10-Q
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2010
Commission file number 000-50448
MARLIN BUSINESS SERVICES CORP.
(Exact name of registrant as specified in its charter)
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Pennsylvania (State of incorporation)
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38-3686388
(I.R.S. Employer Identification Number) |
300 Fellowship Road, Mount Laurel, NJ 08054
(Address of principal executive offices)
(Zip code)
(888) 479-9111
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that registrant was required to submit and post such files.) Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934). Yes o No þ
At April 30, 2010, 12,805,353 shares of Registrants common stock, $.01 par value, were
outstanding.
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 2010
TABLE OF CONTENTS
- 1 -
PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
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March 31, |
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December 31, |
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2010 |
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2009 |
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(Dollars in thousands, except per-share data) |
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ASSETS |
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Cash and due from banks |
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$ |
1,781 |
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$ |
1,372 |
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Interest-earning deposits with banks |
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42,553 |
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35,685 |
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Total cash and cash equivalents |
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44,334 |
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37,057 |
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Restricted interest-earning deposits with banks (includes $63.1 million and $57.1
million, respectively, related to consolidated variable interest entities (VIEs)) |
|
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65,521 |
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63,400 |
|
Net investment in leases and loans (includes $273.1 million and $238.0 million,
respectively, related to consolidated VIEs) |
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408,205 |
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448,610 |
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Property and equipment, net |
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2,305 |
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2,431 |
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Property tax receivables |
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5,866 |
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1,135 |
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Other assets |
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8,290 |
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13,170 |
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Total assets |
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$ |
534,521 |
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$ |
565,803 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Short-term borrowings |
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$ |
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$ |
62,541 |
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Long-term borrowings (includes $249.1 million and $226.7 million, respectively,
related to consolidated VIEs) |
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268,434 |
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244,445 |
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Deposits |
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85,135 |
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80,288 |
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Other liabilities: |
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Fair value of derivatives |
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1,208 |
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2,408 |
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Sales and property taxes payable |
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7,752 |
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4,197 |
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Accounts payable and accrued expenses |
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7,268 |
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7,649 |
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Net deferred income tax liability |
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14,206 |
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16,037 |
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Total liabilities |
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384,003 |
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417,565 |
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Commitments and contingencies (Note 6) |
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Stockholders equity: |
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Common Stock, $0.01 par value; 75,000,000 shares
authorized; 12,811,578 and 12,778,935 shares issued and outstanding, respectively |
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128 |
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128 |
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Preferred Stock, $0.01 par value; 5,000,000 shares authorized; none issued |
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Additional paid-in capital |
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85,691 |
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84,674 |
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Stock subscription receivable |
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(2 |
) |
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(3 |
) |
Accumulated other comprehensive loss |
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(242 |
) |
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(267 |
) |
Retained earnings |
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64,943 |
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63,706 |
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Total stockholders equity |
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150,518 |
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148,238 |
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Total liabilities and stockholders equity |
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$ |
534,521 |
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$ |
565,803 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
- 2 -
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
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Three Months Ended March 31, |
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2010 |
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2009 |
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(Dollars in thousands, except per-share data) |
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Interest income |
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$ |
12,829 |
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$ |
19,072 |
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Fee income |
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3,816 |
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5,034 |
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Interest and fee income |
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16,645 |
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24,106 |
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Interest expense |
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4,658 |
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7,832 |
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Net interest and fee income |
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11,987 |
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16,274 |
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Provision for credit losses |
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3,123 |
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8,748 |
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Net interest and fee income after provision for credit losses |
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8,864 |
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7,526 |
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Other income: |
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Insurance income |
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1,158 |
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1,543 |
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Loss on derivatives |
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(94 |
) |
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(1,307 |
) |
Other income |
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288 |
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407 |
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Other income |
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1,352 |
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643 |
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Other expense: |
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Salaries and benefits |
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5,124 |
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5,885 |
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General and administrative |
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3,046 |
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3,399 |
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Financing related costs |
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147 |
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255 |
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Other expense |
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8,317 |
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9,539 |
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Income (loss) before income taxes |
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1,899 |
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(1,370 |
) |
Income tax expense (benefit) |
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662 |
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(491 |
) |
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Net income (loss) |
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$ |
1,237 |
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$ |
(879 |
) |
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Basic earnings (loss) per share |
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$ |
0.10 |
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$ |
(0.08 |
) |
Diluted earnings (loss) per share |
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$ |
0.10 |
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$ |
(0.08 |
) |
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Weighted average shares used in computing basic earnings (loss) per share |
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12,778,463 |
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11,677,264 |
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Weighted average shares used in computing diluted earnings (loss) per share |
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12,833,643 |
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11,677,264 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
- 3 -
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Condensed Consolidated
Statements of Stockholders Equity
(Unaudited)
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Accumulated |
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Additional |
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Stock |
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Other |
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Total |
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Common |
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Stock |
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Paid-In |
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Subscription |
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Comprehensive |
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Retained |
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Stockholders |
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Shares |
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Amount |
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Capital |
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Receivable |
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Income (Loss) |
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Earnings |
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Equity |
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(Dollars in thousands) |
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Balance, December 31, 2008 |
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12,246,405 |
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$ |
122 |
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$ |
83,671 |
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$ |
(5 |
) |
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$ |
167 |
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$ |
62,670 |
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$ |
146,625 |
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Issuance of common stock |
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35,004 |
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1 |
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105 |
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106 |
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Repurchase of common stock |
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(102,614 |
) |
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(1 |
) |
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(399 |
) |
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(400 |
) |
Exercise of stock options |
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40,424 |
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167 |
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167 |
|
Tax benefit on stock options exercised |
|
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48 |
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|
48 |
|
Stock option compensation recognized |
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|
298 |
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|
298 |
|
Payment of receivables |
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2 |
|
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2 |
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Restricted stock grant |
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559,716 |
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6 |
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(6 |
) |
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Restricted stock compensation recognized |
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|
790 |
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790 |
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Net change related to derivatives, net of tax |
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|
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|
|
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(434 |
) |
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|
(434 |
) |
Net income |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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1,036 |
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|
1,036 |
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Balance, December 31, 2009 |
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|
12,778,935 |
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|
$ |
128 |
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|
$ |
84,674 |
|
|
$ |
(3 |
) |
|
$ |
(267 |
) |
|
$ |
63,706 |
|
|
$ |
148,238 |
|
Repurchase of common stock |
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(54,600 |
) |
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(1 |
) |
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|
(484 |
) |
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|
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|
(485 |
) |
Exercise of stock options |
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28,503 |
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|
113 |
|
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|
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|
|
|
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|
113 |
|
Tax benefit on stock options exercised |
|
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|
|
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|
56 |
|
|
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|
|
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|
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|
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|
56 |
|
Stock option compensation recognized |
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|
74 |
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74 |
|
Payment of receivables |
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1 |
|
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|
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|
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|
1 |
|
Restricted stock grant |
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58,740 |
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|
1 |
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(1 |
) |
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Restricted stock compensation recognized |
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|
1,259 |
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|
1,259 |
|
Net change related to derivatives, net of tax |
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|
25 |
|
|
|
|
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|
25 |
|
Net income |
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|
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|
|
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|
|
|
|
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1,237 |
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|
1,237 |
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Balance, March 31, 2010 |
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12,811,578 |
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|
$ |
128 |
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|
$ |
85,691 |
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|
$ |
(2 |
) |
|
$ |
(242 |
) |
|
$ |
64,943 |
|
|
$ |
150,518 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
- 4 -
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended March 31, |
|
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|
2010 |
|
|
2009 |
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|
(In thousands) |
|
Cash flows from operating activities: |
|
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|
|
|
|
Net income (loss) |
|
$ |
1,237 |
|
|
$ |
(879 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
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Depreciation and amortization |
|
|
706 |
|
|
|
606 |
|
Stock-based compensation |
|
|
1,333 |
|
|
|
402 |
|
Excess tax benefits from stock-based payment arrangements |
|
|
(56 |
) |
|
|
|
|
Amortization of deferred net loss (gain) on cash flow hedge derivatives |
|
|
42 |
|
|
|
19 |
|
Change in fair value of derivatives |
|
|
(1,121 |
) |
|
|
188 |
|
Provision for credit losses |
|
|
3,123 |
|
|
|
8,748 |
|
Net deferred income taxes |
|
|
(1,848 |
) |
|
|
(1,878 |
) |
Amortization of deferred initial direct costs and fees |
|
|
2,057 |
|
|
|
3,541 |
|
Deferred initial direct costs and fees |
|
|
(670 |
) |
|
|
(1,165 |
) |
Loss on equipment disposed |
|
|
596 |
|
|
|
333 |
|
Effect of changes in other operating items: |
|
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|
|
|
|
|
|
Other assets |
|
|
551 |
|
|
|
(2,066 |
) |
Other liabilities |
|
|
3,240 |
|
|
|
3,664 |
|
|
|
|
|
|
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|
Net cash provided by operating activities |
|
|
9,190 |
|
|
|
11,513 |
|
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Cash flows from investing activities: |
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Purchases of equipment for direct financing lease contracts and funds used to originate loans |
|
|
(23,656 |
) |
|
|
(36,280 |
) |
Principal collections on leases and loans |
|
|
58,691 |
|
|
|
72,423 |
|
Security deposits collected, net of refunds |
|
|
(823 |
) |
|
|
(746 |
) |
Proceeds from the sale of equipment |
|
|
1,087 |
|
|
|
1,322 |
|
Acquisitions of property and equipment |
|
|
(128 |
) |
|
|
(178 |
) |
Change in restricted interest-earning deposits with banks |
|
|
(2,121 |
) |
|
|
(5,170 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
33,050 |
|
|
|
31,371 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuances of common stock |
|
|
1 |
|
|
|
|
|
Repurchases of common stock |
|
|
(485 |
) |
|
|
(370 |
) |
Exercise of stock options |
|
|
113 |
|
|
|
|
|
Excess tax benefits from stock-based payment arrangements |
|
|
56 |
|
|
|
|
|
Debt issuance costs |
|
|
(943 |
) |
|
|
(330 |
) |
Term securitization advances |
|
|
68,169 |
|
|
|
|
|
Term securitization repayments |
|
|
(45,768 |
) |
|
|
(57,847 |
) |
Warehouse and bank facility advances |
|
|
4,425 |
|
|
|
42,130 |
|
Warehouse and bank facility repayments |
|
|
(65,378 |
) |
|
|
(27,739 |
) |
Increase in deposits |
|
|
4,847 |
|
|
|
11,468 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(34,963 |
) |
|
|
(32,688 |
) |
|
|
|
|
|
|
|
Net increase in total cash and cash equivalents |
|
|
7,277 |
|
|
|
10,196 |
|
Total cash and cash equivalents, beginning of period |
|
|
37,057 |
|
|
|
40,270 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents, end of period |
|
$ |
44,334 |
|
|
$ |
50,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest on deposits and borrowings |
|
$ |
4,246 |
|
|
$ |
7,195 |
|
Cash paid (refunds received) for income taxes |
|
$ |
(3,051 |
) |
|
$ |
13 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
- 5 -
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Organization
Description
Through its principal operating subsidiary, Marlin Leasing Corporation, Marlin Business Services
Corp. provides equipment leasing solutions nationwide, primarily to small businesses in a segment
of the equipment leasing market commonly referred to as the small-ticket segment. The Company
finances over 100 categories of commercial equipment important to its end user customers including
copiers, telephone systems, computers and certain commercial and industrial equipment. Effective
March 12, 2008, the Company also opened Marlin Business Bank (MBB), a commercial bank chartered
by the State of Utah and a member of the Federal Reserve System. MBB currently provides
diversification of the Companys funding sources through the issuance of certificates of deposit.
Marlin Business Services Corp. is managed as a single business segment.
References to the Company, we, us, and our herein refer to Marlin Business Services Corp.
and its wholly-owned subsidiaries, unless the context otherwise requires.
NOTE 2 Basis of Financial Statement Presentation and Critical Accounting Policies
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of normal recurring items) necessary to present
fairly the Companys financial position at March 31, 2010 and the results of operations for the
three-month periods ended March 31, 2010 and 2009, and cash flows for the three-month periods ended
March 31, 2010 and 2009. These unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and note disclosures included in the
Companys Form 10-K filed with the Securities and Exchange Commission on March 5, 2010. The
consolidated results of operations for the three-month periods ended March 31, 2010 and 2009 are
not necessarily indicative of the results for the respective full years or any other period. All
intercompany accounts and transactions have been eliminated in consolidation.
FASB Accounting Standards Codification. In June 2009, the Financial Accounting Standards Board
(FASB) confirmed that the FASB Accounting Standards Codification (ASC) would become the single
official source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) (other
than guidance issued by the SEC), superseding all other accounting literature except that issued by
the SEC. The Codification does not change U.S. GAAP. However, as a result, only one level of
authoritative U.S. GAAP exists. All other literature is considered non-authoritative.
Use of estimates. The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Estimates
are used when accounting for income recognition, the residual values of leased equipment, the
allowance for credit losses, deferred initial direct costs and fees, late fee receivables,
performance assumptions for stock-based compensation awards, the probability of forecasted
transactions, the fair value of financial instruments and income taxes. Actual results could differ
from those estimates.
Income recognition. Interest income is recognized under the effective interest method. The
effective interest method of income recognition applies a constant rate of interest equal to the
internal rate of return on the lease. Generally, when a lease or loan is 90 days or more
delinquent, the contract is classified as non-accrual and we do not recognize interest income on
that contract until it is less than 90 days delinquent.
Fee income. Fee income consists of fees for delinquent lease and loan payments, cash collected on
early termination of leases and net residual income. Net residual income includes income from lease
renewals and gains and losses on the realization of residual values of leased equipment disposed at
the end of term.
At the end of the original lease term, lessees may choose to purchase the equipment, renew the
lease or return the equipment to the Company. The Company receives income from lease renewals when
the lessee elects to retain the equipment longer than the original term of the lease. This income,
net of appropriate periodic reductions in the estimated residual values of the related equipment,
is included in fee income as net residual income.
- 6 -
When the lessee elects to return the equipment at lease termination, the equipment is transferred
to other assets at the lower of its basis or fair market value. The Company generally sells
returned equipment to an independent third party, rather than leasing the equipment a second time.
The Company does not maintain equipment in other assets for longer than 120 days. Any loss
recognized on transferring the equipment to other assets, and any gain or loss realized on the sale
or disposal of equipment to the lessee or to others is included in fee income as net residual
income. Management performs periodic reviews of the estimated residual values and any impairment,
if other than temporary, is recognized in the current period.
Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated
collection rates. At a minimum of every quarter, an analysis of anticipated collection rates is
performed based on updates to collection history. Adjustments in assumptions are made as needed
based on this analysis. Other fees are recognized when received.
Insurance income. Insurance income is recognized on an accrual basis as earned over the term of the
lease. Generally, insurance payments that are 120 days or more past due are charged against income.
Ceding commissions, losses and loss adjustment expenses are recorded in the period incurred and
netted against insurance income.
Other income. Other income includes various administrative transaction fees, fees received from
lease syndications and gains on sales of leases.
Initial direct costs and fees. We defer initial direct costs incurred and fees received to
originate our leases and loans in accordance with the Receivables Topic and the Nonrefundable Fees
and Other Costs Subtopic of the FASB ASC. The initial direct costs and fees we defer are part of
the net investment in leases and loans, and are amortized to interest income using the effective
interest method. We defer third party commission costs as well as certain internal costs directly
related to the origination activity. Costs subject to deferral include evaluating the prospective
customers financial condition, evaluating and recording guarantees and other security
arrangements, negotiating terms, preparing and processing documents and closing the transaction.
The fees we defer are documentation fees collected at inception. The realization of the deferred
initial direct costs, net of fees deferred, is predicated on the net future cash flows generated by
our lease and loan portfolios.
Lease residual values. A direct financing lease is recorded at the aggregate future minimum lease
payments receivable plus the estimated residual value of the leased equipment, less unearned lease
income. Residual values reflect the estimated amounts to be received at lease termination from
lease extensions, sales or other dispositions of leased equipment. Estimates are based on industry
data and managements experience. Management performs periodic reviews of the estimated residual
values recorded and any impairment, if other than temporary, is recognized in the current period.
Allowance for credit losses. In accordance with the Contingencies Topic of the FASB ASC, we
maintain an allowance for credit losses at an amount sufficient to absorb losses inherent in our
existing lease and loan portfolios as of the reporting dates based on our projection of probable
net credit losses. We evaluate our portfolios on a pooled basis, due to their composition of small
balance, homogenous accounts with similar general credit risk characteristics, diversified among a
large cross section of variables including industry, geography, equipment type, obligor and vendor.
To project probable net credit losses, we perform a migration analysis of delinquent and current
accounts based on historic loss experience. A migration analysis is a technique used to estimate
the likelihood that an account will progress through the various delinquency stages and ultimately
charge off. In addition to the migration analysis, we also consider other factors including recent
trends in delinquencies and charge-offs; accounts filing for bankruptcy; account modifications;
recovered amounts; forecasting uncertainties; the composition of our lease and loan portfolios;
economic conditions; and seasonality. The various factors used in the analysis are reviewed
periodically, and no less frequently than each quarter. We then establish an allowance for credit
losses for the projected probable net credit losses based on this analysis. A provision is charged
against earnings to maintain the allowance for credit losses at the appropriate level. Our policy
is to charge-off against the allowance the estimated unrecoverable portion of accounts once they
reach 121 days delinquent.
Our projections of probable net credit losses are inherently uncertain, and as a result we cannot
predict with certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy laws, and other factors could impact
our actual and projected net credit losses and the related allowance for credit losses. To the
degree we add new
leases and loans to our portfolios, or to the degree credit quality is worse than expected, we
record expense to increase the allowance for credit losses to reflect the estimated net losses
inherent in our portfolios. Actual losses may vary from current estimates.
- 7 -
Securitizations. From inception to March 31, 2010, the Company has completed ten term note
securitizations of which six have been repaid. In connection with each transaction, the Company
established a bankruptcy remote special-purpose subsidiary (SPE) and issued term debt to
institutional investors. These SPEs are considered VIEs under U.S. GAAP. The Company is required to
consolidate VIEs in which it is deemed to be the primary beneficiary through having (1) power over
the significant activities of the entity and (2) an obligation to absorb losses or the right to
receive benefits from the VIE which are potentially significant to the VIE. The Company continues
to service the assets of its VIEs and retain equity and/or residual interests. Accordingly, assets
and related debt of these VIEs are included in the accompanying Consolidated Balance Sheets. The
Companys leases and restricted interest-earning deposits with banks are assigned as collateral for
these borrowings and there is no further recourse to our general credit. Collateral in excess of
these borrowings represents the Companys maximum loss exposure.
Derivatives. The Derivatives and Hedging Topic of the FASB ASC requires recognition of all
derivatives at fair value as either assets or liabilities in the Consolidated Balance Sheets. The
accounting for subsequent changes in the fair value of these derivatives depends on whether each
has been designated and qualifies for hedge accounting treatment pursuant to the accounting
standard.
Prior to July 1, 2008, the Company entered into derivative contracts which were accounted for as
cash flow hedges under hedge accounting as prescribed by U.S. GAAP. Under hedge accounting, the
effective portion of the gain or loss on a derivative designated as a cash flow hedge was reported
net of tax effects in accumulated other comprehensive income on the Consolidated Balance Sheets,
until the pricing of the related term securitization. The derivative gain or loss recognized in
accumulated other comprehensive income was then reclassified into earnings as an adjustment to
interest expense over the terms of the related borrowings.
While the Company may continue to use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the
fair value of derivative instruments, including those that had previously been accounted for under
hedge accounting, is recognized immediately in gain (loss) on derivatives. This change creates
volatility in our results of operations, as the fair value of our derivative financial instruments
changes over time, and this volatility may adversely impact our results of operations and financial
condition.
For the forecasted transactions that were probable of occurring, the derivative gain or loss in
accumulated other comprehensive income as of June 30, 2008 would have been reclassified into
earnings as an adjustment to interest expense over the terms of the related forecasted borrowings,
consistent with hedge accounting treatment. At the time that any related forecasted borrowing was
no longer probable of occurring, the related gain or loss in accumulated other comprehensive income
became recognized immediately in earnings.
The Fair Value Measurements and Disclosures Topic of the FASB ASC establishes a framework for
measuring fair value under U.S. GAAP and requires certain disclosures about fair value
measurements. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in the principal or most
advantageous market for the asset or liability at the measurement date (exit price). Because the
Companys derivatives are not listed on an exchange, the Company values these instruments using a
valuation model with pricing inputs that are observable in the market or that can be derived
principally from or corroborated by observable market data.
Common stock and equity. On November 2, 2007, the Board of Directors approved a stock repurchase
plan. Under the stock repurchase plan, the Company is authorized to repurchase common stock on the
open market. The par value of the shares repurchased is charged to common stock with the excess of
the purchase price over par charged against any available additional paid-in capital.
Stock-based compensation. The CompensationStock Compensation Topic of the FASB ASC establishes
fair value as the measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in accounting for share-based
payment transactions with employees and non-employees, except for equity instruments held by
employee share ownership plans.
- 8 -
The Company measures stock-based compensation cost at grant date, based on the fair value of the
awards ultimately expected to vest. Compensation cost is recognized on a straight-line basis over
the service period. We use the Black-Scholes valuation model to measure
the fair value of our stock options utilizing various assumptions with respect to expected holding
period, risk-free interest rates, stock price volatility, and dividend yield. The assumptions are
based on subjective future expectations combined with management judgment.
The Company uses judgment in estimating the amount of awards that are expected to be forfeited,
with subsequent revisions to the assumptions if actual forfeitures differ from those estimates. In
addition, for performance-based awards the Company estimates the degree to which the performance
conditions will be met to estimate the number of shares expected to vest and the related
compensation expense. Compensation expense is adjusted in the period such performance estimates
change.
Income taxes. The Income Taxes Topic of the FASB ASC requires the use of the asset and liability
method under which deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and liabilities, given the
provisions of the enacted tax laws. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities and projected
future taxable income in making this assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will realize the benefits of
these deductible differences.
Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax
assets. The process involves summarizing temporary differences resulting from the different
treatment of items, for example, leases for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included within the Consolidated Balance Sheets.
Our management must then assess the likelihood that deferred tax assets will be recovered from
future taxable income or tax carry-back availability and, to the extent our management believes
recovery is not likely, a valuation allowance must be established. To the extent that we establish
a valuation allowance in a period, an expense must be recorded within the tax provision in the
Consolidated Statements of Operations.
At March 31, 2010, there have been no material changes to the liability for uncertain tax positions
and there are no significant unrecognized tax benefits. The periods subject to general examination
for the Companys federal return include the 2006 tax year to the present. The Company files state
income tax returns in various states which may have different statutes of limitations. Generally,
state income tax returns for years 2005 through the present are subject to examination.
The Company records penalties and accrued interest related to uncertain tax positions in income tax
expense. Such adjustments have historically been minimal and immaterial to our financial results.
Earnings per share. Pursuant to the Earnings Per Share Topic of the FASB ASC, unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and are included in the computation of earnings per
share using the two-class method.
Basic earnings per share is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period using the two-class method,
which includes our unvested restricted stock awards as participating securities. Diluted earnings
per share is computed based on the weighted average number of common shares outstanding for the
period using the two-class method, which includes our unvested restricted stock awards as
participating securities, and the dilutive impact of the exercise or conversion of common stock
equivalents, such as stock options, into shares of Common Stock as if those securities were
exercised or converted.
- 9 -
NOTE 3 Net Investment in Leases and Loans
Net investment in leases and loans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Minimum lease payments receivable |
|
$ |
448,268 |
|
|
$ |
494,954 |
|
Estimated residual value of equipment |
|
|
42,044 |
|
|
|
43,928 |
|
Unearned lease income, net of initial
direct costs and fees deferred |
|
|
(68,046 |
) |
|
|
(74,823 |
) |
Security deposits |
|
|
(6,858 |
) |
|
|
(7,681 |
) |
Loans, including unamortized deferred
fees and costs |
|
|
3,050 |
|
|
|
4,425 |
|
Allowance for credit losses |
|
|
(10,253 |
) |
|
|
(12,193 |
) |
|
|
|
|
|
|
|
|
|
$ |
408,205 |
|
|
$ |
448,610 |
|
|
|
|
|
|
|
|
At March 31, 2010, a total of $315.8 million of minimum lease payments receivable are assigned as
collateral for short-term and long-term borrowings, including the amounts related to consolidated
VIEs.
Initial direct costs net of fees deferred were $8.8 million and $10.2 million as of March 31, 2010
and December 31, 2009, respectively, and are netted in unearned income and will be amortized to
income using the effective interest method. At March 31, 2010 and December 31, 2009, $33.7 million
and $35.1 million, respectively, of the estimated residual value of equipment retained on our
Consolidated Balance Sheets were related to copiers.
Minimum lease payments receivable under lease contracts and the amortization of unearned lease
income, including initial direct costs and fees deferred, are as follows as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease |
|
|
|
|
|
|
Payments |
|
|
Income |
|
|
|
Receivable |
|
|
Amortization |
|
|
|
(Dollars in thousands) |
|
Period Ending December 31: |
|
|
|
|
|
|
|
|
2010 |
|
$ |
169,158 |
|
|
$ |
30,736 |
|
2010 |
|
|
155,424 |
|
|
|
23,136 |
|
2011 |
|
|
81,745 |
|
|
|
10,129 |
|
2012 |
|
|
32,551 |
|
|
|
3,343 |
|
2013 |
|
|
8,718 |
|
|
|
680 |
|
Thereafter |
|
|
672 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
$ |
448,268 |
|
|
$ |
68,046 |
|
|
|
|
|
|
|
|
Income is not recognized on leases or loans when a default on monthly payment exists for a period
of 90 days or more. Income recognition resumes when the contract becomes less than 90 days
delinquent. As of March 31, 2010 and December 31, 2009, the Company maintained total finance
receivables which were on a non-accrual basis of $3.4 million and $4.6 million, respectively. As of
March 31, 2010 and December 31, 2009, the Company had total finance receivables in which the terms
of the original agreements had been renegotiated in the amount of $3.8 million and $4.5 million,
respectively.
- 10 -
NOTE 4 Allowance for Credit Losses
Net investments in leases and loans are generally charged-off when they are contractually past due
for 121 days based on the historical net loss rates realized by the Company.
Activity in this account is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Allowance for credit losses, beginning of period |
|
$ |
12,193 |
|
|
$ |
15,283 |
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(5,926 |
) |
|
|
(9,398 |
) |
Recoveries |
|
|
863 |
|
|
|
676 |
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(5,063 |
) |
|
|
(8,722 |
) |
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3,123 |
|
|
|
8,748 |
|
|
|
|
|
|
|
|
Allowance for credit losses, end of period |
|
$ |
10,253 |
|
|
$ |
15,309 |
|
|
|
|
|
|
|
|
NOTE 5 Other Assets
Other assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Accrued fees receivable |
|
$ |
3,039 |
|
|
$ |
3,189 |
|
Deferred transaction costs |
|
|
2,437 |
|
|
|
1,893 |
|
Prepaid expenses |
|
|
1,472 |
|
|
|
1,360 |
|
Income taxes receivable |
|
|
|
|
|
|
5,178 |
|
Other |
|
|
1,342 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
$ |
8,290 |
|
|
$ |
13,170 |
|
|
|
|
|
|
|
|
NOTE 6 Commitments and Contingencies
The Company is involved in legal proceedings, which include claims, litigation and suits arising in
the ordinary course of business. In the opinion of management, these actions will not have a
material adverse effect on the Companys consolidated financial position, results of operations or
cash flows.
NOTE 7 Short-term and Long-term Borrowings
Borrowings with an original maturity of less than one year are classified as short-term borrowings.
The Companys revolving and short-term credit facilities (secured bank facility and commercial
paper (CP) conduit warehouse facility) are classified as short-term borrowings, along with MBBs
federal funds purchased. Borrowings with an original maturity of one year or more are classified as
long-term borrowings. The Companys term note securitizations and long-term loan facility are
classified as long-term borrowings.
Scheduled principal and interest payments on outstanding borrowings as of March 31, 2010 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Interest(1) |
|
|
|
(Dollars in thousands) |
|
Period Ending December 31, |
|
|
|
|
|
|
|
|
2010 |
|
$ |
118,929 |
|
|
$ |
7,659 |
|
2011 |
|
|
88,012 |
|
|
|
5,100 |
|
2012 |
|
|
53,830 |
|
|
|
1,791 |
|
2013 |
|
|
7,397 |
|
|
|
107 |
|
2014 |
|
|
265 |
|
|
|
3 |
|
Thereafter |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
268,434 |
|
|
$ |
14,660 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on the variable-rate long-term loan facility is assumed at the March 31,
2010 rate for the remaining term. |
- 11 -
On February 12, 2010, the Company completed an $80.7 million term asset-backed securitization, of
which it elected to defer the issuance of subordinated notes totaling $12.5 million. The two senior
classes of notes issued under the securitization constitute eligible collateral under the Federal
Reserve Bank of New Yorks Term Asset-Backed Securities Loan Facility (TALF) program. This
financing provides the Company with fixed-cost borrowing and is recorded in long-term borrowings in
the Consolidated Balance Sheets. A portion of the proceeds of the new securitization was used to
repay the full amount outstanding under the CP conduit warehouse facility.
NOTE 8 Deposits
Effective March 12, 2008, the Company opened MBB. MBB currently provides diversification of the
Companys funding sources primarily through the issuance of Federal Deposit Insurance Corporation
(FDIC) insured certificates of deposit raised nationally through various brokered deposit
relationships and FDIC-insured retail deposits directly from other financial institutions. As of
March 31, 2010, the remaining scheduled maturities of time deposits are as follows:
|
|
|
|
|
|
|
Scheduled |
|
|
|
Maturities |
|
|
|
(Dollars in thousands) |
|
Period Ending
December 31, |
|
|
|
|
2010 |
|
$ |
24,906 |
|
2010 |
|
|
27,700 |
|
2011 |
|
|
19,028 |
|
2012 |
|
|
10,854 |
|
2013 |
|
|
2,448 |
|
Thereafter |
|
|
199 |
|
|
|
|
|
|
|
$ |
85,135 |
|
|
|
|
|
All time deposits are in denominations of less than $250,000 and all are fully insured by the FDIC.
The weighted average all-in interest rate of deposits outstanding at March 31, 2010 was 3.02%.
NOTE 9 Derivative Financial Instruments
The Company uses derivative financial instruments to manage exposure to the effects of changes in
market interest rates and to fulfill certain covenants in our borrowing arrangements. All
derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or
liabilities. The recorded amounts reflect the fair value of the Companys derivatives as of each
reporting date presented, and will not necessarily reflect the value at settlement due to inherent
volatility in the financial markets. The accounting for subsequent changes in the fair value of
these derivatives depends on whether each has been designated and qualifies for hedge accounting
treatment pursuant to U.S. GAAP.
The Company has entered into various forward starting interest-rate swap agreements related to
anticipated term note securitization transactions. Prior to July 1, 2008, these interest-rate swap
agreements were designated and accounted for as cash flow hedges of specific term note
securitization transactions, as prescribed by U.S. GAAP. Under hedge accounting, the effective
portion of the gain or loss on a derivative designated as a cash flow hedge was reported net of tax
effects in accumulated other comprehensive income on the Consolidated Balance Sheets, until the
pricing of the related term securitization.
These hedges were expected to be highly effective in offsetting the changes in cash flows of the
forecasted transactions, and this expected relationship was documented at the inception of each
hedge. Prior to July 1, 2008, expected hedge effectiveness was assessed using the dollar-offset
change in variable cash flows method which involves a comparison of the present value of the
cumulative change in the expected future cash flows on the variable side of the interest-rate swap
to the present value of the cumulative change in the expected future cash flows on the hedged
floating-rate asset or liability. The Company retrospectively measured ineffectiveness using the
same methodology. The gain or loss from the effective portion of a derivative designated as a cash
flow hedge was recorded net of tax effects in other comprehensive income and the gain or loss from
the ineffective portion was reported in earnings.
- 12 -
Certain of these agreements were terminated simultaneously with the pricing of the related term
securitization transactions. For each terminated agreement, the realized gain or loss was deferred
and recorded in the equity section of the Consolidated Balance Sheets, and is being reclassified
into earnings as an adjustment to interest expense over the terms of the related term
securitizations.
While the Company may continue to use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the
fair value of derivative instruments, including those that had previously been accounted for under
hedge accounting, is recognized immediately in gain (loss) on derivatives. This change creates
volatility in our results of operations, as the fair value of our derivative financial instruments
changes over time, and this volatility may adversely impact our results of operations and financial
condition.
For the forecasted transactions that were probable of occurring, the derivative gain or loss in
accumulated other comprehensive income as of June 30, 2008 would have been reclassified into
earnings as an adjustment to interest expense over the terms of the related forecasted borrowings,
consistent with hedge accounting treatment. At the time that any related forecasted borrowing was
no longer probable of occurring, the related gain or loss in accumulated other comprehensive income
became recognized immediately in earnings.
- 13 -
The following tables summarize specific information regarding the active and terminated
interest-rate swap agreements described above:
For Active Agreements:
|
|
|
|
|
|
|
|
|
|
|
August, |
|
|
August, |
|
Inception Date |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October, |
|
|
October, |
|
Commencement Date |
|
2008 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Notional amount: |
|
|
|
|
|
|
|
|
March 31, 2010 |
|
$ |
50,000 |
|
|
$ |
50,000 |
|
December 31, 2009 |
|
$ |
50,000 |
|
|
$ |
50,000 |
|
For active agreements: |
|
|
|
|
|
|
|
|
Fair value recorded in other assets (liabilities) |
|
|
|
|
|
|
|
|
March 31, 2010 |
|
$ |
(574 |
) |
|
$ |
(634 |
) |
December 31, 2009 |
|
$ |
(1,145 |
) |
|
$ |
(1,263 |
) |
Unrealized gain, net of tax, recorded in equity |
|
|
|
|
|
|
|
|
March 31, 2010 |
|
$ |
|
|
|
$ |
|
|
December 31, 2009 |
|
$ |
|
|
|
$ |
|
|
For Terminated Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June/ |
|
|
|
January, |
|
|
December, |
|
|
March, |
|
|
August, |
|
|
September, |
|
Inception Date |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2006/2007 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October, |
|
|
October, |
|
|
October, |
|
|
October, |
|
|
September, |
|
Commencement Date |
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October, |
|
|
October, |
|
|
May, |
|
|
October, |
|
|
September, |
|
Termination Date |
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
25,000 |
|
|
$ |
100,000 |
|
|
$ |
25,000 |
|
|
$ |
300,000 |
|
|
$ |
225,000 |
|
Realized gain (loss) at termination |
|
$ |
(1,254 |
) |
|
$ |
(5,287 |
) |
|
$ |
(775 |
) |
|
$ |
(2,683 |
) |
|
$ |
3,732 |
|
Deferred gain (loss), net of tax,
recorded in equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(284 |
) |
|
$ |
42 |
|
December 31, 2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(357 |
) |
|
$ |
90 |
|
Amortization recognized as
increase (decrease) in interest
expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
121 |
|
|
$ |
(79 |
) |
Year ended December 31, 2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
699 |
|
|
$ |
(514 |
) |
Expected amortization during next
12 months as increase (decrease)
in interest expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
316 |
|
|
$ |
(71 |
) |
- 14 -
At March 31, 2010, a total of $820,000 of interest-earning cash is assigned as collateral for
interest-rate swap agreements.
The Company also uses interest-rate cap agreements that are not designated for hedge accounting
treatment to fulfill certain covenants in its special purpose subsidiarys warehouse borrowing
arrangements and for overall interest-rate risk management. Accordingly, these cap agreements are
recorded at fair value in other assets at $40,000 and $119,000 as of March 31, 2010 and December
31, 2009, respectively. The notional amount of interest-rate caps owned as of March 31, 2010 and
December 31, 2009 was $108.1 million and $121.4 million, respectively. Changes in the fair values
of the caps are recorded in gain (loss) on derivatives in the accompanying Consolidated Statements
of Operations.
NOTE 10 Fair Value Measurements
The Fair Value Measurements and Disclosures Topic of the FASB ASC establishes a framework for
measuring fair value and requires certain disclosures about fair value measurements. Its provisions
do not apply to fair value measurements for purposes of lease classification, which is addressed in
the Leases Topic of the FASB ASC.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the principal or most
advantageous market for the asset or liability at the measurement date (exit price). A three-level
valuation hierarchy is required for disclosure of fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement date. The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The level in the fair value hierarchy within which the fair value measurement in its entirety falls
is determined based on the lowest level input that is significant to the measurement in its
entirety.
The three levels are defined as follows:
|
|
|
Level 1 Inputs to the valuation are unadjusted quoted prices in active markets for
identical assets or liabilities. |
|
|
|
Level 2 Inputs to the valuation may include quoted prices for similar assets and
liabilities in active or inactive markets, and inputs other than quoted prices, such as
interest rates and yield curves, that are observable for the asset or liability for
substantially the full term of the financial instrument. |
|
|
|
Level 3 Inputs to the valuation are unobservable and significant to the fair value
measurement. Level 3 inputs shall be used to measure fair value only to the extent that
observable inputs are not available. |
The Company uses derivative financial instruments to manage exposure to the effects of changes in
market interest rates and to fulfill certain covenants in our borrowing arrangements. All
derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or
liabilities using measurements classified as Level 2. Because the Companys derivatives are not
listed on an exchange, the Company values these instruments using a valuation model with pricing
inputs that are observable in the market or that can be derived principally from or corroborated by
observable market data. These inputs include the forward LIBOR curve on which the variable payments
are based and the applicable interest-rate swap market curve. The Companys methodology also
incorporates the impact of both the Companys and the counterpartys credit standing.
All of the Companys assets and liabilities measured at fair value on a recurring basis are
computed using fair value measurements classified as Level 2, and include the following as of March
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Level 2 |
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
(Dollars in thousands) |
|
Assets |
|
|
|
|
|
|
|
|
Interest-rate caps purchased |
|
$ |
40 |
|
|
$ |
119 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Interest-rate swaps |
|
|
1,208 |
|
|
|
2,408 |
|
At this time, the Company has not elected to report any assets and liabilities using the fair value
option available under the Financial Instruments Topic of the FASB ASC.
- 15 -
Disclosures about the Fair Value of Financial Instruments
The Financial Instruments Topic of the FASB ASC requires the disclosure of the estimated fair value
of financial instruments including those financial instruments not measured at fair value on a
recurring basis. This requirement excludes certain instruments, such as the net investment in
leases and all nonfinancial instruments.
The fair values shown below have been derived, in part, by managements assumptions, the estimated
amount and timing of future cash flows and estimated discount rates. Valuation techniques involve
uncertainties and require assumptions and judgments regarding prepayments, credit risk and discount
rates. Changes in these assumptions will result in different valuation estimates. The fair values
presented would not necessarily be realized in an immediate sale. Derived fair value estimates
cannot necessarily be substantiated by comparison to independent markets or to other companies
fair value information.
The following summarizes the carrying amount and estimated fair value of the Companys financial
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
|
(Dollars in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
44,334 |
|
|
$ |
44,334 |
|
|
$ |
37,057 |
|
|
$ |
37,057 |
|
Restricted interest-earning deposits with banks |
|
|
65,521 |
|
|
|
65,521 |
|
|
|
63,400 |
|
|
|
63,400 |
|
Loans |
|
|
2,780 |
|
|
|
2,578 |
|
|
|
4,026 |
|
|
|
3,969 |
|
Interest-rate caps purchased |
|
|
40 |
|
|
|
40 |
|
|
|
119 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
|
|
|
|
|
|
|
|
62,541 |
|
|
|
62,541 |
|
Long-term borrowings |
|
|
268,434 |
|
|
|
277,710 |
|
|
|
244,445 |
|
|
|
244,477 |
|
Deposits |
|
|
85,135 |
|
|
|
86,620 |
|
|
|
80,288 |
|
|
|
81,903 |
|
Accounts payable and accrued expenses (1) |
|
|
15,020 |
|
|
|
15,020 |
|
|
|
11,846 |
|
|
|
11,846 |
|
Interest-rate swaps |
|
|
1,208 |
|
|
|
1,208 |
|
|
|
2,408 |
|
|
|
2,408 |
|
|
|
|
(1) |
|
Includes sales and property taxes payable. |
The paragraphs which follow describe the methods and assumptions used in estimating the fair values
of financial instruments.
(a) Cash and Cash Equivalents
The carrying amounts of the Companys cash and cash equivalents approximate fair value as of March
31, 2010 and December 31, 2009, because they bear interest at market rates and have maturities of
less than 90 days.
(b) Restricted Interest-earning Deposits with Banks
The Company maintains various interest-earning trust accounts related to our secured debt
facilities. The book value of such accounts is included in restricted interest-earning deposits
with banks on the accompanying Consolidated Balance Sheet. These accounts earn a floating market
rate of interest which results in a fair value approximating the carrying amount at March 31, 2010
and December 31, 2009.
(c) Loans
The fair values of loans are estimated by discounting contractual cash flows, using interest rates
currently being offered by the Company for loans with similar terms and remaining maturities to
borrowers with similar credit risk characteristics. Estimates utilized were based on the original
credit status of the borrowers combined with the portfolio delinquency statistics.
- 16 -
(d) Short-term and Long-term Borrowings
The fair value of the Companys debt and secured borrowings was estimated by discounting cash flows
at indicative market rates applicable to the Companys debt and secured borrowings of the same or
similar remaining maturities.
(e) Deposits
The fair value of the Companys deposits was estimated by discounting cash flows at current rates
paid by the Company for similar certificates of deposit of the same or similar remaining
maturities.
(f) Accounts Payable and Accrued Expenses
The carrying amount of the Companys accounts payable approximates fair value as of March 31, 2010
and December 31, 2009, because of the relatively short timeframe to realization.
(g) Interest-Rate Swaps and Interest-Rate Caps
Interest-rate swaps and interest-rate caps are measured at fair value on a recurring basis in
accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the FASB
ASC, using the inputs and methods described previously in the Fair Value Measurements section of
this Note.
NOTE
11 Earnings Per Common Share (EPS)
Pursuant to the Earnings Per Share Topic of the FASB ASC, unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and are included in the computation of earnings per share using the
two-class method.
Basic earnings per share is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period using the two-class method,
which includes our unvested restricted stock awards as participating securities. Diluted earnings
per share is computed based on the weighted average number of common shares outstanding for the
period using the two-class method, which includes our unvested restricted stock awards as
participating securities, and the dilutive impact of the exercise or conversion of common stock
equivalents, such as stock options, into shares of Common Stock as if those securities were
exercised or converted.
The following table provides net income and shares used in computing basic and diluted earnings per
common share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands, except |
|
|
|
per-share data) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,237 |
|
|
$ |
(879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
11,807,733 |
|
|
|
11,677,264 |
|
Add: Unvested restricted stock awards considered participating
securities |
|
|
970,730 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares used in computing basic EPS |
|
|
12,778,463 |
|
|
|
11,677,264 |
|
Add: Effect of dilutive stock options |
|
|
55,180 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares used in computing diluted EPS |
|
|
12,833,643 |
|
|
|
11,677,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.10 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
Diluted |
|
$ |
0.10 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
- 17 -
For the three-month periods ended March 31, 2010 and March 31, 2009, options to purchase 564,780
and 764,202 shares of common stock were not considered in the computation of potential common
shares for purposes of diluted EPS, since the exercise prices of the options were greater than the
average market price of the Companys common stock for the respective periods.
When computing diluted loss per share, all potential common shares, including stock options and
restricted stock, are anti-dilutive to the loss per common share calculation. Therefore, for the
three-month period ended March 31, 2009, the effect of 728,170 potential common shares have not
been considered for diluted EPS purposes.
NOTE 12 Comprehensive Income (Loss)
The following table details the components of comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Net income (loss), as reported |
|
$ |
1,237 |
|
|
$ |
(879 |
) |
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Change in fair value of derivatives |
|
|
|
|
|
|
|
|
Amortization of net deferred
losses (gains) on cash flow hedge
derivatives |
|
|
42 |
|
|
|
19 |
|
Tax effect |
|
|
(17 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
25 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
1,262 |
|
|
$ |
(868 |
) |
|
|
|
|
|
|
|
NOTE 13 Stockholders Equity
Stockholders Equity
On November 2, 2007, the Board of Directors (the Board) approved a stock repurchase plan. Under
this program, the Company is authorized to repurchase up to $15 million in value of its outstanding
shares of common stock. This authority may be exercised from time to time and in such amounts as
market conditions warrant. Any shares purchased under this plan are returned to the status of
authorized but unissued shares of common stock. The repurchases may be made on the open market, in
block trades or otherwise. The program may be suspended or discontinued at any time. The
repurchases are funded using the Companys working capital.
The Company did not purchase any shares of its common stock on the open market during the
three-month periods ended March 31, 2010 or March 31, 2009. At March 31, 2010, the Company had
$10.7 million remaining in its stock repurchase plan authorized by the Board.
In addition to the potential repurchases described above, pursuant to the Companys 2003 Equity
Compensation Plan (as amended, the 2003 Plan), participants may have shares withheld to cover
income taxes. There were 54,600 shares repurchased to cover income taxes during the three-month
period ended March 31, 2010, at an average cost of $8.88. There were 5,882 shares repurchased to
cover income taxes during the three-month period ended March 31, 2009, at an average cost of $3.90.
Regulatory Capital Requirements
On March 20, 2007, the FDIC approved the application of our wholly-owned subsidiary, MBB, to become
an industrial bank chartered by the State of Utah. MBB commenced operations effective March 12,
2008. MBB provides diversification of the Companys funding sources and, over time, may add other
product offerings to better serve our customer base.
On December 31, 2008, Marlin Business Services Corp. received approval from the Federal Reserve
Bank of San Francisco (the FRB) to become a bank holding company upon conversion of MBB from an
industrial bank to a commercial bank. On January 13, 2009, MBB received approval from the FRB to
become a member of the Federal Reserve System.
- 18 -
On January 13, 2009, MBB converted from an industrial bank to a commercial bank chartered and
supervised by the State of Utah and the Board of Governors of the Federal Reserve System (the
Federal Reserve Board). In connection with the conversion of MBB to a commercial bank, Marlin
Business Services Corp. became a bank holding company on January 13, 2009. On January 20, 2009, MBB
submitted a modification request to the FDIC related to the Order issued by the FDIC on March 20,
2007 (the Order) to eliminate certain inconsistencies between the Order and the FRB Approval of
MBB as a commercial bank. Until we receive the FDICs response to our submission, MBB intends to
continue operating in accordance with its original de novo three-year business plan, which assumed
total assets of up to $128 million by March 2011 (the end of the three-year de novo period.)
MBB is subject to capital adequacy guidelines issued by the Federal Financial Institutions
Examination Council (the FFIEC). These risk-based capital and leverage guidelines make regulatory
capital requirements more sensitive to differences in risk profiles among banking organizations and
consider off-balance sheet exposures in determining capital adequacy. The FFIEC and/or the U.S.
Congress may determine to increase capital requirements in the future due to the current economic
environment. Under the rules and regulations of the FFIEC, at least half of a banks total capital
is required to be Tier I capital as defined in the regulations, comprised of common equity,
retained earnings and a limited amount of non-cumulative perpetual preferred stock. The remaining
capital, Tier II capital, as defined in the regulations, may consist of other preferred stock, a
limited amount of term subordinated debt or a limited amount of the reserve for possible credit
losses. The FFIEC has also adopted minimum leverage ratios for banks, which are calculated by
dividing Tier I capital by total quarterly average assets. Recognizing that the risk-based capital
standards principally address credit risk rather than interest rate, liquidity, operational or
other risks, many banks are expected to maintain capital in excess of the minimum standards. The
Company will provide the necessary capital to maintain MBB at well-capitalized status as defined
by banking regulations. MBBs equity balance at March 31, 2010 was $17.1 million, which met all
capital requirements to which MBB is subject and qualified for well-capitalized status. Bank
holding companies are required to comply with the Federal Reserve Boards risk-based capital
guidelines that require a minimum ratio of total capital to risk-weighted assets of 8%. At least
half of the total capital is required to be Tier 1 capital. In addition to the risk-based capital
guidelines, the Federal Reserve Board has adopted a minimum leverage capital ratio under which a
bank holding company must maintain a level of Tier 1 capital to average total consolidated assets
of at least 3% in the case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a leverage capital ratio of at least 4%. At March 31, 2010, Marlin
Business Services Corp. also exceeded its regulatory capital requirements and is considered
well-capitalized as defined by federal banking regulations. MBB is designated a Risk Category I
institution for purposes of the risk-based assessment for FDIC deposit insurance. Risk Category I
institutions pay the lowest tier of premiums for their deposit insurance.
The following table sets forth the Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total
risk-based capital ratio for Marlin Business Services Corp. and MBB at March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital |
|
|
Well-Capitalized Capital |
|
|
|
Actual |
|
|
Requirement |
|
|
Requirement |
|
|
|
Ratio |
|
|
Amount |
|
|
Ratio(1) |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
|
(Dollars in thousands) |
|
Tier 1 Leverage Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp. |
|
|
27.69 |
% |
|
$ |
150,761 |
|
|
|
4 |
% |
|
$ |
21,780 |
|
|
|
5 |
% |
|
$ |
27,225 |
|
Marlin Business Bank |
|
|
16.41 |
% |
|
$ |
17,077 |
|
|
|
5 |
% |
|
$ |
5,205 |
|
|
|
5 |
% |
|
$ |
5,205 |
|
Tier 1 Risk-based Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp. |
|
|
33.35 |
% |
|
$ |
150,761 |
|
|
|
4 |
% |
|
$ |
18,083 |
|
|
|
6 |
% |
|
$ |
27,125 |
|
Marlin Business Bank |
|
|
16.77 |
% |
|
$ |
17,077 |
|
|
|
6 |
% |
|
$ |
6,108 |
|
|
|
6 |
% |
|
$ |
6,108 |
|
Total Risk-based Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp. |
|
|
34.61 |
% |
|
$ |
156,469 |
|
|
|
8 |
% |
|
$ |
36,166 |
|
|
|
10 |
% |
|
$ |
45,208 |
|
Marlin Business Bank |
|
|
17.81 |
% |
|
$ |
18,128 |
|
|
|
15 |
% |
|
$ |
15,270 |
|
|
|
10 |
%(1) |
|
$ |
10,180 |
|
|
|
|
(1) |
|
MBB is required to maintain well-capitalized status. In addition, MBB must
maintain a total risk-based capital ratio greater than 15%. |
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) requires the federal regulators to take prompt corrective action against any
undercapitalized institution. FDICIA establishes five capital categories: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. Well-capitalized institutions significantly exceed the required minimum level
for each relevant capital measure. Adequately capitalized institutions include depository
institutions that meet but do not significantly exceed the required minimum level for each relevant
capital measure. Undercapitalized institutions consist of those that fail to meet the required
minimum level for one or more relevant capital measures. Significantly undercapitalized
characterizes depository institutions with capital levels significantly below the minimum
requirements for any relevant capital measure. Critically undercapitalized refers to depository
institutions with minimal capital and at serious risk for government seizure.
- 19 -
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 institutions capital, the agencys corrective powers include, among
other things:
|
|
|
prohibiting the payment of principal and interest on subordinated debt; |
|
|
|
prohibiting the holding company from making distributions without prior regulatory
approval; |
|
|
|
placing limits on asset growth and restrictions on activities; |
|
|
|
placing additional restrictions on transactions with affiliates; |
|
|
|
restricting the interest rate the institution may pay on deposits; |
|
|
|
prohibiting the institution from accepting deposits from correspondent banks; and |
|
|
|
in the most severe cases, appointing a conservator or receiver for the institution. |
A banking institution that is undercapitalized is required to submit a capital restoration plan,
and such a plan will not be accepted unless, among other things, the banking institutions holding
company guarantees the plan up to a certain specified amount. Any such guarantee from a depository
institutions holding company is entitled to a priority of payment in bankruptcy.
Pursuant to the Order, MBB was required to have beginning paid-in capital funds of not less than
$12.0 million and must keep its total risk-based capital ratio above 15%. MBBs equity balance at
March 31, 2010 was $17.1 million, which qualifies for well capitalized status.
Dividends. 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. Pursuant to the Order, MBB is not permitted to pay dividends during the first three
years of operations without the prior written approval of the FDIC and the State of Utah.
NOTE 14 Stock-Based Compensation
Under the terms of the 2003 Plan, employees, certain consultants and advisors, and non-employee
members of the Board have the opportunity to receive incentive and nonqualified grants of stock
options, stock appreciation rights, restricted stock and other equity-based awards as approved by
the Board. These award programs are used to attract, retain and motivate employees and to
encourage individuals in key management roles to retain stock. The Company has a policy of issuing
new shares to satisfy awards under the 2003 Plan. The aggregate number of shares under the 2003
Plan that may be issued pursuant to stock options or restricted stock grants is 3,300,000. Not more
than 1,650,000 of such shares shall be available for issuance as restricted stock grants. There
were 461,646 shares available for future grants under the 2003 Plan as of March 31, 2010.
Total stock-based compensation expense was $1.3 million and $402,000 for the three-month periods
ended March 31, 2010 and March 31, 2009, respectively. Excess tax benefits from stock-based payment
arrangements decreased cash provided by operating activities and increased cash provided by
financing activities by $56,000 for the three-month period ended March 31, 2010. There were no
excess tax benefits from stock-based payment arrangements for the three-month period ended March
31, 2009.
Stock Options
Option awards are generally granted with an exercise price equal to the market price of the
Companys stock at the date of the grant and have 7- to 10-year contractual terms. All options
issued contain service conditions based on the participants continued service with the Company,
and provide for accelerated vesting if there is a change in control as defined in the 2003 Plan.
- 20 -
Employee stock options generally vest over four years. The vesting of certain options is contingent
on various Company performance measures, such as earnings per share and net income. The Company has
recognized expense related to performance options based on the most probable performance
assumptions as of March 31, 2010. There were no revisions to performance assumptions during the
three-month periods ended March 31, 2010 and March 31, 2009.
The Company also issues stock options to non-employee independent directors. These options
generally vest in one year.
There were no stock options granted during the three-month period ended March 31, 2010. A summary
of option activity for the three months ended March 31, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Exercise Price |
|
Options |
|
Shares |
|
|
Per Share |
|
Outstanding, December 31, 2009 |
|
|
778,161 |
|
|
$ |
12.20 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(28,503 |
) |
|
|
3.99 |
|
Forfeited |
|
|
(30,982 |
) |
|
|
21.60 |
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2010 |
|
|
718,676 |
|
|
$ |
12.12 |
|
|
|
|
|
|
|
|
|
During the three-month periods ended March 31, 2010 and March 31, 2009, the Company recognized
total compensation expense related to options of $74,000 and $101,000, respectively.
The total pretax intrinsic value of stock options exercised was $141,000 for the three-month period
ended March 31, 2010. The related tax benefits realized from the exercise of stock options for the
three-month period ended March 31, 2010 was $56,000. There were no stock options exercised for the
three-month period ended March 31, 2009.
The following table summarizes information about the stock options outstanding and exercisable as
of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
Intrinsic |
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Intrinsic |
|
Range of |
|
Number |
|
|
Remaining |
|
|
Average |
|
|
Value |
|
|
Number |
|
|
Average Remaining |
|
|
Average |
|
|
Value |
|
Exercise Prices |
|
Outstanding |
|
|
Life (Years) |
|
|
Exercise Price |
|
|
(In thousands) |
|
|
Exercisable |
|
|
Life (Years) |
|
|
Exercise Price |
|
|
(In thousands) |
|
$3.39 |
|
|
85,925 |
|
|
|
2.0 |
|
|
$ |
3.39 |
|
|
$ |
581 |
|
|
|
85,925 |
|
|
|
2.0 |
|
|
$ |
3.39 |
|
|
$ |
581 |
|
$5.01 |
|
|
5,050 |
|
|
|
0.3 |
|
|
|
5.01 |
|
|
|
26 |
|
|
|
5,050 |
|
|
|
0.3 |
|
|
|
5.01 |
|
|
|
26 |
|
$7.17 10.18 |
|
|
356,839 |
|
|
|
4.1 |
|
|
|
9.43 |
|
|
|
260 |
|
|
|
178,602 |
|
|
|
3.0 |
|
|
|
9.60 |
|
|
|
102 |
|
$14.00 16.01 |
|
|
63,484 |
|
|
|
3.9 |
|
|
|
14.63 |
|
|
|
|
|
|
|
57,235 |
|
|
|
3.8 |
|
|
|
14.57 |
|
|
|
|
|
$17.52 22.23 |
|
|
207,378 |
|
|
|
3.3 |
|
|
|
19.76 |
|
|
|
|
|
|
|
159,166 |
|
|
|
3.1 |
|
|
|
19.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
718,676 |
|
|
|
3.6 |
|
|
|
12.12 |
|
|
$ |
867 |
|
|
|
485,978 |
|
|
|
2.9 |
|
|
|
12.27 |
|
|
$ |
709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic
value, based on the Companys closing stock price of $10.15 as of March 31, 2010, which would have
been received by the option holders had all option holders exercised their options as of that date.
As of March 31, 2010, the total future compensation cost related to non-vested stock options not
yet recognized in the Consolidated Statements of Operations was $245,000 and the weighted average
period over which these awards are expected to be recognized was 1.2 years, based on the most
probable performance assumptions as of March 31, 2010. In the event maximum performance targets are
achieved, an additional $731,000 of compensation cost would be recognized over a weighted average
period of 1.5 years.
At the October 28, 2009 annual stockholders meeting, the shareholders voted to approve an
amendment to the 2003 Plan to allow a one-time stock option exchange program for the Companys
employees, to commence within six months following the annual meeting. The exchange program tender
offer was issued on April 23, 2010. To the extent employees elect to participate in the exchange,
the program will allow us to cancel certain underwater stock options currently held by our
employees in exchange for the grant of a lesser amount of stock options with lower exercise prices
and a new vesting schedule and term. Each replacement option will have an exercise price per share
equal to the closing price of our common stock on the date of grant, and will have a new seven-year
term. The exchange offer is scheduled to expire on May 21, 2010, unless the offer is extended.
- 21 -
Restricted Stock Awards
Restricted stock awards provide that, during the applicable vesting periods, the shares awarded may
not be sold or transferred by the participant. The vesting period for restricted stock awards
generally ranges from 3 to 10 years, though certain awards for special projects may vest in as
little as one year depending on the duration of the project. All awards issued contain service
conditions based on the participants continued service with the Company, and may provide for
accelerated vesting if there is a change in control as defined in the 2003 Plan.
The vesting of certain restricted shares may be accelerated to a minimum of 3 to 4 years based on
achievement of various individual and Company performance measures. In addition, the Company has
issued certain shares under a Management Stock Ownership Program. Under this program, restrictions
on the shares lapse at the end of 10 years but may lapse (vest) in a minimum of three years if the
employee continues in service at the Company and owns a matching number of other common shares in
addition to the restricted shares.
Of the total restricted stock awards granted during the three-month period ended March 31, 2010,
19,582 shares may be subject to accelerated vesting based on performance factors; no shares have
vesting contingent upon performance factors. The Company has recognized expense related to
performance-based shares based on the most probable performance assumptions as of March 31, 2010.
There were no revisions to performance assumptions for the three-month periods ended March 31, 2010
and March 31, 2009, although vesting was accelerated on certain awards based on an annual
evaluation of the achievement of performance criteria, as described below.
The Company also issues restricted stock to non-employee independent directors. These shares
generally vest in seven years from the grant date or six months following the directors
termination from Board service.
The following table summarizes the activity of the non-vested restricted stock during the three
months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
Non-vested restricted stock |
|
Shares |
|
|
Fair Value |
|
Outstanding at December 31, 2009 |
|
|
1,023,403 |
|
|
$ |
7.74 |
|
Granted |
|
|
59,540 |
|
|
|
9.52 |
|
Vested |
|
|
(164,036 |
) |
|
|
7.11 |
|
Forfeited |
|
|
(850 |
) |
|
|
6.20 |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010 |
|
|
918,057 |
|
|
$ |
7.97 |
|
|
|
|
|
|
|
|
|
During the three-month periods ended March 31, 2010 and March 31, 2009, the Company granted
restricted stock awards with grant date fair values totaling $567,000 and $2.1 million,
respectively.
As vesting occurs, or is deemed likely to occur, compensation expense is recognized over the
requisite service period and additional paid-in capital is increased. The Company recognized $1.3
million and $301,000 of compensation expense related to restricted stock for the three-month
periods ended March 31, 2010 and March 31, 2009, respectively. Of the $1.3 million total
compensation expense related to restricted stock for the three-month period ended March 31, 2010,
approximately $866,000 related to the acceleration of vesting based on an annual evaluation of the
achievement of certain performance criteria.
As of March 31, 2010, there was $4.9 million of unrecognized compensation cost related to
non-vested restricted stock compensation scheduled to be recognized over a weighted average period
of 4.2 years, based on the most probable performance assumptions as of March 31, 2010. In the event
performance targets are achieved, $1.8 million of the unrecognized compensation cost would
accelerate to be recognized over a weighted average period of 1.4 years, and an additional $231,000
of compensation cost would be recognized over a weighted average period of 0.7 years. In addition,
certain of the awards granted during 2009 may result in the issuance of 141,935 additional shares
of stock if achievement of certain targets is greater than 100%. The expense related to the
additional shares awarded will be dependent on the Companys stock price when the achievement level
is determined.
The fair value of shares that vested during the three-month periods ended March 31, 2010 and March
31, 2009 was $1.5 million and $61,000, respectively.
- 22 -
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our Consolidated Financial Statements and the related notes thereto in
our Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange
Commission (SEC). This discussion contains certain statements of a forward-looking nature that
involve risks and uncertainties.
FORWARD-LOOKING STATEMENTS
Certain statements in this document may include the words or phrases can be, expects, plans,
may, may affect, may depend, believe, estimate, intend, could, should, would,
if and similar words and phrases that constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. 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 financing; (d) the effectiveness of our hedges; (e) our understanding of our
competition; and (f) industry and market trends. The Companys actual results could differ
materially from those anticipated by such forward-looking statements due to a number of factors,
some beyond the Companys control, including, without limitation:
|
|
|
availability, terms and deployment of funding and capital; |
|
|
|
|
general volatility of the securitization and capital markets; |
|
|
|
|
changes in our industry, interest rates or the general economy; resulting in changes to our business strategy; |
|
|
|
|
the degree and nature of our competition; |
|
|
|
|
availability and retention of qualified personnel; and |
|
|
|
|
the factors set forth in the section captioned Risk Factors in our Form 10-K for the year ended December 31, 2009 filed
with the SEC. |
Forward-looking statements apply only as of the date made and the Company is not required to update
forward-looking statements for subsequent or unanticipated events or circumstances.
Overview
We are a nationwide provider of equipment financing solutions, primarily to small businesses. We
finance over 100 categories of commercial equipment important to our end user customers including
copiers, certain commercial and industrial equipment, security systems, computers and
telecommunications equipment. We access our end user customers through origination sources
comprised of our existing network of independent equipment dealers and, to a much lesser extent,
through relationships with lease brokers and through direct solicitation of our end user customers.
Our leases are fixed-rate transactions with terms generally ranging from 36 to 60 months. At
March 31, 2010, our lease portfolio consisted of approximately 83,000 accounts with an average
original term of 50 months and average original transaction size of approximately $11,300.
Since our founding in 1997, we have grown to $534.5 million in total assets at March 31, 2010. Our
assets are substantially comprised of our net investment in leases and loans which totaled $408.2
million at March 31, 2010.
On March 20, 2007, the Federal Deposit Insurance Corporation (FDIC) approved the application of
our wholly-owned subsidiary, Marlin Business Bank (MBB), to become an industrial bank chartered
by the State of Utah. MBB commenced operations effective March 12, 2008. MBB provides
diversification of the Companys funding sources and, over time, may add other product offerings to
better serve our customer base.
On December 31, 2008, MBB received approval from the Federal Reserve Bank of San Francisco to (i)
convert from an industrial bank to a state-chartered commercial bank and (ii) become a member of
the Federal Reserve System. In addition, on December 31, 2008, Marlin Business Services Corp.
received approval to become a bank holding company upon conversion of MBB from an industrial bank
to a commercial bank.
- 23 -
On January 13, 2009, MBB converted from an industrial bank to a commercial bank chartered and
supervised by the State of Utah and the Federal Reserve Board. In connection with the conversion of
MBB to a commercial bank, Marlin Business Services Corp. became a bank holding company on January
13, 2009.
We generally reach our lessees through a network of independent equipment dealers and, to a much
lesser extent, lease brokers. The number of dealers and brokers that we conduct business with
depends on, among other things, the number of sales account executives we have. Sales account
executive staffing levels and the activity of our origination sources are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
Ended |
|
|
|
|
|
|
March 31, |
|
|
As of or For the Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Number of sales account executives |
|
|
53 |
|
|
|
38 |
|
|
|
86 |
|
|
|
118 |
|
|
|
100 |
|
|
|
103 |
|
Number of originating sources(1) |
|
|
484 |
|
|
|
465 |
|
|
|
1,014 |
|
|
|
1,246 |
|
|
|
1,295 |
|
|
|
1,295 |
|
|
|
|
(1) |
|
Monthly average of origination sources generating lease volume |
Our revenue consists of interest and fees from our leases and loans and, to a lesser extent, income
from our property insurance program and other fee income. Our expenses consist of interest expense
and operating expenses, which include salaries and benefits and other general and administrative
expenses. As a credit lender, our earnings are also significantly impacted by credit losses. For
the quarter ended March 31, 2010, our annualized net credit losses were 4.70% of our average total
finance receivables. We establish reserves for credit losses which require us to estimate inherent
losses in our portfolio.
Our leases are classified under generally accepted accounting principles in the United States of
America (U.S. GAAP) as direct financing leases, and we recognize interest income over the term of
the lease. Direct financing leases transfer substantially all of the benefits and risks of
ownership to the equipment lessee. Our net investment in direct finance leases is included in our
consolidated financial statements in net investment in leases and loans. Net investment in
direct financing leases consists of the sum of total minimum lease payments receivable and the
estimated residual value of leased equipment, less unearned lease income. Unearned lease income
consists of the excess of the total future minimum lease payments receivable plus the estimated
residual value expected to be realized at the end of the lease term plus deferred net initial
direct costs and fees less the cost of the related equipment. Approximately 70% of our lease
portfolio at March 31, 2010 amortizes over the lease term to a $1 residual value. For the
remainder of the portfolio, we must estimate end of term residual values for the leased assets.
Failure to correctly estimate residual values could result in losses being realized on the
disposition of the equipment at the end of the lease term.
Since our founding, we have funded our business through a combination of variable-rate borrowings
and fixed-rate asset securitization transactions, as well as through the issuance from time to time
of subordinated debt and equity securities. Our variable-rate borrowing currently consists of a
long-term loan facility. We have traditionally issued fixed-rate term debt through the asset-backed
securitization market. Historically, leases have been funded through variable-rate warehouse
facilities until they were refinanced through term note securitizations at fixed rates. All of our
term note securitizations have been accounted for as on-balance sheet transactions and, therefore,
we have not recognized gains or losses from these transactions. As of March 31, 2010, $249.1
million, or 92.8%, of our borrowings were fixed-rate term note securitizations.
In addition, since its opening on March 12, 2008, MBB provides diversification of the Companys
funding sources through the issuance of FDIC-insured certificates of deposit raised nationally
primarily through various brokered deposit relationships and FDIC-insured retail deposits directly
from other financial institutions. As of March 31, 2010, total deposits were $85.1 million.
Since we initially finance our fixed-rate leases with variable-rate financing, our earnings are
exposed to interest rate risk should interest rates rise before we complete our fixed-rate term
note securitizations. We generally benefit in times of falling and low interest rates. We are
also dependent upon obtaining future financing to refinance our warehouse line of credit in order
to grow our lease portfolio. We have historically completed a fixed-rate term note securitization
approximately once a year. Due to the impact on interest rates from unfavorable market conditions
and the available capacity in our warehouse facilities at the time, the Company elected not to
complete fixed-rate term note securitizations in 2008 or 2009. Failure to obtain such financing, or
other alternate financing, represents a restriction on our growth and future financial performance.
- 24 -
On February 12, 2010, we completed an $80.7 million TALF eligible term asset-backed securitization.
This transaction was Marlins
tenth term note securitization and the fifth to earn a AAA rating. As with all of the Companys
prior term note securitizations, this financing provides the Company with fixed-cost borrowing and
will be recorded in long-term borrowings in the Consolidated Balance Sheets. A portion of the
proceeds of the new securitization was used to repay the full amount outstanding under the CP
conduit warehouse facility.
We use derivative financial instruments to manage exposure to the effects of changes in market
interest rates and to fulfill certain covenants in our borrowing arrangements. All derivatives are
recorded on the Consolidated Balance Sheets at their fair value as either assets or liabilities.
Accounting for the changes in fair value of derivatives depends on whether the derivative has been
designated and qualifies for hedge accounting treatment pursuant to the Derivatives and Hedging
Topic of the Financial Accounting Standards Board (the FASB) Accounting Standards Codification
(ASC). While the Company may continue to use derivative financial instruments to reduce exposure
to changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with U.S. GAAP.
Preparation of these financial statements requires us to make estimates and judgments that affect
reported amounts of assets and liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of our financial statements. On an ongoing basis, we
evaluate our estimates, including credit losses, residuals, initial direct costs and fees, other
fees, performance assumptions for stock-based compensation awards, the probability of forecasted
transactions, the fair value of financial instruments and the realization of deferred tax assets.
We base our estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Critical accounting policies are defined as those that are reflective of significant
judgments and uncertainties. Our consolidated financial statements are based on the selection and
application of critical accounting policies, the most significant of which are described below.
Income recognition. Interest income is recognized under the effective interest method. The
effective interest method of income recognition applies a constant rate of interest equal to the
internal rate of return on the lease. When a lease or loan is 90 days or more delinquent, the
contract is classified as being on non-accrual and we do not recognize interest income on that
contract until it is less than 90 days delinquent.
Fee income consists of fees for delinquent lease and loan payments, cash collected on early
termination of leases and net residual income. Net residual income includes income from lease
renewals and gains and losses on the realization of residual values of leased equipment disposed at
the end of term.
At the end of the original lease term, lessees may choose to purchase the equipment, renew the
lease or return the equipment to the Company. The Company receives income from lease renewals when
the lessee elects to retain the equipment longer than the original term of the lease. This income,
net of appropriate periodic reductions in the estimated residual values of the related equipment,
is included in fee income as net residual income.
When the lessee elects to return the equipment at lease termination, the equipment is transferred
to other assets at the lower of its basis or fair market value. The Company generally sells
returned equipment to an independent third party, rather than leasing the equipment a second time.
The Company does not maintain equipment in other assets for longer than 120 days. Any loss
recognized on transferring the equipment to other assets, and any gain or loss realized on the sale
or disposal of equipment to the lessee or to others is included in fee income as net residual
income. Management performs periodic reviews of the estimated residual values and any impairment,
if other than temporary, is recognized in the current period.
Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated
collection rates. At a minimum of every quarter, an analysis of anticipated collection rates is
performed based on updates to collection experience. Adjustments in assumptions are made as needed
based on this analysis. Other fees are recognized when received.
- 25 -
Insurance income is recognized on an accrual basis as earned over the term of the lease. Generally,
insurance payments that are 120 days or more past due are charged against income. Ceding
commissions, losses and loss adjustment expenses are recorded in the period incurred and netted
against insurance income.
Initial direct costs and fees. We defer initial direct costs incurred and fees received to
originate our leases and loans in accordance with the Receivables Topic and the Nonrefundable Fees
and Other Costs Subtopic of the FASB ASC. The initial direct costs and fees we defer are part of
the net investment in leases and loans, and are amortized to interest income using the effective
interest method. We defer third-party commission costs as well as certain internal costs directly
related to the origination activity. Costs subject to deferral include evaluating the prospective
customers financial condition, evaluating and recording guarantees and other security
arrangements, negotiating terms, preparing and processing documents and closing the transaction.
Estimates of costs subject to deferral are updated periodically, and no less frequently than each
year. The fees we defer are documentation fees collected at inception. The realization of the
deferred initial direct costs, net of fees deferred, is predicated on the net future cash flows
generated by our lease and loan portfolios.
Lease residual values. A direct financing lease is recorded at the aggregate future minimum lease
payments plus the estimated residual values less unearned income. Residual values reflect the
estimated amounts to be received at lease termination from lease extensions, sales or other
dispositions of leased equipment. These estimates are based on industry data and on our experience.
Management performs periodic reviews of the estimated residual values and any impairment, if other
than temporary, is recognized in the current period.
Allowance for credit losses. In accordance with the Contingencies Topic of the FASB ASC, we
maintain an allowance for credit losses at an amount sufficient to absorb losses inherent in our
existing lease and loan portfolios as of the reporting dates based on our projection of probable
net credit losses. We evaluate our portfolios on a pooled basis, due to their composition of small
balance, homogenous accounts with similar general credit risk characteristics, diversified among a
large cross section of variables including industry, geography, equipment type, obligor and vendor.
To project probable net credit losses, we perform a migration analysis of delinquent and current
accounts based on historic loss experience. A migration analysis is a technique used to estimate
the likelihood that an account will progress through the various delinquency stages and ultimately
charge off. In addition to the migration analysis, we also consider other factors including recent
trends in delinquencies and charge-offs; accounts filing for bankruptcy; account modifications;
recovered amounts; forecasting uncertainties; the composition of our lease and loan portfolios;
economic conditions; and seasonality. The various factors used in the analysis are reviewed on a
periodic basis. We then establish an allowance for credit losses for the projected probable net
credit losses based on this analysis. A provision is charged against earnings to maintain the
allowance for credit losses at the appropriate level. Our policy is to charge-off against the
allowance the estimated unrecoverable portion of accounts once they reach 121 days delinquent.
Our projections of probable net credit losses are inherently uncertain, and as a result we cannot
predict with certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolios, bankruptcy laws, and other factors could impact
our actual and projected net credit losses and the related allowance for credit losses. To the
degree we add new leases and loans to our portfolios, or to the degree credit quality is worse than
expected, we record expense to increase the allowance for credit losses for the estimated net
losses inherent in our portfolios. Actual losses may vary from current estimates.
Securitizations. From inception to March 31, 2010, we have completed ten term note securitizations
of which six have been repaid. In connection with each transaction, we established a bankruptcy
remote SPE and issued term debt to institutional investors. These SPEs are considered VIEs under
U.S. GAAP. We are required to consolidate VIEs in which we are deemed to be the primary beneficiary
through having (1) power over the significant activities of the entity and (2) an obligation to
absorb losses or the right to receive benefits from the VIE which are potentially significant to
the VIE. We continue to service the assets of our VIEs and retain equity and/or residual
interests. Accordingly, assets and related debt of these VIEs are included in the accompanying
Consolidated Balance Sheets. Our leases and restricted interest-earning deposits with banks are
assigned as collateral for these borrowings and there is no further recourse to our general credit.
Collateral in excess of these borrowings represents our maximum loss exposure.
Derivatives. The Derivatives and Hedging Topic of the FASB ASC requires recognition of all
derivatives at fair value as either assets or liabilities in the Consolidated Balance Sheets. The
accounting for subsequent changes in the fair value of these derivatives depends on whether each
has been designated and qualifies for hedge accounting treatment pursuant to the accounting
standard.
- 26 -
Prior to July 1, 2008, the Company entered into derivative contracts which were accounted for as
cash flow hedges under hedge accounting as prescribed by U.S. GAAP. Under hedge accounting, the
effective portion of the gain or loss on a derivative designated as
a cash flow hedge was reported net of tax effects in accumulated other comprehensive income on the
Consolidated Balance Sheets, until the pricing of the related term securitization. The derivative
gain or loss recognized in accumulated other comprehensive income was then reclassified into
earnings as an adjustment to interest expense over the terms of the related borrowings.
While the Company may continue to use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the
fair value of derivative instruments, including those that had previously been accounted for under
hedge accounting, is recognized immediately in gain (loss) on derivatives. This change creates
volatility in our results of operations, as the fair value of our derivative financial instruments
changes over time, and this volatility may adversely impact our results of operations and financial
condition.
For the forecasted transactions that were probable of occurring, the derivative gain or loss in
accumulated other comprehensive income as of June 30, 2008 would have been reclassified into
earnings as an adjustment to interest expense over the terms of the related forecasted borrowings,
consistent with hedge accounting treatment. At the time that any related forecasted borrowing was
no longer probable of occurring, the related gain or loss in accumulated other comprehensive income
became recognized immediately in earnings.
The Fair Value Measurements and Disclosures Topic of the FASB ASC establishes a framework for
measuring fair value under U.S. GAAP and requires certain disclosures about fair value
measurements. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in the principal or most
advantageous market for the asset or liability at the measurement date (exit price). Because the
Companys derivatives are not listed on an exchange, the Company values these instruments using a
valuation model with pricing inputs that are observable in the market or that can be derived
principally from or corroborated by observable market data.
Stock-based compensation. We issue both restricted shares and stock options to certain employees
and directors as part of our overall compensation strategy. The CompensationStock Compensation
Topic of the FASB ASC establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees, except for equity
instruments held by employee share ownership plans.
Stock-based compensation cost is measured at grant date, based on the fair value of the awards
ultimately expected to vest. Compensation cost is recognized on a straight-line basis over the
service period. We use the Black-Scholes valuation model to measure the fair value of our stock
options utilizing various assumptions with respect to expected holding period, risk-free interest
rates, stock price volatility, and dividend yield. The assumptions are based on subjective future
expectations combined with management judgment.
The Company uses judgment in estimating the amount of awards that are expected to be forfeited,
with subsequent revisions to the assumptions if actual forfeitures differ from those estimates. In
addition, for performance-based awards the Company estimates the degree to which the performance
conditions will be met to estimate the number of shares expected to vest and the related
compensation expense. Compensation expense is adjusted in the period such performance estimates
change.
Income taxes. The Income Taxes Topic of the FASB ASC requires the use of the asset and liability
method under which deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and liabilities, given the
provisions of the enacted tax laws. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities and projected
future taxable income in making this assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will realize the benefits of
these deductible differences.
- 27 -
Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax
assets. The process involves summarizing temporary differences resulting from the different
treatment of items, for example, leases for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included within the Consolidated Balance Sheets.
Our management must then assess the likelihood that deferred tax assets will be recovered from
future taxable income or tax carry-back availability and, to the extent our management believes
recovery is not likely, a valuation allowance must be established. To the extent that we establish
a valuation allowance in a period, an expense must be recorded within the tax provision in the
Consolidated Statements of Operations.
At March 31, 2010, there have been no material changes to the liability for uncertain tax positions
and there are no significant unrecognized tax benefits. The periods subject to general examination
for the Companys federal return include the 2006 tax year to the present. The Company files state
income tax returns in various states which may have different statutes of limitations. Generally,
state income tax returns for years 2005 through the present are subject to examination.
The Company records penalties and accrued interest related to uncertain tax positions in
income tax expense. Such adjustments have historically been minimal and immaterial to our financial
results.
RESULTS OF OPERATIONS
Comparison of the Three-Month Periods Ended March 31, 2010 and 2009
Net income. Net income of $1.2 million was reported for the three-month period ended March 31,
2010, resulting in diluted earnings per share of $0.10. This net income includes an after-tax
charge of approximately $57,000 due to the net loss on derivatives. The net loss of $879,000 for
the three-month period ended March 31, 2009 reflects an after-tax charge of approximately $791,000
due to the loss on derivatives. Excluding the impact of these after-tax charges on both periods,
net income would have been $1.3 million for the three-month period ended March 31, 2010, compared
to a net loss of $88,000 for the three-month period ended March 31, 2009. Diluted earnings per
share excluding these after-tax charges would have been $0.10 for the three-month period ended
March 31, 2010, compared to a diluted loss per share of $0.01 for the three-month period ended
March 31, 2009. The exclusion of the losses on derivatives removes the volatility resulting from
derivatives activities subsequent to discontinuing hedge accounting in July 2008.
Excluding the after-tax losses on derivatives identified above, returns on average assets were
0.95% for the three-month period ended March 31, 2010, compared to a net loss of 0.05% for the
three-month period ended March 31, 2009. On the same basis, returns on average equity were 3.47%
for the three-month period ended March 31, 2010, compared to a net loss of 0.24% for the
three-month period ended March 31, 2009.
The provision for credit losses decreased $5.6 million, or 64.4%, to $3.1 million for the
three-month period ended March 31, 2010 from $8.7 million for the same period in 2009, primarily
due to a reduced portfolio size, lower charge-offs and improved delinquencies. During the three
months ended March 31, 2010, net interest and fee income decreased $4.3 million, or 26.4%,
primarily due to a 33.2% decrease in average total finance receivables. The decrease in income was
partially mitigated by reductions in other expenses, which decreased $1.2 million, or 12.8%, for
the three-month period ended March 31, 2010, compared to the same period in 2009.
During the three months ended March 31, 2010, we generated 2,476 new leases with a cost of
$23.6 million compared to 3,811 new leases with a cost of $36.3 million generated for the three
months ended March 31, 2009. Much of the change in volume is the result of reductions in sales
staffing levels, which were 86 at December 31, 2008, 58 at March 31, 2009, 38 at December 31, 2009
and 53 at March 31, 2010. The reductions in staffing resulted from our decision to proactively
lower approval rates and volumes during 2009, in response to economic conditions. Part of the
impact of lower average staffing levels during the three months ended March 31, 2010 was offset by
a return to higher approval rates, which rose from 41% for the quarter ended March 31, 2009 to 46%
for the quarter ended March 31, 2010 due to the improved credit quality of the applications
received.
Overall, our average net investment in total finance receivables for the three-month period ended
March 31, 2010 decreased 33.2% to $431.2 million compared to $645.6 million for the three-month
period ended March 31, 2009.
- 28 -
Average balances and net interest margin. The following table summarizes the Companys average
balances, interest income, interest expense, and average yields and rates on major categories of
interest-earning assets and interest-bearing liabilities for the three-month periods ended March
31, 2010 and March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
|
Average(1) |
|
|
|
|
|
|
Average |
|
|
Average(1) |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Yields/Rates(2) |
|
|
Balance |
|
|
Interest |
|
|
Yields/Rates(2) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks |
|
$ |
35,278 |
|
|
$ |
4 |
|
|
|
0.04 |
% |
|
$ |
36,858 |
|
|
$ |
58 |
|
|
|
0.62 |
% |
Restricted interest-earning deposits
with banks |
|
|
63,047 |
|
|
|
12 |
|
|
|
0.08 |
|
|
|
48,871 |
|
|
|
141 |
|
|
|
1.16 |
|
Net investment in leases(3) |
|
|
427,416 |
|
|
|
12,696 |
|
|
|
11.88 |
|
|
|
634,314 |
|
|
|
18,540 |
|
|
|
11.69 |
|
Loans receivable(3) |
|
|
3,759 |
|
|
|
117 |
|
|
|
12.45 |
|
|
|
11,256 |
|
|
|
333 |
|
|
|
11.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
529,500 |
|
|
|
12,829 |
|
|
|
9.69 |
|
|
|
731,299 |
|
|
|
19,072 |
|
|
|
10.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
1,836 |
|
|
|
|
|
|
|
|
|
|
|
1,650 |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
2,363 |
|
|
|
|
|
|
|
|
|
|
|
2,954 |
|
|
|
|
|
|
|
|
|
Property tax receivables |
|
|
1,481 |
|
|
|
|
|
|
|
|
|
|
|
2,553 |
|
|
|
|
|
|
|
|
|
Other assets(4) |
|
|
6,615 |
|
|
|
|
|
|
|
|
|
|
|
12,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets |
|
|
12,295 |
|
|
|
|
|
|
|
|
|
|
|
19,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
541,795 |
|
|
|
|
|
|
|
|
|
|
$ |
750,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings(5) |
|
$ |
28,854 |
|
|
$ |
325 |
|
|
|
4.51 |
% |
|
$ |
107,969 |
|
|
$ |
1,165 |
|
|
|
4.32 |
% |
Long-term borrowings(5) |
|
|
255,611 |
|
|
|
3,705 |
|
|
|
5.80 |
|
|
|
392,441 |
|
|
|
6,019 |
|
|
|
6.13 |
|
Deposits |
|
|
81,363 |
|
|
|
628 |
|
|
|
3.09 |
|
|
|
67,239 |
|
|
|
648 |
|
|
|
3.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
365,828 |
|
|
|
4,658 |
|
|
|
5.09 |
|
|
|
567,649 |
|
|
|
7,832 |
|
|
|
5.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives |
|
|
1,796 |
|
|
|
|
|
|
|
|
|
|
|
10,984 |
|
|
|
|
|
|
|
|
|
Sales and property taxes payable |
|
|
3,769 |
|
|
|
|
|
|
|
|
|
|
|
5,497 |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
5,120 |
|
|
|
|
|
|
|
|
|
|
|
3,655 |
|
|
|
|
|
|
|
|
|
Net deferred income tax liability |
|
|
15,950 |
|
|
|
|
|
|
|
|
|
|
|
15,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing
liabilities |
|
|
26,635 |
|
|
|
|
|
|
|
|
|
|
|
35,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
392,463 |
|
|
|
|
|
|
|
|
|
|
|
603,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
149,332 |
|
|
|
|
|
|
|
|
|
|
|
147,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
541,795 |
|
|
|
|
|
|
|
|
|
|
$ |
750,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
8,171 |
|
|
|
|
|
|
|
|
|
|
$ |
11,240 |
|
|
|
|
|
Interest rate spread(6) |
|
|
|
|
|
|
|
|
|
|
4.60 |
% |
|
|
|
|
|
|
|
|
|
|
4.91 |
% |
Net interest margin(7) |
|
|
|
|
|
|
|
|
|
|
6.17 |
% |
|
|
|
|
|
|
|
|
|
|
6.15 |
% |
Ratio of average interest-earning
assets to average interest-bearing
liabilities |
|
|
|
|
|
|
|
|
|
|
144.74 |
% |
|
|
|
|
|
|
|
|
|
|
128.83 |
% |
|
|
|
(1) |
|
Average balances are calculated using month-end balances, to the extent such
averages are representative of operations. |
|
(2) |
|
Annualized. |
|
(3) |
|
Average balances of leases and loans include non-accrual leases and loans, and are presented net of unearned income. |
|
(4) |
|
Includes operating leases. |
|
|
|
(5) Includes effect of transaction costs. |
|
(6) |
|
Interest rate spread represents the difference between the average yield on
interest-earning assets and the average rate on interest-bearing liabilities. |
|
(7) |
|
Net interest margin represents net interest income as a percentage of average
interest-earning assets. |
- 29 -
The following table presents the components of the changes in net interest income by volume and
rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 Compared To |
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Increase (Decrease) Due To: |
|
|
|
(Dollars in thousands) |
|
|
|
Volume(1) |
|
|
Rate(1) |
|
|
Total |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks |
|
$ |
(2 |
) |
|
$ |
(52 |
) |
|
$ |
(54 |
) |
Restricted interest-earning deposits with banks |
|
|
32 |
|
|
|
(161 |
) |
|
|
(129 |
) |
Net investment in leases |
|
|
(6,141 |
) |
|
|
297 |
|
|
|
(5,844 |
) |
Loans receivable |
|
|
(232 |
) |
|
|
16 |
|
|
|
(216 |
) |
Total interest income |
|
|
(4,966 |
) |
|
|
(1,277 |
) |
|
|
(6,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
(889 |
) |
|
|
49 |
|
|
|
(840 |
) |
Long-term borrowings |
|
|
(1,999 |
) |
|
|
(315 |
) |
|
|
(2,314 |
) |
Deposits |
|
|
122 |
|
|
|
(142 |
) |
|
|
(20 |
) |
Total interest expense |
|
|
(2,608 |
) |
|
|
(566 |
) |
|
|
(3,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
(3,113 |
) |
|
|
44 |
|
|
|
(3,069 |
) |
|
|
|
(1) |
|
Changes due to volume and rate are calculated independently for each line item
presented. Changes attributable to changes in volume represent changes in average
balances multiplied by the prior periods average rates. Changes attributable to changes in
rate represent changes in average rates multiplied by the prior years average balances.
Changes attributable to the combined impact of volume and rate have been allocated
proportionately to the change due to volume and the change due to rate. |
Net interest and fee margin. The following table summarizes the Companys net interest and fee
income as a percentage of average total finance receivables for the three-month periods ended March
31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
12,829 |
|
|
$ |
19,072 |
|
Fee income |
|
|
3,816 |
|
|
|
5,034 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
16,645 |
|
|
|
24,106 |
|
Interest expense |
|
|
4,658 |
|
|
|
7,832 |
|
|
|
|
|
|
|
|
Net interest and fee income |
|
$ |
11,987 |
|
|
$ |
16,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total finance receivables (1) |
|
$ |
431,176 |
|
|
$ |
645,570 |
|
|
|
|
|
|
|
|
|
|
Percent of average total finance receivables: |
|
|
|
|
|
|
|
|
Interest income |
|
|
11.90 |
% |
|
|
11.82 |
% |
Fee income |
|
|
3.54 |
|
|
|
3.12 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
15.44 |
|
|
|
14.94 |
|
Interest expense |
|
|
4.32 |
|
|
|
4.86 |
|
|
|
|
|
|
|
|
Net interest and fee margin |
|
|
11.12 |
% |
|
|
10.08 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables include net investment in direct financing leases and
loans. For the calculations above, the effects of (1) the allowance for credit losses and (2)
initial direct costs and fees deferred are excluded. |
Net interest and fee income decreased $4.3 million, or 26.4%, to $12.0 million for the three months
ended March 31, 2010 from $16.3 million for the three months ended March 31, 2009. The annualized
net interest and fee margin increased 104 basis points to 11.12% in the three-month period ended
March 31, 2010 from 10.08% for the same period in 2009.
- 30 -
Interest income, net of amortized initial direct costs and fees, decreased $6.3 million, or 33.0%,
to $12.8 million for the three-month period ended March 31, 2010 from $19.1 million for the
three-month period ended March 31, 2009. The decrease in interest income was due principally to a
33.2% decrease in average total finance receivables, which decreased $214.4 million to $431.2
million at March 31, 2010 from $645.6 million at March 31, 2009, partially offset by an 8 basis
point increase in average yield. The decrease in average total finance receivables is primarily due
to our proactive decision in 2008 and 2009 to lower approval rates and volume in response to the
economic conditions. The increase in average yield is primarily due to improved yields achieved on
the origination of new leases. The weighted average implicit interest rate on new finance
receivables originated increased 92 basis points to 15.32% for the three-month period ended March
31, 2010 compared to 14.40% for the three-month period ended March 31, 2009.
Fee income decreased $1.2 million, or 24.0%, to $3.8 million for the three-month period ended March
31, 2010 from $5.0 million for the three-month period ended March 31, 2009. Fee income included
approximately $1.3 million of net residual income for the three-month period ended March 31, 2010
compared to $1.4 million for the three-month period ended March 31, 2009. Fee income also included
approximately $2.2 million in late fee income for the three-month period ended March 31, 2010; a
decline of 33.3% compared to $3.3 million for the three-month period ended March 31, 2009. The
decrease in late fee income was primarily due to the decrease in average total finance receivables.
Fee income, as an annualized percentage of average total finance receivables, increased 42 basis
points to 3.54% for the three-month period ended March 31, 2010 from 3.12% for the same period in
2009. Late fees remained the largest component of fee income at 2.04% as a percentage of average
total finance receivables for the three-month period ended March 31, 2010 compared to 2.06% for the
three-month period ended March 31, 2009. As a percentage of average total finance receivables, net
residual income was 1.23% as a percentage of average total finance receivables for the three-month
period ended March 31, 2010 compared to 0.89% for the three-month period ended March 31, 2009.
Interest expense decreased $3.1 million to $4.7 million for the three-month period ended March 31,
2010 from $7.8 million for the three-month period ended March 31, 2009. The decrease was primarily
due to lower average total finance receivables in combination with lower rates paid in each
category. Interest expense, as an annualized percentage of average total finance receivables,
decreased 54 basis points to 4.32% for the three-month period ended March 31, 2010, from 4.86% for
the same period in 2009.
The interest cost, excluding transaction costs, on short-term and long-term borrowings as an
annualized percentage of weighted average borrowings was 5.11% for the quarter ended March 31, 2010
compared to 5.74% for the same period in 2009. The lower cost reflects the decreased cost of the
term securitizations and variable-rate facilities. The average balance for our warehouse facilities
was $48.1 million for the three months ended March 31, 2010 compared to $108.0 million for the
three months ended March 31, 2009. Interest expense, excluding transaction costs, for our
warehouse facilities was 4.15% for the quarter ended March 31, 2010, compared to 4.32% for the same
period in 2009.
Interest costs on our term securitization borrowings issued in August 2005, September 2006 and
October 2007 have progressively increased due to the generally rising interest rate environment
throughout those periods. The coupon rate on the October 2007 securitization also reflects higher
credit spreads due to general tightening of credit caused by stress and volatility in the financial
markets. Our term securitizations also include multiple classes of fixed-rate notes with the
shorter term, lower coupon classes amortizing (maturing) faster then the longer term higher coupon
classes. This causes the blended interest expenses related to these borrowings to change and
generally increase over the terms of the borrowings. For the three months ended March 31, 2010,
average term securitization borrowings outstanding were $236.4 million at a weighted average coupon
of 5.30% compared to $392.4 million at a weighted average coupon of 5.87% for the same period in
2009.
The opening of our wholly-owned subsidiary, Marlin Business Bank, on March 12, 2008 provides an
additional funding source. Initially, FDIC-insured deposits are being raised via the brokered
certificates of deposit market and from other financial institutions on a direct basis. Interest
expense on deposits was $628,000, or 3.09% as a percentage of weighted average deposits, for the
three-month period ended March 31, 2010. The average balance of deposits was $81.4 million for the
three-month period ended March 31, 2010. Interest expense on deposits was $648,000, or 3.86% as a
percentage of weighted average deposits, for the three-month period ended March 31, 2009. The
average balance of deposits was $67.2 million for the three-month period ended March 31, 2009.
Insurance income. Insurance income decreased $385,000 to $1.2 million for the three-month period
ended March 31, 2010 from $1.5 million for the three-month period ended March 31, 2009, primarily
due to lower billings from lower total finance receivables.
- 31 -
Other income. Other income decreased $119,000 to $288,000 for the three-month period ended March
31, 2010 from $407,000 for the three-month period ended March 31, 2009, primarily due to the impact
of lower transaction volumes.
Gain (loss) on derivatives. Prior to July 1, 2008, the Company entered into derivative contracts
which were accounted for as cash flow hedges under hedge accounting as prescribed by U.S. GAAP.
While the Company may continue to use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting.
By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the fair value
of derivative instruments, including those that had previously been accounted for under hedge
accounting, are recognized immediately. This change creates volatility in our results of
operations, as the fair value of our derivative financial instruments changes over time.
For the three months ended March 31, 2010, the loss on derivatives was $94,000, compared to a loss
of $1.3 million for the three months ended March 31, 2009. These losses are based on the value of
the derivative contracts at the end of each period in a volatile market that is changing daily, and
will not necessarily reflect the value at settlement.
Salaries and benefits expense. Salaries and benefits expense decreased $0.8 million, or 13.6%, to
$5.1 million for the three months ended March 31, 2010 from $5.9 million for the same period in
2009, primarily due to reduced headcount levels. Salaries and benefits expense, as a percentage of
average total finance receivables, was 4.75% for the three-month period ended March 31, 2010
compared with 3.65% for the same period in 2009. Total personnel decreased to 196 at March 31, 2010
from 230 at March 31, 2009.
General and administrative expense. General and administrative expense decreased $353,000, or
11.8%, to $3.0 million for the three months ended March 31, 2010 from $3.4 million for the same
period in 2009. General and administrative expense as an annualized percentage of average total
finance receivables was 2.83% for the three-month period ended March 31, 2010, compared to 2.11%
for the three-month period ended March 31, 2009. Selected major components of general and
administrative expense for the three-month period ended March 31, 2010 included $742,000 of
premises and occupancy expense, $299,000 of audit and tax expense, $232,000 of data processing
expense and $88,000 of marketing expense. In comparison, selected major components of general and
administrative expense for the three-month period ended March 31, 2009 included $786,000 of
premises and occupancy expense, $298,000 of audit and tax expense, $221,000 of data processing
expense and $68,000 of marketing expense.
Financing related costs. Financing related costs primarily represent bank commitment fees paid to
our financing sources. Financing related costs decreased $108,000 to $147,000 for the three-month
period ended March 31, 2010 compared to $255,000 for the same period in 2009, primarily due to
decreased bank commitment fees as a result of reduced unused borrowing capacity.
Provision for credit losses. The provision for credit losses decreased $5.6 million, or 64.4%, to
$3.1 million for the three-month period ended March 31, 2010 from $8.7 million for the same period
in 2009. The decrease in the provision for credit losses was primarily the result of a lower
allowance for credit losses due to a reduced portfolio size, lower charge-offs and improved
delinquencies. Net charge-offs were $5.1 million for the three-month period ended March 31, 2010,
compared to $8.7 million for the same period in 2009. Net charge-offs as a percentage of average
total finance receivables decreased to 4.70% during the three-month period ended March 31, 2010,
from 5.40% for the same period in 2009. The allowance for credit losses decreased to approximately
$10.3 million at March 31, 2010, a decrease of $1.9 million from $12.2 million at December 31,
2009.
Additional information regarding asset quality is included herein in the subsequent section,
Finance Receivables and Asset Quality.
Provision for income taxes. Income tax expense of $662,000 was recorded for the three-month period
ended March 31, 2010, compared to a benefit of $491,000 for the same period in 2009. The change is
attributable to the change in pretax income recorded for the three-month period ended March 31,
2010. Our effective tax rate, which is a combination of federal and state income tax rates, was
approximately 34.9% for the three-month period ended March 31, 2010, compared to 35.8% for the
three-month period ended March 31, 2009.
- 32 -
FINANCE RECEIVABLES AND ASSET QUALITY
Our net investment in leases and loans declined $40.4 million, or 9.0%, to $408.2 million at March
31, 2010, from $448.6 million at December 31, 2009. The Company continues to respond to current
economic conditions with restrictive credit standards. The Companys leases are generally assigned
as collateral for borrowings as described below in Liquidity and Capital Resources.
The chart below provides our asset quality statistics for the three-month periods ended March 31,
2010 and 2009, and the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Allowance for credit losses, beginning of period |
|
$ |
12,193 |
|
|
$ |
15,283 |
|
|
$ |
15,283 |
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(5,926 |
) |
|
|
(9,398 |
) |
|
|
(33,575 |
) |
Recoveries |
|
|
863 |
|
|
|
676 |
|
|
|
3,296 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(5,063 |
) |
|
|
(8,722 |
) |
|
|
(30,279 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3,123 |
|
|
|
8,748 |
|
|
|
27,189 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end of period(1) |
|
$ |
10,253 |
|
|
$ |
15,309 |
|
|
$ |
12,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs to average total finance receivables (2) |
|
|
4.70 |
% |
|
|
5.40 |
% |
|
|
5.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses to total finance receivables, end of period (2) |
|
|
2.50 |
% |
|
|
2.47 |
% |
|
|
2.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total finance receivables (2) |
|
$ |
431,176 |
|
|
$ |
645,570 |
|
|
$ |
558,311 |
|
Total finance receivables, end of period (2) |
|
$ |
409,637 |
|
|
$ |
618,988 |
|
|
$ |
450,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies greater than 60 days past due |
|
$ |
6,288 |
|
|
$ |
16,824 |
|
|
$ |
8,334 |
|
Delinquencies greater than 60 days past due (3) |
|
|
1.39 |
% |
|
|
2.38 |
% |
|
|
1.67 |
% |
Allowance for credit losses to delinquent accounts greater than 60 days past due (3) |
|
|
163.06 |
% |
|
|
91.00 |
% |
|
|
146.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual leases and loans, end of period |
|
$ |
3,399 |
|
|
$ |
8,263 |
|
|
$ |
4,557 |
|
Renegotiated leases and loans, end of period |
|
$ |
3,790 |
|
|
$ |
7,751 |
|
|
$ |
4,521 |
|
Accruing leases and loans past due 90 days or more |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income included on non-accrual leases and loans(4) |
|
$ |
42 |
|
|
$ |
114 |
|
|
$ |
493 |
|
Interest income excluded on non-accrual leases and loans(5) |
|
$ |
40 |
|
|
$ |
199 |
|
|
$ |
103 |
|
|
|
|
(1) |
|
The allowance for credit losses allocated to loans at March 31, 2010, March 31, 2009
and December 31, 2009, was $270,000, $909,000 and $399,000, respectively. |
|
(2) |
|
Total finance receivables include net investment in direct financing leases and
loans. For purposes of asset quality and allowance calculations, the effects of (1) the
allowance for credit losses and (2) initial direct costs and fees deferred are excluded. |
|
(3) |
|
Calculated as a percent of minimum lease payments receivable for leases and as a
percent of principal outstanding for loans. |
|
(4) |
|
Represents interest which was recognized during the period on non-accrual loans and
leases, prior to non-accrual status. |
|
(5) |
|
Represents interest which would have been recorded on non-accrual loans and leases
had they performed in accordance with their contractual terms during the period. |
Net investments in finance receivables are charged-off when they are contractually past due for
121 days and are reported net of recoveries. Income is not recognized on leases or loans when a
default on monthly payment exists for a period of 90 days or more. Income recognition resumes when
a lease or loan becomes less than 90 days delinquent.
- 33 -
Net charge-offs for the three months ended March 31, 2010 were $5.1 million, or 4.70% of average
total finance receivables, compared to $5.8 million, or 4.89% of average total finance receivables,
for the three months ended December 31, 2009. Net charge-offs for the three months ended March 31,
2009 were $8.7 million, or 5.40% of average total finance receivables. Approximately 72% of the
$3.6 million decrease from the first quarter of 2009 was related to the impact on the calculation
of the decrease in average total finance receivables, and approximately 28% of the decrease was due
to a lower charge-off rate as a percentage of average total finance
receivables. The decrease in net charge-offs during the first three months of 2010 compared to
recent prior periods is primarily due to improving delinquency migrations and lower portfolio
balances.
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 1.39% at March 31, 2010,
1.67% at December 31, 2009 and 1.59% at December 31, 2008. Supplemental information regarding loss
statistics and delinquencies is available on the investor relations section of Marlins website at
www.marlincorp.com.
In accordance with the Contingencies Topic of the FASB ASC, we maintain an allowance for credit
losses at an amount sufficient to absorb losses inherent in our existing lease and loan portfolios
as of the reporting dates based on our projection of probable net credit losses. The factors and
trends discussed above were included in the Companys analysis to determine its allowance for
credit losses. (See Critical Accounting Policies.)
RESIDUAL PERFORMANCE
Our leases offer our end user customers the option to own the purchased equipment at lease
expiration. Based on the minimum lease payments receivable as of March 31, 2010, approximately 70%
of our leases were one dollar purchase option leases, 27% were fair market value leases and 3% were
fixed purchase option leases, the latter of which typically are 10% of the original equipment cost.
As of March 31, 2010, there were $42.0 million of residual assets retained on our Consolidated
Balance Sheet, of which $33.7 million, or 80.3%, were related to copiers. No other group of
equipment represented more than 10% of equipment residuals as of March 31, 2010 and December 31,
2009, respectively. Improvements in technology and other market changes, particularly in copiers,
could adversely impact our ability to realize the recorded residual values of this equipment.
Fee income included approximately $1.3 million and $1.4 million of net residual income for the
three-month periods ended March 31, 2010 and March 31, 2009, respectively. Net residual income
includes income from lease renewals and gains and losses on the realization of residual values of
leased equipment disposed at the end of term.
Our leases generally include automatic renewal provisions and many leases continue beyond their
initial contractual term. We consider renewal income a component of residual performance. Renewal
income net of depreciation totaled approximately $1.9 million and $1.8 million for the three-month
periods ended March 31, 2010 and March 31, 2009. For the three months ended March 31, 2010, net
losses on residual values disposed at end of term totaled $596,000 compared to net losses of
$333,000 for the three months ended March 31, 2009. The primary driver of the changes was a shift
in the mix of the amounts and types of equipment disposed at the end of the term.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires a substantial amount of cash to operate and grow. Our primary liquidity need
is for new originations. In addition, we need liquidity to pay interest and principal on our
borrowings, to pay fees and expenses incurred in connection with our securitization transactions,
to fund infrastructure and technology investment and to pay administrative and other operating
expenses.
We are dependent upon the availability of financing from a variety of funding sources to satisfy
these liquidity needs. Historically, we have relied upon four principal types of third-party
financing to fund our operations:
|
|
|
borrowings under a revolving, short-term or long-term bank facility; |
|
|
|
|
financing of leases and loans in various warehouse facilities; |
|
|
|
|
financing of leases through term note securitizations; and |
|
|
|
|
FDIC-insured certificates of deposit issued by our wholly-owned subsidiary, Marlin Business
Bank (MBB). |
On March 20, 2007, the FDIC approved the application of our wholly-owned subsidiary, MBB, to become
an industrial bank chartered by the State of Utah. MBB commenced operations effective March 12,
2008. MBB provides diversification of the Companys funding sources and, over time, may add other
product offerings to better serve our customer base. From its opening to March 31, 2010, MBB has
funded $145.9 million of leases and loans through its initial capitalization of $12 million and its
issuance of $124.1 million in FDIC insured deposits at an average borrowing rate of 3.53%.
- 34 -
On December 31, 2008, Marlin Business Services Corp. received approval from the Federal Reserve
Bank of San Francisco (FRB) to become a bank holding company upon conversion of MBB from an
industrial bank to a commercial bank. In January 2009, MBB
became a commercial bank and a member of the Federal Reserve System, and Marlin Business Services
Corp. became a bank holding company. MBB is operating in accordance with its original de novo
three-year business plan, which assumed total assets of up to $128 million by March 2011 (the end
of the three-year de novo period.)
Our strategy has generally included funding new originations, other than those originated by MBB,
in the short-term with cash from operations or through borrowings under various warehouse
facilities. Historically, we have executed a term note securitization approximately once a year to
refinance and relieve the warehouse facilities. Due to the impact on borrowing costs from
unfavorable market conditions and the available capacity in our warehouse facilities at that time,
the Company elected not to complete fixed-rate term note securitizations in 2008 or 2009.
On October 9, 2009, Marlin Business Services Corp.s wholly-owned subsidiary, Marlin Receivables
Corp. (MRC), closed on a $75,000,000, three-year committed loan facility (long-term loan
facility) with the Lender Finance division of Wells Fargo Capital Finance. The facility is secured
by a lien on MRCs assets and is supported by guaranties from Marlin Business Services Corp. and
Marlin Leasing Corporation. Advances under the facility will be made pursuant to a borrowing base
formula, and the proceeds will be used to fund lease originations. The maturity date of the
facility is October 9, 2012.
On February 12, 2010 we completed an $80.7 million TALF eligible term asset-backed securitization,
of which it elected to defer the issuance of subordinated notes totaling $12.5 million. This
transaction was Marlins tenth term note securitization and the fifth to earn a AAA rating. As with
all of the Companys prior term note securitizations, this financing provides the Company with
fixed-cost borrowing and will be recorded in long-term borrowings in the Consolidated Balance
Sheets.
This was a private offering made to qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended, by Marlin Leasing Receivables XII LLC, a wholly owned
subsidiary of Marlin Leasing Corporation. DBRS, Inc. and Standard & Poors Ratings Services have
assigned a AAA rating to the senior tranche of this offering. The effective weighted average
interest expense over the term of the financing is expected to be approximately 3.13%. A portion of
the proceeds of the new securitization was used to repay the full amount outstanding under the CP
conduit warehouse facility.
At March 31, 2010 we have approximately $56.9 million of available borrowing capacity through these
facilities in addition to available cash and cash equivalents of $44.3 million. Our debt to equity
ratio was 2.35 to 1 at March 31, 2010 and 2.61 to 1 at December 31, 2009.
Net cash provided by investing activities was $33.1 million for the three-month period ended March
31, 2010, compared to net cash provided by investing activities of $31.4 million for the
three-month period ended March 31, 2009. Investing activities primarily relate to lease payment
activity.
Net cash used in financing activities was $35.0 million for the three-month period ended March 31,
2010, compared to net cash used in financing activities of $32.7 million for the three-month period
ended March 31, 2009. Financing activities include net advances and repayments on our various
borrowing sources.
Additional liquidity is provided by or used by our cash flow from operations. Net cash provided by
operating activities was $9.2 million for the three-month period ended March 31, 2010, compared to
net cash provided by operating activities of $11.5 million for the three-month period ended March
31, 2009.
We expect cash from operations, additional borrowings on existing and future credit facilities,
funds from certificates of deposit through brokers and other financial institutions, and the
completion of additional on-balance-sheet term note securitizations to be adequate to support our
operations and projected growth.
Total Cash and Cash Equivalents. Our objective is to maintain a low cash balance, investing any
free cash in leases and loans. We primarily fund our originations and growth using advances under
our long-term bank facility and certificates of deposit issued through MBB. Total cash and cash
equivalents available as of March 31, 2010 totaled $44.3 million compared to $37.1 million at
December 31, 2009.
- 35 -
Restricted Interest-earning Deposits with Banks. As of March 31, 2010, we also had $65.5 million of
cash that was classified as restricted interest-earning deposits with banks, compared to
$63.4 million at December 31, 2009. Restricted interest-earning deposits with banks consist
primarily of various trust accounts related to our secured debt facilities.
Borrowings. Our primary borrowing relationships each require the pledging of eligible lease and
loan receivables to secure amounts advanced. Our aggregate outstanding secured borrowings amounted
to $268.4 million at March 31, 2010 and $307.0 million at December 31, 2009. Borrowings outstanding
under the Companys revolving or short-term credit facilities and long-term debt consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
|
|
Maximum |
|
|
Month End |
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Facility |
|
|
Amount |
|
|
Amount |
|
|
Average |
|
|
Amount |
|
|
Average |
|
|
Unused |
|
|
|
Amount |
|
|
Outstanding |
|
|
Outstanding |
|
|
Coupon |
|
|
Outstanding |
|
|
Coupon |
|
|
Capacity(1) |
|
|
|
(Dollars in thousands) |
|
Federal funds purchased |
|
$ |
1,200 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
|
$ |
1,200 |
|
CP conduit warehouse
facility(2) |
|
|
|
|
|
|
59,692 |
|
|
|
28,854 |
|
|
|
3.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Term note securitizations(3) |
|
|
|
|
|
|
265,883 |
|
|
|
236,383 |
|
|
|
5.30 |
% |
|
|
249,117 |
|
|
|
4.94 |
% |
|
|
|
|
Long-term loan facility |
|
|
75,000 |
|
|
|
20,413 |
|
|
|
19,228 |
|
|
|
5.50 |
% |
|
|
19,317 |
|
|
|
5.50 |
% |
|
|
55,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
76,200 |
|
|
|
|
|
|
$ |
284,465 |
|
|
|
5.11 |
% |
|
$ |
268,434 |
|
|
|
4.98 |
% |
|
$ |
56,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include MBBs access to the Federal Reserve Discount Window, which is based
on the amount of assets MBB chooses to pledge. Based on assets pledged at March 31, 2010, MBB
had $8.4 million in unused, secured borrowing capacity at the Federal Reserve Discount Window. |
|
(2) |
|
Converted from a revolving facility to an amortizing facility in March, 2009, and
was fully repaid in February, 2010. |
|
(3) |
|
Our term note securitizations are one-time fundings that pay down over time without
any ability for us to draw down additional amounts. |
Federal Funds Line of Credit with Correspondent Bank
MBB has established a federal funds line of credit with a correspondent bank. This line allows for
both selling and purchasing of federal funds. The amount that can be drawn against the line is
limited to $1.2 million.
Federal Reserve Discount Window (Federal Reserve Advances)
In addition, MBB has received approval to borrow from the Federal Reserve Discount Window based on
the amount of assets MBB chooses to pledge. Based on assets pledged at March 31, 2010, MBB had $8.4
million in unused, secured borrowing capacity at the Federal Reserve Discount Window.
CP Conduit Warehouse Facility
We had a CP conduit warehouse facility that, until amended in March 31, 2009, allowed us to borrow,
repay and re-borrow based on a borrowing base formula. The amendment (1) extended the termination
date to March 30, 2010, (2) converted the facility from a revolving facility to an amortizing
facility, and (3) revised the interest rate margin and fees. The CP conduit warehouse facility was
repaid in full with the proceeds of the February 12, 2010 term securitization. There is no
additional borrowing capacity under this facility.
Term Note Securitizations
On February 12, 2010 we completed an $80.7 million TALF eligible term asset-backed securitization,
of which it elected to defer the issuance of subordinated notes totaling $12.5 million. This
transaction was Marlins tenth term note securitization and the fifth to earn a AAA rating. As with
all of the Companys prior term note securitizations, this financing provides the Company with
fixed-cost borrowing and will be recorded in long-term borrowings in the Consolidated Balance
Sheets.
- 36 -
This was a private offering made to qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended, by Marlin Leasing Receivables XII LLC, a wholly owned
subsidiary of Marlin Leasing Corporation. DBRS, Inc. and Standard & Poors Ratings Services have
assigned a AAA rating to the senior tranche of this offering. The effective weighted average
interest expense over the term of the financing is expected to be approximately 3.13%. A portion of
the proceeds of the new securitization was used to repay the full amount outstanding under the CP
conduit warehouse facility.
Since our founding through March 31, 2010, we have completed ten on-balance-sheet term note
securitizations of which four remain outstanding. In connection with each securitization
transaction, we have transferred leases to our wholly-owned, special purpose bankruptcy remote
subsidiaries (SPEs) and issued term debt collateralized by such commercial leases to
institutional investors in private securities offerings. These SPEs are considered VIEs under U.S.
GAAP. We are required to consolidate VIEs in which we are deemed to be the primary beneficiary
through having (1) power over the significant activities of the entity and (2) an obligation to
absorb losses or the right to receive benefits from the VIE which are potentially significant to
the VIE. We continue to service the assets of our VIEs and retain equity and/or residual
interests. Accordingly, assets and related debt of these VIEs are included in the accompanying
Consolidated Balance Sheets. Our leases and restricted interest-earning deposits with banks are
assigned as collateral for these borrowings and there is no further recourse to our general credit.
Collateral in excess of these borrowings represents our maximum loss exposure. Our term note
securitizations have fixed terms, fixed interest rates and fixed principal amounts. At March 31,
2010 and at December 31, 2009, outstanding term securitizations amounted to $249.1 million and
$226.7 million, respectively.
Long-term Loan Facility
On October 9, 2009, Marlin Business Services Corp.s wholly-owned subsidiary, Marlin Receivables
Corp. (MRC), closed on a $75,000,000, three-year committed loan facility with the Lender Finance
division of Wells Fargo Capital Finance. The facility is secured by a lien on MRCs assets and is
supported by guaranties from the Marlin Business Services Corp. and Marlin Leasing Corporation.
Advances under the facility will be made pursuant to a borrowing base formula, and the proceeds
will be used as a warehouse facility to fund lease originations. The maturity date of the facility
is October 9, 2012. An event of default such as non-payment of amounts when due under the loan
agreement or a breach of covenants may accelerate the maturity date of the facility.
Financial Covenants
Our secured borrowing arrangements contain numerous covenants, restrictions and default provisions
that we must comply with in order to obtain funding through the facilities and to avoid an event of
default. A change in the Chief Executive Officer or Chief Operating Officer is an event of default
under our long-term loan facility, unless we hire a replacement acceptable to our lenders within
120 days. Such an event is also an immediate event of service termination under the term note
securitizations.
A merger or consolidation with another company in which the Company is not the surviving entity is
also an event of default under the financing facilities. The Companys long-term loan facility
contains an acceleration clause allowing the creditor to accelerate the scheduled maturities of the
obligation under certain conditions that may not be objectively determinable (for example, if a
material adverse change occurs). An event of default under any of the facilities could result in
an acceleration of amounts outstanding under the facilities, foreclosure on all or a portion of the
leases financed by the facilities and/or the removal of the Company as servicer of the leases
financed by the facility.
Some of the critical financial and credit quality covenants under our borrowing arrangements as of
December 31, 2009 include:
|
|
|
|
|
|
|
|
|
|
|
Actual(1) |
|
|
Requirement |
|
Tangible net worth minimum |
|
$150.5 million |
|
|
$81.4 million |
|
Debt-to-equity ratio maximum |
|
|
2.5 to 1 |
|
|
|
10.0 to 1 |
|
Maximum servicer senior leverage ratio |
|
|
2.01 to 1 |
|
|
|
4.0 to 1 |
|
Four-quarter rolling average interest
coverage ratio minimum |
|
|
1.71 to 1 |
|
|
|
1.50 to 1 |
|
Maximum portfolio delinquency ratio |
|
|
1.37 |
% |
|
|
3.50 |
% |
Maximum charge-off ratio |
|
|
5.69 |
% |
|
|
7.0 |
% |
|
|
|
(1) |
|
Calculations are based on specific contractual definitions and subsidiaries per
the applicable debt agreements, which may differ from ratios or amounts presented elsewhere in
this document. |
- 37 -
As of March 31, 2010, the Company was in compliance with terms of the long-term loan facility and
the term note securitization agreements.
Bank Capital and Regulatory Oversight
On January 13, 2009, in connection with the conversion of MBB from an industrial bank to a
commercial bank, we became a bank holding company by order of the Board of Governors of the Federal
Reserve System (the Federal Reserve Board) and are subject to regulation under the Bank Holding
Company Act (BHCA). All of our subsidiaries may be subject to examination by the Federal Reserve
Board even if not otherwise regulated by the Federal Reserve Board.
MBB is also subject to comprehensive federal and state regulations dealing with a wide variety of
subjects, including minimum capital standards, reserve requirements, terms on which a bank may
engage in transactions with its affiliates, restrictions as to dividend payments, and numerous
other aspects of its operations. These regulations generally have been adopted to protect
depositors and creditors rather than shareholders.
There are a number of restrictions on bank holding companies that are designed to minimize
potential loss to depositors and the FDIC insurance funds. If an FDIC-insured depository subsidiary
is undercapitalized, the bank holding company is required to ensure (subject to certain limits)
the subsidiarys compliance with the terms of any capital restoration plan filed with its
appropriate banking agency. Also, a bank holding company is required to serve as a source of
financial strength to its depository institution subsidiaries and to commit resources to support
such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the
Federal Reserve Board has the authority to require a bank holding company to terminate any activity
or to relinquish control of a non-bank subsidiary upon the Federal Reserve Boards determination
that such activity or control constitutes a serious risk to the financial soundness and stability
of a depository institution subsidiary of the bank holding company.
Capital Adequacy. 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). At least 4% out of the total
capital (6% to be well-capitalized) must be composed 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 (Tier 1
Capital). 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 loan and lease losses, allowance
for credit losses on off-balance-sheet credit exposures, and unrealized gains on equity securities.
The Federal Reserve Board has also established minimum leverage ratio guidelines for bank holding
companies. These guidelines mandate a minimum leverage ratio of Tier 1 Capital to adjusted
quarterly average total assets less certain amounts (leverage amounts) equal to 3% for bank
holding companies meeting certain criteria (including those having the highest regulatory rating).
All other banking organizations are generally required to maintain a leverage ratio of at least 3%
plus an additional cushion of at least 100 basis points and in some cases more. The Federal
Reserve Boards 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 promulgated by the Federal Reserve Board.
Bank holding companies are required to comply with the Federal Reserve Boards risk-based capital
guidelines that require a minimum ratio of total capital to risk-weighted assets of 8%. At least
half of the total capital is required to be Tier 1 capital. In addition to the risk-based capital
guidelines, the Federal Reserve Board has adopted a minimum leverage capital ratio under which a
bank holding company must maintain a level of Tier 1 capital to average total consolidated assets
of at least 3% in the case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a leverage capital ratio of at least 4%.
At March 31, 2010, MBBs Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total
risk-based capital ratio were 16.41%, 16.77% and 17.81%, respectively, compared to requirements for
well-capitalized status of 5%, 6% and 10%, respectively. At March 31, 2010, Marlin Business
Services Corp.s Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based
capital ratio were 27.69%, 33.35% and 34.61%, respectively, compared to requirements for
well-capitalized status of 5%, 6% and 10%, respectively.
- 38 -
Pursuant to the Order issued by the FDIC on March 20, 2007 (the Order), MBB was required to have
beginning paid-in capital funds of not less than $12.0 million and must keep its total risk-based
capital ratio above 15%. MBBs equity balance at March 31, 2010 was $17.1 million, which qualifies
for well capitalized status. On January 20, 2009, we submitted a request to modify the Order
issued when MBB became an industrial bank to eliminate certain inconsistencies between the Order
and the FRB Approval of MBB as a commercial bank. Until we receive the FDICs response to our
submission, MBB will continue to operate in accordance with its original de novo three-year
business plan, which assumed total assets of up to $128 million by March 2011 (the end of the
thee-year de novo period.)
Information on Stock Repurchases
Information on Stock Repurchases is provided in Part II. Other Information, Item 2, Unregistered
Sales of Equity Securities and Use of Proceeds herein.
Contractual Obligations (excluding Deposits)
In addition to our scheduled maturities on our credit facilities and term debt, we have future cash
obligations under various types of contracts. We lease office space and office equipment under
long-term operating leases. The contractual obligations under our agreements, credit facilities,
term note securitizations, operating leases and commitments under non-cancelable contracts as of
March 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Leased |
|
|
Capital |
|
|
|
|
Period Ending December 31, |
|
Borrowings |
|
|
Interest(1) |
|
|
Leases |
|
|
Facilities |
|
|
Leases |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
2010 |
|
$ |
118,929 |
|
|
$ |
7,659 |
|
|
$ |
8 |
|
|
$ |
1,153 |
|
|
$ |
26 |
|
|
$ |
127,775 |
|
2011 |
|
|
88,012 |
|
|
|
5,100 |
|
|
|
8 |
|
|
|
1,431 |
|
|
|
35 |
|
|
|
94,586 |
|
2012 |
|
|
53,830 |
|
|
|
1,791 |
|
|
|
4 |
|
|
|
1,460 |
|
|
|
18 |
|
|
|
57,103 |
|
2013 |
|
|
7,397 |
|
|
|
107 |
|
|
|
4 |
|
|
|
624 |
|
|
|
|
|
|
|
8,132 |
|
2014 |
|
|
265 |
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
271 |
|
Thereafter |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
268,434 |
|
|
$ |
14,660 |
|
|
$ |
27 |
|
|
|
4,668 |
|
|
$ |
79 |
|
|
$ |
287,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on the long-term loan facility is assumed at the March 31, 2010 rate for
the remaining term. |
MARKET INTEREST RATE RISK AND SENSITIVITY
Market risk is the risk of losses arising from changes in values of financial instruments. We
engage in transactions in the normal course of business that expose us to market risks. We attempt
to mitigate such risks through prudent management practices and strategies such as attempting to
match the expected cash flows of our assets and liabilities.
We are exposed to market risks associated with changes in interest rates and our earnings may
fluctuate with changes in interest rates. The lease assets we originate are almost entirely
fixed-rate. Accordingly, we generally seek to finance these assets with fixed interest cost term
note securitization borrowings that we issue periodically. Between term note securitization issues,
we have historically financed our new lease originations through a combination of variable-rate
warehouse facilities and working capital. Our mix of fixed- and variable-rate borrowings and our
exposure to interest rate risk changes over time. Over the past twelve months, the mix of
variable-rate borrowings to total borrowings has ranged from 7.1% to 26.6%, and averaged 21.3%. Our
highest exposure to variable-rate borrowings generally occurs just prior to the issuance of a term
note securitization. At March 31, 2010, $19.3 million, or 7.2%, of our borrowings were
variable-rate borrowings.
We use derivative financial instruments to attempt to further reduce our exposure to changing cash
flows caused by possible changes in interest rates. We use forward starting interest-rate swap
agreements to reduce our exposure to changing market interest rates prior to issuing a term note
securitization. In this scenario, we usually enter into a forward starting swap to coincide with
the forecasted pricing date of future term note securitizations. The intention of this derivative
is to reduce possible variations in future cash flows caused by changes in interest rates prior to
our forecasted securitization. The value of the derivative contract correlates with the movements
of interest rates, and we may choose to hedge all or a portion of forecasted transactions.
- 39 -
All derivatives are recorded on the Consolidated Balance Sheets at their fair value as either
assets or liabilities. The accounting for subsequent changes in the fair value of these derivatives
depends on whether each has been designated and qualifies for hedge accounting treatment pursuant
to the Derivatives and Hedging Topic of the FASB ASC.
Prior to July 1, 2008, these interest-rate swap agreements were designated and accounted for as
cash flow hedges of specific term note securitization transactions, as prescribed by U.S. GAAP.
Under hedge accounting, the effective portion of the gain or loss on a derivative designated as a
cash flow hedge was reported net of tax effects in accumulated other comprehensive income on the
Consolidated Balance Sheets, until the pricing of the related term securitization.
Certain of these agreements were terminated simultaneously with the pricing of the related term
securitization transactions. For each terminated agreement, the realized gain or loss was deferred
and recorded in the equity section of the Consolidated Balance Sheets, and is being reclassified
into earnings as an adjustment to interest expense over the terms of the related term
securitizations.
While the Company may continue to use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the
fair value of derivative instruments, including those that had previously been accounted for under
hedge accounting, is recognized immediately in gain (loss) on derivatives. This change creates
volatility in our results of operations, as the fair value of our derivative financial instruments
changes over time, and this volatility may adversely impact our results of operations and financial
condition.
For the forecasted transactions that were probable of occurring, the derivative gain or loss in
accumulated other comprehensive income as of June 30, 2008 would have been reclassified into
earnings as an adjustment to interest expense over the terms of the related forecasted borrowings,
consistent with hedge accounting treatment. At the time that any related forecasted borrowing was
no longer probable of occurring, the related gain or loss in accumulated other comprehensive income
became immediately recognized in earnings.
The tables in Note 9 of the Companys Unaudited Condensed Consolidated Financial Statements
summarize specific information regarding the active and terminated interest-rate swap agreements
described above.
The fair value of derivatives at March 31, 2010 represents their value at that specific point in
time, and will not necessarily reflect the value at settlement due to inherent volatility in the
financial markets. At December 31, 2009, a total of $820,000 of interest-earning cash is assigned
as collateral for interest-rate swap agreements. There were no cash payments related to the
termination of derivative contracts for the three-month periods ended March 31, 2010 and March 31,
2009. Cash payments pursuant to the terms of active derivative contracts totaled $1.2 million and
$700,000 for the three-month periods ended March 31, 2010 and March 31, 2009, respectively.
The Company also uses interest-rate cap agreements that are not designated for hedge
accounting treatment to fulfill certain covenants in its special purpose subsidiarys warehouse
borrowing arrangements and for overall interest-rate risk management. Accordingly, these
interest-rate cap agreements are recorded at fair value in other assets at $40,000 and $119,000 as
of March 31, 2010 and December 31, 2009, respectively. The notional amount of interest-rate caps
owned as of March 31, 2010 and December 31, 2009 was $108.1 million and $121.4 million,
respectively. Changes in the fair values of the caps are recorded in gain (loss) on derivatives in
the accompanying Consolidated Statements of Operations.
The following table presents the scheduled principal repayment of our debt and the related weighted
average interest rates as of March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturities by Calendar Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 & |
|
|
Carrying |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
Amount |
|
|
|
(Dollars in thousands) |
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
$ |
118,929 |
|
|
$ |
88,012 |
|
|
$ |
34,513 |
|
|
$ |
7,397 |
|
|
$ |
266 |
|
|
$ |
249,117 |
|
Average fixed rate |
|
|
5.39 |
% |
|
|
6.25 |
% |
|
|
6.69 |
% |
|
|
4.63 |
% |
|
|
5.49 |
% |
|
|
5.85 |
% |
Variable-rate debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
19,317 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
19,317 |
|
Average variable rate |
|
|
|
|
|
|
|
|
|
|
5.50 |
% |
|
|
|
|
|
|
|
|
|
|
5.50 |
% |
- 40 -
Our earnings are sensitive to fluctuations in interest rates. The long-term loan facility charges a
variable rate of interest based on the London Interbank Offered Rate (LIBOR). Because our assets
are predominately fixed-rate, increases in this market interest rate would negatively impact
earnings and decreases in the rate would positively impact earnings because the rate charged on our
borrowings would change faster than our assets could reprice. We would have to offset increases in
borrowing costs by adjusting the pricing under our new leases or our net interest margin would be
reduced. There can be no assurance that we will be able to offset higher borrowing costs with
increased pricing of our assets.
For example, the impact of a hypothetical 100 basis point, or 1.00%, increase in the market rates
to which our borrowings are indexed for the twelve month period ended March 31, 2010 would have
been to reduce net interest and fee income by approximately $827,000 based on our average
variable-rate borrowings of approximately $82.7 million for the twelve months then ended, excluding
the effects of any changes in the value of derivatives, taxes and possible increases in the yields
from our lease and loan portfolios due to the origination of new contracts at higher interest
rates. The impact of a hypothetical 100 basis point, or 1.00%, increase in the market rates to
which our interest-rate swap agreements are indexed would have resulted in an estimated change in
fair value of approximately $58,000 at March 31, 2010, which would have been reflected as a
reduction in the loss on derivatives in the consolidated statements of operations.
We manage and monitor our exposure to interest rate risk using balance sheet simulation models.
Such models incorporate many of our assumptions about our business including new asset production
and pricing, interest rate forecasts, overhead expense forecasts and assumed credit losses. Many of
the assumptions we used in our simulation models are based on past experience and actual results
could vary substantially.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the FASB issued two standards changing the accounting for securitizations. FASB
Statement No. 166, Accounting for Transfers of Financial Assets, is a revision to FASB Statement
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, and will require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the risks related to
transferred financial assets. It also changes the requirements for derecognizing financial assets,
and requires additional disclosures. These changes have been incorporated in the Transfers and
Servicing Topic of the FASB ASC.
FASB Statement 167, Amendments to FASB Interpretation No. 46(R), is a revision to FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and
changes how a reporting entity determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. This change has been
incorporated in the Consolidation Topic of the FASB ASC, and requires additional disclosures about
involvement with variable interest entities, the related risk exposure due to that involvement, and
the impact on the entitys financial statements.
The new guidance for the accounting for securitizations was effective for the Company on January 1,
2010. The adoption of the new requirements did not have a material impact on the consolidated
earnings, financial position or cash flows of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information appearing in the section captioned Managements Discussion and Analysis of
Financial Condition and Results of Operations Market Interest Rate Risk and Sensitivity under
Item 2 of Part I of this Form 10-Q is incorporated herein by reference.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report.
Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures as
of the end of the period covered by this report are designed and operating effectively to provide
reasonable assurance that the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys first fiscal quarter of 2010 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
- 41 -
PART II. Other Information
Item 1. Legal Proceedings
We are party to various legal proceedings, which include claims and litigation arising in the
ordinary course of business. In the opinion of management, these actions will not have a material
adverse effect on our business, financial condition, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes in the risk factors from those disclosed in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information on Stock Repurchases
On November 2, 2007, the Board of Directors approved a stock repurchase plan. Under this program,
the Company is authorized to repurchase up to $15 million in value of its outstanding shares of
common stock. This authority may be exercised from time to time and in such amounts as market
conditions warrant. Any shares purchased under this plan are returned to the status of authorized
but unissued shares of common stock. The repurchases may be made on the open market, in block
trades or otherwise. The program may be suspended or discontinued at any time. The repurchases are
funded using the Companys working capital.
There were no shares of common stock repurchased by the Company pursuant to the above plan during
the first quarter of 2010. As of March 31, 2010, the maximum approximate dollar value of shares
that may yet be purchased under the stock repurchase plan is $10.7 million.
In addition to the repurchases described above, pursuant to the Companys 2003 Equity Compensation
Plan, participants may have shares withheld to cover income taxes. There were 54,600 shares
repurchased to cover income tax withholding pursuant to the 2003 Plan during the first quarter of
2010, at an average cost of $8.88 per share.
At the October 28, 2009 annual stockholders meeting, the shareholders voted to approve an
amendment to the 2003 Plan to allow a one-time stock option exchange program for the Companys
employees, to commence within six months following the annual meeting. The exchange program tender
offer was issued on April 23, 2010. To the extent employees elect to participate in the exchange,
the program will allow us to cancel certain underwater stock options currently held by our
employees in exchange for the grant of a lesser amount of stock options with lower exercise prices
and a new vesting schedule and term. Each replacement option will have an exercise price per share
equal to the closing price of our common stock on the date of grant, and will have a new seven-year
term. The exchange offer is scheduled to expire on May 21, 2010, unless the offer is extended.
Exchange ratios were designed to result in a fair value, for accounting purposes, of the
replacement options that will be approximately equal to the fair value of the eligible options that
are surrendered in the exchange (based on valuation assumptions made when the offer to exchange
commences). Therefore, we do not expect to recognize significant incremental compensation expense
as a result of the exchange program.
Item 3. Defaults Upon Senior Securities
None.
- 42 -
Item 4. [Removed and Reserved.]
Item 5. Other Information
None.
Item 6. Exhibits
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Articles of Incorporation (1) |
|
3.2 |
|
|
Bylaws (2) |
10.1
|
|
Compensation Policy for Non-Employee Independent Directors. (Filed herewith) |
|
31.1 |
|
|
Certification of the Chief Executive Officer of Marlin Business Services Corp. required by
Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (Filed herewith) |
|
31.2 |
|
|
Certification of the Chief Financial Officer of Marlin Business Services Corp. required by
Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (Filed herewith) |
|
32.1 |
|
|
Certification of the Chief Executive Officer and Chief Financial Officer of Marlin Business
Services Corp. required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as
amended. (This exhibit shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be incorporated by reference into any
filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended.) (Furnished herewith) |
|
|
|
|
|
Management contract or compensatory plan or arrangement. |
|
(1) |
|
Previously filed with the SEC as an exhibit to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2007 filed on March 5, 2008, and incorporated by
reference herein. |
|
(2) |
|
Previously filed with the SEC as an exhibit to the Companys Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-108530), filed on October 14, 2003 and
incorporated by reference herein. |
- 43 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
MARLIN BUSINESS SERVICES CORP.
(Registrant) |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Daniel P. Dyer
Daniel P. Dyer
Chief Executive Officer
(Chief Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Lynne C. Wilson
Lynne C. Wilson
|
|
|
|
|
|
|
Chief Financial Officer & Senior Vice President
(Principal Financial Officer) |
|
|
Date: May 7, 2010
- 44 -