MARLIN BUSINESS SERVICES CORP. 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 theSEC . 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 endedDecember 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
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
Ltd., aBermuda -based, wholly-owned captive insurance subsidiary ("Assurance One"), which
enables us to reinsure the property insurance coverage for the
equipment financed by
("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
("FDIC")-insured
deposits.
In
an equipment leasing company which identifies and sources lease and loan contracts for investor partners for a fee, and
in
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
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
Partners, LLC . OnApril 18, 2021 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among the Company, Madeira
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
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
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
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 endedSeptember 30, 2021 , we generated
3,836 new Equipment Finance leases and loans with equipment
costs of
million, compared to 3,410 new Equipment Finance leases and loans with equipment
costs of$65.8 million generated for the three months endedSeptember 30, 2020 . Working
Capital loan originations were
period endedSeptember 30, 2020 . Overall, our average net investment in total finance receivables for the
three-month period ended
to
endedSeptember 30, 2020 , which has caused a corresponding reduction in interest and fee income. -38-
Equipment Finance receivables delinquent over 30 days were
0.76% at
2020. Working Capital receivables
over 15 days delinquent were 1.49% atSeptember 30, 2021 , down 244 basis points from
3.93% at
Annualized total net charge-offs for the third quarter
of 2021 were 0.59% of average total finance
receivables as compared to 4.54% for the same period in 2020.
For the three-months ended
benefit of
in the third quarter of 2021 was primarily due to positive changes in the outlook of macroeconomic assumptions to which the reserve
is correlated as well as positive trends in portfolio performance. Allowance for credit losses as a percentage of total finance
receivables was 3.35%
atSeptember 30, 2021 compared with 6.75% atSeptember 30, 2020 . -39- F INANCE R ECEIVABLES AND A SSET Q UALITY
The following table summarizes certain portfolio statistics for the
periods presented:September 30 ,June 30 ,December 31 ,September 30, 2021 2021 2020 2020 (Dollars in thousands) Finance receivables: End of period$ 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, throughSeptember 30 282,772 184,630 - 284,117 Assets Sold - three months - - - 4,286 Assets Sold - nine months, throughSeptember 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
Net income.
Net income of
ended
compared to net income of
the three-month period endedSeptember 30, 2020 .
This
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; -$1.5 million increase in general and administrative, primarily driven
by a prior year
of the FFR business. Average balances and net interest margin. The following table summarizes the Company's
average balances, interest income, interest expense and average yields and rates on major categories of interest-earning
assets and interest-bearing liabilities for the three-
month periods ended
. -41- Three Months EndedSeptember 30, 2021 2020 (Dollars in thousands) Average Average Average Yields/ Average Yields/ Balance (1) Interest Rates (2) Balance (1) Interest Rates (2) Interest-earning assets: Interest-earning deposits with banks$ 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 EndedSeptember 30, 2021 Compared To Three Months EndedSeptember 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 andSeptember 30, 2020 . Three Months EndedSeptember 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
million for the three months ended
The annualized net interest and fee margin decreased
36 basis points to 8.51% in the three-month period endedSeptember 30, 2021 from
8.87% for the corresponding period in 2020.
Interest income, net of amortized initial direct costs and fees, was
million and
Average total
finance receivables decreased
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
period ended
Working Capital originations
comprised$17.0 million of our originations for the three months endedSeptember 30, 2021 , compared
to
During the third quarter of 2021, the company originated$98.6 million of total originations compared
to
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
ended
30, 2020, respectively, and included approximately$1.2 million and$1.7 million in late fee income for the three-month periods endedSeptember 30, 2021 andSeptember 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
also included approximately
2021 and
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
period ended
million on lower deposit balances
and rates. Additionally, there
was
a decrease of
Interest expense, as an annualized percentage of average total finance receivables, decreased 74 basis points to 1.29% for the three
-month period ended
million and
securitization borrowings outstanding were
MBB, serves as our primary funding source. MBB raises fixed-rate and variable
-rateFDIC -insured deposits via the brokered certificates of deposit market, on a direct basis, and
through the brokered MMDA Product. At
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
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 endedSeptember 30, 2021 , compared to$2.1 million for the three-month period endedSeptember 30, 2020 as the overall portfolio contracted. Other income.
Other income was
periods endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. Salaries and benefits expense.
The following table summarizes the Company's Salary and benefits expense:
Three Months Ended
2021
2020
(Dollars in thousands) Salary, benefits and payroll taxes$ 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
million for the three-month period endedSeptember 30, 2021 from$8.5 million for the corresponding
period in 2020 primarily due to equity-based compensation which was adjusted to lower target levels in the corresponding period
in 2020 and due to higher commission and bonus in the 2021 period driven by increased origination volume.
-45-
General and administrative expense.
The following table summarizes General and administrative expense:
Three Months Ended
2021 2020 (Dollars in thousands) Occupancy and depreciation$ 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
to
driver of the change was a
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
Provision for income taxes. Income tax expense of$2.0 million was recorded for the three-month period endedSeptember 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
rate of 16.1% for the three-month period ended
that can be recognized under Accounting Standards
Codification ("ASC") 740,
Income Taxes
.
-46-
Comparison of the Nine-Month Periods Ended
andSeptember 30, 2020 Net income/loss. Net income of$22.6 million was reported for the nine-month period
ended
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
This
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;
-
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; -$16.8 million increase in Income tax expense. Average balances and net interest margin. The following table summarizes the Company's average balances, interest income, interest expense
and average yields and rates on major categories of interest-earning assets and interest-bearing
liabilities for the nine- month periods endedSeptember 30, 2021 andSeptember 30, 2020 . -47- Nine Months EndedSeptember 30, 2021 2020 (Dollars in thousands) Average Average Average Yields/ Average Yields/ Balance (1) Interest Rates (2) Balance (1) Interest Rates (2) Interest-earning assets: Interest-earning deposits with banks$ 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 7,189Goodwill - 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 EndedSeptember 30, 2021 Compared To Nine Months EndedSeptember 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
Nine Months Ended
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
million for the nine-month period ended
period ended
decreased 53 basis points to 8.44% in the nine-month period endedSeptember 30 ,
2021 from 8.97% for the corresponding period in 2020.
Interest income, net of amortized initial direct costs and fees, decreased
to$53.6 million for the nine-month period endedSeptember 30, 2021 from$73.1 million for the nine-month
period ended
by a 15.8% decrease in average total finance receivables, which decreased$153.2 million to$817.7 million for the
nine-months ended
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
to 10.96% for the nine-month period endedSeptember 30, 2020 . During
the nine months of 2021, the company originated
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
periods ended
and included approximately
the nine-month periods endedSeptember 30, 2021 andSeptember 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
$2.7 million and$2.4 million of early buyout income for the nine-month periods endedSeptember 30, 2021 and
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
period ended
of
of
expense, as an annualized percentage of average total finance receivables, decreased 76 basis points to 1.41% for the nine-month
period ended
million and
borrowings outstanding were$20.9 million at a weighted average coupon of 4.59%. For the nine-month period ended
MBB, serves as our primary funding source. MBB raises fixed-rate and variable
-rateFDIC -insured deposits via the brokered certificates of deposit market, on a direct basis, and
through the brokered MMDA Product. At
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
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
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 endedSeptember 30, 2021 , compared to$6.6 million for the nine-month period endedSeptember 30, 2020 as the overall portfolio contracted. Other income.
Other income was
million for the nine-month periods ended
The decrease was primarily driven by a
third parties and a
The following table summarizes the Company's Salary and benefits expense:
Nine Months Ended
2021 2020 (Dollars in thousands) Salary, benefits and payroll taxes$ 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
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
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$2.1 million , primarily due to equity-based compensation which was adjusted to lower target levels in the corresponding period in 2020 and lower bonus on COVID related impacts on
company performance. -51-
General and administrative expense.
The following table summarizes General and administrative expense:
Nine Months Ended
2021 2020 (Dollars in thousands) Property taxes$ 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 870FDIC 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
the nine-months ended
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 endedSeptember 30, 2020 . Provision for income taxes. Income tax expense of$8.0 million was recorded for the nine-month period endedSeptember 30, 2021 , compared to an income tax benefit of$8.3 million for the nine-month
period ended
For the nine months ended
tax rate was 26.2% and for the nine months ended
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 ANDC 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
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:
•
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 ofFDIC 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 toFDIC -insured
deposits.
See "Items Subsequent toSeptember 30, 2021 " below for more information regarding actions taken in the fourth quarter to effectuate this transition. MBB is aUtah state-chartered,Federal Reserve member commercial bank.
As such, MBB is supervised by both the
a dividend of
August 19, 2021 to shareholders of record on the close of business onAugust 9, 2021 , which resulted in a dividend
payment of approximately
consecutive quarterly cash dividend.
At
borrowing capacity from a federal funds line of credit
with a correspondent bank in addition to available cash and cash equivalents of
to 1 atDecember 31, 2020 . Net cash provided by investing activities was$52.5 million for the nine
-month period ended
decrease in cash from investing activities is primarily due to reductions
of
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
the nine-month period ended
ended
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
for the nine-month periods ended
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
MBB. Total cash and
cash equivalents available as ofSeptember 30, 2021 totaled$222.3 million , compared
to
Time Deposits with Banks.
Time deposits with banks are primarily
composed of
the certificates of deposits have the ability to redeem early,
however, early redemption penalties may be incurred. Total
time deposits as of
and
$6.0 million , respectively. Restricted Interest-Earning Deposits with Banks . As ofSeptember 30, 2021 , andDecember 31, 2020 , we had$3.2 million and$4.7 million , respectively,
of cash that was classified as restricted interest-earning deposits with banks
. Restricted interest-earning deposits with banks consist primarily of various trust accounts related to our secured
debt facilities. Therefore, these balances generally decline as the term securitization borrowings are repaid.
Borrowings.
Our primary borrowing relationship requires the pledging
of eligible lease and loan receivables to secure amounts
advanced. Our secured borrowings amounted to
million at
Information pertaining to our borrowing facilities is as follows: For the Nine Months EndedSeptember 30, 2021 As ofSeptember 30, 2021 Maximum Maximum Month End Average Weighted Weighted Facility Amount Amount Average Amount Average Unused Amount Outstanding Outstanding Rate (3) Outstanding Rate (2) Capacity (1) (Dollars in thousands) Federal funds purchased$ 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
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
million.
Federal Reserve Discount Window
In addition, MBB has received approval to borrow from the
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
Securitizations
On
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
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
term securitizations amounted to
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 securitizationBank 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 theFederal Reserve Board and theFederal Reserve Bank even if
not otherwise regulated by the
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
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
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