MARLIN BUSINESS SERVICES CORP. 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
endedDecember 31, 2019 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 business strategy; (b) our projected
operating
results; (c) our ability to obtain external deposits or financing; (d)
our understanding of our competition; and (e) industry and market trends. The Company's actual results
could differ materially from those anticipated
by such forward-looking statements due to a number of factors, some of which are beyond the Company's
control, including, without limitation:
?
availability, terms and deployment
of funding and capital;
?
changes in our industry, interest
rates, the regulatory environment or the general economy resulting
in changes to our business strategy; ? the degree and nature of our competition; ?
availability and retention of qualified personnel; ?
general volatility of the capital markets; ? the effects of 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
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
we established
which enables us to reinsure the property insurance coverage for the
equipment financed by
of
funding
source through its issuance of
("FDIC")-insured
deposits.
In
("HKF"), an equipment leasing company
which primarily identifies and sources lease and loan contracts
for investor partners for a fee, and in
we completed
the acquisition of Fleet Financing Resources ("FFR"), an company
specializing in the leasing and financing of both new and used commercial vehicles, with an emphasis on livery equipment and
other types of commercial vehicles used by small businesses.
We access our
end user customers primarily 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 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. -43- 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 Summary
Through the second quarter, the impacts
of the COVID-19 pandemic continued to be experienced
by our business. Origination volumes for both equipment finance and working capital loans
were down, a combined decrease of almost 70% from the
second
quarter of 2019.
While we have tightened our underwriting standards for all of our products,
the decline in volume is primarily due to decreased demand during this period of business shutdowns and economic uncertainty. We expect our origination volumes for the second half of 2020 will be negatively impacted as the effects
of the pandemic continue and this period of uncertainty continues to impact the macroeconomic environment.
Given the ongoing health crisis in
recent COVID-19 flare- ups in the south and west, any return to pre-pandemic levels of
activity remains uncertain.
We implemented
a payment deferral contract modification program to assist
our customers who, during this period of economic decline, were current under their existing obligations.
As of
in
leases and loans in payment deferral agreements,
and on average the term of the modified contracts had increased
by three months.
We have begun to extend
the deferrals for certain customers using specific underwriting
criteria, for up to six months of total modification.
As our contract modification program will allow for up-to six months
of payment deferrals, and the program began in late March,
the
ultimate performance of this portfolio and the customers'
ability to resume full payment will be shown generally starting
late in the third quarter or going into the fourth quarter of this year.
Based on their modified terms as of
25% of our total modified contracts had already resumed their regular payment schedule
before the end of the second quarter,
72%
were scheduled to resume payment in the third quarter and the remaining 3% were
scheduled to resume payment in the fourth quarter.
We are closely monitoring the payment performance of our customers as their
post-deferral obligations become due.
While most modification extensions require partial payments, the ability of these customers
to resume their scheduled payment obligations under their contract has yet to be confirmed.
Additionally, their ability to resume
payment may be highly impacted by the extent and duration of the continued impacts of the pandemic, which remains uncertain
.
Our delinquency statistics as of
based on their current effective terms, which would include intervals of either full or partial payment deferral for the modified
portfolio.
For Equipment Finance and Working
Capital, 12.5% and 42.4% of the respective portfolios were in the modification program.
The 60+ delinquency rate for Equipment Finance has increased
to 2.52% as of
2019.
The 30+ delinquency rate for Working
Capital has increased to 2.68% as ofJune 30, 2020 from 1.42% atDecember 31 ,
2019. Further, these delinquency rates have doubled
from the quarter endedMarch 31, 2020 . Year
-to-date, we have recognized
our allowance for qualitative and forecast adjustments as a result of the expected impacts of the COVID-19 pandemic on our portfolio.
These increases include
in the second quarter, and$19.2 million in the
first quarter.
Our allowance as a percent of receivables has increased for Equipment
Finance
to 6.00% from 2.05% at
for Working Capital
to 18.92% from 3.12% at
2019.
Our total Allowance of
incorporates all of our current judgments about the impact of the COVID
-19
pandemic on our portfolio.
Our estimate of credit losses is based on our assessment of the
risks to our portfolio, including certain economic assumptions driven by forecasted unemployment and business bankruptcy levels, our expectations regarding the performance of our portfolio under these economic conditions,
and such estimates are driven by limited information regarding the extent and timeline of impacts from COVID-19. All of the assumptions
and expectations underlying our estimate of credit loss depend largely on future developments, and these estimates are
highly uncertain;
the ultimate amount of credit losses we may realize on our portfolio may vary from our current estimate.
We may recognize credit
losses in excess of our reserve, or adjustments to our required reserve based on future performance,
and such adjustments may be significant, based on: (i)
the actual performance of our portfolio, including the performance of the modified portfolio;
(ii) any further changes in the economic environment; or (iii)
other developments or unforeseen circumstances that impact our portfolio. -44- We recognized
a
driven largely by the
provision for loan loss.
We
began efforts to tighten our expense base, putting approximately
120 employees on furlough in mid-April.
In June, we made the decision to permanently reduce our workforce by approximately
80 employees, which reduced our headcount to approximately
250
employees at the end of July,
down from approximately 350 employees as of
2019.
Our total Salaries and benefits was$7.7 million for the second quarter of 2020, which is$4.8
million lower than the same quarter of 2019.
That reduction reflects$1.7 million of lower salary expense, primarily driven by reduced
headcount from the furlough, partially offset by
million of severance recognized, plus$1.9 million lower incentive compensation cost and
million of lower commission expense.
We also made the decision to exit one office lease as part of our
cost reduction efforts, and recognized
associated with that planned exit. We continue
to assess all other aspects of our expense base in order to
stabilize our operations and minimize the negative impacts of the ongoing pandemic.
Through the second quarter, our employees
continue to work remotely,
and we have not experienced any significant interruption to our operations from that transition.
We continue to
assess how to best evolve our operations and how to best serve our customers
in this changing environment. -45- F INANCE R ECEIVABLES AND A SSET Q UALITY
The following table summarizes certain portfolio statistics for
the periods presented:June 30 ,March 31 ,December 31 ,June 30, 2020 2020 2019 2019 (Dollars in thousands) Finance receivables: End of period$ 974,679 $ 1,022,135 $ 1,007,706 (1)$ 1,057,727 (1) Average for the quarter (1) 979,313 1,008,823 1,034,464 1,031,774 Origination Volume - three months (6) 65,419 157,391 215,161 209,317 Origination Volume - six months, throughJune 30 (6) 222,810 - - 402,757 Assets Sold - three months 1,127 22,929 114,483 57,640 Assets Sold - six months, throughJune 30 24,056 - - 110,507 Leases and Loans Modified: (3) Payment deferral program (2) End of period$ 133,817 $ 19,518 - - As a % of end of period receivables (1) 13.7% 1.9% - - Other Restructured leases and loans, end of period$ 1,751 $ 3,095 $ 2,668 $ 3,122 Allowance for credit losses : (4) End of period$ 63,644 $ 52,060 $ 21,695 $ 16,777 As a % of end of period receivables (1) 6.53% 5.09% 2.15% 1.59% Annualized net charge-offs
to average total finance receivables
(quarter) (1) 3.47% 3.11% 3.00% 1.88% Delinquencies, end of period: (3)(5) Equipment Finance and CVG: Greater than 60 days past due, $$ 23,353 $ 10,156 $ 8,112 $ 6,593 Greater than 60 days past due, % 2.52% 1.05% 0.86% 0.66% Working Capital: Greater than 30 days past due, $$ 1,130 $ 673 $ 855 $ 240 Greater than 30 days past due, % 2.68% 1.14% 1.42% 0.47% __________________ (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. See further discussion of our Loan modification program below. (3) No renegotiated leases or loans met the definition of a Troubled Debt Restructuring for any period presented, including our payment deferral modifications, as discussed further below. (4) TheDecember 31, 2019 end of period allowance and % of receivables were$33,603 and 3.27% after theJanuary 1, 2020 adoption of CECL. See further discussion below. (5) Calculated as a percentage of net investment in leases and loans. (6) Amount of originations for the three and six months endedJune 30, 2020 presented
above excludes
of loans originated
under the Paycheck Protection Program (PPP). -46-
For three and six months ended
and forecast adjustments to
the allowance for credit losses as a result of the economic impact of the COVID-19 pandemic.
The COVID-19 pandemic, business shutdowns and impacts to our
customers, are still ongoing, and the extent of the effects of the pandemic on our portfolio
depends on future developments, which are highly uncertain and are
difficult to predict.
Further, we instituted a Loan modification
payment deferral program, as discussed further below,
to give payment relief to customers during this period.
As of
remains uncertain.
Our reserve as of
adjustments outlined below in our Provision discussion,
were
calculated referencing our historical loss experience, including loss
experience through the 2008 economic cycle, and our adjustments to that experience based on our judgements about the expected
impact of the COVID-19 pandemic.
Those judgements include certain expectations
for the extent and timing of impacts from COVID-19 on unemployment
rates and business bankruptcies and are based on our current expectations of the performance of our portfolio in the current environment. We may recognize credit losses in excess of our reserve, or increases to our estimated expected credit loss
es, in the future, and such increases may be significant, based
on: (i) the actual performance of our portfolio, including the performance
of the modified portfolio;
(ii) any further changes in the economic environment; or (iii) other developments or unforeseen circumstances that impact our portfolio. Loan Modification Program.
In response to COVID-19, starting in
we instituted a payment deferral program in order to assist our small
-business
customers that request relief who are current under their existing
obligations.
Our COVID-19 modification program allows for up to 6 months of deferred payments.
We typically processed
first requests to defer customers for up to 3 months; starting
in July, we have been evaluating and processing requests to extend the modification
period for certain customers using specific underwriting criteria, such that the modification terms may extend to up to 6
months in total.
The below table outlines certain data on the modified population
based on the balance and status as of
See discussion below the table on the status of this population subsequent to quarter-end. Equipment Working Finance Capital Total (Dollars in thousands) Net investment in leases and loans Completed modifications$ 115,941 $ 17,876 $ 133,817 % of total segment 12.5% 42.4% 13.7% Interest income recognized for the three months endedJune 30, 2020 on modified loans (1)$ 2,295 $ 1,633 $ 3,928 Number of modifications (units) Modified and Active 4,564 453 5,017 Modified and Resolved (2) 56 15 71 Not Processed (3) 3,107 84 3,191 Total Applications - owned portfolio 7,727 552 8,279 Weighted-average total term (months) before modification 56.0 15.7 after modification 59.0 18.9 _________________ (1)
We did not account for these modifications as TDR, as allowed by interagency
guidance issued in
As such these loans were not put on non-accrual upon modification.
The amount presented for interest income reflects total income recognized for the three months, for any loan that was modified in the quarter.
(2)
Resolved population through
for Equipment Finance, 55 loans paid in full and 1 charge-off, and for Working Capital, 11 loans paid in full and 4 charge-offs.
-47- (3)
Requests not processed includes requests declined or cancelled by the customer, requests declined by the Company, and
an insignificant amount of requests in process pending underwriting or without finalized documentation as ofJune 30, 2020 . ThroughJune 30, 2020 , the first round of modifications processed
for Equipment Finance generally consisted of adding three
months
of
As a result, the weighted-average total contract yield for this population declined
by 35 basis points.
The extension requests we are currently processing for
Equipment Finance, to extend the term of the deferral to
up to 6 months total, are generally being processed to require a partial
payment during the deferral period, with additions to the customers
'
post-deferral payments to achieve a consistent level of yield.
Through
Capital have generally consisted of up to 6 months of partial- payment deferral, with additions to the customers post-deferral
payments to achieve a consistent level of yield.
Through
Capital were not significant.
Portfolio Trends
During the three months ended
we generated 3,178 new Equipment Finance leases and loans with equipment
costs of$64.6 million , compared to 7,648 new Equipment Finance leases and
loans with equipment costs of
for the three months endedJune 30, 2019 .
Working Capital loan
originations were less than
period endedJune 30, 2020 ,
compared to
2019.
Overall, our average net investment in total finance receivables
for the three-month period ended
5.1% to$979.3 million , compared to$1,031.8 million for the three-month period
ended
Our origination volumes in the three months endedJune 30, 2020 were lower than our historical norms,
primarily driven by decreased demand attributable to
COVID-19
related business shutdowns and other macroeconomic factors.
We expect our
origination volumes for the third quarter of 2020 will continue to be negatively impacted by these factors, and our
portfolio of receivables may continue to decline as long as our
origination
volumes are less than portfolio runoff.
Given the ongoing health crisis in
recent COVID-19 flare-ups in the south and west, any returns to pre-pandemic levels of activity
remains uncertain.
The following table outlines the delinquency status of the Company's
portfolio as of
requests:
Net Investment (in thousands) Delinquency Rate by population 30 60 90+ Current Total 30 60 90+ Current Total Equipment Finance Non-Restructured Portfolio: Modification not requested$8,150 $7,625 $6,745 $744,616 $767,136 1.06% 0.99% 0.88% 97.07% 100% Requested, Not Processed (1) 4,289 5,793 3,061 31,287 44,430 9.65% 13.04% 6.89% 70.42% 100% Total Non-Restructured 12,439 13,418 9,806 775,903 811,566 1.53% 1.65% 1.21% 95.61% 100% Restructured Portfolio 424 109 21 115,387 115,941 0.37% 0.09% 0.02% 99.52% 100% Total Equipment Finance$12,864 $13,527 $9,826 $891,290 $927,507 1.39% 1.46% 1.06% 96.09% 100% -48- Net Investment (in thousands) Delinquency Rate by population 15 30 60+ Current Total 15 30 60+ Current Total Working Capital Non-Restructured Portfolio: Modification not requested$98 $212 $368 $22,243 $22,921 0.43% 0.92% 1.60% 97.05% 100% Requested, Not Processed (1) 7 13 81 1,180 1,281 0.58% 1.05% 6.35% 92.02% 100% Total Non-Restructured 105 225 449 23,423 24,202 0.44% 0.93% 1.85% 96.78% 100% Restructured Portfolio 608 242 212 16,814 17,876 3.40% 1.35% 1.18% 94.07% 100% Total Working Capital$713 $467 $661 $40,237 $42,078 1.69% 1.11% 1.57% 95.63% 100% _________________ (1)
Represents a subset of modification requests where the customer contacted the Company to initiate a modification, but the request was not processed.
This includes requests cancelled because the customer declined the revised terms or did not finalize documents, requests declined by the Company, as well as an insignificant amount of requests that were in-process at the end of the second quarter.
Contracts that are part of the payment deferral modification program
will be reflected in our Delinquency and Non-Accrual measures based on their performance against their modified terms.
Equipment Finance receivables over 30 days delinquent were
390 basis points as of
Working Capital receivables
over 15 days delinquent were 438 basis points as ofJune 30, 2020 , up 183 basis points fromMarch 31, 2020
and up 386 basis points from
Equipment Finance leases and loans are generally charged
-off when they are contractually past due for 120 days or
more.
Working
Capital loans are generally charged-off at 60
days past due. Annualized second quarter total net charge
-offs were 3.47% of average total finance receivables versus 3.11%
in the first quarter of 2020 and 1.88% a year ago.
Through the end of the second quarter,
we have not yet begun to experience any material increase in charge
-offs driven by the impact of COVID-19. We are
continuing to evaluate the delinquency trends of the non-modified portfolio,
and we are monitoring the payment performance of the modified portfolio as those customers
begin to resume payment. Based on their modified terms as
ofJune 30, 2020 , 25% of our total modified contracts had already resumed
their regular payment schedule before the end of the second quarter, 72% were scheduled to resume payment
in the third quarter and the remaining 3% were scheduled to resume
payment in the fourth quarter. We are
closely monitoring the payment performance of our customers as their
payments post-deferral become due.
While most modification extensions require partial payments, the ability
of these customers to resume their scheduled obligation of their contract has yet to be confirmed.
Additionally, their ability to resume
payment may be highly impacted by the extent and duration of the continued impacts of the pandemic, which remains
uncertain.
In accordance with interagency guidance as amended in April
2020, as affirmed by the FASB,
we are not accounting for our payment- deferral modified loans as TDRs, and we are continuing to accrue
interest on those loans.
For the three months endedJune 30, 2020 , we recognized total Interest income of$3.93 million on loans in our
COVID-19 loan modification program.
-49-
The following table summarizes non-accrual leases and loans
in the Company's portfolio:June 30 ,March 31 ,December 31 June 30, 2020 2020 2019 2019 (Dollars in thousands) Equipment finance$ 9,205 $ 5,357 $ 4,256 $ 3,494 Working capital 1,189 755 946 284 CVG 637 593 389 199 CRA and PPP - - - - Total non-accrual leases and loans$ 11,031 $ 6,705 $ 5,591 $ 3,977
Through
reflects the growth in delinquencies in our portfolio.
Income
recognition is discontinued on Equipment Finance leases or
loans, including CVG loans, when a default on monthly payment
exists
for a period of 90 days or more. Income recognition resumes
when the lease or loan becomes less than
90 days delinquent.
Working
Capital Loans are generally placed in non-accrual status when they
are 30 days past due. The loan is removed from non-accrual
status
once sufficient payments are made to bring the loan
current and evidence of a sustained performance period
as reviewed by management.
The Company has no loans 90 days or more past due that were
still accruing interest for any of the periods presented.
Portfolio Concentration.
The following table summarizes the concentrations of our portfolio
of net investment in leases and loans as of
by state and industry:
Top 10 Industries, by Borrower
SIC Code Top 10 States Equipment Equipment Finance Working Finance Working and CVG Capital and CVG Capital Medical 13.0 % 8.4 % CA 13.8 % 11.1 % Misc. Services 12.4 8.2 TX 11.7 10.5 Retail 10.4 13.1 FL 9.7 8.6 Construction 8.7 13.1 NY 6.8 5.7 Restaurants 7.5 8.2 NJ 4.6 6.7 Professional Services 6.6 5.4 PA 3.6 5.4 Manufacturing 5.9 9.2 GA 3.4 4.6 Transportation 5.3 3.0 IL 3.3 4.0 Trucking 4.5 2.3 NC 3.1 2.6 Automotive 3.4 6.4 MA 3.0 2.1 All Other 22.3 22.7 All Other 37.0 38.7 Total 100 % 100 % Total 100 % 100 %
As a result of the COVID-19 pandemic, we have been continually
assessing the risks to our portfolio, including consideration
of high- risk industries and geographic locations that are being more significantly
impacted by the spread of COVID-19.
While we are attempting to mitigate the impact of the COVID
-19 pandemic on our portfolio, by tightening underwriting standards
for
areas of elevated risk and by assisting borrowers that have been negatively
impacted, the extent of the impacts of COVID-19 on our portfolio remains uncertain.
-50-
Allowance for credit losses.
The following table provides a rollforward of our Allowance for
credit loss: Three Months Ended Six Months EndedJune 30 ,June 30, 2020 2019 2020 2019 (Dollars in thousands) Allowance for credit losses,December 31, 2019 $ 21,695 Adoption of ASU 2016-13 (CECL) 11,908 Allowance for credit losses, beginning of period$ 52,060 $ 16,882 33,603$ 16,100 Provision for credit losses 18,806 4,756 43,956 10,119 Net Charge-offs: Equipment Finance (6,995) (4,026) (12,960) (7,626) Working Capital (669) (551) (1,910) (1,204) CVG (830) (284) (1,470) (612) Net Charge-offs (8,494) (4,861) (16,340) (9,442) Realized cashflows from Residual Income 1,272 - 2,425 - Allowance for credit losses, end of period$ 63,644 $ 16,777 $ 63,644 $ 16,777 The allowance for credit losses as a percentage of total finance receivables increased to 6.53% as ofJune 30, 2020 , from 2.15% as ofDecember 31, 2019 . This increase in reserve coverage is primarily driven by an$11.9 million increase from the Janu ary 1, 2020 adoption of CECL, and a$34.7 million Provision for credit losses recognized as a result of
qualitative and forecast adjustments
in the six months endedJune 30 ,
2020 as a result of the estimated impact to the portfolio from the
COVID-19 pandemic. Provision for credit losses . The provision for credit losses recognized after the adoption of CECL is primarily driven by origination volumes, offset by the reversal of the allowance for any contracts sold, plus adjustments for changes in estimate each
subsequent reporting period.
For 2020, given the wide changes in the macroeconomic environment driven by COVID -19, the changes in estimate is the most significant driver of provision. In contrast, the allowance estimate recognized in 2019 under the probable, incurred model was
based on the current estimate of probable net credit
losses inherent in the portfolio. For the three months ended
2020, the
for credit losses recognized was
$14.0 million greater than the$4.8 million provision recognized for the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , the$44.0 million provision for credit losses recognized was$33.9 million greater than the$10.1 million provision recognized for the three months endedJune 30, 2019 . The provision included COVID-related forecast and qualitative adjustments of$15.5 million for the three months endedJune 30, 2020 , and$34.7 million for
the six months ended
Our estimate of COVID -related losses for the Equipment Finance portfolio is primarily driven by updates to a reasonable and supportable forecast based on the modeled correlation of changes in the loss experience of the our portfolio to certain economic statistics, specifically changes in the unemployme nt rate and changes in the number of business bankruptcies. Our COVID- provision for Equipment Finance was$10.8 million for the first quarter of 2020, and$10.1 million for the second quarter, and those provision levels were calculated using a 6-month period for the economic statistics. In the second quarter, the increase in provision estimate was driven
by the forecasted economic
conditions getting worse than
what was expected at the end of the first quarter. In addition, as ofJune 30 ,
we further increased our reserve for
a
based on an analysis that incorporates the current forecasted peak levels of unemployment and business bankruptcy. -51- For the CVG and Working
Capital portfolio segments, our estimate
of increased losses is
based on qualitative adjustments,
taking
into consideration alternative
scenarios to determine the Company's estimate of the probable impact of the economic shutdown.
The COVID-related provision for CVG was
million for the first quarter of 2020, and
The COVID-related provision for Working Capital was$5.5 million for the first quarter of 2020, and$1.5 million for the second quarter. The qualitative and economic adjustments to our allowance
take into consideration information
and our judgments as ofJune 30, 2020 , and are based in part on an expectation for the extent and timing of impacts from COVID -19 on unemployment rates and business bankruptcies, and are based on our current expectations of the performance of our portfolio in the current environment. The COVID-19 pandemic, and related business shutdowns, is still ongoing, and the extent of the effects of the pandemic on our portfolio depends on future developments, which
are highly uncertain and are difficult
to predict. We may recognize credit losses in excess of our reserve, or increases to our credit loss estimate, in the future, and such increases may be significant, based on future developments. Net Charge-offs. Equipment Finance and TFG receivables are generally charged -off when they are contractually past due for 120 days or more. Working Capital receivables
are generally charged-off at 60 days past
due. Total portfolio net charge -offs for the three months endedJune 30 , 2020 were$8.5 million (3.47% of average total finance receivables on an annualized basis), compared to$7.7 million (3.00%) for the three months endedDecember 31, 2019 , and$4.9 million (1.8 8%) for the three months endedJune 30 , 2019. Compared to the same quarter of the prior year, the Company is experiencing elevated net charge -offs, due primarily to economic headwinds that already existed as ofDecember 31, 2019 that were disproportionally impacting the small business and lower
credit quality borrowers in
our portfolio.
Through the end of the second quarter,
our charge-offs are only slightly elevated compared
to the levels in December.
We believe we have not yet begun to experience the full impact of expected
levels of elevated charge-offs as a result of the
COVID-19
pandemic.
However, we are seeing portfolio trends
that indicate that we will begin to realize those elevated
levels in the third quarter of 2020.
As of
from the quarter endedMarch 31, 2020 , or a$13.1 million increase in Equipment Finance leases and loans 60+
days past due, and
capital
loans 30+ past due.
Further, a large amount of our
portfolio is under deferred payment through our modification program,
as discussed above. We are
continually monitoring the performance of our portfolio and assessing all related
risks to ensure that our allowance estimate is sufficient to cover the expected
losses from COVID-19.
See further discussion with the Provision above about the risks to our reserve estimate, and discussion with Portfolio Trends above about current delinquency levels. Residual Income. Residual income includes income from lease renewals and gains and losses on the realization of residual values of leased equipment disposed at the end of term In 2019 and prior years, t he Company had previously recognized residual income within Fee Income in its Consolidated Statement s of Operations; the adoption of CECL results in any realized amounts of residual income being captured as a component of the activity of the allowance because the Company's estimate of credit losses under CECL takes into consideration all cashflows the Company expects
to receive or derive from the pools of contracts.
Adoption of ASU 2016-13 / CECL.
EffectiveJanuary 1, 2020 , we adopted new guidance for accounting for our allowance, or ASU 2016 -13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"). CECL replaces the probable/ incurred loss model that we historically used to measure our allowance, with a measurement of expected credit losses for the contractual term of our current portfolio of loans and leases. Under CECL, an allowance, or estimate of credit losses, will be recognized immediately upon the origination of a loan or lease, and will be adjusted in each subsequent reporting period. This
estimate of credit losses takes into consideration
all remaining cashflows the Company expects
to receive or derive from the pools of contracts, including recoveries after charge-off, accrued interest receivable and certain future cashflows from residual assets. The provision for credit losses recognized in our Consolidated Statements of Operations under CECL, starting in 2020, will be primarily driven by origination volumes, offset by the reversal of the allowance for any contracts sold, plus adjustments for changes in estimate each subsequent reporting period, including adjustments for economic forecasts within a reasonable and supportable time period. -52- The impact of adopting CECL effectiveJanuary 1, 2020 included a$11.9 million incr ease to the allowance, an$8.9 million decrease to Retained earnings and$3.0 million impact to our Net deferred income tax liability. See Note 2 - Summary of Significant Accounting Policies , for further discussion of the adoption
of this accounting standard, and see
Note 6 - Allowance for Credit Losses , for further discussion of the Company's methodology for measuring its allowance as of the adoption date. Also, see - Executive Summary and Note 13 - Stockholders' Equity , for discussion of our election to delay for two-years the effect of
CECL on regulatory capital, followed by a three-year phase
-in, or a five-year total transition.
Our recorded allowance reflects our current estimate of the expected credit losses of all contracts currently in portfolio, based on our
current assessment of information regarding the risks of our current portfolio, default and collection trends, a reasonable and supportable forecast of economic factors, qualitative adjustments based on our best estimate of expected losses for certain portfolio segments, among other internal and external factors. Our allowance measurement is an estimate, is inherently uncertain, and is
reassessed at each measurement date.
Actual performance of our portfolio and updates to other information
involved in our assessment may drive changes in modeled assumptions, may cause management to adjust the allowance estimate through qualitative adjustments and/or may result in actual losses that vary significantly from of our current estimate. -53- R ESULTS OF O PERATIONS
Comparison of the Three-Month Periods Ended
2020 andJune 30, 2019 Net income.
Net loss of
ended
resulting in diluted loss per share of$0.50 , compared to net income of$6.1 million and diluted EPS of$0.49
for the three-month period ended
This$12.0 million decrease in Net income was primarily driven by: -
(
by updates to the Company's
estimate, reflecting forecasted economic conditions from
COVID-19 pandemic.
The Company adopted CECL onJanuary 1, 2020 which substantially changed its methodology for measuring the estimate of credit
loss.
See further discussion of the Provision and the change in measurement in the prior section "- Finance Receivables and Asset Quality"; -
a decline in the size of our finance receivable portfolio;
-
a decrease in assets sold resulting from disruptions in the capital markets during this current economic environment;
-
Commissions, Incentives and the Company's proactive cost reduction measures.
Average balances
and net interest margin. The following table summarizes the Company's average balances, interest income, interest expense and average yields and rates on major
categories of interest-earning assets and interest-bearing liabilities
for the three- month periods endedJune 30, 2020 andJune 30, 2019 . -54- Three Months EndedJune 30, 2020 2019 (Dollars in thousands) Average Average Average Yields/ Average Yields/ Balance (1) Interest Rates (2) Balance (1) Interest Rates (2) Interest-earning assets: Interest-earning deposits with banks$ 218,748 $ 31 0.06 %$ 129,210 $ 752 2.33 % Time Deposits 12,248 60 1.97 11,715 72 2.46 Restricted interest-earning deposits with banks 7,046 - 0.01 14,671 28 0.77 Securities available for sale 10,481 52 1.98 10,674 74 2.76 Net investment in leases (3) 885,482 19,236 8.69 942,517 21,556 9.15 Loans receivable (3) 93,832 4,868 20.75 89,257 4,600 20.61 Total interest-earning assets 1,227,837 24,247 7.90 1,198,044 27,082 9.04 Non-interest-earning assets: Cash and due from banks 5,655 5,319 Allowance for loan and lease losses (50,963) (16,915) Intangible assets 7,192 8,070Goodwill - 6,735 Operating lease right-of-use assets 8,530 6,935 Property and equipment, net 8,488 3,996 Property tax receivables 9,975 8,479 Other assets (4) 34,303 37,957 Total non-interest-earning assets 23,180 60,576 Total assets$ 1,251,017 $ 1,258,620 Interest-bearing liabilities: Certificate of Deposits (5)$ 891,141 $ 4,741 2.13 % 842,274$ 5,042 2.39 % Money Market Deposits (5) 52,765 73 0.56 23,715 158 2.66 Long-term borrowings (5) 56,957 613 4.30 120,407 1,208 4.01 Total interest-bearing liabilities 1,000,863 5,427 2.17 986,396 6,408 2.59 Non-interest-bearing liabilities: Sales and property taxes payable 7,075 8,213 Operating lease liabilities 9,403 9,094 Accounts payable and accrued expenses 17,587 27,315 Net deferred income tax liability 26,576 24,601 Total non-interest-bearing liabilities 60,641 69,223 Total liabilities 1,061,504 1,055,619 Stockholders' equity 189,513 203,001 Total liabilities and stockholders' equity$ 1,251,017 $ 1,258,620 Net interest income$ 18,820 $ 20,674 Interest rate spread (6) 5.73 % 6.45 % Net interest margin (7) 6.13 % 6.90 % Ratio of average interest-earning assets to average interest-bearing liabilities 122.68 % 121.46 % __________________ (1) Average balances were calculated using average daily balances. -55- (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.
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 EndedJune 30, 2020 Compared To Three Months EndedJune 30, 2019 Increase (Decrease) Due To: Volume (1) Rate (1) Total (Dollars in thousands) Interest income: Interest-earning deposits with banks$ 310 $ (1,031) $ (721) Time Deposits 3 (15) (12) Restricted interest-earning deposits with banks (10) (18) (28) Securities available for sale (1) (21) (22) Net investment in leases (1,269) (1,051) (2,320) Loans receivable 237 31 268 Total interest income 659 (3,494) (2,835) Interest expense: Certificate of Deposits 281 (582) (301) Money Market Deposits 100 (185) (85) Long-term borrowings (677) 82 (595) Total interest expense 93 (1,074) (981) Net interest income 504 (2,357) (1,853) __________________ (1)
Changes due to volume and rate are calculated independently for each line item presented rather than presenting vertical subtotals for the individual volume and rate columns.
Changes attributable to changes in volume represent changes in average balances multiplied by the prior period's average rates. Changes attributable to changes in rate represent changes in average rates multiplied by the prior year's average balances. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate.
-56- Net interest and fee margin. The following table summarizes the Company's
net interest and fee income as an annualized percentage of average total finance receivables for the three-month periods
ended
Three Months EndedJune 30, 2020 2019 (Dollars in thousands) Interest income$ 24,248 $ 27,082 Fee income 2,450 3,507 Interest and fee income 26,698 30,589 Interest expense 5,428 6,408 Net interest and fee income$ 21,270 $ 24,181 Average total finance receivables (1)$ 979,313 $ 1,031,774 Annualized percent of average total finance receivables: Interest income 9.90 % 10.50 % Fee income 1.00 1.36 Interest and fee income 10.90 11.86 Interest expense 2.22 2.48 Net interest and fee margin 8.68 % 9.38 % __________________ (1)
Total finance receivables include net investment in leases and loans.
For the calculations above, the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred are excluded.
Net interest and fee income decreased
to
from$24.2 million for the three months endedJune 30, 2019 .
The annualized net interest and fee margin decreased 70
basis points to 8.68% in the three-month period endedJune 30, 2020 from 9.38% for the corresponding
period in 2019.
Interest income, net of amortized initial direct costs and fees,
was
ended
Average total
finance receivables decreased
to$979.3 million atJune 30, 2020 from$1,031.8 million atJune 30, 2019 .
The decrease in average total finance receivables was primarily
due to lower origination volume along with the customary loan repayments
and charge-offs. The average yield on the portfolio
decreased 60 basis points to 9.90% from 10.50% in the prior year quarter.
The weighted average implicit interest rate on new finance receivables originated decreased 378 basis points to 9.17% for
the three-month period ended
for the three- month period endedJune 30, 2019 .
That decrease was primarily driven by a shift in the mix of originations
as higher-yield Working Capital originations comprised 1% of our originations for the six months
ended
The
reduction in Working Capital
volume is driven by our tightening of underwriting standards
in the second quarter in response to the uncertain macroeconomic environment.
Given the ongoing health crisis in
the COVID-19 flare-ups in the south and west, any returns to pre-pandemic levels of origination
activity, and our ability to
replenish or grow our portfolio, remains uncertain.
Fee income was
ended
respectively. Fee income included approximately$0.9 million of net residual
income for the three-month period ended
2019.
For 2020, after the adoption of CECL, all future cashflows from the Company's
pools of loans are included in the measurement of the allowance, including future cashflows from net residual income.
Amounts of residual income are presented within the rollforward
of the Allowance, as discussed further in "-Finance Receivables and
Asset Quality"
Fee income also included approximately
million in late fee income for the three-month periods ended
June 30, 2020 andJune 30, 2019 ,
respectively. Late fees remained
the largest component of fee income at 0.69% as an annualized
percentage
of average total finance receivables for the three-month period
ended
compared to 0.78% for the three-month period endedJune 30, 2019 . -57-
Interest expense decreased
three-month period ended
the
corresponding period in 2019, primarily due to a decrease
in interest expense of
-term
borrowings offset by an increase of
deposit balances. Interest expense, as an annualized percentage
of average total finance receivables, decreased 26 basis points to 2.22%
for the three-month period ended
from 2.48% for the corresponding period in 2019.
The average balance of deposits was
million for the three-month periods endedJune 30, 2020 andJune 30, 2019 ,
respectively.
For the three-month period ended
average term securitization borrowings outstanding were
million at a weighted average coupon of 4.30%.
For the three-month period ended
borrowings outstanding were$120.4 million at a weighted average coupon of 4.01%.
Our wholly-owned subsidiary,
MBB, serves as our primary funding source. MBB raises fixed
-rate and variable-rateFDIC -insured deposits via the brokered certificates of deposit market, on a direct
basis, and through the brokered MMDA Product. At
2020,
brokered certificates of deposit represented approximately 52%
of total deposits, while approximately 43% of total deposits were obtained from direct channels, and 6% were in the brokered
MMDA Product.
Gain on Sale of Leases and Loans.
Gain on sale of leases and loans was
-month period endedJune 30, 2020 ,
compared to
2019.
Assets sold decreased to
months ended
Our sales execution decisions, including the timing, volu
me and frequency of such sales, depend on many factors including our origination volumes, the characteristics of our contracts versus
market requirements, our current assessment of our balance
sheet
composition and capital levels, and current market conditions,
among other factors.
In the current slowing economy resulting from the COVID-19 pandemic, we may have difficulty accessing
the capital market and may find decreased interest and ability
of
counterparties to purchase our contracts, or we may be unable
to negotiate terms acceptable to us.
Insurance premiums written and earned. Insurance premiums written remained flat at$2.2 million for the three -month periods endedJune 30, 2020 andJune 30, 2019 .
Other income.
Other income was
endedJune 30, 2020 andJune 30, 2019 , respectively. The decrease
in other income was primarily driven by a
in servicing income.
Salaries and benefits expense.
The following table summarizes the Company's Salary and benefits expense:
Three Months Ended
2020
2019
(Dollars in thousands) Salary, benefits and payroll taxes$ 6,868 $ 7,640 Incentive compensation 806 2,783 Commissions (6) 2,046 Total$ 7,668 $ 12,469
Salaries and benefits expense decreased
38.4%, to
June 30, 2020 from$12.5 million for the corresponding period in 2019 .
In
in response COVID-19, putting approximately 120 employees on furlough.
In June, we made the decision to permanently reduce our
workforce
by approximately 80 employees, which reduced our headcount to
approximately 250 employees at the end of July,
down from approximately 350 employees as ofDecember 31, 2019 .
As such, our salary expense is
primarily driven by reduced headcount from the furlough, partially offset
by$0.9 million of severance recognized.
Incentive compensation decreased
recognized bonus and share-based compensation amounts
driven by the Company's operating results,
including reversing
-based RSU awards that are -58-
now assessed as not probable of achievement.
The decrease in Commissions for the three months ended June
30, 2020 reflects a lower amount of commission earned driven by 69% lower origination
volumes, which was fully offset by an annual commission
true-
up adjustment in 2020.
General and administrative expense.
The following table summarizes General and administrative expense: Three Months EndedJune 30, 2020 2019 (Dollars in thousands) Occupancy and depreciation$ 1,415 $ 1,223 Professional fees 865 931 Information technology 995 901 Marketing 206 498 Other G&A 2,366 2,515 Total$ 5,847 $ 6,068
General and administrative expense decreased
million, or 4.9%, to
from
.
General and administrative expense as an annualized percentage of average
total finance receivables was 2.39% for the three-month period endedJune 30, 2020 ,
compared to 2.35% for the three-month period ended
. balance. Provision for income taxes. Income tax benefit of$1.4 million was recorded for the three-month period endedJune 30, 2020 , compared to expense of$2.0 million for the three-month period
ended
Our effective tax rate was 18.9% for the three- month period endedJune 30, 2020 ,
driven by a limitation on the recognition of tax benefits when measuring
the provision on a loss position in an interim period under ASC 740. -59-
Comparison of the Six-Month Periods Ended
and
Net income. Net loss of$17.7 million was reported for the six-month period
ended
resulting in diluted loss per share of$1.50 , compared to net income of$11.3 million and diluted
EPS of
2019. This$29.0 million decrease in Net income was primarily driven by: -
(
by updates to the Company's
estimate, reflecting forecasted economic conditions from COVID-19 pandemic. The Company adopted CECL onJanuary 1, 2020 which substantially changed its methodology for measuring the estimate of credit
loss.
See further discussion of the Provision and the change in measurement in the prior section "- Finance Receivables and Asset Quality"; - ($6.7 million )
impairment of
reporting unit;
-
a decrease in assets sold resulting from the negative impact
of
the COVID-19 pandemic on capital markets activity;
-
3.2 million benefit recognized in Income tax (benefit) from the remeasurement
of the federal net operating losses driven by provisions of the CARES Act; -
Commissions, Incentives and the Company's proactive cost reduction measures.
Average balances
and net interest margin. The following table summarizes the Company's average balances, interest income, interest expense and average yields and rates on major
categories of interest-earning assets and interest-bearing liabilities
for the six- month periods endedJune 30, 2020 andJune 30, 2019 . -60- Six Months EndedJune 30, 2020 2019 (Dollars in thousands) Average Average Average Yields/ Average Yields/ Balance (1) Interest Rates (2) Balance (1) Interest Rates (2) Interest-earning assets: Interest-earning deposits with banks$ 159,665 $ 358 0.45 %$ 126,084 $ 1,525 2.42 % Time Deposits 12,878 124 1.92 11,090 133 2.41 Restricted interest-earning deposits with banks 7,540 9 0.24 15,146 58 0.77 Securities available for sale 10,629 110 2.06 10,697 142 2.66 Net investment in leases (3) 895,015 39,505 8.83 930,586 42,491 9.13 Loans receivable (3) 99,053 10,607 21.42 85,017 8,616 20.27 Total interest-earning assets 1,184,780 50,713 8.56 1,178,620 52,965 8.99 Non-interest-earning assets: Cash and due from banks 5,563 5,459 Allowance for loan and lease losses (40,144) (16,764) Intangible assets 7,292 7,961Goodwill 3,332 7,038 Operating lease right-of-use assets 8,653 5,419 Property and equipment, net 8,291 4,139 Property tax receivables 9,430 7,546 Other assets (4) 32,719 34,157 Total non-interest-earning assets 35,136 54,955 Total assets$ 1,219,916 $ 1,233,575 Interest-bearing liabilities: Certificate of Deposits (5)$ 852,659 $ 9,597 2.25 %$ 814,466 $ 9,489 2.33 % Money Market Deposits (5) 38,544 158 0.82 23,430 299 2.56 Long-term borrowings (5) 63,354 1,352 4.27 130,454 2,582 3.96 Total interest-bearing liabilities 954,557 11,107 2.33 968,350 12,370 2.56 Non-interest-bearing liabilities: Sales and property taxes payable 6,482 6,796 Operating lease liabilities 9,524 7,492 Accounts payable and accrued expenses 22,657 27,251 Net deferred income tax liability 28,022 23,773 Total non-interest-bearing liabilities 66,685 65,312 Total liabilities 1,021,242 1,033,662 Stockholders' equity 198,674 199,913 Total liabilities and stockholders' equity$ 1,219,916 $ 1,233,575 Net interest income$ 39,606 $ 40,595 Interest rate spread (6) 6.23 % 6.43 % Net interest margin (7) 6.69 % 6.89 % Ratio of average interest-earning assets to average interest-bearing liabilities 124.12 % 121.71 % -61- _________________ (1)
Average balances were calculated using average daily balances.
(2)
Annualized.
(3)
Average balances of leases and loans include non-accrual leases and loans, and are presented net of unearned income. The average balances of leases and loans do not include the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred.
(4) Includes operating leases. (5)
Includes effect of transaction costs. Amortization
of transaction costs is on a
straight-line basis, resulting in an increased
average rate whenever average portfolio balances are at reduced levels. (6) Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities. (7) Net interest margin represents net interest income as an annualized percentage of average interest-earning assets.
The following table presents the components of the changes in net interest
income by volume and rate.
Six Months EndedJune 30, 2020 Compared To Six Months EndedJune 30, 2019 Increase (Decrease) Due To: Volume (1) Rate (1) Total (Dollars in thousands) Interest income: Interest-earning deposits with banks$ 325 $ (1,492) $ (1,167) Time Deposits 20 (29) (9) Restricted interest-earning deposits with banks (21) (28) (49) Securities available for sale (1) (31) (32) Net investment in leases (1,595) (1,391) (2,986) Loans receivable 1,482 509 1,991 Total interest income 276 (2,528) (2,252) Interest expense: Certificate of Deposits 436 (328) 108 Money Market Deposits 129 (270) (141) Long-term borrowings (1,418) 188 (1,230) Total interest expense (174) (1,089) (1,263) Net interest income 211 (1,200) (989) __________________ (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. -62- Net interest and fee margin. The following table summarizes the Company's
net interest and fee income as an annualized percentage of average total finance receivables for the six-month periods ended
June 30, 2020 and 2019. Six Months EndedJune 30, 2020 2019 (Dollars in thousands) Interest income$ 50,713 $ 52,965 Fee income 5,216 7,549 Interest and fee income 55,929 60,514 Interest expense 11,108 12,370 Net interest and fee income$ 44,821 $ 48,144 Average total finance receivables (1)$ 994,068 $ 1,015,603 Percent of average total finance receivables: Interest income 10.20 % 10.43 % Fee income 1.05 1.49 Interest and fee income 11.25 11.92 Interest expense 2.23 2.44 Net interest and fee margin 9.02 % 9.48 % __________________ (1) Total finance receivables
include net investment in leases and loans.
For the calculations above, the effects of (i)
the allowance for credit losses and (ii) initial direct costs and fees deferred are
excluded.
Net interest and fee income decreased
,
to
2020 from$48.1 million for the six-month period endedJune 30 ,
2019. The annualized net interest and fee margin decreased
46 basis points to 9.02% in the six-month period endedJune 30, 2020
from 9.48% for the corresponding period in 2019.
Interest income, net of amortized initial direct costs and fees,
decreased
ended
The decrease in interest income was principally due to a
decrease in average yield of 23 basis points and by a 2.1%
decrease in average total finance receivables, which
decreased
The decrease in average total finance receivables was primarily due
to lower origination volume along with the customary loan repayments and charge-offs .
The weighted average implicit interest rate on new finance receivables
originated
decreased 140 basis points to 11.46%
for the six-month period ended
compared to 12.86% for the six-month period endedJune 30, 2019 .
That decrease was primarily driven by a shift in the mix of originations
as higher-yield Working
Capital
originations comprised 11% of our originations
for the six months ended
in 2019.
As our origination volumes have been negatively impacted by the COVID
-19 pandemic, our portfolio of finance receivables and related incomes
may
continue to decline. Any returns to normal levels of origination activity,
and our ability to replenish or grow our portfolio,
remains
uncertain.
Fee income was
ended
respectively. Fee income included approximately$1.9 million of residual income for the
six-month period ended
For 2020, after the adoption of CECL, all future cashflows from the Company's
pools of loans are included in the measurement of the allowance,
including future cashflows from net residual income.
Amounts of residual income are presented within the rollforward
of the Allowance, as discussed further in "-Finance Receivables and Asset Quality". -63-
Fee income also included approximately
for the six-month period ended
which
decreased 9.3% from
Late fees remained the largest component of fee income at 0.77% as an annualized percentage of average total finance receivables for the six-month period endedJune 30, 2020 , compared to 0.86% for the six-month period endedJune 30 ,
2019.
Interest expense decreased
million for the six-month period ended
for the corresponding period in 2019.
The decrease of
million decrease in term securitization interest, and a$0.2 million decrease in transaction costs. Interest expense,
as an annualized percentage of average total finance receivables, decreased 21 basis points to 2.23% for the six-month period
ended
from 2.44% for the corresponding period in 2019. The average balance of deposits was$891.2 million and$837.9
million for the six-month periods ended
respectively.
For the six-month period ended
average term securitization borrowings outstanding were
million at a weighted average coupon of 4.27%.
For the six-month period ended
average term securitization borrowings outstanding were
Our wholly-owned subsidiary,
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
June 30, 2020 , brokered certificates of deposit represented approximately 52%
of total deposits, while approximately 43% of total deposits were obtained from direct channels, and 6% were in the brokered
MMDA Product.
Gain on Sale of Leases and Loans.
Gain on sale of leases and loans was 2.3 million for the six-month period
endedJune 30, 2020 , compared to 6.9 million for the six-month period ended
million for the six-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 slowing economy resulting from the COVID-19 pandemic, we may have difficulty accessing
the capital market and may find decreased interest and ability
of
counterparties to purchase our contracts, or we may be unable
to negotiate terms acceptable to us.
Insurance premiums written and earned. Insurance premiums written and earned remained relatively flat at$4.5 million for the six- month period endedJune 30, 2020 ,
from
2019. Other income.
Other income remained consistent at
the six-month periods endedJune 30, 2020 andJune 30, 2019 , respectively.
Salaries and benefits expense.
The following table summarizes the Company's Salary and benefits expense:
Six Months Ended
2020 2019 (Dollars in thousands) Salary, benefits and payroll taxes$ 14,423 $ 14,992 Incentive compensation 1,711 5,221 Commissions 1,053 3,707 Total$ 17,187 $ 23,920
Salaries and benefits expense in total decreased
the six months ended
In
in response COVID-19, putting approximately 120 employees on furlough.
In June, we made the decision to permanently reduce our workforce
by approximately 80 employees, which reduced our headcount to approximately 250 employees at the
end of July, down from approximately
350 employees as of December -64- 31, 2019.
As such, our salary expense was
endedJune 30, 2020 than for the six months endedJune 30, 2019 ,
primarily driven by reduced headcount from the furlough, partially offset
by
Incentive compensation decreased
recognized bonus and share-based compensation amounts
primarily
driven by the Company's operating
results, including reversing
with performance-based RSU awards that are now assessed as not probable of achievement.
Commissions decreased
General and administrative expense.
The following table summarizes General and administrative expense: Six Months EndedJune 30, 2020 2019 (Dollars in thousands) Property taxes$ 6,026 $ 6,256 Occupancy and depreciation 2,735 2,455 Professional fees 2,084 2,231 Information technology 1,981 1,960 Marketing 708 1,095FDIC Insurance 639 130 Other G&A 5,279 5,295 Total$ 19,452 $ 19,422
General and administrative expense of
ended
General and administrative expense as an annualized percentage of average
total finance receivables was 3.56% for the six-month period ended
compared to 3.82% for the six-month period ended
Goodwill impairment.
In the first quarter of 2020, driven by negative current events related
to the COVID-19 economic shutdown, our market capitalization falling below book value and other
related impacts, we analyzed goodwill for impairment.
We concluded that the implied fair value of goodwill was less than it's
carrying amount, and recognized impairment equal to the entire
million
balance in the six months ended
Provision for income taxes. Income tax benefit of 8.8 million was recorded for the six-month period
ended
compared
to expense of
Our effective tax rate from measuring our benefit for
the six months ended
driven by a$3.2 million discrete benefit from certain provisions in the CARES Act that allowed
for remeasuring our federal net operating losses.
The impact to our effective rate from that benefit was partially offset
by a limitation on the amount of tax benefits that can be recognized
in an interim period under ASC 740. -65- L IQUIDITY 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 of
MBB also offers an
as another source of deposit funding. This product is offered
through participation in a partner bank's insured savings
account product to clients of that bank.
It is a brokered account with a variable interest rate, recorded as a single deposit account at MBB. Over time, MBB
may offer other products and services to the Company's
customer base. MBB is aUtah state-chartered,Federal Reserve member commercial
bank. As such, MBB is supervised by both the Federal
Reserve
Institutions.
We declared
a dividend of
The quarterly dividend was paid on
of
record on the close of business on
2020,
which resulted in a dividend payment of approximately
represented
the Company's thirty-fifth consecutive
quarterly cash dividend. AtJune 30, 2020 ,
we had approximately
a federal funds line of credit with a correspondent bank in addition to available cash and cash equivalents
of
ditional liquidity that may be provided by the issuance of insured deposits through
MBB.
Our debt to equity ratio was 5.27 to 1 at
2020 and 4.26 to 1 at
Net cash provided by investing activities was
the six-month period ended
compared to net cash used in investing activities of$76.0 million for the six-month period
ended
The increase in cash outflows from investing activities is primarily due to a decrease of$180.4 million for
purchases of equipment for lease contracts partially offset by
a reduction of$66.1 million in proceeds from sales of leases originated for
investment. The decrease in purchases of equipment was driven
by
lower origination volumes for the six months ended
,
2020 compared to the corresponding period of 2019, and
the reduction in proceeds from sales was driven by lower volumes of sales.
Net cash provided by financing activities was
the six-month period ended
compared to net cash provided by financing activities of$85.7 million for the six-month period
ended
The decrease in cash flows from financing activities is primarily due to a decrease of$69.8
million in deposits offset by a decrease of
million of term securitization repayments.
Financing activities also include transactions related to
the Company's payment of divi
dends.
Net cash provided by operating activities was
the six-month period ended
compared to net cash provided by operating activities of$27.0 million for the six-month period endedJune 30, 2019 . Transactions affecting net cash
provided by operating activities including goodwill impairment,
provision
for credit losses, changes in income tax liability and leases originated for sale and proceeds thereof are discussed in detail in the
notes to the Consolidated Financial Statements.
-66- We expect
cash from operations, additional borrowings on existing and future
credit facilities and funds from deposits issued through brokers, direct deposit sources,
and the MMDA Product to be adequate to support our operations and
projected growth for the next 12 months and the foreseeable future.
Total
Cash and Cash Equivalents. Our objective is to maintain an adequate level of cash, investing any free cash in leases and loans. We primarily fund
our originations and growth using
through MBB. Total
cash and cash equivalents available as ofJune 30, 2020 totaled$211.7
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
$9.9 million and$12.9 million , respectively. Restricted Interest-Earning Deposits with Banks . As ofJune 30, 2020 andDecember 31, 2019 , we had$6.1 million and$6.9 million , respectively, of cash that was
classified as restricted interest-earning deposits with banks. Restricted
interest-earning deposits with banks consist primarily of various trust accounts related to our secured
debt facilities. Therefore, these balances generally
decline as the term securitization borrowings are repaid.
Borrowings.
Our primary borrowing relationship requires the pledging of
eligible lease and loan receivables to secure amounts
advanced. Our secured borrowings amounted to
million at
.
Information
pertaining to our borrowing facilities is as follows:
For the Six Months EndedJune 30, 2020 As ofJune 30, 2020 Maximum Maximum Month End Average Weighted Weighted Facility Amount Amount Average Amount Average Unused Amount Outstanding Outstanding Rate (3) Outstanding Rate (2) Capacity (1) (Dollars in thousands) Federal funds purchased$ 25,000 $ - $ - - % $ - - %$ 25,000 Term note securitizations (4) - 71,721 69,751 4.24 % 51,161 3.68 % - Revolving line of credit (5) 5,000 - - - % - - % 5,000$ 30,000 $ 71,721 $ 69,751 4.24 %$ 51,161 3.68 %$ 30,000 __________________ (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
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.
(5)
The revolving line of credit was terminated by mutual agreement with the line of
credit provider in
-67-
Federal Funds Line of Credit with
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
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$56.3 million of net investment in leases pledged atJune 30, 2020 . Term Note Securitizations OnJuly 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 entit
y
("VIE") under U.S. GAAP.
We continue to
service the assets of our VIE and
retain equity and/or residual interests. Accordingly,
assets and related debt of the VIE is included in the accompanying
Consolidated
Balance Sheets.
At
amounted to$50.9 million and$76.1 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
We are
subject to regulation under the Bank Holding Company Act and all of our
subsidiaries may be subject to examination by theFederal Reserve Board and theFederal Reserve Bank of Philadelphia
even if not otherwise regulated by the
MBB is also subject to comprehensive federal and state regulations
dealing with a wide variety of subjects, including minimum capital standards, reserve requirements, terms on which a bank may engage
in transactions with its affiliates, restrictions as
to dividend payments and numerous other aspects of its operations.
These regulations generally have been adopted
to protect depositors and creditors rather than shareholders.
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
.
Information on Stock Repurchases
Information on Stock Repurchases is provided in "Part II.
Other Information, Item 2, Unregistered Sales of
Items Subsequent to
The Company declared a dividend of 0.14 per share on July
30, 2020. The quarterly dividend, which is expected to
result in a dividend payment of approximately 1.7 million, is scheduled to be paid
on
It represents the Company's thirty-sixth
consecutive quarterly cash dividend. The payment of future dividends will be subject to approval by the Company's
Board of Directors. -68- MARKET INTEREST RATE RISK AND SENSITIVITY
Market risk is the risk of losses arising from changes in values of financial
instruments. We
engage in transactions in the normal course of business that expose us to market risks. We
attempt to mitigate such risks through prudent management practices
and
strategies such as attempting to match the expected cash flows of
our assets and liabilities.
We are
exposed to market risks associated with changes in interest rates and
our earnings may fluctuate with changes in interest rates.
The lease and loan assets we originate are almost entirely fixed
-rate. Accordingly, we generally
seek to finance these assets primarily with fixed interest certificates of deposit issued by MBB,
and to a lesser extent through the variable rate MMDA Product
at MBB. C RITICAL A CCOUNTING P OLICIES
There have been no significant changes to our Critical Accounting Policies
as described in our Form 10-K for the year endedDecember 31, 2019 , other than as discussed below. Allowance for credit losses.
For 2019 and prior, we maintained an allowance
for credit losses at an amount sufficient to absorb
losses inherent in our existing lease and loan portfolios as of the reporting dates based on our estimate of probable incurred net credit losses in accordance with the Contingencies Topic of the FASB ASC.
See further discussion of our policy under the incurred
model in the "Critical Accounting Policy" section of our 2019 Form 10-K. EffectiveJanuary 1, 2020 , we adopted ASU 2016
-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments ("CECL"), which changed our
accounting policy and estimated allowance.
CECL replaces the probable, incurred loss model with a measurement of expected
credit losses for the contractual term of the Company's
current
portfolio of loans and leases.
After the adoption of CECL, an allowance, or estimate of credit
losses, will be recognized immediately upon the origination of a loan or lease, and will be adjusted in each subsequent reporting period We maintain an
allowance for credit losses at an amount that takes into consideration
all future cashflows that we expect to receive or derive from the pools of contracts, including recoveries after
charge-off, amounts related to initial direct cost
and origination costs net of fees deferred, and certain future cashflows from residual assets.
A provision is charged against earnings to maintain the allowance for credit losses at the appropriate level.
We developed
a consistent, systematic methodology to measure our estimate of the credi
t losses inherent in our current portfolio, over the entire life of the contracts.
We made certain key decisions
that underlie our methodology,
including our decisions of how to aggregate our portfolio into pools for analysis based on similar
risk characteristics, the selection of appropriate historical loss data
to
reference in the model, our selection of a model to calculate the
estimate, a reasonable and supportable forecast, and the length of
our
forecast and approach to reverting to historical loss data.
For our Equipment Finance segment, we determine our reasonable
and supportable forecast based on certain economic variables
that
were selected based on a statistical analysis of our own historical
loss experience, going back to 2004. We
selected unemployment rate and changes in the number of business bankruptcies as our economic variables,
based on an analysis of the correlation of changes in those variables to our loss experience over time.
As part
of our estimate of expected credit losses, specific to each measurement
date, management considers relevant qualitative and quantitative factors to assess whether the historical loss experience
being referenced should be adjusted to better reflect the risk characteristics of the current portfolio and the expected future
loss experience for the life of these contracts.
This assessment incorporates all available information relevant to considering the collectability
of our current portfolio, including considering economic and business conditions, default trends, changes in
portfolio composition, changes in lending policies and practices,
among
other internal and external factors.
Further, each measurement period we determine
whether to separate any loans from their current pool for individual analysis based on their unique risk characteristics.
Our approach to estimating qualitative adjustments takes into consideration all significant current information we believe appropriate
to reflect the changes and risks in the portfolio or environment and involves significant judgment.
-69-
Our estimates of expected net credit losses are inherently uncertain,
and as a result we cannot predict with certainty the amount of such losses. We
may recognize
credit losses in excess of our reserve, or a significant increase to
our credit loss estimate, in the future, driven by the update of assumptions and information underlying our
estimate and/or driven by the actual amount of realized
losses.
Our estimate of credit losses will be revised each period
to reflect current information, including current forecasts of economic conditions, changes in the risk characteristics and composition of the portfolio,
and emerging trends in our portfolio, among other factors, and these updates for current information could drive
a significant adjustment to our reserve.
Further, actual credit losses may exceed our estimated reserve, and such excess may be significant,
if the actual performance of our portfolio differs signif
icantly from the current assumptions and judgements, including those underlying our
forecast and qualitative adjustments, as of any given measurement date.
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.
-70- 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.
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