Form 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 September 30, 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
(Do not check if a smaller reporting company)
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Smaller reporting company o |
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 October 29, 2010, 12,872,071 shares of Registrants common stock, $.01 par value, were
outstanding.
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2010
TABLE OF CONTENTS
-1-
PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
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September 30, |
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December 31, |
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2010 |
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2009 |
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(Dollars in thousands, except per- |
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share data) |
|
ASSETS |
|
|
|
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|
|
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Cash and due from banks |
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$ |
1,310 |
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|
$ |
1,372 |
|
Interest-earning deposits with banks |
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42,790 |
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35,685 |
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|
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Total cash and cash equivalents |
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44,100 |
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37,057 |
|
Restricted interest-earning deposits with banks (includes $44.8 million and $57.1 million,
respectively, related to consolidated variable interest entities (VIEs)) |
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47,384 |
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|
63,400 |
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Securities available for sale (amortized cost of $1.5 million) |
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1,557 |
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Net investment in leases and loans (includes $184.3 million and $238.0 million, respectively,
related to consolidated VIEs) |
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361,143 |
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448,610 |
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Property and equipment, net |
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2,020 |
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2,431 |
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Property tax receivables |
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592 |
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|
1,135 |
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Other assets |
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9,509 |
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13,170 |
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Total assets |
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$ |
466,305 |
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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 $159.5 million and $226.7 million, respectively, related to
consolidated VIEs) |
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191,858 |
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|
244,445 |
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Deposits |
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95,358 |
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80,288 |
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Other liabilities: |
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Fair value of derivatives |
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2,408 |
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Sales and property taxes payable |
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5,291 |
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4,197 |
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Accounts payable and accrued expenses |
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7,198 |
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7,649 |
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Net deferred income tax liability |
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12,090 |
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16,037 |
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Total liabilities |
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311,795 |
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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;
12,870,979 and 12,778,935 shares issued and outstanding, respectively |
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129 |
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128 |
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Preferred Stock, $0.01 par value; 5,000,000 shares authorized; none issued |
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Additional paid-in capital |
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86,608 |
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84,674 |
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Stock subscription receivable |
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(2 |
) |
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(3 |
) |
Accumulated other comprehensive loss |
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(153 |
) |
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(267 |
) |
Retained earnings |
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67,928 |
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|
63,706 |
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Total stockholders equity |
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|
154,510 |
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148,238 |
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Total liabilities and stockholders equity |
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$ |
466,305 |
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$ |
565,803 |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-2-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2010 |
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2009 |
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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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$ |
11,421 |
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$ |
15,591 |
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$ |
36,245 |
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$ |
51,944 |
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Fee income |
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3,567 |
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4,288 |
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10,884 |
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13,702 |
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Interest and fee income |
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14,988 |
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19,879 |
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47,129 |
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65,646 |
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Interest expense |
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3,590 |
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6,448 |
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12,204 |
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21,724 |
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Net interest and fee income |
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11,398 |
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13,431 |
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34,925 |
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43,922 |
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Provision for credit losses |
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2,083 |
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5,951 |
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7,700 |
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21,493 |
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Net interest and fee income after provision for credit losses |
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9,315 |
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7,480 |
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27,225 |
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22,429 |
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Other income: |
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Insurance income |
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985 |
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1,186 |
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3,130 |
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4,051 |
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Gain (loss) on derivatives |
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(9 |
) |
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(1,164 |
) |
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(128 |
) |
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(1,825 |
) |
Other income |
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354 |
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409 |
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948 |
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1,205 |
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Other income |
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1,330 |
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431 |
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3,950 |
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3,431 |
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Other expense: |
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Salaries and benefits |
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4,947 |
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4,051 |
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14,659 |
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14,994 |
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General and administrative |
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3,156 |
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3,076 |
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9,275 |
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9,761 |
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Financing related costs |
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131 |
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|
51 |
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433 |
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361 |
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|
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Other expense |
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8,234 |
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7,178 |
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24,367 |
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25,116 |
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Income before income taxes |
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2,411 |
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|
733 |
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6,808 |
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|
744 |
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Income tax expense |
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|
977 |
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|
225 |
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2,586 |
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|
169 |
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Net income |
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$ |
1,434 |
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$ |
508 |
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$ |
4,222 |
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$ |
575 |
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Basic earnings per share |
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$ |
0.11 |
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$ |
0.04 |
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$ |
0.33 |
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$ |
0.05 |
|
Diluted earnings per share |
|
$ |
0.11 |
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$ |
0.04 |
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$ |
0.33 |
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$ |
0.05 |
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Weighted average shares used in computing basic earnings
per share |
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12,872,123 |
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12,607,147 |
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12,826,263 |
|
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12,499,578 |
|
Weighted average shares used in computing diluted earnings
per share |
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|
12,933,439 |
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|
12,649,800 |
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12,888,662 |
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|
12,522,685 |
|
The accompanying notes are an integral part of the unaudited 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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Common |
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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 |
) |
|
$ |
167 |
|
|
$ |
62,670 |
|
|
$ |
146,625 |
|
Issuance of common stock |
|
|
35,004 |
|
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|
1 |
|
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|
105 |
|
|
|
|
|
|
|
|
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|
|
|
|
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|
106 |
|
Repurchase of common stock |
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|
(102,614 |
) |
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|
(1 |
) |
|
|
(399 |
) |
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|
|
|
|
|
|
|
|
|
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|
(400 |
) |
Exercise of stock options |
|
|
40,424 |
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|
|
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|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167 |
|
Tax benefit on stock options exercised |
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
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|
|
|
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|
48 |
|
Stock option compensation recognized |
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|
|
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|
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|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
298 |
|
Payment of receivables |
|
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|
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|
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2 |
|
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|
|
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|
|
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|
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|
2 |
|
Restricted stock grant |
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|
559,716 |
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6 |
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(6 |
) |
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|
|
|
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|
Restricted stock compensation
recognized |
|
|
|
|
|
|
|
|
|
|
790 |
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|
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|
790 |
|
Net change related to derivatives, net of
tax |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434 |
) |
|
|
|
|
|
|
(434 |
) |
Net income |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
1,036 |
|
|
|
1,036 |
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|
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|
|
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|
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|
Balance, December 31, 2009 |
|
|
12,778,935 |
|
|
$ |
128 |
|
|
$ |
84,674 |
|
|
$ |
(3 |
) |
|
$ |
(267 |
) |
|
$ |
63,706 |
|
|
$ |
148,238 |
|
Issuance of common stock |
|
|
10,479 |
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
Repurchase of common stock |
|
|
(61,442 |
) |
|
|
(1 |
) |
|
|
(561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(562 |
) |
Exercise of stock options |
|
|
35,864 |
|
|
|
1 |
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162 |
|
Tax benefit on stock options exercised |
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
Stock option compensation recognized |
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166 |
|
Payment of receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Restricted stock grant |
|
|
107,143 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation
recognized |
|
|
|
|
|
|
|
|
|
|
2,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,024 |
|
Net change related to derivatives, net of
tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
95 |
|
Net change in unrealized gain/loss on
securities available for sale, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
19 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,222 |
|
|
|
4,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010 |
|
|
12,870,979 |
|
|
$ |
129 |
|
|
$ |
86,608 |
|
|
$ |
(2 |
) |
|
$ |
(153 |
) |
|
$ |
67,928 |
|
|
$ |
154,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-4-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,222 |
|
|
$ |
575 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,938 |
|
|
|
1,844 |
|
Stock-based compensation |
|
|
2,190 |
|
|
|
1,006 |
|
Excess tax benefits from stock-based payment arrangements |
|
|
(72 |
) |
|
|
(5 |
) |
Amortization of deferred net loss on cash flow hedge derivatives |
|
|
158 |
|
|
|
113 |
|
Change in fair value of derivatives |
|
|
(2,291 |
) |
|
|
(997 |
) |
Cash flow hedge gains reclassified from accumulated other comprehensive income |
|
|
|
|
|
|
(642 |
) |
Provision for credit losses |
|
|
7,700 |
|
|
|
21,493 |
|
Net deferred income taxes |
|
|
(4,021 |
) |
|
|
(1,726 |
) |
Amortization of deferred initial direct costs and fees |
|
|
5,488 |
|
|
|
9,482 |
|
Deferred initial direct costs and fees |
|
|
(2,449 |
) |
|
|
(2,039 |
) |
Loss on equipment disposed |
|
|
1,806 |
|
|
|
1,259 |
|
Effect of changes in other operating items: |
|
|
|
|
|
|
|
|
Other assets |
|
|
4,467 |
|
|
|
4,933 |
|
Other liabilities |
|
|
668 |
|
|
|
(935 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
19,804 |
|
|
|
34,361 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of equipment for direct financing lease contracts and funds used to originate loans |
|
|
(91,477 |
) |
|
|
(68,904 |
) |
Principal collections on leases and loans |
|
|
164,783 |
|
|
|
207,923 |
|
Security deposits collected, net of refunds |
|
|
(2,110 |
) |
|
|
(3,415 |
) |
Proceeds from the sale of equipment |
|
|
3,727 |
|
|
|
3,754 |
|
Acquisitions of property and equipment |
|
|
(332 |
) |
|
|
(366 |
) |
Change in restricted interest-earning deposits with banks |
|
|
16,016 |
|
|
|
1,292 |
|
Purchases of securities available for sale |
|
|
(1,527 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
89,080 |
|
|
|
140,284 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuances of common stock |
|
|
74 |
|
|
|
56 |
|
Repurchases of common stock |
|
|
(562 |
) |
|
|
(400 |
) |
Exercise of stock options |
|
|
162 |
|
|
|
44 |
|
Excess tax benefits from stock-based payment arrangements |
|
|
72 |
|
|
|
5 |
|
Debt issuance costs |
|
|
(1,529 |
) |
|
|
(512 |
) |
Term securitization advances |
|
|
68,169 |
|
|
|
|
|
Term securitization repayments |
|
|
(135,383 |
) |
|
|
(166,279 |
) |
Warehouse and bank facility advances |
|
|
24,488 |
|
|
|
42,130 |
|
Warehouse and bank facility repayments |
|
|
(72,402 |
) |
|
|
(57,393 |
) |
Other short-term borrowing advances |
|
|
|
|
|
|
2,200 |
|
Other short-term borrowing repayments |
|
|
|
|
|
|
(1,000 |
) |
Increase in deposits |
|
|
15,070 |
|
|
|
16,675 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(101,841 |
) |
|
|
(164,474 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in total cash and cash equivalents |
|
|
7,043 |
|
|
|
10,171 |
|
Total cash and cash equivalents, beginning of period |
|
|
37,057 |
|
|
|
40,270 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents, end of period |
|
$ |
44,100 |
|
|
$ |
50,441 |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest on deposits and borrowings |
|
$ |
10,957 |
|
|
$ |
20,546 |
|
Cash paid for income taxes, net of refunds received |
|
$ |
3,710 |
|
|
$ |
806 |
|
The accompanying notes are an integral part of the unaudited 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 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. Marlin Business Services Corp. is a bank holding company and a financial holding
company regulated by the Federal Reserve Board under the Bank Holding Company Act.
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 September 30, 2010 and the results of operations for the
three- and nine-month periods ended September 30, 2010 and 2009, and cash flows for the nine-month
periods ended September 30, 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
(SEC) on March 5, 2010. The consolidated results of operations for the three- and nine-month
periods ended September 30, 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.
Use of estimates. The preparation of financial statements in accordance with U.S. generally
accepted accounting principles (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 on leases and loans. 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 each 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.
Modifications to leases are accounted for in accordance with the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) Topic 840. Modifications resulting in
renegotiated leases may include reductions in payment and extensions in term. However, such
renegotiated leases are not granted concessions regarding implicit rates or reductions in total
amounts due. Modifications may be granted on a one-time basis in situations that indicate the
lessee is experiencing a temporary, timing issue and has a high likelihood of success with a
revised payment plan. After a modification, a leases accrual status is based on compliance with
the modified terms.
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 of
at the end of a leases term. Residual income is recognized as earned. Additional information
regarding lease residual values is included in the following Lease residual values section of
this Note 2.
-6-
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 the anticipated collection rate
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 a
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.
Securities available for sale. Securities available for sale consist of mutual funds. Securities
available for sale are measured at fair value on a recurring basis, computed using fair value
measurements classified as Level 1, since prices are obtained from a quoted
market. Unrealized holding gains or losses, net of related deferred income taxes, are reported in
accumulated other comprehensive 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 each prospective
customers financial condition, evaluating and recording guarantees and other security
arrangements, negotiating terms, preparing and processing documents and closing each 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.
The Company records an estimated residual value at lease inception for all fair market value and
fixed purchase option leases based on a percentage of the equipment cost of the asset being leased.
The percentages used depend on equipment type and term. In setting and reviewing estimated
residual values, the Company focuses its analysis primarily on total historical and expected
realization statistics pertaining to both lease renewals and sales of equipment.
At the end of an 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 a lessee elects to return 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 equipment to other assets, and any gain or loss realized on the sale or disposal of
equipment to a lessee or to others is included in fee income as net residual income.
Based on the Companys experience, the amount of ultimate realization of the residual value tends
to relate more to the customers election at the end of the lease term to enter into a renewal
period, to purchase the leased equipment or to return the leased equipment than it does to the
equipment type. Management performs periodic reviews of the estimated residual values and historic
realization statistics no less frequently than quarterly 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.
-7-
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. We consider both
quantitative and qualitative factors in determining the allowance for credit losses. Quantitative
factors considered include a migration analysis, historic delinquencies and charge-offs, historic
bankruptcies, historic performance of restructured accounts and a static pool analysis of historic
recoveries. 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. Qualitative factors
that may result in further adjustments to the quantitative analysis include items such as
forecasting uncertainties, changes in the composition of our lease and loan portfolios,
seasonality, economic conditions and trends or business practices at the reporting date that are
different from the periods used in the quantitative analysis.
The various factors used in the analysis are reviewed periodically, and no less frequently than
quarterly. 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
extent 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.
In our Form 10-Q filed on August 6, 2010, we disclosed that we
were in discussions with the Federal Reserve Bank in connection with the Federal Reserve Banks interpretation of
the Interagency Policy Statement on the Allowance for Loan and Lease Losses (SR 06-17) dated December 13, 2006
(the ALLL Policy Statement) and the appropriate application of the ALLL Policy Statement to managements
estimates used in determining the Companys allowance for credit losses (the Allowance). On October 27, 2010,
MBB received a written determination from the Federal Reserve Bank of San Francisco and the Utah Department of
Financial Institutions (the MBB Report). We do not believe that any of the recommendations in the MBB Report
require a material adjustment by the Company.
While the Company has not received a written determination from the Federal Reserve Bank of Philadelphia in
connection with the ALLL Policy Statement and Allowance discussions, if the Company receives such a written
determination and if, as a result of the Companys review of such written determination, management determines
that it should revise its estimates or methodology used to compute the Allowance, such changes could have a
material impact on the size of the Allowance.
Securitizations. From inception to September 30, 2010, the Company has completed ten term note
securitizations of which seven 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 U.S. GAAP.
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 was established. 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.
-8-
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 (the Board) 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.
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 its 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 that 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 such as 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 then assesses 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 is established. To the extent that we establish a valuation
allowance in a period, an expense is recorded within the tax provision in the Consolidated
Statements of Operations.
At September 30, 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 2007 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 2006 through the present are subject to examination.
-9-
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.
-10-
NOTE 3 Net Investment in Leases and Loans
Net investment in leases and loans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Minimum lease payments receivable |
|
$ |
397,683 |
|
|
$ |
494,954 |
|
Estimated residual value of equipment |
|
|
38,859 |
|
|
|
43,928 |
|
Unearned lease income, net of initial direct costs and fees deferred |
|
|
(62,900 |
) |
|
|
(74,823 |
) |
Security deposits |
|
|
(5,570 |
) |
|
|
(7,681 |
) |
Loans, including unamortized deferred fees and costs |
|
|
1,426 |
|
|
|
4,425 |
|
Allowance for credit losses |
|
|
(8,355 |
) |
|
|
(12,193 |
) |
|
|
|
|
|
|
|
|
|
$ |
361,143 |
|
|
$ |
448,610 |
|
|
|
|
|
|
|
|
At September 30, 2010, a total of $236.2 million of minimum lease payments receivable are assigned
as collateral for borrowings, including the amounts related to consolidated VIEs.
Initial direct costs net of fees deferred were $7.2 million and $10.2 million as of September 30,
2010, and December 31, 2009, respectively, and are netted in unearned income and will be amortized
to income using the effective interest method. At September 30, 2010 and December 31, 2009, $31.9
million and $35.1 million, respectively, of the estimated residual value of equipment retained on
our Consolidated Balance Sheets was 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 September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease |
|
|
|
|
|
|
Payments |
|
|
Income |
|
|
|
Receivable |
|
|
Amortization |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Period Ending December 31, |
|
|
|
|
|
|
|
|
2010 |
|
$ |
53,197 |
|
|
$ |
10,752 |
|
2011 |
|
|
173,560 |
|
|
|
29,435 |
|
2012 |
|
|
99,967 |
|
|
|
14,558 |
|
2013 |
|
|
47,262 |
|
|
|
5,924 |
|
2014 |
|
|
18,229 |
|
|
|
1,935 |
|
Thereafter |
|
|
5,468 |
|
|
|
296 |
|
|
|
|
|
|
|
|
|
|
$ |
397,683 |
|
|
$ |
62,900 |
|
|
|
|
|
|
|
|
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 September 30, 2010 and December 31, 2009, the Company maintained total finance
receivables which were on a non-accrual basis of $2.4 million and $4.6 million, respectively. As of
September 30, 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 $2.6 million and $4.5
million, respectively.
-11-
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 September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, beginning of period |
|
$ |
9,151 |
|
|
$ |
13,978 |
|
|
$ |
12,193 |
|
|
$ |
15,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(3,659 |
) |
|
|
(8,605 |
) |
|
|
(14,023 |
) |
|
|
(26,947 |
) |
Recoveries |
|
|
780 |
|
|
|
969 |
|
|
|
2,485 |
|
|
|
2,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(2,879 |
) |
|
|
(7,636 |
) |
|
|
(11,538 |
) |
|
|
(24,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
2,083 |
|
|
|
5,951 |
|
|
|
7,700 |
|
|
|
21,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end of period |
|
$ |
8,355 |
|
|
$ |
12,293 |
|
|
$ |
8,355 |
|
|
$ |
12,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our Form 10-Q filed on August 6, 2010, we disclosed that we
were in discussions with the Federal Reserve Bank in connection with the Federal Reserve Banks interpretation of
the Interagency Policy Statement on the Allowance for Loan and Lease Losses (SR 06-17) dated December 13, 2006
(the ALLL Policy Statement) and the appropriate application of the ALLL Policy Statement to managements
estimates used in determining the Companys allowance for credit losses (the Allowance). On October 27, 2010,
MBB received a written determination from the Federal Reserve Bank of San Francisco and the Utah Department of
Financial Institutions (the MBB Report). We do not believe that any of the recommendations in the MBB Report
require a material adjustment by the Company.
While the Company has not received a written determination from the Federal Reserve Bank of Philadelphia in
connection with the ALLL Policy Statement and Allowance discussions, if the Company receives such a written
determination and if, as a result of the Companys review of such written determination, management determines
that it should revise its estimates or methodology used to compute the Allowance, such changes could have a
material impact on the size of the Allowance.
NOTE 5 Other Assets
Other assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31. |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Accrued fees receivable |
|
$ |
2,407 |
|
|
$ |
3,189 |
|
Deferred transaction costs |
|
|
2,398 |
|
|
|
1,893 |
|
Prepaid expenses |
|
|
822 |
|
|
|
1,360 |
|
Income taxes receivable |
|
|
2,353 |
|
|
|
5,178 |
|
Other |
|
|
1,529 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
$ |
9,509 |
|
|
$ |
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.
-12-
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 commercial paper (CP) conduit
warehouse facility is 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 facilities are classified as long-term borrowings.
Scheduled principal and interest payments on outstanding borrowings as of September 30, 2010 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Interest(1) |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Period Ending December 31, |
|
|
|
|
|
|
|
|
2010 |
|
$ |
32,787 |
|
|
$ |
4,886 |
|
2011 |
|
|
84,789 |
|
|
|
3,966 |
|
2012 |
|
|
66,517 |
|
|
|
1,744 |
|
2013 |
|
|
7,465 |
|
|
|
27 |
|
2014 |
|
|
294 |
|
|
|
1 |
|
Thereafter |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
191,858 |
|
|
$ |
10,624 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on variable-rate long-term loan facilities is assumed at the September 30,
2010 rate for the remaining term. |
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.
On
September 24, 2010, the Companys affiliate, Marlin Leasing Receivables
XIII LLC (MLR XIII), closed on a $50,000,000 three-year committed loan facility with Key
Equipment Finance Inc. The facility is secured by a lien on MLR XIIIs assets. 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 September 23, 2013. 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.
-13-
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
September 30, 2010, the remaining scheduled maturities of time deposits are as follows:
|
|
|
|
|
|
|
Scheduled |
|
|
|
Maturities |
|
|
|
(Dollars in |
|
|
|
thousands) |
|
|
|
|
|
|
Period Ending December 31, |
|
|
|
|
2010 |
|
$ |
9,864 |
|
2011 |
|
|
31,428 |
|
2012 |
|
|
26,365 |
|
2013 |
|
|
18,200 |
|
2014 |
|
|
6,302 |
|
Thereafter |
|
|
3,199 |
|
|
|
|
|
|
|
$ |
95,358 |
|
|
|
|
|
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 September 30, 2010 was 2.69%.
-14-
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 was established.
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.
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.
During 2009, the Company concluded that certain forecasted transactions were not probable of
occurring on the anticipated date or in the additional time period permitted by U.S. GAAP. As a
result, a $0.2 million pretax ($0.1 million after-tax) gain on the related cash flow hedges was
reclassified from accumulated other comprehensive income into gain (loss) on derivatives for the
three-month period ended September 30, 2009. For the nine-month period ended September 30, 2009, a
pretax gain of $0.6 million ($0.4 million after-tax) on the related cash flow hedges was
reclassified from accumulated other comprehensive income into gain (loss) on derivatives.
-15-
The Company was not a party to any active interest-rate swap agreements at September 30, 2010. The
following table summarizes specific information regarding the terminated interest-rate swap
agreements described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June/ |
|
For Terminated Agreements: |
|
August, |
|
|
Various, |
|
|
August |
|
|
September |
|
Inception Date |
|
2006/2007 |
|
|
2007/2008 |
|
|
2006/2007 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October, |
|
|
October, |
|
|
October, |
|
|
September, |
|
Commencement Date |
|
2008 |
|
|
2009 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June |
|
|
May/October, |
|
|
October, |
|
|
September, |
|
Termination Date |
|
2010 |
|
|
2009 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
100,000 |
|
|
$ |
150,000 |
|
|
$ |
300,000 |
|
|
$ |
225,000 |
|
Realized gain (loss) at termination |
|
$ |
|
|
|
$ |
(7,316 |
) |
|
$ |
(2,683 |
) |
|
$ |
3,732 |
|
Deferred gain (loss), net of tax, recorded in equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
(172 |
) |
|
$ |
|
|
December 31, 2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
(357 |
) |
|
$ |
90 |
|
Amortization recognized as increase (decrease) in
interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
308 |
|
|
$ |
(150 |
) |
Year ended December 31, 2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
699 |
|
|
$ |
(514 |
) |
Expected amortization during next 12 months as an
increase in interest expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
209 |
|
|
$ |
|
|
The Company recorded a gain (loss) on derivatives activities for the periods indicated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative contracts |
|
$ |
(9 |
) |
|
$ |
(1,397 |
) |
|
$ |
(128 |
) |
|
$ |
(2,467 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedging gains on forecasted transactions
no longer probable of occurring(1) |
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivatives |
|
$ |
(9 |
) |
|
$ |
(1,164 |
) |
|
$ |
(128 |
) |
|
$ |
(1,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reclassified from accumulated other comprehensive income |
The Company also uses interest-rate cap agreements that are not designated for hedge accounting
treatment to fulfill certain covenants in its SPEs warehouse borrowing arrangements and for
overall interest-rate risk management. Accordingly, these cap agreements are recorded at fair value
in other assets at $2 thousand and $0.1 million as of September 30, 2010 and December 31, 2009,
respectively. The notional amount of interest-rate caps owned as of September 30, 2010 and December
31, 2009 was $81.5 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.
-16-
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, which are observable for the asset or liability for
substantially the full term of the financial instrument. |
|
|
|
Level 3 Inputs to the valuation are unobservable and significant to the fair value
measurement. Level 3 inputs shall be used to measure fair value only to the extent that
observable inputs are not available. |
The Company 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 London Interbank Offered Rate (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 derivatives are measured at fair value on a recurring basis, computed using
fair value measurements classified as Level 2. The fair value of securities available for sale is
computed using fair value measurements classified as Level 1, since prices are obtained from a
quoted market. The Companys balances measured at fair value on a recurring basis include the
following as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Fair Value Measurements Using |
|
|
Fair Value Measurements Using |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 1 |
|
|
Level 2 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
$ |
1,557 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest-rate caps purchased |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
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.
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.
-17-
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
44,100 |
|
|
$ |
44,100 |
|
|
$ |
37,057 |
|
|
$ |
37,057 |
|
Restricted interest-earning deposits with banks |
|
|
47,384 |
|
|
|
47,384 |
|
|
|
63,400 |
|
|
|
63,400 |
|
Securities available for sale |
|
|
1,557 |
|
|
|
1,557 |
|
|
|
|
|
|
|
|
|
Loans |
|
|
1,284 |
|
|
|
1,280 |
|
|
|
4,026 |
|
|
|
3,969 |
|
Interest-rate caps purchased |
|
|
2 |
|
|
|
2 |
|
|
|
119 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
|
|
|
|
|
|
|
|
62,541 |
|
|
|
62,541 |
|
Long-term borrowings |
|
|
191,858 |
|
|
|
198,263 |
|
|
|
244,445 |
|
|
|
244,477 |
|
Deposits |
|
|
95,358 |
|
|
|
97,404 |
|
|
|
80,288 |
|
|
|
81,903 |
|
Accounts payable and accrued
expenses (1) |
|
|
12,489 |
|
|
|
12,489 |
|
|
|
11,846 |
|
|
|
11,846 |
|
Interest-rate swaps |
|
|
|
|
|
|
|
|
|
|
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
September 30, 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 September 30,
2010 and December 31, 2009.
-18-
(c) Securities Available for Sale
The fair value of securities available for sale is recorded using prices obtained from a quoted
market.
(d) Loans
The fair value of loans is 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.
(e) Short-term and Long-term Borrowings
The fair value of the Companys debt and secured borrowings is estimated by discounting cash flows
at indicative market rates applicable to the Companys debt and secured borrowings of the same or
similar remaining maturities.
(f) Deposits
The fair value of the Companys deposits is estimated by discounting cash flows at current rates
paid by the Company for similar certificates of deposit of the same or similar remaining
maturities.
(g) Accounts Payable and Accrued Expenses
The carrying amount of the Companys accounts payable approximates fair value as of September 30,
2010 and December 31, 2009, because of the relatively short timeframe to realization.
(h) 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 first section of this Note 10.
-19-
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 September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands, except per-share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,434 |
|
|
$ |
508 |
|
|
$ |
4,222 |
|
|
$ |
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
11,919,693 |
|
|
|
11,708,401 |
|
|
|
11,876,168 |
|
|
|
11,686,120 |
|
Add: Unvested restricted stock awards
considered participating
securities |
|
|
952,430 |
|
|
|
898,746 |
|
|
|
950,095 |
|
|
|
813,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares used in computing
basic EPS |
|
|
12,872,123 |
|
|
|
12,607,147 |
|
|
|
12,826,263 |
|
|
|
12,499,578 |
|
Add: Effect of dilutive stock options |
|
|
61,316 |
|
|
|
42,653 |
|
|
|
62,399 |
|
|
|
23,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares used in computing
diluted EPS |
|
|
12,933,439 |
|
|
|
12,649,800 |
|
|
|
12,888,662 |
|
|
|
12,522,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.11 |
|
|
$ |
0.04 |
|
|
$ |
0.33 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.11 |
|
|
$ |
0.04 |
|
|
$ |
0.33 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods ended September 30, 2010 and September 30, 2009, options to purchase
344,950 and 649,672 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.
For the nine-month periods ended September 30, 2010 and September 30, 2009, options to purchase
406,827 and 683,566 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.
-20-
NOTE 12 Comprehensive Income (Loss)
The following table details the components of comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
1,434 |
|
|
$ |
508 |
|
|
$ |
4,222 |
|
|
$ |
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of cash flow hedging gains on forecasted
transactions no longer probable of occurring |
|
|
|
|
|
|
(233 |
) |
|
|
|
|
|
|
(642 |
) |
Amortization of net deferred losses on
cash flow hedge derivatives |
|
|
76 |
|
|
|
47 |
|
|
|
158 |
|
|
|
113 |
|
Change in fair value of securities available for sale |
|
|
11 |
|
|
|
|
|
|
|
31 |
|
|
|
|
|
Tax effect |
|
|
(35 |
) |
|
|
74 |
|
|
|
(75 |
) |
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
52 |
|
|
|
(112 |
) |
|
|
114 |
|
|
|
(319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,486 |
|
|
$ |
396 |
|
|
$ |
4,336 |
|
|
$ |
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13 Stockholders Equity
Stockholders Equity
On November 2, 2007, 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 purchased 2,847 shares of its common stock for $0.03 million during the three- and
nine-month periods ended September 30, 2010. There were no repurchases during the three-month
period ended September 30, 2009. The Company purchased 88,894 shares of its common stock for $0.3
million during the nine-month period ended September 30, 2009. At September 30, 2010, the Company
had $10.6 million remaining in its stock repurchase plan authorized by the Board.
In addition to the 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 425 and 58,595 shares repurchased to cover income taxes during the three- and nine-month
periods ended September 30, 2010, at average per-share costs of $10.87 and $9.09, respectively.
There were no shares repurchased to cover income taxes during the three-month period ended
September 30, 2009. There were 13,720 shares repurchased to cover income taxes during the
nine-month period ended September 30, 2009, at an average cost of $3.89.
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, MBB received approval from the Federal Reserve Bank of San Francisco (the
FRB) 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.
-21-
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).
On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of
Marlin Business Services Corp.s election to become a financial holding company (while remaining a
bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section
225.82 of the FRBs Regulation Y. Such election permits Marlin Business Services Corp. to engage
in activities that are financial in nature or incidental to a financial activity, including the
maintenance and expansion of its reinsurance activities conducted through its wholly-owned
subsidiary, AssuranceOne, Ltd.
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 1 capital as defined in the regulations, comprised of common equity,
retained earnings and a limited amount of non-cumulative perpetual preferred stock. The remaining
capital, Tier 2 capital, as defined in the regulations, may consist of other preferred stock, a
limited amount of term subordinated debt or a limited amount of the reserve for possible credit
losses. The FFIEC has also adopted minimum leverage ratios for banks, which are calculated by
dividing Tier 1 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 September 30, 2010 was $19.1 million, which met all
capital requirements to which MBB is subject and qualified MBB 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 ratio 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 September 30, 2010, Marlin
Business Services Corp. also exceeded its regulatory capital requirements and was 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.
-22-
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 September 30, 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. |
|
|
31.92 |
% |
|
$ |
154,663 |
|
|
|
4 |
% |
|
$ |
19,380 |
|
|
|
5 |
% |
|
$ |
24,225 |
|
Marlin Business Bank |
|
|
15.53 |
% |
|
$ |
19,047 |
|
|
|
5 |
% |
|
$ |
6,134 |
|
|
|
5 |
% |
|
$ |
6,134 |
|
Tier 1 Risk-based Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp. |
|
|
38.98 |
% |
|
$ |
154,663 |
|
|
|
4 |
% |
|
$ |
15,871 |
|
|
|
6 |
% |
|
$ |
23,806 |
|
Marlin Business Bank |
|
|
16.37 |
% |
|
$ |
19,047 |
|
|
|
6 |
% |
|
$ |
6,980 |
|
|
|
6 |
% |
|
$ |
6,980 |
|
Total Risk-based Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp. |
|
|
40.24 |
% |
|
$ |
159,665 |
|
|
|
8 |
% |
|
$ |
31,742 |
|
|
|
10 |
% |
|
$ |
39,677 |
|
Marlin Business Bank |
|
|
17.61 |
% |
|
$ |
20,485 |
|
|
|
15 |
% |
|
$ |
17,451 |
|
|
|
10 |
% (1) |
|
$ |
11,634 |
|
|
|
|
(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.
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. |
-23-
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
September 30, 2010 was $19.1 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 476,405 shares available for future grants under the 2003 Plan as of September 30, 2010.
Total stock-based compensation expense was $0.4 million for the three-month period ended September
30, 2010 and $0.4 million for the three-month period ended September 30, 2009. Total stock-based
compensation expense was $2.2 million and $1.0 million for the nine-month periods ended September
30, 2010 and September 30, 2009, respectively. Excess tax benefits from stock-based payment
arrangements decreased cash provided by operating activities and increased cash provided by
financing activities by $0.1 million and $0.1 million for the nine-month periods ended September
30, 2010 and September 30, 2009, respectively.
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.
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 September 30, 2010. There were no revisions to performance assumptions during the
nine-month periods ended September 30, 2010 and September 30, 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 September 30, 2010 and no
stock options granted during the nine-month period ended September 30, 2009. In addition to the
stock options granted pursuant to the stock option exchange program discussed below, there were
5,000 stock options granted during the nine-month period ended September 30, 2010.
The fair value of each stock option granted during the nine-month period ended September 30, 2010
was estimated on the date of the grant using the Black-Scholes option pricing model. The
weighted-average grant-date fair value of stock options issued for the nine-month period ended
September 30, 2010 was $7.64 per share, excluding the stock options granted pursuant to the stock
option exchange program discussed below.
-24-
The following weighted average assumptions were used for valuing option grants made during the
nine-month period ended September 30, 2010:
|
|
|
|
|
|
|
Assumption |
|
Risk-free interest rate |
|
|
2.18 |
% |
Expected life (years) |
|
|
5 |
|
Expected volatility |
|
|
79 |
% |
Expected dividends |
|
|
|
|
The risk-free interest rate for periods within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. The expected life for options granted
represents the period each option is expected to be outstanding and was determined by applying the
simplified method as defined by the SECs Staff Accounting Bulletin No. 107 (SAB 107), due to the
limited period of time the Companys shares have been publicly traded. The expected volatility was
determined using historical volatilities based on historical stock prices. The Company does not
pay dividends, and therefore did not assume expected dividends.
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. Based on employees elections, the program allowed us to
cancel, on May 24, 2010, 208,774 underwater stock options with an average exercise price of $19.13
in exchange for the grant of 141,421 stock options with an exercise price of $12.41, equal to the
closing price of our common stock on the date of grant. The new option grants also have a new
vesting schedule and seven-year term. No incremental compensation expense was recognized as a
result of the exchange program. The options cancelled and the new grants issued pursuant to this
exchange are included in the table below as forfeited and granted option activity, respectively.
A summary of option activity for the nine months ended September 30, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Exercise Price |
|
Options |
|
Shares |
|
|
Per Share |
|
Outstanding, December 31, 2009 |
|
|
778,161 |
|
|
$ |
12.20 |
|
Granted |
|
|
146,421 |
|
|
|
12.40 |
|
Exercised |
|
|
(35,864 |
) |
|
|
4.49 |
|
Forfeited |
|
|
(240,565 |
) |
|
|
19.42 |
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2010 |
|
|
648,153 |
|
|
|
9.99 |
|
|
|
|
|
|
|
|
|
During the three-month periods ended September 30, 2010 and September 30, 2009, the Company
recognized total compensation expense related to options of $0.1 million and $0.1 million,
respectively. During the nine-month periods ended September 30, 2010 and September 30, 2009, the
Company recognized total compensation expense related to options of $0.2 million and $0.3 million,
respectively.
There were no stock options exercised during the three-month period ended September 30, 2010. There
were 3,691 stock options exercised for the three-month period ended September 30, 2009. The total
pretax intrinsic value of stock options exercised was $0.1 million for the three-month period ended
September 30, 2009. The related tax benefit realized from the exercise of stock options for the
three-month period ended September 30, 2009 was $0.1 million.
The total pretax intrinsic values of stock options exercised were $0.2 million and $0.1 million for
the nine-month periods ended September 30, 2010 and September 30, 2009, respectively. The related
tax benefits realized from the exercise of stock options for the nine-month periods ended September
30, 2010 and September 30, 2009 were $0.1 million and $0.1 million, respectively.
-25-
The following table summarizes information about the stock options outstanding and exercisable as
of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Oustanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Intrinsic |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Intrinsic |
|
Range of |
|
Number |
|
|
Remaining |
|
|
Exercise |
|
|
Value |
|
|
Number |
|
|
Remaining |
|
|
Exercise |
|
|
Value |
|
Exercise Prices |
|
Outstanding |
|
|
Life (Years) |
|
|
Price |
|
|
(In thousands) |
|
|
Exercisable |
|
|
Life (Years) |
|
|
Price |
|
|
(In thousands) |
|
$3.39 |
|
|
85,925 |
|
|
|
1.5 |
|
|
$ |
3.39 |
|
|
$ |
740 |
|
|
|
85,925 |
|
|
|
1.5 |
|
|
$ |
3.39 |
|
|
$ |
740 |
|
$7.17 10.18 |
|
|
354,528 |
|
|
|
3.5 |
|
|
|
9.43 |
|
|
|
911 |
|
|
|
181,712 |
|
|
|
2.6 |
|
|
|
9.55 |
|
|
|
445 |
|
$12.08 12.41 |
|
|
145,612 |
|
|
|
6.6 |
|
|
|
12.40 |
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
$14.00 16.01 |
|
|
39,984 |
|
|
|
3.3 |
|
|
|
14.33 |
|
|
|
|
|
|
|
36,835 |
|
|
|
3.2 |
|
|
|
14.33 |
|
|
|
|
|
$19.78 21.50 |
|
|
22,104 |
|
|
|
2.7 |
|
|
|
20.80 |
|
|
|
|
|
|
|
22,104 |
|
|
|
2.7 |
|
|
|
20.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648,153 |
|
|
|
3.9 |
|
|
|
9.99 |
|
|
$ |
1,651 |
|
|
|
326,576 |
|
|
|
2.4 |
|
|
|
9.23 |
|
|
$ |
1,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value,
based on the Companys closing stock price of $12.00 as of September 30, 2010, which would have
been received by the option holders had all option holders exercised their options as of that date.
As of September 30, 2010, the total future compensation cost related to non-vested stock options
not yet recognized in the Consolidated Statements of Operations was $0.2 million and the weighted
average period over which these awards are expected to be recognized was 1.6 years, based on the
most probable performance assumptions as of September 30, 2010. In the event maximum performance
targets are achieved, an additional $0.7 million of compensation cost would be recognized over a
weighted average period of 1.9 years.
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 three 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 three to four 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 nine-month period ended September 30, 2010,
40,140 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 September 30,
2010. There were no revisions to performance assumptions for the nine-month periods ended
September 30, 2010 and September 30, 2009, although vesting was accelerated in 2010 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.
-26-
The following table summarizes the activity of the non-vested restricted stock during the nine
months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
Non-vested restricted stock |
|
Shares |
|
|
Fair Value |
|
Outstanding at December 31, 2009 |
|
|
1,023,403 |
|
|
$ |
7.74 |
|
Granted |
|
|
121,385 |
|
|
|
10.53 |
|
Vested |
|
|
(177,117 |
) |
|
|
8.16 |
|
Forfeited |
|
|
(14,292 |
) |
|
|
16.04 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
953,379 |
|
|
|
7.89 |
|
|
|
|
|
|
|
|
|
During the three-month periods ended September 30, 2010 and September 30, 2009, the Company granted
restricted stock awards with grant date fair values totaling $0.1 million and $0.1 million,
respectively. During the nine-month periods ended September 30, 2010 and September 30, 2009, the
Company granted restricted stock awards with grant date fair values totaling $1.3 million and $3.1
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 $0.4
million and $0.3 million of compensation expense related to restricted stock for the three-month
periods ended September 30, 2010 and September 30, 2009, respectively. The Company recognized $2.0
million and $0.7 million of compensation expense related to restricted stock for the nine-month
periods ended September 30, 2010 and September 30, 2009, respectively.
Of the $2.0 million total compensation expense related to restricted stock for the nine-month
period ended September 30, 2010, approximately $0.8 million related to the acceleration of vesting
based on an annual evaluation of the achievement of certain performance criteria during the first
quarter 2010.
As of September 30, 2010, there was $4.6 million of unrecognized compensation cost related to
non-vested restricted stock compensation scheduled to be recognized over a weighted average period
of 4.0 years, based on the most probable performance assumptions as of September 30, 2010. In the
event performance targets are achieved, $1.7 million of the unrecognized compensation cost would
accelerate to be recognized over a weighted average period of 0.9 years, and an additional $0.1
million of compensation cost would be recognized over a weighted average period of 0.9 years. In
addition, certain of the awards granted during 2009 may result in the issuance of 143,119
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 values of shares that vested during the three-month period ended September 30, 2010 were
$0.1 million. There were no shares that vested during the three-month period ended September 30,
2009. The fair values of shares that vested during the nine-month periods ended September 30, 2010
and September 30, 2009 were $1.6 million and $0.2 million, respectively.
-27-
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 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
September 30, 2010, our lease portfolio consisted of approximately 75,000 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 $466.3 million in total assets at September 30, 2010.
Our assets are substantially comprised of our net investment in leases and loans which totaled
$361.1 million at September 30, 2010.
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, MBB received approval from the FRB 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.
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.
On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of
Marlin Business Services Corp.s election to become a financial holding company (while remaining a
bank holding company) pursuant to Sections 4(k) and (l) of the
Bank Holding Company Act and Section 225.82 of the FRBs Regulation Y. Such election permits
Marlin Business Services Corp. to engage in activities that are financial in nature or incidental
to a financial activity, including the maintenance and expansion of its reinsurance activities
conducted through its wholly-owned subsidiary, AssuranceOne, Ltd.
-28-
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 with whom we conduct business
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
Ended |
|
|
|
|
|
|
September 30, |
|
|
As of or For the Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of sales account executives |
|
|
84 |
|
|
|
38 |
|
|
|
86 |
|
|
|
118 |
|
|
|
100 |
|
|
|
103 |
|
Number of originating sources(1) |
|
|
564 |
|
|
|
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 September 30, 2010, our annualized net credit losses were 3.10% of our average
total finance receivables. We establish reserves for credit losses which require us to estimate
inherent losses in our portfolio as of the reporting date.
Our leases are classified under U.S. GAAP as 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 69% of our lease portfolio at September 30, 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
long-term loan facilities. 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 September 30,
2010, $159.5 million, or 83.1%, 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 September 30, 2010, total deposits were $95.4 million.
Fixed rate leases not funded with deposits are initially financed with variable-rate debt.
Therefore, our earnings are exposed to interest rate risk should interest rates rise before we
complete our fixed-rate borrowings. We generally benefit in times of falling and low interest
rates. Although, in contrast to previous warehouse facilities our current long-term loan facilities
do not require annual refinancing, failure to renew the existing facilities or to obtain additional
financing would represent a restriction on our growth and future financial performance.
-29-
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.
On
September 24, 2010, the Companys affiliate, Marlin Leasing Receivables
XIII LLC (MLR XIII), closed on a $50,000,000 three-year committed loan facility with Key
Equipment Finance Inc. The facility is secured by a lien on MLR XIIIs assets. 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 September 23, 2013. 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.
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 FASB 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. The Company was not a party to any active interest-rate swap agreements at
September 30, 2010.
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 a leases term. Residual income is recognized as earned.
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 anticipated collection rate
assumptions are made as needed based on this analysis. Other fees are recognized when received.
Insurance income is recognized on an accrual basis as earned over the term of a 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.
-30-
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 each prospective
customers financial condition, evaluating and recording guarantees and other security
arrangements, negotiating terms, preparing and processing documents and closing each 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.
The Company records an estimated residual value at lease inception for all fair market value and
fixed purchase option leases based on a percentage of the equipment cost of the asset being leased.
The percentages used depend on equipment type and term. In setting and reviewing estimated
residual values, the Company focuses its analysis primarily on total historical and expected
realization statistics pertaining to both lease renewals and sales of equipment.
At the end of an 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 a lessee elects to return 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 equipment to other assets, and any gain or loss realized on the sale or disposal of
equipment to a lessee or to others is included in fee income as net residual income.
Based on the Companys experience, the amount of ultimate realization of the residual value tends
to relate more to the customers election at the end of the lease term to enter into a renewal
period, to purchase the leased equipment or to return the leased equipment than it does to the
equipment type. Management performs periodic reviews of the estimated residual values and historic
realization statistics no less frequently than quarterly 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. We consider both
quantitative and qualitative factors in determining the allowance for credit losses. Quantitative
factors considered include a migration analysis, historic delinquencies and charge-offs, historic
bankruptcies, historic performance of restructured accounts and a static pool analysis of historic
recoveries. 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. Qualitative factors
that may result in further adjustments to the quantitative analysis include items such as
forecasting uncertainties, changes in the composition of our lease and loan portfolios,
seasonality, economic conditions and trends or business practices at the reporting date that are
different from the periods used in the quantitative analysis. Adjustments due to such qualitative
factors increased the allowance for credit losses by approximately $0.4 million and $0.8 million at
September 30, 2010 and December 31, 2009, respectively.
The various factors used in the analysis are reviewed periodically, and no less frequently than
quarterly. 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.
-31-
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
extent 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 September 30, 2010, we have completed ten term note
securitizations of which seven 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 U.S. GAAP.
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 was established. 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.
-32-
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 its 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 that 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 such as 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 then assesses 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 is established. To the extent that we establish a valuation
allowance in a period, an expense is recorded within the tax provision in the Consolidated
Statements of Operations.
At September 30, 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 2007 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 2006 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 September 30, 2010 and September 30, 2009
Net income. Net income of $1.4 million was reported for the three-month period ended September 30,
2010, resulting in diluted earnings per share of $0.11. Last years net income of $0.5 million for
the three-month period ended September 30, 2009 reflects an after-tax charge of approximately $0.7
million due to the charge on derivatives. Excluding the impact of this after-tax charge in 2009,
net income would have been $1.2 million for the three-month period ended September 30, 2009,
resulting in adjusted diluted earnings per share of $0.10 for the three-month period ended
September 30, 2009. The exclusion of the impact on derivatives removes the volatility resulting
from derivatives activities subsequent to discontinuing hedge accounting in July 2008.
Excluding the after-tax impact on derivatives identified above, return on average assets was 1.20%
for the three-month period ended September 30, 2010, compared to a return of 0.73% for the
three-month period ended September 30, 2009. On the same basis, return on average equity was 3.75%
for the three-month period ended September 30, 2010, compared to a return of 3.27% for the
three-month period ended September 30, 2009.
-33-
The provision for credit losses decreased $3.9 million, or 65.0%, to $2.1 million for the
three-month period ended September 30, 2010 from $6.0 million for the same period in 2009,
primarily due to a reduced portfolio size, lower charge-offs and improved delinquencies. For the
three-month period ended September 30, 2010 compared to the three-month period ended September 30,
2009,
net interest and fee income decreased $2.0 million, or 14.9%, primarily due to a 29.4% decrease in
average total finance receivables. Other expenses increased $1.0 million, or 13.9%, for the
three-month period ended September 30, 2010 compared to the three-month period ended September 30,
2009, primarily due to increased salaries and benefits expense related to increased sales staffing
levels.
Overall, our average net investment in total finance receivables for the three-month period ended
September 30, 2010 decreased 29.4% to $371.8 million compared to $526.8 million for the three-month
period ended September 30, 2009. Although we continue to respond to current economic conditions
with restrictive credit standards, we have begun rebuilding the sales organization to increase
originations.
During the three months ended September 30, 2010, we generated 3,253 new leases with a cost of
$35.8 million compared to 1,916 new leases with a cost of $16.8 million generated for the three
months ended September 30, 2009. Much of the change in volume is the result of increasing sales
staffing levels, which were 84 sales account executives at September 30, 2010 and 34 sales account
executives at September 30, 2009. Approval rates also rose from 38% for the quarter ended September
30, 2009 to 49% for the quarter ended September 30, 2010 due to the improved credit quality of the
applications received.
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
September 30, 2010 and September 30, 2009.
-34-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Average |
|
|
|
|
|
|
Yields/ |
|
|
Average |
|
|
|
|
|
|
Yields/ |
|
|
|
Balance(1) |
|
|
Interest |
|
|
Rates(2) |
|
|
Balance(1) |
|
|
Interest |
|
|
Rates(2) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks |
|
$ |
35,647 |
|
|
$ |
17 |
|
|
|
0.20 |
% |
|
$ |
49,196 |
|
|
$ |
20 |
|
|
|
0.16 |
% |
Restricted interest-earning deposits with banks |
|
|
62,293 |
|
|
|
23 |
|
|
|
0.15 |
|
|
|
65,569 |
|
|
|
44 |
|
|
|
0.27 |
|
Securities available for sale |
|
|
1,541 |
|
|
|
13 |
|
|
|
3.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in leases(3) |
|
|
369,973 |
|
|
|
11,317 |
|
|
|
12.24 |
|
|
|
519,791 |
|
|
|
15,317 |
|
|
|
11.79 |
|
Loans receivable(3) |
|
|
1,860 |
|
|
|
51 |
|
|
|
10.92 |
|
|
|
7,038 |
|
|
|
210 |
|
|
|
11.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
471,314 |
|
|
|
11,421 |
|
|
|
9.70 |
|
|
|
641,594 |
|
|
|
15,591 |
|
|
|
9.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
1,267 |
|
|
|
|
|
|
|
|
|
|
|
4,239 |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
2,125 |
|
|
|
|
|
|
|
|
|
|
|
2,725 |
|
|
|
|
|
|
|
|
|
Property tax receivables |
|
|
718 |
|
|
|
|
|
|
|
|
|
|
|
1,354 |
|
|
|
|
|
|
|
|
|
Other assets(4) |
|
|
6,083 |
|
|
|
|
|
|
|
|
|
|
|
6,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets |
|
|
10,193 |
|
|
|
|
|
|
|
|
|
|
|
15,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
481,507 |
|
|
|
|
|
|
|
|
|
|
$ |
656,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings(5) |
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
$ |
92,292 |
|
|
$ |
1,275 |
|
|
|
5.53 |
% |
Long-term borrowings(5) |
|
|
205,896 |
|
|
|
2,940 |
|
|
|
5.71 |
|
|
|
301,788 |
|
|
|
4,483 |
|
|
|
5.94 |
|
Deposits |
|
|
96,294 |
|
|
|
650 |
|
|
|
2.70 |
|
|
|
79,444 |
|
|
|
690 |
|
|
|
3.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
302,190 |
|
|
|
3,590 |
|
|
|
4.75 |
|
|
|
473,524 |
|
|
|
6,448 |
|
|
|
5.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,859 |
|
|
|
|
|
|
|
|
|
Sales and property taxes payable |
|
|
5,468 |
|
|
|
|
|
|
|
|
|
|
|
7,674 |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
6,504 |
|
|
|
|
|
|
|
|
|
|
|
5,621 |
|
|
|
|
|
|
|
|
|
Net deferred income tax liability |
|
|
13,704 |
|
|
|
|
|
|
|
|
|
|
|
13,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities |
|
|
25,676 |
|
|
|
|
|
|
|
|
|
|
|
36,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
327,866 |
|
|
|
|
|
|
|
|
|
|
|
509,830 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
153,641 |
|
|
|
|
|
|
|
|
|
|
|
147,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
481,507 |
|
|
|
|
|
|
|
|
|
|
$ |
656,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
7,831 |
|
|
|
|
|
|
|
|
|
|
$ |
9,143 |
|
|
|
|
|
Interest rate spread(6) |
|
|
|
|
|
|
|
|
|
|
4.95 |
% |
|
|
|
|
|
|
|
|
|
|
4.27 |
% |
Net interest margin(7) |
|
|
|
|
|
|
|
|
|
|
6.65 |
% |
|
|
|
|
|
|
|
|
|
|
5.70 |
% |
Ratio of average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
155.97 |
% |
|
|
|
|
|
|
|
|
|
|
135.49 |
% |
|
|
|
(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. |
-35-
The following table presents the components of the changes in net interest income by volume and
rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 Compared To |
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
Increase (Decrease) Due To: |
|
|
|
Volume(1) |
|
|
Rate(1) |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks |
|
$ |
(6 |
) |
|
$ |
3 |
|
|
$ |
(3 |
) |
Restricted interest-earning deposits with banks |
|
|
(2 |
) |
|
|
(19 |
) |
|
|
(21 |
) |
Securities available for sale |
|
|
13 |
|
|
|
|
|
|
|
13 |
|
Net investment in leases |
|
|
(4,563 |
) |
|
|
563 |
|
|
|
(4,000 |
) |
Loans receivable |
|
|
(143 |
) |
|
|
(16 |
) |
|
|
(159 |
) |
Total interest income |
|
|
(4,127 |
) |
|
|
(43 |
) |
|
|
(4,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
(638 |
) |
|
|
(637 |
) |
|
|
(1,275 |
) |
Long-term borrowings |
|
|
(1,375 |
) |
|
|
(168 |
) |
|
|
(1,543 |
) |
Deposits |
|
|
130 |
|
|
|
(170 |
) |
|
|
(40 |
) |
Total interest expense |
|
|
(2,113 |
) |
|
|
(745 |
) |
|
|
(2,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
(2,674 |
) |
|
|
1,362 |
|
|
|
(1,312 |
) |
|
|
|
(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. |
-36-
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
September 30, 2010 and September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
11,421 |
|
|
$ |
15,591 |
|
Fee income |
|
|
3,567 |
|
|
|
4,288 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
14,988 |
|
|
|
19,879 |
|
Interest expense |
|
|
3,590 |
|
|
|
6,448 |
|
|
|
|
|
|
|
|
Net interest and fee income |
|
|
11,398 |
|
|
|
13,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total finance receivables(1) |
|
$ |
371,833 |
|
|
$ |
526,829 |
|
|
|
|
|
|
|
|
|
|
Percent of average total finance receivables: |
|
|
|
|
|
|
|
|
Interest income |
|
|
12.28 |
% |
|
|
11.84 |
% |
Fee income |
|
|
3.84 |
|
|
|
3.26 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
16.12 |
|
|
|
15.10 |
|
Interest expense |
|
|
3.86 |
|
|
|
4.90 |
|
|
|
|
|
|
|
|
Net interest and fee margin |
|
|
12.26 |
% |
|
|
10.20 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables include net investment in direct financing leases and
loans. For the calculations above, the effects of (i) the allowance for credit losses and
(ii) initial direct costs and fees deferred are excluded. |
Net interest and fee income decreased $2.0 million, or 14.9%, to $11.4 million for the three months
ended September 30, 2010 from $13.4 million for the three months ended September 30, 2009. The
annualized net interest and fee margin increased 206 basis points to 12.26% in the three-month
period ended September 30, 2010 from 10.20% for the same period in 2009.
Interest income, net of amortized initial direct costs and fees, decreased $4.2 million, or 26.9%,
to $11.4 million for the three-month period ended September 30, 2010 from $15.6 million for the
three-month period ended September 30, 2009. The decrease in interest income was due principally to
a 29.4% decrease in average total finance receivables, which decreased $155.0 million to $371.8
million at September 30, 2010 from $526.8 million at September 30, 2009, partially offset by an
increase in average yield of 44 basis points. 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 average yield on the portfolio increased, primarily due to
continued higher yields on the new leases compared to the yields on the leases repaying. However,
the weighted average implicit interest rate on new finance receivables originated decreased 122
basis points to 14.40% for the three-month period ended September 30, 2010 compared to 15.62% for
the three-month period ended September 30, 2009, primarily due to a change in mix of new
origination types. This change is due to the mix of origination channels beginning to migrate to
historical percentages as the Company continues to rebuild the sales force and grow volume.
Fee income decreased $0.7 million, or 16.3%, to $3.6 million for the three-month period ended
September 30, 2010 from $4.3 million for the three-month period ended September 30, 2009. Fee
income included approximately $1.3 million of net residual income for the three-month period ended
September 30, 2010 and $1.3 million for the three-month period ended September 30, 2009. Fee income
also included approximately $1.9 million in late fee income for the three-month period ended
September 30, 2010, which decreased 26.9% compared to $2.6 million for the three-month period ended
September 30, 2009. The decrease in late fee income was primarily due to the decrease in average
total finance receivables.
-37-
Fee income, as an annualized percentage of average total finance receivables, increased 58 basis
points to 3.84% for the three-month period ended September 30, 2010 from 3.26% for the same period
in 2009. Late fees remained the largest component of fee income at 2.07% as a percentage of average
total finance receivables for the three-month period ended September 30, 2010 compared to 2.01% for
the three-month period ended September 30, 2009. As a percentage of average total finance
receivables, net residual income was 1.42% for the three-month period ended September 30, 2010
compared to 1.00% for the three-month period ended September 30, 2009.
Interest expense decreased $2.8 million to $3.6 million for the three-month period ended September
30, 2010 from $6.4 million for the three-month period ended September 30, 2009. The decrease was
primarily due to lower average total finance receivables in combination with lower rates paid for
both borrowings and deposits. Interest expense, as an annualized percentage of average total
finance receivables, decreased 104 basis points to 3.86% for the three-month period ended September
30, 2010, from 4.90% for the same period in 2009.
The weighted average interest rate, excluding transaction costs, on short-term and long-term
borrowings was 5.10% for the quarter ended September 30, 2010 compared to 5.55% for the same period
in 2009. The lower interest rate primarily reflects the decreased cost of the term securitization
borrowings. The average balance for our warehouse facilities was $25.4 million for the three months
ended September 30, 2010 compared to $92.3 million for the three months ended September 30, 2009.
The weighted average interest rate, excluding transaction costs, for our warehouse facilities was
5.50% for the quarter ended September 30, 2010, compared to 5.08% for the same period in 2009. For
the three months ended September 30, 2010, average term securitization borrowings outstanding were
$180.5 million at a weighted average coupon of 5.03% compared to $301.8 million at a weighted
average coupon of 5.69% for the same period in 2009.
The opening of our wholly-owned subsidiary, MBB, 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
$0.6 million, or 2.70% as a percentage of weighted average deposits, for the three-month period
ended September 30, 2010. The average balance of deposits was $96.3 million for the three-month
period ended September 30, 2010. Interest expense on deposits was $0.7 million, or 3.47% as a
percentage of weighted average deposits, for the three-month period ended September 30, 2009. The
average balance of deposits was $79.4 million for the three-month period ended September 30, 2009.
Insurance income. Insurance income decreased $0.2 million to $1.0 million for the three-month
period ended September 30, 2010 from $1.2 million for the three-month period ended September 30,
2009, primarily due to lower billings from lower total finance receivables.
Other income. Other income remained constant at $0.4 million for the three-month period ended
September 30, 2010 compared to the three-month period ended September 30, 2009. Other income
includes various administrative transaction fees, fees received from lease syndications and gains
on sales of leases.
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 September 30, 2010, there were $9 thousand in losses on derivatives, and no
interest-rate swap agreements were outstanding, compared to a loss of $1.2 million for the three
months ended September 30, 2009.
The Company was not a party to any active interest-rate swap agreements at September 30, 2010.
Salaries and benefits expense. Salaries and benefits expense increased $0.8 million, or 19.5%, to
$4.9 million for the three months ended September 30, 2010 from $4.1 million for the same period in
2009. Salaries and benefits expense, as a percentage of average total finance receivables, was
5.32% for the three-month period ended September 30, 2010 compared with 3.08% for the same period
in 2009. Total personnel increased to 229 at September 30, 2010 from 175 at September 30, 2009,
primarily due to increased sales staffing levels, which were 84 sales account executives at
September 30, 2010 compared to 34 sales account executives at September 30, 2009.
-38-
During the current quarter we increased the number of our sales account executives by 15, from 69
sales account executives at June 30, 2010 to 84 at September 30, 2010. This action was part of our
plan to rebuild the sales organization to increase originations and match the level of originations
to our current funding capacity.
General and administrative expense. General and administrative expense increased $0.1 million, or
3.2%, to $3.2 million for the three months ended September 30, 2010 from $3.1 million for the same
period in 2009. General and administrative expense as an
annualized percentage of average total finance receivables was 3.40% for the three-month period
ended September 30, 2010, compared to 2.34% for the three-month period ended September 30, 2009.
Selected major components of general and administrative expense for the three-month period ended
September 30, 2010 included $0.7 million of premises and occupancy expense, $0.3 million of audit
and tax expense, $0.3 million of data processing expense and $0.1 million of marketing expense. In
comparison, selected major components of general and administrative expense for the three-month
period ended September 30, 2009 included $0.8 million of premises and occupancy expense, $0.3
million of audit and tax expense, $0.2 million of data processing expense and no marketing expense.
Financing related costs. Financing related costs primarily represent bank commitment fees paid to
our financing sources. Financing related costs were $0.1 million for the three-month period ended
September 30, 2010 and $0.1 million for the same period in 2009.
Provision for credit losses. The provision for credit losses decreased $3.9 million, or 65.0%, to
$2.1 million for the three months ended September 30, 2010 from $6.0 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 $2.9 million for the three-month period ended September 30, 2010, compared to
$7.6 million for the same period in 2009. Net charge-offs as a percentage of average total finance
receivables decreased to 3.10% during the three-month period ended September 30, 2010, from 5.80%
for the same period in 2009. The allowance for credit losses decreased to approximately $8.4
million at September 30, 2010, a decrease of $3.8 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 $1.0 million was recorded for the three-month
period ended September 30, 2010, compared to an expense of $0.2 million for the same period in
2009. The change is primarily attributable to the change in pretax income recorded for the
three-month period ended September 30, 2010. Our effective tax rate, which is a combination of
federal and state income tax rates, was approximately 40.5% for the three-month period ended
September 30, 2010, compared to 30.7% for the three-month period ended September 30, 2009. The
change in effective tax rate is primarily due to a change in the mix of projected pretax book
income across the jurisdictions and entities.
Comparison of the Nine-Month Periods Ended September 30, 2010 and September 30, 2009
Net income. Net income of $4.2 million was reported for the nine-month period ended September 30,
2010, resulting in diluted earnings per share of $0.33. This net income includes an after-tax
charge of approximately $0.1 million due to the net loss on derivatives. The net income of $0.6
million for the nine-month period ended September 30, 2009 reflects an after-tax charge of
approximately $1.1 million due to the loss on derivatives. Excluding the impact of these after-tax
charges on both periods, net income would have been $4.3 million for the nine-month period ended
September 30, 2010, compared to net income of $1.7 million for the nine-month period ended
September 30, 2009. Diluted earnings per share excluding these after-tax charges would have been
$0.33 for the nine-month period ended September 30, 2010, compared to diluted earnings per share of
$0.13 for the nine-month period ended September 30, 2009. The exclusion of the impact on
derivatives removes the volatility resulting from derivatives activities subsequent to
discontinuing hedge accounting in July 2008.
Excluding the after-tax impact on derivatives identified above, return on average assets was 1.12%
for the nine-month period ended September 30, 2010, compared to a return of 0.31% for the
nine-month period ended September 30, 2009. On the same basis, return on average equity was 3.78%
for the nine-month period ended September 30, 2010, compared to a return of 1.52% for the
nine-month period ended September 30, 2009.
Also included in the net loss for the nine-month period ended September 30, 2009 were after-tax
charges of approximately $0.7 million, representing severance costs related to workforce reductions
in the first nine months of 2009.
-39-
The provision for credit losses decreased $13.8 million, or 64.2%, to $7.7 million for the
nine-month period ended September 30, 2010 from $21.5 million for the same period in 2009,
primarily due to a reduced portfolio size, lower charge-offs and improved delinquencies. During the
nine months ended September 30, 2010, net interest and fee income decreased $9.0 million, or 20.5%,
and insurance income decreased $1.0 million, primarily due to a 31.8% decrease in average total
finance receivables. The decrease in income was partially mitigated by reductions in other
expenses, which decreased $0.7 million, or 2.8%, for the nine-month period ended September 30,
2010, compared to the same period in 2009.
During the nine months ended September 30, 2010, we generated 8,738 new leases with a cost of $91.1
million compared to 7,558 new leases with a cost of $68.9 million generated for the nine months
ended September 30, 2009. Approval rates rose from 38% for the nine-month period ended September
30, 2009 to 48% for the nine-month period ended September 30, 2010 due to the improved credit
quality of the applications received.
Overall, our average net investment in total finance receivables for the nine-month period ended
September 30, 2010 decreased 31.8% to $399.6 million compared to $586.3 million for the nine-month
period ended September 30, 2009.
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 nine-month periods ended September
30, 2010 and September 30, 2009.
-40-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Average |
|
|
|
|
|
|
Yields/ |
|
|
Average |
|
|
|
|
|
|
Yields/ |
|
|
|
Balance(1) |
|
|
Interest |
|
|
Rates(2) |
|
|
Balance(1) |
|
|
Interest |
|
|
Rates(2) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks |
|
$ |
37,455 |
|
|
$ |
30 |
|
|
|
0.11 |
% |
|
$ |
45,736 |
|
|
$ |
116 |
|
|
|
0.34 |
% |
Restricted interest-earning deposits with banks |
|
|
63,471 |
|
|
|
55 |
|
|
|
0.12 |
|
|
|
67,136 |
|
|
|
264 |
|
|
|
0.52 |
|
Securities available for sale |
|
|
932 |
|
|
|
27 |
|
|
|
3.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in leases(3) |
|
|
396,879 |
|
|
|
35,888 |
|
|
|
12.06 |
|
|
|
577,199 |
|
|
|
50,753 |
|
|
|
11.72 |
|
Loans receivable(3) |
|
|
2,759 |
|
|
|
245 |
|
|
|
11.84 |
|
|
|
9,136 |
|
|
|
811 |
|
|
|
11.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
501,496 |
|
|
|
36,245 |
|
|
|
9.64 |
|
|
|
699,207 |
|
|
|
51,944 |
|
|
|
9.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
1,663 |
|
|
|
|
|
|
|
|
|
|
|
2,723 |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
2,256 |
|
|
|
|
|
|
|
|
|
|
|
2,859 |
|
|
|
|
|
|
|
|
|
Property tax receivables |
|
|
1,934 |
|
|
|
|
|
|
|
|
|
|
|
3,010 |
|
|
|
|
|
|
|
|
|
Other assets(4) |
|
|
6,435 |
|
|
|
|
|
|
|
|
|
|
|
9,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets |
|
|
12,288 |
|
|
|
|
|
|
|
|
|
|
|
18,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
513,784 |
|
|
|
|
|
|
|
|
|
|
$ |
717,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings(5) |
|
$ |
9,618 |
|
|
$ |
344 |
|
|
|
4.77 |
% |
|
$ |
102,633 |
|
|
$ |
3,922 |
|
|
|
5.10 |
% |
Long-term borrowings(5) |
|
|
234,892 |
|
|
|
9,924 |
|
|
|
5.63 |
|
|
|
356,666 |
|
|
|
15,766 |
|
|
|
5.89 |
|
Deposits |
|
|
90,787 |
|
|
|
1,936 |
|
|
|
2.84 |
|
|
|
74,000 |
|
|
|
2,036 |
|
|
|
3.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
335,297 |
|
|
|
12,204 |
|
|
|
4.85 |
|
|
|
533,299 |
|
|
|
21,724 |
|
|
|
5.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives |
|
|
789 |
|
|
|
|
|
|
|
|
|
|
|
10,546 |
|
|
|
|
|
|
|
|
|
Sales and property taxes payable |
|
|
5,462 |
|
|
|
|
|
|
|
|
|
|
|
7,636 |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
5,927 |
|
|
|
|
|
|
|
|
|
|
|
4,826 |
|
|
|
|
|
|
|
|
|
Net deferred income tax liability |
|
|
14,778 |
|
|
|
|
|
|
|
|
|
|
|
14,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities |
|
|
26,956 |
|
|
|
|
|
|
|
|
|
|
|
37,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
362,253 |
|
|
|
|
|
|
|
|
|
|
|
570,694 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
151,531 |
|
|
|
|
|
|
|
|
|
|
|
146,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
513,784 |
|
|
|
|
|
|
|
|
|
|
$ |
717,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
24,041 |
|
|
|
|
|
|
|
|
|
|
$ |
30,220 |
|
|
|
|
|
Interest rate spread(6) |
|
|
|
|
|
|
|
|
|
|
4.79 |
% |
|
|
|
|
|
|
|
|
|
|
4.47 |
% |
Net interest margin(7) |
|
|
|
|
|
|
|
|
|
|
6.39 |
% |
|
|
|
|
|
|
|
|
|
|
5.76 |
% |
Ratio of average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
149.57 |
% |
|
|
|
|
|
|
|
|
|
|
131.11 |
% |
|
|
|
(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. |
-41-
The following table presents the components of the changes in net interest income by volume and
rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 Compared To |
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
Increase (Decrease) Due To: |
|
|
|
Volume(1) |
|
|
Rate(1) |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks |
|
$ |
(18 |
) |
|
$ |
(68 |
) |
|
$ |
(86 |
) |
Restricted interest-earning deposits with banks |
|
|
(14 |
) |
|
|
(195 |
) |
|
|
(209 |
) |
Securities available for sale |
|
|
27 |
|
|
|
|
|
|
|
27 |
|
Net investment in leases |
|
|
(16,268 |
) |
|
|
1,403 |
|
|
|
(14,865 |
) |
Loans receivable |
|
|
(566 |
) |
|
|
|
|
|
|
(566 |
) |
Total interest income |
|
|
(14,324 |
) |
|
|
(1,375 |
) |
|
|
(15,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
(3,344 |
) |
|
|
(234 |
) |
|
|
(3,578 |
) |
Long-term borrowings |
|
|
(5,172 |
) |
|
|
(670 |
) |
|
|
(5,842 |
) |
Deposits |
|
|
410 |
|
|
|
(510 |
) |
|
|
(100 |
) |
Total interest expense |
|
|
(7,398 |
) |
|
|
(2,122 |
) |
|
|
(9,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
(9,218 |
) |
|
|
3,039 |
|
|
|
(6,179 |
) |
|
|
|
(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. |
-42-
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 nine-month periods ended
September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
36,245 |
|
|
$ |
51,944 |
|
Fee income |
|
|
10,884 |
|
|
|
13,702 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
47,129 |
|
|
|
65,646 |
|
Interest expense |
|
|
12,204 |
|
|
|
21,724 |
|
|
|
|
|
|
|
|
Net interest and fee income |
|
|
34,925 |
|
|
|
43,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total finance receivables(1) |
|
$ |
399,638 |
|
|
$ |
586,336 |
|
|
|
|
|
|
|
|
|
|
Percent of average total finance receivables: |
|
|
|
|
|
|
|
|
Interest income |
|
|
12.09 |
% |
|
|
11.81 |
% |
Fee income |
|
|
3.63 |
|
|
|
3.12 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
15.72 |
|
|
|
14.93 |
|
Interest expense |
|
|
4.07 |
|
|
|
4.94 |
|
|
|
|
|
|
|
|
Net interest and fee margin |
|
|
11.65 |
% |
|
|
9.99 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables include net investment in direct financing leases and
loans. For the calculations above, the effects of (i) the allowance for credit losses and
(ii) initial direct costs and fees deferred are excluded. |
Net interest and fee income decreased $9.0 million, or 20.5%, to $34.9 million for the nine months
ended September 30, 2010 from $43.9 million for the nine months ended September 30, 2009. The
annualized net interest and fee margin increased 166 basis points to 11.65% in the nine-month
period ended September 30, 2010 from 9.99% for the same period in 2009.
Interest income, net of amortized initial direct costs and fees, decreased $15.7 million, or 30.3%,
to $36.2 million for the nine-month period ended September 30, 2010 from $51.9 million for the
nine-month period ended September 30, 2009. The decrease in interest income was due principally to
a 31.8% decrease in average total finance receivables, which decreased $186.7 million to $399.6
million at September 30, 2010 from $586.3 million at September 30, 2009, partially offset by an
increase in average yield of 28 basis points. 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. Although the weighted average implicit interest rate on new
finance receivables originated decreased 34 basis points to 14.69% for the nine-month period ended
September 30, 2010 compared to 15.03% for the nine-month period ended September 30, 2009, the
average yield on the portfolio increased, primarily due to continued higher yields on the new
leases originated compared to the yields on the leases repaying.
Fee income decreased $2.8 million, or 20.4%, to $10.9 million for the nine-month period ended
September 30, 2010 from $13.7 million for the nine-month period ended September 30, 2009. Fee
income included approximately $4.0 million of net residual income for the nine-month period ended
September 30, 2010 compared to $4.1 million for the nine-month period ended September 30, 2009. Fee
income also included approximately $6.0 million in late fee income for the nine-month period ended
September 30, 2010, which decreased 30.2% compared to $8.6 million for the nine-month period ended
September 30, 2009. The decrease in late fee income was primarily due to the decrease in average
total finance receivables.
-43-
Fee income, as an annualized percentage of average total finance receivables, increased 51 basis
points to 3.63% for the nine-month period ended September 30, 2010 from 3.12% for the same period
in 2009. Late fees remained the largest component of fee income at 2.02% as a percentage of average
total finance receivables for the nine-month period ended September 30, 2010 compared to 1.96% for
the nine-month period ended September 30, 2009. As a percentage of average total finance
receivables, net residual income was 1.33% as a percentage of average total finance receivables for
the nine-month period ended September 30, 2010 compared to 0.92% for the nine-month period ended
September 30, 2009.
Interest expense decreased $9.5 million to $12.2 million for the nine-month period ended September
30, 2010 from $21.7 million for the nine-month period ended September 30, 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 87 basis points to 4.07% for the nine-month period ended September 30, 2010, from 4.94%
for the same period in 2009.
The weighted average interest rate, excluding transaction costs, on short-term and long-term
borrowings was 5.03% for the nine-month period ended September 30, 2010 compared to 5.46% for the
same period in 2009. The lower interest rate reflects the decreased cost of the term securitization
borrowings. The average balance for our warehouse facilities was $30.4 million for the nine months
ended September 30, 2010 compared to $102.6 million for the nine months ended September 30, 2009.
The weighted average interest rate, excluding transaction costs, for our warehouse facilities was
4.79% for the nine-month period ended September 30, 2010, compared to 4.80% for the same period in
2009. For the nine months ended September 30, 2010, average term securitization borrowings
outstanding were $214.1 million at a weighted average coupon of 5.06% compared to $356.7 million at
a weighted average coupon of 5.65% for the same period in 2009.
The opening of our wholly-owned subsidiary, MBB, 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
$1.9 million, or 2.84% as a percentage of weighted average deposits, for the nine-month period
ended September 30, 2010. The average balance of deposits was $90.8 million for the nine-month
period ended September 30, 2010. Interest expense on deposits was $2.0 million, or 3.67% as a
percentage of weighted average deposits, for the nine-month period ended September 30, 2009. The
average balance of deposits was $74.0 million for the nine-month period ended September 30, 2009.
Insurance income. Insurance income decreased $1.0 million to $3.1 million for the nine-month period
ended September 30, 2010 from $4.1 million for the nine-month period ended September 30, 2009,
primarily due to lower billings from lower total finance receivables.
Other income. Other income decreased $0.3 million to $0.9 million for the nine-month period ended
September 30, 2010 from $1.2 million for the nine-month period ended September 30, 2009, primarily
due to the impact of lower transaction volumes. Other income includes various administrative
transaction fees, fees received from lease syndications and gains on sales of leases.
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
nine months ended September 30, 2010, the loss on derivatives was $0.1 million, compared to a loss
of $1.8 million for the nine months ended September 30, 2009.
The Company was not a party to any active interest-rate swap agreements at September 30, 2010.
Salaries and benefits expense. Salaries and benefits expense decreased $0.3 million, or 2.0%, to
$14.7 million for the nine months ended September 30, 2010 from $15.0 million for the same period
in 2009, primarily due to severance costs incurred in 2009, partially offset by increased sales
account executives in 2010. Salaries and benefits expense, as a percentage of average total finance
receivables, was 4.89% for the nine-month period ended September 30, 2010 compared with 3.41% for
the same period in 2009. Total personnel increased to 229 at September 30, 2010 from 175 at
September 30, 2009.
-44-
Personnel costs represent our most significant overhead expense and we actively manage our staffing
levels to the requirements of our lease portfolio. As a result of the challenging economic
environment, we proactively lowered expenses in the first quarter of 2009, including reducing our
workforce by 17% and closing our two smallest satellite sales offices (Chicago and Utah). A total
of 49 employees company-wide were terminated in connection with the staff reductions in the first
quarter of 2009. We incurred pretax severance costs in the three months ended March 31, 2009 of
approximately $0.5 million related to the staff reductions. The annualized pretax salary cost
savings that resulted from the reductions are estimated to be approximately $2.3 million.
During the second quarter of 2009, we announced a further workforce reduction of 24%, or 55
employees company-wide, including the closure of our Denver satellite office. We incurred pretax
severance costs in the three months ended June 30, 2009 of approximately $0.7 million related to
these staff reductions. The annualized pretax salary cost savings that resulted from these
reductions are estimated to be approximately $2.9 million.
In the first nine months of 2010 we increased the number of our sales account executives by 46,
from 38 sales account executives at December 31, 2009 to 84 at September 30, 2010. This action was
part of our plan to rebuild the sales organization to increase originations and match the level of
originations to our current funding capacity.
General and administrative expense. General and administrative expense decreased $0.5 million, or
5.1%, to $9.3 million for the nine months ended September 30, 2010 from $9.8 million for the same
period in 2009. General and administrative expense as an annualized percentage of average total
finance receivables was 3.09% for the nine-month period ended September 30, 2010, compared to 2.22%
for the nine-month period ended September 30, 2009. Selected major components of general and
administrative expense for the nine-month period ended September 30, 2010 included $2.1 million of
premises and occupancy expense, $0.9 million of audit and tax expense, $0.7 million of data
processing expense and $0.2 million of marketing expense. In comparison, selected major components
of general and administrative expense for the nine-month period ended September 30, 2009 included
$2.4 million of premises and occupancy expense, $0.9 million of audit and tax expense, $0.7 million
of data processing expense and $0.1 million of marketing expense.
Financing related costs. Financing related costs primarily represent bank commitment fees paid to
our financing sources. Financing related costs remained unchanged at approximately $0.4 million for
the nine-month period ended September 30, 2010 compared to the same period in 2009.
Provision for credit losses. The provision for credit losses decreased $13.8 million, or 64.2%, to
$7.7 million for the nine months ended September 30, 2010 from $21.5 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 $11.5 million for the nine-month period ended September 30, 2010, compared to
$24.5 million for the same period in 2009. Net charge-offs as a percentage of average total finance
receivables decreased to 3.85% during the nine-month period ended September 30, 2010, from 5.57%
for the same period in 2009. The allowance for credit losses decreased to approximately $8.4
million at September 30, 2010, a decrease of $3.8 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 $2.6 million was recorded for the nine-month
period ended September 30, 2010, compared to expense of $0.2 million for the same period in 2009.
The change is primarily attributable to the change in pretax income recorded for the nine-month
period ended September 30, 2010. In addition, the effective tax rate for the nine-month period
ended September 30, 2009 included a change in estimated effective tax rate for the year combined
with a $0.1 million benefit from adjustments relating to changes in estimates. Without these
adjustments, our effective tax rate, which is a combination of federal and state income tax rates,
was approximately 31% for the nine-month period ended September 30, 2009. Our effective tax rate
was approximately 38% for the nine-month period ended September 30, 2010. The change in effective
tax rate is primarily due to a change in the mix of projected pretax book income across the
jurisdictions and entities.
FINANCE RECEIVABLES AND ASSET QUALITY
Our net investment in leases and loans declined $87.5 million, or 19.5%, to $361.1 million at
September 30, 2010, from $448.6 million at December 31, 2009. Although we continue to respond to
current economic conditions with restrictive credit standards, we have begun rebuilding the sales
organization to increase originations. The Companys leases are generally assigned as collateral
for borrowings as described below in Liquidity and Capital Resources.
-45-
The chart below provides our asset quality statistics for the three- and nine-month periods ended
September 30, 2010 and September 30, 2009, and the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
|
Allowance for credit losses, beginning of period |
|
$ |
9,151 |
|
|
$ |
13,978 |
|
|
$ |
12,193 |
|
|
$ |
15,283 |
|
|
$ |
15,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(3,659 |
) |
|
|
(8,605 |
) |
|
|
(14,023 |
) |
|
|
(26,947 |
) |
|
|
(33,575 |
) |
Recoveries |
|
|
780 |
|
|
|
969 |
|
|
|
2,485 |
|
|
|
2,464 |
|
|
|
3,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(2,879 |
) |
|
|
(7,636 |
) |
|
|
(11,538 |
) |
|
|
(24,483 |
) |
|
|
(30,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
2,083 |
|
|
|
5,951 |
|
|
|
7,700 |
|
|
|
21,493 |
|
|
|
27,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end of period(1) |
|
$ |
8,355 |
|
|
$ |
12,293 |
|
|
$ |
8,355 |
|
|
$ |
12,293 |
|
|
$ |
12,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs to average total
finance receivables(2) |
|
|
3.10 |
% |
|
|
5.80 |
% |
|
|
3.85 |
% |
|
|
5.57 |
% |
|
|
5.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses to total
finance receivables, end of period(2) |
|
|
2.31 |
% |
|
|
2.46 |
% |
|
|
2.31 |
% |
|
|
2.46 |
% |
|
|
2.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total finance receivables(2) |
|
$ |
371,833 |
|
|
$ |
526,829 |
|
|
$ |
399,638 |
|
|
$ |
586,336 |
|
|
$ |
558,311 |
|
Total finance receivables, end of period(2) |
|
$ |
362,328 |
|
|
$ |
499,802 |
|
|
$ |
362,328 |
|
|
$ |
499,802 |
|
|
$ |
450,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies greater than 60 days past due |
|
$ |
4,213 |
|
|
$ |
9,431 |
|
|
$ |
4,213 |
|
|
$ |
9,431 |
|
|
$ |
8,334 |
|
Delinquencies greater than 60 days past due(3) |
|
|
1.05 |
% |
|
|
1.69 |
% |
|
|
1.05 |
% |
|
|
1.69 |
% |
|
|
1.67 |
% |
Allowance for credit losses to delinquent
accounts greater than 60 days past due(3) |
|
|
198.31 |
% |
|
|
130.35 |
% |
|
|
198.31 |
% |
|
|
130.35 |
% |
|
|
146.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual leases and loans, end of period |
|
$ |
2,398 |
|
|
$ |
5,209 |
|
|
$ |
2,398 |
|
|
$ |
5,209 |
|
|
$ |
4,557 |
|
Renegotiated leases and loans, end of period |
|
$ |
2,640 |
|
|
$ |
5,383 |
|
|
$ |
2,640 |
|
|
$ |
5,383 |
|
|
$ |
4,521 |
|
Accruing leases and loans past due
90 days or more |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income included on non-accrual
leases and loans(4) |
|
$ |
28 |
|
|
$ |
58 |
|
|
$ |
167 |
|
|
$ |
365 |
|
|
$ |
493 |
|
Interest income excluded on non-accrual
leases and loans(5) |
|
$ |
35 |
|
|
$ |
240 |
|
|
$ |
46 |
|
|
$ |
607 |
|
|
$ |
103 |
|
|
|
|
(1) |
|
The allowance for credit losses allocated to loans at September 30, 2010, September
30, 2009 and December 31, 2009, was $0.1 million, $0.6 million and $0.4 million, 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 (i) the
allowance for credit losses and (ii) 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. |
-46-
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.
Net charge-offs for the three months ended September 30, 2010 were $2.9 million, or 3.10% of
average total finance receivables, compared to $3.6 million, or 3.63% of average total finance
receivables, for the three months ended June 30, 2010. Net charge-offs for the three months ended
September 30, 2009 were $7.6 million, or 5.80% of average total finance receivables. Approximately
40% of the decrease from the third quarter of 2009 was related to the impact on the calculation
of the decrease in average total finance receivables, and approximately 60% 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 third quarter of 2010 compared to recent prior periods is primarily due
to improving delinquency migrations and lower portfolio balances.
Net charge-offs for the nine-month period ended September 30, 2010 were $11.5 million, or 3.85% of
average total finance receivables, compared to $24.5 million, or 5.57% of average total finance
receivables, for the nine-month period ended September 30, 2009. Approximately one-half of the
$13.0 million decrease was related to the impact on the calculation of the decrease in average
total finance receivables, and approximately one-half 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 nine 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 1.05% at September 30,
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.)
In our Form 10-Q filed on August 6, 2010, we disclosed that we
were in discussions with the Federal Reserve Bank in connection with the Federal Reserve Banks interpretation of
the Interagency Policy Statement on the Allowance for Loan and Lease Losses (SR 06-17) dated December 13, 2006
(the ALLL Policy Statement) and the appropriate application of the ALLL Policy Statement to managements
estimates used in determining the Companys allowance for credit losses (the Allowance). On October 27, 2010,
MBB received a written determination from the Federal Reserve Bank of San Francisco and the Utah Department of
Financial Institutions (the MBB Report). We do not believe that any of the recommendations in the MBB Report
require a material adjustment by the Company.
While the Company has not received a written determination from the Federal Reserve Bank of Philadelphia in
connection with the ALLL Policy Statement and Allowance discussions, if the Company receives such a written
determination and if, as a result of the Companys review of such written determination, management determines
that it should revise its estimates or methodology used to compute the Allowance, such changes could have a
material impact on the size of the Allowance.
RESIDUAL PERFORMANCE
Our leases offer our end user customers the option to own the purchased equipment at lease
expiration. As of September 30, 2010, approximately 69% of our leases were one dollar purchase
option leases, 28% were fair market value leases and 3% were fixed purchase option leases, the
latter of which typically contain a purchase price equal to 10% of the original equipment cost. As
of September 30, 2010, there were $38.9 million of residual assets retained on our Consolidated
Balance Sheet, of which $31.9 million, or 82.0%, were related to copiers. No other group of
equipment represented more than 10% of equipment residuals as of September 30, 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 $1.3 million of net residual income for the
three-month periods ended September 30, 2010 and September 30, 2009, respectively. Fee income
included approximately $4.0 million and $4.1 million of net residual income for the nine-month
periods ended September 30, 2010 and September 30, 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. Based on the Companys experience, the amount of ultimate realization of
the residual value tends to relate more to the customers election at the end of the lease term to
enter into a renewal period, purchase the leased equipment or return the leased equipment than it
does to the equipment type. We consider renewal income a component of residual performance. Renewal
income net of depreciation totaled approximately $1.9 million and $1.8 million for the three-month
periods ended September 30, 2010 and September 30, 2009, respectively. Renewal income net of
depreciation totaled approximately $5.8 million and $5.3 million for the nine-month periods ended
September 30, 2010 and September 30, 2009, respectively.
-47-
For the three months ended September 30, 2010, net losses on residual values disposed at end of
term totaled $0.6 million compared to net losses of $0.5 million for the three months ended
September 30, 2009. For the nine months ended September 30, 2010, net losses on residual values
disposed at end of term totaled $1.8 million compared to net losses of $1.3 million for the nine
months ended September 30, 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 applicable term. There was no impairment
recognized on estimated residual values during the nine-month period ended September 30, 2010.
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 revolving, short-term or long-term bank facilities; |
|
|
|
|
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, 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 September 30, 2010, MBB
has funded $179.4 million of leases and loans through its initial capitalization of $12 million and
its issuance of $151.6 million in FDIC insured deposits at an average borrowing rate of 3.39%.
On December 31, 2008, Marlin Business Services Corp. received approval from the 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).
On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of
Marlin Business Services Corp.s election to become a financial holding company (while remaining a
bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section
225.82 of the FRBs Regulation Y. Such election permits Marlin Business Services Corp. to engage
in activities that are financial in nature or incidental to a financial activity, including the
maintenance and expansion of its reinsurance activities conducted through its wholly-owned
subsidiary, AssuranceOne, Ltd.
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 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 we 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.
-48-
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.
On
September 24, 2010, the Companys affiliate, Marlin Leasing Receivables
XIII LLC (MLR XIII), closed on a $50,000,000 three-year committed loan facility with Key
Equipment Finance Inc. The facility is secured by a lien on MLR XIIIs assets. 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 September 23, 2013. 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.
At September 30, 2010 we have approximately $94.2 million of available borrowing capacity through
these facilities in addition to available cash and cash equivalents of $44.1 million. Our debt to
equity ratio was 1.86 to 1 at September 30, 2010 and 2.61 to 1 at December 31, 2009.
Net cash provided by investing activities was $89.1 million for the nine-month period ended
September 30, 2010, compared to net cash provided by investing activities of $140.3 million for the
nine-month period ended September 30, 2009. Investing activities primarily relate to lease payment
activity.
Net cash used in financing activities was $101.8 million for the nine-month period ended September
30, 2010, compared to net cash used in financing activities of $164.5 million for the nine-month
period ended September 30, 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 $19.8 million for the nine-month period ended September 30, 2010, compared
to net cash provided by operating activities of $34.4 million for the nine-month period ended
September 30, 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 facilities and certificates of deposit issued through MBB. Total cash and cash
equivalents available as of September 30, 2010 totaled $44.1 million compared to $37.1 million at
December 31, 2009.
Restricted Interest-earning Deposits with Banks. As of September 30, 2010, we also had $47.4
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.
-49-
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 $191.9 million at September 30, 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 Nine Months Ended September 30, 2010 |
|
|
As of September 30, 2010 |
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
1,600 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
|
$ |
1,600 |
|
CP conduit warehouse facility(2) |
|
|
|
|
|
|
59,692 |
|
|
|
9,618 |
|
|
|
3.26 |
% |
|
|
|
|
|
|
|
% |
|
|
|
|
Term note securitizations(3) |
|
|
|
|
|
|
265,883 |
|
|
|
214,140 |
|
|
|
5.06 |
% |
|
|
159,502 |
|
|
|
4.98 |
% |
|
|
|
|
Long-term loan facilities |
|
|
125,000 |
|
|
|
32,356 |
|
|
|
20,752 |
|
|
|
5.50 |
% |
|
|
32,356 |
|
|
|
5.50 |
% |
|
|
92,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
126,600 |
|
|
|
|
|
|
$ |
244,510 |
|
|
|
5.03 |
% |
|
$ |
191,858 |
|
|
|
5.07 |
% |
|
$ |
94,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 September 30, 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 $1.6 million.
Federal Reserve Discount Window
In addition, MBB has received approval to borrow from the Federal Reserve Discount Window based on
the amount of assets MBB chooses to pledge. Based on assets pledged at September 30, 2010, MBB had
$8.4 million in unused, secured borrowing capacity at the Federal Reserve Discount Window.
CP Conduit Warehouse Facility
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 we 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 is recorded in long-term borrowings in the Consolidated Balance Sheets.
This was a private offering made to qualified institutional buyers pursuant to Rule 144A under 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.
-50-
Since our founding through September 30, 2010, we have completed ten on-balance-sheet term note
securitizations of which three remain outstanding. In connection with each securitization
transaction, we have transferred leases to our wholly-owned 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 September
30, 2010 and at December 31, 2009, outstanding term securitizations amounted to $159.5 million and
$226.7 million, respectively.
Long-term Loan Facilities
On October 9, 2009, Marlin Business Services Corp.s wholly-owned subsidiary, 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. In contrast to previous warehouse facilities, this long-term
loan facility does not require annual refinancing. 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.
On
September 24, 2010, the Companys affiliate, Marlin Leasing Receivables
XIII LLC (MLR XIII), closed on a $50,000,000 three-year committed loan facility with Key
Equipment Finance Inc. The facility is secured by a lien on MLR XIIIs assets. 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 September 23, 2013. 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, Chief Operating Officer or Chief Financial
Officer is an event of default under our long-term loan facilities, 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 facilities
contain 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.
-51-
Some of the critical financial and credit quality covenants under our borrowing arrangements as of
September 30, 2010 include:
|
|
|
|
|
|
|
|
|
|
|
Actual(1) |
|
|
Requirement |
|
Tangible net worth minimum |
|
$ |
159.3 million |
|
|
$ |
83.0 million |
|
Debt-to-equity ratio maximum |
|
|
1.88 to 1 |
|
|
|
10.0 to 1 |
|
Maximum servicer senior leverage ratio |
|
|
1.42 to 1 |
|
|
|
4.0 to 1 |
|
Four-quarter rolling average interest coverage ratio minimum |
|
|
1.9 to 1 |
|
|
|
1.50 to 1 |
|
Maximum portfolio delinquency ratio |
|
|
1.03 |
% |
|
|
3.50 |
% |
Maximum charge-off ratio |
|
|
4.78 |
% |
|
|
7.00 |
% |
|
|
|
(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. |
As of September 30, 2010, the Company was in compliance with terms of the long-term loan facilities
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 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. On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the
effectiveness of the Companys election to become a financial holding company (while remaining a
bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section
225.82 of the FRBs Regulation Y. Such election permits the Company to engage in activities that
are financial in nature or incidental to a financial activity, including the maintenance and
expansion of its reinsurance activities conducted through its wholly-owned subsidiary,
AssuranceOne, Ltd.
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.
-52-
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 September 30, 2010, MBBs Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total
risk-based capital ratio were 15.53%, 16.37% and 17.61%, respectively, compared to requirements for
well-capitalized status of 5%, 6% and 10%, respectively. At September 30, 2010, Marlin Business
Services Corp.s Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based
capital ratio were 31.92%, 38.98% and 40.24%, respectively, compared to requirements for
well-capitalized status of 5%, 6% and 10%, respectively.
Pursuant to the FDICs 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 September 30, 2010 was $19.1 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 three-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.
-53-
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
September 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Leased |
|
|
Capital |
|
|
|
|
Period Ending December 31, |
|
Borrowings |
|
|
Interest(1) |
|
|
Leases |
|
|
Facilities |
|
|
Leases |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
2010 |
|
$ |
32,787 |
|
|
$ |
4,886 |
|
|
$ |
3 |
|
|
$ |
392 |
|
|
$ |
9 |
|
|
$ |
38,077 |
|
2011 |
|
|
84,789 |
|
|
|
3,966 |
|
|
|
8 |
|
|
|
1,587 |
|
|
|
35 |
|
|
|
90,385 |
|
2012 |
|
|
66,517 |
|
|
|
1,744 |
|
|
|
4 |
|
|
|
1,621 |
|
|
|
18 |
|
|
|
69,904 |
|
2013 |
|
|
7,465 |
|
|
|
27 |
|
|
|
4 |
|
|
|
789 |
|
|
|
|
|
|
|
8,285 |
|
2014 |
|
|
294 |
|
|
|
1 |
|
|
|
4 |
|
|
|
141 |
|
|
|
|
|
|
|
440 |
|
Thereafter |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
191,858 |
|
|
$ |
10,624 |
|
|
$ |
23 |
|
|
$ |
4,530 |
|
|
$ |
62 |
|
|
$ |
207,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on the long-term loan facility is assumed at the September 30, 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. Most recently, we have also used variable-rate long-term
loan facilities to finance our new lease originations. 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
15.0%. At September 30, 2010, $32.4 million, or 16.9%, of our borrowings were variable-rate
borrowings.
From time to time, 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.
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 was established.
-54-
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 Company was not a party to any active interest-rate swap agreements at September 30, 2010.
There were no cash payments related to the termination of derivative contracts for the three-month
periods ended September 30, 2010 and September 30, 2009. There were no cash payments pursuant to
the terms of active derivative contracts for the three-month period ended September 30, 2010. Cash
payments pursuant to the terms of active derivative contracts totaled $1.2 million for the
three-month period ended September 30, 2009.
The Company also uses interest-rate cap agreements that are not designated for hedge accounting
treatment to fulfill certain covenants in its SPEs 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 $2 thousand and $0.1 million as of September 30, 2010 and December
31, 2009, respectively. The notional amount of interest-rate caps owned as of September 30, 2010
and December 31, 2009 was $81.5 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 September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturities by Calendar Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 & |
|
|
Carrying |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
Amount |
|
|
|
(Dollars in thousands) |
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
$ |
32,787 |
|
|
$ |
84,789 |
|
|
$ |
34,161 |
|
|
$ |
7,465 |
|
|
$ |
300 |
|
|
$ |
159,502 |
|
Average fixed rate |
|
|
4.95 |
% |
|
|
5.25 |
% |
|
|
5.01 |
% |
|
|
4.09 |
% |
|
|
5.00 |
% |
|
|
5.08 |
% |
Variable-rate debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
32,356 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
32,356 |
|
Average variable
rate |
|
|
|
|
|
|
|
|
|
|
5.50 |
% |
|
|
|
|
|
|
|
|
|
|
5.50 |
% |
Our earnings are sensitive to fluctuations in interest rates. The long-term loan facilities charge
a variable rate of interest based on 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.
-55-
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 September 30, 2010 would have
been to reduce net interest and fee income by approximately $0.4 million based on our average
variable-rate borrowings of approximately $43.5 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.
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 July 2010, the FASB issued Accounting Standards update 2010-20, Receivables (Topic 310):
Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This guidance requires an entity to provide additional disclosures regarding the nature of credit
risk inherent in its financing receivables, how the risk is analyzed and assessed in arriving at
the allowance for credit losses and the changes and reasons for those changes in the allowance for
credit losses. Required disclosures include credit quality indicators and delinquencies. The
guidance is effective for interim and annual reporting periods ending on or after December 15,
2010. Because ASU 2010-20 impacts disclosures only, it will not affect the consolidated earnings or
financial position of the Company.
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 third fiscal quarter of 2010 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
-56-
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
The additional risk factors set forth below supplement or update the risk factors previously
disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. Except
as set forth below, there have been no material changes in the risk factors disclosed in the
Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Legislative and regulatory reforms may have a significant impact on our business, results of
operations and financial condition. Recent conditions, particularly in the financial markets, have
resulted in government regulatory agencies and political bodies placing increased focus and
scrutiny on the financial services industry. The United States government has intervened on a broad
scale, responding to what has been commonly referred to as the financial crisis, by temporarily
enhancing the liquidity support available to financial institutions, establishing a commercial
paper funding facility, temporarily guaranteeing money market funds and certain types of debt
issuances and increasing insurance on bank deposits. These programs have subjected financial
institutions to additional restrictions, oversight and costs.
In addition, on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act), a sweeping financial reform bill, was signed into law. The Dodd-Frank Act
contains provisions that, among other things, establish a Bureau of Consumer Financial Protection,
establish a systemic risk regulator, consolidate certain federal bank regulators and give
shareholders an advisory vote on executive compensation. The Dodd-Frank Act could substantially
increase regulation of the financial services industry, impose restrictions on the operations and
general ability of firms within the industry to conduct business consistent with historical
practices, including in the areas of compensation, interest rates, financial product offerings and
disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential real
estate mortgages, among other things.
The Dodd-Frank Act adds sweeping deposit insurance provisions. Deposit insurance assessments in the
future will be based upon a banks average consolidated total assets minus its average tangible
equity, rather than upon its deposit base. The changes also make the $250,000 deposit insurance
limit permanent, extend the Transaction Account Guarantee program, and expand the FDICs authority
to raise insurance premiums by setting a target ratio as high as the FDIC determines to be
appropriate. The Dodd-Frank Act also restricts proprietary trading and the derivatives activities
of banks and their affiliates.
Many provisions of the Dodd-Frank Act require the adoption of rules to implement. In addition, the
Dodd-Frank Act mandates multiple studies, which could result in additional legislative or
regulatory action. The effect of the Dodd-Frank Act and its implementing regulations on our
business and operations could be significant. In addition, we may be required to invest significant
management time and resources to address the various provisions of the Dodd-Frank Act and the
numerous regulations that are required to be issued under it. The Dodd-Frank Act, any related
legislation and any implementing regulations could have a significant adverse effect on our
business, results of operations and financial condition.
-57-
Further increase in the FDIC deposit insurance premium or required reserves may have a significant
financial impact on us. The FDIC insures deposits at FDIC insured financial institutions up to
certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit
Insurance Fund (the DIF). Recent difficult economic conditions have resulted in higher bank
failures and expectations of future bank failures. In the event of a bank failure, the FDIC takes
control of a failed bank and ensures payment of deposits up to insured limits (which have recently
been increased) using the resources of the DIF. The FDIC is required by law to maintain adequate
funding of the DIF, and the FDIC may increase premium assessments to maintain such funding.
The Dodd-Frank Act requires the FDIC to increase the DIFs reserves against future losses, which
will necessitate increased deposit insurance premiums that are to be borne primarily by
institutions with assets of greater than $10 billion. Although the precise impact on us will not be
clear until implementing rules are issued, any future increases in assessments may decrease our
earnings and could have a material adverse effect on the value of, or market for, our common stock.
On October 19, 2010, the FDIC further addressed plans to bolster the DIF by increasing the required
reserve ratio for the industry to 1.35% (ratio of reserves to insured deposits) by September 30,
2020, as required by the Dodd-Frank Act. Current assessment rates will remain in effect until such
time as the industrys reserve ratio reaches 1.15%, which the FDIC estimates will occur at the end
of 2018. The FDIC also proposed to raise its industry target ratio of reserves to insured deposits
to 2.00%, 65 basis points above the statutory minimum, but the FDIC does not project that goal to
be met until 2027.
We are subject to regulatory capital adequacy guidelines, and if we fail to meet these guidelines,
our business, financial condition or results of operations may be adversely affected. Under
regulatory capital adequacy guidelines, and other regulatory requirements, we must meet guidelines
that include quantitative measures of assets, liabilities and certain off-balance sheet items,
subject to qualitative judgments by regulators regarding components, risk weightings and other
factors. (See Managements Discussion And Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesBank Capital and Regulatory Oversight). If we fail to
meet these minimum capital guidelines and other regulatory requirements, our business, financial
condition or results of operations may be adversely affected. In addition, if we fail to maintain
well-capitalized status under the regulatory framework, if we are deemed to be not well-managed
under regulatory exam procedures or if we experience certain regulatory violations, our status as a
financial holding company, our related eligibility for a streamlined review process for acquisition
proposals and our ability to offer certain financial products may be compromised or impaired.
-58-
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information on Stock Repurchases
On November 2, 2007, 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.
There were 2,847 shares of common stock repurchased by the Company pursuant to the above plan
during the three-month period ended September 30, 2010. As of September 30, 2010, the maximum
approximate dollar value of shares that may yet be purchased under the stock repurchase plan is
$10.6 million.
In addition to the repurchases described above, pursuant to the 2003 Equity Plan, participants may
have shares withheld to cover income taxes. There were 425 shares repurchased to cover income tax
withholding pursuant to the 2003 Plan during the three-month period ended September 30, 2010, at an
average cost of $10.87 per share.
Item 3. Defaults Upon Senior Securities
None
Item 4. [Removed and Reserved.]
Item 5. Other Information
None.
-59-
Item 6. Exhibits
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Articles of Incorporation(1) |
|
3.2 |
|
|
Bylaws(2) |
|
3.3 |
|
|
Receivables Loan and Security Agreement, dated as of September 24, 2010, by and among Marlin
Leasing Receivables XIII LLC, Marlin Leasing Corporation, Key Equipment Finance Inc., the
lenders party thereto and Wells Fargo Bank, National Association(3) |
|
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) |
|
|
|
(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. |
|
(3) |
|
Previously filed with the SEC as an exhibit to the Companys Current Report on Form
8-K filed on September 27, 2010 and incorporated by reference herein. |
-60-
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: November 9, 2010
-61-