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.
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.
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,
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
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
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.
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.
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.
million.
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.
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.
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.
result, we may need to suspend or discontinue our share repurchase
program or any practice of declaring regular quarterly dividends
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.
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
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
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
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.
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
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;
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
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.
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.
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
the
overall
stock
market
from
time
time;
ignificant
volatility
the
market
price
and
trading
volume
financial
services
companies
the
trading
volume
our
common stock in particular;
actual
anticipated
changes
our
earnings
fluctuations
our
operating
results
the
expectations
market
analysts;
investor
perceptions
the
equipment
leasing
industry
general
and
the
Company
particular;
the
operating
and
stock
performance
comparable
companies;
legislative
and
regulatory
changes
with
respect
the
financial
banking
industries;
general
economic
conditions
and
trends
including
but
not
limited
those
resulting
from
the
COVID
pandemic;
major
catastro
phic
events;
loss
external
funding
sources;
sales
large
blocks
our
stock
sales
insiders;
departure
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.
