delinquency rates.discrete benefit.
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Total portfolio net charge-offs for the three months ended June 30, 2019 were $4.9 million (1.88% of average total finance receivables on an annualized basis), compared to $5.6 million (2.30% of average total finance receivables on an annualized basis) for the three months ended March 31, 2019 and $4.3 million (1.84% of average total finance receivables on an annualized basis) for the three months ended June 30, 2018. The Equipment Finance portfolio losses tend to follow patterns based on the mix of origination vintages comprising the portfolio. The timing of credit losses from the inception of a particular lease origination vintage tocharge-off generally follows a pattern of lower losses for the first few months, followed by increased losses in subsequent months, then lower losses during the later periods of the lease term. Therefore, the seasoning, or mix of origination vintages, of the Equipment Finance portfolio affects the timing and amount of charge-offs.
Net charge-offs for thesix-month period ended June 30, 2019 were $9.4 million (1.86% of average total finance receivables on an annualized basis), compared to $8.1 million (1.76% of average total finance receivables on an annualized basis) for thesix-month period ended June 30, 2018. The increase incharge-off rate is partially due to the ongoing seasoning of the portfolio as reflected in the mix of origination vintages and the mix of credit profiles, as discussed above.
RESIDUAL PERFORMANCE
Our leases offer our end user customers the option to own the equipment at lease expiration. As of June 30, 2019, approximately 59% of our leases were one dollar purchase option leases, 40% were fair market value leases and 1% were fixed purchase option leases, the latter of which typically contain anend-of-term purchase option equal to 10% of the original equipment cost. As of June 30, 2019, there were $28.7 million of residual assets retained on our Consolidated Balance Sheet, of which $24.2 million, or 84.2%, were related to copiers. As of December 31, 2018, there were $27.6 million of residual assets retained on our Consolidated Balance Sheet, of which $23.6 million, or 85.4%, were related to copiers. No other group of equipment represented more than 10% of equipment residuals as of June 30, 2019 and December 31, 2018. Improvements in technology and other market changes, particularly in copiers, could adversely impact our ability to realize the recorded residual values of this equipment.
Fee income included approximately $0.9 million of net residual income for both three-month periods ended June 30, 2019 and June 30, 2018, and approximately $1.9 million and $1.8 million of net residual income for thesix-month periods ended June 30, 2019 and June 30, 2018, respectively. Net 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 as further described below.
Our leases generally include renewal provisions and many leases continue beyond their initial contractual term. Based on the Company’s experience, the amount of ultimate realization of the residual value tends to relate more to the customer’s election at the end of the lease term to enter into a renewal period, purchase the leased equipment or return the leased equipment than it does to the equipment type. We consider renewal income a component of residual performance. Renewal income net of depreciation totaled approximately $1.4 million and $1.2 million for each of the three-month periods ended June 30, 2019 and June 30, 2018, respectively, and approximately $2.8 million and $2.4 million for the six-month periods ended June 30, 2019 and June 30, 2018, respectively.
For the three months ended June 30, 2019 and June 30, 2018, the net loss on residual values disposed at end of term totaled $0.5 million and $0.3 million, respectively. The net loss on residual values disposed at end of term totaled $0.9 million and $0.6 million for the six-month periods ended June 30, 2019 and June 30, 2018, respectively. Management performs an impairment assessment no less frequently than quarterly using cash flows it expects to derive from the underlying asset at the end of the lease term. If impairment was required, the Company would record an allowance. There was no allowance recorded on estimated residual values during thesix-month periods ended June 30, 2019 and June 30, 2018, respectively.
LIQUIDITY LIQUIDITYAND CAPITAL RESOURCES CAPITAL RESOURCES
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 othernon-interest expenses.
As a result of the uncertainties surrounding the actual and potential impacts ofCOVID-19 on our business and financial condition, we raised additional liquidity through the issuance of FDIC-insured deposits and we increased our borrowing capacity at the Federal Reserve Discount Window.
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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;
borrowings under various bank facilities;
financing of leases and loans in various warehouse facilities (all of which have since been repaid in full);
financing of leases through term note securitizations; and
sale of leases and loans through our capital markets capabilities
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.
On January 13, 2009, Marlin Business Services Corp. became a bank holding company and is subject to the Bank Holding Company Act and supervised by the Federal Reserve Bank of Philadelphia. On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of Marlin Business Services Corp.’s election to become a financial holding company (while remaining a bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section 225.82 of the Federal Reserve Board’s Regulation Y. Such election permits Marlin Business Services Corp. to engage in activities that are financial in nature or incidental to a financial activity, including the maintenance and expansion of our reinsurance activities conducted through our wholly-owned subsidiary, AssuranceOne.
We declared a dividend of $0.14 per share on May 2, 2019.January 30, 2020. The quarterly dividend was paid on May 23, 2019February 20, 2020 to shareholders of record on the close of business on May 13, 2019,February 10, 2020, which resulted in a dividend payment of approximately $1.7 million. It represented the Company’s thirty-firstthirty-fourth consecutive quarterly cash dividend.
On July 27, 2018, we completed a $201.7 million asset-backed term securitization which provided us with fixed-cost borrowing with the objective of diversifying our funding resources. This was a private offering made pursuant to Rule 144A and Reg S under the Securities Act of 1933, as amended, by Marlin Receivables2018-1 LLC, a wholly owned subsidiary of Marlin Leasing Corporation. Standard & Poor’s Ratings Services, Inc. and Fitch Ratings Inc. rated the transaction, with the two senior classes receiving the agencies’ highest ratings. As with all our prior term note securitizations, it is recorded in long-term borrowings in the Consolidated Balance Sheets.
At June 30, 2019,March 31, 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 $139.7$211.1 million. This amount excludes additional liquidity that may be provided by the issuance of insured deposits through MBB.
Our debt to equity ratio was 4.865.33 to 1 at June 30, 2019March 31, 2020 and 4.564.26 to 1 at December 31, 2018.2019.
Net cash used in investing activities was $76.0$5.2 million for thesix-month three-month period ended June 30, 2019,March 31, 2020, compared to net cash used in investing activities of $62.3$29.8 million for thesix-month three-month period ended June 30, 2018.March 31, 2019. The decrease in cash flowsoutflows from investing activities is primarily due to increasesa decrease of $9.0$41.0 million for purchases of principal collections on leases and loans and $46.9equipment for lease contracts partially offset by a reduction of $24.0 million in proceeds from sales of leases and loans originated for investment offset by $66.5 millioninvestment. The decrease in purchases of equipment for lease contracts and funds used to originate loans. Included in the purchases of equipment for lease contracts and funds used to originate loans was $8.6 million and $7.9 million of deferred initial direct costs and feesprimarily driven by lower origination volumes for thesix-month periods three months ended June 30,March 31, 2020 compared to 2019, and 2018, respectively. Investing activitiesthe reduction in proceeds from sales was driven by lower volumes of sales, driven primarily relate to leasing activities. The Company transferred $81.5 million and $37.8 million of leases originated for investment to held for sale during thesix-month period ended June 30, 2019 and 2018, respectively.by our execution decisions.
Net cash provided by financing activities was $85.7$82.5 million for thesix-month three-month period ended June 30, 2019,March 31, 2020, compared to net cash provided by financing activities of $50.0$60.3 million for thesix-month three-month period ended June 30, 2018.March 31, 2019. The increase in cash flows from financing activities is primarily due to a $78.5an increase of $18.5 million increase in deposits and a decrease of $7.1 million of term securitization repayments offset by $40.8$3.4 million of repayments on borrowings from our 2018 asset-backed term securitization.additional repurchases of common stock. Financing activities also include transactions related to the Company’s common stock, such as repurchasing common stock and payingpayment of dividends.
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Net cash provided by operating activities was $27.0$10.2 million for thesix-month three-month period ended June 30, 2019,March 31, 2020, compared to net cash provided by operating activities of $44.4$12.5 million for thesix-month three-month period ended June 30, 2018. The decrease inMarch 31, 2019. Transactions affecting net cash flows fromprovided by operating activities is primarily dueincluding goodwill impairment, provision for credit losses, changes in income tax liability and leases originated for sale and proceeds thereof are discussed in detail in the notes to the receipt in 2018 of a $7.5 million tax refund as a result of the Tax Cut and Jobs Act and the remittance in 2019 of the $4.0 million for restitution as discussed in Note 10.Consolidated Financial Statements.
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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 June 30, 2019March 31, 2020 totaled $139.7$211.1 million, compared to $97.2$123.1 million at December 31, 2018.2019.
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 June 30, 2019March 31, 2020 and December 31, 20182019 totaled $12.7$13.7 million and $9.7$12.9 million, respectively.
Restricted Interest-Earning Deposits with Banks. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, we had $8.2$6.5 million and $14.0,$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 $110.4$62.6 million at June 30, 2019March 31, 2020 and $151.2$76.6 million at December 31, 2018.2019. Information pertaining to our borrowing facilities is as follows:
For the Six Months Ended June 30, 2019 | As of June 30, 2019 | For the Three Months Ended March 31, 2020 | As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Maximum Facility Amount | Maximum Month End Amount Outstanding | Average Amount Outstanding | Weighted Average Rate(3) | Amount Outstanding | Weighted Average Rate(2) | Unused Capacity(1) | Maximum Facility Amount | Maximum Month End Amount Outstanding | Average Amount Outstanding | Weighted Average Rate(3) | Amount Outstanding | Weighted Average Rate(2) | Unused Capacity(1) | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds purchased | $ | 25,000 | $ | — | $ | — | — | % | $ | — | — | % | $ | 25,000 | $ | 25,000 | $ | — | $ | — | — | % | $ | — | — | % | $ | 25,000 | ||||||||||||||||||||||||||||
Term note securitizations(4) | — | 143,912 | 130,454 | 3.96 | % | 110,405 | 3.39 | % | — | — | 71,721 | 69,751 | 4.24 | % | 62,555 | 3.62 | % | — | ||||||||||||||||||||||||||||||||||||||
Revolving line of credit | 5,000 | — | — | — | % | — | — | % | 5,000 | 5,000 | — | — | — | % | — | — | % | 5,000 | ||||||||||||||||||||||||||||||||||||||
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$ | 30,000 | $ | 143,912 | $ | 130,454 | 3.96 | % | $ | 110,405 | 3.39 | % | $ | 30,000 | $ | 30,000 | $ | 71,721 | $ | 69,751 | 4.24 | % | $ | 62,555 | 3.62 | % | $ | 30,000 | |||||||||||||||||||||||||||||
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(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 |
(2) | Does not include transaction costs. |
(3) | Includes transaction costs. |
(4) | Our term note securitizations areone-time fundings that pay down over time without any ability for us to draw down additional amounts. |
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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 $32.9$47.8 million in unused, secured borrowing capacity at the Federal Reserve Discount Window, based on $35.6$55.1 million of net investment in leases pledged at June 30, 2019.March 31, 2020.
Term Note Securitizations
On July 27, 2018 we completed a $201.7 million asset-backed term securitization. This transaction was Marlin’s eleventh term securitization and its first since 2010. It provides the company with fixed-cost borrowing with the objective of diversifying its funding sources. As with all prior securitizations, this transaction was recorded as an“on-balance sheet” transactionsources and the financing is recorded in long-term borrowings in the Consolidated Balance Sheet.
This was a private offering made to qualified institutional buyers pursuant to Rule 144A under and Regulation S under the Securities Act of 1933 by Marlin Receivables2018-1 LLC, a wholly-owned subsidiary of Marlin Leasing Corporation. Standard & Poor’s Ratings Service, Inc. and Fitch Ratings Inc. rated the transaction with the two senior classes receiving the agencies’ highest ratings. The effective weighted average interest expense over the term of the financing is expected to be approximately 3.41%.
In connection with this securitization transaction, we have 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 offerings. These SPEs areoffering. The SPE is considered variable interest entitiesentity (“VIEs”VIE”) under U.S. GAAP. We are required to consolidate VIEs in which we are deemed to be the primary beneficiary through having (1) power over the significant activities of the entity and (2) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. We continue to service the assets of our VIEsVIE and retain equity and/or residual interests. Accordingly, assets and related debt of these VIEs arethe VIE is included in the accompanying Consolidated Balance Sheets. Our leases and restricted interest-earning deposits with banks are assigned as collateral for theseCollateral in excess of our borrowings under the securitization transaction represents our maximum loss exposure and there is no further recourse to our general credit. Collateral in excess of these borrowings represents our maximum loss exposure. Our term note securitizations have fixed terms, fixed interest ratesAt March 31, 2020 and fixed principal amounts. At June 30,December 31, 2019 outstanding term securitizations amounted to $109.6$62.2 million and $150.1$76.1 million, at December 31, 2018.
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As of June 30, 2019, $124.0 million of minimum lease payments receivablerespectively and $8.1 million of restricted interest-earning deposits are assigned as collateral for the term note securitization. The July 27, 2018, term note securitization is summarized below:
Notes Originally Issued | Outstanding Balance as of June 30, 2019 | Final Maturity Date | Original Coupon Rate | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
2018 — 1 | ||||||||||||||||
Class A-1 | $ | 77,400 | $ | — | July 2019 | 2.55 | % | |||||||||
Class A-2 | 55,700 | $ | 41,855 | October 2020 | 3.05 | |||||||||||
Class A-3 | 36,910 | $ | 36,910 | April 2023 | 3.36 | |||||||||||
Class B | 10,400 | $ | 10,400 | May 2023 | 3.54 | |||||||||||
Class C | 11,390 | $ | 11,390 | June 2023 | 3.70 | |||||||||||
Class D | 5,470 | $ | 5,470 | July 2023 | 3.99 | |||||||||||
Class E | 4,380 | $ | 4,380 | May 2025 | 5.02 | |||||||||||
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Total Term Note Securitizations | $ | 201,650 | $ | 110,405 | 3.05 | %(1)(2) | ||||||||||
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At June 30, 2019, 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
On January 13, 2009, we became a bank holding company by order of the Federal Reserve Board andWe are subject to regulation under the Bank Holding Company Act. AllAct and all of our subsidiaries may be subject to examination by the Federal Reserve Board and the Federal Reserve Bank of Philadelphia even if not otherwise regulated by the Federal Reserve Board. On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of our election to become a financial holding company (while remaining a bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section 225.82 of the Federal Reserve Board’s Regulation Y. Such election permits us to engage in activities that are financial in nature or incidental to a financial activity, including the maintenance and expansion of our reinsurance activities conducted through our wholly-owned subsidiary, AssuranceOne.
MBB is 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 its operations. These regulations generally have been adopted to protect depositors and creditors rather than shareholders.
There are a number of restrictions on bank holding companies that are designed to minimize potential loss to depositorsAt March 31, 2020, Marlin Business Service Corp and the FDIC insurance funds. If an FDIC-insured depository subsidiary is “undercapitalized,” the bank holding company is required to ensure (subject to certain limits) the subsidiary’s compliance with the terms of any capital restoration plan filed with its appropriate banking agency. Also, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Bank Holding Company Act, the Federal Reserve Board has the authority to require a bank holding company to terminate any activity or to relinquish control of anon-bank subsidiary upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company.
Capital Adequacy. The Company and MBB operate under the Basel III capital adequacy standards adopted by the federal bank regulatory agencies effective on January 1, 2015. Under the risk-based capital requirements applicable to them, bank holding companies must maintain a ratio of total capital to risk-weighted assets (including the asset equivalent of certainoff-balance sheet activities such as acceptances and letters of credit) of not less than 8% (10% in order to be considered “well-capitalized”). The
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requirements include a 6% minimum Tier 1 risk-based ratio (8% to be considered well-capitalized). Tier 1 Capital consists of common stock, related surplus, retained earnings, qualifying perpetual preferred stock and minority interests in the equity accounts of certain consolidated subsidiaries, after deducting goodwill and certain other intangibles. The remainder of total capital (“Tier 2 Capital”) may consist of certain perpetual debt securities, mandatory convertible debt securities, hybrid capital instruments and limited amounts of subordinated debt, qualifying preferred stock, allowance for credit losses on loans and leases, allowance for credit losses onoff-balance-sheet credit exposures and unrealized gains on equity securities.
The capital standards require a minimum Tier 1 leverage ratio of 4%. The capital requirements also require a common equity Tier 1 risk-based capital ratio with a required minimum of 4.5% (6.5% to be considered well-capitalized). The Federal Reserve Board’s guidelines also provide that bank holding companies experiencing internal growth or making acquisitions may be expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a “tangible tier 1 leverage ratio” (i.e., after deducting all intangibles) in evaluating proposals for expansion or new activities. MBB is subject to similar capital standards.
The Company is required to have a level of regulatory capital in excess of the regulatory minimum and to have a capital buffer above 1.875% for 2018, and 2.5% for 2019 and thereafter. 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.
At June 30, 2019, MBB’s Tier 1 leverage ratio, common equity Tier 1 risk-based ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 13.76%, 15.05%, 15.05% and 16.30%, respectively, which exceedsratios exceeded the requirements for well-capitalized statusstatus.
See MDA—Executive Summary for discussion of 5%, 6.5%, 8%updates to our capital requirements driven by the termination of the CMLA Agreement and 10%, respectively. At June 30, 2019, Marlin Business Services Corp.’s Tier 1 leverage ratio, common equity Tier 1 risk based ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 15.24%, 17.01%, 17.01% and 18.26%, respectively, which exceeds requirements for well-capitalized status of 5%, 6.5%, 8% and 10%, respectively.
Pursuantdriven by our election to utilize the five-year transition related to the FDIC Agreement entered intoadoption of the CECL accounting standard. In addition, see Note 13—Stockholders’ Equity in conjunction with the opening of MBB, MBB is requiredNotes to keep its total risk-based capital ratio above 15%. MBB’s Tier 1 Capital balanceConsolidated Financial Statements for additional information regarding these ratios and our levels at June 30, 2019 was $146.3 million, which exceeds the regulatory threshold for “well capitalized” status.March 31, 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 June 30, 2019March 31, 2020
The Company declared a dividend of $0.14 per share on August 1, 2019.April 30, 2020. The quarterly dividend, which is expected to result in a dividend payment of approximately $1.7 million, is scheduled to be paid on August 22, 2019May 21, 2020 to shareholders of record on the close of business on August 12, 2019.May 11, 2020. It represents the Company’s thirty-secondthirty-fifth consecutive quarterly cash dividend. The payment of future dividends will be subject to approval by the Company’s Board of Directors.
Contractual Obligations
In addition to scheduled maturities on our deposits and credit facilities, we have future cash obligations under various types of contracts. We lease office space and office equipment under long-term operating leases. The contractual obligations under our certificates of deposits, credit facilities, term note securitizations, operating leases, agreements and commitments undernon-cancelable contracts as of June 30, 2019 were as follows:
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Contractual Obligations as of June 30, 2019 | ||||||||||||||||||||
Period Ending December 31, | Certificates of Deposits(1) | Borrowings | Contractual Interest Payments(2) | Operating Leases | Total | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Remainder of 2019 | $ | 209,179 | $ | 32,994 | $ | 15,972 | $ | 623 | $ | 258,768 | ||||||||||
2020 | 277,081 | 45,200 | 14,547 | 1,769 | 338,597 | |||||||||||||||
2021 | 202,896 | 23,629 | 7,901 | 1,547 | 235,973 | |||||||||||||||
2022 | 105,523 | 8,582 | 3,327 | 1,458 | 118,890 | |||||||||||||||
2023 | 45,873 | — | 1,404 | 1,371 | 48,648 | |||||||||||||||
Thereafter | 25,062 | — | 190 | 11,358 | 36,610 | |||||||||||||||
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Total | $ | 865,614 | $ | 110,405 | $ | 43,341 | $ | 18,126 | $ | 1,037,486 | ||||||||||
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There were nooff-balance sheet arrangements requiring disclosure at June 30, 2019.
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.
CRITICAL ACCOUNTING POLICIESCRITICAL ACCOUNTING POLICIES
There have been no significant changes to our Critical Accounting Policies as described in our Form10-K for the year ended December 31, 2018.2019, other than as discussed below.
RECENTLY ISSUED ACCOUNTING STANDARDSAllowance for credit losses.
InformationFor 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 recently issuedour 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 Form10-K.
Effective January 1, 2020, we adopted ASU2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”), which changed our accounting pronouncementspolicy 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 aftercharge-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 underly 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 impactfuture 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 our financial statements is provided in Note 2, Summary of Significant Accounting Policiestheir 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 accompanying Notesportfolio or environment and involves significant judgment.
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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 increase to Consolidated Financial Statements.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.
RECENTLY ADOPTED ACCOUNTING STANDARDSRECENTLY ADOPTED ACCOUNTING STANDARDS
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.
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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 Form10-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 secondfirst fiscal quarter of 20192020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.
There have been no material changes in the risk factors disclosed in the Company’s Form10-K for the year ended December 31, 2018.2019, other than as discussed below.
The ongoingCOVID-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 theCOVID-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 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
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in a timely fashion. We continue to evaluate newly enacted and monitor proposed government and banking regulations issued in response to theCOVID-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 ofCOVID-19 pandemic, as discussed further in“ MDA – Overview” andMDA—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. We extend credit primarily to small andmid-sized businesses, and many of our customers may be particularly 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 March 31, 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 March 31, 2020, including certain expectations about the extent and timing of impacts fromCOVID-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. We are currently experiencing a significant decrease in demand for our lease and loan products as a result of theCOVID-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 March 31, 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 otherCOVID-19 related impacts on our operations. We are managing the evolving risks of our business while closely monitoring and forecasting the potential impacts ofCOVID-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 ofCOVID-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 ofCOVID-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 theCOVID-19 pandemic has subsided.
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 theCOVID-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.
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There are no comparable recent events that provide guidance as to the effect the spread ofCOVID-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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information on Stock Repurchases
On May 30, 2017, the Company’s Board of Directors approved a stock repurchase plan (the “2017 Repurchase Plan”) under which the Company was authorized to repurchase up to $10 million in value of its outstanding shares of common stock. At September 30, 2019, there was no balance remaining in the 2017 Repurchase Plan.
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, or in block trades.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 or discontinued at any time.time at the Company’s discretion. The repurchases are funded using the Company’s working capital. As of March 31, 2020, the Company had $4.7 million remaining in the 2019 Repurchase Plan.
The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended June 30, 2019.March 31, 2020.
Time Period | Number of Shares Purchased(2) | Average Price Paid Per Share(1) | Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |||||||||
April 1, 2019 to April 30, 2019 | — | $ | — | $ | 5,036,613 | |||||||
May 1, 2019 to May 31, 2019 | 15,971 | $ | 23.34 | $ | 4,663,794 | |||||||
June 1, 2019 to June 30, 2019 | 56,853 | $ | 23.47 | $ | 3,329,408 | |||||||
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Total for the quarter ended June 30, 2019 | 72,824 | $ | 23.44 | $ | 3,329,408 |
Number of Shares Purchased | Average Price Paid Per Share(1) | Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||
Time Period | ||||||||||||
January 1, 2020 to | ||||||||||||
January 31, 2020 | 62,512 | $ | 21.27 | $ | 7,618,055 | |||||||
February 1, 2020 to | ||||||||||||
February 29, 2020 | 66,289 | $ | 20.34 | $ | 6,269,949 | |||||||
March 1, 2020 to | ||||||||||||
March 31, 2020 | 135,669 | $ | 11.63 | $ | 4,691,747 | |||||||
Total for the quarter ended | ||||||||||||
March 31, 2020 | 264,470 | $ | 16.09 |
(1) | Average price paid per share includes commissions and is rounded to the nearest two decimal places. |
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In addition to the repurchases described above, pursuant to the 2014 Equity Compensation Plan, participants may have shares withheld to cover income taxes. There were 53621,123 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 June 30, 2019,March 31, 2020, at an average cost of $ 22.8113.38 per share. At June 30, 2019, the Company had $ 3.3 million remaining in the 2017 Repurchase Plan.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
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(1) | Previously filed with the SEC as an exhibit to the Registrant’s Annual Report on Form10-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 Form8-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 Form8-K filed on April 24, 2020, and incorporated by reference herein. |
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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 | ||
Jeff Hilzinger | (Principal Executive Officer) | |||
By: | /s/ Michael R. Bogansky | |||
Michael R. Bogansky | Chief Financial Officer & Senior Vice | |||
President | ||||
(Principal Financial Officer) |
Date: August 2, 2019May 1, 2020
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