Company Quick10K Filing
Quick10K
Marlin Business Services
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$22.02 12 $272
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 2019-05-30 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
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CLGN Collplant Holdings 20
LBSR Liberty Star Uranium & Metals 0
FNEC First National Energy 0
SCTF Securetech Innovations 0
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LRDC Laredo Oil 0
MRLN 2019-03-31
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 d739250dex311.htm
EX-31.2 d739250dex312.htm
EX-32.1 d739250dex321.htm

Marlin Business Services Earnings 2019-03-31

MRLN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d739250d10q.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 March 31, 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)

 

 

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  ☒

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

At April 25, 2019, 12,349,023 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 March 31, 2019

TABLE OF CONTENTS

 

         Page No.  

Part I – Financial Information

     3  
Item 1  

Consolidated Financial Statements (Unaudited)

     3  
 

Consolidated Balance Sheets at March 31, 2019 and December  31, 2018

     3  
 

Consolidated Statements of Operations for the three-month periods ended March 31, 2019 and 2018

     4  
 

Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2019 and 2018

     5  
 

Consolidated Statements of Stockholders’ Equity for the three-month periods ended March 31, 2019 and 2018

     6  
 

Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2019 and 2018

     7  
 

Notes to Unaudited Consolidated Financial Statements

     9  
Item 2  

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

     41  
Item 3  

Quantitative and Qualitative Disclosures about Market Risk

     59  
Item 4  

Controls and Procedures

     59  
Part II – Other Information      59  
Item 1  

Legal Proceedings

     59  
Item 1A  

Risk Factors

     59  
Item 2  

Unregistered Sales of Equity Securities and Use of Proceeds

     60  
Item 3  

Defaults upon Senior Securities

     60  
Item 4  

Mine Safety Disclosures

     60  
Item 5  

Other Information

     61  
Item 6  

Exhibits

     62  
Signatures      63  
Certifications   


Table of Contents

PART I. Financial Information

 

Item 1.

Consolidated Financial Statements

MARLIN BUSINESS SERVICES CORP.

AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

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

ASSETS

    

Cash and due from banks

   $ 4,737     $ 5,088  

Interest-earning deposits with banks

     136,215       92,068  
  

 

 

   

 

 

 

Total cash and cash equivalents

     140,952       97,156  

Time deposits with banks

     11,239       9,659  

Restricted interest-earning deposits (Note 13)

     13,174       14,045  

Investment securities (amortized cost of $10.8 million and $11.2 million at March 31, 2019 and December 31, 2018, respectively)

     10,676       10,956  

Net investment in leases and loans:

    

Leases

     480,766       489,299  

Loans

     559,306       527,541  
  

 

 

   

 

 

 

Net investment in leases and loans, excluding allowance for credit losses (includes $129.4 million and $150.2 million at March 31, 2019 and December 31, 2018, respectively, related to consolidated VIEs)

     1,040,072       1,016,840  

Allowance for credit losses

     (16,882     (16,100
  

 

 

   

 

 

 

Total net investment in leases and loans

     1,023,190       1,000,740  

Intangible assets

     8,149       7,912  

Goodwill

     6,735       7,360  

Operating lease right-of-use assets

     6,048       —    

Property and equipment, net

     3,992       4,317  

Property tax receivables, net of allowance

     9,133       5,245  

Other assets

     13,437       9,656  
  

 

 

   

 

 

 

Total assets

   $ 1,246,725     $ 1,167,046  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits

   $ 840,167     $ 755,776  

Long-term borrowings related to consolidated VIEs

     129,171       150,055  

Operating lease liabilities

     9,104       —    

Other liabilities:

    

Sales and property taxes payable

     8,590       3,775  

Accounts payable and accrued expenses

     34,105       36,369  

Net deferred income tax liability

     23,938       22,560  
  

 

 

   

 

 

 

Total liabilities

     1,045,075       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; 12,349,076 and 12,367,724 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

     123       124  

Additional paid-in capital

     83,215       83,498  

Stock subscription receivable

     (2     (2

Accumulated other comprehensive loss

     (4     (44

Retained earnings

     118,318       114,935  
  

 

 

   

 

 

 

Total stockholders’ equity

     201,650       198,511  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $     1,246,725     $     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 March 31,  
     2019      2018  
     (Dollars in thousands, except per-share data)  

Interest income

   $     25,883      $     23,279  

Fee income

     4,042        3,959  
  

 

 

    

 

 

 

Interest and fee income

     29,925        27,238  

Interest expense

     5,962        3,399  
  

 

 

    

 

 

 

Net interest and fee income

     23,963        23,839  

Provision for credit losses

     5,363        4,612  
  

 

 

    

 

 

 

Net interest and fee income after provision for credit losses

     18,600        19,227  
  

 

 

    

 

 

 

Non-interest income:

     

Insurance premiums written and earned

     2,132        1,939  

Other income

     10,816        3,295  
  

 

 

    

 

 

 

Non-interest income

     12,948        5,234  
  

 

 

    

 

 

 

Non-interest expense:

     

Salaries and benefits

     11,451        10,023  

General and administrative

     13,354        6,571  
  

 

 

    

 

 

 

Non-interest expense

     24,805        16,594  
  

 

 

    

 

 

 

Income before income taxes

     6,743        7,867  

Income tax expense

     1,602        1,682  
  

 

 

    

 

 

 

Net income

   $ 5,141      $ 6,185  
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.42      $ 0.50  

Diluted earnings per share

   $ 0.41      $ 0.50  

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 March 31,  
     2019     2018  
     (Dollars in thousands)  

Net income

   $ 5,141     $ 6,185  
  

 

 

   

 

 

 

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

     54       (79

Tax effect

     (14     (30
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     40       (2
  

 

 

   

 

 

 

Comprehensive income

   $     5,181     $     6,183  
  

 

 

   

 

 

 

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, 2017

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

Repurchase of common stock

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

Restricted stock grant, 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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

-6-


Table of Contents

MARLIN BUSINESS SERVICES CORP.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended March 31,  
     2019     2018  
     (Dollars in thousands)  

Cash flows from operating activities:

    

Net income

   $ 5,141     $ 6,185  

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

    

Depreciation and amortization

     1,209       1,024  

Stock-based compensation

     861       921  

Change in fair value of equity securities

     (43     55  

Provision for credit losses

     5,363       4,612  

Net deferred income taxes

     1,364       1,883  

Amortization of deferred initial direct costs and fees

     3,563       3,202  

Loss on equipment disposed

     389       310  

Gain on leases sold

     (3,612     (1,681

Leases originated for sale

     (10,675     (547

Proceeds from sale of leases originated for sale

     11,052       558  

Operating lease liability payments

     (100     —    

Effect of changes in other operating items:

    

Other assets

     (4,982     1,058  

Other liabilities

     2,934       4,122  
  

 

 

   

 

 

 

Net cash provided by operating activities

     12,464       21,702  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net change in time deposits with banks

     (1,580     446  

Funds used to originate leases and loans

     (197,168     (165,937

Principal collections on leases and loans

     122,871       115,428  

Proceeds from sale of leases originated for investment

     45,428       24,104  

Security deposits collected, net of refunds

     (76     (93

Proceeds from the sale of equipment

     696       808  

Acquisitions of property and equipment

     (376     (246

Principal payments received on (purchases of) securities available for sale

     372       444  
  

 

 

   

 

 

 

Net cash used in investing activities

     (29,833     (25,046
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net change in deposits

     84,391       23,830  

Term securitization repayments

     (21,104     —    

Business combinations earn-out consideration payments

     (121     —    

Repurchases of common stock

     (1,145     (1,000

Dividends paid

     (1,727     (1,741
  

 

 

   

 

 

 

Net cash provided by financing activities

     60,294       21,089  
  

 

 

   

 

 

 

Net increase in total cash, cash equivalents and restricted cash

     42,925       17,745  

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

     111,201       67,146  
  

 

 

   

 

 

 

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

   $ 154,126     $ 84,891  
  

 

 

   

 

 

 

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)

 

     Three Months Ended March 31,  
     2019      2018  
     (Dollars in thousands)  

Supplemental disclosures of cash flow information:

     

Cash paid for interest on deposits and borrowings

   $ 5,204      $ 3,045  

Net cash paid (refunds received) for income taxes

   $ 1,371      $ (8,092

Leases transferred into held for sale from investment

   $ 42,193      $ 22,434  

Supplemental disclosures of non cash investing activities:

     

Business combinations assets acquired

   $ 146      $ —    

Purchase of equipment for lease contracts and loans originated

   $ 6,979      $ 5,028  

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

     

Cash and cash equivalents

   $ 140,952      $ 84,891  

Restricted Cash

     13,174        —    
  

 

 

    

 

 

 

Cash, cash equivalents and restricted cash at end of period

   $ 154,126      $ 84,891  
  

 

 

    

 

 

 

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

 

-8-


Table of Contents

MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – The Company

Description

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 total revenue and net income for the three-month period ended March 31, 2018, would have been approximately $33.9 million and $6.5 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 March 31, 2019 and the results of operations for the three month periods ended March 31, 2019 and 2018, and cash flows for the three-month periods ended March 31, 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 filed with the Securities and Exchange Commission (“SEC”) on March 8, 2019. The consolidated results of operations for the three-month periods ended March 31, 2019 and 2018 and the consolidated statements of cash flows for the three-month periods ended March 31, 2019 and 2018 are not necessarily indicative of the results of operations or cash flows for the respective full years or any other period.

 

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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.

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. This 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 $6.2 million, lease incentive receivables of $2.8 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 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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Income Statement. In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “TCJA”). Consequently, the amendments eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of information reported to financial statement users. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The early adoption of the guidance resulted in an immaterial cumulative-effect adjustment that increased retained earnings and decreased AOCI in the first quarter of 2018 as reflected on the Consolidated Statements of Stockholders’ Equity.

Stock-Based Compensation. In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of modifications unless all the following are met: 1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted these changes effective January 1, 2018 on a prospective basis. Adoption of this ASU did not have a material impact on our results of operations or financial position.

Restricted Cash. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This Update requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company adopted ASU 2016-18 in the first quarter of 2018 as required although it had no restricted cash balances. The Company subsequently acquired restricted cash in the third quarter of 2018 and has applied the guidance appropriately. As a result, the Company includes restricted cash with cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the consolidated statements of cash flows.

Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted these changes effective January 1, 2018 on a prospective basis. Adoption of this ASU did not have a material impact on our results of operations or financial position.

Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The ASU’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this ASU specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This ASU is effective, as a result of ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the revenue recognition guidance on January 1, 2018 using the modified retrospective approach. A significant amount of the Company’s revenues is excluded from the scope of the amended guidance, including interest income, fee income, and insurance premiums written and earned, as seen on the Consolidated Statements of Operations. Revenue streams that will be subject to the new revenue recognition guidance includes certain revenues associated with lease and loan contracts including property tax administrative fees, fees billed to customers for the convenience of paying through ACH, and insurance administrative fees. In addition, referral fee income generated

 

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from referring lease and loan customers to third parties was deemed to be in scope of the amended guidance. The Company analyzed the in scope contracts and determined there were no material changes in the timing of revenue recognition when considering the amended guidance. The adoption of this ASU did not have a material impact on our results of operations, financial position or disclosure to the notes of the consolidated financial statements. The company has included applicable disclosures regarding revenue recognition within Note 3 of the consolidated financial statements.

 

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NOTE 3 – Non-Interest Income

On January 1, 2018, the Company adopted the amendments of ASU 2014-09 - Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The Company earns revenue including interest and fees from customers as well as revenues from non-customers. Interest and fee income are outside the scope of ASC Topic 606, Revenue from contracts with customers (Topic 606). Some sources of revenue included in non-interest income fall within the scope of Topic 606, while other sources do not. 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 Company has included the following table regarding the Company’s non-interest income for the periods presented.

 

     Three Months Ended March 31,  
     2019      2018  
     (Dollars in thousands)  

Insurance premiums written and earned

   $ 2,132      $ 1,939  

Gain on sale of leases and loans

     3,612        1,681  

Servicing income

     287        496  

Property tax income

     5,643        —    

Net gains recognized during the period on equity securities

     43        —    
  

 

 

    

 

 

 

Non-interest income within the scope of other GAAP topics

     11,717        4,116  
  

 

 

    

 

 

 

Property tax administrative fees on leases

     268        191  

ACH payment fees

     86        85  

Insurance policy fees

     668        511  

Referral fees

     155        282  

Other

     54        49  
  

 

 

    

 

 

 

Non-interest income from contracts with customers

     1,231        1,118  
  

 

 

    

 

 

 

Total non-interest income

   $ 12,948      $ 5,234  
  

 

 

    

 

 

 

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, 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 are within the scope of 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.

 

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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 Statement of Operations. The amortized cost and estimated fair value of investments, with gross unrealized gains and losses, were as follows as of March 31, 2019 and December 31, 2018:

 

     March 31, 2019  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Estimated  
     Cost      Gains      Losses      Fair Value  
     (Dollars in thousands)  

Debt Securities, Available for Sale:

           

Asset-backed securities (“ABS”)

   $ 4,790      $ 23      $ (37    $ 4,776  

Municipal securities

     2,375        32        —          2,407  

Equity Securities

           

Mutual fund

     3,651        —          (158      3,493  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 10,816      $ 55      $ (195    $ 10,676  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2018  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Estimated  
     Cost      Gains      Losses      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 $3.5 million and $3.4 million in equity securities recorded at fair value at March 31, 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 months ended March 31, 2019 and March 31, 2018:

 

     Three Months Ended March 31  
(Dollars in thousands)    2019        2018  

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

   $ 43        $ (55

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

   $ 43        $ (55
  

 

 

      

 

 

 

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 March 31, 2019 and December 31, 2018:

 

     March 31, 2019  
     Less than 12 months      12 months or longer      Total  
     Gross            Gross            Gross        
     Unrealized     Fair      Unrealized     Fair      Unrealized     Fair  
     Losses     Value      Losses     Value      Losses     Value  
     (Dollars in thousands)  

Debt Securities, Available for Sale:

              

ABS

   $ —       $ —        $ (37   $ 3,296      $ (37   $ 3,296  

Equity Securities

              

Mutual fund

     —         —          (158     3,493        (158     3,493  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total investment securities

   $ —       $ —        $ (195   $ 6,789      $ (195   $ 6,789  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

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

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 March 31, 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:

 

     March 31, 2019  
     1 Year      1-5     5-10     After 10         
     or Less      Years     Years     Years      Total  
     (Dollars in thousands)  

Amortized Cost:

            

Debt Securities, Available for Sale:

            

ABS

   $ —        $ 2,915     $ 1,908     $ —        $ 4,823  

Municipal securities

     —          521       1,854       —          2,375  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total debt securities available for sale

   $ —        $ 3,436     $ 3,762     $ —        $ 7,198  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Estimated fair value

   $ —        $ 3,431     $ 3,784     $ —        $ 7,215  

Weighted-average yield, GAAP basis

     —          2.30     2.72     —          2.52

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 three months ended March 31, 2019 and March 31, 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.

Net investment in leases and loans consists of the following:

 

     March 31, 2019     December 31, 2018  
     (Dollars in thousands)  

Minimum lease payments receivable

   $ 520,767     $ 530,867  

Estimated residual value of equipment

     28,240       27,646  

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

     (67,479     (68,376

Security deposits

     (762     (838
  

 

 

   

 

 

 

Total leases

     480,766       489,299  

Commercial loans, net of origination costs and fees deferred

    

Working Capital Loans

     43,210       36,856  

CRA(1)

     1,476       1,466  

Equipment loans(2)

     440,247       423,168  

CVG

     74,373       66,051  
  

 

 

   

 

 

 

Total commercial loans

     559,306       527,541  

Allowance for credit losses

     (16,882     (16,100
  

 

 

   

 

 

 
   $     1,023,190     $     1,000,740  
  

 

 

   

 

 

 

 

(1)

CRA loans are comprised of loans originated under a line of credit to satisfy its obligations under the Community Reinvestment Act of 1977.

(2)

Equipment loans are comprised of Equipment Finance Agreements, Installment Purchase Agreements and other loans.

At March 31, 2019, $129.4 million in net investment in leases are pledged as collateral for the Company’s outstanding asset-backed securitization balance and $36.1 million in net investment in leases are pledged as collateral for the secured borrowing capacity at the Federal Reserve Discount Window.

Initial direct costs and origination costs net of fees deferred were $20.8 million and $20.5 million as of March 31, 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 March 31, 2019 and December 31, 2018, $23.9 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, are as follows as of March 31, 2019:

 

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

Period Ending December 31,

     

2019

   $ 163,540      $ 27,172  

2020

     162,580        22,444  

2021

     105,790        11,464  

2022

     58,853        4,839  

2023

     26,033        1,365  

Thereafter

     3,971        195  
  

 

 

    

 

 

 
   $     520,767      $     67,479  
  

 

 

    

 

 

 

 

(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 is as follows:

 

     March 31, 2019      March 31, 2018  
     (Dollars in thousands)  

Selling profit(1)

   $ —        $ —    

Interest income

   $     10,961      $     12,995  

 

(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.

 

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     Three months ended March 31, 2019  
     Commercial Leases 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

     (673     —          (4,333     (328     (5,334

Recoveries

     19       —          734       —         753  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (654     —          (3,599     (328     (4,581
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Provision for credit losses

     871       —          4,043       449       5,363  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Allowance for credit losses, end of period

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending lease or loan balance(1,3)

   $ 42,781     $ 1,476      $ 897,359     $ 77,695     $ 1,019,311  
     Three months ended March 31, 2018  
     Commercial Leases 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

     (229     —          (4,029     (157     (4,415

Recoveries

     6       —          528       38       572  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (223     —          (3,501     (119     (3,843
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Provision for credit losses

     497       —          3,978       137       4,612  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Allowance for credit losses, end of period

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending lease or loan balance(1)

   $ 30,799     $ 1,355      $ 839,714     $ 55,884     $ 927,752  

Ending balance: individually evaluated for impairment

     —         —          597       —         597  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 30,799     $ 1,355      $ 839,117     $ 55,884     $ 927,155  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Year ended December 31, 2018  
     Commercial Leases 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  

 

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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, Install Purchase Agreements, and other leases and loans.

  (3)

For the three months ended March 31, 2019, and the year ended December 31, 2018, the Company determined that no leases or loans required individual evaluation.

For the three-month period ended March 31, 2019, the Company sold $52.9 million of leases and loans from its portfolio for a gain on sale of $3.6 million. 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 March 31, 2019 and December 31, 2018. The data within the tables reflect net investment, excluding deferred fees and cost and allowance:

 

     March 31, 2019  
     Commercial Leases and Loans  

(Dollars in thousands)

   Working
Capital
Loans
     CRA      Equipment
Finance
     CVG      Total  

Pass

   $ 41,848      $ 1,476      $ 885,180      $ 76,403      $ 1,004,907  

Special Mention

     73        —          4,451        233        4,757  

Substandard

     576        —          3,707        688        4,971  

Doubtful

     284        —          2,515        119        2,918  

Loss

     —          —          1,506        252        1,758  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,781      $ 1,476      $ 897,359      $ 77,695      $ 1,019,311  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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 March 31, 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 March 31, 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 March 31, 2019, there were no Working Capital Loans past due 30 days or more and still accruing. At 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 March 31, 2019 and December 31, 2018:

 

     30-59      60-89      >90                              
     Days      Days      Days      Total             Total         
March 31, 2019    Past      Past      Past      Past             Finance      Non-  

(Dollars in thousands)

   Due      Due      Due      Due      Current      Receivables      Accruing  

Working Capital Loans

   $ 284      $ —        $ —        $ 284      $ 42,497      $ 42,781      $ 284  

CRA

     —          —          —          —          1,476        1,476        —    

Equipment Finance (1)

     4,736        3,106        4,153        11,995        1,009,005        1,021,000        4,153  

CVG

     203        130        237        570        90,438        91,008        237  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Leases and Loans (2)

   $ 5,223      $ 3,236      $ 4,390      $ 12,849      $ 1,143,416      $ 1,156,265      $ 4,674  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     30-59      60-89      >90                              
     Days      Days      Days      Total             Total         
December 31, 2018    Past      Past      Past      Past             Finance      Non-  

(Dollars in thousands)

   Due      Due      Due      Due      Current      Receivables      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, Install 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 leasing 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 three-month period ended March 31, 2019 are as follows:

 

(Dollars in thousands)    Total Company  

Balance at December 31, 2018

   $ 7,360  

Changes

     (625
  

 

 

 

Balance at March 31, 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 March 31, 2019.

The following table presents details of the Company’s intangible assets as of March 31, 2019:

 

(Dollars in thousands)

 

                 Accumulated      Net  
Description    Useful Life      Cost      Amortization      Value  

Lender relationships

     3 to 10 years      $ 1,630      $ 334      $ 1,296  

Vendor relationships

     11 years        7,290        478        6,812  

Corporate trade name

     7 years        60        19        41  
     

 

 

    

 

 

    

 

 

 
      $ 8,980      $ 831      $ 8,149  
     

 

 

    

 

 

    

 

 

 

There was no impairment of these assets in the first quarter of 2019. Amortization related to the Company’s definite lived intangible assets was $0.2 million for the three-month period ended March 31, 2019 and less than $0.1 million for the three-month period ended March 31, 2018. The Company expects the amortization expense for the next five years will be as follows:

 

(Dollars in thousands)       

2019

   $ 689  

2020

     798  

2021

     798  

2022

     798  

2023

     798  

 

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Table of Contents

NOTE 8 – Other Assets

Other assets are comprised of the following:

 

     March 31,      December 31,  
     2019      2018  
     (Dollars in thousands)  

Accrued fees receivable

   $ 3,388      $ 3,354  

Lease Incentive Receivable

     2,836        —    

Prepaid expenses

     2,995        2,447  

Federal Reserve Bank Stock

     1,711        1,711  

Other

     2,507        2,144  
  

 

 

    

 

 

 
   $ 13,437      $ 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 March 31, 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.

The components of lease expense were as follows:

 

     Three Months Ended March 31,  
     2019      2018  
     (Dollars in thousands)  

Operating lease cost

   $ 223      $ 276  

Finance lease costs

     —          2  

Short-term lease cost

     39        —    
  

 

 

    

 

 

 

Total lease cost

   $ 262      $ 278  
  

 

 

    

 

 

 

 

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Table of Contents

Supplemental information related to leases was as follows:

 

     Three Months Ended  
(Dollars in thousands)    March 31, 2019  

Supplemental balance sheet information

  

Operating lease right-of-use assets

   $ 6,048  

Operating lease liabilities

     9,104  

Weighted average remaining lease term

     12.3  Years 

Weighted average discount rate

     3.30

Supplemental cash flow information

  

Operating cash flows from operating leases

   $ 100  

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

     6,048  

Maturities of lease liabilities were as follows:

 

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

Remainder of 2019

   $ 315  

2020

     1,098  

2021

     886  

2022

     791  

2023

     806  

Thereafter

     7,378  
  

 

 

 

Total lease payments

   $ 11,274  

Less: imputed interest

     (2,170
  

 

 

 

Total

   $ 9,104  
  

 

 

 

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 March 31, 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.

The following is a schedule of future minimum lease payments for capital and operating leases as of December 31, 2018:

 

-26-


Table of Contents
     Capital      Operating         

Period Ending December 31,

   Leases      Leases      Total  
     (Dollars in thousands)  

2019

   $ 112      $ 1,582      $ 1,694  

2020

     112        789        901  

2021

     65        103        168  

2022

     —          105        105  

2023

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total minimum lease payments (1)

   $ 289      $ 2,579      $ 2,868  
  

 

 

    

 

 

    

 

 

 

Rent expense was $0.2 million and $0.3 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively.

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 March 31, 2019, money market deposit accounts totaled $23.0 million.

As of March 31, 2019, the remaining scheduled maturities of certificates of deposits are as follows:

 

     Scheduled  
     Maturities  
     (Dollars in thousands)  

Period Ending December 31,

  

2019

   $ 343,259  

2020

     220,089  

2021

     149,510  

2022

     66,008  

2023

     28,803  

Thereafter

     11,998  
  

 

 

 

Total

   $ 819,667  
  

 

 

 

Certificates of deposits issued by MBB are time deposits and are generally issued in denominations of $250,000 or less. The MMDA Product is also issued to customers in amounts less than $250,000. The FDIC insures deposits up to $250,000 per depositor. The weighted average all-in interest rate of deposits at March 31, 2019 was 2.32%.

 

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Table of Contents

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 due on November 20, 2019. As of March 31, 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 March 31, 2019 and December 31, 2018.

Long-term Borrowings

Borrowings with an original maturity date of one year or more are classified as long-term borrowings. The Company’s term note securitizations are classified as long-term borrowings.

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

 

     March 31,      December 31,  
     2019      2018  
     (Dollars in thousands)  

Term securitization 2018-1

   $ 130,129      $ 151,233  

Unamortized debt issuance costs

     (958      (1,178
  

 

 

    

 

 

 
   $ 129,171      $ 150,055  
  

 

 

    

 

 

 

On July 27, 2018 the Company completed a $201.7 million asset-backed term securitization. Each tranche of the term note securitization has a fixed term, fixed interest rate and fixed principal amount. At March 31, 2019, outstanding term securitizations amounted to $130.1 million and are collateralized by $147.3 million of minimum lease and loan payments receivable and $9.1 million of restricted interest-earning deposits.

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

 

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

2018 — 1

              

Class A-1

   $ 5,879      $ 26,983      $ 77,400        July, 2019        2.55

Class A-2

     55,700        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

   $ 130,129      $ 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.

Scheduled principal and interest payments on outstanding borrowings as of March 31, 2019 are as follows:

 

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Table of Contents
     Principal      Interest  
     (Dollars in thousands)  

Period Ending December 31,

     

2019

   $ 52,719      $ 2,691  

2020

     45,200        1,993  

2021

     23,629        813  

2022

     8,581        158  
  

 

 

    

 

 

 
   $ 130,129      $ 5,655  
  

 

 

    

 

 

 

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 March 31, 2019 and December 31, 2018:

 

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

Assets

                 

ABS

   $ —        $ 4,776      $ —        $ —        $ 4,915      $ —    

Municipal securities

     —          2,407        —          —          2,612        —    

Mutual fund

     3,493        —          —          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.

 

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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.

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 March 31, 2019 and December 31, 2018:

 

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

Financial Assets

           

Cash and cash equivalents

   $ 140,952      $ 140,952      $ 97,156      $ 97,156  

Time deposits with banks

     11,239        11,245        9,659        9,614  

Restricted interest-earning deposits with banks

     13,174        13,174        14,045        14,045  

Loans, net of allowance

     549,719        553,286        518,697        515,754  

Federal Reserve Bank Stock

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

Financial Liabilities

           

Deposits

   $ 840,167      $ 819,893      $ 755,776      $ 722,682  

Long-term borrowings

     129,171        129,382        150,055        149,912  

Servicing Liability

     1,588        1,588        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 March 31, 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 $26.9 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 related to 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 March 31, 2019 and December 31, 2018. As of March 31, 2019, $13.2 million was classified as restricted interest-earning deposits in banks, consisting of $9.1 million in a trust account related to our secured debt facility and $4.1 million in a trust account reserved for payments related to customer restitution. This fair value measurement is classified as Level 1.

 

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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 March 31, 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.

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 March 31,  
     2019      2018  
     (Dollars in thousands, except
per-share data)
 

Basic EPS

     

Net income

   $ 5,141      $ 6,185  

Less: net income allocated to participating securities

     (72      (120
  

 

 

    

 

 

 

Net income allocated to common stock

   $ 5,069      $ 6,065  
  

 

 

    

 

 

 

Weighted average common shares outstanding

     12,337,730        12,435,148  

Less: Unvested restricted stock awards considered participating securities

     (172,084      (246,242
  

 

 

    

 

 

 

Adjusted weighted average common shares used in computing basic EPS

     12,165,646        12,188,906  
  

 

 

    

 

 

 

Basic EPS

   $ 0.42      $ 0.50  
  

 

 

    

 

 

 

Diluted EPS

     

Net income allocated to common stock

   $ 5,069      $ 6,065  
  

 

 

    

 

 

 

Adjusted weighted average common shares used in computing basic EPS

     12,165,646        12,188,906  

Add: Effect of dilutive stock-based compensation awards

     86,470        56,113  
  

 

 

    

 

 

 

Adjusted weighted average common shares used in computing diluted EPS

     12,252,116        12,245,019  
  

 

 

    

 

 

 

Diluted EPS

   $ 0.41      $ 0.50  
  

 

 

    

 

 

 

For each of the three-month periods ended March 31, 2019 and March 31, 2018, outstanding stock based compensation awards in the amount of 188,583 and 134,094, 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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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 March 31, 2019, the Company purchased 29,947 shares of its common stock in the open market at an average cost of $ 23.86 per share. During the three-month period ended March 31, 2018, the Company purchased 17,725 shares of its common stock in the open market at an average cost of $ 28.21 per share. At March 31, 2019, the Company had $ 5.0 million of remaining authorization 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. During the three-month periods ended March 31, 2019 and March 31, 2018, there were 18,910 shares and 19,301 shares, respectively, repurchased to cover income tax withholding under the 2014 Plan at an average cost of $ 22.74 per share and $ 25.91 per share, 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.

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 March 31, 2019 was $143.4 million, which met

 

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all capital requirements to which MBB is subject and qualified MBB for “well-capitalized” status. At March 31, 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 March 31, 2019.

 

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

Tier 1 Leverage Capital

                 

Marlin Business Services Corp.

     15.41   $ 186,770        4      $ 48,477        5   $ 60,596  

Marlin Business Bank

     14.29   $ 143,392        5      $ 50,173        5   $ 50,173  

Common Equity Tier 1 Risk-Based Capital

                 

Marlin Business Services Corp.

     17.25   $ 186,770        4.5      $ 48,723        6.5   $ 70,377  

Marlin Business Bank

     15.65   $ 143,392        6.5      $ 64,123        6.5   $ 64,123  

Tier 1 Risk-based Capital

                 

Marlin Business Services Corp.

     17.25   $ 186,770        6      $ 64,964        8   $ 86,618  

Marlin Business Bank

     15.65   $ 143,392        8      $ 77,864        8   $ 77,864  

Total Risk-based Capital

                 

Marlin Business Services Corp.

     18.50   $ 200,346        8      $ 86,618        10   $ 108,273  

Marlin Business Bank

     16.91   $ 154,882        15      $ 137,407        10 (1)    $ 96,185  

 

(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.

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.

 

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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 16.91% at March 31, 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

Under the terms of the 2014 Plan, 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 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 2014 Plan. The aggregate number of shares under the 2014 Plan that may be issued pursuant to stock options, stock units, stock awards, and other equity awards is 1,200,000 with not more than 1,000,000 of such shares available for issuance as stock units, stock awards, and other equity awards. There were 183,999 shares available for future grants under the 2014 Plan as of March 31, 2019, of which 128,164 shares were available to be issued as stock units, stock awards, and other equity awards.

Total stock-based compensation expense was $0.9 million and $0.9 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively. Excess tax benefits from stock-based payment arrangements was less than $0.1 million and $0.1 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively.

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 7 year contractual terms. All options issued contain service conditions based on the participant’s continued service with the Company and 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.

In previous years, the Company has also issued stock options to non-employee independent directors. These options generally vest in one year.

 

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There were no stock options granted during the three-month period ended March 31, 2019. There were 68,689 stock options granted during the three-month period ended March 31, 2018. The fair value of stock options granted during the three-month period ended March 31, 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:

 

Three Months Ended March 31, 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 three-month period ended March 31, 2019 follows:

 

            Weighted  
            Average  
     Number of      Exercise Price  

Options

   Shares      Per Share  

Outstanding, December 31, 2018

     146,431      $ 26.77  

Granted

     —          —    

Exercised

     —          —    

Forfeited

     —          —    

Expired

     (3,175      25.75  
  

 

 

    

Outstanding, March 31, 2019

     143,256        26.80  
  

 

 

    

During both three-month periods ended March 31, 2019 and March 31, 2018, the Company recognized compensation expense related to options of $0.1 million.

There were no stock options exercised during the three-month period ended March 31, 2019. There were no stock options exercised during the three-month period ended March 31, 2018.

The following table summarizes information about the stock options outstanding and exercisable as of March 31, 2019.

 

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Options Outstanding

     Options Exercisable  
            Weighted      Weighted      Aggregate             Weighted      Weighted      Aggregate  
            Average      Average      Intrinsic             Average      Average      Intrinsic  
     Range of    Number      Remaining      Exercise      Value      Number      Remaining      Exercise      Value  

Exercise Prices

   Outstanding      Life (Years)      Price      (In thousands)      Exercisable      Life (Years)      Price      (In thousands)  

$25.75

     83,235        5.0      $ 25.75      $ —          55,165        5.0      $ 25.75        —    

$28.25

     60,021        6.0      $ 28.25      $ —          20,001        6.0      $ 28.25      $ —    
  

 

 

          

 

 

    

 

 

          

 

 

 
     143,256        5.4      $ 26.80      $ —          75,166        5.3      $ 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 $21.50 as of March 31, 2019, which would have been received by the option holders had all option holders exercised their options as of that date.

As of March 31, 2019, there was $0.5 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 1.3 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 three-month period ended March 31, 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 2018 and 2019 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 three-month period ended March 31, 2019:

 

            Weighted  
            Average  
            Grant-Date  

Non-vested restricted stock

   Shares      Fair Value  

Outstanding at December 31, 2018

     186,603      $ 19.91  

Granted

     600        23.86  

Vested

     (31,547      15.87  

Forfeited

     (900      21.08  
  

 

 

    

Outstanding at March 31, 2019

     154,756        20.74  
  

 

 

    

 

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During both three-month periods ended March 31, 2019 and March 31, 2018, the Company granted restricted stock awards with a grant date fair values totaling less than $0.1.

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 $0.3 million and $0.6 million of compensation expense related to restricted stock for the three-month periods ended March 31, 2019 and March 31, 2018, respectively.

Of the $0.3 million total compensation expense related to restricted stock for the three-month period ended March 31, 2019, approximately $0.1 million related to accelerated vesting based on achievement of certain performance criteria determined annually. Of the $0.6 million total compensation expense related to restricted stock for the three-month period ended March 31, 2018, approximately $0.3 million related to accelerated vesting, which was also based on the achievement of certain performance criteria determined annually.

As of March 31, 2019, there was $1.7 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 March 31, 2019, there was 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 March 31, 2019 and March 31, 2018 was $0.7 million and $1.2 million, respectively.

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 service conditions is recognized over the service period based on the grant-date fair value of the award. 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 three-month period ended March 31, 2019:

 

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            Weighted  
            Average  
     Number of      Grant-Date  

Performance-based & market-based RSUs

   RSUs      Fair Value  

Outstanding at December 31, 2018

     191,921      $ 17.43  

Granted

     95,408        18.37  

Forfeited

     —          —    

Converted

     (8,000      9.47  

Cancelled due to non-achievement of market condition

     (4,000      9.47  
  

 

 

    

Outstanding at March 31, 2019

     275,329        18.10  
  

 

 

    

Service-based RSUs

             

Outstanding at December 31, 2018

     61,256      $ 27.61  

Granted

     74,620        21.50  

Forfeited

     —          —    

Converted

     (22,509      27.47  
  

 

 

    

Outstanding at March 31, 2019

     113,367        23.62  
  

 

 

    

There were no RSUs with vesting conditions based solely on market conditions granted during the three-month periods ended March 31, 2019 and March 31, 2018. There were no RSUs with both market and performance based vesting conditions granted during the three-month period ended March 31, 2018. The weighted average grant-date fair value of RSUs with both performance and market based vesting conditions granted during the three-month period ended March 31, 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:

 

     Three Months Ended March 31,  
     2019     2018  

Grant date stock price

   $ 21.50       —    

Risk-free interest rate

     2.16     —  

Expected volatility

     26.68     —  

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.

During the three-month periods ended March 31, 2019 and March 31, 2018, the Company granted RSUs with grant-date fair values totaling $3.4 million and $2.4 million, respectively. The Company recognized $0.5 million and $0.3 million of compensation expense related to RSUs for the three month periods ended March 31, 2019 and March 31, 2018, respectively. As of March 31, 2019, there was $5.4 million of unrecognized compensation cost related to RSUs scheduled to be recognized over a weighted average period of 1.9 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 2.1 years. As of March 31, 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, 484,873 performance units would convert to shares of common stock.

 

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NOTE 17 – Subsequent Events

The Company declared a dividend of $0.14 per share on May 2, 2019. The quarterly dividend, which is expected to result in a dividend payment of approximately $1.7 million, is scheduled to be paid on May 23, 2019 to shareholders of record on the close of business on May 13, 2019. It represents the Company’s thirty-first consecutive quarterly cash dividend. The payment of future dividends will be subject to approval by the Company’s Board of Directors.

 

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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 March 31, 2019, our lease and loan portfolio consisted of 93,901 accounts, excluding working capital loans, with an average original term of 48 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 March 31, 2019, the Company had approximately $43.2 million, not including the allowance for credit losses allocated to loans of $1.7 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 March 31, 2019, we had $1.25 billion in total assets. Our assets are substantially comprised of our net investment in leases and loans which totaled $1,023.2 million at March 31, 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 March 31, 2019, our annualized net credit losses were 1.83% 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 March 31, 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 March 31, 2019, total MBB deposits were $840.2 million, compared to $755.8 million at December 31, 2018. We had $129.2 million of outstanding secured borrowings as of March 31, 2019 and none 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.

CRITICAL ACCOUNTING POLICIES

There have been no significant changes to our Critical Accounting Policies as described in our Form 10-K for the year ended December 31, 2018.

RECENTLY ISSUED ACCOUNTING STANDARDS

Information on recently issued accounting pronouncements and the expected impact on our financial statements is provided in Note 2, Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements.

RECENTLY ADOPTED ACCOUNTING STANDARDS

Information on recently adopted accounting pronouncements and the expected impact on our financial statements is provided in Note 2, Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS

Comparison of the Three-Month Periods Ended March 31, 2019 and March 31, 2018

Net income. Net income of $5.1 million was reported for the three-month period ended March 31, 2019, resulting in diluted EPS of $0.41, compared to net income of $6.2 million and diluted EPS of $0.50 for the three-month period ended March 31, 2018. This decrease was primarily due to an increase in interest expense of $2.6 million primarily due to the interest on the asset backed securitization completed in the third quarter of 2018 and an increase in the provision for credit losses of $0.8 million on a larger portfolio offset by an increase in interest and fee income of $2.7 million.

 

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Return on average assets was 1.69% for the three-month period ended March 31, 2019, compared to a return of 2.37% for the three-month period ended March 31, 2018. Return on average equity was 10.45% for the three-month period ended March 31, 2019, compared to a return of 13.69% for the three-month period ended March 31, 2018.

Overall, our average net investment in total finance receivables for the three-month period ended March 31, 2019 increased 9.4% to $999.4 million, compared to $913.8 million for the three-month period ended March 31, 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 March 31, 2019 was $1,023.2 million, an increase of $22.5 million, or 2.2%, from $1,000.7 million at December 31, 2018.

During the three months ended March 31, 2019, we generated 7,467 new equipment finance lease and loans with equipment cost of $169.8 million, compared to 7,764 new equipment finance lease and loans with equipment cost of $141.6 million generated for the three months ended March 31, 2018. Working Capital Loans originations were $23.6 million during the three-month period ended March 31, 2019, an increase of $5.6 million, or 30.8%, as compared to the three-month period ended March 31, 2018. Approval rates increased by 2% to 58% for the three-month period ended March 31, 2019, compared to 56% for the three-month period ended March 31, 2018.

For the three-month period ended March 31, 2019 compared to the three-month period ended March 31, 2018, net interest and fee income increased $0.2 million, or 0.8%, while provision for credit losses increased $0.8 million to $5.4 million on a larger portfolio.

Average balances and net interest margin. The following table summarizes the Company’s average balances, interest income, interest expense and average yields and rates on major categories of interest-earning assets and interest-bearing liabilities for the three-month periods ended March 31, 2019 and March 31, 2018.

 

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     Three Months Ended March 31,  
     2019     2018  
     (Dollars in thousands)  
                   Average                   Average  
     Average             Yields/     Average             Yields/  
   Balance(1)      Interest      Rates(2)     Balance(1)      Interest      Rates(2)  

Interest-earning assets:

                

Interest-earning deposits with banks

   $ 126,798      $ 773        2.44   $ 75,211      $ 249        1.32

Time Deposits

     10,466        61        2.35       7,912        29        1.45  

Restricted interest-earning deposits with banks

     15,620        30        0.00       0        0        —    

Securities available for sale

     10,720        69        2.56       11,202        42        1.51  

Net investment in leases(3)

     918,655        20,934        9.12       858,410        20,142        9.39  

Loans receivable(3)

     80,776        4,016        19.89       55,394        2,817        20.34  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,163,035        25,883        8.90       1,008,129        23,279        9.24  
  

 

 

    

 

 

      

 

 

    

 

 

    

Non-interest-earning assets:

                

Cash and due from banks

     5,600             574        

Intangible assets

     7,852             1,110        

Goodwill

     7,340             1,160        

Operating Lease right-of-use assets

     3,903             0        

Property and equipment, net

     4,282             4,193        

Property tax receivables

     6,614             8,098        

Other assets(4)

     17,002             18,860        
  

 

 

         

 

 

       

Total non-interest-earning assets

     52,593             33,995        
  

 

 

         

 

 

       

Total assets

   $ 1,215,628           $ 1,042,124        
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Certificate of Deposits(5)

   $ 793,665      $ 4,447        2.24   $ 794,976      $ 3,246        1.63

Money Market Deposits(5)

     23,236        142        2.44       35,913        153        1.70  

Long-term borrowings(5)

     140,500        1,373        3.91       —          0        —    
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     957,401        5,962        2.49       830,889        3,399        1.63  
  

 

 

    

 

 

      

 

 

    

 

 

    

Non-interest-bearing liabilities:

                

Sales and property taxes payable

     5,380             3,971        

Operating lease liabilities

     5,890             0        

Accounts payable and accrued expenses

     27,185             9,204        

Net deferred income tax liability

     22,947             17,298        
  

 

 

         

 

 

       

Total non-interest-bearing liabilities

     61,402             30,473        
  

 

 

         

 

 

       

Total liabilities

     1,018,803             861,362        

Stockholders’ equity

     196,825             180,762        
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 1,215,628           $ 1,042,124        
  

 

 

         

 

 

       

Net interest income

      $ 19,921           $ 19,880     

Interest rate spread(6)

           6.41           7.61

Net interest margin(7)

           6.85           7.89

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

           121.48           121.33

 

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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 March 31, 2019 Compared To  
   Three Months Ended March 31, 2018  
     Increase (Decrease) Due To:  
     Volume(1)      Rate(1)      Total  
     (Dollars in thousands)  

Interest income:

        

Interest-earning deposits with banks

   $ 234      $ 290      $ 524  

Time Deposits

     11        21        32  

Restricted interest-earning deposits with banks

     30        —          30  

Securities available for sale

     (1      28        27  

Net investment in leases

     1,385        (593      792  

Loans receivable

     1,264        (65      1,199  

Total interest income

     3,472        (868      2,604  

Interest expense:

        

Certificate of Deposits

     (5      1,206        1,201  

Money Market Deposits

     (64      53        (11

Long-term borrowings

     1,373        —          1,373  

Total interest expense

     579        1,984        2,563  

Net interest income

     2,838        (2,797      41  

 

(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 March 31, 2019 and March 31, 2018.

 

     Three Months Ended March 31,  
     2019     2018  
     (Dollars in thousands)  

Interest income

   $ 25,883     $ 23,279  

Fee income

     4,042       3,959  
  

 

 

   

 

 

 

Interest and fee income

     29,925       27,238  

Interest expense

     5,962       3,399  
  

 

 

   

 

 

 

Net interest and fee income

   $ 23,963     $ 23,839  
  

 

 

   

 

 

 

Average total finance receivables(1)

   $ 999,432     $ 913,804  

Annualized percent of average total finance receivables:

    

Interest income

     10.36     10.19

Fee income

     1.62       1.73  
  

 

 

   

 

 

 

Interest and fee income

     11.98       11.92  

Interest expense

     2.39       1.49  
  

 

 

   

 

 

 

Net interest and fee margin

     9.59     10.43
  

 

 

   

 

 

 

 

(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 $0.2 million, or 0.8%, to $24.0 million for the three months ended March 31, 2019 from $23.8 million for the three months ended March 31, 2018. The annualized net interest and fee margin decreased 84 basis points to 9.59% in the three-month period ended March 31, 2019 from 10.43% for the corresponding period in 2018.

Interest income, net of amortized initial direct costs and fees, was $25.9 million and $23.3 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively. Average total finance receivables increased $85.6 million, or 9.4%, to $999.4 million at March 31, 2019 from $913.8 million at March 31, 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 remained constant at 10.36%. The weighted average implicit interest rate on new finance receivables originated was 12.76% and 12.45% for the three-month periods ended March 31, 2019, and March 31, 2018, respectively.

Fee income was $4.0 million and $4.0 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively. Fee income included approximately $1.0 million of net residual income for each of the three-month periods ended March 31, 2019 and March 31, 2018, respectively.

Fee income also included approximately $2.3 million in late fee income for the both three-month periods ended March 31, 2019 and March 31, 2018.

Fee income, as an annualized percentage of average total finance receivables, decreased 11 basis points to 1.62% for the three-month period ended March 31, 2019 from 1.73% for the corresponding period in 2018. Late fees remained the largest component of fee income at 0.94% as an annualized percentage of average total finance receivables for the three-month period ended March 31, 2019, compared to 1.09% for the three-month period ended March 31, 2018. As an annualized percentage of average total finance receivables, net residual income was 0.41% for the three-month period ended March 31, 2019, compared to 0.39% for the three-month period ended March 31, 2018.

 

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Interest expense increased $2.6 million to $6.0 million for the three-month period ended March 31, 2019 from $3.4 million for the corresponding period in 2018. A significant component of the increase was $1.4 million attributable to our long-term borrowings related to our 2018 asset-backed term securitization. The remaining increase of $1.2 million represented $4.6 million interest expense or 2.25% as an annualized percentage of average deposits for the three-month period ended March 31, 2019, from $3.4 million, or 1.63% as an annualized percentage of average deposits for the three-month period ended March 31, 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 2.39% for the three-month period ended March 31, 2019, from 1.49% for the corresponding period in 2018. The average balance of deposits was $816.9 million and $830.9 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively.

For the three-month period ended March 31, 2019, average term securitization borrowings outstanding were $140.5 million at a weighted average coupon of 3.91%. There were no outstanding borrowings for the period ended March 31, 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 March 31, 2019, brokered certificates of deposit represented approximately 52% of total deposits, while approximately 45% 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 $2.1 million for the three-month period ended March 31, 2019, from $1.9 million for the three-month period ended March 31, 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 $10.8 million and $3.3 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively. A major component of the $7.5 million increase in other income is property tax income that was previously netted against property tax expense prior to the first quarter of 2019, but is presented as a separate component of revenue for the three months ended March 31, 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, and gain on sale of leases and servicing fee income, recognized as earned. Selected major components of other income for the three-month period ended March 31, 2019 included $5.6 million in property tax income, $4.1 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 March 31, 2018 included $2.5 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 $1.5 million, or 15.0%, to $11.5 million for the three-month period ended March 31, 2019 from $10.0 million for the corresponding period in 2018. The increase was primarily due to increased commissions and compensation and benefits related to increases in personnel. Salaries and benefits expense, as an annualized percentage of average total finance receivables, was 4.58% for the three-month period ended March 31, 2019 compared with 4.39% for the corresponding period in 2018. Total personnel increased to 352 at March 31, 2019 from 326 at March 31, 2018.

General and administrative expense. General and administrative expense increased $6.8 million, or 103.0%, to $13.4 million for the three months ended March 31, 2019 from $6.6 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 prior to the first quarter of 2019, but is presented on a gross basis in the three months ended March 31, 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 5.34% for the three-month period ended March 31, 2019, compared to 2.88% for the three-month period ended March 31, 2018. Selected major components of general and administrative expense for the three-month period ended March 31, 2019 included $6.2 million of property tax expense, $1.1 million of premises and occupancy expense, $0.3 million of audit and tax compliance expense, $1.1 million of data processing expense, $0.6 million of marketing expense, and $0.4 million of insurance-related expenses. In comparison, selected major components of general and administrative expense for the three-month period ended March 31, 2018 included $0.9 million of premises and occupancy expense, $0.4 million of audit and tax compliance expense, $0.9 million of data processing expense, $0.6 million of marketing expense and $0.4 million of insurance-related expenses.

 

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Provision for credit losses. The provision for credit losses was $5.4 million for the three-month period ended March 31, 2019 compared to $4.6 million for the three-month period ended March 31, 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. Therefore, 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 $0.4 million, $0.1 million and $0.3, respectively, for the three-month period ended March 31, 2019 as compared to the three-month period ended March 31, 2018.

Total portfolio net charge-offs were $4.6 million for the three-month period ended March 31, 2019, compared to $3.8 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. Total portfolio net charge-offs as an annualized percentage of average total finance receivables increased to 1.83% during the three-month period ended March 31, 2019, from 1.68% for the corresponding period in 2018. The allowance for credit losses increased to approximately $16.9 million at March 31, 2019, an increase of $0.8 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 $1.6 million and $1.7 million was recorded for the three-month periods ended March 31, 2019 and March 31, 2018, respectively. Our effective tax rate, which is a combination of federal and state income tax rates, was approximately 23.8% and 21.4% for the three-month periods ended March 31, 2019 and March 31, 2018, respectively. The effective tax rate for 2018 reflected a state tax benefit from various state rate changes in the period.

FINANCE RECEIVABLES AND ASSET QUALITY

Our net investment in leases and loans increased $22.5 million, or 2.2%, to $1,023.2 million at March 31, 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-month periods ended March 31, 2019 and March 31, 2018, and the year ended December 31, 2018:

 

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     Three Months Ended     Year Ended  
   March 31,     December 31,  
     2019     2018     2018  
     (Dollars in thousands)  

Allowance for credit losses, beginning of period

   $ 16,100     $ 14,851     $ 14,851  

Provision for credit losses

     5,363       4,612       19,522  

Charge-offs:

      

Commercial lease and loans:

      

Working Capital Loans

     (673     (229     (1,537

CRA

     —         —         —    

Equipment Finance

     (4,333     (4,029     (18,149

CVG

     (328     (157     (907
  

 

 

   

 

 

   

 

 

 

Total Charge-offs

     (5,334     (4,415     (20,593
  

 

 

   

 

 

   

 

 

 

Recoveries

      

Commercial lease and loans:

      

Working Capital Loans

     19       6       60  

CRA

     —         —         —    

Equipment Finance

     734       528       2,199  

CVG

     —         38       61  
  

 

 

   

 

 

   

 

 

 

Total Recoveries

     753       572       2,320  
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (4,581     (3,843     (18,273
  

 

 

   

 

 

   

 

 

 

Allowance for credit losses, end of period(1)

   $ 16,882     $ 15,620     $ 16,100  
  

 

 

   

 

 

   

 

 

 

Annualized net charge-offs to average total finance receivables (2)

     1.83     1.68     1.93

Allowance for credit losses to total finance receivables, end of period (2)

     1.66     1.68     1.62

Average total finance receivables (2)

   $ 999,432     $ 913,804     $ 944,588  

Total finance receivables, end of period (2)

   $ 1,019,311     $ 927,752     $ 996,383  

Delinquencies greater than 60 days past due

   $ 7,626     $ 6,735     $ 7,292  

Delinquencies greater than 60 days past due (3)

     0.66     0.64     0.65

Allowance for credit losses to delinquent accounts greater than 60 days past due (3)

     221.37     231.92     220.79

Non-accrual leases and loans, end of period

   $ 4,674     $ 3,653     $ 4,353  

Renegotiated leases and loans, end of period(4)

   $ 3,363     $ 4,366     $ 3,636  

Accruing leases and loans past due 90 days or more

   $ —       $ —       $ —    

Interest income included on non-accrual leases and loans(5)

   $ 73     $ 47     $ 410  

Interest income excluded on non-accrual leases and loans(6)

   $ 60     $ 51     $ 130  

 

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(1)

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

(2)

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.

(3)

Calculated as a percentage of total minimum lease payments receivable for leases and as a percentage of principal outstanding for loans.

(4)

No renegotiated leases or loans met the definition of a Troubled Debt Restructuring at March 31, 2019, December 31, 2018, or March 31, 2018.

(5) 

Represents interest which was recognized during the period on non-accrual loans and leases, prior to non-accrual status.

(6)

Represents interest which would have been recorded on non-accrual loans and leases had they performed in accordance with their contractual terms during the period.

Delinquent accounts 60 days or more past due (as a percentage of minimum lease payments receivable for leases and as a percentage of principal outstanding for loans) were 0.66% at March 31, 2019 and 0.65% at December 31, 2018, compared to 0.64% at March 31, 2018.

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 projection of probable net credit losses. The factors and trends discussed above were included in the Company’s analysis to determine its allowance for credit losses. (See “Critical Accounting Policies” in our Form 10-K for the year ended December 31, 2018.)

The following tables provide information about delinquent and non-accrual leases and loans in the Company’s portfolio for each of the three month periods ended March 31, 2019 and March 31, 2018, and the year ended December 31, 2018.

 

     Three Months Ended      Year Ended  
     March 31,      December 31  
     2019      2018      2018  
     (Dollars in thousands)  

Non-accrual leases and loans:

        

Commercial leases and loans:

        

Working Capital Loans

   $ 284      $ 27      $ 492  

CRA

     —          —          —    

Equipment Finance (1)

     4,153        3,586        3,529  

CVG

     237        40        191  
  

 

 

    

 

 

    

 

 

 

Total non-accrual leases and loans

   $ 4,674      $ 3,653      $ 4,212  
  

 

 

    

 

 

    

 

 

 

 

(1)

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

Net investments in finance receivables are generally charged-off when they are contractually past due for 120 days or more. Income recognition is discontinued on Equipment Finance leases or loans, including CVG loans, when a default on monthly payment exists for a period of 90 days or more. Income recognition resumes when the lease or loan becomes less than 90 days delinquent.

Working Capital Loans are generally placed in non-accrual status when they are 30 days past due. The loan is removed from non-accrual status once sufficient payments are made to bring the loan current and evidence of a sustained performance period as reviewed by management.

The allowance for credit losses as a percentage of total finance receivables increased to 1.66% at March 31, 2019 from 1.62% at December 31, 2018. The increase is primarily due to a modest increase in delinquency rates.

 

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Total portfolio net charge-offs for the three months ended March 31, 2019 were $4.6 million (1.83% of average total finance receivables on an annualized basis), compared to $5.6 million (2.30% of average total finance receivables on an annualized basis) for the three months ended December 31, 2018 and $3.8 million (1.68% of average total finance receivables on an annualized basis) for the three months ended March 31, 2018. The Equipment Finance portfolio losses tend to follow patterns based on the mix of origination vintages comprising the portfolio. The timing of credit losses from the inception of a particular lease origination vintage to charge-off generally follows 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. Therefore, the seasoning, or mix of origination vintages, of the Equipment Finance portfolio affects the timing and amount of charge-offs.

RESIDUAL PERFORMANCE

Our leases offer our end user customers the option to own the equipment at lease expiration. As of March 31, 2019, approximately 59% of our leases were one dollar purchase option leases, 40% were fair market value leases and 1% were fixed purchase option leases, the latter of which typically contain an end-of-term purchase option equal to 10% of the original equipment cost. As of March 31, 2019, there were $28.2 million of residual assets retained on our Consolidated Balance Sheets, of which $23.9 million, or 84.5%, were related to copiers. As of December 31, 2018, there were $27.6 million of residual assets retained on our Consolidated Balance Sheets, of which $23.6 million, or 85.4%, were related to copiers. No other group of equipment represented more than 10% of equipment residuals as of March 31, 2019 and December 31, 2018, respectively. Improvements in technology and other market changes, particularly in copiers, could adversely impact our ability to realize the recorded residual values of this equipment.

Fee income included approximately $1.0 and $0.9 million of net residual income for the three-month periods ended March 31, 2019 and March 31, 2018, respectively. Net residual income includes income from lease renewals and gains and losses on the realization of residual values of leased equipment disposed at the end of term as further described below.

Our leases generally include renewal provisions and many leases continue beyond their initial contractual term. Based on the Company’s experience, the amount of ultimate realization of the residual value tends to relate more to the customer’s election at the end of the lease term to enter into a renewal period, purchase the leased equipment or return the leased equipment than it does to the equipment type. We consider renewal income a component of residual performance. Renewal income net of depreciation totaled approximately $1.4 and $1.2 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively.

The net loss on residual values disposed at end of term totaled approximately $0.4 and $0.3 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively. Management performs an impairment assessment, no less frequently than quarterly, using cash flows it expects to derive from the underlying asset at the end of the lease term. If impairment was required, the Company would record an allowance. There was no allowance recorded on estimated residual values during each of the three-month periods ended March 31, 2019 and March 31, 2018.

LIQUIDITY AND CAPITAL RESOURCES

Our business requires a substantial amount of cash to operate and grow. Our primary liquidity need is to fund new originations. In addition, we need liquidity to pay interest and principal on our deposits and borrowings, to pay fees and expenses incurred in connection with our financing transactions, to fund infrastructure and technology investment, to pay dividends and to pay administrative and other non-interest expenses.

We are dependent upon the availability of financing from a variety of funding sources to satisfy these liquidity needs. Historically, we have relied upon five principal types of external funding sources for our operations:

 

   

FDIC-insured deposits issued by our wholly-owned subsidiary, MBB;

 

   

borrowings under various bank facilities;

 

   

financing of leases and loans in various warehouse facilities (all of which have since been repaid in full);

 

   

financing of leases through term note securitizations; and

 

   

sale of leases and loans through our capital markets capabilities

 

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Deposits issued by MBB represent our primary funding source for new originations, primarily through the issuance of FDIC insured deposits.

MBB also offers an FDIC-insured MMDA Product as another source of deposit funding. This product is offered through participation in a partner bank’s insured savings account product to clients of that bank. It is a brokered account with a variable interest rate, recorded as a single deposit account at MBB. Over time, MBB may offer other products and services to the Company’s customer base. MBB is a Utah state-chartered, Federal Reserve member commercial bank. As such, MBB is supervised by both the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions.

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 our reinsurance activities conducted through our wholly-owned subsidiary, AssuranceOne.

We declared a dividend of $0.14 per share on January 31, 2019. The quarterly dividend was paid on February 21, 2019 to shareholders of record on the close of business on February 11, 2019, which resulted in a dividend payment of approximately $1.7 million. It represented the Company’s thirtieth consecutive quarterly cash dividend.

On July 27, 2018, we completed a $201.7 million asset-backed term securitization which provided us with fixed-cost borrowing with the objective of diversifying our funding resources. This was a private offering made pursuant to Rule 144A and Reg S under the Securities Act of 1933, as amended, by Marlin Receivables 2018-1 LLC, a wholly owned subsidiary of Marlin Leasing Corporation. Standard & Poor’s Ratings Services, Inc. and Fitch Ratings Inc. rated the transaction, with the two senior classes receiving the agencies’ highest ratings. As with all our prior term note securitizations, it is recorded in long-term borrowings in the Consolidated Balance Sheets.

At March 31, 2019, we had approximately $25.0 million of available borrowing capacity from a federal funds line of credit with a correspondent bank in addition to available cash and cash equivalents of $141.0 million. This amount excludes additional liquidity that may be provided by the issuance of insured deposits through MBB.

Our debt to equity ratio was 4.81 to 1 at March 31, 2019 and 4.56 to 1 at December 31, 2018.

Net cash used in investing activities was $29.8 million for the three-month period ended March 31, 2019, compared to net cash used in investing activities of $25.0 million for the three-month period ended March 31, 2018. The decrease in cash flows from investing activities is primarily due to an increase of $31.9 million of funds used to originate leases and loans offset by $21.6 million in proceeds from sales of leases and loans originated for investment and $8.2 million in principal collections on leases and loans. Included in the funds used to originate leases and loans was $4.1 million and $3.8 million of deferred initial direct costs and fees for the three-month periods ended March 31, 2019 and 2018, respectively. Investing activities primarily relate to leasing activities. The Company transferred $42.2 million and $22.4 million of leases originated for investment to held for sale during the three-month period ended March 31, 2019 and 2018, respectively.

Net cash provided by financing activities was $60.3 million for the three-month period ended March 31, 2019, compared to net cash provided by financing activities of $21.1 million for the three-month period ended March 31, 2018. The increase in cash flows from financing activities is primarily due to a $60.6 million increase in deposits offset by a $21.1 million repayment on borrowings from our 2018 asset-backed term securitization. Financing activities also include transactions related to the Company’s common stock, such as repurchasing common stock and paying dividends.

Additional liquidity is provided by our cash flow from operations. Net cash provided by operating activities was $12.5 million for the three-month period ended March 31, 2019, compared to net cash provided by operating activities of $21.7 million for the three-month period ended March 31, 2018. The decrease in cash flows from operating activities is primarily due to a net tax refund of $8.1 million received in the first quarter of 2018.

 

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We expect cash from operations, additional borrowings on existing and future credit facilities and funds from deposits issued through brokers, direct deposit sources, and the MMDA Product to be adequate to support our operations and projected growth for the next 12 months and the foreseeable future.

Total Cash and Cash Equivalents. Our objective is to maintain an adequate level of cash, investing any free cash in leases and loans. We primarily fund our originations and growth using FDIC-insured deposits issued through MBB. Total cash and cash equivalents available as of March 31, 2019 totaled $141.0 million, compared to $97.2 million at December 31, 2018.

Time Deposits with Banks. Time deposits with banks are primarily composed of FDIC-insured certificates of deposits that have original maturity dates of greater than 90 days. Generally, the certificates of deposits have the ability to redeem early, however, early redemption penalties may be incurred. Total time deposits as of March 31, 2019 and December 31, 2018 totaled $11.2 million and $9.7 million, respectively.

Restricted Interest-earning Deposits with Banks. As of March 31, 2019, we also had $13.2 million of cash that was classified as restricted interest-earning deposits with banks. We had $14.0 million restricted interest-earning deposits with banks at December 31, 2018. Restricted interest-earning deposits with banks consist primarily of various trust accounts related to our secured debt facilities. Therefore, these balances generally decline as the term securitization borrowings are repaid.

Borrowings. Our primary borrowing relationship requires the pledging of eligible lease and loan receivables to secure amounts advanced. Our secured borrowings amounted to $130.1 million at March 31, 2019. We had no secured borrowings at December 31, 2018. Information pertaining to our borrowing facilities is as follows:

 

     For the Three Months Ended March 31, 2019     As of March 31, 2019  
            Maximum                                   
     Maximum      Month End      Average      Weighted            Weighted        
     Facility      Amount      Amount      Average     Amount      Average     Unused  
     Amount      Outstanding      Outstanding      Rate (3)     Outstanding      Rate (2)     Capacity(1)  
     (Dollars in thousands)  

Federal funds purchased

   $ 25,000      $ —        $ —          —     $ —          —     $ 25,000  

Term note securitizations(4)

     —          143,912        140,500        3.91     130,129        3.32     —    
  

 

 

       

 

 

      

 

 

      

 

 

 
   $ 25,000         $ 140,500        3.91   $ 130,129        3.32   $ 25,000  
  

 

 

       

 

 

      

 

 

      

 

 

 

 

(1)

Does not include MBB’s access to the Federal Reserve Discount Window, which is based on the amount of assets MBB chooses to pledge. Based on assets pledged at March 31, 2019, MBB had $33.2 million in unused, secured borrowing capacity at the Federal Reserve Discount Window. Additional liquidity that may be provided by the issuance of insured deposits is also excluded from this table.

(2)

Does not include transaction costs.

(3)

Includes transaction costs.

(4)

Our term note securitizations are one-time fundings that pay down over time without any ability for us to draw down additional amounts.

 

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Federal Funds Line of Credit with Correspondent Bank

MBB has established a federal funds line of credit with a correspondent bank. This line allows for both selling and purchasing of federal funds. The amount that can be drawn against the line is limited to $25.0 million.

Federal Reserve Discount Window

In addition, MBB has received approval to borrow from the Federal Reserve Discount Window based on the amount of assets MBB chooses to pledge. MBB had $33.2 million in unused, secured borrowing capacity at the Federal Reserve Discount Window, based on $36.1 million of net investment in leases pledged at March 31, 2019.

Term Note Securitizations

On July 27, 2018 we completed a $201.7 million asset-backed term securitization. This transaction was Marlin’s eleventh term securitization and its first since 2010. It provides the company with fixed-cost borrowing with the objective of diversifying its funding sources. As with all prior securitizations, this transaction was recorded as an “on-balance sheet” transaction and the financing is recorded in long-term borrowings in the Consolidated Balance Sheets.

This was a private offering made to qualified institutional buyers pursuant to Rule 144A under and Regulation S under the Securities Act of 1933 by Marlin Receivables 2018-1 LLC, a wholly-owned subsidiary of Marlin Leasing Corporation. Standard & Poor’s Ratings Service, Inc. and Fitch Ratings Inc. rated the transaction with the two senior classes receiving the agencies’ highest ratings. The effective weighted average interest expense over the term of the financing is expected to be approximately 3.41%.

In connection with this securitization transaction, we have transferred leases to our bankruptcy remote special purpose wholly-owned subsidiary (“SPE”) and issued term debt collateralized by such commercial leases to institutional investors in private securities offerings. These SPEs are considered variable interest entities (“VIEs”) under U.S. GAAP. We are required to consolidate VIEs in which we are deemed to be the primary beneficiary through having (1) power over the significant activities of the entity and (2) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. We continue to service the assets of our VIEs and retain equity and/or residual interests. Accordingly, assets and related debt of these VIEs are included in the accompanying Consolidated Balance Sheets. Our leases and restricted interest-earning deposits with banks are assigned as collateral for these borrowings and there is no further recourse to our general credit. Collateral in excess of these borrowings represents our maximum loss exposure. Our term note securitizations have fixed terms, fixed interest rates and fixed principal amounts. At March 31, 2019 outstanding term securitizations amounted to $129.2 million and $150.1 million at December 31, 2018.

As of March 31, 2019, $147.3 million of minimum lease payments receivable and $9.1 million of restricted interest-earning deposits are assigned as collateral for the term note securitization. The July 27, 2018, term note securitization is summarized below:

 

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

2018 — 1

           

Class A-1

   $ 77,400      $ 5,879        July, 2019        2.55

Class A-2

     55,700      $ 55,700        October, 2020        3.05  

Class A-3

     36,910      $ 36,910        April, 2023        3.36  

Class B

     10,400      $ 10,400        May, 2023        3.54  

Class C

     11,390      $ 11,390        June, 2023        3.70  

Class D

     5,470      $ 5,470        July, 2023        3.99  

Class E

     4,380      $ 4,380        May, 2025        5.02  
  

 

 

    

 

 

       

Total Term Note Securitizations

   $ 201,650      $ 130,129           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.

At March 31, 2019, the Company was in compliance with terms of the term note securitization agreement.

Bank Capital and Regulatory Oversight

On January 13, 2009, we became a bank holding company by order of the Federal Reserve Board and are subject to regulation under the Bank Holding Company Act. All of our subsidiaries may be subject to examination by the Federal Reserve Board even if not otherwise regulated by the Federal Reserve Board. On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of our 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 us to engage in activities that are financial in nature or incidental to a financial activity, including the maintenance and expansion of our reinsurance activities conducted through our wholly-owned subsidiary, AssuranceOne.

MBB is also subject to comprehensive federal and state regulations dealing with a wide variety of subjects, including minimum capital standards, reserve requirements, terms on which a bank may engage in transactions with its affiliates, restrictions as to dividend payments and numerous other aspects of its operations. These regulations generally have been adopted to protect depositors and creditors rather than shareholders.

There are a number of restrictions on bank holding companies that are designed to minimize potential loss to depositors and the FDIC insurance funds. If an FDIC-insured depository subsidiary is “undercapitalized,” the bank holding company is required to ensure (subject to certain limits) the subsidiary’s compliance with the terms of any capital restoration plan filed with its appropriate banking agency. Also, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Bank Holding Company Act, the Federal Reserve Board has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company.

Capital Adequacy. The Company and MBB operate under the Basel III capital adequacy standards adopted by the federal bank regulatory agencies effective on January 1, 2015. Under the risk-based capital requirements applicable to them, bank holding companies must maintain a ratio of total capital to risk-weighted assets (including the asset equivalent of certain off-balance sheet activities such as acceptances and letters of credit) of not less than 8% (10% in order to be considered “well-capitalized”). The

 

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requirements include a 6% minimum Tier 1 risk-based ratio (8% to be considered well-capitalized). Tier 1 Capital consists of common stock, related surplus, retained earnings, qualifying perpetual preferred stock and minority interests in the equity accounts of certain consolidated subsidiaries, after deducting goodwill and certain other intangibles. The remainder of total capital (“Tier 2 Capital”) may consist of certain perpetual debt securities, mandatory convertible debt securities, hybrid capital instruments and limited amounts of subordinated debt, qualifying preferred stock, allowance for credit losses on loans and leases, allowance for credit losses on off-balance-sheet credit exposures and unrealized gains on equity securities.

The capital standards require a minimum Tier 1 leverage ratio of 4%. The capital requirements also require a common equity Tier 1 risk-based capital ratio with a required minimum of 4.5% (6.5% to be considered well-capitalized). The Federal Reserve Board’s guidelines also provide that bank holding companies experiencing internal growth or making acquisitions may be expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a “tangible tier 1 leverage ratio” (i.e., after deducting all intangibles) in evaluating proposals for expansion or new activities. MBB is subject to similar capital standards.

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.

At March 31, 2019, MBB’s Tier 1 leverage ratio, common equity Tier 1 risk-based ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 14.29%, 15.65%, 15.65% and 16.91%, respectively, which exceeds requirements for well-capitalized status of 5%, 6.5%, 8% and 10%, respectively. At March 31, 2019, Marlin Business Services Corp.’s Tier 1 leverage ratio, common equity Tier 1 risk based ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 15.41%, 17.25%, 17.25% and 18.50%, respectively, which exceeds requirements for well-capitalized status of 5%, 6.5%, 8% and 10%, respectively.

Pursuant to the FDIC Agreement entered into in conjunction with the opening of MBB, MBB is required to keep its total risk-based capital ratio above 15%. MBB’s Tier 1 Capital balance at March 31, 2019 was $143.4 million, which exceeds the regulatory threshold for “well capitalized” status.

Information on Stock Repurchases

Information on Stock Repurchases is provided in “Part II. Other Information, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds” herein.

Items Subsequent to March 31, 2019

The Company declared a dividend of $0.14 per share on May 2, 2019. The quarterly dividend, which is expected to result in a dividend payment of approximately $1.7 million, is scheduled to be paid on May 23, 2019 to shareholders of record on the close of business on May 13, 2019. It represents the Company’s thirty-first consecutive quarterly cash dividend. The payment of future dividends will be subject to approval by the Company’s Board of Directors.

Contractual Obligations

In addition to scheduled maturities on our deposits and credit facilities, we have future cash obligations under various types of contracts. We lease office space and office equipment under long-term operating leases. The contractual obligations under our certificates of deposits, credit facilities, term note securitizations, operating leases, agreements and commitments under non-cancelable contracts as of March 31, 2019 were as follows:

 

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     Contractual Obligations as of March 31, 2019  
     Certificates             Contractual                
     of             Interest      Operating         

Period Ending December 31,

   Deposits(1)      Borrowings      Payments(2)      Leases      Total  
     (Dollars in thousands)  

2019

   $ 343,259      $ 52,719      $ 13,469      $ 722      $ 410,169  

2020

     220,089        45,200        10,520        1,678        277,487  

2021

     149,510        23,629        5,181        1,453        179,773  

2022

     66,008        8,581        2,019        1,361        77,969  

2023

     28,803        —          890        1,271        30,964  

Thereafter

     11,998        —          55        11,290        23,343  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 819,667      $ 130,129      $ 32,134      $ 17,775      $ 999,705  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Money market deposit accounts are not included. As of March 31, 2019, money market deposit accounts totaled $23.0 million.

(2)

Includes interest on certificates of deposits and borrowings.

There were no off-balance sheet arrangements requiring disclosure at March 31, 2019.

MARKET INTEREST RATE RISK AND SENSITIVITY

Market risk is the risk of losses arising from changes in values of financial instruments. We engage in transactions in the normal course of business that expose us to market risks. We attempt to mitigate such risks through prudent management practices and strategies such as attempting to match the expected cash flows of our assets and liabilities.

We are exposed to market risks associated with changes in interest rates and our earnings may fluctuate with changes in interest rates. The lease and loan assets we originate are almost entirely fixed-rate. Accordingly, we generally seek to finance these assets primarily with fixed interest certificates of deposit issued by MBB, and to a lesser extent through the variable rate MMDA Product at MBB.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The information appearing in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Interest Rate Risk and Sensitivity” under Item 2 of Part I of this Form 10-Q is incorporated herein by reference.

 

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.

Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures as of the end of the period covered by this report are designed and operating effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the 1934 Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with management’s evaluation that occurred during the Company’s first fiscal quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. Other Information

 

Item 1.

Legal Proceedings

We are party to various legal proceedings, which include claims and litigation arising in the ordinary course of business. In the opinion of management, these actions will not have a material impact on our business, financial condition, results of operations or cash flows.

 

Item 1A.

Risk Factors

There have been no material changes in the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2018.

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Information on Stock Repurchases

On May 30, 2017, the Company’s Board of Directors approved a stock 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 or in block trades. The program may be suspended or discontinued at any time. The repurchases are funded using the Company’s working capital. The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended March 31, 2019.

 

     Number of
Shares
Purchased(2)
     Average Price
Paid Per
Share(1)
     Maximum Approximate
Dollar Value of Shares that
May Yet be Purchased
Under the Plans or
Programs
 

Time Period

        

January 1, 2019 to

        

January 31, 2019

     29,947      $ 23.86      $ 5,036,613  

February 1, 2019 to

        

February 28, 2019

     0      $ 0.00      $ 5,036,613  

March 1, 2019 to

        

March 31, 2019

     0      $ 0.00      $ 5,036,613  
  

 

 

       

Total for the quarter ended

        

March 31, 2019

     29,947      $ 23.86      $ 5,036,613  

 

(1)

Average price paid per share includes commissions and is rounded to the nearest two decimal places.

(2)

On May 30, 2017, the Company’s Board of Directors approved a new stock repurchase plan to repurchase up to $10 million in value of its outstanding shares of common stock.

In addition to the repurchases described above, pursuant to the 2014 Equity Compensation Plan, participants may have shares withheld to cover income taxes. There were 18,910 shares repurchased to cover income tax withholding in connection with the shares granted under the 2014 Equity Compensation Plan during the three-month period ended March 31, 2019, at an average cost of $ 22.74 per share. At March 31, 2019, the Company had $ 5.0 million remaining in the 2017 Repurchase Plan.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Mine Safety Disclosures

None.

 

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Item 5.

Other Information

None

 

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Item 6.

Exhibits

 

Exhibit
Number
   Description
3.1    Amended and Restated Articles of Incorporation (1)
3.2    Amended and Restated Bylaws of the Registrant (2)
31.1    Certification of the Chief Executive Officer of Marlin Business Services Corp. required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (Filed herewith)
31.2    Certification of the Chief Financial Officer of Marlin Business Services Corp. required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (Filed herewith)
32.1    Certification of the Chief Executive Officer and Chief Financial Officer of Marlin Business Services Corp. required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith)
101    Financial statements from the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2019, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Unaudited Consolidated Financial Statements. (Submitted electronically with this report)

 

(1)

Previously filed with the SEC as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed on March 5, 2008, and incorporated by reference herein.

(2)

Previously filed with the SEC as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 20, 2016, and incorporated by reference herein.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MARLIN BUSINESS SERVICES CORP.

 

(Registrant)

 

  

By:

 

/s/ Jeff Hilzinger

   Chief Executive Officer
 

    Jeff Hilzinger

   (Principal Executive Officer)

By:

 

/s/ Michael R. Bogansky    

  
 

    Michael R. Bogansky    

   Chief Financial Officer & Senior Vice
         President
         (Principal Financial Officer)

Date:    May 3, 2019

 

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