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Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011
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 Number) |
300 Fellowship Road, Mount Laurel, NJ 08054
(Address of principal executive offices)
(Zip code)
(Address of principal executive offices)
(Zip code)
(888) 479-9111
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that registrant was required to submit and post such files.)
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934).
Yes o No þ
At July 26, 2011, 12,827,574 shares of Registrants common stock, $.01 par value, were
outstanding.
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2011
for the Quarter Ended June 30, 2011
TABLE OF CONTENTS
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PART I. Financial Information
Item 1. | Condensed Consolidated Financial Statements |
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands, except per- | ||||||||
share data) | ||||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 558 | $ | 2,557 | ||||
Interest-earning deposits with banks |
51,346 | 34,469 | ||||||
Total cash and cash equivalents |
51,904 | 37,026 | ||||||
Restricted interest-earning deposits with banks (includes $24.2 million and $44.7 million
at June 30, 2011 and December 31, 2010, respectively, related to consolidated variable
interest entities (VIEs)) |
30,910 | 47,107 | ||||||
Securities available for sale (amortized cost of $1.7 million and $1.5 million at
June 30, 2011 and December 31, 2010, respectively) |
1,715 | 1,534 | ||||||
Net investment in leases and loans (includes $94.8 million and $154.1 million at June 30, 2011
and December 31, 2010, respectively, related to consolidated VIEs) |
354,525 | 351,569 | ||||||
Property and equipment, net |
2,149 | 2,180 | ||||||
Property tax receivables |
298 | 197 | ||||||
Other assets |
25,747 | 28,449 | ||||||
Total assets |
$ | 467,248 | $ | 468,062 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Long-term borrowings (includes $76.5 million and $128.2 million at June 30, 2011
and December 31, 2010, respectively, related to consolidated VIEs) |
143,794 | 178,650 | ||||||
Deposits |
124,522 | 92,919 | ||||||
Other liabilities: |
||||||||
Sales and property taxes payable |
4,717 | 1,978 | ||||||
Accounts payable and accrued expenses |
7,841 | 8,019 | ||||||
Net deferred income tax liability |
24,803 | 26,493 | ||||||
Total liabilities |
305,677 | 308,059 | ||||||
Commitments and contingencies (Note 6) |
||||||||
Stockholders equity: |
||||||||
Common Stock, $0.01 par value; 75,000,000 shares authorized;
12,886,841 and 12,864,665 shares issued and outstanding at June 30, 2011
and December 31, 2010, respectively |
129 | 129 | ||||||
Preferred Stock, $0.01 par value; 5,000,000 shares authorized; none issued |
| | ||||||
Additional paid-in capital |
86,199 | 86,987 | ||||||
Stock subscription receivable |
(2 | ) | (2 | ) | ||||
Accumulated other comprehensive loss |
(60 | ) | (132 | ) | ||||
Retained earnings |
75,305 | 73,021 | ||||||
Total stockholders equity |
161,571 | 160,003 | ||||||
Total liabilities and stockholders equity |
$ | 467,248 | $ | 468,062 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands, except per-share data) | ||||||||||||||||
Interest income |
$ | 10,863 | $ | 11,994 | $ | 21,763 | $ | 24,823 | ||||||||
Fee income |
2,926 | 3,501 | 6,058 | 7,317 | ||||||||||||
Interest and fee income |
13,789 | 15,495 | 27,821 | 32,140 | ||||||||||||
Interest expense |
3,063 | 3,955 | 6,355 | 8,614 | ||||||||||||
Net interest and fee income |
10,726 | 11,540 | 21,466 | 23,526 | ||||||||||||
Provision for credit losses |
924 | 2,494 | 2,103 | 5,617 | ||||||||||||
Net interest and fee income after provision for credit losses |
9,802 | 9,046 | 19,363 | 17,909 | ||||||||||||
Other income: |
||||||||||||||||
Insurance income |
951 | 987 | 1,928 | 2,144 | ||||||||||||
Loss on derivatives |
(38 | ) | (25 | ) | (43 | ) | (119 | ) | ||||||||
Other income |
434 | 306 | 716 | 596 | ||||||||||||
Other income |
1,347 | 1,268 | 2,601 | 2,621 | ||||||||||||
Other expense: |
||||||||||||||||
Salaries and benefits |
5,384 | 4,588 | 11,321 | 9,713 | ||||||||||||
General and administrative |
3,145 | 3,073 | 6,616 | 6,118 | ||||||||||||
Financing related costs |
157 | 155 | 346 | 302 | ||||||||||||
Other expense |
8,686 | 7,816 | 18,283 | 16,133 | ||||||||||||
Income before income taxes |
2,463 | 2,498 | 3,681 | 4,397 | ||||||||||||
Income tax expense |
933 | 947 | 1,397 | 1,609 | ||||||||||||
Net income |
$ | 1,530 | $ | 1,551 | $ | 2,284 | $ | 2,788 | ||||||||
Basic earnings per share |
$ | 0.12 | $ | 0.12 | $ | 0.18 | $ | 0.22 | ||||||||
Diluted earnings per share |
$ | 0.12 | $ | 0.12 | $ | 0.18 | $ | 0.22 | ||||||||
Weighted average shares used in computing basic earnings
per share |
12,989,681 | 12,832,792 | 12,957,552 | 12,802,579 | ||||||||||||
Weighted average shares used in computing diluted earnings
per share |
13,065,206 | 12,904,163 | 13,033,875 | 12,865,857 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Common | Additional | Stock | Other | Total | ||||||||||||||||||||||||
Common | Stock | Paid-In | Subscription | Comprehensive | Retained | Stockholders | ||||||||||||||||||||||
Shares | Amount | Capital | Receivable | Income (Loss) | Earnings | Equity | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Balance, December 31, 2009 |
12,778,935 | $ | 128 | $ | 84,674 | $ | (3 | ) | $ | (267 | ) | $ | 67,353 | $ | 151,885 | |||||||||||||
Issuance of common stock |
21,398 | | 172 | | | | 172 | |||||||||||||||||||||
Repurchase of common stock |
(80,925 | ) | (1 | ) | (771 | ) | | | | (772 | ) | |||||||||||||||||
Exercise of stock options |
35,864 | 1 | 161 | | | | 162 | |||||||||||||||||||||
Tax benefit on stock options exercised |
| | 72 | | | | 72 | |||||||||||||||||||||
Stock option compensation recognized |
| | 194 | | | | 194 | |||||||||||||||||||||
Payment of receivables |
| | | 1 | | | 1 | |||||||||||||||||||||
Restricted stock grant |
109,393 | 1 | (1 | ) | | | | | ||||||||||||||||||||
Restricted stock compensation
recognized |
| | 2,486 | | | | 2,486 | |||||||||||||||||||||
Net change related to derivatives, net of
tax |
| | | | 138 | | 138 | |||||||||||||||||||||
Net change in unrealized gain/loss on
securities available for sale, net of tax |
| | | | (3 | ) | | (3 | ) | |||||||||||||||||||
Net income |
| | | | | 5,668 | 5,668 | |||||||||||||||||||||
Balance, December 31, 2010 |
12,864,665 | $ | 129 | $ | 86,987 | $ | (2 | ) | $ | (132 | ) | $ | 73,021 | $ | 160,003 | |||||||||||||
Issuance of common stock |
8,598 | | 101 | | | | 101 | |||||||||||||||||||||
Repurchase of common stock |
(258,123 | ) | (3 | ) | (3,058 | ) | | | | (3,061 | ) | |||||||||||||||||
Exercise of stock options |
9,275 | | 62 | | | | 62 | |||||||||||||||||||||
Stock option compensation recognized |
| | 49 | | | | 49 | |||||||||||||||||||||
Restricted stock grant |
262,426 | 3 | (3 | ) | | | | | ||||||||||||||||||||
Restricted stock compensation
recognized |
| | 2,061 | | | | 2,061 | |||||||||||||||||||||
Net change related to derivatives, net of
tax |
| | | | 63 | | 63 | |||||||||||||||||||||
Net change in unrealized gain/loss on
securities available for sale, net of tax |
| | | | 9 | | 9 | |||||||||||||||||||||
Net income |
| | | | | 2,284 | 2,284 | |||||||||||||||||||||
Balance, June 30, 2011 |
12,886,841 | $ | 129 | $ | 86,199 | $ | (2 | ) | $ | (60 | ) | $ | 75,305 | $ | 161,571 | |||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 2,284 | $ | 2,788 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,284 | 1,319 | ||||||
Stock-based compensation |
1,603 | 1,754 | ||||||
Excess tax benefits from stock-based payment arrangements |
(537 | ) | (72 | ) | ||||
Amortization of deferred net loss on cash flow hedge derivatives |
104 | 82 | ||||||
Change in fair value of derivatives |
43 | (2,300 | ) | |||||
Provision for credit losses |
2,103 | 5,617 | ||||||
Net deferred income taxes |
(1,233 | ) | (3,261 | ) | ||||
Amortization of deferred initial direct costs and fees |
2,650 | 3,883 | ||||||
Deferred initial direct costs and fees |
(2,575 | ) | (1,508 | ) | ||||
Loss on equipment disposed |
1,472 | 1,229 | ||||||
Effect of changes in other operating items: |
||||||||
Other assets |
1,818 | 5,483 | ||||||
Other liabilities |
2,587 | 1,960 | ||||||
Net cash provided by operating activities |
11,603 | 16,974 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of equipment for direct financing lease contracts and funds used to originate
loans |
(100,923 | ) | (55,708 | ) | ||||
Principal collections on leases and loans |
92,867 | 113,462 | ||||||
Security deposits collected, net of refunds |
(991 | ) | (1,546 | ) | ||||
Proceeds from the sale of equipment |
2,442 | 2,521 | ||||||
Acquisitions of property and equipment |
(493 | ) | (299 | ) | ||||
Change in restricted interest-earning deposits with banks |
16,197 | (3,146 | ) | |||||
Purchases of securities available for sale |
(165 | ) | (1,513 | ) | ||||
Net cash provided by investing activities |
8,934 | 53,771 | ||||||
Cash flows from financing activities: |
||||||||
Issuances of common stock |
101 | 74 | ||||||
Repurchases of common stock |
(3,061 | ) | (528 | ) | ||||
Exercise of stock options |
31 | 162 | ||||||
Excess tax benefits from stock-based payment arrangements |
537 | 72 | ||||||
Debt issuance costs |
(14 | ) | (969 | ) | ||||
Term securitization advances |
| 68,169 | ||||||
Term securitization repayments |
(51,686 | ) | (92,027 | ) | ||||
Warehouse and bank facility advances |
37,181 | 4,425 | ||||||
Warehouse and bank facility repayments |
(20,351 | ) | (68,566 | ) | ||||
Increase in deposits |
31,603 | 16,564 | ||||||
Net cash used in financing activities |
(5,659 | ) | (72,624 | ) | ||||
Net increase (decrease) in total cash and cash equivalents |
14,878 | (1,879 | ) | |||||
Total cash and cash equivalents, beginning of period |
37,026 | 37,057 | ||||||
Total cash and cash equivalents, end of period |
$ | 51,904 | $ | 35,178 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest on deposits and borrowings |
$ | 5,426 | $ | 7,901 | ||||
Net cash paid (refunds received) for income taxes |
$ | 347 | $ | (1,115 | ) |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Organization
Description
Through its principal operating subsidiary, Marlin Leasing Corporation, Marlin Business Services
Corp. provides equipment leasing solutions nationwide, primarily to small and mid-sized businesses
in a segment of the equipment leasing market commonly referred to in the industry as the
small-ticket segment. The Company finances over 100 categories of commercial equipment important
to its end user customers, including copiers, security systems, computers, telecommunications
equipment and certain commercial and industrial equipment. Effective March 12, 2008, the Company
opened Marlin Business Bank (MBB), a commercial bank chartered by the State of Utah and a member
of the Federal Reserve System. MBB currently provides diversification of the Companys funding
sources through the issuance of certificates of deposit. Marlin Business Services Corp. is managed
as a single business segment. Marlin Business Services Corp. is a bank holding company and a
financial holding company regulated by the Federal Reserve Board under the Bank Holding Company
Act.
References to the Company, Marlin, Registrant, we, us and our herein refer to Marlin
Business Services Corp. and its wholly-owned subsidiaries, unless the context otherwise requires.
NOTE 2 Basis of Financial Statement Presentation and Critical Accounting Policies
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of normal recurring items) necessary to present
fairly the Companys financial position at June 30, 2011 and the results of operations for the
three- and six-month periods ended June 30, 2011 and 2010, and cash flows for the six-month periods
ended June 30, 2011 and 2010. These unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and note disclosures included in the
Companys Form 10-K filed with the Securities and Exchange Commission (SEC) on March 16, 2011.
The consolidated results of operations for the three- and six-month periods ended June 30, 2011 and
2010 are not necessarily indicative of the results for the respective full years or any other
period. All intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates. The preparation of financial statements in accordance with generally accepted
accounting principles in the United States (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 fair value of financial instruments and income taxes. Actual results could
differ from those estimates.
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 each lease. Generally, when a lease or loan is 90 days or more delinquent, the
contract is classified as non-accrual, and we do not recognize interest income on that contract
until it is less than 90 days delinquent.
Modifications to leases are accounted for in accordance with Topic 840 of the Financial Accounting
Standards Board Accounting Standards Codification (FASB ASC). Modifications resulting in
renegotiated leases may include reductions in payment and extensions in term. However, such
renegotiated leases are not granted concessions regarding implicit rates or reductions in total
amounts due. Modifications may be granted on a one-time basis in situations that indicate the
lessee is experiencing a temporary, timing issue and has a high likelihood of success with a
revised payment plan. After a modification, a leases accrual status is based on compliance with
the modified terms.
Fee income. Fee income consists of fees for delinquent lease and loan payments, cash collected on
early termination of leases and net residual income. Net residual income includes income from lease
renewals and gains and losses on the realization of residual values of leased equipment disposed of
at the end of a leases term. Residual income is recognized as earned.
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Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated
collection rates. At a minimum of every quarter, an analysis of anticipated collection rates is
performed based on updates to collection history. Adjustments in the anticipated collection rate
assumptions are made as needed based on this analysis. Other fees are recognized when received.
Insurance income. Insurance income is recognized on an accrual basis as earned over the term of
each lease. Generally, insurance payments that are 120 days or more past due are charged against
income. Ceding commissions, losses and loss adjustment expenses are recorded in the period incurred
and netted against insurance income.
Other income. Other income includes various administrative transaction fees, fees received from
lease syndications and gains on sales of leases.
Securities available for sale. Securities available for sale consist of mutual funds. Securities
available for sale are measured at fair value on a recurring basis, computed using fair value
measurements classified as Level 1 (as defined in Note 9, Fair Value Measurements and Disclosures
about the Fair Value of Financial Instruments), since prices are obtained from quoted prices in an
active market. Unrealized holding gains or losses, net of related deferred income taxes, are
reported in accumulated other comprehensive income.
Initial direct costs and fees. We defer initial direct costs incurred and fees received to
originate our leases and loans in accordance with the Receivables Topic and the Nonrefundable Fees
and Other Costs Subtopic of the FASB ASC. The initial direct costs and fees we defer are part of
the net investment in leases and loans and are amortized to interest income using the effective
interest method. We defer third-party commission costs, as well as certain internal costs directly
related to the origination activity. Costs subject to deferral include evaluating each prospective
customers financial condition, evaluating and recording guarantees and other security
arrangements, negotiating terms, preparing and processing documents and closing each transaction.
The fees we defer are documentation fees collected at inception. The realization of the initial
direct costs, net of fees deferred, is predicated on the net future cash flows generated by our
lease and loan portfolios.
Net Investment in Leases and Loans. The Company uses the direct financing method of accounting to
record its direct financing leases and related interest income. At the inception of a lease, the
Company records as an asset the aggregate future minimum lease payments receivable, plus the
estimated residual value of the leased equipment, less unearned lease income. Residual values
generally reflect the estimated amounts to be received at lease termination from lease extensions,
sales or other dispositions of leased equipment. Estimates are based on industry data and
managements experience.
The Company records an estimated residual value at lease inception for all fair market value and
fixed purchase option leases based on a percentage of the equipment cost of the asset being leased.
The percentages used depend on equipment type and term. In setting and reviewing estimated
residual values, the Company focuses its analysis primarily on total historical and expected
realization statistics pertaining to both lease renewals and sales of equipment.
At the end of an original lease term, lessees may choose to purchase the equipment, renew the lease
or return the equipment to the Company. The Company receives income from lease renewals when a
lessee elects to retain the equipment longer than the original term of the lease. This income, net
of appropriate periodic reductions in the estimated residual values of the related equipment, is
included in fee income as net residual income.
When a lessee elects to return equipment at lease termination, the equipment is transferred to
other assets at the lower of its basis or fair market value. The Company generally sells returned
equipment to independent third parties, rather than leasing the equipment a second time. The
Company does not maintain equipment in other assets for longer than 120 days. Any loss recognized
on transferring equipment to other assets and any gain or loss realized on the sale or disposal of
equipment to a lessee or to others are included in fee income as net residual income.
Based on the Companys experience, the amount of ultimate realization of the residual value tends
to relate more to the customers election at the end of the lease term to enter into a renewal
period, to purchase the leased equipment or to return the leased equipment than it does to the
equipment type. Management performs periodic reviews of the estimated residual values and historic
realization statistics no less frequently than quarterly and any impairment, if other than
temporary, is recognized in the current period.
Allowance for credit losses. In accordance with the Contingencies Topic of the FASB ASC, we
maintain an allowance for credit losses at an amount sufficient to absorb losses inherent in our
existing lease and loan portfolios as of the reporting dates based on our projection of probable
net credit losses. We evaluate our portfolios on a pooled basis, due to their composition of small
balance,
homogenous accounts with similar general credit risk characteristics, diversified among a large
cross-section of variables, including industry, geography, equipment type, obligor and vendor.
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We consider both quantitative and qualitative factors in determining the allowance for credit
losses. Quantitative factors considered include a migration analysis, historic delinquencies and
charge-offs, historic bankruptcies, historic performance of restructured accounts and a static pool
analysis of historic recoveries. A migration analysis is a technique used to estimate the
likelihood that an account will progress through the various delinquency stages and ultimately
reach charge-off. Qualitative factors that may result in further adjustments to the quantitative
analysis include items such as forecasting uncertainties, changes in the composition of our lease
and loan portfolios (including geography, industry, equipment type and vendor source), seasonality,
economic conditions and trends or business practices at the reporting date that are different from
the periods used in the quantitative analysis.
The various factors used in the analysis are reviewed periodically, and no less frequently than
quarterly. We then establish an allowance for credit losses for the projected probable net credit
losses based on this analysis. A provision is charged against earnings to maintain the allowance
for credit losses at the appropriate level. Our policy is to charge-off against the allowance the
estimated unrecoverable portion of accounts once they reach 121 days delinquent.
Our projections of probable net credit losses are inherently uncertain, and as a result we cannot
predict with certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy laws and other factors could impact
our actual and projected net credit losses and the related allowance for credit losses. To the
extent we add new leases and loans to our portfolios, or to the degree credit quality is worse than
expected, we record expense to increase the allowance for credit losses to reflect the estimated
net losses inherent in our portfolios. Actual losses may vary from current estimates.
As previously disclosed, based on feedback the Company received from the Federal Reserve Bank of
Philadelphia in April 2011, the Company is operating under its established methodology for
determining its allowance for credit losses (the Allowance), which methodology will be reviewed
by the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions
during their next regularly scheduled commercial bank examination of Marlin Business Bank.
Securitizations. In connection with each of its term note securitization transactions, the Company
established a bankruptcy remote special-purpose subsidiary (SPE) and issued term debt to
institutional investors. These SPEs are each considered VIEs under U.S. GAAP. The Company is
required to consolidate VIEs in which it is deemed to be the primary beneficiary through having (1)
power over the significant activities of the entity and (2) an obligation to absorb losses or the
right to receive benefits from the VIE which are potentially significant to the VIE. The Company
continues to service the assets of its VIEs and retain equity and/or residual interests.
Accordingly, assets and related debt of these VIEs are included in the accompanying Consolidated
Balance Sheets. The Companys leases and restricted interest-earning deposits with banks are
assigned as collateral for these borrowings and there is no further recourse to our general credit.
Collateral in excess of these borrowings represents the Companys maximum loss exposure.
Common stock and equity. On November 2, 2007, the Companys Board of Directors approved a stock
repurchase plan. Under the stock repurchase plan, the Company is authorized to repurchase its
common stock on the open market. The par value of the shares repurchased is charged to common stock
with the excess of the purchase price over par charged against any available additional paid-in
capital.
Stock-based compensation. The CompensationStock Compensation Topic of the FASB ASC establishes
fair value as the measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in accounting for share-based
payment transactions with employees and non-employees, except for equity instruments held by
employee share ownership plans.
The Company measures stock-based compensation cost at grant date, based on the fair value of the
awards ultimately expected to vest. Compensation cost is recognized on a straight-line basis over
the service period. We generally 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
managements judgment concerning future events.
The Company uses its judgment in estimating the amount of awards that are expected to be forfeited,
with subsequent revisions to the assumptions if actual forfeitures differ from those estimates. In
addition, for performance-based awards, the Company estimates the degree to which the performance
conditions will be met to estimate the number of shares expected to vest and the related
compensation expense. Compensation expense is adjusted in the period such performance estimates
change.
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Income taxes. The Income Taxes Topic of the FASB ASC requires the use of the asset and liability
method under which deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and liabilities, given the
provisions of the enacted tax laws. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities and projected
future taxable income in making this assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences.
Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax
assets. The process involves summarizing temporary differences resulting from the different
treatment of items, such as leases, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities which are included within the Consolidated Balance Sheets.
Management then assesses the likelihood that deferred tax assets will be recovered from future
taxable income or tax carry-back availability and, to the extent management believes recovery is
not likely, a valuation allowance is established. To the extent that we establish a valuation
allowance in a period, an expense is recorded within the tax provision in the Consolidated
Statements of Operations.
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 June 30, 2011, 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 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. Pursuant to the Earnings Per Share Topic of the FASB ASC, unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and are included in the computation of earnings per
share (EPS) using the two-class method.
Basic EPS 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 EPS 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.
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NOTE 3 Net Investment in Leases and Loans
Net investment in leases and loans consists of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Minimum lease payments receivable |
$ | 396,031 | $ | 389,247 | ||||
Estimated residual value of equipment |
34,860 | 37,320 | ||||||
Unearned lease income, net of initial direct costs and fees deferred |
(66,847 | ) | (63,355 | ) | ||||
Security deposits |
(4,035 | ) | (5,026 | ) | ||||
Loans, including unamortized deferred fees and costs |
691 | 1,101 | ||||||
Allowance for credit losses |
(6,175 | ) | (7,718 | ) | ||||
$ | 354,525 | $ | 351,569 | |||||
At June 30, 2011, a total of $194.4 million of minimum lease payments receivable is assigned as
collateral for borrowings, including the amounts related to consolidated VIEs.
Initial direct costs net of fees deferred were $6.7 million and $6.8 million as of June 30, 2011
and December 31, 2010, respectively, and are netted in unearned income and will be amortized to
income using the effective interest method. At June 30, 2011 and December 31, 2010, $28.5 million
and $30.6 million, respectively, of the estimated residual value of equipment retained on our
Consolidated Balance Sheets was related to copiers.
Minimum lease payments receivable under lease contracts and the amortization of unearned lease
income, including initial direct costs and fees deferred, are as follows as of June 30, 2011:
Minimum Lease | ||||||||
Payments | Income | |||||||
Receivable | Amortization | |||||||
(Dollars in thousands) | ||||||||
Period Ending December 31, |
||||||||
2011 |
$ | 95,793 | $ | 19,681 | ||||
2012 |
142,332 | 25,815 | ||||||
2013 |
85,349 | 13,334 | ||||||
2014 |
44,176 | 5,919 | ||||||
2015 |
23,907 | 1,948 | ||||||
Thereafter |
4,474 | 150 | ||||||
$ | 396,031 | $ | 66,847 | |||||
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 June 30, 2011 and December 31, 2010, the Company maintained total finance
receivables which were on a non-accrual basis of $1.2 million and $2.0 million, respectively. As of
June 30, 2011 and December 31, 2010, the Company had total finance receivables in which the terms
of the original agreements had been renegotiated in the amount of $1.5 million and $2.2 million,
respectively. (See Note 4 for additional asset quality information.)
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NOTE 4 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 estimate of probable net credit losses.
The chart which follows provides activity in the allowance for credit losses and asset quality
statistics.
Three Months Ended | Six Months Ended | Year Ended | ||||||||||||||||||
June 30, | June 30, | December 31, | ||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2010 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Allowance for credit losses, beginning of
period |
$ | 6,887 | $ | 10,253 | $ | 7,718 | $ | 12,193 | $ | 12,193 | ||||||||||
Charge-offs |
(2,247 | ) | (4,438 | ) | (4,875 | ) | (10,364 | ) | (17,095 | ) | ||||||||||
Recoveries |
611 | 842 | 1,229 | 1,705 | 3,182 | |||||||||||||||
Net charge-offs |
(1,636 | ) | (3,596 | ) | (3,646 | ) | (8,659 | ) | (13,913 | ) | ||||||||||
Provision for credit losses |
924 | 2,494 | 2,103 | 5,617 | 9,438 | |||||||||||||||
Allowance for credit losses, end of period(1) |
$ | 6,175 | $ | 9,151 | $ | 6,175 | $ | 9,151 | $ | 7,718 | ||||||||||
Annualized net charge-offs to average total
finance receivables (2) |
1.86 | % | 3.63 | % | 2.08 | % | 4.19 | % | 3.58 | % | ||||||||||
Allowance for credit losses to total
finance receivables, end of period (2) |
1.74 | % | 2.40 | % | 1.74 | % | 2.40 | % | 2.19 | % | ||||||||||
Average total finance receivables (2) |
$ | 351,389 | $ | 395,906 | $ | 350,296 | $ | 413,541 | $ | 389,001 | ||||||||||
Total finance receivables, end of period (2) |
$ | 354,014 | $ | 381,977 | $ | 354,014 | $ | 381,977 | $ | 352,527 | ||||||||||
Delinquencies greater than 60 days past due |
$ | 2,221 | $ | 5,202 | $ | 2,221 | $ | 5,202 | $ | 3,504 | ||||||||||
Delinquencies greater than 60 days past due (3) |
0.56 | % | 1.24 | % | 0.56 | % | 1.24 | % | 0.90 | % | ||||||||||
Allowance for credit losses to delinquent
accounts greater than 60 days past due (3) |
278.03 | % | 175.91 | % | 278.03 | % | 175.91 | % | 220.26 | % | ||||||||||
Non-accrual leases and loans, end of period |
$ | 1,197 | $ | 2,819 | $ | 1,197 | $ | 2,819 | $ | 1,996 | ||||||||||
Renegotiated leases and loans, end of period |
$ | 1,485 | $ | 3,024 | $ | 1,485 | $ | 3,024 | $ | 2,221 |
(1) | The allowance for credit losses allocated to loans at June 30, 2011, June 30, 2010
and December 31, 2010, was $0.1 million, $0.2 million and $0.1 million, respectively. |
|
(2) | Total finance receivables include net investment in direct financing leases and
loans. For purposes of asset quality and allowance calculations, the effects of (i) the
allowance for credit losses and (ii) initial direct costs and fees deferred are excluded. |
|
(3) | Calculated as a percent of minimum lease payments receivable for leases and as a
percent of principal outstanding for loans. |
Net investments in finance receivables are generally charged-off when they are contractually past
due for 121 days. 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. At June 30, 2011, June 30, 2010 and December 31, 2010, there were no
finance receivables past due 90 days or more and still accruing.
Net charge-offs for the three-month period ended June 30, 2011 were $1.6 million (1.86% of average
total finance receivables on an annualized basis), compared to $2.0 million (2.30% of average total
finance receivables on an annualized basis) for the three-month period ended March 31, 2011. The
decrease in net charge-offs during the three-month period ended June 30, 2011 compared to recent
previous periods is primarily due to improving delinquency migrations and lower portfolio balances.
Our key credit quality indicator is delinquency status.
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As previously disclosed, based on feedback the Company received from the Federal Reserve Bank of
Philadelphia in April 2011, the Company is operating under its established methodology for
determining its allowance for credit losses (the Allowance), which methodology will be reviewed
by the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions
during their next regularly scheduled commercial bank examination of Marlin Business Bank.
NOTE 5 Other Assets
Other assets are comprised of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Accrued fees receivable |
$ | 1,918 | $ | 2,250 | ||||
Deferred transaction costs |
1,770 | 2,420 | ||||||
Prepaid expenses |
1,171 | 1,674 | ||||||
Income taxes receivable |
18,425 | 20,711 | ||||||
Other |
2,463 | 1,394 | ||||||
$ | 25,747 | $ | 28,449 | |||||
NOTE 6 Commitments and Contingencies
The Company is involved in legal proceedings, which include claims, litigation and suits arising in
the ordinary course of business. In the opinion of management, these actions will not have a
material impact on the Companys consolidated financial position, results of operations or cash
flows.
NOTE 7 Short-term and Long-term Borrowings
Borrowings with an original maturity of less than one year are classified as short-term borrowings.
MBBs federal funds purchased are classified as short-term borrowings. Borrowings with an original
maturity of one year or more are classified as long-term borrowings. The Companys term note
securitizations and long-term loan facilities are classified as long-term borrowings.
Scheduled principal and interest payments on outstanding borrowings as of June 30, 2011 are as
follows:
Principal | Interest(1) | |||||||
(Dollars in thousands) | ||||||||
Period Ending December 31, |
||||||||
2011 |
$ | 30,934 | $ | 3,882 | ||||
2012 |
101,526 | 3,569 | ||||||
2013 |
8,563 | 247 | ||||||
2014 |
1,623 | 102 | ||||||
2015 |
1,031 | 26 | ||||||
Thereafter |
117 | | ||||||
Total |
$ | 143,794 | $ | 7,826 | ||||
(1) | Interest on variable-rate long-term borrowings is assumed at the June 30, 2011
rate for the remaining term. |
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NOTE 8 Deposits
Effective March 12, 2008, the Company opened MBB. MBB currently provides diversification of the
Companys funding sources primarily through the issuance of Federal Deposit Insurance Corporation
(FDIC) insured certificates of deposit raised nationally through various brokered deposit
relationships and through FDIC-insured retail deposits directly from other financial institutions.
As of June 30, 2011, the remaining scheduled maturities of time deposits are as follows:
Scheduled | ||||
Maturities | ||||
(Dollars in | ||||
thousands) | ||||
Period Ending December 31, |
||||
2011 |
$ | 16,373 | ||
2012 |
37,547 | |||
2013 |
33,993 | |||
2014 |
19,723 | |||
2015 |
14,582 | |||
Thereafter |
2,304 | |||
Total |
$ | 124,522 | ||
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 June 30, 2011 was 2.08%.
NOTE 9 Fair Value Measurements and Disclosures about the Fair Value of Financial Instruments
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 and measurement, which
is addressed in the Leases Topic of the FASB ASC.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the principal or most
advantageous market for the asset or liability at the measurement date (exit price). A three-level
valuation hierarchy is required for disclosure of fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement date. The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The level in the fair value hierarchy within which the fair value measurement in its entirety falls
is determined based on the lowest level input that is significant to the measurement in its
entirety.
The three levels are defined as follows:
| Level 1 Inputs to the valuation are unadjusted quoted prices in active markets for
identical assets or liabilities. |
| Level 2 Inputs to the valuation may include quoted prices for similar assets and
liabilities in active or inactive markets, and inputs other than quoted prices, such as
interest rates and yield curves, which are observable for the asset or liability for
substantially the full term of the financial instrument. |
| Level 3 Inputs to the valuation are unobservable and significant to the fair value
measurement. Level 3 inputs shall be used to measure fair value only to the extent that
observable inputs are not available. |
The Company uses derivative financial instruments to manage exposure to the effects of changes in
market interest rates and to fulfill certain covenants in our borrowing arrangements. All
derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or
liabilities using measurements classified as Level 2. Because the Companys derivatives are not
listed on an exchange, the Company values these instruments using a valuation model with pricing
inputs that are observable in the market or that can be derived principally from or corroborated by
observable market data. These inputs include the forward London Interbank Offered Rate (LIBOR)
curve on which the variable payments are based and the applicable interest-rate swap market curve.
The Companys methodology also incorporates the impact of both the Companys and the counterpartys
credit standing.
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All of the Companys derivatives are measured at fair value on a recurring basis, computed using
fair value measurements classified as Level 2. The fair value of securities available for sale is
computed using fair value measurements classified as Level 1, since prices are obtained from quoted
prices in an active market. The Companys balances measured at fair value on a recurring basis
include the following:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||
Level 1 | Level 2 | Level 1 | Level 2 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Securities available for sale |
$ | 1,715 | $ | | $ | 1,534 | $ | | ||||||||
Interest-rate caps purchased |
| 16 | | 14 |
At this time, the Company has not elected to report any assets and liabilities using the fair value
option available under the Financial Instruments Topic of the FASB ASC.
Disclosures about the Fair Value of Financial Instruments
The Financial Instruments Topic of the FASB ASC requires the disclosure of the estimated fair value
of financial instruments, including those financial instruments not measured at fair value on a
recurring basis. This requirement excludes certain instruments, such as the net investment in
leases and all nonfinancial instruments.
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:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 51,904 | $ | 51,904 | $ | 37,026 | $ | 37,026 | ||||||||
Restricted interest-earning deposits with banks |
30,910 | 30,910 | 47,107 | 47,107 | ||||||||||||
Securities available for sale |
1,715 | 1,715 | 1,534 | 1,534 | ||||||||||||
Loans |
686 | 686 | 1,040 | 1,025 | ||||||||||||
Interest-rate caps purchased |
16 | 16 | 14 | 14 | ||||||||||||
Liabilities |
||||||||||||||||
Long-term borrowings |
143,794 | 146,519 | 178,650 | 183,088 | ||||||||||||
Deposits |
124,522 | 126,111 | 92,919 | 94,602 | ||||||||||||
Accounts payable and accrued
expenses (1) |
12,558 | 12,558 | 9,997 | 9,997 |
(1) | Includes sales and property taxes payable. |
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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 June
30, 2011 and December 31, 2010, 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 June 30, 2011
and December 31, 2010.
(c) Securities Available for Sale
The fair value of securities available for sale is recorded using prices obtained from quoted
prices in an active market.
(d) Loans
The fair value of loans is estimated by discounting contractual cash flows, using interest rates
currently being offered by the Company for loans with similar terms and remaining maturities to
borrowers with similar credit risk characteristics. Estimates utilized were based on the original
credit status of the borrowers combined with the portfolio delinquency statistics.
(e) Interest-Rate Caps
Interest-rate caps are measured at fair value on a recurring basis in accordance with the
requirements of the Fair Value Measurements and Disclosures Topic of the FASB ASC, using the inputs
and methods described previously in the first section of this Note 9.
(f) Long-Term Borrowings
The fair value of the Companys debt and secured borrowings is estimated by discounting cash flows
at indicative market rates applicable to the Companys debt and secured borrowings of the same or
similar remaining maturities.
(g) Deposits
The fair value of the Companys deposits is estimated by discounting cash flows at current rates
paid by the Company for similar certificates of deposit of the same or similar remaining
maturities.
(h) Accounts Payable and Accrued Expenses
The carrying amount of the Companys accounts payable and accrued expenses approximates fair value
as of June 30, 2011 and December 31, 2010, because of the relatively short timeframe to
realization.
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NOTE 10 Earnings Per Common Share
Pursuant to the Earnings Per Share Topic of the FASB ASC, unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and are included in the computation of EPS using the two-class method.
Basic EPS 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 EPS is computed
based on the weighted average number of common shares outstanding for the period using the
two-class method, which includes our unvested restricted stock awards as participating securities,
and the dilutive impact of the exercise or conversion of common stock equivalents, such as stock
options, into shares of common stock as if those securities were exercised or converted.
The following table provides net income and shares used in computing basic and diluted EPS:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands, except per-share data) | ||||||||||||||||
Net income |
$ | 1,530 | $ | 1,551 | $ | 2,284 | $ | 2,788 | ||||||||
Weighted average common shares outstanding |
11,979,787 | 11,899,847 | 11,957,281 | 11,854,044 | ||||||||||||
Add: Unvested restricted stock awards
considered participating
securities |
1,009,894 | 932,945 | 1,000,271 | 948,535 | ||||||||||||
Adjusted weighted average common shares used in computing
basic EPS |
12,989,681 | 12,832,792 | 12,957,552 | 12,802,579 | ||||||||||||
Add: Effect of dilutive stock options |
75,525 | 71,371 | 76,323 | 63,278 | ||||||||||||
Adjusted weighted average common shares used in computing
diluted EPS |
13,065,206 | 12,904,163 | 13,033,875 | 12,865,857 | ||||||||||||
Net earnings per common share: |
||||||||||||||||
Basic |
$ | 0.12 | $ | 0.12 | $ | 0.18 | $ | 0.22 | ||||||||
Diluted |
$ | 0.12 | $ | 0.12 | $ | 0.18 | $ | 0.22 | ||||||||
For the three-month periods ended June 30, 2011 and June 30, 2010, options to purchase 323,585 and
381,378 shares of common stock were not considered in the computation of potential common shares
for purposes of diluted EPS, since the exercise prices of the options were greater than the average
market price of the Companys common stock for the respective periods.
For the six-month periods ended June 30, 2011 and June 30, 2010, options to purchase 343,752 and
428,405 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.
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NOTE 11 Comprehensive Income
The following table details the components of comprehensive income:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income |
$ | 1,530 | $ | 1,551 | $ | 2,284 | $ | 2,788 | ||||||||
Other comprehensive income: |
||||||||||||||||
Amortization of net deferred losses on
cash flow hedge derivatives |
46 | 40 | 104 | 82 | ||||||||||||
Change in fair value of securities available for sale |
20 | 20 | 16 | 20 | ||||||||||||
Tax effect |
(26 | ) | (23 | ) | (48 | ) | (40 | ) | ||||||||
Total other comprehensive income |
40 | 37 | 72 | 62 | ||||||||||||
Comprehensive income |
$ | 1,570 | $ | 1,588 | $ | 2,356 | $ | 2,850 | ||||||||
NOTE 12 Stockholders Equity
Stockholders Equity
On November 2, 2007, the Companys Board of Directors approved a stock repurchase plan. Under this
program, the Company is authorized to repurchase up to $15 million in value of its outstanding
shares of common stock. This authority may be exercised from time to time and in such amounts as
market conditions warrant. Any shares purchased under this plan are returned to the status of
authorized but unissued shares of common stock. The repurchases may be made on the open market, in
block trades or otherwise. The program may be suspended or discontinued at any time. The
repurchases are funded using the Companys working capital.
The Company purchased 155,604 shares of its common stock at an average cost of $12.04 per share
during the three-month period ended June 30, 2011. The Company purchased 171,198 shares of its
common stock at an average cost of $11.98 per share during the six-month period ended June 30,
2011. The Company did not purchase any shares of its common stock on the open market during the
three- or six-month periods ended June 30, 2010. At June 30, 2011, the Company had $8.4 million
remaining in its stock repurchase plan authorized by the Board of Directors.
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 29,730 and 86,925 shares repurchased to cover income taxes during the three- and
six-month periods ended June 30, 2011, at average per-share costs of $12.47 and $11.62,
respectively. There were 3,570 and 58,170 shares repurchased to cover income taxes during the
three- and six-month periods ended June 30, 2010, at average per-share costs of $12.08 and $9.08,
respectively.
Regulatory Capital Requirements
On March 20, 2007, the FDIC approved the application of 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.
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On December 31, 2008, MBB received approval from the Federal Reserve Bank of San Francisco to (i)
convert from an industrial bank to a state-chartered commercial bank and (ii) become a member of
the Federal Reserve System. In addition, on December 31, 2008, Marlin Business Services Corp.
received approval from the Federal Reserve Bank of Philadelphia to become a bank holding company
upon conversion of MBB from an industrial bank to a commercial bank. On January 13, 2009, pursuant
to the December 31, 2008 approval from the Federal Reserve Bank of San Francisco, MBB converted
from an industrial bank to a commercial bank chartered in the State of Utah and supervised by the
State of Utah and the Federal Reserve Board. In connection with MBBs conversion to a commercial
bank and pursuant to the December 31, 2008 approval from the Federal Reserve Bank of Philadelphia,
on January 13, 2009 Marlin Business Services Corp. became a bank holding company, and is subject to
the Bank Holding Company Act and supervised by the Federal Reserve Board. Until March 12, 2011, MBB
operated in accordance with its original de novo three-year business plan (as required by the
original FDIC order issued on March 20, 2007 (the FDIC Order)), which assumed total assets of up
to $128 million by March 12, 2011 (when its three-year de novo period expired). In March 2011,
following the expiration of the de novo period, the Company provided MBB with $25.0 million of
additional capital to support future growth.
On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of
Marlin Business Services Corp.s election to become a financial holding company (while remaining a
bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section
225.82 of the Federal Reserve Boards Regulation Y. Such election permits the Company to engage in
activities that are financial in nature or incidental to a financial activity, including the
maintenance and expansion of our reinsurance activities conducted through our wholly-owned
subsidiary, AssuranceOne, Ltd.
MBB is subject to capital adequacy guidelines issued by the Federal Financial Institutions
Examination Council (the FFIEC). These risk-based capital and leverage guidelines make regulatory
capital requirements more sensitive to differences in risk profiles among banking organizations and
consider off-balance sheet exposures in determining capital adequacy. The FFIEC and/or the U.S.
Congress may determine to increase capital requirements in the future due to the current economic
environment. Under the rules and regulations of the FFIEC, at least half of a banks total capital
is required to be Tier 1 Capital as defined in the regulations, comprised of common equity,
retained earnings and a limited amount of non-cumulative perpetual preferred stock. The remaining
capital, Tier 2 Capital, as defined in the regulations, may consist of other preferred stock, a
limited amount of term subordinated debt or a limited amount of the reserve for possible credit
losses. The FFIEC has also adopted minimum leverage ratios for banks, which are calculated
by dividing Tier 1 Capital by total quarterly average assets. Recognizing that the risk-based
capital standards principally address credit risk rather than interest rate, liquidity, operational
or other risks, many banks are expected to maintain capital in excess of the minimum standards. The
Company plans to provide the necessary capital to maintain MBB at well-capitalized status as
defined by banking regulations. MBBs equity balance at June 30, 2011 was $47.4 million, which met
all capital requirements to which MBB is subject and qualified MBB for well-capitalized status.
Bank holding companies are required to comply with the Federal Reserve Boards risk-based capital
guidelines that require a minimum ratio of total capital to risk-weighted assets of 8%. At least
half of the total capital is required to be Tier 1 Capital. In addition to the risk-based capital
guidelines, the Federal Reserve Board has adopted a minimum leverage capital ratio under which a
bank holding company must maintain a ratio of Tier 1 Capital to average total consolidated assets
of at least 3% in the case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a leverage capital ratio of at least 4%. At June 30, 2011, Marlin Business
Services Corp. also exceeded its regulatory capital requirements and was considered
well-capitalized as defined by federal banking regulations.
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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 June 30, 2011.
Minimum Capital | Well-Capitalized Capital | |||||||||||||||||||||||
Actual | Requirement | Requirement | ||||||||||||||||||||||
Ratio | Amount | Ratio (1) | Amount | Ratio | Amount | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Tier 1 Leverage Capital |
||||||||||||||||||||||||
Marlin Business Services Corp. |
34.35 | % | $ | 161,631 | 4 | % | $ | 18,821 | 5 | % | $ | 23,526 | ||||||||||||
Marlin Business Bank |
28.96 | % | $ | 47,350 | 5 | % | $ | 8,174 | 5 | % | $ | 8,174 | ||||||||||||
Tier 1 Risk-based Capital |
||||||||||||||||||||||||
Marlin Business Services Corp. |
40.10 | % | $ | 161,631 | 4 | % | $ | 16,124 | 6 | % | $ | 24,186 | ||||||||||||
Marlin Business Bank |
28.39 | % | $ | 47,350 | 6 | % | $ | 10,007 | 6 | % | $ | 10,007 | ||||||||||||
Total Risk-based Capital |
||||||||||||||||||||||||
Marlin Business Services Corp. |
41.35 | % | $ | 166,684 | 8 | % | $ | 32,248 | 10 | % | $ | 40,310 | ||||||||||||
Marlin Business Bank |
29.42 | % | $ | 49,069 | 15 | % | $ | 25,016 | 10 | % (1) | $ | 16,678 |
(1) | MBB is required to maintain well-capitalized status. In addition, MBB must
maintain a total risk-based capital ratio greater than 15% pursuant to the FDIC Order. |
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) requires the federal regulators to take prompt corrective action against any
undercapitalized institution. FDICIA establishes five capital categories: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Well-capitalized institutions significantly exceed the required minimum level
for each relevant capital measure. Adequately capitalized institutions include depository
institutions that meet but do not significantly exceed the required minimum level for each relevant
capital measure. Undercapitalized institutions consist of those that fail to meet the required
minimum level for one or more relevant capital measures. Significantly undercapitalized
characterizes depository institutions with capital levels significantly below the minimum
requirements for any relevant capital measure. Critically undercapitalized refers to depository
institutions with minimal capital and at serious risk for government seizure.
Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized
institution may be treated as if the institution were in the next lower capital category. A
depository institution is generally prohibited from making capital distributions, including paying
dividends, or paying management fees to a holding company if the institution would thereafter be
undercapitalized. Institutions that are adequately capitalized but not well-capitalized cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions
may not accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or, in certain cases, required to take certain
actions with respect to institutions falling within one of the three undercapitalized categories.
Depending on the level of an institutions capital, the agencys corrective powers include, among
other things:
| prohibiting the payment of principal and interest on subordinated debt; |
| prohibiting the holding company from making distributions without prior regulatory
approval; |
| placing limits on asset growth and restrictions on activities; |
| placing additional restrictions on transactions with affiliates; |
| restricting the interest rate the institution may pay on deposits; |
| prohibiting the institution from accepting deposits from correspondent banks; and |
| in the most severe cases, appointing a conservator or receiver for the institution. |
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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 FDIC Order, MBB must keep its total risk-based capital ratio above 15%. MBBs
equity balance at June 30, 2011 was $47.4 million, which qualifies MBB 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. Additionally, pursuant to the FDIC Order, MBB was not permitted to pay dividends during
its first three years of operations without the prior written approval of the FDIC and the State of
Utah (such initial three-year period ended on March 12, 2011).
NOTE 13 Stock-Based Compensation
Under the terms of the 2003 Plan, employees, certain consultants and advisors and non-employee
members of the Companys Board of Directors 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 Companys Board of Directors. These award programs are used
to attract, retain and motivate employees and to encourage individuals in key management roles to
retain stock. The Company has a policy of issuing new shares to satisfy awards under the 2003
Plan. The aggregate number of shares under the 2003 Plan that may be issued pursuant to stock
options or restricted stock grants is 3,300,000. Not more than 1,650,000 of such shares shall be
available for issuance as restricted stock grants. There were 211,729 shares available for future
grants under the 2003 Plan as of June 30, 2011.
Total stock-based compensation expense was $0.5 million for the three-month period ended June 30,
2011 and $0.4 million for the three-month period ended June 30, 2010. Total stock-based
compensation expense was $1.6 million and $1.7 million for the six-month periods ended June 30,
2011 and June 30, 2010, respectively. Excess tax benefits from stock-based payment arrangements
decreased cash provided by operating activities and increased cash provided by financing activities
by $0.5 million and $0.1 million for the six-month periods ended June 30, 2011 and June 30, 2010,
respectively.
Stock Options
Option awards are generally granted with an exercise price equal to the market price of the
Companys stock at the date of the grant and have 7- to 10-year contractual terms. All options
issued contain service conditions based on the participants continued service with the Company,
and provide for accelerated vesting if there is a change in control as defined in the 2003 Plan.
Employee stock options generally vest over four years. The vesting of certain options is contingent
on various Company performance measures, such as earnings per share and net income. The Company has
recognized expense related to performance options based on the most probable performance
assumptions as of June 30, 2011. There were no revisions to performance assumptions during the
six-month periods ended June 30, 2011 and June 30, 2010.
The Company also issues stock options to non-employee independent directors. These options
generally vest in one year.
There were no stock options granted during the three-month and six-month periods ended June 30,
2011. In addition to the stock options granted pursuant to the May 2010 stock option exchange
program, there were 5,000 stock options granted during the three-month period ended June 30, 2010
and 5,000 stock options granted during the six-month period ended June 30, 2010.
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A summary of option activity for the six month period ended June 30, 2011 follows:
Weighted | ||||||||
Average | ||||||||
Number of | Exercise Price | |||||||
Options | Shares | Per Share | ||||||
Outstanding, December 31, 2010 |
648,153 | $ | 9.99 | |||||
Granted |
| | ||||||
Exercised |
(9,275 | ) | 3.39 | |||||
Forfeited |
| | ||||||
Expired |
| | ||||||
Outstanding, June 30, 2011 |
638,878 | 10.08 | ||||||
During the three-month periods ended June 30, 2011 and June 30, 2010, the Company recognized total
compensation expense related to options of $0.1 million and $0.1 million, respectively. During the
six-month periods ended June 30, 2011 and June 30, 2010, the Company recognized total compensation
expense related to options of $0.1 million and $0.1 million, respectively.
There were 9,275 stock options exercised during the three-month period ended June 30, 2011. There
were 7,361 stock options exercised for the three-month period ended June 30, 2010. The total pretax
intrinsic values of stock options exercised were $0.1 million and $0.1 million for the three-month
periods ended June 30, 2011 and June 30, 2010, respectively. The related tax benefits realized from
the exercise of stock options for the three-month periods ended June 30, 2011 and June 30, 2010
were $0.1 million and $0.1 million, respectively.
The total pretax intrinsic values of stock options exercised were $0.1 million and $0.2 million for
the six-month periods ended June 30, 2011 and June 30, 2010, respectively. The related tax benefits
realized from the exercise of stock options for the six-month periods ended June 30, 2011 and June
30, 2010 were $0.1 million and $0.1 million, respectively.
The following table summarizes information about the stock options outstanding and exercisable as
of June 30, 2011:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||
Weighted | Weighted | Aggregate | Weighted | Weighted | Aggregate | |||||||||||||||||||||||||||
Average | Average | Intrinsic | Average | Average | Intrinsic | |||||||||||||||||||||||||||
Range of | Number | Remaining | Exercise | Value | Number | Remaining | Exercise | Value | ||||||||||||||||||||||||
Exercise Prices | Outstanding | Life (Years) | Price | (In thousands) | Exercisable | Life (Years) | Price | (In thousands) | ||||||||||||||||||||||||
$3.39 |
76,650 | 0.8 | $ | 3.39 | $ | 710 | 76,650 | 0.8 | $ | 3.39 | $ | 710 | ||||||||||||||||||||
$7.17 - 10.18 |
354,528 | 2.8 | 9.43 | 1,142 | 216,028 | 2.2 | 9.39 | 704 | ||||||||||||||||||||||||
$12.08 - 12.41 |
145,612 | 5.9 | 12.40 | 36 | 30,195 | 5.9 | 12.40 | 7 | ||||||||||||||||||||||||
$14.00 - 16.01 |
39,984 | 2.5 | 14.33 | | 37,253 | 2.5 | 14.33 | | ||||||||||||||||||||||||
$19.78 - 21.50 |
22,104 | 2.0 | 20.80 | | 22,104 | 2.0 | 20.80 | | ||||||||||||||||||||||||
638,878 | 3.2 | 10.08 | $ | 1,888 | 382,230 | 2.2 | 9.57 | $ | 1,421 | |||||||||||||||||||||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic
value, based on the Companys closing stock price of $12.65 as of June 30, 2011, which would have
been received by the option holders had all option holders exercised their options as of that date.
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As of June 30, 2011, the total future compensation cost related to non-vested stock options not yet
recognized in the Consolidated Statements of Operations was $0.1 million and the weighted average
period over which these awards are expected to be recognized was 1.4 years, based on the most
probable performance assumptions as of June 30, 2011. In the event maximum performance targets are
achieved, an additional $0.4 million of compensation cost would be recognized over a weighted
average period of 0.7 years.
Restricted Stock Awards
Restricted stock awards provide that, during the applicable vesting periods, the shares awarded may
not be sold or transferred by the
participant. The vesting period for restricted stock awards generally ranges from three to 10
years, though certain awards for special projects may vest in as little as one year depending on
the duration of the project. All awards issued contain service conditions based on the
participants continued service with the Company and may provide for accelerated vesting if there
is a change in control as defined in the 2003 Plan.
The vesting of certain restricted shares may be accelerated to a minimum of three to four years
based on achievement of various individual and Company performance measures. In addition, the
Company has issued certain shares under a Management Stock Ownership Program. Under this program,
restrictions on the shares lapse at the end of 10 years but may lapse (vest) in a minimum of three
years if the employee continues in service at the Company and owns a matching number of other
common shares in addition to the restricted shares.
Of the total restricted stock awards granted during the six-month period ended June 30, 2011,
204,464 shares may be subject to accelerated vesting based on performance factors; no shares have
vesting contingent upon performance factors. The Company has recognized expense related to
performance-based shares based on the most probable performance assumptions as of June 30, 2011.
There were no revisions to performance assumptions for the six-month periods ended June 30, 2011
and June 30, 2010, although vesting was accelerated in 2011 on certain awards based on an annual
evaluation of the achievement of performance criteria, as described below.
The Company also issues restricted stock to non-employee independent directors. These shares
generally vest in seven years from the grant date or six months following the directors
termination from Board of Directors service.
The following table summarizes the activity of the non-vested restricted stock during the six
months ended June 30, 2011:
Weighted | ||||||||
Average | ||||||||
Grant-Date | ||||||||
Non-vested restricted stock | Shares | Fair Value | ||||||
Outstanding at December 31, 2010 |
954,029 | $ | 7.90 | |||||
Granted |
267,776 | 11.15 | ||||||
Vested |
(269,934 | ) | 6.91 | |||||
Forfeited |
(5,350 | ) | 14.73 | |||||
Outstanding at June 30, 2011 |
946,521 | 9.06 | ||||||
During the three-month periods ended June 30, 2011 and June 30, 2010, the Company granted
restricted stock awards with grant date fair values totaling $0.4 million and $0.5 million,
respectively. During the six-month periods ended June 30, 2011 and June 30, 2010, the Company
granted restricted stock awards with grant date fair values totaling $3.0 million and $1.1 million,
respectively.
As vesting occurs, or is deemed likely to occur, compensation expense is recognized over the
requisite service period and additional paid-in capital is increased. The Company recognized $0.5
million and $0.4 million of compensation expense related to restricted stock for the three-month
periods ended June 30, 2011 and June 30, 2010, respectively. The Company recognized $1.6 million
and $1.6 million of compensation expense related to restricted stock for the six-month periods
ended June 30, 2011 and June 30, 2010, respectively.
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Of the $1.6 million total compensation expense related to restricted stock for the six-month period
ended June 30, 2011, approximately $0.6 million related to the acceleration of vesting based on an
annual evaluation of the achievement of certain performance criteria during the first quarter 2011.
As of June 30, 2011, there was $5.6 million of unrecognized compensation cost related to non-vested
restricted stock compensation scheduled to be recognized over a weighted average period of 4.6
years, based on the most probable performance assumptions as of June 30, 2011. In the event
performance targets are achieved, $2.6 million of the unrecognized compensation cost would
accelerate to be recognized over a weighted average period of 1.4 years. In addition, certain of
the awards granted may result in the issuance of 160,809 additional shares of stock if achievement
of certain targets is greater than 100%. The expense related to the additional shares awarded will
be dependent on the Companys stock price when the achievement level is determined.
The fair values of shares that vested during the three-month periods ended June 30, 2011 and June
30, 2010 were $1.2 million and $0.1 million, respectively. The fair values of shares that vested
during the six-month periods ended June 30, 2011 and June 30, 2010 were $3.1 million and $1.6
million, respectively.
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Item 2. | Managements Discussion And Analysis Of Financial Condition And Results Of Operations |
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our Consolidated Financial Statements and the related notes thereto in
our Form 10-K for the year ended December 31, 2010 filed with the SEC. This discussion contains
certain statements of a forward-looking nature that involve risks and uncertainties.
FORWARD-LOOKING STATEMENTS
Certain statements in this document may include the words or phrases can be, expects, plans,
may, may affect, may depend, believe, estimate, intend, could, should, would,
if and similar words and phrases that constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the 1933 Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the 1934 Act). 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; |
| changes in our industry, interest rates, the regulatory environment or the general
economy resulting in changes to our business strategy; |
| the degree and nature of our competition; |
| availability and retention of qualified personnel; |
| general volatility of the capital markets; and |
| the factors set forth in the section captioned Risk Factors in Item 1 of our Form 10-K
for the year ended December 31, 2010 filed with the SEC. |
Forward-looking statements apply only as of the date made and the Company is not required to update
forward-looking statements for subsequent or unanticipated events or circumstances.
Overview
We are a nationwide provider of equipment financing solutions, primarily to small businesses. We
finance over 100 categories of commercial equipment important to our end user customers including
copiers, security systems, computers, telecommunications equipment and certain commercial and
industrial 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 direct
solicitation of our end user customers and through relationships with select lease brokers. Our
leases are fixed-rate transactions with terms generally ranging from 36 to 60 months. At June 30,
2011, our lease portfolio consisted of approximately 68,000 accounts with an average original term
of 50 months and average original transaction size of approximately $11,400.
Since our founding in 1997, we have grown to $467.2 million in total assets at June 30, 2011. Our
assets are substantially comprised of our net investment in leases and loans which totaled $354.5
million at June 30, 2011.
On March 20, 2007, the FDIC approved the application of our wholly-owned subsidiary, MBB, to become
an industrial bank chartered by the State of Utah. MBB commenced operations effective March 12,
2008. MBB provides diversification of the Companys funding sources and, over time, may add other
product offerings to better serve our customer base.
On December 31, 2008, MBB received approval from the Federal Reserve Bank of San Francisco 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 from the Federal Reserve Bank of Philadelphia to become a bank holding company
upon conversion of MBB from an industrial bank to a commercial bank. On January 13, 2009, pursuant
to the December 31, 2008 approval from the Federal Reserve Bank of San Francisco, MBB converted
from an industrial bank to a state-chartered commercial bank chartered in the State of Utah and
supervised by the State of Utah and the Federal Reserve Board. In connection with MBBs conversion
to a commercial bank and pursuant to the December 31, 2008 approval from the Federal Reserve Bank
of
Philadelphia, on January 13, 2009 Marlin Business Services Corp. became a bank holding company, and
is subject to the Bank Holding Company Act and supervised by the Federal Reserve Board.
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On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of
Marlin Business Services Corp.s election to become a financial holding company (while remaining a
bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section
225.82 of the Federal Reserve Boards Regulation Y. Such election permits Marlin Business Services
Corp. to engage in activities that are financial in nature or incidental to a financial activity,
including the maintenance and expansion of its reinsurance activities conducted through its
wholly-owned subsidiary, AssuranceOne, Ltd.
We generally reach our lessees through a network of independent equipment dealers and, to a much
lesser extent, lease brokers. The number of dealers and brokers with whom we conduct business
depends on, among other things, the number of sales account executives we have. Sales account
executive staffing levels and the activity of our origination sources are shown below.
Six Months | ||||||||||||||||||||||||
Ended | ||||||||||||||||||||||||
June 30, | As of or For the Year Ended December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Number of sales account executives |
97 | 87 | 38 | 86 | 118 | 100 | ||||||||||||||||||
Number of originating sources(1) |
783 | 604 | 465 | 1,014 | 1,246 | 1,295 |
(1) | Monthly average of origination sources generating lease volume |
Our revenue consists of interest and fees from our leases and loans and, to a lesser extent, income
from our property insurance program and other fee income. Our expenses consist of interest expense
and operating expenses, which include salaries and benefits and other general and administrative
expenses. As a credit lender, our earnings are also significantly impacted by credit losses. For
the quarter ended June 30, 2011, our annualized net credit losses were 1.86% of our average total
finance receivables. We establish reserves for credit losses which require us to estimate inherent
losses in our portfolio as of the reporting date.
Our leases are classified under U.S. GAAP as direct financing leases, and we recognize interest
income over the term of the lease. Direct financing leases transfer substantially all of the
benefits and risks of ownership to the equipment lessee. Our net investment in direct finance
leases is included in our consolidated financial statements in net investment in leases and
loans. Net investment in direct financing leases consists of the sum of total minimum lease
payments receivable and the estimated residual value of leased equipment, less unearned lease
income. Unearned lease income consists of the excess of the total future minimum lease payments
receivable plus the estimated residual value expected to be realized at the end of the lease term
plus deferred net initial direct costs and fees less the cost of the related equipment.
Approximately 66% of our lease portfolio at June 30, 2011 amortizes over the lease term to a $1
residual value. For the remainder of the portfolio, we must estimate end of term residual values
for the leased assets. Failure to correctly estimate residual values could result in losses being
realized on the disposition of the equipment at the end of the lease term.
Since our founding, we have funded our business through a combination of variable-rate borrowings
and fixed-rate asset securitization transactions, as well as through the issuance from time to time
of subordinated debt and equity securities. Our variable-rate borrowing currently consists of
long-term loan facilities. We have traditionally issued fixed-rate term debt through the
asset-backed securitization market. Historically, leases were funded through variable-rate
warehouse facilities until they were refinanced through term note securitizations at fixed rates.
All of our term note securitizations have been accounted for as on-balance sheet transactions and,
therefore, we have not recognized gains or losses from these transactions. As of June 30, 2011,
$76.5 million, or 53.2%, of our borrowings were fixed-rate term note securitizations.
In addition, since its opening on March 12, 2008, MBB has provided 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 June 30, 2011, total MBB deposits were $124.5 million.
Fixed rate leases not funded with deposits are initially financed with variable-rate debt.
Therefore, our earnings may be exposed to interest rate risk should interest rates rise. We
generally benefit in times of falling and low interest rates. In contrast to previous warehouse
facilities, our current long-term loan facilities do not require annual refinancing, but failure to
renew the existing facilities or to obtain additional financing could restrict our growth and
future financial performance.
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On October 9, 2009, Marlin Business Services Corp.s wholly-owned subsidiary, Marlin Receivables
Corp. (MRC), closed on a $75,000,000, three-year committed loan facility with the Lender Finance
division of Wells Fargo Capital Finance. The facility is secured by a lien on MRCs assets and is
supported by guaranties from Marlin Business Services Corp. and Marlin Leasing Corporation.
Advances under the facility are made pursuant to a borrowing base formula, and the proceeds are
used to fund lease originations. The maturity date of the facility is October 9, 2012.
On February 12, 2010, we completed an $80.7 million TALF-eligible term asset-backed securitization.
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 provided the Company with
fixed-cost borrowing and is recorded in long-term borrowings in the Consolidated Balance Sheets. A
portion of the proceeds of this securitization was used to repay the full amount outstanding under
the Companys commercial paper (CP) conduit warehouse facility.
On September 24, 2010, the Companys affiliate, Marlin Leasing Receivables XIII LLC (MLR XIII),
closed on a $50.0 million three-year committed loan facility with Key Equipment Finance Inc. The
facility is secured by a lien on MLR XIIIs assets. Advances under the facility are made pursuant
to a borrowing base formula, and the proceeds are used to fund lease originations. The maturity
date of the facility is September 23, 2013. An event of default such as non-payment of amounts when
due under the loan agreement or a breach of covenants may accelerate the maturity date of the
facility.
From time to time we may 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. The Company was not a party to any active interest-rate swap agreements at
June 30, 2011.
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, liabilities, revenues and expenses and affect related disclosure of
contingent assets and liabilities at the date of our financial statements. On an ongoing basis, we
evaluate our estimates, including credit losses, residuals, initial direct costs and fees, other
fees, performance assumptions for stock-based compensation awards, the probability of forecasted
transactions, the fair value of financial instruments and the realization of deferred tax assets.
We base our estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Critical accounting policies are defined as those that are reflective of significant
judgments and uncertainties. Our consolidated financial statements are based on the selection and
application of critical accounting policies, the most significant of which are described below.
Income recognition. Interest income is recognized under the effective interest method. The
effective interest method of income recognition applies a constant rate of interest equal to the
internal rate of return on the lease. When a lease or loan is 90 days or more delinquent, the
contract is classified as being on non-accrual and we do not recognize interest income on that
contract until it is less than 90 days delinquent.
Fee income consists of fees for delinquent lease and loan payments, cash collected on early
termination of leases and net residual income. Net residual income includes income from lease
renewals and gains and losses on the realization of residual values of leased equipment disposed at
the end of a leases term. Residual income is recognized as earned.
Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated
collection rates. At a minimum of every quarter, an analysis of anticipated collection rates is
performed based on updates to collection experience. Adjustments in anticipated collection rate
assumptions are made as needed based on this analysis. Other fees are recognized when received.
Insurance income is recognized on an accrual basis as earned over the term of a lease. Generally,
insurance payments that are 120 days or more past due are charged against income. Ceding
commissions, losses and loss adjustment expenses are recorded in the period incurred and netted
against insurance income.
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Initial direct costs and fees. We defer initial direct costs incurred and fees received to
originate our leases and loans in accordance with the Receivables Topic and the Nonrefundable Fees
and Other Costs Subtopic of the FASB ASC. The initial direct costs and fees we defer are part of
the net investment in leases and loans and are amortized to interest income using the effective
interest method. We defer third-party commission costs as well as certain internal costs directly
related to the origination activity. Costs subject to deferral include evaluating each prospective
customers financial condition, evaluating and recording guarantees and other security
arrangements, negotiating terms, preparing and processing documents and closing each transaction.
Estimates of costs subject to deferral are updated periodically, and no less frequently than each
year. The fees we defer are documentation fees collected at inception. The realization of the
deferred initial direct costs, net of fees deferred, is predicated on the net future cash flows
generated by our lease and loan portfolios.
Lease residual values. A direct financing lease is recorded at the aggregate future minimum lease
payments plus the estimated residual value less unearned income. Residual values generally reflect
the estimated amounts to be received at lease termination from lease extensions, sales or other
dispositions of leased equipment. These estimates are based on industry data and on our experience.
The Company records an estimated residual value at lease inception for all fair market value and
fixed purchase option leases based on a percentage of the equipment cost of the asset being leased.
The percentages used depend on equipment type and term. In setting and reviewing estimated
residual values, the Company focuses its analysis primarily on total historical and expected
realization statistics pertaining to both lease renewals and sales of equipment.
At the end of an original lease term, lessees may choose to purchase the equipment, renew the lease
or return the equipment to the Company. The Company receives income from lease renewals when the
lessee elects to retain the equipment longer than the original term of the lease. This income, net
of appropriate periodic reductions in the estimated residual values of the related equipment, is
included in fee income as net residual income.
When a lessee elects to return equipment at lease termination, the equipment is transferred to
other assets at the lower of its basis or fair market value. The Company generally sells returned
equipment to independent third parties, rather than leasing the equipment a second time. The
Company does not maintain equipment in other assets for longer than 120 days. Any loss recognized
on transferring equipment to other assets, and any gain or loss realized on the sale or disposal of
equipment to a lessee or to others is included in fee income as net residual income.
Based on the Companys experience, the amount of ultimate realization of the residual value tends
to relate more to the customers election at the end of the lease term to enter into a renewal
period, to purchase the leased equipment or to return the leased equipment than it does to the
equipment type. Management performs periodic reviews of the estimated residual values and historic
realization statistics no less frequently than quarterly and any impairment, if other than
temporary, is recognized in the current period.
Allowance for credit losses. In accordance with the Contingencies Topic of the FASB ASC, we
maintain an allowance for credit losses at an amount sufficient to absorb losses inherent in our
existing lease and loan portfolios as of the reporting dates based on our projection of probable
net credit losses.
We evaluate our portfolios on a pooled basis, due to their composition of small balance, homogenous
accounts with similar general credit risk characteristics, diversified among a large cross-section
of variables including industry, geography, equipment type, obligor and vendor. We consider both
quantitative and qualitative factors in determining the allowance for credit losses. Quantitative
factors considered include a migration analysis, historic delinquencies and charge-offs, historic
bankruptcies, historic performance of restructured accounts and a static pool analysis of historic
recoveries. A migration analysis is a technique used to estimate the likelihood that an account
will progress through the various delinquency stages and ultimately charge off. Qualitative factors
that may result in further adjustments to the quantitative analysis include items such as
forecasting uncertainties, changes in the composition of our lease and loan portfolios,
seasonality, economic conditions and trends or business practices at the reporting date that are
different from the periods used in the quantitative analysis. Adjustments due to such qualitative
factors increased the allowance for credit losses by approximately $0.5 million and $0.2 million at
June 30, 2011 and December 31, 2010, respectively.
The various factors used in the analysis are reviewed periodically, and no less frequently than
quarterly. We then establish an allowance for credit losses for the projected probable net credit
losses based on this analysis. A provision is charged against earnings to maintain the allowance
for credit losses at the appropriate level. Our policy is to charge-off against the allowance the
estimated unrecoverable portion of accounts once they reach 121 days delinquent.
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Our projections of probable net credit losses are inherently uncertain, and as a result we cannot
predict with certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolios, bankruptcy laws and other factors could impact
our actual and projected net credit losses and the related allowance for credit losses. To the
extent we add new leases and loans to our portfolios, or to the degree credit quality is worse than
expected, we record expense to increase the allowance for credit losses for the estimated net
losses inherent in our portfolios. Actual losses may vary from current estimates.
As previously disclosed, based on feedback the Company received from the Federal Reserve Bank of
Philadelphia in April 2011, the Company is operating under its established methodology for
determining its allowance for credit losses (the Allowance), which methodology will be reviewed
by the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions
during their next regularly scheduled commercial bank examination of Marlin Business Bank.
Securitizations. In connection with each term note securitization transaction, we established
bankruptcy remote SPEs and issued term debt to institutional investors. These SPEs are each
considered VIEs under U.S. GAAP. We are required to consolidate VIEs in which we are deemed to be
the primary beneficiary through having (1) power over the significant activities of the entity and
(2) an obligation to absorb losses or the right to receive benefits from the VIE which are
potentially significant to the VIE. We continue to service the assets of our VIEs and retain
equity and/or residual interests. Accordingly, assets and related debt of these VIEs are included
in the accompanying Consolidated Balance Sheets. Our leases and restricted interest-earning
deposits with banks are assigned as collateral for these borrowings and there is no further
recourse to our general credit. Collateral in excess of these borrowings represents our maximum
loss exposure.
Stock-based compensation. We issue both restricted shares and stock options to certain employees
and directors as part of our overall compensation strategy. The CompensationStock Compensation
Topic of the FASB ASC establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees, except for equity
instruments held by employee share ownership plans.
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 generally use the Black-Scholes valuation model to measure the fair value of
our stock options utilizing various assumptions with respect to expected holding period, risk-free
interest rates, stock price volatility and dividend yield. The assumptions are based on subjective
future expectations combined with management judgment.
The Company uses its judgment in estimating the amount of awards that are expected to be forfeited,
with subsequent revisions to the assumptions if actual forfeitures differ from those estimates. In
addition, for performance-based awards the Company estimates the degree to which the performance
conditions will be met to estimate the number of shares expected to vest and the related
compensation expense. Compensation expense is adjusted in the period such performance estimates
change.
Income taxes. The Income Taxes Topic of the FASB ASC requires the use of the asset and liability
method under which deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and liabilities, given the
provisions of the enacted tax laws. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities and projected
future taxable income in making this assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences.
Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax
assets. The process involves summarizing temporary differences resulting from the different
treatment of items such as leases for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within the Consolidated Balance Sheets. Our
management then assesses the likelihood that deferred tax assets will be recovered from future
taxable income or tax carry-back availability and, to the extent our management believes recovery
is not likely, a valuation allowance is established. To the extent that we establish a valuation
allowance in a period, an expense is recorded within the tax provision in the Consolidated
Statements of Operations.
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At June 30, 2011, there have been no material changes to the liability for uncertain tax positions
and there are no significant unrecognized tax benefits. The periods subject to general examination
for the Companys federal return include the 2006 tax year to the present. The Company files state
income tax returns in various states which may have different statutes of limitations. Generally,
state income tax returns for years 2005 through the present are subject to examination.
The Company records penalties and accrued interest related to uncertain tax positions in
income tax expense. Such adjustments have historically been minimal and immaterial to our financial
results.
RESULTS OF OPERATIONS
Comparison of the Three-Month Periods Ended June 30, 2011 and June 30, 2010
Net income. Net income of $1.5 million was reported for the three-month period ended June 30, 2011,
resulting in diluted earnings per share of $0.12, compared to net income of $1.6 million and
diluted earnings per share of $0.12 for the three-month period ended June 30, 2010.
Return on average assets was 1.31% for the three-month period ended June 30, 2011, compared to
1.20% for the three-month period ended June 30, 2010. Return on average equity was 3.78% for the
three-month period ended June 30, 2011, compared to 4.09% for the three-month period ended June 30,
2010.
Overall, our average net investment in total finance receivables for the three-month period ended
June 30, 2011 decreased 11.2% to $351.4 million, compared to $395.9 million for the three-month
period ended June 30, 2010. We continue to assess and adjust our credit underwriting guidelines in
response to economic conditions, and over the past twelve months we have added to the sales
organization to increase originations.
During the three months ended June 30, 2011, we generated 4,522 new leases with a cost of $53.9
million, compared to 3,009 new leases with a cost of $31.7 million generated for the three months
ended June 30, 2010. Much of the change in volume is the result of increasing sales staffing
levels from 69 sales account executives at June 30, 2010 to 97 sales account executives at June 30,
2011. Approval rates also rose from 49% for the quarter ended June 30, 2010 to 60% for the quarter
ended June 30, 2011 due to the improved credit quality of the applications received and adjustments
made to credit policy in light of the continued strong performance of recent years lease
originations.
The provision for credit losses decreased $1.6 million, or 64.0%, to $0.9 million for the
three-month period ended June 30, 2011 from $2.5 million for the same period in 2010, primarily due
to lower charge-offs, improved delinquencies and a reduced portfolio size. For the three-month
period ended June 30, 2011 compared to the three-month period ended June 30, 2010, net interest and
fee income decreased $0.8 million, or 7.0%, primarily due to the 11.2% decrease in average total
finance receivables. Other expenses increased $0.9 million, or 11.5%, for the three-month period
ended June 30, 2011 compared to the three-month period ended June 30, 2010, primarily due to
increased salaries and benefits expense related to increased sales staffing levels.
Average balances and net interest margin. The following table summarizes the Companys average
balances, interest income, interest expense and average yields and rates on major categories of
interest-earning assets and interest-bearing liabilities for the three-month periods ended June 30,
2011 and June 30, 2010.
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Three Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Yields/ | Average | Yields/ | |||||||||||||||||||||
Balance(1) | Interest | Rates(2) | Balance(1) | Interest | Rates(2) | |||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Interest-earning deposits with banks |
$ | 47,818 | $ | 8 | 0.07 | % | $ | 39,903 | $ | 9 | 0.09 | % | ||||||||||||
Restricted interest-earning deposits with
banks |
33,798 | 5 | 0.06 | 65,075 | 19 | 0.12 | ||||||||||||||||||
Securities available for sale |
1,705 | 14 | 3.27 | 1,255 | 13 | 4.14 | ||||||||||||||||||
Net investment in leases(3) |
350,662 | 10,825 | 12.35 | 393,248 | 11,876 | 12.08 | ||||||||||||||||||
Loans receivable(3) |
726 | 11 | 5.83 | 2,658 | 77 | 11.59 | ||||||||||||||||||
Total interest-earning assets |
434,709 | 10,863 | 10.00 | 502,139 | 11,994 | 9.55 | ||||||||||||||||||
Non-interest-earning assets: |
||||||||||||||||||||||||
Cash and due from banks |
1,594 | 1,886 | ||||||||||||||||||||||
Property and equipment, net |
2,202 | 2,280 | ||||||||||||||||||||||
Property tax receivables |
1,949 | 3,603 | ||||||||||||||||||||||
Other assets(4) |
27,028 | 6,607 | ||||||||||||||||||||||
Total non-interest-earning assets |
32,773 | 14,376 | ||||||||||||||||||||||
Total assets |
$ | 467,482 | $ | 516,515 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Short-term borrowings(5) |
$ | | $ | | | % | $ | | $ | 19 | | % | ||||||||||||
Long-term borrowings(5) |
159,921 | 2,441 | 6.11 | 243,171 | 3,279 | 5.39 | ||||||||||||||||||
Deposits(5) |
106,662 | 622 | 2.33 | 93,166 | 657 | 2.82 | ||||||||||||||||||
Total interest-bearing liabilities |
266,583 | 3,063 | 4.60 | 336,337 | 3,955 | 4.68 | ||||||||||||||||||
Non-interest-bearing liabilities: |
||||||||||||||||||||||||
Fair value of derivatives |
| 572 | ||||||||||||||||||||||
Sales and property taxes payable |
5,002 | 7,149 | ||||||||||||||||||||||
Accounts payable and accrued expenses |
8,234 | 6,158 | ||||||||||||||||||||||
Net deferred income tax liability |
25,881 | 14,680 | ||||||||||||||||||||||
Total non-interest-bearing liabilities |
39,117 | 28,559 | ||||||||||||||||||||||
Total liabilities |
305,700 | 364,896 | ||||||||||||||||||||||
Stockholders equity |
161,782 | 151,619 | ||||||||||||||||||||||
Total liabilities and stockholders
equity |
$ | 467,482 | $ | 516,515 | ||||||||||||||||||||
Net interest income |
$ | 7,800 | $ | 8,039 | ||||||||||||||||||||
Interest rate spread(6) |
5.40 | % | 4.87 | % | ||||||||||||||||||||
Net interest margin(7) |
7.18 | % | 6.40 | % | ||||||||||||||||||||
Ratio of average interest-earning assets to
average interest-bearing liabilities |
163.07 | % | 149.30 | % |
(1) | Average balances are calculated using month-end balances, to the extent such
averages are representative of operations. |
|
(2) | Annualized. |
|
(3) | Average balances of leases and loans include non-accrual leases and loans, and are
presented net of unearned income. The average balances of leases and loans do not include the
effects of (i) the allowance for credit losses and (ii) initial direct costs and fees
deferred. |
|
(4) | Includes operating leases. |
|
(5) | Includes effect of transaction costs. |
|
(6) | Interest rate spread represents the difference between the average yield on
interest-earning assets and the average rate on interest-bearing liabilities. |
|
(7) | Net interest margin represents net interest income as a percentage of average
interest-earning assets. |
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The following table presents the components of the changes in net interest income by volume
and rate.
Three Months Ended June 30, 2011 Compared To | ||||||||||||
Three Months Ended June 30, 2010 | ||||||||||||
Increase (Decrease) Due To: | ||||||||||||
Volume(1) | Rate(1) | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest income: |
||||||||||||
Interest-earning deposits with banks |
$ | 1 | $ | (2 | ) | $ | (1 | ) | ||||
Restricted interest-earning deposits with banks |
(7 | ) | (7 | ) | (14 | ) | ||||||
Securities available for sale |
4 | (3 | ) | 1 | ||||||||
Net investment in leases |
(1,310 | ) | 259 | (1,051 | ) | |||||||
Loans receivable |
(39 | ) | (27 | ) | (66 | ) | ||||||
Total interest income |
(1,666 | ) | 535 | (1,131 | ) | |||||||
Interest expense: |
||||||||||||
Short-term borrowings |
| (19 | ) | (19 | ) | |||||||
Long-term borrowings |
(1,230 | ) | 392 | (838 | ) | |||||||
Deposits |
88 | (123 | ) | (35 | ) | |||||||
Total interest expense |
(803 | ) | (89 | ) | (892 | ) | ||||||
Net interest income |
(1,148 | ) | 909 | (239 | ) |
(1) | Changes due to volume and rate are calculated independently for each line
item presented rather than presenting vertical subtotals for the individual volume and rate
columns. 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. |
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Net interest and fee margin. The following table summarizes the Companys net interest and fee
income as a percentage of average total finance receivables for the three-month periods ended June
30, 2011 and June 30, 2010.
Three Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Interest income |
$ | 10,863 | $ | 11,994 | ||||
Fee income |
2,926 | 3,501 | ||||||
Interest and fee income |
13,789 | 15,495 | ||||||
Interest expense |
3,063 | 3,955 | ||||||
Net interest and fee income |
10,726 | 11,540 | ||||||
Average total finance receivables(1) |
$ | 351,389 | $ | 395,906 | ||||
Percent of average total finance receivables: |
||||||||
Interest income |
12.37 | % | 12.12 | % | ||||
Fee income |
3.33 | 3.54 | ||||||
Interest and fee income |
15.70 | 15.66 | ||||||
Interest expense |
3.49 | 4.00 | ||||||
Net interest and fee margin |
12.21 | % | 11.66 | % | ||||
(1) | Total finance receivables include net investment in direct financing leases and
loans. For the calculations above, the effects of (i) the allowance for credit losses and
(ii) initial direct costs and fees deferred are excluded. |
Net interest and fee income decreased $0.8 million, or 7.0%, to $10.7 million for the three months
ended June 30, 2011 from $11.5 million for the three months ended June 30, 2010. The annualized net
interest and fee margin increased 55 basis points to 12.21% in the three-month period ended June
30, 2011 from 11.66% for the same period in 2010.
Interest income, net of amortized initial direct costs and fees, decreased $1.1 million, or 9.2%,
to $10.9 million for the three-month period ended June 30, 2011 from $12.0 million for the
three-month period ended June 30, 2010. The decrease in interest income was due principally to the
11.2% decrease in average total finance receivables, which decreased $44.5 million to $351.4
million at June 30, 2011 from $395.9 million at June 30, 2010, partially offset by an increase in
average yield of 25 basis points. The decrease in average total finance receivables is primarily
due to our proactive decision in 2008 and 2009 to lower approval rates and volume in response to
the economic conditions. The average yield on the portfolio increased, primarily due to continued
higher yields on the new leases compared to the yields on the leases repaying. However, the
weighted average implicit interest rate on new finance receivables originated decreased 152 basis
points to 13.04% for the three-month period ended June 30, 2011, compared to 14.56% for the
three-month period ended June 30, 2010, primarily due to a change in mix of new origination types
toward larger program opportunities.
Fee income decreased $0.6 million, or 17.1%, to $2.9 million for the three-month period ended June
30, 2011 from $3.5 million for the three-month period ended June 30, 2010. Fee income included
approximately $1.1 million of net residual income for the three-month period ended June 30, 2011
and $1.3 million for the three-month period ended June 30, 2010. Fee income also included
approximately $1.6 million in late fee income for the three-month period ended June 30, 2011, which
decreased 15.8% from $1.9 million for the three-month period ended June 30, 2010. The decrease in
late fee income was primarily due to the decrease in average total finance receivables.
Fee income, as an annualized percentage of average total finance receivables, decreased 21 basis
points to 3.33% for the three-month period ended June 30, 2011 from 3.54% for the same period in
2010. Late fees remained the largest component of fee income at 1.81% as a percentage of average
total finance receivables for the three-month period ended June 30, 2011, compared to 1.94% for the
three-month period ended June 30, 2010. As a percentage of average total finance receivables, net
residual income was 1.26% for the three-month period ended June 30, 2011, compared to 1.34% for the
three-month period ended June 30, 2010.
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Interest expense decreased $0.9 million to $3.1 million for the three-month period ended June 30,
2011 from $4.0 million for the three-month period ended June 30, 2010. The decrease was primarily
due to lower average total finance receivables in combination with a shift in our funding mix
toward lower-cost deposits. Interest expense, as an annualized percentage of average total finance
receivables, decreased 51 basis points to 3.49% for the three-month period ended June 30, 2011,
from 4.00% for the same period in 2010.
The weighted average interest rate, excluding transaction costs, on short-term and long-term
borrowings was 5.30% for the quarter ended June 30, 2011, compared to 4.89% for the same period in
2010. The higher interest rate primarily reflects the increased cost of the borrowings. The average
balance for our variable-rate debt was $72.4 million for the three months ended June 30, 2011,
compared to $17.7 million for the three months ended June 30, 2010. The weighted average interest
rate, excluding transaction costs, for our variable-rate debt was 5.19% for the quarter ended June
30, 2011, compared to 5.50% for the same period in 2010. For the three months ended June 30, 2011,
average term securitization borrowings outstanding were $87.6 million at a weighted average coupon
of 5.35%, compared to $225.5 million at a weighted average coupon of 4.83% for the same period in
2010.
Our wholly-owned subsidiary, MBB, provides an additional funding source. FDIC-insured deposits are
being raised via the brokered certificates of deposit market and from other financial institutions
on a direct basis. Interest expense on deposits was $0.6 million, or 2.33% as a percentage of
weighted average deposits, for the three-month period ended June 30, 2011. The average balance of
deposits was $106.7 million for the three-month period ended June 30, 2011. Interest expense on
deposits was $0.7 million, or 2.82% as a percentage of weighted average deposits, for the
three-month period ended June 30, 2010. The average balance of deposits was $93.2 million for the
three-month period ended June 30, 2010.
Insurance income. Insurance income remained unchanged at $1.0 million for the three-month period
ended June 30, 2011 compared to the three-month period ended June 30, 2010.
Other income. Other income increased $0.1 million to $0.4 million for the three-month period ended
June 30, 2011 from $0.3 million for the three-month period ended June 30, 2010. Other income
includes various administrative transaction fees, fees received from lease syndications and gains
on sales of leases.
Salaries and benefits expense. Salaries and benefits expense increased $0.8 million, or 17.4%, to
$5.4 million for the three month period ended June 30, 2011 from $4.6 million for the same period
in 2010. Salaries and benefits expense, as a percentage of average total finance receivables, was
6.13% for the three-month period ended June 30, 2011 compared with 4.64% for the same period in
2010. Total personnel increased to 251 at June 30, 2011 from 211 at June 30, 2010, primarily due to
increased sales staffing levels, which were 97 sales account executives at June 30, 2011, compared
to 69 sales account executives at June 30, 2010.
General and administrative expense. General and administrative expense remained unchanged at $3.1
million for the three-month period ended June 30, 2011 compared to the three-month period ended
June 30, 2010. General and administrative expense as an annualized percentage of average total
finance receivables was 3.58% for the three-month period ended June 30, 2011, compared to 3.10% for
the three-month period ended June 30, 2010. Selected major components of general and administrative
expense for the three-month period ended June 30, 2011 included $0.7 million of premises and
occupancy expense, $0.4 million of audit and tax expense, $0.2 million of data processing expense
and $0.1 million of marketing expense. In comparison, selected major components of general and
administrative expense for the three-month period ended June 30, 2010 included $0.7 million of
premises and occupancy expense, $0.3 million of audit and tax expense, $0.2 million of data
processing expense and $0.1 million of marketing expense.
Financing related costs. Financing related costs primarily represent bank commitment fees paid to
our financing sources. Financing related costs were $0.2 million for the three-month period ended
June 30, 2011 and $0.2 million for the same period in 2010.
Provision for credit losses. The provision for credit losses decreased $1.6 million, or 64.0%, to
$0.9 million for the three months ended June 30, 2011 from $2.5 million for the same period in
2010. The decrease in the provision for credit losses was primarily due to lower charge-offs,
improved delinquencies and a reduced portfolio size. Net charge-offs were $1.6 million for the
three-month period ended June 30, 2011, compared to $3.6 million for the same period in 2010. Net
charge-offs as a percentage of average total finance receivables decreased to 1.86% during the
three-month period ended June 30, 2011, from 3.63% for the same period in 2010. The allowance for
credit losses decreased to approximately $6.2 million at June 30, 2011, a decrease of $1.5 million
from $7.7 million at December 31, 2010.
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Additional information regarding asset quality is included herein in the subsequent section,
Finance Receivables and Asset Quality.
Provision for income taxes. Income tax expense of $0.9 million was recorded for the three-month
periods ended June 30, 2011 and June 30, 2010. Our effective tax rate, which is a combination of
federal and state income tax rates, remained unchanged at approximately 37.9% for the three-month
periods ended June 30, 2011 and June 30, 2010.
Comparison of the Six-Month Periods Ended June 30, 2011 and June 30, 2010
Net income. Net income of $2.3 million was reported for the six-month period ended June 30, 2011,
resulting in diluted earnings per share of $0.18, compared to net income of $2.8 million and
diluted earnings per share of $0.22 for the six-month period ended June 30, 2010.
Return on average assets was 0.98% for the six-month period ended June 30, 2011, compared to 1.05%
for the six-month period ended June 30, 2010. Return on average equity was 2.83% for the six-month
period ended June 30, 2011, compared to 3.71% for the six-month period ended June 30, 2010.
Overall, our average net investment in total finance receivables for the six-month period ended
June 30, 2011 decreased 15.3% to $350.3 million, compared to $413.5 million for the six-month
period ended June 30, 2010. We continue to assess and adjust our credit underwriting guidelines in
response to economic conditions, and over the past twelve months we have added to the sales
organization to increase originations.
During the six months ended June 30, 2011, we generated 8,506 new leases with a cost of $100.9
million, compared to 5,485 new leases with a cost of $55.4 million generated for the six months
ended June 30, 2010. Much of the change in volume is the result of increasing sales staffing levels
to 97 sales account executives at June 30, 2011 from 69 sales account executives at June 30, 2010.
Approval rates also rose from 48% for the six-month period ended June 30, 2010 to 58% for the
six-month period ended June 30, 2011 due to the improved credit quality of the applications
received and adjustments made to credit policy in light of the continued strong performance of
recent years lease originations.
The provision for credit losses decreased $3.5 million, or 62.5%, to $2.1 million for the six-month
period ended June 30, 2011 from $5.6 million for the same period in 2010, primarily due to lower
charge-offs, improved delinquencies and a reduced portfolio size. For the six-month period ended
June 30, 2011 compared to the six-month period ended June 30, 2010, net interest and fee income
decreased $2.0 million, or 8.5%, primarily due to a 15.3% decrease in average total finance
receivables. Other expenses increased $2.2 million, or 13.7%, for the six-month period ended June
30, 2011, compared to the six-month period ended June 30, 2011, primarily due to increased salaries
and benefits expense related to increased sales staffing levels.
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 six-month periods ended June 30,
2011 and June 30, 2010.
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Six Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Yields/ | Average | Yields/ | |||||||||||||||||||||
Balance(1) | Interest | Rates(2) | Balance(1) | Interest | Rates(2) | |||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Interest-earning deposits with banks |
$ | 41,482 | $ | 21 | 0.10 | % | $ | 37,622 | $ | 13 | 0.07 | % | ||||||||||||
Restricted interest-earning deposits with
banks |
41,104 | 16 | 0.08 | 64,061 | 31 | 0.10 | ||||||||||||||||||
Securities available for sale |
1,658 | 27 | 3.27 | 628 | 13 | 4.14 | ||||||||||||||||||
Net investment in leases(3) |
349,469 | 21,672 | 12.40 | 410,332 | 24,572 | 11.98 | ||||||||||||||||||
Loans receivable(3) |
826 | 27 | 6.52 | 3,209 | 194 | 12.09 | ||||||||||||||||||
Total interest-earning assets |
434,539 | 21,763 | 10.01 | 515,852 | 24,823 | 9.63 | ||||||||||||||||||
Non-interest-earning assets: |
||||||||||||||||||||||||
Cash and due from banks |
2,090 | 1,861 | ||||||||||||||||||||||
Property and equipment, net |
2,168 | 2,322 | ||||||||||||||||||||||
Property tax receivables |
1,355 | 2,542 | ||||||||||||||||||||||
Other assets(4) |
27,177 | 6,611 | ||||||||||||||||||||||
Total non-interest-earning assets |
32,790 | 13,336 | ||||||||||||||||||||||
Total assets |
$ | 467,329 | $ | 529,188 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Short-term borrowings(5) |
$ | | $ | | | % | $ | 14,427 | $ | 344 | 4.77 | % | ||||||||||||
Long-term borrowings(5) |
167,998 | 5,151 | 6.13 | 249,391 | 6,984 | 5.60 | ||||||||||||||||||
Deposits(5) |
99,945 | 1,204 | 2.41 | 87,297 | 1,286 | 2.95 | ||||||||||||||||||
Total interest-bearing liabilities |
267,943 | 6,355 | 4.74 | 351,115 | 8,614 | 4.91 | ||||||||||||||||||
Non-interest-bearing liabilities: |
||||||||||||||||||||||||
Fair value of derivatives |
| 1,184 | ||||||||||||||||||||||
Sales and property taxes payable |
3,524 | 5,459 | ||||||||||||||||||||||
Accounts payable and accrued expenses |
8,420 | 5,639 | ||||||||||||||||||||||
Net deferred income tax liability |
26,208 | 15,315 | ||||||||||||||||||||||
Total non-interest-bearing liabilities |
38,152 | 27,597 | ||||||||||||||||||||||
Total liabilities |
306,095 | 378,712 | ||||||||||||||||||||||
Stockholders equity |
161,234 | 150,476 | ||||||||||||||||||||||
Total liabilities and stockholders
equity |
$ | 467,329 | $ | 529,188 | ||||||||||||||||||||
Net interest income |
$ | 15,408 | $ | 16,209 | ||||||||||||||||||||
Interest rate spread(6) |
5.27 | % | 4.72 | % | ||||||||||||||||||||
Net interest margin(7) |
7.09 | % | 6.28 | % | ||||||||||||||||||||
Ratio of average interest-earning assets to
average interest-bearing liabilities |
162.18 | % | 146.92 | % |
(1) | Average balances are calculated using month-end balances, to the extent such
averages are representative of operations. |
|
(2) | Annualized. |
|
(3) | Average balances of leases and loans include non-accrual leases and loans, and are
presented net of unearned income. The average balances of leases and loans do not include the
effects of (i) the allowance for credit losses and (ii) initial direct costs and fees
deferred. |
|
(4) | Includes operating leases. |
|
(5) | Includes effect of transaction costs. |
|
(6) | Interest rate spread represents the difference between the average yield on
interest-earning assets and the average rate on interest-bearing liabilities. |
|
(7) | Net interest margin represents net interest income as a percentage of average
interest-earning assets. |
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The following table presents the components of the changes in net interest income by volume
and rate.
Six Months Ended June 30, 2011 Compared To | ||||||||||||
Six Months Ended June 30, 2010 | ||||||||||||
Increase (Decrease) Due To: | ||||||||||||
Volume(1) | Rate(1) | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest income: |
||||||||||||
Interest-earning deposits with banks |
$ | 1 | $ | 7 | $ | 8 | ||||||
Restricted interest-earning deposits with banks |
(10 | ) | (5 | ) | (15 | ) | ||||||
Securities available for sale |
17 | (3 | ) | 14 | ||||||||
Net investment in leases |
(3,750 | ) | 850 | (2,900 | ) | |||||||
Loans receivable |
(103 | ) | (64 | ) | (167 | ) | ||||||
Total interest income |
(4,040 | ) | 980 | (3,060 | ) | |||||||
Interest expense: |
||||||||||||
Short-term borrowings |
(172 | ) | (172 | ) | (344 | ) | ||||||
Long-term borrowings |
(2,447 | ) | 614 | (1,833 | ) | |||||||
Deposits |
171 | (253 | ) | (82 | ) | |||||||
Total interest expense |
(1,981 | ) | (278 | ) | (2,259 | ) | ||||||
Net interest income |
(2,736 | ) | 1,935 | (801 | ) |
(1) | Changes due to volume and rate are calculated independently for each line item
presented rather than presenting vertical subtotals for the individual volume and rate
columns. 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. |
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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 six-month periods ended June
30, 2011 and 2010.
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Interest income |
$ | 21,763 | $ | 24,823 | ||||
Fee income |
6,058 | 7,317 | ||||||
Interest and fee income |
27,821 | 32,140 | ||||||
Interest expense |
6,355 | 8,614 | ||||||
Net interest and fee income |
21,466 | 23,526 | ||||||
Average total finance receivables(1) |
$ | 350,296 | $ | 413,541 | ||||
Percent of average total finance receivables: |
||||||||
Interest income |
12.43 | % | 12.01 | % | ||||
Fee income |
3.46 | 3.54 | ||||||
Interest and fee income |
15.89 | 15.55 | ||||||
Interest expense |
3.63 | 4.17 | ||||||
Net interest and fee margin |
12.26 | % | 11.38 | % | ||||
(1) | Total finance receivables include net investment in direct financing leases and
loans. For the calculations above, the effects of (i) the allowance for credit losses and
(ii) initial direct costs and fees deferred are excluded. |
Net interest and fee income decreased $2.0 million, or 8.5%, to $21.5 million for the six months
ended June 30, 2011 from $23.5 million for the six months ended June 30, 2010. The annualized net
interest and fee margin increased 88 basis points to 12.26% in the six-month period ended June 30,
2011 from 11.38% for the same period in 2010.
Interest income, net of amortized initial direct costs and fees, decreased $3.0 million, or 12.1%,
to $21.8 million for the six-month period ended June 30, 2011 from $24.8 million for the six-month
period ended June 30, 2010. The decrease in interest income was due principally to a 15.3% decrease
in average total finance receivables, which decreased $63.2 million to $350.3 million at June 30,
2011 from $413.5 million at June 30, 2010, partially offset by an increase in average yield of 42
basis points. The decrease in average total finance receivables is primarily due to our proactive
decision in 2008 and 2009 to lower approval rates and volume in response to the economic
conditions. The average yield on the portfolio increased, primarily due to continued higher yields
on the new leases compared to the yields on the leases repaying. However, the weighted average
implicit interest rate on new finance receivables originated decreased 168 basis points to 13.20%
for the six-month period ended June 30, 2011, compared to 14.88% for the six-month period ended
June 30, 2010, primarily due to a change in mix of new origination types toward larger program
opportunities.
Fee income decreased $1.2 million, or 16.4%, to $6.1 million for the six-month period ended June
30, 2011 from $7.3 million for the six-month period ended June 30, 2010. Fee income included
approximately $2.3 million of net residual income for the six-month period ended June 30, 2011,
compared to $2.7 million for the six-month period ended June 30, 2010. Fee income also included
approximately $3.3 million in late fee income for the six-month period ended June 30, 2011, which
decreased 19.5% from $4.1 million for the six-month period ended June 30, 2010. The decrease in
late fee income was primarily due to the decrease in average total finance receivables.
Fee income, as an annualized percentage of average total finance receivables, decreased 8 basis
points to 3.46% for the six-month period ended June 30, 2011 from 3.54% for the same period in
2010. Late fees remained the largest component of fee income at 1.88% as a percentage of average
total finance receivables for the six-month period ended June 30, 2011, compared to 1.99% for the
six-month period ended June 30, 2010. As a percentage of average total finance receivables, net
residual income was 1.32% for the six-month period ended June 30, 2011, compared to 1.29% for the
six-month period ended June 30, 2010.
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Interest expense decreased $2.2 million to $6.4 million for the six-month period ended June 30,
2011 from $8.6 million for the six-month period ended June 30, 2010. The decrease was primarily
due to lower average total finance receivables in combination with a shift in our funding mix
toward lower cost deposits. Interest expense, as an annualized percentage of average total finance
receivables, decreased 54 basis points to 3.63% for the six-month period ended June 30, 2011, from
4.17% for the same period in 2010.
The weighted average interest rate, excluding transaction costs, on short-term and long-term
borrowings was 5.34% for the six-month period ended June 30, 2011, compared to 5.01% for the same
period in 2010. The higher interest rate primarily reflects the increased cost of the borrowings.
The average balance for our variable-rate debt was $65.7 million for the six months ended June 30,
2011, compared to $32.9 million for the six months ended June 30, 2010. The weighted average
interest rate, excluding transaction costs, for our variable-rate debt was 5.29% for the six-month
period ended June 30, 2011, compared to 4.53% for the same period in 2010. For the six months ended
June 30, 2011, average term securitization borrowings outstanding were $102.2 million at a weighted
average coupon of 5.35%, compared to $230.9 million at a weighted average coupon of 5.07% for the
same period in 2010.
Our wholly-owned subsidiary, MBB, provides an additional funding source. FDIC-insured deposits are
being raised via the brokered certificates of deposit market and from other financial institutions
on a direct basis. Interest expense on deposits was $1.2 million, or 2.41% as a percentage of
weighted average deposits, for the six-month period ended June 30, 2011. The average balance of
deposits was $99.9 million for the six-month period ended June 30, 2011. Interest expense on
deposits was $1.3 million, or 2.95% as a percentage of weighted average deposits, for the six-month
period ended June 30, 2010. The average balance of deposits was $87.3 million for the six-month
period ended June 30, 2010.
Insurance income. Insurance income decreased $0.2 million to $1.9 million for the six-month period
ended June 30, 2011 from $2.1 million for the six-month period ended June 30, 2010, primarily due
to lower billings from lower total finance receivables.
Other income. Other income increased $0.1 million to $0.7 million for the six-month period ended
June 30, 2011 from $0.6 million for the six-month period ended June 30, 2010. Other income includes
various administrative transaction fees, fees received from lease syndications and gains on sales
of leases.
Salaries and benefits expense. Salaries and benefits expense increased $1.6 million, or 16.5%, to
$11.3 million for the six months ended June 30, 2011 from $9.7 million for the same period in 2010.
Salaries and benefits expense, as a percentage of average total finance receivables, was 6.46% for
the six-month period ended June 30, 2011 compared with 4.70% for the same period in 2010. Total
personnel increased to 251 at June 30, 2011 from 211 at June 30, 2010, primarily due to increased
sales staffing levels, which were 97 sales account executives at June 30, 2011, compared to 69
sales account executives at June 30, 2010.
In the first six months of 2011, we increased the number of our sales account executives by 10,
from 87 sales account executives at December 31, 2010 to 97 at June 30, 2011. This action continued
our plan to rebuild the sales organization to increase originations and match the level of
originations to our current funding capacity.
General and administrative expense. General and administrative expense decreased $0.5 million, or
8.2%, to $6.6 million for the six months ended June 30, 2011 from $6.1 million for the same period
in 2010. General and administrative expense as an annualized percentage of average total finance
receivables was 3.78% for the six-month period ended June 30, 2011, compared to 2.96% for the
six-month period ended June 30, 2010. Selected major components of general and administrative
expense for the six-month period ended June 30, 2011 included $1.4 million of premises and
occupancy expense, $1.0 million of audit and tax expense, $0.5 million of data processing expense
and $0.3 million of marketing expense. In comparison, selected major components of general and
administrative expense for the six-month period ended June 30, 2010 included $1.4 million of
premises and occupancy expense, $0.6 million of audit and tax expense, $0.5 million of data
processing expense and $0.2 million of marketing expense.
Financing related costs. Financing related costs primarily represent bank commitment fees paid to
our financing sources. Financing related costs remained unchanged at approximately $0.3 million for
each of the six-month periods ended June 30, 2011 and June 30, 2010.
Provision for credit losses. The provision for credit losses decreased $3.5 million, or 62.5%, to
$2.1 million for the six months ended June 30, 2011 from $5.6 million for the same period in 2010.
The decrease in the provision for credit losses was primarily due to lower charge-offs, improved
delinquencies and a reduced portfolio size. Net charge-offs were $3.6 million for the six-month
period ended June 30, 2011, compared to $8.7 million for the same period in 2010. Net charge-offs
as a percentage of average total finance receivables decreased to 2.08% during the six-month period
ended June 30, 2011, from 4.19% for the same period in 2010. The
allowance for credit losses decreased to approximately $6.2 million at June 30, 2011, a decrease of
$1.5 million from $7.7 million at December 31, 2010.
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Additional information regarding asset quality is included herein in the subsequent section,
Finance Receivables and Asset Quality.
Provision for income taxes. Income tax expense of $1.4 million was recorded for the six-month
period ended June 30, 2011, compared to an expense of $1.6 million for the same period in 2010. The
change is primarily attributable to the change in pretax income recorded for the six-month period
ended June 30, 2011. Our effective tax rate, which is a combination of federal and state income tax
rates, was approximately 38% for the six-month period ended June 30, 2011, compared to 36.6% for
the six-month period ended June 30, 2010. The change in effective tax rate is primarily due to a
change in the mix of projected pretax book income across the jurisdictions and entities.
FINANCE RECEIVABLES AND ASSET QUALITY
Our net investment in leases and loans declined $2.9 million, or 0.8%, to $354.5 million at June
30, 2011 from $351.6 million at December 31, 2010. We continue to adjust our credit underwriting
guidelines in response to current economic conditions, and we continue to rebuild our sales
organization to increase originations. A portion of the Companys lease portfolio is generally
assigned as collateral for borrowings as described below in Liquidity and Capital Resources.
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Table of Contents
The chart which follows provides our asset quality statistics for each of the three- and six-month
periods ended June 30, 2011 and June 30, 2010, and the year ended December 31, 2010:
Three Months Ended | Six Months Ended | Year Ended | ||||||||||||||||||
June 30, | June 30, | December 31, | ||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2010 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Allowance for credit losses, beginning of
period |
$ | 6,887 | $ | 10,253 | $ | 7,718 | $ | 12,193 | $ | 12,193 | ||||||||||
Charge-offs |
(2,247 | ) | (4,438 | ) | (4,875 | ) | (10,364 | ) | (17,095 | ) | ||||||||||
Recoveries |
611 | 842 | 1,229 | 1,705 | 3,182 | |||||||||||||||
Net charge-offs |
(1,636 | ) | (3,596 | ) | (3,646 | ) | (8,659 | ) | (13,913 | ) | ||||||||||
Provision for credit losses |
924 | 2,494 | 2,103 | 5,617 | 9,438 | |||||||||||||||
Allowance for credit losses, end of period(1) |
$ | 6,175 | $ | 9,151 | $ | 6,175 | $ | 9,151 | $ | 7,718 | ||||||||||
Annualized net charge-offs to average total
finance receivables (2) |
1.86 | % | 3.63 | % | 2.08 | % | 4.19 | % | 3.58 | % | ||||||||||
Allowance for credit losses to total
finance receivables, end of period (2) |
1.74 | % | 2.40 | % | 1.74 | % | 2.40 | % | 2.19 | % | ||||||||||
Average total finance receivables (2) |
$ | 351,389 | $ | 395,906 | $ | 350,296 | $ | 413,541 | $ | 389,001 | ||||||||||
Total finance receivables, end of period (2) |
$ | 354,014 | $ | 381,977 | $ | 354,014 | $ | 381,977 | $ | 352,527 | ||||||||||
Delinquencies greater than 60 days past due |
$ | 2,221 | $ | 5,202 | $ | 2,221 | $ | 5,202 | $ | 3,504 | ||||||||||
Delinquencies greater than 60 days past due (3) |
0.56 | % | 1.24 | % | 0.56 | % | 1.24 | % | 0.90 | % | ||||||||||
Allowance for credit losses to delinquent
accounts greater than 60 days past due (3) |
278.03 | % | 175.91 | % | 278.03 | % | 175.91 | % | 220.26 | % | ||||||||||
Non-accrual leases and loans, end of period |
$ | 1,197 | $ | 2,819 | $ | 1,197 | $ | 2,819 | $ | 1,996 | ||||||||||
Renegotiated leases and loans, end of period |
$ | 1,485 | $ | 3,024 | $ | 1,485 | $ | 3,024 | $ | 2,221 | ||||||||||
Accruing leases and loans past due
90 days or more |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Interest income included on non-accrual
leases and loans(4) |
$ | 13 | $ | 34 | $ | 41 | $ | 112 | $ | 214 | ||||||||||
Interest income excluded on non-accrual
leases and loans(5) |
$ | 13 | $ | 39 | $ | 19 | $ | 42 | $ | 46 |
(1) | The allowance for credit losses allocated to loans at June 30, 2011, June 30, 2010
and December 31, 2010, was $0.1 million, $0.2 million and $0.1 million, respectively. |
|
(2) | Total finance receivables include net investment in direct financing leases and
loans. For purposes of asset quality and allowance calculations, the effects of (i) the
allowance for credit losses and (ii) initial direct costs and fees deferred are excluded. |
|
(3) | Calculated as a percent of total minimum lease payments receivable for leases and as
a percent of principal outstanding for loans. |
|
(4) | Represents interest which was recognized during the period on non-accrual loans and
leases, prior to non-accrual status. |
|
(5) | Represents interest which would have been recorded on non-accrual loans and leases
had they performed in accordance with their contractual terms during the period. |
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Net investments in finance receivables are generally charged-off when they are contractually past
due for 121 days. Income is not recognized on leases or loans when a default on monthly payment
exists for a period of 90 days or more. Income recognition resumes when a lease or loan becomes
less than 90 days delinquent.
Net charge-offs for the three months ended June 30, 2011 were $1.6 million (1.86% of average total
finance receivables on an annualized basis), compared to $2.0 million (2.30% of average total
finance receivables on an annualized basis) for the three months ended March 31, 2011 and $3.6
million (3.63% of average total finance receivables on an annualized basis) for the three months
ended June 30, 2010. Approximately three-fourths of the decrease from the second quarter of 2010
was due to a lower charge-off rate as a percentage of average total finance receivables, and
approximately one-fourth of the decrease was related to the impact on the calculation of the
decrease in average total finance receivables. The decrease in net charge-offs during the first
quarter of 2011 compared to recent prior periods is primarily due to improving delinquency
migrations and lower portfolio balances.
Net charge-offs for the six-month period ended June 30, 2011 were $3.6 million (2.08% of average
total finance receivables on an annualized basis), compared to $8.7 million (4.19% of average total
finance receivables on an annualized basis) for the six-month period ended June 30, 2010.
Approximately three-fourths of the $5.1 million decrease was related to a lower charge-off rate as
a percentage of average total finance receivables, and approximately one-fourth of the decrease was
due to the impact on the calculation of the decrease in average total finance receivables. The
decrease in net charge-offs during the first six months of 2011 compared to recent prior periods is
primarily due to improving delinquency migrations and lower portfolio balances.
Delinquent accounts 60 days or more past due (as a percentage of minimum lease payments receivable
for leases and as a percentage of principal outstanding for loans) were 0.56% at June 30, 2011 and
0.90% at December 31, 2010. 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.)
As previously disclosed, based on feedback the Company received from the Federal Reserve Bank of
Philadelphia in April 2011, the Company is operating under its established methodology for
determining its allowance for credit losses (the Allowance), which methodology will be reviewed
by the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions
during their next regularly scheduled commercial bank examination of Marlin Business Bank.
RESIDUAL PERFORMANCE
Our leases offer our end user customers the option to own the equipment at lease expiration. As of
June 30, 2011, approximately 66% of our leases were one dollar purchase option leases, 32% were
fair market value leases and 2% were fixed purchase option leases, the latter of which typically
contain an end-of-term purchase option equal to 10% of the original equipment cost. As of June 30,
2011, there were $34.9 million of residual assets retained on our Consolidated Balance Sheet, of
which $28.5 million, or 81.8%, were related to copiers. No other group of equipment represented
more than 10% of equipment residuals as of June 30, 2011 and December 31, 2010, respectively.
Improvements in technology and other market changes, particularly in copiers, could adversely
impact our ability to realize the recorded residual values of this equipment.
Fee income included approximately $1.1 million and $1.3 million of net residual income for the
three-month periods ended June 30, 2011 and June 30, 2010, respectively. Fee income included
approximately $2.3 million and $2.7 million of net residual income for the six-month periods ended
June 30, 2011 and June 30, 2010, 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 as further described below.
Our leases generally include renewal provisions and many leases continue beyond their initial
contractual term. Based on the Companys experience, the amount of ultimate realization of the
residual value tends to relate more to the customers election at the end of the lease term to
enter into a renewal period, purchase the leased equipment or return the leased equipment than it
does to the equipment type. We consider renewal income a component of residual performance. Renewal
income net of depreciation totaled approximately $1.8 million and $2.0 million for the three-month
periods ended June 30, 2011 and June 30, 2010, respectively. Renewal income net of depreciation
totaled approximately $3.8 million and $3.9 million for the six-month periods ended June 30, 2011
and June 30, 2010, respectively.
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For the three months ended June 30, 2011, the net loss on residual values disposed at end of term
totaled $0.7 million, compared to a net loss of $0.6 million for the three months ended June 30,
2010. For the six months ended June 30, 2011, the net loss on residual values disposed at end of
term totaled $1.5 million, compared to a net loss of $1.2 million for the six months ended June 30,
2010. The primary driver of the changes was a shift in the mix of the amounts and types of
equipment disposed at the end of the applicable lease terms. Historically, our net residual income
has exceeded 100% of the residual recorded on such leases. Management performs periodic reviews of
the estimated residual values and historical realization statistics no less frequently than
quarterly. There was no impairment recognized on estimated residual values during the six-month
periods ended June 30, 2011 and June 30, 2010, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires a substantial amount of cash to operate and grow. Our primary liquidity need
is for new originations. In addition, we need liquidity to pay interest and principal on our
borrowings, to pay fees and expenses incurred in connection with our securitization transactions,
to fund infrastructure and technology investment and to pay administrative and other operating
expenses.
We are dependent upon the availability of financing from a variety of funding sources to satisfy
these liquidity needs. Historically, we have relied upon four principal types of third-party
financing to fund our operations:
| borrowings under revolving, short-term or long-term bank facilities; |
||
| financing of leases and loans in various warehouse facilities (all of which have since been
repaid in full); |
||
| 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 June 30, 2011, MBB has
funded $262.6 million of leases and loans through its initial capitalization of $12 million, its
March 2011 capitalization of $25 million and its issuance of $207.5 million in FDIC insured
deposits at an average borrowing rate of 3.12%.
On December 31, 2008, Marlin Business Services Corp. received approval from the Federal Reserve
Bank of Philadelphia 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. Until
March 12, 2011, MBB operated in accordance with its original de novo three-year business plan (as
required by the FDIC Order), which assumed total assets of up to $128 million by March 12, 2011
(when its three-year de novo period expired). In March 2011, following the expiration of the de
novo period, the Company provided MBB with $25.0 million of additional capital to support future
growth.
On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of
Marlin Business Services Corp.s election to become a financial holding company (while remaining a
bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section
225.82 of the Federal Reserve Boards Regulation Y. Such election permits Marlin Business Services
Corp. to engage in activities that are financial in nature or incidental to a financial activity,
including the maintenance and expansion of its reinsurance activities conducted through our
wholly-owned subsidiary, AssuranceOne, Ltd.
Our strategy has generally included funding new originations, other than those funded by MBB, in
the short-term with cash from operations or through borrowings under various warehouse and loan
facilities. Historically, we executed a term note securitization approximately once a year to
refinance and relieve the warehouse and loan facilities. Due to the impact on borrowing costs from
unfavorable market conditions and the available capacity in our warehouse and loan facilities at
that time, the Company elected not to complete fixed-rate term note securitizations in 2008 or
2009. With the opening of MBB in 2008, we are funding increasing amounts of new originations
through the issuance of FDIC-insured certificates of deposit.
On October 9, 2009, Marlin Business Services Corp.s wholly-owned subsidiary, MRC, closed on a
$75,000,000, three-year committed loan facility with the Lender Finance division of Wells Fargo
Capital Finance. The facility is secured by a lien on MRCs assets and is supported by guaranties
from Marlin Business Services Corp. and Marlin Leasing Corporation. Advances under the facility are
made pursuant to a borrowing base formula, and the proceeds are used to fund lease originations.
The maturity date of the facility is October 9, 2012.
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On February 12, 2010 we completed an $80.7 million TALF-eligible term asset-backed securitization,
of which we elected to defer the issuance of subordinated notes totaling $12.5 million. This
transaction was Marlins tenth term note securitization and the fifth to earn a AAA rating. As with
all of the Companys prior term note securitizations, this financing provides the Company with
fixed-cost borrowing and is recorded in long-term borrowings in the Consolidated Balance Sheets.
This was a private offering made to qualified institutional buyers pursuant to Rule 144A under the
1933 Act by Marlin Leasing Receivables XII LLC, a wholly-owned subsidiary of Marlin Leasing
Corporation. DBRS, Inc. and Standard & Poors Ratings Services assigned a AAA rating to the senior
tranche of this offering. The effective weighted average interest expense over the term of the
financing is expected to be approximately 3.13%. A portion of the proceeds of the new
securitization was used to repay the full amount outstanding under the CP conduit warehouse
facility.
On September 24, 2010, the Companys affiliate, Marlin Leasing Receivables XIII LLC (MLR XIII),
closed on a $50.0 million three-year committed loan facility with Key Equipment Finance Inc. The
facility is secured by a lien on MLR XIIIs assets. Advances under the facility are made pursuant
to a borrowing base formula, and the proceeds are used to fund lease originations. The maturity
date of the facility is September 23, 2013. An event of default such as non-payment of amounts when
due under the loan agreement or a breach of covenants may accelerate the maturity date of the
facility. (See Financial Covenants section which follows in this Item 2.)
On April 15, 2011, we elected to exercise our call option and pay off the remaining $12.1 million
of our 2006 term note securitization. This note repayment in full released approximately $19.2
million in restricted cash previously held by the trustee under such securitization.
At June 30, 2011, we had approximately $59.3 million of available borrowing capacity in addition to
available cash and cash equivalents of $51.9 million. Our debt to equity ratio was 1.66 to 1 at
June 30, 2011 and 1.70 to 1 at December 31, 2010.
Net cash provided by investing activities was $8.9 million for the six-month period ended June 30,
2011, compared to net cash provided by investing activities of $53.8 million for the six-month
period ended June 30, 2010. Investing activities primarily relate to lease payment activity.
Net cash used in financing activities was $5.7 million for the six-month period ended June 30,
2011, compared to net cash used in financing activities of $72.6 million for the six-month period
ended June 30, 2010. Financing activities include net advances and repayments on our various
borrowing sources.
Additional liquidity is provided by or used by our cash flow from operations. Net cash provided by
operating activities was $11.6 million for the six-month period ended June 30, 2011, compared to
net cash provided by operating activities of $17.0 million for the six-month period ended June 30,
2010.
We expect cash from operations, additional borrowings on existing and future credit facilities,
funds from certificates of deposit issued through MBB 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 for the foreseeable future.
Total Cash and Cash Equivalents. Our objective is to maintain an adequate level of cash, investing
any free cash in leases and loans. We primarily fund our originations and growth using advances
under our long-term bank facilities and certificates of deposit issued through MBB. Total cash and
cash equivalents available as of June 30, 2011 totaled $51.9 million, compared to $37.0 million at
December 31, 2010.
Restricted Interest-earning Deposits with Banks. As of June 30, 2011, we also had $30.9 million of
cash that was classified as restricted interest-earning deposits with banks, compared to $47.1
million at December 31, 2010. Restricted interest-earning deposits with banks consist primarily of
various trust accounts related to our secured debt facilities.
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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 $143.8 million at June 30, 2011 and $178.7 million at December 31, 2010. Borrowings outstanding
under the Companys short-term and long-term debt consist of the following:
For the Six Months Ended June 30, 2011 | As of June 30, 2011 | |||||||||||||||||||||||||||
Maximum | ||||||||||||||||||||||||||||
Maximum | Month End | Average | Weighted | Weighted | ||||||||||||||||||||||||
Facility | Amount | Amount | Average | Amount | Average | Unused | ||||||||||||||||||||||
Amount | Outstanding | Outstanding | Rate(3) | Outstanding | Rate(3) | Capacity(1) | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Federal funds purchased |
$ | 1,600 | $ | | $ | | | % | $ | | | % | $ | 1,600 | ||||||||||||||
Term note securitizations(2) |
| 121,318 | 102,248 | 5.35 | % | 76,498 | 5.13 | % | | |||||||||||||||||||
Long-term loan facilities |
125,000 | 76,255 | 65,749 | 5.29 | % | 67,296 | 5.18 | % | 57,704 | |||||||||||||||||||
$ | 126,600 | $ | 167,997 | 5.34 | % | $ | 143,794 | 5.15 | % | $ | 59,304 | |||||||||||||||||
(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 June 30, 2011, MBB
had $8.2 million in unused, secured borrowing capacity at the Federal Reserve Discount Window.
Additional liquidity that may be provided by the issuance of insured deposits is also excluded
from this table. |
|
(2) | Our term note securitizations are one-time fundings that pay down over time without
any ability for us to draw down additional amounts. |
|
(3) | Does not include transaction costs. |
Federal Funds Line of Credit with Correspondent Bank
MBB has established a federal funds line of credit with a correspondent bank. This line allows for
both selling and purchasing of federal funds. The amount that can be drawn against the line is
limited to $1.6 million.
Federal Reserve Discount Window
In addition, MBB has received approval to borrow from the Federal Reserve Discount Window based on
the amount of assets MBB chooses to pledge. Based on assets pledged at June 30, 2011, MBB had $8.2
million in unused, secured borrowing capacity at the Federal Reserve Discount Window.
Term Note Securitizations
On February 12, 2010 we completed an $80.7 million TALF-eligible term asset-backed securitization,
of which we elected to defer the issuance of subordinated notes totaling $12.5 million. This
transaction was Marlins tenth term note securitization and the fifth to earn a AAA rating. As with
all of the Companys prior term note securitizations, this financing provided the Company with
fixed-cost borrowing and is recorded in long-term borrowings in the Consolidated Balance Sheets.
This was a private offering made to qualified institutional buyers pursuant to Rule 144A under the
1933 Act by Marlin Leasing Receivables XII LLC, a wholly-owned subsidiary of Marlin Leasing
Corporation. DBRS, Inc. and Standard & Poors Ratings Services assigned a AAA rating to the senior
tranche of this offering. The effective weighted average interest expense over the term of the
financing is expected to be approximately 3.13%. A portion of the proceeds of the new
securitization was used to repay the full amount outstanding under the CP conduit warehouse
facility.
Since our founding through June 30, 2011, we have completed 10 on-balance-sheet term note
securitizations of which two remain outstanding. In connection with our securitization
transactions, we have transferred leases to our wholly-owned SPEs and issued term debt
collateralized by such commercial leases to institutional investors in private securities
offerings. These SPEs are considered VIEs under U.S. GAAP. We are required to consolidate VIEs in
which we are deemed to be the primary beneficiary through having (1) power over the significant
activities of the entity and (2) an obligation to absorb losses or the right to receive benefits
from the VIE
which are potentially significant to the VIE. We continue to service the assets of our VIEs and
retain equity and/or residual interests. Accordingly, assets and related debt of these VIEs are
included in the accompanying Consolidated Balance Sheets. Our leases and restricted
interest-earning deposits with banks are assigned as collateral for these borrowings and there is
no further recourse to our general credit. Collateral in excess of these borrowings represents our
maximum loss exposure. Our term note securitizations have fixed terms, fixed interest rates and
fixed principal amounts. At June 30, 2011 and at December 31, 2010, outstanding term
securitizations amounted to $76.5 million and $128.2 million, respectively.
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Long-term Loan Facilities
On October 9, 2009, Marlin Business Services Corp.s wholly-owned subsidiary, Marlin Receivables
Corp. (MRC), closed on a $75.0 million three-year committed loan facility with the Lender Finance
division of Wells Fargo Capital Finance. The facility is secured by a lien on MRCs assets and is
supported by guaranties from the Marlin Business Services Corp. and Marlin Leasing Corporation.
Advances under the facility are made pursuant to a borrowing base formula, and the proceeds are
used as a warehouse facility to fund lease originations. In contrast to previous warehouse
facilities, this long-term loan facility does not require annual refinancing. The maturity date of
the facility is October 9, 2012. An event of default, such as non-payment of amounts when due under
the loan agreement or a breach of covenants, may accelerate the maturity date of the facility.
On September 24, 2010, the Companys affiliate, Marlin Leasing Receivables XIII LLC (MLR XIII),
closed on a $50.0 million three-year committed loan facility with Key Equipment Finance Inc. The
facility is secured by a lien on MLR XIIIs assets. Advances under the facility are made pursuant
to a borrowing base formula, and the proceeds are used to fund lease originations. The maturity
date of the facility is September 23, 2013. An event of default such as non-payment of amounts when
due under the loan agreement or a breach of covenants may accelerate the maturity date of the
facility.
Financial Covenants
Our secured borrowing arrangements contain numerous covenants, restrictions and default provisions
that we must comply with in order to obtain funding through the facilities and to avoid an event of
default. A change in the Chief Executive Officer, Chief Operating Officer or Chief Financial
Officer is an event of default under our long-term loan facilities, unless we hire a replacement
acceptable to our lenders within 120 days.
A merger or consolidation with another company in which the Company is not the surviving entity is
also an event of default under the financing facilities. The Companys long-term loan facilities
contain acceleration clauses allowing the creditor to accelerate the scheduled maturities of the
obligation under certain conditions that may not be objectively determinable (for example, if a
material adverse change occurs). An event of default under any of the facilities could result in
an acceleration of amounts outstanding under the facilities, foreclosure on all or a portion of the
leases financed by the facilities and/or the removal of the Company as servicer of the leases
financed by the facility.
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Some of the critical financial and credit quality covenants under our borrowing arrangements as of
June 30, 2011 include:
Actual(1) | Requirement | |||||||
Tangible net worth minimum |
$161.6 million | $142.2 million | ||||||
Debt-to-equity ratio maximum |
1.56 to 1 | 10.0 to 1 | ||||||
Maximum servicer senior leverage ratio |
1.26 to 1 | 4.0 to 1 | ||||||
Four-quarter rolling average interest coverage ratio minimum |
2.42 to 1 | 1.50 to 1 | ||||||
Maximum portfolio delinquency ratio |
0.56 | % | 3.50 | % | ||||
Maximum gross charge-off ratio |
3.19 | % | 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 June 30, 2011, the Company was in compliance with terms of the long-term loan facilities and
the term note securitization agreements.
Bank Capital and Regulatory Oversight
On January 13, 2009, in connection with the conversion of MBB from an industrial bank to a
commercial bank, we became a bank holding company by order of the Federal Reserve Board and are
subject to regulation under the Bank Holding Company Act. All of our subsidiaries may be subject to
examination by the Federal Reserve Board even if not otherwise regulated by the Federal Reserve
Board. On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness
our election to become a financial holding company (while remaining a bank holding company)
pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section 225.82 of the Federal
Reserve Boards Regulation Y. Such election permits us to engage in activities that are financial
in nature or incidental to a financial activity, including the maintenance and expansion of our
reinsurance activities conducted through our wholly-owned subsidiary, AssuranceOne, Ltd.
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 Bank
Holding Company Act, 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% 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.
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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 June 30, 2011, MBBs Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based
capital ratio were 28.96%, 28.39% and 29.42%, respectively, compared to requirements for
well-capitalized status of 5%, 6% and 10%, respectively. At June 30, 2011, Marlin Business
Services Corp.s Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based
capital ratio were 34.35%, 40.10% and 41.35%, respectively, compared to requirements for
well-capitalized status of 5%, 6% and 10%, respectively.
Pursuant to the FDIC Order, MBB is required to keep its total risk-based capital ratio above 15%.
MBBs equity balance at June 30, 2011 was $47.4 million, which qualifies for well capitalized
status. Until March 12, 2011, MBB operated in accordance with its original de novo three-year
business plan as required by the FDIC Order, which assumed total assets of up to $128 million by
March 12, 2011 (when its three-year de novo period expired). In March 2011, following the
expiration of the de novo period, the Company provided MBB with $25.0 million of additional capital
to support future growth.
Information on Stock Repurchases
Information on Stock Repurchases is provided in Part II. Other Information, Item 2, Unregistered
Sales of Equity Securities and Use of Proceeds herein.
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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
June 30, 2011 were as follows:
Contractual Obligations as of June 30, 2011 | ||||||||||||||||||||||||
Operating | Leased | Capital | ||||||||||||||||||||||
Period Ending December 31, | Borrowings | Interest (1) | Leases | Facilities | Leases | Total | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
2011 |
$ | 30,934 | $ | 3,882 | $ | 2 | $ | 798 | $ | 60 | $ | 35,676 | ||||||||||||
2012 |
101,526 | 3,569 | 4 | 1,621 | 103 | 106,823 | ||||||||||||||||||
2013 |
8,563 | 247 | 4 | 789 | 86 | 9,689 | ||||||||||||||||||
2014 |
1,623 | 102 | 4 | 141 | 21 | 1,891 | ||||||||||||||||||
2015 |
1,031 | 26 | | | | 1,057 | ||||||||||||||||||
Thereafter |
117 | | | | | 117 | ||||||||||||||||||
Total |
$ | 143,794 | $ | 7,826 | $ | 14 | $ | 3,349 | $ | 270 | $ | 155,253 | ||||||||||||
(1) | Interest on the variable-rate long-term loan facilities is assumed at the June 30,
2011 rate for the remaining term. |
This table excludes time deposits. Deposit maturities are presented in Note 8 to the Companys
Unaudited Condensed Consolidated Financial Statements in Item 1 herein.
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 borrowings
and certificates of deposit that the Company issues periodically. Between term note securitization
issues, we have historically financed our new lease originations through a combination of
variable-rate warehouse facilities and working capital. Most recently, we have also used
variable-rate long-term loan facilities to finance our new lease originations. Our mix of fixed-
and variable-rate borrowings and our exposure to interest rate risk changes over time. Over the
past twelve months, the mix of variable-rate borrowings to total borrowings has ranged from 11.5%
to 46.8% and averaged 30.2%. At June 30, 2011, $67.3 million, or 46.8%, of our borrowings were
variable-rate borrowings.
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The following table presents the contractually scheduled maturities and the related weighted
average interest rates for debt obligations as of June 30, 2011 expected as of and for each year
ended through December 31, 2015 and for periods thereafter.
Scheduled Maturities by Calendar Year | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||
2015 & | Carrying | |||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | Thereafter | Amount | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Debt: |
||||||||||||||||||||||||
Fixed-rate debt |
$ | 30,934 | $ | 34,230 | $ | 8,563 | $ | 1,623 | $ | 1,148 | $ | 76,498 | ||||||||||||
Average fixed rate |
5.37 | % | 5.25 | % | 3.99 | % | 6.21 | % | 6.51 | % | 5.20 | % | ||||||||||||
Variable-rate debt |
$ | | $ | 67,296 | $ | | $ | | $ | | $ | 67,296 | ||||||||||||
Average variable
rate |
| 5.18 | % | | | | 5.18 | % |
Our earnings are sensitive to fluctuations in interest rates. The long-term loan facilities charge
a variable rate of interest based on LIBOR. Because our assets are predominately fixed-rate,
increases in this market interest rate would generally negatively impact earnings because the rate
charged on our borrowings would change faster than our assets could reprice. We would have to
offset increases in borrowing costs by adjusting the pricing under our new leases or our net
interest margin would be reduced. There can be no assurance that we will be able to offset higher
borrowing costs with increased pricing of our assets.
For example, the impact of each hypothetical 100 basis point, or 1.00%, increase in the market
rates to which our borrowings are indexed for the twelve month period ended June 30, 2011 generally
would have been to reduce net interest and fee income by approximately $0.5 million based on our
average variable-rate borrowings of approximately $49.2 million for the twelve months then ended,
excluding the effects of any changes in the value of derivatives, taxes and possible increases in
the yields from our lease and loan portfolios due to the origination of new contracts at higher
interest rates. However, at June 30, 2011, due to an index floor on certain variable-rate
borrowings combined with the current interest rate environment, a 100-basis point increase in the
market rates to which the borrowings are indexed would have had no impact on the cost of the
borrowing.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2011, the Financial Accounting Standards Board (the FASB) issued Accounting Standards
Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance clarifies the FASBs
intent about the application of existing fair value measurement and disclosure requirements and, in
limited situations, changes certain principles or requirements for measuring fair value and
disclosing information about fair value measurements. The guidance is effective for interim and
annual reporting periods beginning after December 15, 2011. 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 June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (Topic
220): Presentation of Comprehensive Income (ASU 2011-05). This guidance will affect the
presentation of comprehensive income, but does not change the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be reclassified to net
income. The guidance is effective for interim and annual reporting periods beginning after December
15, 2011. Because ASU 2011-05 impacts disclosures only, it will not affect the consolidated
earnings, financial position or cash flows of the Company.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The information appearing in the section captioned Managements Discussion and Analysis of
Financial Condition and Results of Operations Market Interest Rate Risk and Sensitivity under
Item 2 of Part I of this Form 10-Q is incorporated herein by reference.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report.
Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures as
of the end of the period covered by this report are designed and operating effectively to provide
reasonable assurance that the information required to be disclosed by us in reports filed under the
1934 Act is (i) recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms and (ii) accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys second fiscal quarter of 2011 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
PART II. Other Information
Item 1. | Legal Proceedings |
We are party to various legal proceedings, which include claims and litigation arising in the
ordinary course of business. In the opinion of management, these actions will not have a material
impact on our business, financial condition, results of operations or cash flows.
Item 1A. | Risk Factors |
There have been no material changes in the risk factors disclosed in the Companys Annual Report on
Form 10-K for the year ended December 31, 2010.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Information on Stock Repurchases
On November 2, 2007, the Companys Board of Directors approved a stock repurchase plan. Under this
program, the Company is authorized to repurchase up to $15 million in value of its outstanding
shares of common stock. This authority may be exercised from time to time and in such amounts as
market conditions warrant. Any shares purchased under this plan are returned to the status of
authorized but unissued shares of common stock. The repurchases may be made on the open market, in
block trades or otherwise. The program may be suspended or discontinued at any time. The
repurchases are funded using the Companys working capital.
During the three-month period ended June 30, 2011, the number of shares of common stock repurchased
by Marlin and the average price paid per share is as follows:
Total Number of | Maximum Approximate | |||||||||||||||
Shares Purchased as | Dollar Value of Shares that | |||||||||||||||
Number of | Average Price | Part of a Publicly | May Yet be Purchased | |||||||||||||
Shares | Paid Per | Announced Plan or | Under the Plans or | |||||||||||||
Time Period | Purchased | Share(1) | Program | Programs | ||||||||||||
April 1, 2011 to
April 30, 2011 |
8,383 | $ | 11.48 | 8,383 | $ | 10,166,918 | ||||||||||
May 1, 2011 to
May 31, 2011 |
33,010 | $ | 12.17 | 33,010 | $ | 9,765,126 | ||||||||||
June 1, 2011 to
June 30, 2011 |
114,211 | $ | 12.04 | 114,211 | $ | 8,389,547 | ||||||||||
Total for the quarter ended
June 30, 2011 |
155,604 | $ | 12.04 | 155,604 | $ | 8,389,547 |
(1) | Average price paid per share includes commissions and is rounded to the nearest two
decimal places. |
In addition to the repurchases described above, pursuant to the 2003 Equity Plan, participants may
have shares withheld to cover income taxes. There were 29,730 shares repurchased to cover income
tax withholding pursuant to the 2003 Plan during the three-month period ended June 30, 2011, at an
average cost of $12.47 per share.
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | [Removed and Reserved.] |
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
Exhibit | ||||
Number | Description | |||
3.1 | Amended and Restated Articles of Incorporation (1) |
|||
3.2 | Bylaws (2) |
|||
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) |
|||
101 | Financial statements from the Quarterly Report on Form 10-Q of the Company for the period
ended June 30, 2011, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii)
the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated
Statements of Stockholders Equity, (iv) the Condensed Consolidated Statements of Cash Flows
and (v) the Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of
text. (Submitted electronically with this report) |
(1) | Previously filed with the SEC as an exhibit to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2007 filed on March 5, 2008, and incorporated by
reference herein. |
|
(2) | Previously filed with the SEC as an exhibit to the Companys Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-108530), filed on October 14, 2003 and
incorporated by reference herein. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
MARLIN BUSINESS SERVICES CORP. | ||||||
(Registrant) | ||||||
By: | /s/ Daniel P. Dyer
|
|||||
Chief Executive Officer | ||||||
(Chief Executive Officer) | ||||||
By: | /s/ Lynne C. Wilson
|
|||||
Chief Financial Officer & Senior Vice President | ||||||
(Principal Financial Officer) |
Date:
August 3, 2011
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