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-1-
 
 
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
Form
10-K
(Mark One)
 
 
 
 
ANNUAL REPORT PURSUANT TO SECTION
 
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2020
or
 
TRANSITION REPORT PURSUANT TO
 
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from__________ to__________
 
Commission file number
000-50448
 
 
Marlin Business Services Corp.
 
(Exact name of Registrant as specified in its charter)
 
 
Pennsylvania
38-3686388
(State of incorporation)
(I.R.S. Employer Identification No.)
 
300 Fellowship Road
,
Mount Laurel
,
NJ
08054
 
(Address of principal executive offices)
 
Registrant’s telephone number,
 
including area code:
 
(
888
)
479-9111
 
Securities registered pursuant to Section
 
12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 per share
MRLN
NASDAQ
 
Global Select Market
Securities registered pursuant to Section
 
12(g) of the Act:
 
None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes
 
No
 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
 
No
 
 
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 during the preceding 12 months (or for such shorter period that registrant was required to submit and 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
 
definition
 
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
 
 
 
 
 
 
 
 
 
-2-
 
 
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report .
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
 
No
 
 
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, based on the closing price of such shares on the
NASDAQ Global Select Market was approximately $
69,053,755
 
as of June 30, 2020. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
 
 
The number of shares of Registrant’s common stock outstanding as of February 26, 2021 was
11,987,682
 
shares.
 
DOCUMENTS INCORPORATED
 
BY REFERENCE
 
 
Portions of the Registrant’s definitive Proxy Statement related to the 2021 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission within 120 days of the close of Registrant’s fiscal year, are incorporated by reference into Part III of this Form 10-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-3-
MARLIN BUSINESS SERVICES CORP.
 
AND SUBSIDIARIES
FORM 10-K
INDEX
 
 
 
Page
 
No.
 
 
 
 
1
 
 
................................................................
 
................................................................
 
................................................... 3
 
1A
 
 
 
................................................................
 
................................................................
 
........................................... 15
 
1B
 
 
 
nts
 
................................................................
 
................................................................
 
.................. 25
 
2
 
 
................................................................
 
................................................................
 
............................................... 26
 
3
 
 
 
................................................................
 
................................................................
 
.................................. 26
 
4
 
 
 
 
................................................................
 
................................................................
 
........................ 26
 
 
 
 
5
 
 
for
 
 
 
 
 
 
 
and
 
 
 
................................................................
 
................................................................
 
..... 27
 
6
 
 
 
 
................................................................
 
................................................................
 
.......................... 29
 
7
 
 
 
and
 
 
of
 
 
 
and
 
 
of
 
 
................................................. 32
 
7A
 
 
and
 
 
 
 
 
 
................................................................
 
............................... 62
It
em
 
8
 
 
 
and
 
 
 
................................................................
 
...................................................... 62
 
9
 
 
in
 
and
 
 
 
 
on
 
 
and
 
 
 
............................................... 126
 
9A
 
 
and
 
 
................................................................
 
................................................................
 
...................... 126
 
9B
 
 
 
................................................................
 
................................................................
 
................................ 126
 
 
 
 
10
 
 
 
 
and
 
 
 
................................................................
 
................................... 127
 
11
 
 
...
 
................................................................
 
................................................................
 
................... 127
 
 
12
 
 
 
of
 
 
 
 
and
 
 
and
 
 
 
 
............................. 127
 
13
 
 
 
and
 
 
 
and
 
 
 
................................................................
 
.... 127
 
14
 
 
 
 
and
 
 
................................................................
 
.............................................................. 127
 
 
 
 
15
 
 
and
 
 
 
.
 
................................................................
 
....................................................... 128
 
PART
 
I
 
 
 
 
 
 
 
 
 
 
-4-
 
As used herein, the terms “Company,”
 
“Marlin,” “Registrant,” “we,” “us” or “our” refer to Marlin Business Services Corp.
 
and its
subsidiaries.
Item 1.
 
Business
 
 
Overview
 
 
We are a nationwide
 
provider of credit products and services to small businesses and were incorporated
 
in the Commonwealth of
Pennsylvania in 2003. In 2008, we opened Marlin Business Bank (“MBB”), a commercial
 
bank chartered by the State of Utah and a
member of the Federal Reserve System, which serves as the Company’s
 
primary funding source through its issuance of Federal
Deposit Insurance Corporation (“FDIC”)-insured deposits.
 
In 2009, Marlin Business Services Corp. became a bank holding company
subject to the Bank Holding Company Act and in 2010, the Federal Reserve
 
Bank of Philadelphia confirmed the effectiveness of
Marlin Business Services Corp.’s
 
election to become a financial holding company (while remaining a bank
 
holding company)
pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and
 
Section 225.82 of the Federal Reserve Board's Regulation Y.
 
Such election permits Marlin Business Services Corp. to engage
 
in activities that are financial in nature or incidental to a financial
activity, including
 
the maintenance and expansion of our reinsurance activities conducted through
 
our wholly-owned subsidiary,
AssuranceOne, Ltd. (“AssuranceOne”).
 
The products and services we provide to our customers include loans and leases for
 
the acquisition of commercial equipment and
working capital loans.
 
Our average original transaction size was approximately $18,000 at December
 
31, 2020 and our average net
investment on Equipment Finance contracts as of December 31, 2020 was approximately
 
$11,000.
 
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.
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. As of December 31, 2020,
 
we serviced approximately 80,000 finance contracts having a
total original value of $1.5 billion for approximately 68,000 small business customers.
 
 
The small balance commercial financing market is highly fragmented.
 
We estimate that there are
 
more than 100,000 independent
commercial equipment dealers and other intermediaries who sell the types
 
of equipment we finance or require the types of financing
we provide. We
 
believe this segment of equipment dealers is underserved because: (1) large
 
commercial finance companies and large
commercial banks typically concentrate their efforts
 
on marketing their products and services directly to larger equipment
manufacturers and larger distributors, rather than
 
to independent equipment dealers; and (2) many smaller commercial finance
companies and regional banking institutions have not developed the
 
systems and infrastructure required to adequately service large
volumes of low-balance transactions. We
 
focus on establishing our relationships with independent equipment
 
dealers who value
convenient point-of-sale financing programs because we can make
 
their sale process more effective. By providing them with the
ability to offer our financing and related services to
 
their customers as an integrated part of their selling process, our origination
partners are able to increase their sales and provide better service to their
 
customers. By doing this, we are also able to gather small
business customers to which we can sell additional credit products and services
 
through our fully integrated origination platform,
which allows us to efficiently solicit, process and service
 
a large number of low-balance financing transactions.
 
We generate
 
revenue through net interest margin on our owned portfolio
 
of leases and loans, from originating new contracts to
generate fee income and to replenish our owned portfolio, and we may
 
sell populations of finance receivables to third parties in the
capital markets as a source of liquidity and to manage the size and composition
 
of our balance sheet and capital levels.
 
We manage
risk to our portfolio through performing a comprehensive credit underwriting
 
process for our origination partners and small business
customers, and we continually monitor and analyze the performance
 
of our portfolio, assess our delinquency and credit loss
experience against our underwriting criteria and determine whether
 
our performance is commensurate with our intended risk
tolerance.
 
 
The following discussion outlines the significant products, services and
 
revenue-generating activities of our business.
 
 
Origination Channels
 
We use multiple
 
sales origination channels to access the highly diversified and fragmented
 
small-ticket equipment leasing market,
including both direct and indirect origination channels.
 
 
 
 
 
 
 
 
 
 
 
-5-
Indirect Channel
s.
 
Our indirect sales origination
 
channels, which account for approximately [90%]
 
of the active lease contracts in our
portfolio, involve:
 
Independent Equipment Dealer Solicitations.
 
This origination channel focuses on soliciting and establishing relationships
with independent equipment dealers in a variety of equipment categories located
 
across the United States. Service is a key
determinant in becoming the preferred provider of financing recommended
 
by these equipment dealers.
 
• Major and National Accounts.
 
This channel focuses on two specific areas of development: (i) national
 
equipment
manufacturers and distributors, where we seek to leverage their endorsements
 
to become the preferred lease financing source
for their independent dealers, and (ii) major accounts (larger
 
independent dealers, distributors and manufacturers)
 
with a
consistent flow of business that need a specialized marketing and sales platform
 
to convert more sales using a leasing option.
 
 
• Brokers.
 
Our broker channels account for approximately 15% of the active
 
lease contracts in our portfolio and consist of
our relationships with lease brokers and certain equipment dealers who ref
 
er small business customer transactions to us for a
fee or sell us leases that they originated with small business customers. We
 
conduct our own independent credit analysis on
each small business customer in a broker lease transaction. We
 
have written agreements with most of our broker origination
partners
 
whereby they provide us with certain representations and warranties about the
 
underlying lease transaction. The
origination partners
 
in our broker channels generate leases that are similar to those generated by our direct
 
channels.
 
 
Direct Channel
.
 
This channel focuses primarily on soliciting our existing portfolio of
 
approximately 68,000 small business customers
for additional equipment leasing or working capital opportunities. We
 
view our existing small business customers as an excellent
source for additional business for various
 
reasons, including (i) retained credit information; (ii) payment history; and
 
(iii) a
demonstrated propensity to finance their equipment.
 
Product Offerings
 
 
Equipment Loans and Leases.
 
We originate
 
both equipment finance leases and loans.
 
Generally, an equipment
 
lease is when the
Company remains the owner of the equipment during the lease term.
 
An equipment lease may have an option at the end of the term
for the lessee to purchase the equipment, whereas with an equipment loan,
 
the borrower
 
purchases equipment with the loan proceeds.
 
In the case of equipment loans, the borrower is the owner of the equipment
 
during the loan period but the equipment is collateral for
the loan. Once the loan is fully repaid the equipment is no longer collateral.
 
The types of lease and loan products offered by each of
our sales origination channels share common characteristics, and
 
we generally underwrite our contracts using the same criteria.
 
We use the direct
 
finance method of accounting to record our sales-type leases and related
 
interest income. At the time of lease
application, small business customers 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. We
seek to realize our recorded residual in leased equipment at the end of the
 
initial lease term by collecting the purchase option price
from the small business customer, re-marketing
 
the equipment in the secondary market or receiving additional rental payments
pursuant to the applicable contract’s
 
renewal provision.
 
Our leases provide for non-cancelable rental payments due during the initial
lease term.
 
 
The terms
 
of our equipment finance leases and loans is equal to or less than the equipment’s
 
economic life, and generally ranges
 
from
36 to 72 months. At December 31, 2020,
 
the average original term of the equipment finance contracts
 
in our portfolio was
approximately 50 months, and we had personal guarantees on approximately
 
31% of our portfolio.
 
The remaining terms and
conditions of our contracts are substantially similar,
 
generally requiring small business customers to, among other things:
 
 
address any maintenance or service issues directly with the equipment
 
dealer or manufacturer;
 
insure the equipment against property and casualty loss;
 
 
pay or reimburse us for all taxes associated with the equipment;
 
use the equipment only for business purposes; and
 
 
make all scheduled payments regardless of the performance of the
 
equipment.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-6-
We charge
 
late fees when appropriate throughout the term of the equipment finance lease or loan
 
.
 
Our standard contract provides that
in the event of a default, we can require payment of the entire balance
 
due under the lease through the initial term and can take action
to seize and remove the equipment collateral for subsequent sale, refinancing
 
or other disposal at our discretion, subject to any
limitations imposed by law.
 
Property Insurance on Leased Equipment.
 
Our lease agreements specifically require customers to obtain all-risk property
 
insurance in
an amount sufficient to cover the value of the equipment
 
and to designate us as the loss payee on the policy.
 
If the customer already
has a commercial property policy for its business, it can satisfy its obligation
 
under the lease by delivering a certificate of insurance
that evidences us as the loss payee under that policy.
 
At December 31, 2020,
 
approximately 51% of our small business customers
insured the equipment under their existing policies. For the others, we have
 
a master property insurance policy underwritten by a third-
party national insurance company that is licensed to write insurance
 
under our program in all 50 states and the District of Columbia.
This master policy names us as the beneficiary for all of the equipment
 
insured under the policy and provides all-risk coverage for the
value of the equipment.
 
Through AssuranceOne, our Bermuda-based, wholly-owned captive
 
insurance subsidiary we reinsure the property insurance coverage
for the equipment financed by Marlin Leasing Corporation and MBB for
 
our small business customers.
 
Under this contract,
AssuranceOne reinsures 100% of the risk under the master policy,
 
and the issuing insurer pays AssuranceOne the policy premiums,
less claims, premium tax and a ceding fee based on a percentage of annual
 
net premiums written. The reinsurance contract is
scheduled to expire in September 2023.
 
As a Class 3 insurer under the Bermuda Insurance Act of 1978, as amended,
 
AssuranceOne is
permitted to collect up to 50% of its premiums in connection with insurance
 
coverage on equipment unrelated to the Company,
meaning that, through AssuranceOne, we may offer an
 
insurance product to cover equipment not otherwise financed through the
Company.
 
 
Working
 
Capital Loans
. In 2015, the Company launched Funding Stream, a flexible loan program of MBB. The
 
success of this
program and the growing demand by small businesses for convenient
 
working capital solutions prompted the Company to update the
name of this program to Working
 
Capital Loans in 2018, while maintaining its commitment to a convenient, hassle-free
 
alternative to
traditional lenders and access to capital to help companies grow their business
 
es. Generally, these loans range
 
from $5,000 to
$150,000,
 
have 6 to 24 month terms, and have automated daily or weekly payback.
 
Business owners can apply online, in ten minutes
or less, on MarlinCapitalSolutions.com.
 
Approved borrowers can receive funds in as little as two days.
 
Portfolio Overview
 
Equipment Finance.
 
At December 31, 2020,
 
we had approximately 80,000 active Equipment Finance leases and loans in our
portfolio, representing a period ending net investment in Equipment
 
Finance lease and loans, excluding the allowance for credit losses,
of $849.0 million. With respect to our portfolio
 
at December 31, 2020:
 
 
the average original Equipment Finance lease and loan transaction was approximately
 
$18,000,
 
with an average remaining
balance of approximately $12,000;
 
 
the average original Equipment Finance lease and loan term was approximately
 
50 months;
 
 
 
our active Equipment Finance lease and loans were spread among approximately
 
68,000 different small business customers, with
the largest single small business customer accounting
 
for only 0.16% of the aggregate Equipment Finance minimum lease and
loan payments receivable;
 
 
over 75.4% of the aggregate minimum Equipment Finance lease and
 
loan payments receivable were with small business
customers who had been in business for more than five years;
 
 
the portfolio was spread among 10,707 origination partners, with the largest
 
source accounting for only 5.91% of the aggregate
Equipment Finance minimum lease and loan payments receivable,
 
and our 10 largest origination partners
 
account for only 18.4%
of the aggregate Equipment Finance minimum lease and loan payments receivable;
 
 
 
there
 
were
 
over
 
100
 
different
 
equipment
 
categories
 
financed,
 
with
 
the
 
largest
 
categories
 
set
 
forth
 
on
 
the
 
following
 
tables;
 
and
 
 
 
 
we
 
had
 
leases
 
outstanding
 
with
 
small
 
business
 
cu
stomers
 
located
 
in
 
all
 
50
 
states
 
and
 
the
 
District
 
of
 
Columbia,
 
with
 
our
 
largest
 
states of origination, as set forth in the following tables.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-7-
Working
 
Capital:
 
As of December 31, 2020,
 
the Company had approximately 870 Working
 
Capital Loans with a book value of $20.0
million on the balance sheet, excluding the allowance for credit losses. Approximately
 
50% of our Working
 
Capital Loan customers
renew financing with Marlin.
The following tables outline the concentrations by state, industry,
 
and equipment category as a percentage of the net investment
receivable for our portfolio as of December 31, 2020:
 
 
 
Top 10
 
Industries, by Borrower SIC Code
Top 10
 
States
Equipment
Equipment
Finance
Working
Finance
Working
and CVG
Capital
and CVG
Capital
Medical
13.7
%
8.1
%
CA
14.0
%
10.7
%
Misc. Services
11.9
8.3
TX
11.7
11.4
Retail
10.1
13.0
FL
9.4
8.7
Construction
8.9
11.0
NY
6.8
6.0
Restaurants
6.8
6.5
NJ
4.6
6.5
Professional Services
6.6
5.5
PA
3.5
4.6
Manufacturing
6.0
7.5
GA
3.4
3.7
Transportation
5.3
2.6
IL
3.3
5.9
Trucking
4.3
1.8
NC
3.2
2.6
Automotive
3.3
6.1
MA
3.2
2.4
All Other
23.1
29.6
All Other
36.9
37.5
Total
100
%
100
%
Total
100
%
100
%
 
Equipment Type
Equipment
Finance
Working
and CVG
Capital
Copiers
20.9
%
Titled V-Commercial
13.2
n/a
Commerce & Indus
8.3
Restaurant
4.8
Dental Systems
4.7
Medical
4.2
Office Furniture
2.5
Computer Software
1.8
Automotive General
1.7
Machine Tool
1.6
All other
36.3
Total
100.00
%
 
 
 
 
 
 
 
-8-
Markets and Competition
 
 
In response to the COVID-19 pandemic, we initially focused our
 
efforts on protecting the value of our portfolio and assisting our
customers that had been negatively impacted by the pandemic, including
 
initiating a loan modification program in response to the
pandemic, and by assisting some of our borrowers by originating loans
 
guaranteed under the Small Business Administration’s
 
(SBA’s)
Paycheck Protection Program (“PPP”).
 
In addition, in response to the onset of the pandemic, we temporarily tightened
 
underwriting
standards for areas of elevated risk, and we continue to update such risk assessments based
 
on current conditions.
 
 
Consistent with other market participants, after the onset of the pandemic
 
we have experienced
softer demand for financing by the
small business community we service due to challenges facing many industries
 
resulting from the continued economic fallout of
COVID-19 across much of the United States.
 
In addition, we have noticed some lessors extending the terms of leases for
 
their current
equipment, rather than entering into commitments to purchase and finance
 
new equipment, which may be driven by the uncertainties
of this environment.
 
In response to the potential impacts on our business resulting from the pandemic, we
 
took a series of actions to
preserve our capital and liquidity and reposition the business for success
 
once the full effects of the pandemic are realized and the
economy begins to recovery.
 
These actions included: (i) temporary re-allocation of resources from
 
front-end origination activities to
portfolio servicing and collection activities (ii) cost reduction initiatives that
 
led to a permanent reduction of approximately 80
employees and (iii) a re-organization of origination and processing
 
platforms
 
to accelerate automation and digitization.
 
We are
currently targeting the rollout of our digital origination platform,
 
which we are calling Express, by the middle of 2021.
 
We are
continuing to monitor the evolving health crisis, and its impacts on our operations
 
and ability to serve our customers in this changing
environment.
 
Any return to pre-pandemic levels of activity,
 
and the long-term impacts of this crisis on our market, remains uncertain
and will be dependent on,
 
among other things, the timing and pace of the macro-economic recovery
 
and the execution of the strategy
that we undertook in 2020.
 
We compete
 
with a variety of equipment financing sources that are available to small and mid
 
-sized businesses, including:
 
 
national, regional and local banks and finance companies that provide
 
leases and loan products;
 
 
financing through captive finance and leasing companies affiliated
 
with major equipment manufacturers;
 
 
FinTech companies;
 
 
working capital lenders;
 
 
corporate credit cards; and
 
 
 
commercial banks, savings and loan associations and credit unions.
 
Our principal competitors in the small-ticket equipment finance market
 
are independent finance companies, local and regional banks
and, to a lesser extent, in the case of our national accounts channels, national
 
providers of equipment financing, some of which are
national banks with leasing divisions. Many of our national competitors
 
are substantially larger than we are and generally focus on
larger ticket transactions and in some cases international
 
programs. We compete
 
on the quality of service we provide to our
origination partners
 
and small business customers,
 
as well as the pricing of our equipment finance and working capital products.
 
With
the introduction of our Working
 
Capital Loans,
 
we also compete with FinTech
 
lenders. We have encountered
 
and will continue to
encounter significant competition.
 
We believe several
 
characteristics may distinguish us from our competitors, including
 
the following:
 
Multiple Sales Origination Channels.
 
We use multiple
 
sales origination channels to penetrate effectively the highly
 
diversified and
fragmented small-ticket equipment finance market.
 
We use both direct
 
and indirect origination channels.
 
Our direct channel involves
soliciting our existing small business customer base for repeat business as well as identifying
 
other small business customers who
need financing.
 
The indirect channel sources financing opportunities through our partner network
 
and our broker network. Our
indirect origination channels, which accounted for approximately
 
83% of the 2020 lease and loan new origination volume, involve:
(1) establishing relationships with independent equipment dealers; (2)
 
securing endorsements from national equipment manufacturers
and distributors to become the preferred lease financing source for the independent
 
dealers who sell their equipment; and
(3) establishing relationships with independent brokers who identify
 
opportunities for us. Our broker network accounted for 24% of
the indirect channel’s 2020
 
lease and loan new origination volume.
 
Our direct origination channel accounted for approximately 17%
 
 
 
 
 
 
-9-
of the 2020 lease and loan new origination volume.
 
Highly Effective Account Origination Platform.
 
Our telephonic direct marketing platform and our strategic use of outside sales
account executives offer origination partners a high
 
level of personalized service through our team of sales account executives and
sales support personnel. Our business model is built on a real-time, fully
 
integrated customer information database and a contact
management and telephony application that facilitate our
 
account solicitation and servicing functions.
 
Comprehensive Credit Process.
 
We seek to manage
 
credit risk
 
effectively at the origination partner as well as at the transaction and
portfolio levels. Our comprehensive credit process starts with the qualification
 
and ongoing review of our origination partners. Once
the origination partner is approved, our credit process focuses on analyzing
 
and underwriting the small business customer and the
specific financing transaction, regardless of whether the transaction
 
was originated through our direct or indirect origination channels.
Our underwriting process involves the use of our customized acquisition
 
scorecards along with detailed rules-based analysis
conducted by our team of seasoned credit analysts.
 
Portfolio Diversification.
 
As of December 31, 2020,
 
no single small business customer accounted for more than 0.16% of our
portfolio balance and leases from our largest origination partner
 
accounted for only 5.91% of our portfolio. Our portfolio is also
diversified nationwide with the largest state portfolios existing
 
in California, Texas and Florida,
 
and we have a diverse equipment type
and industry group represented in our portfolio, as outlined in the above
 
tables.
 
Fully Integrated Information Management System.
 
Our business integrates information technology solutions to optimize the sales
origination, credit, collection and account servicing functions. Throughout
 
a transaction, we collect a significant amount of
information on our origination partners and small business customers.
 
The enterprise-wide integration of our systems enables data
collected by one group, such as credit, to be used by other groups,
 
such as sales or collections, to better perform their functions.
 
Sophisticated Collections Environment.
 
Our centralized collections department is structured to collect delinquent
 
accounts, minimize
credit losses and maximize post charge-off recovery
 
dollars. Our collection strategy employs a delinquency bucket segmentation
approach, where certain collectors are assigned to accounts based on their
 
delinquency status. We
 
also stratify and assign our accounts
to collectors based on other relevant criteria, such as customers with an early
 
missed payment, risk profile and transaction size. This
segmentation approach allows us to assign our more experienced collectors
 
to the late stage delinquent accounts. In addition, the
collections department also focuses on collecting delinquent late fees,
 
property taxes, and other outstanding amounts due under the
customer’s contracts.
 
Access to Multiple Funding Sources.
 
We have established
 
and maintained diversified funding sources, with our wholly-owned
subsidiary, MBB.
 
MBB is currently our primary funding source through the issuance of fixed and
 
variable rate FDIC-insured deposits
raised nationally through direct platforms, listing services, and through
 
various deposit brokers. We
 
believe that our proven ability to
access funding consistently at competitive rates through various economic
 
cycles provides us with the liquidity necessary to manage
our business. (See
 
Liquidity and Capital Resources
 
in Item 7).
 
Experienced Management Team.
 
Our executive officers have an average of more than 20 years of
 
experience in financial services. As
we have grown, we have expanded the management team with a group of
 
successful, seasoned executives.
 
Government Regulation
The banking
 
industry is heavily
 
regulated, and
 
such regulations are
 
intended primarily
 
for the protection
 
of depositors and
 
the federal
deposit
 
insurance
 
funds,
 
not
 
shareholders.
 
Since
 
becoming
 
a
 
bank
 
holding
 
company
 
on January
 
13,
 
2009,
 
we
 
have
 
been
 
subject
 
to
regulation
 
by
 
the
 
Federal
 
Reserve
 
Board
 
and
 
the
 
Federal
 
Reserve
 
Bank
 
of
 
Philadelphia
 
and
 
subject
 
to
 
the
 
Bank
 
Holding
 
Company
Act.
 
Our
 
bank
 
subsidiary,
 
MBB,
 
is
 
also
 
subject
 
to
 
regulation
 
by
 
the
 
Federal
 
Reserve
 
Board,
 
the
 
Federal
 
Reserve
 
Board
 
of
 
San
Francisco,
 
and
 
the
 
Utah
 
Department
 
of
 
Financial
 
Institutions.
 
Such
 
regulation
 
affects
 
our
 
lending
 
practices,
 
capital
 
structure,
 
investment practices, dividend policy and growth.
 
See further
 
discussion in
 
“Risk Factors—Regulations—
Government regulation
 
significantly affects
 
our business.
 
Further changes
 
in
regulations that
 
impact our business may have
 
a significant impact on our
 
business, results of
 
operations, and financial condition.”
 
in
Item 1A of this Form 10-K.
We believe that
 
we currently are in substantial compliance with all material statutes and regulations
 
that are applicable to our business.
 
 
 
 
 
 
 
 
-10-
Certain of the regulatory requirements that
 
are applicable to Marlin Business Services Corp.,
 
MBB and our other subsidiaries are
described below.
 
This description of statutes and regulations is not intended to be a complete explanation
 
of such statutes and
regulations and their effects on us and our subsidiaries and is qualified
 
in its entirety by reference to the actual statutes and regulations.
Banking Regulation.
 
Our subsidiary,
 
Marlin Business Bank, is a Utah state-chartered Federal Reserve member bank and is supervised
 
by both the Federal
Reserve Bank of San Francisco and the Utah Department of Financial Institutions
 
(the “Department”).
 
We are a registered
 
bank
holding company under the Bank Holding Company Act and are
 
supervised by the Federal Reserve Board, including the Federal
Reserve Bank of Philadelphia.
 
We elected to become
 
a financial holding company (while remaining a bank holding company)
 
and the
Bank Holding Company Act, as modified by the Gramm-Leach-Bliley
 
Act, permits us to engage in a wider range of financial
activities deemed to be “financial in nature”
 
including lending, exchanging, transferring, investing for others, safeguarding
 
money or
securities, providing financial, investment or economic advisory
 
services and underwriting, dealing in, or making a market in
securities.
 
Our status as a financial holding company permits the Company to
 
conduct reinsurance activities through our
AssuranceOne subsidiary.
 
Federal law provides the federal banking regulators, including the FDIC and
 
the Federal Reserve Board, with substantial enforcement
powers. This enforcement authority includes, among other things, the ability
 
to assess civil money penalties, to issue cease-and-desist
or removal orders, and to initiate injunctive actions against banking organizations
 
and institution-affiliated parties. In general, these
enforcement actions may be initiated for violations of laws and regulations
 
and unsafe or unsound practices. Other actions or inactions
may provide the basis for enforcement action, including misleading
 
or untimely reports filed with regulatory authorities.
Federal and state laws and regulations which are applicable to banks
 
regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the payment of dividends,
 
the timing of the availability of deposited funds and the nature
and amount of and collateral for certain loans. There are periodic examinations
 
by the Department and the FDIC to test our
compliance with various regulatory requirements. This regulation and
 
supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for
 
the protection of the insurance fund and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in connection
 
with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification
 
of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether
 
by the Department, the FDIC, the Federal Reserve Board or Congress
could have a material adverse impact on our operations.
 
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, as modified by certain provisions
 
of the Dodd-Frank Act that became fully effective on January 1,
 
2019.
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 requirements include a 6% minimum Tier
 
1 risk-based ratio (8%
to be considered well-capitalized). Tier 1 Capital,
 
as defined in the implementing regulations, 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. At December
 
31, 2020,
 
the Company’s Tier
 
1 Capital and
total capital ratios were 22.74% and 24.04%,
 
respectively.
The capital standards
 
require a minimum Tier 1 leverage ratio of 4%. The
 
capital requirements also now require a new 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
 
are 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. At
December 31, 2020,
 
the Company’s leverage and common
 
equity ratios were 18.78% and 22.74%,
 
respectively.
 
 
 
 
 
 
 
 
-11-
The Company is required to have a level of regulatory capital in excess of
 
the regulatory minimum and to have a capital buffer above
2.5% for 2020 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.
 
Prompt Corrective Action
.
 
The Federal Deposit Insurance Corporation Improvement Act of 1991
 
(“FDICIA”) requires 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 depository institutions consist of those with capital
 
levels significantly below
the minimum requirements for any relevant capital measure.
 
Critically undercapitalized depository institutions are those with minimal
capital and at serious risk for government seizure.
Under certain circumstances, a well-capitalized, adequately capitalized
 
or undercapitalized institution may be treated as if the
institution were in the next lower capital category.
 
A depository institution is generally prohibited from making capital distributions,
including paying dividends, or paying management fees to a holding company
 
if the institution would thereafter be undercapitalized.
 
Institutions that are adequately capitalized but not well-capitalized
 
cannot accept, renew or roll over brokered deposits except with a
waiver from the FDIC and are subject to restrictions on the interest rates that
 
can be paid on such deposits.
 
Undercapitalized
institutions may not accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or,
 
in certain cases, required to take certain actions with respect to institutions
falling within one of the three undercapitalized categories.
 
Depending on the level of an institution’s
 
capital, the agency’s corrective
powers include, among other things:
 
 
prohibiting
 
the
 
payment
 
of
 
principal
 
and
 
interest
 
on
 
subordinated
 
debt;
 
 
prohibiting
 
the
 
holding
 
com
pany
 
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
 
th
e
 
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 capit
 
al restoration plan and such a plan will not be accepted
unless, among other things, the banking institution’s
 
holding company guarantees the plan up to a certain specified amount.
 
Any such
guarantee from a depository institution’s
 
holding company is entitled to a priority of payment in bankruptcy.
 
MBB’s Tier 1 Capital
balance was $148.3 million at December 31, 2020,
 
resulting in a Tier 1 leverage ratio, common
 
equity Tier 1 risk based ratio, Tier
 
1
risk-based capital ratio and a total risk-based capital ratio of 15.26%
 
,
 
18.23%,
 
18.23% and 19.53%, respectively,
 
which exceeded the
regulatory 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 was required to keep its total risk-based
capital ratio above 15%. On March 25, 2020, MBB received notice from
 
the FDIC that it had approved MBB’s request to
 
rescind
certain nonstandard conditions in the FDIC’s
 
order granting federal deposit insurance issued on March 20, 2007. Furthermore,
effective March 26, 2020, the FDIC, the Company
 
and certain of the Company’s subsidiaries terminated
 
the Capital Maintenance and
Liquidity Agreement (the “CMLA Agreement”) and the Parent Company
 
Agreement, each entered into by and among the Company,
certain of its subsidiaries and the FDIC in conjunction with the opening of
 
MBB. As a result of these actions, MBB is no longer
required pursuant to the CMLA Agreement to maintain a total risk-based capital
 
ratio above 15%. Rather, MBB must continue
 
to
maintain a total risk-based capital ratio above 10% in order to maintain
 
“well-capitalized” status as defined by banking regulations,
while the Company must continue to maintain a total risk-based capital ratio as discussed
 
in the preceding paragraphs.
 
-12-
The federal banking agencies’ final regulatory capital rules, discussed above,
 
also modify the above prompt corrective action
requirements to add a common equity tier 1 risk-based ratio requirement,
 
and increase certain other capital requirements for the
various prompt corrective action thresholds. For example, the requirements
 
for a bank to be considered well-capitalized under the
rules are a 5.0% tier 1 leverage ratio, a 6.5% common equity tier 1 risk-based ratio,
 
an 8.0% tier 1 risk-based capital ratio and a 10.0%
total risk-based capital ratio. To
 
be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0% and 8.0%, respectively.
 
Federal Deposit Insurance.
 
The deposits of MBB are insured to the maximum extent permitted by the Deposit
 
Insurance Fund (the “DIF”) and are backed by the
full faith and credit of the U.S. Government. The Dodd-Frank Act increased
 
deposit insurance on most accounts to $250,000. As
insurer, the FDIC is authorized to conduct
 
examinations of, and to require reporting by,
 
insured institutions. It also may prohibit any
insured institution from engaging in any activity determined by
 
regulation or order to pose a serious threat to the FDIC. The FDIC also
has the authority to initiate enforcement actions against savings institutions.
The FDIC’s risk-based premium
 
system for FDIC deposit insurance is governed by the Federal Deposit Insurance
 
Reform Act of
2005, as amended by certain provisions of the Dodd-Frank Act. The
 
FDIC changed its risk-based premium system for FDIC deposit
insurance which now includes quarterly assessments of FDIC-insured
 
institutions based on their respective rankings in one of four risk
categories depending upon their examination ratings and capital ratios.
 
The FDIC capital assessment base now includes
 
consolidated
total assets minus tangible equity capital, defined as Tier
 
1 Capital. Institutions in FDIC-assigned Risk Categories II, III and IV are
assessed premiums at progressively higher rates.
 
The Dodd Frank Act raised the minimum reserve ratio of the Deposit Insurance
 
Fund from 1.15% to 1.35% and requires the FDIC to
offset the effect of this increase on insured institutions
 
with assets of less than $10 billion (small institutions).
 
Small institutions will
receive credits for the portion of their regular assessments that contributed
 
to growth in the reserve ratio between 1.15% and 1.35%.
 
When the reserve ratio is at or above 1.38%, the FDIC will automatically apply a small
 
bank's credits to reduce its regular assessment
up to the entire amount of the assessment.
 
If the reserve ratio exceeds 1.5%, the FDIC must dividend to DIF members the amount
above the amount necessary to maintain the DIF at 1.5%, but the FDIC Board
 
of Directors may, in
 
its sole discretion, suspend or limit
the declaration of payment of dividends.
 
Source of Strength
 
Doctrine
.
 
Under the provisions of the Dodd-Frank Act, as well as Federal Reserve Board
 
policy and regulation, a bank holding company must
serve as a source of financial and managerial strength to each of its subsidiary
 
banks and is expected to stand prepared to commit
resources to support each of them.
 
Consistent with this policy,
 
the Federal Reserve Board has stated that, as a matter of prudent
banking, a bank holding company should generally not maintain a given rate
 
of cash dividends unless its net income available to
common shareholders has been sufficient to fully fund
 
the dividends and the prospective rate of earnings retention appears to be
consistent with the organization’s
 
capital needs, asset quality and overall financial condition.
National Monetary Policy
.
 
In addition to being affected by general economic conditions,
 
the earnings and growth of the Company and MBB are affected
 
by the
policies of the Federal Reserve Board.
 
An important function of the Federal Reserve Board is to regulate the money supply
 
and credit
conditions.
 
Among the instruments used by the Federal Reserve Board to implement these objectives
 
are open market operations in
U.S. government securities, adjustments of the discount rate and changes
 
in reserve requirements against bank deposits.
 
These
instruments are used in varying combinations to influence overall economic
 
growth and the distribution of credit, bank loans,
investments and deposits.
 
Their use also affects interest rates charged on
 
loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board
 
have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the future.
 
The effects of such policies upon our future business,
earnings and growth cannot be predicted.
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
 
-13-
consideration of current and prospective economic conditions. MBB’s
 
ability to pay dividends to the Company is subject to various
regulatory requirements, including Title
 
12 part 208 of the Code of Federal Regulations (12 CFR 208.5), which places limitations
 
on
bank dividends. Such limitations applicable to MBB include requiring
 
the approval of the Federal Reserve Board for the payment of
dividends by the bank subsidiary in any calendar year if the total of all dividends
 
declared by the bank in that calendar year, including
the proposed dividend, exceeds the current year’s
 
net income combined with the retained net income for the two preceding calendar
years. “Retained net income” for any period means the net income for that period
 
less any common or preferred stock dividends
declared in that period. Moreover, no dividends
 
may be paid by such bank in excess of its undivided profits account.
 
Furthermore, as
discussed under “
Source of Strength Doctrine
”, as a bank holding company, the
 
Company’s ability to pay dividends to its shareholders
is also subject to various regulatory requirements, including Supervisory
 
Letter SR 09-4, Applying Supervisory Guidance and
Regulations on the Payment of Dividends, Stock Redemptions and Stock
 
Repurchases at Bank Holding Companies.
Transfers of Funds and Transactions
 
with Affiliates.
 
Regulations governing the Company and its affiliates,
 
including sections 23A and 23B of the Federal Reserve Act, impose restrictions
on MBB that limit the transfer of funds by MBB to Marlin Business Services Corp.
 
and certain of its affiliates, in the form of loans,
extensions of credit, investments or purchases of assets. These transfers by
 
MBB to Marlin Business Services Corp. or any other
single affiliate are limited in amount to 10% of MBB’s
 
capital and surplus, and transfers to all affiliates are limited
 
in the aggregate to
20% of MBB’s capital and surplus.
 
These loans and extensions of credit are also subject to various collateral
 
requirements. These
regulations also require generally that MBB’s
 
transactions with its affiliates be on terms no
 
less favorable to MBB than comparable
transactions with unrelated third parties.
 
Subject to certain exceptions, the Change in Bank Control Act of 1978,
 
as amended, prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the FDIC has been
 
notified 60 days prior to such acquisition and has not
objected to the transaction. Under a rebuttable presumption
 
in the Change in Bank Control Act, the acquisition of 10% or more of a
class of voting stock of a bank holding company with a class of securities registered
 
under Section 12 of the 1934 Act, such as the
Company, would, under
 
the circumstances set forth in the presumption, constitute acquisition of control
 
of the bank holding company.
The regulations provide a procedure for challenging this rebuttable control
 
presumption.
 
Securities and Exchange Commission and The NASDAQ Global Select
 
Market (NASDAQ)
.
We are also subject
 
to regulations promulgated by the Securities and Exchange Commission
 
and certain state securities commissions
for matters relating to the offering and sale of our securities. We
 
are subject to the disclosure and regulatory requirements of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
 
as amended, as administered by the Securities and
Exchange Commission. We
 
are listed on NASDAQ under the trading symbol “MRLN,” and we are
 
subject to the rules of NASDAQ
for listed companies.
Other Regulations.
 
Although most states do not directly regulate the commercial equipment
 
financing business, certain states require lenders and finance
companies to be licensed, impose limitations on certain contract terms and
 
on interest rates and other charges, mandate disclosure of
certain contract terms and constrain collection practices and remedies.
 
In addition to state licensing requirements, we are required to comply with
 
various laws and requirements that protect credit applicants
or are otherwise applicable to financial institutions, including
 
but not limited to the following:
 
Gramm-Leach-Bliley Act, which requires financial institutions to maintain
 
privacy regarding credit application data in our
possession and to periodically communicate with certain customers
 
on privacy matters;
 
 
USA Patriot Act of 2001, which requires financial institutions, including our banking
 
subsidiary, to assist in the prevention,
detection and prosecution of money laundering and the financing of terrorism;
 
 
Telephone
 
Consumer Protection Act of 1991, which protects from unwanted auto-dialed or pre
 
-recorded telemarketing calls;
 
Fair and Accurate Credit Transactions Act (“FACT
 
Act”), which requires financial institutions to establish a written
 
program
to implement “Red Flag Guidelines,” which are intended to detect,
 
prevent and mitigate identity theft. The FACT
 
Act also
provides guidance regarding reasonable policies and procedures that a user
 
of consumer credit reports must employ when a
consumer reporting agency sends the user a notice of address discrepancy;
 
 
 
 
 
-14-
 
Fair Credit Reporting Act, which regulates the use and reporting of information
 
related to the credit history of certain credit
applicants;
 
and
 
Equal Credit Opportunity Act and Regulation B, which prohibit discrimination
 
on the basis of age, race and certain other
characteristics in the extension of credit and require that we provide notice to credit
 
applicants of their right to receive a
written statement of reasons for declined credit applications.
Our insurance operations are subject to various
 
types of governmental regulation. Our wholly-owned insurance company subsidiary,
AssuranceOne, is a Class 3 Bermuda insurance company and, as such, is subject
 
to the Bermuda Insurance Act 1978, as amended, and
related regulations.
 
Seasonality
 
 
The products and services we provide to our customers include loans and leases for
 
the acquisition of commercial equipment and
working capital loans.
 
Our business activities are not seasonal in nature.
 
Human Capital
 
 
We believe our
 
success depends on the strength of our workforce. The Chief Human Resources
 
Officer ("CHRO") is responsible for
developing and executing our human capital strategy.
 
This includes the acquisition, development, and retention of talent to deliver on
the Company’s strategy as well as the design
 
of employee compensation and benefits programs.
 
We recognize
 
that attracting,
motivating and retaining talent at all levels is vital to continuing our success.
 
We offer
 
industry competitive wages and benefits and
are committed to maintaining a workplace environment that promotes
 
employee productivity and satisfaction.
 
We manage
 
the business through establishing operational and financial goals that are
 
focused on achieving our organization-wide
initiatives.
 
Those goals are focused for the leadership of each department, and then
 
cascaded through the levels of the organization.
 
 
Like many companies, the COVID-19 pandemic has been especially challenging
 
as we focused our health and safety efforts on
protecting our employees and families from potential virus exposure
 
while continuing to maintain our operations and support our
customers. Since the beginning of the pandemic, our employees have been
 
working remotely, and we have
 
not experienced any
significant interruptions to our operations from that transition.
 
 
As of December 31, 2020, we employed 254 people. None of our employees are
 
covered by a collective bargaining agreement and
 
we
have never experienced any work stoppages.
 
 
 
 
Available Information
 
We are a Pennsylvania
 
corporation with our principal executive offices located
 
at 300 Fellowship Road, Mount Laurel, NJ 08054. Our
telephone number is (888) 479-9111
 
and our website address is www.marlincapitalsolutions
 
.com.
 
We make available
 
free of charge
through the investor relations section of our website our Annual Reports
 
on Form 10-K, Quarterly Reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as reasonably
 
practicable after such material is electronically filed
with or furnished to the Securities and Exchange Commission. The
 
SEC also maintains a website at www.sec.gov
 
that contains our
reports, proxy and information statements, and other information that we
 
electronically file with the SEC. We
 
include the above
website addresses in this Annual Report on Form 10-K only as inactive textual
 
references
 
and do not intend them to be active links
 
to
such websites.
 
 
 
 
 
 
 
 
 
 
 
-15-
Item 1A.
 
Risk Factors
 
 
Set forth below and elsewhere in this report and in other documents we file with
 
the Securities and Exchange Commission are risks
and uncertainties, not limited to the risks set forth below,
 
that could cause our actual results to differ materially from the results
contemplated by the forward-looking statements contained
 
in this report and other periodic statements we make.
COVID-19 Related
 
The ongoing COVID-19 pandemic and measures intended to prevent its spread
 
could have a material adverse effect on our
business, results of operations and financial condition, and such effects
 
will depend on future developments, which are highly
uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 pandemic and related
 
government actions taken to reduce the spread of the virus
have been weighing on the macroeconomic environment, and the outbreak
 
has significantly increased
 
economic uncertainty and
reduced economic activity.
 
The pandemic has resulted in authorities implementing numerous measures
 
to try to contain the virus, such
as travel bans and restrictions, quarantines, shelter in place or total lock
 
-down orders and business limitations and shutdowns. Such
measures have significantly contributed to rising unemployment
 
and negatively impacted consumer and business spending. The
United States government has taken steps to attempt to mitigate some of
 
the more severe anticipated economic effects of the virus,
including the passage of the Coronavirus Aid, Relief, and Economic
 
Security Act (“CARES Act”), but there can be no assurance that
such steps will be effective or achieve their desired results in
 
a timely fashion.
 
We continue to monitor
 
and evaluate newly enacted
and proposed government and banking regulations issued in response
 
to the COVID-19 pandemic; further changes in regulation that
impact our business or that impact our customers could have a significant
 
impact on our future operations and business strategies.
Our operations and financial results have already been negatively
 
impacted as a result of COVID-19 pandemic, as discussed further in
“Part II – Item 7. Management’s Discussion
 
and Analysis of Financial Condition and Results of Operations
 
—Overview” and “—
Results of Operations”.
 
The pandemic, reduction in economic activity,
 
and current business limitations and shutdowns have increased
risks to our business that include, but are not limited to:
 
Portfolio Risk.
 
We experienced
 
a significant decrease in demand for our lease and loan products during
 
the year ended
December 31, 2020 as a result of the COVID-19 pandemic, and we have limited
 
visibility to the future recovery of such demand.
 
Our origination volumes for the year ended December 31, 2020 was $367.1 million
 
,
 
a 54% decrease from $801.9 million for the
year ended December 31, 2019.
 
We have shifted
 
the focus of portions of our operations and certain personnel to implement specific
 
programs and new products in
response to the pandemic.
 
In particular, we have focused efforts on
 
loan modifications and a payment deferral program,
implemented a new PPP loan product, and increased customer service
 
efforts to respond to our borrower’s needs.
 
We modified
over 5,600 contracts as part of our payment deferral program, representing
 
$111.2 million, or
 
12.8% of our Net investment in
leases and loans as of December 31, 2020.
 
While 92% of the modified contracts are out of the deferral period at year end, as part
of our loss mitigation strategies we are further extending the deferral
 
period for select customers in industries that are suffering
prolonged impacts of COVID-19.
 
There can be no assurances that our efforts will be successful in mitigating
 
any risk of credit
loss.
 
 
Credit Risk.
 
We extend credit primarily
 
to small and mid-sized businesses, and many of our customers may be particularly
susceptible to business limitations, shutdowns and possible recessions and
 
may be unable to make scheduled lease or loan
payments during these periods and may be at risk of discontinuing
 
their operations.
 
As a result, our delinquencies and credit
losses may substantially increase.
 
Our risk and exposure to future losses may be amplified to the extent
 
economic activity
remains shutdown for an extended period, or to the extent businesses have limited
 
operations or are unable to return to normal
levels of activity after the restrictions are lifted.
Our estimate of expected future credit losses recognized within our
 
allowance as of December 31, 2020 is based on certain
assumptions, forecasts and estimates about the impact of current economic
 
conditions on our portfolio of receivables based on
information known as of that date, including certain expectations about
 
the extent and timing of impacts from COVID-19.
 
If
those assumptions, forecasts or estimates underlying our financial statements are
 
incorrect, we may experience significant losses
as the ultimate realization of value, or revisions to our estimates, may
 
be materially different than the amounts reflected in our
consolidated statement of financial position as of any particular date.
 
 
 
-16-
 
Liquidity and Capital Risk.
 
As of December 31, 2020, all of our capital ratios, and our subsidiary bank’s
 
capital ratios, were in
excess of all regulatory requirements.
 
While we currently have sufficient capital, our reported and
 
regulatory capital ratios could
be adversely impacted by further credit losses and other COVID-19
 
related impacts on our operations.
 
We are managing the
evolving risks of our business while closely monitoring and forecasting the
 
potential impacts of COVID-19 on our future
operations and financial position, including capital levels.
 
However, given the uncertainty about
 
future developments and the
extent and duration of the impacts of COVID-19 on our business and
 
future operations, we face elevated risks to our ability to
forecast and estimate future capital levels.
 
If we fail to meet capital requirements in the future, our business, financial
 
condition
or results of operations may be adversely affected.
 
 
Our capital markets sale and syndication activities provide a source of liquidity
 
and have enabled us to manage the size and
composition of leases and loans on our balance sheet.
 
For the year ended December 31, 2020, we sold $28.3 million of assets that
generated a net pre-tax gain on sale of $2.4 million.
 
In comparison, for the year ended December 31, 2019, we sold $310.4
million of assets for pre-tax gain on sale of $22.2 million.
 
Disruptions in the capital markets due to the impact of COVID-19
pandemic on the economic environment resulted in a lack of demand
 
in the syndication
 
market since the end of the first quarter of
2020 and we retained substantially all of our origination volume on our balance
 
sheet.
 
Our sales execution decisions, including
the timing, volume and frequency of such sales, depend on many factors including
 
our origination volumes, the characteristics of
our contracts versus market requirements, our current assessment of our balance
 
sheet composition and capital levels, and current
market conditions, among other factors.
 
Driven by the continued market disruptions resulting from the COVID-19 pandemic,
 
we
may have difficulty accessing the capital market
 
and may find decreased interest and ability of counterparties to purchase our
contracts, or we may be unable to negotiate terms acceptable to us.
We have historically
 
returned capital to shareholders through normal dividends, special dividends
 
and share repurchases. There
can be no assurances that these forms of capital returns are the optimal use of our capital
 
or that they will continue in the future.
 
Operational Risk.
 
The spread of COVID-19 has caused us to modify our business practices (including
 
implementing certain
business continuity plans, and developing work from home and social
 
distancing plans for our employees), and we may take
further actions as may be required by government authorities or as we
 
determine are in the best interests of our employees,
customers and business partners.
 
We face increased
 
risk of any operational or procedural failures due to changes in our normal
business practices necessitated by the pandemic.
These factors may remain prevalent for a significant period of time
 
and may continue to adversely affect our business, results of
operations and financial condition even after the COVID-19 pandemic
 
has subsided.
 
The extent to which the coronavirus pandemic impacts our business, results of operations
 
and financial condition will depend on
future developments, which are highly uncertain and are difficult
 
to predict, including, but not limited to, the duration and spread of
the outbreak, its severity,
 
the actions to contain the virus or treat its impact, and how quickly and to what exten
 
t
 
normal economic and
operating conditions can resume. Even after the COVID-19 pandemic
 
has subsided, we may continue to experience materially adverse
impacts to our business as a result of the virus’s
 
global economic impact, including the availability of credit, adverse impacts on
 
our
liquidity and any recession that has occurred or may occur in the future.
 
There are no comparable recent events that provide guidance as to the effect
 
the spread of COVID-19 as a global pandemic may have,
and, as a result, the ultimate impact of the outbreak is highly uncertain
 
and subject to change. We
 
do not yet know the full extent of
the impacts on our business, our operations or the global economy
 
as a whole. However, the effects could have
 
a material impact on
our results of operations and heighten many of our known risks described herein.
Regulations
Government regulation significantly affects our business.
 
Further changes in regulations that impact our business may have
 
a
significant impact on our business, results of operations, and financial
 
condition.
 
 
The banking industry is heavily regulated, and such regulations are
 
intended primarily for the protection of depositors and the federal
deposit insurance
 
funds, not shareholders. Since becoming a bank holding company on
 
January 13, 2009, we have been subject to
regulation by the Federal Reserve Board and the Federal Reserve Bank of Philadelphia
 
and subject to the Bank Holding Company
Act. Our bank subsidiary,
 
MBB, is also subject to regulation by the Federal Reserve Board, the Federal Reserve Board of San
Francisco, and the Utah Department of Financial Institutions.
 
Such regulation affects lending practices, capital structure, investment
practices, dividend policy and growth.
 
 
-17-
The financial crisis of 2008 and 2009 resulted in U.S. government and regulatory
 
agencies placing increased focus and scrutiny on the
financial services industry,
 
which have subjected financial institutions to additional restrictions,
 
oversight and costs. In particular, the
Dodd-Frank Act substantially increased regulation of the financial
 
services industry,
 
changed deposit insurance provisions, and
impacted the ability of firms within the industry to conduct business consistent
 
with historical practices, including in the areas of
compensation, interest rates, financial product offerings
 
and disclosures, among other things.
 
New proposals for legislation continue
to be introduced in Congress that could further substantially increase regulation
 
of the financial services industry and impose
restrictions on the operations and general ability of firms within the
 
industry to conduct business consistent with historical practices,
including in the areas of compensation, interest rates and financial product
 
offerings and disclosures, among other things. Federal and
state regulatory agencies also frequently adopt changes to their reg
 
ulations or change the manner in which existing regulations are
applied. Such proposed changes in laws, regulations and regulatory
 
practices affecting the banking industry or affecting
 
the equipment
financing, telemarketing and collecting processes, may
 
limit the manner in which we conduct our business. Such changes may
adversely affect us, including our ability to execute our
 
strategies, and originate loans and leases, and may also result in the imposition
of additional costs on us.
 
We, like other
 
finance companies, face the risk of litigation, including class action litigation, and regulatory
 
investigations and actions
in connection with our business activities. These matters may be difficult
 
to assess or quantify, and
 
their magnitude may remain
unknown for substantial periods of time. A substantial legal liability or
 
a significant regulatory action against us could cause us to
suffer significant costs and expenses and could require us
 
to alter our business strategy and the manner in which we operate our
business.
Monetary policies and regulations of the Federal Reserve Board could
 
adversely affect our business, financial condition and
results of operations.
 
In addition to being affected by general economic conditions,
 
our earnings and growth are affected by the policies of the Federal
Reserve Board.
 
An important function of the Federal Reserve Board is to regulate the money supply
 
and credit conditions.
 
Among
the instruments used by the Federal Reserve Board to implement these objectives
 
are open market operations in U.S. government
securities, adjustments of the discount rate and changes in reserve requirements
 
against bank deposits.
 
These instruments are used in
varying combinations to influence overall economic growth and the distribution
 
of credit, bank loans, investments and deposits.
 
Their
use also affects interest rates charged on
 
loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board
 
have had a significant effect on the operating results of bank
holding companies in the past and are expected to continue to do so in the future.
 
The effects of such policies upon our business,
financial condition and results of operations cannot be predicted.
 
Further increase in the FDIC deposit insurance premium or required reserves may
 
have a significant financial impact on us.
 
The FDIC insures deposits at FDIC-insured financial institutions up
 
to certain limits and charges insured financial institutions
premiums to maintain the Deposit Insurance Fund (DIF).
 
In the event of a bank failure, the FDIC takes control of a failed bank and
ensures payment of deposits up to insured limits using the resources of
 
the DIF. The FDIC is required
 
by law to maintain adequate
funding of the DIF,
 
and the FDIC may increase premium assessments to maintain such funding.
The Dodd-Frank Act required the FDIC to increase the DIF’s
 
reserves against future losses, which will necessitate increased deposit
insurance premiums that are to be borne primarily by institutions with assets of greater
 
than $10 billion.
 
Future increases in insurance
premiums may decrease our earnings and could require us to alter our business strategy
 
and the manner in which we operate our
business.
 
The total risk-based capital ratio that MBB is required to maintain is currently
 
set forth in the FDIC Agreement entered into in
conjunction with the opening of the bank, as discussed further in –Item 7,
 
Liquidity and Capital Resources–Bank Capital and
Regulatory Oversight.
 
We could become subject
 
to more stringent capital requirements, and such requirements could, among
 
other
things, result in lower returns
 
on equity, could limit our
 
ability to make distributions to shareholders, require the raising of additional
capital, require us to significantly change our funding strategies or operations,
 
and could result in regulatory actions if we were to be
unable to comply with such requirements.
 
 
 
 
 
 
 
 
 
-18-
Liquidity and Capital Resources
We are reliant on debt
 
financing to operate our business.
 
If we cannot issue deposits or obtain other suitable sources of financing,
we may be unable to fund our
 
operations.
 
Furthermore, if the cost of debt financing increases, we may not be able to increase the
associated pricing of our leases and loans, which could adversely impact our results of
 
operations, cash flows and financial
position
 
Our business requires a substantial amount of cash to operate. Our cash
 
requirements will increase as our lease and loan originations
increase. We obtain
 
a substantial amount of the cash required for operations through a variety of external
 
funding sources, such as
deposits raised by MBB, long-term note securitizations and capital markets
 
activities including sales and syndications of leases and
loans. A failure to access the deposits market or to add new funding facilities could
 
affect our ability to fund and originate new leases
and loans.
 
Our ability to obtain continued access to the deposits market or to obtain
 
a renewal of our lender’s commitment and new funding
facilities is affected by a number of factors, including:
 
 
conditions in the market for FDIC-insured deposits;
 
restrictions and costs associated with banking industry regulation which
 
could negatively impact MBB;
 
conditions in the long-term lending markets; and
 
our ability to service the leases and loans.
 
We are and
 
will continue to be dependent upon these funding sources to continue to originate leases and
 
loans and to satisfy our other
working capital needs. We
 
may be unable to obtain additional financing on acceptable terms, or at all, as a result
 
of prevailing interest
rates or other factors at the time, including the presence of covenants or other
 
restrictions under existing financing arrangements. If
any or all of our funding sources become unavailable on acceptable terms or
 
at all, we may not have access to the financing necessary
to conduct our business, which would limit our ability to fund our operations.
 
In the event we seek to obtain equity financing, our
shareholders may experience dilution as a result of the issuance of
 
additional equity securities. This dilution may be significant
depending upon the amount of equity securities that we issue and the prices at which
 
we issue such securities.
We rely on the sale of finance
 
receivables to third parties in the capital markets as an important source of our liquidity.
 
If such
arrangements become unavailable to us, we may be unable to find replacement
 
financing on economically viable terms, if at all.
Our capital markets sale and syndication activities provide a source of liquidity
 
and have enabled us to manage the size and
composition of leases and loans on our balance sheet.
 
Our ability to continue to execute syndications is affected
 
by a number of
factors, including:
 
 
our ability to originate assets with characteristics that meet market demand;
 
the interest and ability of counterparties to purchase our contracts, and
 
our ability to maintain relationships with such
counterparties;
 
current market conditions, including interest rate levels; and
 
our ability to negotiate terms acceptable to us.
 
For the year ended December 31, 2020,
 
we sold $28.3 million of assets that generated a net pre-tax gain on sale of $2.
 
4
 
million.
 
In
comparison, for the year ended December 31, 2019, we sold $310.4
 
million of assets for pre-tax gain on sale of $22.2 million.
 
Disruptions in the capital markets due to the impact of COVID-19 pandemic
 
on the economic environment resulted in a lack of
demand in the syndication market since the end of the first quarter of 2020
 
and we retained substantially all of our origination volume
on our balance sheet.
 
Driven by the continued market disruptions resulting from the COVID-19
 
pandemic, we may have difficulty
accessing the capital market and may find decreased interest and ability of
 
counterparties to purchase our contracts, or we may be
unable to negotiate terms acceptable to us.
 
Any disruption in our ability to access the syndication market due to COVID-19 pandemic,
or any other market disruptions, could negatively affect
 
our revenues, and may have an adverse effect on our results of
 
operations and
cash flows.
 
 
-19-
In addition, if we fail to originate assets with suitable characteristics to satisfy market
 
requirements, or if our counterparties’
underwriting criteria or interest in acquiring our contracts declines, we may
 
be unable to find replacement funding sources for these
assets.
 
The execution of syndications that are accounted for as sales result in the derecognition
 
of the assets, and the recognition of a gain (or
loss) on the sale date, to the extent the proceeds received are in excess of the
 
value of the transferred assets and/or any liability
incurred.
 
We may have continuing
 
involvement in the contracts sold to syndication through servicing the contracts sold,
 
and/or
through any recourse obligations that may include customary representations
 
and warranties or specific recourse provisions.
 
We
generally do not retain credit risk on loans sold, but we are exposed to risk
 
to the extent that we violate such representations and
warranties, and we may be required to repurchase loans and leases, which
 
could impact our cashflows and ability to fund our
operations.
We are subject to regulatory
 
capital adequacy guidelines, and if we fail to meet these guidelines, our business, financial
 
condition
or results of operations may be adversely affected.
 
We may be required to raise additional
 
capital in the future, but that capital may
not be available when it is needed.
 
Under regulatory capital adequacy guidelines, and other regulatory
 
requirements, we must meet guidelines that include quantitative
measures of assets, liabilities and certain off-balance
 
sheet items, subject to qualitative judgments by regulators regarding components,
risk weightings and other factors. If we fail to meet these minimum
 
capital guidelines and other regulatory requirements, our business,
financial condition or results of operations may be adversely affected.
 
In addition, if we fail to maintain “well-capitalized” status
under the regulatory framework, if we are deemed to be not well-managed
 
under regulatory exam procedures or if we experience
certain regulatory violations, our status as a financial holding company,
 
our related eligibility for a streamlined review process for
acquisition proposals and our ability to offer certain financial
 
products may be compromised or impaired.
 
We may require
 
additional capital to fund our operations, driven by changes in required regulatory
 
capital levels, changes in the
availability of our funding sources, changes in our business strategies, and
 
changes in market conditions, among other factors.
 
As a
result, we may need to suspend or discontinue our share repurchase
 
program or any practice of declaring regular quarterly dividends
 
in
order to retain more capital on our Balance sheets.
 
In addition, we may at some point need to raise additional capital to support our
operations.
 
Our ability to raise additional capital will depend, in part, on conditions in the capital markets
 
at that time, which are
outside our control, and on our financial performance. Accordingly,
 
we may be unable to raise additional capital, if and when needed,
on terms acceptable to us, or at all. If we cannot raise additional capital when needed,
 
we may become subject to adverse regulatory
actions or restrictions, and limitations on growth of our operations.
 
In addition, if we decide to raise additional equity capital, our
shareholders’ interests in us could be diluted.
For further information on our required capital levels, see “–Item 1.
 
Business. Supervision and Regulation” and see “–Item 7.
 
Liquidity and Capital Resources. Bank Capital and Regulatory Oversight”
 
in this Form 10-K.
If interest rates change significantly, we may be
 
subject to higher interest costs with respect to our funding sources, which may
cause us to suffer material
 
losses.
 
Because we use FDIC insured deposits to fund our leases, our margins could
 
be reduced by an increase in interest rates. Each of our
leases is structured so that the sum of all scheduled lease payments will equal
 
the cost of the equipment to us, less the residual, plus a
return on the amount of our investment. Generally our leases and loans are
 
fixed-rate in nature.
 
When we originate or acquire leases,
we base our pricing in part on the spread we expect to achieve between the yield on
 
each lease and the effective interest rate we expect
to pay when we finance the lease. To
 
the extent that a lease is financed with variable-rate funding from deposits or
 
borrowings,
increases in interest rates during the term of a lease could narrow or eliminate
 
the spread, or result in a negative spread.
 
A negative
spread is an interest cost greater than the yield on the lease. If interest rates increase
 
faster than we are able to adjust the pricing under
our new leases or loans, our net interest margin would be reduced.
 
In addition, with respect to our fixed-rate deposits and borrowings,
increases in interest rates could have the effect of increasing
 
our costs on future transactions.
 
 
 
 
-20-
Credit and Portfolio Risk
If we inaccurately assess the creditworthiness of our small business customers,
 
we may
 
experience a higher number of lease and
loan defaults, which may restrict our access to funding and reduce our earnings.
 
We specialize in leasing
 
and financing equipment and providing working capital to small and mid
 
-sized businesses. Small and mid-
sized businesses may be more vulnerable than large
 
businesses to economic downturns, as they typically depend on the management
talents and efforts of one person or a small group of persons and
 
often need substantial additional capital to expand or compete. Small
and mid-sized business leases and loans, therefore, may entail a greater
 
risk of delinquencies and defaults than leases and loans
entered
 
into with larger leasing customers. In addition, there is typically only
 
limited publicly available financial and other information
about small and mid-sized businesses and they often do not have
 
audited financial statements. Accordingly,
 
in making credit
decisions, our underwriting guidelines rely upon the accuracy of information
 
about these small and mid-sized businesses obtained
from the small and mid-sized business owner and/or third-party sources,
 
such as credit reporting agencies. If the information we
obtain from small and mid-sized business owners and/or third-party
 
sources is incorrect or fraudulent, our ability to make appropriate
credit decisions will be impaired. If we inaccurately assess the creditworthiness
 
of our small business customers, we may experience a
higher number of lease and loan defaults and related decreases in our
 
earnings.
 
We rely on information
 
provided by our customers and vendors.
 
If the information that we rely upon is not accurate, or if it was
provided with fraudulent or malicious intent, we may not make
 
appropriate credit decisions and our financial position, operating
results and reputation may be negatively impacted.
 
Customer and vendor fraud have always been risks inherent to the equipment
 
finance business. We have
 
taken measures to detect and
reduce the risk of fraud, including the implementation of new antifraud
 
tools, increased vendor surveillance staff and enhancements
 
to
procedures, but these measures need to be continually improved and may not
 
be effective against new and continually evolving forms
of fraud. If we experience increases in fraudulent activity,
 
or if our anti-fraud measures are not effective, we could experience
 
an
increase in the level of our fraud charge-offs,
 
adversely affecting the results of operations.
 
This could also lead to increased regulatory
scrutiny, which
 
could adversely affect our brand and reputation.
 
These impacts, as well as the implementation of any necessary
measures to reduce fraud risk could increase our costs and adversely impact
 
our results of operations.
If we cannot maintain
 
our relationships with origination partners and our existing customers our ability
 
to
 
generate lease and loan
transactions and related revenues may be significantly
 
impeded.
 
We have formed
 
relationships with thousands of origination partners, comprised primarily
 
of independent equipment dealers. We
 
rely
on these relationships to generate lease and loan applications and
 
originations. Most of these relationships are not formalized in
written agreements, and those that are formalized by written agreements
 
are typically terminable at will. Our typical relationship does
not commit the origination partner to provide a minimum number of lease and
 
loan transactions to us nor does it require the
origination partner to direct all of its lease and loan transactions to us. The
 
decision by a significant number of our origination partners
to refer their leasing transactions to another company could impede our
 
ability to generate lease and loan transactions and related
revenues.
Customer complaints or negative publicity could result in a decline in our customer
 
growth and our business could suffer
.
 
Our reputation is important to attract new customers as well as to obtain repeat
 
business from existing customers. There can be no
assurance that we will continue to maintain a good relationship with our customers
 
or avoid negative publicity.
 
Any damage to our
reputation, whether arising from our conduct of business, negative publicity,
 
regulatory, supervisory
 
or enforcement actions, matters
affecting our financial reporting or compliance with Securities and
 
Exchange Commission and NASDAQ listing requirements,
security breaches or otherwise could have a material adverse effect
 
on our business.
 
 
 
-21-
Risks Related to our Operations
If we are unable to effectively execute our business strategy,
 
we may suffer material
 
operating losses.
 
Our financial position, liquidity and results of operations depend
 
on management’s ability to execute our
 
business strategies.
 
Our
objective to transition from a micro-ticket equipment lessor into a nationwide
 
provider of capital solutions to small businesses,
includes the following priorities:
 
a focus on strategically expanding our target market; better leveraging
 
our capital and fixed cost
base through origination and portfolio growth, improving our operating
 
efficiency,
 
and proactively managing our risk profile.
 
The economic fallout from the pandemic caused a reduction in demand
 
for financing in our target market.
 
The tightening of our
underwriting standards and the re-organization of
 
our origination platform caused further pressure on our origination activities in the
wake of the pandemic.
 
Executing the expansion of our target market and growth of our or
 
iginations and portfolio depends on a
number of factors,
 
including executing the acceleration of our automation and digital
 
initiatives, achieving the desired volume of
leases and loans of suitable yield and credit quality,
 
effectively managing those leases and loans, obtaining appropriate
 
funding, the
competitive environment, and changes to our industry,
 
market and general economic conditions.
 
Accomplishing such a result on a
cost-effective basis is largely a function of our
 
marketing capabilities, our management of the leasing process, our credit underwriting
guidelines, our ability to provide competent, attentive and efficient
 
servicing to our origination partners and our small business
customers, our ability to execute effective credit risk management
 
and collection techniques, our access to financing sources on
acceptable terms, our ability to create an automated customer experience through
 
our accelerated digital initiative and our ability to
attract and retain high quality employees in all areas of our business.
 
There can be no assurances that we will be successful in our
growth and expansion strategies, or that such measures will improve our
 
operating efficiency,
 
or that such measures will improve our
operating results, cashflows or financial position.
To proactively
 
manage our risk profile, we continually monitor and analyze the performance of
 
our portfolio, assess our delinquency
and credit loss experience against our underwriting criteria and determine
 
whether our performance is commensurate with our
intended risk tolerance.
 
We may make adjustments
 
in response to such analysis to tighten or loosen our underwriting criteria, or
 
to
adjust borrower guarantee requirements, among other measures.
 
For example, in 2020 we made continual adjustments based on our
assessments of the appropriate risk profile for different
 
geographies and industries based on the changing economic climate driven by
the COVID-19 pandemic.
 
Any such changes to our risk profile may not have the intended outcome on our portfolio’s
 
performance,
and our results of operations, cashflows, and financial position.
 
To the extent that we tighten our standards,
 
we risk not being not
competitive in the market and losing origination volume.
 
To the extent that we loosen our standards,
 
we risk incurring credit losses in
excess of our expectations.
 
As part of our growth and market expansion strategies, we may evaluate
 
opportunities for business combinations from time to time.
 
We completed
 
the acquisitions of Horizon Keystone Financial in January 2017, and Fleet Financing
 
Resources in September 2018, as
part of our strategies to grow through acquisitions that extend our business into
 
new and attractive markets.
 
Any such business
combinations entail numerous risks, including risks related to:
 
(i) integrating the acquired operations, services and products;
 
(ii)
achieving expected synergies, including infrastructure
 
costs; (iii) acquisition-related costs or amortization cost for acquired intangible
assets, that could impact our operating results;
 
(iv) retention of customer and supplier relationships of the acquired business; (v)
diverting management attention from our ongoing business; and (vi) potentially
 
negatively impacting our ability to attract, retain and
motivate key personnel.
 
We may not realize
 
the anticipated benefits of past or future investments or acquisitions, and
 
integration of
acquisitions may disrupt our business and management.
 
There can be no assurances that any business combinations will have the
impact that we intend on our financial position, results of operations and
 
cash flows.
 
While we assess the potential benefits that could
be realized from any acquisition, as well as the potential costs and operating losses that
 
could be incurred, our assessments and
estimates may differ materially from actual costs and benefits realized.
 
If we cannot effectively compete within the equipment leasing industry,
 
we may be
 
unable to increase our revenues or maintain
our current levels of
 
operations.
 
The business of small-ticket equipment leasing is highly fragmented
 
and competitive. Many of our competitors are substantially larger
and have considerably greater financial, technical and marketing resources
 
than we do. For example, some competitors may have a
lower cost of funds and access to funding sources that are not available to us.
 
A lower cost of funds could enable a competitor to offer
leases and loans with yields that are lower than those we use to price our leases and loans, potentially
 
forcing us to decrease our yields
or lose origination volume. In addition, certain of our
 
competitors may have higher risk tolerances or different risk assessments,
 
which
could allow them to establish more origination partner and small business customer
 
relationships and increase their market share. The
barriers to entry are relatively low with respect to our business and, therefore,
 
new competitors could enter the business of small-ticket
 
-22-
equipment leasing at any time. The companies that typically provide
 
financing for large-ticket or middle-market transactions
 
could
begin competing with us on small-ticket equipment leases. If this occurs,
 
or we are unable to compete effectively with our
competitors, we may be unable to sustain our operations at their current levels
 
or generate revenue growth.
Deteriorated economic or business conditions may lead to greater than anticipated
 
lease or loan defaults and credit losses and
lower origination volumes, which could substantially reduce our operating
 
income and limit our ability to obtain additional
 
financing.
 
Furthermore, natural disasters, widespread disease or pandemics
 
(including the recent coronavirus outbreak), acts of
war or terrorism, or other external events could significantly impact
 
our business
.
 
Historically, the capital
 
and credit markets have experienced periodic volatility and disruption.
 
In many cases, these markets have
produced downward pressure on stock prices of, and credit availability
 
to, certain companies without regard to those companies’
underlying financial strength. Concerns over geopolitical issues and
 
the availability and cost of credit, have contributed to increased
volatility for the economy and the capital and credit markets. In the event
 
of extreme and prolonged market events, such as a global
credit crisis, we could incur significant losses.
 
Even in the absence of a market downturn, we are exposed to substantial risk of
 
loss
due to market volatility.
 
Our operating income may be reduced by various economic factors
 
and business conditions, including the level of economic activity
in the markets in which we operate. In turn, those economic factors and business conditions
 
can be significantly and negatively
impacted by natural disasters, widespread disease or pandemics (including
 
the recent coronavirus outbreak), acts of war or terrorism or
other adverse external events, all of which can result in economic slowdowns
 
or recessions. Delinquencies and credit losses generally
increase during economic slowdowns or recessions. Because we extend
 
credit primarily to small and mid-sized businesses, many of
our customers may be particularly susceptible to economic slowdowns or recessions
 
and may be unable to make scheduled lease or
loan payments during these periods. Therefore, to the extent that economic
 
activity or business conditions deteriorate, our
delinquencies and credit losses may increase. Unfavorable economic
 
conditions may also make it more difficult for us to maintain
both our new lease and loan origination volume and the credit quality of new
 
leases and loans at levels previously attained.
Unfavorable economic conditions could also increase our funding
 
costs or operating cost structure or limit our access to funding. We
experienced such impacts in the year ended December 31, 2020 as a result
 
of macroeconomic conditions driven by the COVID-19
pandemic, which would be the primary driver of negative impacts for
 
2020 as compared to 2019, including $10.0 million increase in
realized credit losses, a 52% decline in equipment finance origination
 
volumes, a 69% decline in working capital origination volumes,
 
as well as reduced capital market interest in purchases of finance contracts
 
that, paired with our lower origination volumes,
substantially reduced our gains on sale.
 
Any return to levels prior to the COVID-19 pandemic, or the timing of such
 
return, remains
uncertain, and any prolonged impacts could continue to impact our operating
 
income.
 
In addition, any further changes to economic
and business conditions could reduce our operating income.
In addition, natural disasters, widespread disease or pandemics (including
 
the recent coronavirus outbreak), acts of war or terrorism or
other adverse external events could have not only a significant economic impact
 
as described above, but also a significant impact on
our ability to conduct business as a result of business shutdowns, regional
 
quarantines or otherwise.
 
While we have established and
regularly test disaster recovery procedures, the occurrence of any such event
 
could have a material adverse effect on our business and
operations.
The termination or interruption of, or a decrease in volume under,
 
our property
 
insurance program would cause us to experience
lower revenues and may result in a
 
significant reduction in our net income.
 
Our customers are required to obtain all-risk property insurance for the
 
replacement value of financed equipment. Each customer has
the option of either delivering a certificate of insurance listing us as loss payee
 
under a commercial property policy issued by a third-
party insurer or satisfying such insurance obligation through our
 
insurance program. Under our program, the customer pays for
coverage under a master property insurance policy written by a national
 
third-party insurer (our “primary insurer”) with whom our
captive insurance subsidiary,
 
AssuranceOne, has entered into a 100% reinsurance arrangement. Termination
 
or interruption of our
program could occur for a variety of reasons, including: (1) adverse changes in laws or
 
regulations affecting our primary insurer or
AssuranceOne; (2) a change in the financial condition or financial strength
 
ratings of our primary insurer or AssuranceOne;
(3) negative developments in the loss reserves or future loss experience of
 
AssuranceOne, which render it uneconomical for us to
continue the program; (4) termination or expiration of the reinsurance
 
agreement with our primary insurer, coupled with an inability
by us to identify quickly and negotiate an acceptable arrangement with a replacement
 
carrier; or (5) competitive factors in the property
insurance market. If there is a termination or interruption of this program
 
or if fewer small business customers elected to satisfy their
insurance obligations through our program, we would experience lower
 
revenues and our net income may be reduced.
 
 
 
-23-
Our financial statements are based in part on assumptions and estimates made
 
by our management that could vary from actual
results.
Pursuant to accounting principles generally accepted in the United
 
States, we utilize certain assumptions and estimates in preparing
our financial statements, including but not limited to, when accounting for income
 
recognition, the allowance for credit losses, the
residual values of leased equipment, deferred initial direct costs and fees, late fee
 
receivables, the fair value of financial instruments,
estimated losses from insurance program, and income taxes.
 
If the assumptions or estimates underlying our financial statements are
incorrect, we may experience significant losses as the ultimate realization
 
of value may be materially different than the amounts
reflected in our consolidated statement of financial position as of any particular
 
date.
Specific to our allowance for credit losses, in connection with our financing
 
activities, we record an allowance to provide for estimated
losses based on both qualitative and quantitative factors including, among
 
other things, past collection experience, lease and loan
delinquency data, industry data, economic conditions and our assessment of
 
collection risks. Significant management judgment is
required to determine the appropriate level of the allowance and,
 
therefore, our determination of this allowance may prove to be
inadequate to cover losses in connection with our portfolio of leases and
 
loans. Factors that could lead to the inadequacy of our
allowance may include our inability to manage collections effectively,
 
unanticipated adverse changes in the economy or discrete
events adversely affecting specific leasing customers,
 
industries or geographic areas. Losses in excess of our allowance for credit
losses would cause us to increase our provision for credit losses, reducing
 
or eliminating our operating income.
 
On January 1, 2020,
the Company adopted the guidance of
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
 
326): Measurement of Credit
Losses on Financial Instruments
 
(“CECL”) to measure its allowance for credit losses.
 
This standard substantially replaced the prior
measurement that was based on probable, incurred losses.
 
Starting in 2020, the recognized allowance estimate will include expected
credit losses over the remaining contractual term of the existing portfolio.
 
After the adoption of this standard, our allowance estimate
will continue to involve management’s
 
judgment, and assessment of various qualitative and quantitative factors,
 
and such estimate
will still be subject to continual update driven by similar factors outlined
 
above.
 
 
Specific to our estimates of residual value of equipment, we record sales-type
 
financing leases at the aggregate future minimum lease
payments plus the estimated residual value less unearned income.
 
Residual values are established on our balance sheet at lease
inception based on our estimate of the expected fair value of the equipment
 
at the end of the lease term.
 
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. Our failure
 
to realize our recorded residual values would reduce the
residual value of equipment recorded as assets on our balance sheet and
 
may reduce our operating income.
For additional information on the key areas for which assumptions and
 
estimates are used in preparing our financial statements, see
“Part II—Item 7. Management’s
 
Discussion and Analysis of Financial Condition and Results of Operations
 
—Critical Accounting
Policies and Estimates”, and see “Note 2.
 
Summary of Significant Accounting Policies ” in our Financial Statements for further
discussion of our accounting policies in this Form 10-K.
 
Technology
We are continually encountering
 
technological change.
 
If we experience significant telecommunications or technology downtime,
our
 
operations would be disrupted and our ability to generate operating
 
income could be
 
negatively impacted.
 
Our business depends in large part on our telecommunications
 
and information management systems, and we are increasing our
reliance on our technology platform as a result of our current digital initiative
 
business strategy. The temporary
 
or permanent loss of
our computer systems, telecommunications equipment or software systems,
 
through casualty or operating malfunction, could disrupt
our originations and operations and negatively impact our ability to secure
 
new business and to service our customers. This could lead
to significant declines in our operating income.
 
 
-24-
Furthermore, particularly given our digital strategy implemented and announced
 
in 2020, we are constantly undergoing rapid
technological change with frequent introductions of new technology
 
-driven products and services. The effective use of technology
increases efficiency and enables us to better service clients and
 
reduce costs. Our future success depends, in part, upon our ability to
address the needs of our clients by using technology to provide products
 
and services that will satisfy client demands, as well as create
additional efficiencies within our operations.
 
Many of our large competitors have substantially greater resources to invest in
technological improvements. We
 
may not be able to effectively implement new technology
 
-driven products and services quickly or be
successful in marketing these products and services to our clients. Failure
 
to successfully keep pace with technological change
affecting the financial services industry generally
 
and our business strategy specifically could have a material adverse impact on our
business and, in turn, our financial condition and results of operations.
A failure in or breach of our technology infrastructure or information protection
 
programs, or those of our outsource service
providers, could result in the inadvertent disclosure of the confidential information
 
of our customers and affiliates or confidential
personal information of personal guarantors of our loans and leases.
 
Any such failure, including as a result of cyber-attacks
against us or our outsource partners, non-compliance with our contractual or other
 
legal obligations regarding such information,
or a violation of the Company's privacy and security policies with respect to such
 
information, could adversely affect us
.
 
Our business model and our reputation as a service provider to our
 
clients are dependent upon our ability to safeguard confidential
information. Although we have put in place, and require our outsource
 
service providers to follow,
 
a comprehensive information
security program that we monitor and update as needed, security
 
breaches could occur through intentional or unintentional acts by
individuals having authorized or unauthorized access to confidential information
 
of our customers, employees or stakeholders which
could potentially compromise confidential information processed and
 
stored in or transmitted through our technology infrastructure.
 
The legal, regulatory and contractual environment surrounding
 
information security and privacy is constantly evolving and companies
that collect and retain such information are under increasing attack by
 
cyber-criminals around the world. A significant actual or
potential theft, loss, fraudulent use or misuse of customer,
 
stockholder, employee or our data by cybercrime
 
or otherwise, non-
compliance with our contractual or other legal obligations regarding such
 
data or a violation of our privacy and security policies with
respect to such data could adversely impact our reputation and could result
 
in significant costs, fines, litigation or regulatory action
against us. Increasingly,
 
our products and services are accessed through the Internet, and security breaches
 
in connection with the
delivery of our services via the Internet may affect us and
 
could be detrimental to our reputation, business, operating results and
financial condition.
 
We cannot be certain
 
that advances in criminal capabilities, new discoveries in the field of cryptography
 
or other
developments will not compromise or breach the technology protecting
 
the networks that access our products and services.
 
 
Risks Related to our Stock
Our common stock price is volatile.
 
The trading price of our common stock may fluctuate substantially depending
 
on many factors, some of which are beyond our control
and may not be related to our operating performance. These fluctuations
 
could cause investors to lose part or all of their investment in
our shares of common stock. Those factors that could cause fluctuations
 
include, but are not limited to, the following:
 
price
 
and
 
volume
 
fluctuations
 
in
 
the
 
overall
 
stock
 
market
 
from
 
time
 
to
 
time;
 
 
s
ignificant
 
volatility
 
in
 
the
 
market
 
price
 
and
 
trading
 
volume
 
of
 
financial
 
services
 
companies
 
or
 
in
 
the
 
trading
 
volume
 
of
 
our
 
common stock in particular;
 
actual
 
or
 
anticipated
 
changes
 
in
 
our
 
earnings
 
or
 
fluctuations
 
in
 
our
 
operating
 
results
 
or
 
in
 
the
 
expectations
 
of
 
market
 
analysts;
 
 
investor
 
perceptions
 
of
 
the
 
equipment
 
leasing
 
industry
 
in
 
general
 
and
 
the
 
Company
 
in
 
particular;
 
 
the
 
operating
 
and
 
stock
 
performance
 
of
 
comparable
 
companies;
 
 
legislative
 
and
 
regulatory
 
changes
 
with
 
respect
 
to
 
the
 
financial
 
or
 
banking
 
industries;
 
 
 
general
 
economic
 
conditions
 
and
 
trends
,
 
including
 
but
 
not
 
limited
 
to
 
those
 
resulting
 
from
 
the
 
COVID
-
19
 
pandemic;
 
 
 
major
 
catastro
phic
 
events;
 
 
 
 
 
 
 
 
-25-
 
loss
 
of
 
external
 
funding
 
sources;
 
 
 
sales
 
of
 
large
 
blocks
 
of
 
our
 
stock
 
or
 
sales
 
by
 
insiders;
 
or
 
 
departure
s
 
of
 
key
 
personnel.
 
 
It is possible that in some future quarter our operating results may be below
 
the expectations of financial market analysts and investors
and, as a result of these and other factors, the price of our common stock may
 
decline.
We have historically returned
 
capital to shareholders through normal dividends, special dividends and
 
share repurchases.
 
There
can be no assurances that these forms of capital returns are the optimal
 
use of our capital or that they will continue into the future.
During 2019, our Board of Directors authorized an updated share repurchase
 
program under which we repurchased 264,470 shares of
our common stock in the year ended December 31, 2020 and at December
 
31, 2020 had $4.7 million remaining authorizations under
that 2019 repurchase program. We
 
have no obligation to repurchase shares under this authorization,
 
and any share repurchase program
may be extended, modified, suspended or discontinued at any time.
Any such repurchases reduce our market capitalization and public
 
float, which is the number of shares of our common stock that are
owned by non-affiliated stockholders and available for
 
trading in the securities markets, which may reduce the volume of trading in
our shares and result in reduced liquidity and volatility in our stock price.
 
The market price of our common stock has been and may
continue to be volatile which may affect your ability to
 
sell our common stock at an advantageous price. For example, the closing
market price of our common stock on the NASDAQ fluctuated between
 
$6.02 per share and $22.01 per share during 2020 and may
continue to fluctuate.
 
Market price fluctuations in our common stock may be due to factors both within
 
and outside of our control,
including our strategic actions, industry and regulatory matters or other
 
material public announcements, as well as a variety of
additional factors including, without limitation, those set forth under
 
these “Risk Factors” and "Cautionary Note Regarding Forward-
Looking Statements."
Any repurchases would utilize cash that we will not be able to use in other
 
ways, or to meet other potential demands, and may not
prove to be the best use of our capital. There can be no assurance that we will repurchase
 
any, or the full amount authorized
 
under any
share repurchase program, or that any past or future repurchases will have a positive
 
impact on our stock price.
Future sales of our Common Stock by our significant shareholders may
 
depress our stock price or impair our ability to raise funds
in new share offerings.
 
Our existing shareholders may be able to exert significant influence over matters
 
requiring shareholder
approval and over our management.
A small number of shareholders own a substantial amount of our Common
 
Stock.
 
As of December 31, 2020, our top 5 largest
shareholders beneficially own 55% of our common stock. The market
 
price of our common stock could be adversely affected as a
result of sales of a large number of our common stock shares in the market,
 
or the perception that these sales could occur.
 
These sales,
or the possibility that these sales might occur,
 
also might make it more difficult for us to sell equity securities in the
 
future at a time
and at a price that we deem attractive.
 
These shareholders, if acting together,
 
would be in a position to significantly influence the election of our directors
 
and the vote on
certain corporate transactions, including mergers
 
and other business combinations.
 
This concentrated ownership could limit other
stockholders’ ability to influence corporate matters.
 
This may result in our taking corporate actions that other shareholders may
 
not
consider to be in their best interest and may affect the price of
 
our Common Stock.
 
Anti-takeover provisions and our right to issue preferred stock
 
could make a
 
third-party acquisition of us difficult.
 
We are a Pennsylvania
 
corporation. Anti-takeover provisions of Pennsylvania law could make
 
it more difficult for a third party to
acquire control of us, even if such change in control would be beneficial to our
 
shareholders. Our amended and restated articles of
incorporation and our bylaws contain certain other provisions that would
 
make it difficult for a third party to acquire control of us,
including a provision that our Board of Directors may issue preferred
 
stock without shareholder approval.
 
Item 1B.
 
Unresolved Staff Comments
 
 
None.
 
 
 
 
 
 
 
 
-26-
Item 2.
 
Properties
 
 
 
At December 31,
 
2020,
 
we operated from three leased facilities including our executive office facility,
 
a branch office and the
headquarters of MBB. Our Mount Laurel, New Jersey executive offices
 
are housed in a leased facility of approximately 50,000 square
feet under a lease that expires in May 2032.
 
The headquarters of MBB in Salt Lake City, Utah
 
is 4,399 square feet and the lease
expires in December 2021. We
 
also lease office space for our branch office in
 
Philadelphia,
 
Pennsylvania.
 
 
We believe our
 
leased facilities are adequate for our current needs and sufficient to
 
support our current operations and anticipated
future requirements.
 
See Note 11 – Leases, in the accompanying Notes
 
to Consolidated Financial Statements for additional information.
 
 
 
Item 3.
 
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 effect
 
on our business, financial condition or results of operations or
cash flows.
 
 
 
 
Item 4.
 
Mine Safety Disclosures
 
 
Not applicable.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-27-
PART
 
II
 
 
Item 5.
 
Market for Registrant’s Common
 
Equity, Related Stockholder
 
Matters and Issuer Purchases of Equity Securities
 
 
Marlin Business Services Corp. completed its IPO of common
 
stock and became a publicly traded company on November 12, 2003.
The Company’s common
 
stock trades on the NASDAQ Global Select Market under the symbol “MRLN.”
 
 
Dividend Policy
 
 
On October 29, 2020, Marlin Business Services Corp. declared
 
its thirty-seventh regular quarterly dividend. The dividend of $0.14
 
per
share of common stock was paid on November 19, 2020 to holders of our common
 
stock as of November 9, 2020.
 
 
The Federal Reserve Board has issued policy statements which provide
 
that, as a general matter, insured banks and bank holding
companies should pay dividends only out of current operating earnings. Payment
 
of dividends by MBB to its sole shareholder,
 
Marlin
Business Services Corp., are also subject to the regulatory requirements
 
and restrictions described in the “Supervision and Regulation”
portion of Item 1 of Part I of this Form 10-K.
 
 
Payment of future dividends
 
will also depend upon our earnings, financial condition, capital requirements,
 
cash flow, long-range plans
and such other factors as our Board of Directors may deem relevant.
 
Number of Record Holders
 
 
 
There were 121 holders of record of our common stock at February 26, 2021
 
.
 
We believe that the number
 
of beneficial owners is
greater than the number of record holders because a large
 
portion of our common stock is held of record through brokerage firms in
“street name.”
 
Information on Stock Repurchases
 
 
On August 1, 2019, the Company’s
 
Board of Directors approved a stock repurchase plan (the “2019 Repurchase Plan”) under
 
which
the Company is authorized to repurchase up to $10 million in value of its outstanding
 
shares of common stock.
 
There is no stated
expiration date for the authorizations under this plan.
 
 
The Company did not repurchase any shares of its common stock during
 
the fourth quarter of 2020 and the maximum dollar value of
shares that may yet be purchased under the 2019 Repurchase Plan is $4,491,747.
 
Remaining authorizations for share repurchases 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.
 
Any stock repurchase programs do not obligate the
Company to acquire any particular amount of common stock, and
 
such programs may be suspended at any time at the Company's
discretion. The repurchases are funded using the Company’s
 
working capital.
 
In addition to any repurchases described above, pursuant to the Company’s
 
2003 Equity Compensation Plan, as amended (the “2003
Plan”) and the Company’s 2014
 
Equity Compensation Plan (approved by the Company’s
 
shareholders on June 3, 2014) (the “2014
Plan”) and the Company’s 2019
 
Equity Compensation Plan (approved by the Company’s
 
shareholders on May 30, 2019) (the “2019
Plan” and, together with the 2014 Plan and the 2003 Plan, the “Equity
 
Compensation Plans”), participants may have shares withheld
to cover income taxes. There were 41,821 shares repurchased to cover
 
income tax withholding in connection with shares granted
under the Equity Plans during the year ended December 31, 2020
 
at an average per-share cost of $10.69.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MRLN-20201231P28I0.GIF
 
-28-
Shareholder Return Performance Graph
 
The following graph compares the dollar change in the cumulative total
 
shareholder return on the Company’s
 
common stock against
the cumulative total return of the Russell 2000 Index and the SNL Specialty
 
Lender Index for the period commencing on December
31, 2015 and ending on December 31, 2020. The graph shows the cumulative
 
investment return to shareholders based on the
assumption that a $100 investment was made on December 31,
 
2015 in each of the following: the Company’s
 
common stock, the
Russell 2000 Index and the SNL Specialty Lender Index. We
 
computed returns assuming the reinvestment
 
of all dividends. The
shareholder return shown on the following graph is not indicative of future
 
performance.
 
 
 
 
 
 
Period Ending
 
(amounts in $)
Index
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
Marlin Business Services Corp.
100.00
134.78
147.84
150.41
151.80
89.57
Russell 2000 Index
100.00
121.31
139.08
123.76
155.35
186.36
SNL Specialty Lender Index
100.00
113.01
134.65
114.28
155.10
155.52
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-29-
Item 6.
 
Selected Financial Data
 
 
The following selected financial data as of and for each of the five years
 
ended December 31, 2020 has been derived from the
consolidated financial statements. The selected financial data should
 
be read together with the consolidated financial statements and
notes thereto and “Management’s Discussion
 
and Analysis of Financial Condition and Results of Operations” included elsewhere
 
in
this Form 10-K.
 
 
Year Ended December 31,
 
2020
(1)
2019
2018
2017
(2)
2016
(Dollars in thousands, except per-share data)
Statement of Operations Data:
Interest and fee income
 
$
103,359
$
122,625
$
112,868
$
102,319
$
90,252
Interest expense
 
19,868
25,033
17,414
11,180
7,778
 
Net interest and fee income
 
83,491
97,592
95,454
91,139
82,474
Provision for credit losses
(3)
38,509
28,036
19,522
18,394
12,414
 
Net interest and fee income after
 
 
provision for credit losses
 
44,982
69,556
75,932
72,745
70,060
Non-Interest Income:
Gain on leases and loans sold
(4)
2,426
22,210
8,363
2,818
469
Insurance premiums and Other income
21,914
21,821
13,071
13,914
9,289
Non-Interest Income
 
24,340
44,031
21,434
16,732
9,758
Non-interest expense:
Salaries and benefits
 
33,783
44,168
39,750
37,569
31,912
General and administrative
 
30,914
32,566
24,915
28,272
19,523
Goodwill impairment
6,735
Intangible assets impairment
1,016
Financing related costs
 
85
 
Non-interest expense
 
72,448
76,734
64,665
65,841
51,520
Income before income taxes
 
(3,126)
36,853
32,701
23,636
28,298
Income tax (benefit) expense
(3,468)
9,737
7,721
(1,656)
11,019
 
Net income
 
$
342
$
27,116
$
24,980
$
25,292
$
17,279
Basic earnings per share
 
$
0.03
$
2.21
$
2.01
$
2.02
$
1.38
Diluted earnings per share
 
$
0.03
$
2.20
$
2.00
$
2.01
$
1.38
Cash dividends declared per share
$
0.56
$
0.56
$
0.56
$
0.56
$
0.56
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-30-
 
Year Ended December 31,
 
2020
(1)
2019
2018
2017
(2)
2016
(Dollars in thousands, except per-share data)
Operating Data:
Total number of finance receivables originated
 
16,602
31,246
33,105
32,189
27,583
Total finance receivables originated
 
$
367,128
$
801,945
$
704,894
$
629,445
$
504,282
Assets sold in the period
(4)
$
28,342
$
310,415
$
138,995
$
66,744
$
18,132
Average total finance receivables
(5)
$
945,599
$
1,028,617
$
944,588
$
846,743
$
720,060
Weighted average interest rate (implicit)
 
 
on new finance receivables originated
(6)
 
10.66
%
12.86
%
12.45
%
11.98
%
11.67
%
Interest income as a percent of average
 
 
total finance receivables
(5)
9.81
%
10.44
%
10.27
%
10.33
%
10.38
%
Interest expense as percent of average
 
 
interest-bearing liabilities
 
2.20
%
2.58
%
2.02
%
1.43
%
1.20
%
Portfolio Asset Quality Data:
Total finance receivables, end of period
(5)
$
869,284
$
1,007,706
$
996,383
$
911,242
$
793,285
Delinquencies greater than 60 days past due
(7)
0.77
%
0.85
%
0.65
%
0.55
%
0.46
%
Allowance for credit losses
(3)
$
44,228
$
21,695
$
16,100
$
14,851
$
10,937
Allowance for credit losses to total finance
 
 
receivables, end of period
(5)
5.09
%
2.15
%
1.62
%
1.63
%
1.38
%
Charge-offs, net
 
$
32,416
$
22,441
$
18,273
$
14,480
$
9,890
Ratio of net charge-offs to average
 
 
total finance receivables
(5)
3.43
%
2.18
%
1.93
%
1.71
%
1.37
%
Operating Ratios:
Efficiency ratio
(8)
67.19
%
54.18
%
55.32
%
61.04
%
55.77
%
Return on average total assets
 
0.03
%
2.18
%
2.29
%
2.59
%
2.08
%
Return on average stockholders’ equity
0.18
%
13.33
%
13.27
%
15.38
%
11.15
%
Balance Sheet Data:
Cash and cash equivalents
 
$
135,691
$
123,096
$
97,156
$
67,146
$
61,757
Restricted interest-earning deposits with banks
 
$
4,719
$
6,931
$
$14,045
 
$
$
Net investment in leases and loans
 
$
825,056
$
1,006,520
$
1,000,740
$
914,420
$
796,717
Total assets
 
$
1,021,998
$
1,207,443
$
1,167,046
$
1,040,160
$
892,158
Deposits
 
$
729,614
$
839,132
$
755,776
$
809,315
$
697,357
Long-term borrowings
 
$
30,665
$
76,091
$
$150,055
 
$
$
Total liabilities
 
$
825,633
$
992,487
$
968,535
$
860,511
$
729,869
Total stockholders’ equity
 
$
196,365
$
214,956
$
198,511
$
179,649
$
162,289
__________________________________________________________________________________________
 
 
(1)
In 2020, our business activities, origination volumes, and volumes of lease and loan sales were largely impacted by the COVID-19
 
pandemic.
 
See “—
Results of Operations” in Item 7 for discussion.
 
(2)
 
Net
 
income,
 
Income
 
tax
 
benefit,
 
and
 
certain
 
operation
 
ratios
 
for
 
2017
 
were
 
favorably
 
impacted
 
by
 
a
 
one
-
time
 
tax
 
benefit
 
of
 
$10.2
 
million
 
related
 
to
 
the
 
December 2017 enactment of the Tax Cuts and Jobs Act of 2017.
 
 
-31-
(3)
On January 1, 2020, the Company adopted “CECL”, which replaced the probable/ incurred loss model
 
that we historically used to measure our
allowance, with a measurement of expected credit losses for the contractual term of our current portfolio of
 
loans and leases.
 
The December 31, 2019
end of period allowance and % of receivables were $33,603 and 3.27% after the January 1, 2020 adoption
 
of CECL.
 
See “—Finance Receivables and
Asset Quality” in Item 7 for discussion.
 
(4)
 
See
 
Liquidity
 
and
 
Capital
 
Resources”
 
in
 
Item
 
7
 
for
 
discussion
 
of
 
our
 
sales
 
of
 
finance
 
receivables
 
and
 
related
 
trends
.
 
 
(5)
 
Total
 
finance
 
receivables
 
include
 
net
 
investment
 
in
 
sales
-
type
 
leases
 
and
 
loans.
 
For
 
purposes
 
of
 
as
set
 
quality
 
and
 
allowance
 
calculations
 
the
 
effects
 
of
 
(i)
 
the allowance for credit losses and (ii) initial direct costs and fees deferred, are excluded from total finance receivables.
(6)
 
Excludes
 
initial
 
direct
 
costs
 
and
 
fees
 
deferred
.
 
 
(7)
 
Calculat
ed
 
as
 
a
 
percentage
 
of
 
minimum
 
lease
 
payments
 
receivable
 
for
 
leases
 
and
 
as
 
a
 
percentage
 
of
 
principal
 
outstanding
 
for
 
loans
.
 
(8)
 
Salaries,
 
benefits,
 
general
 
and
 
administrative
 
expense
 
divided
 
by
 
net
 
interest
 
and
 
fee
 
income,
 
and
 
non
-
interest
 
income
.
 
 
 
 
 
-32-
Item 7.
 
Management’s Discussion and Analysis
 
of Financial Condition and
 
Results of Operations
 
 
FORWARD
 
-LOOKING STATEMENTS
 
 
 
Certain statements in this document (or made in other documents filed or furnished
 
with the Securities and Exchange Commission or
orally to analysts, investors, representatives of the media and others) 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”), Section 21E of the Securities Exchange Act of 1934, as amended
 
(the “1934 Act”) and the Private Securities Litigation Reform
Act of 1995.
 
Investors are cautioned not to place undue reliance on these forward-looking
 
statements. Forward-looking statements are
subject to various known and unknown risks and uncertainties and
 
the Company cautions that any forward-looking information
provided by or on its behalf is not a guarantee of future performance.
 
Statements regarding the following subjects are forward-looking
by their nature: (a) our business strategy; (b) our projected operating
 
results; (c) our ability to obtain external deposits or financing,
 
or
other sources of liquidity such as asset syndications;
 
(d) our understanding of our competition; (e) industry
 
and market trends; and (f)
the expected impact of the adoption of recently issued accounting pronouncements
 
on our financial statements.
 
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 1A of this Form
 
10-K.
 
Forward-looking statements apply only as of the date made and the Company
 
is not required to update forward-looking statements for
subsequent or unanticipated events or circumstances. For any forward
 
-looking statements contained in any document, we claim the
protection of the safe harbor for forward-looking statements contained
 
in the Private Securities Litigation Reform Act of 1995.
 
As
used herein, the terms “Company,”
 
“Marlin,” “Registrant,” “we,” “us” or “our” refer to Marlin Business Services
 
Corp. and its
subsidiaries.
O
VERVIEW
 
 
Founded in 1997, we are a nationwide provider of credit products and services
 
to small and mid-sized businesses. The products and
services we provide to our customers include loans and leases for the acquisition of
 
commercial equipment (including Commercial
Vehicle
 
Group (“CVG”) assets) and working capital loans. In May 2000, we established
 
AssuranceOne, Ltd., a Bermuda-based,
wholly-owned captive insurance subsidiary (“Assurance One”),
 
which enables us to reinsure the property insurance coverage for the
equipment financed by Marlin Leasing Corporation (“MLC”) and Marlin
 
Business Bank (“MBB”) for our small business customers.
In 2008, we opened MBB, a commercial bank chartered by the State of Utah
 
and a member of the Federal Reserve System. MBB
serves as the Company’s primary
 
funding source through its issuance of Federal Deposit Insurance Corporation
 
(“FDIC”)-insured
deposits.
 
In January 2017, we completed the acquisition of Horizon Keystone Financial (“HKF”), an
 
equipment leasing company
which identifies and sources lease and loan contracts for investor partners
 
for a fee, and in September 2018, we completed the
acquisition of Fleet Financing Resources (“FFR”), an company specializing
 
in the leasing and financing of both new and used
commercial vehicles, with an emphasis on livery equipment and other
 
types of commercial vehicles used by small businesses.
 
We are continuing
 
to execute on our objective to transition from a micro-ticket equipment lessor into
 
a nationwide provider of capital
solutions to small businesses.
 
This includes the following priorities:
 
a focus on strategically expanding our target market; better
leveraging our capital and fixed cost base through origination and
 
portfolio growth, improving our operating efficiency,
 
and
proactively managing our risk profile.
 
 
 
-33-
We access our end
 
user customers primarily through origination sources consisting of independent
 
commercial equipment dealers,
various national account programs, through direct solicitation of our
 
end user customers and through relationships with select lease
and loan brokers. We
 
use both a telephonic direct sales model and, for strategic larger
 
accounts, outside sales executives to market to
our origination sources and end user customers. Through these origination
 
sources, we are able to cost-effectively access end user
customers while also helping our origination sources obtain financing
 
for their customers.
 
 
E
XECUTIVE
S
UMMARY
 
In 2020, we faced unprecedented operating challenges and macro
 
-economic uncertainty from the COVID-19 pandemic.
 
Our initial
focus from the beginning of the COVID-19 crisis was working with existing
 
customers to protect the value of our portfolio and
limiting the erosion of shareholder capital.
 
To this end, we initiated a loan
 
modification program in response to the pandemic, and
assisted some of our borrowers by originating loans guaranteed under the
 
Small Business Administration’s (SBA’s)
 
Paycheck
Protection Program (“PPP”).
 
In addition, early in response to the onset of the pandemic, we temporarily
 
tightened underwriting
standards for areas of elevated risk, and we continue to update such risk assessments based
 
on current conditions.
 
In response to the potential impacts on our business resulting from the pandemic,
 
we took a series of actions to preserve our capital
and liquidity and reposition the business for success once the full effects
 
of the pandemic are realized and the economy begins to
recovery.
 
These actions included: (i) temporary re-allocation of resources from front-end origination
 
activities to portfolio servicing
and collection activities (ii) cost reduction initiatives that led to a permanent
 
reduction of approximately 80 employees and (iii) a re-
organization of origination and processing platforms
 
to accelerate automation and digitization.
 
We are currently
 
targeting the rollout
of our digital origination platform, which we are calling Express, by the middle
 
of 2021.
 
We are continuing
 
to monitor the evolving
health crisis, and its impacts on our operations and ability to serve our
 
customers in this changing environment.
 
Any return to pre-
pandemic levels of activity,
 
and the long-term impacts of this crisis on our market, remains uncertain and
 
will be dependent, among
other things, on the timing and pace of the macro-economic recovery
 
and the execution of the strategy that we undertook in 2020.
We recognized
 
$ 0.3 million Net income for the year ended December 31, 2020, down from $27.1 million
 
in 2019.
 
Significant drivers
of our results for the year include:
 
Provisions for credit losses
 
were $10.5 million higher for the year ended December 31, 2020, as compared
 
to 2019.
 
Based on
information available at the end of each period, we had significant reserve
 
building in the first half of 2020, including recognizing
$34.7 million of increases to our estimate related to changing economic
 
conditions primarily resulting from the effects of COVID-
19 and our expected impacts on our portfolio.
 
In the second half of the year, as we received updated
 
forecast information and
observed the actual performance of our portfolio, we lowered our expected
 
losses by $12.3 million. At year end, our allowance
was $44.2 million, or 5.09% as a percentage of receivables, an increase
 
from $21.7 million (2.15%) at the end of the prior year.
 
Our current estimate of credit losses incorporates all of our current
 
judgments about the impact of the COVID-19 pandemic on
our portfolio.
Modification program
 
was formed in mid-March 2020 to assist our customers who experienced difficulty
 
from COVID-19.
 
Under
this program, we completed payment deferral modifications of over
 
5,600 contracts in our owned portfolio.
 
As of December 31,
2020,
 
$111.2 million (or 12.8%) of
 
our net investment were modified pursuant to that program, and 92% of those contracts are
out of the deferral period by year end.
 
We continue
 
d
 
to process extended modifications of contracts in the fourth quarter for
customers with prolonged COVID-19 impacts as part of our loss mitigation
 
strategies.
 
Cost Reduction
program was executed promptly in response to COVID-19 pandemic,
 
driving reductions of $10.4 million in Salary
and benefits expense and $1.7 million in General and administrative expense,
 
as compared to the prior year.
 
We continue to
assess all other aspects of our expense base in order to stabilize our operations
 
and minimize the negative impacts of the ongoing
pandemic.
Origination and Sales Volumes
 
for 2020 were substantially lower than 2019.
 
We have been intentionally
 
operating out of a more
defensive position since the pandemic began. Total
 
sourced origination volume of $367.1 million was well below our
 
volume
from last year of $801.9 million due to a variety of factors, which include:
 
(i) the
 
purposeful actions we took in the second and
third quarters to reduce our workforce and re-position the frontend of our
 
business; (ii) the continuing soft demand for financing
by the small business community due to challenges facing many industries resulting
 
from the continued economic fallout of
COVID-19 across much of the United States; and (iii) lower approval rates
 
stemming from our tighter underwriting criteria.
 
 
 
 
 
 
 
-34-
In addition, our gain on leases and loans sold is $19.8 million lower for 2020 as compared to
 
2019, driven by disruptions in the
capital markets from the current economic environment.
 
Our 2020 sales occurred in the first quarter; we retained substantially all
of our origination volume on our balance sheet for the remainder
 
of the year.
While we experienced modest improvement in origination volumes
 
in the fourth quarter of 2020 compared to earlier in the year,
 
and
have seen some improving trends in delinquency,
 
we still are experiencing negative impacts from the effects of the pandemic
 
and as
this period of uncertainty continues to impact the macroeconomic environment.
 
Given the ongoing health crisis in the United States,
any return to pre-pandemic levels of activity remains uncertain.
At year end, our employees continue to work remotely,
 
and we have not experienced any significant interruption to our operations
from that transition.
 
We continue to assess how
 
to best evolve our operations and how to best serve our customers in
 
this changing
environment.
 
Stock Repurchase Plan
 
 
During the year ended December 31, 2020,
 
the Company purchased 264,470 shares of its common stock in the open market under
 
the
2019 Repurchase Plan at an average cost of $16.09. At December 31, 2020
 
,
 
$4.7 million of authorizations remain under the 2019
Repurchase Plan.
 
This authority may be exercised from time to time and in such amounts as market conditions
 
warrant. The stock
repurchase program does not obligate us to acquire any particular amount
 
of common stock, and it may be suspended at any time at
our discretion. Stock repurchases are funded using our working capital.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-35-
F
INANCE
R
ECEIVABLES
 
AND
A
SSET
Q
UALITY
 
 
The following table summarizes certain portfolio statistics for the
 
periods presented:
December 31,
 
2020
2019
2018
(Dollars in thousands)
Finance receivables:
Net investment in leases and loans, excluding allowance, end of period
$
825,056
$
1,028,215
$
1,016,840
Average finance
 
receivables for the year
(1)
945,599
1,028,617
944,588
Origination Volume
(5)
367,128
801,946
704,894
Assets Sold
28,342
310,415
138,995
Allowance for credit losses :
(3)
End of period
$
44,228
$
21,695
$
16,100
As a % of end of period receivables
(1)
5.09%
2.15%
1.62%
Annualized net charge-offs to average
 
total finance receivables
 
(1)
3.43%
2.18%
1.93%
Leases and Loans Modified:
Payment deferral program
(2)
End of period
$
111,209
As a % of end of period receivables
12.8%
Other Restructured leases and loans, end of period
$
922
$
2,906
$
2,323
Delinquencies, end of period:
(4)
Equipment Finance and CVG:
Greater than 60 days past due, $
$
6,582
$
8,112
$
6,036
Greater than 60 days past due, %
0.78%
0.86%
0.63%
Working
 
Capital:
 
Greater than 30 days past due, $
$
741
$
855
$
492
Greater than 30 days past due, %
3.69%
1.42%
1.35%
 
__________________
(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)
Represents balance
 
of active
 
contracts that
 
were part
 
of our
 
2020 payment-deferral
 
modification program.
 
As of
 
December 31,
 
2020, 92%
 
of
the modified contracts are out of the deferral period.
 
See further discussion of our loan modification program below.
 
(3)
The December 31, 2019 end of period allowance and % of receivables were $33,603 and 3.27%, respectively,
 
after the January 1, 2020 adoption
of CECL.
 
See further discussion below.
(4)
Calculated
 
as
 
a
 
percentage
 
of
 
net
 
investment
 
in
 
leases
 
and
 
loans.
 
Contracts
 
that
 
are
 
part
 
of
 
the
 
payment
 
deferral
 
modification
 
program
 
will
appear in our delinquency and non-accrual measures based on their performance against their modified terms.
(5)
For the
 
year ended
 
December 31,
 
2020, excludes
 
$4.4 million
 
of loans
 
originated under
 
the Paycheck
 
Protection Program
 
(PPP).
 
In the
 
third
quarter of 2020, the Company sold the PPP portfolio and will have no continuing involvement with those receivables.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-36-
Finance Receivables.
 
During the year ended December 31, 2020,
 
we generated 16,602 new Equipment Finance leases and loans with equipment
 
costs of
$367.1 million, compared to 31,246 new Equipment Finance leases and loans
 
with equipment costs of $801.9 million generated for
the year ended December 31, 2019.
 
Equipment finance originations decreased 52% for 2020 as compared to
 
the prior year.
 
Working
Capital loan originations were $33.2 million during the year ended
 
December 31, 2020,
 
compared to $108.6 million for the prior year,
a 69% decrease.
 
 
Our origination volumes for 2020 were lower than our historical norms,
 
primarily driven by decreased demand attributable to COVID-
19 related business shutdowns and other macroeconomic factors,
 
as well as our actions to reduce the workforce in the second and third
quarters of this year.
 
During the year, our total originations were $151.5
 
million for the first quarter, declining to $65.4 million,
 
$67.1
million, and $83.0 million for the second, third and fourth quarters,
 
respectively.
 
While we experienced modest improvement in
origination volumes in the fourth quarter compared to earlier in the year,
 
we still are experiencing negative impacts from the effects of
the pandemic as this period of uncertainty continues to impact the macroeconomic
 
environment.
 
Given the ongoing health crisis in
the United States, any return to pre-pandemic levels of activity remains uncertain.
 
Driven by the declines in origination volume, our average net investment
 
in total finance receivables decreased 8.1% for 2020 as
compared to 2019, and our ending net investment in leases and loans,
 
excluding allowance, has declined 19.8% at December 31, 2020
compared to prior year end.
 
See further discussion of the impacts of lower volumes and decreased
 
portfolio size within discussion of
our Results of Operations section, in particular Net interest margin
 
and Gain on leases and loans sold.
 
Allowance for credit losses.
 
The following table provides a rollforward of our Allowance for credit loss:
Twelve Months Ended December 31,
 
2020
2019
2018
(Dollars in thousands)
Allowance for credit losses, December 31, 2019
$
21,695
Adoption of ASU 2016-13 (CECL),
 
January 1, 2020
11,908
Allowance for credit losses, beginning of period
33,603
$
16,100
$
14,851
Provision for credit losses
38,509
28,036
19,522
Net Charge-offs:
Equipment Finance
(26,796)
(18,164)
(15,950)
Working
 
Capital
(2,781)
(2,531)
(1,477)
CVG
(2,838)
(1,746)
(846)
 
Net Charge-offs
(32,415)
(22,441)
(18,273)
Realized cashflows from Residual Income
4,531
Allowance for credit losses, end of period
$
44,228
$
21,695
$
16,100
 
Year
 
Ended December 31, 2020:
 
The allowance for credit losses as a percentage of total finance receivables
 
increased to 5.09% as of
December 31, 2020,
 
from 2.15% as of December 31, 2019.
 
This increase in reserve coverage is primarily driven by both the $11.9
million increase from the January 1, 2020 adoption of CECL (as defined
 
below),
 
which increased the effective coverage to 3.27% as
of that date, and the $14.0 million of forecast and qualitative adjustments included
 
in the estimate of credit loss as of December 31,
2020 related to the increased risks for future losses driven by the ongoing
 
impacts from the COVID-19 pandemic,
 
as discussed further
below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-37-
Adoption of ASU 2016-13 / CECL.
 
 
Effective January 1, 2020, we adopted new guidance
 
for accounting for our allowance, or ASU 2016-13, Financial Instruments -
Credit Losses (Topic 326):
 
Measurement of Credit Losses on Financial Instruments (“CECL”),
 
which replaces the probable/
incurred loss model that we historically used to measure our allowance,
 
with a measurement of expected credit losses for the
contractual term of our current portfolio of loans and leases.
 
Under CECL, an allowance, or estimate of credit losses, will be
recognized immediately upon the origination of a loan or lease, and will be
 
adjusted in each subsequent reporting period.
 
This
estimate of credit losses takes into consideration all remaining cashflows
 
the Company expects to receive or derive from the pools
of contracts, including recoveries after charge-off,
 
accrued interest receivable and certain future cashflows from residual assets.
 
The provision for credit losses recognized in our Consolidated Statements
 
of Operations under CECL, starting in 2020, will be
primarily driven by origination volumes, offset by the
 
reversal of the allowance for any contracts sold, plus adjustments for
changes in estimate each subsequent reporting period, including
 
adjustments for economic forecasts within a reasonable and
supportable time period.
The impact of adopting CECL effective January 1, 2020
 
included a $11.9 million increase to the allowance,
 
an $8.9 million
decrease to Retained earnings and $3.0 million impact to our Net deferred
 
income tax liability.
 
In the accompanying Notes to
Consolidated Financial Statements, see Note 2 –
Summary of Significant Accounting Policies
, for further discussion of the
adoption of this accounting standard, and see Note 7 –
Allowance for Credit Losses
, for further discussion of the Company’s
methodology for measuring its allowance as of the adoption date.
 
Provision for credit losses
.
 
 
The provision for credit losses recognized after the adoption of CECL is primarily
 
driven by origination volumes, offset by the
reversal of the allowance for any contracts sold, plus adjustments for changes
 
in estimate each subsequent reporting period.
 
For
2020, given the wide changes in the macroeconomic environment driven
 
by COVID-19, the changes in estimate is the most
significant driver of provision.
 
In contrast, the allowance estimate recognized in 2019 under the probable,
 
incurred model was
based on the current estimate of probable net credit losses inherent
 
in the portfolio.
For the year ended December 31, 2020, the $ 38.5 million provision
 
for credit losses recognized was $10.5 million greater than
the $ 28.0 million provision recognized for same period of 2019.
 
Provision for the year ended December 31, 2020 includes $18.9
million from originations, and $19.6 million driven by updates to economic
 
forecast and qualitative adjustments related to
COVID-19 and other model updates.
For the Equipment Finance portfolio, our estimated credit losses includes updates
 
to a reasonable and supportable forecast based
on the modeled correlation of changes in the loss experience of the our
 
portfolio to certain economic statistics, specifically
changes in the unemployment rate and changes in the number of business bankruptcies.
 
Starting in the first quarter,
 
we are using
a 6-month period for applying the economic statistics due to the uncertainty in
 
the current economic environment related to
COVID-19 pandemic.
 
As of December 31, 2020, our estimate of credit loss for Equipment Finance includes
 
probability
weighting alternate forecast scenarios for those economic statistics, to address
 
the continuing uncertainty in the economic climate
and uncertainty around our portfolio’s
 
performance in these conditions.
 
Equipment Finance provision for the year ended
December 31, 2020 includes $10.9 million driven by updates to economic
 
forecast and qualitative adjustments related to COVID-
19 and other model updates.
For the Working
 
Capital portfolio segment, our estimate of increased losses is based on qualitative adjustments,
 
taking into
consideration alternative scenarios to determine the Company’s
 
estimate of the ongoing risk related to COVID-19.
 
Working
Capital provision for the year ended December 31, 2020 includes $1
 
.2 million driven by updates to economic forecast and
qualitative adjustments related to COVID-19 and other model updates.
For the CVG segment, our estimate of increased losses is based on qualitative
 
adjustments, taking into consideration the increased
risk of a population of motor coach receivables that have prolonged
 
impacts from the COVID-19 pandemic, as well as an
assessment of alternative scenarios to estimate the expected performance
 
of this segment in the current economic environment.
 
CVG provision for the year ended December 31, 2020 includes $7.5 million
 
driven by these updates to economic forecast and
qualitative adjustments related to COVID-19 and other model updates.
 
 
 
 
 
 
 
 
 
-38-
The qualitative and economic adjustments to our allowance take into
 
consideration information and our judgments as of
December 31, 2020,
 
and are based in part on an expectation for the extent and timing of impacts from
 
COVID-19 on
unemployment rates and business bankruptcies, and are based on our
 
current expectations of the performance of our portfolio in
the current environment.
 
See further discussion of the risks to our estimate below.
Net Charge-offs.
 
Equipment Finance and TFG receivables are generally charged
 
-off when they are contractually past due for 120 days or more.
 
Working
 
Capital receivables are generally charged-off at 60 days past
 
due.
 
Total portfolio
 
net charge-offs for the year December 31, 2020 were $32.4
 
million (3.43% of average total finance receivables on
an annualized basis), compared to $22.4 million (2.18%)
 
for 2019.
 
The elevated net charge-offs for 2020 were primarily driven
 
by
the economic impact of the COVID-19 pandemic, and we experienced
 
our highest levels of net charge-offs in the third quarter
 
of
2020.
 
While we experienced a positive trend in net charge-off
 
levels in the fourth quarter, we continue to monitor
 
the continued
risks in our portfolio from the COVID-19 driven economic environment.
 
A large portion of our portfolio was part of the payment deferral modification
 
program, as discussed above.
 
While 92% of those
contracts are out of the deferral period by December 31, 2020, the long-term
 
performance of the modified portfolio remains
uncertain.
 
We are continually monitoring
 
the performance of our portfolio and assessing all related risks to ensure that our
allowance estimate is sufficient to cover the expected losses from
 
COVID-19.
 
Our best estimate of the risk of future net credit
losses and the near-term uncertainty of the macro-economic environment
 
is reflected in our allowance for loan losses of $44.2
million as of December 31, 2020.
 
See further discussion about the risks to our reserve estimate discussed below.
Residual Income.
 
 
Residual income includes income from lease renewals and gains and
 
losses on the realization of residual values of leased
equipment disposed at the end of term
 
In 2019 and prior years, t
he Company had previously recognized residual income within
Fee Income in its Consolidated Statements
 
of Operations; the adoption of CECL results in any realized amounts of residual
income being captured as a component of the activity of the allowance because
 
the Company’s estimate of credit
 
losses under
CECL takes into consideration all cashflows the Company expects to
 
receive or derive from the pools of contracts.
 
 
Our recorded allowance reflects our current estimate of the expected
 
credit losses of all contracts currently in portfolio based on our
current assessment of information regarding the risks of our current
 
portfolio, default and collection trends, a reasonable and
supportable forecast of economic factors, qualitative adjustments based
 
on our best estimate of expected losses for certain portfolio
segments, among other internal and external factors.
 
In particular, as of December 31, 2020, these assumptions
 
include our current
expectations of the future economic impacts of the COVID-19 pandemic
 
and our current expectations for the performance of our
modified loan portfolio.
 
Our allowance measurement is an estimate, is inherently uncertain,
 
and is reassessed at each measurement
date.
 
We may recognize
 
credit losses in excess of our reserve, or revise our estimate of expected credit losses in the future, and
 
such
amounts may be significant, based on: (i) the actual performance of our
 
portfolio, including the performance of the modified portfolio;
(ii) any further changes in the economic environment; or (iii) other developments
 
or unforeseen circumstances that impact our
portfolio.
 
Years
 
Ended December 31, 2019 and 2018:
 
Provision for credit losses
.
 
The provision for credit losses increased $8.5 million, or 43.6%, to $28.0
 
million for the year ended December 31, 2019 from $19.5
million for the year ended December 31, 2018.
 
Our provision for credit losses is charged against earnings to
 
maintain our allowance
at the appropriate level based on the projected probable net credit losses inherent
 
in our portfolio.
 
Our projection of probable net
credit losses incorporates a migration analysis, which is partially based
 
on the delinquency status of the portfolio as of the
measurement date, as well as consideration of multiple qualitative factors.
 
The increase in our provision for credit losses was driven in part by higher
 
delinquency experience in the portfolio as of December 31,
2019, resulting in a higher projection of expected credit losses. In addition,
 
the increase in the provision was partially driven by
replenishing the allowance from a higher charge-off
 
experience.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-39-
As of December 31, 2019, 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 0.85%,
 
compared to 0.65% at December 31, 2018.
 
This trend in
higher delinquency experience is consistent with the trends for aging of
 
receivables in the equipment leasing industry,
 
as published in
the Monthly Leasing and Finance Index (MLFI-25) of the Equipment
 
Leasing and Finance Association.
 
Net Charge-offs.
 
Net charge-offs were $22.4 million for
 
the year ended December 31, 2019, compared to $18.3 million for the year ended December
31, 2018. Net charge-offs as a percentage of
 
average total finance receivables increased to 2.18% during the year ended December
 
31,
2019, from 1.93% for the year ended December 31, 2018. Industry data on
 
average charge-offs from MLFI-25 indicates an 9.4%
increase in net charge-offs as a percent of
 
receivables for peers, while our increase in net charge-off
 
percentage is 13.0%. Our analysis
of our higher charge-off experience indicates
 
that the small business and lower credit quality borrowers in our portfolio were
disproportionately impacted by the economic headwinds observed
 
in 2019, particularly in the second-half of the year.
 
Both 2019 and
2018 include charge-offs related to fraudulent
 
activity of single vendor partners (separate incidents) of $0.9 million
 
and $1.2 million
respectively.
 
Leases and Loans Modified.
 
In response to COVID-19, starting in mid-March 2020, we instituted a payment
 
deferral program in order to assist our small-business
customers that request relief who are current under their existing obligations.
 
Our COVID-19 modification program allows for up to 6
months of deferred payments.
 
The below table outlines certain data on the modified population based
 
on the net investment balance and status as of December 31,
2020.
 
 
Equip.Fin
Working
and CVG
Capital
Total
(Dollars in thousands)
Active Modified Population:
Modified Contracts, out of deferral period
$
94,962
$
6,922
$
101,884
Extended modifications in fourth quarter
9,325
9,325
Total Program
$
104,287
$
6,922
$
111,209
% of total segment receivables
12.3%
34.6%
12.8%
Active Modification Population:
On Non Accrual as of December 31, 2020
$
10,731
$
846
$
11,577
Resolved Population:
Charge-Offs of Modified Contracts, year
 
ended December 31, 2020
$
2,374
$
889
$
3,263
Our initial deferral program in response to COVID-19 extended through
 
September 30, 2020, and in accordance with the interagency
guidance, loans modified were not considered TDRs and followed our
 
general non-accrual policies with respect to their modified
terms.
 
This program allowed for up to 6 months of fully deferred or reduced paymen
 
ts.
 
As of December 31, 2020, 92% of our total
modified contracts, are out of the deferral period.
In the fourth quarter of 2020, the modification period of contracts was general
 
ly extended only as part of our loss mitigation strategies
for customers with prolonged negative impacts from the pandemic.
 
These extended deferrals total $9.3 million at December 31, 2020,
or 8% of the modified population, and the extensions generally consisted
 
of requiring a partial payment of 25% to 50% of the original
schedule, with full payment scheduled to resume in the first quarter of
 
2021 for 56% of the population, and the remainder in the
second quarter of 2021.
 
We evaluated these extended
 
deferrals on a program basis and concluded that these deferrals are beyond
 
a
short-term period, the deferrals were due to the borrower’s
 
financial difficulties, and the payment deferrals are a concession.
 
The loan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-40-
contracts were assessed as troubled debt restructurings and were put
 
on non-accrual, and the extended lease contracts were also put on
non-accrual.
 
The estimate of increased risk of credit loss for these contracts was assessed as discussed with the
 
qualitative
adjustments above.
 
There were no defaults of these extended, troubled receivables during the year
 
ended December 31, 2020.
 
Delinquency and Non-Accrual
 
The following table outlines the delinquency status of the Company’s
 
portfolio as of December 31, 2020,
 
including information on the
population of restructured contracts, and contracts with restructure
 
requests:
 
Net Investment (in thousands)
Delinquency Rate by population
30
60
90+
Current
Total
30
60
90+
Current
Total
Equip.Finance and CVG
Restructured Portfolio
$2,461
$610
$1,349
$99,867
$104,287
2.36%
0.58%
1.29%
95.77%
100%
Non-Restructured
4,425
2,169
2,453
735,916
744,963
0.59%
0.29%
0.33%
98.79%
100%
Total
$6,886
$2,779
$3,802
$835,783
$849,250
0.81%
0.33%
0.45%
98.41%
100%
 
Net Investment (in thousands)
Delinquency Rate by population
15
30
60+
Current
Total
15
30
60+
Current
Total
Working Capital
 
Restructured Portfolio
$225
$550
$135
$6,012
$6,922
3.25%
7.95%
1.95%
86.85%
100%
Non-Restructured
36
56
13,019
13,111
0.27%
0.43%
0.00%
99.30%
100%
Total
$261
$606
$135
$19,031
$20,033
1.30%
3.03%
0.67%
95.00%
100%
 
Contracts that are part of the payment deferral modification program
 
are reflected in our Delinquency and Non-Accrual measures
based on their performance against their modified terms.
 
 
Equipment Finance receivables over 30 days delinquent were 159
 
basis points as of December 31, 2020, down 54 basis points from
September 30, 2020, and up 19 basis points from December 31,
 
2019. Working Capital receivable
 
s
 
over 15 days delinquent were 500
basis points as of December 31, 2020, up 107 basis points from September
 
30, 2020, and up 325
 
basis points from December 31,
2019.
 
A significant portion of the restructured portfolios is out of the deferral period
 
as of December 31, 2020, and we continue to see
elevated levels of delinquency from that population as compared to the non-restructured
 
portfolio.
 
 
The following table summarizes non-accrual leases and loans in the Company’s
 
portfolio:
December 31,
2020
2019
2018
(Dollars in thousands)
 
Equipment finance and CVG
$
13,357
$
4,645
$
3,115
 
Working capital
932
946
492
 
Total non-accrual leases and
 
loans
$
14,289
$
5,591
$
3,607
 
As of December 31, 2020, the increase in leases and loans on non-accrual
 
is driven by a population of $9.3 million Equipment Finance
and CVG loan modifications contracts that were further extended in the
 
fourth quarter and were placed on non-accrual due to their risk
characteristics.
 
 
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 30 days delinquent.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-41-
Working
 
Capital Loans are generally placed in non-accrual status when they are 30 days past due.
 
The loan is removed from non-
accrual status once sufficient payments are made
 
to bring the loan current and evidence of a sustained performance period as reviewed
by management.
 
The Company has no loans 90 days or more past due that were still accruing
 
interest for any of the periods
presented.
 
R
ESULTS
 
OF
O
PERATIONS
 
 
Comparison of the Year
 
s
 
Ended December 31, 2020 and December 31, 2019
 
 
Net income.
 
Net income of $0.3 million was reported for the year ended December 31, 2020
 
,
 
resulting in diluted EPS of $0.03,
 
compared to net
income of $27.1 million and diluted EPS of $2.20 for the year ended December
 
31, 2019.
 
This decrease in Net income was primarily
driven by:
-
 
$14.1 million decrease in Net interest and fee income, driven primarily by
 
a decline in the size of our finance receivable
portfolio and lower funding needs;
 
-
 
$10.5 million increase in Provision for credit losses, driven by refining our
 
loss estimates for expected increased credit losses
driven by the impacts of the pandemic on our portfolio.
 
In addition, we adopted CECL on January 1, 2020 and substantially
changed the methodology for measuring the estimate of credit loss.
 
See further discussion of the Provision and the change in
measurement in the prior section “—Finance Receivables and Asset Quality”;
 
-
 
$19.8 million decrease in gains on leases and loans sold due to a decrease in
 
assets sold resulting from disruptions in the
capital markets during this current economic environment;
 
-
 
$7.7 million impairments of Goodwill and intangible assets, driven by
 
declines in the fair value of its reporting unit and
projected volumes;
Those drivers of decreases to Net income were partially offset by:
-
 
$10.4 million decrease in Salaries and benefits, driven primarily by
 
lower Commissions, Incentives and the Company’s
proactive cost reduction measures;
 
-
 
$13.2 million favorable change in Income
 
tax (benefit),
 
driven primarily by lower income before taxes and a $3.3 million
benefit from the remeasurement of the federal net operating losses driven
 
by provisions of the CARES Act.
 
 
 
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 years
ended December 31, 2020 and 2019.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-42-
Year Ended December 31,
2020
2019
(Dollars in thousands)
Average
Average
Average
Yields/
Average
Yields/
Balance
(1)
Interest
Rates
Balance
(1)
Interest
Rates
Interest-earning assets:
Interest-earning deposits with banks
$
164,132
$
419
0.25
%
$
122,762
$
2,731
2.23
%
Time deposits
10,940
193
1.77
12,272
308
2.51
Restricted interest-earning deposits with banks
6,831
9
0.13
12,231
95
0.78
Securities available for sale
10,676
207
1.94
10,495
269
2.56
Net investment in leases
(2)
863,875
75,948
8.79
936,707
84,790
9.05
Loans receivable
(2)
81,724
16,023
19.61