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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
September 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 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
.
☐
 
Indicate by check mark whether the registrant is a shell company (as defined
 
in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes
☐
No
☒
At October 22, 2021,
12,026,394
 
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 September 30, 2021
TABLE OF CONTENTS
 
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-3-
PART
 
I. Financial Information
Item 1.
 
Consolidated Financial Statements
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
 
September 30,
December 31,
 
2021
2020
(Dollars in thousands, except per-
share data)
ASSETS
Cash and due from banks
$
4,914
$
5,473
Interest-earning deposits with banks
 
217,346
130,218
 
Total cash and cash equivalents
222,260
135,691
Time deposits with banks
996
5,967
Restricted interest-earning deposits related to consolidated VIEs
3,202
4,719
Investment securities (amortized cost of
 
$11.5 million at December 31, 2020)
—
11,624
Net investment in leases and loans:
 
Leases
295,514
337,159
 
Loans
525,239
532,125
Net investment in leases and loans, excluding allowance for credit losses (includes $
12.1
 
million and
$
30.4
 
million at September 30, 2021 and December 31, 2020, respectively, related to consolidated
VIEs)
820,753
869,284
Allowance for credit losses
(27,521)
(44,228)
 
Total net investment in leases and loans
793,232
825,056
Intangible assets
5,175
5,678
Operating lease right-of-use assets
7,268
7,623
Property and equipment, net
9,359
8,574
Property tax receivables, net of allowance
9,260
6,854
Other assets
16,560
10,212
 
Total assets
$
1,067,312
$
1,021,998
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
$
783,203
$
729,614
Long-term borrowings related to consolidated VIEs
11,676
30,665
Operating lease liabilities
8,134
8,700
Other liabilities:
 
Sales and property taxes payable
6,203
6,316
 
Accounts payable and accrued expenses
19,086
27,734
 
Net deferred income tax liability
23,728
22,604
 
Total liabilities
852,030
825,633
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $
0.01
 
par value;
5,000,000
 
shares authorized; none issued
—
—
Common Stock, $
0.01
 
par value;
75,000,000
 
shares authorized;
12,026,429
 
and
11,974,530
 
shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
120
120
 
Additional paid-in capital
77,903
76,323
 
Accumulated other comprehensive income
—
69
 
Retained earnings
137,259
119,853
 
Total stockholders’ equity
215,282
196,365
 
Total liabilities and stockholders’ equity
$
1,067,312
$
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 September 30,
Nine Months Ended September 30,
 
2021
2020
2021
2020
(Dollars in thousands, except per-share data)
Interest income
$
17,656
$
22,398
$
53,622
$
73,111
Fee income
2,027
2,803
6,795
8,019
Interest and fee income
19,683
25,201
60,417
81,130
Interest expense
2,594
4,694
8,676
15,802
Net interest and fee income
17,089
20,507
51,741
65,328
Provision for credit losses
(1,183)
7,204
(14,010)
51,160
Net interest and fee income after provision for credit losses
18,272
13,303
65,751
14,168
Non-interest income:
 
Gain on leases and loans sold
—
87
—
2,426
 
Insurance premiums written and earned
1,906
2,082
5,847
6,612
 
Other income
 
1,700
2,044
9,828
11,172
 
Non-interest income
 
3,606
4,213
15,675
20,210
Non-interest expense:
 
Salaries and benefits
8,162
8,515
24,996
25,702
 
General and administrative
6,200
4,717
25,823
24,169
 
Goodwill impairment
—
—
—
6,735
 
Intangible assets impairment
—
1,016
—
1,016
 
Non-interest expense
14,362
14,248
50,819
57,622
 
Income (loss) before income taxes
7,516
3,268
30,607
(23,244)
Income tax expense (benefit)
2,035
525
8,019
(8,284)
 
Net income (loss)
$
5,481
$
2,743
$
22,588
$
(14,960)
Basic earnings (loss) per share
$
0.46
$
0.23
$
1.88
$
(1.27)
Diluted earnings (loss) per share
$
0.45
$
0.23
$
1.86
$
(1.27)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the unaudited consolidated
 
financial statements.
-5-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(Dollars in thousands)
Net income (loss)
$
5,481
$
2,743
$
22,588
$
(14,960)
Other comprehensive income:
(Decrease) increase in fair value of debt securities available
for sale
(247)
10
(116)
47
 
Tax effect
82
(3)
47
(12)
Total other comprehensive
 
(loss) income
(165)
7
(69)
35
 
Comprehensive income (loss)
$
5,316
$
2,750
$
22,519
$
(14,925)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2020
11,974,530
$
120
$
76,323
$
69
$
119,853
$
196,365
 
Repurchase of common stock
(16,038)
—
(224)
—
—
(224)
 
Stock issued in connection with restricted
 
stock and RSUs, net of forfeitures
50,831
—
—
—
—
—
 
Stock-based compensation recognized
—
—
583
—
—
583
 
Net change in unrealized gain/loss on
 
 
securities available for sale, net of tax
—
—
—
(184)
—
(184)
 
Net income
—
—
—
—
6,851
6,851
Cash dividends paid ($
0.14
 
per share)
—
—
—
—
(1,689)
(1,689)
Balance, March 31, 2021
12,009,323
120
76,682
(115)
125,015
201,702
 
Repurchase of common stock
(124)
—
(3)
—
—
(3)
 
Stock issued in connection with restricted
 
stock and RSUs, net of forfeitures
17,274
—
—
—
—
—
 
Stock-based compensation recognized
—
—
600
—
—
600
 
Net change in unrealized gain/loss on
 
 
securities available for sale, net of tax
—
—
—
280
—
280
 
Net income
—
—
—
—
10,256
10,256
Cash dividends paid ($
0.14
 
per share)
—
—
—
—
(1,756)
(1,756)
Balance, June 30, 2021
12,026,473
$
120
$
77,279
$
165
$
133,515
$
211,079
 
Repurchase of common stock
6
—
(1)
—
—
(1)
 
Stock issued in connection with restricted
 
stock and RSUs, net of forfeitures
(50)
—
—
—
—
—
 
Stock-based compensation recognized
—
—
625
—
—
625
 
Net change in unrealized gain/loss on
 
 
securities available for sale, net of tax
—
—
—
(165)
—
(165)
 
Net income
—
—
—
—
5,481
5,481
Cash dividends paid ($
0.14
 
per share)
—
—
—
—
(1,737)
(1,737)
Balance, September 30, 2021
12,026,429
$
120
$
77,903
$
—
$
137,259
$
215,282
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the unaudited consolidated
 
financial statements.
-7-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
Accumulated
 
Common
Additional
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)
—
—
(4,538)
 
Stock issued in connection with restricted
 
stock and RSUs, net of forfeitures
56,481
1
(1)
—
—
—
 
Stock-based compensation recognized
—
—
518
—
—
518
 
Net change in unrealized gain/loss on
 
 
securities available for sale, net of tax
—
—
—
(38)
—
(38)
 
Net loss
—
—
—
—
(11,821)
(11,821)
 
Impact of adoption of new accounting
 
standards
(1)
—
—
—
—
(8,877)
(8,877)
Cash dividends paid ($
0.14
 
per share)
—
—
—
—
(1,710)
(1,710)
Balance, March 31, 2020
11,884,473
119
75,647
20
112,704
188,490
 
Issuance of common stock
14,891
—
120
—
—
120
 
Repurchase of common stock
(1,897)
—
(12)
—
—
(12)
 
Stock issued in connection with restricted
 
stock and RSUs, net of forfeitures
44,780
—
—
—
—
—
 
Stock-based compensation recognized
—
—
(149)
—
—
(149)
 
Net change in unrealized gain/loss on
 
 
securities available for sale, net of tax
—
—
—
66
—
66
 
Net loss
—
—
—
—
(5,882)
(5,882)
Cash dividends paid ($
0.14
 
per share)
—
—
—
—
(1,629)
(1,629)
Balance, June 30, 2020
11,942,247
$
119
$
75,606
$
86
$
105,193
$
181,004
 
Repurchase of common stock
(18,446)
—
(149)
—
—
(149)
 
Stock issued in connection with restricted
 
stock and RSUs, net of forfeitures
50,850
1
(1)
—
—
—
 
Stock-based compensation recognized
—
—
437
—
—
437
 
Net change in unrealized gain/loss on
 
 
securities available for sale, net of tax
—
—
—
7
—
7
 
Net income
—
—
—
—
2,743
2,743
Cash dividends paid ($
0.14
 
per share)
—
—
—
—
(1,692)
(1,692)
Balance, September 30, 2020
11,974,651
$
120
$
75,893
$
93
$
106,244
$
182,350
(1)
 
Represents the impact of Accounting Standards Update ("ASU")
 
2016-13 and related ASUs collectively referred to as "CECL".
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the unaudited consolidated
 
financial statements.
-8-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
2021
2020
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)
$
22,588
$
(14,960)
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
Depreciation and amortization
2,848
2,996
 
Stock-based compensation
1,808
806
 
Impairment of goodwill and intangible assets
—
7,751
 
Change in fair value of equity securities
(20)
(89)
 
Provision for credit losses
(14,010)
51,160
 
Change in net deferred income tax liability
1,107
(7,777)
 
Amortization of deferred initial direct costs and fees
7,770
9,244
 
Loss on equipment disposed
—
116
 
Gain on leases sold
—
(2,426)
 
Leases originated for sale
—
(4,882)
 
Proceeds from sale of leases originated for sale
—
5,123
 
Noncash lease expense
683
1,365
 
Adjustment to value of contingent consideration
—
(1,435)
 
Effect of changes in other operating items:
 
Other assets
(9,153)
(1,642)
 
Other liabilities
(10,183)
(311)
 
Net cash provided by operating activities
3,438
45,039
Cash flows from investing activities:
 
Net change in time deposits with banks
4,971
4,471
 
Purchases of equipment for lease contracts and funds used to originate
 
loans
(289,391)
(298,244)
 
Principal collections on leases and loans
325,824
356,133
 
Proceeds from sale of leases originated for investment
—
25,663
 
Security deposits collected, net of refunds
18
(176)
 
Proceeds from the sale of equipment
2,148
1,567
 
Acquisitions of property and equipment
(2,616)
(2,266)
 
Principal payments received on securities available for sale
11,567
432
 
Net cash provided by investing activities
 
52,521
87,580
Cash flows from financing activities:
 
Net change in deposits
53,589
(15,425)
 
Term securitization repayments
(19,080)
(36,538)
 
Business combinations earn-out consideration payments
(3)
(180)
 
Issuances of common stock
 
—
120
 
Repurchases of common stock
(228)
(4,699)
 
Dividends paid
(5,185)
(5,021)
 
Net cash provided (used in) by financing activities
29,093
(61,743)
Net (decrease) increase in total cash, cash equivalents and restricted cash
85,052
70,876
Total cash, cash equivalents
 
and restricted cash, beginning of period
 
140,410
130,027
Total cash, cash equivalents
 
and restricted cash, end of period
$
225,462
$
200,903
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the unaudited consolidated
 
financial statements.
-9-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended September 30,
 
2021
2020
(Dollars in thousands)
Supplemental disclosures of cash flow information:
 
Cash paid for interest on deposits and borrowings
$
8,491
$
17,308
 
Net cash (received) paid for income taxes
22,591
(5,005)
 
Leases and loans transferred into held for sale from investment
—
23,460
Supplemental disclosures of non cash investing activities:
 
Purchase of equipment for lease contracts and loans originated
$
3,191
$
2,253
Reconciliation of Cash, cash equivalents and restricted cash to
 
the Consolidated Balance Sheets:
Cash and cash equivalents
$
222,260
$
195,132
Restricted interest-earning deposits
3,202
5,771
Cash, cash equivalents and restricted cash at end of period
$
225,462
$
200,903
 
 
 
 
 
 
 
 
-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
 
the maintenance and expansion of our reinsurance activities conducted 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”).
 
On August 4, 2021, our shareholders
approved the adoption of the Merger Agreement.
 
The Merger remains subject to, in addition to various other customary closing
conditions,
 
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. Marlin Leasing Corporation (“MLC”) and MBB are managed
 
together as a single business segment and
are aggregated for financial reporting purposes as they exhibit similar economic
 
characteristics, share the same leasing and loan
portfolio and have a single consolidated product offering
 
platform. All intercompany accounts and transactions have been eliminated
in consolidation.
The accompanying unaudited consolidated financial statements present
 
the Company’s financial position
 
at September 30, 2021 and
the results of operations for the three-
 
and nine -month periods ended September 30, 2021 and 2020, and cash flows for
 
the nine-
month periods ended September 30, 2021 and 2020.
 
In management’s opinion, the unaudited
 
consolidated financial statements
contain all adjustments, which include normal and recurring adjustments,
 
necessary for a fair presentation of the financial position and
results of operations for the interim periods presented.
 
These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and note disclosures
 
included in the Company’s Form 10-K
 
for the year ended
December 31, 2020, filed with the Securities and Exchange Commission (“SEC”)
 
on March 5, 2021. 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 taxes,
 
was
25.1
% and
25.4
% for the three months ended
September 30, 2021 and September 30, 2020, respectively.
For the nine months ended September 30, 2021, our effective
 
tax rate was
26.2
%. For the nine months ended September 30, 2020, our
effective tax rate was
35.6
%, driven by a $
3.2
 
million discrete benefit, resulting from certain provisions in the Coronavirus Aid,
Relief, and Economic Security Act (“CARES Act”) that allow for
 
a remeasurement of our federal net operating losses.
For the three and nine-month periods ended September 30, 2021,
 
our effective tax rates were
27.1
% and
26.2
%, respectively.
 
The Company’s IRS federal audit
 
for tax years ending December 31, 2013 to 2018 resulting from Joint Committee
 
Review as part of
an IRS refund 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 as of September 30, 2021 under regular statute
 
of limitations.
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
 
the Accounting for
Income Taxes, which
 
removes certain exceptions to the general principles of ASC 740 in order to reduce
 
the cost and complexity of
its application.
 
The amendments also clarify and amend existing guidance to improve
 
consistent application. The ASU is effective for
fiscal years beginning after December 15, 2020, including interim periods
 
within those annual periods.
 
We adopted
 
ASU 2019-12 on
January 1, 2021, and the adoption did not have a material impact on our
 
consolidated financial position or results of operations.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-12-
NOTE 3 – Non-Interest Income
The following table summarizes non-interest income for the periods
 
presented:
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
(Dollars in thousands)
2021
2020
2021
2020
Insurance premiums written and earned
$
1,906
$
2,082
$
5,847
$
6,612
Gain on sale of leases and loans
—
87
—
2,426
Other income:
 
Property tax income
149
123
5,190
5,247
Servicing income
270
462
963
1,517
Net (loss) gain recognized during the period on investment securities
(3)
—
(59)
89
Non-interest income - other than from contracts with customers
2,322
2,754
11,941
15,891
Other income:
Insurance policy fees
749
819
2,268
2,610
Property tax administrative fees on leases
213
243
622
713
ACH payment fees
62
35
184
143
Referral fees
26
15
57
123
Other
234
347
603
730
Non-interest income from contracts with customers
1,284
1,459
3,734
4,319
Total non-interest
 
income
$
3,606
$
4,213
$
15,675
$
20,210
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-13-
NOTE 4 - Investment Securities
 
In accordance with the Merger Agreement and De-banking
 
process discussed in Note 1, the Company sold all its investment securities
in the third quarter of 2021 and recognized an immaterial gain on
 
the sale of those securities:
The Company had the following investment securities as of the dates presented:
September 30,
December 31,
(Dollars in thousands)
2021
2020
Equity Securities
Mutual fund
$
—
$
3,760
Debt Securities, Available
 
for Sale:
Asset-backed securities ("ABS")
—
3,719
Municipal securities
 
—
 
4,145
 
Total investment securities
$
—
$
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 September 30,
Nine Months Ended September 30,
(Dollars in thousands)
2021
2020
2021
2020
Net gains (losses) recognized during the period on equity securities
 
$
75
$
—
$
20
$
89
Less: Net gains (losses) recognized during the period
 
on equity securities sold during the period
75
—
20
—
Unrealized gains recognized during the reporting period
 
on equity securities still held at the reporting date
$
—
$
—
$
—
$
89
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-14-
Available for
 
Sale
There are no available for sale investments as of September 30, 2021
 
due to the liquidation of all the Company’s
 
available for sale
investments in the third quarter of 2021 resulting in immaterial gains in the
 
three and nine month periods ending September 30, 2021.
The following schedules
 
are a summary of available for sale investments as of December 31, 2020, and
 
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 December 31, 2020
:
 
Gross
 
Gross
Amortized
Unrealized
 
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
3,666
$
53
$
—
$
3,719
Municipal securities
4,082
64
(1)
4,145
 
Total Debt Securities, Available
 
for Sale
$
7,748
$
117
$
(1)
$
7,864
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
$
—
$
—
$
(1)
$
141
Total available for sale investment
securities
$
(1)
$
141
$
—
$
—
$
(1)
$
141
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-15-
NOTE 5 – Net Investment in Leases and Loans
 
Net investment in leases and loans consists of the following:
 
 
September 30, 2021
December 31, 2020
(Dollars in thousands)
Minimum lease payments receivable
$
308,479
$
354,298
Estimated residual value of equipment
24,999
26,983
Unearned lease income, net of initial direct costs and fees deferred
(37,560)
(43,737)
Security deposits
(404)
(385)
Total leases
295,514
337,159
Commercial loans, net of origination costs and fees deferred
Working
 
Capital Loans
31,178
20,034
CRA
(1)
1,019
1,091
Equipment loans
(2)
414,392
449,149
CVG
78,650
61,851
Total commercial
 
loans
525,239
532,125
Net investment in leases and loans, excluding allowance
820,753
869,284
Allowance for credit losses
(27,521)
(44,228)
Total net investment
 
in leases and loans
$
793,232
$
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 September 30, 2021, $
12.8
 
million in net investment in leases were pledged as collateral for the Company’s
 
outstanding asset-
backed securitization balance and $
55.9
 
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
September 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 September 30, 2021 and
 
December 31, 2020, $
20.8
 
million and $
21.9
 
million, respectively, of the
estimated residual value of equipment retained on our Consolidated Balance
 
Sheets was related to copiers.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-16-
Maturities of lease receivables
 
under lease contracts and the amortization of unearned lease income, including
 
initial direct costs and
fees deferred, were as follows as of September 30, 2021:
Minimum Lease
 
Payments
Net Income
Receivable
(1)
Amortization
(2)
(Dollars in thousands)
Period Ending December 31,
Remainder of 2021
$
33,951
$
7,902
2022
120,586
16,069
2023
80,663
8,510
2024
45,306
3,668
2025
20,550
1,221
Thereafter
7,423
190
$
308,479
$
37,560
________________________
 
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-17-
The lease income recognized was as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(Dollars in thousands)
Interest Income
$
6,070
$
8,357
$
19,073
$
25,977
As of September 30, 2021 and December 31, 2020, the Company maintained
 
total finance receivables which were on a non-accrual
basis with net investment of $
10.1
 
million and $
14.3
 
million, respectively. See
 
Note 6 “Allowance for Credit Losses” for additional
discussion of loan modifications due to COVID-19.
Portfolio Sales
The Company has 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 $
0.7
 
million and $
1.3
 
million as of
September 30, 2021, and December 31, 2020, respectively,
 
and is recognized within Accounts payable and accrued expenses in the
Consolidated Balance Sheets.
 
As of September 30, 2021 and December 31, 2020, the portfolio
 
of leases and loans serviced for others
was $
146
 
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:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(Dollars in thousands)
Sales of leases and loans
 
$
—
$
4,286
$
—
$
28,342
Gain on sale of leases and loans
—
87
—
2,426
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-18-
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, 2020
 
for a detailed discussion of our adoption of
this guidance
.
The following tables summarize activity in the allowance for credit
 
losses
:
Three Months Ended September 30, 2021
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
19,718
$
1,003
$
8,036
$
—
$
28,757
 
Charge-offs
(2,407)
(262)
(27)
—
(2,696)
 
Recoveries
1,273
158
85
—
1,516
Net charge-offs
(1,134)
(104)
58
—
(1,180)
Realized cashflows from Residual Income
1,127
—
—
—
1,127
 
Provision for credit losses
(1,334)
300
(149)
—
(1,183)
Allowance for credit losses, end of period
$
18,377
$
1,199
$
7,945
$
—
$
27,521
Net investment in leases and loans, before allowance
$
717,697
$
31,178
$
70,859
$
1,019
$
820,753
Three Months Ended September 30, 2020
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA &
PPP
Total
Allowance for credit losses, beginning of period
$
48,550
$
7,962
$
7,132
$
—
$
63,644
 
Charge-offs
(10,509)
(633)
(524)
—
(11,666)
 
Recoveries
983
101
94
—
1,178
 
Net charge-offs
(9,526)
(532)
(430)
—
(10,488)
Realized cashflows from Residual Income
965
—
—
—
965
 
Provision for credit losses
7,226
(3,974)
3,952
—
7,204
Allowance for credit losses, end of period
$
47,215
$
3,456
$
10,654
$
—
$
61,325
Net investment in leases and loans, before allowance
$
803,689
$
26,472
$
76,778
$
1,114
$
908,053
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-19-
Nine Months Ended September 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
$
—
$
44,228
 
Charge-offs
(8,556)
(813)
(1,176)
—
(10,545)
 
Recoveries
3,933
432
308
—
4,673
Net charge-offs
(4,623)
(381)
(868)
—
(5,872)
Realized cashflows from Residual Income
3,175
—
—
—
3,175
 
Provision for credit losses
(13,359)
374
(1,025)
—
(14,010)
Allowance for credit losses, end of period
$
18,377
$
1,199
$
7,945
$
—
$
27,521
Net investment in leases and loans, before allowance
$
717,697
$
31,178
$
70,859
$
1,019
$
820,753
Nine Months Ended September 30, 2020
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA &
PPP
Total
Allowance for credit losses, December 31, 2019
$
18,334
$
1,899
$
1,462
$
—
$
21,695
Adoption of ASU 2016-13 (CECL)
(1)
9,264
(3)
2,647
—
11,908
Allowance for credit losses, beginning of period
$
27,598
$
1,896
$
4,109
$
—
$
33,603
 
Charge-offs
(24,723)
(2,598)
(2,157)
—
(29,478)
 
Recoveries
2,237
156
257
—
2,650
 
Net charge-offs
(22,486)
(2,442)
(1,900)
—
(26,828)
Realized cashflows from Residual Income
3,390
—
—
—
3,390
 
Provision for credit losses
38,713
4,002
8,445
—
51,160
Allowance for credit losses, end of period
$
47,215
$
3,456
$
10,654
$
—
$
61,325
Net investment in leases and loans, before allowance
$
803,689
$
26,472
$
76,778
$
1,114
$
908,053
__________________
(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.
 
 
 
 
 
-20-
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 September 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 Equipment
 
Finance leases and loans are based on internally developed
credit score ratings, which is a measurement that combines many risk
 
characteristics, including loan size, external credit
scores, existence of a guarantee, and various characteristics of the borrower’s
 
business.
 
In addition, the Company separately
measured a pool of true leases so that any future cashflows from residuals could
 
be used to partially offset the allowance for
that pool.
 
The Company’s measurement
 
of Equipment Finance pools is based on its own historical loss experience.
 
The Company
analyzed the correlation of its own loss data from 2004 to 2019 against various
 
economic variables in order to determine an
approach for reasonable and supportable forecast.
 
The Company then selected certain economic variables to reference for its
forecast about the future, specifically the unemployment rate and growth
 
in business bankruptcy.
 
The Company’s
methodology reverts from the forecast data to its own loss data adjusted for
 
the long-term average of the referenced economic
variables, on a straight-line basis.
At each reporting date, the Company considers current conditions, including
 
changes in portfolio composition or the business
environment, when determining the appropriate measurement of
 
current expected credit losses for the remaining life of its
portfolio.
 
As of the January 1, 2020 adoption date, the Company utilized a 12-month forecast period
 
and 12-month straight-
line reversion period, based on its initial assessment of the appropriate timing.
 
However, starting with the March 31, 2020
 
measurement, the Company adjusted its model to reference a 6-month forecast
period and 12-month straight line reversion period.
 
The change in the length of the reasonable and supportable forecast was
based on observed market volatility in March 2020. During the first quarter
 
of 2021, the Company reverted to the pre-
COVID 12-month forecast period and 12-month straight line reversion
 
period and continued
 
using this forecast in the second
and third quarters of 2021 as uncertainty in the macroeconomic environment
 
has lessened and the Company’s
 
portfolio has
stabilized with low net charge-offs
 
and delinquencies.
 
The continued positive economic forecast resulted in provision
benefits for Equipment Finance of $
1.3
 
million and $
13.4
 
million for the three and nine-months ended September 30, 2021,
respectively, as compared
 
to provisions of $
7.2
 
million and $
38.7
 
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.
 
 
 
 
 
 
 
-21-
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 third quarter, the Company
 
updated its expectation for credit losses for the Working
 
Capital segment based on the
favorable actual portfolio performance during the quarter
 
and a revised forecast based on its current assessment of risks in the
portfolio.
 
Based on that analysis, the Company recognized a provision of $
0.3
 
million for the three months ended September
30, 2021, bringing the total provision associated with Working
 
Capital to $
0.4
 
million for the nine months ended September
30, 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.
 
Beginning in the first quarter of 2021, the Company updated its expectation for
 
credit losses for the CVG segment, including
separately assessing the elevated risks of a population of motor coach industry contracts
 
that are facing prolonged impacts
from COVID-19. While the segment continues to evidence negative impacts
 
from COVID-19 as seen in the segment’s
delinquency and modification balances, it is also experiencing positive
 
indicators such as paydown of balance.
 
These factors,
including no further significant reduction in collateral values resulted
 
in the qualitative reserve remaining unchanged from the
prior quarter at $
4.7
 
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 and nine-months ended September 30, 2021, the Company recognized
 
provision benefits of $
1.2
 
million, and $
14.0
million, respectively,
 
driven primarily by improving economic forecasts and portfolio performance.
Our reserve as of September 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.
 
 
 
 
 
 
 
 
-22-
 
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 customers that requested relief and were current under their existing
 
agreement.
 
The payment deferral program
allows for up to 6 months of fully deferred or reduced payments. As of September
 
30, 2021, the Company’s Loan modification
program has been terminated, with future modifications considered
 
and granted on a case-by-case basis.
As of September 30, 2021, the Company had
3,460
 
active modified leases and loans totaling $
69.5
 
million of which all except $
0.5
million were out of the deferral period. Out of the deferral period
 
means the contract has returned to its regular payment schedule. 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.
Total resolved
 
modifications include
311
 
contracts charged off where a $
7.0
 
million credit loss was realized, and
1,848
 
contracts that
paid in full.
TDRs are restructurings of leases and loans in which, due to the borrower's financial
 
difficulties, a lender grants a concession that it
would not otherwise consider for borrowers of similar credit quality.
 
In accordance with the interagency guidance as updated in April
2020, that the FASB concurred
 
with, loans modified under the Company’s
 
payment deferral program are not considered TDRs. As of
September 30, 2021, the Company had $
10.3
 
million of active contracts designated as TDRs.
Credit Quality
At origination, the Company utilizes an internally developed credit
 
score ratings as part of its underwriting assessment and pricing
decisions for new contracts.
 
The internal
 
credit score is a measurement that combines many risk characteristics, including loan
 
size,
external credit scores, existence of a guarantee, and various characteristics
 
of the borrower’s business.
 
The internal credit score is
used to create pools of loans for analysis in the Company’s
 
Equipment Finance portfolio segment, as discussed further above.
 
We
believe this segmentation allows our loss modeling to properly reflect changes
 
in portfolio mix driven by sales activity and
adjustments to underwriting standards.
 
However, this score is not updated after origination date
 
for analyzing the Company’s
provision.
On an ongoing basis, to monitor the credit quality of its portfolio, the
 
Company primarily reviews the current delinquency of the
portfolio and delinquency migration to monitor risk and default trends
 
.
 
We believe that
 
delinquency is the best factor to use to monitor
the credit quality of our portfolio on an ongoing basis because it reflects the current
 
condition of the portfolio and is a good predictor
of near-term charge-offs and can help
 
with identifying trends and emerging risks to the portfolio.
 
The following tables provide information about delinquent leases and loans in
 
the Company’s portfolio
 
based on the contract’s status
as-of the dates presented. In particular,
 
contracts that are part of the Loan Modification Program discussed above
 
are presented in the
below delinquency table and the non-accrual information for September
 
30, 2021 based on their status with respect to the modified
terms.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-23-
Portfolio by Origination Year as of
 
September 30, 2021
Total
2021
2020
2019
2018
2017
Prior
Receivables
(Dollars in thousands)
Equipment Finance
30-59
$
612
$
688
$
1,149
$
435
$
230
$
31
$
3,145
60-89
179
146
584
277
78
28
1,292
90+
91
266
323
197
90
31
998
Total Past Due
882
1,100
2,056
909
398
90
5,435
Current
203,688
196,444
192,259
83,310
32,507
4,054
712,262
Total
204,570
197,544
194,315
84,219
32,905
4,144
717,697
Working Capital
30-59
224
26
—
—
—
—
250
60-89
51
—
43
—
—
—
94
90+
—
24
—
—
—
—
24
Total Past Due
275
50
43
—
—
—
368
Current
28,626
1,901
283
—
—
—
30,810
Total
28,901
1,951
326
—
—
—
31,178
CVG
30-59
—
—
—
7
2
41
50
60-89
51
157
91
14
—
—
313
90+
—
—
74
55
—
—
129
Total Past Due
51
157
165
76
2
41
492
Current
21,695
13,879
23,270
8,735
2,393
395
70,367
Total
21,746
14,036
23,435
8,811
2,395
436
70,859
CRA
Total Past Due
—
—
—
—
—
—
—
Current
1,019
—
—
—
—
—
1,019
Total
1,019
—
—
—
—
—
1,019
Net investment in leases
and loans, before allowance
$
256,236
$
213,531
$
218,076
$
93,030
$
35,300
$
4,580
$
820,753
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-24-
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
—
—
—
—
606
60-89
—
135
—
—
—
—
135
90+
—
—
—
—
—
—
—
Total Past Due
125
616
—
—
—
—
741
Current
12,741
6,528
24
—
—
—
19,293
Total
12,866
7,144
24
—
—
—
20,034
CVG
30-59
591
1,039
173
29
21
—
1,853
60-89
—
69
33
—
68
—
170
90+
—
340
179
5
11
—
535
Total Past Due
591
1,448
385
34
100
—
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
—
—
—
—
—
—
—
Current
1,091
—
—
—
—
—
1,091
Total
1,091
—
—
—
—
—
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 September 30, 2021 and December 31,
2020, there were
no
 
finance receivables past due 90 days or more and still accruing.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-25-
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 September 30,
 
2021 and December 31, 2020, there were
no
 
Working Capital Loans
past due 30 days or more and still accruing.
The following tables provide information about non-accrual leases and loans:
 
September 30,
December 31,
(Dollars in thousands)
2021
2020
Equipment Finance
$
2,485
$
5,543
Working
 
Capital Loans
139
932
CVG
7,495
7,814
Total
 
Non-Accrual
$
10,119
$
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 September 30, 2021:
 
Gross Carrying
Accumulated
Net
(Dollars in thousands)
Useful Life
Amount
Amortization
Value
Vendor
 
relationships
11
years
$
7,290
$
2,134
$
5,156
Corporate trade name
7
years
60
41
19
 
Total
$
7,350
$
2,175
$
5,175
The Company’s intangible
 
assets consist of definite-lived assets in connection with the January 2017 acquisition
 
of Horizon Keystone
Financial,
 
and definite-lived intangible assets in connection with the September
 
2018 acquisition of Fleet Financing Resources.
 
The
Company has
no
 
indefinite-lived intangible assets.
 
There was
no
 
impairment of these assets in the nine-months ended September 30, 2021 or 2020.
 
Amortization related to the
Company’s definite lived
 
intangible assets was $
0.5
 
million and $
0.6
 
million for the nine-month periods ended September 30, 2021
and September 30, 2020, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-26-
The Company expects the amortization expense for the next five years
 
will be as follows:
Amortization
(Dollars in thousands)
Expense
Remainder of 2021
$
168
2022
671
2023
671
2024
663
2025
663
NOTE 8 – Other Assets
Other assets are comprised of the following:
 
 
September 30,
December 31,
 
2021
2020
(Dollars in thousands)
Accrued fees receivable
$
2,289
$
2,928
Prepaid expenses
2,404
2,790
Income taxes receivable
 
8,214
—
Federal Reserve Bank Stock
1,711
1,711
Other
 
1,942
2,783
$
16,560
$
10,212
NOTE 9 – Deposits
MBB serves as the Company’s primary
 
funding source. MBB issues fixed-rate FDIC-insured certificates of deposit raised
 
nationally
through various brokered deposit relationships and fixed-rate FDIC-insured
 
deposits received from direct sources. MBB offers FDIC-
insured money market deposit accounts (the “MMDA Product”) through
 
participation in a partner bank’s
 
insured savings account
product. This brokered deposit product has a variable rate, no maturity date
 
and is offered to the clients of the partner bank and
recorded as a single deposit account at MBB. As of September 30, 2021,
 
money market deposit accounts totaled $
55.0
 
million.
As of September 30, 2021, the scheduled maturities of certificates of deposits are
 
as follows:
 
 
Scheduled
Dollars in thousands
Maturities
Period Ending December 31,
Remainder of 2021
$
391,752
2022
204,023
2023
91,829
2024
33,321
2025
9,054
Total
$
729,979
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 September 30, 2021
 
was
1.07
%.
See Note 14 –
Subsequent Events
 
for a discussion of an agreement entered into by MBB in October 2021 to transfer
 
its portfolio of
brokered certificates of deposit held through The Depository Trust
 
Company.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-27-
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:
 
September 30,
December 31,
 
2021
2020
 
(Dollars in thousands)
Term securitization
 
2018-1
$
11,719
$
30,800
Unamortized debt issuance costs
(43)
(135)
$
11,676
$
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 September 30, 2021, outstanding term securitizations
amounted to $
11.7
 
million and are collateralized by $
12.8
 
million of minimum lease and loan payments receivable and $
3.2
 
million of
restricted interest-earning deposits. The Company’s
 
term note securitizations are classified as long-term borrowings.
The term note securitization is summarized below:
Outstanding Balance as of
Notes
Final
Original
 
September 30,
December 31,
Originally
 
Maturity
 
Coupon
 
2021
2020
Issued
Date
Rate
(Dollars in thousands)
2018 — 1
 
Class A-1
 
$
—
$
—
$
77,400
July, 2019
2.55
%
 
Class A-2
 
—
—
55,700
October, 2020
3.05
 
Class A-3
 
—
—
36,910
April, 2023
3.36
 
Class B
—
9,560
10,400
May, 2023
3.54
 
Class C
1,869
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
$
11,719
$
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 4.33% over the remaining term of the
borrowing.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-28-
Based on current expected cashflows of leases underlying our term note
 
securitization, principal and interest payments are estimated
as of September 30, 2021 as follows:
Principal
Interest
(Dollars in thousands)
Period Ending December 31,
Remainder of 2021
$
3,137
$
121
2022
8,582
$
159
$
11,719
$
280
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 September 30, 2021, and December 31,
2020, there were
no
 
balances outstanding on this line of credit.
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 $
50.2
 
million in unused, secured borrowing capacity at the Federal Reserve Discount Window,
 
based on
$
55.9
 
million of net investment in leases pledged at September 30, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-29-
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.
 
In accordance with the Merger Agreement and De-banking
 
process discussed in Note 1, the Company sold all its investment securities
in the third quarter of 2021.
The Company’s balances measured
 
at fair value on a recurring basis include the following as of September 30,
 
2021 and December
31, 2020:
 
September 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
$
—
$
—
$
—
$
—
$
3,719
$
—
Municipal securities
—
—
—
—
4,145
—
Mutual fund
—
—
—
3,760
—
—
At this time, the Company has not elected to report any assets and liabilities
 
using the fair value option. There have been
no
 
transfers
between Level 1 and Level 2 of the fair value hierarchy for any of the periods
 
presented.
Non-Recurring Measurements
Non-recurring fair value measurements include assets and liabilities that
 
are periodically remeasured or assessed for impairment using
Fair value measurements. Non-recurring measurements include the Company’s
 
evaluation of goodwill and residual assets for
impairment, and the Company’s
 
remeasurement of contingent consideration and assessment of the
 
carrying amount of its servicing
liability.
 
For the nine months ended September 30, 2021, there were no significant
 
amounts recognized in the Consolidated Statements of
Operations in connection with non-recurring fair value measurements.
For the nine months ended September 30, 2020, the Company recognized
 
$
6.7
 
million for the impairment of goodwill as discussed
further in Note 7 -
Goodwill and Intangible Assets
.
 
Fair Value
 
of Other Financial Instruments
 
The following summarizes the carrying amount and estimated fair
 
value of the Company’s other financial
 
instruments, including those
not measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-30-
September 30, 2021
December 31, 2020
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
222,260
$
222,260
$
135,691
$
135,691
Time deposits with banks
996
1,000
5,967
6,003
Restricted interest-earning deposits with banks
3,202
3,202
4,719
4,719
Loans, net of allowance
504,335
513,431
500,768
507,362
Federal Reserve Bank Stock
1,711
1,711
1,711
1,711
Financial Liabilities
 
Deposits
$
783,203
$
790,175
$
729,614
$
742,882
 
Long-term borrowings
11,676
11,961
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-31-
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 comm
 
on stock as if those securities were exercised or converted.
The following table provides net income and shares used in computing basic
 
and diluted EPS:
 
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(Dollars in thousands, except per-share data)
Basic EPS
Net income (loss)
$
5,481
$
2,743
$
22,588
$
(14,960)
Less: net income allocated to participating securities
(69)
(36)
(281)
—
 
Net income (loss) allocated to common stock
$
5,412
$
2,707
$
22,307
$
(14,960)
Weighted average
 
common shares outstanding
 
12,026,443
11,946,549
12,007,963
11,951,375
Less: Unvested restricted stock awards considered participating
securities
(150,339)
(155,408)
(149,462)
(142,186)
Adjusted weighted average common shares used in computing
basic EPS
11,876,104
11,791,141
11,858,501
11,809,189
Basic EPS
$
0.46
$
0.23
$
1.88
$
(1.27)
Diluted EPS
Net income (loss) allocated to common stock
$
5,412
$
2,707
$
22,307
$
(14,960)
Adjusted weighted average common shares used in computing
basic EPS
11,876,104
11,791,141
11,858,501
11,809,189
Add: Effect of dilutive stock-based compensation
 
awards
186,146
41,272
113,767
—
 
Adjusted weighted average common shares used in computing
diluted EPS
12,062,250
11,832,413
11,972,268
11,809,189
Diluted EPS
$
0.45
$
0.23
$
1.86
$
(1.27)
For the three-month periods ended September 30, 2021 and September
 
30, 2020, weighted average outstanding stock-based
compensation awards in the amount of
112,216
 
and
230,428
, respectively, were considered
 
antidilutive and therefore were not
considered in the computation of potential common shares for purposes of
 
diluted EPS.
 
For the nine-month periods ended September 30, 2021 and September
 
30, 2020, weighted average outstanding stock-based
compensation awards in the amount of
132,619
 
and
286,349
, respectively, were considered
 
antidilutive and therefore were not
considered in the computation of potential common shares for purposes of
 
diluted EPS.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-32-
NOTE 13 – Stockholders’ Equity
 
Share Repurchases
During the three month and nine-month periods ended September
 
30, 2021, the Company did
no
t purchase any shares of its common
stock under the stock repurchase plan approved by the Company’s
 
Board of Directors on August 1, 2019 (the “2019 Repurchase
Plan”).
 
During the three-month period ended September 30, 2020, the Company
 
did
no
t purchase any shares of its common stock under the
2019 Repurchase Plan.
 
During the nine-month period ended September 30, 2020, the Company purchased
264,470
 
shares of its
common stock under the 2019 Repurchase Plan at an average cost of $
16.09
 
per share.
At September 30, 2021, the Company had $
4.7
 
million of remaining authorizations under 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.
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 Equity Compensation Plan (approved by the
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. During
 
the three-month periods ended September 30, 2021
and September 30, 2020, there were
36
 
shares and
18,446
 
shares repurchased to cover income tax withholding under the 2014 Plan
and the 2019 Plan at an average cost of $
22.44
 
per share and $
8.06
 
per share, respectively. During
 
the nine-month periods ended
September 30, 2021 and September 30, 2020, there were
16,198
 
and
41,466
 
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 $
14.07
 
and $
10.70
, 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
 
 
 
-33-
Agreement (the “CMLA Agreement”) and the Parent Company
 
Agreement, each entered into by and among the Company,
 
certain of
its subsidiaries and the FDIC in conjunction with the opening of MBB. As a result of
 
these actions, MBB is no longer required
pursuant to the CMLA Agreement to maintain a total risk-based capital ratio
 
above
15
%. Rather, MBB must continue to maintain a
total risk-based capital ratio above
8
% to be considered adequately capitalized and above
10
% to be 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 additional capital released by the termination of the CMLA Agreement is held
 
at MBB and is
subject to the restrictions outlined in Title
 
12 part 208 of the Code of Federal Regulations (12 CFR 208.5), which places limitations on
bank dividends, including restricting dividends for any year to the
 
earnings from the current and prior two calendar years less the
amount of cumulative dividends paid over that period.
 
Any dividends declared above that amount and any return of permanent
 
capital
would require prior approval of the Federal Reserve Board of Governors.
 
As of September 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 September 30, 2021 was $
165.9
 
million, which met all capital requirements to which MBB is subject
and qualified MBB for “well-capitalized” status. At September 30, 2021,
 
the Company also exceeded its regulatory capital
requirements and was considered “well-capitalized” as defined by federal
 
banking regulations and as required by the FDIC
Agreement.
 
CECL Capital Transition.
 
The 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-34-
The following table sets forth the Tier 1 leverage
 
ratio, common equity Tier 1 risk-based capital ratio,
 
Tier 1 risk-based capital ratio
and total risk-based capital ratio for Marlin Business Services Corp. and MBB at September
 
30, 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.
21.71%
$
217,465
4.00%
$
40,076
5.00%
$
50,095
 
Marlin Business Bank
17.84%
$
165,937
4.00%
$
37,210
5.00%
$
46,513
Common Equity Tier 1 Risk-Based Capital
 
Marlin Business Services Corp.
25.33%
$
217,465
4.50%
$
38,640
6.50%
$
55,813
 
Marlin Business Bank
20.67%
$
165,937
4.50%
$
36,131
6.50%
$
52,189
Tier 1 Risk-based Capital
 
Marlin Business Services Corp.
25.33%
$
217,465
6.00%
$
51,519
8.00%
$
68,693
 
Marlin Business Bank
20.67%
$
165,937
6.00%
$
48,174
8.00%
$
64,232
Total
 
Risk-based Capital
 
Marlin Business Services Corp.
26.60%
$
228,405
8.00%
$
68,693
10.00%
$
85,866
 
Marlin Business Bank
21.94%
$
176,181
8.00%
$
64,232
10.00%
$
80,290
Prompt Corrective Action
.
 
The Federal Deposit Insurance Corporation Improvement Act of 1991
 
(“FDICIA”) requires the federal
regulators to take prompt corrective action against any undercapitalized institution.
 
Five capital categories have been established
under federal banking regulations:
 
well-capitalized, adequately capitalized, undercapitalized, significantly
 
undercapitalized and
critically undercapitalized.
 
Well-capitalized institutions
 
significantly exceed the required minimum level for each relevant capital
measure.
 
Adequately capitalized institutions include depository institutions that meet
 
but do not significantly exceed the required
minimum level for each relevant capital measure. Undercapitalized institutions
 
consist of those that fail to meet the required minimum
level for one or more relevant capital measures.
 
Significantly undercapitalized characterizes depository institutions with capital
 
levels
significantly below the minimum requirements for any relevant capital
 
measure.
 
Critically undercapitalized refers to depository
institutions with minimal capital and at serious risk for government seizure.
Under certain circumstances, a well-capitalized, adequately capitalized or
 
undercapitalized institution may be treated as if the
institution were in the next lower capital category.
 
A depository institution is generally prohibited from making capital distributions,
including paying dividends, or paying management fees to a holding company
 
if the institution would thereafter be undercapitalized.
 
Institutions that are adequately capitalized but not well-capitalized
 
cannot accept, renew or roll over brokered deposits except with a
waiver from the FDIC and are subject to restrictions on the interest rates that can
 
be paid on such deposits. Undercapitalized
institutions may not accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or,
 
in certain cases, required to take certain actions with respect to institutions
falling within one of the three undercapitalized categories.
 
Depending on the level of an institution’s
 
capital, the agency’s corrective
powers include, among other things:
 
•
 
prohibiting the payment of principal and interest on subordinated debt
 
;
•
 
prohibiting the holding company from making distributions without
 
prior regulatory approval;
•
 
placing limits on asset growth and restrictions on activities;
•
 
placing additional restrictions on transactions with affiliates;
•
 
restricting the interest rate the institution may pay on deposits;
 
 
 
 
 
 
 
 
-35-
•
 
prohibiting the institution from accepting deposits from correspondent
 
banks; and
•
 
in the most severe cases, appointing a conservator or receiver for the institution.
A banking institution that is undercapitalized is required to submit a capital
 
restoration plan, and such a plan will not be accepted
unless, among other things, the banking institution’s
 
holding company guarantees the plan up to a certain specified amount.
 
Any such
guarantee from a depository institution’s
 
holding company is entitled to a priority of payment in bankruptcy.
 
MBB’s total risk-based capital
 
ratio of
21.94
% at September 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 commensurate
 
with their overall risk profile. Such assessment process may
affect the ability of the organizations to pay dividends.
 
Although generally organizations may pay dividends only
 
out of current
operating earnings, dividends may be paid if the distribution is prudent relative
 
to the organization’s
 
financial position and risk profile,
after consideration of current and prospective economic conditions. As mentioned
 
above, MBB’s ability to pay dividends to the
Company is subject to various regulatory requirements, including
 
Title 12 part 208 of the Code of Federal Regulations (12 CFR
208.5), which places limitations on bank dividends. Furthermore, as a bank holding
 
company, the Company’s
 
ability to pay dividends
to its shareholders is also subject to various regulatory requirements, including
 
Supervisory Letter SR 09-4,
Applying Supervisory
Guidance and Regulations on the Payment of Dividends, Stock Redemptions
 
and Stock Repurchases at Bank Holding Companies.
Pursuant to the Merger Agreement, 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.
NOTE 14 – Subsequent Events
 
Quarterly Dividend
The Company declared a dividend of $
0.14
 
per share on October 28, 2021. The quarterly dividend, which is expected to result in a
dividend payment of approximately $
1.7
 
million, is scheduled to be paid on
November 18, 2021
 
to shareholders of record on the close
of business on
November 8, 2021
. It represents the Company’s
forty-first
 
consecutive quarterly cash dividend. The payment of future
dividends will be subject to satisfaction of regulatory requirements appli
 
cable 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.
 
Deposit Assignment & Assumption Agreement.
 
On October 8, 2021, MBB entered into an agreement to transfer its portfolio of
 
brokered certificates of deposit held through The
Depository Trust Company with an outstanding
 
principal amount of approximately $
204.8
 
million to a Federal Deposit Insurance
Corporation (“FDIC”)-insured depository institution.
 
In exchange for the acquiror’s assumption of those deposits, MBB has agreed
 
to
pay the acquiror at the time of transfer, in addition
 
to the outstanding principal amount of the deposits, all accrued but unpaid interest
on the deposits as of the transfer date plus a sum of $
750,000
.
 
The agreement contemplates that the transfer,
 
which is subject to
(among other customary closing conditions) the approval of the Utah Department
 
of Financial Institutions and of the FDIC pursuant to
Section 18(c) of the Federal Deposit Insurance Act, expected to occur in late December
 
2021 or early January 2022.
 
 
 
 
-36-
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 the proposed Merger,
including the timing thereof and the costs to be incurred in connection 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)
industry and market trends. The Company’s
 
actual results could differ materially from those anticipated
 
by such forward-looking
statements due to a number of factors, some of which are beyond the Company’s
 
control, including, without limitation:
◾
our ability to complete our proposed merger with HPS Merger
 
Sub, including to complete the De-banking within the timeline
required under the merger agreement, if at all;
◾
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.
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-37-
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
 
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 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”).
 
On August 4, 2021, our shareholders approved the adoption of the Merger
 
Agreement. The
Merger remains subject to, in addition to various other
 
customary closing conditions, 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 the De-banking.
See “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies—"We
 
may fail to consummate the proposed Merger Agreement,
and uncertainties related to the consummation of the transaction may have
 
a material adverse effect on our business, financial position,
results of operations and cash flows, and negatively impact the price
 
of our Common stock." in this Form 10-Q.
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.
Early in response to the onset of the pandemic, we temporarily tightened underwriting
 
standards for areas of elevated risk and we
continue to update such risk assessments based on current conditions.
 
As we have seen economic conditions improve and 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
began to return some of our employees 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
 
early 2022; however, we will continually re-
evaluate our return to office approach as we monitor the
 
trends in COVID-19 cases across the country.
Our third quarter results of net income of $5.5 million, or $0.45 earnings
 
per share, were primarily driven by a $1.2 million provision
for credit losses benefit due to continued positive portfolio
 
performance coupled with expense management benefits.
 
Our total
originations in the third quarter 2021 were $98.6 million, which were
 
16% above total origination in the same quarter as last year,
 
but
2% below the prior quarter.
 
Additionally, total originations
 
in the quarter were 46% below the pre-pandemic levels of 2019.
 
Economic factors, including but not limited to employment conditions
 
and global supply chain disruptions, have affected our
origination volumes; however, we are
 
proactively increasing staffing in our sales organization
 
in order to increase sales activities and
origination momentum.
Portfolio Trends
 
and Performance
During the three months ended September 30, 2021, we generated
 
3,836 new Equipment Finance leases and loans with equipment
costs of $81.6
 
million, compared to 3,410 new Equipment Finance leases and loans with equipment
 
costs of $65.8 million generated
for the three months ended September 30, 2020. Working
 
Capital loan originations were $17.0 million during the three-month period
ended September 30, 2021, compared to $1.4 million for the three-month
 
period ended September 30, 2020.
Overall, our average net investment in total finance receivables for the
 
three-month period ended September 30, 2021 decreased
13.1%
 
to $803.8 million, compared to $924.6 million for the three-month period
 
ended September 30, 2020, which has caused a
corresponding reduction in interest and fee income.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-38-
Equipment Finance receivables delinquent over 30 days were
 
0.76% at September 30, 2021, down 137 basis points from 2.13% at
September 30, 2020 and down 83 basis points from 1.59% at December 31,
 
2020. Working Capital receivables
 
over 15 days
delinquent were 1.49% at September 30, 2021, down 244 basis points from
 
3.93% at September 30, 2020 and down 351 basis point
from 5.00% at December 31, 2020.
 
Annualized total net charge-offs for the third quarter
 
of 2021 were 0.59% of average total finance
receivables as compared to 4.54% for the same period in 2020.
For the three-months ended September 30, 2021 we recognized a provision
 
benefit of $1.2 million as compared to a provision net
expense of $7.2 million for the same period in 2020. The provision benefit
 
in the third 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 3.35%
 
at September 30, 2021 compared with
6.75%
 
at September 30, 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-39-
F
INANCE
R
ECEIVABLES
 
AND
A
SSET
Q
UALITY
The following table summarizes certain portfolio statistics for the
 
periods presented:
September 30,
June 30,
December 31,
September 30,
 
2021
2021
2020
2020
(Dollars in thousands)
Finance receivables:
End of period
$
820,753
$
829,111
$
869,284
 
$
908,053
 
Average for the quarter
(1)
803,783
815,761
945,599
924,635
Origination Volume
 
- three months
98,605
100,864
83,011
67,117
Origination Volume
 
- nine months, through September 30
282,772
184,630
—
284,117
Assets Sold - three months
—
—
—
4,286
Assets Sold - nine months, through September 30
—
—
—
28,342
Leases and Loans Modified:
Payment deferral program
(2)
End of period
$
69,456
$
80,554
111,209
129,882
As a % of end of period receivables
(1)
8.5%
9.7%
12.8%
14.3%
Allowance for credit losses :
End of period
$
27,521
$
28,757
$
44,228
$
61,325
As a % of end of period receivables
(1)
3.35%
3.47%
5.09%
6.75%
Annualized net charge-offs
 
 
to average total finance receivables
 
(quarter)
(1)
0.59%
0.60%
3.43%
4.54%
Delinquencies, end of period:
(3)
Equipment Finance and CVG:
Greater than 60 days past due, $
$
2,848
$
3,899
$
6,717
$
12,551
Greater than 60 days past due, %
0.35%
0.37%
0.77%
1.43%
Working
 
Capital:
 
Greater than 30 days past due, $
$
368
$
56
$
741
$
777
Greater than 30 days past due, %
1.18%
0.23%
3.69%
2.94%
__________________
(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)
Calculated as a percentage of net investment in leases and loans.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-40-
R
ESULTS OF
O
PERATIONS
Comparison of the Three-Month Periods Ended September
 
30, 2021 and September 30, 2020
 
Net income.
 
Net income of $5.5 million was reported for the three-month period
 
ended September 30, 2021, resulting in diluted EPS per share of
$0.45,
 
compared to net income of $2.7 million and diluted loss per share of $0.23 for
 
the three-month period ended September 30,
2020.
 
This $2.8 million increase in Net income was primarily driven by:
-
$8.4 million decrease in Provision for credit losses, driven primarily by an
 
improvement in economic conditions during the
past 12 months
;
-
$3.4 million decrease in net interest and fee income driven primarily
 
by a decline in the size of our finance receivable
portfolio;
-
$2.1 million decrease in interest expense due to a decline in the deposit balance
 
and rates, as well as continuing reduction of
long-term debt;
-
$1.5 million increase in general and administrative, primarily driven
 
by a prior year $1.4 million reduction to the fair value of
the contingent consideration earn out liability related to our 2018 acquisition
 
of the FFR business.
 
Average balances and
 
net interest margin.
The following table summarizes the Company’s
 
average balances, interest income,
interest expense and average yields and rates on major categories of interest-earning
 
assets and interest-bearing liabilities for the three-
month periods ended September 30, 2021 and September 30, 2020
 
.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-41-
Three Months Ended September 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
$
142,540
$
28
0.08
%
$
165,257
$
30
0.07
%
Time Deposits
2,466
7
1.07
10,069
42
1.67
Restricted interest-earning deposits with banks
3,888
—
—
6,487
—
0.01
Securities available for sale
6,325
15
0.98
10,755
50
1.86
Net investment in leases
(3)
753,506
15,282
8.11
851,683
19,010
8.93
Loans receivable
(3)
50,277
2,324
18.49
72,952
3,266
17.91
 
Total
 
interest-earning assets
959,002
17,657
7.36
1,117,203
22,398
8.02
Non-interest-earning assets:
Cash and due from banks
5,686
5,515
Allowance for loan and lease losses
(29,621)
(61,470)
Intangible assets
5,285
6,982
Operating lease right-of-use assets
7,393
8,070
Property and equipment, net
9,252
8,580
Property tax receivables
9,395
8,949
Other assets
(4)
28,428
28,390
 
Total
 
non-interest-earning assets
35,818
5,016
 
Total
 
assets
$
994,820
$
1,122,219
Interest-bearing liabilities:
Certificate of Deposits
(5)
$
666,637
$
2,374
1.42
%
784,056
$
4,149
2.12
%
Money Market Deposits
(5)
53,611
40
0.30
51,563
38
0.29
Long-term borrowings
(5)
14,589
180
4.93
45,594
507
4.45
 
Total
 
interest-bearing liabilities
734,837
2,594
1.41
881,213
4,694
2.13
Non-interest-bearing liabilities:
Sales and property taxes payable
6,603
6,340
Operating lease liabilities
8,260
9,015
Accounts payable and accrued expenses
8,172
20,893
Net deferred income tax liability
25,181
21,865
 
Total
 
non-interest-bearing liabilities
48,216
58,113
 
Total
 
liabilities
783,053
939,326
Stockholders’ equity
211,768
182,893
 
Total
 
liabilities and stockholders’ equity
$
994,820
$
1,122,219
Net interest income
$
15,063
$
17,704
Interest rate spread
(6)
5.95
%
5.89
%
Net interest margin
(7)
6.28
%
6.34
%
Ratio of average interest-earning assets to
 
average interest-bearing liabilities
130.51
%
126.78
%
__________________
(1)
Average balances were calculated using average daily balances.
 
(2)
Annualized.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-42-
(3)
Average
 
balances of leases
 
and loans include
 
non-accrual leases and
 
loans, and are
 
presented net of
 
unearned income. The
 
average balances of
leases and loans do not include the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred.
 
(4)
Includes operating leases.
(5)
 
Includes effect of
 
transaction costs. Amortization of
 
transaction costs is on
 
a straight-line basis, resulting
 
in an increased average
 
rate whenever
average portfolio balances are at reduced levels.
(6)
Interest rate spread
 
represents the difference
 
between the average
 
yield on interest-earning
 
assets and the
 
average rate on
 
interest-bearing liabilities.
(7)
Net interest margin represents net interest income as an annualized percentage of average interest-earning assets.
Changes due to volume and rate.
The following table presents the components of the changes in net interest income
 
by volume and
rate.
Three Months Ended September 30, 2021 Compared To
Three Months Ended September 30, 2020
Increase (Decrease) Due To:
 
Volume
(1)
Rate
(1)
Total
(Dollars in thousands)
Interest income:
Interest-earning deposits with banks
$
(4)
$
2
$
(2)
Time Deposits
(24)
(11)
(35)
Securities available for sale
(16)
(19)
(35)
Net investment in leases
(2,080)
(1,648)
(3,728)
Loans receivable
(1,045)
103
(942)
 
Total
 
interest income
(3,007)
(1,734)
(4,741)
Interest expense:
Certificate of Deposits
(558)
(1,217)
(1,775)
Money Market Deposits
1
1
2
Long-term borrowings
(377)
50
(327)
 
Total
 
interest expense
(693)
(1,407)
(2,100)
Net interest income
(2,486)
(155)
(2,642)
__________________
(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-
Net interest and fee margin.
The following table summarizes the Company’s
 
net interest and fee income as an annualized percentage
of average total finance receivables for the three-month periods ended September
 
30, 2021 and September 30, 2020.
Three Months Ended September 30,
 
2021
2020
(Dollars in thousands)
Interest income
 
$
17,656
$
22,398
Fee income
 
2,027
2,803
 
Interest and fee income
 
19,683
25,201
Interest expense
 
2,594
4,694
 
Net interest and fee income
 
$
17,089
$
20,507
Average total
 
finance receivables
(1)
$
803,783
$
924,635
Annualized percent of average total finance receivables:
Interest income
 
8.79
%
9.69
%
Fee income
 
1.01
1.21
 
Interest and fee income
 
9.80
10.90
Interest expense
 
1.29
2.03
 
Net interest and fee margin
 
8.51
%
8.87
%
__________________
(1)
Total finance receivables include net investment in leases and loans.
 
For the calculations above, the effects of (i) the allowance for credit losses
and (ii) initial direct costs and fees deferred are excluded.
 
Net interest and fee income decreased $3.4 million, or 16.6%, to $17.1
 
million for the three months ended September 30, 2021 from
$20.5 million for the three months ended September 30, 2020.
 
The annualized net interest and fee margin decreased
 
36 basis points to
8.51% in the three-month period ended September 30, 2021 from
 
8.87% for the corresponding period in 2020.
 
Interest income, net of amortized initial direct costs and fees, was $17.7
 
million and $22.4 million for the three-month periods ended
September 30, 2021 and September 30, 2020, respectively.
 
Average total
 
finance receivables decreased $120.8 million, or 13.1%, to
$803.8 million at September 30, 2021 from $924.6 million at September
 
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 average yield
 
on the
portfolio decreased 90 basis points to 8.79% from 9.69% in the same quarter
 
one year ago. Higher yielding working capital portfolio
made up a smaller percentage of the total portfolio during the third quarter
 
of 2021 compared to the same period one year ago.
 
The
weighted average implicit interest rate on new finance receivables originated
 
increased 150 basis points to 10.83% for the three-month
period ended September 30, 2021 compared to 9.33% for the three-month
 
period ended September 30, 2020. That increase was
primarily driven by a shift in the mix of originations as higher-yield
 
Working Capital originations
 
comprised $17.0 million of our
originations for the three months ended September 30, 2021, compared
 
to $1.4 million 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 third quarter of 2021, the
company originated $98.6 million of total originations compared
 
to $67.1 million in the same period one year ago.
 
Additionally,
equipment finance approval percentage in the third quarter of 2021
 
was 50% which was up 10 basis points compared to the third
quarter of 2020.
Fee income was $2.0 million and $2.8 million for the three-month periods
 
ended September 30, 2021 and September
 
30, 2020,
respectively,
 
and included approximately $1.2 million and $1.7 million in late fee income for
 
the three-month periods ended
September 30, 2021 and September 30, 2020, respectively.
 
Late fees remained the largest component of fee income at 0.60% as an
annualized percentage of average total finance receivables for the three-month
 
period ended September 30, 2021, compared to 0.74%
for the three-month period ended September 30, 2020. Fee income
 
also included approximately $0.8 million and $1.1 million of early
buyout income for the three-month periods ended September 30,
 
2021 and September 30, 2020, respectively.
 
Early buyout income is
driven by customer behavior, in which
 
increased levels of this activity and related income have been recorded during the course
 
of the
pandemic.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-44-
Interest expense decreased $2.1 million to $2.6 million for the three-month
 
period ended September 30, 2021 from $4.7 million for the
corresponding period in 2020, primarily due to a decrease of $1.8
 
million on lower deposit balances
 
and rates. Additionally, there
 
was
a decrease of $0.3 million due to the continuing reduction of long-term debt.
 
Interest expense, as an annualized percentage of average
total finance receivables, decreased 74 basis points to 1.29% for the three
 
-month period ended September 30, 2021, from 2.03% for
the corresponding period in 2020. The average balance of deposits was $720.2
 
million and $835.6 million for the three-month periods
ended September 30, 2021 and September 30, 2020, respectively.
For the three-month period ended September 30, 2021, average term
 
securitization borrowings outstanding were $14.6 million at a
weighted average coupon of 4.93%. For the three-month period ended
 
September 30, 2020, average term securitization borrowings
outstanding were $45.6 million at a weighted average coupon of 4.45%.
Our wholly-owned subsidiary,
 
MBB, serves as our primary funding source. MBB raises fixed-rate and variable
 
-rate FDIC-insured
deposits via the brokered certificates of deposit market, on a direct basis, and
 
through the brokered MMDA Product. At September 30,
2021,
 
brokered certificates of deposit represented approximately 70% of
 
total deposits, while approximately 23% 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 September
 
30, 2021 as we retained all
of our origination volume on our balance sheet. There were $4.3
 
million of asset sales for the three-month period ended September 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 three-month period ended
September 30, 2021, compared to $2.1 million for the three-month period
 
ended September 30, 2020 as the overall portfolio
contracted.
Other income.
 
Other income was $1.7 million and $2.0 million for the three-month
 
periods ended September 30, 2021 and September
30, 2020, respectively.
Salaries and benefits expense.
 
The following table summarizes the Company's Salary and benefits expense:
Three Months Ended September 30,
 
2021
2020
(Dollars in thousands)
Salary, benefits and payroll
 
taxes
$
6,061
$
6,825
Incentive compensation
1,819
1,632
Commissions
282
58
 
Total
$
8,162
$
8,515
Salaries and benefits expense.
 
Salaries and benefits expense increased $0.4 million, or 4.2%, to $8.1
 
million for the three-month
period ended September 30, 2021 from $8.5 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-45-
General and administrative expense.
 
The following table summarizes General and administrative expense:
Three Months Ended September 30,
 
2021
2020
(Dollars in thousands)
Occupancy and depreciation
$
1,174
$
1,483
Professional fees
965
910
Information technology
1,147
972
Marketing
398
162
Acquisition-related contingent payment fair value adjustment
—
(1,435)
Other G&A
2,516
2,625
 
Total
$
6,200
$
4,717
General and administrative expense increased $1.5 million, or 31.6%,
 
to $6.2 million for the three months ended September 30, 2021
from $4.7 million for the corresponding period in 2020 The primary
 
driver of the change was a $1.4 million reduction in 2020 to the
fair value of the contingent consideration earn out liability related to our 2018
 
acquisition of the FFR business, driven by a forecasted
decrease in projected volumes, which decreased
 
the liability for estimated payments. General and administrative expense as an
annualized percentage of average total finance receivables was 3.09%
 
for the three-month period ended September 30, 2021,
compared to 2.48% for the three-month period ended September 30, 2020.
 
Provision for income taxes.
Income tax expense of $2.0 million was recorded for the three-month period ended
 
September 30, 2021,
compared to $0.5 million for the three-month period ended September
 
30, 2020. Our effective tax rate was 27.1% for the three-month
period ended September 30, 2021, as compared to an effective tax
 
rate of 16.1% for the three-month period ended September 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
.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-46-
Comparison of the Nine-Month Periods Ended September 30, 2021
 
and September 30, 2020
Net income/loss.
Net income of $22.6 million was reported for the nine-month period
 
ended September 30, 2021,
 
resulting in diluted EPS of $1.86,
compared to net loss of $15.0 million and diluted loss per share of $1.27
 
for the nine-month period ended September 30, 2020.
 
This
$37.6 million increase in Net income was primarily driven by:
-
$65.2 million decrease in Provision for credit losses, primarily driven
 
primarily by an improvement in economic conditions
during the past 12 months
;
-
$20.7 million decrease in interest and fee income driven primarily by
 
a decline in the size of our finance receivable portfolio;
-
$7.1 million decrease in interest expense due to a decline in the deposit balance
 
and rates, as well as continuing reduction of
long-term debt;
-
$2.4 million decrease in gain on leases and loans sold;
-
6.8 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;
-
$16.8 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 nine-
month periods ended September 30, 2021 and September 30, 2020
 
.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-47-
Nine Months Ended September 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
$
117,394
$
57
0.07
%
$
161,528
$
388
0.32
%
Time Deposits
4,000
35
1.18
11,942
167
1.86
Restricted interest-earning deposits with banks
4,421
—
—
7,189
9
0.17
Securities available for sale
9,999
109
1.45
10,671
159
1.99
Net investment in leases
(3)
769,036
47,295
8.20
880,571
58,515
8.86
Loans receivable
(3)
48,637
6,118
16.77
90,353
13,873
20.47
 
Total
 
interest-earning assets
953,487
53,614
7.50
1,162,254
73,111
8.39
Non-interest-earning assets:
Cash and due from banks
6,113
5,547
Allowance for loan and lease losses
(37,863)
(47,253)
Intangible assets
5,453
7,189
Goodwill
—
2,221
Operating lease right-of-use assets
7,512
8,459
Property and equipment, net
8,948
8,387
Property tax receivables
9,401
9,270
Other assets
(4)
26,721
31,276
 
Total
 
non-interest-earning assets
26,285
25,096
 
Total
 
assets
$
979,772
$
1,187,350
Interest-bearing liabilities:
Certificate of Deposits
(5)
$
649,529
$
7,841
1.61
%
$
829,792
$
13,747
2.21
%
Money Market Deposits
(5)
53,323
117
0.29
42,883
196
0.61
Long-term borrowings
(5)
20,858
719
4.59
57,434
1,859
4.32
 
Total
 
interest-bearing liabilities
723,710
8,677
1.60
930,109
15,802
2.27
Non-interest-bearing liabilities:
Sales and property taxes payable
7,840
6,435
Operating lease liabilities
8,423
9,354
Accounts payable and accrued expenses
12,670
22,079
Net deferred income tax liability
23,916
25,959
 
Total
 
non-interest-bearing liabilities
52,849
63,827
 
Total
 
liabilities
776,559
993,936
Stockholders’ equity
203,213
193,414
 
Total
 
liabilities and stockholders’ equity
$
979,772
$
1,187,350
Net interest income
$
44,937
$
57,309
Interest rate spread
(6)
5.90
%
6.12
%
Net interest margin
(7)
6.28
%
6.57
%
Ratio of average interest-earning assets to
 
average interest-bearing liabilities
131.75
%
124.96
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-48-
_________________
(1)
Average balances were calculated using average daily balances.
(2)
Annualized.
(3)
Average balances of leases and loans include non-accrual leases and loans, and are presented net of unearned income. The average balances of leases and
loans do not include the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred.
 
 
(4)
Includes operating leases.
(5)
 
Includes effect of transaction
 
costs. Amortization of transaction costs
 
is on a straight-line
 
basis, resulting in an increased
 
average rate whenever average
portfolio balances are at reduced levels.
(6)
Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing
 
liabilities.
(7)
Net interest margin represents net interest income as an annualized percentage of average interest-earning assets.
The following table presents the components of the changes in net interest income
 
by volume and rate.
Nine Months Ended September 30, 2021 Compared To
Nine Months Ended September 30, 2020
Increase (Decrease) Due To:
 
Volume
(1)
Rate
(1)
Total
(Dollars in thousands)
Interest income:
Interest-earning deposits with banks
$
(84)
$
(247)
$
(331)
Time Deposits
(85)
(47)
(132)
Restricted interest-earning deposits with banks
(3)
(6)
(9)
Securities available for sale
(10)
(40)
(50)
Net investment in leases
(7,064)
(4,156)
(11,220)
Loans receivable
(5,573)
(2,182)
(7,755)
 
Total
 
interest income
(12,256)
(7,241)
(19,497)
Interest expense:
Certificate of Deposits
(2,626)
(3,280)
(5,906)
Money Market Deposits
40
(119)
(79)
Long-term borrowings
(1,253)
113
(1,140)
 
Total
 
interest expense
(3,063)
(4,062)
(7,125)
Net interest income
(9,929)
(2,443)
(12,372)
__________________
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-49-
Net interest and fee margin.
The following table summarizes the Company’s
 
net interest and fee income as an annualized percentage
of average total finance receivables for the nine-month periods ended
 
September 30, 2021 and 2020.
 
Nine Months Ended September 30,
 
2021
2020
(Dollars in thousands)
Interest income
 
$
53,622
$
73,111
Fee income
 
6,795
8,019
 
Interest and fee income
 
60,417
81,130
Interest expense
 
8,676
15,802
 
Net interest and fee income
 
$
51,741
$
65,328
Average total
 
finance receivables
(1)
$
817,673
$
970,924
Percent of average total finance receivables:
Interest income
 
8.74
%
10.04
%
Fee income
 
1.11
1.10
 
Interest and fee income
 
9.85
11.14
Interest expense
 
1.41
2.17
 
Net interest and fee margin
 
8.44
%
8.97
%
__________________
(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 $13.6 million, or 20.8%, to $51.7
 
million for the nine-month period ended September 30, 2021
from $65.3 million for the nine-month
 
period ended September 30, 2020. The annualized net interest and fee margin
 
decreased 53
basis points to 8.44% in the nine-month period ended September 30,
 
2021 from 8.97% for the corresponding period in 2020.
 
Interest income, net of amortized initial direct costs and fees, decreased
 
$19.5 million, or 26.7%,
 
to $53.6 million for the nine-month
period ended September 30, 2021 from $73.1 million for the nine-month
 
period ended September 30, 2020. The decrease in interest
income was principally due to a decrease in average yield of 130 basis points and
 
by a 15.8% decrease in average total finance
receivables, which decreased $153.2 million to $817.7 million for the
 
nine-months ended September 30, 2021 from $970.9 million for
the nine-months ended September 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 80 basis points
 
to 10.16% for the nine-month period ended September 30, 2021, compared
 
to 10.96%
for the nine-month period ended September 30, 2020. During
 
the nine months of 2021, the company originated $282.7 million of total
originations compared to $284.1 million in the same period one year
 
ago. Equipment finance approval percentage in the first nine
months of 2021 was 48% as compared to 41% for the same period one year ago.
Fee income was $6.8 million and $8.0 million for the nine-month
 
periods ended September 30, 2021 and September 30, 2020,
respectively,
 
and included approximately $4.0 million and $5.6 million in late fee income for
 
the nine-month periods ended September
30, 2021 and September 30, 2020, respectively.
 
Late fees remained the largest component of fee income at
 
0.66% as an annualized
percentage of average total finance receivables for the nine-month period
 
ended September 30, 2021, compared to 0.77% for the nine-
month period ended September 30, 2020. Fee income also included approximately
 
$2.7 million and $2.4 million of early buyout
income for the nine-month periods ended September 30, 2021 and
 
September 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-50-
Interest expense decreased $7.1 million to $8.7 million for the nine-month
 
period ended September 30, 2021 from $15.8 for the
corresponding period in 2020, primarily due to a decrease
 
of $5.9 million on lower deposit balances and rates, as well as a decrease
 
of
$1.0 million due to the continuing reduction of long-term debt. Interest
 
expense, as an annualized percentage of average total finance
receivables, decreased 76 basis points to 1.41% for the nine-month
 
period ended September 30, 2021, from 2.17% for the
corresponding period in 2020. The average balance of deposits was $702.9
 
million and $872.7 million for the nine-month periods
ended September 30, 2021 and September 30, 2020, respectively.
For the nine-month period ended September 30, 2021, average term securitization
 
borrowings outstanding were $20.9 million at a
weighted average coupon of 4.59%. For the nine-month period ended
 
September 30, 2020, average term securitization borrowings
outstanding were $57.4 million at a weighted average coupon of 4.32%
Our wholly-owned subsidiary,
 
MBB, serves as our primary funding source. MBB raises fixed-rate and variable
 
-rate FDIC-insured
deposits via the brokered certificates of deposit market, on a direct basis, and
 
through the brokered MMDA Product. At September 30,
2021,
 
brokered certificates of deposit represented approximately 70% of
 
total deposits, while approximately 23% 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 nine-month period ended September 30,
 
2021 as we retained all
of our origination volume on our balance sheet. There were $28.3
 
million of asset sales for the nine-month period ended September
30, 2020 for a $2.4 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 $5.9 million for the nine-month period ended
September 30, 2021, compared to $6.6 million for the nine-month period
 
ended September 30, 2020 as the overall portfolio
contracted.
Other income.
 
Other income was $9.8 million and $11.2
 
million for the nine-month periods ended September 30, 2021 and September
30, 2020, respectively.
 
The decrease was primarily driven by a $0.6 million decrease on servicing of leases sold to
 
third parties and a
$0.3 million decrease of lower insurance policy fees.
Salaries and benefits expense.
 
The following table summarizes the Company's Salary and benefits expense:
Nine Months Ended September 30,
 
2021
2020
(Dollars in thousands)
Salary, benefits and payroll
 
taxes
$
18,650
$
21,248
Incentive compensation
5,488
3,343
Commissions
858
1,111
 
Total
$
24,996
$
25,702
Total salaries and benefits
 
expense decreased to $25.0 million for the nine-month period ended
 
September 30, 2021 compared to $25.7
million for the corresponding period in 2020. In 2020, in response to
 
COVID-19, we reduced our workforce resulting in a lower
expense base. Our salary,
 
benefits and payroll tax expense was $2.6 million lower for the nine-months ended September
 
30, 2021 than
for the same period of 2020, primarily driven by higher average headcount during
 
the first nine months of 2020 and severance
recorded associated with the workforce reduction.
Incentive compensation increased $2.1 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-51-
General and administrative expense.
 
The following table summarizes General and administrative expense:
Nine Months Ended September 30,
 
2021
2020
(Dollars in thousands)
Property taxes
$
6,429
$
6,178
Occupancy and depreciation
3,276
4,218
Professional fees
5,329
2,994
Information technology
3,426
2,953
Marketing
917
870
FDIC Insurance
333
1,089
Acquisition-related contingent payment fair value adjustment
—
(1,435)
Other G&A
6,113
7,302
 
Total
$
25,823
$
24,169
General and administrative expense increased to $25.8 million for
 
the nine-months ended September 30, 2021 from $24.2 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 nine-months ended September 30, 2020.
 
Provision for income taxes.
Income tax expense of $8.0 million was recorded for the nine-month period ended
 
September 30, 2021,
compared to an income tax benefit of $8.3 million for the nine-month
 
period ended September 30, 2020.
 
For the nine months ended September 30, 2021 our effective
 
tax rate was 26.2% and for the nine months ended September 30, 2020,
our effective tax rate was 35.6%, driven by a $3.2 million discrete benefit,
 
resulting from certain provisions in the Coronavirus Aid,
Relief, and Economic Security Act (“CARES Act”) that allow for a remeasurement
 
of our federal net operating losses.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-52-
L
IQUIDITY AND
C
APITAL
R
ESOURCES
Our business requires a substantial amount of liquidity and capital to operate
 
and grow. Our primary liquidity
 
need is to fund new
originations; however, we also utilize liquidity
 
for our financing needs (including our deposits and long term deposits), to fund
infrastructure and technology investment, to pay dividends and to pay administrative
 
and other non-interest expenses.
 
As a result of the uncertainties surrounding the actual and potential impacts of COVID-19
 
on our business and financial condition, in
the first quarter of 2020 we raised additional liquidity through the issuance of
 
FDIC-insured deposits and we increased our borrowing
capacity at the Federal Reserve Discount Window.
 
We are dependent
 
upon the availability of financing from a variety of funding sources to satisfy these liquidity
 
needs. Historically, we
have relied upon five principal types of external funding sources for
 
our operations:
 
•
FDIC-insured deposits issued by our wholly-owned subsidiary,
 
MBB;
 
 
•
 
borrowings under various bank facilities;
 
 
•
 
financing of leases and loans in various warehouse facilities (all of which
 
have since been repaid in full);
 
•
 
financing of leases through term note securitizations; and
 
•
 
sale of leases and loans through our capital markets capabilities.
Deposits issued by MBB represent our primary funding source for new originations,
 
primarily through the issuance of FDIC insured
deposits.
 
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.
 
See “Items Subsequent to September 30, 2021”
below for more information regarding actions taken in the fourth quarter
 
to effectuate this transition.
MBB is a Utah state-chartered, Federal Reserve member commercial bank.
 
As such, MBB is supervised by both the Federal Reserve
Bank of San Francisco and the Utah Department of Financial Institutions.
We declared
 
a dividend of $0.14 per share on July 29, 2021. The quarterly dividend was paid on
 
August 19, 2021 to shareholders of
record on the close of business on August 9, 2021, which resulted in a dividend
 
payment of approximately $1.7 million. It represented
the Company’s fortieth
 
consecutive quarterly cash dividend.
 
At September 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
 
$222.3 million. This amount excludes additional liquidity that
may be provided by the issuance of insured deposits through MBB.
Our debt to equity ratio was 3.69 to 1 at September 30, 2021 and 3.87
 
to 1 at December 31, 2020.
Net cash provided by investing activities was $52.5 million for the nine
 
-month period ended September 30, 2021, compared to $87.6
million for the nine-month period ended September 30, 2020. The
 
decrease in cash from investing activities is primarily due to
reductions
 
of $29.7 million in principal collections on leases and loans and $25.7 million
 
in proceeds from sales of leases originated
for investment offset by $11.1 million
 
in proceeds received on the sale of our investment securities.
 
Net cash provided by financing activities was $29.1 million for
 
the nine-month period ended September 30, 2021, compared to net
cash used in financing activities of $61.7 million for the nine-month period
 
ended September 30, 2020. The increase in cash flows
from financing activities is primarily due to an increase of $69.0 million in deposits and
 
decreases of $17.5 million of term
securitization repayments and $4.5 million in repurchases of common stock.
 
Financing activities also include transactions related to
the Company’s paymen
 
t
 
of dividends.
 
Net cash provided by operating activities was $3.4 million and $45.0 million
 
for the nine-month periods ended September 30, 2021
and September 30, 2020, respectively.
 
Adjustments to reconcile net income or loss to net cash provided by operating activities
including goodwill impairment, provision for credit losses, changes
 
in deferred income tax liability and leases originated for sale and
proceeds thereof are discussed in detail in the notes to the Consolidated Financial
 
Statements.
We expect cash
 
from operations, additional borrowings on existing and future
 
credit facilities and funds from deposits to be adequate
to support our operations and projected growth for the next 12 months
 
and the foreseeable future.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-53-
Total
 
Cash and Cash Equivalents.
Our objective is to maintain an adequate level of cash, investing any free
 
cash in leases and loans.
We primarily
 
fund our originations and growth using FDIC-insured deposits issued through
 
MBB. Total cash and
 
cash equivalents
available as of September 30, 2021 totaled $222.3 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 September 30, 2021 and December 31, 2020 totaled $1.0 million
 
and
$6.0 million, respectively.
Restricted Interest-Earning Deposits with Banks
. As of September 30, 2021, and December 31, 2020, we had $3.2
 
million and $4.7
million, respectively,
 
of cash that was classified as restricted interest-earning deposits with banks
 
.
 
Restricted interest-earning deposits
with banks consist primarily of various trust accounts related to our secured
 
debt facilities. Therefore, these balances generally decline
as the term securitization borrowings are repaid.
 
Borrowings.
Our primary borrowing relationship requires the pledging
 
of eligible lease and loan receivables to secure amounts
advanced. Our secured borrowings amounted to $11.7
 
million at September 30, 2021 and $30.7million at December 31, 2020.
 
Information pertaining to our borrowing facilities is as follows:
For the Nine Months Ended September 30, 2021
As of September 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
20,858
4.59
%
11,719
4.33
%
—
$
25,000
$
28,279
$
20,858
4.59
%
$
11,719
4.33
%
$
25,000
__________________
(1)
 
Does not include MBB’s access to the Federal Reserve Discount Window,
 
which is based on the amount of assets MBB chooses to pledge.
Based on assets pledged at September 30, 2021, MBB had $50.2 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.
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 $50.2 million in unused, secured borrowing
 
capacity at the Federal Reserve Discount Window,
 
based on
$55.9 million of net investment in leases pledged at September 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
 
 
 
 
 
 
 
 
 
 
 
 
 
-54-
retain equity and/or residual interests. Accordingly,
 
assets and related debt of the VIE is included in the accompanying Consolidated
Balance Sheets.
 
At September 30, 2021 and December 31, 2020 outstanding
 
term securitizations amounted to $11.7 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 dividend
payments and numerous other aspects of operations.
 
These regulations generally have been adopted to protect depositors and
creditors rather than shareholders.
 
At September 30, 2021, Marlin Business Service Corp and MBB’s
 
Tier 1 leverage ratio, common equity
 
Tier 1 risk-based ratio, Tier
 
1
risk-based capital ratio and total risk-based capital ratios exceeded the
 
requirements for well-capitalized status.
See “Management’s
 
Discussion and
 
Analysis of Financial
 
Condition and
 
Results of Operations
 
—Executive Summary”
 
for discussion
of updates to our capital requirements driven by the termination of the CMLA Agreement and
 
driven by our election to utilize the five-
year transition related
 
to the adoption of
 
the CECL accounting
 
standard.
 
In addition, see Note
 
13—Stockholders’ Equity
 
in the Notes
to Consolidated Financial Statements for additional information regarding
 
these ratios and our levels at September 30, 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 September 30, 2021
The Company declared a dividend of $0.14 per share on October 28, 2021.
 
The quarterly dividend, which is expected to result in a
dividend payment of approximately $1.7 million, is scheduled to be paid
 
on November 18, 2021 to shareholders of record on the close
of business on November 8, 2021. It represents the Company’s
 
forty-first 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.
On October 8, 2021, MBB entered into an agreement to transfer its portfolio of
 
brokered certificates of deposit held through The
Depository Trust Company with an outstanding
 
principal amount of approximately $204.8 million to a Federal Deposit Insurance
Corporation (“FDIC”)-insured depository institution.
 
In exchange for the acquiror’s assumption of those deposits, MBB has agreed
 
to
pay the acquiror at the time of transfer, in addition
 
to the outstanding principal amount of the deposits, all accrued but unpaid interest
on the deposits as of the transfer date plus a sum of $750,000.
 
The agreement contemplates that the transfer,
 
which is subject to
(among other customary closing conditions) the approval of the Utah Department
 
of Financial Institutions and of the FDIC pursuant to
Section 18(c) of the Federal Deposit Insurance Act, will occur in late December or
 
early January.
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.
 
 
 
 
-55-
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.
 
 
-56-
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
The information appearing in the section captioned “Management’s
 
Discussion and Analysis of Financial Condition and Results of
Operations – Market Interest Rate Risk and Sensitivity” under Item 2 of
 
Part I of this Form 10-Q is incorporated herein by reference.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Off
 
icer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the
effectiveness of our disclosure controls and procedures as of the end
 
of the period covered by this report.
 
Based on that evaluation, the CEO and CFO concluded that our
 
disclosure controls and procedures as of the end of the period covered
by this report are designed and operating effectively to provide
 
reasonable assurance that the information required to be disclosed by
us in reports filed under the 1934 Act is (i) recorded, processed, summarized and reported
 
within the time periods specified in the
SEC's rules and forms and (ii) accumulated and communicated to our management,
 
including the CEO and CFO, as appropriate to
allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s
 
internal control over financial reporting identified in connection with management’s
evaluation that occurred during the Company's third fiscal quarter
 
of 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 York,
 
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. The Company subsequently engaged in
arm’s-length negotiations
 
with parties to three of the four complaints to attempt to resolve the claims asserted and reached an
agreement whereby the Company filed a Current Report on Form 8-K
 
on July 23, 2021 (the “July 23 Form 8-K”) containing certain
supplemental disclosures regarding the Merger.
 
The Company believes that the allegations and claims asserted in the complaints lack
merit, and that the supplemental disclosures set forth in the July 23 Form 8-K were
 
not required or necessary under applicable laws.
However, solely in order to avoid the
 
risk of the litigation delaying or otherwise adversely affecting the Merger
 
and to minimize the
costs, risks, and uncertainties inherent in defending the litigation, the Company
 
voluntarily filed the July 23 Form 8-K. The Company
denies any liability or wrongdoing in connection with the alleged claims, and
 
nothing in the July 23 Form 8-K should be construed as
 
-57-
an admission of the legal necessity or materiality under applicable laws of any
 
of the supplemental disclosures.
 
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.
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.
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,
 
governmental and regulatory approvals and
completion of the De-banking.
The Merger Agreement includes customary representations
 
and warranties of the parties.
 
We have also made
 
certain additional
covenants in the Merger Agreement, including (a) covenants regarding
 
the operation of our business and that of our subsidiaries
pending the closing of the Merger,
 
and (b) a customary non-solicitation covenant prohibiting us from soliciting, providing
 
non-public
information in response to, or entering into discussions or negotiations with
 
respect to, proposals relating to alternative business
combination transactions, except as permitted under the Merger
 
Agreement. The Merger Agreement provides that, upon termination
of the Merger Agreement under certain specified circumstances, including
 
the acceptance of a Superior Proposal (as defined in the
Merger Agreement) for an alternative business combination
 
transaction, we will be required to pay a termination fee of approximately
$10.3
 
million.
There is no assurance that the Merger will occur on the terms and timeline
 
as set forth in the Merger Agreement and currently
contemplated, or at all. Potential risks and uncertainties include, but
 
are not limited to:
•
 
The Merger Agreement generally requires that we operate our
 
business in the ordinary course pending consummation of
the proposed Merger and restricts us, without Madeira Holdings, LLC’s
 
consent, from taking certain specified actions until the Merger
is completed. These restrictions may affect our ability
 
to execute our business strategies and attain our financial and other goals which
could negatively impact our business and results of operations.
 
•
 
The efforts to satisfy the closing conditions of the proposed Merger,
 
including the De-banking and regulatory approval
processes, may place a significant burden on management and internal
 
resources, and the Merger whether or not consummated, may
result in a diversion of management’s
 
attention from our day-to-day operations and result in a disruption of our
 
operations. Any
significant diversion of management attention away from our ongoing
 
business and any difficulties encountered in the Merger
 
process
could negatively impact our business and results of operations.
 
•
 
We could be
 
subject to litigation related to the proposed Merger,
 
which could result in significant costs and expenses. In
addition to potential litigation-related expenses, we have incurred
 
and will continue to incur other costs, expenses and fees for
professional services and other transaction costs in connection with
 
the proposed Merger, and many
 
of these fees and costs are payable
regardless of whether or not the proposed Merger is consummated.
 
•
 
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
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.
 
-58-
Item 2.
 
Unregistered Sales of Equity Securities and Use of
 
Proceeds
Information on Stock Repurchases
On August 1, 2019, the Company’s
 
Board of Directors approved a stock repurchase plan (the “2019 Repurchase Plan”) under
 
which
the Company is authorized to repurchase up to $10 million in value of its outstanding
 
shares of common stock. This authority may be
exercised from time to time and in such amounts as market conditions warrant.
 
Any shares purchased under this plan are returned to
the status of authorized but unissued shares of common stock. The repurchases may
 
be made on the open market, in block trades or
otherwise. The stock repurchase program does not obligate the Company to
 
acquire any particular amount of common stock, and it
may be suspended at any time at the Company's discretion. The repurchases are
 
funded using the Company’s working
 
capital.
 
The Company did not repurchase any of its common stock during the three months
 
ended September 30, 2021. As of September 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.
Pursuant to the 2014 Plan and the 2019 Plan, participants may have shares withheld
 
to cover income taxes. During the three-month
period ended September 30, 2021, there were 36 shares repurchased to
 
cover income tax withholding under the 2014 Plan and the
2019 Plan at an average cost of $22.44 per share.
 
Item 3.
 
Defaults Upon Senior Securities
None.
Item 4.
 
Mine Safety Disclosures
None.
Item 5.
 
Other Information
None
 
-59-
 
Item 6.
 
Exhibits
Exhibit
Number
Description
 
 
3.1
 
(1)
3.2
(2)
3.3
(3)
 
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
September
 
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
 
Cash
 
Flows
 
and
 
(vi) the
 
Notes
 
to
 
Unaudited
 
Consolidated
Financial Statements. (Submitted electronically with this report)
__________________
(1)
Previo
usly filed with the SEC as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed
on March 5, 2008, and incorporated by reference herein.
(2)
Previously filed with the SEC as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 20, 2016, and incorporated by
reference herein.
(3)
Previously filed with the SEC as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 24, 2020, and incorporated by
reference herein.
 
 
 
-60-
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:
 
October 29, 2021
 
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