e10vq
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2008
Commission file number 000-50448
MARLIN BUSINESS SERVICES CORP.
(Exact name of registrant as specified in its charter)
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Pennsylvania
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38-3686388 |
(State of incorporation)
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(I.R.S. Employer Identification Number) |
300 Fellowship Road, Mount Laurel, NJ 08054
(Address of principal executive offices)
(Zip code)
(888) 479-9111
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant 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 October 24, 2008, 12,227,891 shares of Registrants common stock, $.01 par value, were
outstanding.
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2008
TABLE OF CONTENTS
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Page No. |
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2-39 |
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2-18 |
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2 |
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3 |
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4 |
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6-18 |
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18-39 |
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39 |
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39 |
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40-41 |
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40 |
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40 |
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40 |
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40 |
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40 |
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41 |
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42 |
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Certifications |
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1
PART I. Financial Information
Item 1. Financial Statements
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
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September 30, |
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December 31, |
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2008 |
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2007 |
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|
(Dollars in thousands, except per-share data) |
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(Unaudited) |
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ASSETS |
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Cash and cash equivalents |
|
$ |
17,151 |
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$ |
34,347 |
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Restricted cash |
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64,294 |
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141,070 |
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Net investment in leases and loans |
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702,095 |
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765,938 |
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Property and equipment, net |
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2,953 |
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3,266 |
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Property tax receivables |
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|
562 |
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|
539 |
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Fair value of cash flow hedge derivatives |
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4 |
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Other assets |
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16,863 |
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14,490 |
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Total assets |
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$ |
803,918 |
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$ |
959,654 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Revolving and term secured borrowings |
|
$ |
565,914 |
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$ |
773,085 |
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Deposits |
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47,172 |
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Other liabilities: |
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Fair value of cash flow hedge derivatives |
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4,727 |
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4,760 |
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Sales and property taxes payable |
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8,716 |
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5,756 |
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Accounts payable and accrued expenses |
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10,079 |
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10,226 |
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Deferred income tax liability |
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14,861 |
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15,682 |
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Total liabilities |
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651,469 |
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809,509 |
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Commitments and contingencies |
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Stockholders equity: |
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Common Stock, $0.01 par value; 75,000,000 shares
authorized; 12,227,391 and 12,201,304 shares
issued and outstanding, respectively |
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122 |
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122 |
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Preferred Stock, $0.01 par value; 5,000,000
shares authorized; none issued |
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Additional paid-in capital |
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83,666 |
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84,429 |
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Stock subscription receivable |
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(5 |
) |
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(7 |
) |
Accumulated other comprehensive loss |
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(2,182 |
) |
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(3,130 |
) |
Retained earnings |
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70,848 |
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68,731 |
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Total stockholders equity |
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152,449 |
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150,145 |
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Total liabilities and stockholders equity |
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$ |
803,918 |
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$ |
959,654 |
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The accompanying notes are an integral part of the consolidated financial statements.
2
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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(Dollars in thousands, except per-share data) |
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(Unaudited) |
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Income: |
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Interest income |
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$ |
21,062 |
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$ |
22,622 |
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$ |
65,884 |
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$ |
66,210 |
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Fee income |
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5,855 |
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5,685 |
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17,013 |
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16,486 |
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Interest and fee income |
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26,917 |
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28,307 |
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82,897 |
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82,696 |
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Interest expense |
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8,790 |
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8,768 |
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28,396 |
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24,735 |
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Net interest and fee income |
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18,127 |
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19,539 |
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54,501 |
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57,961 |
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Provision for credit losses |
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8,602 |
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3,966 |
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22,137 |
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10,826 |
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Net interest and fee income after provision for
credit losses |
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9,525 |
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15,573 |
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32,364 |
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47,135 |
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Insurance and other income |
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1,712 |
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1,659 |
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5,182 |
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4,888 |
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Net interest and other revenue after
provision for credit losses |
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11,237 |
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17,232 |
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37,546 |
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52,023 |
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Loss on derivatives and hedging activities |
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(3,280 |
) |
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(3,280 |
) |
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Non-interest expense |
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Salaries and benefits |
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5,620 |
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5,257 |
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17,835 |
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16,087 |
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General and administrative |
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3,333 |
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3,447 |
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11,629 |
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10,080 |
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Financing related costs |
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370 |
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202 |
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967 |
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662 |
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Non-interest expense |
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9,323 |
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8,906 |
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30,431 |
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26,829 |
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Income (loss) before income taxes |
|
|
(1,366 |
) |
|
|
8,326 |
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3,835 |
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|
25,194 |
|
Income taxes |
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|
(425 |
) |
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|
3,298 |
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1,718 |
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9,961 |
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Net income (loss) |
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$ |
(941 |
) |
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$ |
5,028 |
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$ |
2,117 |
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$ |
15,233 |
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Basic earnings (loss) per share |
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$ |
(0.08 |
) |
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$ |
0.41 |
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$ |
0.18 |
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$ |
1.26 |
|
Diluted earnings (loss) per share |
|
$ |
(0.08 |
) |
|
$ |
0.41 |
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$ |
0.18 |
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$ |
1.24 |
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Weighted average shares used in computing basic
earnings (loss) per share |
|
|
11,843,300 |
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12,155,152 |
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|
11,899,731 |
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12,066,077 |
|
Weighted average shares used in computing
diluted earnings (loss) per share |
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|
11,843,300 |
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12,355,484 |
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|
12,013,961 |
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12,310,198 |
|
The accompanying notes are an integral part of the consolidated financial statements.
3
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
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Accumulated |
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Additional |
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Stock |
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Other |
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Total |
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Common |
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Stock |
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Paid-In |
|
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Subscription |
|
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Comprehensive |
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Retained |
|
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Stockholders |
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Shares |
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Amount |
|
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Capital |
|
|
Receivable |
|
|
Income (Loss) |
|
|
Earnings |
|
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Equity |
|
|
|
(Dollars in thousands) |
|
|
|
(Unaudited) |
|
Balance, December 31, 2006 |
|
|
12,030,259 |
|
|
$ |
120 |
|
|
$ |
81,850 |
|
|
$ |
(18 |
) |
|
$ |
1,892 |
|
|
$ |
50,445 |
|
|
$ |
134,289 |
|
Issuance of common stock |
|
|
17,994 |
|
|
|
|
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290 |
|
Repurchase of common stock |
|
|
(122,000 |
) |
|
|
(1 |
) |
|
|
(1,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,614 |
) |
Exercise of stock options |
|
|
217,417 |
|
|
|
2 |
|
|
|
1,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,744 |
|
Tax benefit on stock options
exercised |
|
|
|
|
|
|
|
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,220 |
|
Stock option compensation
recognized, net of tax |
|
|
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|
|
|
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|
|
|
413 |
|
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|
413 |
|
Payment of receivables |
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|
11 |
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|
11 |
|
Restricted stock grant |
|
|
57,634 |
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|
1 |
|
|
|
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|
|
|
|
|
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|
1 |
|
Restricted stock compensation
recognized |
|
|
|
|
|
|
|
|
|
|
527 |
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|
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|
527 |
|
Net unrealized losses on cash
flow
hedge derivatives, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,022 |
) |
|
|
|
|
|
|
(5,022 |
) |
Net income |
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
18,286 |
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|
|
18,286 |
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|
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|
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|
|
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|
Balance, December 31, 2007 |
|
|
12,201,304 |
|
|
$ |
122 |
|
|
$ |
84,429 |
|
|
$ |
(7 |
) |
|
$ |
(3,130 |
) |
|
$ |
68,731 |
|
|
$ |
150,145 |
|
Issuance of common stock |
|
|
14,238 |
|
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94 |
|
Repurchase of common stock |
|
|
(230,713 |
) |
|
|
(2 |
) |
|
|
(1,997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,999 |
) |
Exercise of stock options |
|
|
46,616 |
|
|
|
|
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145 |
|
Tax benefit on stock options
exercised |
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
Stock option compensation
recognized, net of tax |
|
|
|
|
|
|
|
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192 |
|
Payment of receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Restricted stock grant |
|
|
195,946 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation
recognized |
|
|
|
|
|
|
|
|
|
|
703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703 |
|
Net change related to cash flow
hedge derivatives, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
948 |
|
|
|
|
|
|
|
948 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,117 |
|
|
|
2,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
|
12,227,391 |
|
|
$ |
122 |
|
|
$ |
83,666 |
|
|
$ |
(5 |
) |
|
$ |
(2,182 |
) |
|
$ |
70,848 |
|
|
$ |
152,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
4
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
|
|
(Unaudited) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,117 |
|
|
$ |
15,233 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,160 |
|
|
|
2,148 |
|
Stock-based compensation |
|
|
843 |
|
|
|
781 |
|
Excess tax benefits from stock-based payment arrangements |
|
|
(102 |
) |
|
|
(1,197 |
) |
Amortization of deferred net gain on cash flow hedge derivatives |
|
|
(153 |
) |
|
|
(1,826 |
) |
Decrease in fair value of cash flow hedge derivatives |
|
|
2,160 |
|
|
|
|
|
Cash flow hedge losses reclassified from accumulated other
comprehensive loss |
|
|
1,120 |
|
|
|
|
|
Provision for credit losses |
|
|
22,137 |
|
|
|
10,826 |
|
Deferred taxes |
|
|
(1,381 |
) |
|
|
(3,413 |
) |
Amortization of deferred initial direct costs and fees |
|
|
12,630 |
|
|
|
11,847 |
|
Deferred initial direct costs and fees |
|
|
(8,055 |
) |
|
|
(14,631 |
) |
Loss on equipment disposed |
|
|
638 |
|
|
|
344 |
|
Effect of changes in other operating items: |
|
|
|
|
|
|
|
|
Other assets |
|
|
(3,495 |
) |
|
|
658 |
|
Other liabilities |
|
|
1,257 |
|
|
|
(499 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
31,876 |
|
|
|
20,271 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of equipment for direct financing lease contracts and funds
used to originate loans |
|
|
(198,456 |
) |
|
|
(294,790 |
) |
Principal collections on leases and loans |
|
|
232,812 |
|
|
|
222,176 |
|
Security deposits collected, net of returns |
|
|
(1,998 |
) |
|
|
(1,595 |
) |
Proceeds from the sale of equipment |
|
|
4,134 |
|
|
|
3,806 |
|
Acquisitions of property and equipment |
|
|
(639 |
) |
|
|
(773 |
) |
Change in restricted cash |
|
|
76,776 |
|
|
|
(10,929 |
) |
|
|
|
|
|
|
|
Net cash provided by (used by) investing activities |
|
|
112,629 |
|
|
|
(82,105 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuances of common stock |
|
|
96 |
|
|
|
182 |
|
Repurchases of common stock |
|
|
(1,999 |
) |
|
|
|
|
Exercise of stock options |
|
|
145 |
|
|
|
1,648 |
|
Excess tax benefits from stock-based payment arrangements |
|
|
102 |
|
|
|
1,197 |
|
Debt issuance costs |
|
|
(46 |
) |
|
|
(131 |
) |
Term securitization repayments |
|
|
(261,932 |
) |
|
|
(204,180 |
) |
Secured bank facility advances |
|
|
69,104 |
|
|
|
160,652 |
|
Secured bank facility repayments |
|
|
(34,276 |
) |
|
|
(133,960 |
) |
Warehouse advances |
|
|
25,911 |
|
|
|
242,046 |
|
Warehouse repayments |
|
|
(5,978 |
) |
|
|
(21,319 |
) |
Increase in deposits |
|
|
47,172 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used by) financing activities |
|
|
(161,701 |
) |
|
|
46,135 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(17,196 |
) |
|
|
(15,699 |
) |
Cash and cash equivalents, beginning of period |
|
|
34,347 |
|
|
|
26,663 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
17,151 |
|
|
$ |
10,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
27,136 |
|
|
$ |
25,230 |
|
Cash paid for income taxes |
|
|
2,660 |
|
|
|
13,366 |
|
The accompanying notes are an integral part of the consolidated financial statements.
5
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Organization
Description
Through its principal operating subsidiary, Marlin Leasing Corporation, Marlin Business Services
Corp. provides equipment leasing and working capital solutions nationwide, primarily to small
businesses in a segment of the equipment leasing market commonly referred to as the small-ticket
segment. The Company finances over 70 categories of commercial equipment important to its end user
customers including copiers, telephone systems, computers and certain commercial and industrial
equipment. Marlin Leasing Corporation is managed as a single business segment. Effective March 12,
2008, the Company also opened Marlin Business Bank, an industrial bank chartered by the State of
Utah. Marlin Business Bank currently provides diversification of the Companys funding sources
through the issuance of brokered certificates of deposit.
References to the Company, we, us, and our herein refer to Marlin Business Services Corp.
and its wholly-owned subsidiaries, unless the context otherwise requires.
NOTE 2 Basis of Financial Statement Presentation and Critical Accounting Policies
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring items) necessary to present
fairly the Companys financial position at September 30, 2008 and the results of operations for the
three- and nine-month periods ended September 30, 2008 and 2007, and cash flows for the nine-month
periods ended September 30, 2008 and 2007. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and note disclosures included in
the Companys Form 10-K filed with the Securities and Exchange Commission on March 5, 2008. The
consolidated results of operations for the three- and nine-month periods ended September 30, 2008
and 2007 are not necessarily indicative of the results for the respective full years. All
intercompany accounts and transactions have been eliminated in consolidation. Certain prior period
amounts have been reclassified to conform to the current presentation.
Use of estimates. The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 and income taxes. Actual results could differ from estimates.
Income recognition. Interest income is recognized under the effective interest method. The
effective interest method of income recognition applies a constant rate of interest equal to the
internal rate of return on the lease. When a lease or loan is 90 days or more delinquent, the
contract is classified as non-accrual and we do not recognize interest income on that contract
until it is less than 90 days delinquent.
Fee income. Fee income consists of fees for delinquent lease and loan payments, cash collected on
early termination of leases and other administrative fees. Fee income also includes net residual
income, which includes income from lease renewals and gains and losses on the realization of
residual values of equipment disposed at the end of term.
At the end of the original lease term, lessees may choose to purchase the equipment, renew the
lease or return the equipment to the Company. The Company receives income from lease renewals when
the lessee elects to retain the equipment longer than the original term of the lease. This income,
net of appropriate periodic reductions in the estimated residual values of the related equipment,
is included in fee income as net residual income.
When the lessee elects to return the equipment at lease termination, the equipment is transferred
to other assets at the lower of its basis or fair market value. The Company generally sells
returned equipment to an independent third party, rather than leasing the equipment a second time.
The Company does not maintain equipment in other assets for longer than 120 days. Any loss
recognized on transferring the equipment to other assets, and any gain or loss realized on the sale
or disposal of equipment to the lessee or to others is included in fee income as net residual
income.
6
Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated
collection rates. Other fees are recognized when received. Management performs periodic reviews of
the estimated residual values and any impairment, if other than temporary, is recognized in the
current period.
Insurance and other income. Insurance income is recognized on an accrual basis as earned over the
term of the lease. Payments that are 120 days or more past due are charged against income. Ceding
commissions, losses and loss adjustment expenses are recorded in the period incurred and netted
against insurance income. Other income includes fees received from lease syndications and gains on
sales of leases which are recognized when received.
Initial direct costs and fees. We defer initial direct costs incurred and fees received to
originate our leases and loans in accordance with Statement of Financial Accounting Standards
(SFAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. The initial direct costs and fees we defer are
part of the net investment in leases and loans, and are amortized to interest income using the
effective interest method. We defer third party commission costs as well as certain internal costs
directly related to the origination activity. Costs subject to deferral include evaluating the
prospective customers financial condition, evaluating and recording guarantees and other security
arrangements, negotiating terms, preparing and processing documents and closing the transaction.
The fees we defer are documentation fees collected at inception. The realization of the deferred
initial direct costs, net of fees deferred, is predicated on the net future cash flows generated by
our lease and loan portfolios.
Lease residual values. A direct financing lease is recorded at the aggregate future minimum lease
payments plus the estimated residual values less unearned income. Residual values reflect the
estimated amounts to be received at lease termination from lease extensions, sales or other
dispositions of leased equipment. These estimates are based on industry data and on our experience.
Management performs periodic reviews of the estimated residual values and any impairment, if other
than temporary, is recognized in the current period.
Allowance for credit losses. 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. To project probable net credit losses, we perform a
migration analysis of delinquent and current accounts. A migration analysis is a technique used to
estimate the likelihood that an account will progress through the various delinquency stages and
ultimately charge off. In addition to the migration analysis, we also consider other factors
including recent trends in delinquencies and charge-offs; accounts filing for bankruptcy; account
modifications; recovered amounts; forecasting uncertainties; the composition of our lease and loan
portfolios; economic conditions; and seasonality. We then establish an allowance for credit losses
for the projected probable net credit losses based on this analysis. A provision is charged against
earnings to maintain the allowance for credit losses at the appropriate level. Our policy is to
charge-off against the allowance the estimated unrecoverable portion of accounts once they reach
121 days delinquent.
Our projections of probable net credit losses are inherently uncertain, and as a result we cannot
predict with certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy laws, and other factors could impact
our actual and projected net credit losses and the related allowance for credit losses. To the
degree we add new leases and loans to our portfolios, or to the degree credit quality is worse than
expected, we record expense to increase the allowance for credit losses for the estimated net
losses inherent in our portfolios. Actual losses may vary from current estimates.
Securitizations. Since inception, the Company has completed nine term note securitizations of which
six have been repaid. In connection with each transaction, the Company has established a bankruptcy
remote special-purpose subsidiary and issued term debt to institutional investors. Under SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a replacement of Financial Accounting Standards Board (FASB) Statement No. 125, the Companys
securitizations do not qualify for sales accounting treatment due to certain call provisions that
the Company maintains as well as the fact that the special purpose entities used in connection with
the securitizations also hold the residual assets. Accordingly, assets and related debt of the
special purpose entities are included in the accompanying Consolidated Balance Sheets. The
Companys leases and restricted cash are assigned as collateral for these borrowings and there is
no further recourse to the general credit of the Company. Collateral in excess of these borrowings
represents the Companys maximum loss exposure.
Derivatives. SFAS No. 133, as amended, Accounting for Derivative Instruments and Hedging
Activities, requires recognition of all derivatives at fair value as either assets or liabilities
in the Consolidated Balance Sheets. The accounting for subsequent changes in the fair value of
these derivatives depends on whether each has been designated and qualifies for hedge accounting
treatment pursuant to the accounting standard.
7
Prior to July 1, 2008, the Company entered into derivative contracts which were accounted for as
cash flow hedges under hedge accounting as prescribed by SFAS No. 133. Under hedge accounting, the
effective portion of the gain or loss on a derivative designated as a cash flow hedge was reported
net of tax effects in accumulated other comprehensive income on the Consolidated Balance Sheets,
until the pricing of the related term securitization. The derivative gain or loss recognized in
accumulated other comprehensive income is then reclassified into earnings as an adjustment to
interest expense over the terms of the related borrowings.
While the Company may continue to use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the
fair value of derivative instruments, including those that had previously been accounted for under
hedge accounting, is recognized immediately in gain (loss) on derivatives and hedging activities.
This change creates volatility in our results of operations, as the market value of our derivative
financial instruments changes over time, and this volatility may adversely impact our results of
operations and financial condition.
For the forecasted transactions that are probable of occurring, the derivative gain or loss in
accumulated other comprehensive income as of June 30, 2008 will be reclassified into earnings as an
adjustment to interest expense over the terms of the related forecasted borrowings, consistent with
hedge accounting treatment. In the event that the related forecasted borrowing is no longer
probable of occurring, the related gain or loss in accumulated other comprehensive income is
recognized in earnings immediately.
The Company has adopted SFAS No. 157, Fair Value Measurements, which establishes a framework for
measuring fair value under generally accepted accounting principles (GAAP) and enhances
disclosures about fair value measurements. As defined in SFAS No. 157, fair value is the price that
would be received to sell an asset or paid to transfer a liability in a orderly transaction between
market participants in the principal or most advantageous market for the asset or liability at the
measurement date (exit price). Because the Companys derivatives are not listed on an exchange, the
Company values these instruments using a valuation model with pricing inputs that are observable in
the market or that can be derived principally from or corroborated by observable market data.
Common stock and equity. On November 2, 2007, the Board of Directors approved a stock repurchase
plan. Under the stock repurchase plan, the Company is authorized to repurchase common stock on the
open market. The par value of the shares repurchased is charged to common stock with the excess of
the purchase price over par charged against any available additional paid-in capital.
Stock-based compensation. SFAS No. 123(R), Share-Based Payments, requires companies to recognize
all share-based payments, which include stock options and restricted stock, in compensation expense
over the service period of the share-based payment award. SFAS No. 123(R) establishes fair value as
the measurement method in accounting for share-based payment transactions with employees, except
for equity instruments held by employee share ownership plans.
Income taxes. The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires the use of the asset and liability method under
which deferred taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities, given the provisions of
the enacted tax laws. In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities and projected future
taxable income in making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will realize the benefits of
these deductible differences.
Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax
assets. The process involves summarizing temporary differences resulting from the different
treatment of items, for example, leases for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included within the Consolidated Balance Sheets.
Our management must then assess the likelihood that deferred tax assets will be recovered from
future taxable income or tax carry-back availability and, to the extent our management believes
recovery is not likely, a valuation allowance must be established. To the extent that we establish
a valuation allowance in a period, an expense must be recorded within the tax provision in the
Consolidated Statements of Operations.
The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, on January 1, 2007. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Guidance is also provided on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we concluded that there are no significant uncertain tax positions
requiring recognition in our financial statements. There was no effect on our financial condition
or
8
results of operations as a result of implementing FIN 48, and we did not have any unrecognized
tax benefits. At September 30, 2008, there have been no material changes to the liability for
uncertain tax positions and there are no unrecognized tax benefits. The periods subject to
examination for the Companys federal return include the 1997 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 2002 through 2007 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.
NOTE 3 Net Investment in Leases and Loans
Net investment in leases and loans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Minimum lease payments receivable |
|
$ |
787,515 |
|
|
$ |
865,156 |
|
Estimated residual value of equipment |
|
|
51,091 |
|
|
|
50,798 |
|
Unearned lease income, net of initial direct
costs and fees deferred |
|
|
(123,447 |
) |
|
|
(137,909 |
) |
Security deposits |
|
|
(13,145 |
) |
|
|
(15,144 |
) |
Loans, net of unamortized deferred fees and costs |
|
|
14,420 |
|
|
|
14,025 |
|
Allowance for credit losses |
|
|
(14,339 |
) |
|
|
(10,988 |
) |
|
|
|
|
|
|
|
|
|
$ |
702,095 |
|
|
$ |
765,938 |
|
|
|
|
|
|
|
|
At September 30, 2008, a total of $654.4 million of minimum lease payments receivable are assigned
as collateral for revolving and term secured borrowings.
Initial direct costs net of fees deferred were $22.8 million and $27.4 million as of September 30,
2008 and December 31, 2007, respectively, and are netted in unearned income and will be amortized
to income using the level yield method. At September 30, 2008 and December 31, 2007, $40.0 million
and $38.6 million, respectively, of the estimated residual value of equipment retained on our
Consolidated Balance Sheets were related to copiers. Minimum lease payments receivable under lease
contracts and the amortization of unearned lease income, net of initial direct costs and fees
deferred, is as follows as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease |
|
|
|
|
|
|
Payments |
|
|
Income |
|
|
|
Receivable |
|
|
Amortization |
|
|
|
(Dollars in thousands) |
|
Period Ending December 31: |
|
|
|
|
|
|
|
|
2008 |
|
$ |
91,215 |
|
|
$ |
19,652 |
|
2009 |
|
|
305,028 |
|
|
|
56,014 |
|
2010 |
|
|
209,203 |
|
|
|
30,150 |
|
2011 |
|
|
120,302 |
|
|
|
13,207 |
|
2012 |
|
|
51,703 |
|
|
|
4,031 |
|
Thereafter |
|
|
10,064 |
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
$ |
787,515 |
|
|
$ |
123,447 |
|
|
|
|
|
|
|
|
9
NOTE 4 Allowance for Credit Losses
Net investments in leases and loans are charged-off when they are contractually past due for 121
days based on the historical net loss rates realized by the Company.
Activity in this account is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Balance, beginning of period |
|
$ |
12,873 |
|
|
$ |
8,829 |
|
|
$ |
10,988 |
|
|
$ |
8,201 |
|
Current provisions |
|
|
8,602 |
|
|
|
3,966 |
|
|
|
22,137 |
|
|
|
10,826 |
|
Charge-offs, net |
|
|
(7,136 |
) |
|
|
(3,400 |
) |
|
|
(18,786 |
) |
|
|
(9,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
14,339 |
|
|
$ |
9,395 |
|
|
$ |
14,339 |
|
|
$ |
9,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 Other Assets
Other assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Derivative collateral |
|
$ |
8,216 |
|
|
$ |
4,361 |
|
Accrued fees receivable |
|
|
3,470 |
|
|
|
3,361 |
|
Deferred transaction costs |
|
|
1,565 |
|
|
|
2,739 |
|
Prepaid expenses |
|
|
1,626 |
|
|
|
1,268 |
|
Other |
|
|
1,986 |
|
|
|
2,761 |
|
|
|
|
|
|
|
|
|
|
$ |
16,863 |
|
|
$ |
14,490 |
|
|
|
|
|
|
|
|
NOTE 6 Contingencies
The Company is involved in legal proceedings, which include claims, litigation and suits arising in
the ordinary course of business. In the opinion of management, these actions will not have a
material adverse effect on the Companys consolidated financial position, results of operations or
cash flows.
NOTE 7 Deposits
Effective March 12, 2008, the Company opened Marlin Business Bank, an industrial bank chartered by
the State of Utah. Marlin Business Bank currently provides diversification of the Companys funding
sources through the issuance of Federal Deposit Insurance Corporation (FDIC) insured certificates
of deposit raised nationally through various brokered deposit relationships. As of September 30,
2008, the remaining scheduled maturities of time deposits are as follows:
|
|
|
|
|
|
|
Scheduled |
|
|
|
Maturities |
|
|
|
(Dollars in thousands) |
|
Period Ending December 31, |
|
|
|
|
2008 |
|
$ |
|
|
2009 |
|
|
19,460 |
|
2010 |
|
|
10,028 |
|
2011 |
|
|
7,556 |
|
2012 |
|
|
5,702 |
|
Thereafter |
|
|
4,426 |
|
|
|
|
|
|
|
$ |
47,172 |
|
|
|
|
|
All time deposits are in denominations of less than $100,000. The weighted average all-in interest
rate of deposits outstanding at September 30, 2008 was 4.15%.
10
NOTE 8 Revolving and Term Secured Borrowings
Scheduled principal and interest payments on outstanding debt as of September 30, 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Interest(1) |
|
|
|
(Dollars in thousands) |
|
Period Ending December 31, |
|
|
|
|
|
|
|
|
2008 |
|
$ |
117,453 |
|
|
$ |
13,379 |
|
2009 |
|
|
219,401 |
|
|
|
17,062 |
|
2010 |
|
|
136,186 |
|
|
|
7,785 |
|
2011 |
|
|
68,841 |
|
|
|
2,622 |
|
2012 |
|
|
23,158 |
|
|
|
383 |
|
Thereafter |
|
|
875 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
$ |
565,914 |
|
|
$ |
41,236 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest on term note securitizations only. Excludes interest on $54.8
million of revolving bank facility and commercial paper (CP) conduit warehouse facility. |
NOTE 9 Derivative Financial Instruments
We use derivative financial instruments to manage exposure to the effects of changes in market
interest rates and to fulfill certain covenants in our borrowing arrangements. All derivatives are
recorded on the Consolidated Balance Sheets at their fair value as either assets or liabilities.
The accounting for subsequent changes in the fair value of these derivatives depends on whether
each has been designated and qualifies for hedge accounting treatment pursuant to the accounting
standard.
The Company has entered into various forward starting interest-rate swap agreements related to
anticipated term note securitization transactions. Prior to July 1, 2008, these interest-rate swap
agreements were designated and accounted for as cash flow hedges of specific term note
securitization transactions, as prescribed by SFAS No. 133. Under hedge accounting, the effective
portion of the gain or loss on a derivative designated as a cash flow hedge was reported net of tax
effects in accumulated other comprehensive income on the Consolidated Balance Sheets, until the
pricing of the related term securitization.
Prior to July 1, 2008, expected hedge effectiveness for SFAS No. 133 was assessed using the
dollar-offset change in variable cash flows method which involves a comparison of the present
value of the cumulative change in the expected future cash flows on the variable side of the
interest-rate swap to the present value of the cumulative change in the expected future cash flows
on the hedged floating-rate asset or liability. The Company retrospectively measured
ineffectiveness using the same methodology. The gain or loss from the effective portion of a
derivative designated as a cash flow hedge was recorded in other comprehensive income and the gain
or loss from the ineffective portion was reported in earnings. The derivative gain or loss
recognized in accumulated other comprehensive income is then reclassified into earnings as an
adjustment to interest expense over the terms of the related borrowings.
While the Company may continue to use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the
fair value of derivative instruments, including those that had previously been accounted for under
hedge accounting, is recognized immediately in gain (loss) on derivatives and hedging activities.
This change creates volatility in our results of operations, as the market value of our derivative
financial instruments changes over time, and this volatility may adversely impact our results of
operations and financial condition.
For the forecasted transactions that are probable of occurring, the derivative gain or loss in
accumulated other comprehensive income as of June 30, 2008 will be reclassified into earnings as an
adjustment to interest expense over the terms of the related forecasted borrowings, consistent
with hedge accounting treatment. In the event that the related forecasted borrowing is no longer
probable, the related gain or loss in accumulated other comprehensive income is recognized in
earnings immediately.
At September 30, 2008, the Company concluded that certain forecasted transactions were not probable
of occurring on the anticipated date or in the additional time period permitted by SFAS 133. As a
result, a $1.1 million pretax ($674,000 after tax) loss was reclassified from accumulated other
comprehensive income into loss on derivatives and hedging activities for the three months ended
September 30, 2008, for the related cash flow hedges.
In July 2004, we issued a term note securitization with certain classes of notes issued at variable
rates to investors. We simultaneously entered into interest-rate swap contracts to convert these
borrowings to a fixed interest cost to the Company for the term of the
11
borrowing. These
interest-rate swap agreements are designated as cash flow hedges of the term note securitization.
The fair value is recorded in other assets or other liabilities on the Consolidated Balance Sheets,
and unrealized gains or losses are recorded in the equity
section of the Consolidated Balance Sheets. During the first quarter of 2008, these interest-rate
swap agreements reached their contractual expiration dates, concurrent with the maturing of the
related borrowings.
The following tables summarize specific information regarding the active and terminated
interest-rate swap agreements described above:
For Active Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception Date |
|
March, 2008 |
|
January, 2008 |
|
December, 2007 |
|
August, 2007 |
|
August, 2006 |
|
July, 2004 |
|
Commencement Date |
|
October, 2009 |
|
October, 2009 |
|
October, 2009 |
|
October, 2008 |
|
October, 2008 |
|
July, 2004 |
|
|
(Dollars in thousands) |
|
Notional amount: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
25,000 |
|
|
$ |
25,000 |
|
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
$ |
50,000 |
|
|
$ |
|
|
December 31, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
$ |
3,066 |
|
For active agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value recorded in other assets (liabilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
199 |
|
|
$ |
(58 |
) |
|
$ |
(531 |
) |
|
$ |
(2,659 |
) |
|
$ |
(1,678 |
) |
|
$ |
|
|
December 31, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
(46 |
) |
|
$ |
(2,010 |
) |
|
$ |
(2,704 |
) |
|
$ |
4 |
|
Unrealized gain (loss), net of tax, recorded in
equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
246 |
|
|
$ |
93 |
|
|
$ |
190 |
|
|
$ |
(629 |
) |
|
$ |
(857 |
) |
|
$ |
|
|
December 31, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
(28 |
) |
|
$ |
(1,213 |
) |
|
$ |
(1,632 |
) |
|
$ |
2 |
|
For Terminated Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2006/August |
|
|
|
|
|
October/December, |
Inception Date |
|
August, 2006 |
|
2007 |
|
June/September, 2005 |
|
2004 |
|
Commencement Date |
|
October, 2008 |
|
October, 2007 |
|
September, 2006 |
|
August, 2005 |
|
Termination Date |
|
September, 2008 |
|
October, 2007 |
|
September, 2006 |
|
August, 2005 |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Notional amount |
|
$ |
50,000 |
|
|
$ |
300,000 |
|
|
$ |
225,000 |
|
|
$ |
250,000 |
|
Realized gain (loss) at termination |
|
$ |
(1,595 |
) |
|
$ |
(2,683 |
) |
|
$ |
3,732 |
|
|
$ |
3,151 |
|
Deferred gain (loss), net of tax,
recorded in equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
(874 |
) |
|
$ |
(921 |
) |
|
$ |
516 |
|
|
$ |
54 |
|
December 31, 2007 |
|
$ |
|
|
|
$ |
(1,462 |
) |
|
$ |
974 |
|
|
$ |
229 |
|
Amortization recognized as increase
(decrease) in interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2008 |
|
$ |
|
|
|
$ |
898 |
|
|
$ |
(759 |
) |
|
$ |
(292 |
) |
Year ended December 31, 2007 |
|
$ |
|
|
|
$ |
255 |
|
|
$ |
(1,543 |
) |
|
$ |
(749 |
) |
Expected amortization during next 12
months as increase (decrease) in interest
expense |
|
$ |
616 |
|
|
$ |
794 |
|
|
$ |
(611 |
) |
|
$ |
(89 |
) |
The Company recorded a loss on derivatives and hedging activities for the periods indicated as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Change in fair value of derivative contracts |
|
$ |
(2,160 |
) |
|
$ |
|
|
|
$ |
(2,160 |
) |
|
$ |
|
|
Cash flow hedging losses on forecasted
transactions no longer probable of
occurring(1) |
|
|
(1,120 |
) |
|
|
|
|
|
|
(1,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives and hedging activities |
|
$ |
(3,280 |
) |
|
$ |
|
|
|
$ |
(3,280 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reclassified from accumulated other comprehensive income |
12
The Company also uses interest-rate cap agreements that are not designated for hedge accounting
treatment to fulfill certain covenants in its special purpose subsidiarys warehouse borrowing
arrangements. Accordingly, these cap agreements are recorded at fair value in other assets at
$286,000 and $182,000 as of September 30, 2008 and December 31, 2007, respectively. The notional
amount of interest-
rate caps owned as of September 30, 2008 and December 31, 2007 was $181.4 million and $227.0
million, respectively. Changes in the fair values of the caps are recorded in financing related
costs in the accompanying Consolidated Statements of Operations.
The Company also sells interest-rate caps to partially offset the interest-rate caps required to be
purchased by the Companys special purpose subsidiary under its warehouse borrowing arrangements.
These sales generate premium revenues to partially offset the premium cost of purchasing the
required interest-rate caps. On a consolidated basis, the interest-rate cap positions sold
partially offset the interest-rate cap positions owned. As of September 30, 2008 and December 31,
2007, the notional amount of interest-rate cap sold agreements totaled $178.5 million and $214.8
million, respectively. The fair value of interest-rate caps sold is recorded in other liabilities
at $286,000 and $182,000 as of September 30, 2008 and December 31, 2007, respectively. Changes in
the fair values of the caps are recorded in financing related costs in the accompanying
Consolidated Statements of Operations.
NOTE 10 Fair Value Measurements
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which
establishes a framework for measuring fair value under GAAP and enhances disclosures about fair
value measurements. The provisions of SFAS No. 157, as amended by FASB Staff Position FAS 157-1,
exclude provisions of SFAS No. 13, Accounting for Leases, and other accounting pronouncements that
address fair value measurements for purposes of lease classification or measurement under SFAS No.
13.
As defined in SFAS No. 157, fair value is 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). SFAS No.
157 establishes a three-level valuation hierarchy for disclosure of fair value measurements based
upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable
inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in
its entirety falls is determined based on the lowest level input that is significant to the
measurement in its entirety.
The three levels are defined as follows:
|
|
Level 1 Inputs to the valuation are unadjusted quoted prices in active markets for
identical assets or liabilities. |
|
|
Level 2 Inputs to the valuation may include quoted prices for similar assets and
liabilities in active or inactive markets, and inputs other than quoted prices, such as
interest rates and yield curves, that are observable for the asset or liability for
substantially the full term of the financial instrument. |
|
|
Level 3 Inputs to the valuation are unobservable and significant to the fair value
measurement. Level 3 inputs shall be used to measure fair value only to the extent that
observable inputs are not available. |
The Company uses derivative financial instruments to manage exposure to the effects of changes in
market interest rates and to fulfill certain covenants in our borrowing arrangements. All
derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or
liabilities. Because the Companys derivatives are not listed on an exchange, the Company values
these instruments using a valuation model with pricing inputs that are observable in the market or
that can be derived principally from or corroborated by observable market data. The Companys
methodology also incorporates the impact of both the Companys and the counterpartys credit
standing.
Assets and liabilities measured at fair value on a recurring basis include the following as of
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
Assets/Liabilities |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
at Fair Value |
|
|
(Dollars in thousands) |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate caps purchased |
|
$ |
|
|
|
$ |
286 |
|
|
$ |
|
|
|
$ |
286 |
|
Interest-rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate caps sold |
|
|
|
|
|
|
286 |
|
|
|
|
|
|
|
286 |
|
Interest-rate swaps |
|
|
|
|
|
|
4,727 |
|
|
|
|
|
|
|
4,727 |
|
13
NOTE 11 Comprehensive Income (Loss)
The following table details the components of comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Net income (loss), as reported |
|
$ |
(941 |
) |
|
$ |
5,028 |
|
|
$ |
2,117 |
|
|
$ |
15,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair values of cash flow hedge derivatives |
|
|
|
|
|
|
(4,366 |
) |
|
|
593 |
|
|
|
(2,978 |
) |
Reclassification of cash flow hedging losses on
forecasted transactions no longer probable of
occurring (1) |
|
|
1,120 |
|
|
|
|
|
|
|
1,120 |
|
|
|
|
|
Amortization of net deferred gain on cash flow hedge
derivatives |
|
|
(32 |
) |
|
|
(536 |
) |
|
|
(153 |
) |
|
|
(1,826 |
) |
Tax effect |
|
|
(434 |
) |
|
|
1,940 |
|
|
|
(612 |
) |
|
|
1,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
654 |
|
|
|
(2,962 |
) |
|
|
948 |
|
|
|
(2,898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(287 |
) |
|
$ |
2,066 |
|
|
$ |
3,065 |
|
|
$ |
12,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reclassified to Loss on derivatives and hedging activities |
NOTE 12 Stockholders Equity and Earnings Per Share
Stockholders Equity
On November 2, 2007, the Board of Directors approved a stock repurchase plan. Under this program,
the Company is authorized to repurchase up to $15 million of its outstanding shares of common
stock. This authority may be exercised from time to time and in such amounts as market conditions
warrant. Any shares purchased under this plan are returned to the status of authorized but unissued
shares of common stock. The repurchases may be made on the open market, in block trades or
otherwise. The program may be suspended or discontinued at any time. The stock repurchases are
funded using the Companys working capital.
The Company purchased 62,015 shares of its common stock for $500,000 during the quarter ended
September 30, 2008. The Company purchased 228,415 shares of its common stock for $2.0 million
during the nine months ended September 30, 2008. At September 30, 2008, the Company had $11.4
million remaining in its stock repurchase plan authorized by the Board. In addition to the
repurchases described above, pursuant to the Companys 2003 Equity Compensation Plan (as amended,
the 2003 Plan), participants may have shares withheld to cover income taxes. There were 296
shares repurchased pursuant to the 2003 Plan during the third quarter of 2008, at an average cost
of $8.28.
Regulatory Capital Requirements
On March 12, 2008, we announced the opening of Marlin Business Bank (Bank), after receiving
approval from the Federal Deposit Insurance Corporation (FDIC) for federal deposit insurance. The
Bank, an industrial bank chartered by the State of Utah, is wholly owned by Marlin Business
Services Corp. In addition to further diversifying our funding sources, over time the Bank may add
other product offerings to better serve our customer base. The Bank is subject to FDIC and Utah
Department of Financial Institutions rules and regulations.
On October 21, 2008, Marlin Business Bank filed an application with the Utah Department of
Financial Institutions to convert its charter from an Industrial Bank to a state chartered
Commercial Bank. As part of the charter conversion process, Marlin Business Bank intends to file
an application for membership in the Federal Reserve System, and the Company intends to file an
application with the Federal Reserve to become a bank holding company under the Bank Holding
Company Act of 1956, as amended.
The Bank 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. Under the rules and
regulations of the FFIEC, at least half of a banks total capital is required to be Tier I
capital as defined in the regulations, comprised of common equity, retained earnings and a limited
amount of non-cumulative perpetual preferred stock. The remaining capital, Tier II capital, as
defined in the regulations, may consist of other preferred stock, a limited amount of term
subordinated debt or a limited amount of the reserve for possible credit losses. The FFIEC has also
adopted minimum leverage ratios for banks, which are calculated by dividing Tier I capital by total
quarterly average assets. Recognizing that the risk-based capital standards principally address
credit
14
risk rather than interest rate, liquidity, operational or other risks, many banks are
expected to maintain capital in excess of the minimum standards. The Company will provide the
necessary capital to maintain the Bank at well-capitalized status as defined by banking
regulations. The Banks equity balance at September 30, 2008 was $12.9 million, which met all
capital requirements to which the Bank is subject and qualified for well-capitalized status. At
September 30, 2008, the Banks Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total
risk-based capital ratio were 22.25%, 21.54% and 22.79%, respectively, compared to requirements for
well-capitalized
status of 5%, 6% and 10%, respectively.
Prompt Corrective Action. The FDIC Improvement Act of 1991 (FDICIA) requires, among other things,
federal bank regulatory authorities to take prompt corrective action with respect to FDIC-insured
institutions that do not meet certain minimum capital requirements. To be well-capitalized under
the prompt corrective action provisions, a bank must have a ratio of combined Tier I and Tier II
capital to risk-weighted assets of not less than 10%, a ratio of Tier I capital to risk-weighted
assets of not less than 6%, and a ratio of Tier I capital to average assets of not less than 5%.
Pursuant to the Order issued by the FDIC on March 20, 2007 (the Order), the Bank was in
compliance with its requirement to have beginning paid-in capital funds of not less than $12.0
million.
Pursuant to certain provisions of FDICIA and related regulations with respect to prompt corrective
action, FDIC-insured institutions, such as the Bank, may only accept brokered deposits without FDIC
permission if they meet specified capital standards. FDIC-insured institutions are also subject to
restrictions with respect to the interest they may pay on brokered deposits unless they are
well-capitalized.
Dividends. The Bank may supply funds to its parent company or affiliates, subject to certain legal
limitations contained in Utah state law. Under Utah law, an industrial bank may declare a dividend
out of net profits after providing for all expenses, losses, interest and taxes accrued or due and
after complying with required transfers to surplus accounts. In addition, it is possible that the
FDIC, pursuant to its authority under the Financial Institutions Supervisory Act (FISA), could
claim that a dividend payment might under some circumstances be an unsafe or unsound practice.
Pursuant to the Order, the Bank shall pay no dividends during the first three years of operations
without the prior written approval of the FDIC and the State of Utah.
Earnings (Loss) Per Common Share (EPS)
The following is a reconciliation of net income (loss) and shares used in computing basic and
diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands, except per-share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(941 |
) |
|
$ |
5,028 |
|
|
$ |
2,117 |
|
|
$ |
15,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding used in computing basic EPS |
|
|
11,843,300 |
|
|
|
12,155,152 |
|
|
|
11,899,731 |
|
|
|
12,066,077 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock |
|
|
|
|
|
|
200,332 |
|
|
|
114,230 |
|
|
|
244,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares
used in computing diluted EPS |
|
|
11,843,300 |
|
|
|
12,355,484 |
|
|
|
12,013,961 |
|
|
|
12,310,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.08 |
) |
|
$ |
0.41 |
|
|
$ |
0.18 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.08 |
) |
|
$ |
0.41 |
|
|
$ |
0.18 |
|
|
$ |
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods ended September 30, 2008 and September 30, 2007, options to purchase
757,839 and 379,955 shares of common stock were not considered in the computation of potential
common shares for purposes of diluted EPS, since the exercise prices of the options were greater
than the average market price of the Companys common stock for the respective periods.
When computing diluted loss per share, all potential common shares, including stock options and
restricted stock, are anti-dilutive to the loss per common share calculation. Therefore, for the
three-month period ended September 30, 2008, the effect of 125,009 potential common shares have not
been considered for diluted EPS purposes.
The shares used in computing diluted earnings per share exclude options to purchase 701,744 and
268,291 shares of common stock for the nine-month periods ended September 30, 2008 and September
30, 2007, respectively, as inclusion of such shares would be anti-dilutive.
15
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 board. These award programs are used to attract, retain and
motivate employees and to encourage individuals in key management roles to retain stock. The
Company has a policy of issuing new shares to satisfy awards under the 2003 Plan. The aggregate
number of shares under the 2003 Plan that may be issued pursuant to stock options or restricted
stock grants was increased from 2,100,000 to 3,300,000 at the annual meeting of shareholders on May
22, 2008. Not more than 1,650,000 of such shares shall be available for issuance as restricted
stock grants. There were 1,052,948 shares available for future grants under the 2003 Plan as of
September 30, 2008.
Stock Options
Option awards are generally granted with an exercise price equal to the market price of the
Companys stock at the date of the grant and have 7- to 10-year contractual terms. All options
issued contain service conditions based on the participants continued service with the Company,
and provide for accelerated vesting if there is a change in control as defined in the 2003 Plan.
Employee stock options generally vest over four years. The vesting of certain options is contingent
on various Company performance measures, such as earnings per share and net income. Of the total
options granted during the nine-month period ended September 30, 2008, 136,845 shares are
contingent on performance factors. The Company has recognized expense related to performance
options based on the most probable performance assumptions as of September 30, 2008.
The Company also issues stock options to non-employee independent directors. These options
generally vest in one year.
The fair value of each stock option granted during the three- and nine-month periods ended
September 30, 2008 and 2007 was estimated on the date of the grant using the Black-Scholes option
pricing model. The weighted-average grant-date fair value of stock options issued for the
three-month period ended September 30, 2008 was $3.34. There were no stock options issued during
the three-month period ended September 30, 2007. The weighted-average grant-date fair value of
stock options issued for the nine-month periods ended September 30, 2008 and 2007 was $3.25 and
$8.02 per share, respectively.
The following weighted average assumptions were used for valuing option grants made during the
three- and nine-month periods ended September 30, 2008 and September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Risk-free interest rate |
|
|
2.99 |
% |
|
|
n/a |
|
|
|
2.45 |
% |
|
|
4.51 |
% |
Expected life (years) |
|
|
5 |
|
|
|
n/a |
|
|
|
5 |
|
|
|
5 |
|
Expected volatility |
|
|
35 |
% |
|
|
n/a |
|
|
|
35 |
% |
|
|
35 |
% |
Expected dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The risk-free interest rate for periods within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. The expected life for options granted
during 2008 and 2007 represents the period the option is expected to be outstanding and was
determined by applying the simplified method as allowed under the Securities and Exchange
Commissions Staff Accounting Bulletin No. 107 (SAB 107). The expected volatility was determined
using historical volatilities based on historical stock prices. The Company does not grant
dividends, and therefore did not assume expected dividends.
The following is a summary of option activity for the nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
Options |
|
Shares |
|
Exercise Price |
Outstanding at January 1, 2008 |
|
|
727,184 |
|
|
$ |
13.20 |
|
Granted |
|
|
271,926 |
|
|
|
9.29 |
|
Exercised |
|
|
(46,616 |
) |
|
|
3.12 |
|
Forfeited |
|
|
(36,949 |
) |
|
|
17.46 |
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
915,545 |
|
|
|
12.38 |
|
|
|
|
|
|
|
|
|
|
16
During the three-month periods ended September 30, 2008 and September 30, 2007, the Company
recognized total compensation expense related to options of $121,000 and $100,000, respectively.
During the nine-month periods ended September 30, 2008 and
September 30, 2007, the Company recognized total compensation expense related to options of
$320,000 and $360,000, respectively.
The total pretax intrinsic value of stock options exercised was $56,000 and $93,000, respectively,
for the three-month periods ended September 30, 2008 and September 30, 2007. The total pretax
intrinsic value of stock options exercised was $257,000 and $2.9 million, respectively, for the
nine-month periods ended September 30, 2008 and September 30, 2007. The related tax benefits
realized from the exercise of stock options for the three-month periods ended September 30, 2008
and September 30, 2007 were $27,000 and $37,000, respectively. The related tax benefits realized
from the exercise of stock options for the nine-month periods ended September 30, 2008 and
September 30, 2007 were $102,000 and $1.2 million, respectively.
The following table summarizes information about the stock options outstanding and exercisable as
of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
Intrinsic |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Intrinsic |
|
Range of |
|
Number |
|
|
Remaining |
|
|
Average |
|
|
Value |
|
|
Number |
|
|
Average Remaining |
|
|
Average |
|
|
Value |
|
Exercise Prices |
|
Outstanding |
|
|
Life (Years) |
|
|
Exercise Price |
|
|
(In thousands) |
|
|
Exercisable |
|
|
Life (Years) |
|
|
Exercise Price |
|
|
(In thousands) |
|
$3.39 |
|
|
101,770 |
|
|
|
3.5 |
|
|
$ |
3.39 |
|
|
$ |
518 |
|
|
|
101,770 |
|
|
|
3.5 |
|
|
$ |
3.39 |
|
|
$ |
518 |
|
$4.23 5.01 |
|
|
58,641 |
|
|
|
1.5 |
|
|
|
4.34 |
|
|
|
243 |
|
|
|
58,641 |
|
|
|
1.5 |
|
|
|
4.34 |
|
|
|
243 |
|
$7.61 10.18 |
|
|
373,875 |
|
|
|
5.5 |
|
|
|
9.53 |
|
|
|
28 |
|
|
|
106,645 |
|
|
|
3.2 |
|
|
|
10.18 |
|
|
|
|
|
$14.00 16.02 |
|
|
89,401 |
|
|
|
5.4 |
|
|
|
14.80 |
|
|
|
|
|
|
|
73,912 |
|
|
|
5.3 |
|
|
|
14.65 |
|
|
|
|
|
$17.52 22.23 |
|
|
291,858 |
|
|
|
4.6 |
|
|
|
20.04 |
|
|
|
|
|
|
|
127,110 |
|
|
|
4.3 |
|
|
|
19.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
915,545 |
|
|
|
4.7 |
|
|
|
12.38 |
|
|
$ |
789 |
|
|
|
468,078 |
|
|
|
3.7 |
|
|
|
11.17 |
|
|
$ |
761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value,
based on the Companys closing stock price of $8.48 as of September 30, 2008, which would have been
received by the option holders had all option holders exercised their options as of that date.
As of September 30, 2008, the total future compensation cost related to non-vested stock options
not yet recognized in the Consolidated Statements of Operations was $803,000 and the weighted
average period over which these awards are expected to be recognized was 1.6 years, based on the
most probable performance assumptions as of September 30, 2008. In the event maximum performance
targets are achieved, an additional $1.3 million of compensation cost would be recognized over a
weighted average period of 2.5 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 3 to 10 years, though in certain circumstances awards may vest in as little
as one year. All awards issued contain service conditions based on the participants continued
service with the Company, and may provide for accelerated vesting if there is a change in control
as defined in the 2003 Plan.
The vesting of certain restricted shares may be accelerated to a minimum of 3 to 4 years based on
achievement of various individual and Company performance measures. In addition, the Company has
issued certain shares under a Management Stock Ownership Program. Under this program, restrictions
on the shares lapse at the end of 10 years but may lapse (vest) in a minimum of three years if the
employee continues employment at the Company and owns a matching number of other common shares in
addition to the restricted shares.
Of the total restricted stock awards granted during the nine-month period ended September 30, 2008,
41,319 shares may be subject to accelerated vesting based on performance factors; no shares are
contingent upon performance factors. The Company has recognized expense related to
performance-based shares based on the most probable performance assumptions as of September 30,
2008.
The Company also issues restricted stock to non-employee independent directors. These shares
generally vest in seven years from the grant date or six months following the directors
termination from Board service.
17
The following table summarizes the activity of the non-vested restricted stock during the nine
months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
|
|
Shares |
|
Fair Value |
Non-vested restricted stock at January 1, 2008 |
|
|
218,248 |
|
|
$ |
20.17 |
|
Granted |
|
|
214,533 |
|
|
|
7.75 |
|
Vested |
|
|
(13,934 |
) |
|
|
19.23 |
|
Forfeited |
|
|
(13,221 |
) |
|
|
17.81 |
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at September 30, 2008 |
|
|
405,626 |
|
|
|
13.71 |
|
|
|
|
|
|
|
|
|
|
During the three-month periods ended September 30, 2008 and September 30, 2007, the Company granted
restricted stock awards with grant date fair values totaling $532,000 and $165,000, respectively.
During each of the nine-month periods ended September 30, 2008 and September 30, 2007, the Company
granted restricted stock awards with grant date fair values totaling $1.7 million.
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
$273,000 and $49,000 of compensation expense related to restricted stock for the three-month
periods ended September 30, 2008 and September 30, 2007, respectively. The Company recognized
$523,000 and $421,000 of compensation expense related to restricted stock for the nine-month
periods ended September 30, 2008 and September 30, 2007, respectively.
As of September 30, 2008, there was $3.0 million of unrecognized compensation cost related to
non-vested restricted stock compensation to be recognized over a weighted average period of 3.7
years, based on the most probable performance assumptions as of September 30, 2008. In the event
maximum performance targets are achieved, an additional $790,000 of compensation cost would be
recognized over a weighted average period of 1.1 years.
There were 2,469 shares that vested during the three-month period ended September 30, 2008 and
13,934 shares that vested during the nine-month period ended September 30, 2008. The fair value of
shares that vested during the three-month period ended September 30, 2008 was $20,000. The fair
value of shares that vested during the nine-month period ended September 30, 2008 was $113,000.
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 filed with the Securities and Exchange Commission. This discussion contains certain
statements of a forward-looking nature that involve risks and uncertainties.
FORWARD-LOOKING STATEMENTS
Certain statements in this document may include the words or phrases can be, expects, plans,
may, may affect, may depend, believe, estimate, intend, could, should, would,
if and similar words and phrases that constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements are subject to various known and unknown risks and uncertainties
and the Company cautions that any forward-looking information provided by or on its behalf is not a
guarantee of future performance. Statements regarding the following subjects are forward-looking by
their nature: (a) our business strategy; (b) our projected operating results; (c) our ability to
obtain external financing; (d) the effectiveness of our hedges; (e) our understanding of our
competition; and (f) industry and market trends. The Companys actual results could differ
materially from those anticipated by such forward-looking statements due to a number of factors,
some beyond the Companys control, including, without limitation:
|
|
|
availability, terms and deployment of capital; |
|
|
|
|
general volatility of capital markets, in particular, the market for securitized assets; |
|
|
|
|
changes in our industry, interest rates or the general economy resulting in changes to our business strategy; |
|
|
|
|
the nature of our competition; |
|
|
|
|
availability of qualified personnel; and |
|
|
|
|
the factors set forth in the section captioned Risk Factors in our Form 10-K filed with the Securities and Exchange
Commission. |
18
Forward-looking statements apply only as of the date made and the Company is not required to update
forward-looking statements for subsequent or unanticipated events or circumstances.
Overview
We are a nationwide provider of equipment financing and working capital solutions, primarily to
small businesses. We finance over 70 categories of commercial equipment important to our end user
customers including copiers, certain commercial and industrial equipment, computers,
telecommunications equipment, and security systems. We access our end user customers through
origination sources comprised of our existing network of independent equipment dealers and, to a
lesser extent, through relationships with lease brokers and through direct solicitation of our end
user customers. Our leases are fixed-rate transactions with terms generally ranging from 36 to 60
months. At September 30, 2008, our lease portfolio consisted of approximately 115,000 accounts
with an average original term of 48 months and average original transaction size of approximately
$10,900.
In November 2006, we announced the introduction of business capital loans. Business capital loans
provide small business customers access to credit through term loans.
Since our founding in 1997, we have grown to $803.9 million in total assets at September 30, 2008
and have added four regional sales offices to help us penetrate certain targeted markets. We opened
our most recent regional sales office in Salt Lake City, Utah in 2006. Our assets are substantially
comprised of our net investment in leases which totaled $688.5 million at September 30, 2008.
Personnel costs represent our most significant overhead expense and we actively manage our staffing
levels to the requirements of our lease portfolio.
As a financial services company, we are navigating through the current challenging economic
environment. In response to this, on May 13, 2008, we reduced our staffing by approximately 14.7%.
This action was part of an overall effort to reduce operating costs in light of our decision to
moderate growth in fiscal 2008. Approximately 51 employees were affected as a result of the staff
reduction. On May 13, 2008, we notified the affected employees. We incurred pretax costs in the
three months ended June 30, 2008 of approximately $501,000 related to this action, almost all of
which was related to severance costs. The total annualized pretax cost savings that are expected to
result from this reduction are estimated to be approximately $2.6 million.
On March 11, 2008, we received approval from the Federal Deposit Insurance Corporation for federal
deposit insurance for our wholly-owned subsidiary, Marlin Business Bank, an industrial bank
chartered by the State of Utah. Marlin Business Bank commenced operations effective March 12, 2008.
Initially, Marlin Business Bank will diversify the Companys funding sources and, over time, the
Bank may add other product offerings to better serve our customer base. On October 21, 2008, Marlin
Business Bank filed an application with the Utah Department of Financial Institutions to convert
its charter from an Industrial Bank to a state chartered Commercial Bank. As part of the charter
conversion process, Marlin Business Bank intends to file an application for membership in the
Federal Reserve System, and the Company intends to file an application with the Federal Reserve to
become a bank holding company under the Bank Holding Company Act of 1956, as amended.
We generally reach our lessees through a network of independent equipment dealers and lease
brokers. The number of dealers and brokers that we conduct business with depends on, among other
things, the number of sales account executives we have. Accordingly, growth indicators that
management evaluates regularly are sales account executive staffing levels and the activity of our
origination sources, which are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
As of or For the Year Ended December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
Number of sales account executives |
|
|
91 |
|
|
|
118 |
|
|
|
100 |
|
|
|
103 |
|
|
|
100 |
|
|
|
84 |
|
Number of originating
sources(1) |
|
|
1,040 |
|
|
|
1,246 |
|
|
|
1,295 |
|
|
|
1,295 |
|
|
|
1,244 |
|
|
|
1,147 |
|
|
|
|
(1) |
|
Monthly average of origination sources generating lease volume |
Our revenue consists of interest and fees from our leases and loans and, to a lesser extent, income
from our property insurance program and other fee income. Our expenses consist of interest expense
and operating expenses, which include salaries and benefits and other general and administrative
expenses. As a credit lender, our earnings are also significantly impacted by credit losses. For
the quarter ended September 30, 2008, our annualized net credit losses were 4.04% of our average
total finance receivables. We establish reserves for credit losses which require us to estimate
inherent losses in our portfolio.
19
Our leases are classified under generally accepted accounting principles in the United States of
America (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 73.6% of our lease
portfolio at September 30, 2008 amortizes over the term to a $1 residual value. For the remainder
of the portfolio, we must estimate end of term residual values for the leased assets. Failure to
correctly estimate residual values could result in losses being realized on the disposition of the
equipment at the end of the lease term.
Since our founding, we have funded our business through a combination of variable-rate borrowings
and fixed-rate asset securitization transactions, as well as through the issuance from time to time
of subordinated debt and equity. Our variable-rate financing sources consist of a revolving bank
facility and a commercial paper (CP) conduit warehouse facility. We issue fixed-rate term debt
through the asset-backed securitization market. Typically, leases are funded through variable-rate
borrowings until they are refinanced through the term note securitization at fixed rates. All of
our term note securitizations have been accounted for as on-balance sheet transactions and,
therefore, we have not recognized gains or losses from these transactions. As of September 30,
2008, $511.2 million, or 90.3%, of our borrowings were fixed-rate term note securitizations.
Since we initially finance our fixed-rate leases with variable-rate financing, our earnings are
exposed to interest rate risk should interest rates rise before we complete our fixed-rate term
note securitizations. We generally benefit in times of falling and low interest rates. We are
also dependent upon obtaining future financing to refinance our revolving bank facility and CP
conduit warehouse facility in order to grow our lease portfolio. We have historically completed a
fixed-rate term note securitization approximately once a year. Failure to obtain such financing,
or other alternate financing, may significantly restrict our growth and future financial
performance. We use derivative financial instruments to manage exposure to the effects of changes
in market interest rates and to fulfill certain covenants in our borrowing arrangements. All
derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or
liabilities. Accounting for the changes in fair value of derivatives depends on whether the
derivative has been designated and qualifies for hedge accounting treatment pursuant to Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, Accounting for Derivative
Instruments and Hedging Activities. While the Company may continue to use derivative financial
instruments to reduce exposure to changing interest rates, effective July 1, 2008, the Company
discontinued the use of hedge accounting pursuant to SFAS No. 133.
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 GAAP. Preparation
of these financial statements requires us to make estimates and judgments that affect reported
amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities at the date of our financial statements. On an ongoing basis, we evaluate
our estimates, including credit losses, residuals, initial direct costs and fees, other fees,
performance assumptions for stock-based compensation awards, and 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 other administrative fees. Fee income also includes net residual income
which includes income from lease renewals and gains and losses on the realization of residual
values of equipment disposed at the end of term.
At the end of the original lease term, lessees may choose to purchase the equipment, renew the
lease or return the equipment to the Company. The Company receives income from lease renewals when
the lessee elects to retain the equipment longer than the original
20
term of the lease. This income,
net of appropriate periodic reductions in the estimated residual values of the related equipment,
is included in fee income as net residual income.
When the lessee elects to return the equipment at lease termination, the equipment is transferred
to other assets at the lower of its basis or fair market value. The Company generally sells
returned equipment to an independent third party, rather than leasing the equipment a second time.
The Company does not maintain equipment in other assets for longer than 120 days. Any loss
recognized on transferring the equipment to other assets, and any gain or loss realized on the sale
of equipment to the lessee or to others is included in fee income as net residual income.
Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated
collection rates. Other fees are recognized when received. Management performs periodic reviews of
the estimated residual values and any impairment, if other than temporary, is recognized in the
current period.
Insurance income is recognized on an accrual basis as earned over the term of the lease. Payments
that are 120 days or more past due are charged against income. Ceding commissions, losses and loss
adjustment expenses are recorded in the period incurred and netted against insurance income.
Initial direct costs and fees. We defer initial direct costs incurred and fees received to
originate our leases and loans in accordance with SFAS No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. The
initial direct costs and fees we defer are part of the net investment in leases and loans, and are
amortized to interest income using the effective interest method. We defer third-party commission
costs as well as certain internal costs directly related to the origination activity. Costs subject
to deferral include evaluating the prospective customers financial condition, evaluating and
recording guarantees and other security arrangements, negotiating terms, preparing and processing
documents and closing the transaction. The fees we defer are documentation fees collected at
inception. The realization of the deferred initial direct costs, net of fees deferred, is
predicated on the net future cash flows generated by our lease and loan portfolios.
Lease residual values. A direct financing lease is recorded at the aggregate future minimum lease
payments plus the estimated residual values less unearned income. Residual values reflect the
estimated amounts to be received at lease termination from lease extensions, sales or other
dispositions of leased equipment. These estimates are based on industry data and on our experience.
Management performs periodic reviews of the estimated residual values and any impairment, if other
than temporary, is recognized in the current period.
Allowance for credit losses. 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. To project probable net credit losses, we perform a
migration analysis of delinquent and current accounts. A migration analysis is a technique used to
estimate the likelihood that an account will progress through the various delinquency stages and
ultimately charge off. In addition to the migration analysis, we also consider other factors
including recent trends in delinquencies and charge-offs; accounts filing for bankruptcy; account
modifications; recovered amounts; forecasting uncertainties; the composition of our lease and loan
portfolios; economic conditions; and seasonality. We then establish an allowance for credit losses
for the projected probable net credit losses based on this analysis. A provision is charged against
earnings to maintain the allowance for credit losses at the appropriate level. Our policy is to
charge-off against the allowance the estimated unrecoverable portion of accounts once they reach
121 days delinquent.
Our projections of probable net credit losses are inherently uncertain, and as a result we cannot
predict with certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy laws, and other factors could impact
our actual and projected net credit losses and the related allowance for credit losses. To the
degree we add new leases and loans to our portfolio, 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.
Securitizations. Since inception, we have completed nine term note securitizations of which six
have been repaid. In connection with each transaction, we established a bankruptcy remote
special-purpose subsidiary and issued term debt to institutional investors. Under SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of Financial Accounting Standards Board Statement No. 125, our securitizations do not
qualify for sales accounting treatment due to certain call provisions that we maintain as well as
the fact that the special purpose entities used in connection with the securitizations also hold
the residual assets. Accordingly, assets and related debt of the special purpose entities are
included in the accompanying Consolidated Balance Sheets. Our leases and restricted cash 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.
21
Derivatives. SFAS No. 133, as amended, Accounting for Derivative Instruments and Hedging
Activities, requires recognition of all derivatives at fair value as either assets or liabilities
in the Consolidated Balance Sheets. The accounting for subsequent changes in the fair value of
these derivatives depends on whether each has been designated and qualifies for hedge accounting
treatment pursuant to the accounting standard.
Prior to July 1, 2008, the Company entered into derivative contracts which were accounted for as
cash flow hedges under hedge accounting as prescribed by SFAS No. 133. Under hedge accounting, the
effective portion of the gain or loss on a derivative designated as a cash flow hedge was reported
net of tax effects in accumulated other comprehensive income on the Consolidated Balance Sheets,
until the pricing of the related term securitization. The derivative gain or loss recognized in
accumulated other comprehensive income is then reclassified into earnings as an adjustment to
interest expense over the terms of the related borrowings.
While the Company may continue to use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the
fair value of derivative instruments, including those that had previously been accounted for under
hedge accounting, is recognized immediately in gain (loss) on derivatives and hedging activities.
This change creates volatility in our results of operations, as the market value of our derivative
financial instruments changes over time, and this volatility may adversely impact our results of
operations and financial condition.
For the forecasted transactions that are probable of occurring, the derivative gain or loss in
accumulated other comprehensive income as of June 30, 2008 will be reclassified into earnings as an
adjustment to interest expense over the terms of the related forecasted borrowings, consistent with
hedge accounting treatment. In the event that the related forecasted borrowing is no longer
probable of occurring, the related gain or loss in accumulated other comprehensive income is
recognized in earnings immediately.
The Company has adopted SFAS No. 157, Fair Value Measurements, which establishes a framework for
measuring fair value under GAAP and enhances disclosures about fair value measurements. As defined
in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to
transfer a liability in a orderly transaction between market participants in the principal or most
advantageous market for the asset or liability at the measurement date (exit price). Because the
Companys derivatives are not listed on an exchange, the Company values these instruments using a
valuation model with pricing inputs that are observable in the market or that can be derived
principally from or corroborated by observable market data.
Stock-based compensation. We issue both restricted shares and stock options to certain employees
and directors as part of our overall compensation strategy. SFAS No. 123(R), Share-Based Payments,
requires companies to recognize all share-based payments, which include stock options and
restricted stock, in compensation expense over the service period of the share-based payment award.
SFAS No. 123(R) establishes fair value as the measurement method in accounting for share-based
payment transactions with employees, except for equity instruments held by employee share ownership
plans.
Income taxes. Significant management judgment is required in determining the provision for income
taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against
net deferred tax assets. The process involves summarizing temporary differences resulting from the
different treatment of items, for example, leases for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included within the
Consolidated Balance Sheets. Our management must then assess the likelihood that deferred tax
assets will be recovered from future taxable income or tax carry-back availability and, to the
extent our management believes recovery is not likely, a valuation allowance must be established.
To the extent that we establish a valuation allowance in a period, an expense must be recorded
within the tax provision in the Consolidated Statements of Operations.
The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, on January 1, 2007. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Guidance is also provided on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we concluded that there are no significant uncertain tax positions
requiring recognition in our financial statements. There was no effect on our financial condition
or results of operations as a result of implementing FIN 48, and we did not have any unrecognized
tax benefits. At September 30, 2008, there have been no material changes to the liability for
uncertain tax positions and no unrecognized tax benefits. The periods subject to examination for
the Companys federal return include the 1997 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 2002 through 2007 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.
22
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2008 and 2007
Net income. A net loss of $941,000 was reported for the three-month period ended September 30,
2008, resulting in a diluted loss per share of $0.08. Net income for the same period in 2007 was
$5.0 million, or $0.41 diluted earnings per share.
The net loss for the third quarter of 2008 represented a decrease of 118.7%, or $5.9 million,
compared to third quarter 2007 net income. The diluted loss per share for the third quarter of 2008
represented a decrease of 119.5%, or $0.49, compared to third quarter 2007. The provision for
credit losses increased $4.6 million, or 115.0%, to $8.6 million for the three-month period ended
September 30, 2008 from $4.0 million for the same period in 2007. During the three months ended
September 30, 2008, net interest and fee income decreased $1.4 million, primarily due to the
combination of a 3.7% decrease in average total finance receivables and a 40 basis point decrease
in overall net interest and fee margin.
The net loss for the third quarter of 2008 reflects an after-tax charge of approximately $1.3
million due to the change in market value of derivatives, and an after-tax charge of approximately
$0.7 million due to the reclassification into earnings from accumulated other comprehensive income
related to a hedged forecasted transaction no longer anticipated to occur. Excluding these
after-tax charges totaling $2.0 million, or $0.17 diluted earnings per share, net income for the
third quarter of 2008 would have been $1.1 million, a decrease of 78.0%, or $3.9 million, compared
to third quarter 2007 net income.
During the three months ended September 30, 2008, we generated 5,837 new leases with a cost of
$59.0 million compared to 7,609 new leases with a cost of $86.2 million generated for the three
months ended September 30, 2007. The reduction in volume was primarily due to our decision to
lower approval rates in response to economic conditions. Overall, our average net investment in
total finance receivables at September 30, 2008 decreased 3.7% to $706.5 million compared to $733.3
million at September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
21,062 |
|
|
$ |
22,622 |
|
Fee income |
|
|
5,855 |
|
|
|
5,685 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
26,917 |
|
|
|
28,307 |
|
Interest expense |
|
|
8,790 |
|
|
|
8,768 |
|
|
|
|
|
|
|
|
Net interest and fee income |
|
$ |
18,127 |
|
|
$ |
19,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total finance receivables (1) |
|
$ |
706,508 |
|
|
$ |
733,304 |
|
|
|
|
|
|
|
|
|
|
Percent of average total finance receivables: |
|
|
|
|
|
|
|
|
Interest income |
|
|
11.92 |
% |
|
|
12.34 |
% |
Fee income |
|
|
3.32 |
|
|
|
3.10 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
15.24 |
|
|
|
15.44 |
|
Interest expense |
|
|
4.98 |
|
|
|
4.78 |
|
|
|
|
|
|
|
|
Net interest and fee margin |
|
|
10.26 |
% |
|
|
10.66 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables includes net investment in direct financing leases, loans
and factoring receivables. For the calculations above, the effects of (1) the allowance for
credit losses and (2) initial direct costs and fees deferred are excluded. |
Net interest and fee margin. Net interest and fee income decreased $1.4 million, or 7.2%, to $18.1
million for the three months ended September 30, 2008 from $19.5 million for the three months ended
September 30, 2007. The annualized net interest and fee margin decreased 40 basis points to 10.26%
in the three-month period ended September 30, 2008 from 10.66% for the same period in 2007.
Interest income, net of amortized initial direct costs and fees, decreased $1.5 million, or 6.6%,
to $21.1 million for the three-month period ended September 30, 2008 from $22.6 million for the
three-month period ended September 30, 2007. The decrease in interest income was due principally to
a 42 basis point decrease in average yield, combined with a 3.7% decrease in average total finance
receivables, which decreased $26.8 million to $706.5 million at September 30, 2008 from $733.3
million at September 30, 2007. The weighted average implicit interest rate on new leases originated
increased 81 basis points to 13.87% for the three-month period ended September 30, 2008 compared to
13.06% for the three-month period ended September 30, 2007.
Fee income increased $170,000, or 2.9%, to $5.9 million for the three-month period ended September
30, 2008 from $5.7 million for the three-month period ended September 30, 2007. The increase was
primarily due to a $264,000 increase in administrative and late fee
23
income. Fee income included approximately $1.5 million of net residual income for each three-month
period ended September 30, 2008 and September 30, 2007. Fee income, as an annualized percentage of
average total finance receivables, increased 22 basis points to 3.32% for the three-month period
ended September 30, 2008 from 3.10% for the same period in 2007.
Interest expense remained flat at approximately $8.8 million for each of the three-month periods
ended September 30, 2008 and September 30, 2007. The impact of higher interest rates was offset by
lower average total finance receivables. Interest expense, as an annualized percentage of average
total finance receivables, increased 20 basis points to 4.98% for the three-month period ended
September 30, 2008, from 4.78% for the same period in 2007. This increase was primarily due to a
shift in the mix of fixed- and variable-rate borrowings.
Interest expense on revolving and term secured borrowings, as an annualized percentage of weighted
average borrowings, was 5.50% for the quarter ended September 30, 2008 compared to 5.39% for the
same period in 2007. The higher cost reflects a shift in mix between fixed-rate term
securitizations and variable-rate facilities, combined with the sequentially increasing cost of the
term securitizations. The average balance for our warehouse facilities was $37.3 million for the
three months ended September 30, 2008 compared to $207.8 million for the same period ended
September 30, 2007. The average borrowing cost for our warehouse facilities was 4.47% for the
quarter ended September 30, 2008, compared to 6.07% for the same period in 2007.
Interest costs on our term securitization borrowings issued in August 2005, September 2006 and
October 2007 increased over those issued in 2004 due to the higher interest rate environment. The
coupon rate on the October 2007 securitization also reflects higher credit spreads due to general
tightening of credit caused by stress and volatility in the financial markets. For the three months
ended September 30, 2008, average term securitization borrowings outstanding were $552.9 million
at a weighted average coupon of 5.46% compared with $443.3 million at a weighted average coupon of
4.72% for the same period in 2007.
On September 21, 2006, we closed on the issuance of our eighth term note securitization transaction
in the amount of $380.2 million at a weighted average interest coupon approximating 5.51% over the
term of the financing. After the effects of hedging and other transaction costs are considered, we
expect total interest expense on the 2006 term transaction to approximate an average of 5.21% over
the term of the borrowing. On October 24, 2007, we closed on the issuance of our ninth term note
securitization transaction in the amount of $440.5 million at a weighted average interest coupon
approximating 5.70% over the term of the financing. After the effects of hedging and other
transaction costs are considered, we expect total interest expense on the 2007 term transaction to
approximate an average of 6.32% over the term of the borrowing.
Effective March 12, 2008, the Company opened Marlin Business Bank, an industrial bank chartered by
the State of Utah. Marlin Business Bank currently provides diversification of the Companys funding
sources through the issuance of FDIC-insured certificates of deposit raised nationally through
various brokered deposit relationships. For the three months ended September 30, 2008, average term
certificates of deposit outstanding were $43.9 million at a weighted average interest rate of
4.13%.
Insurance and other income. Insurance and other income was $1.7 million for each of the three-month
periods ended September 30, 2008 and September 30, 2007.
Loss on derivatives and hedging activities. Prior to July 1, 2008, the Company entered into
derivative contracts which were accounted for as cash flow hedges under hedge accounting as
prescribed by SFAS No. 133. While the Company may continue to use derivative financial instruments
to reduce exposure to changing interest rates, effective July 1, 2008, the Company discontinued the
use of hedge accounting.
By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the fair value
of derivative instruments, including those that had previously been accounted for under hedge
accounting, are recognized immediately. This change creates volatility in our results of
operations, as the market value of our derivative financial instruments changes over time.
For the three months ended September 30, 2008, the loss on derivatives and hedging activities was
$3.3 million. Of this amount, $2.2 million represents the change in the fair value of the
derivatives contracts during the quarter.
At September 30, 2008, the Company concluded that certain forecasted transactions were not probable
of occurring on the anticipated date or in the additional time period permitted by SFAS 133. A $1.1
million pretax loss was reclassified into loss on derivatives and hedging activities for the three
months ended September 30, 2008 for the related cash flow hedges.
These losses are based on the value of the derivative contracts at September 30, 2008 in a volatile
market that is changing daily, and will not necessarily reflect the value at settlement.
24
Salaries and benefits expense. Salaries and benefits expense increased $363,000, or 6.8%, to $5.6
million for the three months ended September 30, 2008 from $5.3 million for the same period in
2007. This increase is substantially due to reduced capitalized costs as a result of lower
origination volumes, and an increase of $238,000 in stock-based compensation expense primarily due
to lower expense in the third quarter of 2007 related to revised performance and forfeiture
assumptions. Compensation related to Marlin Business Bank totaled $160,000, compared to $118,000
for the same period in 2007.
As a financial services company, we are navigating through the current challenging economic
environment. In response to this, on May 13, 2008, we reduced our staffing by approximately 14.7%.
This action was part of an overall effort to reduce operating costs in light of our decision to
moderate growth in fiscal 2008. Approximately 51 employees were affected as a result of the staff
reduction. On May 13, 2008, we notified the affected employees. We incurred pretax costs in the
three months ended June 30, 2008 of approximately $501,000 related to this action, almost all of
which was related to severance costs. The total annualized pretax cost savings that are expected to
result from this reduction are estimated to be approximately $2.6 million. Total personnel
decreased to 286 at September 30, 2008 from 331 at September 30, 2007.
General and administrative expense. General and administrative expense decreased $114,000, or 3.3%,
to $3.3 million for the three months ended September 30, 2008 from $3.4 million for the same period
in 2007. General and administrative expense as an annualized percentage of average total finance
receivables was 1.89% for the three-month period ended September 30, 2008, compared to 1.88% for
the three-month period ended September 30, 2007.
Financing related costs. Financing related costs include commitment fees paid to our financing
sources and costs pertaining to our interest rate cap contracts used to manage interest rate
exposure. Financing related costs increased $168,000, to $370,000 for the three-month period ended
September 30, 2008 compared to the same period in 2007, primarily due to increased bank commitment
fees. Commitment fees were $369,000 for the three-month period ended September 30, 2008 compared
with $200,000 for the three-month period ended September 30, 2007.
Provision for credit losses. The provision for credit losses increased $4.6 million, or 115.0%, to
$8.6 million for the three-month period ended September 30, 2008 from $4.0 million for the same
period in 2007. The increase in the provision for credit losses was primarily the result of higher
net charge-offs. Net charge-offs were $7.1 million for the three-month period ended September 30,
2008, compared to $3.4 million for the same period in 2007. The allowance for credit losses
increased approximately $1.5 million during the three months ended September 30, 2008.
Provision for income taxes. An income tax benefit of $425,000 was recorded for the three-month
period ended September 30, 2008, compared to a provision of $3.3 million for the same period in
2007. The change is primarily attributable to the decrease in pretax income. The effective tax rate
for the quarter ended September 30, 2008 was 31.1%, compared to 39.6% for the quarter ended
September 30, 2007. The effective tax rate for the quarter includes the effect of a minor
adjustment in the estimated annual tax rate for the year. We anticipate our effective tax rate for
the full calendar year of 2008 to be approximately 39%, plus approximately $239,000 of additional
expense that was recognized earlier this year related to a true-up of our deferred tax accounts.
Comparison of the Nine Months Ended September 30, 2008 and 2007
Net income. Net income was $2.1 million for the nine-month period ended September 30, 2008,
resulting in diluted earnings per share of $0.18. Net income for the same period in 2007 was $15.2
million, or $1.24 diluted earnings per share.
Net income for the first nine months of 2008 decreased 86.2%, or $13.1 million, compared to net
income for the first nine months of 2007. Diluted earnings per share for the first nine months of
2008 decreased 85.5%, or $1.06, compared to the first nine months of 2007. The provision for credit
losses increased $11.3 million, or 104.6%, to $22.1 million for the nine-month period ended
September 30, 2008 from $10.8 million for the same period in 2007. During the nine months ended
September 30, 2008, net interest and fee income decreased $3.5 million, primarily due to increased
interest expense.
Net income for the first nine months of 2008 reflects an after-tax charge of approximately $1.3
million due to the change in market value of derivatives, and an after-tax charge of approximately
$0.7 million due to the reclassification into earnings from accumulated other comprehensive income
related to a hedged forecasted transaction no longer anticipated to occur. Excluding these
after-tax charges totaling $2.0 million, or $0.17 diluted earnings per share, net income for the
first nine months of 2008 would have been $4.1 million, a decrease of 73.0%, or $11.1 million,
compared to the first nine months of 2007.
During the nine months ended September 30, 2008, we generated 18,949 new leases with a cost of
$192.0 million compared to 24,671 new leases with a cost of $286.1 million generated for the nine
months ended September 30, 2007. The reduction in volume was
25
primarily due to our decision to
lower approval rates in response to economic conditions. Overall, our average net investment in
total finance receivables at September 30, 2008 increased 1.8% to $727.3 million compared to $714.2
million at September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
65,884 |
|
|
$ |
66,210 |
|
Fee income |
|
|
17,013 |
|
|
|
16,486 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
82,897 |
|
|
|
82,696 |
|
Interest expense |
|
|
28,396 |
|
|
|
24,735 |
|
|
|
|
|
|
|
|
Net interest and fee income |
|
$ |
54,501 |
|
|
$ |
57,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total finance receivables (1) |
|
$ |
727,317 |
|
|
$ |
714,150 |
|
|
|
|
|
|
|
|
|
|
Percent of average total finance receivables: |
|
|
|
|
|
|
|
|
Interest income |
|
|
12.08 |
% |
|
|
12.36 |
% |
Fee income |
|
|
3.12 |
|
|
|
3.08 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
15.20 |
|
|
|
15.44 |
|
Interest expense |
|
|
5.21 |
|
|
|
4.62 |
|
|
|
|
|
|
|
|
Net interest and fee margin |
|
|
9.99 |
% |
|
|
10.82 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables includes net investment in direct financing leases, loans
and factoring receivables. For the calculations above, the effects of (1) the allowance for
credit losses and (2) initial direct costs and fees deferred are excluded. |
Net interest and fee margin. Net interest and fee income decreased $3.5 million, or 6.0%, to $54.5
million for the nine months ended September 30, 2008 from $58.0 million for the nine months ended
September 30, 2007. The annualized net interest and fee margin decreased 83 basis points to 9.99%
in the nine-month period ended September 30, 2008 from 10.82% for the same period in 2007.
Interest income, net of amortized initial direct costs and fees, decreased $326,000, or 0.5%, to
$65.9 million for the nine-month period ended September 30, 2008 from $66.2 million for the
nine-month period ended September 30, 2007. The decrease in interest income was due principally to
a 28 basis point decrease in average yield. The weighted average implicit interest rate on new
leases originated increased 71 basis points to 13.67% for the nine-month period ended September 30,
2008 compared to 12.96% for the nine-month period ended September 30, 2007.
Fee income increased $527,000 to $17.0 million for the nine-month period ended September 30, 2008
from $16.5 million for the same period in 2007. The increase was primarily due to a $751,000
increase in administrative and late fee income. Fee income included approximately $4.5 million of
net residual income for each three-month period ended September 30, 2008 and September 30, 2007.
Fee income, as an annualized percentage of average total finance receivables, increased 4 basis
points to 3.12% for the nine-month period ended September 30, 2008 from 3.08% for the same period
in 2007.
Interest expense increased $3.7 million to $28.4 million for the nine-month period ended September
30, 2008 from $24.7 million for the same period in 2007. The dollar increase in interest expense
is attributed to a combination of higher borrowings needed to fund the continued growth of the
Company and increased interest rates on the Companys borrowed monies. Interest expense, as an
annualized percentage of average total finance receivables, increased 59 basis points to 5.21% for
the nine-month period ended September 30, 2008, from 4.62% for the same period in 2007. This
increase is primarily due to a shift in the mix of fixed- and variable-rate borrowings and the
increased cost of our fixed-rate borrowings.
Interest expense on revolving and term secured borrowings, as an annualized percentage of weighted
average borrowings was 5.42% for the nine-month period ended September 30, 2008 compared to 5.21%
for the same period in 2007. The higher cost reflects a shift in mix between fixed-rate term
securitizations and variable-rate facilities, combined with the sequentially increasing cost of the
term securitizations. The average balance for our warehouse facilities was $22.7 million for the
nine months ended September 30, 2008 compared to $122.7 million for the same period ended September
30, 2007. The average borrowing cost for our warehouse facilities was 4.43% for the nine-month
period September 30, 2008, compared to 5.98% for the same period in 2007.
Interest costs on our term securitization borrowings issued in August 2005, September 2006 and
October 2007 increased over those issued in 2004 due to the higher interest rate environment. The
coupon rate on the October 2007 securitization also reflects higher
26
credit spreads due to general
tightening of credit caused by stress and volatility in the financial markets. For the nine months
ended September 30, 2008, average term securitization borrowings outstanding were $630.5 million at
a weighted average coupon of 5.46% compared to $510.3 million at a weighted average coupon of 4.70%
for the same period in 2007.
On September 21, 2006, we closed on the issuance of our eighth term note securitization transaction
in the amount of $380.2 million at a weighted average interest coupon approximating 5.51% over the
term of the financing. After the effects of hedging and other transaction costs are considered, we
expect total interest expense on the 2006 term transaction to approximate an average of 5.21% over
the term of the borrowing. On October 24, 2007, we closed on the issuance of our ninth term note
securitization transaction in the amount of $440.5 million at a weighted average interest coupon
approximating 5.70% over the term of the financing. After the effects of hedging and other
transaction costs are considered, we expect total interest expense on the 2007 term transaction to
approximate an average of 6.32% over the term of the borrowing.
Insurance and other income. Insurance and other income was $5.2 million for the nine-month period
ended September 30, 2008, compared to $4.9 million for the same period ended September 30, 2007,
primarily due to higher insurance billings.
Loss on derivatives and hedging activities. Prior to July 1, 2008, the Company entered into
derivative contracts which were accounted for as cash flow hedges under hedge accounting as
prescribed by SFAS No. 133. While the Company may continue to use derivative financial instruments
to reduce exposure to changing interest rates, effective July 1, 2008, the Company discontinued the
use of hedge accounting.
By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the fair value
of derivative instruments, including those that had previously been accounted for under hedge
accounting, are recognized immediately. This change creates volatility in our results of
operations, as the market value of our derivative financial instruments changes over time.
For the nine months ended September 30, 2008, the loss on derivatives and hedging activities was
$3.3 million. Of this amount, $2.2 million represents the change in the fair value of the
derivatives contracts during the period.
At September 30, 2008, the Company concluded that certain forecasted transactions were not probable
of occurring on the anticipated date or in the additional time period permitted by SFAS 133. A $1.1
million pretax loss was reclassified into loss on derivatives and hedging activities for the nine
months ended September 30, 2008 for the related cash flow hedges.
These losses are based on the value of the derivative contracts at September 30, 2008 in a volatile
market that is changing daily, and will not necessarily reflect the value at settlement.
Salaries and benefits expense. Salaries and benefits expense increased $1.7 million, or 10.6%, to
$17.8 million for the nine months ended September 30, 2008 from $16.1 million for the same period
in 2007. This increase is substantially due to costs associated with the staff reduction
initiative discussed below and lower capitalized costs as a result of lower origination volumes,
partially offset by the discontinuance of the factoring business. There was no compensation
related to the factoring business for the nine months ended September 30, 2008, compared to
$302,000 for the same period in 2007.
As a financial services company, we are navigating through the current challenging economic
environment. In response to this, on May 13, 2008, we reduced our staffing by approximately 14.7%.
This action was part of an overall effort to reduce operating costs in light of our decision to
moderate growth in fiscal 2008. Approximately 51 employees were affected as a result of the staff
reduction. On May 13, 2008, we notified the affected employees. We incurred pretax costs in the
three months ended June 30, 2008 of approximately $501,000 related to this action, almost all of
which was related to severance costs. The total annualized pretax cost savings that are expected to
result from this reduction are estimated to be approximately $2.6 million. Total personnel
decreased to 286 at September 30, 2008 from 331 at September 30, 2007.
General and administrative expense. General and administrative expense increased $1.5 million, or
14.9%, to $11.6 million for the nine months ended September 30, 2008 from $10.1 million for the
same period in 2007. Of this increase, $525,000 is due to increased marketing expenses, primarily
related to business capital loans in the early part of the period. Additional increases primarily
related to professional fees. General and administrative expense as an annualized percentage of
average total finance receivables was 2.13% for the nine-month period ended September 30, 2008,
compared to 1.88% for the nine-month period ended September 30, 2007.
Financing related costs. Financing related costs include commitment fees paid to our financing
sources and costs pertaining to our derivative contracts used to manage interest rate exposure that
do not qualify for hedge accounting treatment. Financing related costs increased $305,000, to
$1.0 million for the nine-month period ended September 30, 2008 compared to the same period in
2007,
27
primarily due to increased bank commitment fees. Commitment fees were $962,000 for the
nine-month period ended September 30, 2008 compared with $652,000 for the nine-month period ended
September 30, 2007.
Provision for credit losses. The provision for credit losses increased $11.3 million, or 104.6%, to
$22.1 million for the nine-month period ended September 30, 2008 from $10.8 million for the same
period in 2007. The increase in the provision for credit losses was primarily the result of higher
net charge-offs. Net charge-offs were $18.8 million for the nine-month period ended September 30,
2008, compared to $9.6 million for the same period in 2007. The allowance for credit losses increased
approximately $3.4 million during the nine months ended September 30, 2008.
Provision for income taxes. The provision for income taxes decreased to $1.7 million for the
nine-month period ended September 30, 2008 from $10.0 million for the same period in 2007. The
decrease is primarily attributable to the decrease in pretax income. The effective tax rate for the
nine months ended September 30, 2008 was 44.8%, compared to 39.5% for the nine months ended
September 30, 2007. The effective tax rate for the nine months ended September 30, 2008 reflects
the impact of a 2008 tax adjustment of $239,000, primarily related to a true-up of our deferred tax
accounts. We anticipate our effective tax rate for the full calendar year of 2008 to be
approximately 39%, plus approximately $239,000 of additional expense recognized earlier this year
related to a true-up of our deferred tax accounts.
FINANCE RECEIVABLES AND ASSET QUALITY
Our net investment in leases and loans declined $63.8 million, or 8.3%, to $702.1 million at
September 30, 2008, from $765.9 million at December 31, 2007. The Company is responding to current
economic conditions with more restrictive credit standards, while continuing to pursue strategies
designed to increase the number of independent equipment dealers and other origination sources that
generate and develop lease customers. The Companys leases are generally assigned as collateral
for borrowings as described below in Liquidity and Capital Resources.
The activity of the allowance for credit losses and delinquent accounts follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Allowance for credit losses, beginning of period |
|
$ |
12,873 |
|
|
$ |
8,829 |
|
|
$ |
10,988 |
|
|
$ |
8,201 |
|
|
$ |
8,201 |
|
Provision for credit losses |
|
|
8,602 |
|
|
|
3,966 |
|
|
|
22,137 |
|
|
|
10,826 |
|
|
|
17,221 |
|
Charge-offs, net |
|
|
(7,136 |
) |
|
|
(3,400 |
) |
|
|
(18,786 |
) |
|
|
(9,632 |
) |
|
|
(14,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end of period |
|
$ |
14,339 |
|
|
$ |
9,395 |
|
|
$ |
14,339 |
|
|
$ |
9,395 |
|
|
$ |
10,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs to average total finance
receivables (1) |
|
|
4.04 |
% |
|
|
1.85 |
% |
|
|
3.44 |
% |
|
|
1.80 |
% |
|
|
2.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses to total finance receivables,
end of period (1) |
|
|
2.07 |
% |
|
|
1.27 |
% |
|
|
2.07 |
% |
|
|
1.27 |
% |
|
|
1.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total finance receivables (1) |
|
$ |
706,508 |
|
|
$ |
733,304 |
|
|
$ |
727,317 |
|
|
$ |
714,150 |
|
|
$ |
721,900 |
|
Total finance receivables, end of period (1) |
|
$ |
693,627 |
|
|
$ |
738,373 |
|
|
$ |
693,627 |
|
|
$ |
738,373 |
|
|
$ |
749,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies greater than 60 days past due |
|
$ |
11,320 |
|
|
$ |
7,951 |
|
|
$ |
11,320 |
|
|
$ |
7,951 |
|
|
$ |
8,377 |
|
Delinquencies greater than 60 days past due (2) |
|
|
1.41 |
% |
|
|
0.91 |
% |
|
|
1.41 |
% |
|
|
0.91 |
% |
|
|
0.95 |
% |
Allowance for credit losses to delinquent accounts
greater than 60 days past due (2) |
|
|
126.67 |
% |
|
|
118.16 |
% |
|
|
126.67 |
% |
|
|
118.16 |
% |
|
|
131.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual leases and loans |
|
$ |
5,370 |
|
|
$ |
3,438 |
|
|
$ |
5,370 |
|
|
$ |
3,438 |
|
|
$ |
3,695 |
|
Renegotiated leases and loans |
|
$ |
8,133 |
|
|
$ |
5,042 |
|
|
$ |
8,133 |
|
|
$ |
5,042 |
|
|
$ |
6,987 |
|
|
|
|
(1) |
|
Total finance receivables include net investment in direct financing leases, loans
and factoring receivables. For purposes of asset quality and allowance calculations, the
effects of (1) the allowance for credit losses and (2) initial direct costs and fees deferred
are excluded. |
|
(2) |
|
Calculated as a percent of minimum lease payments receivable for leases and as a
percent of principal outstanding for loans and factoring receivables. |
28
Net investments in finance receivables are charged-off when they are contractually past due for 121
days and are reported net of recoveries. Income is not recognized on leases or loans when a
default on monthly payment exists for a period of 90 days or more. Income recognition resumes when
a lease or loan becomes less than 90 days delinquent.
Net charge-offs for the three months ended September 30, 2008 were $7.1 million, or 4.04% of
average total finance receivables, compared to $5.7 million, or 3.14% of average total finance
receivables, for the three months ended June 30, 2008. Net charge-offs for the three months ended
September 30, 2007 were $3.4 million, or 1.85% of average total finance receivables. Net
charge-offs for the nine months ended September 30, 2008 were $18.8 million, or 3.44% of average
total finance receivables, compared to $9.6 million, or 1.80% of average total finance receivables
for the nine months ended September 30, 2007. Net charge-offs for the year ended December 31, 2007
were 2.00% of average total finance receivables. The increase in net charge-offs during the first
nine months of 2008 compared to prior periods is primarily due to (1) worsening general economic
trends, (2) an increase in the charge-offs related to rate-sensitive industries and (3) the
charge-off of a real estate related loan as discussed below.
The Companys net charge-offs increased during 2007, primarily due to worsening general economic
trends from the favorable experience of 2006. These trends have continued to worsen during 2008.
The economic environment has most significantly impacted the performance of interest rate-sensitive
industries in our portfolio, specifically companies in the construction, mortgage and real estate
businesses. These industries comprised approximately 12% of the total portfolio at September 30,
2008. During 2007 and 2008, the Company increased collections activities and strengthened
underwriting criteria for these industries and for the geographical areas most affected by these
industries, specifically California and Florida. These trends continue to be closely monitored.
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 and factoring receivables)
increased to 1.41% at September 30, 2008 from 1.16% at June 30, 2008 and 0.95% at December 31,
2007, primarily due to the worsening general economic trends. Supplemental information regarding loss statistics and delinquencies
is available on the investor relations section of Marlins website at
www.marlincorp.com.
We maintain an allowance for credit losses at an amount sufficient to absorb losses inherent in our
existing lease and loan portfolios as of the reporting dates based on our projection of probable
net credit losses. The factors and trends discussed above were included in the Companys analysis
to determine its allowance for credit losses. (See Critical Accounting Policies.)
RESIDUAL PERFORMANCE
Our leases offer our end user customers the option to own the purchased equipment at lease
expiration. As of September 30, 2008, approximately 74% of our leases were one dollar purchase
option leases, 22% were fair market value leases and 4% were fixed purchase option leases, the
latter of which typically are 10% of the original equipment cost. As of September 30, 2008, there
were $51.1 million of residual assets retained on our Consolidated Balance Sheet, of which $40.0
million were related to copiers. No other group of equipment represented more than 10% of equipment
residuals as of September 30, 2008 and December 31, 2007, respectively.
Our leases generally include automatic renewal provisions and many leases continue beyond their
initial contractual term. We consider renewal income a component of residual performance. For the
three months ended September 30, 2008, renewal income net of depreciation totaled $1.8 million
compared to $1.7 million for the three months ended September 30, 2007. For the nine months ended
September 30, 2008, renewal income net of depreciation totaled $5.2 million compared to $4.9
million for the nine months ended September 30, 2007. For the three months ended September 30,
2008, net losses on residual values disposed at end of term totaled $244,000 compared to net losses
of $162,000 for the three months ended September 30, 2007. For the nine months ended September 30,
2008, net losses on residual values disposed at end of term totaled $638,000 compared to net losses
of $345,000 for the nine months ended September 30, 2007. The primary driver was a shift in the mix
of the types of equipment disposed at the end of the term.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires a substantial amount of cash to operate and grow. Our primary liquidity need
is for new originations. In addition, we need liquidity to pay interest and principal on our
borrowings, to pay fees and expenses incurred in connection with our securitization transactions,
to fund infrastructure and technology investment and to pay administrative and other operating
expenses.
29
We are dependent upon the availability of financing from a variety of funding sources to satisfy
these liquidity needs. Historically, we have relied upon four principal types of third-party
financing to fund our operations:
|
|
|
borrowings under a revolving bank facility; |
|
|
|
|
financing of leases and loans in CP conduit warehouse facilities; |
|
|
|
|
financing of leases through term note securitizations; and |
|
|
|
|
equity and debt securities with third-party investors. |
The opening of our wholly-owned subsidiary Marlin Business Bank, an industrial bank chartered by
the State of Utah, on March 12, 2008 provides an additional funding source. Initially, FDIC-insured
deposits are being raised via the brokered certificates of deposit market.
On October 21, 2008, Marlin Business Bank filed an application with the Utah Department of
Financial Institutions to convert its charter from an Industrial Bank to a state chartered
Commercial Bank. As part of the charter conversion process, Marlin Business Bank intends to file
an application for membership in the Federal Reserve System, and the Company intends to file an
application with the Federal Reserve to become a bank holding company under the Bank Holding
Company Act of 1956, as amended.
Net cash provided by investing activities was $112.6 million for the nine-month period ended
September 30, 2008, compared to net cash used by investing activities of $82.1 million for the
nine-month period ended September 30, 2007. Investing activities primarily relate to lease
origination activity and restricted cash balances.
Net cash used by financing activities was $161.7 million for the nine-month period ended September
30, 2008, compared to net cash provided by financing activities of $46.1 million for the nine-month
period ended September 30, 2007. 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 $31.9 million for the nine-month period ended September 30, 2008, compared
to net cash provided by operating activities of $20.3 million for the nine-month period ended
September 30, 2007.
We expect cash from operations, additional borrowings on existing and future credit facilities,
funds from brokered certificates of deposit and the completion of additional on-balance-sheet term
note securitizations to be adequate to support our operations and projected growth.
Cash and Cash Equivalents. Our objective is to maintain a low cash balance, investing any free cash
in leases and loans. We generally fund our originations and growth using advances under our
revolving bank facility, our CP conduit warehouse facility and brokered certificates of deposit.
Total cash and cash equivalents available as of September 30, 2008 was $17.2 million compared to
$34.3 million at December 31, 2007.
As of September 30, 2008, we also had $64.3 million of cash that was classified as restricted cash,
compared to $141.1 million at December 31, 2007. Restricted cash consists primarily of the
pre-funding cash reserve, and advance payment accounts related to our term note securitizations.
30
Borrowings. Our primary borrowing relationships each require the pledging of eligible lease and
loan receivables to secure amounts advanced. Borrowings outstanding under the Companys revolving
credit facilities and long-term debt consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2008 |
|
|
As of September 30, 2008 |
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
Month End |
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Facility |
|
|
Amount |
|
|
Amount |
|
|
Average |
|
|
Amount |
|
|
Average |
|
|
Unused |
|
|
|
Amount |
|
|
Outstanding |
|
|
Outstanding |
|
|
Coupon |
|
|
Outstanding |
|
|
Coupon |
|
|
Capacity |
|
|
|
(Dollars in thousands) |
|
Revolving bank facility(1) |
|
$ |
40,000 |
|
|
$ |
35,700 |
|
|
$ |
15,261 |
|
|
|
4.34 |
% |
|
$ |
34,828 |
|
|
|
4.10 |
% |
|
$ |
5,172 |
|
CP conduit warehouse
facilities(1) |
|
|
175,000 |
|
|
|
25,911 |
|
|
|
7,439 |
|
|
|
4.61 |
% |
|
|
19,933 |
|
|
|
5.70 |
% |
|
|
155,067 |
|
Term note securitizations(2) |
|
|
|
|
|
|
744,167 |
|
|
|
630,499 |
|
|
|
5.46 |
% |
|
|
511,153 |
|
|
|
5.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
215,000 |
|
|
|
|
|
|
$ |
653,199 |
|
|
|
5.42 |
% |
|
$ |
565,914 |
|
|
|
5.60 |
% |
|
$ |
160,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Subject to lease or loan eligibility and borrowing base formula. |
|
(2) |
|
Our term note securitizations are one-time fundings that pay down over time without
any ability for us to draw down additional amounts. |
Revolving Bank Facility
As of September 30, 2008 and December 31, 2007, the Company has a committed revolving line of
credit with several participating banks to provide up to $40.0 million in borrowings at LIBOR plus
a spread of 1.50% to 1.87%. The credit facility expires on March 31, 2009. There was $34.8 million
outstanding under this facility at September 30, 2008 and no balance outstanding at December 31,
2007. For the nine months ended September 30, 2008 and the year ended December 31, 2007, the
Company incurred commitment fees on the unused portion of the credit facility of $114,000 and
$186,000, respectively.
CP Conduit Warehouse Facilities
We have a Commercial Paper (CP) conduit warehouse facility that allows us to borrow, repay and
re-borrow based on a borrowing base formula. In these transactions, we transfer pools of leases and
interests in the related equipment to special purpose, bankruptcy remote subsidiaries. These
special purpose entities in turn pledge their interests in the leases and related equipment to an
unaffiliated conduit entity, which generally issues commercial paper to investors. The warehouse
facility allows the Company on an ongoing basis to transfer lease receivables to a wholly-owned,
bankruptcy remote, special purpose subsidiary of the Company, which issues variable-rate notes to
investors carrying an interest rate equal to the rate on commercial paper issued to fund the notes
during the interest period.
The facility requires that the Company limit its exposure to adverse interest rate movements on the
variable-rate notes through entering into interest-rate cap agreements.
00-A Warehouse Facility This facility totaled $125 million and expired in March 2008. The
Company decided not to seek renewal of the facility, due to the availability of more diversified
funding options at more favorable terms as a result of the opening of Marlin Business Bank. There
were no outstanding borrowings under the 00-A Warehouse Facility at September 30, 2008 and December
31, 2007, and no outstanding borrowings during the nine months ended September 30, 2008.
02-A Warehouse Facility This facility totals $175 million and expires in March 2009. This
facility has the ability to utilize both leases and business capital loan products in the borrowing
base. There were $19.9 million outstanding borrowings under this facility at September 30, 2008
and there were no outstanding borrowings under this facility at December 31, 2007. For the nine
months ended September 30, 2008, the weighted average interest rate was 4.61%. For the year ended
December 31, 2007, the weighted average interest rate was 5.84%.
31
Term Note Securitizations
Since our founding, we have completed nine on-balance-sheet term note securitizations of which
three remain outstanding. In connection with each securitization transaction, we have transferred
leases to our wholly-owned, special purpose bankruptcy remote subsidiaries and issued term debt
collateralized by such commercial leases to institutional investors in private securities
offerings. Our term note securitizations differ from our CP conduit warehouse facility primarily in
that our term note securitizations have fixed terms, fixed interest rates and fixed principal
amounts. Our securitizations do not qualify for sales accounting treatment due to certain call
provisions that we maintain and because the special purpose entities also hold residual assets.
Accordingly, assets and the related debt of the special purpose entities are included in our
Consolidated Balance Sheets. Our leases and restricted cash are assigned as collateral for these
borrowings and there is no further recourse to the general credit of the Company. By entering into
term note securitizations, we reduce outstanding borrowings under our CP conduit warehouse facility
and revolving bank facility, which increases the amounts available to us under these facilities to
fund additional lease originations. Failure to periodically pay down the outstanding borrowings
under our revolving bank facility or CP conduit warehouse facility, or increase such facilities,
would significantly limit our ability to grow our lease portfolio. At September 30, 2008 and at
December 31, 2007, outstanding term securitizations amounted to $511.2 million and $773.1 million,
respectively.
On October 24, 2007, we closed on the issuance of our ninth term note securitization transaction in
the amount of $440.5 million. This issuance has a similar structure to our 2006 term
securitization with seven different classes of notes. Each class of notes has its own interest
rate, repayment term and rating. The weighted average interest coupon of the 2007 term
securitization will approximate 5.70% over the term of the financing. We entered into
forward-starting interest-rate swap agreements in advance of pricing our 2007 term securitization
to hedge against rising interest rates. The Company terminated these swap agreements simultaneously
with the pricing of the term securitization issued in October 2007 and is amortizing the realized
losses of $2.7 million to increase recorded interest expense over the term of the related
borrowing. As a result of hedging activity and other transaction costs, we expect total interest
expense on the 2007 term transaction to approximate an average of 6.32% over the term of the
borrowing.
On September 21, 2006, we closed on the issuance of our eighth term note securitization transaction
in the amount of $380.2 million. This issuance has a similar structure to our 2005 term
securitization with six different classes of notes. Each class of notes has its own interest rate,
repayment term and rating. The weighted average interest coupon of the 2006 term securitization
will approximate 5.51% over the term of the financing. We entered into forward-starting
interest-rate swap agreements in advance of pricing our 2006 term securitization to hedge against
rising interest rates. The Company terminated these swap agreements simultaneously with the
pricing of the term securitization issued in September 2006 and is amortizing the realized gains of
$3.7 million to reduce recorded interest expense over the term of the related borrowing. As a
result of hedging activity and other transaction costs, we expect total interest expense on the
2006 term transaction to approximate an average of 5.21% over the term of the borrowing.
Financial Covenants
Under the revolving bank facility, CP conduit warehouse facility and term securitization
agreements, the Company is subject to numerous covenants, restrictions and default provisions. Some
of the critical financial and credit quality covenants under our borrowing arrangements as of
September 30, 2008 include:
|
|
|
|
|
|
|
|
|
|
|
Actual(1) |
|
Requirement |
Tangible net worth minimum |
|
$139.5 million |
|
$89.4 million |
Debt-to-equity ratio maximum |
|
|
4.22 to 1 |
|
|
|
10 to 1 |
|
Four-quarter rolling average
interest coverage ratio minimum |
|
|
2.94 to 1 |
|
|
|
1.50 to 1 |
|
Three-month rolling average
lease portfolio charge-off
ratio maximum |
|
|
3.28 |
% |
|
|
4.25 |
% |
Minimum quarterly net income
(loss) |
|
$1.1 million |
|
|
($100,000 |
) |
|
|
|
(1) |
|
Calculations are based on specific contractual definitions and subsidiaries per the
applicable debt agreements, which may differ from ratios or amounts presented elsewhere in this
document. |
A change in the Chief Executive Officer or Chief Operating Officer is an event of default under the
revolving bank facility and CP conduit warehouse facility unless a replacement acceptable to the
Companys lenders is hired within 90 days. Such an event is also an
32
immediate event of service
termination under the term securitizations. A merger or consolidation with another company in which
the Company is not the surviving entity is an event of default under the financing facilities. In
addition, both the revolving bank facility and the CP conduit warehouse facility contain cross
default provisions whereby certain defaults under one facility would also be an event of default
under the other facility. An event of default under the revolving bank facility or CP conduit
warehouse facility could result in termination of further funds being available under such
facility. 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.
None of the Companys debt facilities contain subjective acceleration clauses allowing the creditor
to accelerate the scheduled maturities of the obligation under conditions that are not objectively
determinable (for example, if a material adverse change occurs).
As of September 30, 2008, the Company was in compliance with the terms of the revolving bank
facility, the CP conduit warehouse facility and the term securitization agreements.
Marlin Business Bank (Bank)
On March 12, 2008, we announced the opening of Marlin Business Bank, after receiving approval from
the Federal Deposit Insurance Corporation (FDIC) for federal deposit insurance. The Bank, an
industrial bank chartered by the State of Utah, is wholly owned by Marlin Business Services Corp.
In addition to further diversifying our funding sources, over time the Bank may add other product
offerings to better serve our customer base. The Bank is subject to FDIC and Utah Department of
Financial Institutions rules and regulations as described below in Bank Capital and Regulatory
Oversight.
On October 21, 2008, Marlin Business Bank filed an application with the Utah Department of
Financial Institutions to convert its charter from an Industrial Bank to a state chartered
Commercial Bank. As part of the charter conversion process, Marlin Business Bank intends to file
an application for membership in the Federal Reserve System, and the Company intends to file an
application with the Federal Reserve to become a bank holding company under the Bank Holding
Company Act of 1956, as amended.
Subject to regulatory and soundness considerations, the Bank is expected to provide up to $69
million in origination funding capacity in its first year of operations, up to $90 million in its
second year, and up to $105 million in its third year and beyond.
Initially, FDIC-insured deposits are being raised via the brokered certificates of deposit market.
All deposits will be transacted via telephone, mail, and/or ACH and wire transfer. There will be
limited, if any, face-to-face interaction with deposit and lease/loan customers in the Banks
office. The Banks initial asset product offering will consist of small-ticket leasing and loans
similar to what we originate currently. During the three months ended June 30, 2008, the Bank
purchased $48.0 million in leases and loans from Marlin Leasing Corporation, funded primarily by
$43.6 million of brokered certificates of deposit. During the three months ended September 30,
2008, the Bank originated $11.3 million in leases and loans. For the three months ended June 30,
2008, average term certificates of deposit outstanding were $15.8 million at a weighted average
interest rate of 4.17%. For the three months ended September 30, 2008, average term certificates of
deposit outstanding were $43.9 million at a weighted average interest rate of 4.13%. We have
assembled a team of experienced bank managers and directors to provide leadership for the Bank.
Many of the operational aspects of the Bank are outsourced to Marlin Leasing Corporation.
Bank Capital and Regulatory Oversight
As a result of the approval from the FDIC, the Bank, a depository institution, is subject to
regulatory oversight and examination by both the FDIC and the Utah Department of Financial
Institutions. Under its banking charter, the Bank may make loans and leases and may accept all
FDIC-insured deposits other than demand deposits such as checking accounts. Conditions contained in
the FDICs approval as well as certain federal and state regulations apply to a broad range of
banking activities and practices, including minimum capital standards, maintenance of reserves and
the terms on which a bank may engage in transactions with its affiliates. In addition, the FDIC has
regulatory authority under the Financial Institutions Supervisory Act (FISA) to prohibit the Bank
from engaging in any unsafe or unsound practice in conducting its business.
Capital Requirements. The Bank 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. Under the rules and regulations of the FFIEC, at least half of a banks total capital is
required to be Tier I capital, comprised of common equity, retained earnings and a limited amount
of non-cumulative perpetual preferred stock. The remaining capital, Tier II capital, may consist
of other preferred stock, a limited amount of term subordinated debt or a limited amount of the
reserve for possible credit losses. The FFIEC has also adopted minimum leverage ratios for banks,
which are calculated by dividing Tier I capital
33
by total quarterly average assets. Recognizing that
the risk-based capital standards principally address credit risk rather than interest rate,
liquidity, operational or other risks, many banks are expected to maintain capital in excess of the
minimum standards. The Company will provide the necessary capital to maintain the Bank at well-capitalized status as
defined by banking regulations. The Banks equity balance at September 30, 2008 was $12.9 million,
which qualifies for well-capitalized status. At September 30, 2008, the Banks Tier 1 leverage
ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 22.25%, 21.54% and
22.79%, respectively, compared to requirements for well-capitalized status of 5%, 6% and 10%,
respectively.
Prompt Corrective Action. The FDIC Improvement Act of 1991 (FDICIA) requires, among other things,
federal bank regulatory authorities to take prompt corrective action with respect to FDIC-insured
institutions that do not meet certain minimum capital requirements. To be well-capitalized under
the prompt corrective action provisions, a bank must have a ratio of combined Tier I and Tier II
capital to risk-weighted assets of not less than 10%, a ratio of Tier I capital to risk-weighted
assets of not less than 6%, and a ratio of Tier I capital to average assets of not less than 5%.
Pursuant to the Order issued by the FDIC on March 20, 2007 (the Order), the Bank was required to
have beginning paid-in capital funds of not less than $12.0 million.
Pursuant to certain provisions of FDICIA and related regulations with respect to prompt corrective
action, FDIC-insured institutions, such as the Bank, may only accept brokered deposits without FDIC
permission if they meet specified capital standards. FDIC-insured institutions are also subject to
restrictions with respect to the interest they may pay on brokered deposits unless they are
well-capitalized.
Dividends. The Bank may supply funds to its parent company or affiliates, subject to certain legal
limitations contained in Utah state law. Under Utah law, an industrial bank may declare a dividend
out of net profits after providing for all expenses, losses, interest and taxes accrued or due and
after complying with required transfers to surplus accounts. In addition, it is possible that the
FDIC, pursuant to its authority under FISA, could claim that a dividend payment might under some
circumstances be an unsafe or unsound practice. Pursuant to the Order, the Bank shall pay no
dividends during the first three years of operations without the prior written approval of the FDIC
and the State of Utah.
Transfers of Funds and Transactions with Affiliates. Sections 23A and 23B of the Federal Reserve
Act and applicable regulations impose restrictions on the Bank that limit the transfer of funds by
the Bank to the Company and certain of its affiliates, in the form of loans, extensions of credit,
investments or purchases of assets. These transfers by the Bank to the Company or any other single
affiliate are limited in amount to 10% of the Banks capital and surplus, and transfers to all
affiliates are limited in the aggregate to 20% of the Banks capital and surplus. These loans and
extensions of credit are also subject to various collateral requirements. Sections 23A and 23B of
the Federal Reserve Act and applicable regulations also require generally that the Banks
transactions with its affiliates be on terms no less favorable to the Bank than comparable
transactions with unrelated third parties. The Bank completed de novo purchases totaling
approximately $48.0 million of eligible leases and loans from Marlin Leasing Corporation during the
second quarter of 2008, which completed the anticipated de novo transactions allowed by the Order.
Restrictions on Ownership. Subject to certain exceptions, the Change in Bank Control Act of 1978,
as amended, prohibits a person or group of persons from acquiring control of a bank holding
company unless the FDIC has been notified 60 days prior to such acquisition and has not objected to
the transaction. Under a rebuttable presumption in the Change in Bank Control Act, the acquisition
of 10% or more of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, such as the Company, would,
under the circumstances set forth in the presumption, constitute acquisition of control of the bank
holding company. The regulations provide a procedure for challenging this rebuttable control
presumption.
Information on Stock Repurchases
On November 2, 2007, the Board of Directors approved a stock repurchase plan. Under this program,
the Company is authorized to repurchase up to $15 million of its outstanding shares of common
stock. This authority may be exercised from time to time and in such amounts as market conditions
warrant. Any shares purchased under this plan are returned to the status of authorized but unissued
shares of common stock. The repurchases may be made on the open market, in block trades or
otherwise. The program may be suspended or discontinued at any time. The stock repurchases are
funded using the Companys working capital.
34
The number of shares of common stock repurchased by the Company during the third quarter of 2008
and the average price paid per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Approximate |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Shares that May Yet |
|
|
|
|
|
|
|
|
|
|
Part of a Publicly |
|
be Purchased Under |
|
|
Number of Shares |
|
Average Price |
|
Announced Plan or |
|
the Plans or |
Time Period |
|
Purchased |
|
Paid Per Share(1) |
|
Program |
|
Programs |
July 1, 2008 to
July 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,902,895 |
|
August 1, 2008 to
August 31, 2008 |
|
|
62,015 |
|
|
$ |
8.06 |
|
|
|
62,015 |
|
|
|
11,402,903 |
|
September 1, 2008 to
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,402,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the quarter
ended September 30,
2008 |
|
|
62,015 |
|
|
$ |
8.06 |
|
|
|
62,015 |
|
|
|
11,402,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average price paid per share includes commissions and is rounded to the nearest two
decimal places. |
In addition to the repurchases disclosed 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 296 shares repurchased pursuant to the 2003 Plan during the third quarter of 2008, at an
average cost of $8.28.
Contractual Obligations
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 securitizations, operating leases and commitments under non-cancelable contracts as of
September 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Leased |
|
|
Capital |
|
|
|
|
Period Ending December 31, |
|
Borrowings |
|
|
Interest(1) |
|
|
Leases |
|
|
Facilities |
|
|
Leases |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
2008 |
|
$ |
117,453 |
|
|
$ |
13,379 |
|
|
$ |
3 |
|
|
$ |
445 |
|
|
$ |
3 |
|
|
$ |
131,283 |
|
2009 |
|
|
219,401 |
|
|
|
17,062 |
|
|
|
16 |
|
|
|
1,779 |
|
|
|
11 |
|
|
|
238,269 |
|
2010 |
|
|
136,186 |
|
|
|
7,785 |
|
|
|
12 |
|
|
|
1,624 |
|
|
|
3 |
|
|
|
145,610 |
|
2011 |
|
|
68,841 |
|
|
|
2,622 |
|
|
|
5 |
|
|
|
1,484 |
|
|
|
|
|
|
|
72,952 |
|
2012 |
|
|
23,158 |
|
|
|
383 |
|
|
|
|
|
|
|
1,514 |
|
|
|
|
|
|
|
25,055 |
|
Thereafter |
|
|
875 |
|
|
|
5 |
|
|
|
|
|
|
|
655 |
|
|
|
|
|
|
|
1,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
565,914 |
|
|
$ |
41,236 |
|
|
$ |
36 |
|
|
$ |
7,501 |
|
|
$ |
17 |
|
|
$ |
614,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest on term note securitizations only. Excludes interest on $54.8
million of revolving bank facility and CP conduit warehouse facility. |
MARKET INTEREST RATE RISK AND SENSITIVITY
Market risk is the risk of losses arising from changes in values of financial instruments. We
engage in transactions in the normal course of business that expose us to market risks. We attempt
to mitigate such risks through prudent management practices and strategies such as attempting to
match the expected cash flows of our assets and liabilities.
We are exposed to market risks associated with changes in interest rates and our earnings may
fluctuate with changes in interest rates. The lease assets we originate are almost entirely
fixed-rate. Accordingly, we generally seek to finance these assets with fixed interest cost term
note securitization borrowings that we issue periodically. Between term note securitization
issues, we finance our new lease originations through a combination of variable-rate warehouse
facilities and working capital. Our mix of fixed- and variable-rate borrowings and our exposure to
interest rate risk changes over time. Over the past twelve months, the mix of variable-rate
borrowings to total borrowings has ranged from zero to 9.68%, and averaged 1.4%. Our highest
exposure to variable-rate borrowings generally occurs just prior to the issuance of a term note
securitization.
We use derivative financial instruments to attempt to further reduce our exposure to changing cash
flows caused by possible changes in interest rates. We use forward starting interest-rate swap
agreements to reduce our exposure to changing market interest rates prior to
35
issuing a term note
securitization. In this scenario, we usually enter into a forward starting swap to coincide with
the forecasted pricing date of future term note securitizations. The intention of this derivative
is to reduce possible variations in future cash flows caused by
changes in interest rates prior to our forecasted securitization. The value of the derivative
contract correlates with the movements of interest rates, and we may choose to hedge all or a
portion of forecasted transactions.
Prior to July 1, 2008, these interest-rate swap agreements were designated and accounted for as
cash flow hedges of specific term note securitization transactions, as prescribed by SFAS No. 133.
Under hedge accounting, the effective portion of the gain or loss on a derivative designated as a
cash flow hedge was reported net of tax effects in accumulated other comprehensive income on the
Consolidated Balance Sheets, until the pricing of the related term securitization. The derivative
gain or loss recognized in accumulated other comprehensive income is then reclassified into
earnings as an adjustment to interest expense over the terms of the related borrowings.
While the Company may continue to use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge
accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the
fair value of derivative instruments, including those that had previously been accounted for under
hedge accounting, is recognized immediately in gain (loss) on derivatives and hedging activities.
This change creates volatility in our results of operations, as the market value of our derivative
financial instruments changes over time, and this volatility may adversely impact our results of
operations and financial condition.
For the forecasted transactions that are probable of occurring, the derivative gain or loss in
accumulated other comprehensive income as of June 30, 2008 will be reclassified into earnings as an
adjustment to interest expense over the terms of the related forecasted borrowings, consistent
with hedge accounting treatment. In the event that the related forecasted borrowing is no longer
probable of occurring, the related gain or loss in accumulated other comprehensive income is
recognized in earnings immediately.
At September 30, 2008, the Company concluded that certain forecasted transactions were not probable
of occurring on the anticipated date or in the additional time period permitted by SFAS 133. As a
result, a $1.1 million pretax ($674,000 after tax) loss was reclassified from accumulated other
comprehensive income into loss on derivatives and hedging activities for the three months ended
September 30, 2008 for the related cash flow hedges.
In July 2004, we issued a term note securitization with certain classes of notes issued at variable
rates to investors. We simultaneously entered into interest-rate swap contracts to convert these
borrowings to a fixed interest cost to the Company for the term of the borrowing. These
interest-rate swap agreements are designated as cash flow hedges of the term note securitization.
The fair value is recorded in other assets or other liabilities on the Consolidated Balance Sheets,
and unrealized gains or losses are recorded in the equity section of the Consolidated Balance
Sheets. During the first quarter of 2008, these interest-rate swap agreements reached their
contractual expiration dates, concurrent with the maturing of the related borrowings.
The following tables summarize specific information regarding the active and terminated
interest-rate swap agreements described above:
For Active Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception Date |
|
March, 2008 |
|
January, 2008 |
|
December, 2007 |
|
August, 2007 |
|
August, 2006 |
|
July, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commencement Date |
|
October, 2009 |
|
October, 2009 |
|
October, 2009 |
|
October, 2008 |
|
October, 2008 |
|
July, 2004 |
|
|
(Dollars in thousands) |
Notional amount: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
25,000 |
|
|
$ |
25,000 |
|
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
$ |
50,000 |
|
|
$ |
|
|
December 31, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
$ |
3,066 |
|
For active agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value recorded in other assets (liabilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
199 |
|
|
$ |
(58 |
) |
|
$ |
(531 |
) |
|
$ |
(2,659 |
) |
|
$ |
(1,678 |
) |
|
$ |
|
|
December 31, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
(46 |
) |
|
$ |
(2,010 |
) |
|
$ |
(2,704 |
) |
|
$ |
4 |
|
Unrealized gain (loss), net of tax, recorded in
equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
246 |
|
|
$ |
93 |
|
|
$ |
190 |
|
|
$ |
(629 |
) |
|
$ |
(857 |
) |
|
$ |
|
|
December 31, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
(28 |
) |
|
$ |
(1,213 |
) |
|
$ |
(1,632 |
) |
|
$ |
2 |
|
36
For Terminated Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception Date |
|
August, 2006 |
|
August 2006/August
2007 |
|
June/September,
2005 |
|
October/December,
2004 |
|
Commencement Date |
|
October, 2008 |
|
October, 2007 |
|
September, 2006 |
|
August, 2005 |
|
Termination Date |
|
September, 2008 |
|
October, 2007 |
|
September, 2006 |
|
August, 2005 |
|
|
(Dollars in thousands) |
Notional amount |
|
$ |
50,000 |
|
|
$ |
300,000 |
|
|
$ |
225,000 |
|
|
$ |
250,000 |
|
Realized gain (loss) at termination |
|
$ |
(1,595 |
) |
|
$ |
(2,683 |
) |
|
$ |
3,732 |
|
|
$ |
3,151 |
|
Deferred gain (loss), net of tax,
recorded in equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
(874 |
) |
|
$ |
(921 |
) |
|
$ |
516 |
|
|
$ |
54 |
|
December 31, 2007 |
|
$ |
|
|
|
$ |
(1,462 |
) |
|
$ |
974 |
|
|
$ |
229 |
|
Amortization recognized as increase
(decrease) in interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2008 |
|
$ |
|
|
|
$ |
898 |
|
|
$ |
(759 |
) |
|
$ |
(292 |
) |
Year ended December 31, 2007 |
|
$ |
|
|
|
$ |
255 |
|
|
$ |
(1,543 |
) |
|
$ |
(749 |
) |
Expected amortization during next 12
months as increase (decrease) in interest
expense |
|
$ |
616 |
|
|
$ |
794 |
|
|
$ |
(611 |
) |
|
$ |
(89 |
) |
The Company recorded a loss on derivatives and hedging activities in non-interest income for the
periods indicated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Change in fair value of derivative contracts |
|
$ |
(2,160 |
) |
|
$ |
|
|
|
$ |
(2,160 |
) |
|
$ |
|
|
Cash flow hedging losses on forecasted
transactions no longer probable of
occurring(1) |
|
|
(1,120 |
) |
|
|
|
|
|
|
(1,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives and hedging activities |
|
$ |
(3,280 |
) |
|
$ |
|
|
|
$ |
(3,280 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reclassified from accumulated other comprehensive income |
The Company also uses interest-rate cap agreements that are not designated for hedge accounting
treatment to fulfill certain covenants in its special purpose subsidiarys warehouse borrowing
arrangements. Accordingly, these cap agreements are recorded at fair value in other assets at
$286,000 and $182,000 as of September 30, 2008 and December 31, 2007, respectively. The notional
amount of interest-rate caps owned as of September 30, 2008 and December 31, 2007 was $181.4
million and $227.0 million, respectively. Changes in the fair values of the caps are recorded in
financing related costs in the accompanying Consolidated Statements of Operations.
The Company also sells interest-rate caps to partially offset the interest-rate caps required to be
purchased by the Companys special purpose subsidiary under its warehouse borrowing arrangements.
These sales generate premium revenues to partially offset the premium cost of purchasing the
required interest-rate caps. On a consolidated basis, the interest-rate cap positions sold
partially offset the interest-rate cap positions owned. As of September 30, 2008 and December 31,
2007, the notional amount of interest-rate cap agreements sold totaled $178.0 million and $214.8
million, respectively. The fair value of interest-rate caps sold is recorded in other liabilities
at $286,000 and $182,000 as of September 30, 2008 and December 31, 2007, respectively. Changes in
the fair values of the caps are recorded in financing related costs in the accompanying
Consolidated Statements of Operations.
37
The following table presents the scheduled principal repayment of our debt and the related weighted
average interest rates as of
September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturities by Calendar Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 & |
|
Carrying |
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
Amount |
|
|
(Dollars in thousands) |
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
$ |
62,692 |
|
|
$ |
219,401 |
|
|
$ |
136,186 |
|
|
$ |
68,841 |
|
|
$ |
24,033 |
|
|
$ |
511,153 |
|
Average fixed rate |
|
|
5.50 |
% |
|
|
5.70 |
% |
|
|
5.93 |
% |
|
|
6.24 |
% |
|
|
6.78 |
% |
|
|
5.86 |
% |
Variable-rate debt |
|
$ |
54,761 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
54,761 |
|
Average variable rate |
|
|
4.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.68 |
% |
Our earnings are sensitive to fluctuations in interest rates. Our warehouse facility charges
variable rates of interest based on LIBOR, prime rate or commercial paper interest rates. Because
our assets are predominately fixed-rate, increases in these market interest rates would negatively
impact earnings and decreases in the rates would positively impact earnings because the rate
charged on our borrowings would change faster than our assets could reprice. We would have to
offset increases in borrowing costs by adjusting the pricing under our new leases or our net
interest margin would be reduced. There can be no assurance that we will be able to offset higher
borrowing costs with increased pricing of our assets.
For example, the impact of a hypothetical 100 basis point, or 1.00%, increase in the market rates
for which our borrowings are indexed for the twelve month period ended September 30, 2008 would
have been to reduce net interest and fee income by approximately $170,000 based on our average
variable-rate borrowings of approximately $17.0 million for the twelve months then ended, excluding
the effects of any changes in the value of derivatives, taxes and possible increases in the yields
from our lease and loan portfolios due to the origination of new contracts at higher interest
rates.
We manage and monitor our exposure to interest rate risk using balance sheet simulation models.
Such models incorporate many of our assumptions about our business including new asset production
and pricing, interest rate forecasts, overhead expense forecasts and assumed credit losses. Past
experience drives many of the assumptions we use in our simulation models and actual results could
vary substantially.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines
fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or
permit fair value measurements, in which the Board previously concluded in those pronouncements
that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require
any new fair value measurements. The changes to current practice resulting from the application of
this Statement relate to the definition of fair value, the methods used to measure fair value, and
the expanded disclosures about fair value measurements. SFAS No. 157, however, does not apply under
accounting pronouncements that address share-based payment transactions, including SFAS No. 123(R)
and its related interpretative pronouncements. The provisions of SFAS No. 157, as amended by FASB
Staff Position FAS 157-1, also exclude provisions of SFAS No. 13, Accounting for Leases, and other
accounting pronouncements that address fair value measurements for purposes of lease classification
or measurement under SFAS No. 13. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company adopted SFAS No. 157 effective January 1, 2008. The adoption of SFAS
No. 157 did not have a material impact on the consolidated earnings, financial position or cash
flows of the Company. However, it resulted in additional disclosures as presented in Note 10 to the
Consolidated Financial Statements.
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115. This Statement permits an
entity to irrevocably elect to report selected financial assets and liabilities at fair value, with
subsequent changes in fair value reported in earnings. The election may be applied on an
instrument-by-instrument basis. The Statement also establishes additional presentation and
disclosure requirements for items measured using the fair value option. SFAS No. 159 is effective
for all financial statements issued for fiscal years beginning after November 15, 2007. At this
time, the Company has not elected to report any assets and liabilities using the fair value option
available under SFAS No. 159.
On June 16, 2008, the FASB issued FASB Staff Position (FSP) No. Emerging Issues Task Force
(EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities, which concluded that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
38
participating securities and shall be included in the computation of EPS pursuant to the two-class
method. FSP No. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and
interim periods within those years. Upon adoption, a company is required to retrospectively adjust
its earnings per share data to conform with the provisions of FSP No. EITF 03-6-1. The Company is
currently evaluating the requirements of FSP EITF 03-6-1 and has not yet determined the impact on
the Companys condensed consolidated financial statements.
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 functioning effectively to provide
reasonable assurance that the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and (ii) accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions regarding
disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys third fiscal quarter of 2008 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
39
PART II. Other Information
Item 1. Legal Proceedings
We are party to various legal proceedings, which include claims and litigation arising in
the ordinary course of business. In the opinion of management, these actions will not have
a material adverse effect on our business, financial condition, results of operations or
cash flows.
Item 1A. Risk Factors
There have been no material changes in the risk factors from those disclosed in the
Companys Annual Report on Form 10-K for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information on Stock Repurchases
On November 2, 2007, the Board of Directors approved a stock repurchase plan. Under this program,
the Company is authorized to repurchase up to $15 million of its outstanding shares of common
stock. This authority may be exercised from time to time and in such amounts as market conditions
warrant. Any shares purchased under this plan are returned to the status of authorized but unissued
shares of common stock. The repurchases may be made on the open market, in block trades or
otherwise. The program may be suspended or discontinued at any time. The stock repurchases are
funded using the Companys working capital.
The number of shares of common stock repurchased by the Company during the third quarter of 2008
and the average price paid per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Approximate |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Shares that May Yet |
|
|
|
|
|
|
|
|
|
|
Part of a Publicly |
|
be Purchased Under |
|
|
Number of Shares |
|
Average Price |
|
Announced Plan or |
|
the Plans or |
Time Period |
|
Purchased |
|
Paid Per Share(1) |
|
Program |
|
Programs |
July 1, 2008 to
July 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,902,895 |
|
August 1, 2008 to
August 31, 2008 |
|
|
62,015 |
|
|
$ |
8.06 |
|
|
|
62,015 |
|
|
|
11,402,903 |
|
September 1, 2008 to
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,402,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the quarter
ended September 30,
2008 |
|
|
62,015 |
|
|
$ |
8.06 |
|
|
|
62,015 |
|
|
|
11,402,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Average price paid per share includes commissions and is rounded to the nearest two
decimal places. |
In addition to the repurchases disclosed 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 296 shares repurchased pursuant to the 2003 Plan during the third quarter of 2008, at an
average cost of $8.28.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote Of Security Holders
None
Item 5. Other Information
None
40
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
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) |
41
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 |
|
|
Daniel P. Dyer |
(Chief Executive Officer) |
|
|
|
|
|
|
|
|
By: |
/s/ Lynne C. Wilson
|
|
|
|
Lynne C. Wilson |
Chief Financial Officer & Senior Vice President (Principal Financial Officer) |
|
|
|
|
|
Date: November 4, 2008
42