UNITED STATES
 
SECURITIES AND EXCHANGE
COMMISSION
 
 
WASHINGTON,
 
D.C. 20549
 
FORM
10-Q
 
QUARTERLY REPORT☑
 
QUARTERLY
REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES
SECURITIES EXCHANGE ACT OF 1934
1934
 
For the Quarterly Period Ended
June 30, 2020March 31, 2021
or
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from__________ to__________
 
Commission file number
000-50448
 
 
MARLIN BUSINESS SERVICES CORP.
 
 
(Exact name of registrant as specified in its charter)
 
Pennsylvania
38-3686388
(State of incorporation) (I.R.S.
(I.R.S. Employer Identification Number)
 
 
300 Fellowship Road
,
Mount Laurel
,
NJ
08054
 
(Address of principal executive offices)
 
(Zip code)
 
(
888
)
479-9111
 
(Registrant’s telephone number,
 
including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 per share
MRLN
NASDAQ
 
Global Select Market
 
Indicate by check mark whether the registrant (1) has filed all reports required
 
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or
for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.
Yes
 
☑
 
No
☐
 
 
Indicate by check mark whether the registrant has submitted electronically
 
every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
 
during the preceding 12 months (or for such shorter period
that
registrant was required to submit such files.)
Yes
☑
No
☐
 
 
Indicate by check mark whether the registrant is a large accelerated
 
accelerated filer, an accelerated filer,
 
a non-accelerated filer, a smaller
reporting company or an emerging growth company.
 
See the definitions of "large accelerated
filer,”
 
“accelerated filer", “smaller
reporting company” and “emerging growth company”
 
company” in Rule 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
 
provided pursuant to Section 13(a) of the Exchange Act.
☐
 
 
Indicate by check mark whether the registrant is a shell company (as defined
 
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes
☐
 
No
☒
 
 
At July 24, 2020,April 23, 2021,
11,941,02412,009,234
 
shares of Registrant’s common
 
stock, $.01 par value, were outstanding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MARLIN BUSINESS SERVICES CORP.
 
AND SUBSIDIARIES
 
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2020March 31, 2021
 
 
TABLE OF CONTENTS
 
Page
 
Page
No.
 
 
 
................................................................
 
................................................................
 
................................ 3
 
................................................................
 
...........................................................
3
 
 
................................................................
 
............................... 3
 
 
 
 
................................................................
 
................................................................
 
......................................... 4
 
 
 
June 30,March 31, 2021 and 2020 and 2019
 
................................................................
 
................................................................
 
......................................... 5
 
Consolidated Statements of Stockholders’ Equity for the threethree-month and six-month periods ended
 
 
June 30,March 31, 2021 and 2020 and 2019
 
................................................................
 
................................................................
 
.......................................... 6
 
Consolidated Statements of Cash Flows for the six-monththree-month periods ended
 
 
June 30,March 31, 2021 and 2020 and 2019
 
................................................................
 
................................................................
 
...................... 8................... 7
 
Notes to Unaudited Consolidated Financial Statements
 
................................................................
 
........................................
10.......................................... 9
Item
2
Management’s
Discussion
and
Analysis
of
Financial
Condition
and Results
Res
ults
of
Operations
 
....................................................
42 35
Item
3
Quantitative
and
Qualitative
Disclosures
about
Market
Risk
 
................................................................
 
....................................
70 49
Item
4
Controls
and
Procedures
 
................................................................
 
................................................................
 
............................ 7049
Part II – Other Information
 
................................................................
 
................................................................
 
..................................
70 49
Item
1
Legal
Proceedings
................................................................
 
................................................................
 
......................................
70 49
Item 1A Risk Factors
…
 
................................................................
 
................................................................
 
...........................................
70 49
Item
2
Unregistered
Sales
of
Equity
Securities
and
Use
of
Proceeds
 
................................................................
 
...................................
72 50
Item
3
Defaults
upon
Senior
Securities
 
................................................................
 
................................................................
 
................. 7251
Item
4
Mine
Safety
Disclosures
 
................................................................
 
................................................................
 
............................ 7251
Item
5
Other
Information
 
................................................................
 
................................................................
 
......................................
72 51
Item
6
Exhibits
 
……. ................................................................................................
 
................................................................
 
............ 73................................................................
............................................ 52
Signatures
 
................................................................
 
................................................................
 
................................................................
 
7453
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-3-
 
PART
 
I. Financial Information
 
Item 1. Consolidated
 
1.
Consolidated
Financial
Statements
 
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
 
 
June 30,March 31,
December 31,
 
20202021
20192020
(Dollars in thousands, except per-share
data)
ASSETS
Cash and due from banks
$
5,8985,244
$
4,7015,473
Interest-earning deposits with banks
 
205,808105,378
118,395130,218
 
Total cash and cash equivalents
211,706110,622
123,096135,691
Time deposits with banks
9,9414,482
12,9275,967
Restricted interest-earning deposits related to consolidated VIEs
6,0724,358
6,9314,719
Investment securities (amortized cost of $
$10.312.6
 
million and $
$11.111.5
 
million at
 
June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively)
10,40812,373
11,07611,624
Net investment in leases and loans:
 
Leases
383,787319,092
426,608337,159
 
Loans
590,892517,249
601,607532,125
Net investment in leases and loans, excluding allowance for credit losses (includes $
50.523.2
 
million and
974,679
1,028,215
$
76.130.4
 
million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, related to consolidated VIEs)
836,341
869,284
Allowance for credit losses
(63,644)(38,912)
(21,695)(44,228)
 
Total net investment in leases and loans
911,035797,429
1,006,520825,056
Intangible assets
7,0625,510
7,461
Goodwill
—
6,7355,678
Operating lease right-of-use assets
8,1467,648
8,8637,623
Property and equipment, net
8,5948,603
7,8888,574
Property tax receivables, net of allowance
9,21712,063
5,4936,854
Other assets
14,0349,776
10,45310,212
 
Total assets
$
1,196,215972,864
$
1,207,4431,021,998
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
$
902,191678,331
$
839,132729,614
Long-term borrowings related to consolidated VIEs
50,89023,670
76,09130,665
Operating lease liabilities
9,2428,517
9,7308,700
Other liabilities:
 
Sales and property taxes payable
6,88410,916
2,6786,316
 
Accounts payable and accrued expenses
24,24526,086
34,02827,734
 
Net deferred income tax liability
21,75923,642
30,82822,604
 
Total liabilities
1,015,211771,162
992,487825,633
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $
0.01
 
par value;
5,000,000
 
shares authorized; none
NaN
issued
—0
—0
Common Stock, $
0.01
 
par value;
75,000,000
 
shares authorized;
11,942,24712,009,323
 
and
12,113,58511,974,530
 
shares issued and outstanding at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively
119120
121120
 
Additional paid-in capital
75,60676,682
79,66576,323
 
Accumulated other comprehensive (loss) income
86(115)
5869
 
Retained earnings
105,193125,015
135,112119,853
 
Total stockholders’ equity
181,004201,702
214,956196,365
 
Total liabilities and stockholders’ equity
$
1,196,215972,864
$
1,207,4431,021,998
 
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
-4-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
2021
2020
(Dollars in thousands, except per-share
data)
Interest income
$
18,288
$
26,465
Fee income
2,455
2,766
Interest and fee income
20,743
29,231
Interest expense
3,263
5,680
Net interest and fee income
17,480
23,551
Provision for credit losses
(2,936)
25,150
Net interest and fee income (loss) after provision for credit losses
20,416
(1,599)
Non-interest income:
Gain on leases and loans sold
0
2,282
Insurance premiums written and earned
1,998
2,282
Other income
6,574
7,639
Non-interest income
8,572
12,203
Non-interest expense:
Salaries and benefits
8,373
9,519
General and administrative
11,246
13,605
Goodwill impairment
0
6,735
Non-interest expense
19,619
29,859
Income (loss) before income taxes
9,369
(19,255)
Income tax expense (benefit)
2,518
(7,434)
Net income (loss)
$
6,851
$
(11,821)
Basic earnings (loss) per share
$
0.57
$
(1.00)
Diluted earnings (loss)
per share
$
0.57
$
(1.00)
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
-5-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended March 31,
2021
2020
(Dollars in thousands)
Net income (loss)
$
6,851
$
(11,821)
Other comprehensive income (loss):
Decrease in fair value of debt securities available for sale
(246)
(51)
Tax effect
62
13
Total other comprehensive
loss
(184)
(38)
Comprehensive income (loss)
$
6,667
$
(11,859)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the unaudited consolidated
 
consolidated financial statements.
 
-4--6-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of OperationsStockholders’ Equity
(Unaudited)
 
Three Months Ended June 30,
Six Months Ended June 30,Accumulated
 
2020Common
2019Additional
2020Other
2019Total
Common
Stock
Paid-In
Comprehensive
Retained
Stockholders’
Shares
Amount
Capital
Income (Loss)
Earnings
Equity
(Dollars in thousands, except per-share data)thousands)
Interest incomeBalance, December 31, 2019
12,113,585
121
79,665
58
135,112
$
24,248
$
27,082
$
50,713
$
52,965
Fee income
2,450
3,507
5,216
7,549
Interest and fee income
26,698
30,589
55,929
60,514
Interest expense
5,428
6,408
11,108
12,370
Net interest and fee income
21,270
24,181
44,821
48,144
Provision for credit losses
18,806
4,756
43,956
10,119
Net interest and fee income after provision for credit losses
2,464
19,425
865
38,025
Non-interest income:214,956
 
Gain on leases and loans soldRepurchase of common stock
57(285,593)
3,332(3)
2,339(4,535)
6,9440
0
(4,538)
 
Insurance premiums written and earned
2,249
2,176
4,531
4,308Stock issued in connection with restricted
 
Other income
stock and RSUs, net of forfeitures
1,48956,481
1,6931
9,128(1)
8,8970
0
0
 
Non-interest income
3,795
7,201
15,998
20,149
Non-interest expense:
Salaries and benefits
7,668
12,469
17,187
23,920
General and administrative
5,847
6,068
19,452
19,422
Goodwill impairmentStock option compensation recognized
—
—0
6,735518
—0
Non-interest expense0
13,515
18,537
43,374
43,342
(Loss) income before income taxes
(7,256)
8,089
(26,511)
14,832
Income tax (benefit) expense
(1,374)
1,974
(8,808)
3,576518
 
Net (loss) incomechange in unrealized gain/loss on
securities available for sale, net of tax
—
0
0
(38)
0
(38)
Net loss
—
0
0
0
(11,821)
(11,821)
Impact of adoption of new accounting
standards
(1)
—
0
0
0
(8,877)
(8,877)
Cash dividends paid ($
0.14
per share)
—
0
0
0
(1,710)
(1,710)
Balance, March 31, 2020
11,884,473
$
(5,882)
6,115
(17,703)
11,256
Basic (loss) earnings per share119
$
(0.50)75,647
$
0.5020
$
(1.50)112,704
$
0.91188,490
Diluted (loss) earnings Balance, December 31, 2020
11,974,530
120
76,323
69
119,853
196,365
Repurchase of common stock
(16,038)
0
(224)
0
0
(224)
Stock issued in connection with restricted
stock and RSUs, net of forfeitures
50,831
0
0
0
0
0
Stock-based compensation recognized
—
0
583
0
0
583
Net change in unrealized gain/loss on
securities available for sale, net of tax
—
0
0
(184)
0
(184)
Net income
—
0
0
0
6,851
6,851
Cash dividends paid ($
0.14
per shareshare)
—
0
0
0
(1,689)
(1,689)
Balance, March 31, 2021
12,009,323
$
(0.50)120
$
0.4976,682
$
(1.50)(115)
$
0.91125,015
$
201,702
(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
 
consolidated financial statements.
 
-5--7-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Cash Flows
(Unaudited)
 
Three Months Ended June 30,March 31,
Six Months Ended June 30,2021
2020
2019
2020
2019
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) income
$
(5,882)6,851
$
6,115
$
(17,703)
$
11,256
Other comprehensive income (loss):(11,821)
 
IncreaseAdjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
877
1,057
Stock-based compensation
583
518
Impairment of goodwill and intangible assets
0
6,735
Change in fair value of debtequity securities available
66
(58)
Provision for credit losses
(2,936)
25,150
Change in net deferred income tax liability
1,100
(2,107)
Amortization of deferred initial direct costs and fees
2,520
3,413
Gain on leases sold
0
(2,282)
Leases originated for sale
880
69
37
123(3,693)
 
Tax effectProceeds from sale of leases originated for sale
(22)0
(17)
(9)
(31)
Total other comprehensive income
66
52
28
923,874
 
Comprehensive (loss) incomeNoncash lease expense
166
324
Effect of changes in other operating items:
Other assets
(4,905)
(12,002)
Other liabilities
2,710
1,083
Net cash provided by operating activities
7,032
10,191
Cash flows from investing activities:
Net change in time deposits with banks
1,485
(737)
Purchases of equipment for lease contracts and funds used to originate
loans
(85,571)
(156,145)
Principal collections on leases and loans
112,667
129,810
Proceeds from sale of leases originated for investment
0
21,337
Security deposits collected, net of refunds
(14)
(78)
Proceeds from the sale of equipment
817
840
Acquisitions of property and equipment
(615)
(796)
Purchases of investment securities
(1,569)
(19)
Principal payments received on investment securities
548
613
Net cash provided by (used in) investing activities
27,748
(5,175)
Cash flows from financing activities:
Net change in deposits
(51,283)
102,864
Term securitization repayments
(7,026)
(14,008)
Business combinations earn-out consideration payments
0
(132)
Repurchases of common stock
(224)
(4,538)
Dividends paid
(1,677)
(1,685)
Net cash (used in) provided by financing activities
(60,210)
82,501
Net increase in total cash, cash equivalents and restricted cash
(25,430)
87,517
Total cash, cash equivalents
and restricted cash, beginning of period
140,410
130,027
Total cash, cash equivalents
and restricted cash, end of period
$
(5,816)114,980
$
6,167
$
(17,675)
$
11,348217,544
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the unaudited consolidated
 
consolidated financial statements.
 
-6--8-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ EquityCash Flows
(Unaudited)
 
 
Accumulated
Three Months Ended March 31,
 
Common2021
Additional
Other
Total
Common
Stock
Paid-In
Comprehensive
Retained
Stockholders’
Shares
Amount
Capital
Income (Loss)
Earnings
Equity
2020
(Dollars in thousands)
Balance, December 31, 2019Supplemental disclosures of cash flow information:
12,113,585
Cash paid for interest on deposits and borrowings
$
1213,170
$
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
—
—
5185,420
 
Net change in unrealized gain/loss oncash paid for income taxes
903
1,797
Leases and loans transferred into held for sale from investment
0
19,235
Supplemental disclosures of non-cash investing activities:
Purchase of equipment for lease contracts and loans originated
1,309
3,773
Reconciliation of Cash, cash equivalents and restricted cash to
 
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)the Consolidated Balance Sheets:
Cash dividends paid ($
0.14
per share)
—
—
—
—
(1,710)
(1,710)
Balance, March 31, 2020
11,884,473
119
75,647
20
112,704
188,490
Issuance of common stock
14,891
—
120
—
—
120
Repurchase of common stock
(1,897)
—
(12)
—
—
(12)
Stock issued in connection with restricted
stock and RSUs, net of forfeitures
44,780
—
—
—
—
—
Stock-based compensation recognized
—
—
(149)
—
—
(149)
Net change in unrealized gain/loss on
securities available for sale, net of tax
—
—
—
66
—
66
Net loss
—
—
—
—
(5,882)
(5,882)
Cash dividends paid ($
0.14
per share)
—
—
—
—
(1,629)
(1,629)
Balance, June 30, 2020
11,942,247cash equivalents
$
119110,622
$
75,606211,070
Restricted interest-earning deposits
4,358
6,474
Cash, cash equivalents and restricted cash at end of period
$
86114,980
$
105,193
$
181,004
(1)
Represents the impact of Accounting Standards Update ("ASU")
2016-13 and related ASUs collectively referred to as "CECL".
See Note 2.
217,544
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
-7-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Accumulated
Common
Additional
Stock
Other
Total
Common
Stock
Paid-In
Subscription
Comprehensive
Retained
Stockholders’
Shares
Amount
Capital
Receivable
Income (Loss)
Earnings
Equity
(Dollars in thousands)
Balance, December 31, 2018
12,367,724
$
124
$
83,498
$
(2)
$
(44)
$
114,935
$
198,511
Repurchase of common stock
(48,857)
(1)
(1,144)
—
—
—
(1,145)
Stock issued in connection with restricted
stock and RSUs, 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)
Balance, March 31, 2019
12,349,076
123
83,215
(2)
(4)
118,318
201,650
Issuance of common stock
10,298
—
240
—
—
—
240
Repurchase of common stock
(73,360)
—
(1,719)
—
—
—
(1,719)
Stock issued in connection with restricted
stock and RSUs, net of forfeitures
(450)
—
—
—
—
—
—
Stock-based compensation recognized
—
—
990
—
—
—
990
Net change in unrealized gain/loss on
securities available for sale, net of tax
—
—
—
—
52
—
52
Net income
—
—
—
—
—
6,115
6,115
Cash dividends paid ($
0.14
per share)
—
—
—
—
—
(1,774)
(1,774)
Balance, June 30, 2019
12,285,564
$
123
$
82,726
$
(2)
$
48
$
122,659
$
205,554
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,
2020
2019
(Dollars in thousands)
Cash flows from operating activities:
Net (loss) income
$
(17,703)
$
11,256
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization
2,059
2,390
Stock-based compensation
369
1,851
Goodwill impairment
6,735
—
Change in fair value of equity securities
(89)
(94)
Provision for credit losses
43,956
10,119
Change in net deferred income tax liability
(6,047)
4,142
Amortization of deferred initial direct costs and fees
6,393
7,252
(Gain) loss on equipment disposed
(37)
911
Gain on leases sold
(2,339)
(6,944)
Leases originated for sale
(4,820)
(29,036)
Proceeds from sale of leases originated for sale
5,058
30,062
Noncash lease expense
872
551
Effect of changes in other operating items:
Other assets
(7,665)
(4,549)
Other liabilities
(1,320)
(892)
Net cash provided by operating activities
25,422
27,019
Cash flows from investing activities:
Net change in time deposits with banks
2,986
(3,020)
Purchases of equipment for lease contracts and funds used to
originate loans
(229,512)
(409,915)
Principal collections on leases and loans
237,797
248,563
Proceeds from sale of leases originated for investment
21,337
87,390
Security deposits collected, net of refunds
(129)
(130)
Proceeds from the sale of equipment
1,151
1,409
Acquisitions of property and equipment
(1,790)
(816)
Principal payments received on securities available for sale
779
529
Net cash provided by (used in) investing activities
32,619
(75,990)
Cash flows from financing activities:
Net change in deposits
63,059
132,785
Term securitization repayments
(25,402)
(40,829)
Business combinations earn-out consideration payments
(168)
(223)
Issuances of common stock
120
240
Repurchases of common stock
(4,550)
(2,864)
Dividends paid
(3,349)
(3,456)
Net cash provided by financing activities
29,710
85,653
Net increase in total cash, cash equivalents and restricted cash
87,751
36,682
Total cash, cash equivalents
and restricted cash, beginning of period
130,027
111,201
Total cash, cash equivalents
and restricted cash, end of period
$
217,778
$
147,883
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
-9-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
2020
2019
(Dollars in thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest on deposits and borrowings
$
11,368
$
11,504
Net cash paid for income taxes
1,868
1,362
Leases transferred into held for sale from investment
19,235
81,472
Supplemental disclosures of non cash investing activities:
Business combinations assets acquired
$
—
$
146
Purchase of equipment for lease contracts and loans originated
4,106
7,038
Reconciliation of Cash, cash equivalents and restricted cash
to
the Consolidated Balance Sheets:
Cash and cash equivalents
$
211,706
$
139,731
Restricted interest-earning deposits
6,072
8,152
Cash, cash equivalents and restricted cash at end of period
$
217,778
$
147,883
-10-
 
MARLIN BUSINESS SERVICES CORP.
 
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
 
FINANCIAL STATEMENTS
 
 
NOTE 1 – The Company
 
 
Marlin Business Services Corp. (the “Company”) isWe are a nationwide provider
 
provider of credit products and services to small businesses. The
productsbusinesses and services we provide to our customers include loans andwere incorporated
 
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
of Pennsylvania on August 5, 2003.in
2003
. In May 2000,
2008, 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”) andopened Marlin Business Bank
(“MBB”) for our small business customers. Effective, a commercial bank chartered
 
March 12, 2008, the Company opened MBB, a commercial
bank chartered by
the State of
Utah
and a
member of the Federal Reserve System.
MBBSystem, which serves as the Company’s
 
primary funding source through its
issuance of Federal
Deposit Insurance Corporation (“FDIC”)-insured deposits. In 2009,
 
-insured deposits.Marlin Business Services Corp. became a bank holding company
subject to the Bank Holding Company Act and in 2010, the Federal Reserve
 
In January 2017, we completedBank of Philadelphia confirmed the acquisitioneffectiveness of
Horizon Keystone Financial (“HKF”), an equipment leasingMarlin Business Services Corp.’s
election to become a financial holding company which(while remaining a bank
 
primarily identifiesholding company)
pursuant to Sections 4(k) and sources lease(l) of the Bank Holding Company Act and loan contracts
for investor partners for a fee.
 
On September 19, 2018,section 225.82 of the Company completed the acquisition of FleetFederal Reserve Board’s
 
Financing ResourcesRegulation Y.
(“FFR”), a leading provider of equipment finance credit products specializingSuch election permits Marlin Business Services Corp. to engage
 
in the leasing and financing of both new and usedactivities that are financial in nature or incidental to a financial
commercial vehicles, with an emphasis on livery equipment andactivity,
 
other typesincluding the maintenance and expansion of commercial vehicles used by small businesses.our reinsurance activities conducted
through our wholly-owned subsidiary,
AssuranceOne, Ltd. (“AssuranceOne”).
 
 
References to the “Company,”
 
“Marlin,” “Registrant,” “we,” “us” and “our” herein refer to Marlin
 
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
 
the accounts of the Company and
its wholly-owned subsidiaries. MLC and MBB are managed togetherThe Company has one reportable segment,
 
as a single business segment and are aggregated for financial
reporting purposes as they exhibit similar economic characteristics,which includes the Company’s commercial
 
share the same lending and
leasing products and loan portfoliorelated services, including equipment loans and have a single
leases, property insurance on leased equipment, and working
consolidated product offering platform.capital loans. 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, 2020March 31, 2021 and the
results of operations for the three-three-month periods ended March 31, 2021
 
and six -month periods ended June 30, 2020, and 2019
,
 
and cash flows for the six-monththree-month periods ended
ended June 30, 2020March 31, 2021 and 2019.2020.
 
In management’s opinion, the unaudited
 
unaudited consolidated financial statements contain all adjustments, which
which include normal and recurring adjustments, necessary for a fair presentation
 
fair presentation of the financial position and results of operations
for the
the interim periods presented.
 
These unaudited consolidated financial statements should be
read in conjunction
with the consolidated
financial statements and note disclosures included in the Company’s
 
Form 10-K for the year ended December 31, 2019,
2020, filed with the
Securities and Exchange Commission (“SEC”) on March 13,5, 2021
 
2020. .
The consolidated results and statements of cash flows for these
interim financial statements are not necessarily indicative of the results of
 
of operations or cash flows for the respective
full years or
any
other period.
 
 
Use of Estimates.
 
These unaudited consolidated financial statements require
 
require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
 
disclosure of contingent assets and liabilities at the date of
the financial
statements and the reported amounts of revenues and expenses during
 
during the reporting period. Estimates are used when accounting
for
income recognition, the residual values of leased equipment, the
 
the allowance for credit losses, deferred initial direct costs and fees, late
fee receivables, the fair value of financial instruments, estimated losses from
 
losses from insurance program, and income taxes. Actual results
could differ from those estimates.
 
 
Provision for incomeIncome taxes.
 
 
Our statutory tax rate, which is a combination of federal and state income tax
rates
,
was
25.425.1
% and
23.9
% for the three months ended June 30, 2020.
For the three-month period ended June 30,March 31, 2021 and March 31, 2020, the
effective tax rate was
18.9
%, driven by an interim reporting limitation on the amount of tax benefits
that can be recognized under
Accounting Standards Codification (“ASC”) 740,
Income Taxes
.respectively.
 
 
For the six-month periodthree months ended June 30, 2020, theMarch 31, 2021 our effective
 
tax rate in recognizing our benefit was
33.226.9
%, expense and for the three months ended March 31, 2020,
our effective tax rate was
38.6
% benefit, driven by a $
3.2
 
million
discrete benefit, resulting from certain provisions in the Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”) that
allow for a remeasurement
of our federal net operating losses.
 
The Company has filed is
currently under examination
by the IRS
for atax
years ending December
31, 2013 to
2018 resulting from
Joint Committee
Review as part of an IRS refund claim. The Company remains subject to examination for the 2017 tax year to the present under regular
statute of carryback net operating losseslimitations. The Company files state income tax returns in various
states which may have different statutes of limitations.
 
 
 
-11--10-
 
as permitted under the CARES act.
The impact to our effective rate from that benefit was partially
offset by the limitation on interim
tax benefits, as discussed above.
For the three and six month periods ended June 30, 2019,
our effective tax rates were
24.4
% and
24.1
%, respectively, and there were
no significant reconciling items from our statutory rate.
 
Significant Accounting Policies.
 
There have been no significant changes to our Significant Accounting
 
Accounting Policies as described in our
Annual Report on Form 10-K for the year ended December 31,
 
31, 2019, other than the adoption of ASU 2016-13 as described
below.
2020.
 
Recently Adopted Accounting Standards
.
 
 
Credit Losses.
 
In June 2016, the FASBFinancial Accounting Standards Board (“FASB”)
 
issued Accounting Standards Update (“ASU”)
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
 
326): Measurement of Credit
Credit Losses on Financial Instruments
, which changes the methodology for evaluating impairment
of most financial instruments.
This guidance was subsequently amended by ASU 2018-19,
Codification Improvements,
ASU 2019-04,
Codification Improvements
,
ASU 2019-05,
Targeted
Transition Relief,
ASU 2019-10,
Effective Dates,
and ASU 2019-11,
Codification Improvements
.
These
ASUs are referred to collectively as “CECL”.
CECL replaces the probable, incurred loss model with a measurement
of expected credit losses for the contractual term of the
Company’s current portfolio of loans
 
and leases.
Under CECL, an
allowance, or estimate of credit losses, is recognized immediatelyrelated
upon the origination of a loan or lease and will be adjusted in
each subsequent reporting period.
This estimate of credit losses takes
into consideration all cashflows the Company expectsASUs collectively referred to receive or
derive from the pools of contracts, including recoveries after
charge-off, amounts related to initial direct cost
and origination costs net of fees deferred, accrued interest receivable
and certain
future cashflows from residual assets. The Company had previously
recognized residual income within Fee Income in its Consolidated
Statements
of Operations; the adoption of CECL results in such residual income
being captured as a component of the activity of the
allowance. The Company’s poli
cy for charging off contracts against the
allowance, and non-accrual policy are not impacted by the
adoption of CECL.
The provision for credit losses recognized in the Consolidated
Statements of Operations under CECL will be primarily driven by
originations, offset by the reversal of the allowance
for any contracts sold, plus any amounts of realized cashflows,
such as charge-
offs, above or below our modeled estimates, plus adjustments
for changes in estimate each subsequent reporting period.
Estimating an allowance under CECL requires the Company to
develop and maintain a consistent systematic methodology to
measure
the estimated credit losses inherent in its current portfolio,
over the entire life of the contracts.
The Company assesses the appropriate
collective, or pool, basis to use to aggregate its portfolio based
on the existence of similar risk characteristics and determined that its
measurement begins by separately considering segments of financing
receivables, which is similar to how it has historically analyzed
its allowance for credit losses: (i) equipment finance lease and loan;
(ii) working capital loans; (iii) commercial vehicles “CVG”;
and
(iv) Community Reinvestment Act and Paycheck Protectio
n
loans.
However, these classes of receivables are
further disaggregated
into pools of loans based on risk characteristics that may include:
lease or loan type, origination channel, and internal credit
score
(which is a measurement that combines many risk characteristics,
including loan size, external credit scores, existence of
a guarantee,
and various characteristics of the borrower’s business)“CECL”.
As part of our analysis of expected credit losses, we may analyze
contracts on an individual basis, or create additional pools of
contracts, in situations where such loans exhibit unique risk characteristics
and are no longer expected to experience similar losses to
the rest of their pool.
As part of its estimate of expected credit losses, specific to each
measurement date, management considers relevant qualitative and
quantitative factors to assess whether the historical loss experience
being referenced should be adjusted to better reflect the risk
characteristics of the current portfolio and the expected future
loss experience for the life of these contracts.
This assessment
incorporates all available information relevant to considering the collectability
of its current portfolio, including considering economic
and business conditions, default trends, changes in its portfolio
composition, changes in its lending policies and practices, among
other
internal and external factors.
 
The Company adopted the guidance in these ASUs, effective January
 
January 1, 2020, applying changes resulting from the application
of the
new standard’s provisions
as a
cumulative-effect adjustment to retained earnings as of the beginning
 
the beginning of the first reporting period in
which the guidance iswas effective (i.e., modified retrospective
 
approach). See our Annual Report on Form 10-K for the year ended
December 31, 2020 for a detailed discussion of our adoption of
 
this guidance.
 
Income Taxes
.
In December 2019, the FASB
issued ASU 2019-12,
Income Taxes
(Topic 740):
Simplifying the Accounting for
Income Taxes
, which removes certain exceptions to the general principles of ASC 740 in order
to reduce the cost and complexity of its
application.
The amendments also clarify and amend existing guidance to improve consistent application.
The ASU is effective for
fiscal years beginning after December 15, 2020, including interim periods
within those annual periods.
We adopted
ASU 2019-12 on
January 1, 2021, and the adoption did not have a material impact on our
consolidated financial position or results of operations.
 
 
 
 
-12-
The adoption of this standard resulted in the following adjustment
to the Company’s Consolidated
Balance Sheets:
Balance as of
Balance as of
December 31,
Adoption
January 1,
2019
Impact
2020
(Dollars in thousands)
Assets:
Net investment in leases and loans
$
1,028,215
$
—
$
1,028,215
Allowance for credit losses
(21,695)
(11,908)
(33,603)
Total net investment in leases
and loans
1,006,520
994,612
Liabilities:
Net deferred income tax liability
30,828
(3,031)
27,797
Stockholders' Equity:
Retained Earnings
135,112
(8,877)
126,235
See Note 6 – Allowance for Credit Losses, for further discussion of the
January 1, 2020 measurement of allowance under CECL, as
well as discussion of the Company’s
new Accounting Policy governing its Allowance.
See Note 13 – Stockholders’ Equity,
for discussion of the Company’s
election to delay for two-years the effect of CECL
on regulatory
capital, followed by a three-year phase-in for a five-year total
transition.
In addition, as a result of adoption this standard, future measurements of
the impairment of our investment securities will
incorporate
the guidance in these ASUs, including analyzing any decline
in fair value between credit quality-driven factors versus other factors.
There was no impact as of the adoption date to our investment
securities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-13--11-
 
NOTE 3 – Non-Interest Income
 
The following table summarizes the Company’s
non-interest income for the periods
presented:
 
Three Months Ended
Six Months Ended
June 30,
June 30, March 31,
(Dollarsdollars in thousands)
2020
20192021
2020
2019
Insurance premiums written and earned
$
2,2491,998
$
2,176
$
4,531
$
4,3082,282
Gain on sale of leases and loans
570
3,3322,282
2,339Other income:
6,944Property tax income
5,020
5,504
Servicing income
489386
339
1,055
626
Property tax (loss) income
(380)
79
5,124
5,722566
Net gainsgain (loss) recognized during the period on equity securities
31(66)
50
89
9458
Non-interest income - other than from contracts with customers
2,4467,338
5,97610,692
13,138Other income:
17,694Insurance policy fees
772
918
Property tax administrative fees on leases
236203
261
470
529234
ACH payment fees
3659
74
108
160
Insurance policy fees
873
666
1,791
1,33472
Referral fees
1410
164
108
31894
Other
190
60
383
114193
Non-interest income from contracts with customers
1,3491,234
1,225
2,860
2,4551,511
Total non-interest income
$
3,7958,572
$
7,20112,203
$
15,998
$
20,149
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-14-
-12-
 
NOTE 4 - Investment Securities
 
 
The Company had the following investment securities as of the
dates presented:
 
June 30,March 31,
December 31,
2020
2019
(Dollars in thousands)
2021
2020
Equity Securities
Mutual fund
$
3,7403,707
$
3,6153,760
Debt Securities, Available
 
for Sale:
Asset-backed securities ("ABS")
3,9355,192
4,3323,719
Municipal securities
 
2,7333,474
 
3,1294,145
 
Total investment securities
$
10,40812,373
$
11,07611,624
 
The following schedule summarizes changes in fair value of equity securities
 
and the portion of unrealized gains and losses for each
period presented:
 
Three Months Ended June 30,March 31,
Six Months Ended June 30,2021
2020
(Dollars in thousands)
2020
2019
2020
2019
Net gains and (losses) recognized during the period on equity securities
$
31(66)
$
50
$
89
$
9458
Less: Net gains and (losses) recognized during the period
 
on equity securities sold during the period
 
—0
—
—
—0
Unrealized gains and (losses) recognized during the reporting period
 
on equity securities still held at the reporting date
$
31(66)
$
5058
Available for
Sale
The following schedule is a summary of available for sale investments as of the
dates presented:
March 31, 2021
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
895,125
$
9468
$
0
$
5,192
Municipal securities
3,672
2
(199)
3,474
Total Debt Securities, Available
for Sale
$
8,797
$
70
$
(199)
$
8,666
December 31, 2020
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
3,666
$
53
$
0
$
3,719
Municipal securities
4,082
64
(1)
4,145
Total Debt Securities, Available
for Sale
$
7,748
$
117
$
(1)
$
7,864
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-13-
 
-15-
Available for
Sale
The following schedule is a summary of available for sale investments
as of the dates presented:
June 30, 2020
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
3,865
$
70
$
—
$
3,935
Municipal securities
2,664
69
—
2,733
Total Debt
Securities, Available for Sale
$
6,529
$
139
$
—
$
6,668
December 31, 2019
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
4,302
$
33
$
(3)
$
4,332
Municipal securities
3,058
71
—
3,129
Total Debt
Securities, Available for Sale
$
7,360
$
104
$
(3)
$
7,461
The Company evaluates its available for sale securities in an unrealized loss position
 
loss position for other than temporary impairment on at least a
quarterly basis. The Company did not
0
t recognize any other than temporary
impairment to earnings for each of the periods ended June
March
30, 202031, 2021 and June 30, 2019.March 31, 2020.
The following tables present the aggregate amount of unrealized losses on
 
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, 2020
March 31, 2021 and
December 31, 2019:2020:
June 30,March 31, 2021
Less than 12 months
12 months or longer
Total
Gross
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Unrealized
Fair
Losses
Value
Losses
Value
Losses
Value
(Dollars in thousands)
Municipal securities
$
(199)
$
3,348
$
0
$
0
$
(199)
$
3,348
Total available for sale investment
securities
$
(199)
$
3,348
$
0
$
0
$
(199)
$
3,348
December 31, 2020
Less than 12 months
12 months or longer
Total
Gross
 
Gross
Gross
Unrealized
 
Fair
Unrealized
Fair
Unrealized
Fair
Losses
Value
Losses
Value
Losses
Value
(Dollars in thousands)
Municipal securities
$
(1)
$
—141
$
1700
$
—0
$
—(1)
$
—
$
170141
Total available
for sale investment
securities
$
—(1)
$
170141
$
—0
$
—0
$
—(1)
$
170141
(1)
The unrealized loss is immaterialfollowing table presents the amortized cost, fair value, and weighted average
yield of available for sale investments at March 31,
December 31, 20192021,
based on estimated average life. Receipt of cash flows may differ
from those estimated maturities because borrowers may have
Less than 12 monthsthe right to call or prepay obligations with or without penalties:
12 months or longer
Total
Gross
 
Gross
Distribution of Maturities
Gross
Unrealized1 Year
 
Fair
Over 1 to
Unrealized
Over 5 to
FairOver 10
Unrealizedor Less
Fair5 Years
Losses10 Years
ValueYears
Losses
Value
Losses
ValueTotal
(Dollars in thousands)
Amortized Cost:
ABS
$
—750
$
—1,302
$
(3)1,475
$
4301,598
$
(3)5,125
Municipal securities
5
120
0
3,547
3,672
Total available for sale investments
$
430
Total available
for sale investment
securities755
$
—1,422
$
—1,475
$
(3)5,145
$
4308,797
Estimated fair value
$
(3)763
$
4301,447
$
1,510
$
4,946
$
8,666
Weighted-average
yield, GAAP basis
2.31
%
1.84
%
0.81
%
2.15
%
1.89
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-16-
The following table presents the amortized cost, fair value, and
weighted average yield of available for sale investments at June 30,
2020,
based on estimated average life. Receipt of cash flows may differ
from those estimated maturities because borrowers may have
the right to call or prepay obligations with or without penalties:
Distribution of Maturities
1 Year
Over 1 to
Over 5 to
Over 10
or Less
5 Years
10 Years
Years
Total
(Dollars in thousands)
Amortized Cost:
ABS
$
—
$
2,351
$
1,514
$
—
$
3,865
Municipal securities
15
346
2,133
170
2,664
Total available
for sale investments
$
15
$
2,697
$
3,647
$
170
$
6,529
Estimated fair value
$
15
$
2,762
$
3,721
$
170
$
6,668
Weighted-average
yield, GAAP basis
4.75%
2.01%
2.31%
2.10%
2.19%
-17--14-
 
NOTE 5 – Net Investment in Leases and Loans
 
 
Net investment in leases and loans consists of the following:
 
June 30, 2020March 31, 2021
December 31, 20192020
(Dollars in thousands)
Minimum lease payments receivable
$
407,019334,294
$
457,602354,298
Estimated residual value of equipment
28,85126,349
29,34226,983
Unearned lease income, net of initial direct costs and fees deferred
(51,625)(41,179)
(59,746)(43,737)
Security deposits
(458)(372)
(590)(385)
Total leases
383,787319,092
426,608337,159
Commercial loans, net of origination costs and fees deferred
Working Capital
 
Capital Loans
42,07818,351
60,94220,034
CRA
(1)
1,0981,158
1,3981,091
Equipment loans
(2)
473,267436,814
464,655449,149
CVG
70,45260,926
74,612
PPP Loans
3,997
—61,851
Total commercial
loans
590,892517,249
601,607532,125
Net investment in leases and loans, excluding allowance
974,679836,341
1,028,215869,284
Allowance for credit losses
(63,644)(38,912)
(21,695)(44,228)
Total net investment
in leases
and loans
$
911,035797,429
$
1,006,520825,056
________________________
 
(1)
 
CRA loans are comprised of loans originated under a line of credit to satisfy its obligations under the Community Reinvestment Act of 1977
(“CRA”).
(2)
 
Equipment loans are comprised of Equipment Finance Agreements, Installment Purchase Agreements and other loans.
 
In 2020, the Company was a participating lender,
offering loans to its customers that are guaranteed under
the Small Business
Administration’s (SBA’s)
Paycheck Protection Program (“PPP”).
The SBA pays lender fees for processing PPP loans, and the
Company will recognize the fee income associated with originating
these loans over the life of the contracts on the effective
interest
method.
In response to COVID-19, starting in mid-March 2020, the Company
 
the Company instituted a payment deferral contract modification
program in
order to assist our small-business customers.
 
See Note 6, “Allowance for Credit Losses” for discussion of that program.
 
At June 30, 2020,March 31, 2021, $
50.5
million in net investment in leases were pledged as collateral
for the Company’s outstanding asset-backed
securitization balance and $
56.324.9
 
million in net investment in leases were pledged as collateral for the Company’s
 
outstanding asset-backed
securitization balance and $
55.2
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 fees deferred
were $
17.913.6
 
million and $
20.514.6
 
million as of JuneMarch
30, 202031, 2021 and December 31, 2019,2020,
 
respectively. Initial direct
 
costs are netted in unearned income and are amortized to income using
the effective interest method.
ASU 2016-02 limited the types of costs that qualify for deferral
as initial direct costs for leases, which
reduced the deferral of unit lease costs and resulted in an increase
in current period expense. Origination costs are
netted in
commercial loans and are amortized to income using the effective interest
interest method. At June 30, 2020March 31, 2021 and December 31, 2020, $
21.5
 
2019, $
23.1
million and $
23.421.9
 
million, respectively,
of the estimated
residual value of
equipment retained on our Consolidated Balance Sheets was related
 
Sheets was
related to copiers.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-18-
-15-
 
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, 2020:March 31, 2021:
 
 
 
Minimum Lease
 
Payments
Net Income
Receivable
(1)
Amortization
(2)
(Dollars in thousands)
Period Ending DecemberMarch 31,
Remainder of 20202021
$
87,364105,209
$
15,111
2021
142,161
19,71318,517
2022
94,796109,389
10,46313,153
2023
53,31268,649
4,5886,463
2024
23,86235,012
1,4032,403
2025
13,032
589
Thereafter
5,5243,003
34754
$
407,019334,294
$
51,62541,179
________________________
 
 
(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.
The lease income recognized was as follows:
 
Three Months Ended March 31,
2021
2020
(Dollars in thousands)
Interest Income
$
6,693
$
9,151
As of March 31, 2021 and December 31, 2020,
the Company maintained total finance receivables which were on a non-accrual basis
with net investment of $
14.0
million and $
14.3
million, respectively.
As of March 31, 2021, the Company had contracts that had been
modified under its COVID-19 payment deferral program of $
93.8
million representing approximately
11.2
% of the Company’s total
net investment.
See
Note 6
“Allowance for Credit Losses” for additional discussion of loan modifications
due to COVID-19.
 
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
 
leases and loans that were originated for investment to
third parties.
 
For agreements that qualify as a sale where the Company has continuing
 
continuing involvement through servicing, the Company recognizes
a
servicing liability at its initial fair value, and then amortizes the liability over
 
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
 
typically do not contain
a stated servicing fee, so the initial value recognized as a servicing liability
 
liability is a reduction of the proceeds received and is based
on an
estimate of the fair value attributable to that obligation.
 
The Company’s servicing liability
 
was $
1.91.1
 
million and $
2.51.3
 
million as of
June 30, 2020 March 31, 2021,
and December 31, 2019, respectively,2020,
 
respectively, and is recognized
within Accounts payable and accrued expenses
in the
Consolidated Balance Sheets.
 
As of June 30, 2020March 31, 2021 and December 31, 2019, 2020,
the portfolio
of leases and loans serviced for others was
approximately $
296199
 
million and $
340230
 
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 reserve
for expected losses from recourse
obligations was $
0.8
million as of June 30, 2020 and $
0.4
million as of December 31, 2019.
The following table summarizes information related to portfolio
 
sales for the periods presented:
 
 
-16-
 
Three Months Ended June 30,March 31,
Six Months Ended June 30,2021
2020
2019
2020
2019
(Dollars in thousands)
Sales of leases and loans
 
$
1,1270
$
57,640
$
24,056
$
110,50822,929
Gain on sale of leases and loans
570
3,332
2,339
6,9442,282
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-19-
-17-
 
NOTE 6 – Allowance for Credit Losses
 
For 2019 and prior, we maintained an allowance
for credit losses at an amount sufficient to absorb
losses inherent in our existing lease
and loan portfolios as of the reporting dates based on our estimate of probable
incurred net credit losses in accordance with the
Contingencies Topic
of the FASB ASC.
 
Effective January 1, 2020, we
 
adopted
ASU 2016-13
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments
(“CECL”) and related ASUs collectively referred to as CECL
,
 
which changed our accounting policy and estimated allowance.replaced
 
CECL replaces the probable,
probable, incurred loss model with a measurement of expected
credit losses for the contractual
term of the Company’s current portfolio
 
current
portfolio of loans
and leases.
After the adoption of CECL, an allowance, or estimate of credit
losses, is recognized immediately upon
the origination of a loan or lease and will be adjusted in each
subsequent reporting period.
 
See furtherour Annual Report on Form 10-K for the year ended December 31, 20
20 for a detailed discussion of theour 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 June 30, 2020 is below.guidance.
 
The following tables summarize activity in the allowance for
credit losses
:
 
Three Months Ended June 30, 2020
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA &
PPP
Total
Allowance for credit losses, beginning of period
$
37,774
$
7,200
$
7,086
$
—
$
52,060
Charge-offs
(7,724)
(686)
(904)
—
(9,314)
Recoveries
729
17
74
—
820
Net charge-offs
(6,995)
(669)
(830)
—
(8,494)
Realized cashflows from Residual Income
1,272
—
—
—
1,272
Provision for credit losses
16,499
1,431
876
—
18,806
Allowance for credit losses, end of period
$
48,550
$
7,962
$
7,132
$
—
$
63,644
Net investment in leases and loans, before
allowance
$
846,057
$
42,078
$
81,449
$
5,095
$
974,679
Three Months Ended June 30, 2019March 31, 2021
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
13,97533,184
$
1,6841,206
$
1,2239,838
$
—0
$
16,88244,228
 
Charge-offs
(4,508)(3,711)
(602)(535)
(345)(762)
—0
(5,455)(5,008)
 
Recoveries
4821,360
51130
6143
—0
5941,533
Net charge-offs
(4,026)(2,351)
(551)(405)
(284)(719)
—0
(4,861)(3,475)
Realized cashflows from Residual Income
1,095
0
0
0
1,095
 
Provision for credit losses
3,467(3,076)
807209
482(69)
—0
4,756(2,936)
Allowance for credit losses, end of period
$
13,41628,852
$
1,9401,010
$
1,4219,050
$
—0
$
16,77738,912
Net investment in leases and loans, before
allowance
$
942,508746,395
$
51,74818,351
$
83,29970,437
$
1,4931,158
$
1,079,048836,341
 
Three Months Ended March 31, 2020
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, December 31, 2019
$
18,334
$
1,899
$
1,462
$
0
$
21,695
Adoption of ASU 2016-13 (CECL)
(1)
9,264
(3)
2,647
0
11,908
Allowance for credit losses, January 1, 2020
$
27,598
$
1,896
$
4,109
$
0
$
33,603
Charge-offs
(6,490)
(1,279)
(729)
0
(8,498)
Recoveries
525
38
89
0
652
Net charge-offs
(5,965)
(1,241)
(640)
0
(7,846)
Realized cashflows from Residual Income
1,153
0
0
0
1,153
Provision for credit losses
14,988
6,545
3,617
0
25,150
Allowance for credit losses, end of period
$
37,774
$
7,200
$
7,086
$
0
$
52,060
Net investment in leases and loans, before allowance
$
877,199
$
59,012
$
84,515
$
1,410
$
1,022,136
__________________
(1)
The Company adopted ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on
Financial Instruments
, which changed our accounting policy and estimated allowance,
effective January 1, 2020.
See further
discussion in Note 2, “Summary of Significant Accounting Policies”, and
below.
-18-
Estimate of Current Expected Credit Losses (CECL)
The Company uses 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
as of March 31, 2021, is summarized below.
Equipment Finance:
Equipment Finance consists of Equipment Finance Agreements, Installment
Purchase Agreements and other leases and loans.
The risk characteristics referenced to develop pools of Equipment
Finance leases and loans are based on internally developed
credit score ratings, which is a measurement that combines many
risk characteristics, including loan size, external credit
scores, existence of a guarantee, and various characteristics of the borrower’s
business.
In addition, the Company separately
measured a pool of true leases so that any future cashflows from residuals
could be used to partially offset the allowance for
that pool.
The Company’s measurement
of Equipment Finance pools is based on its own historical loss experience.
The Company
analyzed the correlation of its own loss data from 2004 to 2019 against various
economic variables in order to determine an
approach for reasonable and supportable forecast.
The Company then selected certain economic variables to reference for
its
forecast about the future, specifically the unemployment rate and growth
in business bankruptcy.
The Company’s
methodology reverts from the forecast data to its own loss data adjusted for
the long-term average of the referenced economic
variables, on a straight-line basis.
At each reporting date, the Company considers current conditions, including
changes in portfolio composition or the business
environment, when determining the appropriate measurement
of current expected credit losses for the remaining life of its
portfolio.
As of the January 1, 2020 adoption date, the Company utilized a 12-month forecast period
and 12-month straight-
line reversion period, based on its initial assessment of the appropriate timing.
However, starting with the March 31, 2020
measurement,
the Company adjusted its model to reference a 6-month forecast
period and 12-month straight line reversion period.
The change in the length of the reasonable and supportable forecast was
based on observed market volatility in March 2020.
During the first quarter of 2021,
the Company reverted back to the pre-
COVID 12-month forecast period and 12-month straight line reversion
period as uncertainty of the duration and level of
impact of the COVID-19 virus on the macroeconomic environment
and Company’s portfolio, including
uncertainty about the
forecasted impact of COVID-19,
was reduced.
The provision impact from improving economic forecasts was partially offset
by the reversion to a 12-month forecast, additional provision for new originations,
continued residual performance, and better
than expected net charge-offs, contributing
to first quarter provision benefit for Equipment Finance of $
3.1
million.
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.
 
 
 
 
 
 
 
 
 
 
 
 
-19-
 
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, there was no qualitative adjustment to the Working
 
Capital portfolio.
 
However, starting with its March 31, 2020
 
measurement, driven by the elevated risk of credit loss driven by market
conditions due to COVID-19, the Company developed alternate
 
scenarios for credit loss based on an analysis of the
characteristics of its portfolio,
 
considering different timing and magnitudes of potential
 
exposures.
 
During the first quarter, the Company
 
updated its expectation for credit losses for the Working
 
Capital segment based on the
favorable actual portfolio performance during the quarter
 
and a revised forecast based on its current assessment of risks in the
portfolio.
 
Based on that analysis, the Company recognized a provision benefit of $
0.2
 
million for the three months ended
March 31, 2021, bringing the total provision associated with Working
 
Capital to $
0.2
 
million for the three months ended
March 31, 2021.
Commercial Vehicle
 
Group (CVG):
 
Transportation-related equipment leases and
 
loans are analyzed as a single pool, as the Company did not consider any risk
characteristics to be significant enough to warrant disaggregating this population.
 
The Company’s measurement
 
of CVG is based on a combination of its own historical loss experience and
 
industry loss data
from an external source. The Company has limited history of this product,
 
and therefore the Company determined it was
appropriate to develop an estimate based on a combination of internal
 
and industry data.
 
Due to the Company’s limited
history of performance of this segment, and the limited size of the
 
portfolio, the Company did not develop a standard
methodology to adjust its loss estimate based on a forecast of economic conditions.
 
However, the Company will continually
assess through a qualitative adjustment whether there are changes in
 
conditions and the environment that will impact the
performance of these loans that should be considered for qualitative adjustment.
At each reporting date, the Company considers current conditions, including
 
changes in portfolio composition or the business
environment, when determining the appropriate measurement
 
for the remaining life of the current portfolio.
 
As of the
January 1, 2020 adoption date, there were no qualitative adjustment to the CVG portfolio.
 
However, starting with the March
31, 2020 measurement, driven by the elevated risk of credit loss driven by market
 
conditions due to COVID-19, the
Company developed alternate scenarios for expected credit loss for
 
this segment, considering different timing and
magnitudes of potential exposures.
 
During the first quarter, the Company
 
updated its expectation for credit losses for the CVG segment, including separately
assessing the elevated risks of a population of motor coach industry
 
contracts that are facing prolonged impacts from
COVID-19. While the segment continues to evidence negative impacts from COVID-19
 
as seen in the segment’s
delinquency and modification balances, it is also experiencing positive
 
indicators such as paydown of balance.
 
These factors,
including no further significant reduction in collateral values contributed
 
to a $
0.7
 
million reduction in qualitative reserve
ending the period at $
5.7
 
million of total CVG qualitative adjustments for COVID-19 related risks.
Community Reinvestment Act (CRA) Loans:
 
CRA loans are comprised of loans originated under a line of credit to satisfy the
 
Company’s obligations under the CRA.
 
The
Company does not measure an allowance specific to this population because
 
the exposure to credit loss is nominal.
For the three- months ended March 31, 2021, the Company has recognized
 
a provision benefit of $
2.9
 
million, driven primarily by
improving economic forecasts and portfolio performance, partially offset
 
by the reversion to a 12-month forecast period. The COVID-
19 pandemic, business shutdowns and impacts to our customers, are still ongoing,
 
and the extent of the effects of the pandemic on our
portfolio depends on future developments, which remain uncertain
 
and are difficult to predict.
 
Further, the Company instituted a Loan
modification payment deferral program, as discussed further below,
 
to give payment relief to customers during this period.
 
As of
March 31, 2021,
 
the ultimate performance of loans modified under that program remains uncertain, due
 
to the timing of the modified
loans resuming payment.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-20-
 
Six Months Ended June 30, 2020
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA &
PPP
Total
Allowance for credit losses, December 31, 2019
$
18,334
$
1,899
$
1,462
$
—
$
21,695
Adoption of ASU 2016-13 (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
(14,214)
(1,965)
(1,633)
—
(17,812)
Recoveries
1,254
55
163
—
1,472
Net charge-offs
(12,960)
(1,910)
(1,470)
—
(16,340)
Realized cashflows from Residual Income
2,425
—
—
—
2,425
Provision for credit losses
31,487
7,976
4,493
—
43,956
Allowance for credit losses, end of period
$
48,550
$
7,962
$
7,132
$
—
$
63,644
Net investment in leases and loans, before
allowance
$
846,057
$
42,078
$
81,449
$
5,095
$
974,679
Six Months Ended June 30, 2019
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
13,531
$
1,467
$
1,102
$
—
$
16,100
Charge-offs
(8,840)
(1,275)
(673)
—
(10,788)
Recoveries
1,214
71
61
—
1,346
Net charge-offs
(7,626)
(1,204)
(612)
—
(9,442)
Provision for credit losses
7,511
1,677
931
—
10,119
Allowance for credit losses, end of period
$
13,416
$
1,940
$
1,421
$
—
$
16,777
Net investment in leases and loans, before
allowance
$
942,508
$
51,748
$
83,299
$
1,493
$
1,079,048
__________________
(1)
The Company adopted ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on
Financial Instruments
, which changed our accounting policy and estimated allowance,
effective January 1, 2020.
See further
discussion in Note 2, “Summary of Significant Accounting Policies”,
and below.
Estimate of Current Expected Credit Losses
(CECL)
Starting with the January 1, 2020 adoption of CECL, the Company recognizes
an allowance, or estimate of credit losses, immediately
upon the origination of a loan or lease, and that estimate will
be reassessed in each subsequent reporting period.
This estimate of
credit losses takes into consideration all cashflows the Company
expects to receive or derive from the pools of contracts, including
recoveries after charge-off, amounts related to
initial direct cost and origination costs net of fees deferred,
accrued interest receivable
and certain future cashflows from residual assets.
-21-
As part of its estimate of expected credit losses, specific to each
measurement date, management considers relevant qualitative and
quantitative factors to assess whether the historical loss experience
being referenced should be adjusted to better reflect the risk
characteristics of the current portfolio and the expected future
loss experience for the life of these contracts.
This assessment
incorporates all available information relevant to considering the collectability
of its current portfolio, including considering economic
and business conditions, default trends, changes in its portfolio
composition, changes in its lending policies and practices, among
other
internal and external factors.
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 June 30,
2020 is
summarized below.
Equipment Finance:
Equipment Finance consists of Equipment Finance Agreements, Installment
Purchase Agreements and other leases and loans.
The risk characteristics referenced to develop pools of Equipment
Finance leases and loans are based on internally developed
credit score ratings, which is a measurement that combines many risk
characteristics, including loan size, external credit
scores, existence of a guarantee, and various characteristics of the borrower’s
business.
In addition, the Company separately
measured a pool of true leases so that any future cashflo
ws from residuals could be used to partially offset the allowance for
that pool.
The Company’s measurement of
Equipment Finance pools is based on its own historical loss experience.
The Company
analyzed the correlation of its own loss data from 2004 to 2019
against various economic variables in order to determine an
approach for reasonable and supportable forecast.
The Company then selected certain economic variables to
reference for its
forecast about the future, specifically the unemployment rate
and growth in business bankruptcy.
The Company’s
methodology reverts from the forecast data to its own loss data
adjusted for the long-term average of the referenced economic
variables, on a straight-line basis.
At each reporting date, the Company considers current conditions, including
changes in portfolio composition or the business
environment, when determining the appropriate measurement
of current expected credit losses for the remaining life of its
portfolio.
As of the January 1, 2020 adoption date, the Company utilized a 12
-month forecast period and 12-month straight-
line reversion period, based on its initial assessment of the appropriate
timing.
However, starting with the March 31,
2020 measurement, the Company adjusted
its model to reference a 6-month forecast
period and 12-month straight line reversion period.
The change in the length of the reasonable and supportable
forecast was
based on observed market volatility in late March,
and the Company continues to reference a 6-month forecast
period at June
30, 2020 due to continuing uncertainty of the duration and level of impact
of the COVID-19 virus on the macroeconomic
environment and the Company’s portfolio,
including uncertainty about the forecasted impact of COVID
-19 that was
underlying its economic forecasted variables beyond a 6-month period.
The forecast adjustment to the Equipment Finance
portfolio segment resulted in the recognition of provision of $
10.1
million and $
20.9
million for the three and six months
ended June 30, 2020, respectively.
After completing the forecast adjustment, the Company assessed
the output of the Equipment Finance reserve estimate and
increased the reserve for a $
3.4
million qualitative adjustment as of June 30,
2020 based on an analysis that incorporates the
current forecasted peak levels of unemployment and business bankruptcy.
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.
-22-
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 determining the appropriate measurement
of current expected credit losses for the remaining life of its
portfolio.
As of the January 1, 2020 adoption date, there was no qualitative adjustment to
the Working
Capital portfolio.
However, starting with its March 31,
2020
measurement, driven by the elevated risk of credit loss driven by market
conditions due to COVID-19, the Company developed alternate
scenarios for credit loss based on an analysis of the
characteristics of its portfolio,
considering different timing and magnitudes of potential
exposures.
The Company determined
its most likely expectation for credit losses for the Working
Capital segment based on the increased risk to its borrowers and
increased risk to the collectability of its portfolio from COVID
-19.
Based on that analysis, the Working
Capital reserve was
increased and the Company recognized provision associated with
qualitative adjustments of $
1.5
million and $
7.0
million for
the three and six months ended June 30, 2020, respectively.
Commercial Vehicle
Group (CVG):
Transportation-related equipment leases and
loans are analyzed as a single pool, as the Company did not consider
any risk
characteristics to be significant enough to warrant disaggregating this
population.
The Company’s measurement of
CVG 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 Company determined it was
appropriate to develop an estimate based on a combination of
internal and industry data.
Due to the Company’s limited
history of performance of this segment, and the limited size of
the portfolio, the Company did not develop a standard
methodology to adjust its loss estimate based on a forecast of economic
conditions.
However, the Company will continually
assess through a qualitative adjustment whether there are changes
in conditions and the environment that will impact the
performance of these loans that should be considered for
qualitative adjustment.
At each reporting date, the Company considers current conditions, including
changes in portfolio composition or the business
environment, when determining the appropriate measurement
for the remaining life of the current portfolio.
As of the
January 1, 2020 adoption date, there were no qualitative adjustment to
the CVG portfolio.
However, starting with the March
31, 2020 measurement, driven by the elevated risk of credit loss driven
by market conditions due to COVID-19, the
Company developed alternate scenarios for expected credit
loss for this segment, considering different timing
and
magnitudes of potential exposures.
The Company determined its most likely expectation for
credit losses for the CVG
segment based on the increased risk to its borrowers and increased
risk to the collectability of its portfolio from COVID-19,
and increased the reserve and recognized provision associated
with qualitative adjustments of $
0.4
million and $
3.3
million
for the three and six months ended June 30, 2020,
respectively.
Community Reinvestment Act (CRA) and Paycheck Protection
Program (PPP)
Loans:
CRA loans are comprised of loans originated under a line of
credit to satisfy the Company’s obligations
under the CRA. PPP
loans are comprised of loans that are guaranteed by the Small Business
Administration.
The Company does not measure an
allowance specific to these populations
because the exposure to credit loss is nominal.
Specific Analysis:
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 of June 30, 2020 and January 1, 2020, there were
0
contracts subject to specific
analysis.
-23-
For the three and six months ended June 30, 2020, the Company has recognized
$15.5 million and $
34.7
million of provision,
respectively, driven by increasing
the allowance for qualitative and forecast adjustments as
a result of conditions driven by the
COVID-19 pandemic.
The COVID-19 pandemic, business shutdowns and impacts to our
customers, is still ongoing, and the extent of
the effects of the pandemic on our portfolio
depends on future developments, which are highly uncertain and
are difficult to predict.
Further, the Company instituted a
Loan modification payment deferral program, as discussed further
below, to give payment
relief to
customers during this period.
As of June 30, 2020, the performance of loans modified under
that program remains uncertain, due to
the timing of the modified loans resuming payment.
Our reserve as of June 30, 2020, March 31, 2021,
and the qualitative and economic
adjustments discussed above, were calculated
referencing our
historical loss experience, including loss experience through the 2008
 
economic cycle, and our adjustments to that experience based
on our judgements about the extent of the impact of the COVID
-19COVID-19 pandemic.
 
Those judgements include certain expectations for the
extent and timing of impacts from COVID-19 on unemployment rates and business
 
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 torevise our estimate of credit loss estimate,losses in the future, and such amounts
 
increases may be significant, based on (i) the actual performance of
our
portfolio, including the performance of the modified portfolio, (ii)
 
(ii) any further changes in the economic environment, or (iii) other
developments or unforeseen circumstances that impact our portfolio.
Loan Modification Program:
 
In response to COVID-19, starting in mid-March 2020, the Company
 
the Company instituted a payment deferral program in order
to assist its small-
business customers that requestrequested relief whoand were current under their
 
their existing agreement.
 
The payment deferral program through June
30,
2020 for Equipment Finance and CVG typically included
a deferral of the full payment amount, and for Working
Capital, included
a deferral of the partial amount of payment.
The Company’s COVID-modification
program allows for up
to 6 months of fully deferred or reduced payments. In 2020, the COVID-19
 
The Company typically processed
first requests to defer customers for up to 3 months; starting in June,deferral program ended, however, the
 
the Company has been evaluating and processing requests tocontinues
extend the modification period for certain customers
using specific underwriting criteria, such that the modification
terms may extend
up to 6 monthsconsider modifications in total.select cases.
 
The below table outlines certain data on the modified population with details
 
based on theof count and net investment balance, and status with all information
as of June 30, 2020.
See discussion
below the table on the status of this population subsequent to
quarter-end.March 31, 2021.
 
Equipment
Finance
Working
(Dollars in thousands)
and Finance
CVG
Capital
Total
Net investment inModified leases and loans receivable
3,808
372
176
4,356
Resolved
 
(payoff, chargeoff)
Completed modifications(1)
877
81
315
1,273
Total Program, number
of contracts
4,685
453
491
5,629
Current Quarter Population Changes:
Q1 - New modification
$
115,94128
$
17,876150
$
133,8170
$
178
Q1 - Extended modification
994
3,773
0
4,767
Previously Modified
69,649
16,249
3,004
88,902
Total Modifications,
Net investment receivable
$
70,671
$
20,172
$
3,004
$
93,847
% of total segment receivables
12.5%9.5
42.4%%
13.7%28.6
Number%
16.3
%
11.2
%
Deferral Status:
Out of active modifications as of June 30, 2020
4,564
453
5,017
Interest income recognized for the three months
ended June 30, 2020 on modified loans
(1)deferral
$
2,29569,605
$
1,63314,820
$
3,9283,004
Weighted-average$
87,429
In deferral period
 
total term (months):
before modification1,066
56.05,352
15.70
after modification6,418
59.0Total Modifications,
Net investment receivable
18.9(2)
$
70,671
$
20,172
$
3,004
$
93,847
Modifications 30+ Days Delinquent:
Modified Contracts, not TDR
$
1,751
$
293
$
143
$
2,187
TDR and Extended Modifications
22
1,056
0
1,078
 
_________________
(1)
As discussed further below, the
Company did not account for these modifications as Troubled
Debt Restructurings (“TDRs”),
and as such these loans were not put on non-accrual upon modification.
The amount presented for interest income reflects
total income recognized for the three months, for any loan that
was modified in the quarter.
 
 
 
 
 
-21-
 
_________________
-24-(1)
 
Total resolved
modifications include
230
contracts charged off where $
5.7
million credit loss was realized, and
1,043
contracts that paid in full.
(2)
Out of the deferral period represents the month in which the contract
returns to its regular contract schedule for the entire
month.
For loans in deferral period, the deferral may either be full, with zero payment owed
during the deferral period, or
partial, with reduced payments during deferral that are primarily
25
%-
50
% of schedule, or the deferral period payment may
be a nominal amount. In all cases, information is presented with respect to the contracts’
current deferral terms as of March
31, 2021.
TDRs are restructurings of leases and loans in which, due to the borrower's financial
 
financial difficulties, a lender grants a concession that
it
would not otherwise consider for borrowers of similar credit
quality.
 
In accordance with the interagency guidance as updated
in April
2020, that the FASB concurred
 
concurred with, loans modified under the Company’s
 
payment deferral program aremodified on or before
September 30, 2020, were not considered TDRs. As of
June 30, 2020 and December March 31, 2019, 2021,
the Company didhad $
011.4
t have any TDRs.
 
Based on their modified terms as of June 30, 2020,
25
% of our total modified contracts had already resumed their regular payment
schedule before the end of the second quarter,
7
2% were scheduled to resume payment in the third quarter and the
remaining
3
% were
scheduled to resume payment in the fourth quarter.
Through July 24, 2020, we processed modifications for an additional
$5.9 million of Equipment Finance net investment and additionsactive contracts designated
to the modified population of Working
Capital were not significant.
as TDRs.
 
Credit Quality
 
 
At origination, the Company utilizes an internally developed credit
 
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
 
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
 
the Company primarily reviews the current delinquency of the
portfolio and delinquency migration to monitor risk and default trends. Wetrends
 
.
We believe that
delinquency is the best factor to use to monitor
the credit quality of our portfolio on an ongoing basis because
it reflects the
current condition of the portfolio, and is a good
predictor
of near term charge-offs and can help with identifying
 
trends and emerging risks to the portfolio.
 
 
The following tables provide information about delinquent leases and loans
 
and loans in the Company’s portfolio
 
portfolio based on the contract’s
status
as-of the dates presented. In particular, contracts
 
that are part of the Loan Modification Program discussed above are presented
 
In response to COVID-19, starting in mid-March 2020,
the Company instituted a payment deferral program in order
to assist its small-
business customers that 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.
This program includes either reduced or full-payment deferrals for
the modified
contracts, and those contracts are presented in the
below delinquency
table and the non-accrual information for June 30,March
 
202031, 2021 based on
their status with respect to the modified terms.
 
terms.
See “LoanLoan Modification Program” section above for delinquency data specific
 
further information onto the
modifications. modified portfolio.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-25--22-
 
Portfolio by Origination Year as of
 
June 30, 2020March 31, 2021
Total
2021
2020
2019
2018
2017
2016
Prior
Receivables
(Dollars in thousands)
Equipment Finance
30-59
$
1,392112
$
5,493767
$
2,7641,517
$
1,833748
$
501406
$
144155
$
12,1273,705
60-89
1,2770
5,008360
3,551940
2,030421
810346
190191
12,8662,258
90+
4610
3,519358
2,722735
1,564511
784245
139148
9,1891,997
Total Past Due
3,130112
14,0201,485
9,0373,192
5,4271,680
2,095997
473494
34,1827,960
Current
163,70665,850
333,621241,243
179,308246,179
94,036118,356
34,55853,855
6,64612,952
811,875738,435
Total
166,83665,962
347,641242,728
188,345249,371
99,463120,036
36,65354,852
7,11913,446
846,057746,395
Working Capital
30-59
910
3443
3296
—0
—0
—0
46799
60-89
1770
20639
—31
—0
—0
—0
38370
90+
—0
2790
—39
—0
—0
—0
27939
Total Past Due
2680
82942
32166
—0
—0
—0
1,129208
Current
16,2777,647
24,2387,950
3962,546
380
—0
—0
40,94918,143
Total
16,5457,647
25,0677,992
4282,712
380
—0
—0
42,07818,351
CVG
30-59
580
3130
147705
21017
9
—59
737790
60-89
2200
124172
143542
160152
1314
—0
660880
90+
540
620
23651
25253
330
—11
637115
Total Past Due
3320
499172
5261,298
622222
5523
—70
2,0341,785
Current
11,9406,612
37,58016,485
17,72827,792
8,95111,937
3,1384,618
781,208
79,41568,652
Total
12,2726,612
38,07916,657
18,25429,090
9,57312,159
3,1934,641
781,278
81,44970,437
CRA & PPP
Total Past Due
—0
—0
—0
—0
—0
—0
—0
Current
5,0951,158
—0
—0
—0
—0
—0
5,0951,158
Total
5,0951,158
—0
—0
—0
—0
—0
5,0951,158
Net investment in leases
and loans, before allowance
$
200,74881,379
$
410,787267,377
$
207,027281,173
$
109,074132,195
$
39,84659,493
$
7,19714,724
$
974,679836,341
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-26--23-
 
Portfolio by Origination Year as of
 
December 31, 20192020
Total
2020
2019
2018
2017
2016
2015
Prior
Receivables
(Dollars in thousands)
Equipment Finance
30-59
$
1,4201,162
$
1,7551,526
$
9351,349
$
454690
$
169292
$
1714
$
4,7505,033
60-89
1,023367
1,0551,111
685463
366532
80130
46
3,2132,609
90+
947503
1,5221,370
1,090804
527377
163199
716
4,2563,269
Total Past Due
3,3902,032
4,3324,007
2,7102,616
1,3471,599
412621
2836
12,21910,911
Current
424,559265,036
236,068276,140
135,419138,142
55,11965,722
16,46118,805
1,4071,615
869,033765,460
Total
427,949267,068
240,400280,147
138,129140,758
56,46667,321
16,87319,426
1,4351,651
881,252776,371
Working Capital
30-59
566125
18481
—0
—0
—0
—0
584606
60-89
160
52135
—0
—0
—0
—0
68
90+
203
—
—
—
—
—
203135
Total Past Due
785125
70616
—0
—0
—0
—0
855741
Current
57,70612,741
2,3436,528
3824
—0
—0
—0
60,08719,293
Total
58,49112,866
2,4137,144
3824
—0
—0
—0
60,94220,034
CVG
30-59
50591
1261,039
90173
9929
—21
—0
3651,853
60-89
50
1569
18833
460
—68
—0
254170
90+
—0
178340
158179
535
—11
—0
389535
Total Past Due
55591
3191,448
436385
19834
—100
—0
1,0082,558
Current
42,53617,065
22,53130,805
13,44213,733
4,9765,938
1301,659
—30
83,61569,230
Total
42,59117,656
22,85032,253
13,87814,118
5,1745,972
1301,759
—30
84,62371,788
CRA
Total Past Due
—0
—0
—0
—0
—0
—0
—0
Current
1,3981,091
—0
—0
—0
—0
—0
1,3981,091
Total
1,3981,091
—0
—0
—0
—0
—0
1,3981,091
Net investment in leases
and loans, before allowance
$
530,429298,681
$
265,663319,544
$
152,045154,900
$
61,64073,293
$
17,00321,185
$
1,4351,681
$
1,028,215869,284
 
Net investments in Equipment Finance and CVG leases and
loans are generally
charged-off when they are contractually past due
 
past due for
120 days or more.
 
Income recognition is discontinued when a default on monthly payment exists for
 
exists for a period of 90 days or more.
Income recognition resumes when a lease or loan becomes less than 90
 
than 90 days delinquent.
At June 30, 2020March 31, 2021 and December
31, 2019,2020,
there were
0
 
finance receivables past due 90 days or more and still accruing.
 
 
Working
 
-27-
Working Capital Loans
are generally placed in non-accrual status when they are
30 days past due
and generally charged-off
at 60 days
past due.
The loan is removed from non-accrual status once sufficient payments
 
payments are made to bring the loan current and reviewed
by
management. At June 30, 2020March 31, 2021 and December 31, 2019,
2020, there were
0
 
Working
Capital Loans
past due 30 days or more and still
accruing.
The following tables provide information about non-accrual leases and
loans:
June 30,
December 31,
(Dollars in thousands)
2020
2019
Equipment Finance
$
9,205
$
4,256
Working Capital Loans
1,189
946
CVG
637
389
Total
Non-Accrual
$
11,031
$
5,591
NOTE 7 - Goodwill and Intangible
Assets
Goodwill
The Company’s goodwill balance of $
6.7
million at December 31, 2019 included $
1.2
million from the Company’s acquisition of
HKF, in January 2017,
and $
5.5
million from the September 2018 acquisition of 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.
The Company assigns its goodwill to a single, consolidated reporting
unit, Marlin Business Services Corp. In the first quarter
of 2020,
events or circumstances indicated that it was more likely than
not that the fair value of its reporting unit was less than its carrying
amount, driven in part by market capitalization of the Company falling
below its book value, and negative current events that impact
the Company related to the COVID-19 economic shutdown.
The Company calculated the fair value of the reporting unit,
by taking
the average stock price over a reasonable period of time multiplied
by shares outstanding as of March 31, 2020 and then further
applying a control premium, and compared it to its carryin
g
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 the
Consolidated Statements of Operations.
The changes in the carrying amount of goodwill for the six-month period
ended June 30, 2020 are as follows:
(Dollars in thousands)
Total Company
Balance at December 31, 2019
$
6,735
Impairment of Goodwill
(6,735)
Balance at June 30, 2020
$
—
Intangible assets
The Company’s intangible assets consist
of $
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, and
$
7.6
million
of definite-lived intangible
assets with a weighted-average amortization period of
10.8
years that were recognized in connection with the September
2018
acquisition of FFR.
The Company has no indefinite-lived intangible assets.
The following table presents details of the Company’s
intangible assets as of June 30, 2020:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-28-
-24-
The following tables provide information about non-accrual leases and loans:
March 31,
December 31,
(Dollars in thousands)
2021
2020
Equipment Finance
$
5,254
$
5,543
Working
Capital Loans
344
932
CVG
8,415
7,814
Total
Non-Accrual
$
14,013
$
14,289
NOTE 7 - Goodwill and Intangible Assets
Goodwill
In the first quarter of 2020, driven by negative events that impacted the Company
related to the COVID-19 economic shutdown, the
Company concluded that the implied fair value of its $
6.7
million goodwill balance was less than the carrying amount and recognized
impairment equal to the $
6.7
million balance in the March 31, 2020 Consolidated Statements of
Operations.
Intangible assets
The following table presents details of the Company’s
intangible assets as of March 31, 2021:
 
(Dollars in thousands)
Gross Carrying
Accumulated
Net
Description
Useful Life
Amount
Amortization
Value
Lender relationships
3
to
10
years
$
1,630
$
582
$
1,048(Dollars in thousands)
Vendor
 
relationships
11
years
$
7,290
1,306$
5,9841,804
$
5,486
Corporate trade name
7
years
60
3036
3024
Total
$
8,9807,350
$
1,9181,840
$
7,0625,510
 
The Company’s intangible
assets consist of definite-lived intangible assets in connection with the January 2017
acquisition of Horizon
Keystone Financial and the September 2018 acquisition of Fleet Financing
Resources. The Company has
0
indefinite-lived intangible
assets.
There was
0
 
impairment of these assets in the six-months ended June 30,
2020 or 2019.first quarter of 2021.
 
Amortization related to the Company’s
definite lived intangible
assets was $
0.40.2
million and $
0.50.2
million for the six-monththree-month periods ended June 30,March 31, 2021 and March 31, 2020, and June 30,
 
2019,
respectively.
The Company expects the amortization expense for the next
five years will be as follows:
(Dollars in thousands)
Remainder of 2020
$
399
2021
798
2022
798
2023
798
2024
790
NOTE 8 – Other Assets
Other assets are comprised of the following:
June 30,
December 31,
2020
2019
(Dollars in thousands)
Accrued fees receivable
$
3,213
$
3,509
Prepaid expenses
2,776
2,872
Income taxes receivable
(1)
4,348
—
Federal Reserve Bank Stock
1,711
1,711
Other
1,986
2,361
$
14,034
$
10,453
_______________________
(1)
See Note 2 –
Summary of Significant Accounting Policies,
for discussion of the Provision for income taxes.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-29-
-25-
The Company expects the amortization expense for the next five years
will be as follows:
Amortization
(Dollars in thousands)
Expense
Remainder of 2021
$
503
2022
671
2023
671
2024
663
2025
663
NOTE 8 – Other Assets
Other assets are comprised of the following:
March 31,
December 31,
2021
2020
(Dollars in thousands)
Accrued fees receivable
$
2,609
$
2,928
Prepaid expenses
2,824
2,790
Federal Reserve Bank Stock
1,711
1,711
Other
2,632
2,783
$
9,776
$
10,212
 
NOTE 9 – Deposits
 
MBB serves as the Company’s primary
 
primary funding source. MBB issues fixed-rate FDIC-insured
certificates of deposit
raised nationally
through various brokered deposit relationships and fixed-rate FDIC-insured
 
FDIC-insured deposits received from direct sources. MBB offers
FDIC-
insured money market deposit accounts (the “MMDA Product”) through
 
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 a
ndand
recorded as a single deposit account at MBB. As of June 30,March 31, 2021,
 
2020, money market deposit accounts totaled $
53.252.5
 
million.
 
As of June 30, 2020,March 31, 2021, the scheduled maturities of certificates of
deposits are as follows:
 
 
Scheduled
Maturities
(Dollars in thousands
thousands)Maturities
Period Ending December 31,
Remainder of 20202021
$
300,996
2021
293,009212,240
2022
147,704210,075
2023
71,375117,717
2024
29,29056,814
Thereafter2025
7,29929,087
Total
$
849,673625,933
 
Certificates of deposits issued by MBB are time deposits and are generally issued
 
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 average all-in interest rate of deposits at June 30,
2020March 31, 2021 was
1.991.60
%.
 
 
-26-
NOTE 10 – Debt and Financing Arrangements
Long-term Borrowings
Borrowings with an original maturity date of one year or more are
classified as long-term borrowings.
The Company’s term note
securitizations are classified as long-term borrowings.
The balance of long-term borrowings consisted of the following:
 
Short-Term
Borrowings
 
The Company has a secured, variable rate revolving line of credit
in the amount of $
5.0
million that was scheduled to expire on
November 20, 2020
. There were
0
outstanding balances on this line of credit as of June 30, 2020,
and the line of credit was
terminated by mutual agreement with the line of credit provider
in July 2020.
 
March 31,
December 31,
Long-term Borrowings2021
2020
(Dollars in thousands)
Term securitization
2018-1
$
23,774
$
30,800
Unamortized debt issuance costs
(104)
(135)
$
23,670
$
30,665
 
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.
 
amount. At June 30, 2020,March 31, 2021,
 
outstanding term securitizations
amounted to $
51.223.8
 
million and are collateralized by $
55.424.9
 
million of minimum lease and loan payments receivable and
$
6.14.4
 
million of
restricted interest-earning deposits.
The Company’sJuly 27, 2018 term note securitization is summarized below:
 
Outstanding Balance as of
Notes
Final
Original
March 31,
December 31,
Originally
Maturity
Coupon
2021
2020
Issued
Date
Rate
(Dollars in thousands)
2018 — 1
Class A-1
$
0
$
0
$
77,400
July, 2019
2.55
%
Class A-2
0
0
55,700
October, 2020
3.05
Class A-3
0
0
36,910
April, 2023
3.36
Class B
2,534
9,560
10,400
May, 2023
3.54
Class C
11,390
11,390
11,390
June, 2023
3.70
Class D
5,470
5,470
5,470
July, 2023
3.99
Class E
4,380
4,380
4,380
May, 2025
5.02
Total Term
Note Securitizations
$
23,774
$
30,800
$
201,650
3.05
%
(1)(2)
__________________
(1)
Represents the original weighted average initial coupon rate for
all tranches of the securitization. In addition to this coupon
interest, term note securitizations have other transaction costs which are classifiedamortized
over the life of the borrowings as long-term borrowings.additional
interest expense.
(2)
The weighted average coupon rate of the 2018-1 term note securitization
will approximate
3.99
% over the remaining term of the
borrowing.
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. As of March 31, 2021 and December 31,
2020, there were
0
balances outstanding on this line of credit.
-27-
Federal Reserve Discount Window
In addition, MBB has received approval to borrow from the Federal Reserve
Discount Window based on the amount of assets MBB
chooses to pledge. MBB had $
49.7
million in unused, secured borrowing capacity at the Federal Reserve Discount
Window,
based on
$
55.2
million of net investment in leases pledged at March 31, 2021.
Maturities
Based on current expected cashflows of leases underlying our term note
securitization, principal and interest payments are estimated
as of March 31, 2021 as follows:
Principal
Interest
(Dollars in thousands)
Period Ending December 31,
Remainder of 2021
15,191
524
2022
8,583
159
$
23,774
$
683
-28-
NOTE 11 – Fair Value
Measurements and Disclosures about the Fair
Value of Financial
Instruments
Fair Value
Measurements
Fair value is defined in GAAP as the price that would be received to sell an asset or the price that
would be paid to transfer a liability
on the measurement date. GAAP focuses on the exit price in the principal
or most advantageous market for the asset or liability in an
orderly transaction between market participants. A three-level valuation
hierarchy is required for disclosure of fair value
measurements based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date. The fair value
hierarchy gives the highest priority to quoted prices (unadjusted) in active
markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The level in the fair value
hierarchy within which the fair value measurement in its
entirety falls is determined based on the lowest level input that is significant
to the measurement in its entirety.
Recurring Fair Value
Measurements
 
The balanceCompany’s balances measured
at fair value on a recurring basis include the following as of long-term borrowings consisted of the following:March 31, 2021
and December 31,
2020:
 
June 30,March 31, 2021
December 31,
2020
2019Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
(Dollars in thousands)
Term securitization 2018Assets
-1ABS
$
51,1610
$
76,563
Unamortized debt issuance costs
(271)
(472)5,192
$
50,8900
$
76,0910
$
3,719
$
0
Municipal securities
0
3,474
0
0
4,145
0
Mutual fund
3,707
0
0
3,760
0
0
At this time, the Company has not elected to report any assets and liabilities
using the fair value option. There have been
0
transfers
between Level 1 and Level 2 of the fair value hierarchy for any of the periods
presented.
Non-Recurring Measurements
Non-recurring fair value measurements include assets and liabilities that
are periodically remeasured or assessed for impairment using
Fair value measurements. Non-recurring measurements include the Company’s
evaluation of goodwill and intangible assets for
impairment, and the Company’s
remeasurement of contingent consideration and assessment of the
carrying amount of its servicing
liability.
For the three months ended March 31, 2021,
there were no significant amounts recognized in the Consolidated Statements of
Operations in connection with non-recurring fair value measurements.
For the three months ended March 31, 2020, the Company recognized
$
6.7
million for the impairment of goodwill as discussed further
in Note 7, Goodwill and Intangible Assets.
Fair Value
of Other Financial Instruments
The following summarizes the carrying amount and estimated fair
value of the Company’s other financial
instruments, including those
not measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-30-
The term note securitization is summarized below:
Outstanding Balance as of
Notes
Final
Original
June 30,
December 31,
Originally
Maturity
Coupon
2020
2019
Issued
Date
Rate
(Dollars in thousands)
2018 — 1
Class A-1
$
—
$
—
$
77,400
July, 2019
2.55
%
Class A-2
—
8,013
55,700
October, 2020
3.05
Class A-3
19,521
36,910
36,910
April, 2023
3.36
Class B
10,400
10,400
10,400
May, 2023
3.54
Class C
11,390
11,390
11,390
June, 2023
3.70
Class D
5,470
5,470
5,470
July, 2023
3.99
Class E
4,380
4,380
4,380
May, 2025
5.02
Total Term
Note Securitizations
$
51,161
$
76,563
$
201,650
3.05
%
(1)(2)
__________________
(1)
Represents the original weighted average initial coupon rate for
all tranches of the securitization. In addition to this coupon
interest, term note securitizations have other transaction costs which are
amortized over the life of the borrowings as additional
interest expense.
(2)
The weighted average coupon rate of the 2018-1 term note securitization
will approximate
3.68
% over the remaining term of the
borrowing.
Scheduled principal and interest payments on outstanding borrowings
as of June 30, 2020 are as follows:
Principal
Interest
(Dollars in thousands)
Period Ending December 31,
Remainder of 2020
$
18,950
$
803
2021
23,629
813
2022
8,582
159
$
51,161
$
1,775
-31-
NOTE 11 – Fair Value
Measurements and Disclosures about
the Fair Value
of Financial Instruments
Fair Value
Measurements
Fair value is defined in GAAP as the price that would be received
to sell an asset or the price that would be paid to transfer a
liability
on the measurement date. GAAP focuses on the exit price in
the principal or most advantageous market for the asset or liability in
an
orderly transaction between market participants. A three-level
valuation hierarchy is required for disclosure of fair value
measurements based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date. The fair value
hierarchy gives the highest priority to quoted prices (unadjusted)
in active markets for identical assets or liabilities (Level 1) and
the
lowest priority to unobservable inputs (Level 3). The level in the fair
value hierarchy within which the fair value measurement in its
entirety falls is determined based on the lowest level input that
is significant to the measurement in its entirety.
The Company’s balances measured
at fair value on a recurring basis include the following
as of June 30, 2020 and December 31,
2019:
June 30, 2020
December 31, 2019
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
(Dollars in thousands)
Assets
ABS
$
—
$
3,935
$
—
$
—
$
4,332
$
—
Municipal securities
—
2,733
—
—
3,129
—
Mutual fund
3,740
—
—
3,615
—
—
At this time, the Company has not elected to report any assets
and liabilities using the fair value option. There have been
no transfers
between Level 1 and Level 2 of the fair value hierarchy for
any of the periods presented.
Non-Recurring Measurements
Non-recurring fair value measurements include assets and liabilities
that are periodically remeasured or assessed for impairment
using
Fair value measurements. Non-recurring measurements include
the Company’s evaluation of goodwill
and residual assets for
impairment, and the Company’s remeasurement
of contingent consideration and assessment of the carrying amount
of its servicing
liability.
For the six months ended June 30, 2020, the Company recognized
$
6.7
million for the impairment of goodwill in the Consolidated
Statements of Operations, as discussed further in Note 7, Goodwill
and Intangible Assets.
For the six months ended June 30,
2019,
there were no significant amounts recognized in the Consolidated
Statements of Operations in connection with non-recurring fair
value measurements.
Fair Value
of Other Financial Instruments
The following summarizes the carrying amount and estimated
fair value of the Company’s other financial
instruments, including those
not measured at fair value on a recurring basis:
-32--29-
 
June 30, 2020March 31, 2021
December 31, 20192020
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
211,706110,622
$
211,706110,622
$
123,096135,691
$
123,096135,691
Time deposits with banks
9,9414,482
10,0344,504
12,9275,967
12,9706,003
Restricted interest-earning deposits with banks
6,0724,358
6,0724,358
6,9314,719
6,9314,719
Loans, net of allowance
548,989490,516
561,140507,612
588,688500,768
593,406507,362
Federal Reserve Bank Stock
1,711
1,711
1,711
1,711
Financial Liabilities
 
Deposits
$
902,191678,331
$
921,196687,928
$
839,132729,614
$
846,304742,882
 
Long-term borrowings
50,89023,670
51,46924,025
76,09130,665
76,78131,114
 
There have been no significant changes in the methods and assumptions used
 
used in estimating the fair values of financial instruments,
as
outlined in our consolidated financial statements and note disclosures in
 
in the Company’s Form 10-K for the
 
the year ended December 31,
2019.
-33-
NOTE 12 – Earnings Per Share
The Company’s restricted stock
awards are paid non-forfeitable common stock dividends and
thus meet the criteria of participating
securities. Accordingly, earnings
per share (“EPS”) has been calculated using the two-class method,
under which earnings are
allocated to both common stock and participating securities.
Basic EPS has been computed by dividing net income or loss allocated
to common stock by the weighted average common shares
used in computing basic EPS. For the computation of basic EPS,
all shares of restricted stock have been deducted from the weighted
average shares outstanding.
Diluted EPS has been computed by dividing net income or loss
allocated to common stock by the weighted average number
of
common shares used in computing basic EPS, further adjusted
by including the dilutive impact of the exercise or conversion of
common stock equivalents, such as stock options, into shares
of common stock as if those securities were exercised or
converted.
The following table provides net income and shares used in computing basic
and diluted EPS:
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
(Dollars in thousands, except per-share data)
Basic EPS
Net (loss) income
$
(5,882)
$
6,115
$
(17,703)
$
11,256
Less: net income allocated to participating securities
—
(74)
—
(147)
Net (loss) income allocated to common stock
$
(5,882)
$
6,041
$
(17,703)
$
11,109
Weighted average common
shares outstanding
11,893,235
12,333,383
11,953,815
12,335,545
Less: Unvested restricted stock awards considered participating
securities
(132,756)
(148,387)
(135,502)
(160,170)
Adjusted weighted average common shares used in computing
basic EPS
11,760,479
12,184,996
11,818,313
12,175,375
Basic EPS
$
(0.50)
$
0.50
$
(1.50)
$
0.91
Diluted EPS
Net (loss) income allocated to common stock
$
(5,882)
$
6,041
$
(17,703)
$
11,109
Adjusted weighted average common shares used in computing
basic EPS
11,760,479
12,184,996
11,818,313
12,175,375
Add: Effect of dilutive stock-based compensation awards
—
81,855
—
84,624
Adjusted weighted average common shares used in computing
diluted EPS
11,760,479
12,266,851
11,818,313
12,259,999
Diluted EPS
$
(0.50)
$
0.49
$
(1.50)
$
0.91
For the three-month periods ended June 30, 2020
and June 30,
2019,
weighted average outstanding stock-based compensation awards
in the amount of
289,635
and
174,458
, respectively, were considered antidilutive
and therefore were not considered in the
computation of potential common shares for purposes of diluted
EPS.
-34-
For the six-month periods ended June 30, 2020
and June 30, 2019,
weighted average outstanding stock-based compensation awards in
the amount of
297,057
and
187,093
, respectively, were considered
antidilutive and therefore were not considered in the computation
of potential common shares for purposes of diluted EPS.
NOTE 13 – Stockholders’ Equity
Share Repurchases
During the three-month period ended June 30, 2020,
the Company did
0
t purchase any shares of its common stock under the 2019
Repurchase Plan. During the six-month period ended June 30,
2020, the Company purchased
264,470
shares of its common stock
under a stock repurchase plan approved by the Company’s
Board of Directors on August 1, 2019 (the “2019 Repurchase Plan”)
at an
average cost of $
16.09
per share.
During the three-month period ended June 30, 2019,
the Company purchased
72,824
shares of its common stock in the open market
under the 2017 Repurchase Plan at an average cost of $
23.44
per share. During the six-month period ended June 30, 2019,
the
Company purchased
102,771
shares of its common stock under a stock repurchase plan approved
by the Company’s Board of
Directors on May 30, 2017 (the “2017 Repurchase Plan”) at an
average cost of $
23.57
per share.
At June 30, 2020, the Company had $
4.7
million of remaining authorizations under the 2019 Repurchase Plan.
In addition to the repurchases described above, participants in
the Company’s 2014 Equity Compensation
Plan (approved by the
Company’s shareholders on June 3,
2014) (the “2014 Plan”) may have
shares withheld to cover income taxes. During the three-month
periods ended June 30, 2020 and June 30, 2019, there were
1,897
shares and
536
shares repurchased to cover income tax withholding
under the 2014 Plan at an average cost of $
6.50
per share and $
22.81
per share, respectively. During the
six-month periods ended
June 30, 2020 and June 30, 2019, there were
23,020
and
19,446
shares repurchased to cover income tax withholding in connection
with shares granted under the 2014 Plan at average per-share
costs of $
12.81
and $
22.74
, respectively.
Regulatory Capital Requirements
Through its issuance of FDIC-insured deposits, MBB serves as the Company’s
primary funding source. Over time, MBB may offer
other products and services to the Company’s
customer base. MBB operates as a Utah state-chartered, Federal
Reserve member
commercial bank, insured by the FDIC. As a state-chartered Federal
Reserve member bank, MBB is supervised by both the Federal
Reserve Bank of San Francisco and the Utah Department of Financial
Institutions.
The Company and MBB are subject to capital adequacy regulations
issued jointly by the federal bank regulatory agencies. These
risk-
based capital and leverage guidelines make regulatory capital requirements
more sensitive to differences in risk profiles among
banking organizations and consider off
-balance sheet exposures in determining capital adequacy.
The federal bank regulatory agencies
and/or the U.S. Congress may determine to increase capital requirements
in the future due to the current economic environment.
Under the capital adequacy regulation, at least half of a banking organization’s
total capital is required to be "Tier
1 Capital" as
defined in the regulations, comprised of common equity,
retained earnings and a limited amount of non-cumulative
perpetual
preferred stock. The remaining capital, "Tier
2 Capital," as defined in the regulations, may consist of other preferred
stock, a limited
amount of term subordinated debt or a limited amount of the
reserve for possible credit losses. The regulations establish
minimum
leverage ratios for banking organizations, which are
calculated by dividing Tier 1 Capital
by total average assets. Recognizing that the
risk-based capital standards principally address credit risk rather than interest
rate, liquidity, operational
or other risks, many banking
organizations are expected to maintain capital in excess
of the minimum standards.
The Company and MBB operate under the Basel III capital
adequacy standards. These standards require a minimum for Tier
1
leverage ratio of
4
%, minimum Tier 1 risk-based ratio
of
6
%, and a total risk-based capital ratio of
8
%.
The Basel III capital adequacy
standards established a new common equity Tier
1 risk-based capital ratio with a required
4.5
% minimum (
6.5
% to be considered
well-capitalized). The Company is required to have a level of
regulatory capital in excess of the regulatory minimum and
to have a
capital buffer above
2.5
%. If a banking organization does not maintain capital above
the minimum plus the capital conservation buffer
it may be subject to restrictions on dividends, share buybacks, and
certain discretionary payments such as bonus payments.
CMLA Agreement.
On March 25, 2020, MBB received notice from the FDIC that
it had approved MBB’s request
to rescind certain
nonstandard conditions in the FDIC’s
order granting federal deposit insurance issued on March 20,
2007. Furthermore, effective
-35-
March 26, 2020,
the FDIC, the Company and certain of the Company’s
subsidiaries terminated the Capital Maintenance and Liquidity
Agreement (the “CMLA Agreement”) and the Parent Company
Agreement, each entered into by and among the Company,
certain of
its subsidiaries and the FDIC in conjunction with the opening of
MBB.
As
a result of these actions, MBB is no longer required
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, 2020 was$
133.6
million, which met all capital requirements to which MBB is subject
and
qualified MBB for “well-capitalized” status. At June 30, 2020
,
the Company also exceeded its regulatory capital requirements and
was
considered “well-capitalized” as defined by federal banking regulations
and as required by the FDIC Agreement.
CECL Capital Transition.
The Company adopted CECL, or a new measurement methodology for
the allowance estimate, on January
1, 2020, as discussed further in Note 2—Summary of Significant Accounting
Policies.
Rules governing the Company’s regulatory
capital requirements give entities the option of delaying for two years
the estimated impact of CECL on regulatory capital, followed
by a three-year transition period to phase out the aggregate amount
of capital benefit, or a five-year transition in total. The Company
has elected to avail itself of the five-year transition.
For measurements of regulatory capital in 2020 and 2021
,
under the two year
delay the Company shall prepare: (i) a measurement of its estimated
allowance for credit losses under CECL, as reported in its balance
sheets; and (ii) a measurement of its estimated allowance under
the historical incurred loss methodology,
as prescribed by the
regulatory calculation.
Any amount of provisions under CECL that is in excess of the incurred
estimate will be an adjustment the
Company’s capital during the two-year
delay.
The three-year transition, starting in 2022, will phase in that
adjustment straight-line,
such that
25
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, 2020.
Minimum Capital
Well-Capitalized Capital
Actual
Requirement
Requirement
Ratio
Amount
Ratio
Amount
Ratio
Amount
(Dollars in thousands)
Tier 1 Leverage Capital
Marlin Business Services Corp.
15.05%
$
190,244
4.00%
$
50,558
5.00%
$
63,197
Marlin Business Bank
11.79%
$
133,551
4.00%
$
45,322
5.00%
$
56,652
Common Equity Tier 1 Risk-Based Capital
Marlin Business Services Corp.
19.33%
$
190,244
4.50%
$
44,282
6.50%
$
63,962
Marlin Business Bank
14.91%
$
133,551
4.50%
$
40,297
6.50%
$
58,207
Tier 1 Risk-based Capital
Marlin Business Services Corp.
19.33%
$
190,244
6.00%
$
59,042
8.00%
$
78,723
Marlin Business Bank
14.91%
$
133,551
6.00%
$
53,729
8.00%
$
71,639
Total
Risk-based Capital
Marlin Business Services Corp.
20.65%
$
203,178
8.00%
$
78,723
10.00%
$
98,404
Marlin Business Bank
16.23%
$
145,364
8.00%
$
71,639
10.00%
$
89,549
-36-
Prompt Corrective Action
.
The Federal Deposit Insurance Corporation Improvement Act of
1991 (“FDICIA”) requires the federal
regulators to take prompt corrective action against any undercapitalized
institution.
Five capital categories have been established
under federal banking regulations:
well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and
critically undercapitalized.
Well-capitalized
institutions significantly exceed the required minimum level
for each relevant capital
measure.
Adequately capitalized institutions include depository institutions
that meet but do not significantly exceed the required
minimum level for each relevant capital measure. Undercapitalized
institutions consist of those that fail to meet the required
minimum
level for one or more relevant capital measures.
Significantly undercapitalized characterizes depository institutions with
capital levels
significantly below the minimum requirements for any relevant capital
measure.
Critically undercapitalized refers to depository
institutions with minimal capital and at serious risk for government
seizure.
Under certain circumstances, a well-capitalized, adequately capitalized
or undercapitalized institution may be treated as if the
institution were in the next lower capital category.
A depository institution is generally prohibited from making
capital distributions,
including paying dividends, or paying management fees to a holding
company if the institution would thereafter be undercapitalized.
Institutions that are adequately capitalized but not well-capitalized
cannot accept, renew or roll over brokered deposits except with a
waiver from the FDIC and are subject to restrictions on the interest
rates that can be paid on such deposits. Undercapitalized
institutions may not accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or,
in certain cases, required to take certain actions with respect to
institutions
falling within one of the three undercapitalized categories.
Depending on the level of an institution’s
capital, the agency’s corrective
powers include, among other things:
• prohibiting
the payment of principal and interest on subordinated
debt;
• prohibiting
the holding company from making distributions without
prior regulatory approval;
• placing
limits on asset growth and restrictions on activities;
• placing
additional restrictions on transactions with affiliates;
• restricting
the interest rate the institution may pay on deposits;
• prohibiting the institution from accepting
deposits from correspondent banks; and
• in the most severe cases, appointing a
conservator or receiver for the institution.
A banking institution that is undercapitalized is required to
submit a capital restoration plan, and such a plan will not be accepted
unless, among other things, the banking institution’s
holding company guarantees the plan up to a certain specified amount.
Any such
guarantee from a depository institution’s
holding company is entitled to a priority of payment in bankruptcy.
MBB’s total risk-based capital
ratio of
1623
% at June 30, 2020 exceeded the threshold for “well capitalized”
status under the
applicable laws and regulations.
Dividends
.
The Federal Reserve Board has issued policy statements requiring
insured banks and bank holding companies to have an
established assessment process for maintaining capital 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.
As of June 30, 2020, MBB does not have the capacity to pay
dividends to the Company without explicit approval from the
Federal Reserve Board of Governors because of the current
period losses
and the amount of cumulative dividends paid over the past two years.
-37-
NOTE 14 – Stock-Based Compensation
Awards for
Stock-Based Compensation are governed by the Company’s
2003 Equity Compensation Plan, as amended (the “2003
Plan”), the Company’s 2014
Equity Compensation Plan (approved by the Company’s
shareholders on June 3, 2014) (the “2014 Plan”)
and the Company’s 2019
Equity Compensation Plan (approved by the Company’s
shareholders on May 30, 2019) (the “2019 Plan”
and, together with the 2014 Plan and the 2003 Plan, the “Equity Compensation
Plans”). Under the terms of the Equity Compensation
Plans, employees, certain consultants and advisors and non-employee
members of the Company’s Board
of Directors have the
opportunity to receive incentive and nonqualified grants of stock options,
stock appreciation rights, restricted stock and other equity-
based awards as approved by the Company’s
Board of Directors.
These award programs are used to attract, retain and motivate
employees and to encourage individuals in key management
roles to retain stock.
The Company has a policy of issuing new shares to
satisfy awards under the Equity Compensation Plans. The aggregate number
of shares under the 2019 Plan that may be issued for
Grants is
826,036
. There were
541,222
shares available for future awards under the 2019 Plan as of June 30,
2020.
There was
0
stock-based compensation expense recognized for the three-month
period ended June 30, 2020. Total
stock-based
compensation expense was $
1.0
million for the three-month period ended June 30, 2019.
Total stock-based compensation
expense was
$
0.4
million and $
1.9
million for the six-month periods ended June 30, 2020 and
June 30, 2019, respectively. Excess
tax benefits from
stock-based payment arrangements were less than $
0.1
million for the six-month period ended June 30, 2019.
Stock Options
Option awards are generally granted with an exercise price equal
to the market price of the Company’s
stock at the date of the grant
and have
7
year contractual terms.
All options issued contain service conditions based on the participant’s
continued service with the
Company and provide for accelerated vesting if there is a change in control
as defined in the Equity Compensation Plans.
Employee
stock options generally vest over
three
to
four years
.
There were
0
stock options granted during the three-month and six periods ended
June 30, 2020 and June 30, 2019, respectively.
The expected life for options is estimated based on their vesting and
contractual terms and was determined by applying the simplified
method as defined by the SEC’s Staff
Accounting Bulletin No. 107 (“SAB 107”). The risk-free interest rate
reflected the yield on
zero-coupon Treasury securities with a term
approximating the expected life of the stock options. The
expected volatility was
determined using historical volatilities based on historical stock
prices
.
A summary of option activity for the six-month period ended
June 30, 2020 follows:
Weighted
Average
Number of
Exercise Price
Options
Shares
Per Share
Outstanding, December 31, 2019
135,159
$
26.79
Granted
—
—
Exercised
—
—
Forfeited
(3,929)
27.31
Expired
(11,270)
26.41
Outstanding, June 30, 2020
119,960
26.82
The Company recognized $
0.1
million of compensation expense related to options during the three and
six-month periods ended June
30, 2020.
The Company recognized $
0.1
million and $
0.2
million of compensation expense related to options during the three
and
six-month periods ended June 30, 2019.
There were
0
stock options exercised during the three or six-month periods ended
June 30, 2020 and June 30, 2019.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-38-
-30-
 
The following table summarizes information about the stockNOTE 12 – Earnings Per Share
 
options outstanding and exercisable as of June 30, 2020:
Options Outstanding
Options Exercisable
Weighted
Weighted
Aggregate
Weighted
Weighted
Aggregate
Average
Average
Intrinsic
Average
Average
Intrinsic
Range of
Number
Remaining
Exercise
Value
Number
Remaining
Exercise
Value
Exercise Prices
Outstanding
Life (Years
)
Price
(In thousands)
Exercisable
Life (Years
)
Price
(In thousands)
$
25.75
68,818
3.8
$
25.75
$
—
68,818
3.8
$
25.75
—
$
28.25
51,142
4.7
$
28.25
$
—
34,092
4.7
$
28.25
$
—
119,960
4.2
$
26.82
$
—
102,910
4.1
$
26.58
$
—
The aggregate intrinsic value in the preceding table represents
the total pretax intrinsic value, based on the Company’s
closing stock
price of $
8.46
as of June 30, 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, 2020, there was $
0.1
million of unrecognized compensation cost related to non-vested stock options
not yet recognized
in the Consolidated Statements of Operations scheduled to be recognized
over a weighted average period of
0.7
year.
Restricted Stock Awards
 
The Company’s restricted stock
 
awards provide that, during the applicable vesting periods,are paid non-forfeitable common stock dividends and thus meet
 
the shares awarded may not be sold orcriteria of participating
transferred by the participant. The vesting period for restrictedsecurities. Accordingly,
 
stock awards generally ranges from
three
earnings per share (“EPS”) has been calculated using the two-class method, under
 
towhich earnings are
seven years
. All awards
issued contain service conditions based on the participant’s
continued service with the Companyallocated to both common stock and may provide for accelerated
vesting if there is a change in control as defined in the Equity Compensation
Plans.participating securities.
 
 
The vestingBasic 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 certain restrictedbasic EPS, all shares may be accelerated toof
 
a minimum ofrestricted stock have been deducted from the weighted
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.
Vesting
was accelerated in 2019 on certain awards based on the achievement
of certain performance criteria determined annually,
as
described below.average shares outstanding.
 
 
The Company also issues restricted stockDiluted EPS has been computed by dividing net income or loss allocated to non-employee independent
 
directors.common stock by the weighted average number of
common shares used in computing basic EPS, further adjusted by including
 
Thesethe dilutive impact of the exercise or conversion of
common stock equivalents, such as stock options, into shares generally vest in
seven years
of common
 
from thestock as if those securities were exercised or converted.
grant date or
six months
 
The following the director’s termination from Boardtable provides net income and shares used in computing basic
 
of Directors service.and diluted EPS:
 
The following table summarizes the activity of non-vested restricted
Three Months Ended March 31,
2021
2020
(Dollars in thousands,
 
stock for the six-month period ended June 30, 2020:
except per-share data)
Basic EPS
Net income (loss)
$
6,851
$
(11,821)
Less: net income allocated to participating securities
(85)
0
 
Net income (loss) allocated to common stock
$
6,766
$
(11,821)
Weighted average
common shares outstanding
 
Weighted11,982,476
Average12,014,396
Grant-Date
Non-vestedLess: Unvested restricted stock awards considered participating securities
Shares(148,061)
(138,249)
Adjusted weighted average common shares used in computing basic EPS
11,834,415
11,876,147
Basic earnings (loss) per share
$
0.57
$
(1.00)
Diluted EPS
Net income (loss) allocated to common stock
$
6,766
$
(11,821)
Adjusted weighted average common shares used in computing basic EPS
11,834,415
11,876,147
Add: Effect of dilutive stock-based compensation
awards
 
34,803
0
 
Fair Value
Outstanding at December 31, 2019Adjusted weighted average common shares used in computing diluted EPS
143,93511,869,218
11,876,147
Diluted earnings (loss) per share
$
21.880.57
$
(1.00)
For each of the three-month periods ended March 31, 2021 and March
31, 2020,
outstanding stock based compensation awards in the
amount of
199,193
 
Grantedand
45,830359,035
8.64, respectively, were considered
antidilutive and therefore were not considered in the computation of
potential common shares for purposes of diluted EPS.
 
Vested
(29,774)
22.02
Forfeited
(1,600)
25.67
Outstanding at June 30, 2020
158,391
17.98
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
��
-39--31-
 
NOTE 13 – Stockholders’ Equity
Share Repurchases
During the three-month periodsperiod ended June 30, 2020March 31, 2021, the Company
 
and June 30,did
0
t purchase any shares of its common stock under a stock
repurchase plan approved by the Company’s
 
Board of Directors on August 1, 2019 (the “2019 Repurchase Plan”).
During the three-
month period ended March 31, 2020, the Company granted restricted stock awards with grant-datepurchased
fair values totaling $
0.4264,470
 
million andshares of its common stock in the open market under 2019
Repurchase Plan at an average cost of $
0.116.09
 
million, respectively. During the
six-month periods ended June 30, 2020 and June 30,
2019,
the Company granted restricted stock awards with grant-date
fair values totaling $
0.4
million and $
0.1
million, respectively.per share.
 
As vesting occurs, or is deemed likely to occur,
compensation expense is recognized overAt March 31, 2021, the requisite service
period and additional
paid-in capital is increased. The Company recognizedhad $
0.1
million and $
0.24.7
 
million of compensation expense relatedremaining authorizations under the 2019 Repurchase Plan.
Pursuant to restrictedthe
stock for the three-month periods ended June 30, 2020Agreement and Plan of Merger dated as of April 18, 2021 by and
 
among the Company, Madeira Holdings,
LLC and June 30, 2019, respectively. TheMadeira Merger
Subsidiary, Inc., the
 
Company recognized $
0.2
may not repurchase shares of common stock (pursuant to the 201
 
million and
$
0.5
9
 
millionRepurchase Plan or otherwise)
without prior written consent of compensation expense relatedMadeira Holdings, LLC. See Note 14
“Subsequent Events” for additional discussion regarding the
proposed merger transaction.
In addition to restricted stock for the six-monthrepurchases described above, participants in
 
periods endedthe Company’s 2014 Equity Compensation
Plan (approved by the
Company’s shareholders
on June 30, 20203, 2014) and June 30, 2019,
respectively.
Of the $
0.2
million total compensation expense related to restricted stock for the six-month
period ended June 30, 2020,
0
expense
was related to accelerated vesting based on achievement of certain performance
criteria determined annually.
Of the $0.5 million total
compensation expense related to restricted stock for the six-month
period ended June 30, 2019, approximately $
0.1
million related to
accelerated vesting during the first quarter ofCompany’s 2019
 
which was also basedEquity Compensation Plan (approved by the Company’s
shareholders on the achievement of certain performance criteria
determined annually.
May 30, 2019) may have shares withheld to cover income
 
As of June 30, 2020, there was $
1.6
million of unrecognized compensation cost related to non-vested restricted
stock compensation
scheduled to be recognized over a weighted average period
of
5.0
years.
The fair value of shares that vested duringtaxes. During the three-month periods
 
ended June 30,March 31,
2021 and March 31, 2020, and June 30, 2019 was $there were
0.116,038
 
millionshares and
21,123
shares repurchased to cover income tax withholding under the 2014
Equity Compensation Plan and the 2019 Equity Compensation Plan
at an average cost of $
14.01
per share and $
0.3
million, respectively. The
fair value of shares that vested during the six-month periods
ended June 30, 2020 and June 30, 2019 was
$
0.313.38
 
million and $per share,
1.1
million, respectively.
 
 
Restricted Stock UnitsRegulatory Capital Requirements
Restricted stock units (“RSUs”) are granted with vesting conditions
 
based on fulfillment
Through its issuance of a service condition (generally three to
four
years from the grant date), and may also require achievement
of certain operating performance criteria,
achievement of certain market-
based targets associated withFDIC-insured deposits, MBB serves as the Company’s
 
stock price or relative total shareholder return, or aprimary funding source. Over time, MBB may offer
other products and services to the Company’s
 
combinationcustomer 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 both performance
criteriaSan Francisco and market-based targets.
For those awards subject to achievementthe Utah Department of certain market
performance criteria, the market-based
target measurement period begins one year from the grant
date and ends three years from the grant date. Expense for
equity-basedFinancial Institutions.
 
awards with marketThe Company and performance conditionsMBB are subject to capital adequacy regulations issued
jointly by the federal bank regulatory agencies. These risk-
based capital and leverage guidelines make regulatory capital requirements more
sensitive to differences in risk profiles among
banking organizations and consider off
-balance sheet exposures in determining capital adequacy.
The federal bank regulatory agencies
and/or the U.S. Congress may determine to increase capital requirements
in the future due
to the current economic environment.
Under the capital adequacy regulation, at least half of a banking organization’s
total capital is recognizedrequired to be "Tier 1 Capital" as
defined in the regulations, comprised of common equity,
 
overretained earnings and a limited amount of non-cumulative perpetual
preferred stock. The remaining capital, "Tier
2 Capital," as defined in the performance period based onregulations, may consist of other preferred stock, a limited
amount of term subordinated debt or a limited amount of the grant-date fair value ofreserve 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
award for those awards whichrisk-based capital standards principally address credit risk rather than
interest rate, liquidity, operational
or other risks, many banking
organizations are expected to bemaintain capital in excess
 
earned.
of the minimum standards.
The Company and MBB operate under the Basel III capital adequacy standards.
 
These standards require a minimum for Tier 1
leverage ratio of
4
%, minimum Tier 1 risk-based ratio of
6
%, and a total risk-based capital ratio of
8
%.
The Basel III capital adequacy
standards established a new common equity Tier
1 risk-based capital ratio with a required
4.5
% minimum (
6.5
% to be considered
well-capitalized). The Company is required to have a level of
regulatory capital in excess of the regulatory minimum and to have a
capital buffer above
2.5
%. If a banking organization does not maintain capital above the
minimum plus the capital conservation buffer
it may be subject to restrictions on dividends, share buybacks, and certain discretionary
payments such as bonus payments.
CMLA Agreement.
On March 25, 2020, MBB received notice from the FDIC that it had approved
MBB’s request to rescind certain
nonstandard conditions in the FDIC’s
order granting federal deposit insurance issued on March 20, 2007.
Furthermore, effective
March 26, 2020, the FDIC, the Company and certain of the Company’s
subsidiaries terminated the Capital Maintenance and Liquidity
Agreement (the “CMLA Agreement”) and the Parent Company
Agreement, each entered into by and among the Company,
certain of
its subsidiaries and the FDIC in conjunction with the opening of MBB. As a result of
these actions, MBB is no longer required
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-40-
-32-
 
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 less the amount of cumulative dividends paid over
that period.
Any dividends declared above that amount and any return of permanent capital would
require prior approval of the
Federal Reserve Board of Governors. As of March 31, 2021,
MBB has the capacity under 12 CFR 208.5 to pay dividends to the
Company without explicit approval from the Federal Reserve Board
of Governors.
MBB’s Tier 1
Capital balance at March 31, 2021 was $
152.9
million, which met all capital requirements to which MBB is subject and
qualified MBB for “well-capitalized” status. At March 31, 2021,
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 following tables summarize restricted stock unit activityCompany 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
 
six-monthPolicies.
Rules governing the Company’s
regulatory
capital requirements give entities the option of delaying for two years the
estimated impact of CECL on regulatory capital, followed
by a three-year transition period ended June 30, 2020:
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.
 
Weighted
Average
NumberFor measurements of
Grant-Date
Performance-based & market-based RSUs
RSUs
regulatory capital in 2020 and 2021,
 
Fair Valueunder the two year
Outstanding at December 31, 2019
257,476
$
18.00
Granted
95,758
17.55
Forfeited
(5,081)
23.99
Converted
(13,810)
25.75
Cancelled due to non-achievementdelay the Company shall prepare: (i) a measurement of market condition
(30,390)
25.65
Outstanding at June 30, 2020
303,953
16.64
Service-based RSUs
Outstanding at December 31, 2019
99,951
$
23.59
Granted
69,422
20.43
Forfeited
(19,299)
22.25
Converted
(39,879)
24.30
Outstanding at June 30, 2020
110,195
21.58
its estimated allowance
 
There werefor credit losses under CECL, as reported in its balance
0
sheets; and (ii) a measurement of its estimated allowance under the
 
RSUs with vesting conditions based solely on market conditions grantedhistorical incurred loss methodology,
 
as prescribed by the
regulatory calculation.
Any amount of provisions under CECL that is in excess of the incurred estimate
will be an adjustment the
Company’s capital during the six-month periods ended June 30,
2020 and June 30, 2019,two-year
 
respectively. The weighted averagedelay.
 
grant-date fair valueThe three-year transition, starting in 2022, will phase in that adjustment straight
-line,
such that
25
% of RSUs with both performance and market-based
vesting conditions granted during the six-month periods ended
June 30, 2020 and June 30, 2019
was $
12.90
transitional amounts will be included in the first year,
 
and an additional
12.9125
% over each of the next two years,
such that we will have phased in
75
% of the adjustment during year three.
 
per unit,At the beginning of year 6 (2025) the Company will have
respectively. The weightedcompletely reflected the effects of CECL in its regulatory
 
average grant date fair value of these performance and market-based
RSUs was estimated using a Monte
Carlo simulation valuation model with the following assumptions:
Six Months Ended June 30,
2020
2019
Grant date stock price
$
20.43
21.50
Risk-free interest rate
1.40
%
2.16
Expected volatility
26.18
%
26.68
Dividend yield
—
—
capital.
 
The risk free interest rate reflectedfollowing table sets forth the yield on zero coupon TreasuryTier 1
 
securitiesleverage 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 March
31, 2021.
Minimum Capital
Well-Capitalized Capital
Actual
Requirement
Requirement
Ratio
Amount
Ratio
Amount
Ratio
Amount
(Dollars in thousands)
Tier 1 Leverage Capital
Marlin Business Services Corp.
20.68%
$
206,512
4.00%
$
39,945
5.00%
$
49,931
Marlin Business Bank
16.84%
$
152,855
4.00%
$
36,316
5.00%
$
45,395
Common Equity Tier 1 Risk-Based Capital
Marlin Business Services Corp.
23.79%
$
206,512
4.50%
$
39,068
6.50%
$
56,432
Marlin Business Bank
19.00%
$
152,855
4.50%
$
36,203
6.50%
$
52,294
Tier 1 Risk-based Capital
Marlin Business Services Corp.
23.79%
$
206,512
6.00%
$
52,091
8.00%
$
69,454
Marlin Business Bank
19.00%
$
152,855
6.00%
$
48,271
8.00%
$
64,361
Total
Risk-based Capital
Marlin Business Services Corp.
25.08%
$
217,711
8.00%
$
69,454
10.00%
$
86,818
Marlin Business Bank
20.29%
$
163,253
8.00%
$
64,361
10.00%
$
80,452
-33-
Prompt Corrective Action
.
The Federal Deposit Insurance Corporation Improvement
Act of 1991 (“FDICIA”) requires the federal
regulators to take prompt corrective action against any undercapitalized institution.
Five capital categories have been established
under federal banking regulations:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and
critically undercapitalized.
Well-capitalized
institutions significantly exceed the required minimum level
for each relevant capital
measure.
Adequately capitalized institutions include depository institutions that meet
but do not significantly exceed the required
minimum level for each relevant capital measure. Undercapitalized institutions
consist of those that fail to meet the required minimum
level for one or more relevant capital measures.
Significantly undercapitalized characterizes depository institutions with capital
levels
significantly below the minimum requirements for any relevant capital
measure.
Critically undercapitalized refers to depository
institutions with minimal capital and at serious risk for government
seizure.
Under certain circumstances, a term approximating the expected life ofwell-capitalized, adequately capitalized
or undercapitalized institution may be treated as if the
RSUs. The expected volatility was based on historical volatilityinstitution were in the next lower capital category.
 
A depository institution is generally prohibited from making capital distributions,
including paying dividends, or paying management fees to a holding company
if the institution would thereafter be undercapitalized.
Institutions that are adequately capitalized but not well-capitalized
cannot accept, renew or roll over brokered deposits except with a
waiver from the FDIC and are subject to restrictions on the interest rates that
can be paid on such deposits. Undercapitalized
institutions may not accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or,
in certain cases, required to take certain actions with respect to institutions
falling within one of the Company’s commonthree undercapitalized categories.
 
stock. Dividend yield was assumedDepending 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
makin
g
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
sev
ere
cases,
appointing
a
conservator
or
receiver
for
the
institution.
A banking institution that is undercapitalized is required to submit a capital
restoration plan, and such a plan will not be accepted
unless, among other things, the banking institution’s
holding company guarantees the plan up to a certain specified amount.
Any such
guarantee from a depository institution’s
holding company is entitled to a priority of payment in bankruptcy.
MBB’s total risk-based capital
ratio of
20.29
% at zero
asMarch 31, 2021 exceeded the grant assumes dividends distributed during the performance periodthreshold for “well capitalized” status under
 
are reinvested.the
applicable laws and regulations.
 
When valuing
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 grant, we have assumed a
dividend yieldability of zero, which is mathematically equivalentthe organizations to
 
reinvestingpay dividends. Although generally organizations may
pay dividends only out of current
operating earnings, dividends may be paid if the distribution is prudent
relative to the organization’s
financial position and risk profile,
after consideration of current and prospective economic conditions. As mentioned
above, MBB’s ability to pay dividends to the
Company is subject to various regulatory requirements, including
Title 12 part 208 of the Code of Federal Regulations (12 CFR
208.5), which places limitations on bank dividends. Furthermore,
as a bank holding company, the
Company’s ability to pay dividends
to its shareholders is also subject to various regulatory requirements, including
Supervisory Letter SR 09-4,
Applying Supervisory
Guidance and Regulations on the Payment of Dividends, Stock Redemptions
and Stock Repurchases at Bank Holding Companies
.
Pursuant to the Agreement and Plan of Merger dated as of April
18, 2021 by and among the Company,
Madeira Holdings, LLC and
Madeira Merger Subsidiary,
Inc., the Company may not, without the prior written consent of Madeira
Holdings, LLC, declare or pay
any dividends, other than the Company’s
regular quarterly cash dividends in an amount not to exceed $
0.14
per quarter. See Note 14
“Subsequent Events” for additional discussion regarding the issuing entity.proposed merger
transaction.
 
 
 
 
 
 
 
 
 
-41-
There were
0
RSUs granted during the three-month periods ended June 30,
2020 and June 30, 2019, respectively.
During the six-
month periods ended June 30, 2020 and June 30, 2019,
the Company granted RSUs with grant-date fair values totaling $
3.1
million
and $
3.4
million, respectively.
The Company did
0
t recognize compensation expense related to RSUs for the three-month
period
ended June 30, 2020.
The Company recognized $
0.7
million of compensation expense related to RSUs for the three-month period
ended June 30, 2019. The Company did
0
t recognize compensation expense related to RSUs for
the six-month period ended June 30,
2020.
The Company recognized $
1.1
million of compensation expense related to RSUs for the six-month period
ended June 30, 2019.
During the three-month period ended June 30, 2020
the Company reversed $
0.7
million of previously recognized compensation
expense related to RSUs based on the adjustment of the most probable
performance assumptions related to certain non-market
performance awards.
The fair value of restricted stock units that converted to shares of common
stock during the six-month periods
ended June 30, 2020 and June 30, 2019 was $
0.6
million and $
0.8
million, respectively. As of June 30,
2020, there was $
2.1
million of
unrecognized compensation cost related to RSUs scheduled to
be recognized over a weighted average period of
1.5
years based on the
most probable performance assumptions. In the event maximum performance
targets are achieved, an additional $
8.1
million of
compensation cost would be recognized over a weighted average period
of
1.7
years.
As of June 30, 2020,
64,260
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,
514,957
performance units would convert to shares of common stock.
-34-
 
NOTE 1514 – Subsequent Events
 
On April 18, 2021, the Company entered into an Agreement and Plan of Merger
(the “Merger Agreement”), by and among the
Company, Madeira
Holdings, LLC and Madeira Merger Subsidiary,
Inc. (the “HPS Merger Sub”) pursuant to which all outstanding
shares of the Company’s common
stock will, subject to the terms and conditions of the Merger Agreement,
be cancelled and
converted into the merger consideration specified
in the Merger Agreement in an all cash transaction pursuant to a merger
of the
Company with and into the HPS Merger Sub, with the Company
surviving (the “Merger”).
The Company's Board of Directors has
unanimously approved the Merger.
The Merger is subject to, in addition to various other customary closing
conditions: approval by
the Company’s shareholders; antitrust
clearance and other governmental and regulatory approvals; and
the completion of MBB’s
surrender of its banking licenses and authority and termination of its FDIC insured
deposits (a process we refer to as “De-banking”).
 
The Company declared a dividend of $
0.14
 
per share on July 30, 2020.April 29, 2021. The quarterly dividend, which is expected to
result in a
dividend payment of approximately $
1.7
 
million, is scheduled to be paid on
AugustMay 20, 20202021
 
to shareholders of record on the close of
business on
AugustMay 10, 20202021
. It represents the Company’s thirty-sixth consecutive
thirty-ninth
 
consecutive quarterly cash dividend. The payment of future
dividends will be subject to satisfaction of regulatory requirements
applicable to bank holding companies and approval by the
Company’s
Board of Directors.
 
In addition, see Note 6—"Allowance for Credit Losses” forpursuant to the Merger Agreement, the Company may
not, without the prior written consent of Madeira Holdings, LLC,
declare or pay any future dividends other than the Company’s
regular quarterly cash dividend in an updateamount not to exceed $
0.14
 
on our payment deferral contract modification programper
subsequent to June 30, 2020.quarter.
 
 
 
 
 
 
 
-42--35-
 
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
 
 
The following discussion and analysis of our financial condition
 
condition and results of operations should be read
 
be read in conjunction with our
Consolidated Financial Statements and the related
 
notes thereto in our Form 10-K for the year ended
 
ended December 31, 20192020 filed with
the SEC.
 
This discussion contains certain statements of a forwardforward-looking
 
-looking nature that involve risks and
uncertainties.
 
 
F
ORWARD
-L
OOKING
S
TATEMENTS
 
Certain statements in this document may include the words or phrases “can
 
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
 
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 expectations related to our proposed merger
with a subsidiary of funds managed by HPS Investment Partners, LLC (the
“HPS Merger Sub”), including the timing thereof and the
costs to be incurred in connection with MBB’s
surrender of its banking licenses and authority and termination
of its FDIC insured
deposits (a process we refer to as “De-banking”); (b) our business strategy; (b)(c) our projected
 
projected operating
results; (c)(d) our ability to obtain
external deposits or financing; (d)
(e) our understanding of our competition; and (e)
(f) industry and market
trends. The Company’s actual results
 
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,
 
control, including,
without limitation:
 
 
◾
our ability to complete our proposed merger with the
HPS Merger Sub, including to complete the De-banking within
the
timeline required under the merger agreement, if at all, and
to obtain the requisite shareholder approval for the proposed
merger;
◾
 
availability, terms and deployment
 
of funding and capital;
 
◾
 
changes in our industry, interest
 
interest rates, the regulatory environment or the general economy resulting in changes
 
in changes to our
business strategy;
◾
 
the degree and nature of our competition;
◾
 
availability and retention of qualified personnel;
◾
 
general volatility of the capital markets;
◾
 
the effects of the COVID-19 pandemic; and
◾
 
the factors set forth in the section captioned “Risk Factors” in
Item 1 of our Form
10-K for the year ended December 31,
20192020 and in Part II—Item 1A of this Form 10-Q.
 
Forward-looking statements apply only as of the date made and the Company
 
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
 
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
 
Services Corp. and its
subsidiaries.
 
 
O
VERVIEW
 
Founded in 1997, we are a nationwide provider of credit
products and services
to small and mid-sized businesses. The products
and
services we provide to our customers include loans and leases for the acquisition of
 
of commercial equipment (including Commercial
Vehicle
 
Group (“CVG”) assets) and working capital loans. In May 2000, we established
 
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
 
Marlin Business Bank (“MBB”) for our small business customers.
In 2008, we opened MBB, a commercial bank chartered by the State of Utah
 
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, an equipment
 
(“HKF”), an equipment leasing company which
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”), ana 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.
-36-
 
We access our end
 
end user customers primarily through origination sources consisting of independent
 
of independent commercial equipment dealers,
various national account programs, through direct solicitation of our
 
end user customers and through relationships with select
lease
and loan brokers. We
 
use both a telephonic direct sales model and, for strategic larger
 
accounts, outside sales executives to market to
our origination sources and end user customers. Through these origination
 
sources, we are able to cost-effectively access end
user
customers while also helping our origination sources obtain financing
 
for their customers.
We fund
 
-43-
We fund our
business primarily through the issuance of fixed and variable-rate FDIC-insured
 
FDIC-insured deposits and money market demand
accounts raised nationally by MBB, sales of pools of leases or loans,
 
loans, as well as, from time to time, fixed-rate asset backed
securitization transactions.
 
On April 18, 2021, the Company entered into an Agreement and Plan of Merger
(the “Merger Agreement”), by and among the
Company, Madeira
Holdings, LLC and the HPS Merger Sub pursuant
to which all outstanding shares of the Company’s
common
stock will, subject to the terms and conditions of the Merger Agreement,
be cancelled and converted into the merger consideration
specified in the Merger Agreement in an all cash transaction pursuant
to a merger of the Company with and into the HPS Merger Sub,
with the Company surviving (the “Merger”).
The Company's Board of Directors has unanimously approved the Merger.
The Merger
is subject to, in addition to various other customary closing conditions: approval
by the Company’s shareholders;
antitrust clearance
and other governmental and regulatory approvals; and completion of
the De-banking.
See “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies—"
We may
fail to consummate the proposed Merger
Agreement,
and uncertainties related to the consummation
of the transaction may have a material adverse effect on our business, financial
position, results of operations and cash flows, and
negatively impact the price of our Common stock.
" in this Form 10-Q.
 
E
XECUTIVE
S
UMMARY
 
Summary
In 2020, we faced unprecedented operating challenges and macro
 
Through-economic uncertainty from the second quarter,COVID-19 pandemic.
Our initial
focus from the impacts
beginning of the COVID-19 pandemic continued to be experienced
by our business. Origination
volumes for both equipment finance and working capital loans
were down, a combined decrease of almost 70% from the
second
quarter of 2019.
While we have tightened our underwriting standards for all of our products,
the decline in volume is primarily due to
decreased demand during this period of business shutdowns and
economic uncertainty.
We expect our
origination volumes for the
second half of 2020 will be negatively impacted as the effects
of the pandemic continue and this period of uncertainty continues to
impact the macroeconomic environment.
Given the ongoing health crisis in the United States, especially thefirst quarter of 2020
 
recent COVID-19 flare-was working with existing customers to protect the value
ups inof our portfolio and limiting the south and west, any return to pre-pandemic levelserosion of shareholder capital.
 
activity remains uncertain.
We implementedTo this end, we initiated
 
a payment deferral contractloan modification program to assist
 
our customers who, during this period of economicprogram in response to
decline, were current under their existing obligations.
As of June 30, 2020, we had $133.8 million, or 13.7%, of our Net investment
in
leases and loans in payment deferral agreements,
and on average the term of the modified contracts had increased
by three months.
We have begun to extend
the deferrals for certain customers using specific underwriting
criteria,
pandemic that allowed for up to six months of total
modification.
deferred payments
 
As our contract modification program will allow for up-to six months.
 
Although the pace of payment deferrals, andmodifications has slowed substantially
during the program began in late March,first quarter,
 
the
ultimate performance of this portfolio and the customers’
ability to resume full payment will be shown generally starting
latewe continue offering extensions in the
third quarter or going into the fourth quarter of this year.
Based on their modified termsselect cases as of June 30, 2020,
25%part of our total
modified contracts had already resumed their regular payment scheduleloss mitigation strategies.
 
beforeSee Note 6 –
Allowance for Credit Losses for information and data about our loan modifications
.
In addition, early in response to the endonset of the pandemic, we temporarily
tightened underwriting standards for areas of elevated risk
and we continue to update such risk assessments based on current
conditions.
As we see economic conditions improve, our
underwriting criteria and standards have been updated accordingly.
Most of our employees continue to work remotely but we have not experienced
any significant interruption to our operations. We
anticipate officially re-opening our offices in the second quarter
 
72%of 2021 for select departments while offering our employees
 
were scheduledthe
choice of returning to
resume payment in the third quarter and the remaining 3% wereoffice or continuing to work
 
scheduled to resume payment inremotely for the fourth quarter.foreseeable future.
Our first quarter results of net income of $6.9 million, or $0.57 earnings
 
Weper share, are closely
monitoring the payment performance of our customers as theirhighlighted by solid credit quality,
 
post-deferral obligations become due.improving
origination volume trends and strong earnings, and although our
 
While most modificationfirst quarter origination volume remains well below pre-pandemic
extensions require partial payments, the ability of these customers
to resume their scheduled payment obligations under their contract
has yet to be confirmed.
Additionally, their ability to resume
payment may be highly impacted by the extent and duration of the
continued impactslevels, originations grew sequentially during each month of the pandemic, which remains uncertainquarter
 
.
Portfolio trends and performance.
Our delinquency statistics as of June 30, 2020 measureDuring the portfoliothree months ended March 31, 2021, we generated 3,687
 
based on their current effective terms, which would includenew Equipment Finance leases and loans with equipment costs of
intervals$75.3 million, compared to 5,863 new Equipment Finance leases and loans
with equipment costs of either full or partial payment deferral$127.7 million generated for the
three months ended March 31, 2020.
Working Capital loan
originations were $8.4 million during the three-month period ended March
31, 2021, compared to $23.9 million for the modifiedthree-month period ended
 
portfolio.March 31, 2020.
Overall, our average net investment in total finance receivables for the
 
For Equipment Finance and Workingthree-month period ended March 31, 2021 decreased 17.4% to
$833.5 million, compared to $1,008.8 million for the three-month period
 
Capital, 12.5% and
42.4% of the respective portfolios were in the modification program.
The 60+ delinquency rate for Equipment Finance has increased
to 2.52% as of June 30, 2020 from 0.86% at December 31,
2019.
The 30+ delinquency rate for Working
Capital has increased to
2.68% as of June 30, 2020 from 1.42% at December 31,
2019. Further, these delinquency rates have doubled
from the quarter ended
March 31, 2020.
 
YearEquipment Finance receivables delinquent over 30 days were 1.16%
 
-to-date, we have recognized $34.7 million of increases toat March 31, 2021, down 66 basis points from 1.82% at March
31, 2020. Working
 
our allowance for qualitative and forecast adjustments as a result of the
expected impacts of the COVID-19 pandemic on our portfolio.Capital receivables over 15 days delinquent were 1.47% at March 31, 2021,
 
These increases include $15.5 million of provision recognized
in thedown 108 basis points from 2.55% at
second quarter, and $19.2 million in the
first quarter.
Our allowance as a percent of receivables has increased for Equipment
Finance
to 6.00% from 2.05% at DecemberMarch 31, 2019, and increased2020. Annualized total net charge-offs
 
for Working Capitalthe first quarter of 2021 were 1.67% of average total finance receivables as
compared to 18.92% from 3.12% at December 31,
2019.
Our total Allowance of $63.6 million as of June 30,3.11% for the same period in 2020
 
incorporates all of our current judgments about the impact of the COVID
-19
pandemic on our portfolio.
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 from COVID-19. All of the assumptions
and expectations underlying our estimate of credit loss depend
largely on future developments, and these estimates are
highly uncertain;
the ultimate amount of credit losses we may realize on our
portfolio may vary from our current estimate.
We may recognize credit
losses in excess of our reserve, or adjustments to our required
reserve based on future performance,
and such adjustments may be significant, based on: (i)
the actual performance of our portfolio,
including the performance of the modified portfolio;
(ii) any further changes in the economic environment; or (iii)
other developments
or unforeseen circumstances that impact our portfolio.
.
 
 
 
 
 
-37-
 
For the three-months ended March 31, 2021 we recognized a provision
 
benefit of $2.9 million as compared to a provision net expense
-44-
We recognized
a $5.9 million Net loss for the quarter,
driven largely by the $15.5 million COVID-related
provision for loan loss.
We
began efforts to tighten our expense base, putting approximately
120 employees on furlough in mid-April.
In June, we made the
decision to permanently reduce our workforce by approximately
80 employees, which reduced our headcount to approximately
250
employees at the end of July,
down from approximately 350 employees as of December 31,
2019.
Our total Salaries and benefits was
$7.7$25.2 million for the secondsame period in 2020. The provision release in the
first quarter of 2020,2021 was primarily due to positive changes
in the outlook of macroeconomic assumptions to which is $4.8the reserve
 
million lower than the same quarteris correlated as well as positive trends in portfolio performance.
Allowance for credit losses as a percentage of 2019.total finance
 
That reduction reflects $1.7receivables was 4.65% at March 31, 2021 compared with 5.09% at March
million of lower salary expense, primarily driven by reduced
headcount from the furlough, partially offset by $0.9
million of
severance recognized, plus $1.9 million lower incentive compensation cost and
$2.1
million of lower commission expense.
We also
made the decision to exit one office lease as part of our
cost reduction efforts, and recognized $0.2 million of costs
associated with
that planned exit.
We continue
to assess all other aspects of our expense base in order to
stabilize our operations and minimize the
negative impacts of the ongoing pandemic.
Through the second quarter, our employees
continue to work remotely,
and we have not experienced any significant interruption to
our operations from that transition.
We continue to
assess how to best evolve our operations and how to best serve our customers
in
this changing environment.31, 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-45--38-
 
F
INANCE
R
ECEIVABLES
 
AND
A
SSET
Q
UALITY
 
 
The following table summarizes certain portfolio statistics for the periods
 
the periods presented:
June 30,Three Months Ended
Year Ended
March 31,
December 31,
June 30,
 
2021
2020
2020
2019
2019
(Dollars in thousands)
Finance receivables:
End of period
(1)
$
974,679836,341
$
1,022,135
$
1,007,706825,056
Average for the period
(1)
$
1,057,727833,474
(1)
Average for the quarter
(1)
979,313$
1,008,823
1,034,464$
1,031,774945,599
Origination Volume
- three months
(6)$
65,41983,766
$
157,391
215,161$
209,317367,128
Origination Volume
- six months, through June 30Assets Sold
(6)
222,810$
—
—
402,757
Assets Sold - three months
1,127$
22,929
114,483$
57,64028,342
Assets Sold - six months, through June 30
24,056
—
—
110,507
Leases and Loans Modified:
(3)
Payment deferral program
(2)Allowance for credit losses :
End of period
$
133,81738,912
$
19,51852,060
—$
—44,228
As a % of end of period receivables
(1)
13.7%4.65%
1.9%5.09%
—5.09%
—
Other Restructured leases and loans, end of period
$
1,751
$
3,095
$
2,668
$
3,122
Allowance for credit losses :
(4)Loans modified, in payment deferral:
End of period
$
63,64493,847
$
52,06019,518
$
21,695
$
16,777111,209
As a % of end of period receivables
(1)
6.53%11.22%
5.09%1.91%
2.15%
1.59%
Annualized net charge-offs
to average total finance receivables
(quarter)
(1)
3.47%
3.11%
3.00%
1.88%12.80%
Delinquencies, end of period:
(3)(5)(2)
Equipment Finance and CVG:
Greater than 60 days past due, $
$
23,3535,203
$
10,156
$
8,112
$
6,5936,717
Greater than 60 days past due, %
2.52%0.62%
1.05%
0.86%
0.66%0.77%
Working
Capital:
 
Greater than 30 days past due, $
$
1,130193
$
673
$
855
$
240741
Greater than 30 days past due, %
2.68%1.05%
1.14%
1.42%3.69%
0.47%Other Renegotiated leases and loans, end of period
(3)
$
822
$
3,095
$
922
Annualized net charge-offs
to average total finance receivables
(1)
1.67%
3.11%
3.43%
__________________
(1)
For purposes of
 
of asset
quality and
 
allowance calculations, the
 
the effects
of (i)
 
the allowance for
 
for credit
losses and
 
(ii) initial direct
 
direct costs
and fees
deferred are excluded.
 
(2)
Contracts that are
 
are part
of our
 
Payment-deferral modification program
 
,program,
 
that allows for
 
for either
full or
 
partial payment deferral,
 
deferral, will
appear in
 
our
Delinquency and Non-Accrual measures based on their performance against their modified terms.
 
See further discussion of
our Loan
modification program below.
(3)
No renegotiated leases
 
leases or
loans met
 
the definition of
 
of a Troubled
 
Troubled Debt
Restructuring for
 
any period
presented,
 
including our payment
 
payment deferral
modifications, as discussed further below.
(4)
The December 31,
2019 end of
period allowance and
% of receivables
were $33,603 and
3.27%
after the January 1,
2020 adoption of
CECL.
See further discussion below.
(5)
Calculated as a percentage of net investment in leases and loans.
(6)
Amount of originations
for the three and
six months ended June
30, 2020 presented
above excludes $4.2 million
of loans originated
under the
Paycheck Protection Program (PPP).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-46-
For three and six months ended June 30, 2020, we have recognized
$15.5 million and $34.7 million of provision for credit losses,
respectively, driven by qualitative
and forecast adjustments to
the allowance for credit losses as a result of the economic impact of the
COVID-19 pandemic.
The COVID-19 pandemic, business shutdowns and impacts to our
customers, are still ongoing, and the extent
of the effects of the pandemic on our portfolio
depends on future developments, which are highly uncertain and are
difficult to predict.
Further, we instituted a Loan modification
payment deferral program, as discussed further below,
to give payment relief to customers
during this period.
As of June 30, 2020, the performance of loans modified under that program
remains uncertain.
Our reserve as of June 30, 2020, and the qualitative and economic
adjustments outlined below in our Provision discussion,
were
calculated referencing our historical loss experience, including loss
experience through the 2008 economic cycle, and our adjustments
to that experience based on our judgements about the expected
impact of the COVID-19 pandemic.
Those judgements include certain
expectations
for the extent and timing of impacts from COVID-19 on unemployment
rates and business bankruptcies and are based on
our current expectations of the performance of our portfolio in
the current environment.
We may recognize
credit losses in excess of
our reserve, or increases to our estimated expected credit loss
es, in the future, and such increases may be significant, based
on: (i) the
actual performance of our portfolio, including the performance
of the modified portfolio;
(ii) any further changes in the economic
environment; or (iii) other developments or unforeseen circumstances
that impact our portfolio.
Loan Modification Program.
In response to COVID-19, starting in mid-March 2020,
we instituted a payment deferral program in order to assist our small
-business
customers that request relief who are current under their existing
obligations.
Our COVID-19 modification program allows for up to 6
months of deferred payments.
We typically processed
first requests to defer customers for up to 3 months; starting
in July, we have
been evaluating and processing requests to extend the modification
period for certain customers using specific underwriting criteria,
such that the modification terms may extend to up to 6
months in total.
The below table outlines certain data on the modified population
based on the balance and status as of June 30, 2020.
See discussion
below the table on the status of this population subsequent to
quarter-end.
Equipment
Working
Finance
Capital
Total
(Dollars in thousands)
Net investment in leases and loans
Completed modifications
$
115,941
$
17,876
$
133,817
% of total segment
12.5%
42.4%
13.7%
Interest income recognized for the three months
ended June 30, 2020 on modified loans
(1)
$
2,295
$
1,633
$
3,928
Number of modifications (units)
Modified and Active
4,564
453
5,017
Modified and Resolved
(2)
56
15
71
Not Processed
(3)
3,107
84
3,191
Total Applications - owned
portfolio
7,727
552
8,279
Weighted-average
total term (months)
before modification
56.0
15.7
after modification
59.0
18.9
_________________
(1)
We did not account for these modifications as TDR, as allowed by interagency guidance issued in April 2020.
As such these loans were
not put on non-accrual upon modification.
The amount presented for interest income reflects total income recognized for the three months,
for any loan that was modified in the quarter.
(2)
Resolved population through June 30, 2020 includes:
for Equipment Finance, 55 loans paid in full and 1 charge-off, and for Working
Capital, 11 loans paid in full and 4 charge-offs.
-47-
(3)
Requests not processed includes requests declined or cancelled by the customer, requests declined by the Company, and
an insignificant
amount of requests in process pending underwriting or without finalized documentation as of June 30, 2020.
Through June 30, 2020, the first round of modifications processed
for Equipment Finance generally consisted of adding three
months
of $0 payments, or fully deferred payments.
As a result, the weighted-average total contract yield for this population declined
by 35
basis points.
The extension requests we are currently processing for
Equipment Finance, to extend the term of the deferral to
up to 6
months total, are generally being processed to require a partial
payment during the deferral period, with additions to the customers
’
post-deferral payments to achieve a consistent level of yield.
Through June 30, 2020, the modifications processed for Working
Capital have generally consisted of up to 6 months of partial-
payment deferral, with additions to the customers post-deferral
payments to achieve a consistent level of yield.
Through July 24, 2020, we processed modifications for an additional
$5.9 million of Equipment Finance net investment and additions
to the modified population for Working
Capital were not significant.
Portfolio Trends
During the three months ended June 30, 2020,
we generated 3,178 new Equipment Finance leases and loans with equipment
costs of
$64.6 million, compared to 7,648 new Equipment Finance leases and
loans with equipment costs of $181.8 million generated
for the
three months ended June 30, 2019.
Working Capital loan
originations were less than $1.0 million during the three-month
period ended
June 30, 2020,
compared to $27.5 million for the three-month period ended June 30,
2019.
Overall, our average net investment in total finance receivables
for the three-month period ended June 30, 2020 decreased
5.1% to
$979.3 million, compared to $1,031.8 million for the three-month period
ended June 30, 2019.
Our origination volumes in the three
months ended June 30, 2020 were lower than our historical norms,
primarily driven by decreased demand attributable to
COVID-19
related business shutdowns and other macroeconomic factors.
We expect our
origination volumes for the third quarter of 2020 will
continue to be negatively impacted by these factors, and our
portfolio of receivables may continue to decline as long as our
origination
volumes are less than portfolio runoff.
Given the ongoing health crisis in the United States, especially the
recent COVID-19 flare-ups
in the south and west, any returns to pre-pandemic levels of activity
remains uncertain.
The following table outlines the delinquency status of the Company’s
portfolio as of June 30, 2020, including information on the
population of restructured contracts, and contracts with restructure
requests:
Net Investment (in thousands)
Delinquency Rate by population
30
60
90+
Current
Total
30
60
90+
Current
Total
Equipment Finance
Non-Restructured Portfolio:
Modification not requested
$8,150
$7,625
$6,745
$744,616
$767,136
1.06%
0.99%
0.88%
97.07%
100%
Requested, Not Processed
(1)
4,289
5,793
3,061
31,287
44,430
9.65%
13.04%
6.89%
70.42%
100%
Total Non-Restructured
12,439
13,418
9,806
775,903
811,566
1.53%
1.65%
1.21%
95.61%
100%
Restructured Portfolio
424
109
21
115,387
115,941
0.37%
0.09%
0.02%
99.52%
100%
Total
Equipment Finance
$12,864
$13,527
$9,826
$891,290
$927,507
1.39%
1.46%
1.06%
96.09%
100%
-48-
Net Investment (in thousands)
Delinquency Rate by population
15
30
60+
Current
Total
15
30
60+
Current
Total
Working Capital
Non-Restructured Portfolio:
Modification not requested
$98
$212
$368
$22,243
$22,921
0.43%
0.92%
1.60%
97.05%
100%
Requested, Not Processed
(1)
7
13
81
1,180
1,281
0.58%
1.05%
6.35%
92.02%
100%
Total Non-Restructured
105
225
449
23,423
24,202
0.44%
0.93%
1.85%
96.78%
100%
Restructured Portfolio
608
242
212
16,814
17,876
3.40%
1.35%
1.18%
94.07%
100%
Total
Working Capital
$713
$467
$661
$40,237
$42,078
1.69%
1.11%
1.57%
95.63%
100%
_________________
(1)
Represents a subset of modification requests where the customer contacted the Company to initiate a modification, but the request was not
processed.
This includes requests cancelled because the customer declined the revised terms or did not finalize documents, requests
declined by the Company, as well as an insignificant amount of requests that were in-process at the end of the second quarter.
Contracts that are part of the payment deferral modification program
will be reflected in our Delinquency and Non-Accrual measures
based on their performance against their modified terms.
Equipment Finance receivables over 30 days delinquent were
390 basis points as of June 30, 2020, up 208 basis points from March
31, 2020, and up 284 basis points from June 30, 2019.
Working Capital receivables
over 15 days delinquent were 438 basis points as
of June 30, 2020, up 183 basis points from March 31, 2020
and up 386 basis points from June 30, 2019.
Equipment Finance leases and loans are generally charged
-off when they are contractually past due for 120 days or
more.
Working
Capital loans are generally charged-off at 60
days past due. Annualized second quarter total net charge
-offs were 3.47% of average
total finance receivables versus 3.11%
in the first quarter of 2020 and 1.88% a year ago.
Through the end of the second quarter,
we have not yet begun to experience any material increase in charge
-offs driven by the impact
of COVID-19.
We are
continuing to evaluate the delinquency trends of the non-modified portfolio,
and we are monitoring the
payment performance of the modified portfolio as those customers
begin to resume payment. Based on their modified terms as
of June
30, 2020, 25% of our total modified contracts had already resumed
their regular payment schedule before the end of the second
quarter, 72% were scheduled to resume payment
in the third quarter and the remaining 3% were scheduled to resume
payment in the
fourth quarter.
We are
closely monitoring the payment performance of our customers as their
payments post-deferral become due.
While most modification extensions require partial payments, the ability
of these customers to resume their scheduled obligation of
their contract has yet to be confirmed.
Additionally, their ability to resume
payment may be highly impacted by the extent and
duration of the continued impacts of the pandemic, which remains
uncertain.
In accordance with interagency guidance as amended in April
2020, as affirmed by the FASB,
we are not accounting for our payment-
deferral modified loans as TDRs, and we are continuing to accrue
interest on those loans.
For the three months ended June 30, 2020,
we recognized total Interest income of $3.93 million on loans in our
COVID-19 loan modification program.
-49-
The following table summarizes non-accrual leases and loans
in the Company’s portfolio:
June 30,
March 31,
December 31
June 30,
2020
2020
2019
2019
(Dollars in thousands)
Equipment finance
$
9,205
$
5,357
$
4,256
$
3,494
Working capital
1,189
755
946
284
CVG
637
593
389
199
CRA and PPP
—
—
—
—
Total non-accrual leases
and loans
$
11,031
$
6,705
$
5,591
$
3,977
Through June 30, 2020, the increase in leases and loans on non-accrual
reflects the growth in delinquencies in our portfolio.
Income
recognition is discontinued on Equipment Finance leases or
loans, including CVG loans, when a default on monthly payment
exists
for a period of 90 days or more. Income recognition resumes
when the lease or loan becomes less than
90 days delinquent.
Working
Capital Loans are generally placed in non-accrual status when they
are 30 days past due. The loan is removed from non-accrual
status
once sufficient payments are made to bring the loan
current and evidence of a sustained performance period
as reviewed by
management.
The Company has no loans 90 days or more past due that were
still accruing interest for any of the periods presented.
Portfolio Concentration.
The following table summarizes the concentrations of our portfolio
of net investment in leases and loans as of June 30, 2020
by state
and industry:
Top 10 Industries, by Borrower
SIC Code
Top 10 States
Equipment
Equipment
Finance
Working
Finance
Working
and CVG
Capital
and CVG
Capital
Medical
13.0
%
8.4
%
CA
13.8
%
11.1
%
Misc. Services
12.4
8.2
TX
11.7
10.5
Retail
10.4
13.1
FL
9.7
8.6
Construction
8.7
13.1
NY
6.8
5.7
Restaurants
7.5
8.2
NJ
4.6
6.7
Professional Services
6.6
5.4
PA
3.6
5.4
Manufacturing
5.9
9.2
GA
3.4
4.6
Transportation
5.3
3.0
IL
3.3
4.0
Trucking
4.5
2.3
NC
3.1
2.6
Automotive
3.4
6.4
MA
3.0
2.1
All Other
22.3
22.7
All Other
37.0
38.7
Total
100
%
100
%
Total
100
%
100
%
As a result of the COVID-19 pandemic, we have been continually
assessing the risks to our portfolio, including consideration
of high-
risk industries and geographic locations that are being more significantly
impacted by the spread of COVID-19.
While we are attempting to mitigate the impact of the COVID
-19 pandemic on our portfolio, by tightening underwriting standards
for
areas of elevated risk and by assisting borrowers that have been negatively
impacted, the extent of the impacts of COVID-19 on our
portfolio remains uncertain.
-50-
Allowance for credit losses.
The following table provides a rollforward of our Allowance for
credit loss:
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
(Dollars in thousands)
Allowance for credit losses, December 31, 2019
$
21,695
Adoption of ASU 2016-13 (CECL)
11,908
Allowance for credit losses, beginning of period
$
52,060
$
16,882
33,603
$
16,100
Provision for credit losses
18,806
4,756
43,956
10,119
Net Charge-offs:
Equipment Finance
(6,995)
(4,026)
(12,960)
(7,626)
Working Capital
(669)
(551)
(1,910)
(1,204)
CVG
(830)
(284)
(1,470)
(612)
Net Charge-offs
(8,494)
(4,861)
(16,340)
(9,442)
Realized cashflows from Residual Income
1,272
—
2,425
—
Allowance for credit losses, end of period
$
63,644
$
16,777
$
63,644
$
16,777
The allowance for
credit losses as a
percentage of total finance
receivables increased to
6.53% as of June
30, 2020,
from 2.15% as of
December 31,
2019.
This increase
in reserve
coverage is
primarily driven
by an
$11.9 million
increase from
the Janu
ary 1,
2020
adoption of CECL, and
a $34.7 million Provision
for credit losses recognized
as a result of
qualitative and forecast adjustments
in the
six months ended June 30,
2020 as a result of the estimated impact to the portfolio from the
COVID-19 pandemic.
Provision for credit
losses
.
The provision for
credit losses recognized
after the adoption
of CECL is
primarily driven
by origination volumes,
offset by
the
reversal of the
allowance for any
contracts sold, plus
adjustments for changes
in estimate each
subsequent reporting period.
For
2020, given
the wide
changes in
the macroeconomic
environment driven
by COVID
-19, the
changes in
estimate is
the most
significant driver
of provision.
In contrast, the
allowance estimate
recognized in
2019 under
the probable,
incurred model
was
based on the current estimate of probable net credit
losses inherent in the portfolio.
For the three months ended
June 30,
2020, the $18.8 million provision
for credit losses recognized was
$14.0 million greater than
the $4.8
million provision recognized
for the three
months ended
June 30,
2019.
For the
six months ended
June 30,
2020, the
$44.0 million provision for
credit losses recognized was
$33.9 million greater than
the $10.1 million provision
recognized for the
three months ended
June 30, 2019.
The provision included
COVID-related forecast and
qualitative adjustments of
$15.5 million
for the three months ended June 30, 2020, and $34.7 million for
the six months ended June 30, 2020.
Our estimate
of COVID
-related losses
for the
Equipment Finance
portfolio is
primarily driven
by updates
to a
reasonable and
supportable forecast based
on the modeled
correlation of changes
in the loss
experience of the
our portfolio to
certain economic
statistics, specifically
changes in
the unemployme
nt rate
and changes
in the
number of
business bankruptcies.
Our COVID-
provision for
Equipment Finance
was $10.8
million for the
first quarter
of 2020,
and $10.1
million for the
second quarter,
and
those provision levels
were calculated using
a 6-month period
for the economic
statistics.
In the second
quarter, the
increase in
provision estimate was driven
by the forecasted economic
conditions getting worse than
what was expected at
the end of the first
quarter.
In addition, as of June 30,
we further increased our reserve for
a $3.4 million qualitative adjustment
based on an analysis
that incorporates the current forecasted peak levels of unemployment
and business bankruptcy.
-51-
For the CVG and Working
Capital portfolio segments, our estimate
of increased losses is
based on qualitative adjustments,
taking
into consideration alternative
scenarios to determine
the Company’s
estimate of the
probable impact of
the economic shutdown.
The COVID-related provision for CVG was $2.8
million for the first quarter of 2020, and
$0.4 million for the second quarter.
The
COVID-related provision
for Working
Capital was
$5.5 million
for the
first quarter
of 2020,
and $1.5
million for
the second
quarter.
The qualitative and economic
adjustments to our allowance
take into consideration information
and our judgments
as of June 30,
2020, and are
based in part
on an expectation
for the extent
and timing of
impacts from COVID
-19 on unemployment
rates and
business bankruptcies, and
are based on
our current expectations
of the performance
of our portfolio
in the current
environment.
The COVID-19 pandemic,
and related business
shutdowns, is still
ongoing, and the
extent of the
effects of the
pandemic on our
portfolio depends on future developments, which
are highly uncertain and are difficult
to predict.
We may recognize
credit losses
in excess of
our reserve,
or increases
to our
credit loss estimate,
in the future,
and such increases
may be significant,
based on
future developments.
Net Charge-offs.
Equipment Finance
and TFG
receivables are
generally charged
-off when
they are
contractually past
due for
120 days
or more.
Working Capital receivables
are generally charged-off at 60 days past
due.
Total portfolio
net charge
-offs for
the three
months ended
June 30
,
2020 were
$8.5 million
(3.47%
of average
total finance
receivables on an
annualized basis), compared
to $7.7 million
(3.00%) for the
three months ended
December 31, 2019
,
and $4.9
million (1.8
8%) for
the three
months ended
June 30
,
2019.
Compared to
the same
quarter of
the prior
year, the
Company is
experiencing elevated
net charge
-offs, due
primarily to
economic headwinds
that already
existed as of
December 31,
2019 that
were disproportionally impacting the small business and lower
credit quality borrowers in
our portfolio.
Through the end of the second quarter,
our charge-offs are only slightly elevated compared
to the levels in December.
We believe
we have not yet begun to experience the full impact of expected
levels of elevated charge-offs as a result of the
COVID-19
pandemic.
However, we are seeing portfolio trends
that indicate that we will begin to realize those elevated
levels in the third
quarter of 2020.
As of June 30, 2020, our portfolio delinquency rates have doubled
from the quarter ended March 31, 2020, or a
$13.1 million increase in Equipment Finance leases and loans 60+
days past due, and $0.5 million increase in Working
capital
loans 30+ past due.
Further, a large amount of our
portfolio is under deferred payment through our modification program,
as
discussed above.
We are
continually monitoring the performance of our portfolio and assessing all related
risks to ensure that our
allowance estimate is sufficient to cover the expected
losses from COVID-19.
See further discussion with the Provision above
about the risks to our reserve estimate, and discussion with Portfolio
Trends above about current delinquency levels.
Residual Income.
Residual income
includes income
from lease
renewals and
gains and
losses on
the realization
of residual
values of
leased
equipment disposed at
the end of term
In 2019 and
prior years, t
he Company had previously
recognized residual income
within
Fee Income
in its
Consolidated Statement
s
of Operations;
the adoption
of CECL
results in
any realized
amounts of
residual
income being
captured as
a component
of the
activity of
the allowance
because the
Company’s estimate
of credit
losses under
CECL takes into consideration all cashflows the Company expects
to receive or derive from the pools of contracts.
Adoption of ASU 2016-13 / CECL.
Effective January 1,
2020, we adopted
new guidance for accounting
for our allowance,
or ASU 2016
-13, Financial Instruments
-
Credit Losses
(Topic
326): Measurement
of Credit
Losses on
Financial Instruments
(“CECL”).
CECL replaces
the probable/
incurred loss
model that
we historically
used to
measure our
allowance, with
a measurement
of expected
credit losses
for the
contractual term
of our
current portfolio
of loans
and leases.
Under CECL,
an allowance,
or estimate
of credit
losses, will be
recognized immediately
upon the origination
of a loan
or lease,
and will be
adjusted in each
subsequent reporting
period.
This
estimate of credit losses takes into consideration
all remaining cashflows the Company expects
to receive or derive from the pools
of contracts, including
recoveries after
charge-off, accrued
interest receivable and
certain future cashflows
from residual assets.
The provision
for credit
losses recognized
in our Consolidated
Statements of Operations
under CECL,
starting in
2020, will
be
primarily driven
by origination
volumes, offset
by the
reversal of
the allowance
for any
contracts sold,
plus adjustments
for
changes in
estimate each
subsequent reporting
period, including
adjustments for
economic forecasts
within a
reasonable and
supportable time period.
-52-
The impact
of adopting
CECL effective
January 1,
2020 included
a $11.9
million incr
ease to
the allowance,
an $8.9
million
decrease to
Retained earnings
and $3.0
million impact
to our
Net deferred
income tax
liability.
See Note
2 –
Summary of
Significant Accounting Policies
, for further discussion of the adoption
of this accounting standard, and see
Note 6 –
Allowance for
Credit Losses
, for further
discussion of the
Company’s methodology
for measuring its
allowance as of
the adoption date.
Also,
see –
Executive Summary
and Note 13
–
Stockholders’ Equity
, for discussion
of our election
to delay for
two-years the effect
of
CECL on regulatory capital, followed by a three-year phase
-in, or a five-year total transition.
Our recorded allowance
reflects our current
estimate of the
expected credit losses
of all contracts
currently in portfolio,
based on our
current assessment of information regarding the risks of our current portfolio,
default and collection trends, a reasonable and
supportable forecast
of economic
factors, qualitative
adjustments based
on our
best estimate
of expected
losses for
certain portfolio
segments, among
other internal
and external
factors.
Our allowance
measurement is
an estimate,
is inherently
uncertain, and
is
reassessed at each measurement date.
Actual performance of our portfolio and updates to other information
involved in our
assessment may drive
changes in modeled
assumptions, may cause
management to adjust
the allowance estimate
through qualitative
adjustments and/or may result in actual losses that vary significantly from
of our current estimate.
-53--39-
 
R
ESULTS
 
OF
O
PERATIONS
 
 
Comparison of the Three-Month Periods Ended June 30,March
 
202031, 2021 and June 30, 2019March 31, 2020
 
 
Net income.
 
Net lossincome of $5.9$6.9 million was reported for the three-month period
 
ended June 30, 2020,
March 31, 2021, resulting in diluted lossEPS per share of $0.50,
$0.57,
compared to net incomeloss of $6.1$11.8 million and diluted EPS of $0.49Loss per Share
 
of $1.00 for the three-month period ended June 30, 2019.March 31, 2020.
 
This $12.0$18.7 million
decrease increase in Net income was primarily driven by:
-
 
($14.1 million) increase28.1 million decrease in Provision for credit losses, driven primarily driven
 
by updates to the Company’s
estimate, reflecting
forecastedan improvement in economic conditions from
COVID-19 pandemic.
The Company adopted CECL on January 1, 2020 whichduring the
substantially changed its methodology for measuring the estimate of credit
loss.
See further discussion of the Provision andpast 12 months
the change in measurement in the prior section “—
Finance Receivables and Asset Quality”;
 
 
-
 
$3.96.1 million decrease in Interestnet interest and fee income driven primarily by
 
by a decline in the size of our finance receivable
portfolio;
 
-
 
$3.32.3 million decrease in gains on leaseslease and loans sold due to
a decrease in assets sold resulting
from disruptions in the capital
capital markets during this current economic environment;
 
-
 
$4.83.5 million decrease in Salaries and benefits, and General and administrative
expenses
driven primarily by lower
Commissions, Incentives and the Company’s
proactive cost reduction measures.measures;
 
-
$6.7 million Goodwill impairment recorded in 2020;
-
$10.0 million increase in income tax expense.
 
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-earninginterest
-earning assets and interest-bearing liabilities
for the three-
month periods ended June 30, 2020March 31, 2021 and June 30, 2019
.March 31, 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-54--40-
 
Three Months Ended June 30,March 31,
2021
2020
2019
(Dollars in thousands)
Average
Average
Average
Yields/
Average
Yields/
Balance
(1)
Interest
Rates
(2)
Balance
(1)
Interest
Rates
(2)
Interest-earning assets:
Interest-earning deposits with banks
$
218,748115,151
$
3117
0.06
%
$
129,210100,582
$
752327
2.331.30
%
Time Deposits
12,2485,325
6018
1.971.37
11,71513,507
7263
2.461.88
Restricted interest-earning deposits with banks
7,0464,870
-—
0.01—
14,6718,033
289
0.770.44
Securities available for sale
10,48111,236
5248
1.981.70
10,67410,778
7458
2.762.14
Net investment in leases
(3)
885,482784,787
19,23616,339
8.698.33
942,517904,548
21,55620,269
9.158.96
Loans receivable
(3)
93,83248,687
4,8681,866
20.7515.33
89,257104,275
4,6005,739
20.6122.02
 
Total
 
interest-earning assets
1,227,837970,056
24,24718,288
7.907.54
1,198,0441,141,723
27,08226,465
9.049.27
Non-interest-earning assets:
Cash and due from banks
5,6555,819
5,3195,470
Allowance for loan and lease losses
(50,963)(43,993)
(16,915)(29,325)
Intangible assets
7,1925,620
8,0707,392
Goodwill
-—
6,7356,663
Operating lease right-of-use assets
8,5307,559
6,9358,776
Property and equipment, net
8,4888,738
3,9968,094
Property tax receivables
9,9758,033
8,4798,886
Other assets
(4)
34,30327,740
37,95731,136
 
Total
 
non-interest-earning assets
23,18019,516
60,57647,092
 
Total
 
assets
$
1,251,017989,572
$
1,258,6201,188,815
Interest-bearing liabilities:
Certificate of Deposits
(5)
$
891,141648,030
$
4,7412,933
2.131.81
%
842,274814,178
$
5,0424,856
2.39
%
Money Market Deposits
(5)
52,76553,320
7337
0.560.28
23,71524,322
15885
2.661.40
Long-term borrowings
(5)
56,95727,313
613293
4.304.29
120,40769,751
1,208739
4.014.24
 
Total
 
interest-bearing liabilities
1,000,863728,663
5,4273,263
2.171.79
986,396908,251
6,4085,680
2.592.51
Non-interest-bearing liabilities:
Sales and property taxes payable
7,0757,226
8,2135,890
Operating lease liabilities
9,4038,559
9,0949,644
Accounts payable and accrued expenses
17,58724,758
27,31527,726
Net deferred income tax liability
26,57623,043
24,60129,468
 
Total
 
non-interest-bearing liabilities
60,64163,586
69,22372,728
 
Total
 
liabilities
1,061,504792,249
1,055,619980,979
Stockholders’ equity
189,513197,323
203,001207,836
 
Total
 
liabilities and stockholders’ equity
$
1,251,017989,572
$
1,258,6201,188,815
Net interest income
$
18,82015,025
$
20,67420,785
Interest rate spread
(6)
5.735.75
%
6.456.76
%
Net interest margin
(7)
6.136.20
%
6.907.28
%
Ratio of average interest-earning assets to
 
average interest-bearing liabilities
122.68133.13
%
121.46125.71
%
__________________
(1)
Average balances were calculated using average daily balances.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-55--41-
 
(2)
Annualized.
 
(3)
Average
balances of leases
 
leases and loans include
 
include non-accrual leases and
 
loans, and are presented
 
presented net of
unearned income. The
 
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
 
transaction costs. Amortization of
transaction costs is on
 
is on a straight-line basis, resulting
 
resulting in an increased average
 
rate whenever
average portfolio balances are at reduced levels.
(6)
Interest rate spread
 
spread represents
the difference
 
between the average
 
average yield
on interest-earning
 
assets and the
 
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
 
interest income by volume and
rate.
 
Three Months Ended June 30, 2020March 31, 2021 Compared To
Three Months Ended June 30, 2019March 31, 2020
Increase (Decrease) Due To:
 
Volume
(1)
Rate
(1)
Total
(Dollars in thousands)
Interest income:
Interest-earning deposits with banks
$
31041
$
(1,031)(351)
$
(721)(310)
Time Deposits
3(31)
(15)(14)
(12)(45)
Restricted interest-earning deposits with banks
(10)(3)
(18)(6)
(28)(9)
Securities available for sale
(1)2
(21)(12)
(22)(10)
Net investment in leases
(1,269)(2,560)
(1,051)(1,370)
(2,320)(3,930)
Loans receivable
237(2,468)
31(1,405)
268(3,873)
 
Total
 
interest income
659(3,648)
(3,494)(4,529)
(2,835)(8,177)
Interest expense:
Certificate of Deposits
281(881)
(582)(1,042)
(301)(1,923)
Money Market Deposits
10053
(185)(101)
(85)(48)
Long-term borrowings
(677)(455)
829
(595)(446)
 
Total
 
interest expense
93(992)
(1,074)(1,425)
(981)(2,417)
Net interest income
504(2,891)
(2,357)(2,869)
(1,853)(5,760)
 
__________________
(1)
 
Changes due to volume and rate are calculated independently for each line item presented rather than presenting vertical subtotals for the
individual volume and rate columns.
 
Changes attributable to changes in volume represent changes in average balances multiplied by the
prior period’s average rates. Changes attributable to changes in rate represent changes in average rates multiplied by the prior year’s
average balances. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to
volume and the change due to rate.
 
 
 
��
-56-
Net interest and fee margin.
The following table summarizes the Company’s
net interest and fee income as an annualized percentage
of average total finance receivables for the three-month periods
ended June 30, 2020 and June 30, 2019.
Three Months Ended June 30,
2020
2019
(Dollars in thousands)
Interest income
$
24,248
$
27,082
Fee income
2,450
3,507
Interest and fee income
26,698
30,589
Interest expense
5,428
6,408
Net interest and fee income
$
21,270
$
24,181
Average total finance receivables
(1)
$
979,313
$
1,031,774
Annualized percent of average total finance
receivables:
Interest income
9.90
%
10.50
%
Fee income
1.00
1.36
Interest and fee income
10.90
11.86
Interest expense
2.22
2.48
Net interest and fee margin
8.68
%
9.38
%
__________________
(1)
Total finance receivables include net investment in leases and loans.
For the calculations above, the effects of (i) the allowance for credit losses
and (ii) initial direct costs and fees deferred are excluded.
Net interest and fee income decreased $2.9 million, or 12.0%,
to $21.3 million for the three months ended June 30, 2020
from $24.2
million for the three months ended June 30, 2019.
The annualized net interest and fee margin decreased 70
basis points to 8.68% in the
three-month period ended June 30, 2020 from 9.38% for the corresponding
period in 2019.
Interest income, net of amortized initial direct costs and fees,
was $24.2 million and $27.1 million for the three-month periods
ended
June 30, 2020 and June 30, 2019, respectively.
Average total
finance receivables decreased $52.5 million, or 5.1%,
to $979.3 million
at June 30, 2020 from $1,031.8 million at June 30, 2019
.
The decrease in average total finance receivables was primarily
due to lower
origination volume along with the customary loan repayments
and charge-offs. The average yield on the portfolio
decreased 60 basis
points to 9.90% from 10.50% in the prior year quarter.
The weighted average implicit interest rate on new finance receivables
originated decreased 378 basis points to 9.17% for
the three-month period ended June 30, 2020 compared to 12.95%
for the three-
month period ended June 30, 2019.
That decrease was primarily driven by a shift in the mix of originations
as higher-yield Working
Capital originations comprised 1% of our originations for the six months
ended June 30, 2020, compared to 13% in 2019.
The
reduction in Working Capital
volume is driven by our tightening of underwriting standards
in the second quarter in response to the
uncertain macroeconomic environment.
Given the ongoing health crisis in the United States, especially
the COVID-19 flare-ups in the
south and west, any returns to pre-pandemic levels of origination
activity, and our ability to
replenish or grow our portfolio, remains
uncertain.
Fee income was $2.5 million and $3.5 million for the three-month periods
ended June 30, 2020 and June 30, 2019,
respectively. Fee
income included approximately $0.9 million of net residual
income for the three-month period ended June 30,
2019.
For 2020, after
the adoption of CECL, all future cashflows from the Company’s
pools of loans are included in the measurement of the allowance,
including future cashflows from net residual income.
Amounts of residual income are presented within the rollforward
of the
Allowance, as discussed further in “—Finance Receivables and
Asset Quality”
Fee income also included approximately $1.8 million and $2.0
million in late fee income for the three-month periods ended
June 30,
2020 and June 30, 2019,
respectively. Late fees remained
the largest component of fee income at 0.69% as an annualized
percentage
of average total finance receivables for the three-month period
ended June 30, 2020,
compared to 0.78% for the three-month period
ended June 30, 2019.
-57-
Interest expense decreased $1.0 million to $5.4 million for the
three-month period ended June 30, 2020 from $6.4 million for
the
corresponding period in 2019, primarily due to a decrease
in interest expense of $0.6 million on lower outstanding long
-term
borrowings offset by an increase of $0.3 million on higher
deposit balances. Interest expense, as an annualized percentage
of average
total finance receivables, decreased 26 basis points to 2.22%
for the three-month period ended June 30, 2020,
from 2.48% for the
corresponding period in 2019.
The average balance of deposits was $943.9 million and $866.0
million for the three-month periods
ended June 30, 2020 and June 30, 2019,
respectively.
For the three-month period ended June 30, 2020,
average term securitization borrowings outstanding were $57.0
million at a weighted
average coupon of 4.30%.
For the three-month period ended June 30, 2019, average term securitization
borrowings outstanding were
$120.4 million at a weighted average coupon of 4.01%.
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,
2020,
brokered certificates of deposit represented approximately 52%
of total deposits, while approximately 43% of total deposits were
obtained from direct channels, and 6% were in the brokered
MMDA Product.
Gain on Sale of Leases and Loans.
Gain on sale of leases and loans was $0.1 million for the three
-month period ended June 30,
2020,
compared to $3.3 million for the three-month period ended June 30,
2019.
Assets sold decreased to $1.1 million for the three
months ended June 30, 2020, compared to $57.6 million for the three
months ended June 30, 2019.
Our sales execution decisions, including the timing, volu
me and frequency of such sales, depend on many factors including our
origination volumes, the characteristics of our contracts versus
market requirements, our current assessment of our balance
sheet
composition and capital levels, and current market conditions,
among other factors.
In the current slowing economy resulting from the
COVID-19 pandemic, we may have difficulty accessing
the capital market and may find decreased interest and ability
of
counterparties to purchase our contracts, or we may be unable
to negotiate terms acceptable to us.
Insurance premiums written and earned.
Insurance premiums written remained flat at $2.2 million for the three
-month periods ended
June 30, 2020 and June 30, 2019.
Other income.
Other income was $1.5 million and $1.7 million for the three-month periods
ended June 30, 2020 and June 30, 2019,
respectively. The decrease
in other income was primarily driven by a $0.2 million decrease
in servicing income.
Salaries and benefits expense.
The following table summarizes the Company's Salary and benefits expense:
Three Months Ended June 30,
2020
2019
(Dollars in thousands)
Salary, benefits and payroll
taxes
$
6,868
$
7,640
Incentive compensation
806
2,783
Commissions
(6)
2,046
Total
$
7,668
$
12,469
Salaries and benefits expense decreased $4.8 million, or
38.4%, to $7.7 million for the three-month period ended
June 30, 2020 from
$12.5 million for the corresponding period in 2019
.
In mid-April 2020, we began efforts to tighten our expense base
in response
COVID-19, putting approximately 120 employees on furlough.
In June, we made the decision to permanently reduce our
workforce
by approximately 80 employees, which reduced our headcount to
approximately 250 employees at the end of July,
down from
approximately 350 employees as of December 31, 2019.
As such, our salary expense is $1.7 million lower than the three months
ended June 30, 2019,
primarily driven by reduced headcount from the furlough, partially offset
by $0.9 million of severance
recognized.
Incentive compensation decreased $2.0 million, driven by lower
recognized bonus and share-based compensation amounts
driven by
the Company’s operating results,
including reversing $0.7 million of expense associated with performance
-based RSU awards that are
-58-
now assessed as not probable of achievement.
The decrease in Commissions for the three months ended June
30, 2020 reflects a
lower amount of commission earned driven by 69% lower origination
volumes, which was fully offset by an annual commission
true-
up adjustment in 2020.
General and administrative expense.
The following table summarizes General and administrative expense:
Three Months Ended June 30,
2020
2019
(Dollars in thousands)
Occupancy and depreciation
$
1,415
$
1,223
Professional fees
865
931
Information technology
995
901
Marketing
206
498
Other G&A
2,366
2,515
Total
$
5,847
$
6,068
General and administrative expense decreased $0.3
million, or 4.9%, to $5.8 million for the three months ended June 30, 2020
from
$6.1 million for the corresponding period in 2019
.
General and administrative expense as an annualized percentage of average
total finance receivables
was 2.39% for the three-month
period ended June 30, 2020,
compared to 2.35% for the three-month period ended June 30, 2019
.
balance.
Provision for income taxes.
Income tax benefit of $1.4 million was recorded for the three-month period
ended June 30, 2020,
compared to expense of $2.0 million for the three-month period
ended June 30, 2019.
Our effective tax rate was 18.9% for the three-
month period ended June 30, 2020,
driven by a limitation on the recognition of tax benefits when measuring
the provision on a loss
position in an interim period under ASC 740.
-59-
Comparison of the Six-Month Periods Ended June 30, 2020
and June 30, 2019
Net income.
Net loss of $17.7 million was reported for the six-month period
ended June 30, 2020,
resulting in diluted loss per share of $1.50,
compared to net income of $11.3 million and diluted
EPS of $0.91 for the six-month period ended June 30,
2019. This $29.0 million
decrease in Net income was primarily driven by:
-
($33.8 million) increase in Provision for credit losses, primarily driven
by updates to the Company’s
estimate, reflecting
forecasted economic conditions from COVID-19 pandemic.
The Company adopted CECL on January 1, 2020 which
substantially changed its methodology for measuring the estimate of credit
loss.
See further discussion of the Provision and
the change in measurement in the prior section “—
Finance Receivables and Asset Quality”;
-
($6.7 million)
impairment of Goodwill, driven by declines in the fair value of its
reporting unit;
-
$4.6 million decrease in gains on leases and loans sold due to
a decrease in assets sold resulting from the negative impact
of
the COVID-19 pandemic on capital markets activity;
-
3.2 million benefit recognized in Income tax (benefit) from the remeasurement
of the federal net operating losses driven by
provisions of the CARES Act;
-
$6.7 million decrease in Salaries and benefits, driven primarily by lower
Commissions, Incentives and the Company’s
proactive cost reduction measures.
Average balances
and net interest margin.
The following table summarizes the Company’s
average balances, interest income,
interest expense and average yields and rates on major
categories of interest-earning assets and interest-bearing liabilities
for the six-
month periods ended June 30, 2020 and June 30, 2019
.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-42-
 
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 March
31, 2021 and March 31, 2020.
 
-60-
SixThree Months Ended June 30,March 31,
2021
2020
2019
(Dollars in thousands)
AverageInterest income
$
18,288
$
26,465
Fee income
2,455
2,766
Interest and fee income
20,743
29,231
Interest expense
3,263
5,680
Net interest and fee income
$
17,480
$
23,551
Average total
Average
Yields/
Average
Yields/
Balancefinance receivables
(1)
Interest$
Rates833,474
(2)$
Balance1,008,823
Annualized percent of average total finance receivables:
Interest income
8.78
%
10.49
%
Fee income
1.18
1.10
Interest and fee income
9.96
11.59
Interest expense
1.57
2.25
Net interest and fee margin
8.39
%
9.34
%
__________________
(1)
Interest
Rates
(2)
Interest-earning assets:
Interest-earning deposits with banks
$
159,665
$
358
0.45
%
$
126,084
$
1,525
2.42
%
Time Deposits
12,878
124
1.92
11,090
133
2.41
Restricted interest-earning deposits with banks
7,540
9
0.24
15,146
58
0.77
Securities available for sale
10,629
110
2.06
10,697
142
2.66
NetTotal finance receivables include net investment in leases
(3)
895,015
39,505
8.83
930,586
42,491
9.13
Loans receivable
(3)
99,053
10,607
21.42
85,017
8,616
20.27
and loans.
 
TotalFor the calculations above, the effects of (i) the allowance for credit losses
and (ii) initial direct costs and fees deferred are excluded.
 
interest-earning assets
1,184,780
50,713
8.56
1,178,620
52,965
8.99
Non-interest-earning assets:
Cash and due from banks
5,563
5,459
Allowance for loan and lease losses
(40,144)
(16,764)
Intangible assets
7,292
7,961
Goodwill
3,332
7,038
Operating lease right-of-use assets
8,653
5,419
Property and equipment, net
8,291
4,139
Property tax receivables
9,430
7,546
Other assets
(4)
32,719
34,157
Total
non-interest-earning assets
35,136
54,955
Total
assets
$
1,219,916
$
1,233,575
Interest-bearing liabilities:
Certificate of Deposits
(5)
$
852,659
$
9,597
2.25
%
$
814,466
$
9,489
2.33
%
Money Market Deposits
(5)
38,544
158
0.82
23,430
299
2.56
Long-term borrowings
(5)
63,354
1,352
4.27
130,454
2,582
3.96
Total
interest-bearing liabilities
954,557
11,107
2.33
968,350
12,370
2.56
Non-interest-bearing liabilities:
Sales and property taxes payable
6,482
6,796
Operating lease liabilities
9,524
7,492
Accounts payable and accrued expenses
22,657
27,251
Net deferred income tax liability
28,022
23,773
Total
non-interest-bearing liabilities
66,685
65,312
Total
liabilities
1,021,242
1,033,662
Stockholders’ equity
198,674
199,913
Total
liabilities and stockholders’ equity
$
1,219,916
$
1,233,575
Net interest and fee income decreased $6.1 million, or 25.8%, to $17.5
million for the three months ended March 31, 2021 from $23.6
$million for the three months ended March 31, 2020.
The annualized net interest and fee margin decreased 95 basis points to 8.39%
in
39,606the three-month period ended March 31, 2021 from 9.34% for the
corresponding period in 2020.
$
40,595
Interest income, net of amortized initial direct costs and fees, was $18.3
million and $26.5 million for the three-month periods ended
March 31, 2021 and March 31, 2020,
respectively. Average
total finance receivables decreased $175.3 million, or 17.4%, to $833.5
million at March 31, 2021 from $1,008.8 million at March 31, 2020
.
The decrease in average total finance receivables was primarily
due to lower origination volume along with the customary loan repayments
and charge-offs. The average yield on the portfolio
decreased 171 basis points to 8.78% from 10.49% in the prior year quarter
.
The weighted average implicit interest rate spreadon new
(6)finance receivables originated decreased 299 basis points to 9.46%
for the three-month period ended March 31, 2021 compared to
6.2312.45% for the three-month period ended March 31, 2020.
That decrease was primarily driven by a decrease of 531 basis points for
%Working
Capital originations for the three-month period ended March 31, 2021 compared
to the corresponding period in 2020 as a
6.43result of declining interest rates during the economic disruption caused by
the COVID-19 pandemic.
%
Net interest marginFee income was $2.5 million and $2.8 million for the three-month periods
ended March 31, 2021 and March 31, 2020,
respectively,
(7)and included approximately $1.6 million and $2.1 million in late fee income
for the three-month periods ended March 31, 2021 and
6.69March 31, 2020,
respectively. Late fees
remained the largest component of fee income at 0.63% as an annualized
percentage of
%average total finance receivables for the three-month period ended
March 31, 2021,
compared to 0.86% for the three-month period
6.89ended March 31, 2020.
%
RatioInterest expense decreased $2.4 million to $3.3 million for the three-month
period ended March 31, 2021 from $5.7 million for the
corresponding period in 2020,
primarily due to a decrease of $1.9 million on lower deposit balance
s
as well as a decrease of $0.4
million due to the continuing reduction of long-term debt.
Interest expense, as an annualized percentage of average interest-earning assetstotal finance
receivables, decreased 68 basis points to
1.57% for the three-month period
 
ended March 31, 2021,
from 2.25% for the corresponding
period in 2020.
The average interest-bearing liabilitiesbalance of deposits was $701.3 million and $838.5 million for the three
-month periods ended March 31,
124.122021 and March 31, 2020,
respectively.
%
121.71
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-61-
_________________
(1)
Average balances were calculated using average daily balances.
(2)
Annualized.
(3)
Average balances of leases and loans include non-accrual leases and loans, and are presented net of unearned income. The average balances of leases and
loans do not include the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred.
(4)
Includes operating leases.
(5)
Includes effect of transaction costs. Amortization
of transaction costs is on a
straight-line basis, resulting in an increased
average rate whenever average
portfolio balances are at reduced levels.
(6)
Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.
(7)
Net interest margin represents net interest income as an annualized percentage of average interest-earning assets.
 
 
 
 
The following table presents the components of the changes in net interest
income by volume and rate.
 
 
Six
-43-
For the three-month period ended March 31, 2021,
average term securitization borrowings outstanding were $27.3 million at a
weighted average coupon of 4.29%. For the three-month period ended
March 31, 2020,
average term securitization borrowings
outstanding were $69.8 million at a weighted average coupon of 4.24%.
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 March 31,
2021,
brokered certificates of deposit represented approximately 54% of
total deposits, while approximately 38%
of total deposits
were obtained from direct channels, and 8% were in the brokered
MMDA Product.
Gain on Sale of Leases and Loans.
There were no asset sales for the three-month period ended March 31, 2021
as we retained all of
our origination volume on our balance sheet. There were $22.9 million of
asset sales for the three-month period ended March 31, 2020
for a $2.3 million gain on sale of lease and loans.
Our sales execution decisions, including the timing, volume and frequency
of such sales, depend on many factors including our
origination volumes, the characteristics of our contracts versus market
requirements, our current assessment of our balance sheet
composition and capital levels, and current market conditions, among
other factors.
In the current slowing economy resulting from the
COVID-19 pandemic, we may have difficulty accessing
the capital market and may find decreased interest and ability of
counterparties to purchase our contracts, or we may be unable to negotiate
terms acceptable to us.
Insurance premiums written and earned.
Insurance premiums written declined slightly to $ 2.0 million for the three-month
period
ended March 31, 2021,
compared to $ 2.3 million for the three-month period ended March 31, 2020.
Other income.
Other income was $ 6.6 million and $ 7.6 million for the three-month periods
ended March 31, 2021 and March 31,
2020,
respectively. The decrease in other
income was primarily driven by lower servicing income, and lower insurance
policy and
other miscellaneous fees.
Salaries and benefits expense
. Salaries and benefits expense decreased $1.1 million, or 12.0%, to
$8.4 million for the three-month
period ended March 31, 2021 from $9.5 million for the corresponding period
in 2020 as a result of our efforts to tighten our expense
base in response to the COVID-19 pandemic by reducing our work force by
approximately 80 employees.
General and administrative expense.
The following table summarizes General and administrative expense:
Three Months Ended June 30, 2020 Compared ToMarch 31,
Six Months Ended June 30, 2019
Increase (Decrease) Due To:
 
Volume2021
(1)
Rate
(1)
Total2020
(Dollars in thousands)
Interest income:
Interest-earning deposits with banksProperty tax
$
3255,601
$
(1,492)6,012
$Occupancy and depreciation
(1,167)1,066
Time Deposits1,320
20Professional fees
(29)893
(9)1,219
Restricted interest-earning deposits with banksInformation technology
(21)1,053
(28)986
(49)Marketing
Securities available for sale218
(1)502
(31)Other servicing expenses
(32)320
Net investment in leases274
(1,595)Other G&A
(1,391)2,095
(2,986)
Loans receivable
1,482
509
1,9913,292
 
Total
interest income
276$
(2,528)11,246
(2,252)$
Interest expense:
Certificate of Deposits
436
(328)
108
Money Market Deposits
129
(270)
(141)
Long-term borrowings
(1,418)
188
(1,230)
Total
interest expense
(174)
(1,089)
(1,263)
Net interest income
211
(1,200)
(989)13,605
 
__________________
(1)
General and administrative expense decreased $2.3 million, or 17.3%,
 
Changes due to volume and rate are calculated independently for
each line item presented rather than presenting vertical subtotals
$11.2 million for the individual volumethree months ended March
31, 2021
from $13.6 million for the corresponding period in 2020 as a result of our
cost reduction initiatives. General and rate columns.administrative
expense as an annualized percentage of average total finance receivables
was 5.40% for the three-month period ended March 31,
2021,
compared to 5.39% for the three-month period ended March 31, 2020
.
 
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.
 
 
 
-44-
Goodwill impairment.
In the first quarter of 2020, driven by negative events related to the COVID-19
economic shutdown, we
analyzed goodwill for impairment.
We concluded
that the implied fair value of goodwill was less than its carrying amount, and
recognized impairment equal to the entire $6.7 million balance in the three-months
ended March 31, 2020.
Provision for income taxes.
Income tax expense of $2.5 million was recorded for the three-month period ended
March 31, 2021,
compared to a benefit of $7.4 million for the three-month period ended
March 31, 2020.
For the three-month period ended March 31,
2020, the income tax benefit included a $3.2 million discrete benefit,
related to remeasuring our federal net operating losses, driven by
certain provisions in the CARES Act. For the three months ended March
31, 2021 our effective tax rate was 26.9%
and for the three
months ended March 31, 2020, our effective tax rate was 38.6% driven
by the aforementioned benefit.
-45-
L
IQUIDITY AND
C
APITAL
R
ESOURCES
Our business requires a substantial amount of liquidity and capital to operate
and grow. Our primary liquidity
need is to fund new
originations; however, we also utilize liquidity
for our financing needs (including our deposits and long term deposits), to fund
infrastructure and technology investment, to pay dividends and to
pay administrative and other non-interest expenses.
As a result of the uncertainties surrounding the actual and potential impacts of COVID-19
on our business and financial condition, in
the first quarter of 2020 we raised additional liquidity through the issuance
of FDIC-insured deposits and we increased our borrowing
capacity at the Federal Reserve Discount Window.
We are dependent
upon the availability of financing from a variety of funding sources to satisfy these liquidity
needs. Historically, we
have relied upon five principal types of external funding sources for
our operations:
•
FDIC-insured deposits issued by our wholly-owned subsidiary,
MBB;
•
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
ca
pital
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.
We declared
a dividend of $0.14 per share on January 28, 2021.
The quarterly dividend was paid on February 18, 2021 to shareholders
of record on the close of business on February 8, 2021, which resulted in
a dividend payment of approximately $1.7 million. It
represented the Company’s thirty
-eighth consecutive quarterly cash dividend.
At March 31, 2021,
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 $110.6 million. This amount excludes
additional liquidity that
may be provided by the issuance of insured deposits through MBB.
Our debt to equity ratio was 3.48 to 1 at March 31, 2021 and 3.87 to 1 at
December 31, 2020.
Net cash provided by investing activities was $27.7 million for the
three-month period ended March 31, 2021, compared to net cash
used in investing activities of $5.2 million for the three-month period ended
March 31, 2020.
The increase in cash from investing
activities is primarily due to a decrease of $70.6 million for purchases
of equipment for lease contracts partially offset by reductions
of
$21.3 million in proceeds from sales of leases originated for investment
and $17.1 million in principal collections on leases
and loans.
The decrease in purchases of equipment was driven by lower origination
volumes for the three months ended March 31, 2021
compared to the corresponding period of 2020, and the reduction in
proceeds from sales was driven by the absence of asset sales in the
first quarter of 2021.
Net cash used financing activities was $60.2 million for the three-month
period ended March 31, 2021,
compared to net cash provided
by financing activities of $82.5 million for the three-month period
ended March 31, 2020. The decrease in cash flows from financing
activities is primarily due to a decrease of $154.1 million in the net change
deposits partially offset by a decrease of $7.0 million of
term securitization repayments. Financing activities also include transactions
related to the Company’s payment of
dividends.
Net cash provided by operating activities was $7.0 million for the three-month
period ended March 31, 2021, compared to net cash
provided by operating activities of $10.2 million for the three-month period
ended March 31, 2020.
Adjustments to reconcile net
income or loss to net cash provided by operating activities including goodwill
impairment, provision for credit losses, changes in
deferred income tax liability and leases originated for sale and proceeds
thereof are discussed in detail in the notes to the Consolidated
Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-46-
 
 
We expect cash
 
-62-
Net interest and fee margin.
The following table summarizes the Company’s
net interest and fee income as an annualized percentage
of average total finance receivables for the six-month periods ended
June 30, 2020 and 2019.
Six Months Ended June 30,
2020
2019
(Dollars in thousands)
Interest income
$
50,713
$
52,965
Fee income
5,216
7,549
Interest and fee income
55,929
60,514
Interest expense
11,108
12,370
Net interest and fee income
$
44,821
$
48,144
Average total finance receivables
(1)
$
994,068
$
1,015,603
Percent of average total finance receivables:
Interest income
10.20
%
10.43
%
Fee income
1.05
1.49
Interest and fee income
11.25
11.92
Interest expense
2.23
2.44
Net interest and fee margin
9.02
%
9.48
%
__________________
(1)
Total finance receivables
include net investment in leases and loans.
For the calculations above, the effects of (i)
the allowance
for credit losses and (ii) initial direct costs and fees deferred are
excluded.
Net interest and fee income decreased $3.3 million, or 6.9%
,
to $44.8 million for the six-month period ended June 30,
2020 from
$48.1 million for the six-month period ended June 30,
2019. The annualized net interest and fee margin decreased
46 basis points to
9.02% in the six-month period ended June 30, 2020
from 9.48% for the corresponding period in 2019.
Interest income, net of amortized initial direct costs and fees,
decreased $2.3 million, or 4.3%, to $50.7 million for the six-month
period ended June 30, 2020 from $53.0 million for the six-month period
ended June 30, 2019.
The decrease in interest income was
principally due to a
decrease in average yield of 23 basis points and by a 2.1%
decrease in average total finance receivables, which
decreased $21.5 million to $994.1 million for the six-months ended
June 30, 2020 from $1,015.6 million for the six-months ended
June 30, 2019.
The decrease in average total finance receivables was primarily due
to lower origination volume along with the
customary loan repayments and charge-offs
.
The weighted average implicit interest rate on new finance receivables
originated
decreased 140 basis points to 11.46%
for the six-month period ended June 30, 2020,
compared to 12.86% for the six-month period
ended June 30, 2019.
That decrease was primarily driven by a shift in the mix of originations
as higher-yield Working
Capital
originations comprised 11% of our originations
for the six months ended June 30, 2020, compared to 13%
in 2019.
As our origination
volumes have been negatively impacted by the COVID
-19 pandemic, our portfolio of finance receivables and related incomes
may
continue to decline. Any returns to normal levels of origination activity,
and our ability to replenish or grow our portfolio,
remains
uncertain.
Fee income was $5.2 million and $7.5 for the six-month periods
ended June 30, 2020 and June 30, 2019,
respectively. Fee income
included approximately $1.9 million of residual income for the
six-month period ended June 30, 2019.
For 2020, after the adoption of
CECL, all future cashflows from the Company’s
pools of loans are included in the measurement of the allowance,
including future
cashflows from net residual income.
Amounts of residual income are presented within the rollforward
of the Allowance, as discussed
further in “—Finance Receivables and Asset Quality”.
-63-
Fee income also included approximately $3.9 million in late fee income
for the six-month period ended June 30, 2020,
which
decreased 9.3% from $4.3 million for the six-month period ended
June 30, 2019.
Late fees remained the largest component of fee
income at 0.77% as an annualized percentage of average total finance receivables
for the six-month period ended June 30, 2020,
compared to 0.86% for the six-month period ended June 30,
2019.
Interest expense decreased $1.3 million to $11.1
million for the six-month period ended June 30, 2020 from $12.4
for the
corresponding period in 2019.
The decrease of $1.3 million was primarily due to a $1.0
million decrease in term securitization interest,
and a $0.2 million decrease in transaction costs. Interest expense,
as an annualized percentage of average total finance receivables,
decreased 21 basis points to 2.23% for the six-month period
ended June 30, 2020,
from 2.44% for the corresponding period in 2019.
The average balance of deposits was $891.2 million and $837.9
million for the six-month periods ended June 30, 2020 and June 30,
2019,
respectively.
For the six-month period ended June 30, 2020,
average term securitization borrowings outstanding were $63.4
million at a weighted
average coupon of 4.27%.
For the six-month period ended June 30, 2019,
average term securitization borrowings outstanding were
$130.5 million at a weighted average coupon of 3.96%
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, 2020,
brokered certificates of deposit represented approximately 52%
of total deposits, while approximately 43% of total deposits were
obtained from direct channels, and 6% were in the brokered
MMDA Product.
Gain on Sale of Leases and Loans.
Gain on sale of leases and loans was 2.3 million for the six-month period
ended June 30, 2020,
compared to 6.9 million for the six-month period ended
June 30, 2019 due to a decline in assets sold to $24.1 million for the six-
month period ended June 30, 2020 from $110.5
million for the six-month period ended June 30, 2019.
Our sales execution decisions, including the timing, volume and
frequency of such sales, depend on many factors including our
origination volumes, the characteristics of our contracts versus
market requirements, our current assessment of our balance
sheet
composition and capital levels, and current market conditions,
among other factors.
In the current slowing economy resulting from the
COVID-19 pandemic, we may have difficulty accessing
the capital market and may find decreased interest and ability
of
counterparties to purchase our contracts, or we may be unable
to negotiate terms acceptable to us.
Insurance premiums written and earned.
Insurance premiums written and earned remained relatively flat at $4.5
million for the six-
month period ended June 30, 2020,
from $4.3 million for the six-month period ended June 30,
2019.
Other income.
Other income remained consistent at $9.1 million and $8.9 million for
the six-month periods ended June 30, 2020 and
June 30, 2019,
respectively.
Salaries and benefits expense.
The following table summarizes the Company's Salary and benefits expense:
Six Months Ended June 30,
2020
2019
(Dollars in thousands)
Salary, benefits and payroll
taxes
$
14,423
$
14,992
Incentive compensation
1,711
5,221
Commissions
1,053
3,707
Total
$
17,187
$
23,920
Salaries and benefits expense in total decreased $6.7 million for
the six months ended June 30, 2020, compared to the corresponding
period in 2019.
In mid-April 2020, we began efforts to tighten our expense base
in response COVID-19, putting approximately 120
employees on furlough.
In June, we made the decision to permanently reduce our workforce
by approximately 80 employees, which
reduced our headcount to approximately 250 employees at the
end of July, down from approximately
350 employees as of December
-64-
31, 2019.
As such, our salary expense was $1.4 million lower for the six-months
ended June 30, 2020 than for the six months ended
June 30, 2019,
primarily driven by reduced headcount from the furlough, partially offset
by $0.9 million of severance recognized.
Incentive compensation decreased $3.5 million, driven by lower
recognized bonus and share-based compensation amounts
primarily
driven by the Company’s operating
results, including reversing $0.7 million of expense associated
with performance-based RSU
awards that are now assessed as not probable of achievement.
Commissions decreased $2.7 million primarily driven by a 45%
decrease in origination volume.
General and administrative expense.
The following table summarizes General and administrative expense:
Six Months Ended June 30,
2020
2019
(Dollars in thousands)
Property taxes
$
6,026
$
6,256
Occupancy and depreciation
2,735
2,455
Professional fees
2,084
2,231
Information technology
1,981
1,960
Marketing
708
1,095
FDIC Insurance
639
130
Other G&A
5,279
5,295
Total
$
19,452
$
19,422
General and administrative expense of $19.4 million for the six months
ended June 30, 2020 was relatively consistent with the total
from the corresponding period in 2019.
General and administrative expense as an annualized percentage of average
total finance
receivables was 3.56% for the six-month period ended
June 30, 2020,
compared to 3.82% for the six-month period ended June 30,
2019.
Goodwill impairment.
In the first quarter of 2020, driven by negative current events related
to the COVID-19 economic shutdown,
our market capitalization falling below book value and other
related impacts, we analyzed goodwill for impairment.
We concluded
that the implied fair value of goodwill was less than it’s
carrying amount, and recognized impairment equal to the entire $6.7
million
balance in the six months ended June 30, 2020.
Provision for income taxes.
Income tax benefit of 8.8 million was recorded for the six-month period
ended June 30, 2020,
compared
to expense of $3.6 million for the six-month period ended
June 30, 2019.
Our effective tax rate from measuring our benefit for
the six months ended June 30, 2020 was 33.2%,
driven by a $3.2 million discrete
benefit from certain provisions in the CARES Act that allowed
for remeasuring our federal net operating losses.
The impact to our
effective rate from that benefit was partially offset
by a limitation on the amount of tax benefits that can be recognized
in an interim
period under ASC 740.
-65-
L
IQUIDITY AND
C
APITAL
R
ESOURCES
Our business requires a substantial amount of liquidity and capital
to operate and grow. Our
primary liquidity need is to fund new
originations; however, we also utilize liquidity
for our financing needs (including our deposits and long term deposits),
to fund
infrastructure and technology investment, to pay dividends and
to pay administrative and other non-interest expenses.
As a result of the uncertainties surrounding the actual and potential impacts
of COVID-19 on our business and financial condition, in
the first quarter of 2020 we raised additional liquidity through the issuance
of FDIC-insured deposits and we increased our borrowing
capacity at the Federal Reserve Discount Window.
We are
dependent upon the availability of financing from a variety of funding
sources to satisfy these liquidity needs. Historically,
we
have relied upon five principal types of external funding sources
for our operations:
•
FDIC-insured deposits issued by our wholly-owned subsidiary,
MBB;
•
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.
We declared
a dividend of $0.14 per share on April 30, 2020.
The quarterly dividend was paid on May 21, 2020 to shareholders
of
record on the close of business on May 11,
2020,
which resulted in a dividend payment of approximately $1.7 million. It
represented
the Company’s thirty-fifth consecutive
quarterly cash dividend.
At June 30, 2020,
we had approximately $25.0 million of available borrowing capacity from
a federal funds line of credit with a
correspondent bank in addition to available cash and cash equivalents
of $211.7 million. This amount excludes ad
ditional liquidity that
may be provided by the issuance of insured deposits through
MBB.
Our debt to equity ratio was 5.27 to 1 at June 30,
2020 and 4.26 to 1 at December 31, 2019.
Net cash provided by investing activities was $32.6 million for
the six-month period ended June 30, 2020,
compared to net cash used
in investing activities of $76.0 million for the six-month period
ended June 30, 2019.
The increase in cash outflows from investing
activities is primarily due to a decrease of $180.4 million for
purchases of equipment for lease contracts partially offset by
a reduction
of $66.1 million in proceeds from sales of leases originated for
investment. The decrease in purchases of equipment was driven
by
lower origination volumes for the six months ended June 30
,
2020 compared to the corresponding period of 2019, and
the reduction in
proceeds from sales was driven by lower volumes of sales.
Net cash provided by financing activities was $29.7 million for
the six-month period ended June 30, 2020,
compared to net cash
provided by financing activities of $85.7 million for the six-month period
ended June 30, 2019.
The decrease in cash flows from
financing activities is primarily due to a decrease of $69.8
million in deposits offset by a decrease of $15.4
million of term
securitization repayments.
Financing activities also include transactions related to
the Company’s payment of divi
dends.
Net cash provided by operating activities was $25.4 million for
the six-month period ended June 30, 2020,
compared to net cash
provided by operating activities of $27.0 million for the six-month period
ended June 30, 2019.
Transactions affecting net
cash
provided by operating activities including 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 Consolidated Financial Statements.
-66-
We expect
cash from operations, additional borrowings on existing and future
 
credit facilities and funds from deposits issued through
brokers, direct deposit sources,
 
and the MMDA Product to be adequate to support our operations and projected
 
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
 
any free cash in leases and loans.
We primarily fund
 
fund our originations and growth using FDIC-insured deposits issued through
 
through MBB. Total
cash and cash
equivalents
available as of June 30, 2020March 31, 2021 totaled $211.7$110.6 million,
 
million, compared to $123.1$135.7 million at December 31, 2019
.2020.
 
 
Time Deposits with Banks.
 
Time deposits with banks are primarily composed
 
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, 2020March 31, 2021 and December 31, 20192020 totaled
$9.9 $4.5 million and $12.9$6.0
million, respectively.
 
Restricted Interest-Earning Deposits with Banks
. As of June 30, 2020March 31, 2021 and December 31, 2019
,2020,
 
we had $6.1$4.4 million and $6.9 million,$4.7
million, respectively,
of cash that was
classified as restricted interest-earning deposits with banks. Restrictedbanks
 
.
Restricted interest-earning deposits with
with banks consist primarily of various trust accounts related to our secured
 
debt facilities. Therefore, these balances generally
decline as
as the term securitization borrowings are repaid.
 
 
Borrowings.
Our primary borrowing relationship requires the pledging of
 
of eligible lease and loan receivables to secure amounts
advanced. Our secured borrowings amounted to $51.2
$23.7 million at June 30, 2020March 31,
2021 and $76.6$30.7 million at December 31, 20192020.
 
.
Information
Information pertaining to our borrowing facilities is as follows:
 
For the SixThree Months Ended June 30, 2020March 31, 2021
As of June 30, 2020March 31, 2021
Maximum
Maximum
Month End
Average
Weighted
Weighted
Facility
Amount
Amount
Average
Amount
Average
Unused
Amount
 
Outstanding
 
Outstanding
 
Rate
(3)
Outstanding
 
Rate
(2)
Capacity
(1)
(Dollars in thousands)
Federal funds purchased
$
25,000
$
—
$
—
—
%
$
—
—
%
$
25,000
Term note securitizations
(4)
—
71,72128,279
69,75127,313
4.244.29
%
51,16123,774
3.683.99
%
—
Revolving line of credit$
(5)
5,000
—
—
—
%
—
—
%
5,00025,000
$
30,00028,279
$
71,72127,313
$
69,751
4.244.29
%
$
51,16123,774
3.683.99
%
$
30,000
25,000
__________________
(1) Does not include MBB’s
 
access to the Federal Reserve Discount Window, which is based on the amount of assets MBB chooses
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 June 30, 2020,March 31, 2021, MBB had $50.2$49.7 million in unused, secured borrowing capacity at the Federal Reserve Discount
Window. Additional
 
Additional liquidity that may be provided by the issuance of insured deposits is also excluded from this table.
(2)
 
(2)
Does
not
include
transaction
costs.
 
(3)
Includes
transaction
costs.
 
(4)
Our
term
note
securitizations
are one-time
one
-
time
fundings
that
pay
down
over
time
without
any
ability
for
us
to
draw
down
additional
amounts.
(5)
The revolving line of credit was terminated by mutual agreement with the line of credit provider in July 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-67--47-
 
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
 
Federal Reserve Discount Window based on the
amount of assets MBB
chooses to pledge. MBB had $50.2$49.7 million in unused, secured borrowing
 
borrowing capacity at the Federal Reserve Discount Window,
 
,
based on
$56.355.2 million of net investment in leases pledged at June 30,March 31, 2021
 
2020..
 
Term Note
 
Note Securitizations
On July 27, 2018 we completed a $201.7 million asset-backed term securitization.
 
term securitization. It provides the company with fixed-cost borrowing
with the objective of diversifying its funding sources and is recorded in long-term
 
in long-term borrowings in the Consolidated Balance Sheet.
 
In connection with this securitization transaction, we transferred
 
leases to our bankruptcy remote special purpose wholly-owned
subsidiary (“SPE”) and issued term debt collateralized
by such commercial
leases to institutional investors in a private securities
offering. The SPE is considered variable interest entitentity (“VIE”)
 
y
(“VIE”) under U.S. GAAP.
 
We continue to
 
to service the assets of our VIE and
retain equity and/or residual interests. Accordingly,
 
assets and related debt of the VIE is included in the accompanying
Consolidated
Balance Sheets.
 
At June 30, 2020March 31, 2021 and December 31, 20192020 outstanding term securitizations amounted
 
amounted to $50.9$23.8 million and $76.1$30.8
million, respectively and the Company was in compliance with terms of
 
of the term note securitization agreement. See Note 10
– Debt
and Financing Arrangements in the accompanying Consolidated Financial
 
Financial Statements for detailed information regarding of our term
note securitization
 
Bank Capital and Regulatory Oversight
 
 
We are subject
 
subject to regulation under the Bank Holding Company Act and we and all of our subsidiaries may
 
subsidiaries may be subject to examination
by the
Federal Reserve Board and the Federal Reserve Bank of Philadelphiaeven if
 
even if not otherwise regulated by the Federal Reserve Board.
 
We and
MBB isare also subject to comprehensive federal and state regulations dealing
 
dealing with a wide variety of subjects, including minimum capital
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.
 
 
At June 30, 2020,March 31, 2021,
 
Marlin Business Service Corp and MBB’s
 
Tier 1 leverage ratio, common equity Tier
 
1 risk-based ratio, Tier 1 risk-
basedrisk-based capital ratio and total risk-based capital ratios exceeded the
 
the requirements for well-capitalized status.
See “Management’s
 
Discussion and Analysis
 
Analysis of Financial Condition
 
Condition and
Results of Operations
 
—Executive Summary”
 
for discussion
of updates
to our
capital requirements driven by the termination of the CMLA Agreement and
 
driven by
the termination
of the
CMLA Agreement
and driven
by our
election to
utilize the five-
five-yearyear transition related
 
to the adoption of
 
of the CECL accounting
 
accounting standard.
 
In addition, see Note
 
Note 13—Stockholders’ Equity
 
in the Notes
Notes to Consolidated Financial Statements for additional information regarding
 
regarding these ratios and our levels at June 30, 2020
.March 31, 2021.
 
Information on Stock Repurchases
 
Information on Stock Repurchases is provided in “Part II. Other Information,
 
Other Information, Item 2, Unregistered Sales of Equity Securities and Use
of Proceeds” herein.
 
Items Subsequent to June 30, 2020March 31, 2021
On
April
18,
2021,
the
Company
entered
into
the
Merger
Agreement,
pursuant
to
which
all
outstanding
shares
of
the
Company’s
common
stock
will,
subject
to
the
terms
and
conditions
of
the
Merger
Agreement,
be
cancelled
and
converted
into
the
merger
consideration specified in the Merger Agreement
in an all cash transaction pursuant to the Merger.
The Company's Board of Directors
has unanimously approved the Merger. The Merger
is subject to, in addition to various
other customary closing conditions: approval by
the Company’s shareholders; antitrust
clearance and other governmental and regulatory approvals; and
completion of the De-banking.
 
The Company declared a dividend of 0.14 per share on JulyApril 29, 2021
 
30, 2020. .
The quarterly dividend, which is expected to
result in a dividend
dividend payment of approximately 1.7 million, is scheduled to be paid
 
on AugustMay 20, 20202021 to shareholders of record on the close of business
on August 10, 2020.
It represents the Company’s thirty-sixth
consecutive quarterly cash dividend. The payment of future dividends
will be subject to approval by the Company’s
Board of Directors.
 
 
 
 
 
-68-
-48-
business on May 10, 2021.
It represents the Company’s thirty
-ninth consecutive quarterly cash dividend. The payment of future
dividends will be subject to satisfaction of regulatory requirements
applicable to bank holding companies and approval by the
Company’s Board of Directors.
In addition, pursuant to the Merger Agreement, the Company may
not, without the prior written consent of Madeira Holdings, LLC,
declare or pay any future dividends other than the Company’s
regular quarterly cash dividend in an amount not to exceed $0.14 per
quarter.
 
 
MARKET INTEREST RATE
 
RISK AND SENSITIVITY
 
 
Market risk is the risk of losses arising from changes in values of financial instruments.
 
instruments. We engage
 
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
 
our assets and liabilities.
 
We are exposed
 
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 fixedfixed-rate. Accordingly,
 
-rate. Accordingly, we generally
seek to finance these assets primarily
with fixed interest certificates of deposit issued by MBB,
and to a lesser extent
through the variable rate MMDA Product
at MBB.
 
 
C
RITICAL
A
CCOUNTING
P
OLICIES
 
 
There have been no significant changes to our Critical Accounting Policies as described
 
as described in our Form 10-K for the year ended
December 31, 2019,
other than as discussed below.
Allowance for credit losses.
For 2019 and prior, we maintained an allowance
for credit losses at an amount sufficient to absorb
losses inherent in our existing lease
and loan portfolios as of the reporting dates based on our estimate of probable
incurred net credit losses in accordance with the
Contingencies
Topic of the FASB
ASC.
See further discussion of our policy under the incurred
model in the “Critical Accounting
Policy” section of our 2019 Form 10-K.
Effective January 1, 2020, we adopted ASU 2016
-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments (“CECL”), which changed our
accounting policy and estimated allowance.
CECL replaces the
probable, incurred loss model with a measurement of expected
credit losses for the contractual term of the Company’s
current
portfolio of loans and leases.
After the adoption of CECL, an allowance, or estimate of credit
losses, will be recognized immediately
upon the origination of a loan or lease, and will be adjusted in each subsequent
reporting period
We maintain an
allowance for credit losses at an amount that takes into consideration
all future cashflows that we expect to receive or
derive from the pools of contracts, including recoveries after
charge-off, amounts related to initial direct cost
and origination costs net
of fees deferred, and certain future cashflows from residual assets.
A provision is charged against earnings to maintain the allowance
for credit losses at the appropriate level.
We developed
a consistent, systematic methodology to measure our estimate of the credi
t
losses inherent in our current portfolio, over
the entire life of the contracts.
We made certain key decisions
that underlie our methodology,
including our decisions of how to
aggregate our portfolio into pools for analysis based on similar
risk characteristics, the selection of appropriate historical loss data
to
reference in the model, our selection of a model to calculate the
estimate, a reasonable and supportable forecast, and the length of
our
forecast and approach to reverting to historical loss data.
For our Equipment Finance segment, we determine our reasonable
and supportable forecast based on certain economic variables
that
were selected based on a statistical analysis of our own historical
loss experience, going back to 2004. We
selected unemployment rate
and changes in the number of business bankruptcies as our economic variables,
based on an analysis of the correlation of changes in
those variables to our loss experience over time.
As part
of our estimate of expected credit losses, specific to each measurement
date, management considers relevant qualitative and
quantitative factors to assess whether the historical loss experience
being referenced should be adjusted to better reflect the risk
characteristics of the current portfolio and the expected future
loss experience for the life of these contracts.
This assessment
incorporates all available information relevant to considering the collectability
of our current portfolio, including considering
economic and business conditions, default trends, changes in
portfolio composition, changes in lending policies and practices,
among
other internal and external factors.
Further, each measurement period we determine
whether to separate any loans from their current
pool for individual analysis based on their unique risk characteristics.
Our approach to estimating qualitative adjustments takes into
consideration all significant current information we believe appropriate
to reflect the changes and risks in the portfolio or environment
and involves significant judgment.
-69-
Our estimates of expected net credit losses are inherently uncertain,
and as a result we cannot predict with certainty the amount of
such losses. We
may recognize
credit losses in excess of our reserve, or a significant increase to
our credit loss estimate, in the future,
driven by the update of assumptions and information underlying our
estimate and/or driven by the actual amount of realized
losses.
Our estimate of credit losses will be revised each period
to reflect current information, including current forecasts of economic
conditions, changes in the risk characteristics and composition of the portfolio,
and emerging trends in our portfolio, among other
factors, and these updates for current information could drive
a significant adjustment to our reserve.
Further, actual credit losses may
exceed our estimated reserve, and such excess may be significant,
if the actual performance of our portfolio differs signif
icantly from
the current assumptions and judgements, including those underlying our
forecast and qualitative adjustments, as of any given
measurement date.
2020.
 
R
ECENTLY
I
SSUED
A
CCOUNTING
S
TANDARDS
 
 
Information on recently issued accounting pronouncements and
 
and the expected impact on our financial statements is provided
in Note 2,
Summary of Significant Accounting Policies in the accompanying
 
Notes to Consolidated Financial Statements.
 
 
R
ECENTLY
A
DOPTED
A
CCOUNTING
S
TANDARDS
 
 
Information on recently adopted accounting pronouncements and the expected
 
impact on our financial statements is provided in Note
2, Summary of Significant Accounting Policies in the accompanying Notes
 
to Consolidated Financial Statements.
 
��
 
 
 
 
-70--49-
 
Item 3. Quantitative
 
3.
Quantitative
and
Qualitative Disclosures
Disclos
ures
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
 
Item 2 of Part I of this Form 10-Q is incorporated herein by reference.
 
 
Item 4. Controls and Procedures
 
 
Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer
 
(“CEO”) and Chief Financial Officer (“CFO”),
evaluated the
effectiveness of our disclosure controls and procedures
 
as of the end of the period covered by this report.
 
 
Based on that evaluation, the CEO and CFO concluded that our disclosure
 
disclosure controls and procedures as of the end of the period
covered
by this report are designed and operating effectively to
 
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
 
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 2020 2021
that have materially affected, or are
reasonably likely to
materially affect, the Company’s
 
internal control over financial reporting.
 
 
 
 
 
 
PART
 
II. Other Information
 
 
 
Item 1. Legal Proceedings
 
1.
Legal
Proceedings
 
We are party
 
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,
 
our business, financial condition,
 
results of operations or
cash flows.
 
 
 
Item 1A. Risk Factors
 
1A.
Risk
Factors
There have been no material changes in the risk factors disclosed
in the Company’s
Form 10-K for the year
ended December 31, 2019,2020,
other than as discussed below.
The ongoing COVID-19 pandemic and measures intended toWe may fail
 
prevent its spread couldto consummate the proposed Merger,
and uncertainties related to the consummation of the Merger may have a
material adverse effect
on our
business, results of operations and financial condition, and
such effects will depend on future developments, which are
highly
uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 pandemic and
related government actions taken to reduce the spread of
the virus
have been weighing on the macroeconomic environment, and
the outbreak has significantly increased economic uncertainty and
-71-
reduced economic activity. The
pandemic has resulted in authorities implementing numerous measures
to try to contain the virus, such
as travel bans and restrictions, quarantines, shelter in place or
total lock-down orders and business limitations and shutdowns. Such
measures have significantly contributed to rising unemployment
and negatively impacted consumer and business spending. The
United States government has taken steps to attempt to mitigate
some of the more severe anticipated economic effects of
the virus,
including the passage of the CARES Act, but there can be no
assurance that such steps will be effective or achieve their
desired results
in a timely fashion.
We continue to monitor
and evaluate newly enacted and proposed government and banking
regulations issued in
response to the COVID-19 pandemic; further changes in regulation that
impact our business or that impact our customers could
have a
significant impact on our future operations and business strategies.
Our operations and financial results have already been negatively
impacted as a result of COVID-19 pandemic, as discussed
further in
“Part I – Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations —Overview” and ”—
Results of Operations”.
The pandemic, reduction in economic activity,
and current business limitations and shutdowns have increased
risks to our business that include, but are not limited to:
●
Credit Risk.
We extend
credit primarily to small and mid-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 June 30,
2020 is based on certain
assumptions, forecasts and estimates about the impact of current
economic conditions on our portfolio of receivables based
on information known as of June 30,
2020, including certain expectations about the extent and timing of impacts
from
COVID-19.
If those assumptions, forecasts or estimates underlying our financial statements
are incorrect, we may
experience significant losses as the ultimate realization of value, or
revisions to our estimates, may be materially different
than the amounts reflected in our consolidated statement of financial
position as of any particular date.
●
Portfolio Risk.
We are
currently experiencing a significant decrease in demand for our lease and
loan products as a result of
the COVID-19 pandemic, and we have limited visibility to the future
recovery of such demand.
We have shifted
the focus of portions of our operations and certain personnel
to implement specific programs and new
products in response to the pandemic.
In particular, we have focused efforts
on loan modifications and a payment deferral
program, implemented a new PPP loan product, and increased
customer service efforts to respond to our borrower’s
needs.
There can be no assurances that such efforts will be
successful in mitigating any risk of credit loss.
●
Liquidity and Capital Risk.
As of June 30,
2020, all of our capital ratios, and our subsidiary bank’s
capital ratios, were in
excess of all regulatory requirements.
While we currently have sufficient capital, our reported
and regulatory capital ratios
could be adversely impacted by further credit losses and other
COVID-19 related impacts on our operations.
We are
managing the evolving risks of our business while closely monitoring
and forecasting the potential impacts of COVID-19 on
our future operations and financial position, including capital levels.
However, given the uncertainty about
future
developments and the extent and duration of the impacts of COVID
-19 on our business, and future operations, we face
elevated risks to our ability to forecast and estimate future capitalfinancial position, results of
 
levels.
If we fail to meet capital requirements inoperations and cash flows, and negatively impact the future,price of
our business, financial condition or results of operations may be
adversely affected.
We have historically returned
capital to shareholders through normal dividends, special dividends and
share repurchases.
There can be no assurances that these forms of capital returns are
the optimal use of our capital or that they will continue in
the future.
●
Operational Risk.
The spread of COVID-19 has caused us to modify our business practices
(including implementing certain
business continuity plans, and developing work from home and
social distancing plans for our employees), and we may take
further actions as may be required by government authorities
or as we determine are in the best interests of our employees,
customers and business partners.
We face increased
risk of any operational or procedural failures due to changes in our
normal business practices necessitated by the pandemic.
These factors may remain prevalent for a significant period of
time and may continue to adversely affect our business,
results of
operations and financial condition even after the COVID-19 pandemic
has subsided.
Common stock.
 
 
 
 
 
 
-50-
As previously discussed, on April 18, 2021, we entered into the Merger
Agreement, pursuant to which all outstanding shares of the
Company’s common
stock will, subject to the terms and conditions of the Merger Agreement,
be cancelled and converted into the
merger consideration specified in the Merger
Agreement
in an all cash transaction pursuant to the Merger.
The Merger is subject to, in addition to various other customary
closing conditions: approval by the Company’s
shareholders; antitrust
clearance and other governmental and regulatory approvals; and
completion of the De-banking.
The Merger Agreement includes customary representations
and warranties of the parties.
We have also made
certain additional
covenants in the Merger Agreement, including (a) covenants regarding
the operation of our business and that of our subsidiaries
pending the closing of the Merger,
and (b) a customary non-solicitation covenant prohibiting us from soliciting,
providing non-public
information in response to, or entering into discussions or negotiations with
respect to, proposals relating to alternative business
combination transactions, except as permitted under the Merger
Agreement. The Merger Agreement provides that, upon termination
of the Merger Agreement under certain specified circumstances,
including the acceptance of a Superior Proposal (as defined in the
Merger Agreement) for an alternative business combination
transaction, we will be required to pay a termination fee of approximately
$10.3 million.
There is no assurance that the merger will occur on the terms and
timeline as set forth in the Merger Agreement and currently
contemplated,
or at all. Potential risks and uncertainties include, but are not limited to:
●
The Merger Agreement generally requires that
we operate our business in the ordinary course pending consummation of the
proposed Merger and restricts us, without Madeira Holdings, LLC’s
consent, from taking certain specified actions until the
Merger is completed. These restrictions may affect
our ability to execute our business strategies and attain our financial and
other goals which could negatively impact our business and results of operations.
●
The efforts to satisfy the closing conditions of the proposed Merger,
including the De-banking and shareholder and regulatory
approval processes, may place a significant burden on management
and internal resources, and the Merger whether or not
consummated, may result in a diversion of management’s
attention from our day-to-day operations and result in a disruption
of our operations. Any significant diversion of management attention
away from our ongoing business and any difficulties
encountered in the Merger process could negatively
impact our business and results of operations.
●
We could be
subject to litigation related to the proposed Merger,
which could result in significant costs and expenses. In
addition to potential litigation-related expenses, we have incurred
and will continue to incur other costs, expenses and fees for
professional services and other transaction costs in connection with
the proposed Merger, and many
of these fees and costs
are
payable
regardless
of
whether
or
not
the
proposed
Merger
is
consummated.
 
 
-72-●
 
The extent to which the coronavirus pandemic impacts our business,Merger Agreement contains certain termination provisions.
 
If the proposed Merger is not completed or the Merger
Agreement is terminated, the price of our common stock may decline,
including to the extent that the current market price of
our common stock reflects an assumption that the Merger
will be consummated without unexpected delays.
All of the foregoing could materially and adversely affect our
business, financial position, results of operations and financial condition will depend on
future developments, which are highly uncertain and are difficult
to predict, including, but not limited to, the duration and
spread of
the outbreak, its severity, the
actions to contain the virus or treat its impact, and how quickly
and to what extent normal economic and
operating conditions can resume. Even after the COVID-19
pandemic has subsided, we may continue to experience materially
adverse
impacts to our business as a result of the virus’s
global economic impact, including the availability of credit, adverse
impacts on our
liquidity and any recession that has occurred or may occur in
the future.
There are no comparable recent events that provide guidance as to
the effect the spread of COVID-19 as a global pandemic may
have,
and, as a result, the ultimate impact of the outbreak is highly
uncertain and subject to change. We
do not yet know the full extent of
the impacts on our business, our operations or the global economy
as a whole. However, the effects
could have a material impact on
our results of operations and heighten many of our known risks described
in the “Risk Factors” section of our Annual Report on
Form
10-K for the year ended December 31, 2019.cash flows.
 
Item 2. Unregistered Sales of Equity
 
2.
Unregistered
Sales
of
Equity
Securities
and
Use
of
Proceeds
 
 
Information on Stock Repurchases
 
On August 1, 2019, the Company’s
 
Board of Directors approved a stock repurchase plan (the “2019
Repurchase Plan”) under
which
the Company is authorized to repurchase up to $10 million in value of its outstanding
 
outstanding shares of common stock. This authority may be
exercised from time to time and in such amounts as market conditions warrant.
 
warrant. Any shares purchased under this plan are returned to
the status of authorized but unissued shares of common stock. The repurchases
 
repurchases may be made on the open market, in block trades or
otherwise. The stock repurchase program does not obligate the Company
 
to acquire any particular amount of common stock, and
it
may be suspended
at any time at the Company's discretion. The repurchases
are funded
using the Company’s working
 
working capital.
 
 
The Company did not repurchase any of its common stock during the three
 
three months ended June 30, 2020.March 31, 2021.
 
As of June 30, 2020,March 31, 2021,
 
the
Company had $4.7 million remaining in the 2019 Repurchase Plan. Pursuant
to the Merger Agreement, the Company may not
repurchase shares of common stock (pursuant to the 2019 Repurchase
Plan or otherwise) without the prior written consent of Madeira
Holdings, LLC.
-51-
 
Pursuant to the 2014 Equity Compensation Plan participantsand the 2019 Equity
 
Compensation Plan, participants may have shares withheld to
cover income taxes. There were 1,897
16,038 shares repurchased to cover income
tax withholding in connection
with the shares granted
under the 2014 Equity Compensation Plan and 2019 Equity Compensation
Plan during the three-month period ended June 30, 2020,March 31, 2021,
at an average cost of $ 6.50$14.01 per share.
 
Item
3.
Defaults
Upon
Senior
Securities
 
 
None.
 
Item 4. Mine
 
4.
Mine
Safety
Disclosures
None.
 
Item
5.
Other
Information
 
 
None
 
 
 
 
-73--52-
 
Item
 
Item
6.
 
Exhibits
 
 
Exhibit
 
Number
 
Description
 
2.1
 
(1)
3.1
 
(1)(2)
3.2
 
(2)(3)
3.3
 
(3)
10.1
(Filed Herewith)(4)
31.1
 
 
 
(Filed herewith)
 
31.2
 
 
 
(Filed herewith)
32.1
 
 
 
 
 
 
(Furnished herewith)
 
101 Financial
 
statements from
Financial
 
the Quarterly
statements
 
Report on
from
 
Form 10-Q of
the
 
Marlin Business
Quarterly
 
Services Corp.
Report
 
for the period
on
 
Form
10
-
Q
of
Marlin
Business
Services
Corp.
for
the
period
ended
June 30, 2020
,March 31, 2021,
 
formatted in XBRL: (i)
the Consolidated Balance
Sheets, (ii) the Consolidated
Statements of Operations,
(iii) the
Consolidated
 
Statements of Comprehensive
 
Comprehensive Income, (iv)
 
(iv) the
Consolidated Statements
 
of Stockholders’
 
Equity,
(v) the
Consolidated
 
Statements
of
 
Cash
Flows
 
and (vi)
 
(vi) the
Notes
 
to
Unaudited
 
Consolidated
Financial
 
Statements.
(Submitted electronically with this report)
__________________
 
 
__________________
 
(1)
 
PreviouslyPrevio
usly filed with the SEC as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 20, 2021, and incorporated by
reference herein.
(2)
 
Previo
usly filed with the SEC as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December
31, 2007 filed
on March 5, 2008, and incorporated by reference
herein.
(2)
Previously filed with the SEC as an exhibit to the Registrant’s
Current Report on Form 8-K filed on October 20,
2016, and
incorporated by reference herein.
(3)
 
Previously filed with the SEC as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 20, 2016, and incorporated by
reference herein.
(4)
 
Previously filed with the SEC as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 24,
2020,
and incorporated by
incorporated
by reference herein.
 
 
 
 
 
 
 
 
 
-74--53-
 
SIGNATURES
 
Pursuant to the requirements of
 
the requirementsSecurities Exchange Act of
 
of the Securities
Exchange Act
of 1934,
the Registrant has duly
 
duly caused this report to be
 
report to
be signed on
its behalf
behalf by the undersigned thereunto duly authorized.
 
 
MARLIN BUSINESS SERVICES CORP.
 
(Registrant)
 
By: /s/
 
/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:
 
July 31, 2020April 30, 2021