UNITED STATES
 
SECURITIES AND EXCHANGE
COMMISSION
 
 
WASHINGTON,
 
D.C. 20549
 
FORM
10-Q
 
☑
 
QUARTERLY
 
REPORT PURSUANT TO SECTION
 
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
 
For the Quarterly Period Ended
March 31,June 30, 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.
Employer
Identification
Number)
 
 
300 Fellowship Road
,
Mount Laurel
,
NJ
08054
 
(Address of principal executive offices)
(Zip (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
 
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
 
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
 
☑
 
No
☐
 
 
Indicate by check mark whether the registrant has submitted electronically
 
every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
 
during the preceding 12 months (or for such shorter period that
registrant was required to submit such files.)
Yes
☑
No
☐
 
 
Indicate by check mark whether the registrant is a large accelerated
 
filer, an accelerated filer,
 
a non-accelerated filer, a smaller
reporting company or an emerging growth company.
 
See the definitions of "large accelerated filer,”
 
“accelerated filer", “smaller
reporting company” and “emerging growth
 
company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
☐
Accelerated filer
☑
 
Non-accelerated filer
☐
Smaller reporting company
☐
 
Emerging growth company
☐
 
 
If an emerging growth company,
 
indicate by check mark if the registrant has elected not to use the extended transition
 
period for
complying with any new or revised financial accounting standards provided
 
pursuant to Section 13(a) of
the Exchange Act.Act
.
☐
 
 
Indicate by check mark whether the registrant is a shell company (as defined
 
in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes
☐
No
No
☒
 
 
At AprilJuly 23, 2021,
12,009,23412,026,456
 
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 March 31,June 30, 2021
 
 
TABLE OF CONTENTS
 
 
Page
 
No.
 
 
 
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5362
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-3-
 
PART
 
I. Financial Information
 
Item
 
1.
 
Consolidated
 
Financial
 
Statements
 
 
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
 
March 31,June 30,
December 31,
 
2021
2020
(Dollars in thousands, except per-shareper-
share data)
ASSETS
Cash and due from banks
$
5,2444,451
$
5,473
Interest-earning deposits with banks
 
105,378109,801
130,218
 
Total cash and cash equivalents
110,622114,252
135,691
Time deposits with banks
4,4823,486
5,967
Restricted interest-earning deposits related to consolidated VIEs
4,3583,799
4,719
Investment securities (amortized cost of $
12.612.4
 
million and $
11.5
 
million at
 
March 31,June 30, 2021 and December 31, 2020, respectively)
12,37312,580
11,624
Net investment in leases and loans:
 
Leases
319,092308,191
337,159
 
Loans
517,249520,920
532,125
Net investment in leases and loans, excluding allowance for credit losses (includes $
23.217
.0 million and
$
30.4
 
million at March 31,June 30, 2021 and December 31, 2020, respectively, related to consolidated VIEs)
836,341829,111
869,284
Allowance for credit losses
(38,912)(28,757)
(44,228)
 
Total net investment in leases and loans
797,429800,354
825,056
Intangible assets
5,5105,343
5,678
Operating lease right-of-use assets
7,6487,458
7,623
Property and equipment, net
8,6039,043
8,574
Property tax receivables, net of allowance
12,0639,855
6,854
Other assets
9,77619,269
10,212
 
Total assets
$
972,864985,439
$
1,021,998
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
$
678,331697,805
$
729,614
Long-term borrowings related to consolidated VIEs
23,67017,227
30,665
Operating lease liabilities
8,5178,326
8,700
Other liabilities:
 
Sales and property taxes payable
10,9167,224
6,316
 
Accounts payable and accrued expenses
26,08618,961
27,734
 
Net deferred income tax liability
23,64224,817
22,604
 
Total liabilities
771,162774,360
825,633
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $
0.01
 
par value;
5,000,000
 
shares authorized;
NaN
none issued
0
0
Common Stock, $
0.01
 
par value;
75,000,000
 
shares authorized;
12,009,32312,026,473
 
and
11,974,530
 
shares issued and outstanding at March 31,June 30, 2021 and December 31, 2020, respectively
120
120
 
Additional paid-in capital
76,68277,279
76,323
 
Accumulated other comprehensive (loss) income
(115)165
69
 
Retained earnings
125,015133,515
119,853
 
Total stockholders’ equity
201,702211,079
196,365
 
Total liabilities and stockholders’ equity
$
972,864985,439
$
1,021,998
 
 
 
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
 
financial statements.
 
-4-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2021
2020
2021
2020
(Dollars in thousands, except per-share data)
Interest income
$
17,678
$
24,248
$
35,966
$
50,713
Fee income
2,313
2,450
4,768
5,216
Interest and fee income
19,991
26,698
40,734
55,929
Interest expense
2,819
5,428
6,082
11,108
Net interest and fee income
17,172
21,270
34,652
44,821
Provision for credit losses
(9,891)
18,806
(12,827)
43,956
Net interest and fee income after provision for credit losses
27,063
2,464
47,479
865
Non-interest income:
Gain on leases and loans sold
0
57
0
2,339
Insurance premiums written and earned
1,943
2,249
3,941
4,531
Other income
1,554
1,489
8,128
9,128
Non-interest income
3,497
3,795
12,069
15,998
Non-interest expense:
Salaries and benefits
8,461
7,668
16,834
17,187
General and administrative
8,377
5,847
19,623
19,452
Goodwill impairment
0
0
0
6,735
Non-interest expense
16,838
13,515
36,457
43,374
Income (loss) before income taxes
13,722
(7,256)
23,091
(26,511)
Income tax expense (benefit)
3,466
(1,374)
5,984
(8,808)
Net income (loss)
$
10,256
$
(5,882)
$
17,107
$
(17,703)
Basic earnings (loss) per share
$
0.85
$
(0.50)
$
1.43
$
(1.50)
Diluted earnings (loss) per share
$
0.84
$
(0.50)
$
1.41
$
(1.50)
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 June 30,
Six Months Ended June 30,
2021
2020
2021
2020
(Dollars in thousands)
Net income (loss)
$
10,256
$
(5,882)
$
17,107
$
(17,703)
Other comprehensive income:
Increase in fair value of debt securities available for sale
377
88
130
37
Tax effect
(97)
(22)
(34)
(9)
Total other comprehensive
income
280
66
96
28
Comprehensive income (loss)
$
10,536
$
(5,816)
$
17,203
$
(17,675)
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
-6-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
Accumulated
 
Common
Additional
Other
Total
 
Common
Stock
Paid-In
Comprehensive
Retained
Stockholders’
Shares
Amount
 
Capital
 
Income (Loss)
Earnings
 
Equity
 
(Dollars in thousands)
Balance, December 31, 2019
12,113,585
121
79,665
58
135,112
$
214,956
Repurchase of common stock
(285,593)
(3)
(4,535)
0
0
(4,538)
Stock issued in connection with restricted
stock and RSUs, net of forfeitures
56,481
1
(1)
0
0
0
Stock option compensation recognized
—
0
518
0
0
518
Net change 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
$
119
$
75,647
$
20
$
112,704
$
188,490
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 share)
—
0
0
0
(1,689)
(1,689)
Balance, March 31, 2021
12,009,323
120
76,682
(115)
125,015
201,702
Repurchase of common stock
(124)
0
(3)
0
0
(3)
Stock issued in connection with restricted
stock and RSUs, net of forfeitures
17,274
—
—
—
—
—
Stock-based compensation recognized
—
0
600
0
0
600
Net change in unrealized gain/loss on
securities available for sale, net of tax
—
0
0
280
0
280
Net income
—
0
0
0
10,256
10,256
Cash dividends paid ($
0.14
per share)
—
0
0
0
(1,756)
(1,756)
Balance, June 30, 2021
12,026,473
$
120
$
76,68277,279
$
(115)165
$
125,015133,515
$
201,702211,079
(1)
Represents the impact of Accounting Standards Update
 
("ASU") 2016-13 and related ASUs collectively referred
 
to as "CECL".
 
See Note 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the unaudited consolidated
 
financial statements.
 
-7-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash FlowsStockholders’ Equity
(Unaudited)
 
Three Months Ended March 31,
2021Accumulated
2020
Common
Additional
Other
Total
Common
Stock
Paid-In
Comprehensive
Retained
Stockholders’
Shares
Amount
Capital
Income (Loss)
Earnings
Equity
(Dollars in thousands)
Cash flows from operating activities:Balance, December 31, 2019
12,113,585
$
121
$
79,665
$
58
$
135,112
$
214,956
 
Net income (loss)Repurchase of common stock
$(285,593)
6,851(3)
$(4,535)
(11,821)0
0
(4,538)
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:Stock issued in connection with restricted
 
Depreciationstock and amortizationRSUs, net of forfeitures
87756,481
1,0571
(1)
0
0
0
 
Stock-based compensation recognized
583—
0
518
Impairment of goodwill and intangible assets0
0
6,735
Change in fair value of equity securities
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
0
(3,693)
Proceeds from sale of leases originated for sale
0
3,874
Noncash 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:518
 
Net change in time deposits with banksunrealized gain/loss on
1,485
(737)
 
Purchasessecurities available for sale, net of equipment for lease contracts and funds used to originate
loanstax
(85,571)
(156,145)
Principal collections on leases and loans
112,667
129,810
Proceeds from sale of leases originated for investment—
0
21,3370
Security deposits collected, net of refunds(38)
(14)0
(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(38)
 
Net cash provided by (used in) investing activitiesloss
—
0
0
0
(11,821)
(11,821)
 
Impact of adoption of new accounting
27,748
standards
(5,175)(1)
—
0
0
0
(8,877)
(8,877)
Cash flows from financing activities:dividends paid ($
0.14
per share)
—
0
0
0
(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
0
120
0
0
120
Repurchase of common stock
(1,897)
0
(12)
0
0
(12)
Stock issued in connection with restricted
stock and RSUs, net of forfeitures
44,780
—
—
—
—
—
Stock-based compensation recognized
—
0
(149)
0
0
(149)
 
Net change in depositsunrealized gain/loss on
(51,283)
102,864
 
Term securitization repaymentssecurities available for sale, net of tax
(7,026)
(14,008)
Business combinations earn-out consideration payments—
0
(132)0
Repurchases of common stock66
(224)0
(4,538)
Dividends paid
(1,677)
(1,685)66
 
Net cash (used in) provided by financing activitiesloss
(60,210)—
82,5010
Net increase in total cash, cash equivalents and restricted cash0
(25,430)0
87,517(5,882)
Total cash, cash equivalents(5,882)
Cash dividends paid ($
0.14
 
and restricted cash, beginning of period
per share)
140,410—
130,0270
Total cash, cash equivalents0
0
and restricted cash, end of period
(1,629)
(1,629)
Balance, June 30, 2020
11,942,247
$
114,980119
$
217,54475,606
$
86
$
105,193
$
181,004
(1)
Represents the impact of Accounting Standards Update ("ASU")
2016-13 and related ASUs collectively referred to as "CECL".
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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,
2021
2020
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)
$
17,107
$
(17,703)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
1,813
2,059
Stock-based compensation
1,183
369
Goodwill impairment
0
6,735
Change in fair value of equity securities
56
(89)
Provision for credit losses
(12,827)
43,956
Change in net deferred income tax liability
2,177
(6,047)
Amortization of deferred initial direct costs and fees
5,064
6,393
Gain on equipment disposed
0
(37)
Gain on leases sold
0
(2,339)
Leases originated for sale
0
(4,820)
Proceeds from sale of leases originated for sale
0
5,058
Noncash lease expense
425
872
Effect of changes in other operating items:
Other assets
(12,317)
(7,665)
Other liabilities
(9,227)
(1,320)
Net cash (used in) provided by operating activities
(6,546)
25,422
Cash flows from investing activities:
Net change in time deposits with banks
2,481
2,986
Purchases of equipment for lease contracts and funds used to originate
loans
(187,852)
(229,512)
Principal collections on leases and loans
219,357
237,797
Proceeds from sale of leases originated for investment
0
21,337
Security deposits collected, net of refunds
2
(129)
Proceeds from the sale of equipment
1,600
1,151
Acquisitions of property and equipment
(1,659)
(1,790)
Purchase of investment securities
(1,571)
(37)
Principal payments received on investment securities
728
816
Net cash provided by investing activities
 
Three33,086
32,619
Cash flows from financing activities:
Net change in deposits
(31,809)
63,059
Term securitization repayments
(13,504)
(25,402)
Business combinations earn-out consideration payments
0
(168)
Issuances of common stock
0
120
Repurchases of common stock
(227)
(4,550)
Dividends paid
(3,359)
(3,349)
Net cash (used in) provided by financing activities
(48,899)
29,710
Net (decrease) increase in total cash, cash equivalents and restricted cash
(22,359)
87,751
Total cash, cash equivalents
and restricted cash, beginning of period
140,410
130,027
Total cash, cash equivalents
and restricted cash, end of period
$
118,051
$
217,778
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 March 31,June 30,
 
2021
2020
(Dollars in thousands)
Supplemental disclosures of cash flow information:
 
Cash paid for interest on deposits and borrowings
$
3,1706,023
$
5,42011,368
 
Net cash paid for income taxes
90321,825
1,7971,868
 
Leases and loans transferred into held for sale from investment
0
19,235
Supplemental disclosures of non-cashnon cash investing activities:
 
Purchase of equipment for lease contracts and loans originated
1,309$
3,7733,194
$
4,106
Reconciliation of Cash, cash equivalents and restricted cash to
 
the Consolidated Balance Sheets:
Cash and cash equivalents
$
110,622114,252
$
211,070211,706
Restricted interest-earning deposits
4,3583,799
6,4746,072
Cash, cash equivalents and restricted cash at end of period
$
114,980118,051
$
217,544217,778
 
 
 
 
 
 
 
 
 
 
 
-9--10-
 
MARLIN BUSINESS SERVICES CORP.
 
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
 
FINANCIAL STATEMENTS
 
 
NOTE 1 – The Company
 
 
We are a nationwide
 
provider of credit products and services to small businesses and were incorporated
 
in the Commonwealth of
Pennsylvania
in
2003
. In 2008, we opened Marlin Business Bank (“MBB”), a commercial bank chartered
 
by the State of
Utah
 
and a
member of the Federal Reserve System, which serves as the Company’s
 
primary funding source through its issuance of Federal
Deposit Insurance Corporation (“FDIC”)-insured deposits. In 2009,
 
Marlin Business Services Corp. became a bank holding company
subject to the Bank Holding Company Act and in 2010, the Federal Reserve
 
Bank of Philadelphia confirmed the effectiveness of
Marlin Business Services Corp.’s
 
election to become a financial holding company (while remaining a bank
 
holding company)
pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and
 
section 225.82 of the Federal Reserve Board’s
 
Regulation
Y.
Such election permits Marlin Business Services Corp. to engage
 
in activities that are financial in nature or incidental to a financial
activity, including
 
including the maintenance and expansion of our reinsurance activities conducted through
 
through our wholly-owned subsidiary,
AssuranceOne, Ltd. (“AssuranceOne”).
 
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. (“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 HPS Merger Sub, with the Company
surviving (the “Merger”).
The Company's Board of Directors has
unanimously approved the Merger.
The Merger remains subject to, in addition to various other customary
closing conditions: approval
by the Company’s shareholders; governmental
and regulatory approvals; and 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”).
 
References to the “Company,”
 
“Marlin,” “Registrant,” “we,” “us” and “our” herein refer to Marlin
 
Business Services Corp. and its
wholly-owned subsidiaries, unless the context otherwise requires.
 
 
NOTE 2 – Summary of Significant Accounting Policies
 
 
Basis of financial statement presentation.
 
The unaudited consolidated financial statements include the
 
accounts of the Company and
its wholly-owned subsidiaries. The Company has one reportable segment,
which includes the Company’s commercial
lending and
leasing products and related services, including equipment loansMarlin Leasing Corporation (“MLC”) and
 
leases, property insurance on leased equipment,MBB are managed
together as a single business segment and working
capital loans. are aggregated for financial reporting purposes as they exhibit similar economic
characteristics, share the same leasing and loan
portfolio and have a single consolidated product offering
platform.
All intercompany accounts and transactions have been eliminated
eliminated in consolidation.
 
The accompanying unaudited consolidated financial statements present
 
the Company’s financial position
 
at March 31,June 30, 2021 and the
results of operations for the three-monththree- and six -month periods ended March 31,June 30, 2021
 
and 2020,
 
and cash flows for the three-monthsix-month periods ended
March 31,ended June 30, 2021 and 2020.
 
In management’s opinion,
the unaudited
consolidated financial statements contain all adjustments, which
which include normal and recurring adjustments, necessary for
a 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
 
conjunction with the consolidated
financial statements and note disclosures included in the Company’s
 
Form 10-K for the year ended December 31, 2020, filed with the
Securities and Exchange Commission (“SEC”) on March 5, 20212021. The
 
.
The consolidated results and statements of cash flows for these
interim financial statements are not necessarily indicative of the results of
 
operations or cash flows for the respective
full years or any
other period.
 
 
Use of Estimates.
 
These unaudited consolidated financial statements require
 
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
 
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
 
the reporting period. Estimates are used when accounting for
income recognition, the residual values of leased equipment, the
 
allowance for credit losses, deferred initial direct costs and fees, late
fee receivables, the fair value of financial instruments, estimated losses from
 
insurance program, and income taxes. Actual results
could differ from those estimates.
 
 
Income taxes.
 
 
-11-
Our statutory tax rate, which is a combination of federal and state income taxtaxes,
 
rates
,
was
25.125.2
% and
23.925.4
% for the three months ended
March 31,June 30, 2021 and March 31,June 30, 2020, respectively.
 
For the threesix months ended March 31,June 30, 2021, our effective
tax rate was
26.9
% expense and for the three months ended March 31, 2020,
our effective tax rate was
38.625.9
% benefit,. For the six months ended June 30, 2020, our effective tax
rate was
33.2
%, 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.
For the three and six-month periods ended June 30, 2021, our effective
tax rates were
25.3
% and
25.9
%, respectively.
 
 
During the second quarter of 2021, the Company made a $
19.8
million 2020 tax year extension payment, resulting in a quarter end
current tax receivable balance of $
10.5
million.
The Company isexpects to receive a refund in connection with its annual Federal tax
filing during the second half of 2021.
 
currently under examination
The Company’s IRS federal
 
by the IRS
audit for tax
years ending December
31, 2013 to
2018 resulting from Joint Committee
 
Joint Committee
Review as part of
an IRS refund claim.claim closed in the second quarter of 2021 with no
adjustments. The Company remains subject to examination for the
2017 tax year to the present under regular
statute of limitations. The Company files state income tax returns in various
states which may have different statutes of limitations.
-10-
 
Significant Accounting Policies.
 
There have been no significant changes to our Significant Accounting
 
Policies as described in our
Annual Report on Form 10-K for the year ended December 31,
 
2020.
 
Recently Adopted Accounting Standards
.
 
 
Credit Losses.
 
In June 2016, the Financial Accounting Standards Board (“FASB”)
 
issued Accounting Standards Update (“ASU”)
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
 
326): Measurement of Credit
Losses on Financial Instruments
and related
ASUs collectively referred to as “CECL”.
 
The Company adopted the guidance in these ASUs, effective January
 
1, 2020, applying changes resulting from the application of the
new standard’s provisions
 
as a cumulative-effect adjustment to retained earnings as of the beginning
 
of the first reporting period in
which the guidance was 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
 
Simplifying the Accounting for
Income Taxes, which
, which removes certain exceptions to the general principles of ASC 740 in order to reduce
 
to reduce the cost and complexity of its
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-11-
-12-
 
NOTE 3 – Non-Interest Income
 
The following table summarizes the Company’s
non-interest income for the periods
presented:
 
Three Months Ended March 31,
Six Months Ended
June 30,
June 30,
(dollarsDollars in thousands)
2021
2020
2021
2020
Insurance premiums written and earned
$
1,9981,943
$
2,2822,249
$
3,941
$
4,531
Gain on sale of leases and loans
0
2,28257
0
2,339
Other income:
 
Property tax (loss) income
5,02020
5,504(380)
5,040
5,124
Servicing income
386307
566489
693
1,055
Net gain (loss)gains recognized during the period on equity securities
(66)10
5831
(56)
89
Non-interest income - other than from contracts with customers
7,3382,280
10,6922,446
9,618
13,138
Other income:
Insurance policy fees
772747
918873
1,519
1,791
Property tax administrative fees on leases
203206
234236
409
470
ACH payment fees
5963
7236
122
108
Referral fees
1021
9414
31
108
Other
180
190
193370
383
Non-interest income from contracts with customers
1,2341,217
1,5111,349
2,451
2,860
Total non-interest income
$
8,5723,497
$
12,2033,795
$
12,069
$
15,998
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-12--13-
 
NOTE 4 - Investment Securities
 
 
The Company had the following investment securities as of the dates presented:
 
March 31,June 30,
December 31,
(Dollars in thousands)
2021
2020
Equity Securities
Mutual fund
$
3,7073,730
$
3,760
Debt Securities, Available
 
for Sale:
Asset-backed securities ("ABS")
5,1924,974
3,719
Municipal securities
 
3,4743,876
 
4,145
 
Total investment securities
$
12,37312,580
$
11,624
 
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 March 31,June 30,
2021
2020Six Months Ended June 30,
(Dollars in thousands)
2021
2020
2021
2020
Net gains and (losses) recognized during the period on equity securities
$
(66)10
$
5831
$
(56)
$
89
Less: Net gains and (losses) recognized during the period
 
on equity securities sold during the period
 
0
0
0
0
Unrealized gains and (losses) recognized during the reporting period
 
on equity securities still held at the reporting date
$
(66)10
$
58
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
$
5,125(56)
$
68
$
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)
$
7,86489
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-13-
-14-
Available for
Sale
The following schedule is a summary of available for sale investments as of the
dates presented:
June 30, 2021
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
4,933
$
42
$
(1)
$
4,974
Municipal securities
3,672
205
(1)
3,876
Total Debt Securities, Available
for Sale
$
8,605
$
247
$
(2)
$
8,850
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
 
The Company evaluates its available for sale securities in an unrealized loss position
 
for other than temporary impairment on at least a
quarterly basis. The Company did
0
t not recognize any other than temporary
impairment to earnings for each of the periods ended
March June
31,30, 2021 and March 31,June 30, 2020.
The following tables present the aggregate amount of unrealized losses on
 
available for sale securities in the Company’s
 
investment
securities classified according to the amount of time those securities
 
have been in a continuous loss position as of March 31,June 30, 2021 and
December 31, 2020:
March 31,June 30, 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 securitiesABS
$
(199)(1)
$
3,3481,588
$
0
$
0
$
(199)(1)
$
3,3481,588
Municipal securities
(1)
71
0
0
(1)
71
Total available for sale investment
securities
$
(199)(2)
$
3,3481,659
$
0
$
0
$
(199)(2)
$
3,3481,659
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
$
0
$
0
$
(1)
$
141
Total available for sale investment
securities
$
(1)
$
141
$
0
$
0
$
(1)
$
141
 
-15-
The following table presents the amortized cost, fair value, and weighted average
 
yield of available for sale investments at March 31,June 30,
2021,
 
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
$
7501,480
$
1,302204
$
1,4751,660
$
1,5981,589
$
5,1254,933
Municipal securities
 
5
 
120253
 
03,342
 
3,54772
 
3,672
Total available for sale investments
$
7551,485
$
1,422457
$
1,4755,002
$
5,1451,661
$
8,7978,605
Estimated fair value
$
7631,501
$
1,447463
$
1,5105,086
$
4,9461,659
$
8,6668,709
Weighted-average
 
yield, GAAP basis
2.312.26%
%1.79%
1.841.84%
%1.81%
0.81
%
2.15
%
1.89
%1.90%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-14-
-16-
 
NOTE 5 – Net Investment in Leases and Loans
 
 
Net investment in leases and loans consists of the following:
 
 
March 31,June 30, 2021
December 31, 2020
(Dollars in thousands)
Minimum lease payments receivable
$
334,294322,598
$
354,298
Estimated residual value of equipment
26,34925,544
26,983
Unearned lease income, net of initial direct costs and fees deferred
(41,179)(39,564)
(43,737)
Security deposits
(372)(387)
(385)
Total leases
319,092308,191
337,159
Commercial loans, net of origination costs and fees deferred
Working
 
Capital Loans
18,35124,688
20,034
CRA
(1)
1,1581,164
1,091
Equipment loans
(2)
436,814432,681
449,149
CVG
60,92662,387
61,851
Total commercial
 
loans
517,249520,920
532,125
Net investment in leases and loans, excluding allowance
836,341829,111
869,284
Allowance for credit losses
(38,912)(28,757)
(44,228)
Total net investment
 
in leases and loans
$
797,429800,354
$
825,056
________________________
 
 
 
(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 response to COVID-19, starting in mid-March 2020, the Company
 
instituted a payment deferral contract modification program in
order to assist our small-business customers.
 
See Note 6, “Allowance for Credit Losses” for discussion of that program.
 
At March 31,June 30, 2021, $
24.918.1
 
million in net investment in leases were pledged as collateral for the Company’s
 
outstanding asset-backed
securitization balance and $
55.255.3
 
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 $
13.6
 
million and $
14.6
 
million as of MarchJune
31,30, 2021 and December 31, 2020,
 
respectively. Initial direct
 
costs are netted in unearned income and are amortized to income using
the effective interest method. Origination costs are
 
netted in commercial loans and are amortized to income using the effective interest
method. At March 31,June 30, 2021 and December 31, 2020, $
21.521.1
 
million and $
21.9
 
million, respectively,
of the estimated
residual value of
equipment retained on our Consolidated Balance Sheets was related
 
to copiers.
 
 
-17-
Maturities of lease receivables
under lease contracts and the amortization of unearned lease income, including
initial direct costs and
fees deferred, were as follows as of June 30, 2021:
Minimum Lease
Payments
Net Income
Receivable
(1)
Amortization
(2)
(Dollars in thousands)
Period Ending December 31,
Remainder of 2021
$
69,625
$
13,567
2022
115,706
14,628
2023
75,251
7,429
2024
40,201
2,983
2025
16,815
865
Thereafter
5,000
92
$
322,598
$
39,564
________________________
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-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 March 31, 2021:
Minimum Lease
Payments
Net Income
Receivable
(1)
Amortization
(2)
(Dollars in thousands)
Period Ending March 31,
Remainder of 2021
$
105,209
$
18,517
2022
109,389
13,153
2023
68,649
6,463
2024
35,012
2,403
2025
13,032
589
Thereafter
3,003
54
$
334,294
$
41,179
________________________
(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.
-18-
 
The lease income recognized was as follows:
 
Three Months Ended March 31,June 30,
Six Months Ended June 30,
2021
2020
2021
2020
(Dollars in thousands)
Interest Income
$
6,6936,309
$
9,1518,469
$
13,003
$
17,620
 
As of March 31,June 30, 2021 and December 31, 2020,
the Company maintained
total finance receivables which were on a non-accrual basis
with net investment of $
14.013.1
 
million and $
14.3
 
million, respectively.
 
As of March 31,June 30, 2021, the Company had contracts that had been
modified under its COVID-19 payment deferral program of $
93.880.6
 
million representing approximately
11.29.72
% of the Company’s total
net investment.
See
Note 6
“Allowance “Allowance for Credit Losses” for additional
discussion of loan modifications
due to COVID-19.
 
Portfolio Sales
The Company originateshas historically originated certain lease and loans for
sale to third parties, based
on their underwriting criteria and
specifications.
 
In
addition, the Company may periodically enter into agreements to
sell certain leases and
loans that were originated
for investment to
third parties.
 
For agreements that qualify as a sale where the Company has continuing
 
involvement through servicing, the Company recognizes a
servicing
liability at its initial fair value, and then amortizes the liability over
the expected servicing
period based on the effective yield
method, within Other income in the Consolidated Statements of Operations.
 
The Company’s sale agreements typically
 
do not
contain
a stated servicing fee, so the initial value recognized as a servicing liability
 
is a reduction of the proceeds received and is based on an
estimate of the fair value attributable to that obligation.
 
The Company’s servicing liability
 
was $
1.10.9
 
million and $
1.3
 
million as of
March 31,June 30, 2021,
 
and December 31, 2020, respectively,
 
respectively, and is recognized
within Accounts payable and accrued expenses in the
Consolidated Balance Sheets.
 
As of March 31,June 30, 2021 and December 31, 2020,
the portfolio of leases and loans serviced
for others was
approximately $
199172
 
million and $
230
 
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 following table summarizes information related to portfolio
 
sales for the periods presented:
 
 
-16-
 
Three Months Ended March 31,June 30,
Six Months Ended June 30,
2021
2020
2021
2020
(Dollars in thousands)
Sales of leases and loans
 
$
0
$
22,9291,127
$
0
$
24,056
Gain on sale of leases and loans
0
2,28257
0
2,339
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-17--19-
 
NOTE 6 – Allowance for Credit Losses
 
 
Effective January 1, 2020, we
 
adopted
ASU 2016-13 and related ASUs collectively referred to as CECL
,
 
which replaced
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.
 
See our Annual Report on Form 10-K for the year ended December 31, 202020
 
20 for a detailed discussion of our adoption of
this guidance.guidance
.
 
The following tables summarize activity in the allowance for credit losses
:
 
Three Months Ended June 30, 2021
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
28,852
$
1,010
$
9,049
$
0
$
38,911
Charge-offs
(2,425)
(16)
(399)
0
(2,840)
Recoveries
1,300
144
180
0
1,624
Net charge-offs
(1,125)
128
(219)
0
(1,216)
Realized cashflows from Residual Income
953
0
0
0
953
Provision for credit losses
(8,961)
(135)
(795)
0
(9,891)
Allowance for credit losses, end of period
$
19,719
$
1,003
$
8,035
$
0
$
28,757
Net investment in leases and loans, before allowance
$
732,152
$
24,688
$
71,107
$
1,164
$
829,111
Three Months Ended March 31,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
$
0
$
52,060
Charge-offs
(7,724)
(686)
(904)
0
(9,314)
Recoveries
729
17
74
0
820
Net charge-offs
(6,995)
(669)
(830)
0
(8,494)
Realized cashflows from Residual Income
1,272
0
0
0
1,272
Provision for credit losses
16,499
1,431
876
0
18,806
Allowance for credit losses, end of period
$
48,550
$
7,962
$
7,132
$
0
$
63,644
Net investment in leases and loans, before allowance
$
846,057
$
42,078
$
81,449
$
5,095
$
974,679
-20-
Six Months Ended June 30, 2021
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
33,184
$
1,206
$
9,838
$
0
$
44,228
 
Charge-offs
(3,711)(6,149)
(535)(550)
(762)(1,149)
0
(5,008)(7,848)
 
Recoveries
1,3602,660
130273
43223
0
1,5333,156
Net charge-offs
(2,351)(3,489)
(405)(277)
(719)(926)
0
(3,475)(4,692)
Realized cashflows from Residual Income
1,0952,048
0
0
0
1,0952,048
 
Provision for credit losses
(3,076)(12,024)
20974
(69)(877)
0
(2,936)(12,827)
Allowance for credit losses, end of period
$
28,85219,719
$
1,0101,003
$
9,0508,035
$
0
$
38,91228,757
Net investment in leases and loans, before allowance
$
746,395732,152
$
18,35124,688
$
70,43771,107
$
1,1581,164
$
836,341829,111
 
ThreeSix Months Ended March 31,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
$
0
$
21,695
Adoption of ASU 2016-13 (CECL)
(1)
9,264
(3)
2,647
0
11,908
Allowance for credit losses, January 1, 2020beginning of period
$
27,598
$
1,896
$
4,109
$
0
$
33,603
 
Charge-offs
(6,490)(14,214)
(1,279)(1,965)
(729)(1,633)
0
(8,498)(17,812)
 
Recoveries
5251,254
3855
89163
0
6521,472
 
Net charge-offs
(5,965)(12,960)
(1,241)(1,910)
(640)(1,470)
0
(7,846)(16,340)
Realized cashflows from Residual Income
1,1532,425
0
0
0
1,1532,425
 
Provision for credit losses
14,98831,487
6,5457,976
3,6174,493
0
25,15043,956
Allowance for credit losses, end of period
$
37,77448,550
$
7,2007,962
$
7,0867,132
$
0
$
52,06063,644
Net investment in leases and loans, before allowance
$
877,199846,057
$
59,01242,078
$
84,51581,449
$
1,4105,095
$
1,022,136974,679
__________________
 
(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-
-21-
 
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,June 30, 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 EquipmentEquipme
 
nt 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 asand continued using this forecast in the second
quarter of 2021as uncertainty of the duration and level of
impact of the COVID-19 virus onin the macroeconomic environment
 
has lessened and the Company’s portfolio, including
 
uncertainty about theportfolio has stabilized
forecasted impact of COVID-19,with low net charge-offs and delinquencies
 
was reduced..
 
The continued positive economic forecast resulted in provision impact from improving economic forecasts was partially offsetbenefits for
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 $
3.19.0
 
million.million and $
12.0
million for the three and six-months ended June 30, 2021, respectively,
as
compared to provisions of $
16.5
million and $
31.5
million for the same periods in 2020 during the height of the COVID-19
pandemic.
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--22-
 
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 firstsecond quarter, the Company updated
 
updated its expectation for credit losses for the Working
 
Capital segment based on the
the favorable actual portfolio performance during the quarter
and a revised
forecast based on its current assessment of risks in the
the portfolio.
 
Based on that analysis, the Company recognized a provision benefit of $
0.20.1
 
million for the three months ended
March 31,June 30, 2021, bringing the total provision associated with Working
 
Capital to $
0.20.1
 
million for the threesix months ended June 30,
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.
 
DuringBeginning in the first quarter of 2021,
the Company
updated its expectation for credit losses for the CVG segment, including separately
separately assessing the elevated risks of a population of motor coach industry
 
contracts that are facing prolonged impacts from
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 $
0.71.0
 
million reduction in qualitative reserve
ending the period at $
5.74.7
 
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-three and six- months ended March 31,June 30, 2021, the Company has recognized
 
arecognized provision benefitbenefits of $
2.99.9
 
million, and $
12.8
million,
respectively, driven
primarily by
improving economic forecasts and portfolio performance, partially offset
performance.
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-
Our reserve as of March 31,June 30, 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-19 pandemic.
 
Those judgements include certain expectations for the
extent and timing of impacts from COVID-19 on unemployment rates and business
 
bankruptcies and are based on our current
expectations of the performance of our portfolio in the current environment.
 
We may recognize
 
credit losses in excess of our reserve
or revise our estimate of credit losses in the future, and such amounts
 
may be significant, based on (i) the actual performance of our
portfolio, including the performance of the modified portfolio, (ii)
 
any further changes in the economic environment, or (iii) other
developments or unforeseen circumstances that impact our portfolio.portfolio
.
-23-
Loan Modification Program:
 
In response to COVID-19, starting in mid-March 2020, the Company
 
instituted a Loan modification payment deferral program in
order to assist its small-
businesssmall-business customers that requested relief and were current under their
 
their existing agreement.
 
The payment
deferral program allows for up
to 6 months of fully deferred or reduced payments. In 2020, the COVID-19
deferral program ended, however, the
Company continues
to consider modifications in select cases.
 
The below table outlines certain data on the modified population with details
 
of count and net investment balance, with all information
as of March 31,June 30, 2021.
 
 
Equipment
Working
(Dollars in thousands)
Finance
CVG
Capital
Total
Modified leases and loans receivable
3,8083,484
372334
176106
4,3563,924
Resolved
 
(payoff, chargeoff)
(1)
8771,198
81119
315385
1,2731,702
Total Program, number
 
of contracts
4,6854,682
453
491
5,6295,626
Current Quarter Population Changes:
Q1Q2 - New modification
$
28
$
15076
$
0
$
1780
Q1$
76
Q2 - Extended modification
994279
3,7732,810
0
4,7673,089
Previously Modified
69,64961,354
16,24914,939
3,0041,097
88,90277,390
Total Modifications,
 
Net investment receivable
$
70,67161,709
$
20,17217,749
$
3,0041,097
$
93,84780,555
% of total segment receivables
9.58.40%
%25.00%
28.64.40%
%
16.3
%
11.2
%9.72%
Deferral Status:
Out of deferral
$
69,60561,299
$
14,82012,059
$
3,0041,097
$
87,42974,455
In deferral period
1,066410
5,3525,690
0
6,4186,100
Total Modifications,
 
Net investment receivable
(2)
$
70,67161,709
$
20,17217,749
$
3,0041,097
$
93,84780,555
Modifications 30+ Days Delinquent:
Modified Contracts, not TDR
$
1,751
$
2931,341
$
143
$
2,18721
TDR and Extended Modifications$
22
1,056
0
1,0781,505
-21-
 
_________________
(1)
 
Total resolved
 
modifications include
230278
 
contracts charged off where $
5.76.6
 
million credit loss was realized, and
1,0431,424
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 MarchJune 30,
31, 2021.
 
TDRs are restructurings of leases and loans in which, due to the borrower's financial
 
difficulties, a lender grants a concession that it
would not otherwise consider for borrowers of similar credit quality.
 
In accordance with the interagency guidance as updated in April
2020, that the FASB concurred
 
with, loans modified under the Company’s
 
payment deferral program modified on or before
September 30, 2020, wereare not considered TDRs. As of March 31,
June 30, 2021
the Company had $
11.411.0
 
million of active contracts designated
as TDRs.
-24-
 
Credit Quality
 
 
At origination, the Company utilizes an internally developed credit
 
score ratings as part of its underwriting assessment and pricing
decisions for new contracts.
 
The internal credit score is a measurement that combines many risk characteristics,
 
including loan size,
external credit scores, existence of a guarantee, and various characteristics
 
of the borrower’s business.
 
The internal credit score is
used to create pools of loans for analysis in the Company’s
 
Equipment Finance portfolio segment, as discussed further above.
 
We
believe this segmentation allows our loss modeling to properly reflect
 
changes in portfolio mix driven by sales activity and
adjustments to underwriting standards.
 
However, this score is not updated after origination
 
date for analyzing the Company’s
provision.
 
On an ongoing basis, to monitor the credit quality of its portfolio, the
 
Company primarily reviews the current delinquency of the
portfolio and delinquency migration to monitor risk and default trends
 
.
 
We believe that
 
delinquency is the best factor to use to monitor
the credit quality of our portfolio on an ongoing basis because it reflects the
 
current condition of the portfolio, and is a good predictor
of near term charge-offs and can help with identifying
 
trends and emerging risks to the portfolio.
 
 
The following tables provide information about delinquent leases and loans
 
in the Company’s portfolio
 
based on the contract’s status
as-of the dates presented. In particular, contracts
 
that are part of the Loan Modification Program discussed above are presentedpresent
 
ed in the
below delinquency table and the non-accrual information for MarchJune 30, 2021
 
31, 2021 based on their status with respect to the modified
terms.
See Loan Modification section above for delinquency data specific
 
to the modified portfolio.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-22--25-
 
Portfolio by Origination Year as of
 
March 31,June 30, 2021
Total
2021
2020
2019
2018
2017
Prior
Receivables
(Dollars in thousands)
Equipment Finance
30-59
$
112340
$
767647
$
1,517970
$
748394
$
406196
$
155181
$
3,7052,728
60-89
059
360192
940785
421310
346232
19169
2,2581,647
90+
011
358537
735533
511582
24586
14865
1,9971,814
Total Past Due
112410
1,4851,376
3,1922,288
1,6801,286
997514
494315
7,9606,189
Current
65,850138,289
241,243218,463
246,179219,060
118,35699,756
53,85542,834
12,9527,561
738,435725,963
Total
65,962138,699
242,728219,839
249,371221,348
120,036101,042
54,85243,348
13,4467,876
746,395732,152
Working Capital
30-59
0
30
964
0
0
0
994
60-89
0
39
312
0
0
0
700
2
90+
0
032
3918
0
0
0
3950
Total Past Due
0
4234
16622
0
0
0
20856
Current
7,64719,440
7,9504,358
2,546834
0
0
0
18,14324,632
Total
7,64719,440
7,9924,392
2,712856
0
0
0
18,35124,688
CVG
30-59
0
0
705
1738
9
5916
7900
63
60-89
045
172167
54253
152
1479
0
88052
396
90+
0
0
510
5366
0
110
11566
Total Past Due
045
172167
1,29891
222154
2316
7052
1,785525
Current
6,61215,398
16,48515,236
27,79225,767
11,93710,201
4,6183,327
1,208653
68,65270,582
Total
6,61215,443
16,65715,403
29,09025,858
12,15910,355
4,6413,343
1,278705
70,43771,107
CRA
Total Past Due
0
0
0
0
0
0
0
Current
1,1581,164
0
0
0
0
0
1,1581,164
Total
1,1581,164
0
0
0
0
0
1,1581,164
Net investment in leases
and loans, before allowance
$
81,379174,746
$
267,377239,634
$
281,173248,062
$
132,195111,397
$
59,49346,691
$
14,7248,581
$
836,341829,111
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-23--26-
 
Portfolio by Origination Year as of
 
December 31, 2020
Total
2020
2019
2018
2017
2016
Prior
Receivables
(Dollars in thousands)
Equipment Finance
30-59
$
1,162
$
1,526
$
1,349
$
690
$
292
$
14
$
5,033
60-89
367
1,111
463
532
130
6
2,609
90+
503
1,370
804
377
199
16
3,269
Total Past Due
2,032
4,007
2,616
1,599
621
36
10,911
Current
265,036
276,140
138,142
65,722
18,805
1,615
765,460
Total
267,068
280,147
140,758
67,321
19,426
1,651
776,371
Working Capital
30-59
125
481
0
0
0
0
606
60-89
0
135
0
0
0
0
135
90+
0
0
0
0
0
0
0
Total Past Due
125
616
0
0
0
0
741
Current
12,741
6,528
24
0
0
0
19,293
Total
12,866
7,144
24
0
0
0
20,034
CVG
30-59
591
1,039
173
29
21
0
1,853
60-89
0
69
33
0
68
0
170
90+
0
340
179
5
11
0
535
Total Past Due
591
1,448
385
34
100
0
2,558
Current
17,065
30,805
13,733
5,938
1,659
30
69,230
Total
17,656
32,253
14,118
5,972
1,759
30
71,788
CRA
Total Past Due
0
0
0
0
0
0
0
Current
1,091
0
0
0
0
0
1,091
Total
1,091
0
0
0
0
0
1,091
Net investment in leases
and loans, before allowance
$
298,681
$
319,544
$
154,900
$
73,293
$
21,185
$
1,681
$
869,284
 
Net investments in Equipment Finance and CVG leases and loans are generally
 
charged-off when they are contractually past due
 
for
120 days or more.
 
Income recognition is discontinued when a default on monthly payment exists for
 
a period of 90 days or more.
Income recognition resumes when a lease or loan becomes less than 90
 
days delinquent.
 
At March 31,June 30, 2021 and December 31, 2020,
there were
0
 
finance receivables past due 90 days or more and still accruing.
 
 
Working
Capital Loans are generally placed in non-accrual status when they are 30 days past due
and generally charged-off at 60 days
past due.
The loan is removed from non-accrual status once sufficient payments
are made to bring the loan current and reviewed by
management. At March 31, 2021 and December 31, 2020, there were
0
Working
Capital Loans past due 30 days or more and still
accruing.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-24-
-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.
Both Equipment Finance and Working
Capital loans are considered for non-accrual status if and when they are modified
and
classified as a troubled
debt restructuring. The loan is removed from non-accrual status once sufficient
payments are made to bring the
loan current and reviewed by management. At June 30, 2021 and
December 31, 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:
 
March 31,June 30,
December 31,
(Dollars in thousands)
2021
2020
Equipment Finance
$
5,2544,334
$
5,543
Working
 
Capital Loans
344114
932
CVG
8,4158,686
7,814
Total
 
Non-Accrual
$
14,01313,134
$
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,June 30, 2021:
 
 
(Dollars in thousands)
Gross Carrying
Accumulated
Net
Useful Life
Amount
Amortization
Value
(Dollars in thousands)
Vendor
 
relationships
11
years
$
7,290
$
1,8041,969
$
5,4865,321
Corporate trade name
7
years
60
3638
2422
 
Total
$
7,350
$
1,8402,007
$
5,5105,343
 
The Company’s intangible
 
assets consist of definite-lived intangible assets in connection with the January 2017 acquisition
 
acquisition of Horizon Keystone
Keystone Financial,
and definite-lived intangible assets in connection with the September
2018 acquisition of Fleet Financing Resources.
 
Resources. The
Company has
0
 
indefinite-lived intangible
assets.
 
 
There was
0
 
impairment of these assets in the first quarter of 2021.six-months ended June 30, 2021 or 2020.
 
Amortization related to the Company’s
definite lived intangible
assets was $
0.20.3
 
million and $
0.20.4
 
million for the three-monthsix-month periods ended March 31,June 30, 2021 and March 31,June 30, 2020,
respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-25-
-28-
 
The Company expects the amortization expense for the next five years
 
will be as follows:
Amortization
(Dollars in thousands)
Expense
Remainder of 2021
$
503336
2022
671
2023
671
2024
663
2025
663
 
 
NOTE 8 – Other Assets
 
Other assets are comprised of the following:
 
 
March 31,June 30,
December 31,
 
2021
2020
(Dollars in thousands)
Accrued fees receivable
$
2,6092,392
$
2,928
Prepaid expenses
2,8242,623
2,790
Income taxes receivable
(1)
10,545
0
Federal Reserve Bank Stock
1,711
1,711
Other
 
2,6321,998
2,783
$
9,77619,269
$
10,212
__________________
(1)
See Note 2 –
Summary of Significant Accounting Policies
, for discussion of the Provision for income taxes.
 
 
NOTE 9 – Deposits
 
MBB serves as the Company’s primary
 
funding source. MBB issues fixed-rate FDIC-insured certificates of deposit
 
raised nationally
through various brokered deposit relationships and fixed-rate FDIC-insured
 
deposits received from direct sources. MBB offers FDIC-
insured money market deposit accounts (the “MMDA Product”) through
 
participation in a partner bank’s
 
insured savings account
product. This brokered deposit product has a variable rate, no maturity date
 
and is offered to the clients of the partner bank and
recorded as a single deposit account at MBB. As of March 31,June 30, 2021, money
 
money market deposit accounts totaled $
52.552.9
 
million.
 
As of March 31,June 30, 2021, the scheduled maturities of certificates of deposits are as follows:
 
 
Scheduled
Dollars in thousands
Maturities
Period Ending December 31,
Remainder of 2021
$
212,240230,762
2022
210,075210,474
2023
117,717
2024
56,81456,813
2025
29,087
Total
$
625,933644,853
 
Certificates of deposits issued by MBB are time deposits and are generally issued
 
in denominations of $
250,000
 
or less. The MMDA
Product is also issued to customers in amounts less than $
250,000
. The FDIC insures deposits up to $
250,000
 
per depositor. The
weighted average all-in interest rate of deposits at March 31,June 30, 2021
was
1.601.32
%.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-29-
-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:
 
March 31,June 30,
December 31,
 
2021
2020
 
(Dollars in thousands)
Term securitization
 
2018-1
$
23,77417,295
$
30,800
Unamortized debt issuance costs
(104)(68)
(135)
$
23,67017,227
$
30,665
 
Long-term Borrowings
On July 27, 2018, the Company completed a $
201.7
 
million asset-backed term securitization. Each tranche of the term note
securitization has a fixed term, fixed interest rate and fixed principal amount.
 
At March 31,June 30, 2021,
 
outstanding term securitizations
amounted to $
23.817.3
 
million and are collateralized by $
24.918.1
 
million of minimum lease and loan payments receivable and $
4.43.8
 
million of
restricted interest-earning deposits. The Company’s
term note securitizations are classified as long-term borrowings.
The July 27, 2018 term note securitization is summarized below:
Outstanding Balance as of
Notes
Final
Original
 
March 31,June 30,
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
2,5340
9,560
10,400
May, 2023
3.54
 
Class C
11,3907,445
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
$
23,77417,295
$
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 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
3.994.13
% over the remaining term of the
borrowing.
 
 
 
 
-30-
Based on current expected cashflows of leases underlying our term
note securitization, principal and interest payments are estimated
as of June 30, 2021 as follows:
Principal
Interest
(Dollars in thousands)
Period Ending December 31,
Remainder of 2021
$
8,713
$
293
2022
8,582
$
159
$
17,295
$
452
 
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,June 30, 2021 and December 31, 2020,
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 $
49.749.8
 
million in unused, secured borrowing capacity at the Federal Reserve Discount
 
Window,
 
based on
$
55.255.3
 
million of net investment in leases pledged at March 31,June 30, 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--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.
 
 
Recurring Fair Value
Measurements
The Company’s balances measured
 
at fair value on a recurring basis include the following as of March 31,June 30, 2021 and
 
and December 31,
2020:
 
March 31,June 30, 2021
December 31, 2020
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
(Dollars in thousands)
Assets
ABS
$
0
$
5,1924,974
$
0
$
0
$
3,719
$
0
Municipal securities
0
3,4743,876
0
0
4,145
0
Mutual fund
3,7073,730
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 intangibleresidual assets for
impairment, and the Company’s
 
remeasurement of contingent consideration and assessment of the
 
carrying amount of its servicing
liability.
 
 
For the threesix months ended March 31,June 30, 2021,
there were no significant amounts recognized
in the Consolidated Statements of Operations
Operations in connection with non-recurring fair value measurements.
 
For the threesix months ended March 31,June 30, 2020, the Company recognized
$
6.7
 
million for the impairment of goodwill as discussed further in
in Note 7 -
Goodwill and Intangible Assets.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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-29--32-
 
March 31,June 30, 2021
December 31, 2020
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
110,622114,252
$
110,622114,252
$
135,691
$
135,691
Time deposits with banks
4,4823,486
4,5043,501
5,967
6,003
Restricted interest-earning deposits with banks
4,3583,799
4,3583,799
4,719
4,719
Loans, net of allowance
490,516500,366
507,612508,461
500,768
507,362
Federal Reserve Bank Stock
1,711
1,711
1,711
1,711
Financial Liabilities
 
Deposits
$
678,331697,805
$
687,928706,171
$
729,614
$
742,882
 
Long-term borrowings
23,67017,227
24,02517,485
30,665
31,114
 
There have been no significant changes in the methods and assumptions used
 
in estimating the fair values of financial instruments,
 
as
outlined in our consolidated financial statements and note disclosures in
 
the Company’s Form 10-K for the
 
year ended December 31,
2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-30-
-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 March 31,June 30,
Six Months Ended June 30,
2021
2020
2021
2020
(Dollars in thousands,
except per-share data)
Basic EPS
Net income (loss)
$
6,85110,256
$
(11,821)(5,882)
$
17,107
$
(17,703)
Less: net income allocated to participating securities
(85)(128)
0
(212)
0
 
Net income (loss) allocated to common stock
$
6,76610,128
$
(11,821)(5,882)
$
16,895
$
(17,703)
Weighted average
 
common shares outstanding
 
11,982,47612,014,487
12,014,39611,893,235
11,998,570
11,953,815
Less: Unvested restricted stock awards considered participating
securities
(148,061)(149,961)
(138,249)(132,756)
(149,016)
(135,502)
Adjusted weighted average common shares used in computing
basic EPS
11,834,41511,864,526
11,876,14711,760,479
11,849,554
11,818,313
Basic earnings (loss) per shareEPS
$
0.570.85
$
(1.00)(0.50)
$
1.43
$
(1.50)
Diluted EPS
Net income (loss) allocated to common stock
$
6,76610,128
$
(11,821)(5,882)
$
16,895
$
(17,703)
Adjusted weighted average common shares used in computing
basic EPS
11,834,41511,864,526
11,876,14711,760,479
11,849,554
11,818,313
Add: Effect of dilutive stock-based compensation
 
awards
151,519
0
 
34,803108,091
0
 
Adjusted weighted average common shares used in computing
diluted EPS
11,869,21812,016,045
11,876,14711,760,479
11,957,645
11,818,313
Diluted earnings (loss) per shareEPS
$
0.570.84
$
(1.00)(0.50)
$
1.41
$
(1.50)
 
For each of the three-month periods ended March 31,June 30, 2021 and MarchJune 30,
 
31, 2020,
 
weighted average outstanding stock basedstock-based compensation awards
in the
amount of
199,193113,237
 
and
359,035289,635
, respectively, were considered
antidilutive and therefore were not considered in the
computation of potential common shares for purposes of diluted EPS.
For the six-month periods ended June 30, 2021 and June 30, 2020,
weighted average outstanding stock-based compensation awards in
the amount of
169,673
and
297,057
, respectively, were considered
 
antidilutive and therefore were not considered in the computation of
of potential common shares for purposes of diluted EPS.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-31-
-34-
 
NOTE 13 – Stockholders’ Equity
 
Share Repurchases
During the three-month periodthree and six-month periods ended March 31,June 30, 2021, the Company
 
did
0
t purchase any shares of its common stock under a stockthe
stock repurchase plan approved by the Company’s
 
Board of Directors on August 1, 2019 (the “2019 Repurchase Plan”).
 
During the three-
monththree-month period ended March 31,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 in
under the open market under 2019
Repurchase Plan at an average cost of $
16.09
 
per share.
At March 31,June 30, 2021, the Company had $
4.7
 
million of remaining authorizations under the 2019 Repurchase Plan. Pursuant
 
Pursuant to the Merger
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 repurchase shares of common
stock (pursuant to the 201
9
2019 Repurchase Plan or otherwise) without
withoutthe prior written consent of Madeira Holdings, LLC. See Note 14
“Subsequent Events” for additional discussion regarding the
proposed merger transaction.
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”) and the Company’s 2019
 
2019 Equity Compensation Plan (approved by the Company’s
Company’s shareholders
on May 30, 2019) (as amended by the First Amendment approved by the Company’s
shareholders on June 2,
2021, the “2019 Plan”) may have shares withheld to cover income taxes.
 
taxes. During the three-month periods
 
ended March 31,
June 30, 2021 and March 31,
June 30, 2020, there were
16,038124
 
shares and
21,1231,897
 
shares repurchased to cover income tax withholding under the 2014
Equity Compensation Plan and the 2019 Equity Compensation
Plan
at an average cost of $
14.0120.04
 
per share and $
13.386.50
 
per share, respectively.
During the six-month periods ended June 30, 2021 and
June 30, 2020, there were
16,162
and
23,020
shares repurchased to cover income tax withholding in connection with shares granted
under the 2014 Plan and the 2019 Plan at average per-share
costs of $
14.05
and $
12.81
, respectively.
 
Regulatory Capital Requirements
 
Through its issuance of FDIC-insured deposits, MBB serves as the Company’s
 
primary funding source. Over time, MBB may offer
other products and services to the Company’s
 
customer base. MBB operates as a Utah state-chartered, Federal Reserve member
commercial
bank, insured by the FDIC. As a state-chartered Federal Reserve
member bank, MBB is
supervised by both the Federal
Reserve Bank of San Francisco and the Utah Department of Financial Institutions.
 
The Company and MBB are subject to capital adequacy regulations issued
 
jointly by the federal bank regulatory agencies. These risk-
based capital and leverage guidelines make regulatory capital requirements more
 
sensitive to differences in risk profiles among
banking organizations and consider off
 
-balance sheet exposures in determining capital adequacy.
 
The federal bank regulatory agencies
and/or the U.S. Congress may determine to increase capital requirements
 
in the future due
to the current economic environment.
Under the capital adequacy regulation, at least half of a banking organization’s
 
total capital is required to be "Tier 1 Capital" as
defined in the regulations, comprised of common equity,
 
retained earnings and a limited amount of non-cumulative perpetual
preferred stock. The remaining capital, "Tier
 
2 Capital," as defined in the regulations, may consist of other preferred stock, a limited
amount of term subordinated debt or a limited amount of the reserve for possible
 
credit losses. The regulations establish minimum
leverage ratios for banking organizations, which
 
are calculated by dividing Tier 1 Capital by total average
 
assets. Recognizing that the
risk-based capital standards principally address credit risk rather than
 
interest rate, liquidity, operational
 
or other risks, many banking
organizations are expected to maintain capital in excess
 
of the minimum standards.
 
The Company and MBB operate under the Basel III capital adequacy standards.
 
These standards require a minimum for Tier 1
leverage ratio of
4
%, minimum Tier 1 risk-based ratio of
6
%, and a total risk-based capital ratio of
8
%.
 
The Basel III capital adequacy
standards established a new common equity Tier
 
1 risk-based capital ratio with a required
4.5
% minimum (
6.5
% to be considered
well-capitalized). The Company is required to have a level of
 
regulatory capital in excess of the regulatory minimum and to have a
capital buffer above
2.5
%. If a banking organization does not maintain capital above the
 
minimum plus the capital conservation buffer
it may be subject to restrictions on dividends, share buybacks, and certain discretionary
 
payments such as bonus payments.
 
CMLA Agreement.
 
On March 25, 2020, MBB received notice from the FDIC that it had approved
 
MBB’s request to rescind certain
nonstandard conditions in the FDIC’s
 
order granting federal deposit insurance issued on March 20, 2007.
 
Furthermore, effective
March 26, 2020, the FDIC, the Company and certain of the Company’s
 
subsidiaries terminated the Capital Maintenance and Liquidity
Agreement (the “CMLA Agreement”) and the Parent Company
 
Agreement, each entered into by and among the Company,
 
certain of
-35-
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
8
% to be considered adequately capitalized and above
10
% in order to maintain “well-capitalized” statusbe considered well-capitalized 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
-32-
additional capital released by the termination of the CMLA Agreement is held
 
is held at MBB and is
subject to the restrictions outlined in Title
Title 12 part 208 of the Code of Federal Regulations
(12 (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
 
capital
would require prior approval of the
Federal Reserve Board of Governors.
As of March 31,June 30, 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,June 30, 2021 was $
152.9161.3
 
million, which met all capital requirements to which MBB is subject and
qualified MBB for “well-capitalized” status. At March 31,June 30, 2021, the Company
 
the Company also exceeded its regulatory capital requirements and was
was considered “well-capitalized” as defined by federal banking regulations
 
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
% 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.
 
 
-36-
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 MarchJune
 
31,30, 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%22.16%
$
206,512213,238
4.00%
$
39,94538,488
5.00%
$
49,93148,110
 
Marlin Business Bank
16.84%18.22%
$
152,855161,289
4.00%
$
36,31635,410
5.00%
$
45,39544,262
Common Equity Tier 1 Risk-Based Capital
 
Marlin Business Services Corp.
23.79%24.41%
$
206,512213,238
4.50%
$
39,06839,307
6.50%
$
56,43256,776
 
Marlin Business Bank
19.00%19.89%
$
152,855161,289
4.50%
$
36,20336,499
6.50%
$
52,29452,721
Tier 1 Risk-based Capital
 
Marlin Business Services Corp.
23.79%24.41%
$
206,512213,238
6.00%
$
52,09152,409
8.00%
$
69,45469,879
 
Marlin Business Bank
19.00%19.89%
$
152,855161,289
6.00%
$
48,27148,665
8.00%
$
64,36164,887
Total
 
Risk-based Capital
 
Marlin Business Services Corp.
25.08%25.69%
$
217,711224,377
8.00%
$
69,45469,879
10.00%
$
86,81887,348
 
Marlin Business Bank
20.29%21.16%
$
163,253171,649
8.00%
$
64,36164,887
10.00%
$
80,45281,109
-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 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
 
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;
 
-37-
•
 
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
20.2921.16
% at March 31,June 30, 2021 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 commensuratecommensur
 
ate with their overall risk profile. Such assessment process may
affect the ability of the organizations to
 
pay dividends. Although generally organizations may
 
pay dividends only out of current
operating earnings, dividends may be paid if the distribution is prudent
 
relative to the organization’s
 
financial position and risk profile,
after consideration of current and prospective economic conditions. As mentioned
 
above, MBB’s ability to pay dividends to the
Company is subject to various regulatory requirements, including
 
Title 12 part 208 of the Code of Federal Regulations (12 CFR
208.5), which places limitations on bank dividends. Furthermore,
 
as a bank holding company, the
 
Company’s ability to pay dividends
to its shareholders is also subject to various regulatory requirements, including
 
Supervisory Letter SR 09-4,
Applying Supervisory
Guidance and Regulations on the Payment of Dividends, Stock Redemptions
 
and Stock Repurchases at Bank Holding Companies
.Companies.
Pursuant to the Agreement and Plan of Merger dated as of April
18, 2021 by and amongAgreement, 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 proposed merger
transaction.
 
 
-34-
 
NOTE 14 – 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 AprilJuly 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
May 20,August 19, 2021
 
to shareholders of record on the close of
business on
May 10,August 9, 2021
. It represents the Company’s
thirty-ninthfortieth
 
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.
 
 
 
 
 
 
 
 
-35--38-
 
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
 
 
The following discussion and analysis of our financial condition
 
and results of operations should be read
 
in conjunction with our
Consolidated Financial Statements and the related
 
notes thereto in our Form 10-K for the year ended
 
December 31, 2020 filed with
the SEC.
 
This discussion contains certain statements of a forward-looking
 
nature that involve risks and uncertainties.
 
 
F
ORWARD
-L
OOKING
S
TATEMENTS
 
Certain statements in this document may include the words or phrases “can
 
be,” “expects,” “plans,” “may,”
 
“may affect,” “may
depend,” “believe,” “estimate,” “intend,” “could,” “should,” “would,”
 
“if” and similar words and phrases that constitute “forward-
looking statements” within the meaning of Section 27A of the Securities Act of
 
1933,
as amended (the “1933 Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Investors
 
are cautioned not to place undue reliance on these
forward-looking statements. Forward-looking statements are subject
 
to various
known and unknown risks and uncertainties and the
Company cautions that any forward-looking information provided
 
by or on its behalf is not a guarantee of future performance.
Statements regarding the following subjects are forward-looking
 
by their nature:
(a) our expectations related to ourthe proposed mergerMerger,
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”);with the De-banking; (b) our business strategy; (c) our
projected operating results; (d) our ability to obtain
external deposits or financing;
(e) our understanding of our competition; and (f)
(f) industry and market trends. The Company’s
 
actual
results could differ materially from those anticipated
 
by such forward-looking
statements due to a number of factors, some of which
are beyond the Company’s control,
 
control, including,
without limitation:
 
◾
 
our ability to complete our proposed merger with theHPS Merger
 
HPS Merger Sub, including to complete the De-banking within
the timeline
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 rates, the regulatory environment or the general economy resulting in changes
 
to our
business strategy;
◾
 
the degree and nature of our competition;
◾
 
availability and retention of qualified personnel;
◾
 
general volatility of the capital markets;
◾
 
the effects of the COVID-19 pandemic; and
◾
 
the factors set forth in the section captioned “Risk Factors” in Item 1 of our Form
 
10-K for the year ended December 31,
2020 and in Part II—Item 1A of this Form 10-Q.
 
Forward-looking statements apply only as of the date made and the Company
 
is not required to update forward-looking statements for
subsequent or unanticipated events or circumstances.
 
For any forward-looking statements contained in any document,
 
we claim the
protection of the safe harbor for forward-looking statements contained
 
in the Private Securities Litigation Reform Act of 1995. As
used herein, the terms “Company,”
 
“Marlin,” “Registrant,” “we,” “us” or “our” refer to Marlin Business Services
 
Corp. and its
subsidiaries.
 
 
O
VERVIEW
 
Founded in 1997, we are a nationwide provider of credit products and services
 
to small and mid-sized businesses. The products and
services we provide to our customers include loans and leases for the acquisition of
 
commercial equipment (including Commercial
Vehicle
 
Group (“CVG”) assets) and working capital loans. In May 2000, we established
 
AssuranceOne, Ltd., a Bermuda-based,
wholly-owned captive insurance subsidiary (“Assurance One”),
 
which enables us to reinsure the property insurance coverage for the
equipment financed by Marlin Leasing Corporation (“MLC”) and Marlin
 
Business Bank (“MBB”) for our small business customers.
In 2008, we opened MBB, a commercial bank chartered by the State of Utah
 
and a member of the Federal Reserve System. MBB
serves as the Company’s primary
 
funding source through its issuance of Federal Deposit Insurance Corporation
 
(“FDIC”)-insured
deposits.
 
In January 2017, we completed the acquisition of Horizon Keystone Financial, an equipment
 
leasing company which
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 , a 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
 
user customers primarily through origination sources consisting of independent
 
commercial equipment dealers,
various national account programs, through direct solicitation of our
 
end user customers and through relationships with select lease
and loan brokers. We
 
use both a telephonic direct sales model and, for strategic larger
 
accounts, outside sales executives to market to
-39-
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
 
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,
 
as well as, from time to time, fixed-rate asset backed
securitization transactions.
 
E
XECUTIVE
S
UMMARY
Proposed Acquisition by a Subsidiary of Funds Managed by HPS Investment
Partners, LLC.
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
 
to which all outstanding shares of the Company’s
 
common stock
stock will, subject to the terms and conditions of the Merger Agreement,
 
be cancelled and converted into the merger consideration specified
specified in the Merger Agreement in an all cash transaction pursuant to
 
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 remains
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.
We continue
 
to operate the business and are focused on taking necessary actions to ensure we meet
all closing conditions, including
completion of De-banking.
See “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies—"
We may
 
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,
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
Business Update
In 2020, we faced unprecedented operating challenges and macro
 
-economic uncertainty from the COVID-19 pandemic.
 
Our initial
focus from the beginning of the COVID-19 crisis in the first quarter of 2020
 
was working with existing customers to protect the value
of our portfolio and limiting the erosion of shareholder capital.
To this end, we initiated
a loan modification
program in response to
the pandemic that allowed for up to six months of deferred payments
.
Although the pace of modifications has slowed substantially
during the first quarter,
we continue offering extensions in select cases as part of our loss mitigation strategies.
See Note 6 –
Allowance for Credit Losses for information and data about our loan modifications
.
In addition, earlyEarly in response to the onset of the pandemic, we temporarily tightened
 
tightened underwriting standards for areas of elevated risk
and we
continue to update such risk assessments based on current
conditions.
 
As we seehave seen economic conditions improve ourand continued
excellent portfolio performance, 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-openingbegan to return some of our officesemployees back to the workplace in May 2021 based
upon business needs and employee interest.
We
currently intend to implement
a hybrid approach to our return to the office beginning in September
2021;
however, we will continually
re-evaluate our return to office approach as we monitor
the recent increase in COVID-19 cases across the country.
Our second quarter results of net income of $10.3 million, or $0.85
earnings per share,
were primarily driven by a large provision for
credit losses benefit due to continued positive portfolio performance
coupled with an improved economic forecast.
While our
origination volume grew 20% sequentially during the second quarter
 
of 2021, for select departments while offering our employees
it remained 52% below the same period in 2019 prior to
choice of returning to the office or continuing to work
remotely for the foreseeable future.
Our first quarter results of net income of $6.9 million, or $0.57 earnings
per share, are highlighted by solid credit quality,
improving
origination volume trends and strong earnings, and although our
first quarter origination volume remains well below pre-pandemic
levels, originations grew sequentially during each month of the quarter
.pandemic.
Portfolio trends Trends
and performance.Performance
During the three months ended March 31,June 30, 2021,
we generated 3,687
4,023 new Equipment Finance leases and loans with equipment costs of
$75.386.0 million, compared to 5,8633,178 new Equipment Finance leases and loans
 
with equipment costs of $127.7$64.6 million generated for the
three months ended March 31,June 30, 2020.
 
Working Capital loan
 
originations were $8.4$14.5 million during the three-month period ended March
June
31,30, 2021,
compared to $23.9$0.8 million for the three-month period ended
March 31, June 30, 2020.
Overall, our average net investment in total finance receivables for the
 
three-month period ended March 31,June 30, 2021 decreased 17.4%16.7% to
$833.5815.8 million, compared to $1,008.8$979.3 million for the three-month period
 
ended March 31, 2020.June 30, 2020,
 
which has caused a corresponding
reduction in interest and fee income.
Equipment Finance receivables delinquent over 30 days were 1.16%0.82
%
 
at March 31,June 30, 2021,
down 66308 basis points from 1.82%3.90% at MarchJune 30,
2020 and down 77 basis points from 1.59% at December 31, 2020. Working2020
 
.
Working Capital receivables
over 15 days delinquent were 1.47% at March 31, 2021,
down 108 basis points from 2.55% at
March 31, 2020. Annualized total net charge-offs
for the first quarter of 2021 were 1.67% of average total finance receivables as
compared to 3.11% for the same period in 2020
.0.36%
 
 
 
 
 
-37-
 
-40-
at June 30, 2021,
down 402 basis points from 4.38% at June 30, 2020 and down 464 basis point from
5.00% at December 31, 2020.
Annualized total net charge-offs for the
second quarter of 2021 were 0.60%
of average total finance receivables as compared to 3.47%
for the same period in 2020.
For the three-months ended March 31,June 30, 2021 we recognized a provision
 
benefit of $2.9$9.9 million as compared to a provision net expense of
of $25.2$18.8 million for the same period in 2020. The provision releasebenefit in the second
 
first quarter of 2021 was primarily due to positive changes
in the outlook of macroeconomic assumptions to which the reserve
 
is correlated as well as positive trends in portfolio performance.
Allowance for credit losses as a percentage of total finance
 
receivables was 4.65%3.47% at March 31,June 30, 2021 compared with 5.09% at MarchJune 30,
31, 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-38-
-41-
 
F
INANCE
R
ECEIVABLES
 
AND
A
SSET
Q
UALITY
 
 
The following table summarizes certain portfolio statistics for the periods
 
presented:
Three Months Ended
Year EndedJune 30,
March 31,
December 31,
June 30,
 
2021
2021
2020
2020
(Dollars in thousands)
Finance receivables:
End of period
(1)$
829,111
$
836,341
$
1,022,135869,284
(1)
$
825,056974,679
(1)
Average for the periodquarter
(1)
$815,761
833,474
$945,599
1,008,823979,313
Origination Volume
- three months
(5)
100,864
83,766
84,057
65,419
Origination Volume
- six months, through June. 30
184,630
—
—
222,810
Assets Sold - three months
—
—
—
1,127
Assets Sold - nine months, through June. 30
—
—
—
24,056
Leases and Loans Modified:
(3)
Payment deferral program
(2)
End of period
$
945,599
Origination Volume80,554
$
83,76693,847
111,209
133,817
As a % of end of period receivables
(1)
9.7%
11.2%
12.8%
13.7%
Other Restructured leases and loans, end of period
$
157,391600
$
367,128
Assets Sold822
$
—922
$
22,929
$
28,3421,751
Allowance for credit losses :
End of period
$
28,757
$
38,912
$
52,06044,228
$
44,22863,644
As a % of end of period receivables
(1)
3.47%
4.65%
5.09%
5.09%6.53%
Loans modified, in payment deferral:Annualized net charge-offs
End of period
to average total finance receivables
$
93,847
$
19,518
$
111,209
As a % of end of period receivables(quarter)
(1)
11.22%0.60%
1.91%1.67%
12.80%3.43%
3.47%
Delinquencies, end of period:
(2)(3)(4)
Equipment Finance and CVG:
Greater than 60 days past due, $
$
3,899
$
5,203
$
10,1566,717
$
6,71723,353
Greater than 60 days past due, %
0.37%
0.62%
1.05%0.77%
0.77%2.52%
Working
 
Capital:
 
Greater than 30 days past due, $
$
56
$
193
$
673741
$
7411,130
Greater than 30 days past due, %
1.05%0.23%
1.14%1.05%
3.69%
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%2.68%
__________________
(1)
For purposes
 
of asset
 
quality and
 
allowance calculations,
 
the effects
 
of (i)
 
the allowance
 
for credit
 
losses and
 
(ii) initial
 
direct costs
 
and fees
deferred are excluded.
 
(2)
Contracts that
 
are part
 
of our
 
Payment-deferral modification
 
program,
 
that allows
 
for either
 
full or
 
partial payment
 
deferral, will
 
appear in
 
our
Delinquency and Non-Accrual measures based on their performance against their modified terms.
 
(3)
No renegotiated
 
leases or
 
loans met
 
the definition
 
of a
 
Troubled Debt
 
Restructuring for
 
any period
 
presented,
 
including our
 
payment deferral
modifications,modifications.
(4)
Calculated as discussed further below.a percentage of net investment in leases and loans.
(5)
Amount of
originations for
the three
and six
months ended
June 30,
2020 presented
above exclude
$4.2 million,
of loans
originated under
the
Paycheck Protection Program (PPP).
In the third quarter
of 2020, the Company
sold the PPP portfolio
and has no continuing
involvement with
those receivables.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-39-
-42-
 
R
ESULTS
 
OF
O
PERATIONS
 
 
Comparison of the Three-Month Periods Ended MarchJune 30, 2021
 
31, 2021 and March 31,June 30, 2020
 
 
Net income.
 
Net income
of $6.9$10.3 million was reported for the three-month period ended June 30, 2021
 
ended March 31, 2021, ,
resulting in diluted EPS per share of $0.84,
$0.57,
compared to net loss of $11.8$5.9 million and diluted Lossloss per Shareshare of $0.50 for
 
of $1.00 for the three-month period ended March 31,June 30, 2020.
 
This $16.2
This $18.7 million increase in Net income was primarily driven by:
-
 
$28.128.7 million decrease in Provision for credit losses, driven primarily
 
by an improvement in economic conditions during the
past 12 months
;
 
 
-
 
$6.14.1 million decrease in net interest and fee income driven primarily
 
by a decline in the size of our finance receivable
portfolio;
 
-
 
$2.32.6 million decrease in gains on lease and loans soldinterest expense due to a decrease in assets sold resultingdecline
 
from disruptions in the capitaldeposit balance and rates, as well as continuing reduction of
markets during this current economic environment;long-term debt;
 
-
 
$3.5 million decrease in Salaries and benefits, and General and administrative
expenses
driven primarily by lower
Commissions, Incentives and the Company’s
cost reduction measures;
-
$6.7 million Goodwill impairment recorded in 2020;
-
$10.03.3 million increase in income tax expense.general and administrative, driven primarily
by expenses connected with the Merger Agreement.
 
Average balances
 
and net interest margin.
The following table summarizes the Company’s
 
average balances, interest income,
interest expense and average yields and rates on major categories of interest
 
-earning assets and interest-bearing liabilities for the three-
month periods ended March 31,June 30, 2021 and March 31,June 30, 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-40-
-43-
 
Three Months Ended March 31,June 30,
2021
2020
(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
$
115,15194,492
$
1712
0.060.05
%
$
100,582218,748
$
32731
1.300.06
%
Time Deposits
5,3254,209
1810
1.370.99
13,50712,248
6360
1.881.97
Restricted interest-earning deposits with banks
4,8704,506
—
—
8,0337,046
9—
0.440.01
Securities available for sale
11,23612,435
4846
1.701.46
10,77810,481
5852
2.141.98
Net investment in leases
(3)
784,787768,815
16,33915,682
8.338.16
904,548885,482
20,26919,236
8.968.69
Loans receivable
(3)
48,68746,946
1,8661,928
15.3316.43
104,27593,832
5,7394,868
22.0220.75
 
Total
 
interest-earning assets
970,056931,403
18,28817,678
7.547.59
1,141,7231,227,837
26,46524,248
9.277.90
Non-interest-earning assets:
Cash and due from banks
5,8196,834
5,4705,655
Allowance for loan and lease losses
(43,993)(39,975)
(29,325)(50,963)
Intangible assets
5,6205,453
7,392
Goodwill
—
6,6637,192
Operating lease right-of-use assets
7,5597,583
8,7768,530
Property and equipment, net
8,7388,853
8,0948,488
Property tax receivables
8,03310,776
8,8869,975
Other assets
(4)
27,74023,998
31,13634,303
 
Total
 
non-interest-earning assets
19,51623,522
47,09223,180
 
Total
 
assets
$
989,572954,925
$
1,188,8151,251,017
Interest-bearing liabilities:
Certificate of Deposits
(5)
$
648,030633,920
$
2,9332,533
1.811.60
%
814,178891,141
$
4,8564,741
2.392.13
%
Money Market Deposits
(5)
53,32053,037
3740
0.280.30
24,32252,765
8573
1.400.56
Long-term borrowings
(5)
27,31320,674
293246
4.294.76
69,75156,957
739614
4.244.30
 
Total
 
interest-bearing liabilities
728,663707,631
3,2632,819
1.791.59
908,2511,000,863
5,6805,428
2.512.17
Non-interest-bearing liabilities:
Sales and property taxes payable
7,2269,561
5,8907,075
Operating lease liabilities
8,5598,451
9,6449,403
Accounts payable and accrued expenses
24,7584,919
27,72617,587
Net deferred income tax liability
23,04323,551
29,46826,576
 
Total
 
non-interest-bearing liabilities
63,58646,482
72,72860,641
 
Total
 
liabilities
792,249754,113
980,9791,061,504
Stockholders’ equity
197,323200,812
207,836189,513
 
Total
 
liabilities and stockholders’ equity
$
989,572954,925
$
1,188,8151,251,017
Net interest income
$
15,02514,851
$
20,78518,820
Interest rate spread
(6)
5.755.99
%
6.765.73
%
Net interest margin
(7)
6.206.38
%
7.286.13
%
Ratio of average interest-earning assets to
 
average interest-bearing liabilities
133.13131.62
%
125.71122.68
%
__________________
(1)
Average balances were calculated using average daily balances.
 
(2)
Annualized.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-41-
(2)
Annualized.-44-
 
(3)
Average
 
balances of leases
 
and loans include
 
non-accrual leases and
 
loans, and are
 
presented net of
 
unearned income. The
 
average balances of
leases and loans do not include the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred.
 
 
(4)
Includes operating leases.
(5)
 
Includes effect of
 
transaction costs. Amortization of
 
transaction costs is on
 
a straight-line basis, resulting
 
in an increased average
 
rate whenever
average portfolio balances are at reduced levels.
(6)
Interest rate spread
 
represents the difference
 
between the average
 
yield on interest-earning
 
assets and the
 
average rate on
 
interest-bearing liabilities.
(7)
Net interest margin represents net interest income as an annualized percentage of average interest-earning assets.
 
 
 
 
Changes due to volume and rate.
 
The following table presents the components of the changes in net interest income
 
by volume and
rate.
 
Three Months Ended March 31,June 30, 2021 Compared To
Three Months Ended March 31,June 30, 2020
Increase (Decrease) Due To:
 
Volume
(1)
Rate
(1)
Total
(Dollars in thousands)
Interest income:
Interest-earning deposits with banks
$
41(16)
$
(351)(2)
$
(310)(18)
Time Deposits
(31)(28)
(14)(22)
(45)
Restricted interest-earning deposits with banks
(3)
(6)
(9)(50)
Securities available for sale
29
(12)(15)
(10)(6)
Net investment in leases
(2,560)(2,424)
(1,370)(1,132)
(3,930)(3,556)
Loans receivable
(2,468)(2,075)
(1,405)(865)
(3,873)(2,940)
 
Total
 
interest income
(3,648)(5,652)
(4,529)(918)
(8,177)(6,570)
Interest expense:
Certificate of Deposits
(881)(1,186)
(1,042)(1,022)
(1,923)(2,208)
Money Market Deposits
53—
(101)(34)
(48)(34)
Long-term borrowings
(455)(426)
959
(446)(367)
 
Total
 
interest expense
(992)(1,369)
(1,425)(1,240)
(2,417)(2,609)
Net interest income
(2,891)(4,697)
(2,869)736
(5,760)(3,961)
 
__________________
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-42--45-
 
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 MarchJune
 
31,30, 2021 and March 31,June 30, 2020.
 
Three Months Ended March 31,June 30,
 
2021
2020
(Dollars in thousands)
Interest income
 
$
18,28817,678
$
26,46524,248
Fee income
 
2,4552,313
2,7662,450
 
Interest and fee income
 
20,74319,991
29,23126,698
Interest expense
 
3,2632,819
5,6805,428
 
Net interest and fee income
 
$
17,48017,172
$
23,55121,270
Average total
 
finance receivables
(1)
$
833,474815,761
$
1,008,823979,313
Annualized percent of average total finance receivables:
Interest income
 
8.788.67
%
10.499.90
%
Fee income
 
1.181.13
1.101.00
 
Interest and fee income
 
9.969.80
11.5910.90
Interest expense
 
1.571.38
2.252.22
 
Net interest and fee margin
 
8.398.42
%
9.348.68
%
 
__________________
 
 
(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 $6.1$4.1 million, or 25.8%19.2%, to $17.5$17.2
 
million for the three months ended March 31,June 30, 2021 from $23.6$21.3
million for the three months ended March 31,June 30, 2020.
 
The annualized net interest and fee margin decreased 9526 basis points to 8.39%
 
8.42% in the
the three-month period ended March 31,June 30, 2021 from 9.34%8.68% for the corresponding period
 
corresponding period in 2020.
 
 
Interest income, net of amortized initial direct costs and fees, was $18.3$17.7
 
million and $26.5$24.2 million for the three-month periods ended
March 31,June 30, 2021 and March 31,June 30, 2020, respectively.
 
respectively. Average total finance
 
total finance receivables decreased $175.3$163.5 million, or 17.4%16.7%, to $833.5$815.8
million at March 31,June 30, 2021 from $1,008.8$979.3 million at March 31, 2020June 30, 2020. The decrease
 
.
The decrease in average total finance receivables was primarily
due to
lower origination volume along with the customary loan repayments and
 
and charge-offs. The average yield on the portfolio decreased
123
decreased 171 basis points to 8.78%8.67% from 10.49%9.90% in the priorsame quarter one year quarterago.
 
.Higher yielding working capital portfolio made up a smaller
percentage of the total portfolio during the second quarter of 2021
compared to the same period one year ago.
 
The weighted average
implicit interest rate on new
finance receivables originated decreased 299increased
92 basis points to 9.46%
10.08% for the three-month period ended March 31,June
30, 2021 compared to
12.45% 9.16% for the three-month period ended March 31, 2020.June 30, 2020
.
 
That decreaseincrease was primarily driven by a decrease shift in the mix
of 531 basis points for
originations as higher-yield Working
 
Capital originations comprised 14.4%
of our originations for the three-monththree months ended June 30,
2021, compared to 1.3% in 2020.
As the economy continues to recover from the impacts of the COVID-19 pandemic
the company is
looking to grow originations. During the second quarter of 2021,
the company originated $100.5 million of total originations
compared to $65.4 million in the same period ended March 31,one year ago.
Additionally, equipment
finance approval percentage in the second
quarter of 2021 was 49% which was up 12 basis points compared
 
to the corresponding period in 2020 as a
resultsecond quarter of declining interest rates during the economic disruption caused by
the COVID-19 pandemic.
2020.
 
Fee income was $2.5$2.3 million and $2.8$2.5 million for the three-month periods
 
ended March 31,June 30, 2021 and March 31,June 30, 2020,
 
respectively,
and
and included approximately $1.6$1.3 million and $2.1$1.8 million in late fee income
 
for the three-month periods ended March 31,June 30, 2021 and June 30,
March 31, 2020,
 
respectively. Late fees remained
 
remained the largest component of fee income at 0.63%0.62% as an annualized percentage
 
percentage of
average total
finance receivables for the three-month period ended June 30, 2021
 
March 31, 2021,,
 
compared to 0.86%0.72% for the three-month period ended June 30,
2020.
Fee income also included approximately $1.1 million and $0.7 million of
early buyout income for the three-month periods
ended March 31, 2020.June 30, 2021 and June 30, 2020, respectively.
 
Early buyout income is driven by customer behavior,
increased levels of this
activity and related income have been recorded during the course of
the pandemic.
-46-
 
Interest expense decreased $2.4$2.6 million to $3.3$2.8 million for the three-month
 
period ended March 31,June 30, 2021 from $5.7$5.4 million for
the
corresponding period in 2020,
primarily due to a decrease of $1.9 $2.2
million on lower deposit balancebalances
 
sand rates. Additionally, there
 
as well as was
a decrease of $0.4
$0.3 million due to the continuing reduction of long-term debt.debt
.
 
Interest expense, as an annualized percentage of average
total finance
receivables, decreased 6884 basis points to 1.57%1.38% for the three-month periodthree
 
-month period ended March 31,June 30, 2021,
 
from 2.25%2.22% for the corresponding
corresponding period in 2020.
 
The average balance of deposits was $701.3$687.0 million and $838.5$943.9 million for
the three-month periods
ended June 30, 2021 and June 30, 2020,
respectively.
For the three-month period ended June 30, 2021,
average term securitization borrowings outstanding were $20.7 million
at a weighted
average coupon of 4.76%. For the three-month period ended June 30, 2020
,
average term securitization borrowings outstanding were
$57.0 million at a weighted average coupon of 4.3%.
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, 2021,
brokered certificates of deposit represented approximately 62% of
total deposits, while approximately 31%
of total deposits were
obtained from direct channels, and 7% were in the brokered MMDA Product.
Gain on Sale of Leases and Loans.
There were no asset sales for the three-month period ended June 30, 2021
as we retained all of
our origination volume on our balance sheet. There were $1.1 million
of asset sales for the three-month period ended June 30, 2020
for a $0.1 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.
There can be no assurance that we can execute
sales based on our prior experience or on terms that are acceptable to us.
Insurance premiums written and earned.
Insurance premiums written declined to $1.9 million for the threethree-month period
 
-month ended June
30, 2021,
compared to $2.2 million for the three-month period ended June 30, 2020 as the overall
portfolio contracted.
Other income.
Other income was $1.6 million and $1.5 million for the three-month
periods ended March 31,
June 30, 2021 and March 31,June 30, 2020,
respectively.
 
respectively.
Salaries and benefits expense.
The following table summarizes the Company's Salary and benefits expense:
Three Months Ended June 30,
2021
2020
(Dollars in thousands)
Salary, benefits and payroll
taxes
$
6,202
$
6,868
Incentive compensation
1,919
806
Commissions
340
(6)
Total
$
8,461
$
7,668
Salaries and benefits expense.
Salaries and benefits expense increased $0.8 million, or 10.3%, to $8.5
million for the three-month
period ended June 30, 2021 from $7.7 million for the corresponding
period in 2020 primarily due to equity-based compensation which
was adjusted to lower target levels in the corresponding
period in 2020 and due to higher commission and bonus in the 2021 period
driven by increased origination volume.
-47-
General and administrative expense.
The following table summarizes General and administrative expense:
Three Months Ended June 30,
2021
2020
(Dollars in thousands)
Occupancy and depreciation
$
1,036
$
1,415
Professional fees
3,471
865
Information technology
1,226
995
Marketing
301
206
Other G&A
2,343
2,366
Total
$
8,377
$
5,847
General and administrative expense increased $2.5 million, or 43.3%,
to $8.3 million for the three months ended June 30, 2021 from
$5.8 million for the corresponding period in 2020 primarily due
to an increase in professional fees of $2.6 million connected with the
Merger Agreement.
General and administrative expense as an annualized percentage of average total
finance receivables was 4.11%
for the three-month period ended June 30, 2021,
compared to 2.39%
for the three-month period ended June 30, 2020.
Provision for income taxes.
Income tax expense of $3.5 million was recorded for the three-month period ended
June 30, 2021,
compared to a benefit of $1.4 million for the three-month period ended
June 30, 2020.
Our effective tax rate was 25.3%
for the three-
month period ended June 30, 2021,
as compared to an effective tax rate of 18.9% for the three-month period
ended June 30, 2020
which was driven by an interim reporting limitation on the amount of
tax benefits that can be recognized under Accounting Standards
Codification (“ASC”) 740,
Income Taxes
.
-48-
Comparison of the Six-Month Periods Ended June 30, 2021 and June
30, 2020
Net income/loss.
Net income of $17.1 million was reported for the six-month period
ended June 30, 2021,
resulting in diluted EPS of $1.41, compared
to net loss of $17.7 million and diluted loss per share of $1.50 for the six-month
period ended June 30, 2020.
This $34.8 million
increase in Net income was primarily driven by:
-
$56.8 million decrease in Provision for credit losses, primarily driven
primarily by an improvement in economic conditions
during the past 12 months
;
-
$15.2 million decrease in interest and fee income driven primarily by
a decline in the size of our finance receivable portfolio;
-
$5.0 million decrease in interest expense due to a decline in the deposit balance
and rates, as well as continuing reduction of
long-term debt;
-
$3.9 million decrease in gain on leases and loans sold;
-
6.9 million decrease in Non-interest expense due to the primarily due to the $6.7
million goodwill impairment that was
recorded in the first quarter of 2020;
-
$14.8 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
-earning assets and interest-bearing liabilities for the six-
month periods ended June 30, 2021 and June 30, 2020.
-49-
Six Months Ended June 30,
2021
2020
(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
$
104,821
$
29
0.06
%
$
159,665
$
358
0.45
%
Time Deposits
4,767
29
1.20
12,878
124
1.92
Restricted interest-earning deposits with banks
4,688
—
—
7,540
9
0.24
Securities available for sale
11,836
93
1.58
10,629
110
2.06
Net investment in leases
(3)
776,801
32,020
8.24
895,015
39,505
8.83
Loans receivable
(3)
47,816
3,794
15.87
99,053
10,607
21.42
Total
interest-earning assets
950,729
35,966
7.57
1,184,780
50,713
8.56
Non-interest-earning assets:
Cash and due from banks
6,327
5,563
Allowance for loan and lease losses
(41,984)
(40,144)
Intangible assets
5,537
7,292
Goodwill
—
3,332
Operating lease right-of-use assets
7,571
8,653
Property and equipment, net
8,796
8,291
Property tax receivables
9,404
9,430
Other assets
(4)
25,868
32,719
Total
non-interest-earning assets
21,519
35,136
Total
assets
$
972,248
$
1,219,916
Interest-bearing liabilities:
Certificate of Deposits
(5)
$
640,975
$
5,466
1.71
%
$
852,659
$
9,597
2.25
%
Money Market Deposits
(5)
53,179
77
0.29
38,544
158
0.82
Long-term borrowings
(5)
23,993
539
4.49
63,354
1,352
4.27
Total
interest-bearing liabilities
718,147
6,082
1.70
954,557
11,107
2.33
Non-interest-bearing liabilities:
Sales and property taxes payable
8,394
6,482
Operating lease liabilities
8,505
9,524
Accounts payable and accrued expenses
14,838
22,657
Net deferred income tax liability
23,297
28,022
Total
non-interest-bearing liabilities
55,034
66,685
Total
liabilities
773,181
1,021,242
Stockholders’ equity
199,067
198,674
Total
liabilities and stockholders’ equity
$
972,248
$
1,219,916
Net interest income
$
29,875
$
39,606
Interest rate spread
(6)
5.86
%
6.23
%
Net interest margin
(7)
6.28
%
6.69
%
Ratio of average interest-earning assets to
average interest-bearing liabilities
132.39
%
124.12
%
-50-
_________________
(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 Months Ended June 30, 2021 Compared To
Six Months Ended June 30, 2020
Increase (Decrease) Due To:
Volume
(1)
Rate
(1)
Total
(Dollars in thousands)
Interest income:
Interest-earning deposits with banks
$
(93)
$
(236)
$
(329)
Time Deposits
(60)
(35)
(95)
Restricted interest-earning deposits with banks
(2)
(7)
(9)
Securities available for sale
11
(28)
(17)
Net investment in leases
(4,983)
(2,501)
(7,484)
Loans receivable
(4,540)
(2,273)
(6,813)
Total
interest income
(9,280)
(5,467)
(14,747)
Interest expense:
Certificate of Deposits
(2,090)
(2,041)
(4,131)
Money Market Deposits
46
(127)
(81)
Long-term borrowings
(881)
67
(814)
Total
interest expense
(2,394)
(2,632)
(5,026)
Net interest income
(7,460)
(2,261)
(9,721)
__________________
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-43-
 
For
-51-
Net interest and fee margin.
The following table summarizes the three-month period ended March 31, 2021,Company’s
 
net interest and fee income as an annualized percentage
of average term securitization borrowings outstanding were $27.3 million at a
weighted average coupon of 4.29%. Fortotal finance receivables for the three-month periodsix-month periods 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-rateJune 30, 2021 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.
2020.
 
 
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:
ThreeSix Months Ended March 31,June 30,
 
2021
2020
(Dollars in thousands)
Property taxInterest income
$
5,60135,966
$
6,01250,713
Occupancy and depreciationFee income
1,0664,768
1,320
Professional fees
893
1,219
Information technology
1,053
986
Marketing
218
502
Other servicing expenses
320
274
Other G&A
2,095
3,2925,216
 
TotalInterest and fee income
40,734
55,929
Interest expense
6,082
11,108
Net interest and fee income
$
11,24634,652
$
13,60544,821
Average total
finance receivables
(1)
$
824,617
$
994,068
Percent of average total finance receivables:
Interest income
8.72
%
10.20
%
Fee income
1.16
1.05
Interest and fee income
9.88
11.25
Interest expense
1.48
2.23
Net interest and fee margin
8.40
%
9.02
%
 
General__________________
(1)
Total finance receivables include net investment in leases and administrative expenseloans.
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 $2.3$10.1 million, or 17.3%22.5%, to $34.7
million for the six-month period ended June 30, 2021 from
$44.8 million for the six-month period ended June 30, 2020. The annualized
net interest and fee margin decreased 62 basis points to
8.40% in the six-month period ended June 30, 2021 from 9.02% for the
corresponding period in 2020.
Interest income, net of amortized initial direct costs and fees, decreased
$14.7 million, or 29.0%,
 
to $11.2$36.0 million for the three monthssix-month
period ended March
31,June 30, 2021
from $13.6$50.7 million for the correspondingsix-month period
ended June 30, 2020.
The decrease in 2020interest income was
principally due to a decrease in average yield of 148 basis points and by a 17.1%
decrease in average total finance receivables, which
decreased $169.5 million to $824.6 million for the six-months ended
June 30, 2021 from $994.1 million for the six-months ended June
30, 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 weighted average implicit interest rate on new finance receivables originated
decreased 166
basis points
to 9.80% for the six-month period ended June 30, 2021,
compared to 11.46% for the six-month period ended
June 30,
2020.
That decrease was primarily driven by a shift in the mix of originations as a resulthigher-yield Working
Capital originations comprised
9% of our originations for the six months ended June 30, 2021,
 
cost reduction initiatives. Generalcompared to 13% in 2020.
During the first half of 2021, the company
originated $184.2 million of total originations compared to $217.0
million in the same period one year ago.
Of the $217 million total
originations in the first half of 2020, $157.4 million was attributed
to the first quarter (pre-pandemic) 2020 originations.
Additionally,
equipment finance approval percentage in the first half of 2021
was 47% which was up 5 basis points compared to the same period
one year ago.
Fee income was $4.8 million and administrative$5.2 for the six-month periods ended June
30, 2021 and June 30, 2020,
respectively,
and included
expense approximately $22.9 million and $3.9 million in late fee income for the
six-month periods ended June 30, 2021 and June 30, 2020,
respectively. Late
fees remained the largest component of fee income at 0.69
%
as an annualized percentage of average total finance
receivables
was 5.40% for the three-monthsix-month period ended March 31,
June 30, 2021,
 
compared to 5.39% 0.78%
for the three-monthsix-month period ended March 31, 2020June 30, 2020.
 
.Fee
income also included approximately $1.9 million and $1.3 million
of early buyout income for the six-month periods ended June 30,
2021 and June 30, 2020, respectively.
Early buyout income is driven by customer behavior,
increased levels of this activity and
related income have been recorded during the course of the pandemic.
 
 
-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-
-52-
Interest expense decreased $5.0 million to $6.1 million for the six-month
period ended June 30, 2021 from $11.1 for
the corresponding
period in 2020,
primarily due to a decrease of $4.1 million on lower deposit balances and rates, as well as a decrease
of $0.7 million
due to the continuing reduction of long-term debt.
Interest expense, as an annualized percentage of average total finance receivables,
decreased 75 basis points to 1.48% for the six-month period ended
June 30, 2021,
from 2.23% for the corresponding period in 2020.
The average balance of deposits was $694.2 million and $891.2 million
for the six-month periods ended June 30, 2021 and June 30,
2020,
respectively.
For the six-month period ended June 30, 2021,
average term securitization borrowings outstanding were $24.0 million
at a weighted
average coupon of 4.49%. 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%
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, 2021,
brokered certificates of deposit represented approximately 62% of
total deposits, while approximately 31%
of total deposits were
obtained from direct channels, and 7% were in the brokered MMDA Product.
Gain on Sale of Leases and Loans.
There were no asset sales for the six-month period ended June 30, 2021 as we
retained all of our
origination volume on our balance sheet. There were $24.1 million of
asset sales for the six-month period ended June 30, 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 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 to $3.9 million for the six-month period ended
June
30, 2021,
compared to $2.2 million for the six-month period ended June 30, 2020 as the
overall portfolio contracted.
Other income.
Other income was $8.1 million and $9.1 million for the six-month periods
ended June 30, 2021 and June 30, 2020,
respectively.
Salaries and benefits expense.
The following table summarizes the Company's Salary and benefits expense:
Six Months Ended June 30,
2021
2020
(Dollars in thousands)
Salary, benefits and payroll
taxes
$
12,590
$
14,423
Incentive compensation
3,668
1,711
Commissions
576
1,053
Total
$
16,834
$
17,187
Total salaries and benefits
expense remained relatively consistent at $16.8 million six-month period ended
June 30, 2021 compared to
$17.2 million for the corresponding period in 2020.
In 2020, in response to COVID-19, we reduced our workforce resulting in a lower
expense base.
Late 2020 and into 2021, the Company began expanding the workforce as the economy
recovered.
As of June 2021,
the headcount was 264 as compared to 276 as of June 2020.
Our salary, benefits and
payroll tax expense was $1.8 million lower for
the six-months ended June 30, 2021 than for the same period of 2020, primarily
driven by higher average headcount during the first
six months of 2020 and severance recorded associated with the workforce
reduction.
Incentive compensation increased $2.0 million, primarily due to equity
-based compensation which was adjusted to lower target levels
in the corresponding period in 2020 and lower bonus on COVID related impacts on
company performance. Commissions decreased
$0.5 million primarily driven by a 15% decrease in origination volume
over the 6 month-periods.
-53-
General and administrative expense.
The following table summarizes General and administrative expense:
Six Months Ended June 30,
2021
2020
(Dollars in thousands)
Property taxes
$
6,104
$
6,026
Occupancy and depreciation
2,102
2,735
Professional fees
4,364
2,084
Information technology
2,279
1,981
Marketing
519
708
FDIC Insurance
500
639
Other G&A
3,755
5,279
Total
$
19,623
$
19,452
General and administrative expense remained consistent at $19.6
million for the six-months ended June 30, 2021 from $19.5 million
from the same period in 2020. Professional fees increased by $2.3 million primarily
due to fees connected with the Merger
Agreement.
Goodwill impairment.
In the first quarter of 2020, driven by negative 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 expense of $6.0 million was recorded for the six-month period
ended June 30, 2021,
compared to an income tax benefit of $8.8 million for the six-month period
ended June 30, 2020.
For the six months ended June 30, 2021 our effective tax rate was 25.9%
and for the six months ended June 30, 2020, our effective tax
rate was 33.2%, 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.
-54-
 
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
 
facilitiesfacil
ities
 
(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
pitalcapital
 
markets
 
capabilities.
 
 
Deposits issued by MBB represent our primary funding source for new originations,
 
primarily through the issuance of FDIC insured
deposits.
 
We are currently
executing our De-banking process, after which time our primary sources of liquidity
will transition to
third-party bank and securitization financing as opposed to
FDIC-insured deposits.
We currently
expect that this transition will occur
during the fourth quarter of 2021.
 
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,April 29, 2021.
The quarterly dividend was paid on February 18,
May 20, 2021 to shareholders of
of record on the close of business on February 8,May 10, 2021,
which resulted in
a dividend payment of approximately $1.7 million. It represented
represented the Company’s thirtythirty-ninth
 
-eighth consecutive quarterly cash dividend.
 
 
At March 31,June 30, 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$114.3 million. This amount excludes
 
additional liquidity that
may be provided by the issuance of insured deposits through MBB.
 
Our debt to equity ratio was 3.483.39 to 1 at March 31,June 30, 2021 and 3.87 to 1 at December 31,
 
December 31, 2020.
 
Net cash provided by investing activities was $27.7$33.1 million for the
 
three-monthsix-month period ended March 31,June 30, 2021,
compared to net cash$32.6 million
used in investing activities of $5.2 million for the three-monthsix-month period ended
March 31, June 30, 2020.
 
The nominal 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
reduction of
$21.3 million in proceeds from sales of leases originated for investment
 
offset by the differences in purchases of equipment for
lease
contracts and $17.1 million in principal collections on leases and loans during the
 
six-month periods ended June 30, 2021 and loans.
The decrease in purchases of equipment was driven by lower origination2020.
 
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 in financing activities was $60.2$48.9 million for the three-monthsix-month period
 
period ended March 31,June 30, 2021,
 
compared to net cash provided
by financing activities of $82.5$29.7 million for the three-monthsix-month period
 
ended March 31,June 30, 2020.
The decrease in cash flows
from financing
activities is primarily due to a decrease of $154.1$94.9 million in the net changedeposits partially
 
deposits partially offset by a decrease of $7.0$11.9 million
of term
term securitization repayments.repayments and a decrease of $4.3 million in repurchases
of common stock. Financing activities also include
transactions
related to the Company’s
payment of
dividends.
 
 
Net cash provided byused in operating activities was $7.0$6.5 million for the three-monthsix-month period
 
period ended March 31,June 30, 2021,
compared to net cash
provided by
operating activities of $10.2$25.4 million for the three-monthsix-month period ended
 
ended March 31,June 30, 2020.
 
Adjustments to reconcile net
income or loss to net
cash provided by operating activities including goodwill impairment,
 
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
Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-46-
 
-55-
 
We expect cash
 
from operations, additional borrowings on existing and future
 
credit facilities and funds from deposits issued through
brokers, direct deposit sources,
 
and the MMDA Product to be adequate to support our operations and projected
 
growth for the next 12
months and the foreseeable future.
 
 
Total
 
Cash and Cash Equivalents.
Our objective is to maintain an adequate level of cash, investing any
 
free cash in leases and loans.
We primarily
 
fund our originations and growth using FDIC-insured deposits issued through
 
MBB. Total
cash and cash
equivalents
available as of March 31,June 30, 2021 totaled $110.6$114.3 million,
 
compared to $135.7 million at December 31, 2020.
 
 
Time Deposits with Banks.
 
Time deposits with banks are primarily
 
composed of FDIC-insured certificates of deposits that have
original maturity dates of greater than 90 days. Generally,
 
the certificates of deposits have the ability to redeem early,
 
however, early
redemption penalties may be incurred. Total
 
time deposits as of March 31,June 30, 2021 and December 31, 2020 totaled $4.5$3.5 million and $6.0
million, respectively.
 
Restricted Interest-Earning Deposits with Banks
. As of March 31,June 30, 2021 and December 31, 2020,
 
we had $4.4$3.8 million and $4.7 million,
million, respectively, of
 
of cash that was classified as restricted interest-earning deposits with banks
.banks.
 
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 eligible lease and loan receivables to secure amounts
advanced. Our secured borrowings amounted to $23.7$17.2 million at March 31,June 30,
 
2021 and $30.7 million$30.7million at December 31, 2020.
 
Information
Information pertaining to our borrowing facilities is as follows:
 
For the ThreeSix Months Ended March 31,June 30, 2021
As of March 31,June 30, 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)
—
28,279
27,31323,993
4.294.49
%
23,77417,295
3.994.13
%
—
$
25,000
$
28,279
$
27,31323,993
4.294.49
%
$
23,77417,295
3.994.13
%
$
25,000
__________________
(1)
 
Does
 
not
 
include
 
MBB’s
 
access
 
to
 
the
 
Federal
 
Reserve
 
Discount
 
Window,
 
which
 
is
 
based
 
on
 
the
 
amount
 
of
 
assets
 
MBB
 
chooses
 
to
 
pledge.
 
Based on assets pledged at March 31,June 30, 2021, MBB had $49.7$49.8 million in unused, secured borrowing capacity at the Federal Reserve Discount
Window.
 
Additional liquidity that may be provided by the issuance of insured deposits is also excluded from this table.
 
(2)
 
Does
 
not
 
include
 
transaction
 
costs.
 
 
(3)
 
Includes
 
transaction
 
costs.
 
 
(4)
 
Our
 
term
 
note
 
securitizations
 
are
 
one
-
time
 
fundings
 
that
 
pay
 
down
 
over
 
time
 
without
 
any
 
ability
 
for
 
us
 
to
 
draw
 
down
 
additional
 
amounts.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-47-
-56-
 
Federal Funds Line of Credit with Correspondent Bank
 
MBB has established a federal funds line of credit with a correspondent
 
bank. This line allows for both selling and purchasing of
federal funds. The amount that can be drawn against the line is limited to $25.0
 
million.
 
 
Federal Reserve Discount Window
 
 
In addition, MBB has received approval to borrow from the Federal Reserve
 
Discount Window based on the amount of assets MBB
chooses to pledge. MBB had $49.7$49.8 million in unused, secured borrowing
 
capacity at the Federal Reserve Discount Window,
 
based on
$55.255.3 million of net investment in leases pledged at March 31, 2021
.June 30, 2021.
 
Term Note
 
Securitizations
On July 27, 2018 we completed a $201.7 million asset-backed term securitization.
 
It provides the company with fixed-cost borrowing
with the objective of diversifying its funding sources and is recorded in long-term
 
borrowings in the Consolidated Balance Sheet.
 
In connection with this securitization transaction, we transferred
 
leases to our bankruptcy remote special purpose wholly-owned
subsidiary (“SPE”) and issued term debt collateralized by such commercial
 
leases to institutional investors in a private securities
offering. The SPE is considered variable interest entity (“VIE”)
 
under U.S. GAAP.
 
We continue
 
to service the assets of our VIE and
retain equity and/or residual interests. Accordingly,
 
assets and related debt of the VIE is included in the accompanying Consolidated
Balance Sheets.
 
At March 31,June 30, 2021 and December 31, 2020 outstanding term securitizations amounted
 
amounted to $23.8$17.3 million and $30.8
million, respectively and the Company was in compliance with terms of
 
the term note securitization agreement. See Note 10 – Debt
and Financing Arrangements in the accompanying Consolidated Financial
 
Statements for detailed information regarding of our term
note securitization
 
Bank Capital and Regulatory Oversight
 
 
We are subject
 
to regulation under the Bank Holding Company Act and we and all of our subsidiaries may
 
be subject to examination
by the Federal Reserve Board and the Federal Reserve Bank even if
 
not otherwise regulated by the Federal Reserve Board.
 
We and
MBB are also subject to comprehensive federal and state regulations dealing
 
with a wide variety of subjects, including minimum
capital standards, reserve requirements, terms on which a bank
 
may engage in transactions with its affiliates, restrictions as to dividenddivide
nd
payments and numerous other aspects of operations.
 
These regulations generally have been adopted to protect depositors and
creditors rather than shareholders.
 
 
At March 31,June 30, 2021,
 
Marlin Business Service Corp and MBB’s
 
Tier 1 leverage ratio, common equity Tier
 
1 risk-based ratio, Tier 1 risk-
risk-basedbased capital ratio and total risk-based capital ratios exceeded the requirements
 
requirements for well-capitalized status.
See “Management’s
 
Discussion and
 
Analysis of Financial
 
Condition and
 
Results of Operations
 
—Executive Summary”
 
for discussion
of updates to our capital requirements driven by the termination of the CMLA Agreement and
 
driven by our election to utilize the five-
year transition related
 
to the adoption of
 
the CECL accounting
 
standard.
 
In addition, see Note
 
13—Stockholders’ Equity
 
in the Notes
to Consolidated Financial Statements for additional information regarding
 
these ratios and our levels at March 31,June 30, 2021.
 
Information on Stock Repurchases
 
Information on Stock Repurchases is provided in “Part II. Other Information,
 
Item 2, Unregistered Sales of Equity Securities and Use
of Proceeds” herein.
 
Items Subsequent to March 31,June 30, 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 AprilJuly 29, 2021
.2021.
 
The quarterly dividend, which is expected to result in a dividend
dividend payment of approximately 1.7 million, is scheduled to be paid on August
 
on May 20,19, 2021 to shareholders of record on the close of business
on August 9, 2021.
It represents the Company’s fortieth 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.
 
 
 
 
 
 
 
-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.
-57-
 
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.
 
We engage
 
in transactions in the normal
course of business that expose us to market risks. We
 
attempt to mitigate such risks through prudent management practices and
strategies such as attempting to match the expected cash flows of our
 
assets and liabilities.
 
We are exposed
 
to market risks associated with changes in interest rates and our earnings may fluctuate
 
with changes in interest rates.
 
The lease and loan assets we originate are almost entirely fixed-rate. Accordingly,
 
we generally seek to finance these assets primarily
with fixed interest certificates of deposit issued by MBB, and to a lesser extent
 
through the variable rate MMDA Product at MBB.
 
 
C
RITICAL
A
CCOUNTING
P
OLICIES
 
 
There have been no significant changes to our Critical Accounting Policies as described
 
in our Form 10-K for the year ended
December 31, 2020.
 
R
ECENTLY
I
SSUED
A
CCOUNTING
S
TANDARDS
 
 
Information on recently issued accounting pronouncements
 
and the expected impact on our financial statements is provided in Note 2,
Summary of Significant Accounting Policies in the accompanying
 
Notes to Consolidated Financial Statements.
 
R
ECENTLY
A
DOPTED
A
CCOUNTING
S
TANDARDS
 
 
Information on recently adopted accounting pronouncements and the expected
 
impact on our financial statements is provided in Note
2, Summary of Significant Accounting Policies in the accompanying Notes
 
to Consolidated Financial Statements.
 
��
 
 
 
-49--58-
 
Item
 
3.
 
Quantitative
 
and
 
Qualitative
 
Disclos
uresDisclosures
 
About
 
Market
 
Risk
 
 
 
The information appearing in the section captioned “Management’s
 
Discussion and Analysis of Financial Condition and Results of
Operations – Market Interest Rate Risk and Sensitivity” under Item 2
 
of Part I of this Form 10-Q is incorporated herein by reference.
 
 
Item 4. Controls and Procedures
 
 
Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer
 
(“CEO”) and Chief Financial Officer (“CFO”), evaluated the
effectiveness of our disclosure controls and procedures
 
as of the end of the period covered by this report.
 
 
Based on that evaluation, the CEO and CFO concluded that our disclosure
 
controls and procedures as of the end of the period covered
by this report are designed and operating effectively
 
to provide reasonable assurance that the information required to be disclosed by
us in reports filed under the 1934 Act is (i) recorded, processed, summarized and
 
reported within the time periods specified in the
SEC's rules and forms and (ii) accumulated and communicated to our management,
 
including the CEO and CFO, as appropriate to
allow timely decisions regarding disclosure.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in the Company’s
 
internal control over financial reporting identified in connection with management’s
evaluation that occurred during the Company's firstsecond fiscal quarter of 2021
 
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
 
 
 
We are party
 
to various legal proceedings, which include claims and litigation arising
 
in the ordinary course of business.
 
In the
opinion of management, these actions will not have a material impact on our business,
 
financial condition,
 
results of operations or
cash flows.
 
 
 
Following the announcement on April 18, 2021 of the proposed Merger,
four complaints were filed against us and each member of our
Board of Directors, two of which were filed in the United States District Court for
the Southern District of New Yo
rk, one of which
was filed in the United States District Court for the Eastern District of New York
and one of which was filed in the United States
District Court for the District of New Jersey.
The complaints assert, among other things, claims under Section 14(a) and Section
20(a)
of the 1934 Act, and Rule 14a-9 promulgated thereunder,
for allegedly causing a materially incomplete and misleading preliminary
proxy statement to be filed with the SEC and disseminated to the Company’s
shareholders. Among other remedies, the complaints
seek to enjoin the defendants from proceeding with, consummating or
closing the Merger unless and until the allegedly materially
incomplete and misleading information is disclosed to Company
shareholders.
If these cases are not resolved, the lawsuit(s) could
prevent or delay completion of the Merger and result in
costs to the Company.
While the Company believes that the Complaints are
without merit, due to the inherent uncertainties of litigation, and because
these actions are at a preliminary stage, we cannot accurately
predict the ultimate outcome of these matters at this time.
See “Part I—Item 2. Management’s Discussion
and Analysis of Financial
Condition and Results of Operations—Executive Summary” in this Form
10-Q for more information regarding the proposed Merger.
-59-
Item
 
1A.
 
Risk
 
Factors
 
 
There have been no material changes in the risk factors disclosed in the Company’s
 
Form 10-K for the year ended December 31, 2020,
other than as discussed below.
We may fail
 
to consummate the proposed Merger,
 
and uncertainties related to the consummation of the Merger 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.
-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 combinationcombinati
 
on transaction, we will be required to pay a termination fee of approximately
$10.3 million.
There is no assurance that the mergerMerger 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
 
we operate our business in the ordinary course pending consummation of the
the proposed Merger and restricts us, without Madeira Holdings, LLC’s
 
LLC’s consent, from taking certain
specified actions until the Merger
Merger is completed. These restrictions may affect our ability
 
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
regulatory approval processes, may place a significant burden on management
 
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
encountered in the Merger process could negatively
impact our business and results of operations.
●Merger
 
process
could
negative
ly
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
 
with the proposed Merger, and many
 
many of these fees and costs
are
payable
regardless
 
of
 
whether
 
or
 
not
 
the
 
proposed
 
Merger
 
is
 
consummated.
 
 
●
•
 
The 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
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 cash flows.
-60-
 
Item
 
2.
 
Unregistered
 
Sales
 
of
 
Equity
 
Securities
 
and
 
Use
 
of
 
Proceeds
 
 
Information on Stock Repurchases
 
On August 1, 2019, the Company’s
 
Board of Directors approved a stock repurchase plan (the “2019 Repurchase Plan”) under
 
which
the Company is authorized to repurchase up to $10 million in value of its outstanding
 
shares of common stock. This authority may be
exercised from time to time and in such amounts as market conditions warrant.
 
Any shares purchased under this plan are returned to
the status of authorized but unissued shares of common stock. The repurchases
 
may be made on the open market, in block trades or
otherwise. The stock repurchase program does not obligate the Company
 
to acquire any particular amount of common stock, and it
may be suspended at any time at the Company's discretion. The repurchases
 
are funded using the Company’s
 
working capital.
 
 
The Company did not repurchase any of its common stock during the three
 
months ended March 31,June 30, 2021.
 
As of March 31,June 30, 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 and the 2019 Equity
Compensation Plan, participants may have
shares withheld to
cover income taxes. ThereDuring the three-month
period ended June 30, 2021,
there were 16,038124 shares
repurchased to cover income
tax withholding in connection with the shares granted
under the 2014 Equity Compensation Plan and the 2019 Equity Compensation
Plan during the three-month period ended March 31, 2021,
at an average cost of $14.01$20.04 per share.
 
Item
 
3.
 
Defaults
 
Upon
 
Senior
 
Securities
 
 
 
None.
 
Item
 
4.
 
Mine
 
Safety
 
Disclosures
 
None.
 
Item
 
5.
 
Other
 
Information
 
 
 
None
 
 
 
 
-52-
-61-
 
 
Item
 
6.
 
 
Exhibits
 
 
 
Exhibit
 
Number
 
Description
 
2.1
 
 
(1)
 
3.1
 
(2)
3.2
 
(3)
3.3
 
(4)
10.1
(Filed herewith)
31.1
 
 
 
(Filed herewith)
 
31.2
 
 
 
(Filed herewith)
32.1
 
 
 
 
 
 
(Furnished herewith)
 
101
 
Financial
 
statements
 
from
 
the
 
Quarterly
 
Report
 
on
 
Form
 
10
-
Q
 
of
 
Marlin
 
Business
 
Services
 
Corp.
 
for
 
the
 
period
 
ended
 
March 31,June
30, 2021,
 
formatted in XBRL: (i) the
Consolidated Balance Sheets, (ii) the
Consolidated Statements of Operations,
(iii) the
Consolidated
 
Statements
of
 
Comprehensive
Income,
 
(iv) the
 
Consolidated Statements
of Stockholders’
Equity,
(v) the
 
Consolidated
 
Statements
 
of
 
Stockholders’
Equity,
(v) the
Consolidated Statements
of Cash
 
Flows
and
 
(vi) the
Notes
 
to
Unaudited
 
Consolidated
Financial
 
Statements. (Submitted
(Submitted electronically with this report)
 
 
 
__________________
(1)
 
Previo
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.
(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
reference herein.
 
 
 
 
 
 
 
 
 
-53--62-
 
SIGNATURES
 
Pursuant to the requirements of
 
the Securities Exchange Act of
 
1934, the Registrant has duly
 
caused this report to be
 
signed on its behalf
by the undersigned thereunto duly authorized.
 
 
MARLIN BUSINESS SERVICES CORP.
 
(Registrant)
 
By:
 
/s/ Jeff Hilzinger
 
 
Chief Executive Officer
 
 
 
Jeff
 
Hilzinger
 
(Principal Executive Officer)
 
 
 
 
 
 
 
By:
 
/s/ Michael R. Bogansky
 
Michael R. Bogansky
 
Chief Financial Officer & Senior Vice
 
 
 
President
 
 
 
 
 
(Principal
 
Financial
 
Officer)
 
 
 
 
Date:
 
AprilJuly 30, 2021