UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal
year ended December 31,
2009
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from to
|
Commission file number
000-50448
Marlin Business Services
Corp.
(Exact name of Registrant as
specified in its charter)
|
|
|
Pennsylvania
(State of
incorporation)
|
|
38-3686388
(I.R.S. Employer
Identification No.)
|
300
Fellowship Road, Mount Laurel, NJ 08054
(Address
of principal executive offices)
Registrants
telephone number, including area code:
(888) 479-9111
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common Stock, $.01 par value
|
|
The NASDAQ Stock Market LLC
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer þ
|
Non-accelerated
filer o
|
Smaller
reporting
company o
|
(Do not check if a
smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant, based on the closing price of
such shares on the NASDAQ Global Select Market was approximately
$50,970,293 as of June 30, 2009. Shares of common stock
held by each executive officer and director and persons known to
us who beneficially owns 5% or more of our outstanding common
stock have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of Registrants common stock
outstanding as of February 25, 2010 was
12,727,965 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement
related to the 2010 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days
of the close of Registrants fiscal year, are incorporated
by reference into Part III of this
Form 10-K.
MARLIN
BUSINESS SERVICES CORP.
FORM 10-K
INDEX
1
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 of
which are 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 Item 1A of this Form
10-K.
|
Forward-looking statements apply only as of the date made and
the Company is not required to update forward-looking statements
for subsequent or unanticipated events or circumstances.
As used herein, the terms Company,
Marlin, we, us, or
our refer to Marlin Business Services Corp. and its
subsidiaries.
PART I
Overview
We are a nationwide provider of equipment financing and working
capital 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. Our average lease transaction was approximately
$11,300 at December 31, 2009, and we typically do not
exceed $250,000 for any single lease transaction. This segment
of the equipment leasing market is commonly known in the
industry as the small-ticket segment. We access our end user
customers through origination sources comprised of our existing
network of over 9,700 independent commercial equipment dealers
and, to a much lesser extent, through relationships with lease
brokers and direct solicitation of our end user customers. We
use a highly efficient telephonic direct sales model to market
to our origination sources. Through these origination sources,
we are able to deliver convenient and flexible equipment
financing to our end user customers. Our typical financing
transaction involves a non-cancelable, full-payout lease with
payments sufficient to recover the purchase price of the
underlying equipment plus an expected profit. As of
December 31, 2009, we serviced approximately 87,000 active
equipment leases having a total original equipment cost of
$985.9 million for approximately 72,000 end user customers.
On March 20, 2007, the Federal Deposit Insurance
Corporation (FDIC) approved the application of our
wholly-owned subsidiary, Marlin Business Bank (MBB)
to become an industrial bank chartered by the State of Utah. MBB
commenced operations effective March 12, 2008. MBB provides
diversification of the Companys funding sources and, over
time, may add other product offerings to better serve our
customer base.
2
On December 31, 2008, MBB received approval from the
Federal Reserve Bank of San Francisco (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 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. In
connection with this approval, the Federal Reserve Board
required the Company to identify any of its activities or
investments that were impermissible under the Bank Holding
Company Act of 1956, as amended (the Bank Holding Company
Act). Such activities or investments must be terminated or
conform to the Bank Holding Company Act within two years of the
approval (unless additional time is granted by the Federal
Reserve Board). (See Supervision and Regulation in this
Item 1). The Companys reinsurance activities
conducted through its wholly-owned subsidiary, AssuranceOne,
Ltd., are impermissible under the Bank Holding Company Act.
However, such activities would be permissible if the Company was
a financial holding company, and the Company intends to seek
certification from the Federal Reserve Board to become a
financial holding company within two years from its approval on
January 13, 2009 to become a bank holding company.
The small-ticket equipment leasing market is highly fragmented.
We estimate that there are more than 100,000 independent
equipment dealers who sell the types of equipment we finance. We
focus primarily on the segment of the market comprised of the
small and mid-size independent equipment dealers. We believe
this segment is underserved because: 1) the large
commercial finance companies and large commercial banks
typically concentrate their efforts on marketing their products
and services directly to equipment manufacturers and larger
distributors, rather than the independent equipment dealers; and
2) many smaller commercial finance companies and regional
banking institutions have not developed the systems and
infrastructure required to service adequately these equipment
dealers on high volume, low-balance transactions. We focus on
establishing our relationships with independent equipment
dealers to meet their need for high-quality, convenient
point-of-sale
lease financing programs. We provide equipment dealers with the
ability to offer our lease financing and related services to
their customers as an integrated part of their selling process,
allowing them to increase their sales and provide better
customer service. We believe our personalized service approach
appeals to the independent equipment dealer by providing each
dealer with a single point of contact to access our flexible
lease programs, obtain rapid credit decisions and receive prompt
payment of the equipment cost. Our fully integrated account
origination platform enables us to solicit, process and service
a large number of low-balance financing transactions. From our
inception in 1997 to December 31, 2009, we have processed
approximately 653,000 lease applications and originated over
279,000 new leases.
Reorganization
and Initial Public Offering
Marlin Leasing Corporation was incorporated in the state of
Delaware on June 16, 1997. On August 5, 2003, we
incorporated Marlin Business Services Corp. in Pennsylvania. On
November 11, 2003, we reorganized our operations into a
holding company structure by merging Marlin Leasing Corporation
with a wholly-owned subsidiary of Marlin Business Services Corp.
As a result, all former shareholders of Marlin Leasing
Corporation became shareholders of Marlin Business Services
Corp. After the reorganization, Marlin Leasing Corporation
remains in existence as our primary operating subsidiary.
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our initial public offering
(IPO). Of these shares, a total of
3,581,255 shares were sold by the company and
1,478,745 shares were sold by selling shareholders. The
initial public offering price was $14.00 per share resulting in
net proceeds to us, after payment of underwriting discounts and
commissions but before other offering costs, of approximately
$46.6 million. We did not receive any proceeds from the
shares sold by the selling shareholders.
3
Competitive
Strengths
We believe several characteristics may distinguish us from our
competitors, including the following:
Multiple Sales Origination Channels. We use
multiple sales origination channels to penetrate effectively the
highly diversified and fragmented small-ticket equipment leasing
market. Our direct origination channels, which
historically have accounted for approximately 74% of our
originations, involve: 1) establishing relationships with
independent equipment dealers; 2) securing endorsements
from national equipment manufacturers and distributors to become
the preferred lease financing source for the independent dealers
who sell their equipment; and 3) soliciting our existing
end user customer base for repeat business. Our indirect
origination channels have historically accounted for
approximately 26% of our originations and consist of our
relationships with brokers and certain equipment dealers who
refer transactions to us for a fee or sell leases to us that
they originated. In 2008, we took steps to reduce the portion of
our business that is derived from the indirect channels to focus
our origination resources on the more profitable direct
channels. During 2009, the Company discontinued substantially
all origination activity from indirect origination channels. As
a result, indirect business represented only 2% of 2009
originations, while direct business represented 98%.
Highly Effective Account Origination
Platform. Our telephonic direct marketing
platform offers origination sources a high level of personalized
service through our team of 38 sales account executives, each of
whom acts as the single point of contact for his or her
origination sources. Our business model is built on a real-time,
fully integrated customer information database and a contact
management and telephony application that facilitate our account
solicitation and servicing functions.
Comprehensive Credit Process. We seek to
manage credit risk effectively at the origination source as well
as at the transaction and portfolio levels. Our comprehensive
credit process starts with the qualification and ongoing review
of our origination sources. Once the origination source is
approved, our credit process focuses on analyzing and
underwriting the end user customer and the specific financing
transaction, regardless of whether the transaction was
originated through our direct or indirect origination channels.
Portfolio Diversification. As of
December 31, 2009, no single end user customer accounted
for more than 0.08% of our portfolio and leases from our largest
origination source accounted for only 2.7% of our portfolio. Our
portfolio is also diversified nationwide with the largest state
portfolios existing in California (12%), Florida (9%), and New
York (9%).
Fully Integrated Information Management
System. Our business integrates information
technology solutions to optimize the sales origination, credit,
collection and account servicing functions. Throughout a
transaction, we collect a significant amount of information on
our origination sources and end user customers. The
enterprise-wide integration of our systems enables data
collected by one group, such as credit, to be used by other
groups, such as sales or collections, to better perform their
functions.
Sophisticated Collections Environment. Our
centralized collections department is structured to collect
delinquent accounts, minimize credit losses and collect post
charge-off recovery dollars. Our collection strategy employs a
delinquency bucket segmentation approach, where certain
collectors are assigned to accounts based on their delinquency
status. The delinquency bucket segmentation approach allows us
to assign our more experienced collectors to the late stage
delinquent accounts. In addition, the collections department
utilizes specialist collectors who focus on delinquent late
fees, property taxes, bankrupt and large balance accounts.
Access to Multiple Funding Sources. We have
established and maintained diversified funding capacity through
multiple facilities with several national credit providers. The
opening of our wholly-owned subsidiary, MBB, provides an
additional funding source, primarily through the issuance of
FDIC-insured certificates of deposit raised nationally through
various brokered deposit relationships and FDIC-insured retail
deposits directly from other financial institutions. Our proven
ability to access funding consistently at competitive rates
through various economic cycles provides us with the liquidity
necessary to manage our business. (See Liquidity and Capital
Resources in Item 7).
4
Experienced Management Team. Our executive
officers average more than 19 years of experience in
providing financing solutions primarily to small businesses. As
we have grown, our founders have expanded the management team
with a group of successful, seasoned executives.
Disciplined
Growth Strategy
Our primary objective is to enhance our current position as a
provider of equipment financing and working capital solutions,
primarily to small businesses, by pursuing a strategy focused on
organic growth initiatives while actively managing credit risk.
We have responded to recent economic conditions with more
restrictive credit standards, while continuing to pursue
strategies designed to increase the number of independent
equipment dealers and other origination sources that generate
and develop lease customers. We also target strategies to
further penetrate our existing origination sources.
Personnel costs represent our most significant overhead expense
and we actively manage our staffing levels to the requirements
of our lease portfolio. As a financial services company, we have
been navigating through the ongoing challenging economic
environment. In response to this environment, on May 13,
2008, we reduced our staffing by approximately 14.7%. This
action was part of an overall effort to reduce operating costs
in light of our decision to moderate growth in fiscal 2008.
Approximately 51 employees were affected as a result of the
staff reduction. On May 13, 2008, we notified the affected
employees. We incurred pretax costs in the three months ended
June 30, 2008 of approximately $501,000 related to this
action, almost all of which was related to severance costs. The
total annualized pretax cost savings resulting from this
reduction is estimated to be approximately $2.6 million.
We continued to face a challenging economic environment in 2009.
As a result, we proactively lowered expenses in the first
quarter of 2009, including reducing our workforce by 17% and
closing our two smallest satellite sales offices in Chicago and
Utah. A total of approximately 49 employees company-wide
were affected as a result of the staff reductions in the first
quarter of 2009. We incurred pretax severance costs in the three
months ended March 31, 2009 of approximately $500,000
related to the staff reductions. The total annualized pretax
salary cost savings resulting from this reduction is 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 $700,000 related to these
staff reductions. The total annualized pretax salary cost
savings resulting from this reduction is estimated to be
approximately $2.9 million. Although we believe that our
estimates are appropriate and reasonable based on available
information, actual results could differ from these estimates.
Asset
Originations
Overview of Origination Process. We access our
end user customers through our extensive network of independent
equipment dealers and, to a much lesser extent, through the
direct solicitation of our end user customers. We use a highly
efficient telephonic direct sales model to market to our
origination sources. Through these sources, we are able to
deliver convenient and flexible equipment financing to our end
user customers.
Our origination process begins with our database of thousands of
origination source prospects located throughout the United
States. We developed and continually update this database by
purchasing marketing data from third parties, such as
Dun & Bradstreet, Inc., by joining industry
organizations and by attending equipment trade shows. The
independent equipment dealers we target typically have had
limited access to lease financing programs, as the traditional
providers of this financing generally have concentrated their
efforts on equipment manufacturers and larger distributors.
The prospects in our database are systematically distributed to
our sales force for solicitation and further data collection.
Sales account executives access prospect information and related
marketing data through our contact management software. This
contact management software enables the sales account executives
to sort their origination sources and prospects by any data
field captured, schedule calling campaigns, fax marketing
materials, send
e-mails,
produce correspondence and documents, manage their time and
calendar, track activity, recycle leads
5
and review management reports. We have also integrated
predictive dialer technology into the contact management system,
enabling our sales account executives to create efficient
calling campaigns to any subset of the origination sources in
the database.
Once a sales account executive converts a prospect into an
active relationship, that sales account executive becomes the
origination sources single point of contact for all
dealings with us. This approach, which is a cornerstone of our
origination platform, offers our origination sources a personal
relationship through which they can address all of their
questions and needs, including matters relating to pricing,
credit, documentation, training and marketing. This single point
of contact approach distinguishes us from our competitors, many
of whom require the origination sources to interface with
several people in various departments, such as sales support,
credit and customer service, for each application submitted.
Since many of our origination sources have little or no prior
experience in using lease financing as a sales tool, our
personalized, single point of contact approach facilitates the
leasing process for them. Other key aspects of our platform
aimed at facilitating the lease financing process for the
origination sources include:
|
|
|
|
|
ability to submit applications via fax, phone, Internet, mail or
e-mail;
|
|
|
|
credit decisions generally within two hours;
|
|
|
|
one-page, plain-English form of lease for transactions under
$50,000;
|
|
|
|
overnight or ACH funding to the origination source once all
lease conditions are satisfied;
|
|
|
|
value-added portfolio reports, such as application status and
volume of lease originations;
|
|
|
|
on-site or
telephonic training of the equipment dealers sales force
on leasing as a sales tool; and
|
|
|
|
custom leases and programs.
|
Of our 181 total employees as of December 31, 2009, we
employed 38 sales account executives, each of whom receives a
base salary and earns commissions based on his or her lease and
loan originations. We also employed 3 employees dedicated
to marketing as of December 31, 2009.
Sales Origination Channels. We currently use
direct sales origination channels to penetrate effectively a
multitude of origination sources in the highly diversified and
fragmented small-ticket equipment leasing market. All sales
account executives use our telephonic direct marketing sales
model to solicit these origination sources and end user
customers.
Direct Channels. Our direct sales origination
channels, which have historically accounted for approximately
74% of our originations, involve:
|
|
|
|
|
Independent Equipment Dealer
Solicitations. This origination channel focuses
on soliciting and establishing relationships with independent
equipment dealers in a variety of equipment categories located
across the United States. Our typical independent equipment
dealer has less than $2.0 million in annual revenues and
fewer than 20 employees. Service is a key determinant in
becoming the preferred provider of financing recommended by
these equipment dealers.
|
|
|
|
Major and National Accounts. This channel
focuses on two specific areas of development: (i) national
equipment manufacturers and distributors, where we seek to
leverage their endorsements to become the preferred lease
financing source for their independent dealers, and
(ii) major accounts (distributors) with a consistent flow
of business that need a specialized marketing and sales platform
to convert more sales using a leasing option. Once a
relationship is established with a major or national account,
they are serviced by our sales account executives in the
independent equipment dealer channel. This allows us to leverage
quickly and efficiently the relationship into new business
opportunities with many new distributors located nationwide.
|
|
|
|
End User Customer Solicitations. This channel
focuses on soliciting our existing portfolio of approximately
72,000 end user customers for additional equipment leasing or
financing opportunities. We view our existing end user customers
as an excellent source for additional business for various
reasons,
|
6
|
|
|
|
|
including (i) retained credit information;
(ii) consistent payment histories; and (iii) a
demonstrated propensity to finance their equipment.
|
Indirect Channels. Our indirect origination
channels have historically accounted for approximately 26% of
our originations and consist of our relationships with lease
brokers and certain equipment dealers who refer end user
customer transactions to us for a fee or sell us leases that
they originated with an end user customer. We conduct our own
independent credit analysis on each end user customer in an
indirect lease transaction. We have written agreements with most
of our indirect origination sources whereby they provide us with
certain representations and warranties about the underlying
lease transaction. The origination sources in our indirect
channels generate leases that are similar to our direct channels.
In 2008, we took steps to reduce the portion of our business
that is derived from the indirect channels to focus our
origination resources on the more profitable direct channels.
During 2009, the Company discontinued substantially all
origination activity from indirect origination channels. As a
result, indirect business represented only 2% of 2009
originations while direct business represented 98%.
Sales
Recruiting, Training and Mentoring
Sales account executive candidates are screened for previous
sales experience and communication skills, phone presence and
teamwork orientation. Each new sales account executive undergoes
a comprehensive training program shortly after he or she is
hired. The training program covers the fundamentals of lease
finance and introduces the sales account executive to our
origination and credit policies and procedures. It also covers
technical training on our databases and our information
management tools and techniques. At the end of the program, the
sales account executives are tested to ensure they meet our
standards. In addition to our formal training program, sales
account executives receive extensive
on-the-job
training and mentoring. All sales account executives sit in
groups, providing newer sales account executives the opportunity
to learn first-hand from their more senior peers. In addition,
our sales managers frequently monitor and coach sales account
executives during phone calls, providing the executives
immediate feedback. Our sales account executives also receive
continuing education and training, including periodic, detailed
presentations on our contact management system, underwriting
guidelines and sales enhancement techniques.
Product
Offerings
Equipment Leases. The types of lease products
offered by each of our sales origination channels share common
characteristics, and we generally underwrite our leases using
the same criteria. We seek to reduce the financial risk
associated with our lease transactions through the use of full
pay-out leases. A full pay-out lease provides that the
non-cancelable rental payments due during the initial lease term
are sufficient to recover the purchase price of the underlying
equipment plus an expected profit. The initial non-cancelable
lease term is equal to or less than the equipments
economic life. Initial terms generally range from 36 to
60 months. At December 31, 2009, the average original
term of the leases in our portfolio was approximately
50 months, and we had personal guarantees on approximately
41% of our leases. The remaining terms and conditions of our
leases are substantially similar, generally requiring end user
customers to, among other things:
|
|
|
|
|
address any maintenance or service issues directly with the
equipment dealer or manufacturer;
|
|
|
|
insure the equipment against property and casualty loss;
|
|
|
|
pay or reimburse us for all taxes associated with the equipment;
|
|
|
|
use the equipment only for business purposes; and
|
|
|
|
make all scheduled payments regardless of the performance of the
equipment.
|
We charge late fees when appropriate throughout the term of the
lease. Our standard lease contract provides that in the event of
a default, we can require payment of the entire balance due
under the lease through the initial term and can take action to
seize and remove the equipment for subsequent sale, refinancing
or other disposal at our discretion, subject to any limitations
imposed by law.
7
At the time of application, end user customers select a purchase
option that will allow them to purchase the equipment at the end
of the contract term for either one dollar, the fair market
value of the equipment or a specified percentage of the original
equipment cost. We seek to realize our recorded residual in
leased equipment at the end of the initial lease term by
collecting the purchase option price from the end user customer,
re-marketing the equipment in the secondary market or receiving
additional rental payments pursuant to the contracts
automatic renewal provision.
Property Insurance on Leased Equipment. Our
lease agreements specifically require the end user customers to
obtain all-risk property insurance in an amount equal to the
replacement value of the equipment and to designate us as the
loss payee on the policy. If the end user customer already has a
commercial property policy for its business, it can satisfy its
obligation under the lease by delivering a certificate of
insurance that evidences us as a loss payee under that policy.
At December 31, 2009, approximately 57% of our end user
customers insured the equipment under their existing policies.
For the others, we offer an insurance product through a master
property insurance policy underwritten by a third-party national
insurance company that is licensed to write insurance under our
program in all 50 states and the District of Columbia. This
master policy names us as the beneficiary for all of the
equipment insured under the policy and provides all-risk
coverage for the replacement cost of the equipment.
In May 2000, we established AssuranceOne, Ltd., our
Bermuda-based, wholly-owned captive insurance subsidiary, to
enter into a reinsurance contract with the issuer of the master
property insurance policy. Under this contract, AssuranceOne
reinsures 100% of the risk under the master policy, and the
issuing insurer pays AssuranceOne the policy premiums, less a
ceding fee based on annual net premiums written. The reinsurance
contract expires in May 2012.
Portfolio
Overview
At December 31, 2009, we had 87,458 active leases in our
portfolio, representing aggregate minimum lease payments
receivable of $495.0 million. With respect to our portfolio
at December 31, 2009:
|
|
|
|
|
the average original lease transaction was $11,300, with an
average remaining balance of $5,700;
|
|
|
|
the average original lease term was 50 months;
|
|
|
|
our active leases were spread among 72,345 different end user
customers, with the largest single end user customer accounting
for only 0.08% of the aggregate minimum lease payments
receivable;
|
|
|
|
over 78.9% of the aggregate minimum lease payments receivable
were with end user customers who had been in business for more
than five years;
|
|
|
|
the portfolio was spread among 10,280 origination sources, with
the largest source accounting for only 2.7% of the aggregate
minimum lease payments receivable, and our ten largest
origination sources accounting for only 10.4% of the aggregate
minimum lease payments receivable;
|
|
|
|
there were over 100 different equipment categories financed,
with the largest categories set forth as follows, as a
percentage of the December 31, 2009 aggregate minimum lease
payments receivable:
|
8
|
|
|
|
|
Equipment Category
|
|
Percentage
|
|
|
Copiers
|
|
|
27.02
|
%
|
Security systems
|
|
|
7.75
|
%
|
Commercial & Industrial
|
|
|
6.69
|
%
|
Telecommunications equipment
|
|
|
6.25
|
%
|
Computers
|
|
|
6.08
|
%
|
Closed Circuit TV security systems
|
|
|
5.83
|
%
|
Restaurant equipment
|
|
|
4.16
|
%
|
Computer software
|
|
|
3.69
|
%
|
Medical
|
|
|
3.12
|
%
|
Automotive
|
|
|
2.78
|
%
|
Healthcare diagnostic
|
|
|
2.47
|
%
|
Water filtration systems
|
|
|
2.36
|
%
|
Cash registers
|
|
|
2.02
|
%
|
Office Furniture
|
|
|
1.68
|
%
|
All others (none more than 1.30%)
|
|
|
18.01
|
%
|
|
|
|
|
|
we had leases outstanding with end user customers located in all
50 states and the District of Columbia, with our largest
states of origination set forth below, as a percentage of the
December 31, 2009 aggregate minimum lease payments
receivable:
|
|
|
|
|
|
State
|
|
Percentage
|
|
|
California
|
|
|
12.47
|
%
|
Florida
|
|
|
8.70
|
%
|
New York
|
|
|
8.66
|
%
|
Texas
|
|
|
7.45
|
%
|
New Jersey
|
|
|
6.09
|
%
|
Pennsylvania
|
|
|
4.32
|
%
|
North Carolina
|
|
|
3.78
|
%
|
Georgia
|
|
|
3.56
|
%
|
Massachusetts
|
|
|
3.10
|
%
|
Illinois
|
|
|
2.96
|
%
|
South Carolina
|
|
|
2.89
|
%
|
Ohio
|
|
|
2.72
|
%
|
All others (none more than 2.3%)
|
|
|
33.30
|
%
|
Information
Management
A critical element of our business operations is our ability to
collect detailed information on our origination sources and end
user customers at all stages of a financing transaction and to
manage that information effectively so that it can be used
across all aspects of our business. Our information management
system integrates a number of technologies to optimize our sales
origination, credit, collection and account servicing functions.
Applications used across our business include:
|
|
|
|
|
a sales information database that: 1) summarizes
vital information on our prospects, origination sources,
competitors and end user customers compiled from third-party
data, trade associations, manufacturers, transaction information
and data collected through the sales solicitation process; and
2) produces detailed reports using a variety of data fields
to evaluate the performance and effectiveness of our sales
account executives;
|
9
|
|
|
|
|
a call management reporting system that systematically
analyzes call activity patterns to improve inbound and outbound
calling campaigns for originations, collections and customer
service;
|
|
|
|
a credit performance database that stores extensive
portfolio performance data on our origination sources and end
user customers. Our credit staff has on-line access to this
information to monitor origination sources, end user customer
exposure, portfolio concentrations and trends and other credit
performance indicators;
|
|
|
|
predictive auto dialer technology that is used in both
the sales origination and collection processes to improve the
efficiencies by which these groups make their thousands of daily
phone calls;
|
|
|
|
imaging technology that enables our employees to retrieve
at their desktops all documents evidencing a lease transaction,
thereby further improving our operating efficiencies and service
levels; and
|
|
|
|
an integrated voice response unit that enables our end
user customers the opportunity to obtain quickly and efficiently
certain information from us about their account.
|
Our information technology platform infrastructure is industry
standard and fully scalable to support future growth. Our
systems are backed up nightly and a full set of data tapes is
sent to an off-site storage provider weekly. In addition, we
have contracted with a third party for disaster recovery
services.
Credit
Underwriting
Credit underwriting is separately performed and managed apart
from asset origination. Credit analysts are centralized in our
New Jersey headquarters and at December 31, 2009 we had a
total of 12 analysts, each with an average of more than
8 years of experience. Each credit analyst is measured
monthly against a discrete set of performance variables,
including decision turnaround time, approval and loss rates, and
adherence to our underwriting policies and procedures.
Our typical financing transaction involves three parties: the
origination source, the end user customer and us. The key
elements of our comprehensive credit underwriting process
include the pre-qualification and ongoing review of origination
sources, the performance of due diligence procedures on each end
user customer and the monitoring of overall portfolio trends and
underwriting standards.
Pre-qualification and Ongoing Review of Origination
Sources. Each origination source must be
pre-qualified before we will accept applications from it. The
origination source must submit a source profile, which we use to
review the origination sources credit information and
check references. Over time, our database has captured credit
profiles on thousands of origination sources. We regularly track
all applications and lease originations by source, assessing
whether the origination source has a high application decline
rate and analyzing the delinquency rates on the leases
originated through that source. Any unusual situations that
arise involving the origination source are noted in the
sources file. Each origination source is reviewed on a
regular basis using portfolio performance statistics as well as
any other information noted in the sources file. We will
place an origination source on watch status if its portfolio
performance statistics are consistently below our expectations.
If the origination sources statistics do not improve in a
timely manner, we often stop accepting applications from that
origination source.
End User Customer Review. Each end user
customers application is reviewed using our rules-based
set of underwriting guidelines that focus on commercial and
consumer credit data. These underwriting guidelines have been
developed and refined by our management team based on their
experience in extending credit to small businesses. The
guidelines are reviewed and revised as necessary by our Senior
Credit Committee, which is comprised of our Chief Executive
Officer, Chief Operating Officer, Chief Risk Officer, Chief
Lending Officer and Vice President of Collections. Our
underwriting guidelines require a thorough credit investigation
of the end user customer. The guidelines also include an
analysis of the personal credit of the owner, who often
guarantees the transaction, and verification of the corporate
name and location. The credit analyst may also consider other
factors in the credit decision process, including:
|
|
|
|
|
length of time in business;
|
|
|
|
confirmation of actual business operations and ownership;
|
10
|
|
|
|
|
management history, including prior business experience;
|
|
|
|
size of the business, including the number of employees and
financial strength of the business;
|
|
|
|
third-party commercial reports;
|
|
|
|
legal structure of business; and
|
|
|
|
fraud indicators.
|
Transactions over $50,000 receive a higher level of scrutiny,
often including a review of financial statements or tax returns
and review of the business purpose of the equipment to the end
user customer.
Within two hours of receipt of the application, the credit
analyst is usually ready to render a credit decision on
transactions less than $50,000. If there is insufficient
information to render a credit decision, a request for more
information will be made by the credit analyst. Credit approvals
are typically valid for a
45-day
period from the date of initial approval. In the event that the
funding does not occur within the initial approval period, a
re-approval may be issued after the credit analyst has
reprocessed all the relevant credit information to determine
that the creditworthiness of the applicant has not deteriorated.
In most instances after a lease is approved, a phone
verification with the end user customer is performed by us, or
in some instances by the origination source, prior to funding
the transaction. The purpose of this call is to verify
information on the credit application, review the terms and
conditions of the lease contract, confirm the customers
satisfaction with the equipment, and obtain additional billing
information. We will delay paying the origination source for the
equipment if the credit analyst uncovers any material issues
during the phone verification.
Monitoring of Portfolio Trends and Underwriting
Standards. Credit personnel use our databases and
our information management tools to monitor the characteristics
and attributes of our overall portfolio. Reports are produced to
analyze origination source performance, end user customer
delinquencies, portfolio concentrations, trends, and other
related indicators of portfolio performance. Any significant
findings are presented to the Senior Credit Committee for review
and action.
Our internal credit surveillance team is responsible for
ensuring that the credit department adheres to all underwriting
guidelines. The audits produced by this department are designed
to monitor our origination sources, appropriateness of
exceptions to credit policy and documentation quality.
Management reports are regularly generated by this department
detailing the results of these surveillance activities.
Account
Servicing
We service all of the leases we originate. Account servicing
involves a variety of functions performed by numerous work
groups, including:
|
|
|
|
|
entering the lease into our accounting and billing system;
|
|
|
|
preparing the invoice information;
|
|
|
|
filing Uniform Commercial Code financing statements on leases in
excess of $25,000;
|
|
|
|
paying the equipment dealers for leased equipment;
|
|
|
|
billing, collecting and remitting sales, use and property taxes
to the taxing jurisdictions;
|
|
|
|
assuring compliance with insurance requirements; and
|
|
|
|
providing customer service to the leasing customers.
|
Our integrated lease processing and accounting systems automate
many of the functions associated with servicing high volumes of
small-ticket leasing transactions.
11
Collection
Process
Our centralized collections department is structured to collect
delinquent accounts, minimize credit losses and collect
post-default recovery dollars. Our collection strategy employs a
delinquency bucket segmentation approach, where certain
collectors are assigned to accounts based on their delinquency
status. The collectors are individually accountable for their
results and a significant portion of their compensation is based
on the delinquency performance of their accounts. The
delinquency bucket segmentation approach allows us to assign our
more experienced collectors to the later stage delinquent
accounts.
Our collection activities begin with phone contact when a
payment becomes ten days past due and continue throughout the
delinquency period. We utilize a predictive dialer that
automates outbound telephone dialing. The dialer is primarily
used to focus on and reduce the number of accounts that are
between ten and 30 days delinquent. A series of collection
notices are sent once an account reaches the 30-, 60-, 75- and
90-day
delinquency stages. Collectors input notes directly into our
servicing system, enabling the collectors to monitor the status
of problem accounts and promptly take any necessary actions. In
addition, late charges are assessed when a leasing customer
fails to remit payment on a lease by its due date. If the lease
continues to be delinquent, we may exercise our remedies under
the terms of the contract, including acceleration of the entire
lease balance, litigation
and/or
repossession.
In addition, the collections department employs specialist
collectors who focus on delinquent late fees, property taxes,
bankrupt and large balance accounts.
After an account becomes 120 days or more past due, it is
generally charged-off and referred to our internal recovery
group, consisting of a team of paralegals and collectors. The
group utilizes several resources in an attempt to maximize
recoveries on charged-off accounts, including:
1) initiating litigation against the end user customer and
any personal guarantor using our internal legal staff;
2) referring the account to an outside law firm or
collection agency;
and/or
3) repossessing and remarketing the equipment through third
parties.
At the end of the initial lease term, a customer may return the
equipment, continue leasing the equipment, or purchase the
equipment for the amount set forth in the purchase option
granted to the customer. The end of term department maintains a
team of employees who seek to realize our recorded residual in
the leased equipment at the end of the lease term.
Supervision
and Regulation
Although most states do not directly regulate the commercial
equipment lease financing business, certain states require
lenders and finance companies to be licensed, impose limitations
on interest rates and other charges, mandate disclosure of
certain contract terms and constrain collection practices and
remedies. Under certain circumstances, we also may be required
to comply with the Equal Credit Opportunity Act and the Fair
Credit Reporting Act. These acts require, among other things,
that we provide notice to credit applicants of their right to
receive a written statement of reasons for declined credit
applications. The Telephone Consumer Protection Act
(TCPA) of 1991 and similar state statutes or rules
that govern telemarketing practices are generally not applicable
to our
business-to-business
calling platform; however, we are subject to the sections of the
TCPA that regulate
business-to-business
facsimiles. The Fair and Accurate Transactions Act (FACT
ACT) requires financial institutions to establish a
written program to implement Red Flag Guidelines,
which is intended to detect, prevent and mitigate identity
theft. The FACT ACT also provides guidance regarding reasonable
policies and procedures that a user of consumer credit reports
must employ when a consumer reporting agency sends the user a
notice of address discrepancy.
Our insurance operations are subject to various types of
governmental regulation. We are required to maintain insurance
producer licenses in states where we sell our insurance product.
Our wholly-owned insurance company subsidiary, AssuranceOne
Ltd., is a Class 1 Bermuda insurance company and, as such,
is subject to the Insurance Act 1978 of Bermuda, as amended, and
related regulations.
Banking Regulation. 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 will be subject to regulation
under the Bank Holding Company Act. In connection with this
approval, the Federal Reserve
12
Board required the Company to identify any of its activities or
investments that were impermissible under the Bank Holding
Company Act. Such activities or investments must be terminated
or conform to the Bank Holding Company Act within two years of
the approval (unless additional time is granted by the Federal
Reserve Board). The Company also agreed not to make additional
investments in, or increase the types of impermissible products
or services offered during this timeframe without the approval
of the Federal Reserve Board. The Companys reinsurance
activities conducted through its wholly-owned subsidiary,
AssuranceOne, Ltd., are impermissible under the Bank Holding
Company Act. However, such activities would be permissible if
the Company was a financial holding company, and the Company
intends to seek certification from the Federal Reserve Board to
become a financial holding company within two years from its
approval on January 13, 2009 to become a bank holding
company. The Bank Holding Company Act requires prior approval of
an acquisition of all or substantially all of the assets of a
bank or of ownership or control of voting shares of any bank if
the share acquisition would give us more than 5% of the voting
shares of any bank or bank holding company.
MBB is also subject to comprehensive federal and state
regulations dealing with a wide variety of subjects, including
reserve requirements, loan limitations, restrictions as to
interest rates on loans and deposits, restrictions as to
dividend payments, requirements governing the establishment of
branches, and numerous other aspects of its operations. These
regulations generally have been adopted to protect depositors
and creditors rather than shareholders. All of our subsidiaries
may be subject to examination by the Federal Reserve Board even
if not otherwise regulated by the Federal Reserve Board, subject
to certain conditions in the case of functionally
regulated subsidiaries, such as broker/dealers and
registered investment advisers.
Regulations governing MBB restrict extensions of credit by such
institution to Marlin and, with some exceptions, to other Marlin
affiliates. For these purposes, extensions of credit include
loans and advances to and guarantees and letters of credit on
behalf of Marlin and such affiliates. These regulations also
restrict investments by MBB in the stock or other securities of
Marlin and the covered affiliates, as well as the acceptance of
such stock or other securities as collateral for loans to any
borrower, whether or not related to Marlin.
Additional Activities. Bank holding companies
and their banking and non-banking subsidiaries have
traditionally been limited to the business of banking and
activities which are closely related thereto. The
Gramm-Leach-Bliley Act (GLB Act) expanded the
provisions of the Bank Holding Company Act by including a
section that permits a bank holding company to become a
financial holding company and permits them to engage in a full
range of financial activities. A financial holding company is
permitted to engage in a wide variety of activities deemed to be
financial in nature and includes lending,
exchanging, transferring, investing for others, or safeguarding
money or securities, providing financial, investment or economic
advisory services and underwriting, dealing in, or making a
market in securities. It is our intention in the future to seek
certification from the Federal Reserve Board to become a
financial holding company.
Capital Adequacy. Under the risk-based capital
requirements applicable to them, bank holding companies must
maintain a ratio of total capital to risk-weighted assets
(including the asset equivalent of certain off-balance sheet
activities such as acceptances and letters of credit) of not
less than 8% (10% in order to be considered
well-capitalized). At least 4% out of the total
capital (6% to be well-capitalized) must be composed of common
stock, related surplus, retained earnings, qualifying perpetual
preferred stock and minority interests in the equity accounts of
certain consolidated subsidiaries, after deducting goodwill and
certain other intangibles (Tier 1 Capital). The
remainder of total capital (Tier 2 Capital) may
consist of certain perpetual debt securities, mandatory
convertible debt securities, hybrid capital instruments and
limited amounts of subordinated debt, qualifying preferred
stock, allowance for loan and lease losses, allowance for credit
losses on off-balance-sheet credit exposures, and unrealized
gains on equity securities.
The Federal Reserve Board has also established minimum leverage
ratio guidelines for bank holding companies. These guidelines
mandate a minimum leverage ratio of Tier 1 Capital to
adjusted quarterly average total assets less certain amounts
(leverage amounts) equal to 3% for bank holding
companies meeting certain criteria (including those having the
highest regulatory rating). All other banking organizations are
generally required to maintain a leverage ratio of at least 3%
plus an additional cushion of at least 100 basis points and
in some cases more. The Federal Reserve Boards guidelines
also provide that bank holding companies experiencing internal
growth or making acquisitions are expected to maintain capital
positions substantially above the minimum
13
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.
The federal bank regulatory agencies risk-based capital
guidelines for years have been based upon the 1988 capital
accord (Basel I) of the Basel Committee on Banking
Supervision, a committee of central bankers and bank supervisors
from the major industrialized countries. This body develops
broad policy guidelines for use by each countrys
supervisors in determining the supervisory policies they apply.
In 2004, it proposed a new capital adequacy framework
(Basel II) for large, internationally active banking
organizations to replace Basel I. Basel II was designed to
produce a more risk-sensitive result than its predecessor.
However, certain portions of Basel II entail complexities
and costs that were expected to preclude their practical
application to the majority of U.S. banking organizations
that lack the economies of scale needed to absorb the associated
expenses.
Effective April 1, 2008, the U.S. federal bank
regulatory agencies have adopted Basel II for application
to certain banking organizations in the United States. The new
capital adequacy framework apply to organizations that
(i) have consolidated assets of at least $250 billion,
or (ii) have consolidated total on-balance sheet foreign
exposures of at least $10 billion, or (iii) are
eligible to, and elect to, opt-in to the new framework even
though not required to do so under clause (i) or
(ii) above, or (iv) as a general matter, are
subsidiaries of a bank or bank holding company that uses the new
rule. During a two-year phase in period, organizations required
or electing to apply Basel II will report their capital
adequacy calculations separately under both Basel I and
Basel II on a parallel run basis.
Given the high thresholds noted above, Marlin is not required to
apply Basel II and does not expect to apply it in the
foreseeable future. Related modifications to regulatory practice
in late 2009 to address issues related to the financial crisis
of 2008 also did not require a change in MBBs regulatory
capital calculations. The U.S. federal bank regulatory
agencies issued a separate proposal in December 2006 that would
modify the existing Basel I framework applicable to the vast
majority of U.S. banking organizations not required or
electing to use the new Basel II program. The goal of this
separate proposal would be to provide a more risk-sensitive
capital regime for those organizations and to address concerns
that the new Basel II framework would otherwise present
significant competitive advantages for the largest participants
in the U.S. banking industry.
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;
|
14
|
|
|
|
|
placing limits on asset growth and restrictions on activities;
|
|
|
|
placing additional restrictions on transactions with affiliates;
|
|
|
|
restricting the interest rate the institution may pay on
deposits;
|
|
|
|
prohibiting the institution from accepting deposits from
correspondent banks; and
|
|
|
|
in the most severe cases, appointing a conservator or receiver
for the institution.
|
A banking institution that is undercapitalized is required to
submit a capital restoration plan, and such a plan will not be
accepted unless, among other things, the banking
institutions holding company guarantees the plan up to a
certain specified amount. Any such guarantee from a depository
institutions holding company is entitled to a priority of
payment in bankruptcy. At December 31, 2009, MBBs
Tier 1 leverage ratio, Tier 1 risk-based capital ratio
and total risk-based capital ratio were 15.55%, 16.07% and
17.12%, respectively, compared to requirements for
well-capitalized status of 5%, 6% and 10%, respectively.
Pursuant to the Order issued by the FDIC on March 20, 2007
(the Order), MBB was required to have beginning
paid-in capital funds of not less than $12.0 million and
must keep its total risk-based capital ratio above 15%.
MBBs equity balance at December 31, 2009 was
$16.1 million, which qualifies for well
capitalized status.
Federal Deposit Insurance. Under the Federal
Deposit Insurance Reform Act of 2005, the FDIC adopted a new
risk-based premium system for FDIC deposit insurance, providing
for quarterly assessments of FDIC insured institutions based on
their respective rankings in one of four risk categories
depending upon their examination ratings and capital ratios.
Beginning in 2007, well-capitalized institutions with certain
CAMELS ratings (under the Uniform Financial
Institutions Examination System adopted by the Federal Financial
Institutions Examination Council) were grouped in Risk Category
I and were assessed for deposit insurance premiums at an annual
rate, with the assessment rate for the particular institution to
be determined according to a formula based on a weighted average
of the institutions individual CAMELS component ratings
plus either a set of financial ratios or the average ratings of
its long-term debt. Institutions in Risk Categories II, III
and IV are assessed premiums at progressively higher rates.
MBB is designated a Risk Category I institution for purposes of
the risk-based assessment for FDIC deposit insurance.
On November 21, 2008, following a determination by the
Secretary of the Treasury that systemic risk existed in the
nations financial sector, the FDIC Board of Directors
adopted a new program to strengthen confidence and encourage
liquidity in the banking system by guaranteeing newly issued
senior unsecured debt of banks, thrifts, and certain holding
companies, and by providing full coverage of noninterest-bearing
deposit transaction accounts, regardless of dollar amount (the
Temporary Liquidity Guarantee Program
(TLGP)). MBB has not participated in either facet of
the TLGP.
After the passage of the Emergency Economic Stabilization Act of
2008 (the EESA), the FDIC also increased deposit
insurance for all deposit accounts up to $250,000 per account as
of October 3, 2008 and ending December 31, 2009. In
May 2009, a law was signed extending the temporary increase
through December 31, 2013. Legislation has been introduced
that will make this increase permanent. On December 16,
2008, the FDIC Board of Directors determined deposit insurance
assessment rates for the first quarter of 2009. Effective
April 1, 2009, the FDIC changed the way its assessment
system differentiates for risk, making corresponding changes to
assessment rates beginning with the second quarter of 2009, and
make certain technical and other changes to these rules. The
increase in deposit insurance described above, as well as the
recent increase and anticipated additional increase in the
number of bank failures, is expected to result in an increase in
deposit insurance assessments for all banks. The FDIC is
required by law to return the insurance reserve ratio to a
1.15 percent ratio no later than the end of 2013. Recent
failures caused that ratio to fall to 0.76 percent as of
September 30, 2008.
On November 12, 2009, the Board of Directors of the FDIC
voted to require insured institutions to prepay slightly over
three years of estimated insurance assessments. The pre-payment
allows the FDIC to strengthen the cash position of the Deposit
Insurance Fund immediately without immediately impacting
earnings of the industry. Payment of the prepaid assessment,
along with the payment of MBBs regular third quarter
assessment, was paid when due on December 30, 2009.
15
Source of Strength Doctrine. Under Federal
Reserve Board policy and regulation, a bank holding company must
serve as a source of financial and managerial strength to each
of its subsidiary banks and is expected to stand prepared to
commit resources to support each of them. Consistent with this
policy, the Federal Reserve Board has stated that, as a matter
of prudent banking, a bank holding company should generally not
maintain a given rate of cash dividends unless its net income
available to common shareholders has been sufficient to fully
fund the dividends and the prospective rate of earnings
retention appears to be consistent with the organizations
capital needs, asset quality, and overall financial condition.
USA Patriot Act of 2001. A major focus of
governmental policy applicable to financial institutions in
recent years has been the effort to combat money laundering and
terrorism financing. The USA Patriot Act of 2001 (the
Patriot Act) was enacted to strengthen the ability
of the U.S. law enforcement and intelligence communities to
achieve this goal. The Patriot Act requires financial
institutions, including our banking subsidiary, to assist in the
prevention, detection and prosecution of money laundering and
the financing of terrorism. The Patriot Act established
standards to be followed by institutions in verifying client
identification when accounts are opened and provides rules to
promote cooperation among financial institutions, regulators and
law enforcement organizations in identifying parties that may be
involved in terrorism or money laundering.
Privacy. Title V of the GLB Act is
intended to increase the level of privacy protection afforded to
customers of financial institutions, including customers of the
securities and insurance affiliates of such institutions, partly
in recognition of the increased cross-marketing opportunities
created by the GLB Acts elimination of many of the
boundaries previously separating various segments of the
financial services industry. Among other things, these
provisions require institutions to have in place administrative,
technical, and physical safeguards to ensure the security and
confidentiality of customer records and information, to protect
against anticipated threats or hazards to the security or
integrity of such records, and to protect against unauthorized
access to or use of such records that could result in
substantial harm or inconvenience to a customer.
EESA. Turmoil in the nations financial
sector during 2008 resulted in the passage of the EESA and the
adoption of several programs by the U.S. Department of the
Treasury, as well as several actions by the Federal Reserve
Board. One such program under the Treasury Departments
Troubled Asset Relief Program (TARP) was action by
Treasury to make significant investments in U.S. financial
institutions through the Capital Purchase Program. Our
application to provide us with the flexibility to participate in
the TARP was approved. However, based upon subsequent
evaluation, we declined to participate.
The Federal Reserve has also developed an Asset-Backed
Commercial Paper Money Market Fund Liquidity Facility
(AMLF) and the Commercial Paper Funding Facility
(CPFF). The AMLF provides loans to depository
institutions to purchase asset-backed commercial paper from
money market mutual funds. The CPFF provides a liquidity
backstop to U.S. issuers of commercial paper. These
facilities are presently authorized through February 1,
2010. We did not participate in either AMLF or CPFF.
TALF program. In 2009, the Federal Reserve
also created the Term Asset-Backed Securities Loan Facility
(TALF) program, the intent of which was to make
credit available to consumers and businesses on more favorable
terms by facilitating the issuance of asset-backed securities
(ABS) and improving the market conditions for ABS
more generally. The TALF program provided ABS investors with
financing to support their purchases of certain AAA-rated
securities. On February 12, 2010, we issued
$80.7 million of term ABS securities through our special
purpose subsidiary, Marlin Leasing Receivables XII LLC, and the
senior tranche of the offering was rated AAA, thereby making it
eligible under the TALF program.
Future Legislation. From time to time,
legislation will be introduced in Congress and state
legislatures with respect to the regulation of financial
institutions. The financial crisis of 2008 and 2009 has resulted
in U.S. government and regulatory agencies placing
increased focus and scrutiny on the financial services industry.
The U.S. government has intervened on an unprecedented
scale 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, among other things.
These programs have subjected financial institutions to
additional restrictions, oversight and costs. In addition, new
proposals for legislation continue to be introduced in Congress
that could further substantially increase
16
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 and financial product offerings and disclosures,
among other things. Federal and state regulatory agencies also
frequently adopt changes to their regulations or change the
manner in which existing regulations are applied. We cannot
determine the ultimate effect that potential legislation, if
enacted, or any regulations issued to implement it, would have
on us.
National Monetary Policy. In addition to being
affected by general economic conditions, the earnings and growth
of MBB are affected by the policies of the Federal Reserve
Board. An important function of the Federal Reserve Board is to
regulate the money supply and credit conditions. Among the
instruments used by the Federal Reserve Board to implement these
objectives are open market operations in U.S. Government
securities, adjustments of the discount rate, and changes in
reserve requirements against bank deposits. These instruments
are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments,
and deposits. Their use also affects interest rates charged on
loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve
Board have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do
so in the future. The effects of such policies upon our future
business, earnings, and growth cannot be predicted.
Dividends. The Federal Reserve Board has
issued policy statements which provide that, as a general
matter, insured banks and bank holding companies should pay
dividends only out of current operating earnings. Additionally,
pursuant to its FDIC 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.
Transfers of Funds and Transactions with
Affiliates. Sections 23A and 23B of the
Federal Reserve Act and applicable regulations impose
restrictions on MBB that limit the transfer of funds by MBB to
Marlin and certain of its affiliates, in the form of loans,
extensions of credit, investments or purchases of assets. These
transfers by MBB to Marlin or any other single affiliate are
limited in amount to 10% of MBBs capital and surplus, and
transfers to all affiliates are limited in the aggregate to 20%
of MBBs capital and surplus. These loans and extensions of
credit are also subject to various collateral requirements.
Sections 23A and 23B of the Federal Reserve Act and
applicable regulations also require generally that MBBs
transactions with its affiliates be on terms no less favorable
to MBB than comparable transactions with unrelated third
parties. MBB completed de novo purchases totaling approximately
$48.0 million of eligible leases and loans from Marlin
Leasing Corporation during the second quarter of 2008, which
completed the anticipated de novo transactions allowed by the
Order.
Restrictions on Ownership. Subject to certain
exceptions, the Change in Bank Control Act of 1978, as amended,
prohibits a person or group of persons from acquiring
control of a bank holding company unless the FDIC
has been notified 60 days prior to such acquisition and has
not objected to the transaction. Under a rebuttable presumption
in the Change in Bank Control Act, the acquisition of 10% or
more of a class of voting stock of a bank holding company with a
class of securities registered under Section 12 of the
Securities Exchange Act of 1934, such as the Company, would,
under the circumstances set forth in the presumption, constitute
acquisition of control of the bank holding company. The
regulations provide a procedure for challenging this rebuttable
control presumption.
We believe that we currently are in compliance with all material
statutes and regulations that are applicable to our business.
Competition
We compete with a variety of equipment financing sources that
are available to small businesses, including:
|
|
|
|
|
national, regional and local finance companies that provide
leases and loan products;
|
|
|
|
financing through captive finance and leasing companies
affiliated with major equipment manufacturers;
|
|
|
|
corporate credit cards; and
|
|
|
|
commercial banks, savings and loan associations and credit
unions.
|
17
Our principal competitors in the highly fragmented and
competitive small-ticket equipment leasing market are smaller
finance companies and local and regional banks. Other providers
of equipment lease financing include Key Corp, De Lage Landen
Financial, GE Commercial Equipment Finance and Wells Fargo Bank,
National Association. Many of these companies are substantially
larger than we are and have significantly greater financial,
technical and marketing resources than we do. While these larger
competitors provide lease financing to the marketplace, many of
them are not our primary competitors given that our average
transaction size is relatively small and that our marketing
focus is on independent equipment dealers and their end user
customers. Nevertheless, there can be no assurances that these
providers of equipment lease financing will not increase their
focus on our market and begin to compete more directly with us.
Some of our competitors have a lower cost of funds and access to
funding sources that are not available to us. A lower cost of
funds could enable a competitor to offer leases with yields that
are less than the yields we use to price our leases, which might
force us to lower our yields or lose lease origination volume.
In addition, certain of our competitors may have higher risk
tolerances or different risk assessments, which could enable
them to establish more origination sources and end user customer
relationships and increase their market share. We compete on the
quality of service we provide to our origination sources and end
user customers. We have and will continue to encounter
significant competition.
Employees
As of December 31, 2009, we employed 181 people. None
of our employees are covered by a collective bargaining
agreement and we have never experienced any work stoppages.
Available
Information
We are a Pennsylvania corporation with our principal executive
offices located at 300 Fellowship Road, Mount Laurel, NJ 08054.
Our telephone number is
(888) 479-9111
and our Web site address is
www.marlincorp.com. We make available free of
charge through the Investor Relations section of our Web site
our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. We include
our Web site address in this Annual Report on
Form 10-K
only as an inactive textual reference and do not intend it to be
an active link to our Web site.
Set forth below and elsewhere in this report and in other
documents we file with the Securities and Exchange Commission
are risks and uncertainties that could cause our actual results
to differ materially from the results contemplated by the
forward-looking statements contained in this report and other
periodic statements we make.
If we cannot obtain external financing, we may be unable to
fund our operations. Our business requires a
substantial amount of cash to operate. Our cash requirements
will increase if our lease originations increase. We
historically have obtained a substantial amount of the cash
required for operations through a variety of external financing
sources, such as borrowings under a revolving bank facility,
along with financing of leases through commercial paper
(CP) conduit warehouse facilities, a long-term loan
facility and term note securitizations. A failure to renew and
increase the funding availability under our existing facilities
or to add new funding facilities could affect our ability to
fund and originate new leases. An inability to complete term
note securitizations or similar funding facilities would also
negatively impact our ability to originate and service new
leases.
Our ability to complete CP conduit transactions and term note
securitizations, as well as our ability to obtain renewals of
lenders commitments and new funding facilities, is
affected by a number of factors, including:
|
|
|
|
|
conditions in the securities and asset-backed securities markets;
|
|
|
|
conditions in the market for commercial bank liquidity support
for CP programs;
|
|
|
|
compliance of our leases with the eligibility requirements
established in connection with our CP conduit warehouse facility
and term note securitizations, including the level of lease
delinquencies and defaults; and
|
|
|
|
our ability to service the leases.
|
18
We are and will continue to be dependent upon the availability
of credit from these external financing sources to continue to
originate leases and to satisfy our other working capital needs.
We may be unable to obtain additional financing on acceptable
terms, or at all, as a result of prevailing interest rates or
other factors at the time, including the presence of covenants
or other restrictions under existing financing arrangements. If
any or all of our funding sources become unavailable on
acceptable terms or at all, we may not have access to the
financing necessary to conduct our business, which would limit
our ability to fund our operations. Other than our long-term
loan facility which matures on October 9, 2012, we do not
have long-term commitments from any of our current funding
sources. As a result, we may be unable to continue to access
these or other funding sources. (See Liquidity and Capital
Resources in Item 7). In the event we seek to obtain
equity financing, our shareholders may experience dilution as a
result of the issuance of additional equity securities. This
dilution may be significant depending upon the amount of equity
securities that we issue and the prices at which we issue such
securities.
Our financing sources impose covenants, restrictions and
default provisions on us, which could lead to termination of our
financing facilities, acceleration of amounts outstanding under
our financing facilities and our removal as
servicer. The legal agreements relating to our CP
conduit warehouse facility, our long-term loan facility and our
term note securitizations contain numerous covenants,
restrictions and default provisions relating to, among other
things, maximum lease delinquency and default levels, a minimum
net worth requirement, an interest coverage test and a maximum
debt to equity ratio. In addition, a change in the Chief
Executive Officer or Chief Operating Officer is an event of
default under the long-term loan facility and CP conduit
warehouse facility, unless we hire a replacement acceptable to
our lenders within 120 days.
A merger or consolidation with another company in which we are
not the surviving entity, likewise, is an event of default under
our financing facilities. The Companys long-term loan
facility contains an acceleration clause allowing the creditor
to accelerate the scheduled maturities of the obligation under
certain conditions that may not be objectively determinable (for
example, if a material adverse change occurs).
Further, our long-term loan facility and CP conduit warehouse
facility contain cross default provisions whereby certain
defaults under one facility would also be an event of default
under the other facilities. An event of default under the CP
conduit warehouse facility or the long-term loan facility could
result in termination of further funds being made available. An
event of default under any of our 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 our
removal as a servicer of the leases financed by the facility.
This would reduce our revenues from servicing and, by delaying
any cash payment allowed to us under the financing facilities
until the lenders have been paid in full, reduce our liquidity
and cash flow.
If we inaccurately assess the creditworthiness of our end
user customers, we may experience a higher number of lease
defaults, which may restrict our ability to obtain additional
financing and reduce our earnings. We specialize
in leasing equipment to small businesses. Small businesses may
be more vulnerable than large businesses to economic downturns,
typically depend upon the management talents and efforts of one
person or a small group of persons and often need substantial
additional capital to expand or compete. Small business leases,
therefore, may entail a greater risk of delinquencies and
defaults than leases entered into with larger, more creditworthy
leasing customers. In addition, there is typically only limited
publicly available financial and other information about small
businesses and they often do not have audited financial
statements. Accordingly, in making credit decisions, our
underwriting guidelines rely upon the accuracy of information
about these small businesses obtained from the small business
owner and/or
third-party sources, such as credit reporting agencies. If the
information we obtain from small business owners
and/or
third- party sources is incorrect, our ability to make
appropriate credit decisions will be impaired. If we
inaccurately assess the creditworthiness of our end user
customers, we may experience a higher number of lease defaults
and related decreases in our earnings.
Defaulted leases and certain delinquent leases also do not
qualify as collateral against which initial advances may be made
under our funding facilities, and we cannot include them in our
term note securitizations. An increase in delinquencies or lease
defaults could reduce the funding available to us under our
facilities and could adversely affect our earnings, possibly
materially. In addition, increasing rates of delinquencies or
charge-offs could result in adverse changes in the structure of
our future financing facilities, including increased interest
rates payable to investors and the imposition of more burdensome
covenants and credit enhancement requirements. Any of these
occurrences may cause us to experience reduced earnings.
19
Deteriorated economic or business conditions may lead to
greater than anticipated lease defaults and credit losses, which
could limit our ability to obtain additional financing and
reduce our operating income. The capital and
credit markets have been experiencing extreme volatility and
disruption for more than twelve months at unprecedented levels.
In many cases, these markets have produced downward pressure on
stock prices of, and credit availability to, certain companies
without regard to those companies underlying financial
strength. Concerns over inflation, energy costs, geopolitical
issues, the availability and cost of credit, the
U.S. mortgage market and a declining U.S. real estate
market have contributed to increased volatility and diminished
expectations for the economy and the capital and credit markets.
These factors, combined with declining business and consumer
confidence and increased unemployment, have precipitated an
economic slowdown and national recession. These events and the
continuing market upheavals, may have an adverse effect on us.
In the event of extreme and prolonged market events, such as the
global credit crisis, we could incur significant losses. Even in
the absence of a market downturn, we are exposed to substantial
risk of loss due to market volatility.
Our operating income may be reduced by various economic factors
and business conditions, including the level of economic
activity in the markets in which we operate. Delinquencies and
credit losses generally increase during economic slowdowns or
recessions. Because we extend credit primarily to small
businesses, many of our customers may be particularly
susceptible to economic slowdowns or recessions and may be
unable to make scheduled lease payments during these periods.
Therefore, to the extent that economic activity or business
conditions deteriorate, our delinquencies and credit losses may
increase. Unfavorable economic conditions may also make it more
difficult for us to maintain both our new lease origination
volume and the credit quality of new leases at levels previously
attained. Unfavorable economic conditions could also increase
our funding costs or operating cost structure, limit our access
to the securitization and other capital markets or result in a
decision by lenders not to extend credit to us. Any of these
events could reduce our operating income.
If losses from leases exceed our allowance for credit losses,
our operating income will be reduced or
eliminated. In connection with our financing of
leases, we record an allowance for credit losses to provide for
estimated losses. Our allowance for credit losses is based on,
among other things, past collection experience, industry data,
lease delinquency data and our assessment of prospective
collection risks. Determining the appropriate level of the
allowance is an inherently uncertain process and therefore our
determination of this allowance may prove to be inadequate to
cover losses in connection with our portfolio of leases. Factors
that could lead to the inadequacy of our allowance may include
our inability to manage collections effectively, unanticipated
adverse changes in the economy or discrete events adversely
affecting specific leasing customers, industries or geographic
areas. Losses in excess of our allowance for credit losses would
cause us to increase our provision for credit losses, reducing
or eliminating our operating income.
If we are unable to effectively execute our business
strategy, we may suffer material operating
losses. Our financial position, liquidity, and
results of operations depend on managements ability to
execute our business strategy and navigate through the ongoing
challenging economic environment. Key factors involved in the
execution of this strategy include achieving the desired volume
of leases of suitable yield and credit quality, effectively
managing those leases and obtaining appropriate funding.
Accomplishing such a result on a cost-effective basis is largely
a function of our marketing capabilities, our management of the
leasing process, our credit underwriting guidelines, our ability
to provide competent, attentive and efficient servicing to our
end user customers, our ability to execute effective credit risk
management and collection techniques, our access to financing
sources on acceptable terms and our ability to attract and
retain high quality employees in all areas of our business.
Failure to manage effectively these and other factors related to
our business strategy and our overall operations may cause us to
suffer material operating losses.
If we cannot effectively compete within the equipment leasing
industry, we may be unable to increase our revenues or maintain
our current levels of operations. The business of
small-ticket equipment leasing is highly fragmented and
competitive. Many of our competitors are substantially larger
and have considerably greater financial, technical and marketing
resources than we do. For example, some competitors may have a
lower cost of funds and access to funding sources that are not
available to us. A lower cost of funds could enable a competitor
to offer leases with yields that are lower than those we use to
price our leases, potentially forcing us to decrease our yields
or lose origination volume. In addition, certain of our
competitors may have higher risk tolerances or different risk
assessments, which could allow them to establish more
origination source and end user customer relationships
20
and increase their market share. There are few barriers to entry
with respect to our business and, therefore, new competitors
could enter the business of small-ticket equipment leasing at
any time. The companies that typically provide financing for
large-ticket or middle-market transactions could begin competing
with us on small-ticket equipment leases. If this occurs, or we
are unable to compete effectively with our competitors, we may
be unable to sustain our operations at their current levels or
generate revenue growth.
If we cannot maintain our relationships with origination
sources, our ability to generate lease transactions and related
revenues may be significantly impeded. We have
formed relationships with thousands of origination sources,
comprised primarily of independent equipment dealers. We rely on
these relationships to generate lease applications and
originations. Most of these relationships are not formalized in
written agreements and those that are formalized by written
agreements are typically terminable at will. Our typical
relationship does not commit the origination source to provide a
minimum number of lease transactions to us nor does it require
the origination source to direct all of its lease transactions
to us. The decision by a significant number of our origination
sources to refer their leasing transactions to another company
could impede our ability to generate lease transactions and
related revenues.
If interest rates change significantly, we may be subject to
higher interest costs on future term note securitizations and we
may be unable to hedge our variable-rate borrowings effectively,
which may cause us to suffer material
losses. Because our strategy is to fund our
leases through bank deposits, a long-term loan facility and term
note securitizations, our margins could be reduced by an
increase in interest rates. Each of our leases is structured so
that the sum of all scheduled lease payments will equal the cost
of the equipment to us, less the residual, plus a return on the
amount of our investment. This return is known as the yield. The
yield on our leases is fixed because the scheduled payments are
fixed at the time of lease origination. When we originate or
acquire leases, we base our pricing in part on the spread we
expect to achieve between the yield on each lease and the
effective interest rate we expect to pay when we finance the
lease. To the extent that a lease is financed with variable-rate
funding, increases in interest rates during the term of a lease
could narrow or eliminate the spread, or result in a negative
spread. A negative spread is an interest cost greater than the
yield on the lease. Certain of our funding facilities have
variable rates based on the London Interbank Offered Rate
(LIBOR), prime rate or commercial paper interest
rates. As a result, because our assets have a fixed interest
rate, increases in LIBOR, prime rate or commercial paper
interest rates would negatively impact our earnings. If interest
rates increase faster than we are able to adjust the pricing
under our new leases, our net interest margin would be reduced.
As required under our financing facility agreement, we enter
into interest-rate cap agreements to hedge against the risk of
interest rate increases in our CP conduit warehouse facility. If
our hedging strategies are imperfectly implemented or if a
counterparty defaults on a hedging agreement, we could suffer
losses relating to our hedging activities. In addition, with
respect to our fixed-rate borrowings, such as our term note
securitizations, increases in interest rates could have the
effect of increasing our borrowing costs on future term note
transactions.
Further increase in the FDIC deposit insurance premium 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.
Recent difficult economic conditions have increased actual bank
failures and expectations for 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 Deposit
Insurance Fund. The FDIC is required by law to maintain adequate
funding of the Deposit Insurance Fund, and the FDIC may increase
premium assessments to maintain such funding.
On February 27, 2009, the FDIC determined that it would
assess higher rates for institutions that relied significantly
on secured liabilities or on brokered deposits but, for
well-managed and well-capitalized banks, only when accompanied
by rapid asset growth. On May 22, 2009, the FDIC adopted a
final rule imposing a 5 basis-point special assessment on each
insured depository institutions assets minus Tier 1
capital as of June 30, 2009. On November 12, 2009, the
FDIC adopted a final rule imposing a
13-quarter
prepayment of FDIC premiums due on December 30, 2009.
Although we paid the prepayment when due on December 30,
2009, the FDIC may further increase our premiums or impose
additional assessments or prepayment requirements on us in the
future.
Monetary policies and regulations of the Federal Reserve
could adversely affect our business, financial condition and
results of operations. In addition to being
affected by general economic conditions, our earnings
21
and growth are affected by the policies of the Federal Reserve
Board. An important function of the Federal Reserve Board is to
regulate the money supply and credit conditions. Among the
instruments used by the Federal Reserve Board to implement these
objectives are open market operations in U.S. Government
securities, adjustments of the discount rate and changes in
reserve requirements against bank deposits. These instruments
are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments
and deposits. Their use also affects interest rates charged on
loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve
Board have had a significant effect on the operating results of
bank holding companies in the past and are expected to continue
to do so in the future. The effects of such policies upon our
business, financial condition and results of operations cannot
be predicted.
The departure of any of our key management personnel or our
inability to hire suitable replacements for our management may
result in defaults under our financing facilities, which could
restrict our ability to access funding and operate our business
effectively. Our future success depends to a
significant extent on the continued service of our senior
management team. A change in the Chief Executive Officer or
Chief Operating Officer is an event of default under our
long-term loan facility and CP conduit warehouse facility,
unless we hire a replacement acceptable to our lenders within
120 days.
The termination or interruption of, or a decrease in volume
under, our property insurance program would cause us to
experience lower revenues and may result in a significant
reduction in our net income. Our end user
customers are required to obtain all-risk property insurance for
the replacement value of the leased equipment. The end user
customer has the option of either delivering a certificate of
insurance listing us as loss payee under a commercial property
policy issued by a third-party insurer or satisfying their
insurance obligation through our insurance program. Under our
program, the end user customer purchases coverage under a master
property insurance policy written by a national third-party
insurer (our primary insurer) with whom our captive
insurance subsidiary, AssuranceOne, Ltd., has entered into a
100% reinsurance arrangement. Termination or interruption of our
program could occur for a variety of reasons, including:
1) adverse changes in laws or regulations affecting our
primary insurer or AssuranceOne, Ltd.; 2) a change in the
financial condition or financial strength ratings of our primary
insurer or AssuranceOne, Ltd.; 3) negative developments in
the loss reserves or future loss experience of AssuranceOne,
Ltd., which render it uneconomical for us to continue the
program; 4) termination or expiration of the reinsurance
agreement with our primary insurer, coupled with an inability by
us to identify quickly and negotiate an acceptable arrangement
with a replacement carrier; 5) competitive factors in the
property insurance market; or 6) failure of the Company to
become a financial holding company within two years of its
approval as a bank holding company, thereby requiring the
Company to terminate its insurance operations given they are
impermissible activities under the Bank Holding Company Act. If
there is a termination or interruption of this program or if
fewer end user customers elected to satisfy their insurance
obligations through our program, we would experience lower
revenues and our net income may be reduced.
Regulatory and legal uncertainties could result in
significant financial losses and may require us to alter our
business strategy and operations. Laws or
regulations may be adopted with respect to our equipment leases,
the equipment leasing, telemarketing and collection processes or
the banking industry. Any new legislation or regulation, or
changes in the interpretation of existing laws, that affect the
equipment leasing industry or the banking industry could
increase our costs of compliance or require us to alter our
business strategy.
We, like other finance companies, face the risk of litigation,
including class action litigation, and regulatory investigations
and actions in connection with our business activities. These
matters may be difficult to assess or quantify, and their
magnitude may remain unknown for substantial periods of time. A
substantial legal liability or a significant regulatory action
against us could cause us to suffer significant costs and
expenses, and could require us to alter our business strategy
and the manner in which we operate our business.
Government regulation significantly affects our
business. The banking industry is heavily
regulated, and such regulations are intended primarily for the
protection of depositors and the federal deposit insurance
funds, not shareholders. As of January 13, 2009, as a bank
holding company, we are subject to regulation by the Federal
Reserve Board and subject to the Bank Holding Company Act. Our
bank subsidiary, MBB, is also subject to regulation by the
Federal Reserve Board and is subject to regulation by the State
of Utah. These regulations affect lending practices, capital
structure, investment practices, dividend policy, and growth.
The financial crisis of 2008
22
and 2009 has resulted in U.S. government and regulatory
agencies placing increased focus and scrutiny on the financial
services industry. The U.S. government has intervened on an
unprecedented scale 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, among other things.
These programs have subjected financial institutions to
additional restrictions, oversight and costs. In addition, new
proposals for legislation continue to be introduced in Congress
that could further 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 and financial
product offerings and disclosures, among other things. Federal
and state regulatory agencies also frequently adopt changes to
their regulations or change the manner in which existing
regulations are applied. Such proposed changes in laws,
regulations, and regulatory practices affecting the banking
industry may limit the manner in which we may conduct our
business. Such changes may adversely affect us, including our
ability to make loans and leases, and may also result in the
imposition of additional costs on us.
Failure to realize the projected value of residual interests
in equipment we finance would reduce the residual value of
equipment recorded as assets on our balance sheet and may reduce
our operating income. We estimate the residual
value of the equipment which is recorded as an asset on our
balance sheet. Realization of residual values depends on
numerous factors including: the general market conditions at the
time of expiration of the lease; the cost of comparable new
equipment; the obsolescence of the leased equipment; any unusual
or excessive wear and tear on or damage to the equipment; the
effect of any additional or amended government regulations; and
the foreclosure by a secured party of our interest in a
defaulted lease. Our failure to realize our recorded residual
values would reduce the residual value of equipment recorded as
assets on our balance sheet and may reduce our operating income.
If we experience significant telecommunications or technology
downtime, our operations would be disrupted and our ability to
generate operating income could be negatively
impacted. Our business depends in large part on
our telecommunications and information management systems. The
temporary or permanent loss of our computer systems,
telecommunications equipment or software systems, through
casualty or operating malfunction, could disrupt our operations
and negatively impact our ability to service our customers and
lead to significant declines in our operating income.
Our quarterly operating results may fluctuate
significantly. Our operating results may differ
from quarter to quarter, and these differences may be
significant. Factors that may cause these differences include:
changes in the volume of lease applications, approvals and
originations; changes in interest rates; the timing of term note
securitizations; the availability and cost of capital and
funding; the degree of competition we face; the levels of
charge-offs we incur; general economic conditions and other
factors. In addition, 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 the Consolidated Statements of
Operations. This change creates volatility in our results of
operations, as the market value of our derivatives may change
over time, and this volatility may adversely impact our results
of operations and financial condition. These changes in value
are based on the values of the derivative contracts as of the
dates reported in a volatile market that changes daily, and will
not necessarily reflect the value at settlement. The results of
any one quarter may not indicate what our performance may be in
the future.
Our common stock price is volatile. The
trading price of our common stock may fluctuate substantially
depending on many factors, some of which are beyond our control
and may not be related to our operating performance. These
fluctuations could cause you to lose part or all of your
investment in our shares of common stock. Those factors that
could cause fluctuations include, but are not limited to, the
following:
|
|
|
|
|
price and volume fluctuations in the overall stock market from
time to time;
|
|
|
|
significant volatility in the market price and trading volume of
financial services companies;
|
|
|
|
actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of market analysts;
|
23
|
|
|
|
|
investor perceptions of the equipment leasing industry in
general and our company in particular;
|
|
|
|
the operating and stock performance of comparable companies;
|
|
|
|
legislative and regulatory changes with respect to the financial
industry;
|
|
|
|
general economic conditions and trends;
|
|
|
|
major catastrophic events;
|
|
|
|
loss of external funding sources;
|
|
|
|
sales of large blocks of our stock or sales by insiders; or
|
|
|
|
departures of key personnel.
|
It is possible that in some future quarter our operating results
may be below the expectations of financial market analysts and
investors and, as a result of these and other factors, the price
of our common stock may decline.
Future sales of our common stock by a certain large
shareholder could adversely affect the market price of our
common stock. A substantial number of shares of
our common stock could be sold into the public market pursuant
to a shelf registration statement on
Form S-3
(No. 333-128329)
that became effective on December 19, 2005. As of
February 1, 2010, this large shareholder owned
2,309,934 shares of our common stock. The sale of all or a
portion of these shares into the public market, or the
perception that such a sale could occur, could adversely affect
the market price of our common stock.
Anti-takeover provisions and our right to issue preferred
stock could make a third-party acquisition of us
difficult. We are a Pennsylvania corporation.
Anti-takeover provisions of Pennsylvania law could make it more
difficult for a third party to acquire control of us, even if
such change in control would be beneficial to our shareholders.
Our amended and restated articles of incorporation and our
bylaws contain certain other provisions that would make it more
difficult for a third party to acquire control of us, including
a provision that our board of directors may issue preferred
stock without shareholder approval.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
At December 31, 2009, we operated from four leased
facilities including our executive office facility, a
Philadelphia office facility, one branch office and the
headquarters of MBB. Our Mount Laurel, New Jersey executive
offices are housed in a leased facility of approximately
50,000 square feet under a lease that expires in May 2013.
We also lease 3,524 square feet of office space in
Philadelphia, Pennsylvania, where we perform our lease recording
and acceptance functions. Our Philadelphia lease expires in July
2013. In addition, we have a regional office in Johns Creek,
Georgia (a suburb of Atlanta). Our Georgia office is
5,822 square feet and the lease expires in July 2013. The
headquarters of MBB in Salt Lake City is 5,764 square feet
and the lease expires in October 2010. We believe our leased
facilities are adequate for our current needs and sufficient to
support our current operations and anticipated future
requirements.
|
|
Item 3.
|
Legal
Proceedings
|
We are party to various legal proceedings, which include claims
and litigation arising in the ordinary course of business. In
the opinion of management, these actions will not have a
material adverse effect on our business, financial condition or
results of operations or cash flows.
24
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Marlin Business Services Corp. completed its initial public
offering of common stock and became a publicly traded company on
November 12, 2003. The Companys common stock trades
on the NASDAQ Global Select Market under the symbol
MRLN. The following table sets forth, for the
periods indicated, the high and low sales prices per share of
our common stock as reported on the NASDAQ Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
4.66
|
|
|
$
|
2.52
|
|
|
$
|
11.57
|
|
|
$
|
7.55
|
|
Second Quarter
|
|
$
|
5.60
|
|
|
$
|
3.14
|
|
|
$
|
8.01
|
|
|
$
|
6.02
|
|
Third Quarter
|
|
$
|
8.64
|
|
|
$
|
4.94
|
|
|
$
|
9.19
|
|
|
$
|
6.12
|
|
Fourth Quarter
|
|
$
|
8.11
|
|
|
$
|
6.71
|
|
|
$
|
8.75
|
|
|
$
|
1.36
|
|
Dividend
Policy
We have not paid or declared any cash dividends on our common
stock. The payment of cash dividends, if any, will depend upon
our earnings, financial condition, capital requirements, cash
flow and long-range plans and such other factors as our Board of
Directors may deem relevant.
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. For state-chartered banks which are members
of the Federal Reserve System, the approval of the Federal
Reserve Board is required for the payment of dividends by the
bank subsidiary in any calendar year if the total of all
dividends declared by the bank in that calendar year, including
the proposed dividend, exceeds the current years net
income combined with the retained net income for the two
preceding calendar years. Retained net income for
any period means the net income for that period less any common
or preferred stock dividends declared in that period. Moreover,
no dividends may be paid by such bank in excess of its undivided
profits account.
Number of
Record Holders
There were 285 holders of record of our common stock at
February 25, 2010. We believe that the number of beneficial
owners is greater than the number of record holders because a
large portion of our common stock is held of record through
brokerage firms in street name.
Information
on Stock Repurchases
On November 2, 2007, the Board of Directors approved a
stock repurchase plan. Under this program, Marlin is authorized
to repurchase up to $15 million 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
stock repurchases are funded using the Companys working
capital.
There were no shares of common stock repurchased by the Company
pursuant to its stock repurchase plan during the fourth quarter
of 2009. As of December 31, 2009, the maximum approximate
dollar value of shares that may yet be purchased under the stock
repurchase plan is $10.7 million.
In addition to the stock repurchase plan disclosed above,
pursuant to the Companys 2003 Equity Compensation Plan (as
amended, the 2003 Plan), participants in the 2003
Plan may have shares withheld to cover income
25
taxes. There were no such shares repurchased to cover
participants income tax withholding pursuant to the 2003
Plan during the fourth quarter of 2009.
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. If implemented, the exchange
program would allow us to cancel certain underwater stock
options currently held by our employees in exchange for the
grant of a lesser amount of stock options with lower exercise
prices and a new vesting schedule and term. Each replacement
option will have an exercise price per share equal to the
closing price of our common stock on the date of grant, and will
have a new seven-year term.
Exchange ratios will be designed to result in a fair value, for
accounting purposes, of the replacement options that will be
approximately equal to the fair value of the eligible options
that are surrendered in the exchange (based on valuation
assumptions made when the offer to exchange commences).
Therefore, we do not expect to recognize significant incremental
compensation expense as a result of the exchange program.
Sale of
Unregistered Securities
On February 12, 2010, we issued $80.7 million of term
asset-backed debt securities through our special purpose
subsidiary, Marlin Leasing Receivables XII LLC, with the senior
tranche of the offering being eligible under the TALF program
established by the Federal Reserve. This issuance was done in
reliance on the exemption from registration provide by
Rule 144A of the Securities Act of 1933. J.P. Morgan
Securities, Inc., served as the initial purchaser and placement
agent for the issuance, and the aggregate initial
purchasers discounts and commissions paid were
approximately $532,000.
On October 24, 2007, we issued $440.5 million of
asset-backed debt securities through our special purpose
subsidiary, Marlin Leasing Receivables XI LLC. The issuance was
done in reliance on the exemption from registration provided by
Rule 144A of the Securities Act of 1933. J.P. Morgan
Securities, Inc. served as the initial purchaser and placement
agent for the issuance, and the aggregate initial
purchasers discounts and commissions paid was
approximately $1.3 million.
26
Shareholder
Return Performance Graph
The following graph compares the dollar change in the cumulative
total shareholder return on the Companys common stock
against the cumulative total return of the Russell 2000 Index
and the SNL Specialty Lender Index for the period commencing on
December 31, 2004 and ending on December 31, 2009. The
graph shows the cumulative investment return to shareholders
based on the assumption that a $100 investment was made on
December 31, 2004 in each of the following: the
Companys common stock, the Russell 2000 Index and the SNL
Specialty Lender Index. We computed returns assuming the
reinvestment of all dividends. The shareholder return shown on
the following graph is not indicative of future performance.
Total
Return Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
Index
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
12/31/09
|
Marlin Business Services Corp.
|
|
|
100.00
|
|
|
|
125.74
|
|
|
|
126.47
|
|
|
|
63.47
|
|
|
|
13.74
|
|
|
|
41.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell 2000
|
|
|
100.00
|
|
|
|
104.55
|
|
|
|
123.76
|
|
|
|
121.82
|
|
|
|
80.66
|
|
|
|
102.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SNL Specialty Lender
|
|
|
100.00
|
|
|
|
93.02
|
|
|
|
105.35
|
|
|
|
69.03
|
|
|
|
19.25
|
|
|
|
31.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data as of and for each of the
five years ended December 31, 2009 has been derived from
the consolidated financial statements. The selected financial
data should be read together with the consolidated financial
statements and notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per- share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
83,444
|
|
|
$
|
107,453
|
|
|
$
|
110,532
|
|
|
$
|
97,429
|
|
|
$
|
85,147
|
|
Interest expense
|
|
|
27,338
|
|
|
|
36,880
|
|
|
|
35,322
|
|
|
|
26,562
|
|
|
|
20,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
56,106
|
|
|
|
70,573
|
|
|
|
75,210
|
|
|
|
70,867
|
|
|
|
64,312
|
|
Provision for credit losses
|
|
|
27,189
|
|
|
|
31,494
|
|
|
|
17,221
|
|
|
|
9,934
|
|
|
|
10,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income after provision for credit losses
|
|
|
28,917
|
|
|
|
39,079
|
|
|
|
57,989
|
|
|
|
60,933
|
|
|
|
53,426
|
|
Loss on derivatives
|
|
|
(1,959
|
)
|
|
|
(16,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other income
|
|
|
6,855
|
|
|
|
8,144
|
|
|
|
7,902
|
|
|
|
5,501
|
|
|
|
4,682
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
19,071
|
|
|
|
22,916
|
|
|
|
21,329
|
|
|
|
22,468
|
|
|
|
18,173
|
|
General and administrative
|
|
|
12,854
|
|
|
|
15,241
|
|
|
|
13,633
|
|
|
|
11,957
|
|
|
|
11,908
|
|
Financing related costs
|
|
|
505
|
|
|
|
1,418
|
|
|
|
1,045
|
|
|
|
1,324
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
32,430
|
|
|
|
39,575
|
|
|
|
36,007
|
|
|
|
35,749
|
|
|
|
31,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,383
|
|
|
|
(8,391
|
)
|
|
|
29,884
|
|
|
|
30,685
|
|
|
|
26,473
|
|
Income tax expense (benefit)
|
|
|
347
|
|
|
|
(3,161
|
)
|
|
|
11,884
|
|
|
|
12,367
|
|
|
|
10,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
|
$
|
18,000
|
|
|
$
|
18,318
|
|
|
$
|
16,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
$
|
1.47
|
|
|
$
|
1.53
|
|
|
$
|
1.37
|
|
Shares used in computing basic earnings (loss) per share
|
|
|
12,549,167
|
|
|
|
11,874,647
|
|
|
|
12,237,263
|
|
|
|
11,939,742
|
|
|
|
11,671,010
|
|
Diluted earnings (loss) per share
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
$
|
1.45
|
|
|
$
|
1.50
|
|
|
$
|
1.33
|
|
Shares used in computing diluted earnings (loss) per share
|
|
|
12,579,806
|
|
|
|
11,874,647
|
|
|
|
12,399,786
|
|
|
|
12,206,095
|
|
|
|
12,047,561
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of finance receivables originated
|
|
|
9,763
|
|
|
|
24,869
|
|
|
|
33,141
|
|
|
|
34,214
|
|
|
|
32,754
|
|
Total finance receivables originated
|
|
$
|
88,935
|
|
|
$
|
256,554
|
|
|
$
|
390,766
|
|
|
$
|
388,661
|
|
|
$
|
318,413
|
|
Average total finance
receivables(1)
|
|
$
|
558,311
|
|
|
$
|
715,649
|
|
|
$
|
721,900
|
|
|
$
|
611,348
|
|
|
$
|
523,948
|
|
Weighted average interest rate (implicit) on new finance
receivables
originated(2)
|
|
|
15.09
|
%
|
|
|
13.67
|
%
|
|
|
12.93
|
%
|
|
|
12.72
|
%
|
|
|
12.75
|
%
|
Interest income as a percent of average total finance
receivables(1)
|
|
|
11.83
|
%
|
|
|
12.03
|
%
|
|
|
12.43
|
%
|
|
|
12.61
|
%
|
|
|
12.82
|
%
|
Interest expense as percent of average interest-bearing
liabilities
|
|
|
5.40
|
%
|
|
|
5.62
|
%
|
|
|
5.23
|
%
|
|
|
4.78
|
%
|
|
|
4.24
|
%
|
Portfolio Asset Quality Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance receivables, end of
period(1)
|
|
$
|
450,595
|
|
|
$
|
664,902
|
|
|
$
|
749,712
|
|
|
$
|
679,729
|
|
|
$
|
562,110
|
|
Delinquencies greater than 60 days past
due(3)
|
|
|
1.67
|
%
|
|
|
1.59
|
%
|
|
|
0.95
|
%
|
|
|
0.71
|
%
|
|
|
0.61
|
%
|
Allowance for credit losses
|
|
$
|
12,193
|
|
|
$
|
15,283
|
|
|
$
|
10,988
|
|
|
$
|
8,201
|
|
|
$
|
7,813
|
|
Allowance for credit losses to total finance receivables, end of
period(1)
|
|
|
2.71
|
%
|
|
|
2.30
|
%
|
|
|
1.47
|
%
|
|
|
1.21
|
%
|
|
|
1.39
|
%
|
Charge-offs, net
|
|
$
|
30,279
|
|
|
$
|
27,199
|
|
|
$
|
14,434
|
|
|
$
|
9,546
|
|
|
$
|
9,135
|
|
Ratio of net charge-offs to average total finance
receivables(1)
|
|
|
5.42
|
%
|
|
|
3.80
|
%
|
|
|
2.00
|
%
|
|
|
1.56
|
%
|
|
|
1.74
|
%
|
Operating Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio(4)
|
|
|
50.71
|
%
|
|
|
48.47
|
%
|
|
|
42.07
|
%
|
|
|
45.08
|
%
|
|
|
43.60
|
%
|
Return on average total assets
|
|
|
0.15
|
%
|
|
|
(0.62
|
)%
|
|
|
2.09
|
%
|
|
|
2.50
|
%
|
|
|
2.53
|
%
|
Return on average stockholders equity
|
|
|
0.70
|
%
|
|
|
(3.48
|
)%
|
|
|
12.37
|
%
|
|
|
14.73
|
%
|
|
|
15.74
|
%
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,057
|
|
|
$
|
40,270
|
|
|
$
|
38,708
|
|
|
$
|
29,762
|
|
|
$
|
35,256
|
|
Restricted interest-earning deposits with banks
|
|
$
|
63,400
|
|
|
$
|
66,212
|
|
|
$
|
141,070
|
|
|
$
|
57,705
|
|
|
$
|
47,786
|
|
Net investment in leases and loans
|
|
$
|
448,610
|
|
|
$
|
669,109
|
|
|
$
|
764,553
|
|
|
$
|
693,003
|
|
|
$
|
572,199
|
|
Total assets
|
|
$
|
565,803
|
|
|
$
|
794,431
|
|
|
$
|
958,269
|
|
|
$
|
794,544
|
|
|
$
|
670,607
|
|
Short-term borrowings
|
|
$
|
62,541
|
|
|
$
|
101,923
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Long-term borrowings
|
|
$
|
244,445
|
|
|
$
|
441,385
|
|
|
$
|
773,085
|
|
|
$
|
616,322
|
|
|
$
|
516,849
|
|
Deposits
|
|
$
|
80,288
|
|
|
$
|
63,385
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total liabilities
|
|
$
|
417,565
|
|
|
$
|
647,806
|
|
|
$
|
808,955
|
|
|
$
|
660,800
|
|
|
$
|
558,227
|
|
Total stockholders equity
|
|
$
|
148,238
|
|
|
$
|
146,625
|
|
|
$
|
149,314
|
|
|
$
|
133,744
|
|
|
$
|
112,380
|
|
|
|
|
(1) |
|
Total finance receivables include net investment in direct
financing leases, loans and factoring receivables. For purposes
of asset quality and allowance calculations the effects of
(1) the allowance for credit losses and (2) initial
direct costs and fees deferred, are excluded from total finance
receivables. |
|
(2) |
|
Excludes initial direct costs and fees deferred. |
|
(3) |
|
Calculated as a percentage of minimum lease payments receivable
for leases and as a percentage of principal outstanding for
loans and factoring receivables. |
|
(4) |
|
Salaries, benefits, general and administrative expense divided
by net interest and fee income, insurance and other income. |
29
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
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 of
which are 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 in 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 Item 1A of this Form
10-K.
|
Forward-looking statements apply only as of the date made and
the Company is not required to update forward-looking statements
for subsequent or unanticipated events or circumstances.
Overview
We are a nationwide provider of equipment financing and working
capital 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 December 31, 2009, our lease portfolio
consisted of approximately 87,000 active equipment leases with
an average original term of 50 months, and an average
original transaction size of approximately $11,300.
Since our founding in 1997, we have grown to $565.8 million
in total assets at December 31, 2009. Our assets are
substantially comprised of our net investment in leases and
loans which totaled $448.6 million at December 31,
2009.
Personnel costs represent our most significant overhead expense
and we actively manage our staffing levels to the requirements
of our lease portfolio. As a financial services company, we were
impacted by the challenging economic environment in 2008 and
2009. In response to this, on May 13, 2008, we reduced our
staffing by approximately 14.7%. This action was part of an
overall effort to reduce operating costs in light of our
decision to moderate growth in fiscal 2008. Approximately
51 employees were affected as a result of the staff
reduction. On May 13, 2008, we notified the affected
employees. We incurred pretax costs in the three months ended
June 30, 2008 of approximately $501,000 related to this
action, almost all of which was related to severance costs. The
total annualized pretax cost savings resulting from this
reduction is estimated to be approximately $2.6 million.
We continued to be impacted by the challenging economic
conditions in 2009. As a result, we proactively lowered expenses
in the first quarter of 2009, including reducing our workforce
by 17% and closing our two
30
smallest satellite sales offices in Chicago and Utah. A total of
49 employees company-wide were affected as a result of the
staff reductions in the first quarter of 2009. We incurred
pretax severance costs in the three months ended March 31,
2009 of approximately $500,000 related to the staff reductions.
The total annualized pretax salary cost savings resulting from
this reduction is 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 $700,000 related to these
staff reductions. The total annualized pretax salary cost
savings resulting from this reduction is estimated to be
approximately $2.9 million. Although we believe that our
estimates are appropriate and reasonable based on available
information, actual results could differ from these estimates.
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 expense. As a
credit lender, our earnings are also significantly impacted by
credit losses. For the year ended December 31, 2009, our
net credit losses were 5.42% of our average total finance
receivables. We establish reserves for credit losses which
require us to estimate inherent losses in our portfolio.
Our leases are classified under generally accepted accounting
principles in the United States of America
(U.S. GAAP) as direct financing leases, and we
recognize interest income over the term of the lease. Direct
financing leases transfer substantially all of the benefits and
risks of ownership to the equipment lessee. Our net investment
in direct finance leases is included in our consolidated
financial statements in net investment in leases and
loans. Net investment in direct financing leases consists
of the sum of total minimum lease payments receivable and the
estimated residual value of leased equipment, less unearned
lease income. Unearned lease income consists of the excess of
the total future minimum lease payments receivable plus the
estimated residual value expected to be realized at the end of
the lease term plus deferred net initial direct costs and fees
less the cost of the related equipment. Approximately 71% of our
lease portfolio at December 31, 2009 amortizes over the
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. Our
variable-rate borrowing currently consists of a long-term loan
facility and a commercial paper (CP) conduit
warehouse facility which is being amortized. There is no
available borrowing capacity in the facility. We have
traditionally issued fixed-rate term debt through the
asset-backed securitization market. Historically, leases have
been funded through variable-rate borrowings until they were
refinanced through the term note securitization 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
December 31 2009, $226.7 million, or 73.8%, of our
$307.0 million in total 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 December 31, 2009,
total deposits were $80.3 million.
Since we initially finance our fixed-rate leases with
variable-rate financing, our earnings are exposed to
interest-rate risk should interest rates rise before we complete
our fixed-rate term note securitizations. We generally benefit
in times of falling and low interest rates. We are also
dependent upon obtaining future financing to refinance our
warehouse line of credit in order to grow our lease portfolio.
We have historically completed a fixed-rate term note
securitization approximately once a year. Due to the impact on
interest rates from unfavorable market conditions and the
available capacity in our warehouse facilities at the time, the
Company elected not to complete fixed-rate term note
securitizations in 2008 or 2009. Failure to obtain such
financing, or other alternate financing, represents a
restriction on our growth and future financial performance.
31
On February 12, 2010, we completed an $80.7 million
TALF eligible term asset-backed securitization. This transaction
was Marlins tenth term note securitization and the fifth
to earn a AAA rating. As with all of the Companys prior
term note securitizations, this financing provides the Company
with fixed-cost borrowing and will be recorded in long-term
borrowings in the Consolidated Balance Sheets. A portion of the
proceeds of the new securitization was used to repay the full
amount outstanding under the CP conduit warehouse facility.
We use derivative financial instruments to manage exposure to
the effects of changes in market interest rates and to fulfill
certain covenants in our borrowing arrangements. All derivatives
are recorded on the Consolidated Balance Sheets at their fair
value as either assets or liabilities. Accounting for the
changes in fair value of derivatives depends on whether the
derivative has been designated and qualifies for hedge
accounting treatment pursuant to the Derivatives and Hedging
Topic of the Financial Accounting Standards Board (the
FASB) Accounting Standards Codification
(ASC). While the Company may continue to use
derivative financial instruments to reduce exposure to changing
interest rates, effective July 1, 2008, the Company
discontinued the use of hedge accounting.
On March 20, 2007, the FDIC approved the application of our
wholly-owned subsidiary, Marlin Business Bank (MBB),
to become an industrial bank chartered by the State of Utah. MBB
commenced operations effective March 12, 2008. MBB provides
diversification of the Companys funding sources and, over
time, may add other product offerings to better serve our
customer base.
On December 31, 2008, MBB received approval from the
Federal Reserve Bank of San Francisco (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. In
connection with this approval, the Federal Reserve Board
required the Company to identify any of its activities or
investments that were impermissible under the Bank Holding
Company Act. Such activities or investments must be terminated
or conform to the Bank Holding Company Act within two years of
the approval (unless additional time is granted by the Federal
Reserve Board). (See Supervision and Regulation in
Item 1). The Companys reinsurance activities
conducted through its wholly-owned subsidiary, AssuranceOne,
Ltd., are impermissible under the Bank Holding Company Act.
However, such activities would be permissible if the Company was
a financial holding company, and the Company intends to seek
certification from the Federal Reserve Board to become a
financial holding company within two years from its approval on
January 13, 2009 to become a bank holding company. The Bank
Holding Company Act requires prior approval of an acquisition of
all or substantially all of the assets of a bank or of ownership
or control of voting shares of any bank if the share acquisition
would give us more than 5% of the voting shares of any bank or
bank holding company.
Reorganization
and Initial Public Offering
Marlin Leasing Corporation was incorporated in the state of
Delaware on June 16, 1997. On August 5, 2003, we
incorporated Marlin Business Services Corp. in Pennsylvania. On
November 11, 2003, we reorganized our operations into a
holding company structure by merging Marlin Leasing Corporation
with a wholly-owned subsidiary of Marlin Business Services Corp.
As a result, all former shareholders of Marlin Leasing
Corporation became shareholders of Marlin Business Services
Corp. After the reorganization, Marlin Leasing Corporation
remains in existence as our primary operating subsidiary.
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our IPO. Of these shares, a total of
3,581,255 shares were sold by the company and
1,478,745 shares were sold by selling shareholders. The
initial public offering price was $14.00 per share resulting in
net proceeds to us, after payment of underwriting discounts and
commissions but before other offering costs, of approximately
$46.6 million. We did not receive any proceeds from the
shares sold by the selling shareholders.
32
On January 13, 2009, in connection with the conversion of
MBB to a commercial bank, Marlin Business Services Corp. became
a bank holding company and thus became subject to regulation by
the Federal Reserve Board as of that date.
Stock
Repurchase Plan
On November 2, 2007, the Board of Directors approved a
stock repurchase plan. Under this program, Marlin is authorized
to repurchase up to $15 million 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
stock repurchases are funded using the Companys working
capital.
Marlin purchased 88,894 shares of its common stock for
$347,000 during the year ended December 31, 2009. At
December 31, 2009, Marlin had $10.7 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 in the 2003 Plan may have
shares withheld to cover income taxes. There were 13,720 such
shares repurchased to cover participants income tax
withholding pursuant to the 2003 Plan during the year ended
December 31, 2009, at an average cost of $3.89. There were
2,444 such shares repurchased pursuant to the 2003 Plan during
the year ended December 31, 2008, at an average cost of
$6.78.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
U.S. GAAP. Preparation of these financial statements
requires us to make estimates and judgments that affect reported
amounts of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the
date of our financial statements. On an ongoing basis, we
evaluate our estimates, including credit losses, residuals,
initial direct costs and fees, other fees, performance
assumptions for stock-based compensation awards, the probability
of forecasted transactions, the fair value of financial
instruments and the realization of deferred tax assets. We base
our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Critical
accounting policies are defined as those that are reflective of
significant judgments and uncertainties. Our consolidated
financial statements are based on the selection and application
of critical accounting policies, the most significant of which
are described below.
Income recognition. Interest income is
recognized under the effective interest method. The effective
interest method of income recognition applies a constant rate of
interest equal to the internal rate of return on the lease. When
a lease or loan is 90 days or more delinquent, the contract
is classified as being on non-accrual and we do not recognize
interest income on that contract until it is less than
90 days delinquent.
Fee income consists of fees for delinquent lease and loan
payments, cash collected on early termination of leases and net
residual income. Net residual income includes income from lease
renewals and gains and losses on the realization of residual
values of leased equipment disposed at the end of term.
At the end of the original lease term, lessees may choose to
purchase the equipment, renew the lease or return the equipment
to the Company. The Company receives income from lease renewals
when the lessee elects to retain the equipment longer than the
original term of the lease. This income, net of appropriate
periodic reductions in the estimated residual values of the
related equipment, is included in fee income as net residual
income.
When the lessee elects to return the equipment at lease
termination, the equipment is transferred to other assets at the
lower of its basis or fair market value. The Company generally
sells returned equipment to an independent third party, rather
than leasing the equipment a second time. The Company does not
maintain equipment in other assets for longer than
120 days. Any loss recognized on transferring the equipment
to other assets, and any gain or loss realized on the sale or
disposal of equipment to the lessee or to others is included in
fee income as net residual
33
income. Management performs periodic reviews of the estimated
residual values and any impairment, if other than temporary, is
recognized in the current period.
Fee income from delinquent lease payments is recognized on an
accrual basis based on anticipated collection rates. At a
minimum of every quarter, an analysis of anticipated collection
rates is performed based on updates to collection experience.
Adjustments in assumptions are made as needed based on this
analysis. Other fees are recognized when received.
Insurance income is recognized on an accrual basis as earned
over the term of the lease. Payments that are 120 days or
more past due are charged against income. Ceding commissions,
losses and loss adjustment expenses are recorded in the period
incurred and netted against insurance income.
Initial direct costs and fees. We defer
initial direct costs incurred and fees received to originate our
leases and loans in accordance with the Receivables Topic and
the Nonrefundable Fees and Other Costs Subtopic of the FASB ASC.
The initial direct costs and fees we defer are part of the net
investment in leases and loans and are amortized to interest
income using the effective interest method. We defer third-party
commission costs as well as certain internal costs directly
related to the origination activity. Costs subject to deferral
include evaluating the prospective customers financial
condition, evaluating and recording guarantees and other
security arrangements, negotiating terms, preparing and
processing documents and closing the transaction. Estimates of
costs subject to deferral are updated periodically, and no less
frequently than each year. The fees we defer are documentation
fees collected at inception. The realization of the deferred
initial direct costs, net of fees deferred, is predicated on the
net future cash flows generated by our lease and loan portfolios.
Lease residual values. A direct financing
lease is recorded at the aggregate future minimum lease payments
plus the estimated residual values less unearned income.
Residual values reflect the estimated amounts to be received at
lease termination from lease extensions, sales or other
dispositions of leased equipment. These estimates are based on
industry data and on our experience. Management performs
periodic reviews of the estimated residual values and any
impairment, if other than temporary, is recognized in the
current period.
Allowance for credit losses. In accordance
with the Contingencies Topic of the FASB ASC, we maintain
an allowance for credit losses at an amount sufficient to absorb
losses inherent in our existing lease and loan portfolios as of
the reporting dates based on our projection of probable net
credit losses. We evaluate our portfolios on a pooled basis, due
to their composition of small balance, homogenous accounts with
similar general credit risk characteristics, diversified among a
large cross section of variables including industry, geography,
equipment type, obligor and vendor. To project probable net
credit losses, we perform a migration analysis of delinquent and
current accounts based on historic loss experience. A migration
analysis is a technique used to estimate the likelihood that an
account will progress through the various delinquency stages and
ultimately charge off. In addition to the migration analysis, we
also consider other factors including recent trends in
delinquencies and charge-offs; accounts filing for bankruptcy;
account modifications; recovered amounts; forecasting
uncertainties; the composition of our lease and loan portfolios;
economic conditions; and seasonality. The various factors used
in the analysis are reviewed on a periodic basis. We then
establish an allowance for credit losses for the projected
probable net credit losses based on this analysis. A provision
is charged against earnings to maintain the allowance for credit
losses at the appropriate level. Our policy is to charge-off
against the allowance the estimated unrecoverable portion of
accounts once they reach 121 days delinquent.
Our projections of probable net credit losses are inherently
uncertain, and as a result we cannot predict with certainty the
amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolios, bankruptcy
laws, and other factors could impact our actual and projected
net credit losses and the related allowance for credit losses.
To the degree we add new leases and loans to our portfolios, or
to the degree credit quality is worse than expected, we record
expense to increase the allowance for credit losses for the
estimated net losses inherent in our portfolios. Actual losses
may vary from current estimates.
Securitizations. From inception to
December 31, 2009, we have completed nine term note
securitizations of which six have been repaid. In connection
with each transaction, we established a bankruptcy remote
special-purpose subsidiary and issued term debt to institutional
investors. Under the Transfers and Servicing Topic of the FASB
ASC, our securitizations do not qualify for sales accounting
treatment due to certain call provisions that we
34
maintain as well as the fact that the special purpose entities
used in connection with the securitizations also hold the
residual assets. Accordingly, assets and related debt of the
special purpose entities are included in the accompanying
Consolidated Balance Sheets. Our leases and restricted
interest-earning deposits with banks are assigned as collateral
for these borrowings and there is no further recourse to our
general credit. Collateral in excess of these borrowings
represents our maximum loss exposure.
Derivatives. The Derivatives and Hedging Topic
of the FASB ASC requires recognition of all derivatives at fair
value as either assets or liabilities in the Consolidated
Balance Sheets. The accounting for subsequent changes in the
fair value of these derivatives depends on whether each has been
designated and qualifies for hedge accounting treatment pursuant
to the accounting standard.
Prior to July 1, 2008, the Company entered into derivative
contracts which were accounted for as cash flow hedges under
hedge accounting as prescribed by U.S. GAAP. Under hedge
accounting, the effective portion of the gain or loss on a
derivative designated as a cash flow hedge was reported net of
tax effects in accumulated other comprehensive income on the
Consolidated Balance Sheets, until the pricing of the related
term securitization. The derivative gain or loss recognized in
accumulated other comprehensive income was then reclassified
into earnings as an adjustment to interest expense over the
terms of the related borrowings.
While the Company may continue to use derivative financial
instruments to reduce exposure to changing interest rates,
effective July 1, 2008, the Company discontinued the use of
hedge accounting. By discontinuing hedge accounting effective
July 1, 2008, any subsequent changes in the fair value of
derivative instruments, including those that had previously been
accounted for under hedge accounting, is recognized immediately
in 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 are probable of occurring,
the derivative gain or loss in accumulated other comprehensive
income as of June 30, 2008 will be reclassified into
earnings as an adjustment to interest expense over the terms of
the related forecasted borrowings, consistent with hedge
accounting treatment. In the event that the related forecasted
borrowing is no longer probable of occurring, the related gain
or loss in accumulated other comprehensive income is recognized
in earnings immediately.
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
Compensation Stock Compensation Topic of the FASB
ASC establishes fair value as the measurement objective in
accounting for share-based payment arrangements and requires all
entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees,
except for equity instruments held by employee share ownership
plans.
Stock-based compensation cost is measured at grant date, based
on the fair value of the awards ultimately expected to vest.
Compensation cost is recognized on a straight-line basis over
the service period. We use the Black-Scholes valuation model to
measure the fair value of our stock options utilizing various
assumptions with respect to expected holding period, risk-free
interest rates, stock price volatility, and dividend yield. The
assumptions are based on subjective future expectations combined
with management judgment.
The Company uses judgment in estimating the amount of awards
that are expected to be forfeited, with subsequent revisions to
the assumptions if actual forfeitures differ from those
estimates. In addition, for performance-based awards the Company
estimates the degree to which the performance conditions will be
met to estimate the number of shares expected to vest and the
related compensation expense. Compensation expense is adjusted
in the period such performance estimates change.
35
Income taxes. The Income Taxes Topic of the
FASB ASC requires the use of the asset and liability method
under which deferred taxes are determined based on the estimated
future tax effects of differences between the financial
statement and tax bases of assets and liabilities, given the
provisions of the enacted tax laws. In assessing the
realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the
deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities and
projected future taxable income in making this assessment. Based
upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these
deductible differences.
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities
and any necessary valuation allowance recorded against net
deferred tax assets. The process involves summarizing temporary
differences resulting from the different treatment of items, for
example, leases for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within the Consolidated Balance Sheets. Our
management must then assess the likelihood that deferred tax
assets will be recovered from future taxable income or tax
carry-back availability and, to the extent our management
believes recovery is not likely, a valuation allowance must be
established. To the extent that we establish a valuation
allowance in a period, an expense must be recorded within the
tax provision in the Consolidated Statements of Operations.
At December 31, 2009, there have been no material changes
to the liability for uncertain tax positions and there are no
significant unrecognized tax benefits. The periods subject to
general examination for the Companys federal return
include the 2006 tax year to the present. The Company files
state income tax returns in various states which may have
different statutes of limitations. Generally, state income tax
returns for years 2005 through the present are subject to
examination.
The Company records penalties and accrued interest related to
uncertain tax positions in income tax expense. Such adjustments
have historically been minimal and immaterial to our financial
results.
Results
of Operations
Comparison
of the Years Ended December 31, 2009 and 2008
Net income (loss). Net income of
$1.0 million, or $0.08 per share, was recorded for the year
ended December 31, 2009. This net income includes an
after-tax loss on derivatives of approximately
$1.2 million. The net loss of $5.2 million, or $0.44
per share for the year ended December 31, 2008 includes an
after-tax loss on derivatives of approximately $9.7 million.
Excluding the after-tax losses on derivatives of
$1.2 million and $9.7 million for the years ended
December 31, 2009 and 2008, respectively, adjusted net
income for the year ended December 31, 2009 would have been
$2.2 million, or $0.18 diluted earnings per share, compared
to $4.5 million, or $0.36 diluted earnings per share for
the year ended December 31, 2008. The exclusion of the
losses on derivatives removes the volatility resulting from
derivatives activities subsequent to discontinuing hedge
accounting in July 2008.
Excluding the after-tax losses on derivatives identified above,
returns on average assets were 0.32% for the year ended
December 31, 2009 and 0.53% for the year ended
December 31, 2008. On the same basis, returns on average
equity were 1.51% for the year ended December 31, 2009 and
2.98% for the year ended December 31, 2008.
Also included in the results for the year ended
December 31, 2009 were after-tax charges of approximately
$724,000 representing severance costs related to workforce
reductions, compared to after-tax severance costs of
approximately $300,000 for the year ended December 31, 2008.
The provision for credit losses decreased $4.3 million, or
13.7%, to $27.2 million for the year ended
December 31, 2009 from $31.5 million for the same
period in 2008, primarily due to a reduced portfolio size and
improved delinquencies. During the year ended December 31,
2009, net interest and fee income decreased
36
$14.5 million, primarily due to a 22.0% decrease in average
total finance receivables. The decrease in income was partially
mitigated by reductions in other expenses, which decreased
$7.1 million, or 18.1%, for the year ended
December 31, 2009, compared to the same period in 2008.
For the year ended December 31, 2009, we generated 9,763
new finance receivables at a cost of $88.9 million compared
to 24,869 new finance receivables at a cost of
$256.6 million for the year ended December 31, 2008.
The reduction in volume was primarily due to a combination of
our decision to lower approval rates in response to economic
conditions and the limited availability of funding during the
first half of 2009. Overall, our average net investment in total
finance receivables for the year ended December 31, 2009
decreased 22.0% to $558.3 million at December 31, 2009
from $715.6 million for the year ended December 31,
2008.
37
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 years ended
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average(1)
|
|
|
|
|
|
Average
|
|
|
Average(1)
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yields/Rates
|
|
|
Balance
|
|
|
Interest
|
|
|
Yields/Rates
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
47,240
|
|
|
$
|
123
|
|
|
|
0.26
|
%
|
|
$
|
31,026
|
|
|
$
|
743
|
|
|
|
2.39
|
%
|
Restricted interest-earning deposits with banks
|
|
|
66,310
|
|
|
|
289
|
|
|
|
0.44
|
|
|
|
72,706
|
|
|
|
2,020
|
|
|
|
2.78
|
|
Net investment in
leases(2)
|
|
|
550,160
|
|
|
|
64,650
|
|
|
|
11.75
|
|
|
|
700,332
|
|
|
|
81,436
|
|
|
|
11.63
|
|
Loans
receivable(2)
|
|
|
8,151
|
|
|
|
977
|
|
|
|
11.99
|
|
|
|
15,317
|
|
|
|
1,900
|
|
|
|
12.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
671,861
|
|
|
|
66,039
|
|
|
|
9.83
|
|
|
|
819,381
|
|
|
|
86,099
|
|
|
|
10.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
2,618
|
|
|
|
|
|
|
|
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,777
|
|
|
|
|
|
|
|
|
|
|
|
3,141
|
|
|
|
|
|
|
|
|
|
Property tax receivables
|
|
|
2,513
|
|
|
|
|
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
|
|
|
|
Other
assets(3)
|
|
|
8,881
|
|
|
|
|
|
|
|
|
|
|
|
19,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets
|
|
|
16,789
|
|
|
|
|
|
|
|
|
|
|
|
25,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
688,650
|
|
|
|
|
|
|
|
|
|
|
$
|
844,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings(4)
|
|
$
|
94,588
|
|
|
$
|
4,917
|
|
|
|
5.20
|
%
|
|
$
|
35,806
|
|
|
$
|
2,191
|
|
|
|
6.12
|
%
|
Long-term
borrowings(4)
|
|
|
333,193
|
|
|
|
19,696
|
|
|
|
5.91
|
|
|
|
591,815
|
|
|
|
33,515
|
|
|
|
5.66
|
|
Deposits
|
|
|
78,615
|
|
|
|
2,725
|
|
|
|
3.47
|
|
|
|
28,244
|
|
|
|
1,174
|
|
|
|
4.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
506,396
|
|
|
|
27,338
|
|
|
|
5.40
|
|
|
|
655,865
|
|
|
|
36,880
|
|
|
|
5.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives
|
|
|
8,917
|
|
|
|
|
|
|
|
|
|
|
|
7,065
|
|
|
|
|
|
|
|
|
|
Sales and property taxes payable
|
|
|
7,065
|
|
|
|
|
|
|
|
|
|
|
|
8,989
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
4,817
|
|
|
|
|
|
|
|
|
|
|
|
8,696
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
|
14,239
|
|
|
|
|
|
|
|
|
|
|
|
14,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
35,038
|
|
|
|
|
|
|
|
|
|
|
|
39,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
541,434
|
|
|
|
|
|
|
|
|
|
|
|
695,005
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
147,216
|
|
|
|
|
|
|
|
|
|
|
|
149,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
688,650
|
|
|
|
|
|
|
|
|
|
|
$
|
844,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
38,701
|
|
|
|
|
|
|
|
|
|
|
$
|
49,219
|
|
|
|
|
|
Interest rate
spread(5)
|
|
|
|
|
|
|
|
|
|
|
4.43
|
%
|
|
|
|
|
|
|
|
|
|
|
4.89
|
%
|
Net interest
margin(6)
|
|
|
|
|
|
|
|
|
|
|
5.76
|
%
|
|
|
|
|
|
|
|
|
|
|
6.01
|
%
|
Ratio of average interest-earning assets to average
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
132.68
|
%
|
|
|
|
|
|
|
|
|
|
|
124.93
|
%
|
|
|
|
(1) |
|
Average balances are calculated using month-end balances, to the
extent such averages are representative of operations. |
|
(2) |
|
Average balances of leases and loans include non-accrual leases
and loans, and are presented net of unearned income. |
|
(3) |
|
Includes operating leases. |
|
(4) |
|
Includes effect of transaction costs. |
|
(5) |
|
Interest rate spread represents the difference between the
average yield on interest-earning assets and the average rate on
interest-bearing liabilities. |
|
(6) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
38
The following table presents the components of the changes in
net interest income by volume and rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009 Compared to Year Ended December 31, 2008
|
|
|
|
Increase (Decrease) Due to:
|
|
|
|
Volume(1)
|
|
|
Rate(1)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
260
|
|
|
$
|
(880
|
)
|
|
$
|
(620
|
)
|
Restricted interest-earning deposits with banks
|
|
|
(163
|
)
|
|
|
(1,568
|
)
|
|
|
(1,731
|
)
|
Net investment in leases
|
|
|
(17,638
|
)
|
|
|
852
|
|
|
|
(16,786
|
)
|
Loans receivable
|
|
|
(861
|
)
|
|
|
(62
|
)
|
|
|
(923
|
)
|
Total interest income
|
|
|
(14,764
|
)
|
|
|
(5,296
|
)
|
|
|
(20,060
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
3,101
|
|
|
|
(375
|
)
|
|
|
2,726
|
|
Long-term borrowings
|
|
|
(15,229
|
)
|
|
|
1,410
|
|
|
|
(13,819
|
)
|
Deposits
|
|
|
1,776
|
|
|
|
(225
|
)
|
|
|
1,551
|
|
Total interest expense
|
|
|
(8,119
|
)
|
|
|
(1,423
|
)
|
|
|
(9,542
|
)
|
Net interest income
|
|
|
(8,565
|
)
|
|
|
(1,953
|
)
|
|
|
(10,518
|
)
|
|
|
|
(1) |
|
Changes due to volume and rate are calculated independently for
each line item presented. Changes attributable to changes in
volume represent changes in average balances multiplied by the
prior periods average rates. Changes attributable to
changes in rate represent changes in average rates multiplied by
the prior years average balances. Changes attributable to
the combined impact of volume and rate have been allocated
proportionately to the change due to volume and the change due
to rate. |
Net interest and fee margin. The following
table summarizes the Companys net interest and fee income
as a percentage of average total finance receivables for the
years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
$
|
66,039
|
|
|
$
|
86,099
|
|
Fee income
|
|
|
17,405
|
|
|
|
21,354
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
83,444
|
|
|
|
107,453
|
|
Interest expense
|
|
|
27,338
|
|
|
|
36,880
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
$
|
56,106
|
|
|
$
|
70,573
|
|
|
|
|
|
|
|
|
|
|
Average total finance
receivables(1)
|
|
$
|
558,311
|
|
|
$
|
715,649
|
|
Percent of average total finance receivables:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11.83
|
%
|
|
|
12.03
|
%
|
Fee income
|
|
|
3.12
|
|
|
|
2.98
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
14.95
|
|
|
|
15.01
|
|
Interest expense
|
|
|
4.90
|
|
|
|
5.15
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee margin
|
|
|
10.05
|
%
|
|
|
9.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables include net investment in direct
financing leases, loans and factoring receivables. For the
calculations above, the effects of (1) the allowance for
credit losses and (2) initial direct costs and fees
deferred, are excluded from total finance receivables. |
39
Net interest and fee income decreased $14.5 million, or
20.5%, to $56.1 million for the year ended
December 31, 2009 from $70.6 million for the year
ended December 31, 2008. The net interest and fee margin
increased 19 basis points to 10.05% for the year ended
December 31, 2009 from 9.86% for the same period in 2008.
The following paragraphs discuss the components of this change.
Interest income, net of amortized initial direct costs and fees,
decreased $20.1 million, or 23.3%, to $66.0 million
for the year ended December 31, 2009 from
$86.1 million for the year ended December 31, 2008.
The decrease in interest income was primarily due to a 22.0%
decrease in average total finance receivables and a
20 basis point decrease in average yield. The decrease in
average yield is primarily due to lower earnings on
interest-earning deposits with banks. The decrease in average
total finance receivables is primarily due to our proactive
decision to lower approval rates in response to economic
conditions, combined with the limited availability of funding
during the first half of 2009. The weighted average implicit
interest rate on new finance receivables originated increased
142 basis points to 15.09% for the year ended
December 31, 2009 compared to 13.67% for year ended
December 31, 2008.
Fee income decreased $4.0 million, or 18.7%, to
$17.4 million for the year ended December 31, 2009
from $21.4 million for the year ended December 31,
2008. The decrease in fee income was primarily due to a decline
in administrative and late fee income of $3.4 million, or
22.1%, to $12.0 million for the year ended
December 31, 2009 from $15.4 million for the year
ended December 31, 2008. The decrease is primarily a result
of lower total finance receivables. Fee income also included
approximately $5.4 million of net residual income for the
year ended December 31, 2009 compared to $5.9 million
for the year ended December 31, 2008.
Fee income, as a percentage of average total finance
receivables, increased 14 basis points to 3.12% for the
year ended December 31, 2009 from 2.98% for the year ended
December 31, 2008. Administrative and late fees remained
the largest component of fee income at 2.15% as a percentage of
average total finance receivables for the year ended
December 31, 2009 compared to 2.16% for the year ended
December 31, 2008. As a percentage of average total finance
receivables, net residual income was 0.97% for the year ended
December 31, 2009 compared to 0.83% for the year ended
December 31, 2008.
Interest expense decreased $9.6 million to
$27.3 million for the year ended December 31, 2009
from $36.9 million for the year ended December 31,
2008. Interest expense, as a percentage of average total finance
receivables, decreased 25 basis points to 4.90% for the
year ended December 31, 2009 from 5.15% for the year ended
December 31, 2008. The decrease in interest expense was
primarily due to the 22.0% decline in average total finance
receivables combined with a shift in mix from term
securitization borrowings to less expensive deposits and
short-term borrowings. During the year ended December 31,
2009, average term securitization borrowings outstanding were
$330.1 million, representing 77.2% of total borrowings,
compared to $591.8 million representing 94.3% of total
borrowings for the same period in 2008.
Interest cost, excluding transaction costs, on short-term and
long-term borrowings as a percentage of weighted average
borrowings was 5.47% for the year ended December 31, 2009
compared to 5.44% for the year ended December 31, 2008. The
average balance for our warehouse facilities was
$97.7 million for the year ended December 31, 2009
compared to $35.8 million for the year ended
December 31, 2008. The average borrowing cost for our
warehouse facilities was 4.81% for the year ended
December 31, 2009 compared to 4.86% for the year ended
December 31, 2008. (See Liquidity and Capital Resources
in this Item 7).
Interest costs on our September 2006 and October 2007 issued
term securitization borrowings increased over those issued in
2005 due to the rising interest rate environment. The coupon
rate on the October 2007 securitization also reflected higher
credit costs due to the general tightening of credit caused by
overall stress and volatility in the financial markets. Our term
securitizations also include multiple classes of fixed-rate
notes with the shorter term, lower coupon classes amortizing
(maturing) faster than the longer term higher coupon classes.
This causes the blended interest expense related to these
borrowings to change and generally increase over the terms of
the borrowings. For the year ended December 31, 2009,
average term securitization borrowings outstanding were
$330.1 million at a weighted average coupon of 5.67%
compared with $591.8 million at a weighted average coupon
of 5.48% for the year ended December 31, 2008.
40
On August 18, 2005, we closed on the issuance of our
seventh term note securitization transaction in the amount of
$340.6 million at a weighted average interest coupon
approximating 4.81% over the term of the financing. After the
effects of hedging and other transaction costs are considered,
we expect total interest expense on the 2005 term transaction to
approximate an average of 4.50% over the term of the borrowing.
On September 21, 2006, we closed on the issuance of our
eighth term note securitization transaction in the amount of
$380.2 million at a weighted average interest coupon
approximating 5.51% over the term of the financing. After the
effects of hedging and other transaction costs are considered,
we expect total interest expense on the 2006 term transaction to
approximate an average of 5.21% over the term of the financing.
On October 24, 2007, we closed on the issuance of our ninth
term note securitization transaction in the amount of
$440.5 million at a weighted average interest coupon
approximating 5.70% over the term of the financing. After the
effects of hedging and other transaction costs are considered,
we expect total interest expense on the 2007 term transaction to
approximate an average of 6.32% over the term of the financing.
Due to the impact on interest rates from unfavorable market
conditions and the available capacity in other facilities, the
Company elected not to complete fixed-rate term note
securitizations in 2008 or 2009.
The opening of our wholly-owned subsidiary, Marlin Business
Bank, on March 12, 2008 provides an additional funding
source. FDIC-insured deposits are raised nationally via the
brokered certificates of deposit market and FDIC-insured retail
deposits are also raised primarily directly from other financial
institutions. Interest expense on deposits was
$2.7 million, or 3.47% as a percentage of weighted average
deposits, for the year ended December 31, 2009, compared to
$1.2 million, or 4.16% as a percentage of weighted average
deposits, for the year ended December 31, 2008. The average
balance of deposits was $78.6 million for the year ended
December 31, 2009, compared to $28.2 million for the
year ended December 31, 2008.
Provision for credit losses. The provision for
credit losses decreased $4.3 million, or 13.7%, to
$27.2 million for the year ended December 31, 2009
from $31.5 million for the year ended December 31,
2008. 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 and improved delinquencies,
partially offset by higher charge-offs. Net charge-offs were
$30.3 million for the year ended December 31, 2009, an
increase of $3.1 million from $27.2 million during the
year ended December 31, 2008. Net charge-offs as a
percentage of average total finance receivables increased to
5.42% for the year ended December 31, 2009 from 3.80% for
the same period in 2008. The allowance for credit losses
decreased approximately $3.1 million to $12.2 million
at December 31, 2009, from $15.3 million at
December 31, 2008.
Unfavorable economic trends have most significantly impacted the
performance of rate-sensitive industries in our portfolio,
specifically companies in the construction, financial services,
mortgage and real estate businesses. Though these industries
comprised approximately 9% of the total portfolio at
December 31, 2009, approximately 17% of the charge-off
activity during the year ended December 31, 2009 related to
these industries. Throughout 2007 to 2009, Marlin increased
collection activities and strengthened underwriting criteria for
these industries.
Additional information regarding asset quality is included
herein in the subsequent section, Finance Receivables and
Asset Quality.
Insurance income. Insurance income decreased
$1.0 million to $5.3 million for the year ended
December 31, 2009 from $6.3 million for the year ended
December 31, 2008. The decrease is primarily related to
lower insurance billings due to lower total finance receivables.
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
market value of our derivative financial instruments changes
over time.
For the year ended December 31, 2009, the loss on
derivatives was $2.0 million, compared to a loss of $16.0
million for the year ended December 31, 2008. The losses
included $2.8 million and $11.0 million, respectively,
41
which represented the decline in the fair value of derivatives
contracts during each period. These losses are based on the
values of the derivative contracts at December 31, 2009 and
2008 in a volatile market that is changing daily, and will not
necessarily reflect the value at settlement.
During 2009 and 2008, 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, during 2009 an $880,000 pretax
($529,000 after-tax) gain on the related cash flow hedges was
reclassified from accumulated other comprehensive income into
loss on derivatives. During 2008, a $5.0 million pretax
($3.0 million after-tax) loss on the related cash flow
hedges was reclassified from accumulated other comprehensive
income into loss on derivatives.
Other income. Other income includes various
administrative transaction fees and fees received from lease
syndications. Other income decreased $367,000 to
$1.5 million for the year ended December 31, 2009 from
$1.9 million for the year ended December 31, 2008. The
decrease is primarily related to the impact of lower transaction
volumes.
Salaries and benefits expense. Salaries and
benefits expense decreased $3.8 million, or 16.6%, to
$19.1 million for the year ended December 31, 2009
from $22.9 million for the year ended December 31,
2008. The decrease in compensation expense is primarily due to
reduced headcount levels. Total personnel decreased to 181 at
December 31, 2009 from 284 at December 31, 2008.
Personnel costs represent our most significant overhead expense
and we actively manage our staffing levels to the requirements
of our lease portfolio. As a financial services company, we
continue to be impacted by the challenging economic environment.
As a result, we proactively lowered expenses in the first
quarter of 2009, including reducing our workforce by 17% and
closing our two smallest satellite sales offices in Chicago and
Utah. A total of approximately 49 employees company-wide
were affected as a result of the staff reductions in the first
quarter of 2009. We incurred pretax severance costs in the three
months ended March 31, 2009 of approximately $500,000
related to the staff reductions. The total annualized pretax
salary cost savings resulting from this reduction is 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 $700,000 related to these
staff reductions. The total annualized pretax salary cost
savings resulting from this reduction is estimated to be
approximately $2.9 million. Although we believe that our
estimates are appropriate and reasonable based on available
information, actual results could differ from these estimates.
In comparison, during the first quarter of 2008 we reduced our
workforce by approximately 51 employees and incurred
related pretax severance costs of approximately $501,000. The
total annualized pretax cost savings resulting from this
reduction is estimated to be approximately $2.6 million.
Salaries and benefits expense, as a percentage of the average
total finance receivables, was 3.42% for the year ended
December 31, 2009 compared with 3.20% for the same period
in 2008.
General and administrative expense. General
and administrative expense decreased $2.3 million, or
15.1%, to $12.9 million for the year ended
December 31, 2009 from $15.2 million for the year
ended December 31, 2008. Over half of the decrease related
to marketing expense and recruiting expense. As a percentage of
average total finance receivables, general and administrative
expense increased to 2.30% for the year ended December 31,
2009 from 2.13% for the year ended December 31, 2008.
Selected major components of general and administrative expense
for the year ended December 31, 2009 included
$3.0 million of premises and occupancy expense,
$1.2 million of audit and tax expense, $930,000 of data
processing expense and $183,000 of marketing expense. In
comparison, selected major components of general and
administrative expense for the year ended December 31, 2008
included $3.3 million of premises and occupancy expense,
$1.3 million of audit and tax expense, $1.0 million of
data processing expense, and $1.1 million of marketing
expense.
42
Financing related costs. Financing related
costs primarily represent bank commitment fees paid to our
financing sources. Financing related costs decreased $913,000 to
$505,000 for the year ended December 31, 2009 from
$1.4 million for the year ended December 31, 2008,
primarily due to decreased bank commitment fees as a result of
reduced unused borrowing capacity.
Income tax expense (benefit). An income tax
expense of $347,000 was recorded for the year ended
December 31, 2009, compared to an income tax benefit of
$3.2 million for the year ended December 31, 2008. The
change in taxes is primarily attributed to the pretax loss
recorded in 2008. Our effective tax rate, which is a combination
of federal and state income tax rates, was 25.1% for the year
ended December 31, 2009, compared to a benefit of 37.7% for
the year ended December 31, 2008. The effective tax rate
for the year ended December 31, 2009 was reduced by a
$60,000 benefit from adjustments relating to changes in
estimates. The effective tax rate for the year ended
December 31, 2008 reflects a decreased benefit due to a
2008 tax adjustment of $239,000, primarily related to a
true-up of
our deferred tax accounts. Without these adjustments in 2009 and
2008, our effective tax rate would have been an expense of
approximately 29.4% for the year ended December 31, 2009
compared to an effective tax rate benefit without adjustments of
40.5% for the year ended December 31, 2008. The change in
effective tax rate for 2009 is also due to a change in the mix
of pretax book income across the jurisdictions and entities. We
generally expect an effective tax rate of approximately 39% in
future years.
Comparison
of the Years Ended December 31, 2008 and 2007
Net income(loss). A net loss of
$5.2 million, or $0.44 per share, was recorded for the year
ended December 31, 2008. This net loss includes an
after-tax charge of approximately $6.7 million due to the
change in market value of derivatives and an after-tax charge of
approximately $3.0 million due to the reclassification into
earnings from accumulated other comprehensive income related to
a hedged forecasted transaction no longer anticipated to occur.
Excluding these after-tax charges totaling $9.7 million,
net income for the year ended December 31, 2008 would have
been $4.5 million, a decrease of 75.0% or
$13.5 million, compared to $18.0 million for the year
ended December 31, 2007. Diluted earnings per share
excluding these after-tax charges would have been $0.36 for the
year ended December 31, 2008, compared to $1.45 for the
year ended December 31, 2007.
Excluding the after-tax losses on hedging activities identified
above, returns on average assets were 0.53% for the year ended
December 31, 2008 and 2.09% for the year ended
December 31, 2007. On the same basis, returns on average
equity were 2.98% for the year ended December 31, 2008 and
12.37% for the year ended December 31, 2007.
The provision for credit losses increased $14.3 million, or
83.1%, to $31.5 million for the year ended
December 31, 2008 from $17.2 million for the same
period in 2007. For the year ended December 31, 2008, net
interest and fee income decreased $4.6 million from the
prior year, primarily due to reduced interest income from
payoffs of older, higher yielding leases, combined with lower
outstanding invested cash balances.
For the year ended December 31, 2008, we generated 24,869
new finance receivables at a cost of $256.6 million
compared to 33,141 new finance receivables at a cost of
$390.8 million for the year ended December 31, 2007.
The reduction in volume was primarily due to a combination of
our decision to lower approval rates in response to economic
conditions. Overall, our average total finance receivables at
December 31, 2008 decreased 0.9% to $715.6 million at
December 31, 2008 from $721.9 million at
December 31, 2007.
43
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 years ended
December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average(1)
|
|
|
|
|
|
Average
|
|
|
Average(1)
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yields/Rates
|
|
|
Balance
|
|
|
Interest
|
|
|
Yields/Rates
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
31,026
|
|
|
$
|
743
|
|
|
|
2.39
|
%
|
|
$
|
19,476
|
|
|
$
|
812
|
|
|
|
4.17
|
%
|
Restricted interest-earning deposits with banks
|
|
|
72,706
|
|
|
|
2,020
|
|
|
|
2.78
|
|
|
|
90,111
|
|
|
|
4,201
|
|
|
|
4.66
|
|
Net investment in
leases(2)
|
|
|
700,332
|
|
|
|
81,436
|
|
|
|
11.63
|
|
|
|
714,106
|
|
|
|
83,814
|
|
|
|
11.74
|
|
Loans
receivable(2)
|
|
|
15,317
|
|
|
|
1,900
|
|
|
|
12.40
|
|
|
|
7,794
|
|
|
|
927
|
|
|
|
11.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
819,381
|
|
|
|
86,099
|
|
|
|
10.51
|
|
|
|
831,487
|
|
|
|
89,754
|
|
|
|
10.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
(497
|
)
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,141
|
|
|
|
|
|
|
|
|
|
|
|
3,318
|
|
|
|
|
|
|
|
|
|
Property tax receivables
|
|
|
2,556
|
|
|
|
|
|
|
|
|
|
|
|
2,762
|
|
|
|
|
|
|
|
|
|
Other
assets(3)
|
|
|
19,267
|
|
|
|
|
|
|
|
|
|
|
|
24,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets
|
|
|
25,589
|
|
|
|
|
|
|
|
|
|
|
|
29,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
844,970
|
|
|
|
|
|
|
|
|
|
|
$
|
861,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings(4)
|
|
$
|
35,806
|
|
|
$
|
2,191
|
|
|
|
6.12
|
%
|
|
$
|
112,220
|
|
|
$
|
6,741
|
|
|
|
6.01
|
%
|
Long-term
borrowings(4)
|
|
|
591,815
|
|
|
|
33,515
|
|
|
|
5.66
|
|
|
|
562,774
|
|
|
|
28,581
|
|
|
|
5.08
|
|
Deposits
|
|
|
28,244
|
|
|
|
1,174
|
|
|
|
4.16
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
655,865
|
|
|
|
36,880
|
|
|
|
5.62
|
|
|
|
674,994
|
|
|
|
35,322
|
|
|
|
5.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives
|
|
|
7,065
|
|
|
|
|
|
|
|
|
|
|
|
2,109
|
|
|
|
|
|
|
|
|
|
Sales and property taxes payable
|
|
|
8,989
|
|
|
|
|
|
|
|
|
|
|
|
8,919
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
8,696
|
|
|
|
|
|
|
|
|
|
|
|
9,550
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
|
14,390
|
|
|
|
|
|
|
|
|
|
|
|
20,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
39,140
|
|
|
|
|
|
|
|
|
|
|
|
41,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
695,005
|
|
|
|
|
|
|
|
|
|
|
|
716,297
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
149,965
|
|
|
|
|
|
|
|
|
|
|
|
144,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
844,970
|
|
|
|
|
|
|
|
|
|
|
$
|
861,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
49,219
|
|
|
|
|
|
|
|
|
|
|
$
|
54,432
|
|
|
|
|
|
Interest rate
spread(5)
|
|
|
|
|
|
|
|
|
|
|
4.89
|
%
|
|
|
|
|
|
|
|
|
|
|
5.56
|
%
|
Net interest
margin(6)
|
|
|
|
|
|
|
|
|
|
|
6.01
|
%
|
|
|
|
|
|
|
|
|
|
|
6.55
|
%
|
Ratio of average interest-earning assets to average
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
124.93
|
%
|
|
|
|
|
|
|
|
|
|
|
123.18
|
%
|
|
|
|
(1) |
|
Average balances are calculated using month-end balances, to the
extent such averages are representative of operations. |
|
(2) |
|
Average balances of leases and loans include non-accrual leases
and loans, and are presented net of unearned income. |
|
(3) |
|
Includes operating leases. |
|
(4) |
|
Includes effect of transaction costs. |
|
(5) |
|
Interest rate spread represents the difference between the
average yield on interest-earning assets and the average rate on
interest-bearing liabilities. |
|
(6) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
44
The following table presents the components of the changes in
net interest income by volume and rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008 Compared to Year Ended
|
|
|
|
December 31, 2007
|
|
|
|
Volume(1)
|
|
|
Rate(1)
|
|
|
Total
|
|
|
|
Increase (Decrease) Due to:
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
363
|
|
|
$
|
(432
|
)
|
|
$
|
(69
|
)
|
Restricted interest-earning deposits with banks
|
|
|
(706
|
)
|
|
|
(1,475
|
)
|
|
|
(2,181
|
)
|
Net investment in leases
|
|
|
(1,607
|
)
|
|
|
(771
|
)
|
|
|
(2,378
|
)
|
Loans receivable
|
|
|
931
|
|
|
|
42
|
|
|
|
973
|
|
Total interest income
|
|
|
(1,295
|
)
|
|
|
(2,360
|
)
|
|
|
(3,655
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
(4,673
|
)
|
|
|
123
|
|
|
|
(4,550
|
)
|
Long-term borrowings
|
|
|
1,528
|
|
|
|
3,406
|
|
|
|
4,934
|
|
Deposits
|
|
|
1,174
|
|
|
|
|
|
|
|
1,174
|
|
Total interest expense
|
|
|
(1,021
|
)
|
|
|
2,579
|
|
|
|
1,558
|
|
Net interest income
|
|
|
(783
|
)
|
|
|
(4,430
|
)
|
|
|
(5,213
|
)
|
|
|
|
(1) |
|
Changes due to volume and rate are calculated independently for
each line item presented. Changes attributable to changes in
volume represent changes in average balances multiplied by the
prior periods average rates. Changes attributable to
changes in rate represent changes in average rates multiplied by
the prior years average balances. Changes attributable to
the combined impact of volume and rate have been allocated
proportionately to the change due to volume and the change due
to rate. |
Net interest and fee margin. The following
table summarizes the Companys net interest and fee income
as a percentage of average total finance receivables for the
years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
$
|
86,099
|
|
|
$
|
89,754
|
|
Fee income
|
|
|
21,354
|
|
|
|
20,778
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
107,453
|
|
|
|
110,532
|
|
Interest expense
|
|
|
36,880
|
|
|
|
35,322
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
$
|
70,573
|
|
|
$
|
75,210
|
|
|
|
|
|
|
|
|
|
|
Average total finance
receivables(1)
|
|
$
|
715,649
|
|
|
$
|
721,900
|
|
Percent of average total finance receivables:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12.03
|
%
|
|
|
12.43
|
%
|
Fee income
|
|
|
2.98
|
|
|
|
2.88
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
15.01
|
|
|
|
15.31
|
|
Interest expense
|
|
|
5.15
|
|
|
|
4.89
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee margin
|
|
|
9.86
|
%
|
|
|
10.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables include net investment in direct
financing leases, loans and factoring receivables. For the
calculations above, the effects of (1) the allowance for
credit losses and (2) initial direct costs and fees
deferred, are excluded from total finance receivables. |
45
Net interest and fee income decreased $4.6 million, or
6.1%, to $70.6 million for the year ended December 31,
2008 from $75.2 million for the year ended
December 31, 2007. The net interest and fee margin
decreased 56 basis points to 9.86% for the year ended
December 31, 2008 from 10.42% for the same period in 2007.
Interest income, net of amortized initial direct costs and fees,
decreased $3.7 million, or 4.1%, to $86.1 million for
the year ended December 31, 2008 from $89.8 million
for the year ended December 31, 2007. The decrease in
interest income was primarily due to a 40 basis point
decrease in average yield. This reduction is partially due to
payoffs of older, higher yielding leases, combined with lower
earnings on outstanding invested cash balances. The weighted
average implicit interest rate on new finance receivables
originated was 13.67% for the year ended December 31, 2008
compared to 12.93% for year ended December 31, 2007.
Fee income increased $576,000, or 2.8%, to $21.4 million
for the year ended December 31, 2008 from
$20.8 million for the year ended December 31, 2007.
The increase in fee income was primarily due to higher late fees
that grew by $895,000 to $13.6 million for the year ended
December 31, 2008 compared to $12.8 million for the
year ended December 31, 2007. The increase in late fee
income is primarily attributed to increased late fee billings.
Fee income also included approximately $5.9 million of net
residual income for each of the years ended December 31,
2008 and 2007.
Fee income, as a percentage of average total finance
receivables, increased 10 basis points to 2.98% for the
year ended December 31, 2008 from 2.88% for the year ended
December 31, 2007. Late fees remained the largest component
of fee income at 1.91% as a percentage of average total finance
receivables for the year ended December 31, 2008 compared
to 1.77% for the year ended December 31, 2007. As a
percentage of average total finance receivables, net residual
income was 0.83% for the year ended December 31, 2008
compared to 0.82% for the year ended December 31, 2007.
Interest expense increased $1.6 million to
$36.9 million for the year ended December 31, 2008
from $35.3 million for the year ended December 31,
2007. Interest expense, as a percentage of the average total
finance receivables, increased 25 basis points to 5.15% for
the year ended December 31, 2008 from 4.90% for the year
ended December 31, 2007. Interest expense has risen
primarily due to higher interest rates on the Companys
term note securitizations. During the year ended
December 31, 2008, average term securitization borrowings
outstanding were $591.8 million, representing 94.3% of
total borrowings, compared to $562.8 million representing
83.4% of total borrowings for the same period in 2007.
Interest cost, excluding transaction costs, on short-term and
long-term borrowings as a percentage of weighted average
borrowings was 5.44% for the year ended December 31, 2008
compared to 5.23% for the year ended December 31, 2007. The
average balance for our warehouse facilities was
$35.8 million for the year ended December 31, 2008
compared to $112.2 million for the year ended
December 31, 2007. The average borrowing costs for our
warehouse facilities was 4.86% for the year ended
December 31, 2008 compared to 5.76% for the year ended
December 31, 2007. (See Liquidity and Capital Resources
in this Item 7).
Interest costs on our August 2005, September 2006 and October
2007 issued term securitization borrowings increased over those
issued in 2004 due to the rising interest rate environment. The
coupon rate on the October 2007 securitization also reflects
higher credit costs due to the general tightening of credit
caused by recent overall stress and volatility in the financial
markets. For the year ended December 31, 2008, average term
securitization borrowings outstanding were $591.8 million
at a weighted average coupon of 5.48% compared with
$562.8 million at a weighted average coupon of 4.83% for
the year ended December 31, 2007.
On August 18, 2005, we closed on the issuance of our
seventh term note securitization transaction in the amount of
$340.6 million at a weighted average interest coupon
approximating 4.81% over the term of the financing. After the
effects of hedging and other transaction costs are considered,
we expect total interest expense on the 2005 term transaction to
approximate an average of 4.50% over the term of the borrowing.
On September 21, 2006, we closed on the issuance of our
eighth term note securitization transaction in the amount of
$380.2 million at a weighted average interest coupon
approximating 5.51% over the term of the financing. After the
effects of hedging and other transaction costs are considered,
we expect total interest expense on the 2006 term transaction to
approximate an average of 5.21% over the term of the financing.
On October 24, 2007, we closed on the issuance of our ninth
term note securitization transaction in the amount of
$440.5 million at a weighted average interest coupon
46
approximating 5.70% over the term of the financing. After the
effects of hedging and other transaction costs are considered,
we expect total interest expense on the 2007 term transaction to
approximate an average of 6.32% over the term of the financing.
Due to the impact on interest rates from unfavorable market
conditions and the available capacity in our warehouse
facilities, the Company elected not to complete fixed-rate term
note securitizations in 2008 or 2009.
Our term note securitizations include multiple classes of
fixed-rate notes with the shorter term, lower coupon classes
amortizing (maturing) faster then the longer term higher coupon
classes. This causes the blended interest expenses related to
these borrowings to change and generally increase over the terms
of the borrowings.
On February 15, 2008, we elected to exercise our call
option and pay off the remaining $29.9 million of our 2004
term note securitization, which carried a coupon rate of
approximately 4.64%.
The opening of our wholly-owned subsidiary, Marlin Business
Bank, on March 12, 2008 provides an additional funding
source. FDIC-insured deposits are raised nationally via the
brokered certificates of deposit market and FDIC-insured retail
deposits are also raised primarily directly from other financial
institutions. Interest expense on deposits was
$1.2 million, or 4.16% as a percentage of weighted average
deposits, for the year ended December 31, 2008. The average
balance of deposits was $28.2 million for the year ended
December 31, 2008.
Provision for credit losses. The provision for
credit losses increased $14.3 million, or 83.1%, to
$31.5 million for the year ended December 31, 2008
from $17.2 million for the year ended December 31,
2007. Most of the increase was due to higher net charge-offs,
which were $27.2 million for the year ended
December 31, 2008, an increase of $12.8 million from
$14.4 million during the year ended December 31, 2007.
Net charge-offs as a percentage of average total finance
receivables increased to 3.80% for the year ended
December 31, 2008 from 2.00% for the same period in 2007.
The allowance for credit losses increased approximately
$4.3 million to $15.3 million at December 31,
2008, from $11.0 million at December 31, 2007.
Unfavorable economic trends have most significantly impacted the
performance of rate-sensitive industries in our portfolio,
specifically companies in the construction, mortgage and real
estate businesses. Though these industries comprised
approximately 10% of the total portfolio at December 31,
2008, approximately 22% of the charge-off activity related to
these industries. Throughout 2007 and 2008, Marlin increased
collection activities and strengthened underwriting criteria for
these industries.
Insurance income. Insurance income increased
$188,000 to $6.3 million for the year ended
December 31, 2008 from $6.1 million for the year ended
December 31, 2007. The increase is primarily related to
insurance billings, which were $256,000 higher in 2008 than in
2007.
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
market value of our derivative financial instruments changes
over time.
For the year ended December 31, 2008, the loss on
derivatives was $16.0 million. Of this amount,
$11.0 million represented the change in the fair value of
derivatives contracts during the year. These losses were based
on the value of the derivative contracts at December 31,
2008 in a volatile market that is changing daily, and will not
necessarily reflect the value at settlement.
During 2008, 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. A $5.0 million pretax loss was reclassified
into loss on derivatives for the year ended December 31,
2008 for the related cash flow hedges.
Other income. Other income remained almost
unchanged; increasing $54,000 from the year ended
December 31, 2007 to $1.9 million for the year ended
December 31, 2008.
47
Salaries and benefits expense. Salaries and
benefits expense increased $1.6 million, or 7.5%, to
$22.9 million for the year ended December 31, 2008
from $21.3 million for the year ended December 31,
2007. The increase in compensation expense is primarily due to
costs associated with the staff reduction initiative discussed
below and lower capitalized costs as a result of lower
origination volumes, partially offset by the discontinuance of
the factoring business. There was no compensation related to the
factoring business for the year ended December 31, 2008,
compared to $364,000 for the same period in 2007.
As a financial services company, we were navigating through the
current challenging economic environment. In response to this,
on May 13, 2008, we reduced our staffing by approximately
14.7%. This action was part of an overall effort to reduce
operating costs in light of our decision to moderate growth in
fiscal 2008. Approximately 51 employees were affected as a
result of the staff reduction. On May 13, 2008, we notified
the affected employees. We incurred pretax costs during the
twelve months ended December 31, 2008 of approximately
$501,000 related to this action, almost all of which was related
to severance costs. The total annualized pretax cost savings
resulting from this reduction is estimated to be approximately
$2.6 million. Total personnel decreased to 284 at
December 31, 2008 from 357 at December 31, 2007.
Salaries and benefits expense, as a percentage of the average
total finance receivables, was 3.20% for the year ended
December 31, 2008 compared with 2.95% for the same period
in 2007.
General and administrative expense. General
and administrative expense increased $1.6 million, or
11.8%, to $15.2 million for the year ended
December 31, 2008 from $13.6 million for the year
ended December 31, 2007. Over half of the increase related
to temporary services for lease servicing and professional fees.
As a percentage of average total finance receivables, general
and administrative expense increased to 2.13% for the year ended
December 31, 2008 from 1.89% for the year ended
December 31, 2007.
Selected major components of general and administrative expense
for the year ended December 31, 2008 included
$3.3 million of premises and occupancy expense,
$1.3 million of audit and tax expense, $1.0 million of
data processing expense, and $1.1 million of marketing
expense. In comparison, selected major components of general and
administrative expense for the year ended December 31, 2007
included $3.3 million of premises and occupancy expense,
$1.1 million of audit and tax expense, $902,000 of data
processing expense, and $989,000 of marketing expense.
Financing related costs. Financing related
costs primarily represent bank commitment fees paid to our
financing sources. Financing related costs increased $373,000 to
$1.4 million for the year ended December 31, 2008 from
$1.0 million for the year ended December 31, 2007.
Mark-to-market
expense recognized on our interest-rate caps was $39,000 for the
year ended December 31, 2008 compared to expense of $8,000
for the year ended December 31, 2007. Commitment fees were
$1.4 million for the year ended December 31, 2008
compared to $1.0 million for the year ended
December 31, 2007.
Income tax expense (benefit). An income tax
benefit of $3.2 million was recorded for the year ended
December 31, 2008, compared to income tax expense of
$11.9 million for the year ended December 31, 2007.
The change in taxes is primarily attributed to the pretax loss
recorded in 2008. Our effective tax rate, which is a combination
of federal and state income tax rates, was a benefit of 37.7%
for the year ended December 31, 2008, compared to expense
of 39.8% for the year ended December 31, 2007. The
effective tax rate for the year ended December 31, 2008
reflects a reduced benefit related to a 2008 tax adjustment of
$239,000, primarily related to a
true-up of
our deferred tax accounts.
Operating
Data
We manage expenditures using a comprehensive budgetary review
process. Expenses are monitored by departmental heads and are
reviewed by senior management monthly. The efficiency ratio
(relating expenses with revenues) and the ratio of salaries and
benefits and general and administrative expense as a percentage
of the average total finance receivables shown below are metrics
used by management to monitor productivity and spending levels.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Average total finance receivables
|
|
$
|
558,311
|
|
|
$
|
715,649
|
|
|
$
|
721,900
|
|
Salaries and benefits expense
|
|
|
19,071
|
|
|
|
22,916
|
|
|
|
21,329
|
|
General and administrative expense
|
|
|
12,854
|
|
|
|
15,241
|
|
|
|
13,633
|
|
Efficiency ratio
|
|
|
50.71
|
%
|
|
|
48.47
|
%
|
|
|
42.07
|
%
|
Percent of average total finance receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
3.42
|
%
|
|
|
3.20
|
%
|
|
|
2.95
|
%
|
General and administrative
|
|
|
2.30
|
%
|
|
|
2.13
|
%
|
|
|
1.89
|
%
|
We generally reach our lessees through a network of independent
equipment dealers and lease brokers. The number of dealers and
brokers that we conduct business with depends on, among other
things, the number of sales account executives we have. Sales
account executive staffing levels and the activity of our
origination sources are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Number of sales account executives
|
|
|
38
|
|
|
|
86
|
|
|
|
118
|
|
|
|
100
|
|
|
|
103
|
|
Number of originating
sources(1)
|
|
|
465
|
|
|
|
1,014
|
|
|
|
1,246
|
|
|
|
1,295
|
|
|
|
1,295
|
|
|
|
|
(1) |
|
Monthly average of origination sources generating lease volume. |
Finance
Receivables and Asset Quality
Our net investment in leases and loans declined
$220.5 million, or 33.0%, to $448.6 million at
December 31, 2009, from $669.1 million at
December 31, 2008. The Company continues to respond to
current economic conditions with restrictive credit standards.
The Companys leases are generally assigned as collateral
for borrowings as described below in Liquidity and Capital
Resources.
49
The chart below provides our asset quality statistics for the
years ended December 31, 2009, 2008, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for credit losses, beginning of period
|
|
$
|
15,283
|
|
|
$
|
10,988
|
|
|
$
|
8,201
|
|
|
$
|
7,813
|
|
|
$
|
6,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(33,575
|
)
|
|
|
(30,231
|
)
|
|
|
(18,022
|
)
|
|
|
(12,551
|
)
|
|
|
(11,851
|
)
|
Recoveries
|
|
|
3,296
|
|
|
|
3,032
|
|
|
|
3,588
|
|
|
|
3,005
|
|
|
|
2,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(30,279
|
)
|
|
|
(27,199
|
)
|
|
|
(14,434
|
)
|
|
|
(9,546
|
)
|
|
|
(9,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
27,189
|
|
|
|
31,494
|
|
|
|
17,221
|
|
|
|
9,934
|
|
|
|
10,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end of
period(1)
|
|
$
|
12,193
|
|
|
$
|
15,283
|
|
|
$
|
10,988
|
|
|
$
|
8,201
|
|
|
$
|
7,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average total finance
receivables(2)
|
|
|
5.42
|
%
|
|
|
3.80
|
%
|
|
|
2.00
|
%
|
|
|
1.56
|
%
|
|
|
1.74
|
%
|
Allowance for credit losses to total finance receivables, end of
period(2)
|
|
|
2.71
|
%
|
|
|
2.30
|
%
|
|
|
1.47
|
%
|
|
|
1.21
|
%
|
|
|
1.39
|
%
|
Average total finance
receivables(2)
|
|
$
|
558,311
|
|
|
$
|
715,649
|
|
|
$
|
721,900
|
|
|
$
|
611,348
|
|
|
$
|
523,948
|
|
Total finance receivables, end of
period(2)
|
|
$
|
450,595
|
|
|
$
|
664,902
|
|
|
$
|
749,712
|
|
|
$
|
679,729
|
|
|
$
|
562,110
|
|
Delinquencies greater than 60 days past due
|
|
$
|
8,334
|
|
|
$
|
12,203
|
|
|
$
|
8,377
|
|
|
$
|
5,676
|
|
|
$
|
4,063
|
|
Delinquencies greater than 60 days past
due(3)
|
|
|
1.67
|
%
|
|
|
1.59
|
%
|
|
|
0.95
|
%
|
|
|
0.71
|
%
|
|
|
0.61
|
%
|
Allowance for credit losses to delinquent accounts greater than
60 days past
due(3)
|
|
|
146.30
|
%
|
|
|
125.24
|
%
|
|
|
131.17
|
%
|
|
|
144.49
|
%
|
|
|
192.30
|
%
|
Non-accrual leases and loans, end of period
|
|
$
|
4,557
|
|
|
$
|
6,380
|
|
|
$
|
3,695
|
|
|
$
|
2,250
|
|
|
$
|
2,017
|
|
Renegotiated leases and loans, end of period
|
|
$
|
4,521
|
|
|
$
|
8,256
|
|
|
$
|
6,987
|
|
|
$
|
3,819
|
|
|
$
|
4,140
|
|
Accruing leases and loans past due 90 days or more
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest income included on non-accrual leases and
loans(4)
|
|
$
|
493
|
|
|
$
|
711
|
|
|
$
|
420
|
|
|
$
|
232
|
|
|
$
|
228
|
|
Interest income excluded on non-accrual leases and
loans(5)
|
|
$
|
103
|
|
|
$
|
92
|
|
|
$
|
55
|
|
|
$
|
27
|
|
|
$
|
28
|
|
|
|
|
(1) |
|
The allowance for credit losses allocated to loans at
December 31, 2009, 2008, 2007, 2006 and 2005 was $399,000,
$881,000, $649,000, $25,000 and $0, respectively. |
|
(2) |
|
Total finance receivables include net investment in direct
financing leases, loans and factoring receivables. For purposes
of asset quality and allowance calculations, the effects of
(1) the allowance for credit losses and (2) initial
direct costs and fees deferred are excluded from total finance
receivables. Total finance receivables for 2005 to 2008 have
been restated as described in Note 20 to the Consolidated
Financial Statements. |
|
(3) |
|
Calculated as a percent of minimum lease payments receivable for
leases and as a percent of principal outstanding for loans and
factoring receivables. |
|
(4) |
|
Represents interest which was recognized during the period on
non-accrual loans and leases, prior to non-accrual status. |
|
(5) |
|
Represents interest which would have been recorded on
non-accrual loans and leases had they performed in accordance
with their contractual terms during the period. |
Net investments in finance receivables are generally 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.
50
Net charge-offs for the year ended December 31, 2009 were
$30.3 million, or 5.42% of average total finance
receivables, compared to $27.2 million, or 3.80% of average
total finance receivables, for the year ended December 31,
2008. Approximately
3/4
of the 1.62% increase from 2008 was related to the impact on the
calculation of the decrease in average total finance
receivables, and approximately
1/4
of the percentage increase was due to the $3.1 million
increase in net charge-offs. The increase in net charge-offs
during 2009 compared to prior periods is primarily due to
worsening general economic trends.
The Companys net charge-offs began increasing during 2007,
primarily due to worsening general economic trends from the
favorable experience of 2006. These trends continued to worsen
during 2008 and 2009. The economic environment has most
significantly impacted the performance of interest
rate-sensitive industries in our portfolio, specifically
companies in the construction, financial services, mortgage and
real estate businesses. Though these industries comprised
approximately 9% of the total portfolio at December 31,
2009, approximately 17% of the charge-off activity for the year
ended December 31, 2009 related to these industries. During
2007 and 2008, the Company increased collection activities and
strengthened underwriting criteria for these industries and for
the geographical areas most affected by these industries,
specifically California and Florida. These trends continue to be
closely monitored. In addition, during 2009 the Company
discontinued substantially all origination activity from
indirect origination channels, due to the higher credit risk
associated with these channels.
Delinquent accounts greater than 60 days past due (as a
percentage of minimum lease payments receivable for leases and
as a percentage of principal outstanding for loans and factoring
receivables) increased to 1.67% at December 31, 2009 from
1.59% at December 31, 2008. Worsening general economic
trends have resulted in increased delinquencies, as discussed
above. Supplemental information regarding loss statistics and
delinquencies is available on the investor relations section of
Marlins website at www.marlincorp.com.
In accordance with the Contingencies Topic of the FASB ASC,
we maintain an allowance for credit losses at an amount
sufficient to absorb losses inherent in our existing lease and
loan portfolios as of the reporting dates based on our
projection of probable net credit losses. The factors and trends
discussed above were included in the Companys analysis to
determine its allowance for credit losses. (See Critical
Accounting Policies.)
Residual
Performance
Our leases offer our end user customers the option to own the
purchased equipment at lease expiration. Based on the minimum
lease payments receivable as of December 31, 2009,
approximately 71% of our leases were one dollar purchase option
leases, 26% were fair market value leases and 3% were fixed
purchase option leases, the latter of which typically are 10% of
the original equipment cost. As of December 31, 2009, there
were $43.9 million of residual assets retained on our
Consolidated Balance Sheet of which $35.1 million, or
79.9%, were related to copiers. As of December 31, 2008,
there were $51.2 million of residual assets retained on our
Consolidated Balance Sheet of which $40.5 million, or
79.2%, were related to copiers. No other group of equipment
represented more than 10% of equipment residuals as of
December 31, 2009 and 2008, 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 $5.4 million,
$5.9 million, and $5.9 million of net residual income
for the years ended December 31, 2009, 2008 and 2007,
respectively. Net residual income includes income from lease
renewals and gains and losses on the realization of residual
values of leased equipment disposed at the end of term.
Our leases generally include automatic renewal provisions and
many leases continue beyond their initial contractual term. We
consider renewal income a component of residual performance. For
the years ended December 31, 2009, 2008 and 2007 renewal
income, net of depreciation, amounted to $7.2 million,
$7.0 million and $6.6 million and net losses on
residual values on equipment disposed amounted to
$1.8 million, $1.1 million and $640,000, respectively.
The primary driver of the changes was a shift in the mix of the
amounts and types of equipment disposed at the end of the term.
51
Liquidity
and Capital Resources
Our business requires a substantial amount of cash to operate
and grow. Our primary liquidity need is for new originations. In
addition, we need liquidity to pay interest and principal on our
borrowings, to pay fees and expenses incurred in connection with
our securitization transactions, to fund infrastructure and
technology investment and to pay administrative and other
operating expenses.
We are dependent upon the availability of financing from a
variety of funding sources to satisfy these liquidity needs.
Historically, we have relied upon four principal types of
third-party financing to fund our operations:
|
|
|
|
|
borrowings under a revolving, short-term or long-term bank
facility;
|
|
|
|
financing of leases and loans in CP conduit 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 December 31, 2009, MBB has funded
$133.7 million of leases and loans through its initial
capitalization of $12 million and its issuance of
$115.6 million in FDIC-insured deposits at an average
borrowing rate of 3.65%.
On December 31, 2008, Marlin Business Services Corp.
received approval from the Federal Reserve Bank of
San Francisco (FRB) to become a bank holding
company upon conversion of MBB from an industrial bank to a
commercial bank. In January 2009, MBB became a commercial bank
and a member of the Federal Reserve System, and Marlin Business
Services Corp. became a bank holding company. MBB is operating
in accordance with its original de novo three-year business
plan, which assumed total assets of up to $128 million by
March 2011 (the end of the three-year de novo period.)
Our strategy has generally included funding new originations,
other than those originated by MBB, in the short-term with cash
from operations or through borrowings under our CP conduit
warehouse facility, our short-term bank facility or our
long-term loan facility. Historically, we have executed a term
note securitization approximately once a year to refinance and
relieve the CP conduit warehouse facility. 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. The revolving bank facility had
a termination date of March 31, 2009, and was subsequently
amended to a short-term borrowing facility which was paid off on
its revised termination date of June 29, 2009.
As of December 31, 2009, we had $62.5 million in
borrowings outstanding under our CP conduit warehouse facility.
The CP conduit warehouse facility had a termination date of
March 15, 2009, and was subsequently amended to terminate
on March 30, 2010. Borrowings under the CP conduit
warehouse facility are currently being amortized and there is no
available borrowing capacity in the facility. Subsequent to
December 31, 2009, we completed an $80.7 million TALF
eligible term asset-backed securitization, discussed in more
detail on the following page. A portion of the proceeds from the
new securitization was used to repay the full amount outstanding
under the CP conduit warehouse facility.
On October 9, 2009, Marlin Business Services Corp.s
wholly-owned subsidiary, Marlin Receivables Corp.
(MRC), closed on a $75,000,000, three-year committed
loan facility (long-term loan facility) with the
Lender Finance division of Wells Fargo Foothill. 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.
At December 31, 2009 we have approximately
$58.5 million of available borrowing capacity through these
facilities in addition to available cash and cash equivalents of
$37.1 million. Our debt to equity ratio was 2.61 to 1 at
December 31, 2009 and 4.41 to 1 at December 31, 2008.
52
Net cash used in financing activities for the years ended
December 31, 2009 and 2008 was $221.2 million and
$168.6 million, respectively. Net cash provided by
financing activities for the year ended December 31, 2007
was $156.4 million. Financing activities include net
advances and repayments on our various borrowing sources.
Net cash provided by investing activities for the years ended
December 31, 2009 and 2008 was $184.7 million and
$130.4 million, respectively. We used cash in investing
activities of $171.3 million for the year ended
December 31, 2007. Investing activities primarily relate to
lease payment activity and restricted interest-earning deposits
with banks.
Additional liquidity is provided by or used by our cash flow
from operating activities. We generated net cash from operating
activities of $33.4 million, $39.7 million and
$23.8 million for the years ended December 31, 2009,
2008 and 2007, respectively.
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.
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.
We expect cash from operations, additional borrowings on
existing and future credit facilities, funds from certificates
of deposit through brokers and other financial institutions, and
the completion of additional on-balance sheet term note
securitizations to be adequate to support our operations and
projected growth.
Total cash and cash equivalents. Our objective
is to maintain a low cash balance, investing any free cash in
leases and loans. We primarily fund our originations and growth
using advances under our long-term bank facility and
certificates of deposit issued through MBB. Total cash and cash
equivalents available as of December 31, 2009 totaled
$37.1 million compared to $40.3 million at
December 31, 2008.
Restricted interest-earning deposits with
banks. As of December 31, 2009, we also had
$63.4 million of cash that was classified as restricted
interest-earning deposits with banks, compared to
$66.2 million at December 31, 2008. Restricted
interest-earning deposits with banks consist primarily of
various trust accounts related to our secured debt facilities.
Borrowings. Our primary borrowing
relationships each require the pledging of eligible lease and
loan receivables to secure amounts advanced. Our aggregate
outstanding secured borrowings amounted to $307.0 million
53
at December 31, 2009 and $543.3 million at
December 31, 2008. Borrowings outstanding under the
Companys revolving or short-term credit facilities and
long-term debt consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 12 Months Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Maximum
|
|
|
Month End
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Facility
|
|
|
Amount
|
|
|
Amount
|
|
|
Average
|
|
|
Amounts
|
|
|
Average
|
|
|
Unused
|
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Coupon
|
|
|
Outstanding
|
|
|
Coupon
|
|
|
Capacity(1)
|
|
|
|
(Dollars in thousands)
|
|
|
Revolving or short-term bank
facility(2)
|
|
$
|
|
|
|
$
|
16,839
|
|
|
$
|
4,421
|
|
|
|
2.92
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
Federal funds purchased
|
|
|
1,200
|
|
|
|
1,200
|
|
|
|
3
|
|
|
|
0.65
|
%
|
|
|
|
|
|
|
|
%
|
|
|
1,200
|
|
CP conduit warehouse
facility(3)
|
|
|
|
|
|
|
111,380
|
|
|
|
90,167
|
|
|
|
4.88
|
%
|
|
|
62,541
|
|
|
|
5.15
|
%
|
|
|
|
|
Term note
securitizations(4)
|
|
|
|
|
|
|
419,167
|
|
|
|
330,110
|
|
|
|
5.67
|
%
|
|
|
226,716
|
|
|
|
6.03
|
%
|
|
|
|
|
Long-term loan facility
|
|
|
75,000
|
|
|
|
17,729
|
|
|
|
3,084
|
|
|
|
5.50
|
%
|
|
|
17,729
|
|
|
|
5.50
|
%
|
|
|
57,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,200
|
|
|
|
|
|
|
$
|
427,785
|
|
|
|
5.47
|
%
|
|
$
|
306,986
|
|
|
|
5.82
|
%
|
|
$
|
58,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 December 31,
2009, MBB had $8.2 million in unused, secured borrowing
capacity at the Federal Reserve Discount Window. |
|
(2) |
|
Paid off and not renewed at June 29, 2009. Therefore, there
was no unused capacity at December 31, 2009. |
|
(3) |
|
Converted from a revolving facility to an amortizing facility in
March, 2009. |
|
(4) |
|
Our term note securitizations are one-time fundings that pay
down over time without any ability for us to draw down
additional amounts. |
Revolving bank facility/short-term bank
facility. As of December 31, 2008, the
Company had a committed revolving line of credit with several
participating banks to provide up to $40.0 million in
borrowings. The revolving bank facility had a termination date
of March 31, 2009, and was subsequently amended to a
short-term borrowing facility scheduled to terminate on
June 29, 2009. The Company elected to pay off the balance
outstanding at the termination date. Therefore, there were no
outstanding borrowings under this facility at December 31,
2009. There were $20.0 million of outstanding borrowings
under this facility at December 31, 2008. For the years
ended December 31, 2009 and 2008, the Company incurred
commitment fees on the unused portion of the credit facility of
$24,000 and $138,000, respectively.
Our weighted average outstanding borrowings under this facility
were $4.4 million for the year ended December 31, 2009
compared to $18.5 million for the year ended
December 31, 2008. We incurred interest expense under this
facility of $129,000 for the year ended December 31, 2009
compared to $808,000 for the year ended December 31, 2008.
Federal funds line of credit with correspondent
bank. MBB has established a federal funds line of
credit with a correspondent bank. This line allows for both
selling and purchasing of federal funds. The amount that can be
drawn against the line is limited to $1.2 million.
Federal Reserve Discount Window (Federal Reserve
Advances). In addition, MBB has received
approval to borrow from the Federal Reserve Discount Window
based on the amount of assets MBB chooses to pledge. Based on
assets pledged at December 31, 2009, MBB had
$8.2 million in unused, secured borrowing capacity at the
Federal Reserve Discount Window.
CP conduit warehouse facility. We have a CP
conduit warehouse facility that, until March 31, 2009,
allowed us to borrow, repay and re-borrow based on a borrowing
base formula. In these transactions, we transferred pools of
leases and interests in the related equipment to special
purpose, bankruptcy remote subsidiaries. These special purpose
entities in turn pledged their interests in the leases and
related equipment to an unaffiliated conduit entity, which
generally issued commercial paper to investors. The warehouse
facility allowed the Company on an ongoing basis to transfer
lease receivables to a wholly-owned, bankruptcy remote, special
purpose subsidiary of the Company, which issued variable-rate
notes to investors carrying an interest rate equal to the rate
on commercial paper issued to fund the notes during the interest
period.
54
This facility was scheduled to expire in March 2009, and was
amended to (1) extend the termination date to
March 30, 2010, (2) convert the facility from a
revolving facility to an amortizing facility, and
(3) revise the interest rate margin and fees. Borrowings
outstanding under this facility were $62.5 million and
$81.9 million at December 31, 2009 and
December 31, 2008, respectively. There is no additional
borrowing capacity under this facility. For the year ended
December 31, 2009, the weighted average interest rate was
4.88%. For the year ended December 31, 2008, the weighted
average interest rate was 5.37%. The facility requires that the
Company limit its exposure to adverse interest rate movements on
the variable-rate notes through entering into interest-rate cap
agreements.
Subsequent to December 31, 2009, the CP conduit warehouse
facility was fully repaid from the proceeds of the term
asset-backed securitization that closed on February 12,
2010.
Term note securitizations. Since our founding
through December 31, 2009, we have completed nine
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, special purpose
bankruptcy remote subsidiaries and issued term debt
collateralized by such commercial leases to institutional
investors in private securities offerings. Our term note
securitizations differ from our CP conduit warehouse facility
primarily in that our term note securitizations have fixed
terms, fixed interest rates and fixed principal amounts. Our
securitizations do not qualify for sales accounting treatment
due to certain call provisions that we maintain and because the
special purpose entities also hold residual assets. Accordingly,
assets and the related debt of the special purpose entities are
included in our Consolidated Balance Sheets. Our leases and
interest-earning deposits with banks are assigned as collateral
for these borrowings and there is no further recourse to the
general credit of the Company. By entering into term note
securitizations, we have historically reduced the outstanding
borrowings under our CP conduit warehouse facility in order to
increase the amount available to us under this facility to fund
additional lease originations. Our current strategy includes
using term note securitizations to periodically reduce the
outstanding borrowings under our long-term loan facility to
increase the amount available to us to fund additional lease
originations. Failure to periodically pay down the outstanding
borrowings under our long-term loan facility or CP conduit
warehouse facility, or to increase such facilities, would
significantly limit our ability to grow our lease portfolio. At
December 31, 2009 and at December 31, 2008,
outstanding term note securitizations amounted to
$226.7 million and $441.4 million, respectively.
55
As of December 31, 2009, $238.2 million of our net
investment in leases and loans was pledged to our term note
securitizations. Each of our outstanding term note
securitizations is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Scheduled
|
|
|
|
|
|
|
Notes Originally
|
|
|
Balance as of
|
|
|
Maturity
|
|
|
Original
|
|
|
|
Issued
|
|
|
December 31, 2009
|
|
|
Date
|
|
|
Coupon Rate
|
|
|
|
(Dollars in thousands)
|
|
|
2005 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
92,000
|
|
|
$
|
|
|
|
|
August 2006
|
|
|
|
4.05
|
%
|
Class A-2
|
|
|
73,500
|
|
|
|
|
|
|
|
January 2008
|
|
|
|
4.49
|
|
Class A-3
|
|
|
50,000
|
|
|
|
|
|
|
|
November 2008
|
|
|
|
4.63
|
|
Class A-4
|
|
|
46,749
|
|
|
|
|
|
|
|
August 2012
|
|
|
|
4.75
|
|
Class B
|
|
|
55,546
|
|
|
|
2,832
|
|
|
|
August 2012
|
|
|
|
5.09
|
|
Class C
|
|
|
22,765
|
|
|
|
11,003
|
|
|
|
August 2012
|
|
|
|
5.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
340,560
|
|
|
$
|
13,835
|
|
|
|
|
|
|
|
4.60
|
%(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
100,000
|
|
|
$
|
|
|
|
|
September 2007
|
|
|
|
5.48
|
%
|
Class A-2
|
|
|
65,000
|
|
|
|
|
|
|
|
November 2008
|
|
|
|
5.43
|
|
Class A-3
|
|
|
65,000
|
|
|
|
|
|
|
|
December 2009
|
|
|
|
5.34
|
|
Class A-4
|
|
|
62,761
|
|
|
|
23,696
|
|
|
|
September 2013
|
|
|
|
5.33
|
|
Class B
|
|
|
62,008
|
|
|
|
24,260
|
|
|
|
September 2013
|
|
|
|
5.63
|
|
Class C
|
|
|
25,413
|
|
|
|
12,967
|
|
|
|
September 2013
|
|
|
|
6.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
380,182
|
|
|
$
|
60,923
|
|
|
|
|
|
|
|
5.51
|
%(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
112,000
|
|
|
$
|
|
|
|
|
July 2008
|
|
|
|
5.21
|
%
|
Class A-2
|
|
|
80,000
|
|
|
|
|
|
|
|
April 2009
|
|
|
|
5.35
|
|
Class A-3
|
|
|
75,000
|
|
|
|
29,574
|
|
|
|
April 2010
|
|
|
|
5.32
|
|
Class A-4
|
|
|
72,174
|
|
|
|
72,174
|
|
|
|
May 2011
|
|
|
|
5.37
|
|
Class B
|
|
|
32,975
|
|
|
|
15,405
|
|
|
|
May 2011
|
|
|
|
5.82
|
|
Class C
|
|
|
38,864
|
|
|
|
18,156
|
|
|
|
May 2011
|
|
|
|
6.31
|
|
Class D
|
|
|
29,442
|
|
|
|
16,649
|
|
|
|
May 2011
|
|
|
|
7.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
440,455
|
|
|
$
|
151,958
|
|
|
|
|
|
|
|
5.70
|
%(1)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Term Note Securitizations
|
|
|
|
|
|
$
|
226,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the original weighted average initial coupon rate for
all tranches of the securitization. In addition to this coupon
interest, term note securitizations also have other transaction
costs which are amortized over the life of the borrowings as
additional interest expense. |
|
(2) |
|
The weighted average coupon rate of the
2005-1 term
note securitization will approximate 4.81% over the term of the
borrowing. |
|
(3) |
|
The weighted average coupon rate of the
2006-1 term
note securitization will approximate 5.51% over the term of the
borrowing. |
|
(4) |
|
The weighted average coupon rate of the
2007-1 term
note securitization will approximate 5.70% over the term of the
borrowing. |
Long-term loan facility. On October 9,
2009, Marlin Business Services Corp.s wholly-owned
subsidiary, Marlin Receivables Corp. (MRC), closed
on a $75,000,000, three-year committed loan facility with the
Lender Finance division of Wells Fargo Foothill. 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
56
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. 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.
Item subsequent to December 31, 2009. 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.
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.
Financial
Covenants
Our secured borrowing arrangements have numerous covenants,
restrictions and default provisions that we must comply with in
order to obtain funding through the facilities and to avoid an
event of default. A change in the Chief Executive Officer or
Chief Operating Officer is an event of default under our
long-term loan facility and CP conduit warehouse facility,
unless we hire a replacement acceptable to our lenders within
120 days. Such an event is also an immediate event of
service termination under the term note securitizations.
A merger or consolidation with another company in which the
Company is not the surviving entity is also an event of default
under the financing facilities. The Companys long-term
loan facility contains an acceleration clause allowing the
creditor to accelerate the scheduled maturities of the
obligation under certain conditions that may not be objectively
determinable (for example, if a material adverse change
occurs). In addition, the CP conduit warehouse facility
contains a cross-default provision whereby certain defaults
under a term note securitization would also be an event of
default. An event of default under any of the facilities could
result in an acceleration of amounts outstanding under the
facilities, foreclosure on all or a portion of the leases
financed by the facilities
and/or the
removal of the Company as servicer of the leases financed by the
facility.
Some of the critical financial and credit quality covenants
under our borrowing arrangements as of December 31, 2009
include:
|
|
|
|
|
|
|
|
|
|
|
Actual(1)
|
|
|
Requirement
|
|
|
Tangible net worth minimum
|
|
$
|
148.5 million
|
|
|
$
|
138.2 million
|
|
Debt-to-equity
ratio maximum
|
|
|
2.7 to 1
|
|
|
|
10.0 to 1
|
|
Maximum servicer senior leverage ratio
|
|
|
2.3 to 1
|
|
|
|
4.0 to 1
|
|
Four-quarter rolling average interest coverage ratio minimum
|
|
|
1.70 to 1
|
|
|
|
1.50 to 1
|
|
Maximum portfolio delinquency ratio
|
|
|
1.68
|
%
|
|
|
3.50
|
%
|
Maximum charge-off ratio
|
|
|
5.69
|
%
|
|
|
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 December 31, 2009, the Company was in compliance with
terms of the CP conduit warehouse facility, the long-term loan
facility and the term note securitization agreements.
Bank
Capital and Regulatory Oversight
On January 13, 2009, in connection with the conversion of
MBB from an industrial bank to a commercial bank, we became a
bank holding company by order of the 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.
57
MBB is also subject to comprehensive federal and state
regulations dealing with a wide variety of subjects, including
minimum capital standards, reserve requirements, terms on which
a bank may engage in transactions with its affiliates,
restrictions as to dividend payments, and numerous other aspects
of its operations. These regulations generally have been adopted
to protect depositors and creditors rather than shareholders.
There are a number of restrictions on bank holding companies
that are designed to minimize potential loss to depositors and
the FDIC insurance funds. If an FDIC-insured depository
subsidiary is undercapitalized, the bank holding
company is required to ensure (subject to certain limits) the
subsidiarys compliance with the terms of any capital
restoration plan filed with its appropriate banking agency.
Also, a bank holding company is required to serve as a source of
financial strength to its depository institution subsidiaries
and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. Under
the BHCA, the Federal Reserve Board has the authority to require
a bank holding company to terminate any activity or to
relinquish control of a non-bank subsidiary upon the Federal
Reserve Boards determination that such activity or control
constitutes a serious risk to the financial soundness and
stability of a depository institution subsidiary of the bank
holding company.
Capital adequacy. Under the risk-based capital
requirements applicable to them, bank holding companies must
maintain a ratio of total capital to risk-weighted assets
(including the asset equivalent of certain off-balance sheet
activities such as acceptances and letters of credit) of not
less than 8% (10% in order to be considered
well-capitalized). At least 4% out of the total
capital (6% to be well-capitalized) must be composed of common
stock, related surplus, retained earnings, qualifying perpetual
preferred stock and minority interests in the equity accounts of
certain consolidated subsidiaries, after deducting goodwill and
certain other intangibles (Tier 1 Capital). The
remainder of total capital (Tier 2 Capital) may
consist of certain perpetual debt securities, mandatory
convertible debt securities, hybrid capital instruments and
limited amounts of subordinated debt, qualifying preferred
stock, allowance for loan and lease losses, allowance for credit
losses on off-balance-sheet credit exposures, and unrealized
gains on equity securities.
The Federal Reserve Board has also established minimum leverage
ratio guidelines for bank holding companies. These guidelines
mandate a minimum leverage ratio of Tier 1 Capital to
adjusted quarterly average total assets less certain amounts
(leverage amounts) equal to 3% for bank holding
companies meeting certain criteria (including those having the
highest regulatory rating). All other banking organizations are
generally required to maintain a leverage ratio of at least 3%
plus an additional cushion of at least 100 basis points and
in some cases more. The Federal Reserve Boards guidelines
also provide that bank holding companies experiencing internal
growth or making acquisitions are expected to maintain capital
positions substantially above the minimum supervisory levels
without significant reliance on intangible assets. Furthermore,
the guidelines indicate that the Federal Reserve Board will
continue to consider a tangible tier 1 leverage
ratio (i.e., after deducting all intangibles) in
evaluating proposals for expansion or new activities. MBB is
subject to similar capital standards promulgated by the Federal
Reserve Board.
Bank holding companies are required to comply with the Federal
Reserve Boards risk-based capital guidelines that require
a minimum ratio of total capital to risk-weighted assets of 8%.
At least half of the total capital is required to be Tier 1
capital. In addition to the risk-based capital guidelines, the
Federal Reserve Board has adopted a minimum leverage capital
ratio under which a bank holding company must maintain a level
of Tier 1 capital to average total consolidated assets of
at least 3% in the case of a bank holding company which has the
highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding
companies are expected to maintain a leverage capital ratio of
at least 4%.
At December 31, 2009, MBBs Tier 1 leverage
ratio, Tier 1 risk-based capital ratio and total risk-based
capital ratio were 15.55%, 16.07% and 17.12%, respectively,
compared to requirements for well-capitalized status of 5%, 6%
and 10%, respectively. At December 31, 2009, Marlin
Business Services Corp.s Tier 1 leverage ratio,
Tier 1 risk-based capital ratio and total risk-based
capital ratio were 24.89%, 30.19% and 31.45%, respectively,
compared to requirements for well-capitalized status of 5%, 6%
and 10%, respectively.
Pursuant to the Order issued by the FDIC on March 20, 2007
(the Order), MBB was required to have beginning
paid-in capital funds of not less than $12.0 million and
must keep its total risk-based capital ratio above 15%.
MBBs equity balance at December 31, 2009 was
$16.1 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
58
eliminate certain inconsistencies between the Order and the FRB
Approval of MBB as a commercial bank. Until we receive the
FDICs response to our submission, MBB will continue to
operate in accordance with its original de novo three-year
business plan, which assumed total assets of up to
$128 million by March 2011 (the end of the thee-year de
novo period.)
Information
on Stock Repurchases
Information on Stock Repurchases is provided in
Part II, Item 5, Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities, herein.
Contractual
Obligations (Excluding Deposits)
In addition to our scheduled maturities on our credit facilities
and term debt, we have future cash obligations under various
types of contracts. We lease office space and office equipment
under long-term operating leases. The contractual obligations
under our agreements, credit facilities, term note
securitizations, operating leases and commitments under
non-cancelable contracts as of December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Leased
|
|
|
Capital
|
|
|
|
|
|
|
Borrowings
|
|
|
Interest(1)
|
|
|
Leases
|
|
|
Facilities
|
|
|
Leases
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
2010
|
|
$
|
195,164
|
|
|
$
|
10,285
|
|
|
$
|
11
|
|
|
$
|
1,576
|
|
|
$
|
38
|
|
|
$
|
207,074
|
|
2011
|
|
|
68,277
|
|
|
|
4,334
|
|
|
|
8
|
|
|
|
1,431
|
|
|
|
35
|
|
|
|
74,085
|
|
2012
|
|
|
41,555
|
|
|
|
1,435
|
|
|
|
4
|
|
|
|
1,460
|
|
|
|
18
|
|
|
|
44,472
|
|
2013
|
|
|
1,857
|
|
|
|
44
|
|
|
|
4
|
|
|
|
624
|
|
|
|
|
|
|
|
2,529
|
|
2014
|
|
|
133
|
|
|
|
2
|
|
|
|
4
|
|
|
|
0
|
|
|
|
|
|
|
|
139
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
306,986
|
|
|
$
|
16,100
|
|
|
$
|
31
|
|
|
$
|
5,091
|
|
|
$
|
91
|
|
|
$
|
328,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on the CP conduit warehouse facility and the long-term
loan facility is assumed at the December 31, 2009 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 and loan originations through a combination of
variable-rate warehouse facilities and working capital. Our mix
of fixed- and variable-rate borrowings and our exposure to
interest-rate risk changes over time. Over the past twelve
months, the mix of variable-rate borrowings to total borrowings
has ranged from none to 26.1% and averaged 23.3%. Our highest
exposure to variable-rate borrowings generally occurs just prior
to the issuance of a term note securitization. At
December 31, 2009, $80.3 million, or 26.1%, of our
borrowings were variable-rate borrowings.
We use derivative financial instruments to attempt to further
reduce our exposure to changing cash flows caused by possible
changes in interest rates. We use forward starting interest-rate
swap agreements to reduce our exposure to changing market
interest rates prior to issuing a term note securitization. In
this scenario, we usually enter into a forward starting swap to
coincide with the forecasted pricing date of future term note
securitizations. The intention of this derivative is to reduce
possible variations in future cash flows caused by changes in
interest
59
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 note securitization.
Certain of these agreements were terminated simultaneously with
the pricing of the related term note 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 note 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 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 and 2008, 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, during 2009 an $880,000 pretax
($529,000 after-tax) gain on the related cash flow hedges was
reclassified from accumulated other comprehensive income into
loss on derivatives. During 2008, a $5.0 million pretax
($3.0 million after-tax) loss on the related cash flow
hedges was reclassified from accumulated other comprehensive
income into loss on derivatives.
The tables in Note 11 of the Companys Consolidated
Financial Statements summarize specific information regarding
the active and terminated interest-rate swap agreements
described above.
The Company recorded a loss on derivatives for the periods
indicated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
|
(Dollars in thousands)
|
|
|
Change in fair value of derivative contracts
|
|
$
|
(2,839
|
)
|
|
$
|
(10,998
|
)
|
|
$
|
|
|
Cash flow hedging gains (losses) on forecasted transactions no
longer probable of
occurring(2)
|
|
|
880
|
|
|
|
(5,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives
|
|
$
|
(1,959
|
)
|
|
$
|
(16,039
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior to July 1, 2008, the Companys derivatives were
designated and accounted for as cash flow hedges. Effective
July 1, 2008, the Company discontinued the use of hedge
accounting and subsequent changes in the fair value of
derivative instruments began to be recognized immediately in
loss on derivatives in the Consolidated Statements of Operations. |
|
(2) |
|
Reclassified from accumulated other comprehensive income |
60
These results are based on the fair value of the Companys
derivative contracts at December 31, 2009, and will not
necessarily reflect the value at settlement due to inherent
volatility in the financial markets. At December 31, 2009,
a total of $820,000 of interest-earning cash is assigned as
collateral for interest-rate swap agreements.
Cash payments related to the termination of derivative contracts
totaled $7.3 million and $3.3 million for the years
ended December 31, 2009 and 2008, respectively. Cash
payments pursuant to the terms of active derivative contracts
totaled $4.7 million and $320,000 for the years ended
December 31, 2009 and 2008, respectively.
The Company also uses interest-rate cap agreements that are not
designated for hedge accounting treatment to fulfill certain
covenants in its special purpose subsidiarys warehouse
borrowing arrangements and for overall interest-rate risk
management. Accordingly, these interest-rate cap agreements are
recorded at fair value in other assets at $119,000 and $53,000
as of December 31, 2009 and December 31, 2008,
respectively. The notional amount of interest-rate caps owned as
of December 31, 2009 and December 31, 2008 was
$121.4 million and $175.8 million, respectively.
Changes in the fair values of the caps are recorded in loss on
derivatives in the accompanying Consolidated Statements of
Operations.
The Company also sells interest-rate caps to offset a portion of
the interest-rate caps required to be purchased by the
Companys special purpose subsidiary under its warehouse
borrowing arrangements. These sales generate premium revenues to
offset a portion the premium cost of purchasing the required
interest-rate caps. On a consolidated basis, the interest-rate
cap positions sold offset a portion of the interest-rate cap
positions owned. There were no outstanding notional amounts for
interest-rate cap agreements sold at December 31, 2009. As
of December 31, 2008, the notional amount of interest-rate
cap agreements sold totaled $165.5 million. The fair value
of interest-rate cap agreements sold was recorded in other
liabilities at $40,000 as of December 31, 2008. Changes in
the fair values of the caps are recorded in loss on derivatives
in the accompanying Consolidated Statements of Operations.
61
The following table provides information about our derivative
financial instruments and other financial instruments that are
sensitive to changes in interest rates, including debt
obligations. For debt obligations, the table presents the
contractually scheduled maturities and the related weighted
average interest rates as of December 31, 2009 expected as
of and for each year ended through December 31, 2013 and
for periods thereafter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturities by Calendar Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 &
|
|
|
Carrying
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt
|
|
$
|
132,623
|
|
|
$
|
68,277
|
|
|
$
|
23,826
|
|
|
$
|
1,857
|
|
|
$
|
133
|
|
|
$
|
226,716
|
|
Average fixed rate
|
|
|
6.11
|
%
|
|
|
6.40
|
%
|
|
|
7.00
|
%
|
|
|
7.95
|
%
|
|
|
8.25
|
%
|
|
|
6.31
|
%
|
Variable-rate debt
|
|
$
|
62,541
|
|
|
$
|
|
|
|
$
|
17,729
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
80,270
|
|
Average variable rate
|
|
|
5.15
|
%
|
|
|
|
|
|
|
5.50
|
%
|
|
|
|
|
|
|
|
|
|
|
5.23
|
%
|
Interest-rate caps purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
121,409
|
|
|
$
|
70,102
|
|
|
$
|
28,107
|
|
|
$
|
6,000
|
|
|
$
|
1,000
|
|
|
$
|
121,409
|
|
Ending notional balance
|
|
|
70,102
|
|
|
|
28,107
|
|
|
|
6,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Average receive rate
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Interest-rate caps sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Ending notional balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average pay rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Forward starting interest-rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
100,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
100,000
|
|
Ending notional balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average pay rate
|
|
|
5.09
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
5.09
|
%
|
Our earnings are sensitive to fluctuations in interest rates.
The long-term loan facility and CP conduit warehouse facility
charge variable rates of interest based on LIBOR, prime rate or
commercial paper interest rates. Because our assets are
predominantly fixed-rate, increases in these market interest
rates would negatively impact earnings and decreases in the
rates 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 of our new lease originations or our net
interest margin would be reduced. There can be no assurance that
we will be able to offset higher borrowing costs with increased
pricing of our assets.
For example, the impact of a hypothetical 100 basis point,
or 1.00%, increase in the market rates to which our borrowings
are indexed for the year ended December 31, 2009 would have
been to reduce net interest and fee income by approximately
$977,000 based on our average variable-rate borrowings of
approximately $97.7 million for the year then ended,
excluding the effects of any changes in the value of
derivatives, taxes and possible increases in the yields from our
lease and loan portfolios due to the origination of new
contracts at higher interest rates. The impact of a hypothetical
100 basis point, or 1.00%, increase in the market rates to
which our interest-rate swap agreements are indexed would have
resulted in an estimated change in fair value of approximately
$257,000 at December 31, 2009, which would have been
reflected as a reduction in the loss on derivatives in the
Consolidated Statements of Operations.
We manage and monitor our exposure to interest-rate risk using
balance sheet simulation models. Such models incorporate many of
our assumptions about our business including new asset
production and pricing, interest rate forecasts, overhead
expense forecasts and assumed credit losses. Many of the
assumptions we use in our simulation models are based on past
experience and actual results could vary substantially.
62
Selected
Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Quarters
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
19,072
|
|
|
$
|
17,281
|
|
|
$
|
15,591
|
|
|
$
|
14,095
|
|
Fee income
|
|
|
5,034
|
|
|
|
4,380
|
|
|
|
4,288
|
|
|
|
3,703
|
|
Interest and fee income
|
|
|
24,106
|
|
|
|
21,661
|
|
|
|
19,879
|
|
|
|
17,798
|
|
Interest expense
|
|
|
7,832
|
|
|
|
7,444
|
|
|
|
6,448
|
|
|
|
5,614
|
|
Provision for credit losses
|
|
|
8,748
|
|
|
|
6,793
|
|
|
|
5,951
|
|
|
|
5,697
|
|
Gain (Loss) on derivatives
|
|
|
(1,306
|
)
|
|
|
646
|
|
|
|
(1,164
|
)
|
|
|
(135
|
)
|
Income tax expense (benefit)
|
|
|
(491
|
)
|
|
|
434
|
|
|
|
225
|
|
|
|
179
|
|
Net income (loss)
|
|
|
(879
|
)
|
|
|
946
|
|
|
|
508
|
|
|
|
461
|
|
Basic earnings (loss) per share
|
|
|
(0.08
|
)
|
|
|
0.08
|
|
|
|
0.04
|
|
|
|
0.04
|
|
Diluted earnings (loss) per share
|
|
|
(0.08
|
)
|
|
|
0.08
|
|
|
|
0.04
|
|
|
|
0.04
|
|
Net investment in leases and loans
|
|
|
620,934
|
|
|
|
555,082
|
|
|
|
499,556
|
|
|
|
448,610
|
|
Total assets
|
|
|
763,639
|
|
|
|
690,646
|
|
|
|
628,057
|
|
|
|
565,803
|
|
Net deferred income tax liability
|
|
|
13,382
|
|
|
|
12,979
|
|
|
|
13,317
|
|
|
|
16,037
|
|
Total liabilities
|
|
|
617,983
|
|
|
|
543,985
|
|
|
|
480,599
|
|
|
|
417,565
|
|
Retained earnings
|
|
|
61,791
|
|
|
|
62,737
|
|
|
|
63,245
|
|
|
|
63,706
|
|
Total stockholders equity
|
|
|
145,656
|
|
|
|
146,661
|
|
|
|
147,458
|
|
|
|
148,238
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
22,953
|
|
|
$
|
21,870
|
|
|
$
|
21,062
|
|
|
$
|
20,214
|
|
Fee income
|
|
|
5,235
|
|
|
|
5,252
|
|
|
|
5,534
|
|
|
|
5,333
|
|
Interest and fee income
|
|
|
28,188
|
|
|
|
27,122
|
|
|
|
26,596
|
|
|
|
25,547
|
|
Interest expense
|
|
|
10,247
|
|
|
|
9,359
|
|
|
|
8,790
|
|
|
|
8,484
|
|
Provision for credit losses
|
|
|
7,006
|
|
|
|
6,530
|
|
|
|
8,602
|
|
|
|
9,356
|
|
Loss on derivatives
|
|
|
|
|
|
|
|
|
|
|
(3,280
|
)
|
|
|
(12,759
|
)
|
Income tax expense (benefit)
|
|
|
1,157
|
|
|
|
985
|
|
|
|
(425
|
)
|
|
|
(4,878
|
)
|
Net income (loss)
|
|
|
1,359
|
|
|
|
1,700
|
|
|
|
(941
|
)
|
|
|
(7,348
|
)
|
Basic earnings (loss) per share
|
|
|
0.11
|
|
|
|
0.14
|
|
|
|
(0.08
|
)
|
|
|
(0.62
|
)
|
Diluted earnings (loss) per share
|
|
|
0.11
|
|
|
|
0.14
|
|
|
|
(0.08
|
)
|
|
|
(0.62
|
)
|
Net investment in leases and loans
|
|
|
752,150
|
|
|
|
730,042
|
|
|
|
700,170
|
|
|
|
669,109
|
|
Total assets
|
|
|
871,448
|
|
|
|
854,192
|
|
|
|
802,533
|
|
|
|
794,431
|
|
Net deferred income tax liability
|
|
|
13,748
|
|
|
|
13,959
|
|
|
|
14,307
|
|
|
|
15,119
|
|
Total liabilities
|
|
|
724,677
|
|
|
|
702,628
|
|
|
|
650,915
|
|
|
|
647,806
|
|
Retained earnings
|
|
|
69,259
|
|
|
|
70,959
|
|
|
|
70,017
|
|
|
|
62,670
|
|
Total stockholders equity
|
|
|
146,771
|
|
|
|
151,564
|
|
|
|
151,618
|
|
|
|
146,625
|
|
Recently
Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board
(FASB) confirmed that the FASB Accounting Standards
Codification (ASC) would become the single official
source of authoritative U.S. GAAP (other than guidance
issued by the SEC), superseding all other accounting literature
except that issued by the SEC. The Codification does not change
U.S. GAAP. However, as a result, only one level of
authoritative U.S. GAAP exists. All other literature is
considered non-authoritative. The FASB ASC is effective for
financial statements issued for interim and annual periods
ending after September 15, 2009. Therefore, we have changed
the way specific accounting standards are referenced in our
consolidated financial statements.
63
On June 16, 2008, the FASB issued FASB Staff Position
No. Emerging Issues Task Force
03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP
EITF 03-6-1),
which was subsequently included in the Earnings Per Share Topic
of the FASB ASC. This guidance concluded that unvested
share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are
participating securities to be included in the computation of
earnings per share (EPS) using the two-class method.
The guidance was effective for fiscal years beginning after
December 15, 2008 on a retrospective basis, including
interim periods within those years.
In this report for the annual period ended December 31,
2009, the Company has retrospectively adjusted its earnings per
share data to conform to the provisions of FSP
EITF 03-6-1,
as incorporated in the Earnings Per Share Topic of the FASB ASC.
The adoption of these provisions resulted in an increase of
approximately 1% in the weighted average number of shares used
in computing basic and diluted EPS for the year ended
December 31, 2007, which reduced both basic and diluted
earnings per share by $0.02. There was no change in the weighted
average number of shares used in computing basic and diluted
loss per share for the year ended December 31, 2008 because
the inclusion of additional shares would have been anti-dilutive.
In April 2009, the FASB issued FASB Staff Position
No. FAS 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP
FAS 157-4),
which was subsequently incorporated in the Fair Value
Measurements and Disclosures Topic of the ASC. This guidance
provided additional direction in determining whether a market
for a financial asset is inactive and, if so, whether
transactions in that market are distressed, in order to
determine whether an adjustment to quoted prices is necessary to
estimate fair value. This additional guidance was effective for
interim and annual reporting periods ending after June 15,
2009, with early adoption permitted. The adoption of the
guidance did not have a material impact on the consolidated
earnings, financial position or cash flows of the Company.
In April 2009, the FASB issued FASB Staff Position
No. 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments, which was subsequently incorporated in the
Financial Instruments Topic of the FASB ASC. This guidance
requires disclosures about the fair value of an entitys
financial instruments, whenever financial information is issued
for interim reporting periods. The additional guidance was
effective for interim periods ending after June 15, 2009.
Accordingly, the Company has included these disclosures in its
Notes to Consolidated Financial Statements.
In May 2009, the FASB issued FASB Statement No. 165,
Subsequent Events, which was subsequently incorporated in
the Subsequent Events Topic of the FASB ASC. The new guidance
established general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
The circumstances under which these events or transactions
should be recognized or disclosed in financial statements were
defined. Disclosure of the date through which subsequent events
have been evaluated was also required, as well as whether that
date was the date the financial statements were issued or the
date the financial statements were available to be issued.
The new guidance was effective for interim or annual reporting
periods ending after June 15, 2009. In February 2010, the
FASB issued Accounting Standards Update (ASU)
2010-09 to
further amend the Subsequent Events Topic of the FASB ASC. ASU
2010-09
removed the requirement for an entity that is an SEC filer to
disclose the date through which subsequent events have been
evaluated. Although we have evaluated events and transactions
that occurred after the balance sheet date through the issuance
date of these financial statements to determine if financial
statement recognition or additional disclosure is required, the
Company has discontinued the separate evaluation date disclosure
in its Notes to Consolidated Financial Statements.
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.
64
FASB Statement No. 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 will be
effective for the Company on January 1, 2010. Early
application is not permitted. The adoption of the new
requirements is not expected to have a material impact on the
consolidated earnings, financial position or cash flows of the
Company.
In August 2009, the FASB issued Accounting Standards Update
2009-05,
Fair Value Measurements and Disclosures
Measuring Liabilities at Fair Value. This guidance
provides clarification that in circumstances in which a quoted
price in an active market for an identical liability is not
available, fair value should be measured using one or more
specific techniques outlined in the update. The guidance was
effective for the first reporting period after issuance. The
adoption of the guidance did not have a material impact on the
consolidated earnings, financial position or cash flows of the
Company.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
The information appearing in the section captioned
Managements Discussion and Analysis of Operations
and Financial Condition Market Interest-Rate Risk
and Sensitivity under Item 7 of this
Form 10-K
is incorporated herein by reference.
65
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Managements
Annual Report on Internal Control over Financial
Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act). The Companys internal control
over financial reporting is designed to provide reasonable
assurance to the Companys management and Board of
Directors regarding the preparation and fair presentation of
published financial statements. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements.
Management has assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2009. In making its assessment of internal
control over financial reporting, management used the criteria
set forth by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission in Internal
Control Integrated Framework.
Management has concluded that, as of December 31, 2009, the
Companys internal control over financial reporting was
effective based on the criteria set forth by the COSO of the
Treadway Commission in Internal Control
Integrated Framework.
The effectiveness of our internal control over financial
reporting as of December 31, 2009 has been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report, which is
included herein.
March 5, 2010
66
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
Marlin Business Services Corp. and
Subsidiaries
Mount Laurel, New Jersey
We have audited the internal control over financial reporting of
Marlin Business Services Corp. and subsidiaries (the
Company) as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2009 of the Company and our report dated
March 5, 2010 expressed an unqualified opinion on those
financial statements.
Philadelphia, Pennsylvania
March 5, 2010
Member
of
Deloitte Touche Tohmatsu
67
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
68
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
Marlin Business Services Corp. and
Subsidiaries
Mount Laurel, New Jersey
We have audited the accompanying consolidated balance sheets of
Marlin Business Services Corp. and subsidiaries (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2009. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Marlin Business Services Corp. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 5, 2010 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
Philadelphia, Pennsylvania
March 5, 2010
Member
of
Deloitte Touche Tohmatsu
69
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
1,372
|
|
|
$
|
1,604
|
|
Interest-earning deposits with banks
|
|
|
35,685
|
|
|
|
38,666
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
37,057
|
|
|
|
40,270
|
|
Restricted interest-earning deposits with banks
|
|
|
63,400
|
|
|
|
66,212
|
|
Net investment in leases and loans
|
|
|
448,610
|
|
|
|
669,109
|
|
Property and equipment, net
|
|
|
2,431
|
|
|
|
2,961
|
|
Property tax receivables
|
|
|
1,135
|
|
|
|
3,120
|
|
Other assets
|
|
|
13,170
|
|
|
|
12,759
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
565,803
|
|
|
$
|
794,431
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Short-term borrowings
|
|
$
|
62,541
|
|
|
$
|
101,923
|
|
Long-term borrowings
|
|
|
244,445
|
|
|
|
441,385
|
|
Deposits
|
|
|
80,288
|
|
|
|
63,385
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Fair value of derivatives
|
|
|
2,408
|
|
|
|
11,528
|
|
Sales and property taxes payable
|
|
|
4,197
|
|
|
|
6,540
|
|
Accounts payable and accrued expenses
|
|
|
7,649
|
|
|
|
7,926
|
|
Net deferred income tax liability
|
|
|
16,037
|
|
|
|
15,119
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
417,565
|
|
|
|
647,806
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par value; 75,000,000 shares
authorized; 12,778,935 and 12,246,405 shares issued and
outstanding at December 31, 2009 and 2008, respectively
|
|
|
128
|
|
|
|
122
|
|
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
84,674
|
|
|
|
83,671
|
|
Stock subscription receivable
|
|
|
(3
|
)
|
|
|
(5
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(267
|
)
|
|
|
167
|
|
Retained earnings
|
|
|
63,706
|
|
|
|
62,670
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
148,238
|
|
|
|
146,625
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
565,803
|
|
|
$
|
794,431
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
70
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
Interest income
|
|
$
|
66,039
|
|
|
$
|
86,099
|
|
|
$
|
89,754
|
|
Fee income
|
|
|
17,405
|
|
|
|
21,354
|
|
|
|
20,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
83,444
|
|
|
|
107,453
|
|
|
|
110,532
|
|
Interest expense
|
|
|
27,338
|
|
|
|
36,880
|
|
|
|
35,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
56,106
|
|
|
|
70,573
|
|
|
|
75,210
|
|
Provision for credit losses
|
|
|
27,189
|
|
|
|
31,494
|
|
|
|
17,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income after provision for credit losses
|
|
|
28,917
|
|
|
|
39,079
|
|
|
|
57,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance income
|
|
|
5,330
|
|
|
|
6,252
|
|
|
|
6,064
|
|
Loss on derivatives
|
|
|
(1,959
|
)
|
|
|
(16,039
|
)
|
|
|
|
|
Other income
|
|
|
1,525
|
|
|
|
1,892
|
|
|
|
1,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
|
4,896
|
|
|
|
(7,895
|
)
|
|
|
7,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
19,071
|
|
|
|
22,916
|
|
|
|
21,329
|
|
General and administrative
|
|
|
12,854
|
|
|
|
15,241
|
|
|
|
13,633
|
|
Financing related costs
|
|
|
505
|
|
|
|
1,418
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
32,430
|
|
|
|
39,575
|
|
|
|
36,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,383
|
|
|
|
(8,391
|
)
|
|
|
29,884
|
|
Income tax expense (benefit)
|
|
|
347
|
|
|
|
(3,161
|
)
|
|
|
11,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
$
|
1.47
|
|
Diluted earnings (loss) per share
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
$
|
1.45
|
|
Weighted average shares used in computing basic earnings (loss)
per share
|
|
|
12,549,167
|
|
|
|
11,874,647
|
|
|
|
12,237,263
|
|
Weighted average shares used in computing diluted earnings
(loss) per share
|
|
|
12,579,806
|
|
|
|
11,874,647
|
|
|
|
12,399,786
|
|
See accompanying notes to consolidated financial statements.
71
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Subscription
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Receivable
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
Balance, December 31, 2006
|
|
|
12,030,259
|
|
|
$
|
120
|
|
|
$
|
81,850
|
|
|
$
|
(18
|
)
|
|
$
|
1,892
|
|
|
$
|
49,900
|
|
|
$
|
133,744
|
|
Issuance of common stock
|
|
|
17,994
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
Repurchase of common stock
|
|
|
(122,000
|
)
|
|
|
(1
|
)
|
|
|
(1,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,614
|
)
|
Exercise of stock options
|
|
|
217,417
|
|
|
|
2
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,744
|
|
Tax benefit on stock options exercised
|
|
|
|
|
|
|
|
|
|
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,220
|
|
Stock option compensation recognized
|
|
|
|
|
|
|
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
413
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Restricted stock grant
|
|
|
57,634
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Restricted stock compensation recognized
|
|
|
|
|
|
|
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527
|
|
Net change related to derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,022
|
)
|
|
|
|
|
|
|
(5,022
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
12,201,304
|
|
|
$
|
122
|
|
|
$
|
84,429
|
|
|
$
|
(7
|
)
|
|
$
|
(3,130
|
)
|
|
$
|
67,900
|
|
|
$
|
149,314
|
|
Issuance of common stock
|
|
|
36,360
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
Repurchase of common stock
|
|
|
(333,759
|
)
|
|
|
(3
|
)
|
|
|
(2,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,383
|
)
|
Exercise of stock options
|
|
|
46,616
|
|
|
|
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145
|
|
Tax benefit on stock options exercised
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
Stock option compensation recognized
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Restricted stock grant
|
|
|
295,884
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation recognized
|
|
|
|
|
|
|
|
|
|
|
926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
926
|
|
Net change related to derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,297
|
|
|
|
|
|
|
|
3,297
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,230
|
)
|
|
|
(5,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
12,246,405
|
|
|
$
|
122
|
|
|
$
|
83,671
|
|
|
$
|
(5
|
)
|
|
$
|
167
|
|
|
$
|
62,670
|
|
|
$
|
146,625
|
|
Issuance of common stock
|
|
|
35,004
|
|
|
|
1
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
Repurchase of common stock
|
|
|
(102,614
|
)
|
|
|
(1
|
)
|
|
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(400
|
)
|
Exercise of stock options
|
|
|
40,424
|
|
|
|
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
Tax benefit on stock options exercised
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
Stock option compensation recognized
|
|
|
|
|
|
|
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Restricted stock grant
|
|
|
559,716
|
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation recognized
|
|
|
|
|
|
|
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
790
|
|
Net change related to derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
(434
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,036
|
|
|
|
1,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
12,778,935
|
|
|
$
|
128
|
|
|
$
|
84,674
|
|
|
$
|
(3
|
)
|
|
$
|
(267
|
)
|
|
$
|
63,706
|
|
|
$
|
148,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
72
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
|
$
|
18,000
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,481
|
|
|
|
2,845
|
|
|
|
2,877
|
|
Stock-based compensation
|
|
|
1,450
|
|
|
|
1,178
|
|
|
|
940
|
|
Excess tax benefits from stock-based payment arrangements
|
|
|
(48
|
)
|
|
|
(101
|
)
|
|
|
(1,198
|
)
|
Amortization of deferred net loss (gain) on cash flow hedge
derivatives
|
|
|
159
|
|
|
|
(172
|
)
|
|
|
(2,037
|
)
|
Change in fair value of derivatives
|
|
|
(1,837
|
)
|
|
|
10,998
|
|
|
|
|
|
Cash flow hedge losses (gains) reclassified from accumulated
other comprehensive income
|
|
|
(880
|
)
|
|
|
5,041
|
|
|
|
|
|
Provision for credit losses
|
|
|
27,189
|
|
|
|
31,494
|
|
|
|
17,221
|
|
Net deferred income taxes
|
|
|
255
|
|
|
|
(2,146
|
)
|
|
|
(4,140
|
)
|
Amortization of deferred initial direct costs and fees
|
|
|
11,843
|
|
|
|
16,493
|
|
|
|
16,661
|
|
Deferred initial direct costs and fees
|
|
|
(2,561
|
)
|
|
|
(10,126
|
)
|
|
|
(19,269
|
)
|
Loss on equipment disposed
|
|
|
1,767
|
|
|
|
1,072
|
|
|
|
640
|
|
Effect of changes in other operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
2,528
|
|
|
|
(6,556
|
)
|
|
|
1,056
|
|
Other liabilities
|
|
|
(10,026
|
)
|
|
|
(5,106
|
)
|
|
|
(6,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
33,356
|
|
|
|
39,684
|
|
|
|
23,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of equipment for direct financing lease contracts and
funds used to originate loans
|
|
|
(88,934
|
)
|
|
|
(256,554
|
)
|
|
|
(388,376
|
)
|
Principal collections on leases and loans
|
|
|
270,680
|
|
|
|
310,600
|
|
|
|
298,550
|
|
Security deposits collected, net of refunds
|
|
|
(4,484
|
)
|
|
|
(2,979
|
)
|
|
|
(2,380
|
)
|
Proceeds from the sale of equipment
|
|
|
4,999
|
|
|
|
5,445
|
|
|
|
5,404
|
|
Acquisitions of property and equipment
|
|
|
(418
|
)
|
|
|
(938
|
)
|
|
|
(1,106
|
)
|
Change in restricted interest-earning deposits with banks
|
|
|
2,812
|
|
|
|
74,858
|
|
|
|
(83,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
184,655
|
|
|
|
130,432
|
|
|
|
(171,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
108
|
|
|
|
150
|
|
|
|
301
|
|
Repurchases of common stock
|
|
|
(400
|
)
|
|
|
(2,383
|
)
|
|
|
(1,614
|
)
|
Exercise of stock options
|
|
|
167
|
|
|
|
145
|
|
|
|
1,744
|
|
Excess tax benefits from stock-based payment arrangements
|
|
|
48
|
|
|
|
101
|
|
|
|
1,198
|
|
Debt issuance costs
|
|
|
(1,728
|
)
|
|
|
(175
|
)
|
|
|
(1,965
|
)
|
Term note securitization advances
|
|
|
|
|
|
|
|
|
|
|
440,455
|
|
Term note securitization repayments
|
|
|
(214,669
|
)
|
|
|
(331,700
|
)
|
|
|
(283,692
|
)
|
Warehouse and bank facility advances
|
|
|
61,166
|
|
|
|
192,353
|
|
|
|
416,006
|
|
Warehouse and bank facility repayments
|
|
|
(82,819
|
)
|
|
|
(90,430
|
)
|
|
|
(416,006
|
)
|
Other short-term borrowing advances
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
Other short-term borrowing repayments
|
|
|
(2,200
|
)
|
|
|
|
|
|
|
|
|
Increase in deposits
|
|
|
16,903
|
|
|
|
63,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(221,224
|
)
|
|
|
(168,554
|
)
|
|
|
156,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in total cash and cash equivalents
|
|
|
(3,213
|
)
|
|
|
1,562
|
|
|
|
8,946
|
|
Total cash and cash equivalents, beginning of period
|
|
|
40,270
|
|
|
|
38,708
|
|
|
|
29,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents, end of period
|
|
$
|
37,057
|
|
|
$
|
40,270
|
|
|
$
|
38,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest on deposits and borrowings
|
|
$
|
26,059
|
|
|
$
|
35,051
|
|
|
$
|
34,976
|
|
Cash paid for income taxes
|
|
|
499
|
|
|
|
2,758
|
|
|
|
15,708
|
|
See accompanying notes to consolidated financial statements.
73
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
Through its principal operating subsidiary, Marlin Leasing
Corporation, Marlin Business Services Corp.
(Company) was incorporated in the Commonwealth of
Pennsylvania on August 5, 2003. Through its principal
operating subsidiary, Marlin Leasing Corporation, the Company
provides equipment leasing and working capital solutions
nationwide, primarily to small businesses nationwide in a
segment of the equipment leasing market commonly referred to in
the leasing industry 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, security systems and certain commercial and
industrial equipment. Effective March 12, 2008, the Company
also opened Marlin Business Bank (MBB), a commercial
bank chartered by the State of Utah and a member of the Federal
Reserve System. MBB currently provides diversification of the
Companys funding sources through the issuance of
certificates of deposit. Marlin Business Services Corp. is
managed as a single business segment.
References to the Company, Marlin,
we, us, and our herein refer
to Marlin Business Services Corp. and its wholly-owned
subsidiaries, unless the context otherwise requires.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Financial Statement Presentation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform
to the current presentation, pursuant to the requirements of the
Securities and Exchange Commissions
Regulation S-X,
Article 9, applicable to bank holding companies. Certain
prior period amounts have also been restated as described in
Note 20, Restatement of Prior Financial Statements.
FASB
Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board
(FASB) confirmed that the FASB Accounting Standards
Codification (ASC) would become the single official
source of authoritative U.S. generally accepted accounting
principles (GAAP) (other than guidance issued by the
SEC), superseding all other accounting literature except that
issued by the SEC. The Codification does not change
U.S. GAAP. However, as a result, only one level of
authoritative U.S. GAAP exists. All other literature is
considered non-authoritative. The FASB ASC is effective for
interim and annual periods ending on or after September 15,
2009. Therefore, we have changed the way specific accounting
standards are referenced in our consolidated financial
statements.
Use of
Estimates
The preparation of financial statements in accordance with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Estimates
are used when accounting for income recognition, the residual
values of leased equipment, the allowance for credit losses,
deferred initial direct costs and fees, late fee receivables,
performance assumptions for stock-based compensation awards, the
probability of forecasted transactions, the fair value of
financial instruments and income taxes. Actual results could
differ from those estimates.
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.
74
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and Cash Equivalents
Cash and cash equivalents include cash and interest-bearing
money market funds. For purposes of the consolidated statement
of cash flows, the Company considers all highly liquid
investments purchased with a maturity of three months or less to
be cash equivalents.
Restricted
Interest-earning Deposits with Banks
Restricted interest-earning deposits with banks consist
primarily of various trust accounts related to the
Companys secured debt facilities. The balance also
includes amounts due from securitizations representing
reimbursements of servicing fees and excess spread income.
Net
Investment in Leases and Loans
The Company uses the direct finance method of accounting to
record direct financing leases and related interest income. At
the inception of a lease, the Company records as an asset the
minimum future lease payments receivable, plus the estimated
residual value of the leased equipment, less unearned lease
income. Initial direct costs and fees related to lease
originations are deferred as part of the investment and
amortized over the lease term. Unearned lease income is the
amount by which the total lease receivable plus the estimated
residual value exceeds the cost of the equipment. Unearned lease
income, net of initial direct costs and fees, is recognized as
revenue over the lease term using the effective interest method.
Residual values reflect the estimated amounts to be received at
lease termination from lease extensions, sales or other
dispositions of leased equipment. Estimates are based on
industry data and managements experience. Management
performs periodic reviews of the estimated residual values
recorded and any impairment, if other than temporary, is
recognized in the current period.
Allowance
for Credit Losses
In accordance with the Contingencies Topic of the FASB ASC, we
maintain an allowance for credit losses at an amount sufficient
to absorb losses inherent in our existing lease and loan
portfolios as of the reporting dates based on our projection of
probable net credit losses. We evaluate our portfolios on a
pooled basis, due to their composition of small balance,
homogenous accounts with similar general credit risk
characteristics, diversified among a large cross section of
variables including industry, geography, equipment type, obligor
and vendor. To project probable net credit losses, we perform a
migration analysis of delinquent and current accounts based on
historic loss experience. A migration analysis is a technique
used to estimate the likelihood that an account will progress
through the various delinquency stages and ultimately charge
off. In addition to the migration analysis, we also consider
other factors including recent trends in delinquencies and
charge-offs; accounts filing for bankruptcy; account
modifications; recovered amounts; forecasting uncertainties; the
composition of our lease and loan portfolios; economic
conditions; and seasonality. The various factors used in the
analysis are reviewed periodically, and no less frequently than
each quarter. We then establish an allowance for credit losses
for the projected probable net credit losses based on this
analysis. A provision is charged against earnings to maintain
the allowance for credit losses at the appropriate level. Our
policy is to charge-off against the allowance the estimated
unrecoverable portion of accounts once they reach 121 days
delinquent.
Our projections of probable net credit losses are inherently
uncertain, and as a result we cannot predict with certainty the
amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy
laws, and other factors could impact our actual and projected
net credit losses and the related allowance for credit losses.
To the degree we add new leases and loans to our portfolios, or
to the degree credit quality is worse than expected, we record
expense to increase the allowance for credit losses to reflect
the estimated net losses inherent in our portfolios. Actual
losses may vary from current estimates.
75
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property
and Equipment
The Company records property and equipment at cost. Equipment
capitalized under capital leases is recorded at the present
value of the minimum lease payments due over the lease term.
Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the
related assets or lease term, whichever is shorter. The Company
generally uses depreciable lives that range from three to seven
years based on equipment type.
Other
Assets
Included in other assets on the Consolidated Balance Sheets are
transaction costs associated with warehouse facilities and term
note securitization transactions that are being amortized over
the estimated lives of the related warehouse facilities and the
term note securitization transactions using a method which
approximates the effective interest method. In addition, other
assets include derivative collateral, income taxes receivable,
prepaid expenses, accrued fee income and progress payments on
equipment purchased to lease.
Securitizations
From inception through December 31, 2009, the Company has
completed nine term note securitizations of which six have been
repaid. In connection with each transaction, the Company has
established a bankruptcy remote special-purpose subsidiary and
issued term debt to institutional investors. Under the Transfers
and Servicing Topic of the FASB ASC, the Companys
securitizations do not qualify for sales accounting treatment
due to certain call provisions that the Company maintains as
well as the fact that the special purpose entities used in
connection with the securitizations also hold the residual
assets. Accordingly, assets and related debt of the special
purpose entities are included in the accompanying Consolidated
Balance Sheets. The Companys leases and interest-earning
deposits with banks are assigned as collateral for these
borrowings and there is no further recourse to the general
credit of the Company. Collateral in excess of these borrowings
represents the Companys maximum loss exposure.
Derivatives
The Derivatives and Hedging Topic of the FASB ASC requires
recognition of all derivatives at fair value as either assets or
liabilities in the Consolidated Balance Sheets. The accounting
for subsequent changes in the fair value of these derivatives
depends on whether each has been designated and qualifies for
hedge accounting treatment pursuant to the accounting standard.
Prior to July 1, 2008, the Company entered into derivative
contracts which were accounted for as cash flow hedges under
hedge accounting as prescribed by U.S. GAAP. Under hedge
accounting, the effective portion of the gain or loss on a
derivative designated as a cash flow hedge was reported net of
tax effects in accumulated other comprehensive income on the
Consolidated Balance Sheets, until the pricing of the related
term note securitization. The derivative gain or loss recognized
in accumulated other comprehensive income was then reclassified
into earnings as an adjustment to interest expense over the
terms of the related borrowings.
While the Company may continue to use derivative financial
instruments to reduce exposure to changing interest rates,
effective July 1, 2008, the Company discontinued the use of
hedge accounting. By discontinuing hedge accounting effective
July 1, 2008, any subsequent changes in the fair value of
derivative instruments, including those that had previously been
accounted for under hedge accounting, is recognized immediately
in 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 are probable of occurring,
the derivative gain or loss in accumulated other comprehensive
income as of June 30, 2008 will be reclassified into
earnings as an adjustment to interest expense over the terms of
the related forecasted borrowings, consistent with hedge
accounting treatment. In the event that the
76
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
related forecasted borrowing is no longer probable of occurring,
the related gain or loss in accumulated other comprehensive
income is recognized in earnings immediately.
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.
Interest
Income
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 non-accrual and
we do not recognize interest income on that contract until it is
less than 90 days delinquent.
Fee
Income
Fee income consists of fees for delinquent lease and loan
payments, cash collected on early termination of leases and net
residual income. Net residual income includes income from lease
renewals and gains and losses on the realization of residual
values of leased equipment disposed at the end of term.
At the end of the original lease term, lessees may choose to
purchase the equipment, renew the lease or return the equipment
to the Company. The Company receives income from lease renewals
when the lessee elects to retain the equipment longer than the
original term of the lease. This income, net of appropriate
periodic reductions in the estimated residual values of the
related equipment, is included in fee income as net residual
income.
When the lessee elects to return the equipment at lease
termination, the equipment is transferred to other assets at the
lower of its basis or fair market value. The Company generally
sells returned equipment to an independent third party, rather
than leasing the equipment a second time. The Company does not
maintain equipment in other assets for longer than
120 days. Any loss recognized on transferring the equipment
to other assets, and any gain or loss realized on the sale or
disposal of equipment to the lessee or to others is included in
fee income as net residual income. Management performs periodic
reviews of the estimated residual values and any impairment, if
other than temporary, is recognized in the current period.
Fee income from delinquent lease payments is recognized on an
accrual basis based on anticipated collection rates. At a
minimum of every quarter, an analysis of anticipated collection
rates is performed based on updates to collection history.
Adjustments in assumptions are made as needed based on this
analysis. Other fees are recognized when received.
Insurance
Income
Insurance income is recognized on an accrual basis as earned
over the term of the lease. 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.
77
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Initial
Direct Costs and Fees
We defer initial direct costs incurred and fees received to
originate our leases and loans in accordance with the
Receivables Topic and the Nonrefundable Fees and Other Costs
Subtopic of the FASB ASC. The initial direct costs and fees we
defer are part of the net investment in leases and loans and are
amortized to interest income using the effective interest
method. We defer third-party commission costs as well as certain
internal costs directly related to the origination activity.
Costs subject to deferral include evaluating the prospective
customers financial condition, evaluating and recording
guarantees and other security arrangements, negotiating terms,
preparing and processing documents and closing the transaction.
The fees we defer are documentation fees collected at inception.
The realization of the deferred initial direct costs, net of
fees deferred, is predicated on the net future cash flows
generated by our lease and loan portfolios.
Common
Stock and Equity
On November 2, 2007, the Board of Directors approved a
stock repurchase plan. Under the stock repurchase plan, the
Company is authorized to repurchase common stock on the open
market. The par value of the shares repurchased is charged to
common stock with the excess of the purchase price over par
charged against any available additional paid-in capital.
Financing
Related Costs
Financing related costs primarily consist of bank commitment
fees paid to our financing sources.
Stock-Based
Compensation
The Compensation Stock 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.
As required by U.S. GAAP, the Company uses judgment in
estimating the amount of awards that are expected to be
forfeited, with subsequent revisions to the assumptions if
actual forfeitures differ from those estimates. In addition, for
performance-based awards the Company estimates the degree to
which the performance conditions will be met to estimate the
number of shares expected to vest and the related compensation
expense. Compensation expense is adjusted in the period such
performance estimates change.
Income
Taxes
The Income Taxes Topic of the FASB ASC requires the use of the
asset and liability method under which deferred taxes are
determined based on the estimated future tax effects of
differences between the financial statement and tax bases of
assets and liabilities, given the provisions of the enacted tax
laws. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities and projected future taxable income in making this
assessment. Based upon the level of historical taxable income
and projections for future taxable income
78
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will
realize the benefits of these deductible differences.
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities
and any necessary valuation allowance recorded against net
deferred tax assets. The process involves summarizing temporary
differences resulting from the different treatment of items, for
example, leases for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within the Consolidated Balance Sheets. Our
management must then assess the likelihood that deferred tax
assets will be recovered from future taxable income or tax
carry-back availability and, to the extent our management
believes recovery is not likely, a valuation allowance must be
established. To the extent that we establish a valuation
allowance in a period, an expense must be recorded within the
tax provision in the Consolidated Statements of Operations.
In accordance with U.S. GAAP, uncertain tax positions taken
or expected to be taken in a tax return are subject to potential
financial statement recognition based on prescribed recognition
and measurement criteria. Based on our evaluation, we concluded
that there are no significant uncertain tax positions requiring
recognition in our financial statements. At December 31,
2009 and 2008, there have been no material changes to the
liability for uncertain tax positions and there are no
significant unrecognized tax benefits.
The periods subject to general examination for the
Companys federal return include the 2006 tax year to the
present. The Company files state income tax returns in various
states which may have different statutes of limitations.
Generally, state income tax returns for the years 2005 through
the present are subject to examination.
The Company records penalties and accrued interest related to
uncertain tax positions in income tax expense. Such adjustments
have historically been minimal and immaterial to our financial
results.
Earnings
Per Share
The Company follows guidance previously promulgated in Statement
of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share, as clarified by the
requirements of FASB Staff Position No. Emerging Issues
Task Force
03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP
EITF 03-6-1),
which were both subsequently incorporated in the Earnings Per
Share Topic of the FASB ASC. This guidance concluded that
unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities to be included in the
computation of earnings per share using the two-class method.
The guidance was effective for fiscal years beginning after
December 15, 2008 on a retrospective basis, including
interim periods within those years.
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.
In this report for the annual period ended December 31,
2009, the Company has retrospectively adjusted its earnings per
share data to conform to the provisions of FSP
EITF 03-6-1,
as incorporated in the Earnings Per Share Topic of the FASB ASC.
The adoption of these provisions resulted in an increase of
approximately 1% in the weighted average number of shares used
in computing basic and diluted earnings per share for the annual
period ended December 31, 2007, which reduced both basic
and diluted earnings per share by $0.02. There was no change in
the weighted average number of shares used in computing basic
and diluted loss per share for the year ended December 31,
2008 because the inclusion of additional shares would have been
anti-dilutive.
79
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
In April 2009, the FASB issued FASB Staff Position
No. FAS 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP
FAS 157-4),
which was subsequently incorporated in the Fair Value
Measurements and Disclosures Topic of the ASC. This guidance
provided additional direction in determining whether a market
for a financial asset is inactive and, if so, whether
transactions in that market are distressed, in order to
determine whether an adjustment to quoted prices is necessary to
estimate fair value. This additional guidance was effective for
interim and annual reporting periods ending after June 15,
2009, with early adoption permitted. The adoption of the
guidance did not have a material impact on the consolidated
earnings, financial position or cash flows of the Company.
In April 2009, the FASB issued FASB Staff Position
No. 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments, which was subsequently incorporated in the
Financial Instruments Topic of the FASB ASC. This guidance
requires disclosures about the fair value of an entitys
financial instruments, whenever financial information is issued
for interim reporting periods. The additional guidance was
effective for interim periods ending after June 15, 2009.
Accordingly, the Company has included these disclosures in its
interim period Notes to Consolidated Financial Statements.
In May 2009, the FASB issued FASB Statement No. 165,
Subsequent Events, which was subsequently incorporated in
the Subsequent Events Topic of the FASB ASC. The new guidance
established general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
The circumstances under which these events or transactions
should be recognized or disclosed in financial statements were
defined. Disclosure of the date through which subsequent events
have been evaluated was also required, as well as whether that
date was the date the financial statements were issued or the
date the financial statements were available to be issued.
The new guidance was effective for interim or annual reporting
periods ending after June 15, 2009. In February 2010, the
FASB issued Accounting Standards Update (ASU)
2010-09 to
further amend the Subsequent Events Topic of the FASB ASC. ASU
2010-09
removed the requirement for an entity that is an SEC filer to
disclose the date through which subsequent events have been
evaluated. Although we have evaluated events and transactions
that occurred after the balance sheet date through the issuance
date of these financial statements to determine if financial
statement recognition or additional disclosure is required, the
Company has discontinued the separate evaluation date disclosure
in its Notes to Consolidated Financial Statements.
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 No. 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 will be
effective for the Company on January 1, 2010. Early
application is not permitted. The adoption of the new
requirements is not expected to have a material impact on the
consolidated earnings, financial position or cash flows of the
Company.
80
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In August 2009, the FASB issued Accounting Standards Update
2009-05,
Fair Value Measurements and Disclosures Measuring
Liabilities at Fair Value. This guidance provides
clarification that in circumstances in which a quoted price in
an active market for an identical liability is not available,
fair value should be measured using one or more specific
techniques outlined in the update. The guidance was effective
for the first reporting period after issuance. The adoption of
the guidance did not have a material impact on the consolidated
earnings, financial position or cash flows of the Company.
|
|
3.
|
Net
Investment in Leases and Loans
|
Net investment in leases and loans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Minimum lease payments receivable
|
|
$
|
494,954
|
|
|
$
|
752,802
|
|
Estimated residual value of equipment
|
|
|
43,928
|
|
|
|
51,197
|
|
Unearned lease income, net of initial direct costs and fees
deferred
|
|
|
(74,823
|
)
|
|
|
(119,775
|
)
|
Security deposits
|
|
|
(7,681
|
)
|
|
|
(12,165
|
)
|
Loans, net of unamortized deferred fees and costs
|
|
|
4,425
|
|
|
|
12,333
|
|
Allowance for credit losses
|
|
|
(12,193
|
)
|
|
|
(15,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
448,610
|
|
|
$
|
669,109
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, a total of $373.4 million of
minimum lease payments receivable are assigned as collateral for
the CP conduit warehouse facility, the long-term loan facility
and term secured borrowings as further discussed in Note 10.
Initial direct costs net of fees deferred were
$10.2 million and $19.5 million as of
December 31, 2009 and 2008, respectively, and are netted in
unearned income and will be amortized to income using the
effective interest method. At December 31, 2009 and 2008,
$35.1 million and $40.5 million, respectively, of the
estimated residual value of equipment retained on our
Consolidated Balance Sheets were related to copiers.
Minimum lease payments receivable under lease contracts and the
amortization of unearned lease income, including initial direct
costs and fees deferred, are as follows as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease
|
|
|
|
|
|
|
Payments
|
|
|
Income
|
|
|
|
Receivable
|
|
|
Amortization
|
|
|
|
(Dollars in thousands)
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
234,212
|
|
|
$
|
41,742
|
|
2011
|
|
|
150,341
|
|
|
|
21,239
|
|
2012
|
|
|
76,054
|
|
|
|
8,828
|
|
2013
|
|
|
28,539
|
|
|
|
2,631
|
|
2014
|
|
|
5,727
|
|
|
|
381
|
|
Thereafter
|
|
|
81
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
494,954
|
|
|
$
|
74,823
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2009 and 2008,
the Company maintained total finance receivables which were on a
non-accrual basis of $4.6 million and $6.4 million,
respectively. As of December 31, 2009 and 2008, the Company
had total finance receivables in
81
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
which the terms of the original agreements had been renegotiated
in the amount of $4.5 million and $8.3 million,
respectively.
|
|
4.
|
Concentrations
of Risk
|
As of December 31, 2009, leases approximating 13%, 9%, and
9% of the net investment balance of leases by the Company were
located in the states of California, Florida, and New York,
respectively. No other state accounted for more than 8% of the
net investment balance of leases owned and serviced by the
Company as of December 31, 2009. As of December 31,
2009, no single vendor source accounted for more than 3% of the
net investment balance of leases owned by the Company. The
largest single obligor accounted for less than 1% of the net
investment balance of leases owned by the Company as of
December 31, 2009. Although the Companys portfolio of
leases includes lessees located throughout the United States,
such lessees ability to honor their contracts may be
substantially dependent on economic conditions in these states.
All such contracts are collateralized by the related equipment.
The Company leases to a variety of different industries,
including retail, construction, real estate, mortgage brokers,
financial services, manufacturing, medical, service and
restaurant, among others. To the extent that the economic or
regulatory conditions prevalent in such industries change, the
lessees ability to honor their lease obligations may be
adversely impacted. The estimated residual value of leased
equipment was comprised of 79.9% of copiers as of
December 31, 2009. No other group of equipment represented
more than 10% of equipment residuals as of December 31,
2009. Improvements and other changes in technology could
adversely impact the Companys ability to realize the
recorded value of this equipment. There were no impairments of
estimated residual value recorded during the years ended
December 31, 2009, 2008 or 2007.
The Company enters into derivative instruments with
counterparties that generally consist of large financial
institutions. The Company monitors its positions with these
counterparties and the credit quality of these financial
institutions. The Company does not anticipate nonperformance by
any of its counterparties. In addition to the fair value of
derivative instruments recognized in the Consolidated Financial
Statements, the Company could be exposed to increased interest
costs in future periods if the counterparties failed.
|
|
5.
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for credit losses, beginning of period
|
|
$
|
15,283
|
|
|
$
|
10,988
|
|
|
$
|
8,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(33,575
|
)
|
|
|
(30,231
|
)
|
|
|
(18,022
|
)
|
Recoveries
|
|
|
3,296
|
|
|
|
3,032
|
|
|
|
3,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(30,279
|
)
|
|
|
(27,199
|
)
|
|
|
(14,434
|
)
|
Provision for credit losses
|
|
|
27,189
|
|
|
|
31,494
|
|
|
|
17,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
12,193
|
|
|
$
|
15,283
|
|
|
$
|
10,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys net charge-offs began increasing during 2007,
primarily due to worsening general economic trends. These trends
continued to worsen during 2008 and 2009, most significantly
impacting the performance of interest rate-sensitive industries
in our portfolio, specifically companies in construction,
financial services, mortgage and real estate businesses. The
increased charge-offs during 2008 and 2009 compared to prior
periods are primarily due to the unfavorable changes in the
economic environment. The decrease in the allowance for credit
82
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
losses from 2008 to 2009 was primarily due to the decrease in
overall portfolio levels, partially offset by the impact of
weakening economic conditions on delinquency levels.
|
|
6.
|
Property
and Equipment, Net
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Depreciable Life
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
2,719
|
|
|
$
|
2,815
|
|
|
|
7 years
|
|
Computer systems and equipment
|
|
|
7,351
|
|
|
|
6,962
|
|
|
|
3-5 years
|
|
Leasehold improvements
|
|
|
566
|
|
|
|
569
|
|
|
|
Estimated useful life or remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
lease term, whichever is shorter
|
|
Total property and equipment
|
|
|
10,636
|
|
|
|
10,346
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(8,205
|
)
|
|
|
(7,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,431
|
|
|
$
|
2,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $1.0 million,
$1.2 million and $1.2 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Other assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Income taxes receivable
|
|
$
|
5,178
|
|
|
$
|
4,136
|
|
Accrued fees receivable
|
|
|
3,189
|
|
|
|
3,559
|
|
Deferred transaction costs
|
|
|
1,893
|
|
|
|
1,375
|
|
Prepaid expenses
|
|
|
1,360
|
|
|
|
1,990
|
|
Other
|
|
|
1,550
|
|
|
|
1,699
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,170
|
|
|
$
|
12,759
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
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.
As of December 31, 2009, the Company leases all four of its
office locations including its executive offices in Mt. Laurel,
New Jersey, and its offices in or near Atlanta, Georgia;
Philadelphia, Pennsylvania; and Salt Lake City, Utah. These
lease commitments are accounted for as operating leases.
The Company has entered into several capital leases to finance
corporate property and equipment.
83
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a schedule of future minimum lease payments for
capital and operating leases as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
|
(Dollars in thousands)
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
38
|
|
|
$
|
1,587
|
|
2011
|
|
|
35
|
|
|
|
1,439
|
|
2012
|
|
|
18
|
|
|
|
1,464
|
|
2013
|
|
|
|
|
|
|
628
|
|
2014
|
|
|
|
|
|
|
4
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
91
|
|
|
$
|
5,122
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense was $1.1 million, $1.3 million and
$1.3 million for the years ended December 31, 2009,
2008 and 2007, respectively.
The Company has employment agreements with certain senior
officers that currently extend through November 12, 2011,
with certain renewal options.
|
|
9.
|
Short-term
and Long-term Borrowings
|
Borrowings with an original maturity of less than one year are
classified as short-term borrowings. The Companys
revolving and short-term credit facilities (secured bank
facility and commercial paper (CP) conduit warehouse
facility) are classified as short-term borrowings, along with
MBBs federal funds purchased. Borrowings with an original
maturity of one year or more are classified as long-term
borrowings. The Companys term note securitizations and
long-term loan facility are classified as long-term borrowings.
The Company has generally used its short-term bank facility, CP
conduit warehouse facility and long-term loan facility as
warehouse facilities for interim financing to fund new
originations until the leases may be included in a subsequent
securitization.
Borrowings outstanding under the Companys revolving or
short-term credit facilities and long-term debt consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Revolving/Short-term Bank Facility
|
|
$
|
|
|
|
$
|
20,048
|
|
CP Conduit Warehouse Facility
|
|
|
62,541
|
|
|
|
81,875
|
|
05-1 Term
Note Securitization
|
|
|
13,835
|
|
|
|
42,129
|
|
06-1 Term
Note Securitization
|
|
|
60,923
|
|
|
|
123,371
|
|
07-1 Term
Note Securitization
|
|
|
151,958
|
|
|
|
275,885
|
|
Long-term Loan Facility
|
|
|
17,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowings
|
|
$
|
306,986
|
|
|
$
|
543,308
|
|
|
|
|
|
|
|
|
|
|
The Companys short-term and long-term borrowings are
collateralized by certain of the Companys direct financing
leases. The Company is restricted from selling, transferring, or
assigning these leases or placing liens or
84
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
pledges on these leases. At the end of each period, the Company
has the following minimum lease payments receivable assigned as
collateral:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Revolving/Short-term Bank Facility
|
|
$
|
|
|
|
$
|
25,418
|
|
CP Conduit Warehouse Facility
|
|
|
100,746
|
|
|
|
124,104
|
|
05-1 Term
Note Securitization
|
|
|
13,397
|
|
|
|
43,830
|
|
06-1 Term
Note Securitization
|
|
|
65,229
|
|
|
|
135,467
|
|
07-1 Term
Note Securitization
|
|
|
167,703
|
|
|
|
318,750
|
|
Long-term Loan Facility
|
|
|
26,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
373,400
|
|
|
$
|
647,569
|
|
|
|
|
|
|
|
|
|
|
On June 29, 2009, the Company terminated the secured bank
facility and paid off the outstanding balance. In March 2009,
the CP conduit warehouse facility was converted from a revolving
facility to an amortizing facility, scheduled to mature in March
2010. Subsequent to December 31, 2009, we completed an
$80.7 million term asset-backed securitization eligible
under the Term Asset-Backed Securities Loan Facility
(TALF) program established by the Federal Reserve. A
portion of the proceeds of the new securitization was used to
repay the full amount outstanding under the CP conduit warehouse
facility.
Revolving
Bank Facility/Short-term Bank Facility
As of December 31, 2008, the Company had a committed
revolving line of credit with several participating banks to
provide up to $40.0 million in borrowings. The revolving
bank facility had a termination date of March 31, 2009, and
was subsequently amended to a short-term borrowing facility
scheduled to terminate on June 29, 2009. The Company
elected to pay off the balance outstanding at the termination
date. Therefore, there were no outstanding borrowings under this
facility at December 31, 2009. There were
$20.0 million of outstanding borrowings under this facility
at December 31, 2008. For the years ended December 31,
2009, 2008 and 2007, the Company incurred commitment fees on the
unused portion of the credit facility of $24,000, $138,000 and
$186,000, respectively.
Federal
Funds Line of Credit with Correspondent Bank
MBB has established a federal funds line of credit with a
correspondent bank. This line allows for both selling and
purchasing of federal funds. The amount that can be drawn
against the line is limited to $1.2 million. There were no
outstanding borrowings under this line of credit at
December 31, 2009 or 2008.
Federal
Reserve Discount Window (Federal Reserve
Advances)
In addition, MBB has received approval to borrow from the
Federal Reserve Discount Window based on the amount of assets
MBB chooses to pledge. Based on assets pledged at
December 31, 2009, MBB had $8.2 million in unused,
secured borrowing capacity at the Federal Reserve Discount
Window.
CP
Conduit Warehouse Facility
We have a CP conduit warehouse facility that, until
March 31, 2009, allowed us to borrow, repay and re-borrow
based on a borrowing base formula. In these transactions, we
transferred pools of leases and interests in the related
equipment to special purpose, bankruptcy remote subsidiaries.
These special purpose entities in turn pledged their interests
in the leases and related equipment to an unaffiliated conduit
entity, which generally issued commercial paper to investors.
The warehouse facility allowed the Company on an ongoing basis
to transfer lease receivables to
85
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
a wholly-owned, bankruptcy remote, special purpose subsidiary of
the Company, which issued variable-rate notes to investors
carrying an interest rate equal to the rate on commercial paper
issued to fund the notes during the interest period.
This facility was scheduled to expire in March 2009, and was
amended to (1) extend the termination date to
March 30, 2010, (2) convert the facility from a
revolving facility to an amortizing facility, and
(3) revise the interest rate margin and fees. Subsequent to
December 31, 2009, this facility was repaid in full. (See
Item Subsequent to December 31, 2009,
below.)
For the years ended December 31, 2009, 2008 and 2007, the
weighted average interest rate was 4.88%, 5.37% and 5.84%,
respectively. At December 31, 2009 and 2008, borrowings
outstanding under this facility were $62.5 million and
$81.9 million, respectively. There is no additional
borrowing capacity under this facility.
The CP Conduit Warehouse Facility requires that the Company
limit its exposure to adverse interest rate movements on the
variable-rate notes through entering into interest-rate cap
agreements. As of December 31, 2009, the Company had
interest-rate cap transactions with notional values of
$63.8 million at a weighted average rate of 6.00%. The fair
value of these interest-rate cap transactions was $57,000
included in other assets as of December 31, 2009.
Term
Note Securitizations
05-1
Transaction On August 18, 2005, the Company
closed a $340.6 million term note securitization. In
connection with the
2005-1
transaction, 6 classes of fixed-rate notes were issued to
investors. The weighted average interest coupon will approximate
4.81% over the term of the financing. After the effects of
hedging and other transaction costs are considered, we expect
total interest expense on the 2005 term transaction to
approximate an average of 4.50% over the term of the borrowing.
06-1
Transaction On September 21, 2006, the Company
closed a $380.2 million term note securitization. In
connection with the
2006-1
transaction, 6 classes of fixed-rate notes were issued to
investors. The weighted average interest coupon will approximate
5.51% over the term of the financing. After the effects of
hedging and other transaction costs are considered, we expect
total interest expense on the 2006 term transaction to
approximate an average of 5.21% over the term of the financing.
07-1
Transaction On October 24, 2007, the Company
closed a $440.5 million term note securitization. In
connection with the
2007-1
transaction, 7 classes of fixed-rate notes were issued to
investors. The weighted average interest coupon will approximate
5.70% over the term of the financing. After the effects of
hedging and other transaction costs are considered, we expect
total interest expense on the 2007 term transaction to
approximate an average of 6.32% over the term of the financing.
Long-term
Loan Facility
On October 9, 2009, Marlin Business Services Corp.s
wholly-owned subsidiary, Marlin Receivables Corp.
(MRC), closed on a $75,000,000, three-year committed
loan facility with the Lender Finance division of Wells Fargo
Foothill. 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 to fund lease originations. The
maturity date of the facility is October 9, 2012. An event
of default such as non-payment of amounts when due under the
loan agreement or a breach of covenants may accelerate the
maturity date of the facility.
Item Subsequent
to December 31, 2009
On February 12, 2010 we completed an $80.7 million
term asset-backed securitization eligible under the TALF program
established by the Federal Reserve. As with all of the
Companys prior term note securitizations, this
86
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Financial
Covenants
Under the CP conduit warehouse facility, long-term loan facility
and term note securitization agreements, the Company is subject
to numerous covenants, restrictions and default provisions. Some
of the critical financial and credit quality covenants under our
borrowing arrangements as of December 31, 2009 include:
|
|
|
|
|
|
|
|
|
|
|
Actual(1)
|
|
|
Requirement
|
|
|
Tangible net worth minimum
|
|
$
|
148.5 million
|
|
|
$
|
138.2 million
|
|
Debt-to-equity
ratio maximum
|
|
|
2.7 to 1
|
|
|
|
10.0 to 1
|
|
Maximum servicer senior leverage ratio
|
|
|
2.3 to 1
|
|
|
|
4.0 to 1
|
|
Four-quarter rolling average interest coverage ratio minimum
|
|
|
1.70 to 1
|
|
|
|
1.50 to 1
|
|
Maximum portfolio delinquency ratio
|
|
|
1.68
|
%
|
|
|
3.50
|
%
|
Maximum charge-off ratio
|
|
|
5.69
|
%
|
|
|
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. |
A change in the Chief Executive Officer or Chief Operating
Officer is an event of default under the long-term loan facility
and CP conduit warehouse facility unless a replacement
acceptable to the Companys lenders is hired 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 an event of default under
the financing facilities. The Companys long-term loan
facility contains an acceleration clause allowing the creditor
to accelerate the scheduled maturities of the obligation under
certain conditions that may not be objectively determinable (for
example, if a material adverse change occurs). In
addition, the CP conduit warehouse facility and the long-term
loan facility contain cross default provisions whereby certain
defaults under one facility would also be an event of default
under the other facilities. 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.
As of December 31, 2009, the Company was in compliance with
the terms of the CP conduit warehouse facility, the long-term
loan facility and the term note securitization agreements.
Scheduled principal and interest payments on outstanding
borrowings as of December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest(1)
|
|
|
|
(Dollars in thousands)
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
195,164
|
|
|
$
|
10,285
|
|
2011
|
|
|
68,277
|
|
|
|
4,334
|
|
2012
|
|
|
41,555
|
|
|
|
1,435
|
|
2013
|
|
|
1,857
|
|
|
|
44
|
|
2014
|
|
|
133
|
|
|
|
2
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
306,986
|
|
|
$
|
16,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on the CP conduit warehouse facility and the long-term
loan facility is assumed at the December 31, 2009 rate for
the remaining term. |
87
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 December 31, 2009, the
remaining scheduled maturities of time deposits are as follows:
|
|
|
|
|
|
|
Scheduled
|
|
Period Ending December 31,
|
|
Maturities
|
|
|
|
(Dollars in thousands)
|
|
|
2010
|
|
$
|
26,138
|
|
2011
|
|
|
23,700
|
|
2012
|
|
|
19,028
|
|
2013
|
|
|
9,172
|
|
2014
|
|
|
2,250
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,288
|
|
|
|
|
|
|
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 December 31, 2009
was 3.16%.
|
|
11.
|
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 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 note securitization.
These hedges were expected to be highly effective in offsetting
the changes in cash flows of the forecasted transactions, and
this expected relationship was documented at the inception of
each hedge. Prior to July 1, 2008, expected hedge
effectiveness was assessed using the dollar-offset change
in variable cash flows method which involves a comparison
of the present value of the cumulative change in the expected
future cash flows on the variable side of the interest-rate swap
to the present value of the cumulative change in the expected
future cash flows on the hedged floating-rate asset or
liability. The Company retrospectively measured ineffectiveness
using the same methodology. The gain or loss from the effective
portion of a derivative designated as a cash flow hedge was
recorded net of tax effects in other comprehensive income and
the gain or loss from the ineffective portion was reported in
earnings.
Certain of these agreements were terminated simultaneously with
the pricing of the related term note 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 note securitizations.
88
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 and 2008, 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, during 2009 an $880,000 pretax
($529,000 after-tax) gain on the related cash flow hedges was
reclassified from accumulated other comprehensive income into
loss on derivatives in the Consolidated Statements of
Operations. During 2008, a $5.0 million pretax
($3.0 million after-tax) loss on the related cash flow
hedges was reclassified from accumulated other comprehensive
income into loss on derivatives in the Consolidated Statements
of Operations.
The following tables summarize specific information regarding
the active and terminated interest-rate swap agreements
described above:
For
Active Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception Date
|
|
March, 2008
|
|
January, 2008
|
|
December, 2007
|
|
August, 2007
|
|
August, 2006
|
Commencement Date
|
|
October, 2009
|
|
October, 2009
|
|
October, 2009
|
|
October, 2008
|
|
October, 2008
|
|
|
(Dollars in thousands)
|
|
Notional amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
December 31, 2008
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
$
|
100,000
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
For active agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value recorded in other assets (liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,145
|
)
|
|
$
|
(1,263
|
)
|
December 31, 2008
|
|
$
|
(653
|
)
|
|
$
|
(922
|
)
|
|
$
|
(3,955
|
)
|
|
$
|
(2,823
|
)
|
|
$
|
(3,175
|
)
|
Unrealized gain, net of tax, recorded in equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
December 31, 2008
|
|
$
|
246
|
|
|
$
|
93
|
|
|
$
|
190
|
|
|
$
|
|
|
|
$
|
|
|
89
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For
Terminated Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception Date
|
|
January, 2008
|
|
December, 2007
|
|
March, 2008
|
|
August, 2006/2007
|
|
August, 2006/ 2007
|
|
June/September, 2005
|
|
October/December, 2004
|
Commencement Date
|
|
October, 2009
|
|
October, 2009
|
|
October, 2009
|
|
October, 2008
|
|
October, 2007
|
|
September, 2006
|
|
August, 2005
|
Termination Date
|
|
October, 2009
|
|
October, 2009
|
|
May, 2009
|
|
September/October, 2008
|
|
October, 2007
|
|
September, 2006
|
|
August, 2005
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
25,000
|
|
|
$
|
100,000
|
|
|
$
|
25,000
|
|
|
$
|
100,000
|
|
|
$
|
300,000
|
|
|
$
|
225,000
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss) at termination
|
|
$
|
(1,254
|
)
|
|
$
|
(5,287
|
)
|
|
$
|
(775
|
)
|
|
$
|
(3,312
|
)
|
|
$
|
(2,683
|
)
|
|
$
|
3,732
|
|
|
$
|
3,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gain (loss), net of tax, recorded in equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(357
|
)
|
|
$
|
90
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(777
|
)
|
|
$
|
399
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization recognized as increase (decrease) in interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
699
|
|
|
$
|
(514
|
)
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,136
|
|
|
$
|
(953
|
)
|
|
$
|
(354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected amortization during next 12 months as increase
(decrease) in interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
379
|
|
|
$
|
(150
|
)
|
|
$
|
|
|
The Company recorded a loss on derivatives for the periods
indicated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
|
(Dollars in thousands)
|
|
|
Change in fair value of derivative contracts
|
|
$
|
(2,839
|
)
|
|
$
|
(10,998
|
)
|
|
$
|
|
|
Cash flow hedging gains (losses) on forecasted transactions no
longer probable of
occurring(2)
|
|
|
880
|
|
|
|
(5,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives
|
|
$
|
(1,959
|
)
|
|
$
|
(16,039
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior to July 1, 2008, the Companys derivatives were
designated and accounted for as cash flow hedges. Effective
July 1, 2008, the Company discontinued the use of hedge
accounting and subsequent changes in the fair value of
derivative instruments began to be recognized immediately in
loss on derivatives in the Consolidated Statements of Operations. |
|
(2) |
|
Reclassified from accumulated other comprehensive income |
These results are based on the fair value of the Companys
derivative contracts at December 31, 2009, and will not
necessarily reflect the value at settlement due to inherent
volatility in the financial markets. At December 31, 2009,
a total of $820,000 of interest-earning cash is assigned as
collateral for interest-rate swap agreements.
Cash payments related to the termination of derivative contracts
totaled $7.3 million and $3.3 million for the years
ended December 31, 2009 and 2008, respectively. Cash
payments pursuant to the terms of active derivative contracts
totaled $4.7 million and $320,000 for the years ended
December 31, 2009 and 2008, respectively.
The Company also uses interest-rate cap agreements that are not
designated for hedge accounting treatment to fulfill certain
covenants in its special purpose subsidiarys warehouse
borrowing arrangements and for overall interest-rate risk
management. Accordingly, these cap agreements are recorded at
fair value in other assets at $119,000 and $53,000 as of
December 31, 2009 and December 31, 2008, respectively.
The notional amount of interest-rate caps owned as of
December 31, 2009 and December 31, 2008 was
$121.4 million and $175.8 million, respectively.
Changes in the fair values of the caps are recorded in loss on
derivatives in the accompanying Consolidated Statements of
Operations.
The Company also sells interest-rate caps to offset a portion of
the interest-rate caps required to be purchased by the
Companys special purpose subsidiary under its warehouse
borrowing arrangements. These sales generate
90
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
premium revenues to offset a portion of the premium cost of
purchasing the required interest-rate caps. On a consolidated
basis, the interest-rate cap positions sold offset a portion of
the interest-rate cap positions owned. There were no outstanding
notional amounts for interest-rate cap agreements sold at
December 31, 2009. As of December 31, 2008, the
notional amount of interest-rate cap agreements sold was
$165.5 million. The fair value of interest-rate caps sold
was recorded in other liabilities at $40,000 as of
December 31, 2008. Changes in the fair values of the caps
are recorded in loss on derivatives in the accompanying
Consolidated Statements of Operations.
In March 2006, the FASB issued additional guidance on
disclosures about derivative instruments and hedging activities,
which was subsequently incorporated in the Derivatives and
Hedging Topic of the FASB ASC. As a result, enhanced disclosures
are required about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and
related hedged items are accounted for, and (c) how
derivative instruments and related hedged items affect an
entitys financial position, financial performance and cash
flows. The additional requirements are effective for fiscal
years, and interim periods within those fiscal years, beginning
after November 15, 2008. The adoption of the new guidance
did not have an impact on the consolidated earnings, financial
position or cash flows of the Company because it only amended
the disclosure requirements for derivatives and hedged items.
|
|
12.
|
Fair
Value Measurements and Disclosures about the Fair Value of
Financial Instruments
|
Fair
Value Measurements
The Fair Value Measurements and Disclosures Topic of the FASB
ASC establishes a framework for measuring fair value and
requires certain disclosures about fair value measurements. Its
provisions do not apply to fair value measurements for purposes
of lease classification, which is addressed in the Leases Topic
of the FASB ASC.
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal or most
advantageous market for the asset or liability at the
measurement date (exit price). A three-level valuation hierarchy
is required for disclosure of fair value measurements based upon
the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The fair value hierarchy
gives the highest priority to quoted prices (unadjusted) in
active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable
inputs (Level 3). The level in the fair value hierarchy
within which the fair value measurement in its entirety falls is
determined based on the lowest level input that is significant
to the measurement in its entirety.
The three levels are defined as follows:
|
|
|
|
|
Level 1 Inputs to the valuation are unadjusted
quoted prices in active markets for identical assets or
liabilities.
|
|
|
|
Level 2 Inputs to the valuation may include
quoted prices for similar assets and liabilities in active or
inactive markets, and inputs other than quoted prices, such as
interest rates and yield curves, that are observable for the
asset or liability for substantially the full term of the
financial instrument.
|
|
|
|
Level 3 Inputs to the valuation are
unobservable and significant to the fair value measurement.
Level 3 inputs shall be used to measure fair value only to
the extent that observable inputs are not available.
|
The Company uses derivative financial instruments to manage
exposure to the effects of changes in market interest rates and
to fulfill certain covenants in our borrowing arrangements. All
derivatives are recorded on the Consolidated Balance Sheets at
their fair value as either assets or liabilities using
measurements classified as Level 2. Because the
Companys derivatives are not listed on an exchange, the
Company values these instruments using a valuation model with
pricing inputs that are observable in the market or that can be
derived principally from or corroborated by observable market
data. The Companys methodology also incorporates the
impact of both the Companys and the counterpartys
credit standing.
91
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
All of the Companys assets and liabilities measured at
fair value on a recurring basis are computed using fair value
measurements classified as Level 2, and include the
following as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Level 2
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
Interest-rate caps purchased
|
|
$
|
119
|
|
|
$
|
53
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest-rate caps sold
|
|
|
|
|
|
|
40
|
|
Interest-rate swaps
|
|
|
2,408
|
|
|
|
11,528
|
|
Disclosures
about the Fair Value of Financial Instruments
The Financial Instruments Topic of the FASB ASC requires the
disclosure of the estimated fair value of financial instruments
including those financial instruments not measured at fair value
on a recurring basis. This requirement excludes certain
instruments, such as the net investment in leases and all
nonfinancial instruments.
The fair values shown below have been derived, in part, by
managements assumptions, the estimated amount and timing
of future cash flows and estimated discount rates. Valuation
techniques involve uncertainties and require assumptions and
judgments regarding prepayments, credit risk and discount rates.
Changes in these assumptions will result in different valuation
estimates. The fair values presented would not necessarily be
realized in an immediate sale. Derived fair value estimates
cannot necessarily be substantiated by comparison to independent
markets or to other companies fair value information.
The following summarizes the carrying amount and estimated fair
value of the Companys financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,057
|
|
|
$
|
37,057
|
|
|
$
|
40,270
|
|
|
$
|
40,270
|
|
Restricted interest-earning deposits with banks
|
|
|
63,400
|
|
|
|
63,400
|
|
|
|
66,212
|
|
|
|
66,212
|
|
Loans
|
|
|
4,026
|
|
|
|
3,969
|
|
|
|
11,452
|
|
|
|
11,201
|
|
Interest-rate caps purchased
|
|
|
119
|
|
|
|
119
|
|
|
|
53
|
|
|
|
53
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
62,541
|
|
|
|
62,541
|
|
|
|
101,923
|
|
|
|
101,923
|
|
Long-term borrowings
|
|
|
244,445
|
|
|
|
244,477
|
|
|
|
441,385
|
|
|
|
433,119
|
|
Deposits
|
|
|
80,288
|
|
|
|
81,903
|
|
|
|
63,385
|
|
|
|
64,635
|
|
Accounts payable and accrued
expenses(1)
|
|
|
11,846
|
|
|
|
11,846
|
|
|
|
14,426
|
|
|
|
14,426
|
|
Interest-rate caps sold
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
40
|
|
Interest-rate swaps
|
|
|
2,408
|
|
|
|
2,408
|
|
|
|
11,528
|
|
|
|
11,528
|
|
|
|
|
(1) |
|
Includes sales and property taxes payable. |
92
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 December 31, 2009
and 2008, 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
December 31, 2009 and 2008.
The fair values of loans are estimated by discounting
contractual cash flows, using interest rates currently being
offered by the Company for loans with similar terms and
remaining maturities to borrowers with similar credit risk
characteristics. Estimates utilized were based on the original
credit status of the borrowers combined with the portfolio
delinquency statistics.
|
|
(d)
|
Short-term
and Long-term Borrowings
|
The fair value of the Companys debt and secured borrowings
was estimated by discounting cash flows at current rates offered
to the Company for debt and secured borrowings of the same or
similar remaining maturities.
The fair value of the Companys deposits was estimated by
discounting cash flows at current rates paid by the Company for
similar certificates of deposit of the same or similar remaining
maturities.
|
|
(f)
|
Accounts
Payable and Accrued Expenses
|
The carrying amount of the Companys accounts payable
approximates fair value as of December 31, 2009 and 2008,
because of the relatively short timeframe to realization.
|
|
(g)
|
Interest-Rate
Swaps and Interest-Rate Caps
|
Interest-rate swaps and interest-rate caps are measured at fair
value on a recurring basis in accordance with the requirements
of the Fair Value Measurements and Disclosures Topic of the FASB
ASC, using the inputs and methods described previously in the
Fair Value Measurements section of this Note.
93
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Income
Tax Expense (Benefit)
|
The Companys income tax provision consisted of the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(54
|
)
|
|
$
|
(2,147
|
)
|
|
$
|
13,490
|
|
State
|
|
|
146
|
|
|
|
1,132
|
|
|
|
2,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
92
|
|
|
|
(1,015
|
)
|
|
|
16,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
483
|
|
|
|
(928
|
)
|
|
|
(3,993
|
)
|
State
|
|
|
(228
|
)
|
|
|
(1,218
|
)
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
255
|
|
|
|
(2,146
|
)
|
|
|
(4,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
347
|
|
|
$
|
(3,161
|
)
|
|
$
|
11,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with U.S. GAAP, uncertain tax positions taken
or expected to be taken in a tax return are subject to potential
financial statement recognition based on prescribed recognition
and measurement criteria. Based on our evaluation, we concluded
that there are no significant uncertain tax positions requiring
recognition in our financial statements. At December 31,
2009, there have been no material changes to the liability for
uncertain tax positions and there are no significant
unrecognized tax benefits. We do not expect our unrecognized tax
positions to change significantly over the next twelve months.
The periods subject to general examination for the
Companys federal return include the 2006 tax year to the
present. The Company files state income tax returns in various
states which may have different statutes of limitations.
Generally, state income tax returns for the years 2005 through
the present are subject to examination.
Deferred income tax expense results principally from the use of
different revenue and expense recognition methods for tax and
financial accounting purposes, primarily related to lease
accounting. The Company estimates these differences and adjusts
to actual upon preparation of the income tax returns. The
sources of these temporary differences and the related tax
effects were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
4,802
|
|
|
$
|
6,071
|
|
Interest-rate swaps and caps
|
|
|
1,003
|
|
|
|
5,000
|
|
Accrued expenses
|
|
|
278
|
|
|
|
281
|
|
Deferred income
|
|
|
1,443
|
|
|
|
1,728
|
|
Deferred compensation
|
|
|
1,789
|
|
|
|
1,513
|
|
Other comprehensive income
|
|
|
177
|
|
|
|
|
|
Other
|
|
|
142
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
9,634
|
|
|
|
14,843
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Lease accounting
|
|
|
(23,451
|
)
|
|
|
(26,589
|
)
|
Deferred acquisition costs
|
|
|
(1,954
|
)
|
|
|
(2,957
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
(110
|
)
|
Depreciation
|
|
|
(266
|
)
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(25,671
|
)
|
|
|
(29,962
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
(16,037
|
)
|
|
$
|
(15,119
|
)
|
|
|
|
|
|
|
|
|
|
94
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, the Company has utilized all of
its federal net operating loss carryforwards (NOLs)
generated in prior tax years. The federal net operating loss
generated in 2008 has been carried back to tax year 2006.
The following is a reconciliation of the statutory federal
income tax rate to the effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
|
|
State taxes, net of federal benefit
|
|
|
(9.6
|
)%
|
|
|
(5.7
|
)%
|
|
|
5.1
|
%
|
|
|
|
|
Other permanent differences
|
|
|
0.5
|
%
|
|
|
0.1
|
%
|
|
|
(0.6
|
)%
|
|
|
|
|
Other, including
true-up of
deferred tax accounts
|
|
|
(0.8
|
)%
|
|
|
2.9
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Rate
|
|
|
25.1
|
%
|
|
|
(37.7
|
)%
|
|
|
39.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Earnings
(Loss) Per Share
|
The Company follows guidance previously promulgated in
SFAS No. 128, Earnings Per Share, as clarified by the
requirements of FSP
EITF 03-6-1,
which were both subsequently incorporated in the Earnings Per
Share Topic of the FASB ASC. This guidance concluded that
unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities to be included in the
computation of EPS using the two-class method. The guidance was
effective for fiscal years beginning after December 15,
2008 on a retrospective basis, including interim periods within
those years.
In this report for the annual period ended December 31,
2009, the Company has retrospectively adjusted its earnings per
share data to conform to the provisions of FSP
EITF 03-6-1,
as incorporated in the Earnings Per Share Topic of the FASB ASC.
The adoption of these provisions resulted in an increase of
approximately 1% in the weighted average number of shares used
in computing basic and diluted EPS for the year ended
December 31, 2007, which reduced both basic and diluted
earnings per share by $0.02. There was no change in the weighted
average number of shares used in computing basic and diluted
loss per share for the year ended December 31, 2008 because
the inclusion of additional shares would have been anti-dilutive.
The following table provides net income and shares used in
computing basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
Net income (loss)
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
11,693,720
|
|
|
|
11,874,647
|
|
|
|
12,079,172
|
|
Add: Unvested restricted stock awards considered participating
securities
|
|
|
855,447
|
|
|
|
|
|
|
|
158,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares used in computing basic
EPS
|
|
|
12,549,167
|
|
|
|
11,874,647
|
|
|
|
12,237,263
|
|
Add: Effect of dilutive stock options
|
|
|
30,639
|
|
|
|
|
|
|
|
162,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares used in computing
diluted EPS
|
|
|
12,579,806
|
|
|
|
11,874,647
|
|
|
|
12,399,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the years ended December 31, 2009, 2008 and 2007,
options to purchase 670,776, 711,510 and 373,543 shares of
common stock were not considered in the computation of potential
common shares for purposes of diluted EPS, since the exercise
prices of the options were greater than the average market price
of the Companys common stock for the respective periods.
When computing diluted loss per share for the year ended
December 31, 2008, all potential common shares, including
stock options and restricted stock, are anti-dilutive to the
loss per common share calculation. Therefore, for the year ended
December 31, 2008, the effect of 391,372 potential common
shares have not been considered for diluted EPS purposes.
|
|
15.
|
Comprehensive
Income (Loss)
|
The following table details the components of comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Net income (loss), as reported
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives
|
|
|
|
|
|
|
593
|
|
|
|
(6,287
|
)
|
Reclassification of cash flow hedging (gains) losses on
forecasted transactions no longer probable of
occurring(1)
|
|
|
(880
|
)
|
|
|
5,041
|
|
|
|
|
|
Amortization of net deferred (gain) loss on cash flow hedge
derivatives
|
|
|
159
|
|
|
|
(171
|
)
|
|
|
(2,037
|
)
|
Tax effect
|
|
|
287
|
|
|
|
(2,166
|
)
|
|
|
3,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(434
|
)
|
|
|
3,297
|
|
|
|
(5,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
602
|
|
|
$
|
(1,933
|
)
|
|
$
|
12,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reclassified to loss on derivatives. |
Stockholders
Equity
On November 2, 2007, the Board of Directors (the
Board) approved a stock repurchase plan. Under this
program, the Company is authorized to repurchase up to
$15 million 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 stock repurchases are
funded using the Companys working capital.
The Company purchased 88,894 shares of its common stock for
$347,000 during the year ended December 31, 2009. The
Company purchased 331,315 shares of its common stock for
$2.4 million during the year ended December 31, 2008.
At December 31, 2009, the Company had $10.7 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 13,720 shares repurchased to
cover income taxes during the year ended December 31, 2009,
at an average cost of $3.89. There were 2,444 shares
repurchased to cover income taxes during the year ended
December 31, 2008, at an average cost of $6.78.
96
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Regulatory
Capital Requirements
On March 20, 2007, the FDIC approved the application of our
wholly-owned subsidiary, MBB, to become an industrial bank
chartered by the State of Utah. MBB commenced operations
effective March 12, 2008. MBB provides diversification of
the Companys funding sources and, over time, may add other
product offerings to better serve our customer base.
On December 31, 2008, Marlin Business Services Corp.
received approval from the Federal Reserve Bank of
San Francisco (the FRB) to become a bank
holding company upon conversion of MBB from an industrial bank
to a commercial bank. On January 13, 2009, MBB received
approval from the FRB to become a member of the Federal Reserve
System.
On January 13, 2009, MBB converted from an industrial bank
to a commercial bank chartered and supervised by the State of
Utah and the Board of Governors of the Federal Reserve System
(the Federal Reserve Board). In connection with the
conversion of MBB to a commercial bank, Marlin Business Services
Corp. became a bank holding company on January 13, 2009. On
January 20, 2009, MBB submitted a modification request to
the FDIC related to the Order issued by the FDIC on
March 20, 2007 (the Order) to eliminate certain
inconsistencies between the Order and the FRB Approval of MBB as
a commercial bank. Until we receive the FDICs response to
our submission, MBB intends to continue operating in accordance
with its original de novo three-year business plan, which
assumed total assets of up to $128 million by March 2011
(the end of the three-year de novo period.)
MBB is subject to capital adequacy guidelines issued by the
Federal Financial Institutions Examination Council (the
FFIEC). These risk-based capital and leverage
guidelines make regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations and
consider off-balance sheet exposures in determining capital
adequacy. The FFIEC
and/or the
U.S. Congress may determine to increase capital
requirements in the future due to the current economic
environment. Under the rules and regulations of the FFIEC, at
least half of a banks total capital is required to be
Tier I capital as defined in the regulations,
comprised of common equity, retained earnings and a limited
amount of non-cumulative perpetual preferred stock. The
remaining capital, Tier II capital, as defined
in the regulations, may consist of other preferred stock, a
limited amount of term subordinated debt or a limited amount of
the reserve for possible credit losses. The FFIEC has also
adopted minimum leverage ratios for banks, which are calculated
by dividing Tier I capital by total quarterly average
assets. Recognizing that the risk-based capital standards
principally address credit risk rather than interest rate,
liquidity, operational or other risks, many banks are expected
to maintain capital in excess of the minimum standards. The
Company will provide the necessary capital to maintain MBB at
well-capitalized status as defined by banking
regulations. MBBs equity balance at December 31, 2009
was $16.1 million, which met all capital requirements to
which MBB is subject and qualified for
well-capitalized status. Bank holding companies are
required to comply with the Federal Reserve Boards
risk-based capital guidelines that require a minimum ratio of
total capital to risk-weighted assets of 8%. At least half of
the total capital is required to be Tier 1 capital. In
addition to the risk-based capital guidelines, the Federal
Reserve Board has adopted a minimum leverage capital ratio under
which a bank holding company must maintain a level of
Tier 1 capital to average total consolidated assets of at
least 3% in the case of a bank holding company which has the
highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding
companies are expected to maintain a leverage capital ratio of
at least 4%. At December 31, 2009, Marlin Business Services
Corp. also exceeded its regulatory capital requirements and is
considered well-capitalized as defined by federal
banking regulations. MBB is designated a Risk Category I
institution for purposes of the risk-based assessment for FDIC
deposit insurance. Risk Category I institutions pay the lowest
tier of premiums for their deposit insurance.
97
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well-Capitalized
|
|
|
|
|
Minimum Capital
|
|
Capital
|
|
|
Actual
|
|
Requirement
|
|
Requirement
|
|
|
Ratio
|
|
Amount
|
|
Ratio(1)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
|
(Dollars in thousands)
|
|
Tier 1 Leverage Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp.
|
|
|
24.89
|
%
|
|
$
|
148,505
|
|
|
|
|
|
|
|
4
|
%
|
|
$
|
23,867
|
|
|
|
5
|
%
|
|
$
|
29,834
|
|
Marlin Business Bank
|
|
|
15.55
|
%
|
|
$
|
16,071
|
|
|
|
|
|
|
|
5
|
%
|
|
$
|
5,169
|
|
|
|
5
|
%
|
|
$
|
5,169
|
|
Tier 1 Risk-based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp.
|
|
|
30.19
|
%
|
|
$
|
148,505
|
|
|
|
|
|
|
|
4
|
%
|
|
$
|
19,679
|
|
|
|
6
|
%
|
|
$
|
29,519
|
|
Marlin Business Bank
|
|
|
16.07
|
%
|
|
$
|
16,071
|
|
|
|
|
|
|
|
6
|
%
|
|
$
|
6,000
|
|
|
|
6
|
%
|
|
$
|
6,000
|
|
Total Risk-based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp.
|
|
|
31.45
|
%
|
|
$
|
154,728
|
|
|
|
|
|
|
|
8
|
%
|
|
$
|
39,358
|
|
|
|
10
|
%
|
|
$
|
49,198
|
|
Marlin Business Bank
|
|
|
17.12
|
%
|
|
$
|
17,122
|
|
|
|
|
|
|
|
15
|
%
|
|
$
|
15,000
|
|
|
|
10
|
%(1)
|
|
$
|
10,000
|
|
|
|
|
(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;
|
98
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
prohibiting the institution from accepting deposits from
correspondent banks; and
|
|
|
|
in the most severe cases, appointing a conservator or receiver
for the institution.
|
A banking institution that is undercapitalized is required to
submit a capital restoration plan, and such a plan will not be
accepted unless, among other things, the banking
institutions holding company guarantees the plan up to a
certain specified amount. Any such guarantee from a depository
institutions holding company is entitled to a priority of
payment in bankruptcy.
Pursuant to the Order, MBB was required to have beginning
paid-in capital funds of not less than $12.0 million and
must keep its total risk-based capital ratio above 15%.
MBBs equity balance at December 31, 2009 was
$16.1 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.
|
|
17.
|
Stock-Based
Compensation
|
Under the terms of the Marlin Business Services Corp. 2003
Equity Compensation Plan (as amended, 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 was increased from 2,100,000 to
3,300,000 at the annual meeting of shareholders on May 22,
2008. Not more than 1,650,000 of such shares shall be available
for issuance as restricted stock grants. There were
489,354 shares available for future grants under the 2003
Plan as of December 31, 2009.
Total stock-based compensation expense was $1.5 million,
$1.2 million and $0.9 million for the years ended
December 31, 2009, December 31, 2008 and
December 31, 2007, respectively. Excess tax benefits from
stock-based payment arrangements decreased cash provided by
operating activities and increased cash provided by financing
activities by $48,000, $101,000 and $1.2 million for the
years ended December 31, 2009, December 31, 2008 and
December 31, 2007, 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.
Of the total options granted during the year ended
December 31, 2009, no shares are contingent on performance
factors. The Company has recognized expense related to
performance options based on the most probable performance
assumptions as of December 31, 2009. Revised performance
assumptions during 2007 resulted in a reduction of $248,000 in
expense related to stock options during the year ended
December 31, 2007. There were no revisions necessary to
performance assumptions in 2008 or 2009.
The Company also issues stock options to non-employee
independent directors. These options generally vest in one year.
99
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There were 15,877 stock options granted during the year ended
December 31, 2009. The fair value of each stock option
granted during the years ended December 31, 2009, 2008, and
2007 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 years
ended December 31, 2009, 2008 and 2007, was $4.49, $3.25,
and $7.93 per share, respectively.
The following weighted average assumptions were used for valuing
option grants made during the years ended December 31,
2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Weighted Averages:
|
|
2009
|
|
2008
|
|
2007
|
|
Risk-free interest rate
|
|
|
1.97
|
%
|
|
|
2.45
|
%
|
|
|
4.50
|
%
|
Expected life
|
|
|
4.0 years
|
|
|
|
5.1 years
|
|
|
|
5.1 years
|
|
Expected volatility
|
|
|
84
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
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 Securities and Exchange
Commissions 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.
The following table summarizes option activity during the each
of the three years in the period ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Outstanding, December 31, 2006
|
|
|
918,977
|
|
|
$
|
11.61
|
|
Granted
|
|
|
108,409
|
|
|
|
20.49
|
|
Exercised
|
|
|
(217,417
|
)
|
|
|
8.02
|
|
Forfeited
|
|
|
(82,785
|
)
|
|
|
18.70
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2007
|
|
|
727,184
|
|
|
$
|
13.20
|
|
Granted
|
|
|
271,926
|
|
|
|
9.29
|
|
Exercised
|
|
|
(46,616
|
)
|
|
|
3.12
|
|
Forfeited
|
|
|
(67,035
|
)
|
|
|
15.98
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
885,459
|
|
|
$
|
12.32
|
|
Granted
|
|
|
15,877
|
|
|
|
7.30
|
|
Exercised
|
|
|
(40,424
|
)
|
|
|
4.13
|
|
Forfeited
|
|
|
(82,751
|
)
|
|
|
16.51
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
778,161
|
|
|
$
|
12.20
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2009, December 31,
2008 and December 31, 2007, the Company recognized total
compensation expense related to options of $0.3 million,
$0.4 million and $0.4 million,
100
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. The total pre-tax intrinsic value of stock options
exercised was $0.1 million, $0.3 million and
$3.0 million for the years ended December 31, 2009,
2008 and 2007, respectively. The related tax benefits realized
from the exercise of stock options for the years ended
December 31, 2009, 2008 and 2007 were $0.1 million,
$0.1 million and $1.2 million, respectively.
The following table summarizes information about the stock
options outstanding and exercisable as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
Range of
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Exercisable
|
|
|
Life (Years)
|
|
|
Exercisable Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
$3.39
|
|
|
94,134
|
|
|
|
2.3
|
|
|
$
|
3.39
|
|
|
$
|
427
|
|
|
|
94,134
|
|
|
|
2.3
|
|
|
$
|
3.39
|
|
|
$
|
427
|
|
$4.23 $5.01
|
|
|
25,344
|
|
|
|
0.3
|
|
|
|
4.39
|
|
|
|
90
|
|
|
|
25,344
|
|
|
|
0.3
|
|
|
|
4.39
|
|
|
|
90
|
|
$7.17 $10.18
|
|
|
356,839
|
|
|
|
4.3
|
|
|
|
9.43
|
|
|
|
19
|
|
|
|
158,061
|
|
|
|
3.0
|
|
|
|
9.61
|
|
|
|
8
|
|
$14.00 $16.01
|
|
|
63,484
|
|
|
|
4.1
|
|
|
|
14.63
|
|
|
|
|
|
|
|
57,235
|
|
|
|
4.0
|
|
|
|
14.57
|
|
|
|
|
|
$17.52 $22.23
|
|
|
238,360
|
|
|
|
3.5
|
|
|
|
20.00
|
|
|
|
|
|
|
|
137,813
|
|
|
|
3.3
|
|
|
|
19.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
778,161
|
|
|
|
3.7
|
|
|
$
|
12.20
|
|
|
$
|
536
|
|
|
|
472,587
|
|
|
|
2.9
|
|
|
$
|
11.54
|
|
|
$
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents
the total pre-tax intrinsic value, based on the Companys
closing stock price of $7.93 as of December 31, 2009, which
would have been received by the option holders had all option
holders exercised their options as of that date.
As of December 31, 2009, the total future compensation cost
related to non-vested stock options not yet recognized in the
Consolidated Statements of Operations was $319,000 and the
weighted average period over which these awards are expected to
be recognized was 1.2 years, based on the most probable
performance assumptions as of December 31, 2009. In the
event maximum performance targets are achieved, an additional
$1.0 million of compensation cost would be recognized over
a weighted average period of 1.7 years.
At the October 28, 2009 annual stockholders meeting,
the shareholders voted to approve an amendment to the 2003 Plan
to allow a one-time stock option exchange program for the
Companys employees, to commence within six months
following the annual meeting. If implemented, the exchange
program would allow us to cancel certain underwater stock
options currently held by our employees in exchange for the
grant of a lesser amount of stock options with lower exercise
prices and a new vesting schedule and term. Each replacement
option will have an exercise price per share equal to the
closing price of our common stock on the date of grant, and will
have a new seven-year term.
Restricted
Stock Awards
Restricted stock awards provide that, during the applicable
vesting periods, the shares awarded may not be sold or
transferred by the participant. The vesting period for
restricted stock awards generally ranges from 3 to
10 years, though certain awards for special projects may
vest in as little as one year depending on the duration of the
project. All awards issued contain service conditions based on
the participants continued service with the Company, and
may provide for accelerated vesting if there is a change in
control as defined in the 2003 Plan.
The vesting of certain restricted shares may be accelerated to a
minimum of 3 to 4 years based on achievement of various
individual and Company performance measures. In addition, the
Company has issued certain shares under a Management Stock
Ownership Program. Under this program, restrictions on the
shares lapse at the end of 10 years but may lapse (vest) in
a minimum of three years if the employee continues in service at
the Company and owns a matching number of other common shares in
addition to the restricted shares.
101
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Of the total restricted stock awards granted during the year
ended December 31, 2009, 477,341 shares may be subject
to accelerated vesting based on performance factors; no shares
have vesting contingent upon performance factors. Certain of the
awards granted during 2009 may result in the issuance of
212,902 additional shares of stock if achievement of certain
targets is greater than 100%. The Company has recognized expense
related to performance-based shares based on the most probable
performance assumptions as of December 31, 2009. Revised
performance assumptions during 2007 resulted in a reduction of
$425,000 in expense related to restricted stock awards during
the year ended December 31, 2007. There were no revisions
necessary to performance assumptions in 2008 or 2009.
The Company also issues restricted stock to non-employee
independent directors. These shares generally vest in seven
years from the grant date or six months following the
directors termination from Board service.
The following table summarizes the activity of the non-vested
restricted stock during each of the three years in the period
ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested restricted stock at December 31, 2006
|
|
|
207,731
|
|
|
$
|
19.57
|
|
Granted
|
|
|
95,295
|
|
|
|
19.76
|
|
Vested
|
|
|
(47,211
|
)
|
|
|
17.60
|
|
Forfeited
|
|
|
(37,567
|
)
|
|
|
19.06
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at December 31, 2007
|
|
|
218,248
|
|
|
$
|
20.17
|
|
Granted
|
|
|
330,168
|
|
|
|
6.13
|
|
Vested
|
|
|
(15,684
|
)
|
|
|
18.58
|
|
Forfeited
|
|
|
(28,818
|
)
|
|
|
15.49
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at December 31, 2008
|
|
|
503,914
|
|
|
$
|
11.29
|
|
Granted
|
|
|
628,772
|
|
|
|
6.26
|
|
Vested
|
|
|
(40,177
|
)
|
|
|
18.23
|
|
Forfeited
|
|
|
(69,106
|
)
|
|
|
14.06
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at December 31, 2009
|
|
|
1,023,403
|
|
|
$
|
7.74
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2009, 2008 and 2007,
the Company granted restricted stock awards with grant date fair
values totaling $3.9 million, $2.0 million and
$1.9 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 compensation expense of
$1.1 million, $0.7 million and $0.5 million
related to restricted stock for the years ended
December 31, 2009, 2008 and 2007, respectively.
As of December 31, 2009, there was $5.2 million of
unrecognized compensation cost related to non-vested restricted
stock compensation scheduled to be recognized over a weighted
average period of 4.7 years, based on the most probable
performance assumptions as of December 31, 2009. In the
event maximum performance targets are achieved,
$2.8 million of the unrecognized compensation cost would
accelerate to be recognized over a weighted average period of
1.3 years, and an additional $231,000 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 212,902
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.
102
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of shares that vested was $0.2 million,
$0.1 million and $1.1 million during the years ended
December 31, 2009, 2008 and 2007, respectively.
Employee
Stock Purchase Plan
In October 2003, the Company adopted the Employee Stock Purchase
Plan (the ESPP). Under the terms of the ESPP,
employees have the opportunity to purchase shares of common
stock during designated offering periods equal to the lesser of
95% of the fair market value per share on the first day of the
offering period or the purchase date. Participants are limited
to 10% of their compensation. The aggregate number of shares
under the ESPP that may be issued is 200,000. During 2009, 2008
and 2007, 35,004, 36,360 and 17,994 shares, respectively,
of common stock were sold for $106,000, $149,000 and $273,000,
respectively, pursuant to the terms of the ESPP.
The Company adopted a 401(k) plan (the Plan) which
originally became effective as of January 1, 1997. The
Companys employees are entitled to participate in the
Plan, which provides savings and investment opportunities.
Employees can contribute up to the maximum annual amount
allowable per Internal Revenue Service (IRS)
guidelines. During 2006 and the first six months of 2007, the
Plan also provided for Company contributions equal to 25% of an
employees contribution percentage up to a maximum employee
contribution of 4%. Effective July 1, 2007, the Plan
provides for Company contributions equal to 25% of an
employees contribution percentage up to a maximum employee
contribution of 6%. The Companys contributions to the Plan
for the years ended December 31, 2009, 2008 and 2007 were
approximately $119,000, $177,000 and $159,000, respectively.
|
|
19.
|
Related
Party Transactions
|
The Company obtains all of its commercial, healthcare and other
insurance coverage through The Selzer Company, an insurance
broker located in Warrington, Pennsylvania. Richard Dyer, the
brother of Daniel P. Dyer, the Chief Executive Officer, is the
President of The Selzer Company. We do not have any contractual
arrangement with The Selzer Group or Richard Dyer, nor do we pay
either of them any direct fees. Insurance premiums paid to The
Selzer Company were $495,000, $584,000 and $521,000 during the
years ended December 31, 2009, 2008 and 2007, respectively.
|
|
20.
|
Restatement
of Prior Financial Statements
|
Subsequent to the issuance of the Companys
Form 10-K
for the year ended December 31, 2008, the Company
identified a software error affecting the timing of interest
income recognition on approximately 1,500 of its 107,000 active
leases. This software calculation error was identified and the
programming was corrected during the second quarter of 2009.
This error impacted the Consolidated Financial Statements for
the fiscal years ended December 31, 2005 through 2008,
including interim periods therein, and the three-month period
ended March 31, 2009. The impact of the error on the
Consolidated Statements of Operations was limited to the fiscal
years ended December 31, 2005 through 2007, including the
interim periods therein. It is a non-cash adjustment impacting
the timing of income recognition, and will not have any impact
on historical or future cash flows or any other aspect of the
Companys business. It did not adversely affect compliance
with covenants under the Companys existing credit
facilities. The Company concluded that the impact of correcting
the error on each individual previously filed consolidated
financial statement was not material, and therefore the Company
did not amend its previous filings with the SEC.
The cumulative effect of this adjustment reduced interest income
through December 31, 2007 by $1.4 million, with a
corresponding increase in unearned lease income, a component of
net investment in leases and loans, to be recognized in the
future. The cumulative effect of this adjustment also decreased
the net deferred income tax liability through December 31,
2007 by $554,000, and decreased retained earnings by $831,000.
Accordingly, the
103
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company has restated the accompanying consolidated financial
statements as of December 31, 2008 from amounts previously
reported to correct the error by increasing unearned lease
income and reducing the net deferred income tax liability and
retained earnings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
As Previously
|
|
|
|
|
|
|
Reported
|
|
Adjustment
|
|
As Restated
|
|
|
(Dollars in thousands)
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in leases and loans
|
|
$
|
670,494
|
|
|
$
|
(1,385
|
)
|
|
$
|
669,109
|
|
Total assets
|
|
|
795,816
|
|
|
|
(1,385
|
)
|
|
|
794,431
|
|
Net deferred income tax liability
|
|
|
15,673
|
|
|
|
(554
|
)
|
|
|
15,119
|
|
Total liabilities
|
|
|
648,360
|
|
|
|
(554
|
)
|
|
|
647,806
|
|
Retained earnings
|
|
|
63,501
|
|
|
|
(831
|
)
|
|
|
62,670
|
|
Total stockholders equity
|
|
|
147,456
|
|
|
|
(831
|
)
|
|
|
146,625
|
|
Total liabilities and stockholders equity
|
|
|
795,816
|
|
|
|
(1,385
|
)
|
|
|
794,431
|
|
A summary of the effects of the restatement for the year ended
December 31, 2007 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
As Previously
|
|
|
|
|
|
|
Reported
|
|
Adjustment
|
|
As Restated
|
|
|
(Dollars in thousands, except per-share data)
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
90,231
|
|
|
$
|
(477
|
)
|
|
$
|
89,754
|
|
Income before income taxes
|
|
|
30,361
|
|
|
|
(477
|
)
|
|
|
29,884
|
|
Income tax expense
|
|
|
12,075
|
|
|
|
(191
|
)
|
|
|
11,884
|
|
Net income
|
|
|
18,286
|
|
|
|
(286
|
)
|
|
|
18,000
|
|
Basic earnings per
share(2)
|
|
$
|
1.49
|
|
|
$
|
(0.02
|
)
|
|
$
|
1.47
|
|
Diluted earnings per
share(2)
|
|
$
|
1.47
|
|
|
$
|
(0.02
|
)
|
|
$
|
1.45
|
|
|
|
|
(1) |
|
The amount for interest income as previously
reported reflects the impact of the reclassifications to
conform to the current years presentation, pursuant to the
requirements of the Securities and Exchange Commissions
Regulation S-X,
Article 9, applicable to bank holding companies, previously
discussed in Note 2 herein. Therefore, the difference
between the amounts as previously reported and
as restated represents the effect of the error
correction discussed above. |
|
(2) |
|
The amounts for basic and diluted earnings per share as
previously reported reflect the impact of the
retrospective adjustment to conform to the provisions of FSP
EITF 03-6-1,
as incorporated in the Earnings Per Share Topic of the FASB ASC
and previously discussed in Note 2 herein. Therefore, the
difference between the amounts as previously
reported and as restated represents the effect
of the error correction discussed above. |
104
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure Controls and Procedures The
Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in
the Companys reports under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to management,
including the Companys Chief Executive Officer
(CEO) and Chief Financial Officer (CFO),
as appropriate, to allow timely decisions regarding required
disclosure.
In connection with the preparation of this Annual Report on
Form 10-K,
as of December 31, 2009, we updated our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures for purposes of filing reports under the
Securities and Exchange Act of 1934. This controls evaluation
was done under the supervision and with the participation of
management, including our CEO and our CFO. Our CEO and our CFO
have concluded that our disclosure controls and procedures (as
defined in
Rule 13(a)-15(e)
and 15(d)-15(e) under the Exchange Act) are designed and
operating effectively to provide reasonable assurance that
information relating to us and our subsidiaries that we are
required to disclose in the reports that we file or submit to
the SEC is accumulated and communicated to management as
appropriate to allow timely decisions regarding required
disclosure, and is recorded, processed, summarized and reported
with the time periods specified in the SECs rules and
forms.
Managements Annual Report on Internal Control over
Financial Reporting Our CEO and CFO provided a
report on behalf of management on our internal control over
financial reporting. The full text of managements report
is contained in Item 8 of this
Form 10-K
and is incorporated herein by reference.
Attestation Report of the Registered Public Accounting
Firm The attestation report of our independent
registered public accounting firm on their assessment of
internal control over financial reporting is contained in
Item 8 of this
Form 10-K
and is incorporated herein by reference.
Changes in Internal Control Over Financial
Reporting There were no changes in the
Companys internal control over financial reporting that
occurred during the Companys fourth fiscal quarter of 2009
that have materially affected, or are reasonably likely to
affect materially, the Companys internal control over
financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by Item 10 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2010 Annual Meeting of Stockholders.
We have adopted a code of ethics and business conduct that
applies to all of our directors, officers and employees,
including our principal executive officer, principal financial
officer, principal accounting officer and persons performing
similar functions. Our code of ethics and business conduct is
available free of charge within the investor relations
section of our Web site at www.marlincorp.com. We
intend to post on our Web site any amendments and waivers to the
code of ethics and business conduct that are required to be
disclosed by the rules of the Securities and Exchange
Commission, or file a
Form 8-K,
Item 5.05 to the extent required by NASDAQ listing
standards.
105
|
|
Item 11.
|
Executive
Compensation
|
The information required by Item 11 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2010 Annual Meeting of Stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 12 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2010 Annual Meeting of Stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by Item 13 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2010 Annual Meeting of Stockholders.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by Item 14 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2010 Annual Meeting of Stockholders.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as part of this Report
The following is a list of consolidated and combined financial
statements and supplementary data included in this report under
Item 8 of Part II hereof:
1. Financial Statements and Supplemental Data
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and
2008.
Consolidated Statements of Operations for the years ended
December 31, 2009, 2008 and 2007.
Consolidated Statements of Stockholders Equity for the
years ended December 31, 2009, 2008 and 2007.
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Schedules are omitted because they are not applicable or are not
required or because the required information is included in the
consolidated and combined financial statements or notes thereto.
(b) Exhibits.
|
|
|
|
|
Number
|
|
Description
|
|
|
1
|
.1(11)
|
|
Purchase Agreement, dated November 15, 2006, between Piper
Jaffray & Co., Primus Capital Fund IV Limited
Partnership and its affiliate and Marlin Business Services Corp.
|
|
3
|
.1(15)
|
|
Amended and Restated Articles of Incorporation of the Registrant.
|
|
3
|
.2(2)
|
|
Bylaws of the Registrant.
|
|
4
|
.1(2)
|
|
Second Amended and Restated Registration Agreement, as amended
through July 26, 2001, by and among Marlin Leasing
Corporation and certain of its shareholders.
|
|
10
|
.1(17)
|
|
2003 Equity Compensation Plan of the Registrant, as amended.
|
|
10
|
.2(26)
|
|
Amendment
2009-1 to
the Marlin Business Services Corp. 2003 Equity Compensation
Plan, as amended.
|
106
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.3(26)
|
|
Amendment
2009-2 to
the Marlin Business Services Corp. 2003 Equity Compensation
Plan, as amended.
|
|
10
|
.4(26)
|
|
Amendment
2009-3 to
the Marlin Business Services Corp. 2003 Equity Compensation
Plan, as amended.
|
|
10
|
.5(2)
|
|
2003 Employee Stock Purchase Plan of the Registrant.
|
|
10
|
.6(4)
|
|
Lease Agreement, dated as of October 21, 2003, between
Liberty Property Limited Partnership and Marlin Leasing
Corporation.
|
|
10
|
.7(2)
|
|
Employment Agreement, dated as of October 14, 2003 between
Daniel P. Dyer and the Registrant.
|
|
10
|
.8(20)
|
|
Amendment
2008-1 dated
as of December 31, 2008 to the Employment Agreement between
Daniel P. Dyer and the Registrant.
|
|
10
|
.9(2)
|
|
Employment Agreement, dated as of October 14, 2003 between
George D. Pelose and the Registrant.
|
|
10
|
.10(10)
|
|
Amendment
2006-1 dated
as of May 19, 2006 to the Employment Agreement between
George D. Pelose and the Registrant.
|
|
10
|
.11(20)
|
|
Amendment
2008-1 dated
as of December 31, 2008 to the Employment Agreement between
George D. Pelose and the Registrant.
|
|
10
|
.12(1)
|
|
Second Amended and Restated Warehouse Revolving Credit Facility
Agreement dated as of August 31, 2001, by and among Marlin
Leasing Corporation, the Lenders and National City Bank.
|
|
10
|
.13(1)
|
|
First Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement dated as of July 28,
2003, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
|
10
|
.14(3)
|
|
Second Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement dated as of October 16,
2003, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
|
10
|
.15(7)
|
|
Third Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement dated as of August 26,
2005, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
|
10
|
.16(13)
|
|
Fourth Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement, dated as of April 2,
2007, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
|
10
|
.17(19)
|
|
Fifth Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement, dated as of
September 12, 2008, by and among Marlin Leasing
Corporation, the Lenders and National City Bank.
|
|
10
|
.18(21)
|
|
Sixth Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement, dated as of March 31,
2009, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
|
10
|
.19(1)
|
|
Master Lease Receivables Asset-Backed Financing Facility
Agreement, dated as of April 1, 2002, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. II and
Wells Fargo Bank Minnesota, National Association.
|
|
10
|
.20(1)
|
|
Series 2002-A
Supplement, dated as of April 1, 2002, to the Master Lease
Receivables Asset-Backed Financing Facility Agreement, dated as
of April 1, 2002, by and among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. II, Marlin Leasing
Receivables II LLC, National City Bank and Wells Fargo Bank
Minnesota, National Association.
|
|
10
|
.21(1)
|
|
First Amendment to
Series 2002-A
Supplement and Consent to Assignment of
2002-A Note,
dated as of July 10, 2003, by and among Marlin Leasing
Corporation, Marlin Leasing Receivables Corp. II, Marlin Leasing
Receivables II LLC, ABN AMRO Bank N.V. and Wells Fargo Bank
Minnesota, National Association.
|
|
10
|
.22(4)
|
|
Second Amendment to
Series 2002-A
Supplement, dated as of January 13, 2004, by and among
Marlin Leasing Corporation, Marlin Leasing Receivables Corp. II,
Marlin Leasing Receivables II LLC, Bank One, N.A., and
Wells Fargo Bank Minnesota, National Association.
|
|
10
|
.23(4)
|
|
Third Amendment to
Series 2002-A
Supplement, dated as of March 19, 2004, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. II, Marlin
Leasing Receivables II LLC, Bank One, N.A., and Wells Fargo
Bank Minnesota, National Association.
|
107
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.24(5)
|
|
Fifth Amendment to
Series 2002-A
Supplement, dated as of March 18, 2005, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. II, Marlin
Leasing Receivables II LLC, JP Morgan Chase Bank,
N.A., (successor by merger to Bank One, N.A.), and Wells Fargo
Bank Minnesota, National Association.
|
|
10
|
.25(9)
|
|
Amended & Restated
Series 2002-A
Supplement to the Master Facility Agreement, dated as of
March 15, 2006, by and among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. II, Marlin Leasing
Receivables II LLC, JPMorgan Chase Bank, N.A. and Wells
Fargo Bank, N.A.
|
|
10
|
.26(22)
|
|
Consent and Amendment to the Amended and Restated
Series 2002-A
Supplement, dated as of June 29, 2009, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. II, Marlin
Leasing Receivables II LLC, JP Morgan Chase Bank, N.A., and
Wells Fargo Bank Minnesota, N.A., as the trustee.
|
|
10
|
.27(14)
|
|
First Amendment to the Amended and Restated
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement, dated as of August 30, 2007,
by and among Marlin Leasing Corporation, JP Morgan Chase Bank,
N.A., (successor by merger to Bank One, N.A.), and Wells Fargo
Bank Minnesota, National Association.
|
|
10
|
.28(18)
|
|
First Amendment to the Amended & Restated
Series 2002-A
Supplement to the Master Facility Agreement, dated as of
August 29, 2008, by and among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. II, Marlin Leasing
Receivables II LLC, JPMorgan Chase Bank, N.A. and Wells
Fargo Bank, N.A.
|
|
10
|
.29(23)
|
|
Second Amendment to the Amended and Restated
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement, dated as of March 15, 2009,
among Marlin Leasing Corporation, Marlin Leasing Receivables
Corp. II, Marlin Leasing Receivables II LLC, JPMorgan Chase
Bank, N.A., as the agent and Wells Fargo Bank, N.A., as the
trustee.
|
|
10
|
.30(24)
|
|
Third Amendment to the Amended and Restated
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement, dated as of March 31, 2009,
among Marlin Leasing Corporation, Marlin Leasing Receivables
Corp. II, Marlin Leasing Receivables II LLC, JPMorgan Chase
Bank, N.A., as the agent and Wells Fargo Bank, N.A., as the
trustee.
|
|
10
|
.31
|
|
Compensation Policy for Non-Employee Independent Directors
(Filed herewith).
|
|
10
|
.32(8)
|
|
Transition & Release Agreement made as of
December 6, 2005 (effective as of December 14,
2005) between Bruce E. Sickel and the Registrant.
|
|
10
|
.33(12)
|
|
Separation Agreement, dated December 20, 2006, between
Marlin Business Services Corp. and Gary R. Shivers.
|
|
10
|
.34(16)
|
|
Letter Agreement, dated as of June 11, 2007 and effective
as of March 11, 2008, by and between the Registrant,
Peachtree Equity Investment Management, Inc. and WCI (Private
Equity) LLC.
|
|
10
|
.35(25)
|
|
Loan and Security Agreement, dated as of October 9, 2009,
by and among Marlin Receivables Corp., Marlin Leasing
Corporation, Marlin Business Services Corp. and Wells Fargo
Foothill, LLC.
|
|
16
|
.1(6)
|
|
Letter on Change in Certifying Accountant dated June 27,
2005 from KPMG LLP to the Securities and Exchange Commission.
|
|
21
|
.1
|
|
List of Subsidiaries (Filed herewith)
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP (Filed herewith)
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer of Marlin Business
Services Corp. required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended. (Filed
herewith)
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer of Marlin Business
Services Corp. required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended. (Filed
herewith)
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer of Marlin Business Services Corp. required by
Rule 13a-14(b)
under the Securities Exchange Act of 1934, as amended. (This
exhibit shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Exchange Act of
1933, as amended, or the Securities Exchange Act of 1934, as
amended.). (Furnished herewith)
|
|
|
|
|
|
Management contract or compensatory plan or arrangement. |
108
|
|
|
(1) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Registration Statement on
Form S-1
(File
No. 333-108530),
filed on September 5, 2003, and incorporated by reference
herein. |
|
(2) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants 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 Securities and Exchange Commission as
an exhibit to the Registrants Amendment No. 2 to
Registration Statement on
Form S-1
filed on October 28, 2003 (File
No. 333-108530),
and incorporated by reference herein. |
|
(4) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003 filed on
March 29, 2004, and incorporated by reference herein. |
|
(5) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2005 filed on
May 9, 2005, and incorporated by reference herein. |
|
(6) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated June 24, 2005 filed on June 29, 2005, and
incorporated by reference herein. |
|
(7) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated August 26, 2005 filed on August 26, 2005, and
incorporated by reference herein. |
|
(8) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated December 14, 2005 and filed on December 14,
2005, and incorporated by reference herein. |
|
(9) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 15, 2006 and filed on March 17, 2006, and
incorporated by reference herein. |
|
(10) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated May 19, 2006 and filed on May 25, 2006, and
incorporated by reference herein. |
|
(11) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated November 15, 2006 and filed on November 17,
2006, and incorporated by reference herein. |
|
(12) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated December 20, 2006 and filed on December 21,
2006, and incorporated by reference herein. |
|
(13) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated April 2, 2007 and filed on April 6, 2007, and
incorporated by reference herein. |
|
(14) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated August 30, 2007 and filed on September 5, 2007,
and incorporated by reference herein. |
|
(15) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007 filed on
March 5, 2008, and incorporated by reference herein. |
|
(16) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 11, 2008 and filed on March 17, 2008, and
incorporated by reference herein. |
|
(17) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Registration Statement on
Form S-8
(File
No. 333-151358)
filed on June 2, 2008, and incorporated by reference herein. |
|
(18) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated August 29, 2008 and filed on September 5, 2008,
and incorporated by reference herein. |
|
(19) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated September 12, 2008 and filed on September 16,
2008, and incorporated by reference herein. |
|
(20) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated December 31, 2008 and filed on January 7, 2009,
and incorporated by reference herein. |
|
(21) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 31, 2009 and filed on April 2, 2009, and
incorporated by reference herein. |
109
|
|
|
(22) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated June 29, 2009 and filed on July 2, 2009, and
incorporated by reference herein. |
|
(23) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 15, 2009 and filed on March 17, 2009, and
incorporated by reference herein. |
|
(24) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 31, 2009 and filed on April 2, 2009, and
incorporated by reference herein. |
|
(25) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated October 9, 2009 and filed on October 13, 2009,
and incorporated by reference herein. |
|
(26) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated October 28, 2009 and filed on November 2, 2009,
and incorporated by reference herein. |
110
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 5, 2010
Marlin Business Services
Corp.
Daniel P. Dyer
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Daniel
P. Dyer
Daniel
P. Dyer
|
|
Chief Executive Officer and President (Principal Executive
Officer)
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Lynne
C. Wilson
Lynne
C. Wilson
|
|
Chief Financial Officer and Senior Vice President (Principal
Financial and Accounting Officer)
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Kevin
J. McGinty
Kevin
J. McGinty
|
|
Chairman of the Board of Directors
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ John
J. Calamari
John
J. Calamari
|
|
Director
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Lawrence
J. DeAngelo
Lawrence
J. DeAngelo
|
|
Director
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Edward
Grzedzinski
Edward
Grzedzinski
|
|
Director
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Matthew
J. Sullivan
Matthew
J. Sullivan
|
|
Director
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ James
W. Wert
James
W. Wert
|
|
Director
|
|
March 5, 2010
|
111