Company Quick10K Filing
Quick10K
Marlin Business Services
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$22.02 12 $272
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-01 Earnings, Officers, Other Events, Exhibits
8-K 2019-05-30 Officers, Shareholder Vote, Exhibits
8-K 2019-05-02 Earnings, Exhibits
8-K 2019-01-31 Earnings, Exhibits
8-K 2019-01-02 Officers, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-09-04 Officers, Exhibits
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-07-30 Off-BS Arrangement, Exhibits
8-K 2018-05-31 Shareholder Vote
8-K 2018-05-03 Earnings, Exhibits
8-K 2018-02-01 Earnings, Exhibits
8-K 2018-01-08 Earnings, Regulation FD, Exhibits
IP International Paper 18,160
EDU New Oriental Education & Technology Group 13,960
MXL Maxlinear 1,780
LOAC Longevity Acquisition 53
IWBB IWeb 0
ATHN Athenahealth 0
PFHO Pacific Health Care Organization 0
C070 Barclays Bank 0
ANW Aegean Marine Petroleum Network 0
KBLMU KBL Merger IV 0
MRLN 2019-06-30
Part I. Financial Information
Item 1. Consolidated Financial Statements
Note 1 - The Company
Note 2 - Summary of Significant Accounting Policies
Note 3 - Non-Interest Income
Note 4 - Investment Securities
Note 5 - Net Investment in Leases and Loans
Note 6 - Allowance for Credit Losses
Note 7 - Goodwill and Intangible Assets
Note 8 - Other Assets
Note 9 - Leases
Note 10 - Commitments and Contingencies
Note 11 - Deposits
Note 12 - Debt and Financing Arrangements
Note 13 - Fair Value Measurements and Disclosures About The Fair Value of Financial Instruments
Note 14 - Earnings per Share
Note 15 - Stockholders' Equity
Note 16 - Stock-Based Compensation
Note 17 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 d763265dex311.htm
EX-31.2 d763265dex312.htm
EX-32.1 d763265dex321.htm

Marlin Business Services Earnings 2019-06-30

MRLN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d763265d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2019

Commission file number 000-50448

 

 

MARLIN BUSINESS SERVICES CORP.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   38-3686388
(State of incorporation)  

(I.R.S. Employer

Identification Number)

300 Fellowship Road, Mount Laurel, NJ 08054

(Address of principal executive offices) (Zip code)

(888) 479-9111

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $.01 per share   MRLN   The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files.)    Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ☐    No  ☑

At July 26, 2019, 12,240,635 shares of Registrant’s common stock, $.01 par value, were outstanding.

 

 

 


Table of Contents

MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

for the Quarter Ended June 30, 2019

TABLE OF CONTENTS

 

         Page No.  
Part I – Financial Information      3  

Item 1

  Consolidated Financial Statements (Unaudited)      3  
 

Consolidated Balance Sheets at June 30, 2019 and December 31, 2018

     3  
 

Consolidated Statements of Operations for the three- and six- month periods ended June 30, 2019 and 2018

     4  
 

Consolidated Statements of Comprehensive Income for the three- and six- month periods ended June 30, 2019 and 2018

     5  
 

Consolidated Statements of Stockholders’ Equity for the three and six-month periods ended June 30, 2019 and 2018

     6  
 

Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2019 and 2018

     8  
 

Notes to Unaudited Consolidated Financial Statements

     10  

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      42  

Item 3

  Quantitative and Qualitative Disclosures about Market Risk      64  

Item 4

  Controls and Procedures      64  
Part II – Other Information      64  

Item 1

  Legal Proceedings      64  

Item 1A

  Risk Factors      64  

Item 2

  Unregistered Sales of Equity Securities and Use of Proceeds      65  

Item 3

  Defaults upon Senior Securities      65  

Item 4

  Mine Safety Disclosures      65  

Item 5

  Other Information      65  

Item 6

  Exhibits      66  
Signatures      67  


Table of Contents

PART I. Financial Information

Item 1. Consolidated Financial Statements

MARLIN BUSINESS SERVICES CORP.

AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

     June 30,     December 31,  
     2019     2018  
     (Dollars in thousands, except per-share data)  

ASSETS

    

Cash and due from banks

   $ 5,170     $ 5,088  

Interest-earning deposits with banks

     134,561       92,068  
  

 

 

   

 

 

 

Total cash and cash equivalents

     139,731       97,156  

Time deposits with banks

     12,679       9,659  

Restricted interest-earning deposits (includes $8.1 million and $10.0 million at June 30, 2019 and December 31, 2018, respectively related to consolidated VIEs)

     8,152       14,045  

Investment securities (amortized cost of $10.7 million and $11.2 million at June 30, 2019 and December 31, 2018, respectively)

     10,633       10,956  

Net investment in leases and loans:

    

Leases

     478,068       489,299  

Loans

     600,980       527,541  
  

 

 

   

 

 

 

Net investment in leases and loans, excluding allowance for credit losses (includes $109.8 million and $150.2 million at June 30, 2019 and December 31, 2018, respectively, related to consolidated VIEs)

     1,079,048       1,016,840  

Allowance for credit losses

     (16,777     (16,100
  

 

 

   

 

 

 

Total net investment in leases and loans

     1,062,271       1,000,740  

Intangible assets

     7,920       7,912  

Goodwill

     6,735       7,360  

Operating lease right-of-use assets

     8,626       —    

Property and equipment, net

     4,014       4,317  

Property tax receivables, net of allowance

     8,070       5,245  

Other assets

     11,152       9,656  
  

 

 

   

 

 

 

Total assets

   $ 1,279,983     $ 1,167,046  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits

   $ 888,561     $ 755,776  

Long-term borrowings related to consolidated VIEs

     109,637       150,055  

Operating lease liabilities

     9,074       —    

Other liabilities:

    

Sales and property taxes payable

     7,827       3,775  

Accounts payable and accrued expenses

     32,597       36,369  

Net deferred income tax liability

     26,733       22,560  
  

 

 

   

 

 

 

Total liabilities

     1,074,429       968,535  
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Stockholders’ equity:

    

Preferred Stock, $0.01 par value; 5,000,000 shares authorized; none issued

     —         —    

Common Stock, $0.01 par value; 75,000,000 shares authorized; 12,285,564 and 12,367,724 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

     123       124  

Additional paid-in capital

     82,726       83,498  

Stock subscription receivable

     (2     (2

Accumulated other comprehensive loss

     48       (44

Retained earnings

     122,659       114,935  
  

 

 

   

 

 

 

Total stockholders’ equity

     205,554       198,511  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,279,983     $ 1,167,046  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

-3-


Table of Contents

MARLIN BUSINESS SERVICES CORP.

AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2019      2018      2019      2018  
     (Dollars in thousands, except per-share data)  

Interest income

   $ 27,082      $ 23,964      $ 52,965      $ 47,243  

Fee income

     3,507        3,876        7,549        7,835  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest and fee income

     30,589        27,840        60,514        55,078  

Interest expense

     6,408        3,711        12,370        7,110  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and fee income

     24,181        24,129        48,144        47,968  

Provision for credit losses

     4,756        4,256        10,119        8,868  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and fee income after provision for credit losses

     19,425        19,873        38,025        39,100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income:

           

Insurance premiums written and earned

     2,176        1,993        4,308        3,932  

Other income

     5,025        2,634        15,841        5,929  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income

     7,201        4,627        20,149        9,861  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense:

           

Salaries and benefits

     12,469        9,527        23,920        19,550  

General and administrative

     6,068        6,449        19,422        13,020  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense

     18,537        15,976        43,342        32,570  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     8,089        8,524        14,832        16,391  

Income tax expense

     1,974        2,057        3,576        3,739  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 6,115      $ 6,467      $ 11,256      $ 12,652  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.50      $ 0.52      $ 0.91      $ 1.02  

Diluted earnings per share

   $ 0.49      $ 0.52      $ 0.91      $ 1.01  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

-4-


Table of Contents

MARLIN BUSINESS SERVICES CORP.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2019     2018     2019     2018  
     (Dollars in thousands)  

Net income

   $ 6,115     $ 6,467     $ 11,256     $ 12,652  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Reclassification due to adoption of ASU 2016-01, ASU 2018-02 and ASU 2018-03

     —         —         —         107  

Increase (decrease) in fair value of debt securities available for sale

     69       33       123       (46

Tax effect

     (17     (8     (31     (38
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     52       25       92       23  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 6,167     $ 6,492     $ 11,348     $ 12,675  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

-5-


Table of Contents

MARLIN BUSINESS SERVICES CORP.

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

     Common
Shares
    Common
Stock
Amount
    Additional
Paid-In
Capital
    Stock
Subscription
Receivable
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total
Stockholders’
Equity
 
     (Dollars in thousands)  

Balance,December 31, 2018

     12,367,724     $ 124     $ 83,498     $ (2   $ (44   $ 114,935     $ 198,511  

Repurchase of common stock

     (48,857     (1     (1,144     —         —         —         (1,145

Stock issued in connection with restricted stock and RSU’s, net of forfeitures

     30,209       —         —         —         —         —         —    

Stock-based compensation recognized

     —         —         861       —         —         —         861  

Net change in unrealized gain/loss on securities available for sale, net of tax

     —         —         —         —         40       —         40  

Net income

     —         —         —         —         —         5,141       5,141  

Cash dividends paid ($0.14 per share)

     —         —         —         —         —         (1,758     (1,758
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance,March 31, 2019

     12,349,076       123       83,215       (2     (4     118,318       201,650  

Issuance of common stock

     10,298       —         240       —         —         —         240  

Repurchase of common stock

     (73,360     —         (1,719     —         —         —         (1,719

Stock issued in connection with restricted stock and RSUs, net of forfeitures

     (450     —         —         —         —         —         —    

Stock-based compensation recognized

     —         —         990       —         —         —         990  

Net change in unrealized gain/loss on securities available for sale, net of tax

     —         —         —         —         52       —         52  

Net income

     —         —         —         —         —         6,115       6,115  

Cash dividends paid ($0.14 per share)

     —         —         —         —         —         (1,774     (1,774
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance,June 30, 2019

     12,285,564     $ 123     $ 82,726     $ (2   $ 48     $ 122,659     $ 205,554  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

-6-


Table of Contents

MARLIN BUSINESS SERVICES CORP.

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

     Common
Shares
    Common
Stock
Amount
     Additional
Paid-In
Capital
    Stock
Subscription
Receivable
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total
Stockholders’
Equity
 
     (Dollars in thousands)  

Balance, December 31, 2017

     12,449,458     $ 124      $ 82,588     $ (2   $ (96   $ 97,035     $ 179,649  

Repurchase of common stock

     (37,026     —          (1,000     —         —         —         (1,000

Stock issued in connection with restricted stock and RSU’s, net of forfeitures

     6,065       —          —         —         —         —         —    

Stock-based compensation recognized

     —         —          921       —         —         —         921  

Net change in unrealized gain/loss on securities available for sale, net of tax

     —         —          —         —         (59     —         (59

Net income

     —         —          —         —         —         6,185       6,185  

Impact of adoption of new accounting standards (1)

     —         —          —         —         57       (57     —    

Cash dividends paid ($0.14 per share)

     —         —          —         —         —         (1,769     (1,769
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2018

     12,418,497       124        82,509       (2     (98     101,394       183,927  

Issuance of common stock

     9,101       —          211       —         —         —         211  

Repurchase of common stock

     (1,121     —          (32     —         —         —         (32

Exercise of stock options

     909       —          23       —         —         —         23  

Stock issued in connection with restricted stock and RSUs, net of forfeitures

     11,545       —          —         —         —         —         —    

Stock-based compensation recognized

     —         —          763       —         —         —         763  

Net change in unrealized gain/loss on securities available for sale, net of tax

     —         —          —         —         25       —         25  

Net income

     —         —          —         —         —         6,467       6,467  

Cash dividends paid ($0.14 per share)

     —         —          —         —         —         (1,742     (1,742
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2018

     12,438,931     $ 124      $ 83,474     $ (2   $ (73   $ 106,119     $ 189,642  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Represents the impact of Accounting Standards Update (“ASU”) 2016-01, ASU 2018-02 and ASU 2018-03

See Note 2 to the consolidated financial statements for more information

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

-7-


Table of Contents

MARLIN BUSINESS SERVICES CORP.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
     2019     2018  
     (Dollars in thousands)  

Cash flows from operating activities:

    

Net income

   $ 11,256     $ 12,652  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     2,390       2,228  

Stock-based compensation

     1,851       1,684  

Change in fair value of equity securities

     (94     81  

Provision for credit losses

     10,119       8,868  

Net deferred income taxes

     4,142       3,868  

Amortization of deferred initial direct costs and fees

     7,252       6,517  

Loss on equipment disposed

     911       604  

Gain on leases sold

     (6,944     (2,616

Leases originated for sale

     (29,036     (2,063

Proceeds from sale of leases originated for sale

     30,062       2,104  

Operating lease liability payments

     (199     —    

Effect of changes in other operating items:

    

Other assets

     (4,549     5,427  

Other liabilities

     (142     5,025  
  

 

 

   

 

 

 

Net cash provided by operating activities

     27,019       44,379  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net change in time deposits with banks

     (3,020     (304

Funds used to originate leases and loans

     (409,915     (339,701

Principal collections on leases and loans

     248,563       235,669  

Proceeds from sale of leases originated for investment

     87,390       40,383  

Security deposits collected, net of refunds

     (130     (141

Proceeds from the sale of equipment

     1,409       1,731  

Acquisitions of property and equipment

     (816     (543

Principal payments received on securities available for sale

     529       632  
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (75,990     (62,274
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net change in deposits

     132,785       54,253  

Term securitization repayments

     (40,829     —    

Business combinations earn-out consideration payments

     (223     —    

Issuances of common stock

     240       211  

Repurchases of common stock

     (2,864     (1,032

Dividends paid

     (3,456     (3,479

Exercise of stock options

     —         23  
  

 

 

   

 

 

 

Net cash provided by financing activities

     85,653       49,976  
  

 

 

   

 

 

 

Net increase in total cash, cash equivalents and restricted cash

     36,682       32,081  

Total cash, cash equivalents and restricted cash, beginning of period

     111,201       67,146  
  

 

 

   

 

 

 

Total cash, cash equivalents and restricted cash, end of period

   $ 147,883     $ 99,227  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

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MARLIN BUSINESS SERVICES CORP.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
     2019      2018  
     (Dollars in thousands)  

Supplemental disclosures of cash flow information:

     

Cash paid for interest on deposits and borrowings

   $ 11,504      $ 6,805  

Net cash paid (refunds received) for income taxes

   $ 1,362      $ (8,051

Leases transferred into held for sale from investment

   $ 81,472      $ 37,808  

Supplemental disclosures of non cash investing activities:

     

Business combinations assets acquired

   $ 146      $ —    

Purchase of equipment for lease contracts and loans originated

   $ 7,038      $ 9,294  

Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets

     

Cash and cash equivalents

   $ 139,731      $ 99,227  

Restricted Cash

     8,152        —    
  

 

 

    

 

 

 

Cash, cash equivalents and restricted cash at end of period

   $ 147,883      $ 99,227  
  

 

 

    

 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

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MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – The Company

Marlin Business Services Corp. (the “Company”) is a nationwide provider of credit products and services to small 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 which now incorporates Transportation Finance Group (“TFG”)) and working capital loans. The Company was incorporated in the Commonwealth of Pennsylvania on August 5, 2003. In May 2000, we established AssuranceOne, Ltd., a Bermuda-based, wholly-owned captive insurance subsidiary (“Assurance One”), which enables us to reinsure the property insurance coverage for the equipment financed by Marlin Leasing Corporation (“MLC”) and Marlin Business Bank (“MBB”) for our end user customers. Effective March 12, 2008, the Company opened MBB, a commercial bank chartered by the State of Utah and a member of the Federal Reserve System. MBB serves as the Company’s primary funding source through its issuance of Federal Deposit Insurance Corporation (“FDIC”)-insured deposits.

On September 19, 2018, the Company completed the acquisition of Fleet Financing Resources (“FFR”), a leading provider of equipment finance credit products 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. This acquisition is consistent with our strategy of augmenting organic growth with strategic acquisitions that extend our existing equipment finance business into new and attractive markets. The Company paid $10.0 million in cash for FFR and incurred an immaterial amount of acquisition-related cost. In addition, if FFR generates volume of up to $542 million from the closing date through September 30, 2026, we have agreed to pay the seller up to an additional $5.5 million in cash in earn-out consideration. This earn-out consideration will be calculated quarterly based on a sliding scale of percentage of revenue volume that increases as successively greater tiers of volume are attained, and if the maximum earn-out consideration is earned, the total consideration paid for FFR will be $15.5 million. The valuation of this earn-out will be evaluated in the fourth quarter of each year and more frequently if warranted, and the difference between the revised fair value estimate and the earn-out liability will be recorded in earnings. The Company completed the purchase price allocation in the first quarter of 2019 with $5.6 million recorded to goodwill and $7.6 million recorded to intangible assets for vendor relationships and lender relationships, offset by a contingent consideration liability of $3.2 million representing the estimated fair value of the earn-out. See Note 7 for additional information regarding the identified intangible assets acquired. The acquisition has been accounted for using the acquisition method of accounting. The unaudited pro forma financial information disclosed in the following sentence is for informational purposes only and is not indicative of future operations or results. If the acquisition had occurred at the beginning of 2018, the Company’s Interest and fee income, Non-interest income and net income for the six-month period ending June 30, 2018, would have been approximately $57.8 million, $10.0 million and $13.3 million, respectively.

References to the “Company,” “Marlin,” “Registrant,” “we,” “us” and “our” herein refer to Marlin Business Services Corp. and its wholly-owned subsidiaries, unless the context otherwise requires.

NOTE 2 – Summary of Significant Accounting Policies

Basis of financial statement presentation. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. MLC and MBB are managed together as a single business segment and are aggregated for financial reporting purposes as they exhibit similar economic characteristics, share the same leasing and loan portfolio and have one product offering. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements present the Company’s financial position at June 30, 2019 and the results of operations for the three- and six-month periods ended June 30, 2019 and 2018, and cash flows for the six-month periods ended June 30, 2019 and 2018. In Management’s opinion, the unaudited consolidated financial statements contain all adjustments, which include normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and note disclosures included in the Company’s Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2019. The consolidated results of operations for the three- and six-month periods ended June 30, 2019 and 2018 and the consolidated statements of cash flows for the six-month periods ended June 30, 2019 and 2018 are not necessarily indicative of the results of operations or cash flows for the respective full years or any other period.

There have been no significant changes to our Significant Accounting Policies as described in our 2018 Annual Report on Form 10-K other than the adoption of ASU 2016-02 as described below.

 

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Recently Issued Accounting Standards.

Fair Value. In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of such transfers and the valuation process for Level 3 fair value measurements. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The adoption of this new requirement is not expected to have a material impact on the consolidated earnings, financial position or cash flows of the company.

Intangibles—Goodwill. In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract to clarify the accounting treatment for implementation costs for cloud computing arrangements The ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The adoption of this new requirement is not expected to have a material impact on the consolidated earnings, financial position or cash flows of the company.

Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the methodology for evaluating impairment of most financial instruments. The ASU replaces the currently used incurred loss model with a forward-looking current expected loss model which will generally result in more timely recognition of losses. In April 2019, the FASB issued ASU 2019-04, Codification Improvements, which provides guidance on accounting for credit losses on accrued interest receivable balances and guidance on including recoveries when estimating the allowance. In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief, which allows entities with an option to elect fair value for certain instruments upon adoption of Topic 326.

The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has formed a cross functional implementation team to review the requirements of ASU 2016-13. The Company is still evaluating the impact the adoption of this ASU will have on our consolidated financial statements.

Recently Adopted Accounting Standards.

Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations recognizing lease assets and lease liabilities on the balance sheet. The ASU will require lessees to recognize a right-of-use (ROU) asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation for leases with terms of more than twelve months. Accounting by lessors will remain largely unchanged from current U.S. GAAP. The ASU also requires expanded quantitative and qualitative disclosures for both lessees and lessors. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an additional (and optional) transition method in which the entity applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has applied the new transition method upon adoption. In December 2018, the FASB issued ASU 2018-20 Leases (Topic 842): Narrow Scope Improvements for Lessors, which clarifies the treatment of sales taxes and other taxes collected from lessees, lessor costs paid directly by lessees, and recognition of variable payments for contracts with lease and non-lease components. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which aligned the new lease guidance with the existing guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers. It also clarified an exemption for lessors and lessees from a certain interim disclosure requirement associated with adopting the board’s new lease accounting standard.

The Company adopted the guidance in these ASUs on January 1, 2019. As a result, the Company recorded right-of-use assets of $9.1 million and lease liabilities of $9.1 million. At January 1, 2019, there was no adjustment to opening retained earnings. The Company, as a Lessor, will record property tax income and expense associated with leasing on a gross basis in the Consolidated

 

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Statements of Operations. The property tax income and expense are recorded in the same period as earned and incurred, and the Company recognizes a provision for uncollectible property tax revenue as contra-revenue when a loss is probable and collectability is not reasonably assured. In addition, ASU 2016-02 limits the types of direct lease origination costs that are able to be deferred, which will reduce prospective deferred lease origination costs on a unit basis.

 

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NOTE 3 – Non-Interest Income

The Company earns revenue including interest and fees from customers as well as revenues from non-customers. The Company recognizes revenue when the performance obligations related to the transfer of goods or services under the terms of the contract are satisfied. Some obligations are satisfied at a point in time while others are satisfied over a period of time related to the specific obligation. Revenue is recognized as the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. When consideration includes a variable component, the amount of consideration attributable to variability is included in the transaction price only to the extent it is probable that significant revenue recognized will not be reversed when uncertainty associated with the variable consideration is subsequently resolved. Generally, the variability relating to the consideration is explicitly stated in the contracts, but may also arise from the Company’s customer business practice, for example, waiving certain fees. The Company’s contracts generally do not contain terms that require significant judgement to determine the variability impacting the transaction price.

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, Revenue from Contracts with Customers, including revenue generated from financial instruments, such as our leases and loans, investment securities, as well as revenue related to our gain on sale of leases and loans, servicing income, and insurance premiums written and earned. Revenue-generating activities that the Company accounts for under ASC 606, which are presented in our income statements as components of non-interest income, include certain fees such as property tax administrative fees on leases, ACH payment fees, insurance policy fees outside of the scope of ASC 944, broker fees earned for referring leases and loans to other funding partners, and other fees. The Company has included the following table regarding the Company’s non-interest income for the periods presented.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Dollars in thousands)    2019      2018      2019      2018  

Insurance premiums written and earned

   $ 2,176      $ 1,993      $ 4,308      $ 3,932  

Gain on sale of leases and loans

     3,332        936        6,944        2,616  

Servicing income

     339        677        626        1,174  

Property tax income

     79        —          5,722        —    

Net gains (losses) recognized during the period on equity securities

     50        (26      94        (81
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income within the scope of other GAAP topics

     5,976        3,580        17,694        7,641  
  

 

 

    

 

 

    

 

 

    

 

 

 

Property tax administrative fees on leases

     261        190        529        381  

ACH payment fees

     74        83        160        168  

Insurance policy fees

     666        514        1,334        1,025  

Referral fees

     164        210        318        493  

Other

     60        50        114        153  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income from contracts with customers

     1,225        1,047        2,455        2,220  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 7,201      $ 4,627      $ 20,149      $ 9,861  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTE 4 – Investment Securities

Debt Securities, Available for Sale are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders’ equity unless management determines that an investment is other-than-temporarily impaired (OTTI). Changes in fair value of equity securities are recorded through the Consolidated Statements of Operations. The amortized cost and estimated fair value of investments, with gross unrealized gains and losses, were as follows as of June 30, 2019 and December 31, 2018:

 

     June 30, 2019  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 
     (Dollars in thousands)  

Debt Securities, Available for Sale:

           

Asset-backed securities (“ABS”)

   $ 4,607      $ 29      $ (21    $ 4,615  

Municipal securities

     2,375        79        —          2,454  

Equity Securities

           

Mutual fund

     3,672        —          (108      3,564  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 10,654      $ 108      $ (129    $ 10,633  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2018  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 
     (Dollars in thousands)  

Debt Securities, Available for Sale:

           

ABS

   $ 4,934      $ 20      $ (39    $ 4,915  

Municipal securities

     2,629        3        (20      2,612  

Equity Securities

           

Mutual fund

     3,631        —          (202      3,429  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 11,194      $ 23      $ (261    $ 10,956  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company had $3.6 million and $3.4 million in equity securities recorded at fair value at June 30, 2019 and December 31, 2018, respectively. The following schedule is a summary of fair value changes recognized in net income on equity securities during the three and six months ended June 30, 2019:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
(Dollars in thousands)    2019      2018      2019      2018  

Net gains (losses) recognized during the period on equity securities

   $ 50      $ (26    $ 94      $ (81

Less: Net gains (losses) recognized during the period on equity securities sold during the period

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date

   $ 50      $ (26    $ 94      $ (81
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present the aggregate amount of unrealized losses on securities in the Company’s investment securities classified according to the amount of time those securities have been in a continuous loss position as of June 30, 2019 and December 31, 2018:

 

     June 30, 2019  
     Less than 12 months      12 months or longer      Total  
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
 
     (Dollars in thousands)  

Debt Securities, Available for Sale:

              

ABS

   $ —       $ —        $ (21   $ 1,433      $ (21   $ 1,433  

Equity Securities Mutual fund

     —         —          (108     3,564        (108     3,564  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total investment securities

   $ —       $ —        $ (129   $ 4,997      $ (129   $ 4,997  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     December 31, 2018  
     Less than 12 months      12 months or longer      Total  
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
 
     (Dollars in thousands)  

Debt Securities, Available for Sale:

              

ABS

   $ —       $ —        $ (39   $ 3,340      $ (39   $ 3,340  

Municipal securities

     (16     1,436        (4     408        (20     1,844  

Equity Securities Mutual fund

     —         —          (202     3,429        (202     3,429  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total investment securities

   $ (16   $ 1,436      $ (245   $ 7,177      $ (261   $ 8,613  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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The following table presents the amortized cost, fair value, and weighted average yield of investments in debt securities available for sale at June 30, 2019, by remaining contractual maturity, with the exception of ABS and municipal securities, which are based on estimated average life. Receipt of cash flows may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties:

 

     June 30, 2019  
     1 Year
or Less
     1-5
Years
    5-10
Years
    After 10
Years
     Total  
     (Dollars in thousands)  

Amortized Cost:

            

Debt Securities, Available for Sale:

            

ABS

   $ —        $ 2,776     $ 1,863     $ —        $ 4,639  

Municipal securities

     —          521       1,854       —          2,375  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total debt securities available for sale

   $ —        $ 3,297     $ 3,717     $ —        $ 7,014  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Estimated fair value

   $ —        $ 3,327     $ 3,774     $ —        $ 7,101  

Weighted-average yield, GAAP basis

     —          2.34     2.72     —          2.55

OTTI

The Company evaluates all investment securities in an unrealized loss position for OTTI on at least a quarterly basis. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The OTTI assessment is a subjective process requiring the use of judgments and assumptions. During the securities-level assessments, consideration is given to (1) the intent not to sell and probability that the Company will not be required to sell the security before recovery of its cost basis to allow for any anticipated recovery in fair value, (2) the financial condition and near-term prospects of the issuer, as well as company news and current events, and (3) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows may include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average Fair Isaac Corporation (“FICO®”) scores and weighted average LTV ratio, rating or scoring, credit ratings and market spreads, as applicable.

According to accounting guidance for debt securities in an unrealized loss position, the Company is required to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met the Company must recognize an other than temporary impairment with the entire unrealized loss being recorded through earnings. For debt securities in an unrealized loss position not meeting these conditions, the Company assesses whether the impairment of a security is other than temporary. If the impairment is deemed to be other than temporary, the Company must separate the other than temporary impairment into two components: the amount representing the credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses is recorded in other comprehensive income, net of taxes. The Company did not recognize any OTTI in earnings related to its investment securities for the six months ended June 30, 2019 and June 30, 2018.

 

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NOTE 5 – Net Investment in Leases and Loans

The Company’s lease portfolio is comprised entirely of sales type leases whose terms generally range from 36 to 72 months. At the time of application, small business customers can select a purchase option that will allow them to purchase the equipment at the end of the contract term for either one dollar, the fair market value of the equipment or a specified percentage of the original equipment cost. Alternatively, the customers can continue leasing or return the equipment. We estimate the residual value of the equipment which is recorded as an asset on our balance sheet. Realization of residual values depends on numerous factors including: the general market conditions at the time of expiration of the lease; the customer’s election to enter into a renewal period; the cost of comparable new equipment; the obsolescence of the leased equipment; any unusual or excessive wear and tear on or damage to the equipment; the effect of any additional or amended government regulations; and the foreclosure by a secured party of our interest in a defaulted lease.

The Company’s loan portfolio is comprised of Working Capital loans, loans under the Community Reinvestment Act of 1977 (CRA), and Equipment loans. Working Capital loans generally have 6 to 24 month terms with repayment terms that can vary from daily, weekly or monthly. Equipment loans are comprised of Equipment Finance Agreements, Installment Purchase Agreements, and other loans.

Net investment in leases and loans consists of the following:

 

     June 30, 2019      December 31, 2018  
     (Dollars in thousands)  

Minimum lease payments receivable

   $ 518,005      $ 530,867  

Estimated residual value of equipment

     28,688        27,646  

Unearned lease income, net of initial direct costs and fees deferred

     (67,917      (68,376

Security deposits

     (708      (838
  

 

 

    

 

 

 

Total leases

     478,068        489,299  

Commercial loans, net of origination costs and fees deferred Working Capital Loans

     51,748        36,856  

CRA(1)

     1,493        1,466  

Equipment loans(2)

     469,367        423,168  

CVG

     78,372        66,051  
  

 

 

    

 

 

 

Total commercial loans

     600,980        527,541  

Allowance for credit losses

     (16,777      (16,100
  

 

 

    

 

 

 
   $ 1,062,271      $ 1,000,740  
  

 

 

    

 

 

 

At June 30, 2019, $109.8 million in net investment in leases were pledged as collateral for the Company’s outstanding asset-backed securitization balance and $35.6 million in net investment in leases were pledged as collateral for the secured borrowing capacity at the Federal Reserve Discount Window.

The amount of deferred initial direct costs and origination costs net of deferred fees deferred were $21.3 million and $20.5 million as of June 30, 2019 and December 31, 2018, respectively. Initial direct costs are netted in unearned income and are amortized to income using the effective interest method. ASU 2016-02 limited the types of costs that qualify for deferral as initial direct costs for leases, which reduced the deferral of unit lease costs and resulted in an increase in current period expense. Origination costs are netted in commercial loans and are amortized to income using the effective interest method. At June 30, 2019 and December 31, 2018, $24.2 million and $23.6 million, respectively, of the estimated residual value of equipment retained on our Consolidated Balance Sheets was related to copiers.

Maturities of lease receivables under lease contracts and the amortization of unearned lease income, including initial direct costs and fees deferred, were as follows as of June 30, 2019:

 

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     Minimum Lease
Payments
Receivable (1)
     Net Income
Amortization (2)
 
     (Dollars in thousands)  

Period Ending December 31,

     

Remainder of 2019

   $ 112,557      $ 19,216  

2020

     175,405        25,906  

2021

     118,603        13,913  

2022

     69,111        6,326  

2023

     33,751        2,131  

Thereafter

     8,578        425  
  

 

 

    

 

 

 
   $ 518,005      $ 67,917  
  

 

 

    

 

 

 

 

(1)

Represents the undiscounted cash flows of the lease payments receivable.

(2)

Represents the difference between the undiscounted cash flows and the discounted cash flows.

The lease income recognized was as follows:

 

     Three Months Ended June 30      Six Months Ended June 30  
     2019      2018      2019      2018  
     (Dollars in thousands)  

Selling Profit (1)

   $ —        $ —        $ —        $ —    

Interest Income

   $ 10,730      $ 12,482      $ 21,691      $ 25,478  

 

(1)

The Company does not derive income from the sale of the equipment.

 

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NOTE 6 – Allowance for Credit Losses

In accordance with the Contingencies and Receivables Topics of the FASB ASC, we maintain 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 net credit losses.

The tables which follow provide activity in the allowance for credit losses and asset quality statistics.

 

     Three Months Ended June 30, 2019  
     Commercial Lease and Loans  

(Dollars in thousands)

   Working
Capital
Loans
    CRA      Equipment
Finance (2)
    CVG     Total  

Allowance for credit losses, beginning of period

   $ 1,684     $ —        $ 13,975     $ 1,223     $ 16,882  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Charge-offs

     (602     —          (4,508     (345     (5,455

Recoveries

     51       —          482       61       594  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (551     —          (4,026     (284     (4,861
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Provision for credit losses

     807       —          3,467       482       4,756  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Allowance for credit losses, end of period

   $ 1,940     $ —        $ 13,416     $ 1,421     $ 16,777  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending lease or loan balance(1,3)

   $ 51,223     $ 1,493      $ 921,709     $ 83,301     $ 1,057,726  
     Three Months Ended June 30, 2018  
     Commercial Lease and Loans  

(Dollars in thousands)

   Working
Capital
Loans
    CRA      Equipment
Finance (2)
    CVG     Total  

Allowance for credit losses, beginning of period

   $ 1,310     $ —        $ 13,140     $ 1,170     $ 15,620  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Charge-offs

     (499     —          (4,190     (243     (4,932

Recoveries

     43       —          580       3       626  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (456     —          (3,610     (240     (4,306
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Provision for credit losses

     480       —          3,482       294       4,256  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Allowance for credit losses, end of period

   $ 1,334     $ —        $ 13,012     $ 1,224     $ 15,570  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending lease or loan balance(1)

   $ 30,880     $ 1,445      $ 870,366     $ 56,761     $ 959,452  

Ending balance: individually evaluated for impairment

   $ —       $ —        $ 545     $ —       $ 545  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 30,880     $ 1,445      $ 869,821     $ 56,761     $ 958,907  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Six Months Ended June 30, 2019  
     Commercial Lease and Loans  

(Dollars in thousands)

   Working
Capital
Loans
    CRA      Equipment
Finance (2)
    CVG     Total  

Allowance for credit losses, beginning of period

   $ 1,467     $ —        $ 13,531     $ 1,102     $ 16,100  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Charge-offs

     (1,275     —          (8,840     (673     (10,788

Recoveries

     71       —          1,214       61       1,346  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,204     —          (7,626     (612     (9,442
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Provision for credit losses

     1,677       —          7,511       931       10,119  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Allowance for credit losses, end of period

   $ 1,940     $ —        $ 13,416     $ 1,421     $ 16,777  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending lease or loan balance(1,3)

   $ 51,223     $ 1,493      $ 921,709     $ 83,301     $ 1,057,726  
     Six Months Ended June 30, 2018  
     Commercial Lease and Loans  

(Dollars in thousands)

   Working
Capital
Loans
    CRA      Equipment
Finance (2)
    CVG     Total  

Allowance for credit losses, beginning of period

   $ 1,036     $ —        $ 12,663     $ 1,152     $ 14,851  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Charge-offs

     (728     —          (8,219     (400     (9,347

Recoveries

     49       —          1,108       41       1,198  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (679     —          (7,111     (359     (8,149
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Provision for credit losses

     977       —          7,460       431       8,868  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Allowance for credit losses, end of period

   $ 1,334     $ —        $ 13,012     $ 1,224     $ 15,570  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending lease or loan balance(1)

   $ 30,880     $ 1,445      $ 870,366     $ 56,761     $ 959,452  

Ending balance: individually evaluated for impairment

   $ —       $ —        $ 545     $ —       $ 545  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 30,880     $ 1,445      $ 869,821     $ 56,761     $ 958,907  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Year ended December 31, 2018  
     Commercial Lease and Loans  

(Dollars in thousands)

   Working
Capital
Loans
    CRA      Equipment
Finance (2)
    CVG     Total  

Allowance for credit losses, beginning of period

   $ 1,036     $ —        $ 12,663     $ 1,152     $ 14,851  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Charge-offs

     (1,537     —          (18,149     (907     (20,593

Recoveries

     60       —          2,199       61       2,320  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,477     —          (15,950     (846     (18,273
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Provision for credit losses

     1,908       —          16,818       796       19,522  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Allowance for credit losses, end of period

   $ 1,467     $ —        $ 13,531     $ 1,102     $ 16,100  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending lease or loan balance(1,3)

   $ 36,478     $ 1,466      $ 890,785     $ 67,654     $ 996,383  

 

-20-


Table of Contents

 

(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)

Equipment Finance consists of Equipment Finance Agreements, Installment Purchase Agreements, and other leases and loans.

(3)

For the six months ended June 30, 2019 and the year ended December 31, 2018, all leases and loans were collectively evaluated .

For the six-month periods ended June 30, 2019 and June 30, 2018, the Company sold $110.5 million of leases and loans from its portfolio for a gain on sale of $6.9 million and $38.8 million of leases and loans from its portfolio for a gain on sale of $2.6 million, respectively. For the year ended December 31, 2018, the Company sold $139.0 million of leases and loans from its portfolio for a gain on sale of $8.4 million.

Credit Quality Indicators

The Company’s credit review process includes a risk classification of all leases and loans that includes pass, special mention, substandard, doubtful, and loss. The classification of a lease or loan may change based on changes in the creditworthiness of the borrower. The description of the risk classifications are as follows:

Pass: A lease or loan is classified as pass when payments are current and it is performing under the original contractual terms.

Special Mention: A lease or loan is classified as special mention when the borrower exhibits potential credit weakness or a downward trend which, if not checked or corrected, will weaken the asset or inadequately protect the Company’s position. While potentially weak, the borrower is currently marginally acceptable; no loss of principal or interest is envisioned.

Substandard: A lease or loan is classified as substandard when the borrower has a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt. A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor, normal repayment from this borrower is in jeopardy, and there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected.

Doubtful: A lease or loan is classified as doubtful when a borrower has all weaknesses inherent in a loan classified as substandard with the added provision that: (1) the weaknesses make collection of debt in full on the basis of currently existing facts, conditions and values highly questionable and improbable; (2) serious problems exist to the point where a partial loss of principal is likely; and (3) the possibility of loss is extremely high, but because of certain important, reasonably specific pending factors which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens and additional refinancing plans.

Loss: A lease or loan is classified as loss when uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

The Company charges-off the collateral or discounted cash flow deficiency on all loans on non-accrual status. In all cases, leases and loans are placed on non-accrual when 90 days past due or earlier if collection of principal or interest is considered doubtful.

 

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Table of Contents

The following tables present the segments of the loan portfolio in which a formal risk weighting system is utilized summarized by the categories of “pass” and “special mention”, and the classified categories of “substandard”, “doubtful”, and “loss” within the Company’s risk rating system at June 30, 2019 and December 31, 2018. The data within the tables reflect net investment, excluding deferred fees and cost and allowance:

 

     June 30, 2019  
     Commercial Leases and Loans  

(Dollars in thousands)

   Working
Capital
Loans
     CRA      Equipment
Finance
     CVG      Total  

Pass

   $ 50,465      $ 1,493      $ 910,157      $ 81,709      $ 1,043,824  

Special Mention

     267        —          4,406        347        5,020  

Substandard

     243        —          3,351        719        4,313  

Doubtful

     248        —          2,265        368        2,881  

Loss

     —          —          1,530        158        1,688  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51,223      $ 1,493      $ 921,709      $ 83,301      $ 1,057,726  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2018  
     Commercial Leases and Loans  

(Dollars in thousands)

   Working
Capital
Loans
     CRA      Equipment
Finance
     CVG      Total  

Pass

   $ 35,793      $ 1,466      $ 879,275      $ 66,463      $ 982,997  

Special Mention

     47        —          4,373        146        4,566  

Substandard

     145        —          3,460        660        4,265  

Doubtful

     300        —          2,353        158        2,811  

Loss

     193        —          1,324        227        1,744  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,478      $ 1,466      $ 890,785      $ 67,654      $ 996,383  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructurings are restructurings of leases and loans in which, due to the borrower’s financial difficulties, a lender grants a concession that it would not otherwise consider for borrowers of similar credit quality. As of June 30, 2019 and December 31, 2018, the Company did not have any troubled debt restructurings.

Loan Delinquencies and Non-Accrual Leases and Loans

Net investments in leases and loans are generally charged-off when they are contractually past due for 120 days or more. Income recognition is discontinued on leases or loans when a default on monthly payment exists for a period of 90 days or more. Income recognition resumes when a lease or loan becomes less than 90 days delinquent. At June 30, 2019 and December 31, 2018, there were no finance receivables past due 90 days or more and still accruing.

Working Capital Loans are generally placed in non-accrual status when they are 30 days past due and generally charged-off at 60 days past due. The loan is removed from non-accrual status once sufficient payments are made to bring the loan current and reviewed by management. At June 30, 2019 and December 31, 2018, there were no Working Capital Loans past due 30 days or more and still accruing.

 

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Table of Contents

Management further monitors the performance and credit quality of the loan portfolio as determined by the length of time a recorded payment is due.

The following tables provide information about delinquent and non-accrual leases and loans in the Company’s portfolio as of June 30, 2019 and December 31, 2018:

 

June 30, 2019

(Dollars in thousands)

   30-59
Days
Past
Due
     60-89
Days
Past
Due
     >90
Days
Past
Due
     Total
Past

Due
     Current      Total
Finance
Receivables
     Non-
Accruing
 

Working Capital Loans

   $ 240      $ —        $ —        $ 240      $ 50,983      $ 51,223      $ 248  

CRA

     —          —          —          —          1,493        1,493        —    

Equipment Finance (1)

     4,287        3,030        3,817        11,134        1,037,233        1,048,367        3,817  

CVG

     381        374        465        1,220        96,424        97,644        465  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Leases and Loans (2)

   $ 4,908      $ 3,404      $ 4,282      $ 12,594      $ 1,186,133      $ 1,198,727      $ 4,530  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

(Dollars in thousands)

   30-59
Days
Past
Due
     60-89
Days
Past
Due
     >90
Days
Past
Due
     Total
Past

Due
     Current      Total
Finance
Receivables
     Non-
Accruing
 

Working Capital Loans

   $ 300      $ 51      $ 141      $ 492      $ 35,986      $ 36,478      $ 492  

CRA

     —          —          —          —          1,466        1,466        —    

Equipment Finance (1)

     4,537        3,123        3,529        11,189        1,001,363        1,012,552        3,529  

CVG

     166        257        191        614        78,407        79,021        191  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Leases and Loans (2)

   $ 5,003      $ 3,431      $ 3,861      $ 12,295      $ 1,117,222      $ 1,129,517      $ 4,212  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Equipment Finance consists of Equipment Finance Agreements, Installment Purchase Agreements, and other leases and loans.

(2)

Represents total minimum lease and loan payments receivable for Equipment Finance and CVG and as a percentage of principal outstanding for Working Capital Loans and CRA.

 

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Table of Contents

NOTE 7 – Goodwill and Intangible Assets

Goodwill

The Company’s goodwill balance of $7.4 million at December 31, 2018 included $1.2 million from the Company’s acquisition of Horizon Keystone Financial, an equipment company (‘HKF”) in January 2017 and $6.2 million from the preliminary allocation of the purchase price of the Company’s acquisition of FFR in September 2018. The Company completed the purchase price allocation in the first quarter of 2019 upon receiving clarification of certain outstanding matters and established a final goodwill valuation of $5.6 million resulting in a goodwill reduction of $0.6 million in the first quarter of 2019. The goodwill balance represents the excess purchase price over the Company’s fair value of the assets acquired and is not amortizable but is deductible for tax purposes. Impairment testing will be performed in the fourth quarter of each year and more frequently as warranted in accordance with the applicable accounting guidance.

The changes in the carrying amount of goodwill for the six month period ended June 30, 2019 are as follows:

 

(Dollars in thousands)    Total
Company
 

Balance at December 31, 2018

   $ 7,360  

Changes

     (625
  

 

 

 

Balance at June 30, 2019

   $ 6,735  
  

 

 

 

Intangible assets

During the first quarter of 2017, in connection with the acquisition of HKF, the Company acquired certain definite-lived intangible assets with a total cost of $1.3 million and a weighted average amortization period of 8.7 years. During the third quarter of 2018, in connection with the acquisition of FFR, the Company acquired certain definite-lived intangible assets with a total cost of $7.2 million based on a preliminary evaluation. The Company subsequently completed the purchase price allocation in the first quarter of 2019 and established a cost of $7.6 million for the acquired intangible assets and a weighted average amortization period of 10.8 years. The Company had no indefinite-lived intangible assets at June 30, 2019.

The following table presents details of the Company’s intangible assets as of June 30, 2019:

 

(Dollars in thousands) Description    Useful Life      Cost      Accumulated
Amortization
     Net
Value
 

Lender relationships

     3 to 10 years      $ 1,630      $ 395      $ 1,235  

Vendor relationships

     11 years        7,290        644        6,646  

Corporate trade name

     7 years        60        21        39  
     

 

 

    

 

 

    

 

 

 
      $ 8,980      $ 1,060      $ 7,920  
     

 

 

    

 

 

    

 

 

 

There was no impairment of these assets in the second quarter or six months of 2019 or 2018. Amortization related to the Company’s definite lived intangible assets was $0.5 million and $0.1 million for the six-month periods ended June 30, 2019 and June 30, 2018, respectively.

 

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Table of Contents

The Company expects the amortization expense for the next five years will be as follows:

 

(Dollars in thousands)       

Remainder of 2019

   $ 459  

2020

     798  

2021

     798  

2022

     798  

2023

     798  

NOTE 8 – Other Assets

Other assets are comprised of the following:

 

     June 30,
2019
     December 31,
2018
 
     (Dollars in thousands)  

Accrued fees receivable

   $ 3,339      $ 3,354  

Prepaid expenses

     2,956        2,447  

Income taxes receivable

     754        —    

Federal Reserve Bank Stock

     1,711        1,711  

Other

     2,392        2,144  
  

 

 

    

 

 

 
   $ 11,152      $ 9,656  
  

 

 

    

 

 

 

NOTE 9 – Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on our consolidated balance sheets. ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, in order to determine the present value of future payments for office leases we use an incremental borrowing rate based on the information available through real estate databases for similar locations and for the present value of future payments for equipment leases we use the average rate of our term note securitization which is collateralized by similar equipment. The ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

As of June 30, 2019, the Company leases all six of its office locations including its executive offices in Mt. Laurel, New Jersey, and its offices in or near Salt Lake City, Utah; Portsmouth, New Hampshire; Highlands Ranch, Colorado; Riverside, California; and Philadelphia, Pennsylvania. The Company has elected not to recognize ROU assets and lease liabilities for three office leases whose terms are twelve months or less and are considered short-term leases. Three of the office leases include options to extend for terms of three to ten years. These options have not been recognized as part of our ROU assets and lease liabilities as the Company is not reasonably certain to exercise these options. The Company has also entered into two leases for office equipment for which ROU assets and lease liabilities have been recognized. All the aforementioned leases have been accounted for as operating leases.

 

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Table of Contents

The components of lease expense were as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2019      2018      2019      2018  
     (Dollars in thousands)      (Dollars in thousands)  

Operating lease cost

   $ 333      $ 283      $ 556      $ 559  

Finance lease costs

     —          2        —          4  

Short-term lease cost

     35        —          74        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total lease cost

   $ 368      $ 285      $ 630      $ 563  
  

 

 

    

 

 

    

 

 

    

 

 

 

Supplemental information related to leases was as follows:

 

(Dollars in thousands)    Six Months Ended
June 30, 2019
 

Supplemental balance sheet information

  

Operating lease right-of-use assets (1)

   $ 8,626  

Operating lease liabilities

     9,074  

Weighted average remaining lease term

     12.4  Years 

Weighted average discount rate

     3.30

Supplemental cash flow information

  

Operating cash flows from operating leases

   $ 199  

Right-of-use assets obtained in exchange for lease obligations

     8,626  

 

(1)

In the second quarter, right-of-use assets related to the Company’s existing leases increased by $2.9 million as a result of additional negotiations with a landlord on a lease put in place January 1, 2019. These changes resulted in additional right-of-use assets and the removal of lease incentive receivables.

Maturities of lease liabilities were as follows:

 

     Operating Leases  
Period Ending December 31,    (Dollars in thousands)  

Remainder of 2019

   $ 210  

2020

     1,098  

2021

     886  

2022

     791  

2023

     806  

Thereafter

     7,378  
  

 

 

 

Total lease payments

   $ 11,169  

Less: imputed interest

     (2,095
  

 

 

 

Total

   $ 9,074  
  

 

 

 

 

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Table of Contents

NOTE 10 – Commitments and Contingencies

MBB is a member bank in a non-profit, multi-financial institution Community Development Financial Institution (“CDFI”) organization. The CDFI serves as a catalyst for community development by offering flexible financing for affordable, quality housing to low- and moderate-income residents, helping MBB meet its Community Reinvestment Act (“CRA”) obligations. Currently, MBB receives approximately 1.2% participation in each funded loan which is collateral for the loan issued to the CDFI under the program. MBB records loans in its financial statements when they have been funded or become payable. Such loans help MBB satisfy its obligations under the Community Reinvestment Act of 1977. At June 30, 2019, MBB had an unfunded commitment of $0.5 million for this activity. MBB’s one-year commitment to the CDFI will expire in September 2019 at which time the commitment may be renewed for another year based on the Company’s discretion.

The Company is involved in legal proceedings, which include claims, litigation and suits arising in the ordinary course of business. In the opinion of management, these actions will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Banking institutions are subject to periodic reviews and examinations from banking regulators. In 2017, one of MBB’s regulatory agencies communicated findings in connection with the timing of certain aspects of payment application processes in effect prior to February 2016 related to the assessment of late fees. The Company agreed to pay restitution to customers in the amount $4.0 million to resolve this matter, and the Company established a liability for such amount in the first quarter of 2017. In the second quarter of 2019, the Company remitted the $4.0 million into a fund that will process the restitution and resolve its obligation for this matter.

NOTE 11 – Deposits

MBB serves as the Company’s primary funding source. MBB issues fixed-rate FDIC-insured certificates of deposit raised nationally through various brokered deposit relationships and fixed-rate FDIC-insured deposits received from direct sources. MBB offers FDIC-insured money market deposit accounts (the “MMDA Product”) through participation in a partner bank’s insured savings account product. This brokered deposit product has a variable rate, no maturity date and is offered to the clients of the partner bank and recorded as a single deposit account at MBB. As of June 30, 2019, money market deposit accounts totaled $22.6 million.

As of June 30, 2019, the scheduled maturities of certificates of deposits are as follows:

 

     Scheduled
Maturities
 
     (Dollars in thousands)  

Period Ending December 31,

  

Remainder of 2019

   $ 209,179  

2020

     277,081  

2021

     202,896  

2022

     105,523  

2023

     45,873  

Thereafter

     25,062  
  

 

 

 

Total

   $ 865,614  
  

 

 

 

Certificates of deposits issued by MBB are time deposits and are generally issued in denominations of $250,000 or less. The MMDA Product is also issued to customers in amounts less than $250,000. The FDIC insures deposits up to $250,000 per depositor. The weighted average all-in interest rate of deposits at June 30, 2019 was 2.44%.

 

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NOTE 12 – Debt and Financing Arrangements

Short-Term Borrowings

On November 20, 2018, the Company closed on a secured, variable rate revolving line of credit in the amount of $5.0 million that expires on November 20, 2019. As of June 30, 2019, the Company was in compliance with all debt covenants required under this line of credit and there were no outstanding balances on this line of credit as of June 30, 2019 and December 31, 2018.

Long-term Borrowings

On July 27, 2018 the Company completed a $201.7 million asset-backed term securitization. Each tranche of the term note securitization has a fixed term, fixed interest rate and fixed principal amount. At June 30, 2019, outstanding term securitizations amounted to $110.4 million and are collateralized by $124.0 million of minimum lease and loan payments receivable and $8.1 million of restricted interest-earning deposits. The Company’s term note securitizations are classified as long-term borrowings.

The Company’s long-term borrowings consisted of the following:

 

     June 30,
2019
     December 31,
2018
 
     (Dollars in thousands)  

Term securitization 2018-1

   $ 110,405      $ 151,233  

Unamortized debt issuance costs

     (768      (1,178
  

 

 

    

 

 

 
   $ 109,637      $ 150,055  
  

 

 

    

 

 

 

The July 27, 2018 term note securitization is summarized below:

 

            Notes      Final      Original  
     Outstanding Balance as of      Originally      Maturity      Coupon  
     June 30, 2019      December 31, 2018      Issued      Date      Rate  
     (Dollars in thousands)                

2018 — 1

              

Class A-1

   $ —        $ 26,983      $ 77,400        July, 2019        2.55

Class A-2

     41,855        55,700        55,700        October, 2020        3.05  

Class A-3

     36,910        36,910        36,910        April, 2023        3.36  

Class B

     10,400        10,400        10,400        May, 2023        3.54  

Class C

     11,390        11,390        11,390        June, 2023        3.70  

Class D

     5,470        5,470        5,470        July, 2023        3.99  

Class E

     4,380        4,380        4,380        May, 2025        5.02  
  

 

 

    

 

 

    

 

 

       

Total Term Note Securitizations

   $ 110,405      $ 151,233      $ 201,650           3.05 %(1)(2) 
  

 

 

    

 

 

    

 

 

       

 

(1)

Represents the original weighted average initial coupon rate for all tranches of the securitization. In addition to this coupon interest, term note securitizations have other transaction costs which are amortized over the life of the borrowings as additional interest expense.

(2)

The weighted average coupon rate of the 2018-1 term note securitization will approximate 3.41% over the term of the borrowing.

 

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Scheduled principal and interest payments on outstanding borrowings as of June 30, 2019 are as follows:

 

     Principal      Interest  
     (Dollars in thousands)  

Period Ending December 31,

     

Remainder of 2019

   $ 32,994      $ 1,656  

2020

     45,200        1,993  

2021

     23,629        813  

2022

     8,582        159  
  

 

 

    

 

 

 
   $ 110,405      $ 4,621  
  

 

 

    

 

 

 

 

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NOTE 13 – Fair Value Measurements and Disclosures about the Fair Value of Financial Instruments

Fair Value Measurements

The Fair Value Measurements and Disclosures Topic of the FASB ASC establishes a framework for measuring fair value and requires certain disclosures about fair value measurements. Its provisions do not apply to fair value measurements for purposes of lease classification and measurement, which is addressed in the Leases Topic of the FASB ASC.

Fair value is defined in GAAP as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date. GAAP focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. A three-level valuation hierarchy is required for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

The three levels are defined as follows:

 

   

Level 1 – Inputs to the valuation are unadjusted quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 – Inputs to the valuation may include quoted prices for similar assets and liabilities in active or inactive markets, and inputs other than quoted prices, such as interest rates and yield curves, which are observable for the asset or liability for substantially the full term of the financial instrument.

 

   

Level 3 – Inputs to the valuation are unobservable and significant to the fair value measurement. Level 3 inputs shall be used to measure fair value only to the extent that observable inputs are not available.

The Company characterizes active markets as those where transaction volumes are sufficient to provide objective pricing information, such as an exchange traded price. Inactive markets are typically characterized by low transaction volumes, and price quotations that vary substantially among market participants or are not based on current information.

The Company’s balances measured at fair value on a recurring basis include the following as of June 30, 2019 and December 31, 2018:

 

     June 30, 2019
Fair Value Measurements Using
     December 31, 2018
Fair Value Measurements Using
 
     Level 1      Level 2      Level 3      Level 1      Level 2      Level 3  
     (Dollars in thousands)  

Assets

                 

ABS

   $ —        $ 4,615      $ —        $ —        $ 4,915      $ —    

Municipal securities

     —          2,454        —          —          2,612        —    

Mutual fund

     3,564        —          —          3,429        —          —    

At this time, the Company has not elected to report any assets or liabilities using the fair value option available under the Financial Instruments Topic of the FASB ASC. There have been no transfers between Level 1 and Level 2 of the fair value hierarchy.

Disclosures about the Fair Value of Financial Instruments

The Financial Instruments Topic of the FASB ASC requires the disclosure of the estimated fair value of financial instruments including those financial instruments not measured at fair value on a recurring basis. This requirement excludes certain instruments, such as the net investment in leases and all nonfinancial instruments.

The fair values shown below have been derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Valuation techniques involve uncertainties and require assumptions and judgments regarding prepayments, credit risk and discount rates. Changes in these assumptions will result in different valuation estimates. The fair values presented would not necessarily be realized in an immediate sale. Derived fair value estimates cannot necessarily be substantiated by comparison to independent markets or to other companies’ fair value information.

 

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The following summarizes the carrying amount and estimated fair value of the Company’s financial instruments that are not recorded on the consolidated balance sheet at fair value as of June 30, 2019 and December 31, 2018:

 

     June 30, 2019      December 31, 2018  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (Dollars in thousands)  

Financial Assets

           

Cash and cash equivalents

   $ 139,731      $ 139,731      $ 97,156      $ 97,156  

Time deposits with banks

     12,679        12,210        9,659        9,614  

Restricted interest-earning deposits with banks

     8,152        8,152        14,045        14,045  

Loans, net of allowance

     590,973        596,755        518,697        515,754  

Federal Reserve Bank Stock

     1,711        1,711        1,711        1,711  

Financial Liabilities

           

Deposits

   $ 888,561      $ 868,564      $ 755,776      $ 722,682  

Long-term borrowings

     109,637        110,532        150,055        149,912  

Servicing Liability

     1,794        1,794        1,352        1,352  

The paragraphs which follow describe the methods and assumptions used in estimating the fair values of financial instruments.

Cash and Cash Equivalents

The carrying amounts of the Company’s cash and cash equivalents approximate fair value as of June 30, 2019 and December 31, 2018, because they bear interest at market rates and had maturities of less than 90 days at the time of purchase. The cash equivalents include a money market fund with a balance of $34.3 million that the Company considers operating cash and has no reportable gross unrealized gains or losses. The fair value measurement of cash and cash equivalents is classified as Level 1.

Time Deposits with Banks

Fair value of time deposits is estimated by discounting cash flows of current rates paid by market participants for similar time deposits of the same or similar remaining maturities. This fair value measurement is classified as Level 2.

Restricted Interest-Earning Deposits with Banks

The company maintains interest-earning trust accounts pledged as collateral for our secured debt facilities. The book value of such accounts is included in restricted interest-earning deposits with banks on the accompanying Consolidated Balance Sheet. These accounts earn a floating market rate of interest which results in a fair value approximating the carrying amount at June 30, 2019 and December 31, 2018. This fair value measurement is classified as Level 1.

Loans

The loan balances are comprised of three types of loans. Loans made as a member bank in a non-profit, multi-financial institution CDFI serve as a catalyst for community development by offering financing for affordable, quality housing to low- and moderate-income residents. Such loans help MBB satisfy its obligations under the Community Reinvestment Act of 1977. The fair value of these loans approximates the carrying amount at June 30, 2019 and December 31, 2018 as it is based on recent comparable sales transactions with consideration of current market rates. This fair value measurement is classified as Level 2. The Company also invests in a small business loan product tailored to the small business market. Fair value for these loans is estimated by discounting cash flows at an imputed market rate for similar loan products with similar characteristics. This fair value measurement is classified as Level 2. The Company invests in loans to our customers in the franchise finance channel. These loans may be secured by equipment being acquired, blanket liens on personal property, or specific equipment already owned by the customer. The fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans would be made to borrowers with similar credit, collateral, and for the same remaining maturities. This fair value measurement is classified as Level 2.

 

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Federal Reserve Bank Stock

Federal Reserve Bank Stock are non-marketable equitable equity securities and are reported at their redeemable carrying amounts, which approximates fair value. This fair value measurement is classified as Level 2.

Deposits

Deposit liabilities with no defined maturity such as MMDA deposits have a fair value equal to the amount payable on demand at the reporting date (i.e., their carrying amount). Fair value for certificates of deposits is estimated by discounting cash flows at current rates paid by the Company for similar certificates of deposit of the same or similar remaining maturities. This fair value measurement is classified as Level 2.

Long-Term Borrowings

The fair value of the Company’s secured borrowings is estimated by discounting cash flows at indicative market rates applicable to the Company’s secured borrowings of the same or similar maturities. This fair value measurement is classified as Level 2.

Servicing Liability

Servicing liabilities do not trade in an active market with readily observable prices. Accordingly, we determined fair value based on a discounted cash flow model which uses various inputs related to the estimated net servicing income, if any, and costs to service discounted back at a discount rate. There were no changes to the valuation techniques for the periods presented. Fair value measurements of our servicing liabilities use unobservable inputs, and accordingly we classify our servicing liability as Level 3.

 

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NOTE 14 – Earnings Per Share

The Company’s restricted stock awards are paid non-forfeitable common stock dividends and thus meet the criteria of participating securities. Accordingly, earnings per share (“EPS”) has been calculated using the two-class method, under which earnings are allocated to both common stock and participating securities.

Basic EPS has been computed by dividing net income allocated to common stock by the weighted average common shares used in computing basic EPS. For the computation of basic EPS, all shares of restricted stock have been deducted from the weighted average shares outstanding.

Diluted EPS has been computed by dividing net income allocated to common stock by the weighted average number of common shares used in computing basic EPS, further adjusted by including the dilutive impact of the exercise or conversion of common stock equivalents, such as stock options, into shares of common stock as if those securities were exercised or converted.

The following table provides net income and shares used in computing basic and diluted EPS:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2019      2018      2019      2018  
     (Dollars in thousands, except per-share data)  

Basic EPS

           

Net income

   $ 6,115      $ 6,467      $ 11,256      $ 12,652  

Less: net income allocated to participating securities

     (74      (115      (147      (235
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common stock

   $ 6,041      $ 6,352      $ 11,109      $ 12,417  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     12,333,383        12,419,955        12,335,545        12,427,501  

Less: Unvested restricted stock awards considered participating securities

     (148,387      (220,866      (160,170      (233,475
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares used in computing basic EPS

     12,184,996        12,199,089        12,175,375        12,194,026  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

   $ 0.50      $ 0.52      $ 0.91      $ 1.02  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

           

Net income allocated to common stock

   $ 6,041      $ 6,352      $ 11,109      $ 12,417  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares used in computing basic EPS

     12,184,996        12,199,089        12,175,375        12,194,026  

Add: Effect of dilutive stock-based compensation awards

     81,855        70,900        84,624        61,473  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares used in computing diluted EPS

     12,266,851        12,269,989        12,259,999        12,255,499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 0.49      $ 0.52      $ 0.91      $ 1.01  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three-month periods ended June 30, 2019 and June 30, 2018, outstanding stock-based compensation awards in the amount of 174,458 and 135,265, respectively, were considered antidilutive and therefore were not considered in the computation of potential common shares for purposes of diluted EPS.

 

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For the six-month periods ended June 30, 2019 and June 30, 2018, outstanding stock-based compensation awards in the amount of 187,093 and 125,166, respectively, were considered antidilutive and therefore were not considered in the computation of potential common shares for purposes of diluted EPS.

NOTE 15 – Stockholders’ Equity

Stockholders’ Equity

On May 30, 2017, the Company’s Board of Directors approved a stock repurchase plan (the “2017 Repurchase Plan”) under which the Company is authorized to repurchase up to $10 million in value of its outstanding shares of common stock. This authority may be exercised from time to time and in such amounts as market conditions warrant. Any shares purchased under this plan are returned to the status of authorized but unissued shares of common stock. The repurchases may be made on the open market, in block trades or otherwise. The program may be suspended or discontinued at any time. The repurchases are funded using the Company’s working capital.

During the three-month period ended June 30, 2019, the Company purchased 72,824 shares of its common stock in the open market under the 2017 Repurchase Plan at an average cost of $ 23.44 per share. During the six-month period ended June 30, 2019, the Company purchased 102,771 shares of its common stock under the 2017 Repurchase Plan at an average cost of $ 23.57 per share. During the three-month period ended June 30, 2018 the Company did not purchase any its common stock in the open market under the 2017 Repurchase Plan. During the six-month period ended June 30, 2018, the Company purchased 17,725 shares of its common stock under the 2017 Repurchase Plan at an average cost of $ 28.21 per share. At June 30, 2019, the Company had $ 3.3 million remaining in the 2017 Repurchase Plan.

In addition to the repurchases described above, participants in the Company’s 2014 Equity Compensation Plan (approved by the Company’s shareholders on June 3, 2014) (the “2014 Plan”) may have shares withheld to cover income taxes. There were 536 and 19,446 shares repurchased to cover income tax withholding in connection with shares granted under the 2014 Plan during each of the three- and six-month periods ended June 30, 2019, at average per-share costs of $ 22.81 and $ 22.74, respectively. There were 1,121 and 20,422 shares repurchased to cover income tax withholding in connection with shares granted under the 2014 Plan during the three- and six-month periods ended June 30, 2018, at average per-share costs of $ 29.13 and $ 26.09, respectively.

Regulatory Capital Requirements

Through its issuance of FDIC-insured deposits, MBB serves as the Company’s primary funding source. Over time, MBB may offer other products and services to the Company’s customer base. MBB operates as a Utah state-chartered, Federal Reserve member commercial bank, insured by the FDIC. As a state-chartered Federal Reserve member bank, MBB is supervised by both the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions.

The Company and MBB are subject to capital adequacy regulations issued jointly by the federal bank regulatory agencies. These risk-based capital and leverage guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and consider off-balance sheet exposures in determining capital adequacy. The federal bank regulatory agencies and/or the U.S. Congress may determine to increase capital requirements in the future due to the current economic environment. Under the capital adequacy regulation, at least half of a banking organization’s total capital is required to be “Tier 1 Capital” as defined in the regulations, comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual preferred stock. The remaining capital, “Tier 2 Capital,” as defined in the regulations, may consist of other preferred stock, a limited amount of term subordinated debt or a limited amount of the reserve for possible credit losses. The regulations establish minimum leverage ratios for banking organizations, which are calculated by dividing Tier 1 Capital by total average assets. Recognizing that the risk-based capital standards principally address credit risk rather than interest rate, liquidity, operational or other risks, many banking organizations are expected to maintain capital in excess of the minimum standards.

The Company and MBB operate under the Basel III capital adequacy standards. These standards require a minimum for Tier 1 leverage ratio of 4%, minimum Tier 1 risk-based ratio of 6%, and a total risk-based capital ratio of 8%. The Basel III capital adequacy standards established a new common equity Tier 1 risk-based capital ratio with a required 4.5% minimum (6.5% to be considered well-capitalized). The Company is required to have a level of regulatory capital in excess of the regulatory minimum and to have a capital buffer above 1.875% for 2018, and 2.5% for 2019 and thereafter. If a banking organization does not maintain capital above the minimum plus the capital conservation buffer it may be subject to restrictions on dividends, share buybacks, and certain discretionary payments such as bonus payments.

 

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The Company plans to provide the necessary capital to maintain MBB at “well-capitalized” status as defined by banking regulations and as required by an agreement entered into by and among MBB, MLC, Marlin Business Services Corp. and the FDIC in conjunction with the opening of MBB (the “FDIC Agreement”). MBB’s Tier 1 Capital balance at June 30, 2019 was $146.3 million, which met all capital requirements to which MBB is subject and qualified MBB for “well-capitalized” status. At June 30, 2019, the Company also exceeded its regulatory capital requirements and was considered “well-capitalized” as defined by federal banking regulations and as required by the FDIC Agreement.

The following table sets forth the Tier 1 leverage ratio, common equity Tier 1 risk-based capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio for Marlin Business Services Corp. and MBB at June 30, 2019.

 

     Actual      Minimum Capital
Requirement
     Well-Capitalized Capital
Requirement
 
     Ratio     Amount      Ratio (1)     Amount      Ratio     Amount  
     (Dollars in thousands)  

Tier 1 Leverage Capital

              

Marlin Business Services Corp.

     15.24   $ 190,851        4   $ 50,084        5   $ 62,605  

Marlin Business Bank

     13.76   $ 146,293        5   $ 53,146        5   $ 53,146  

Common Equity Tier 1 Risk-Based Capital

              

Marlin Business Services Corp.

     17.01   $ 190,851        4.5   $ 50,497        6.5   $ 72,939  

Marlin Business Bank

     15.05   $ 146,293        6.5   $ 68,053        6.5   $ 68,053  

Tier 1 Risk-based Capital

              

Marlin Business Services Corp.

     17.01   $ 190,851        6   $ 67,329        8   $ 89,772  

Marlin Business Bank

     15.05   $ 146,293        8   $ 82,635        8   $ 82,635  

Total Risk-based Capital

              

Marlin Business Services Corp.

     18.26   $ 204,912        8   $ 89,772        10   $ 112,215  

Marlin Business Bank

     16.30   $ 158,476        15   $ 145,827        10 %(1)    $ 102,079  

 

(1) 

MBB is required to maintain “well-capitalized” status and must also maintain a total risk-based capital ratio greater than 15% pursuant to the FDIC Agreement.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires the federal regulators to take prompt corrective action against any undercapitalized institution. Five capital categories have been established under federal banking regulations: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Well-capitalized institutions significantly exceed the required minimum level for each relevant capital measure. Adequately capitalized institutions include depository institutions that meet but do not significantly exceed the required minimum level for each relevant capital measure. Undercapitalized institutions consist of those that fail to meet the required minimum level for one or more relevant capital measures. Significantly undercapitalized characterizes depository institutions with capital levels significantly below the minimum requirements for any relevant capital measure. Critically undercapitalized refers to depository institutions with minimal capital and at serious risk for government seizure.

 

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Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions, including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized. Institutions that are adequately capitalized but not well-capitalized cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits.

The federal bank regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective powers include, among other things:

 

   

prohibiting the payment of principal and interest on subordinated debt;

 

   

prohibiting the holding company from making distributions without prior regulatory approval;

 

   

placing limits on asset growth and restrictions on activities;

 

   

placing additional restrictions on transactions with affiliates;

 

   

restricting the interest rate the institution may pay on deposits;

 

   

prohibiting the institution from accepting deposits from correspondent banks; and

 

   

in the most severe cases, appointing a conservator or receiver for the institution.

A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.

Pursuant to the FDIC Agreement entered into in conjunction with the opening of MBB, MBB must keep its total risk-based capital ratio above 15%. MBB’s total risk-based capital ratio of 16.30% at June 30, 2019 exceeded the threshold for “well capitalized” status under the applicable laws and regulations, and also exceeded the 15% minimum total risk-based capital ratio required in the FDIC Agreement.

Dividends. The Federal Reserve Board has issued policy statements requiring insured banks and bank holding companies to have an established assessment process for maintaining capital commensurate with their overall risk profile. Such assessment process may affect the ability of the organizations to pay dividends. Although generally organizations may pay dividends only out of current operating earnings, dividends may be paid if the distribution is prudent relative to the organization’s financial position and risk profile, after consideration of current and prospective economic conditions.

NOTE 16 – Stock-Based Compensation

Awards for Stock-Based Compensation are governed by the Company’s 2003 Equity Compensation Plan, as amended (the “2003 Plan”), the Company’s 2014 Equity Compensation Plan (approved by the Company’s shareholders on June 3, 2014) (the “2014 Plan”) and the Company’s 2019 Equity Compensation Plan (approved by the Company’s shareholders on May 30, 2019) (the “2019 Plan” and, together with the 2014 Plan and the 2003 Plan, the “Equity Compensation Plans”). Under the terms of the Equity Compensation Plans, employees, certain consultants and advisors and non-employee members of the Company’s Board of Directors have the opportunity to receive incentive and nonqualified grants of stock options, stock appreciation rights, restricted stock and other equity-based awards (collectively referred to as “Grants”) as approved by the Company’s Board of Directors. These award programs are used to attract, retain and motivate employees and to encourage individuals in key management roles to retain stock. The Company has a policy of issuing new shares to satisfy awards under the Equity Compensation Plans. The aggregate number of shares under the 2019 Plan that may be issued for Grants is 826,036. There were 826,036 shares available for future awards under the 2019 Plan as of June 30, 2019.

Total stock-based compensation expense was $1.0 million and $0.7 million for the three-month periods ended June 30, 2019 and June 30, 2018, respectively. Total stock-based compensation expense was $1.9 million and $1.7 million for the six-month periods ended June 30, 2019 and June 30, 2018, respectively. Excess tax benefits from stock-based payment arrangements was $0.1 million and $0.2 million for the six-month periods ended June 30, 2019 and June 30, 2018, respectively.

 

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Stock Options

Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of the grant and have seven year contractual terms. All options issued contain service conditions based on the participant’s continued service with the Company and may provide for accelerated vesting if there is a change in control as defined in the Equity Compensation Plans. Employee stock options generally vest over three to four years.

The Company may also issue stock options to non-employee independent directors. These options generally vest in one year.

There were no stock options granted during the three-month and six-month periods ended June 30, 2019, respectively. There were no stock options and 68,689 stock options granted during the three-month and six-month periods ended June 30, 2018, respectively. The fair value of stock options granted during the six-month period ended June 30, 2018 was $7.21. The fair value was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:

 

Six Months Ended June 30, 2018

      

Risk-free interest rate

     2.64

Expected life (years)

     4.50  

Expected volatility

     32.32

Expected dividends

     1.98

The expected life for options is estimated based on their vesting and contractual terms and was determined by applying the simplified method as defined by the SEC’s Staff Accounting Bulletin No. 107 (“SAB 107”). The risk-free interest rate reflected the yield on zero-coupon Treasury securities with a term approximating the expected life of the stock options. The expected volatility was determined using historical volatilities based on historical stock prices.

A summary of option activity for the six-month period ended June 30, 2019 follows:

 

Options

   Number of
Shares
     Weighted
Average
Exercise Price

Per Share
 

Outstanding, December 31, 2018

     146,431      $ 26.77  

Granted

     —          —    

Exercised

     —          —    

Forfeited

     —          —    

Expired

     (3,175      25.75  
  

 

 

    

Outstanding, June 30, 2019

     143,256        26.80  
  

 

 

    

The Company recognized $0.1 million and $0.2 million of compensation expense related to options during the three and six-month periods ended June 30, 2019. The Company recognized $0.1 million and $0.1 million of compensation expense related to options during the three and six-month periods ended June 30, 2018.

There were no stock options exercised during the three-month period ended June 30, 2019. There were 909 stock options exercised during the three-month period ended June 30, 2018.

The total pretax intrinsic values of stock options exercised was $0.1 million for the six-month period ended June 30, 2018.

 

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The following table summarizes information about the stock options outstanding and exercisable as of June 30, 2019:

 

Options Outstanding

     Options Exercisable  

Range of

Exercise Prices

   Number
Outstanding
     Weighted
Average
Remaining
Life (Years)
   Weighted
Average
Exercise
Price
     Aggregate
Intrinsic
Value
(In thousands)
     Number
Exercisable
     Weighted
Average
Remaining
Life (Years)
   Weighted
Average
Exercise
Price
     Aggregate
Intrinsic
Value
(In thousands)
 

$25.75

     83,235      4.8    $ 25.75      $ —          55,165      4.8    $ 25.75        —    

$28.25

     60,021      5.7    $ 28.25      $ —          20,001      5.7    $ 28.25      $ —    
  

 

 

          

 

 

    

 

 

          

 

 

 
     143,256      5.2    $ 26.80      $ —          75,166      5.0    $ 26.42      $ —    
  

 

 

          

 

 

    

 

 

          

 

 

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $24.93 as of June 30, 2019, which would have been received by the option holders had all option holders exercised their options as of that date.

As of June 30, 2019, there was $0.4 million of unrecognized compensation cost related to non-vested stock options not yet recognized in the Consolidated Statements of Operations scheduled to be recognized over a weighted average period of 1.1 years.

Restricted Stock Awards

The Company’s restricted stock awards provide that, during the applicable vesting periods, the shares awarded may not be sold or transferred by the participant. The vesting period for restricted stock awards generally ranges from three to seven years. All awards issued contain service conditions based on the participant’s continued service with the Company and may provide for accelerated vesting if there is a change in control as defined in the Equity Compensation Plans.

The vesting of certain restricted shares may be accelerated to a minimum of three years based on achievement of various individual performance measures. Acceleration of expense for awards based on individual performance factors occurs when the achievement of the performance criteria is determined.

Of the total restricted stock awards granted during the six-month period ended June 30, 2019, no shares may be subject to accelerated vesting based on individual performance factors; no shares have vesting contingent upon performance factors. Vesting was accelerated in 2019 and 2018 on certain awards based on the achievement of certain performance criteria determined annually, as described below.

The Company also issues restricted stock to non-employee independent directors. These shares generally vest in seven years from the grant date or six months following the director’s termination from Board of Directors service.

The following table summarizes the activity of the non-vested restricted stock during the six-month period ended June 30, 2019:

 

Non-vested restricted stock

   Shares      Weighted
Average
Grant-Date
Fair Value
 

Outstanding at December 31, 2018

     186,603      $ 19.91  

Granted

     1,100        23.05  

Vested

     (46,492      15.37  

Forfeited

     (1,850      22.79  
  

 

 

    

Outstanding at June 30, 2019

     139,361        21.41  
  

 

 

    

 

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During the three-month periods ended June 30, 2019 and June 30, 2018, the Company granted restricted stock awards with grant-date fair values totaling less than $0.1 million and $0.5 million, respectively. During the six-month periods ended June 30, 2019 and June 30, 2018, the Company granted restricted stock awards with grant-date fair values totaling less than $0.1 million and $0.5 million, respectively.

As vesting occurs, or is deemed likely to occur, compensation expense is recognized over the requisite service period and additional paid-in capital is increased. The Company recognized $0.2 million and $0.2 million of compensation expense related to restricted stock for the three-month periods ended June 30, 2019 and June 30, 2018, respectively. The Company recognized $0.5 million and $0.8 million of compensation expense related to restricted stock for the six-month periods ended June 30, 2019 and June 30, 2018, respectively.

Of the $0.5 million total compensation expense related to restricted stock for the six-month period ended June 30, 2019, approximately $0.1 million related to accelerated vesting during the first quarter of 2019, based on achievement of certain performance criteria determined annually. Of the $0.8 million total compensation expense related to restricted stock for the six-month period ended June 30, 2018, approximately $0.3 million related to accelerated vesting during the first quarter of 2018, which was also based on the achievement of certain performance criteria determined annually.

As of June 30, 2019, there was $1.5 million of unrecognized compensation cost related to non-vested restricted stock compensation scheduled to be recognized over a weighted average period of 3.6 years. As of June 30, 2019, there were no restricted stock awards outstanding for which vesting may be accelerated based on achievement of individual performance measures.

The fair value of shares that vested during the three-month periods ended June 30, 2019 and June 30, 2018 was $0.3 million and $0.6 million, respectively. The fair value of shares that vested during the six-month periods ended June 30, 2019 and June 30, 2018 was $1.1 million and $1.8 million, respectively.

 

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Restricted Stock Units

Restricted stock units (“RSUs”) are granted with vesting conditions based on fulfillment of a service condition (generally three to four years from the grant date), and may also require achievement of certain operating performance criteria, achievement of certain market-based targets associated with the Company’s stock price or relative total shareholder return, or a combination of both performance criteria and market-based targets. Expense for equity based awards with market and performance conditions is recognized over the performance period based on the grant-date fair value of the award for those awards which are expected to be earned.

In the second quarter of 2018, the Company modified the terms of the portion of certain outstanding 2017 performance based RSUs that are based on actual versus targeted operating performance criteria over the performance period. The modification eliminated the tax benefit that arose from the Tax Cuts and Jobs Act enacted in December of 2017. This modification did not result in any incremental compensation costs.

The following tables summarize restricted stock unit activity for the six-month period ended June 30, 2019:

 

Performance-based & market-based RSUs

   Number
of RSUs
     Weighted
Average
Grant-Date
Fair Value
 

Outstanding at December 31, 2018

     191,921      $ 17.43  

Granted

     95,408        18.37  

Forfeited

     —          0.00  

Converted

     (8,000      9.47  

Cancelled due to non-achievement of market condition

     (4,000      9.47  
  

 

 

    

Outstanding at June 30, 2019

     275,329        18.10  
  

 

 

    

Service-based RSUs

             

Outstanding at December 31, 2018

     61,256      $ 27.61  

Granted

     74,620        21.50  

Forfeited

     —          0.00  

Converted

     (22,509      27.47  
  

 

 

    

Outstanding at June 30, 2019

     113,367        23.62  
  

 

 

    

The weighted average grant-date fair value of RSUs with both performance and market-based vesting conditions granted during the six-month period ended June 30, 2019 was $12.91 per unit. The weighted average grant date fair value of these performance and market-based RSUs was estimated using a Monte Carlo simulation valuation model with the following assumptions:

 

     Six Months Ended June 30,  
     2019     2018  

Grant date stock price

   $ 21.50       —    

Risk-free interest rate

     2.16     —    

Expected volatility

     26.68     —    

Dividend yield

     —         —    

There were no RSUs with vesting conditions based solely on market conditions granted during the six-month periods ended June 30, 2019. There were no RSU’s granted during the six-month period ended June 30, 2018.

 

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The risk free interest rate reflected the yield on zero coupon Treasury securities with a term approximating the expected life of the RSUs. The expected volatility was based on historical volatility of the Company’s common stock. Dividend yield was assumed at zero as the grant assumes dividends distributed during the performance period are reinvested. When valuing the grant, we have assumed a dividend yield of zero, which is mathematically equivalent to reinvesting dividends in the issuing entity.

There were no RSUs granted during the three-month period ended June 30, 2019. During the three-month period ended June 30, 2018, the Company granted RSUs with grant-date fair values totaling $0.1 million. During the six-month periods ended June 30, 2019 and June 30, 2018, the Company granted RSUs with grant-date fair values totaling $3.4 million and $2.4 million, respectively. The Company recognized $0.7 million and $0.4 million of compensation expense related to RSUs for the three-month periods ended June 30, 2019 and June 30, 2018, respectively. The Company recognized $1.1 million and $0.7 million of compensation expense related to RSUs for the six-month periods ended June 30, 2019 and June 30, 2018, respectively. As of June 30, 2019, there was $4.7 million of unrecognized compensation cost related to RSUs scheduled to be recognized over a weighted average period of 1.7 years based on the most probable performance assumptions. In the event maximum performance targets are achieved, an additional $3.7 million of compensation cost would be recognized over a weighted average period of 1.9 years. As of June 30, 2019, 210,211 performance units are expected to convert to shares of common stock based on the most probable performance assumptions. In the event maximum performance targets are achieved, 450,107 performance units would convert to shares of common stock.

NOTE 17 – Subsequent Events

The Company declared a dividend of $0.14 per share on August 1, 2019. The quarterly dividend, which is expected to result in a dividend payment of approximately $1.7 million, is scheduled to be paid on August 22, 2019 to shareholders of record on the close of business on August 12, 2019. It represents the Company’s thirty-second consecutive quarterly cash dividend. The payment of future dividends will be subject to approval by the Company’s Board of Directors.

On August 1, 2019, the Company’s Board of Directors approved a stock repurchase plan (the “2019 Repurchase Plan”) under which the Company is authorized to repurchase up to $10 million in value of its outstanding shares of common stock. This authorization is in addition to the $3.3 million remaining authorization under the 2017 Repurchase Plan. The repurchase may be made on the open market, in block trades through privately negotiated transactions or plans, pursuant to instructions or contracts established under Rule 10b5-1 under the Securities Exchange Act of 1934, or otherwise in accordance with applicable laws, rules and regulations. No time limit has been set for the completion of the program. The stock repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended at any time at the Company’s discretion. The stock repurchase will be funded using the Company’s working capital. Any shares purchased under this program will be returned to the status of authorized but unissued shares of common stock.

 

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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto in our Form 10-K for the year ended December 31, 2018 filed with the SEC. This discussion contains certain statements of a forward-looking nature that involve risks and uncertainties.

FORWARD-LOOKING STATEMENTS

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”). 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; and

 

   

the factors set forth in the section captioned “Risk Factors” in Item 1 of our Form 10-K for the year ended December 31, 2018 filed with the SEC.

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.

OVERVIEW

Founded in 1997, we are a nationwide provider of credit products and services to small 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. We acquire our small business customers primarily by offering equipment financing through independent commercial equipment dealers and various national account programs, through direct solicitation of our small business customers and through relationships with select lease and loan brokers. We also extend financing through direct solicitation of our existing small business customers. Through these origination partners, we are able to cost-effectively access small business customers while also helping our origination partners obtain financing for their customers.

Our leases and loans are fixed-rate transactions with terms generally ranging from 36 to 60 months. At June 30, 2019, our lease and loan portfolio consisted of 94,088 accounts, excluding Working Capital Loans, with an average original term of 49 months and average original transaction size of approximately $17,000.

MBB offers a flexible loan program called Working Capital Loans (formerly called Funding Stream.) Working Capital Loans is tailored to the small business market to provide customers access to capital to help grow their businesses. As of June 30, 2019, the Company had approximately $51.7 million, not including the allowance for credit losses allocated to loans of $1.9 million, of small business loans on the balance sheet. Generally, these loans range from $5,000 to $200,000, have flexible 6 to 24 month terms, and have automated daily, weekly and monthly payback.

At June 30, 2019, we had $1.28 billion in total assets. Our assets are substantially comprised of our net investment in leases and loans which totaled $1.06 billion at June 30, 2019.

 

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Our revenue consists of interest and fees from our leases and loans, interest income from our interest earning cash and investments and, to a lesser extent, non-interest income from insurance premiums written and earned and other income. Our expenses consist of interest expense and non-interest expense, which include salaries and benefits and general and administrative expenses. As a credit lender, our earnings are also impacted by credit losses. For the quarter ended June 30, 2019, our annualized net credit losses were 1.88% of our average total finance receivables. We establish reserves for credit losses which require us to estimate inherent losses in our portfolio as of the reporting date.

Our leases are classified under U.S. GAAP as sales type leases, and we recognize interest income over the term of the lease. Sales type leases transfer substantially all of the benefits and risks of ownership to the equipment lessee. Net investment in leases consists of the sum of total minimum lease payments receivable and the estimated residual value of leased equipment, less unearned lease income. Unearned lease income consists of the excess of the total future minimum lease payments receivable plus the estimated residual value expected to be realized at the end of the lease term plus deferred net initial direct costs and fees less the cost of the related equipment. Approximately 59% of our lease portfolio at June 30, 2019 amortizes over the lease term to a $1 residual value. For the remainder of the portfolio, we must estimate end of term residual values for the leased assets. Failure to correctly estimate residual values could result in losses being realized on the disposition of the equipment at the end of the lease term.

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, as well as, from time to time, fixed-rate asset backed securitization transactions.

We anticipate that FDIC-insured deposits issued by MBB will continue to represent our primary source of funds for the foreseeable future. In the future MBB may elect to offer other products and services to the Company’s customer base. As a Utah state-chartered Federal Reserve member bank, MBB is supervised by both the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions. As of June 30, 2019, total MBB deposits were $888.6 million, compared to $755.8 million at December 31, 2018. We had $109.6 million of outstanding secured borrowings as of June 30, 2019 and $150.1 million as of December 31, 2018.

On January 13, 2009, Marlin Business Services Corp. became a bank holding company and is subject to the Bank Holding Company Act and supervised by the Federal Reserve Bank of Philadelphia. On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of Marlin Business Services Corp.’s election to become a financial holding company (while remaining a bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section 225.82 of the Federal Reserve Board’s Regulation Y. Such election permits Marlin Business Services Corp. to engage in activities that are financial in nature or incidental to a financial activity, including the maintenance and expansion of the reinsurance activities conducted through its wholly-owned subsidiary, AssuranceOne, Ltd. On September 19, 2018, we acquired Fleet Financing Resources (“FFR”), an equipment financing and leasing company specializing in both new and used commercial vehicles. This acquisition will augment our organic growth by extending our existing equipment finance business into new and attractive markets.

 

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RESULTS OF OPERATIONS

Comparison of the Three-Month Periods Ended June 30, 2019 and June 30, 2018

Net income. Net income of $6.1 million was reported for the three-month period ended June 30, 2019, resulting in diluted EPS of $0.49, compared to net income of $6.5 million and diluted EPS of $0.52 for the three-month period ended June 30, 2018. This decrease was primarily due to an increase in interest expense of $2.7 million due to interest payments on deposits as well as the interest on the asset backed securitization completed in the third quarter of 2018 and an increase in the provision for credit losses of $0.5 million on a larger portfolio.

Return on average assets was 1.94% for the three-month period ended June 30, 2019, compared to a return of 2.41% for the three-month period ended June 30, 2018. Return on average equity was 12.05% for the three-month period ended June 30, 2019, compared to a return of 13.93% for the three-month period ended June 30, 2018.

Overall, our average net investment in total finance receivables for the three-month period ended June 30, 2019 increased 10.2% to $1,031.8 million, compared to $936.0 million for the three-month period ended June 30, 2018. This change was primarily due to origination volume exceeding lease and loan repayments, sales and charge-offs. The end-of-period net investment in total finance receivables at June 30, 2019 was $1,062.3 million, an increase of $61.6 million, or 6.2%, from $1,000.7 million at December 31, 2018.

During the three months ended June 30, 2019, we generated 7,648 new equipment finance leases and loans with equipment costs of $181.8 million, compared to 8,238 new equipment finance leases and loans with equipment costs of $155.4 million generated for the three months ended June 30, 2018. Working Capital loan originations were $27.5 million during the three-month period ended June 30, 2019, an increase of $10.7 million, or 63.5%, as compared to the three-month period ended June 30, 2018. Approval rates decreased by 1% to 55% for the three-month period ended June 30, 2019, compared to 56% for the three-month period ended June 30, 2018.

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 June 30, 2019 and June 30, 2018.

 

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     Three Months Ended June 30,  
     2019     2018  
     (Dollars in thousands)  
     Average
Balance(1)
     Interest      Average
Yields/
Rates(2)
    Average
Balance(1)
     Interest      Average
Yields/
Rates(2)
 

Interest-earning assets:

                

Interest-earning deposits with banks

   $ 129,210      $ 752        2.33   $ 77,957      $ 320        1.64

Time Deposits

     11,715        72        2.46       8,706        39        1.77  

Restricted interest-earning deposits with banks

     14,671        28        0.77       —          —          —    

Securities available for sale

     10,674        74        2.76       10,850        60        2.21  

Net investment in leases(3)

     942,517        21,556        9.15       874,877        20,517        9.38  

Loans receivable(3)

     89,257        4,600        20.61       61,131        3,028        19.82  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

Total interest-earning assets

     1,198,044        27,082        9.04       1,033,521        23,964        9.27  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

Non-interest-earning assets:

                

Cash and due from banks

     5,319             3,989        

Intangible assets

     8,070             1,056        

Goodwill

     6,735             1,160        

Operating lease right-of-use assets

     6,935             —          

Property and equipment, net

     3,996             4,054        

Property tax receivables

     8,479             9,650        

Other assets(4)

     21,042             22,115        
  

 

 

         

 

 

       

Total non-interest-earning assets

     60,576             42,024        
  

 

 

         

 

 

       

Total assets

   $ 1,258,620           $ 1,075,545        
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Certificate of Deposits(5)

   $ 842,274      $ 5,042        2.39     814,524      $ 3,556        1.75

Money Market Deposits(5)

     23,715        158        2.66       30,091        155        2.06  

Long-term borrowings(5)

     120,407        1,208        4.01       —          —          —    
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     986,396        6,408        2.59       844,615        3,711        1.76  
  

 

 

    

 

 

      

 

 

    

 

 

    

Non-interest-bearing liabilities:

                

Sales and property taxes payable

     8,213             7,451        

Operating lease liabilities

     9,094             —          

Accounts payable and accrued expenses

     27,315             18,402        

Net deferred income tax liability

     24,601             19,316        
  

 

 

         

 

 

       

Total non-interest-bearing liabilities

     69,223             45,169        
  

 

 

         

 

 

       

Total liabilities

     1,055,619             889,784        

Stockholders’ equity

     203,001             185,761        
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 1,258,620           $ 1,075,545        
  

 

 

         

 

 

       

Net interest income

      $ 20,674           $ 20,253     

Interest rate spread(6)

           6.45           7.51

Net interest margin(7)

           6.90           7.84

Ratio of average interest-earning assets to average interest-bearing liabilities

           121.46           122.37

 

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(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.

Changes due to volume and rate. The following table presents the components of the changes in net interest income by volume and rate.

 

     Three Months Ended June 30, 2019 Compared To
Three Months Ended June 30, 2018
 
     Increase (Decrease) Due To:  
     Volume(1)      Rate(1)      Total  
     (Dollars in thousands)  

Interest income:

        

Interest-earning deposits with banks

   $ 264      $ 168      $ 432  

Time Deposits

     16        17        33  

Restricted interest-earning deposits with banks

     28        —          28  

Securities available for sale

     (1      15        14  

Net investment in leases

     1,557        (518      1,039  

Loans receivable

     1,445        127        1,572  

Total interest income

     3,732        (614      3,118  

Interest expense:

        

Certificate of Deposits

     125        1,361        1,486  

Money Market Deposits

     (37      40        3  

Long-term borrowings

     1,208        —          1,208  

Total interest expense

     700        1,997        2,697  

Net interest income

     3,004        (2,583      421  

 

(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.

 

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Net interest and fee margin. The following table summarizes the Company’s net interest and fee income as an annualized percentage of average total finance receivables for the three-month periods ended June 30, 2019 and June 30, 2018.

 

     Three Months Ended
June 30,
 
     2019     2018  
     (Dollars in thousands)  

Interest income

   $ 27,082     $ 23,964  

Fee income

     3,507       3,876  
  

 

 

   

 

 

 

Interest and fee income

     30,589       27,840  

Interest expense

     6,408       3,711  
  

 

 

   

 

 

 

Net interest and fee income

   $ 24,181     $ 24,129  
  

 

 

   

 

 

 

Average total finance receivables(1)

   $ 1,031,774     $ 936,007  

Annualized percent of average total finance receivables:

    

Interest income

     10.50     10.24

Fee income

     1.36       1.66  
  

 

 

   

 

 

 

Interest and fee income

     11.86       11.90  

Interest expense

     2.48       1.59  
  

 

 

   

 

 

 

Net interest and fee margin

     9.38     10.31
  

 

 

   

 

 

 

 

(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 increased $0.1 million, or 0.4%, to $24.2 million for the three months ended June 30, 2019 from $24.1 million for the three months ended June 30, 2018. The annualized net interest and fee margin decreased 93 basis points to 9.38% in the three-month period ended June 30, 2019 from 10.31% for the corresponding period in 2018.

Interest income, net of amortized initial direct costs and fees, was $27.1 million and $24.0 million for the three-month periods ended June 30, 2019 and June 30, 2018, respectively. Average total finance receivables increased $95.8 million, or 10.2%, to $1,031.8 million at June 30, 2019 from $936.0 million at June 30, 2018. The increase in average total finance receivables was primarily due to origination volume continuing to exceed lease and loan repayments, sales and charge-offs. The average yield on the portfolio increased 26 basis points to 10.50% from 10.24% in the prior year quarter. The weighted average implicit interest rate on new finance receivables originated was 12.95% and 12.24% for the three-month periods ended June 30, 2019, and June 30, 2018, respectively.

Fee income was $3.5 million and $3.9 million for the three-month periods ended June 30, 2019 and June 30, 2018, respectively. Fee income included approximately $0.9 million of net residual income for each of the three-month periods ended June 30, 2019 and June 30, 2018, respectively.

Fee income also included approximately $2.0 million and $2.3 million in late fee income for the three-month periods ended June 30, 2019 and June 30, 2018, respectively.

Fee income, as an annualized percentage of average total finance receivables, decreased 30 basis points to 1.36% for the three-month period ended June 30, 2019 from 1.66% for the corresponding period in 2018. Late fees remained the largest component of fee income at 0.76% as an annualized percentage of average total finance receivables for the three-month period ended June 30, 2019, compared to 0.97% for the three-month period ended June 30, 2018. As an annualized percentage of average total finance receivables, net residual income was 0.34% for the three-month period ended June 30, 2019, compared to 0.39% for the three-month period ended June 30, 2018.

 

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Interest expense increased $2.7 million to $6.4 million for the three-month period ended June 30, 2019 from $3.7 million for the corresponding period in 2017. A significant component of the increase was $1.2 million attributable to our long-term borrowings related to our 2018 asset-backed term securitization. The remaining increase of $1.5 million represented $5.2 million interest expense or 2.40% as an annualized percentage of average deposits for the three-month period ended June 30, 2019, from $3.7 million, or 1.76% as an annualized percentage of average deposits for the three-month period ended June 30, 2018. The increase was primarily due to an increase in the rate paid on interest bearing liabilities and to a lesser degree, the increase in the average balances of interest bearing liabilities. Interest expense, as an annualized percentage of average total finance receivables, increased 89 basis points to 2.48% for the three-month period ended June 30, 2019, from 1.59% for the corresponding period in 2018. The average balance of deposits was $866.0 million and $844.6 million for the three-month periods ended June 30, 2019 and June 30, 2018, respectively.

For the three-month period ended June 30, 2019, average term securitization borrowings outstanding were $120.4 million at a weighted average coupon of 4.01%. There were no outstanding borrowings for the period ended June 30, 2018.

Our wholly-owned subsidiary, MBB, serves as our primary funding source. MBB raises fixed-rate and variable-rate FDIC-insured deposits via the brokered certificates of deposit market, on a direct basis, and through the brokered MMDA Product. At June 30, 2019, brokered certificates of deposit represented approximately 49% of total deposits, while approximately 48% of total deposits were obtained from direct channels, and 3% were in the brokered MMDA Product.

Insurance premiums written and earned. Insurance premiums written and earned increased $0.2 million to $2.2 million for the three-month period ended June 30, 2019, from $2.0 million for the three-month period ended June 30, 2018, primarily due to an increase in the number of contracts enrolled in the insurance program as well as higher average ticket size.

Other income. Other income was $5.0 million and $2.6 million for the three-month periods ended June 30, 2019 and June 30, 2018, respectively. Other income also includes various administrative transaction fees and fees received from referral of leases to third parties, gain on sale of leases and servicing fee income, recognized as earned. Selected major components of other income for the three-month period ended June 30, 2019 included $3.8 million in income attributed to capital markets related activities, including gain on sale, servicing revenue and referral fee income, and $0.7 million of insurance policy fees. In comparison, selected major components of other income for the three-month period ended June 30, 2018 included $1.8 million in income attributed to capital markets related activities, including gain on sale, servicing revenue and referral fee income and $0.5 million of insurance policy fees.

Salaries and benefits expense. Salaries and benefits expense increased $3.0 million, or 31.6%, to $12.5 million for the three-month period ended June 30, 2019 from $9.5 million for the corresponding period in 2018. This increase was due to higher compensation costs related to increases in personnel, bonuses, commissions on higher origination volume and reduced salary deferrals due to changes in the accounting treatment of initial direct costs under ASC 842 – Leases. Salaries and benefits expense, as an annualized percentage of average total finance receivables, was 4.83% for the three-month period ended June 30, 2019 compared with 4.07% for the corresponding period in 2018. Total personnel increased to 356 at June 30, 2019 from 320 at June 30, 2018.

General and administrative expense. General and administrative expense decreased $0.3 million, or 4.7%, to $6.1 million for the three months ended June 30, 2019 from $6.4 million for the corresponding period in 2018. General and administrative expense as an annualized percentage of average total finance receivables was 2.35% for the three-month period ended June 30, 2019, compared to 2.76% for the three-month period ended June 30, 2018. Selected major components of general and administrative expense for the three-month period ended June 30, 2019 included $1.1 million of premises and occupancy expense, $0.4 million of audit and tax compliance expense, $0.9 million of data processing expense, $0.5 million of marketing expense, and $0.3 million of insurance-related expenses. In comparison, selected major components of general and administrative expense for the three-month period ended June 30, 2018 included $0.9 million of premises and occupancy expense, $0.5 million of audit and tax compliance expense, $0.9 million of data processing expense, $0.4 million of marketing expense and $0.3 million of insurance-related expenses.

Provision for credit losses. The provision for credit losses was $4.8 million for the three-month period ended June 30, 2019 compared to $4.3 million for the three-month period ended June 30, 2018. Equipment Finance portfolio losses tend to follow patterns based on the mix of origination vintages comprising the portfolio. The anticipated credit losses from the inception of a particular Equipment Finance origination vintage to charge-off generally follow a pattern of lower losses for the first few months, followed by increased losses in subsequent months, then lower losses during the later periods of the lease term. The higher provision is reflective of higher charge-offs and increasing portfolio size and the seasoning, or mix of origination vintages, of the portfolio affects the timing and amount of anticipated probable and estimable credit losses.

 

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The $0.5 million increase in the provision for credit losses was attributable to the increases in the Working Capital Loans and CVG portfolios of $0.3 million and $0.2 million, respectively, for the three-month period ended June 30, 2019 as compared to the three-month period ended June 30, 2018.

Total portfolio net charge-offs were $4.9 million for the three-month period ended June 30, 2019, compared to $4.3 million for the corresponding period in 2018. The increase in charge-off rate is primarily due to the ongoing seasoning of the Equipment Finance portfolio as reflected in the mix of origination vintages and the mix of credit profiles, as well as the increased portfolio balances. Total portfolio net charge-offs as an annualized percentage of average total finance receivables increased to 1.88% during the three-month period ended June 30, 2019, from 1.84% for the corresponding period in 2018. The allowance for credit losses increased to approximately $16.8 million at June 30, 2019, an increase of $0.7 million from $16.1 million at December 31, 2018.

Additional information regarding asset quality is included herein in the section “Finance Receivables and Asset Quality.”

Provision for income taxes. Income tax expense of $2.0 million and $2.1 million was recorded for the three-month periods ended June 30, 2019 and June 30, 2018, respectively. Our effective tax rate, which is a combination of federal and state income tax rates, was approximately 24.4% and 24.1% for the three-month periods ended June 30, 2019 and June 30, 2018, respectively.

Comparison of the Six-Month Periods Ended June 30, 2019 and June 30, 2018

Net income. Net income of $11.3 million was reported for the six-month period ended June 30, 2019, resulting in diluted EPS of $0.91, compared to net income of $12.7 million and diluted EPS of $1.01 for the six-month period ended June 30, 2018. The decrease is primarily due to increased interest expense of $5.3 million offset by interest and fee income of $5.4 million, an increase in provision for credit losses of $1.3 million, an increase in salary and benefits expense of $4.3 million and an increased gain on sale in capital market activities of $4.3 million.

Return on average assets was 1.82% for the six-month period ended June 30, 2019, compared to a return of 2.39% for the six-month period ended June 30, 2018. Return on average equity was 11.26% for the six-month period ended June 30, 2019, compared to a return of 13.81% for the six-month period ended June 30, 2018.

Overall, our average net investment in total finance receivables for the six-month period ended June 30, 2019 increased 9.8% to $1,015.6 million, compared to $924.9 million for the six-month period ended June 30, 2018. This change was primarily due to origination volume continuing to exceed lease repayments. The end-of-period net investment in total finance receivables at June 30, 2019 was $1,062.3 million, an increase of $61.6 million, or 6.2%, from $1,000.7 million at December 31, 2018.

During the six months ended June 30, 2019, we generated 15,115 new leases with equipment cost of $351.7 million, compared to 16,002 new leases with equipment cost of $297.0 million generated for the six months ended June 30, 2018. Approval rates were 57% for the six-month period ended June 30, 2019, compared to 56% for the six-month period ended June 30, 2018.

For the six-month period ended June 30, 2019 compared to the six-month period ended June 30, 2018, net interest and fee income increased $0.2 million, or 0.3%. The provision for credit losses increased $1.2 million, or 13.5%, to $10.1 million for the six-month period ended June 30, 2019 from $8.9 million for the same period in 2018, due to an increase in delinquency and charge-offs which is attributed to a return to a more normal credit environment.

Average balances and net interest margin. The following table summarizes the Company’s average balances, interest income, interest expense and average yields and rates on major categories of interest-earning assets and interest-bearing liabilities for the six-month periods ended June 30, 2019 and June 30, 2018.

 

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     Six Months Ended June 30,  
     2019     2018  
     (Dollars in thousands)  
     Average
Balance(1)
     Interest      Average
Yields/
Rates(2)
    Average
Balance(1)
     Interest      Average
Yields/
Rates(2)
 

Interest-earning assets:

                

Interest-earning deposits with banks

   $ 126,084      $ 1,525        2.42   $ 74,204      $ 569        1.53

Time Deposits

     11,090        133        2.41       8,309        67        1.62  

Restricted interest-earning deposits with banks

     15,146        58        0.77       —          —          —    

Securities available for sale

     10,697        142        2.66       11,026        102        1.86  

Net investment in leases(3)

     930,586        42,491        9.13       866,643        40,659        9.38  

Loans receivable(3)

     85,017        8,616        20.27       58,262        5,846        20.07  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,178,620        52,965        8.99       1,018,444        47,243        9.27  
  

 

 

    

 

 

      

 

 

    

 

 

    

Non-interest-earning assets:

                

Cash and due from banks

     5,459             4,493        

Intangible assets

     7,961             1,083        

Goodwill

     7,038             1,160        

Operating lease right-of-use assets

     5,419             —          

Property and equipment, net

     4,139             4,124        

Property tax receivables

     7,546             8,874        

Other assets(4)

     17,393             20,487        
  

 

 

         

 

 

       

Total non-interest-earning assets

     54,955             40,221        
  

 

 

         

 

 

       

Total assets

   $ 1,233,575           $ 1,058,665        
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Certificate of Deposits(5)

   $ 814,466      $ 9,489        2.33   $ 804,596      $ 6,802        1.69

Money Market Deposits(5)

     23,430        299        2.56       32,986        308        1.86  

Long-term borrowings(5)

     130,454        2,582        3.96       —          —          —    
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     968,350        12,370        2.56       837,582        7,110        1.70  
  

 

 

    

 

 

      

 

 

    

 

 

    

Non-interest-bearing liabilities:

                

Sales and property taxes payable

     6,796             5,711        

Operating lease liabilities

     7,492             —          

Accounts payable and accrued expenses

     27,251             13,803        

Net deferred income tax liability

     23,773             18,307        
  

 

 

         

 

 

       

Total non-interest-bearing liabilities

     65,312             37,821        
  

 

 

         

 

 

       

Total liabilities

     1,033,662             875,403        

Stockholders’ equity

     199,913             183,262        
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 1,233,575           $ 1,058,665        
  

 

 

         

 

 

       

Net interest income

      $ 40,595           $ 40,133     

Interest rate spread(6)

           6.43           7.57

Net interest margin(7)

           6.89           7.88

Ratio of average interest-earning assets to average interest-bearing liabilities

           121.71           121.59

 

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(1)

Average balances were calculated using average daily balances.

(2)

Annualized.

(3)

Average balances of leases and loans include non-accrual leases and loans, and are presented net of unearned income. The average balances of leases and loans do not include the effects of (i) the allowance for credit losses and (ii) initial direct costs and fees deferred.

(4)

Includes operating leases.

(5)

Includes effect of transaction costs. Amortization of transaction costs is on a straight-line basis, resulting in an increased average rate whenever average portfolio balances are at reduced levels.

(6)

Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.

(7)

Net interest margin represents net interest income as an annualized percentage of average interest-earning assets.

The following table presents the components of the changes in net interest income by volume and rate.

 

     Six Months Ended June 30, 2019 Compared To
Six Months Ended June 30, 2018
 
     Increase (Decrease) Due To:  
     Volume(1)      Rate(1)      Total  
     (Dollars in thousands)  

Interest income:

        

Interest-earning deposits with banks

   $ 523      $ 433      $ 956  

Time Deposits

     27        39        66  

Restricted interest-earning deposits with banks

     58        —          58  

Securities available for sale

     (3      43        40  

Net investment in leases

     2,941        (1,109      1,832  

Loans receivable

     2,711        59        2,770  

Total interest income

     7,236        (1,514      5,722  

Interest expense:

        

Certificate of Deposits

     84        2,602        2,687  

Money Market Deposits

     (104      95        (9

Long-term borrowings

     2,582        —          2,582  

Total interest expense

     1,242        4,018        5,260  

Net interest income

     5,870        (5,408      462  

 

(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.

 

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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, 2019 and 2018.

 

     Six Months Ended June 30,  
     2019     2018  
     (Dollars in thousands)  

Interest income

   $ 52,965     $ 47,243  

Fee income

     7,549       7,835  
  

 

 

   

 

 

 

Interest and fee income

     60,514       55,078  

Interest expense

     12,370       7,110  
  

 

 

   

 

 

 

Net interest and fee income

   $ 48,144     $ 47,968  
  

 

 

   

 

 

 

Average total finance receivables(1)

   $ 1,015,603     $ 924,906  

Percent of average total finance receivables:

    

Interest income

     10.43     10.22

Fee income

     1.49       1.69  
  

 

 

   

 

 

 

Interest and fee income

     11.92       11.91  

Interest expense

     2.44       1.54  
  

 

 

   

 

 

 

Net interest and fee margin

     9.48     10.37
  

 

 

   

 

 

 

 

(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 increased $0.1 million, or 0.2%, to $48.1 million for the six-month period ended June 30, 2019 from $48.0 million for the six-month period ended June 30, 2018. The annualized net interest and fee margin decreased 89 basis points to 9.48% in the six-month period ended June 30, 2019 from 10.37% for the corresponding period in 2018.

Interest income, net of amortized initial direct costs and fees, increased $5.8 million, or 12.3%, to $53.0 million for the six-month period ended June 30, 2019 from $47.2 million for the six-month period ended June 30, 2018. The increase in interest income was principally due to an increase in average yield of 21 basis points and by a 9.8% increase in average total finance receivables, which increased $90.7 million to $1,015.6 million for the six-months ended June 30, 2019 from $924.9 million for the six-months ended June 30, 2018. The increase in average total finance receivables was primarily due to origination volume continuing to exceed lease repayments. The average yield on the portfolio increased, due to higher yields on the new leases compared to the yields on the leases repaying. The weighted average implicit interest rate on new finance receivables originated increased 52 basis points to 12.86% for the six-month period ended June 30, 2019, compared to 12.34% for the six-month period ended June 30, 2018.

Fee income decreased $0.3 million to $7.5 million for the six-month period ended June 30, 2019, compared to $7.8 million for the six-month period ended June 30, 2018. Fee income included approximately $1.9 million of net residual income for the six-month period ended June 30, 2019 and $1.8 million for the six-month period ended June 30, 2018.

Fee income also included approximately $4.3 million in late fee income for the six-month period ended June 30, 2019, which decreased 10.4% from $4.8 million for the six-month period ended June 30, 2018.

 

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Fee income, as an annualized percentage of average total finance receivables, decreased 20 basis points to 1.49% for the six-month period ended June 30, 2019 from 1.69% for the six-month period ended June 30, 2018. Late fees remained the largest component of fee income at 0.85% as an annualized percentage of average total finance receivables for the six-month period ended June 30, 2019, compared to 1.03% for the six-month period ended June 30, 2018. As an annualized percentage of average total finance receivables, net residual income was 0.37% for the six-month period ended June 30, 2019, compared to 0.39% for the six-month period ended June 30, 2018.

Interest expense increased $5.3 million to $12.4 million for the six-month period ended June 30, 2019 from $7.1 for the corresponding period in 2018. The components of the increase were $2.6 million attributable to our long-term borrowings related to our 2018 asset-backed term securitization and $2.7 million representing $9.8 million interest expense, or 2.34% as an annualized percentage of average deposits for the six-month period ended June 30, 2019, from $7.1 million, or 1.70% as an annualized percentage of average deposits for the six-month period ended June 30, 2018. The increase was primarily due to an increase in the rate paid on interest bearing liabilities and to a lesser degree, the increase in the average balances of interest bearing liabilities. Interest expense, as an annualized percentage of average total finance receivables, increased 90 basis points to 2.44% for the six-month period ended June 30, 2019, from 1.54% for the corresponding period in 2018. The average balance of deposits was $837.9 million and $837.6 million for the six-month periods ended June 30, 2019 and June 30, 2018, respectively.

For the six-month period ended June 30, 2019, average term securitization borrowings outstanding were $130.5 million at a weighted average coupon of 3.96%. There were no outstanding borrowings for the period ended June 30, 2018.

Our wholly-owned subsidiary, MBB, serves as our primary funding source. MBB raises fixed-rate and variable-rate FDIC-insured deposits via the brokered certificates of deposit market, on a direct basis, and through the brokered MMDA Product. At June 30, 2019, brokered certificates of deposit represented approximately 49% of total deposits, while approximately 48% of total deposits were obtained from direct channels, and 3% were in the brokered MMDA Product.

Insurance premiums written and earned. Insurance premiums written and earned increased $0.4 million to $4.3 million for the six-month period ended June 30, 2019, from $3.9 million for the six-month period ended June 30, 2018, primarily due to an increase in the number of contracts enrolled in the insurance program as well as higher average ticket size.

Other income. Other income was $15.8 million and $5.9 million for the six-month periods ended June 30, 2019 and June 30, 2018, respectively. A major component of the $9.9 million increase in other income is property tax income that was previously netted against property tax expense in fiscal 2018 but is presented as a separate component of revenue in fiscal 2019 as a result of the adoption of ASU 2016-02 and related ASUs. Other income also includes various administrative transaction fees and fees received from referral of leases to third parties, gain on sale of leases and servicing fee income, recognized as earned. Selected major components of other income for the six-month period ended June 30, 2019 included $5.7 million in property tax income, $7.8 million in income attributed to capital markets related activities, including gain on sale, servicing revenue and referral fee income, and $1.3 million of insurance policy fees. In comparison, selected major components of other income for the six-month period ended June 30, 2018 included $4.2 million in income attributed to capital markets related activities, including gain on sale, servicing revenue and referral fee income, and $1.0 million of insurance policy fees.

Salaries and benefits expense. Salaries and benefits expense increased $4.3 million, or 21.9%, to $23.9 million for the six-month period ended June 30, 2019 from $19.6 million for the corresponding period in 2018. The increase was due to higher compensation costs related to increases in personnel, bonuses, commissions on higher origination volume and reduced salary deferrals due to changes in the accounting treatment of initial direct costs under ASC 842 – Leases. Salaries and benefits expense, as an annualized percentage of average total finance receivables, was 4.71% for the six-month period ended June 30, 2019 compared with 4.23% for the corresponding period in 2018.

Total personnel increased to 356 at June 30, 2019 from 320 at June 30, 2018.

 

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General and administrative expense. General and administrative expense increased $6.4 million, or 49.2%, to $19.4 million for the six-month period ended June 30, 2019 from $13.0 million for the corresponding period in 2018. A major component of the increase is property tax expense that was previously netted against property tax income in fiscal 2018 but is presented on a gross basis in in fiscal 2019 as a result of the adoption of ASU 2016-02 and related ASUs. General and administrative expense as an annualized percentage of average total finance receivables was 3.82% for the six-month period ended June 30, 2019, compared to 2.82% for the six-month period ended June 30, 2018. Selected major components of general and administrative expense for the six-month period ended June 30, 2019 included $6.2 million on property tax expense, $2.1 million of premises and occupancy expense, $0.7 million of audit and tax compliance expense, $2.0 million of data processing expense and $1.1 million of marketing expense. In comparison, selected major components of general and administrative expense for the six-month period ended June 30, 2018 included $1.8 million of premises and occupancy expense, $0.9 million of audit and tax compliance expense, $1.8 million of data processing expense, and $1.0 million of marketing expense, and $0.7 million of insurance-related expenses.

Provision for credit losses. The provision for credit losses increased $1.2 million, or 13.5%, to $10.1 million for the six-month period ended June 30, 2019 from $8.9 million for the corresponding period in 2018. Equipment Finance portfolio losses tend to follow patterns based on the mix of origination vintages comprising the portfolio. The anticipated credit losses from the inception of a particular Equipment Finance origination vintage to charge-off generally follow a pattern of lower losses for the first few months, followed by increased losses in subsequent months, then lower losses during the later periods of the lease term. The higher provision is reflective of higher charge-offs and increasing portfolio size and the seasoning, or mix of origination vintages, of the portfolio affects the timing and amount of anticipated probable and estimable credit losses.

The provision for credit losses for the Working Capital Loans, Equipment Finance and CVG portfolios increased by $0.7 million, $0.1 million and $0.5 million respectively, for the six-month period ended June 30, 2019 as compared to the six-month period ended June 30, 2018.

The increase in our provision for credit losses resulted from increased delinquency and charge-offs and to a lesser extent growth in the portfolio.

Total portfolio net charge-offs were $9.4 million for the six-month period ended June 30, 2019, compared to $8.1 million for the corresponding period in 2018. The increase in charge-off rate is primarily due to the ongoing seasoning of the Equipment Finance portfolio as reflected in the mix of origination vintages and the mix of credit profiles as well as the increased portfolio balances. Net charge-offs as an annualized percentage of average total finance receivables increased to 1.86% during the six-month period ended June 30, 2019, from 1.76% for the corresponding period in 2018. The allowance for credit losses increased to approximately $16.8 million at June 30, 2019, an increase of $0.7 million from $16.1 million at December 31, 2018.

Additional information regarding asset quality is included herein in the section “Finance Receivables and Asset Quality.”

Provision for income taxes. Income tax expense of $3.6 million was recorded for the six-month period ended June 30, 2019, compared to an expense of $3.7 million for the corresponding period in 2018. Our effective tax rate, which is a combination of federal and state income tax rates, was approximately 24.1% for the six-month period ended June 30, 2019, compared to 22.8% for the six-month period ended June 30, 2018.

FINANCE RECEIVABLES AND ASSET QUALITY

Our net investment in leases and loans increased $61.6 million, or 6.2%, to $1,062.3 million at June 30, 2019 from $1,000.7 million at December 31, 2018. We continue to monitor our credit underwriting guidelines in response to current economic conditions, and we continue to develop our sales organization and origination strategies to increase originations.

 

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The chart which follows provides our asset quality statistics for each of the three and six month periods ended June 30, 2019 and June 30, 2018, and the year ended December 31, 2018:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
    Year Ended
December 31,
 
     2019     2018     2019     2018     2018  
     (Dollars in thousands)  

Allowance for credit losses, beginning of period

   $ 16,882     $ 15,620     $ 16,100     $ 14,851     $ 14,851  

Provision for credit losses

     4,756       4,256       10,119       8,868       19,522  

Charge-offs

          

Commercial lease and loans:

          

Working Capital Loans

     (602     (499     (1,275     (728     (1,537

CRA

     —         —         —         —         —    

Equipment Finance

     (4,508     (4,190     (8,840     (8,219     (18,149

CVG

     (345     (243     (673     (400     (907
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Charge-offs

     (5,455     (4,932