e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31,
2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-50448
Marlin Business Services
Corp.
(Exact name of Registrant as
specified in its charter)
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Pennsylvania
(State of
incorporation)
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38-3686388
(I.R.S. Employer
Identification No.)
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300
Fellowship Road, Mount Laurel, NJ 08054
(Address
of principal executive offices)
Registrants
telephone number, including area code:
(888) 479-9111
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.01 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that registrant was required to submit and post such files.) Yes
o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant, based on the closing price of
such shares on the NASDAQ Global Select Market was approximately
$116,231,567 as of June 30, 2010. Shares of common stock
held by each executive officer and director and persons known to
us who beneficially own 5% or more of our outstanding common
stock have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of Registrants common stock
outstanding as of February 28, 2011 was
12,852,013 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement
related to the 2011 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days
of the close of Registrants fiscal year, are incorporated
by reference into Part III of this
Form 10-K.
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
FORM 10-K
INDEX
1
FORWARD-LOOKING
STATEMENTS
Certain statements in this document may include the words or
phrases can be, expects,
plans, may, may affect,
may depend, believe,
estimate, intend, could,
should, would, if and
similar words and phrases that constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the
1933 Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the
1934 Act). Forward-looking statements are
subject to various known and unknown risks and uncertainties and
the Company cautions that any forward-looking information
provided by or on its behalf is not a guarantee of future
performance. Statements regarding the following subjects are
forward-looking by their nature: (a) our business strategy;
(b) our projected operating results; (c) our ability
to obtain external financing; (d) the effectiveness of our
hedges; (e) our understanding of our competition; and
(f) industry and market trends. The Companys actual
results could differ materially from those anticipated by such
forward-looking statements due to a number of factors, some of
which are beyond the Companys control, including, without
limitation:
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availability, terms and deployment of funding and capital;
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general volatility of the securitization and capital markets;
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changes in our industry, interest rates, the regulatory
environment or the general economy resulting in changes to our
business strategy;
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the degree and nature of our competition;
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availability and retention of qualified personnel; and
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the factors set forth in the section captioned Risk
Factors in Item 1A of this Form
10-K.
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Forward-looking statements apply only as of the date made and
the Company is not required to update forward-looking statements
for subsequent or unanticipated events or circumstances.
As used herein, the terms Company,
Marlin, Registrant, we,
us or our refer to Marlin Business
Services Corp. and its subsidiaries.
PART I
Overview
We are a nationwide provider of equipment financing solutions
primarily to small and mid-sized businesses. We finance over 100
categories of commercial equipment important for the typical
small and mid-sized business customer, including copiers,
security systems, computers, telecommunications equipment and
certain commercial and industrial equipment. Our average lease
transaction was approximately $11,300 at December 31, 2010,
and we typically do not exceed $250,000 for any single lease
transaction. This under $250,000 segment of the equipment
leasing market is commonly known in the industry as the
small-ticket segment. We access our end user customers through
origination sources comprised of our existing network of over
9,200 independent commercial equipment dealers and, to a much
lesser extent, through direct solicitation of our end user
customers and through relationships with select lease brokers.
We use a highly efficient telephonic direct sales model to
market to our origination sources. Through these origination
sources, we are able to deliver convenient and flexible
equipment financing to our end user customers. Our typical
financing transaction involves a non-cancelable, full-payout
lease with payments sufficient to recover the purchase price of
the underlying equipment plus an expected profit. As of
December 31, 2010, we serviced approximately 72,000 active
equipment leases having a total original equipment cost of
$818.2 million for approximately 60,000 small and mid-sized
business customers.
The small-ticket equipment leasing market is highly fragmented.
We estimate that there are more than 100,000 independent
commercial equipment dealers who sell the types of equipment we
finance. We focus primarily on the segment of the market
comprised of the small and mid-size independent equipment
dealers. We believe this segment is underserved because:
(1) the large commercial finance companies and large
commercial banks typically
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concentrate their efforts on marketing their products and
services directly to equipment manufacturers and larger
distributors, rather than to independent equipment dealers; and
(2) many smaller commercial finance companies and regional
banking institutions have not developed the systems and
infrastructure required to adequately service these equipment
dealers on high volume, low-balance transactions. We focus on
establishing our relationships with independent equipment
dealers to meet their need for high-quality, convenient
point-of-sale
lease financing programs. We have the capabilities and expertise
to service large national accounts through our Strategic
National Accounts Program which provides dedicated resources
focused on exemplary service levels for select national
accounts. We provide equipment dealers with the ability to offer
our lease financing and related services to their customers as
an integrated part of their selling process, providing them with
the opportunity to increase their sales and provide better
customer service. We believe our personalized service approach
appeals to the independent equipment dealer by providing each
dealer with a single point of contact to access our flexible
lease programs, obtain rapid credit decisions and receive prompt
payment of the equipment cost. Our fully integrated account
origination platform enables us to solicit, process and service
a large number of low-balance financing transactions. From our
inception in 1997 to December 31, 2010, we have processed
approximately 692,000 lease applications and originated over
291,000 new leases.
On March 20, 2007, the Federal Deposit Insurance
Corporation (FDIC) approved the application of our
wholly-owned subsidiary, Marlin Business Bank (MBB),
to become an industrial bank chartered by the State of Utah. MBB
commenced operations effective March 12, 2008. MBB provides
diversification of the Companys funding sources and, over
time, may add other product offerings to better serve our
customer base.
On December 31, 2008, MBB received approval from the
Federal Reserve Bank of San Francisco to (i) convert
from an industrial bank to a state-chartered commercial bank and
(ii) become a member of the Federal Reserve System. In
addition, on December 31, 2008, Marlin Business Services
Corp. received approval from the Federal Reserve Bank of
Philadelphia to become a bank holding company upon conversion of
MBB from an industrial bank to a commercial bank. On
January 13, 2009, pursuant to the December 31, 2008
approval from the Federal Reserve Bank of San Francisco,
MBB converted from an industrial bank to a state-chartered
commercial bank chartered in the State of Utah and supervised by
the State of Utah and the Federal Reserve Board. In connection
with MBBs conversion to a commercial bank and pursuant to
the December 31, 2008 approval from the Federal Reserve
Bank of Philadelphia, on January 13, 2009 Marlin Business
Services Corp. became a bank holding company, and is subject to
the Bank Holding Company Act and supervised by the Federal
Reserve Board.
On September 15, 2010, the Federal Reserve Bank of
Philadelphia confirmed the effectiveness of Marlin Business
Services Corp.s election to become a financial holding
company (while remaining a bank holding company) pursuant to
Sections 4(k) and (l) of the Bank Holding Company Act
and Section 225.82 of the Federal Reserve Boards
Regulation Y. Such election permits Marlin Business
Services Corp. to engage in activities that are financial in
nature or incidental to a financial activity, including the
maintenance and expansion of our reinsurance activities
conducted through our wholly-owned subsidiary, AssuranceOne,
Ltd. (AssuranceOne).
Reorganization
and Initial Public Offering
Marlin Leasing Corporation was incorporated in Delaware on
June 16, 1997. On August 5, 2003, we incorporated
Marlin Business Services Corp. in Pennsylvania. On
November 11, 2003, we reorganized our operations into a
holding company structure by merging Marlin Leasing Corporation
with a wholly-owned subsidiary of Marlin Business Services Corp.
As a result, all former shareholders of Marlin Leasing
Corporation became shareholders of Marlin Business Services
Corp. Marlin Leasing Corporation remains in existence as our
primary operating subsidiary.
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our initial public offering
(IPO). Of these shares, a total of
3,581,255 shares were sold by the Company and
1,478,745 shares were sold by selling shareholders. The IPO
price was $14.00 per share resulting in net proceeds to us,
after payment of underwriting discounts and commissions but
before other offering costs, of approximately
$46.6 million. We did not receive any proceeds from the
shares sold by the selling shareholders.
3
Competitive
Strengths
We believe several characteristics may distinguish us from our
competitors, including the following:
Multiple Sales Origination Channels. We use
multiple sales origination channels to penetrate effectively the
highly diversified and fragmented small-ticket equipment leasing
market. Our direct origination channels, which account
for approximately 79% of the active lease contracts in our
portfolio, involve: (1) establishing relationships with
independent equipment dealers; (2) securing endorsements
from national equipment manufacturers and distributors to become
the preferred lease financing source for the independent dealers
who sell their equipment; and (3) soliciting our existing
end user customer base for repeat business. Our indirect
origination channels account for approximately 21% of the active
lease contracts in our portfolio and consist of our
relationships with brokers and certain equipment dealers who
refer transactions to us for a fee or sell leases to us that
they originate. In 2008, we took steps to reduce the portion of
our business that is derived from the indirect channels to focus
our origination resources on the more profitable direct
channels. During 2009, the Company discontinued substantially
all origination activity from indirect origination channels. In
2010, we resumed originations for selected indirect sources
whose historical portfolio with us has performed at our asset
quality and profit expectations. As a result, indirect business
represented 3% of 2010 originations, while direct business
represented 97%.
Highly Effective Account Origination
Platform. Our telephonic direct marketing
platform offers origination sources a high level of personalized
service through our team of 87 sales account executives, each of
whom acts as the single point of contact for his or her
origination sources. Our business model is built on a real-time,
fully integrated customer information database and a contact
management and telephony application that facilitate our account
solicitation and servicing functions.
Comprehensive Credit Process. We seek to
manage credit risk effectively at the origination source as well
as at the transaction and portfolio levels. Our comprehensive
credit process starts with the qualification and ongoing review
of our origination sources. Once the origination source is
approved, our credit process focuses on analyzing and
underwriting the end user customer and the specific financing
transaction, regardless of whether the transaction was
originated through our direct or indirect origination channels.
Portfolio Diversification. As of
December 31, 2010, no single end user customer accounted
for more than 0.14% of our portfolio and leases from our largest
origination source accounted for only 1.29% of our portfolio.
Our portfolio is also diversified nationwide with the largest
state portfolios existing in California (11%) and New York (10%).
Fully Integrated Information Management
System. Our business integrates information
technology solutions to optimize the sales origination, credit,
collection and account servicing functions. Throughout a
transaction, we collect a significant amount of information on
our origination sources and end user customers. The
enterprise-wide integration of our systems enables data
collected by one group, such as credit, to be used by other
groups, such as sales or collections, to better perform their
functions.
Sophisticated Collections Environment. Our
centralized collections department is structured to collect
delinquent accounts, minimize credit losses and maximize post
charge-off recovery dollars. Our collection strategy employs a
delinquency bucket segmentation approach, where certain
collectors are assigned to accounts based on their delinquency
status. The delinquency bucket segmentation approach allows us
to assign our more experienced collectors to the late stage
delinquent accounts. In addition, the collections department
utilizes specialist collectors who focus on delinquent late
fees, property taxes, bankruptcies and large balance accounts.
Access to Multiple Funding Sources. We have
established and maintained diversified funding capacity through
multiple facilities with national credit providers. Our
wholly-owned subsidiary, MBB, provides an additional funding
source, primarily through the issuance of certificates of
deposit insured through the FDIC raised nationally through
various brokered deposit relationships and FDIC-insured retail
deposits directly from other financial institutions. Our proven
ability to access funding consistently at competitive rates
through various economic cycles provides us with the liquidity
necessary to manage our business. (See Liquidity and Capital
Resources in Item 7).
4
Experienced Management Team. Our executive
officers have an average of more than 20 years of
experience in providing financing solutions primarily to small
and mid-sized businesses. As we have grown, we have expanded the
management team with a group of successful, seasoned executives.
Disciplined
Growth Strategy
Our primary objective is to enhance our current position as a
provider of equipment financing to small and mid-sized
businesses by pursuing a strategy focused primarily on organic
growth initiatives while actively managing credit risk. We seek
to maintain consistent credit quality standards while continuing
to pursue strategies designed to increase the number of
independent equipment dealers and other origination sources that
generate and develop lease customers. We also target strategies
to further penetrate our existing origination sources.
Personnel costs represent our most significant overhead expense
and we actively manage our staffing levels to the requirements
of our lease portfolio. As a financial services company, we
navigated through the challenging economic environment in 2008
and 2009 by tightening credit standards, reducing our workforce
and closing three satellite offices. However, as the economic
environment stabilized in 2010, we increased the number of our
sales account executives by 49, from 38 sales account executives
at December 31, 2009 to 87 at December 31, 2010. This
action was part of our plan to rebuild our sales organization to
increase originations and match the level of originations to our
current funding capacity. (See Operating Data in
Item 7.)
Asset
Originations
Overview of Origination Process. We access our
end user customers through our extensive network of independent
equipment dealers and, to a much lesser extent, through the
direct solicitation of our end user customers. We use a highly
efficient telephonic direct sales model to market to our
origination sources. Through these sources, we are able to
deliver convenient and flexible equipment financing to our end
user customers.
Our origination process begins with our database of thousands of
origination source prospects located throughout the United
States. We developed and continually update this database by
purchasing marketing data from third parties, such as
Dun & Bradstreet, Inc., by joining industry
organizations and by attending equipment trade shows. The
independent equipment dealers we target typically have had
limited access to lease financing programs, as the traditional
providers of this financing generally have concentrated their
efforts on equipment manufacturers and larger distributors.
The prospects in our database are systematically distributed to
our sales force for solicitation and further data collection.
Sales account executives access prospect information and related
marketing data through our contact management software. This
contact management software enables the sales account executives
to sort their origination sources and prospects by any data
field captured, schedule calling campaigns, fax marketing
materials, send
e-mails,
produce correspondence and documents, manage their time and
calendar, track activity, recycle leads and review management
reports. We have also integrated predictive dialer technology
into the contact management system, enabling our sales account
executives to create efficient calling campaigns to any subset
of the origination sources in the database.
Once a sales account executive converts a prospect into an
active relationship, that sales account executive becomes the
origination sources single point of contact for all
dealings with us. This approach, which is a cornerstone of our
origination platform, offers our origination sources a personal
relationship through which they can address all of their
questions and needs, including matters relating to pricing,
credit, documentation, training and marketing. This single point
of contact approach distinguishes us from our competitors, many
of whom require origination sources to interface with several
people in various departments, such as sales support, credit and
customer service, for each application submitted. Since many of
our origination sources have little or no prior experience in
using lease financing as a sales tool, our personalized, single
point of contact approach facilitates the leasing process for
them. Other key aspects of our platform aimed at facilitating
the lease financing process for the origination sources include:
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ability to submit applications via fax, phone, Internet, mail or
e-mail;
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credit decisions generally within two hours;
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one-page, plain-English form of lease for transactions under
$50,000;
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overnight or ACH funding to the origination source once all
lease conditions are satisfied;
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value-added services, such as application and portfolio
reporting, marketing support and sales training on the benefits
of financing;
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on-site or
telephonic training of the equipment dealers sales force
on leasing as a sales tool; and
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custom leases and programs.
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Of our 234 total employees as of December 31, 2010, we
employed 87 sales account executives, each of whom receives a
base salary and earns commissions based on his or her lease and
loan originations. We also have three employees dedicated to
marketing as of December 31, 2010.
Sales Origination Channels. We currently use
direct sales origination channels to penetrate effectively a
multitude of origination sources in the highly diversified and
fragmented small-ticket equipment leasing market. All sales
account executives use our telephonic direct marketing sales
model to solicit these origination sources and end user
customers.
Direct Channels. Our direct sales origination
channels, which account for approximately 79% of the active
lease contracts in our portfolio, involve:
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Independent Equipment Dealer
Solicitations. This origination channel focuses
on soliciting and establishing relationships with independent
equipment dealers in a variety of equipment categories located
across the United States. Our typical independent equipment
dealer has less than $7.0 million in annual revenues and
fewer than 40 employees. Service is a key determinant in
becoming the preferred provider of financing recommended by
these equipment dealers.
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Major and National Accounts. This channel
focuses on two specific areas of development: (i) national
equipment manufacturers and distributors, where we seek to
leverage their endorsements to become the preferred lease
financing source for their independent dealers, and
(ii) major accounts (distributors) with a consistent flow
of business that need a specialized marketing and sales platform
to convert more sales using a leasing option. Once a
relationship is established with a major or national account, it
is serviced by our sales account executives in the independent
equipment dealer channel or, in some cases, by a dedicated group
of account managers within our Strategic National Account
Program. This allows us to quickly and efficiently leverage the
relationship into new business opportunities with many new
distributors located nationwide.
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End User Customer Solicitations. This channel
focuses on soliciting our existing portfolio of approximately
60,000 end user customers for additional equipment leasing or
financing opportunities. We view our existing end user customers
as an excellent source for additional business for various
reasons, including (i) retained credit information;
(ii) consistent payment histories; and (iii) a
demonstrated propensity to finance their equipment.
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Indirect Channels. Our indirect origination
channels account for approximately 21% of the active lease
contracts in our portfolio and consist of our relationships with
lease brokers and certain equipment dealers who refer end user
customer transactions to us for a fee or sell us leases that
they originated with end user customers. We conduct our own
independent credit analysis on each end user customer in an
indirect lease transaction. We have written agreements with most
of our indirect origination sources whereby they provide us with
certain representations and warranties about the underlying
lease transaction. The origination sources in our indirect
channels generate leases that are similar to those generated by
our direct channels.
In 2008, we took steps to reduce the portion of our business
that is derived from the indirect channels to focus our
origination resources on the more profitable direct channels.
During 2009, the Company discontinued substantially all
origination activity from indirect origination channels. In
2010, we resumed originations for selected indirect vendors. As
a result, indirect business represented 3% of 2010 originations
while direct business represented 97%.
6
Sales
Recruiting, Training and Mentoring
Sales account executive candidates are screened for previous
sales experience and communication skills, phone presence and
teamwork orientation. Each new sales account executive undergoes
a comprehensive training program shortly after he or she is
hired. The training program covers the fundamentals of lease
finance and introduces the sales account executive to our
origination and credit policies and procedures. New sales
account executives also receive technical training on our
databases and our information management tools and techniques.
At the end of the program, the sales account executives are
tested to ensure they meet our standards. In addition to our
formal training program, sales account executives receive
extensive
on-the-job
training and mentoring. All sales account executives sit in
groups, providing newer sales account executives the opportunity
to learn first-hand from their more senior peers. In addition,
our sales managers frequently monitor and coach sales account
executives during phone calls, providing immediate feedback. Our
sales account executives also receive continuing education and
training, including periodic, detailed presentations on our
contact management system, underwriting guidelines and sales
enhancement techniques.
Product
Offerings
Equipment Leases. The types of lease products
offered by each of our sales origination channels share common
characteristics, and we generally underwrite our leases using
the same criteria. We seek to reduce the financial risk
associated with our lease transactions through the use of full
pay-out leases. A full pay-out lease provides that the
non-cancelable rental payments due during the initial lease term
are sufficient to recover the purchase price of the underlying
equipment plus an expected profit. The initial non-cancelable
lease term is equal to or less than the equipments
economic life. Initial terms generally range from 36 to
60 months. At December 31, 2010, the average original
term of the leases in our portfolio was approximately
50 months, and we had personal guarantees on approximately
38% of our leases. The remaining terms and conditions of our
leases are substantially similar, generally requiring end user
customers to, among other things:
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address any maintenance or service issues directly with the
equipment dealer or manufacturer;
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insure the equipment against property and casualty loss;
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pay or reimburse us for all taxes associated with the equipment;
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use the equipment only for business purposes; and
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make all scheduled payments regardless of the performance of the
equipment.
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We charge late fees when appropriate throughout the term of the
lease. Our standard lease contract provides that in the event of
a default, we can require payment of the entire balance due
under the lease through the initial term and can take action to
seize and remove the equipment for subsequent sale, refinancing
or other disposal at our discretion, subject to any limitations
imposed by law.
At the time of application, end user customers select a purchase
option that will allow them to purchase the equipment at the end
of the contract term for either one dollar, the fair market
value of the equipment or a specified percentage of the original
equipment cost. We seek to realize our recorded residual in
leased equipment at the end of the initial lease term by
collecting the purchase option price from the end user customer,
re-marketing the equipment in the secondary market or receiving
additional rental payments pursuant to the applicable
contracts renewal provision.
Property Insurance on Leased Equipment. Our
lease agreements specifically require the end user customers to
obtain all-risk property insurance in an amount equal to the
replacement value of the equipment and to designate us as the
loss payee on the policy. If the end user customer already has a
commercial property policy for its business, it can satisfy its
obligation under the lease by delivering a certificate of
insurance that evidences us as a loss payee under that policy.
At December 31, 2010, approximately 57% of our end user
customers insured the equipment under their existing policies.
For the others, we offer an insurance product through a master
property insurance policy underwritten by a third-party national
insurance company that is licensed to write insurance under our
program in all 50 states and the District of Columbia. This
master policy names us as the beneficiary for all of the
equipment insured under the policy and provides all-risk
coverage for the replacement cost of the equipment.
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In May 2000, we established AssuranceOne, our Bermuda-based,
wholly-owned captive insurance subsidiary, to enter into a
reinsurance contract with the issuer of the master property
insurance policy. Under this contract, AssuranceOne reinsures
100% of the risk under the master policy, and the issuing
insurer pays AssuranceOne the policy premiums, less claims,
premium tax and a ceding fee based on a percentage of annual net
premiums written. The reinsurance contract expires in May 2012.
On January 27, 2010, pursuant to an application filed with
the Bermuda Monetary Authority, AssuranceOne changed from a
Class 1 insurer to a Class 3 insurer under the Bermuda
Insurance Act of 1978, as amended. As a Class 3 insurer,
AssuranceOne is permitted to collect up to 50% off its premiums
in connection with insurance coverage on equipment unrelated to
the Company, meaning that, through AssuranceOne, we may offer an
insurance product to cover equipment not otherwise financed
through the Company.
Portfolio
Overview
At December 31, 2010, we had 72,000 active leases in our
portfolio, representing aggregate minimum lease payments
receivable of $389.2 million. With respect to our portfolio
at December 31, 2010:
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the average original lease transaction was approximately
$11,300, with an average remaining balance of approximately
$5,400;
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the average original lease term was approximately 50 months;
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our active leases were spread among approximately 60,000
different end user customers, with the largest single end user
customer accounting for only 0.14% of the aggregate minimum
lease payments receivable;
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over 81.6% of the aggregate minimum lease payments receivable
were with end user customers who had been in business for more
than five years;
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the portfolio was spread among 9,749 origination sources, with
the largest source accounting for only 1.29% of the aggregate
minimum lease payments receivable, and our 10 largest
origination sources accounting for only 9.8% of the aggregate
minimum lease payments receivable;
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there were over 100 different equipment categories financed,
with the largest categories set forth as follows, as a
percentage of the December 31, 2010 aggregate minimum lease
payments receivable:
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Equipment Category
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|
Percentage
|
|
Copiers
|
|
|
33.12
|
%
|
Security systems
|
|
|
6.78
|
%
|
Closed Circuit TV security systems
|
|
|
5.94
|
%
|
Computers
|
|
|
5.19
|
%
|
Telecommunications Equipment
|
|
|
5.17
|
%
|
Commercial & Industrial
|
|
|
3.66
|
%
|
Computer software
|
|
|
3.52
|
%
|
Water filtration systems
|
|
|
2.74
|
%
|
Restaurant equipment
|
|
|
2.56
|
%
|
Medical
|
|
|
2.14
|
%
|
Healthcare diagnostic
|
|
|
1.85
|
%
|
Cash registers
|
|
|
1.79
|
%
|
Automotive
|
|
|
1.54
|
%
|
All others (none more than 1.3)%
|
|
|
24.00
|
%
|
8
|
|
|
|
|
we had leases outstanding with end user customers located in all
50 states and the District of Columbia, with our largest
states of origination set forth below, as a percentage of the
December 31, 2010 aggregate minimum lease payments
receivable:
|
|
|
|
|
|
State
|
|
Percentage
|
|
California
|
|
|
11.46
|
%
|
New York
|
|
|
9.53
|
%
|
Florida
|
|
|
7.89
|
%
|
Texas
|
|
|
7.70
|
%
|
New Jersey
|
|
|
6.58
|
%
|
Pennsylvania
|
|
|
4.92
|
%
|
North Carolina
|
|
|
3.73
|
%
|
Georgia
|
|
|
3.39
|
%
|
South Carolina
|
|
|
3.29
|
%
|
Massachusetts
|
|
|
3.21
|
%
|
Illinois
|
|
|
2.88
|
%
|
Ohio
|
|
|
2.61
|
%
|
All others (none more than 2.20)%
|
|
|
32.81
|
%
|
Information
Management
A critical element of our business operations is our ability to
collect detailed information on our origination sources and end
user customers at all stages of a financing transaction and to
manage that information effectively so that it can be used
across all aspects of our business. Our information management
system integrates a number of technologies to optimize our sales
origination, credit, collection and account servicing functions.
Applications used across our business include:
|
|
|
|
|
a sales information database that: (1) summarizes
vital information on our prospects, origination sources,
competitors and end user customers compiled from third-party
data, trade associations, manufacturers, transaction information
and data collected through the sales solicitation process; and
(2) produces detailed reports using a variety of data
fields to evaluate the performance and effectiveness of our
sales account executives;
|
|
|
|
a call management reporting system that systematically
analyzes call activity patterns to improve inbound and outbound
calling campaigns for originations, collections and customer
service;
|
|
|
|
a credit performance database that stores extensive
portfolio performance data on our origination sources and end
user customers. Our credit staff has on-line access to this
information to monitor origination sources, end user customer
exposure, portfolio concentrations and trends and other credit
performance indicators;
|
|
|
|
predictive auto dialer technology that is used in both
the sales origination and collection processes to improve the
efficiencies by which these groups make their thousands of daily
phone calls;
|
|
|
|
imaging technology that enables our employees to retrieve
at their desktops all documents evidencing a lease transaction,
thereby further improving our operating efficiencies and service
levels; and
|
|
|
|
an integrated voice response unit that enables our end
user customers the opportunity to obtain quickly and efficiently
certain information from us about their accounts.
|
Our information technology platform infrastructure is industry
standard and fully scalable to support future growth. Our
systems are backed up nightly and a full set of data tapes is
sent to an off-site storage provider weekly. In addition, we
have contracted with a third party for disaster recovery
services.
9
Credit
Underwriting
Credit underwriting is separately performed and managed apart
from asset origination. Credit analysts are centralized in our
New Jersey headquarters and at December 31, 2010 we had a
total of 15 analysts, each with an average of approximately
8 years of experience. Each credit analyst is measured
monthly against a discrete set of performance variables,
including decision turnaround time, performance metrics and
adherence to our underwriting policies and procedures.
Our typical financing transaction involves three parties: the
origination source, the end user customer and us. The key
elements of our comprehensive credit underwriting process
include the qualification and ongoing review of origination
sources, the performance of due diligence procedures on each end
user customer and the monitoring of overall portfolio trends and
underwriting standards.
Qualification and Ongoing Review of Origination
Sources. Each origination source is reviewed and
qualified by the credit analyst. The origination sources
credit information and references are reviewed as part of the
qualification process. Over time, our database has captured
credit profiles on thousands of origination sources. We
regularly track all applications and lease originations by
source, assessing whether the origination source has a high
application decline rate and analyzing the delinquency rates on
the leases originated through that source. Any unusual
situations that arise involving the origination source are noted
in the sources file. Each origination source is reviewed
on a regular basis using portfolio performance statistics as
well as any other information noted in the sources file.
We will place an origination source on watch status if its
portfolio performance statistics are consistently below our
expectations. If the origination sources statistics do not
improve in a timely manner, we often stop accepting applications
from that origination source.
End User Customer Review. Each end user
customers application is reviewed using our rules-based
set of underwriting guidelines that focus on commercial and
consumer credit data. These underwriting guidelines have been
developed and refined by our management team based on its
experience in extending credit to small and mid-sized
businesses. The guidelines are reviewed and revised as necessary
by our Senior Credit Committee, which is comprised of our Chief
Executive Officer, Chief Operating Officer, Chief Risk Officer,
Director of Credit and Vice President of Account Servicing. Our
underwriting guidelines require a thorough credit investigation
of the end user customer. The guidelines may also include an
analysis of the personal credit of the owner, who often
guarantees the transaction, and verification of the corporate
name and location. The credit analyst may also consider other
factors in the credit decision process, including:
|
|
|
|
|
length of time in business;
|
|
|
|
confirmation of actual business operations and ownership;
|
|
|
|
management history, including prior business experience;
|
|
|
|
size of the business, including the number of employees and
financial strength of the business;
|
|
|
|
third-party commercial reports;
|
|
|
|
legal structure of business; and
|
|
|
|
fraud indicators.
|
Transactions over $50,000 receive a higher level of scrutiny,
often including a review of financial statements or tax returns
and a review of the business purpose of the equipment to the end
user customer.
Within two hours of receipt of the application, the credit
analyst is usually ready to render a credit decision on
transactions less than $50,000. If there is insufficient
information to render a credit decision, a request for more
information will be made by the credit analyst. Credit approvals
are typically valid for up to a
90-day
period from the date of initial approval. In the event that the
funding does not occur within the initial approval period, a
re-approval may be issued after the credit analyst has
reprocessed all the relevant credit information to determine
that the creditworthiness of the applicant has not deteriorated.
In most instances after a lease is approved, a phone
verification with the end user customer is performed by us, or
in some instances by the origination source, prior to funding
the transaction. The purpose of this call is to verify
10
information on the credit application, review the terms and
conditions of the lease contract, confirm the customers
satisfaction with the equipment and obtain additional billing
information. We will delay paying the origination source for the
equipment if the credit analyst uncovers any material issues
during the phone verification.
Since mid-2009, we have been developing and implementing a
customized acquisition scorecard for use in our credit
decisioning process based on our database of historical
information. The scorecard has been, and will continue to be,
tested and validated on an ongoing basis by credit and
non-credit subject matter experts. The scorecards key
attributes and mathematical computations are periodically
modified. Our goal is to increase the scorecards use in
connection with new applications to further increase
efficiencies and consistency in the credit decisioning process.
Since its implementation, approximately 15% of credit decisions
made on new applications have been made using the scorecard.
Monitoring of Portfolio Trends and Underwriting
Standards. Credit personnel use our databases and
our information management tools to monitor the characteristics
and attributes of our overall portfolio. Reports are produced to
analyze origination source performance, end user customer
delinquencies, portfolio concentrations, trends and other
related indicators of portfolio performance. Any significant
findings are presented to the Senior Credit Committee for review
and action.
Our internal credit surveillance team is responsible for
ensuring that the credit department adheres to all underwriting
guidelines. The examinations conducted by this department are
designed to monitor our origination sources, the appropriateness
of exceptions to our underwriting guidelines and documentation
quality. Management reports are regularly generated by this
department detailing the results of these surveillance
activities.
Account
Servicing
We service all of the leases we originate. Account servicing
involves a variety of functions performed by numerous work
groups, including:
|
|
|
|
|
entering the lease into our accounting and billing system;
|
|
|
|
preparing the invoice information;
|
|
|
|
filing Uniform Commercial Code financing statements on leases in
excess of $25,000;
|
|
|
|
paying the equipment dealers for leased equipment;
|
|
|
|
billing, collecting and remitting sales, use and property taxes
to the taxing jurisdictions;
|
|
|
|
assuring compliance with insurance requirements; and
|
|
|
|
providing customer service to the leasing customers.
|
Our integrated lease processing and accounting systems automate
many of the functions associated with servicing high volumes of
small-ticket leasing transactions.
Collection
Process
Our centralized collections department is structured to collect
delinquent accounts, minimize credit losses and maximize
post-default recovery dollars. Our collection strategy employs a
delinquency bucket segmentation approach, where certain
collectors are assigned to accounts based on their delinquency
status. The collectors are individually accountable for their
results and a significant portion of their compensation is based
on the delinquency performance of their accounts. The
delinquency bucket segmentation approach allows us to assign our
more experienced collectors to the later stage delinquent
accounts.
Our collection activities begin with phone contact when a
payment becomes 10 days past due and continue throughout
the delinquency period. We utilize a predictive dialer that
automates outbound telephone dialing. The dialer is primarily
used to focus on and reduce the number of accounts that are
between 10 and 30 days delinquent. A collection notice is
sent once an account initially falls delinquent and then once an
account reaches the 31- to
60-day
delinquency stage, the 61- to
75-day
delinquency stage, the 76- to
90-day
delinquency stage and the over
90-day
delinquency stage. Collectors input notes directly into our
servicing system, enabling the collectors to monitor the
11
status of problem accounts and promptly take any necessary
actions. In addition, late charges are assessed when a leasing
customer fails to remit payment on a lease by its due date. If
the lease continues to be delinquent, we may exercise our
remedies under the terms of the contract, including acceleration
of the entire lease balance, litigation
and/or
repossession.
In addition, the collections department employs specialist
collectors who focus on delinquent late fees, property taxes,
bankruptcies and large balance accounts.
After an account becomes 120 days or more past due, it is
generally charged-off and referred to our internal recovery
group, consisting of a team of paralegals and collectors. The
group utilizes several resources in order to maximize recoveries
on charged-off accounts, including: (1) initiating
litigation against the end user customer and any personal
guarantor, using our internal legal staff; (2) referring
the account to an outside law firm or collection agency;
and/or
(3) repossessing and remarketing the equipment through
third parties.
At the end of the initial lease term, a customer may return the
equipment, continue leasing the equipment or purchase the
equipment for the amount set forth in the purchase option
granted to the customer. Our end of term department maintains a
team of employees who seek to realize our recorded residual in
the leased equipment at the end of the lease term.
Supervision
and Regulation
Although most states do not directly regulate the commercial
equipment lease financing business, certain states require
lenders and finance companies to be licensed, impose limitations
on certain contract terms and on interest rates and other
charges, mandate disclosure of certain contract terms and
constrain collection practices and remedies. Under certain
circumstances, we also may be required to comply with the Equal
Credit Opportunity Act and the Fair Credit Reporting Act. These
acts require, among other things, that we provide notice to
credit applicants of their right to receive a written statement
of reasons for declined credit applications. The Telephone
Consumer Protection Act of 1991 (TCPA) and similar
state statutes or rules that govern telemarketing practices are
generally not applicable to our
business-to-business
calling platform; however, we are subject to the sections of the
TCPA that regulate
business-to-business
facsimiles. The Fair and Accurate Transactions Act (FACT
Act) requires financial institutions to establish a
written program to implement Red Flag Guidelines,
which are intended to detect, prevent and mitigate identity
theft. The FACT Act also provides guidance regarding reasonable
policies and procedures that a user of consumer credit reports
must employ when a consumer reporting agency sends the user a
notice of address discrepancy.
Our insurance operations are subject to various types of
governmental regulation. Our wholly-owned insurance company
subsidiary, AssuranceOne, is a Class 3 Bermuda insurance
company and, as such, is subject to the Bermuda Insurance Act
1978, as amended, and related regulations.
Banking Regulation. On January 13, 2009,
in connection with the conversion of MBB from an industrial bank
to a commercial bank, we became a bank holding company by order
of the Federal Reserve Board and are subject to regulation under
the Bank Holding Company Act. In connection with this approval,
the Federal Reserve Board required the Company to identify any
of its activities or investments that were impermissible under
the Bank Holding Company Act, such as our reinsurance activities
conducted through AssuranceOne. Such activities or investments
were required to be terminated or conform to the Bank Holding
Company Act within two years of the approval (which meant that
we had to become a financial holding company). On
September 15, 2010, the Federal Reserve Bank of
Philadelphia confirmed the effectiveness of the Companys
election to become a financial holding company (while remaining
a bank holding company) pursuant to Sections 4(k) and
(l) of the Bank Holding Company Act and Section 225.82
of the Federal Reserve Boards Regulation Y. Based on
such confirmation, the Companys reinsurance activities
conducted through AssuranceOne are permissible and the Company
is permitted to expand such activities.
Since its opening on March 12, 2008, MBB has been operating
in accordance with the order issued by the FDIC on
March 20, 2007 (the FDIC Order) and in
accordance with certain requirements and conditions applicable
during its three-year de novo period. MBBs three-year de
novo period expired on March 12, 2011, as did certain of
the requirements and conditions that were applicable solely
during such period.
12
MBB is also subject to comprehensive federal and state
regulations dealing with a wide variety of subjects, including
reserve requirements, loan limitations, requirements governing
the establishment of branches and numerous other aspects of its
operations. These regulations generally have been adopted to
protect depositors and creditors rather than shareholders. All
of our subsidiaries may be subject to examination by the Federal
Reserve Board even if not otherwise regulated by the Federal
Reserve Board, subject to certain conditions in the case of
functionally regulated subsidiaries, such as
broker/dealers and registered investment advisers.
Regulations governing MBB restrict extensions of credit by such
institution to Marlin Business Services Corp. and, with some
exceptions, to other affiliates. For these purposes, extensions
of credit include loans and advances to and guarantees and
letters of credit on behalf of Marlin Business Services Corp.
and such affiliates. These regulations also restrict investments
by MBB in the stock or other securities of Marlin Business
Services Corp. and the covered affiliates, as well as the
acceptance of such stock or other securities as collateral for
loans to any borrower, whether or not related to Marlin Business
Services Corp.
Additional Activities. Bank holding companies
and their banking and non-banking subsidiaries have
traditionally been limited to the business of banking and
activities which are closely related thereto. The
Gramm-Leach-Bliley Act (GLB Act) expanded the
provisions of the Bank Holding Company Act by including a
section that permits bank holding companies to become financial
holding companies (which we did effective September 15,
2010, while remaining a bank holding company) and permits them
to engage in a full range of financial activities. A financial
holding company is permitted to engage in a wide variety of
activities deemed to be financial in nature
including lending, exchanging, transferring, investing for
others, or safeguarding money or securities, providing
financial, investment or economic advisory services and
underwriting, dealing in, or making a market in securities.
Capital Adequacy. Under the risk-based capital
requirements applicable to them, bank holding companies must
maintain a ratio of total capital to risk-weighted assets
(including the asset equivalent of certain off-balance sheet
activities such as acceptances and letters of credit) of not
less than 8% (10% in order to be considered
well-capitalized). At least 4% out of the total
capital (6% to be well-capitalized) must be composed of common
stock, related surplus, retained earnings, qualifying perpetual
preferred stock and minority interests in the equity accounts of
certain consolidated subsidiaries, after deducting goodwill and
certain other intangibles (Tier 1 Capital). The
remainder of total capital (Tier 2 Capital) may
consist of certain perpetual debt securities, mandatory
convertible debt securities, hybrid capital instruments and
limited amounts of subordinated debt, qualifying preferred
stock, allowance for loan and lease losses, allowance for credit
losses on off-balance-sheet credit exposures and unrealized
gains on equity securities.
The Federal Reserve Board has also established minimum leverage
ratio guidelines for bank holding companies. These guidelines
mandate a minimum leverage ratio of Tier 1 Capital to
adjusted quarterly average total assets less certain amounts
(leverage amounts) equal to 3% for bank holding
companies meeting certain criteria (including those having the
highest regulatory rating). All other banking organizations are
generally required to maintain a leverage ratio of at least 3%
plus an additional cushion of at least 100 basis points and
in some cases more. The Federal Reserve Boards guidelines
also provide that bank holding companies experiencing internal
growth or making acquisitions are expected to maintain capital
positions substantially above the minimum supervisory levels
without significant reliance on intangible assets. Furthermore,
the guidelines indicate that the Federal Reserve Board will
continue to consider a tangible tier 1 leverage
ratio (i.e., after deducting all intangibles) in
evaluating proposals for expansion or new activities. MBB is
subject to similar capital standards promulgated by the Federal
Reserve Board.
The federal bank regulatory agencies risk-based capital
guidelines for years have been based upon the 1988 capital
accord (Basel I) of the Basel Committee on Banking
Supervision, a committee of central bankers and bank supervisors
from the major industrialized countries. This committee develops
broad policy guidelines for use by each countrys
supervisors in determining the supervisory policies they apply.
In 2004, the committee proposed a new capital adequacy framework
(Basel II) for large, internationally active banking
organizations to replace Basel I. Basel II was designed to
produce a more risk-sensitive result than its predecessor.
However, certain portions of Basel II entail complexities
and costs that were expected to preclude their practical
application to the majority of U.S. banking organizations
that lack the economies of scale needed to absorb the associated
expenses.
13
Effective April 1, 2008, the U.S. federal bank
regulatory agencies adopted Basel II for application to
certain banking organizations in the United States. The new
capital adequacy framework applies to organizations that
(i) have consolidated assets of at least $250 billion,
(ii) have consolidated total on-balance sheet foreign
exposures of at least $10 billion, (iii) are eligible
to, and elect to, opt-in to the new framework even though not
required to do so under clause (i) or (ii) above or
(iv) as a general matter, are subsidiaries of a bank or
bank holding company that uses the new rule. During a two-year
phase in period, organizations required or electing to apply
Basel II have been required to report their capital
adequacy calculations separately under both Basel I and
Basel II on a parallel run basis.
Given the high thresholds noted above, Marlin is not required to
apply Basel II and does not expect to apply it in the
foreseeable future. Related modifications to regulatory practice
in late 2009 to address issues related to the financial crisis
of 2008 also did not require a change in MBBs regulatory
capital calculations. The U.S. federal bank regulatory
agencies issued a separate proposal in December 2006 that would
modify the existing Basel I framework applicable to the vast
majority of U.S. banking organizations not required or
electing to use the new Basel II program. The goal of this
separate proposal would be to provide a more risk-sensitive
capital regime for those organizations and to address concerns
that the new Basel II framework would otherwise present
significant competitive advantages for the largest participants
in the U.S. banking industry.
Prompt Corrective Action. The Federal Deposit
Insurance Corporation Improvement Act of 1991
(FDICIA) requires federal regulators to take prompt
corrective action against any undercapitalized institution.
FDICIA establishes five capital categories: well-capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
Well-capitalized institutions significantly exceed the required
minimum level for each relevant capital measure. Adequately
capitalized institutions include depository institutions that
meet but do not significantly exceed the required minimum level
for each relevant capital measure. Undercapitalized institutions
consist of those that fail to meet the required minimum level
for one or more relevant capital measures. Significantly
undercapitalized depository institutions consist of those with
capital levels significantly below the minimum requirements for
any relevant capital measure. Critically undercapitalized
depository institutions are those with minimal capital and at
serious risk for government seizure.
Under certain circumstances, a well-capitalized, adequately
capitalized or undercapitalized institution may be treated as if
the institution were in the next lower capital category. A
depository institution is generally prohibited from making
capital distributions, including paying dividends, or paying
management fees to a holding company if the institution would
thereafter be undercapitalized. Institutions that are adequately
capitalized but not well-capitalized cannot accept, renew or
roll over brokered deposits except with a waiver from the FDIC
and are subject to restrictions on the interest rates that can
be paid on such deposits. Undercapitalized institutions may not
accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or, in
certain cases, required to take certain actions with respect to
institutions falling within one of the three undercapitalized
categories. Depending on the level of an institutions
capital, the agencys corrective powers include, among
other things:
|
|
|
|
|
prohibiting the payment of principal and interest on
subordinated debt;
|
|
|
|
prohibiting the holding company from making distributions
without prior regulatory approval;
|
|
|
|
placing limits on asset growth and restrictions on activities;
|
|
|
|
placing additional restrictions on transactions with affiliates;
|
|
|
|
restricting the interest rate the institution may pay on
deposits;
|
|
|
|
prohibiting the institution from accepting deposits from
correspondent banks; and
|
|
|
|
in the most severe cases, appointing a conservator or receiver
for the institution.
|
A banking institution that is undercapitalized is required to
submit a capital restoration plan and such a plan will not be
accepted unless, among other things, the banking
institutions holding company guarantees the plan up to a
certain specified amount. Any such guarantee from a depository
institutions holding company is entitled to a priority of
payment in bankruptcy. At December 31, 2010, MBBs
Tier 1 leverage ratio, Tier 1 risk-based capital
14
ratio and total risk-based capital ratio were 16.58%, 17.39% and
18.65%, respectively, compared to requirements for
well-capitalized status of 5%, 6% and 10%, respectively.
Pursuant to the FDIC Order, MBB must keep its total risk-based
capital ratio above 15%. MBBs equity balance at
December 31, 2010 was $20.2 million, which qualifies
for well capitalized status.
Federal Deposit Insurance. Under the Federal
Deposit Insurance Reform Act of 2005, as amended by the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act), the FDIC changed its risk-based
premium system for FDIC deposit insurance, providing for
quarterly assessments of FDIC-insured institutions based on
their respective rankings in one of four risk categories
depending upon their examination ratings and capital ratios.
Beginning in 2011, the FDIC assessment base will change from
total domestic deposits to consolidated total assets minus
tangible equity capital, defined as Tier 1 Capital.
Additionally, the change would use the quarterly average of
daily closing balance of total assets, as currently reported in
the call reports. The FDIC aims to raise the same expected
revenue under the new base as under the current assessment base.
Since the new base is larger than the current base, the proposal
would lower the assessment rate schedule to maintain revenue
neutrality. Institutions in FDIC-assigned Risk Categories
II, III and IV are assessed premiums at progressively
higher rates. MBB is designated a Risk Category I institution
for purposes of the risk-based assessment for FDIC deposit
insurance.
On November 21, 2008, following a determination by the
Secretary of the Treasury that systemic risk existed in the
nations financial sector, the FDIC Board of Directors
adopted a new program to strengthen confidence and encourage
liquidity in the banking system by (1) guaranteeing newly
issued senior unsecured debt of banks, thrifts and certain
holding companies, and (2) providing full coverage of
noninterest-bearing deposit transaction accounts, regardless of
dollar amount (the Temporary Liquidity Guarantee
Program or TLGP). MBB did not participate in
either facet of the TLGP.
After the passage of the Emergency Economic Stabilization Act of
2008 (the EESA), the FDIC also increased deposit
insurance for all deposit accounts up to $250,000 per account
beginning on October 3, 2008 and ending on
December 31, 2009. In May 2009, a law was signed extending
the temporary increase through December 31, 2013. On
July 21, 2010, President Barack Obama signed the Dodd-Frank
Act into law, which, in part, (1) required the FDIC to
increase reserves for the Deposit Insurance Fund (the
DIF) against future losses which will necessitate
increased deposit insurance premiums that are to be borne
primarily by institutions with assets greater than
$10 billion and (2) permanently raised the standard
maximum deposit insurance amount to $250,000. On
December 16, 2008, the FDIC Board of Directors determined
deposit insurance assessment rates for the first quarter of
2009. Effective April 1, 2009, the FDIC changed the way its
assessment system differentiates for risk, making corresponding
changes to assessment rates beginning with the second quarter of
2009, and making certain technical and other changes to these
rules. The increase in deposit insurance described above, as
well as the recent increase and anticipated additional increase
in the number of bank failures, is expected to result in an
increase in deposit insurance assessments for all banks. To
bolster the DIF, the Dodd-Frank Act provides for a new minimum
reserve ratio of not less than 1.35% of estimated insured
deposits and requires that the FDIC take steps necessary to
attain this 1.35% ratio by September 30, 2020. The FDIC is
required by law to return the insurance reserve ratio to a
1.15 percent ratio no later than the end of 2016. Continued
bank failures have caused the ratio to fall to a negative
0.16 percent as of September 2010. The FDIC also proposed
to raise its industry target ratio of reserves to insured
deposits to 2.00%, 65 basis points above the statutory
minimum, but the FDIC does not project that goal to be met until
2027.
On November 12, 2009, the Board of Directors of the FDIC
voted to require insured institutions to prepay slightly over
three years of estimated insurance assessments. The pre-payment
allows the FDIC to strengthen the cash position of the DIF
immediately without immediately impacting earnings of the
industry. Payment of the prepaid assessment, along with the
payment of MBBs regular third quarter assessment, was paid
when due on December 30, 2009.
Source of Strength Doctrine. Under Federal
Reserve Board policy and regulation, a bank holding company must
serve as a source of financial and managerial strength to each
of its subsidiary banks and is expected to stand prepared to
commit resources to support each of them. Consistent with this
policy, the Federal Reserve Board has stated that, as a matter
of prudent banking, a bank holding company should generally not
maintain a given rate of
15
cash dividends unless its net income available to common
shareholders has been sufficient to fully fund the dividends and
the prospective rate of earnings retention appears to be
consistent with the organizations capital needs, asset
quality and overall financial condition.
USA Patriot Act of 2001. A major focus of
governmental policy applicable to financial institutions in
recent years has been the effort to combat money laundering and
terrorism financing. The USA Patriot Act of 2001 (the
Patriot Act) was enacted to strengthen the ability
of the U.S. law enforcement and intelligence communities to
achieve this goal. The Patriot Act requires financial
institutions, including our banking subsidiary, to assist in the
prevention, detection and prosecution of money laundering and
the financing of terrorism. The Patriot Act established
standards to be followed by institutions in verifying client
identification when accounts are opened and provides rules to
promote cooperation among financial institutions, regulators and
law enforcement organizations in identifying parties that may be
involved in terrorism or money laundering.
Privacy. Title V of the GLB Act is
intended to increase the level of privacy protection afforded to
customers of financial institutions, including customers of the
securities and insurance affiliates of such institutions, partly
in recognition of the increased cross-marketing opportunities
created by the GLB Acts elimination of many of the
boundaries previously separating various segments of the
financial services industry. Among other things, these
provisions require institutions to have in place administrative,
technical and physical safeguards to ensure the security and
confidentiality of customer records and information, to protect
against anticipated threats or hazards to the security or
integrity of such records and to protect against unauthorized
access to or use of such records that could result in
substantial harm or inconvenience to a customer.
EESA. Turmoil in the nations financial
sector during 2008 resulted in the passage of the EESA and the
adoption of several programs by the U.S. Department of the
Treasury, as well as several actions by the Federal Reserve
Board. One such program under the Treasury Departments
Troubled Asset Relief Program (TARP) was action by
the Treasury Department to make significant investments in
U.S. financial institutions through the Capital Purchase
Program. Our application to provide us with the flexibility to
participate in the TARP was approved. However, based upon
subsequent evaluation, we declined to participate.
The Federal Reserve Board has also developed an Asset-Backed
Commercial Paper Money Market Fund Liquidity Facility
(AMLF) and the Commercial Paper Funding Facility
(CPFF). The AMLF provides loans to depository
institutions to purchase asset-backed commercial paper
(CP) from money market mutual funds. The CPFF
provides a liquidity backstop to U.S. issuers of CP. These
facilities closed on February 1, 2010. We did not
participate in either AMLF or CPFF.
TALF program. In 2009, the Federal Reserve
Board also created the Term Asset-Backed Securities Loan
Facility (TALF) program, the intent of which was to
make credit available to consumers and businesses on more
favorable terms by facilitating the issuance of asset-backed
securities (ABS) and improving the market conditions
for ABS generally. The TALF program provided ABS investors with
financing to support their purchases of certain AAA-rated
securities. On February 12, 2010, we issued
$80.7 million of term ABS securities through our special
purpose subsidiary, Marlin Leasing Receivables XII LLC, and the
senior tranche of the offering was rated AAA, thereby making it
eligible under the TALF program.
Future Legislation. From time to time,
legislation will be introduced in Congress and state
legislatures with respect to the regulation of financial
institutions. The financial crisis of 2008 and 2009 resulted in
U.S. government and regulatory agencies placing increased
focus and scrutiny on the financial services industry. The
U.S. government intervened on an unprecedented scale by
temporarily enhancing the liquidity support available to
financial institutions, establishing a CP funding facility,
temporarily guaranteeing money market funds and certain types of
debt issuances, increasing insurance on bank deposits, among
other things, and by passing the Dodd-Frank Act, a sweeping
financial reform bill.
These programs have subjected financial institutions to
additional restrictions, oversight and costs. In addition, new
proposals for legislation continue to be introduced in Congress
that could further substantially increase regulation of the
financial services industry, impose restrictions on the
operations and general ability of firms within the industry to
conduct business consistent with historical practices, including
in the areas of compensation, interest rates and financial
product offerings and disclosures, among other things. Federal
and state regulatory agencies also
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frequently adopt changes to their regulations or change the
manner in which existing regulations are applied. We cannot
determine the ultimate effect that potential legislation, if
enacted, or any regulations issued to implement it, would have
on us.
National Monetary Policy. In addition to being
affected by general economic conditions, the earnings and growth
of MBB are affected by the policies of the Federal Reserve
Board. An important function of the Federal Reserve Board is to
regulate the money supply and credit conditions. Among the
instruments used by the Federal Reserve Board to implement these
objectives are open market operations in U.S. government
securities, adjustments of the discount rate and changes in
reserve requirements against bank deposits. These instruments
are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments
and deposits. Their use also affects interest rates charged on
loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve
Board have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do
so in the future. The effects of such policies upon our future
business, earnings and growth cannot be predicted.
Dividends. The Federal Reserve Board has
issued policy statements which provide that, as a general
matter, insured banks and bank holding companies should pay
dividends only out of current operating earnings. Additionally,
pursuant to its FDIC Order, MBB was not permitted to pay
dividends during the first three years of operations without the
prior written approval of the FDIC and the State of Utah (such
three-year period expired on March 12, 2011).
Transfers of Funds and Transactions with
Affiliates. Sections 23A and 23B of the
Federal Reserve Act and applicable regulations impose
restrictions on MBB that limit the transfer of funds by MBB to
Marlin Business Services Corp. and certain of its affiliates, in
the form of loans, extensions of credit, investments or
purchases of assets. These transfers by MBB to Marlin Business
Services Corp. or any other single affiliate are limited in
amount to 10% of MBBs capital and surplus, and transfers
to all affiliates are limited in the aggregate to 20% of
MBBs capital and surplus. These loans and extensions of
credit are also subject to various collateral requirements.
Sections 23A and 23B of the Federal Reserve Act and
applicable regulations also require generally that MBBs
transactions with its affiliates be on terms no less favorable
to MBB than comparable transactions with unrelated third
parties. MBB completed de novo purchases totaling approximately
$48.0 million of eligible leases and loans from Marlin
Leasing Corporation during the second quarter of 2008, which
completed the anticipated de novo transactions allowed by the
FDIC 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
1934 Act, such as the Company, would, under the
circumstances set forth in the presumption, constitute
acquisition of control of the bank holding company. The
regulations provide a procedure for challenging this rebuttable
control presumption.
We believe that we currently are in compliance with all material
statutes and regulations that are applicable to our business.
Competition
We compete with a variety of equipment financing sources that
are available to small and mid-sized businesses, including:
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national, regional and local finance companies that provide
leases and loan products;
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financing through captive finance and leasing companies
affiliated with major equipment manufacturers;
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corporate credit cards; and
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commercial banks, savings and loan associations and credit
unions.
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Our principal competitors in the highly fragmented and
competitive small-ticket equipment leasing market are smaller
finance companies and local and regional banks. Other providers
of equipment lease financing include KeyCorp, De Lage Landen
Financial, GE Commercial Equipment Finance and Wells Fargo Bank,
National Association. Many of these companies are substantially
larger than we are and have significantly greater financial,
technical and marketing resources than we do. While these larger
competitors provide lease financing to the marketplace, many of
them are not our primary competitors given that our average
transaction size is relatively small and that our marketing
focus is on independent equipment dealers and their end user
customers. Nevertheless, there can be no assurances that these
providers of equipment lease financing will not increase their
focus on our market and begin to compete more directly with us.
Some of our competitors have a lower cost of funds and access to
funding sources that are not available to us. A lower cost of
funds could enable a competitor to offer leases with yields that
are less than the yields we use to price our leases, which might
force us to lower our yields or lose lease origination volume.
In addition, certain of our competitors may have higher risk
tolerances or different risk assessments, which could enable
them to establish more origination sources and end user customer
relationships and increase their market share. We compete on the
quality of service we provide to our origination sources and end
user customers. We have encountered and will continue to
encounter significant competition.
Employees
As of December 31, 2010, we employed 234 people. None
of our employees are covered by a collective bargaining
agreement and we have never experienced any work stoppages.
Available
Information
We are a Pennsylvania corporation with our principal executive
offices located at 300 Fellowship Road, Mount Laurel, NJ 08054.
Our telephone number is
(888) 479-9111
and our website address is www.marlincorp.com. We make
available free of charge through the investor relations section
of our website our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. We include
our website address in this Annual Report on
Form 10-K
only as an inactive textual reference and do not intend it to be
an active link to our website.
Set forth below and elsewhere in this report and in other
documents we file with the Securities and Exchange Commission
are risks and uncertainties that could cause our actual results
to differ materially from the results contemplated by the
forward-looking statements contained in this report and other
periodic statements we make.
If we cannot obtain financing, we may be unable to fund our
operations. Our business requires a substantial
amount of cash to operate. Our cash requirements will increase
if our lease originations increase. We historically have
obtained a substantial amount of the cash required for
operations through a variety of external financing sources, such
as borrowings under revolving bank facilities, financing of
leases through CP conduit warehouse facilities, long-term loan
facilities, term note securitizations and certificates of
deposit raised by MBB. A failure to renew and increase the
funding availability under our existing facilities, to add new
funding facilities or to access the certificate of deposit
market could affect our ability to fund and originate new leases.
Our ability to obtain renewals of lenders commitments and
new funding facilities or to obtain continued access to the
certificate of deposit market, is affected by a number of
factors, including:
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conditions in the long-term lending markets;
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conditions in the market for FDIC-insured certificates of
deposit;
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compliance of our leases with the eligibility requirements
established in connection with our long-term loan facilities and
term note securitizations, including the level of lease
delinquencies and default;
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restrictions and costs associated with banking industry
regulation which could negatively impact MBB;
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conditions in the securities and asset-backed securities markets;
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conditions in the market for commercial bank liquidity support
for CP programs; and
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our ability to service the leases.
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We are and will continue to be dependent upon the availability
of credit from these financing sources to continue to originate
leases and to satisfy our other working capital needs. We may be
unable to obtain additional financing on acceptable terms, or at
all, as a result of prevailing interest rates or other factors
at the time, including the presence of covenants or other
restrictions under existing financing arrangements. If any or
all of our funding sources become unavailable on acceptable
terms or at all, we may not have access to the financing
necessary to conduct our business, which would limit our ability
to fund our operations. Our long-term loan facilities mature on
October 9, 2012 and September 23, 2013, respectively.
As a result, we may be unable to continue to access these
facilities after those dates. (See Liquidity and Capital
Resources in Item 7). In the event we seek to obtain
equity financing, our shareholders may experience dilution as a
result of the issuance of additional equity securities. This
dilution may be significant depending upon the amount of equity
securities that we issue and the prices at which we issue such
securities.
Our financing sources impose covenants, restrictions and
default provisions on us, which could lead to termination of our
financing facilities, acceleration of amounts outstanding under
our financing facilities and our removal as
servicer. The legal agreements relating to our
long-term loan facilities and our term note securitizations
contain numerous covenants, restrictions and default provisions
relating to, among other things, maximum lease delinquency and
default levels, a minimum net worth requirement, an interest
coverage test and a maximum debt to equity ratio. In addition, a
change in the Chief Executive Officer, Chief Operating Officer
or Chief Financial Officer is an event of default under our
long-term loan facilities, unless we hire a replacement
acceptable to our lenders within 120 days. A change in
Chief Executive Officer or Chief Operating Officer is an
immediate event of servicer termination under our term note
securitization completed in 2006.
A merger or consolidation with another company in which we are
not the surviving entity, likewise, is an event of default under
our financing facilities. The Companys long-term loan
facilities contain acceleration clauses allowing the creditors
to accelerate the scheduled maturities of the obligation under
certain conditions that may not be objectively determinable (for
example, if a material adverse change occurs).
Further, our long-term loan facilities contain cross default
provisions whereby certain defaults under one facility would
also be an event of default under the other facilities. An event
of default under the long-term loan facilities could result in
termination of further funds being made available. An event of
default under any of our facilities could result in an
acceleration of amounts outstanding under the facilities,
foreclosure on all or a portion of the leases financed by the
facilities
and/or our
removal as a servicer of the leases financed by the facility.
This would reduce our revenues from servicing and, by delaying
any cash payment allowed to us under the financing facilities
until the lenders have been paid in full, reduce our liquidity
and cash flow.
If we inaccurately assess the creditworthiness of our end
user customers, we may experience a higher number of lease
defaults, which may restrict our ability to obtain additional
financing and reduce our earnings. We specialize
in leasing equipment to small and mid-sized businesses. Small
and mid-sized businesses may be more vulnerable than large
businesses to economic downturns, typically depend upon the
management talents and efforts of one person or a small group of
persons and often need substantial additional capital to expand
or compete. Small and mid-sized business leases, therefore, may
entail a greater risk of delinquencies and defaults than leases
entered into with larger, more creditworthy leasing customers.
In addition, there is typically only limited publicly available
financial and other information about small and mid-sized
businesses and they often do not have audited financial
statements. Accordingly, in making credit decisions, our
underwriting guidelines rely upon the accuracy of information
about these small and mid-sized businesses obtained from the
small and mid-sized business owner
and/or
third-party sources, such as credit reporting agencies. If the
information we obtain from small and mid-sized business owners
and/or
third- party sources is incorrect, our ability to make
appropriate credit decisions will be impaired. If we
inaccurately assess the creditworthiness of our end user
customers, we may experience a higher number of lease defaults
and related decreases in our earnings.
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Defaulted leases and certain delinquent leases also do not
qualify as collateral against which initial advances may be made
under our funding facilities, and we cannot include them in our
term note securitizations. An increase in delinquencies or lease
defaults could reduce the funding available to us under our
facilities and could adversely affect our earnings, possibly
materially. In addition, increasing rates of delinquencies or
charge-offs could result in adverse changes in the structure of
our future financing facilities, including increased interest
rates payable to investors and the imposition of more burdensome
covenants and credit enhancement requirements. Any of these
occurrences may cause us to experience reduced earnings.
Deteriorated economic or business conditions may lead to
greater than anticipated lease defaults and credit losses, which
could limit our ability to obtain additional financing and
reduce our operating income. The capital and
credit markets have been experiencing extreme volatility and
disruption for more than three years at unprecedented levels. In
many cases, these markets have produced downward pressure on
stock prices of, and credit availability to, certain companies
without regard to those companies underlying financial
strength. Concerns over inflation, energy costs, geopolitical
issues, the availability and cost of credit, the
U.S. mortgage market and a declining U.S. real estate
market have contributed to increased volatility and diminished
expectations for the economy and the capital and credit markets.
These factors, combined with declining business and consumer
confidence and increased unemployment, precipitated an economic
slowdown and national recession throughout 2008 and 2009. These
events and the continuing market uncertainty may have an adverse
effect on us. In the event of extreme and prolonged market
events, such as a global credit crisis or a double
dip recession in the U.S., we could incur significant
losses. Even in the absence of a market downturn, we are exposed
to substantial risk of loss due to market volatility.
Our operating income may be reduced by various economic factors
and business conditions, including the level of economic
activity in the markets in which we operate. Delinquencies and
credit losses generally increase during economic slowdowns or
recessions. Because we extend credit primarily to small and
mid-sized businesses, many of our customers may be particularly
susceptible to economic slowdowns or recessions and may be
unable to make scheduled lease payments during these periods.
Therefore, to the extent that economic activity or business
conditions deteriorate, our delinquencies and credit losses may
increase. Unfavorable economic conditions may also make it more
difficult for us to maintain both our new lease origination
volume and the credit quality of new leases at levels previously
attained. Unfavorable economic conditions could also increase
our funding costs or operating cost structure or limit our
access to funding. Any of these events could reduce our
operating income.
If losses from leases exceed our allowance for credit losses,
our operating income will be reduced or
eliminated. In connection with our financing of
leases, we record an allowance for credit losses to provide for
estimated losses. Our allowance for credit losses is based on,
among other things, past collection experience, industry data,
lease delinquency data and our assessment of collection risks.
Determining the appropriate level of the allowance is an
inherently uncertain process and, therefore, our determination
of this allowance may prove to be inadequate to cover losses in
connection with our portfolio of leases. Factors that could lead
to the inadequacy of our allowance may include our inability to
manage collections effectively, unanticipated adverse changes in
the economy or discrete events adversely affecting specific
leasing customers, industries or geographic areas. Losses in
excess of our allowance for credit losses would cause us to
increase our provision for credit losses, reducing or
eliminating our operating income.
If we are unable to effectively execute our business
strategy, we may suffer material operating
losses. Our financial position, liquidity and
results of operations depend on managements ability to
execute our business strategy and navigate through the ongoing
challenging economic environment. Key factors involved in the
execution of this strategy include achieving the desired volume
of leases of suitable yield and credit quality, effectively
managing those leases and obtaining appropriate funding.
Accomplishing such a result on a cost-effective basis is largely
a function of our marketing capabilities, our management of the
leasing process, our credit underwriting guidelines, our ability
to provide competent, attentive and efficient servicing to our
origination sources and our end user customers, our ability to
execute effective credit risk management and collection
techniques, our access to financing sources on acceptable terms
and our ability to attract and retain high quality employees in
all areas of our business. Failure to manage effectively these
and other factors related to our business strategy and our
overall operations may cause us to suffer material operating
losses.
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If we cannot effectively compete within the equipment leasing
industry, we may be unable to increase our revenues or maintain
our current levels of operations. The business of
small-ticket equipment leasing is highly fragmented and
competitive. Many of our competitors are substantially larger
and have considerably greater financial, technical and marketing
resources than we do. For example, some competitors may have a
lower cost of funds and access to funding sources that are not
available to us. A lower cost of funds could enable a competitor
to offer leases with yields that are lower than those we use to
price our leases, potentially forcing us to decrease our yields
or lose origination volume. In addition, certain of our
competitors may have higher risk tolerances or different risk
assessments, which could allow them to establish more
origination source and end user customer relationships and
increase their market share. There are few barriers to entry
with respect to our business and, therefore, new competitors
could enter the business of small-ticket equipment leasing at
any time. The companies that typically provide financing for
large-ticket or middle-market transactions could begin competing
with us on small-ticket equipment leases. If this occurs, or we
are unable to compete effectively with our competitors, we may
be unable to sustain our operations at their current levels or
generate revenue growth.
If we cannot maintain our relationships with origination
sources, our ability to generate lease transactions and related
revenues may be significantly impeded. We have
formed relationships with thousands of origination sources,
comprised primarily of independent equipment dealers. We rely on
these relationships to generate lease applications and
originations. Most of these relationships are not formalized in
written agreements and those that are formalized by written
agreements are typically terminable at will. Our typical
relationship does not commit the origination source to provide a
minimum number of lease transactions to us nor does it require
the origination source to direct all of its lease transactions
to us. The decision by a significant number of our origination
sources to refer their leasing transactions to another company
could impede our ability to generate lease transactions and
related revenues.
If interest rates change significantly, we may be subject to
higher interest costs with respect to our funding sources and we
may be unable to hedge our variable-rate borrowings effectively,
which may cause us to suffer material
losses. Because we use bank deposits, long-term
loan facilities and term note securitizations to fund our
leases, our margins could be reduced by an increase in interest
rates. Each of our leases is structured so that the sum of all
scheduled lease payments will equal the cost of the equipment to
us, less the residual, plus a return on the amount of our
investment. This return is known as the yield. The yield on our
leases is fixed because the scheduled payments are fixed at the
time of lease origination. When we originate or acquire leases,
we base our pricing in part on the spread we expect to achieve
between the yield on each lease and the effective interest rate
we expect to pay when we finance the lease. To the extent that a
lease is financed with variable-rate funding, increases in
interest rates during the term of a lease could narrow or
eliminate the spread, or result in a negative spread. A negative
spread is an interest cost greater than the yield on the lease.
Certain of our funding facilities have variable rates based on
the London Interbank Offered Rate (LIBOR) or the
prime rate. As a result, because our assets have a fixed
interest rate, increases in LIBOR or the prime rate would
negatively impact our earnings. If interest rates increase
faster than we are able to adjust the pricing under our new
leases, our net interest margin would be reduced. As required
under certain financing facilities, we entered into
interest-rate cap agreements to hedge against the risk of
interest rate increases. If our hedging strategies are
imperfectly implemented or if a counterparty defaults on a
hedging agreement, we could suffer losses relating to our
hedging activities. At December 31, 2010, there was no
notional principal outstanding under interest-rate swap
agreements. In addition, with respect to our fixed-rate
borrowings, such as our term note securitizations, increases in
interest rates could have the effect of increasing our borrowing
costs on future term note transactions.
Legislative and regulatory reforms may have a significant
impact on our business, results of operations and financial
condition. Recent conditions, particularly in the
financial markets, have resulted in government regulatory
agencies and political bodies placing increased focus and
scrutiny on the financial services industry. The United States
government has intervened on a broad scale, responding to what
has been commonly referred to as the financial crisis, by
temporarily enhancing the liquidity support available to
financial institutions, establishing a CP funding facility,
temporarily guaranteeing money market funds and certain types of
debt issuances and increasing insurance on bank deposits. These
programs have subjected financial institutions to additional
restrictions, oversight and costs.
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In addition, on July 21, 2010, the Dodd-Frank Act was
signed into law. The Dodd-Frank Act contains provisions that,
among other things, establish a Bureau of Consumer Financial
Protection, establish a systemic risk regulator, consolidate
certain federal bank regulators and give shareholders an
advisory vote on executive compensation. The Dodd-Frank Act
could substantially increase regulation of the financial
services industry, impose restrictions on the operations and
general ability of firms within the industry to conduct business
consistent with historical practices, including in the areas of
compensation, interest rates, financial product offerings and
disclosures, and have an effect on bankruptcy proceedings with
respect to consumer residential real estate mortgages, among
other things.
The Dodd-Frank Act adds sweeping deposit insurance provisions.
Deposit insurance assessments in the future will be based upon a
banks average consolidated total assets minus its average
tangible equity, rather than upon its deposit base. The changes
also make the $250,000 deposit insurance limit permanent, extend
the Transaction Account Guarantee program and expand the
FDICs authority to raise insurance premiums by setting a
target ratio as high as the FDIC determines to be appropriate.
The Dodd-Frank Act also restricts proprietary trading and the
derivatives activities of banks and their affiliates.
Many provisions of the Dodd-Frank Act require the adoption of
rules to implement. In addition, the
Dodd-Frank
Act mandates multiple studies, which could result in additional
legislative or regulatory action. The effect of the Dodd-Frank
Act and its implementing regulations on our business and
operations could be significant. In addition, we may be required
to invest significant management time and resources to address
the various provisions of the Dodd-Frank Act and the numerous
regulations that have been and are still required to be issued
under it. The Dodd-Frank Act, any related legislation and any
implementing regulations could have a significant adverse effect
on our business, results of operations and financial condition.
Further increase in the FDIC deposit insurance premium or
required reserves may have a significant financial impact on
us. The FDIC insures deposits at FDIC insured
financial institutions up to certain limits. The FDIC charges
insured financial institutions premiums to maintain the DIF.
Recent difficult economic conditions have resulted in higher
bank failures and expectations of future bank failures. In the
event of a bank failure, the FDIC takes control of a failed bank
and ensures payment of deposits up to insured limits (which have
recently been increased) using the resources of the DIF. The
FDIC is required by law to maintain adequate funding of the DIF,
and the FDIC may increase premium assessments to maintain such
funding.
The Dodd-Frank Act requires the FDIC to increase the DIFs
reserves against future losses, which will necessitate increased
deposit insurance premiums that are to be borne primarily by
institutions with assets of greater than $10 billion. The
current proposed rules to base insurance premiums on the
institutions asset base would have a neutral impact to
MBB; however, future increases in assessments may decrease our
earnings and could have a material adverse effect on the value
of, or market for, our common stock.
On October 19, 2010, the FDIC further addressed plans to
bolster the DIF by increasing the required reserve ratio for the
industry to 1.35% (ratio of reserves to insured deposits) by
September 30, 2020, as required by the Dodd-Frank Act.
Current assessment rates will remain in effect until such time
as the industrys reserve ratio reaches 1.15%, which the
FDIC estimates will occur at the end of 2016. The FDIC also
proposed to raise its industry target ratio of reserves to
insured deposits to 2.00%, 65 basis points above the
statutory minimum, but the FDIC does not project that goal to be
met until 2027.
We are subject to regulatory capital adequacy guidelines, and
if we fail to meet these guidelines, our business, financial
condition or results of operations may be adversely
affected. Under regulatory capital adequacy
guidelines, and other regulatory requirements, we must meet
guidelines that include quantitative measures of assets,
liabilities and certain off-balance sheet items, subject to
qualitative judgments by regulators regarding components, risk
weightings and other factors. (See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Bank Capital and Regulatory
Oversight). If we fail to meet these minimum capital
guidelines and other regulatory requirements, our business,
financial condition or results of operations may be adversely
affected. In addition, if we fail to maintain
well-capitalized status under the regulatory
framework, if we are deemed to be not well-managed under
regulatory exam procedures or if we experience certain
regulatory violations, our status as a financial holding
company, our
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related eligibility for a streamlined review process for
acquisition proposals and our ability to offer certain financial
products may be compromised or impaired.
Monetary policies and regulations of the Federal Reserve
Board could adversely affect our business, financial condition
and results of operations. In addition to being
affected by general economic conditions, our earnings and growth
are affected by the policies of the Federal Reserve Board. An
important function of the Federal Reserve Board is to regulate
the money supply and credit conditions. Among the instruments
used by the Federal Reserve Board to implement these objectives
are open market operations in U.S. government securities,
adjustments of the discount rate and changes in reserve
requirements against bank deposits. These instruments are used
in varying combinations to influence overall economic growth and
the distribution of credit, bank loans, investments and
deposits. Their use also affects interest rates charged on loans
or paid on deposits.
The monetary policies and regulations of the Federal Reserve
Board have had a significant effect on the operating results of
bank holding companies in the past and are expected to continue
to do so in the future. The effects of such policies upon our
business, financial condition and results of operations cannot
be predicted.
The departure of any of our key management personnel or our
inability to hire suitable replacements for our management may
result in defaults under our financing facilities, which could
restrict our ability to access funding and operate our business
effectively. Our future success depends to a
significant extent on the continued service of our senior
management team. A change in the Chief Executive Officer, Chief
Operating Officer or Chief Financial Officer is an event of
default under our long-term loan facilities, unless we hire a
replacement acceptable to our lenders within 120 days. A
change in Chief Executive Officer or Chief Operating Officer is
an immediate event of servicer termination under our term note
securitization completed in 2006.
The termination or interruption of, or a decrease in volume
under, our property insurance program would cause us to
experience lower revenues and may result in a significant
reduction in our net income. Our end user
customers are required to obtain all-risk property insurance for
the replacement value of the leased equipment. Each end user
customer has the option of either delivering a certificate of
insurance listing us as loss payee under a commercial property
policy issued by a third-party insurer or satisfying such
insurance obligation through our insurance program. Under our
program, the end user customer purchases coverage under a master
property insurance policy written by a national third-party
insurer (our primary insurer) with whom our captive
insurance subsidiary, AssuranceOne, has entered into a 100%
reinsurance arrangement. Termination or interruption of our
program could occur for a variety of reasons, including:
(1) adverse changes in laws or regulations affecting our
primary insurer or AssuranceOne; (2) a change in the
financial condition or financial strength ratings of our primary
insurer or AssuranceOne; (3) negative developments in the
loss reserves or future loss experience of AssuranceOne, which
render it uneconomical for us to continue the program;
(4) termination or expiration of the reinsurance agreement
with our primary insurer, coupled with an inability by us to
identify quickly and negotiate an acceptable arrangement with a
replacement carrier; or (5) competitive factors in the
property insurance market. If there is a termination or
interruption of this program or if fewer end user customers
elected to satisfy their insurance obligations through our
program, we would experience lower revenues and our net income
may be reduced.
Regulatory and legal uncertainties could result in
significant financial losses and may require us to alter our
business strategy and operations. Laws or
regulations may be adopted with respect to our equipment leases,
the equipment leasing, telemarketing and collection processes or
the banking industry. Any new legislation or regulation, or
changes in the interpretation of existing laws, that affect the
equipment leasing industry or the banking industry could
increase our costs of compliance or require us to alter our
business strategy.
We, like other finance companies, face the risk of litigation,
including class action litigation, and regulatory investigations
and actions in connection with our business activities. These
matters may be difficult to assess or quantify, and their
magnitude may remain unknown for substantial periods of time. A
substantial legal liability or a significant regulatory action
against us could cause us to suffer significant costs and
expenses and could require us to alter our business strategy and
the manner in which we operate our business.
Government regulation significantly affects our
business. The banking industry is heavily
regulated, and such regulations are intended primarily for the
protection of depositors and the federal deposit insurance
funds, not shareholders. Since becoming a bank holding company
on January 13, 2009, we have been subject to regulation by
the
23
Federal Reserve Board and subject to the Bank Holding Company
Act. Our bank subsidiary, MBB, is also subject to regulation by
the Federal Reserve Board and the State of Utah. Such regulation
affects lending practices, capital structure, investment
practices, dividend policy and growth. The financial crisis of
2008 and 2009 resulted in U.S. government and regulatory
agencies placing increased focus and scrutiny on the financial
services industry. The U.S. government intervened on an
unprecedented scale by temporarily enhancing the liquidity
support available to financial institutions, establishing a CP
funding facility, temporarily guaranteeing money market funds
and certain types of debt issuances, increasing insurance on
bank deposits and by passing the Dodd-Frank Act, among other
things.
These programs have subjected financial institutions to
additional restrictions, oversight and costs. In addition, new
proposals for legislation continue to be introduced in Congress
that could further substantially increase regulation of the
financial services industry and impose restrictions on the
operations and general ability of firms within the industry to
conduct business consistent with historical practices, including
in the areas of compensation, interest rates and financial
product offerings and disclosures, among other things. Federal
and state regulatory agencies also frequently adopt changes to
their regulations or change the manner in which existing
regulations are applied. Such proposed changes in laws,
regulations and regulatory practices affecting the banking
industry may limit the manner in which we may conduct our
business. Such changes may adversely affect us, including our
ability to make loans and leases, and may also result in the
imposition of additional costs on us.
Failure to realize the projected value of residual interests
in equipment we finance would reduce the residual value of
equipment recorded as assets on our balance sheet and may reduce
our operating income. We estimate the residual
value of the equipment which is recorded as an asset on our
balance sheet. Realization of residual values depends on
numerous factors including: the general market conditions at the
time of expiration of the lease; the cost of comparable new
equipment; the obsolescence of the leased equipment; any unusual
or excessive wear and tear on or damage to the equipment; the
effect of any additional or amended government regulations; and
the foreclosure by a secured party of our interest in a
defaulted lease. Our failure to realize our recorded residual
values would reduce the residual value of equipment recorded as
assets on our balance sheet and may reduce our operating income.
If we experience significant telecommunications or technology
downtime, our operations would be disrupted and our ability to
generate operating income could be negatively
impacted. Our business depends in large part on
our telecommunications and information management systems. The
temporary or permanent loss of our computer systems,
telecommunications equipment or software systems, through
casualty or operating malfunction, could disrupt our operations
and negatively impact our ability to service our customers and
lead to significant declines in our operating income.
Our quarterly operating results may fluctuate
significantly. Our operating results may differ
from quarter to quarter, and these differences may be
significant. Factors that may cause these differences include:
changes in the volume of lease applications, approvals and
originations; changes in interest rates; the timing of term note
securitizations; the availability and cost of capital and
funding; the degree of competition we face; the levels of
charge-offs we incur; general economic conditions; and other
factors. Because we discontinued hedge accounting effective
July 1, 2008, any subsequent changes in the fair value of
derivative instruments, including those that had previously been
accounted for under hedge accounting, is recognized immediately
in the Consolidated Statements of Operations. This change
creates volatility in our results of operations, as the market
value of our derivatives may change over time, and this
volatility may adversely impact our results of operations and
financial condition. These changes in value are based on the
values of the derivative contracts as of the dates reported in a
volatile market that changes daily, and will not necessarily
reflect the value at settlement. The results of any one quarter
may not indicate what our performance may be in the future. At
December 31, 2010, there was no notional principal
outstanding under interest-rate swap agreements.
Our common stock price is volatile. The
trading price of our common stock may fluctuate substantially
depending on many factors, some of which are beyond our control
and may not be related to our operating performance. These
fluctuations could cause investors to lose part or all of their
investment in our shares of common stock. Those factors that
could cause fluctuations include, but are not limited to, the
following:
|
|
|
|
|
price and volume fluctuations in the overall stock market from
time to time;
|
|
|
|
significant volatility in the market price and trading volume of
financial services companies;
|
24
|
|
|
|
|
actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of market analysts;
|
|
|
|
investor perceptions of the equipment leasing industry in
general and the Company in particular;
|
|
|
|
the operating and stock performance of comparable companies;
|
|
|
|
legislative and regulatory changes with respect to the financial
or banking industries;
|
|
|
|
general economic conditions and trends;
|
|
|
|
major catastrophic events;
|
|
|
|
loss of external funding sources;
|
|
|
|
sales of large blocks of our stock or sales by insiders; or
|
|
|
|
departures of key personnel.
|
It is possible that in some future quarter our operating results
may be below the expectations of financial market analysts and
investors and, as a result of these and other factors, the price
of our common stock may decline.
Future sales of our common stock by a certain large
shareholder could adversely affect the market price of our
common stock. A substantial number of shares of
our common stock could be sold into the public market pursuant
to a shelf registration statement on
Form S-3
(No. 333-128329)
that became effective on December 19, 2005. As of
February 1, 2010, this large shareholder owned
2,309,934 shares of our common stock. The sale of all or a
portion of these shares into the public market, or the
perception that such a sale could occur, could adversely affect
the market price of our common stock.
Anti-takeover provisions and our right to issue preferred
stock could make a third-party acquisition of us
difficult. We are a Pennsylvania corporation.
Anti-takeover provisions of Pennsylvania law could make it more
difficult for a third party to acquire control of us, even if
such change in control would be beneficial to our shareholders.
Our amended and restated articles of incorporation and our
bylaws contain certain other provisions that would make it
difficult for a third party to acquire control of us, including
a provision that our Board of Directors may issue preferred
stock without shareholder approval.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
At December 31, 2010, we operated from five leased
facilities including our executive office facility, a
Philadelphia office facility, two branch offices and the
headquarters of MBB. Our Mount Laurel, New Jersey executive
offices are housed in a leased facility of approximately
50,000 square feet under a lease that expires in May 2013.
We also lease 3,524 square feet of office space in
Philadelphia, Pennsylvania, where we perform our lease recording
and acceptance functions. Our Philadelphia lease expires in July
2013. In addition, we have a regional office in Johns Creek,
Georgia (a suburb of Atlanta). Our Georgia office is
5,822 square feet and the lease expires in July 2013. The
headquarters of MBB in Salt Lake City is 5,764 square feet
and the lease expires in October 2014. We also lease
300 square feet for a sales office in Sherwood, Oregon.
This lease commenced September 2010 and is on a
month-to-month
basis. We believe our leased facilities are adequate for our
current needs and sufficient to support our current operations
and anticipated future requirements.
|
|
Item 3.
|
Legal
Proceedings
|
We are party to various legal proceedings, which include claims
and litigation arising in the ordinary course of business. In
the opinion of management, these actions will not have a
material adverse effect on our business, financial condition or
results of operations or cash flows.
25
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Marlin Business Services Corp. completed its IPO of common stock
and became a publicly traded company on November 12, 2003.
The Companys common stock trades on the NASDAQ Global
Select Market under the symbol MRLN. The following
table sets forth, for the periods indicated, the high and low
sales prices per share of our common stock as reported on the
NASDAQ Global Select Market.
|
|
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|
|
|
|
2010
|
|
2009
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
10.75
|
|
|
$
|
8.35
|
|
|
$
|
4.66
|
|
|
$
|
2.52
|
|
Second Quarter
|
|
$
|
13.38
|
|
|
$
|
10.23
|
|
|
$
|
5.60
|
|
|
$
|
3.14
|
|
Third Quarter
|
|
$
|
12.52
|
|
|
$
|
9.47
|
|
|
$
|
8.64
|
|
|
$
|
4.94
|
|
Fourth Quarter
|
|
$
|
13.17
|
|
|
$
|
10.38
|
|
|
$
|
8.11
|
|
|
$
|
6.71
|
|
Dividend
Policy
We have not paid or declared any cash dividends on our common
stock. The payment of cash dividends, if any, will depend upon
our earnings, financial condition, capital requirements, cash
flow and long-range plans and such other factors as our Board of
Directors may deem relevant.
The Federal Reserve Board has issued policy statements which
provide that, as a general matter, insured banks and bank
holding companies should pay dividends only out of current
operating earnings. For state-chartered banks which are members
of the Federal Reserve System, the approval of the Federal
Reserve Board is required for the payment of dividends by the
bank subsidiary in any calendar year if the total of all
dividends declared by the bank in that calendar year, including
the proposed dividend, exceeds the current years net
income combined with the retained net income for the two
preceding calendar years. Retained net income for
any period means the net income for that period less any common
or preferred stock dividends declared in that period. Moreover,
no dividends may be paid by such bank in excess of its undivided
profits account.
Number of
Record Holders
There were 373 holders of record of our common stock at
February 28, 2011. We believe that the number of beneficial
owners is greater than the number of record holders because a
large portion of our common stock is held of record through
brokerage firms in street name.
Information
on Stock Repurchases
On November 2, 2007, the Companys Board of Directors
approved a stock repurchase plan. Under this program, the
Company is authorized to repurchase up to $15 million in
value of its outstanding shares of common stock. This authority
may be exercised from time to time and in such amounts as market
conditions warrant. Any shares purchased under this plan are
returned to the status of authorized but unissued shares of
common stock. The repurchases may be made on the open market, in
block trades or otherwise. The program may be suspended or
discontinued at any time. The repurchases are funded using the
Companys working capital.
26
The number of shares of common stock repurchased by Marlin
during the fourth quarter of 2010 and the average price paid per
share is as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Approximate
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Dollar Value of Shares that
|
|
|
|
Number of
|
|
|
Average Price
|
|
|
Part of a Publicly
|
|
|
May Yet be Purchased
|
|
|
|
Shares
|
|
|
Paid Per
|
|
|
Announced Plan or
|
|
|
Under the Plans or
|
|
Time Period
|
|
Purchased
|
|
|
Share(1)
|
|
|
Program
|
|
|
Programs
|
|
|
October 1, 2010 to October 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
10,642,744
|
|
November 1, 2010 to November 30, 2010
|
|
|
6,212
|
|
|
$
|
10.71
|
|
|
|
6,212
|
|
|
$
|
10,576,204
|
|
December 1, 2010 to December 31, 2010
|
|
|
12,763
|
|
|
$
|
10.67
|
|
|
|
12,763
|
|
|
$
|
10,440,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the quarter ended December 31, 2010
|
|
|
18,975
|
|
|
$
|
10.68
|
|
|
|
18,975
|
|
|
$
|
10,440,013
|
|
|
|
|
(1) |
|
Average price paid per share includes commissions and is rounded
to the nearest two decimal places. |
In addition to the repurchases described above, pursuant to the
Companys 2003 Equity Compensation Plan (the 2003
Plan), participants may have shares withheld to cover
income taxes. There were 508 shares repurchased to cover
income tax withholding pursuant to the 2003 Plan during the
three-month period ended December 31, 2010, at an average
cost of $12.83 per share.
Sale of
Unregistered Securities
On February 12, 2010, we issued $80.7 million of term
asset-backed debt securities through our special purpose
subsidiary, Marlin Leasing Receivables XII LLC, with the senior
tranche of the offering being eligible under the TALF program
established by the Federal Reserve Board. This issuance was done
in reliance on the exemption from registration provide by
Rule 144A of the 1933 Act. J.P. Morgan
Securities, Inc. served as the initial purchaser and placement
agent for the issuance, and the aggregate initial
purchasers discounts and commissions paid were
approximately $0.5 million.
27
Shareholder
Return Performance Graph
The following graph compares the dollar change in the cumulative
total shareholder return on the Companys common stock
against the cumulative total return of the Russell 2000 Index
and the SNL Specialty Lender Index for the period commencing on
December 31, 2005 and ending on December 31, 2010. The
graph shows the cumulative investment return to shareholders
based on the assumption that a $100 investment was made on
December 31, 2005 in each of the following: the
Companys common stock, the Russell 2000 Index and the SNL
Specialty Lender Index. We computed returns assuming the
reinvestment of all dividends. The shareholder return shown on
the following graph is not indicative of future performance.
Total
Return Performance
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
|
Index
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
12/31/09
|
|
12/31/10
|
Marlin Business Services Corp.
|
|
|
100.00
|
|
|
|
100.59
|
|
|
|
50.48
|
|
|
|
10.93
|
|
|
|
33.19
|
|
|
|
52.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell 2000
|
|
|
100.00
|
|
|
|
118.37
|
|
|
|
116.51
|
|
|
|
77.15
|
|
|
|
98.11
|
|
|
|
124.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SNL Specialty Lender
|
|
|
100.00
|
|
|
|
113.25
|
|
|
|
74.21
|
|
|
|
20.69
|
|
|
|
33.96
|
|
|
|
41.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Source : SNL Financial LC, Charlottesville, VA
©
2011
28
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data as of December 31,
2010 and 2009 and for each of the years ended December 31,
2010, 2009 and 2008 has been derived from the consolidated
financial statements. The selected financial data as of
December 31, 2008, December 31, 2007 and
December 31, 2006 and for the years ended December 31,
2007 and 2006 has been updated to reflect the restatement
discussed in Note 20 to the Consolidated Financial
Statements in Item 8 herein. The selected financial data
should be read together with the consolidated financial
statements and notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
61,337
|
|
|
$
|
83,444
|
|
|
$
|
107,453
|
|
|
$
|
110,532
|
|
|
$
|
97,429
|
|
Interest expense
|
|
|
15,613
|
|
|
|
27,338
|
|
|
|
36,880
|
|
|
|
35,322
|
|
|
|
26,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
45,724
|
|
|
|
56,106
|
|
|
|
70,573
|
|
|
|
75,210
|
|
|
|
70,867
|
|
Provision for credit losses
|
|
|
9,438
|
|
|
|
27,189
|
|
|
|
31,494
|
|
|
|
17,221
|
|
|
|
9,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income after provision for credit losses
|
|
|
36,286
|
|
|
|
28,917
|
|
|
|
39,079
|
|
|
|
57,989
|
|
|
|
60,933
|
|
Loss on derivatives
|
|
|
(116
|
)
|
|
|
(1,959
|
)
|
|
|
(16,039
|
)
|
|
|
|
|
|
|
|
|
Insurance and other income
|
|
|
5,401
|
|
|
|
6,855
|
|
|
|
8,144
|
|
|
|
7,902
|
|
|
|
5,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
19,966
|
|
|
|
19,071
|
|
|
|
22,916
|
|
|
|
21,329
|
|
|
|
22,468
|
|
General and administrative
|
|
|
12,762
|
|
|
|
12,854
|
|
|
|
15,241
|
|
|
|
13,633
|
|
|
|
11,957
|
|
Financing related costs
|
|
|
680
|
|
|
|
505
|
|
|
|
1,418
|
|
|
|
1,045
|
|
|
|
1,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
33,408
|
|
|
|
32,430
|
|
|
|
39,575
|
|
|
|
36,007
|
|
|
|
35,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
8,163
|
|
|
|
1,383
|
|
|
|
(8,391
|
)
|
|
|
29,884
|
|
|
|
30,685
|
|
Income tax expense (benefit)
|
|
|
2,495
|
|
|
|
347
|
|
|
|
(3,161
|
)
|
|
|
11,884
|
|
|
|
12,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,668
|
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
|
$
|
18,000
|
|
|
$
|
18,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.44
|
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
$
|
1.47
|
|
|
$
|
1.53
|
|
Shares used in computing basic earnings (loss) per share
|
|
|
12,836,340
|
|
|
|
12,549,167
|
|
|
|
11,874,647
|
|
|
|
12,237,263
|
|
|
|
11,939,742
|
|
Diluted earnings (loss) per share
|
|
$
|
0.44
|
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
$
|
1.45
|
|
|
$
|
1.50
|
|
Shares used in computing diluted earnings (loss) per share
|
|
|
12,902,151
|
|
|
|
12,579,806
|
|
|
|
11,874,647
|
|
|
|
12,399,786
|
|
|
|
12,206,095
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands, except per-share data)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of finance receivables originated
|
|
|
12,407
|
|
|
|
9,763
|
|
|
|
24,869
|
|
|
|
33,141
|
|
|
|
34,214
|
|
Total finance receivables originated
|
|
$
|
134,030
|
|
|
$
|
88,935
|
|
|
$
|
256,554
|
|
|
$
|
390,766
|
|
|
$
|
388,661
|
|
Average total finance
receivables(1)
|
|
$
|
389,001
|
|
|
$
|
558,311
|
|
|
$
|
715,649
|
|
|
$
|
721,900
|
|
|
$
|
611,348
|
|
Weighted average interest rate (implicit) on new finance
receivables
originated(2)
|
|
|
14.47
|
%
|
|
|
15.09
|
%
|
|
|
13.67
|
%
|
|
|
12.93
|
%
|
|
|
12.72
|
%
|
Interest income as a percent of average total finance
receivables(1)
|
|
|
12.15
|
%
|
|
|
11.83
|
%
|
|
|
12.03
|
%
|
|
|
12.43
|
%
|
|
|
12.61
|
%
|
Interest expense as percent of average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing liabilities
|
|
|
4.85
|
%
|
|
|
5.40
|
%
|
|
|
5.62
|
%
|
|
|
5.23
|
%
|
|
|
4.78
|
%
|
Portfolio Asset Quality Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance receivables, end of
period(1)
|
|
$
|
352,527
|
|
|
$
|
450,595
|
|
|
$
|
664,902
|
|
|
$
|
749,712
|
|
|
$
|
679,729
|
|
Delinquencies greater than 60 days past
due(3)
|
|
|
0.90
|
%
|
|
|
1.67
|
%
|
|
|
1.59
|
%
|
|
|
0.95
|
%
|
|
|
0.71
|
%
|
Allowance for credit losses
|
|
$
|
7,718
|
|
|
$
|
12,193
|
|
|
$
|
15,283
|
|
|
$
|
10,988
|
|
|
$
|
8,201
|
|
Allowance for credit losses to total finance receivables, end of
period(1)
|
|
|
2.19
|
%
|
|
|
2.71
|
%
|
|
|
2.30
|
%
|
|
|
1.47
|
%
|
|
|
1.21
|
%
|
Charge-offs, net
|
|
$
|
13,913
|
|
|
$
|
30,279
|
|
|
$
|
27,199
|
|
|
$
|
14,434
|
|
|
$
|
9,546
|
|
Ratio of net charge-offs to average total finance
receivables(1)
|
|
|
3.58
|
%
|
|
|
5.42
|
%
|
|
|
3.80
|
%
|
|
|
2.00
|
%
|
|
|
1.56
|
%
|
Operating Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio(4)
|
|
|
64.02
|
%
|
|
|
50.71
|
%
|
|
|
48.47
|
%
|
|
|
42.07
|
%
|
|
|
45.08
|
%
|
Return on average total assets
|
|
|
1.13
|
%
|
|
|
0.15
|
%
|
|
|
(0.62
|
)%
|
|
|
2.09
|
%
|
|
|
2.50
|
%
|
Return on average stockholders equity
|
|
|
3.72
|
%
|
|
|
0.70
|
%
|
|
|
(3.48
|
)%
|
|
|
12.37
|
%
|
|
|
14.73
|
%
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,026
|
|
|
$
|
37,057
|
|
|
$
|
40,270
|
|
|
$
|
38,708
|
|
|
$
|
29,762
|
|
Restricted interest-earning deposits with banks
|
|
$
|
47,107
|
|
|
$
|
63,400
|
|
|
$
|
66,212
|
|
|
$
|
141,070
|
|
|
$
|
57,705
|
|
Net investment in leases and loans
|
|
$
|
351,569
|
|
|
$
|
448,610
|
|
|
$
|
669,109
|
|
|
$
|
764,553
|
|
|
$
|
693,003
|
|
Total assets
|
|
$
|
468,062
|
|
|
$
|
565,803
|
|
|
$
|
794,431
|
|
|
$
|
958,269
|
|
|
$
|
794,544
|
|
Short-term borrowings
|
|
$
|
|
|
|
$
|
62,541
|
|
|
$
|
101,923
|
|
|
$
|
|
|
|
$
|
|
|
Long-term borrowings
|
|
$
|
178,650
|
|
|
$
|
244,445
|
|
|
$
|
441,385
|
|
|
$
|
773,085
|
|
|
$
|
616,322
|
|
Deposits
|
|
$
|
92,919
|
|
|
$
|
80,288
|
|
|
$
|
63,385
|
|
|
$
|
|
|
|
$
|
|
|
Total
liabilities(5)
|
|
$
|
308,059
|
|
|
$
|
413,918
|
|
|
$
|
644,159
|
|
|
$
|
805,308
|
|
|
$
|
657,153
|
|
Total stockholders
equity(5)
|
|
$
|
160,003
|
|
|
$
|
151,885
|
|
|
$
|
150,272
|
|
|
$
|
152,961
|
|
|
$
|
137,391
|
|
|
|
|
(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
(i) the allowance for credit losses and (ii) initial
direct costs and fees deferred, are excluded from total finance
receivables. |
|
(2) |
|
Excludes initial direct costs and fees deferred. |
|
(3) |
|
Calculated as a percentage of minimum lease payments receivable
for leases and as a percentage of principal outstanding for
loans and factoring receivables. |
|
(4) |
|
Salaries, benefits, general and administrative expense divided
by net interest and fee income, insurance and other income. |
|
(5) |
|
Information has been updated to reflect the restatement
discussed in Note 20 of the Notes to Consolidated Financial
Statements in Item 8 herein. The impact of the restatement
decreased net deferred income tax liability and increased
retained earnings by $3.6 million as of December 31,
2006, 2007, 2008 and 2009. |
30
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
FORWARD-LOOKING
STATEMENTS
Certain statements in this document may include the words or
phrases can be, expects,
plans, may, may affect,
may depend, believe,
estimate, intend, could,
should, would, if and
similar words and phrases that constitute forward-looking
statements within the meaning of Section 27A of the
1933 Act and Section 21E of the 1934 Act.
Forward-looking statements are subject to various known and
unknown risks and uncertainties and the Company cautions that
any forward-looking information provided by or on its behalf is
not a guarantee of future performance. Statements regarding the
following subjects are forward-looking by their nature:
(a) our business strategy; (b) our projected operating
results; (c) our ability to obtain external financing;
(d) the effectiveness of our hedges; (e) our
understanding of our competition; and (f) industry and
market trends. The Companys actual results could differ
materially from those anticipated by such forward-looking
statements due to a number of factors, some of which are beyond
the Companys control, including, without limitation:
|
|
|
|
|
availability, terms and deployment of funding and capital;
|
|
|
|
general volatility of the securitization and capital markets;
|
|
|
|
changes in our industry, interest rates, the regulatory
environment or the general economy resulting in changes to our
business strategy;
|
|
|
|
the degree and nature of our competition;
|
|
|
|
availability and retention of qualified personnel; and
|
|
|
|
the factors set forth in the section captioned Risk
Factors in Item 1A of this Form
10-K.
|
Forward-looking statements apply only as of the date made and
the Company is not required to update forward-looking statements
for subsequent or unanticipated events or circumstances.
Overview
Managements discussion and analysis has been updated to
reflect corrections to prior periods as discussed in
Note 20 to the Consolidated Financial Statements in
Item 8 herein.
We are a nationwide provider of equipment financing solutions,
primarily to small businesses. We finance over 100 categories of
commercial equipment important to our end user customers
including copiers, security systems, computers,
telecommunications equipment and certain commercial and
industrial equipment. We access our end user customers through
origination sources comprised of our existing network of
independent equipment dealers and, to a much lesser extent,
through direct solicitation of our end user customers and
through relationships with select lease brokers. Our leases are
fixed-rate transactions with terms generally ranging from 36 to
60 months. At December 31, 2010, our lease portfolio
consisted of approximately 72,000 accounts with an average
original term of 50 months and average original transaction
size of approximately $11,300.
Since our founding in 1997, we have grown to $468.1 million
in total assets at December 31, 2010. Our assets are
substantially comprised of our net investment in leases and
loans which totaled $351.6 million at December 31,
2010.
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 year ended December 31, 2010, our
net credit losses were 3.58% of our average total finance
receivables. We establish reserves for credit losses which
require us to estimate inherent losses in our portfolio as of
the reporting date.
Our leases are classified under generally accepted accounting
principles in the United States (U.S. GAAP) as
direct financing leases, and we recognize interest income over
the term of the lease. Direct financing leases transfer
substantially all of the benefits and risks of ownership to the
equipment lessee. Our net investment in direct finance
31
leases is included in our consolidated financial statements in
net investment in leases and loans. Net investment
in direct financing leases consists of the sum of total minimum
lease payments receivable and the estimated residual value of
leased equipment, less unearned lease income. Unearned lease
income consists of the excess of the total future minimum lease
payments receivable plus the estimated residual value expected
to be realized at the end of the lease term plus deferred net
initial direct costs and fees less the cost of the related
equipment. Approximately 69% of our lease portfolio at
December 31, 2010 amortizes over the lease term to a $1
residual value. For the remainder of the portfolio, we must
estimate end of term residual values for the leased assets.
Failure to correctly estimate residual values could result in
losses being realized on the disposition of the equipment at the
end of the lease term.
Since our founding, we have funded our business through a
combination of variable-rate borrowings and fixed-rate asset
securitization transactions, as well as through the issuance
from time to time of subordinated debt and equity securities.
Our variable-rate borrowing currently consists of long-term loan
facilities. We have traditionally issued fixed-rate term debt
through the asset-backed securitization market. Historically,
leases were funded through variable-rate warehouse facilities
until they were refinanced through term note securitizations at
fixed rates. All of our term note securitizations have been
accounted for as on-balance sheet transactions and, therefore,
we have not recognized gains or losses from these transactions.
As of December 31, 2010, $128.2 million, or 71.8%, of
our borrowings were fixed-rate term note securitizations.
In addition, since its opening on March 12, 2008, MBB has
provided diversification of the Companys funding sources
through the issuance of FDIC-insured certificates of deposit
raised nationally primarily through various brokered deposit
relationships and FDIC-insured retail deposits directly from
other financial institutions. As of December 31, 2010,
total MBB deposits were $92.9 million.
Fixed rate leases not funded with deposits are initially
financed with variable-rate debt. Therefore, our earnings may be
exposed to interest rate risk should interest rates rise. We
generally benefit in times of falling and low interest rates. In
contrast to previous warehouse facilities, our current long-term
loan facilities do not require annual refinancing, but failure
to renew the existing facilities or to obtain additional
financing could restrict our growth and future financial
performance.
On February 12, 2010, we completed an $80.7 million
TALF-eligible term asset-backed securitization. This transaction
was Marlins tenth term note securitization and the fifth
to earn a AAA rating. As with all of the Companys prior
term note securitizations, this financing provided the Company
with fixed-cost borrowing and is recorded in long-term
borrowings in the Consolidated Balance Sheets. A portion of the
proceeds of the new securitization was used to repay the full
amount outstanding under the CP conduit warehouse facility.
On September 24, 2010, the Companys affiliate, Marlin
Leasing Receivables XIII LLC (MLR XIII), closed on a
$50.0 million three-year committed loan facility with Key
Equipment Finance Inc. The facility is secured by a lien on MLR
XIIIs assets. Advances under the facility will be made
pursuant to a borrowing base formula, and the proceeds will be
used to fund lease originations. The maturity date of the
facility is September 23, 2013. An event of default such as
non-payment of amounts when due under the loan agreement or a
breach of covenants may accelerate the maturity date of the
facility.
We use derivative financial instruments to manage exposure to
the effects of changes in market interest rates and to fulfill
certain covenants in our borrowing arrangements. All derivatives
are recorded on the Consolidated Balance Sheets at their fair
value as either assets or liabilities. Accounting for the
changes in fair value of derivatives depends on whether the
derivative has been designated and qualifies for hedge
accounting treatment pursuant to the Derivatives and Hedging
Topic of the Financial Accounting Standards Boards
Accounting Standards Codification (the FASB ASC).
While the Company may continue to use derivative financial
instruments to reduce exposure to changing interest rates,
effective July 1, 2008, the Company discontinued the use of
hedge accounting. At December 31, 2010, there was no
notional principal outstanding under interest-rate swap
agreements.
On March 20, 2007, the FDIC approved the application of our
wholly-owned subsidiary, MBB, to become an industrial bank
chartered by the State of Utah. MBB commenced operations
effective March 12, 2008. MBB provides diversification of
the Companys funding sources and, over time, may add other
product offerings to better serve our customer base.
32
On December 31, 2008, MBB received approval from the
Federal Reserve Bank of San Francisco to (i) convert
from an industrial bank to a state-chartered commercial bank and
(ii) become a member of the Federal Reserve System. In
addition, on December 31, 2008, Marlin Business Services
Corp. received approval from the Federal Reserve Bank of
Philadelphia to become a bank holding company upon conversion of
MBB from an industrial bank to a commercial bank. On
January 13, 2009, pursuant to the December 31, 2008
approval from the Federal Reserve Bank of San Francisco,
MBB converted from an industrial bank to a state-chartered
commercial bank chartered in the State of Utah and supervised by
the State of Utah and the Federal Reserve Board. In connection
with MBBs conversion to a commercial bank and pursuant to
the December 31, 2008 approval from and the Federal Reserve
Bank of Philadelphia, on January 13, 2009 Marlin Business
Services Corp. became a bank holding company and is subject to
the Bank Holding Company Act and supervised by the Federal
Reserve Board.
On September 15, 2010, the Federal Reserve Bank of
Philadelphia confirmed the effectiveness of Marlin Business
Services Corp.s election to become a financial holding
company (while remaining a bank holding company) pursuant to
Sections 4(k) and (l) of the Bank Holding Company Act
and Section 225.82 of the Federal Reserve Boards
Regulation Y. Such election permits Marlin Business
Services Corp. to engage in activities that are financial in
nature or incidental to a financial activity, including the
maintenance and expansion of our reinsurance activities
conducted through its wholly-owned subsidiary, AssuranceOne.
Reorganization
and Initial Public Offering
Marlin Leasing Corporation was incorporated in Delaware on
June 16, 1997. On August 5, 2003, we incorporated
Marlin Business Services Corp. in Pennsylvania. On
November 11, 2003, we reorganized our operations into a
holding company structure by merging Marlin Leasing Corporation
with a wholly-owned subsidiary of Marlin Business Services Corp.
As a result, all former shareholders of Marlin Leasing
Corporation became shareholders of Marlin Business Services
Corp. Marlin Leasing Corporation remains in existence as our
primary operating subsidiary.
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our IPO. Of these shares, a total of
3,581,255 shares were sold by the Company and
1,478,745 shares were sold by selling shareholders. The IPO
price was $14.00 per share resulting in net proceeds to us,
after payment of underwriting discounts and commissions but
before other offering costs, of approximately
$46.6 million. We did not receive any proceeds from the
shares sold by the selling shareholders.
Stock
Repurchase Plan
On November 2, 2007, the Board of Directors approved a
stock repurchase plan. Under this program, Marlin is authorized
to repurchase up to $15 million of its outstanding shares
of common stock. This authority may be exercised from time to
time and in such amounts as market conditions warrant. Any
shares purchased under this plan are returned to the status of
authorized but unissued shares of common stock. The repurchases
may be made on the open market, in block trades or otherwise.
The program may be suspended or discontinued at any time. The
stock repurchases are funded using the Companys working
capital.
There were 21,822 shares of common stock repurchased by the
Company pursuant to the above plan during the year ended
December 31, 2010. As of December 31, 2010, the
maximum approximate dollar value of shares that may yet be
purchased under the stock repurchase plan is approximately
$10.4 million.
In addition to the repurchases described above, pursuant to the
2003 Plan, participants may have shares withheld to cover income
taxes. There were 59,103 shares repurchased to cover income
tax withholding pursuant to the 2003 Plan during the year ended
December 31, 2010, at an average cost of $9.12 per share.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
U.S. GAAP. Preparation of these financial statements
requires us to make estimates and judgments that affect reported
amounts of assets, liabilities, revenues and expenses and affect
related disclosure of contingent assets and liabilities at the
date of our financial
33
statements. On an ongoing basis, we evaluate our estimates,
including credit losses, residuals, initial direct costs and
fees, other fees, performance assumptions for stock-based
compensation awards, the probability of forecasted transactions,
the fair value of financial instruments and the realization of
deferred tax assets. We base our estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Critical accounting policies are defined as those that
are reflective of significant judgments and uncertainties. Our
consolidated financial statements are based on the selection and
application of critical accounting policies, the most
significant of which are described below.
Income recognition. Interest income is
recognized under the effective interest method. The effective
interest method of income recognition applies a constant rate of
interest equal to the internal rate of return on the lease. When
a lease or loan is 90 days or more delinquent, the contract
is classified as being on non-accrual and we do not recognize
interest income on that contract until it is less than
90 days delinquent.
Fee income consists of fees for delinquent lease and loan
payments, cash collected on early termination of leases and net
residual income. Net residual income includes income from lease
renewals and gains and losses on the realization of residual
values of leased equipment disposed at the end of a leases
term. Residual income is recognized as earned.
Fee income from delinquent lease payments is recognized on an
accrual basis based on anticipated collection rates. At a
minimum of every quarter, an analysis of anticipated collection
rates is performed based on updates to collection experience.
Adjustments in anticipated collection rate assumptions are made
as needed based on this analysis. Other fees are recognized when
received.
Insurance income is recognized on an accrual basis as earned
over the term of a lease. Generally, insurance payments that are
120 days or more past due are charged against income.
Ceding commissions, losses and loss adjustment expenses are
recorded in the period incurred and netted against insurance
income.
Initial direct costs and fees. We defer
initial direct costs incurred and fees received to originate our
leases and loans in accordance with the Receivables Topic and
the Nonrefundable Fees and Other Costs Subtopic of the FASB ASC.
The initial direct costs and fees we defer are part of the net
investment in leases and loans and are amortized to interest
income using the effective interest method. We defer third-party
commission costs as well as certain internal costs directly
related to the origination activity. Costs subject to deferral
include evaluating each prospective customers financial
condition, evaluating and recording guarantees and other
security arrangements, negotiating terms, preparing and
processing documents and closing each transaction. Estimates of
costs subject to deferral are updated periodically, and no less
frequently than each year. The fees we defer are documentation
fees collected at inception. The realization of the deferred
initial direct costs, net of fees deferred, is predicated on the
net future cash flows generated by our lease and loan portfolios.
Lease residual values. A direct financing
lease is recorded at the aggregate future minimum lease payments
plus the estimated residual value less unearned income. Residual
values generally reflect the estimated amounts to be received at
lease termination from lease extensions, sales or other
dispositions of leased equipment. These estimates are based on
industry data and on our experience.
The Company records an estimated residual value at lease
inception for all fair market value and fixed purchase option
leases based on a percentage of the equipment cost of the asset
being leased. The percentages used depend on equipment type and
term. In setting and reviewing estimated residual values, the
Company focuses its analysis primarily on total historical and
expected realization statistics pertaining to both lease
renewals and sales of equipment.
At the end of an original lease term, lessees may choose to
purchase the equipment, renew the lease or return the equipment
to the Company. The Company receives income from lease renewals
when the lessee elects to retain the equipment longer than the
original term of the lease. This income, net of appropriate
periodic reductions in the estimated residual values of the
related equipment, is included in fee income as net residual
income.
When a lessee elects to return equipment at lease termination,
the equipment is transferred to other assets at the lower of its
basis or fair market value. The Company generally sells returned
equipment to independent third parties,
34
rather than leasing the equipment a second time. The Company
does not maintain equipment in other assets for longer than
120 days. Any loss recognized on transferring equipment to
other assets, and any gain or loss realized on the sale or
disposal of equipment to a lessee or to others is included in
fee income as net residual income.
Based on the Companys experience, the amount of ultimate
realization of the residual value tends to relate more to the
customers election at the end of the lease term to enter
into a renewal period, to purchase the leased equipment or to
return the leased equipment than it does to the equipment type.
Management performs periodic reviews of the estimated residual
values and historic realization statistics no less frequently
than quarterly and any impairment, if other than temporary, is
recognized in the current period.
Allowance for credit losses. In accordance
with the Contingencies Topic of the FASB ASC, we maintain an
allowance for credit losses at an amount sufficient to absorb
losses inherent in our existing lease and loan portfolios as of
the reporting dates based on our projection of probable net
credit losses.
We evaluate our portfolios on a pooled basis, due to their
composition of small balance, homogenous accounts with similar
general credit risk characteristics, diversified among a large
cross-section of variables including industry, geography,
equipment type, obligor and vendor. We consider both
quantitative and qualitative factors in determining the
allowance for credit losses. Quantitative factors considered
include a migration analysis, historic delinquencies and
charge-offs, historic bankruptcies, historic performance of
restructured accounts and a static pool analysis of historic
recoveries. A migration analysis is a technique used to estimate
the likelihood that an account will progress through the various
delinquency stages and ultimately charge off. Qualitative
factors that may result in further adjustments to the
quantitative analysis include items such as forecasting
uncertainties, changes in the composition of our lease and loan
portfolios, seasonality, economic conditions and trends or
business practices at the reporting date that are different from
the periods used in the quantitative analysis. Adjustments due
to such qualitative factors increased the allowance for credit
losses by approximately $0.2 million and $0.8 million
at December 31, 2010 and 2009, respectively.
The various factors used in the analysis are reviewed
periodically, and no less frequently than quarterly. We then
establish an allowance for credit losses for the projected
probable net credit losses based on this analysis. A provision
is charged against earnings to maintain the allowance for credit
losses at the appropriate level. Our policy is to charge-off
against the allowance the estimated unrecoverable portion of
accounts once they reach 121 days delinquent.
Our projections of probable net credit losses are inherently
uncertain, and as a result we cannot predict with certainty the
amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolios, bankruptcy
laws and other factors could impact our actual and projected net
credit losses and the related allowance for credit losses. To
the extent we add new leases and loans to our portfolios, or to
the degree credit quality is worse than expected, we record
expense to increase the allowance for credit losses for the
estimated net losses inherent in our portfolios. Actual losses
may vary from current estimates.
In 2010, we disclosed that we were in discussions with the
Federal Reserve Bank in connection with the Federal Reserve
Banks interpretation of the Interagency Policy Statement
on the Allowance for Loan and Lease Losses (SR
06-17) dated
December 13, 2006 (the ALLL Policy Statement)
and the appropriate application of the ALLL Policy Statement to
managements estimates used in determining the
Companys allowance for credit losses (the
Allowance). On October 27, 2010, MBB received a
written determination from the Federal Reserve Bank of
San Francisco and the Utah Department of Financial
Institutions (the MBB Report). On December 22,
2010, the Company received a written determination from the
Federal Reserve Bank of Philadelphia (the MBSC
Report). While we have not received a final determination
from the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank of Philadelphia in connection with our
implementation of the recommendations contained in the MBB
Report and the MBSC Report, we believe that we have properly
implemented such recommendations and that such implementation
did not require material adjustments or significant changes to
the methodology used to determine the Allowance. If the Company
receives additional information from the Federal Reserve Bank of
San Francisco or the Federal Reserve Bank of Philadelphia
in connection with our implementation of the recommendations and
if, as a result of its review of such additional information,
management determines that such additional information requires
adjustments or changes to the methodology used to determine the
Allowance, such adjustments or changes could have a material
impact on the size of the Allowance.
35
Securitizations. From inception to
December 31, 2010, we have completed 10 term note
securitizations of which seven have been repaid. In connection
with each transaction, we established a bankruptcy remote
special purpose entity (SPE) and issued term debt to
institutional investors. These SPEs are each considered a
variable interest entity (VIE) under U.S. GAAP.
We are required to consolidate VIEs in which we are deemed to be
the primary beneficiary through having (1) power over the
significant activities of the entity and (2) an obligation
to absorb losses or the right to receive benefits from the VIE
which are potentially significant to the VIE. We continue to
service the assets of our VIEs and retain equity
and/or
residual interests. Accordingly, assets and related debt of
these VIEs are included in the accompanying Consolidated Balance
Sheets. Our leases and restricted interest-earning deposits with
banks are assigned as collateral for these borrowings and there
is no further recourse to our general credit. Collateral in
excess of these borrowings represents our maximum loss exposure.
Derivatives. The Derivatives and Hedging Topic
of the FASB ASC requires recognition of all derivatives at fair
value as either assets or liabilities in the Consolidated
Balance Sheets. The accounting for subsequent changes in the
fair value of these derivatives depends on whether each has been
designated and qualifies for hedge accounting treatment pursuant
to U.S. GAAP.
Prior to July 1, 2008, the Company entered into derivative
contracts which were accounted for as cash flow hedges under
hedge accounting as prescribed by U.S. GAAP. Under hedge
accounting, the effective portion of the gain or loss on a
derivative designated as a cash flow hedge was reported net of
tax effects in accumulated other comprehensive income on the
Consolidated Balance Sheets, until the pricing of the related
term securitization was established. The derivative gain or loss
recognized in accumulated other comprehensive income was then
reclassified into earnings as an adjustment to interest expense
over the terms of the related borrowings.
While the Company may continue to use derivative financial
instruments to reduce exposure to changing interest rates,
effective July 1, 2008, the Company discontinued the use of
hedge accounting. By discontinuing hedge accounting effective
July 1, 2008, any subsequent changes in the fair value of
derivative instruments, including those that had previously been
accounted for under hedge accounting, are recognized immediately
in gain (loss) on derivatives. This change creates volatility in
our results of operations, as the fair value of our derivative
financial instruments changes over time, and this volatility may
adversely impact our results of operations and financial
condition. At December 31, 2010, there was no notional
principal outstanding under interest-rate swap agreements.
For the forecasted transactions that were probable of occurring,
the derivative gain or loss in accumulated other comprehensive
income as of June 30, 2008 was reclassified into earnings
as an adjustment to interest expense over the terms of the
related forecasted borrowings, consistent with hedge accounting
treatment. At the time that any related forecasted borrowing was
no longer probable of occurring, the related gain or loss in
accumulated other comprehensive income became recognized
immediately in earnings.
The Fair Value Measurements and Disclosures Topic of the FASB
ASC establishes a framework for measuring fair value under
U.S. GAAP and requires certain disclosures about fair value
measurements. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants in the principal
or most advantageous market for the asset or liability at the
measurement date (exit price). Because the Companys
derivatives are not listed on an exchange, the Company values
these instruments using a valuation model with pricing inputs
that are observable in the market or that can be derived
principally from or corroborated by observable market data.
Stock-based compensation. We issue both
restricted shares and stock options to certain employees and
directors as part of our overall compensation strategy. The
Compensation Stock Compensation Topic of the FASB
ASC establishes fair value as the measurement objective in
accounting for share-based payment arrangements and requires all
entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees,
except for equity instruments held by employee share ownership
plans.
The Company measures stock-based compensation cost at grant
date, based on the fair value of the awards ultimately expected
to vest. Compensation cost is recognized on a straight-line
basis over the service period. We generally use the
Black-Scholes valuation model to measure the fair value of our
stock options utilizing various
36
assumptions with respect to expected holding period, risk-free
interest rates, stock price volatility and dividend yield. The
assumptions are based on subjective future expectations combined
with management judgment.
The fair value calculations for the one-time stock option
exchange program the Company effected through an
October 28, 2009 amendment to the 2003 Plan were based on a
binomial valuation model which considered many variables, such
as the volatility of our stock and the expected term of an
option, including consideration of the ratio of stock price to
the exercise price at which exercise is expected to occur. The
binomial valuation model was used for both the surrendered stock
options and the new replacement options under the stock option
exchange program.
The Company uses its judgment in estimating the amount of awards
that are expected to be forfeited, with subsequent revisions to
the assumptions if actual forfeitures differ from those
estimates. In addition, for performance-based awards the Company
estimates the degree to which the performance conditions will be
met to estimate the number of shares expected to vest and the
related compensation expense. Compensation expense is adjusted
in the period such performance estimates change.
Income taxes. The Income Taxes Topic of the
FASB ASC requires the use of the asset and liability method
under which deferred taxes are determined based on the estimated
future tax effects of differences between the financial
statement and tax bases of assets and liabilities, given the
provisions of the enacted tax laws. In assessing the
realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the
deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities and
projected future taxable income in making this assessment. Based
upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of these
deductible differences.
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities
and any necessary valuation allowance recorded against net
deferred tax assets. The process involves summarizing temporary
differences resulting from the different treatment of items such
as leases for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are
included within the Consolidated Balance Sheets. Our management
then assesses the likelihood that deferred tax assets will be
recovered from future taxable income or tax carry-back
availability and, to the extent our management believes recovery
is not likely, a valuation allowance is established. To the
extent that we establish a valuation allowance in a period, an
expense is recorded within the tax provision in the Consolidated
Statements of Operations.
At December 31, 2010, there have been no material changes
to the liability for uncertain tax positions and there are no
significant unrecognized tax benefits. The periods subject to
general examination for the Companys federal return
include the 2006 tax year to the present. The Company files
state income tax returns in various states which may have
different statutes of limitations. Generally, state income tax
returns for years 2005 through the present are subject to
examination.
The Company records penalties and accrued interest related to
uncertain tax positions in income tax expense. Such adjustments
have historically been minimal and immaterial to our financial
results.
Results
of Operations
Comparison
of the Years Ended December 31, 2010 and 2009
Net income. Net income of $5.7 million
was reported for the year ended December 31, 2010,
resulting in diluted earnings per share of $0.44. This net
income includes an after-tax charge related to derivatives of
approximately $70 thousand. The net income of $1.0 million
for the year ended December 31, 2009 reflects an after-tax
charge related to derivatives of approximately $1.2 million.
Excluding the impact of the after-tax charges related to
derivatives of $70 thousand and $1.2 million for the years
ended December 31, 2010 and 2009, respectively, adjusted
net income for the year ended December 31, 2010 would have
been $5.7 million, or $0.44 adjusted diluted earnings per
share, compared to $2.2 million, or $0.18 adjusted diluted
earnings per share for the year ended December 31, 2009.
The exclusion of the impact on
37
derivatives removes the volatility resulting from derivatives
activities subsequent to discontinuing hedge accounting in July
2008.
Excluding the after-tax impact on derivatives identified above,
return on average assets was 1.15% for the year ended
December 31, 2010, compared to a return of 0.32% for the
year ended December 31, 2009. On the same basis, return on
average equity was 3.76% for the year ended December 31,
2010, compared to a return of 1.51% for the year ended
December 31, 2009.
The provision for credit losses decreased $17.8 million, or
65.4%, to $9.4 million for the year ended December 31,
2010 from $27.2 million for the year ended
December 31, 2009, primarily due to lower charge-offs, a
reduced portfolio size and improved delinquencies. For the year
ended December 31, 2010 compared to the year ended
December 31, 2009, net interest and fee income decreased
$10.4 million, or 18.5%, primarily due to a 30.3% decrease
in average total finance receivables. Other expenses increased
$1.0 million, or 3.1%, for the year ended December 31,
2010 compared to the year ended December 31, 2009,
primarily due to increased salaries and benefits expense related
to increased sales staffing levels.
Overall, our average net investment in total finance receivables
for the year ended December 31, 2010 decreased 30.3% to
$389.0 million compared to $558.3 million for the year
ended December 31, 2009. Although we continue to adjust our
credit underwriting guidelines in response to current economic
conditions, we have begun rebuilding the sales organization to
increase originations.
During the year ended December 31, 2010, we generated
12,407 new leases with a cost of $134.0 million compared to
9,763 new leases with a cost of $88.9 million generated for
the year ended December 31, 2009. Much of the change in
volume is the result of increasing sales staffing levels from 38
sales account executives at December 31, 2009 to 87 sales
account executives at December 31, 2010. Approval rates
also rose from 40% for the year ended December 31, 2009 to
50% for the year ended December 31, 2010 due to the
improved credit quality of the applications received.
38
Average balances and net interest margin. The
following table summarizes the Companys average balances,
interest income, interest expense and average yields and rates
on major categories of interest-earning assets and
interest-bearing liabilities for the years ended
December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Yields/
|
|
|
Average
|
|
|
|
|
|
Yields/
|
|
|
|
Balance(1)
|
|
|
Interest
|
|
|
Rates
|
|
|
Balance(1)
|
|
|
Interest
|
|
|
Rates
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
38,882
|
|
|
$
|
45
|
|
|
|
0.12
|
%
|
|
$
|
47,240
|
|
|
$
|
123
|
|
|
|
0.26
|
%
|
Restricted interest-earning deposits with banks
|
|
|
59,308
|
|
|
|
67
|
|
|
|
0.11
|
|
|
|
66,310
|
|
|
|
289
|
|
|
|
0.44
|
|
Securities available for sale
|
|
|
1,087
|
|
|
|
39
|
|
|
|
3.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in
leases(2)
|
|
|
386,625
|
|
|
|
46,872
|
|
|
|
12.12
|
|
|
|
550,160
|
|
|
|
64,650
|
|
|
|
11.75
|
|
Loans
receivable(2)
|
|
|
2,376
|
|
|
|
273
|
|
|
|
11.51
|
|
|
|
8,151
|
|
|
|
977
|
|
|
|
11.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
488,278
|
|
|
|
47,296
|
|
|
|
9.68
|
|
|
|
671,861
|
|
|
|
66,039
|
|
|
|
9.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
1,605
|
|
|
|
|
|
|
|
|
|
|
|
2,618
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
2,777
|
|
|
|
|
|
|
|
|
|
Property tax receivables
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
2,513
|
|
|
|
|
|
|
|
|
|
Other
assets(3)
|
|
|
6,379
|
|
|
|
|
|
|
|
|
|
|
|
8,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets
|
|
|
11,721
|
|
|
|
|
|
|
|
|
|
|
|
16,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
499,999
|
|
|
|
|
|
|
|
|
|
|
$
|
688,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings(4)
|
|
$
|
7,213
|
|
|
$
|
345
|
|
|
|
4.77
|
%
|
|
$
|
94,588
|
|
|
$
|
4,917
|
|
|
|
5.20
|
%
|
Long-term
borrowings(4)
|
|
|
221,792
|
|
|
|
12,695
|
|
|
|
5.72
|
|
|
|
333,193
|
|
|
|
19,696
|
|
|
|
5.91
|
|
Deposits
|
|
|
92,956
|
|
|
|
2,573
|
|
|
|
2.77
|
|
|
|
78,615
|
|
|
|
2,725
|
|
|
|
3.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
321,961
|
|
|
|
15,613
|
|
|
|
4.85
|
|
|
|
506,396
|
|
|
|
27,338
|
|
|
|
5.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
8,917
|
|
|
|
|
|
|
|
|
|
Sales and property taxes payable
|
|
|
4,989
|
|
|
|
|
|
|
|
|
|
|
|
7,065
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
5,748
|
|
|
|
|
|
|
|
|
|
|
|
4,817
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
|
14,255
|
|
|
|
|
|
|
|
|
|
|
|
14,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
25,584
|
|
|
|
|
|
|
|
|
|
|
|
35,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
347,545
|
|
|
|
|
|
|
|
|
|
|
|
541,434
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
152,454
|
|
|
|
|
|
|
|
|
|
|
|
147,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
499,999
|
|
|
|
|
|
|
|
|
|
|
$
|
688,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
31,683
|
|
|
|
|
|
|
|
|
|
|
$
|
38,701
|
|
|
|
|
|
Interest rate
spread(5)
|
|
|
|
|
|
|
|
|
|
|
4.83
|
%
|
|
|
|
|
|
|
|
|
|
|
4.43
|
%
|
Net interest
margin(6)
|
|
|
|
|
|
|
|
|
|
|
6.49
|
%
|
|
|
|
|
|
|
|
|
|
|
5.76
|
%
|
Ratio of average interest-earning assets to average
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
151.66
|
%
|
|
|
|
|
|
|
|
|
|
|
132.68
|
%
|
|
|
|
(1) |
|
Average balances are calculated using month-end balances, to the
extent such averages are representative of operations. |
|
(2) |
|
Average balances of leases and loans include non-accrual leases
and loans, and are presented net of unearned income. |
|
(3) |
|
Includes operating leases. |
|
(4) |
|
Includes effect of transaction costs. |
|
(5) |
|
Interest rate spread represents the difference between the
average yield on interest-earning assets and the average rate on
interest-bearing liabilities. |
|
(6) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
39
The following table presents the components of the changes in
net interest income by volume and rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010 Compared to Year Ended
|
|
|
December 31, 2009
|
|
|
Increase (Decrease) Due to:
|
|
|
Volume(1)
|
|
Rate(1)
|
|
Total
|
|
|
(Dollars in thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
(19
|
)
|
|
$
|
(59
|
)
|
|
$
|
(78
|
)
|
Restricted interest-earning deposits with banks
|
|
|
(28
|
)
|
|
|
(194
|
)
|
|
|
(222
|
)
|
Securities available for sale
|
|
|
39
|
|
|
|
|
|
|
|
39
|
|
Net investment in leases
|
|
|
(19,767
|
)
|
|
|
1,989
|
|
|
|
(17,778
|
)
|
Loans receivable
|
|
|
(667
|
)
|
|
|
(37
|
)
|
|
|
(704
|
)
|
Total interest income
|
|
|
(17,796
|
)
|
|
|
(947
|
)
|
|
|
(18,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
(4,199
|
)
|
|
|
(373
|
)
|
|
|
(4,572
|
)
|
Long-term borrowings
|
|
|
(6,395
|
)
|
|
|
(606
|
)
|
|
|
(7,001
|
)
|
Deposits
|
|
|
449
|
|
|
|
(601
|
)
|
|
|
(152
|
)
|
Total interest expense
|
|
|
(9,165
|
)
|
|
|
(2,560
|
)
|
|
|
(11,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
(11,489
|
)
|
|
|
4,471
|
|
|
|
(7,018
|
)
|
|
|
|
(1) |
|
Changes due to volume and rate are calculated independently for
each line item presented rather than presenting vertical
subtotals for the individual volume and rate columns. Changes
attributable to changes in volume represent changes in average
balances multiplied by the prior periods average rates.
Changes attributable to changes in rate represent changes in
average rates multiplied by the prior years average
balances. Changes attributable to the combined impact of volume
and rate have been allocated proportionately to the change due
to volume and the change due to rate. |
Net interest and fee margin. The following
table summarizes the Companys net interest and fee income
as a percentage of average total finance receivables for the
years ended December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
$
|
47,296
|
|
|
$
|
66,039
|
|
Fee income
|
|
|
14,041
|
|
|
|
17,405
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
61,337
|
|
|
|
83,444
|
|
Interest expense
|
|
|
15,613
|
|
|
|
27,338
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
45,724
|
|
|
|
56,106
|
|
|
|
|
|
|
|
|
|
|
Average total finance
receivables(1)
|
|
$
|
389,001
|
|
|
$
|
558,311
|
|
Percent of average total finance receivables:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12.15
|
%
|
|
|
11.83
|
%
|
Fee income
|
|
|
3.61
|
|
|
|
3.12
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
15.76
|
|
|
|
14.95
|
|
Interest expense
|
|
|
4.01
|
|
|
|
4.90
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee margin
|
|
|
11.75
|
%
|
|
|
10.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables include net investment in direct
financing leases and loans. For the calculations above, the
effects of (i) the allowance for credit losses and
(ii) initial direct costs and fees deferred are excluded. |
40
Net interest and fee income decreased $10.4 million, or
18.5%, to $45.7 million for the year ended
December 31, 2010 from $56.1 million for the year
ended December 31, 2009. The net interest and fee margin
increased 170 basis points to 11.75% in the year ended
December 31, 2010 from 10.05% for the year ended
December 31, 2009.
Interest income, net of amortized initial direct costs and fees,
decreased $18.7 million, or 28.3%, to $47.3 million
for the year ended December 31, 2010 from
$66.0 million for the year ended December 31, 2009.
The decrease in interest income was due principally to a 30.3%
decrease in average total finance receivables, which decreased
$169.3 million to $389.0 million at December 31,
2010 from $558.3 million at December 31, 2009,
partially offset by an increase in average yield of
32 basis points. The decrease in average total finance
receivables is primarily due to our proactive decision in 2008
and 2009 to lower approval rates and volume in response to the
economic conditions. The average yield on the portfolio
increased, primarily due to continued higher yields on the new
leases compared to the yields on the leases repaying. However,
the weighted average implicit interest rate on new finance
receivables originated decreased 62 basis points to 14.47%
for the year ended December 31, 2010 compared to 15.09% for
the year ended December 31, 2009, primarily due to a change
in mix of new origination types. This change is due to the mix
of origination channels beginning to migrate to historical
percentages as the Company continues to rebuild the sales force
and grow volume.
Fee income decreased $3.4 million, or 19.5%, to
$14.0 million for the year ended December 31, 2010
from $17.4 million for the year ended December 31,
2009. Fee income included approximately $5.1 million of net
residual income for the year ended December 31, 2010 and
$5.4 million for the year ended December 31, 2009. Fee
income also included approximately $7.9 million in late fee
income for the year ended December 31, 2010, which
decreased 25.5% compared to $10.6 million for the year
ended December 31, 2009. The decrease in late fee income
was primarily due to the decrease in average total finance
receivables.
Fee income, as a percentage of average total finance
receivables, increased 49 basis points to 3.61% for the
year ended December 31, 2010 from 3.12% for the year ended
December 31, 2009. Late fees remained the largest component
of fee income at 2.02% as a percentage of average total finance
receivables for the year ended December 31, 2010 compared
to 1.90% for the year ended December 31, 2009. As a
percentage of average total finance receivables, net residual
income was 1.31% for the year ended December 31, 2010
compared to 0.97% for the year ended December 31, 2009.
Interest expense decreased $11.7 million to
$15.6 million for the year ended December 31, 2010
from $27.3 million for the year ended December 31,
2009. The decrease was primarily due to lower average total
finance receivables in combination with lower rates paid for
both borrowings and deposits. Interest expense, as a percentage
of average total finance receivables, decreased 89 basis
points to 4.01% for the year ended December 31, 2010, from
4.90% for the year ended December 31, 2009.
The weighted average interest rate, excluding transaction costs,
on short-term and long-term borrowings was 5.09% for the year
ended December 31, 2010 compared to 5.47% for the year
ended December 31, 2009. The lower interest rate primarily
reflects the decreased cost of the term securitization
borrowings. The average balance for our loan facilities was
$32.8 million for the year ended December 31, 2010
compared to $97.7 million for the year ended
December 31, 2009. The weighted average interest rate,
excluding transaction costs, for our loan facilities was 5.01%
for the year ended December 31, 2010, compared to 4.81% for
the year ended December 31, 2009. For the year ended
December 31, 2010, average term securitization borrowings
outstanding were $196.2 million at a weighted average
coupon of 5.09% compared to $330.1 million at a weighted
average coupon of 5.67% for the year ended December 31,
2009. (See Liquidity and Capital Resources in this
Item 7).
The opening of our wholly-owned subsidiary, MBB, on
March 12, 2008 provided an additional funding source. MBB
raises FDIC-insured deposits via the brokered certificates of
deposit market and from other financial institutions on a direct
basis. Interest expense on deposits was $2.6 million, or
2.77% as a percentage of weighted average deposits, for the year
ended December 31, 2010. Interest expense on deposits was
$2.7 million, or 3.47% as a percentage of weighted average
deposits, for the year ended December 31, 2009. The average
balance of deposits was $93.0 million for the year ended
December 31, 2010. The average balance of deposits was
$78.6 million for the year ended December 31, 2009.
41
Insurance income. Insurance income decreased
$1.2 million to $4.1 million for the year ended
December 31, 2010 from $5.3 million for the year ended
December 31, 2009, primarily due to lower billings from
lower total finance receivables.
Other income. Other income decreased
$0.2 million to $1.3 million for the year ended
December 31, 2010 from $1.5 million for the year ended
December 31, 2009. Other income includes various
administrative transaction fees, fees received from lease
syndications and gains on sales of leases.
Loss on derivatives. Prior to July 1,
2008, the Company entered into derivative contracts which were
accounted for as cash flow hedges under hedge accounting as
prescribed by U.S. GAAP. While the Company may continue to
use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the
Company discontinued the use of hedge accounting.
By discontinuing hedge accounting effective July 1, 2008,
any subsequent changes in the fair value of derivative
instruments, including those that had previously been accounted
for under hedge accounting, are recognized immediately. This
change creates volatility in our results of operations, as the
fair value of our derivative financial instruments changes over
time. For the year ended December 31, 2010, the loss on
derivatives was $0.1 million, compared to a loss of
$2.0 million for the year ended December 31, 2009. At
December 31, 2010, there was no notional principal
outstanding under interest-rate swap agreements.
Salaries and benefits expense. Salaries and
benefits expense increased $0.9 million, or 4.7%, to
$20.0 million for the year ended December 31, 2010
from $19.1 million for the year ended December 31,
2009. Salaries and benefits expense, as a percentage of average
total finance receivables, was 5.13% for the year ended
December 31, 2010 compared with 3.42% for the year ended
December 31, 2009. Total personnel increased to 234 at
December 31, 2010 from 181 at December 31, 2009,
primarily due to higher sales staffing levels, which increased
from 38 sales account executives at December 31, 2009 to 87
sales account executives at December 31, 2010.
Personnel costs represent our most significant overhead expense
and we actively manage our staffing levels to the requirements
of our lease portfolio. As a result of the challenging economic
environment, we proactively lowered expenses in the first
quarter of 2009, including reducing our workforce by 17% and
closing our two smallest satellite sales offices (Chicago and
Salt Lake City). A total of 49 employees company-wide were
terminated in connection with the staff reductions in the first
quarter of 2009. We incurred pretax severance costs in the three
months ended March 31, 2009 of approximately
$0.5 million related to the staff reductions.
During the second quarter of 2009, we announced a further
workforce reduction of 24%, or 55 employees company-wide,
including the closure of our Denver satellite office. We
incurred pretax severance costs in the three months ended
June 30, 2009 of approximately $0.7 million related to
these staff reductions.
During the year ended December 31, 2010, our strong asset
quality and our access to funding enabled us to increase the
number of our sales account executives by 49, from 38 sales
account executives at December 31, 2009 to 87 at
December 31, 2010. This action was part of our plan to
rebuild our sales organization to increase originations and to
match our current funding capacity.
General and administrative expense. General
and administrative expense decreased $0.1 million, or 0.8%,
to $12.8 million for the year ended December 31, 2010
from $12.9 million for the year ended December 31,
2009. General and administrative expense as a percentage of
average total finance receivables was 3.28% for the year ended
December 31, 2010, compared to 2.30% for the year ended
December 31, 2009.
Selected major components of general and administrative expense
for the year ended December 31, 2010 included
$2.8 million of premises and occupancy expense,
$1.2 million of audit and tax compliance expense,
$1.0 million of data processing expense, $0.9 million
of legal fees and $0.3 million of marketing expense. In
comparison, selected major components of general and
administrative expense for the year ended December 31, 2009
included $3.2 million of premises and occupancy expense,
$1.2 million of audit and tax compliance expense,
$0.9 million of data processing expense, $0.6 million
of legal fees and $0.2 million of marketing expense.
Financing related costs. Financing related
costs primarily represent bank commitment fees paid to our
financing sources. Financing related costs were
$0.7 million for the year ended December 31, 2010 and
$0.5 million for the year ended December 31, 2009.
42
Provision for credit losses. The provision for
credit losses decreased $17.8 million, or 65.4%, to
$9.4 million for the year ended December 31, 2010 from
$27.2 million for the year ended December 31, 2009.
The decrease in the provision for credit losses was primarily
the result of a lower allowance for credit losses due to lower
charge-offs, a reduced portfolio size and improved
delinquencies. Net charge-offs were $13.9 million for the
year ended December 31, 2010, compared to
$30.3 million for the year ended December 31, 2009.
Net charge-offs as a percentage of average total finance
receivables decreased to 3.58% during the year ended
December 31, 2010, from 5.42% for the year ended
December 31, 2009. The allowance for credit losses
decreased to approximately $7.7 million at
December 31, 2010, a decrease of $4.5 million from
$12.2 million at December 31, 2009.
Additional information regarding asset quality is included
herein in the subsequent section, Finance Receivables and
Asset Quality.
Provision for income taxes. Income tax expense
of $2.5 million was recorded for the year ended
December 31, 2010, compared to an expense of
$0.3 million for the year ended December 31, 2009. The
change is primarily attributable to the change in pretax income
recorded for the year ended December 31, 2010. In addition,
for the year ended December 31, 2010, the Company
recognized a current tax benefit of approximately
$0.5 million to reflect interest receivable on amended
returns the Company plans to file in 2011, as discussed in
Note 13.
Our effective tax rate, which is a combination of federal and
state income tax rates, was approximately 30.6% for the year
ended December 31, 2010, compared to 25.1% for the year
ended December 31, 2009. The change in effective tax rate
is primarily due to a change in the mix of projected pretax book
income across the jurisdictions and entities combined with the
effect of the benefit recorded for interest receivable on
amended returns the Company plans to file in 2011.
Comparison
of the Years Ended December 31, 2009 and 2008
Net income (loss). Net income of
$1.0 million, or $0.08 per share, was recorded for the year
ended December 31, 2009. This net income includes an
after-tax loss on derivatives of approximately
$1.2 million. The net loss of $5.2 million, or $0.44
per share for the year ended December 31, 2008 includes an
after-tax loss on derivatives of approximately $9.7 million.
Excluding the after-tax losses on derivatives of
$1.2 million and $9.7 million for the years ended
December 31, 2009 and 2008, respectively, adjusted net
income for the year ended December 31, 2009 would have been
$2.2 million, or $0.18 diluted earnings per share, compared
to $4.5 million, or $0.36 diluted earnings per share for
the year ended December 31, 2008. The exclusion of the
losses on derivatives removes the volatility resulting from
derivatives activities subsequent to discontinuing hedge
accounting in July 2008.
Excluding the after-tax losses on derivatives identified above,
returns on average assets were 0.32% for the year ended
December 31, 2009 and 0.53% for the year ended
December 31, 2008. On the same basis, returns on average
equity were 1.51% for the year ended December 31, 2009 and
2.98% for the year ended December 31, 2008.
Also included in the results for the year ended
December 31, 2009 were after-tax charges of approximately
$0.7 million representing severance costs related to
workforce reductions, compared to after-tax severance costs of
approximately $0.3 million for the year ended
December 31, 2008.
The provision for credit losses decreased $4.3 million, or
13.7%, to $27.2 million for the year ended
December 31, 2009 from $31.5 million for the year
ended December 31, 2008, primarily due to a reduced
portfolio size and improved delinquencies. During the year ended
December 31, 2009, net interest and fee income decreased
$14.5 million, primarily due to a 22.0% decrease in average
total finance receivables. The decrease in income was partially
mitigated by reductions in other expenses, which decreased
$7.1 million, or 18.1%, for the year ended
December 31, 2009, compared to the year ended
December 31, 2008.
For the year ended December 31, 2009, we generated 9,763
new finance receivables at a cost of $88.9 million compared
to 24,869 new finance receivables at a cost of
$256.6 million for the year ended December 31, 2008.
The reduction in volume was primarily due to a combination of
our decision to lower approval rates in response to economic
conditions and the limited availability of funding during the
first half of 2009. Overall, our average net
43
investment in total finance receivables for the year ended
December 31, 2009 decreased 22.0% to $558.3 million at
December 31, 2009 from $715.6 million for the year
ended December 31, 2008.
Average balances and net interest margin. The
following table summarizes the Companys average balances,
interest income, interest expense and average yields and rates
on major categories of interest-earning assets and
interest-bearing liabilities for the years ended
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance(1)
|
|
|
Interest
|
|
|
Yields/Rates
|
|
|
Balance(1)
|
|
|
Interest
|
|
|
Yields/Rates
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
47,240
|
|
|
$
|
123
|
|
|
|
0.26
|
%
|
|
$
|
31,026
|
|
|
$
|
743
|
|
|
|
2.39
|
%
|
Restricted interest-earning deposits with banks
|
|
|
66,310
|
|
|
|
289
|
|
|
|
0.44
|
|
|
|
72,706
|
|
|
|
2,020
|
|
|
|
2.78
|
|
Net investment in
leases(2)
|
|
|
550,160
|
|
|
|
64,650
|
|
|
|
11.75
|
|
|
|
700,332
|
|
|
|
81,436
|
|
|
|
11.63
|
|
Loans
receivable(2)
|
|
|
8,151
|
|
|
|
977
|
|
|
|
11.99
|
|
|
|
15,317
|
|
|
|
1,900
|
|
|
|
12.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
671,861
|
|
|
|
66,039
|
|
|
|
9.83
|
|
|
|
819,381
|
|
|
|
86,099
|
|
|
|
10.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
2,618
|
|
|
|
|
|
|
|
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,777
|
|
|
|
|
|
|
|
|
|
|
|
3,141
|
|
|
|
|
|
|
|
|
|
Property tax receivables
|
|
|
2,513
|
|
|
|
|
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
|
|
|
|
Other
assets(3)
|
|
|
8,881
|
|
|
|
|
|
|
|
|
|
|
|
19,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets
|
|
|
16,789
|
|
|
|
|
|
|
|
|
|
|
|
25,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
688,650
|
|
|
|
|
|
|
|
|
|
|
$
|
844,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings(4)
|
|
$
|
94,588
|
|
|
$
|
4,917
|
|
|
|
5.20
|
%
|
|
$
|
35,806
|
|
|
$
|
2,191
|
|
|
|
6.12
|
%
|
Long-term
borrowings(4)
|
|
|
333,193
|
|
|
|
19,696
|
|
|
|
5.91
|
|
|
|
591,815
|
|
|
|
33,515
|
|
|
|
5.66
|
|
Deposits
|
|
|
78,615
|
|
|
|
2,725
|
|
|
|
3.47
|
|
|
|
28,244
|
|
|
|
1,174
|
|
|
|
4.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
506,396
|
|
|
|
27,338
|
|
|
|
5.40
|
|
|
|
655,865
|
|
|
|
36,880
|
|
|
|
5.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives
|
|
|
8,917
|
|
|
|
|
|
|
|
|
|
|
|
7,065
|
|
|
|
|
|
|
|
|
|
Sales and property taxes payable
|
|
|
7,065
|
|
|
|
|
|
|
|
|
|
|
|
8,989
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
4,817
|
|
|
|
|
|
|
|
|
|
|
|
8,696
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
|
14,239
|
|
|
|
|
|
|
|
|
|
|
|
14,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
35,038
|
|
|
|
|
|
|
|
|
|
|
|
39,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
541,434
|
|
|
|
|
|
|
|
|
|
|
|
695,005
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
147,216
|
|
|
|
|
|
|
|
|
|
|
|
149,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
688,650
|
|
|
|
|
|
|
|
|
|
|
$
|
844,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
38,701
|
|
|
|
|
|
|
|
|
|
|
$
|
49,219
|
|
|
|
|
|
Interest rate
spread(5)
|
|
|
|
|
|
|
|
|
|
|
4.43
|
%
|
|
|
|
|
|
|
|
|
|
|
4.89
|
%
|
Net interest
margin(6)
|
|
|
|
|
|
|
|
|
|
|
5.76
|
%
|
|
|
|
|
|
|
|
|
|
|
6.01
|
%
|
Ratio of average interest-earning assets to average
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
132.68
|
%
|
|
|
|
|
|
|
|
|
|
|
124.93
|
%
|
|
|
|
(1) |
|
Average balances are calculated using month-end balances, to the
extent such averages are representative of operations. |
|
(2) |
|
Average balances of leases and loans include non-accrual leases
and loans, and are presented net of unearned income. |
|
(3) |
|
Includes operating leases. |
|
(4) |
|
Includes effect of transaction costs. |
|
(5) |
|
Interest rate spread represents the difference between the
average yield on interest-earning assets and the average rate on
interest-bearing liabilities. |
44
|
|
|
(6) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
The following table presents the components of the changes in
net interest income by volume and rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009 Compared to Year Ended
|
|
|
December 31, 2008
|
|
|
Volume(1)
|
|
Rate(1)
|
|
Total
|
|
|
Increase (Decrease) Due to:
|
|
|
(Dollars in thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
260
|
|
|
$
|
(880
|
)
|
|
$
|
(620
|
)
|
Restricted interest-earning deposits with banks
|
|
|
(163
|
)
|
|
|
(1,568
|
)
|
|
|
(1,731
|
)
|
Net investment in leases
|
|
|
(17,638
|
)
|
|
|
852
|
|
|
|
(16,786
|
)
|
Loans receivable
|
|
|
(861
|
)
|
|
|
(62
|
)
|
|
|
(923
|
)
|
Total interest income
|
|
|
(14,764
|
)
|
|
|
(5,296
|
)
|
|
|
(20,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
3,101
|
|
|
|
(375
|
)
|
|
|
2,726
|
|
Long-term borrowings
|
|
|
(15,229
|
)
|
|
|
1,410
|
|
|
|
(13,819
|
)
|
Deposits
|
|
|
1,776
|
|
|
|
(225
|
)
|
|
|
1,551
|
|
Total interest expense
|
|
|
(8,119
|
)
|
|
|
(1,423
|
)
|
|
|
(9,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
(8,565
|
)
|
|
|
(1,953
|
)
|
|
|
(10,518
|
)
|
|
|
|
(1) |
|
Changes due to volume and rate are calculated independently for
each line item presented rather than presenting vertical
subtotals for the individual volume and rate columns. Changes
attributable to changes in volume represent changes in average
balances multiplied by the prior periods average rates.
Changes attributable to changes in rate represent changes in
average rates multiplied by the prior years average
balances. Changes attributable to the combined impact of volume
and rate have been allocated proportionately to the change due
to volume and the change due to rate. |
Net interest and fee margin. The following
table summarizes the Companys net interest and fee income
as a percentage of average total finance receivables for the
years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
$
|
66,039
|
|
|
$
|
86,099
|
|
Fee income
|
|
|
17,405
|
|
|
|
21,354
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
83,444
|
|
|
|
107,453
|
|
Interest expense
|
|
|
27,338
|
|
|
|
36,880
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
56,106
|
|
|
|
70,573
|
|
|
|
|
|
|
|
|
|
|
Average total finance
receivables(1)
|
|
$
|
558,311
|
|
|
$
|
715,649
|
|
Percent of average total finance receivables:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11.83
|
%
|
|
|
12.03
|
%
|
Fee income
|
|
|
3.12
|
|
|
|
2.98
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
14.95
|
|
|
|
15.01
|
|
Interest expense
|
|
|
4.90
|
|
|
|
5.15
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee margin
|
|
|
10.05
|
%
|
|
|
9.86
|
%
|
|
|
|
|
|
|
|
|
|
45
|
|
|
(1) |
|
Total finance receivables include net investment in direct
financing leases, loans and factoring receivables. For the
calculations above, the effects of (i) the allowance for
credit losses and (ii) initial direct costs and fees
deferred, are excluded from total finance receivables. |
Net interest and fee income decreased $14.5 million, or
20.5%, to $56.1 million for the year ended
December 31, 2009 from $70.6 million for the year
ended December 31, 2008. The net interest and fee margin
increased 19 basis points to 10.05% for the year ended
December 31, 2009 from 9.86% for the year ended
December 31, 2008. The following paragraphs discuss the
components of this change.
Interest income, net of amortized initial direct costs and fees,
decreased $20.1 million, or 23.3%, to $66.0 million
for the year ended December 31, 2009 from
$86.1 million for the year ended December 31, 2008.
The decrease in interest income was primarily due to a 22.0%
decrease in average total finance receivables and a
20 basis point decrease in average yield. The decrease in
average yield is primarily due to lower earnings on
interest-earning deposits with banks. The decrease in average
total finance receivables is primarily due to our proactive
decision to lower approval rates in response to economic
conditions, combined with the limited availability of funding
during the first half of 2009. The weighted average implicit
interest rate on new finance receivables originated increased
142 basis points to 15.09% for the year ended
December 31, 2009 compared to 13.67% for year ended
December 31, 2008.
Fee income decreased $4.0 million, or 18.7%, to
$17.4 million for the year ended December 31, 2009
from $21.4 million for the year ended December 31,
2008. The decrease in fee income was primarily due to a decline
in administrative and late fee income of $3.4 million, or
22.1%, to $12.0 million for the year ended
December 31, 2009 from $15.4 million for the year
ended December 31, 2008. The decrease is primarily a result
of lower total finance receivables. Fee income also included
approximately $5.4 million of net residual income for the
year ended December 31, 2009 compared to $5.9 million
for the year ended December 31, 2008.
Fee income, as a percentage of average total finance
receivables, increased 14 basis points to 3.12% for the
year ended December 31, 2009 from 2.98% for the year ended
December 31, 2008. Administrative and late fees remained
the largest component of fee income at 2.15% as a percentage of
average total finance receivables for the year ended
December 31, 2009 compared to 2.16% for the year ended
December 31, 2008. As a percentage of average total finance
receivables, net residual income was 0.97% for the year ended
December 31, 2009 compared to 0.83% for the year ended
December 31, 2008.
Interest expense decreased $9.6 million to
$27.3 million for the year ended December 31, 2009
from $36.9 million for the year ended December 31,
2008. Interest expense, as a percentage of average total finance
receivables, decreased 25 basis points to 4.90% for the
year ended December 31, 2009 from 5.15% for the year ended
December 31, 2008. The decrease in interest expense was
primarily due to the 22.0% decline in average total finance
receivables combined with a shift in mix from term
securitization borrowings to less expensive deposits and
short-term borrowings. During the year ended December 31,
2009, average term securitization borrowings outstanding were
$330.1 million, representing 77.2% of total borrowings,
compared to $591.8 million representing 94.3% of total
borrowings for the year ended December 31, 2008.
Interest cost, excluding transaction costs, on short-term and
long-term borrowings as a percentage of weighted average
borrowings was 5.47% for the year ended December 31, 2009
compared to 5.44% for the year ended December 31, 2008. The
average balance for our warehouse facilities was
$97.7 million for the year ended December 31, 2009
compared to $35.8 million for the year ended
December 31, 2008. The average borrowing cost for our
warehouse facilities was 4.81% for the year ended
December 31, 2009 compared to 4.86% for the year ended
December 31, 2008. (See Liquidity and Capital Resources
in this Item 7).
Interest costs on our September 2006 and October 2007 issued
term securitization borrowings increased over those issued in
2005 due to the rising interest rate environment. The coupon
rate on the October 2007 securitization also reflected higher
credit costs due to the general tightening of credit caused by
overall stress and volatility in the financial markets. Our term
securitizations also include multiple classes of fixed-rate
notes with the shorter term, lower coupon classes amortizing
(maturing) faster than the longer term higher coupon classes.
This causes the blended interest expense related to these
borrowings to change and generally increase over the terms of
the borrowings. For the year ended December 31, 2009,
average term securitization borrowings outstanding were
46
$330.1 million at a weighted average coupon of 5.67%
compared with $591.8 million at a weighted average coupon
of 5.48% for the year ended December 31, 2008.
On August 18, 2005, we closed on the issuance of our
seventh term note securitization transaction in the amount of
$340.6 million at a weighted average interest coupon
approximating 4.81% over the term of the financing. After the
effects of hedging and other transaction costs are considered,
we expect total interest expense on the 2005 term transaction to
approximate an average of 4.50% over the term of the borrowing.
On September 21, 2006, we closed on the issuance of our
eighth term note securitization transaction in the amount of
$380.2 million at a weighted average interest coupon
approximating 5.51% over the term of the financing. After the
effects of hedging and other transaction costs are considered,
we expect total interest expense on the 2006 term transaction to
approximate an average of 5.21% over the term of the financing.
On October 24, 2007, we closed on the issuance of our ninth
term note securitization transaction in the amount of
$440.5 million at a weighted average interest coupon
approximating 5.70% over the term of the financing. After the
effects of hedging and other transaction costs are considered,
we expect total interest expense on the 2007 term transaction to
approximate an average of 6.32% over the term of the financing.
Due to the impact on interest rates from unfavorable market
conditions and the available capacity in other facilities, the
Company elected not to complete fixed-rate term note
securitizations in 2008 or 2009.
The opening of our wholly-owned subsidiary, MBB, on
March 12, 2008 provides an additional funding source. MBB
raises FDIC-insured deposits via the brokered certificates of
deposit market and from other financial institutions on a direct
basis. Interest expense on deposits was $2.7 million, or
3.47% as a percentage of weighted average deposits, for the year
ended December 31, 2009, compared to $1.2 million, or
4.16% as a percentage of weighted average deposits, for the year
ended December 31, 2008. The average balance of deposits
was $78.6 million for the year ended December 31,
2009, compared to $28.2 million for the year ended
December 31, 2008.
Insurance income. Insurance income decreased
$1.0 million to $5.3 million for the year ended
December 31, 2009 from $6.3 million for the year ended
December 31, 2008. The decrease is primarily related to
lower insurance billings due to lower total finance receivables.
Other income. Other income includes various
administrative transaction fees and fees received from lease
syndications. Other income decreased $0.4 million to
$1.5 million for the year ended December 31, 2009 from
$1.9 million for the year ended December 31, 2008. The
decrease is primarily related to the impact of lower transaction
volumes.
Loss on derivatives. Prior to July 1,
2008, the Company entered into derivative contracts which were
accounted for as cash flow hedges under hedge accounting as
prescribed by U.S. GAAP. While the Company may continue to
use derivative financial instruments to reduce exposure to
changing interest rates, effective July 1, 2008, the
Company discontinued the use of hedge accounting.
By discontinuing hedge accounting effective July 1, 2008,
any subsequent changes in the fair value of derivative
instruments, including those that had previously been accounted
for under hedge accounting, are recognized immediately. This
change creates volatility in our results of operations, as the
market value of our derivative financial instruments changes
over time.
For the year ended December 31, 2009, the loss on
derivatives was $2.0 million, compared to a loss of
$16.0 million for the year ended December 31, 2008.
The losses included $2.8 million and $11.0 million,
respectively, which represented the decline in the fair value of
derivatives contracts during each period. These losses are based
on the values of the derivative contracts at December 31,
2009 and 2008 in a volatile market that is changing daily, and
will not necessarily reflect the value at settlement.
During 2009 and 2008, the Company concluded that certain
forecasted transactions were not probable of occurring on the
anticipated date or in the additional time period permitted by
U.S. GAAP. As a result, during 2009 a $0.9 million
pretax ($0.5 million after-tax) gain on the related cash
flow hedges was reclassified from accumulated other
comprehensive income into loss on derivatives. During 2008, a
$5.0 million pretax ($3.0 million after-tax) loss on
the related cash flow hedges was reclassified from accumulated
other comprehensive income into loss on derivatives.
47
Salaries and benefits expense. Salaries and
benefits expense decreased $3.8 million, or 16.6%, to
$19.1 million for the year ended December 31, 2009
from $22.9 million for the year ended December 31,
2008. The decrease in compensation expense is primarily due to
reduced headcount levels. Total personnel decreased to 181 at
December 31, 2009 from 284 at December 31, 2008.
Personnel costs represent our most significant overhead expense
and we actively manage our staffing levels to the requirements
of our lease portfolio. As a result of the challenging economic
environment, we proactively lowered expenses in the first
quarter of 2009, including reducing our workforce by 17% and
closing our two smallest satellite sales offices (Chicago and
Salt Lake City). A total of 49 employees company-wide were
terminated in connection with the staff reductions in the first
quarter of 2009. We incurred pretax severance costs in the three
months ended March 31, 2009 of approximately
$0.5 million related to the staff reductions.
During the second quarter of 2009, we announced a further
workforce reduction of 24%, or 55 employees company-wide,
including the closure of our Denver satellite office. We
incurred pretax severance costs in the three months ended
June 30, 2009 of approximately $0.7 million related to
these staff reductions.
In comparison, during the first quarter of 2008 we reduced our
workforce by 51 employees and incurred related pretax
severance costs of approximately $0.5 million.
Salaries and benefits expense, as a percentage of the average
total finance receivables, was 3.42% for the year ended
December 31, 2009 compared with 3.20% for the year ended
December 31, 2008.
General and administrative expense. General
and administrative expense decreased $2.3 million, or
15.1%, to $12.9 million for the year ended
December 31, 2009 from $15.2 million for the year
ended December 31, 2008. Over half of the decrease related
to marketing expense and recruiting expense. As a percentage of
average total finance receivables, general and administrative
expense increased to 2.30% for the year ended December 31,
2009 from 2.13% for the year ended December 31, 2008.
Selected major components of general and administrative expense
for the year ended December 31, 2009 included
$3.0 million of premises and occupancy expense,
$1.2 million of audit and tax compliance expense,
$0.9 million of data processing expense and
$0.2 million of marketing expense. In comparison, selected
major components of general and administrative expense for the
year ended December 31, 2008 included $3.3 million of
premises and occupancy expense, $1.3 million of audit and
tax compliance expense, $1.0 million of data processing
expense, and $1.1 million of marketing expense.
Financing related costs. Financing related
costs primarily represent bank commitment fees paid to our
financing sources. Financing related costs decreased
$0.9 million to $0.5 million for the year ended
December 31, 2009 from $1.4 million for the year ended
December 31, 2008, primarily due to decreased bank
commitment fees as a result of reduced unused borrowing capacity.
Provision for credit losses. The provision for
credit losses decreased $4.3 million, or 13.7%, to
$27.2 million for the year ended December 31, 2009
from $31.5 million for the year ended December 31,
2008. The decrease in the provision for credit losses was
primarily the result of a lower allowance for credit losses due
to a reduced portfolio size and improved delinquencies,
partially offset by higher charge-offs. Net charge-offs were
$30.3 million for the year ended December 31, 2009, an
increase of $3.1 million from $27.2 million during the
year ended December 31, 2008. Net charge-offs as a
percentage of average total finance receivables increased to
5.42% for the year ended December 31, 2009 from 3.80% for
the year ended December 31, 2008. The allowance for credit
losses decreased approximately $3.1 million to
$12.2 million at December 31, 2009, from
$15.3 million at December 31, 2008.
Unfavorable economic trends have most significantly impacted the
2009 performance of rate-sensitive industries in our portfolio,
specifically companies in the construction, financial services,
mortgage and real estate businesses. Though these industries
comprised approximately 9% of the total portfolio at
December 31, 2009, approximately 17% of the charge-off
activity during the year ended December 31, 2009 related to
these industries. Throughout 2007 to 2009, Marlin increased
collection activities and strengthened underwriting criteria for
these industries.
48
Additional information regarding asset quality is included
herein in the subsequent section, Finance Receivables and
Asset Quality.
Income tax expense (benefit). An income tax
expense of $0.3 million was recorded for the year ended
December 31, 2009, compared to an income tax benefit of
$3.2 million for the year ended December 31, 2008. The
change in taxes is primarily attributed to the pretax loss
recorded in 2008. Our effective tax rate, which is a combination
of federal and state income tax rates, was 25.1% for the year
ended December 31, 2009, compared to a benefit of 37.7% for
the year ended December 31, 2008. The effective tax rate
for the year ended December 31, 2009 was reduced by a
$0.1 million benefit from adjustments relating to changes
in estimates. The effective tax rate for the year ended
December 31, 2008 reflects a decreased benefit due to a
2008 tax adjustment of $0.2 million, primarily related to a
true-up of
our deferred tax accounts. Without these adjustments in 2009 and
2008, our effective tax rate would have been an expense of
approximately 29.4% for the year ended December 31, 2009
compared to an effective tax rate benefit without adjustments of
40.5% for the year ended December 31, 2008. The change in
effective tax rate for 2009 is also due to a change in the mix
of pretax book income across the jurisdictions and entities.
Operating
Data
We manage expenditures using a comprehensive budgetary review
process. Expenses are monitored by departmental heads and are
reviewed by senior management monthly. The efficiency ratio
(relating expenses with revenues) and the ratio of salaries and
benefits and general and administrative expense as a percentage
of the average total finance receivables shown below are metrics
used by management to monitor productivity and spending levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Average total finance receivables
|
|
$
|
389,001
|
|
|
$
|
558,311
|
|
|
$
|
715,649
|
|
Salaries and benefits expense
|
|
|
19,966
|
|
|
|
19,071
|
|
|
|
22,916
|
|
General and administrative expense
|
|
|
12,762
|
|
|
|
12,854
|
|
|
|
15,241
|
|
Efficiency ratio
|
|
|
64.02
|
%
|
|
|
50.71
|
%
|
|
|
48.47
|
%
|
Percent of average total finance receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
5.13
|
%
|
|
|
3.42
|
%
|
|
|
3.20
|
%
|
General and administrative
|
|
|
3.28
|
%
|
|
|
2.30
|
%
|
|
|
2.13
|
%
|
We generally reach our lessees through a network of independent
equipment dealers and, to a much lesser extent, lease brokers.
The number of dealers and brokers with whom we conduct business
depends on, among other things, the number of sales account
executives we have. Sales account executive staffing levels and
the activity of our origination sources are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Number of sales account executives
|
|
|
87
|
|
|
|
38
|
|
|
|
86
|
|
|
|
118
|
|
|
|
100
|
|
Number of originating
sources(1)
|
|
|
604
|
|
|
|
465
|
|
|
|
1,014
|
|
|
|
1,246
|
|
|
|
1,295
|
|
|
|
|
(1) |
|
Monthly average of origination sources generating lease volume |
Finance
Receivables and Asset Quality
Our net investment in leases and loans declined
$97.0 million, or 21.6%, to $351.6 million at
December 31, 2010, from $448.6 million at
December 31, 2009. Although we continue to adjust our
credit underwriting guidelines in response to current economic
conditions, we have begun rebuilding our sales organization to
increase originations. A portion of the Companys lease
portfolio is generally assigned as collateral for borrowings as
described below in Liquidity and Capital Resources in
this Item 7.
49
The chart below provides our asset quality statistics for each
of the five years ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for credit losses, beginning of period
|
|
$
|
12,193
|
|
|
$
|
15,283
|
|
|
$
|
10,988
|
|
|
$
|
8,201
|
|
|
$
|
7,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(17,095
|
)
|
|
|
(33,575
|
)
|
|
|
(30,231
|
)
|
|
|
(18,022
|
)
|
|
|
(12,551
|
)
|
Recoveries
|
|
|
3,182
|
|
|
|
3,296
|
|
|
|
3,032
|
|
|
|
3,588
|
|
|
|
3,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(13,913
|
)
|
|
|
(30,279
|
)
|
|
|
(27,199
|
)
|
|
|
(14,434
|
)
|
|
|
(9,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
9,438
|
|
|
|
27,189
|
|
|
|
31,494
|
|
|
|
17,221
|
|
|
|
9,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end of
period(1)
|
|
$
|
7,718
|
|
|
$
|
12,193
|
|
|
$
|
15,283
|
|
|
$
|
10,988
|
|
|
$
|
8,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average total finance
receivables(2)
|
|
|
3.58
|
%
|
|
|
5.42
|
%
|
|
|
3.80
|
%
|
|
|
2.00
|
%
|
|
|
1.56
|
%
|
Allowance for credit losses to total finance receivables, end of
period(2)
|
|
|
2.19
|
%
|
|
|
2.71
|
%
|
|
|
2.30
|
%
|
|
|
1.47
|
%
|
|
|
1.21
|
%
|
Average total finance
receivables(2)
|
|
$
|
389,001
|
|
|
$
|
558,311
|
|
|
$
|
715,649
|
|
|
$
|
721,900
|
|
|
$
|
611,348
|
|
Total finance receivables, end of
period(2)
|
|
$
|
352,527
|
|
|
$
|
450,595
|
|
|
$
|
664,902
|
|
|
$
|
749,712
|
|
|
$
|
679,729
|
|
Delinquencies greater than 60 days past due
|
|
$
|
3,504
|
|
|
$
|
8,334
|
|
|
$
|
12,203
|
|
|
$
|
8,377
|
|
|
$
|
5,676
|
|
Delinquencies greater than 60 days past
due(3)
|
|
|
0.90
|
%
|
|
|
1.67
|
%
|
|
|
1.59
|
%
|
|
|
0.95
|
%
|
|
|
0.71
|
%
|
Allowance for credit losses to delinquent accounts greater than
60 days past
due(3)
|
|
|
220.26
|
%
|
|
|
146.30
|
%
|
|
|
125.24
|
%
|
|
|
131.17
|
%
|
|
|
144.49
|
%
|
Non-accrual leases and loans, end of period
|
|
$
|
1,996
|
|
|
$
|
4,557
|
|
|
$
|
6,380
|
|
|
$
|
3,695
|
|
|
$
|
2,250
|
|
Renegotiated leases and loans, end of period
|
|
$
|
2,221
|
|
|
$
|
4,521
|
|
|
$
|
8,256
|
|
|
$
|
6,987
|
|
|
$
|
3,819
|
|
Accruing leases and loans past due 90 days or more
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest income included on non-accrual leases and
loans(4)
|
|
$
|
214
|
|
|
$
|
493
|
|
|
$
|
711
|
|
|
$
|
420
|
|
|
$
|
232
|
|
Interest income excluded on non-accrual leases and
loans(5)
|
|
$
|
46
|
|
|
$
|
103
|
|
|
$
|
92
|
|
|
$
|
55
|
|
|
$
|
27
|
|
|
|
|
(1) |
|
The allowance for credit losses allocated to loans at
December 31, 2010, 2009, 2008, 2007 and 2006, was
$0.1 million, $0.4 million, $0.9 million,
$0.6 million and $0.1 million, respectively. |
|
(2) |
|
Total finance receivables include net investment in direct
financing leases and loans. For purposes of asset quality and
allowance calculations, the effects of (i) the allowance
for credit losses and (ii) initial direct costs and fees
deferred are excluded. |
|
(3) |
|
Calculated as a percent of total minimum lease payments
receivable for leases and as a percent of principal outstanding
for loans. |
|
(4) |
|
Represents interest which was recognized during the period on
non-accrual loans and leases, prior to non-accrual status. |
|
(5) |
|
Represents interest which would have been recorded on
non-accrual loans and leases had they performed in accordance
with their contractual terms during the period. |
Net investments in finance receivables are generally charged-off
when they are contractually past due for 121 days. Income
is not recognized on leases or loans when a default on monthly
payment exists for a period of 90 days or more. Income
recognition resumes when a lease or loan becomes less than
90 days delinquent.
The Companys net charge-offs began increasing during 2007,
primarily due to worsening general economic trends from the
favorable experience of 2006. These trends continued to worsen
during 2008 and 2009. The economic environment from 2007 to 2009
most significantly impacted the performance of interest
rate-sensitive
50
industries in our portfolio, specifically companies in the
construction, financial services, mortgage and real estate
businesses. During 2007 and 2008, the Company increased
collection activities and strengthened underwriting criteria for
these industries and for the geographical areas most affected by
these industries, specifically California and Florida. As a
result, in 2010 the performance of interest rate-sensitive
industries in our portfolio improved. In addition, during 2009
the Company discontinued substantially all origination activity
from indirect origination channels, due to the indications of
increasing credit risk associated with these channels during
2007 to 2009.
Net charge-offs for the year ended December 31, 2010 were
$13.9 million, or 3.58% of average total finance
receivables, compared to $30.3 million, or 5.42% of average
total finance receivables, for the year ended December 31,
2009. Approximately 47% of the decrease from the prior year was
related to the impact on the calculation of the decrease in
average total finance receivables, and approximately 53% of the
decrease was due to a lower charge-off rate as a percentage of
average total finance receivables. The decrease in net
charge-offs during year ended December 31, 2010 compared to
recent years is primarily due to improving delinquency
migrations and lower portfolio balances.
Delinquent accounts 60 days or more past due (as a
percentage of minimum lease payments receivable for leases and
as a percentage of principal outstanding for loans) were 0.90%
at December 31, 2010, 1.67% at December 31, 2009 and
1.59% at December 31, 2008. Supplemental information
regarding loss statistics and delinquencies is available on the
investor relations section of Marlins website at
www.marlincorp.com.
In accordance with the Contingencies Topic of the FASB ASC, we
maintain an allowance for credit losses at an amount sufficient
to absorb losses inherent in our existing lease and loan
portfolios as of the reporting dates based on our estimate of
probable net credit losses. The factors and trends discussed
above were included in the Companys analysis to determine
its allowance for credit losses. (See Critical Accounting
Policies.)
In 2010, we disclosed that we were in discussions with the
Federal Reserve Bank in connection with the Federal Reserve
Banks interpretation of the Interagency Policy Statement
on the Allowance for Loan and Lease Losses (SR
06-17) dated
December 13, 2006 (the ALLL Policy Statement)
and the appropriate application of the ALLL Policy Statement to
managements estimates used in determining the
Companys allowance for credit losses (the
Allowance). On October 27, 2010, MBB received a
written determination from the Federal Reserve Bank of
San Francisco and the Utah Department of Financial
Institutions (the MBB Report). On December 22,
2010, the Company received a written determination from the
Federal Reserve Bank of Philadelphia (the MBSC
Report). While we have not received a final determination
from the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank of Philadelphia in connection with our
implementation of the recommendations contained in the MBB
Report and the MBSC Report, we believe that we have properly
implemented such recommendations and that such implementation
did not require material adjustments or significant changes to
the methodology used to determine the Allowance. If the Company
receives additional information from the Federal Reserve Bank of
San Francisco or the Federal Reserve Bank of Philadelphia
in connection with our implementation of the recommendations and
if, as a result of its review of such additional information,
management determines that such additional information requires
adjustments or changes to the methodology used to determine the
Allowance, such adjustments or changes could have a material
impact on the size of the Allowance.
Residual
Performance
Our leases offer our end user customers the option to own the
purchased equipment at lease expiration. As of December 31,
2010, approximately 69% of our leases were one dollar purchase
option leases, 28% were fair market value leases and 3% were
fixed purchase option leases, the latter of which typically
contain a purchase price equal to 10% of the original equipment
cost. As of December 31, 2010, there were
$37.3 million of residual assets retained on our
Consolidated Balance Sheet, of which $30.6 million, or
82.0%, were related to copiers. As of December 31, 2009,
there were $43.9 million of residual assets retained on our
Consolidated Balance Sheet, of which $35.1 million, or
79.9%, were related to copiers. No other group of equipment
represented more than 10% of equipment residuals as of
December 31, 2010 and 2009, respectively. Improvements in
technology and other market changes, particularly in copiers,
could adversely impact our ability to realize the recorded
residual values of this equipment.
Fee income included approximately $5.1 million,
$5.4 million and $5.9 million of net residual income
for the years ended December 31, 2010, 2009 and 2008,
respectively. Net residual income includes income from lease
51
renewals and gains and losses on the realization of residual
values of leased equipment disposed at the end of term as
further described below.
Our leases generally include renewal provisions and many leases
continue beyond their initial contractual term. Based on the
Companys experience, the amount of ultimate realization of
the residual value tends to relate more to the customers
election at the end of the lease term to enter into a renewal
period, purchase the leased equipment or return the leased
equipment than it does to the equipment type. We consider
renewal income a component of residual performance. Renewal
income, net of depreciation, totaled approximately
$7.7 million, $7.2 million and $7.0 million for
the years ended December 31, 2010, 2009 and 2008,
respectively.
For the year ended December 31, 2010, net losses on
residual values disposed at end of term totaled
$2.6 million compared to net losses of $1.8 million
for the year ended December 31, 2009. For the year ended
December 31, 2008, net losses on residual values disposed
at end of term totaled $1.1 million. The primary driver of
the changes was a shift in the mix of the amounts and types of
equipment disposed at the end of the applicable term.
Historically, our net residual income has exceeded 100% of the
residual recorded on such leases. Management performs periodic
reviews of the estimated residual values and historical
realization statistics no less frequently than quarterly. There
was no impairment recognized on estimated residual values during
the years ended December 31, 2010, 2009 and 2008,
respectively.
Liquidity
and Capital Resources
Our business requires a substantial amount of cash to operate
and grow. Our primary liquidity need is for new originations. In
addition, we need liquidity to pay interest and principal on our
borrowings, to pay fees and expenses incurred in connection with
our securitization transactions, to fund infrastructure and
technology investment and to pay administrative and other
operating expenses.
We are dependent upon the availability of financing from a
variety of funding sources to satisfy these liquidity needs.
Historically, we have relied upon four principal types of
third-party financing to fund our operations:
|
|
|
|
|
borrowings under revolving, short-term or long-term bank
facilities;
|
|
|
|
financing of leases and loans in various warehouse facilities
(all of which have since been repaid in full);
|
|
|
|
financing of leases through term note securitizations; and
|
|
|
|
FDIC-insured certificates of deposit issued by our wholly-owned
subsidiary, MBB.
|
On March 20, 2007, the FDIC approved the application of our
wholly-owned subsidiary, MBB, to become an industrial bank
chartered by the State of Utah. MBB commenced operations
effective March 12, 2008. MBB provides diversification of
the Companys funding sources and, over time, may add other
product offerings to better serve our customer base. From its
opening to December 31, 2010, MBB has funded
$192.1 million of leases and loans through its initial
capitalization of $12 million and its issuance of
$159.1 million in FDIC insured deposits at an average
borrowing rate of 3.28%.
On December 31, 2008, Marlin Business Services Corp.
received approval from the Federal Reserve Bank of Philadelphia
to become a bank holding company upon conversion of MBB from an
industrial bank to a commercial bank. In January 2009, MBB
became a commercial bank and a member of the Federal Reserve
System, and Marlin Business Services Corp. became a bank holding
company. Until March 12, 2011, MBB operated in accordance
with the FDIC Order and in accordance with its original de novo
three-year business plan, which assumed total assets of up to
$128 million by March 12, 2011 (when its three-year de
novo period expired).
On September 15, 2010, the Federal Reserve Bank of
Philadelphia confirmed the effectiveness of Marlin Business
Services Corp.s election to become a financial holding
company (while remaining a bank holding company) pursuant to
Sections 4(k) and (l) of the Bank Holding Company Act
and Section 225.82 of the Federal Reserve Boards
Regulation Y. Such election permits Marlin Business
Services Corp. to engage in activities that are financial in
nature or incidental to a financial activity, including the
maintenance and expansion of our reinsurance activities
conducted through our wholly-owned subsidiary, AssuranceOne.
52
Our strategy has generally included funding new originations,
other than those funded by MBB, in the short-term with cash from
operations or through borrowings under various warehouse and
loan facilities. Historically, we have executed a term note
securitization approximately once a year to refinance and
relieve the warehouse and loan facilities. Due to the impact on
borrowing costs from unfavorable market conditions and the
available capacity in our warehouse and loan facilities at that
time, the Company elected not to complete fixed-rate term note
securitizations in 2008 or 2009. With the opening of MBB in
2008, we are funding increasing amounts of new originations
through the issuance of FDIC-insured certificates of deposit.
On October 9, 2009, Marlin Business Services Corp.s
wholly-owned subsidiary, Marlin Receivables Corp.
(MRC), closed on a $75.0 million, three-year
committed loan facility with the Lender Finance division of
Wells Fargo Capital Finance. The facility is secured by a lien
on MRCs assets and is supported by guaranties from Marlin
Business Services Corp. and Marlin Leasing Corporation. Advances
under the facility are made pursuant to a borrowing base
formula, and the proceeds are used to fund lease originations.
The maturity date of the facility is October 9, 2012.
On February 12, 2010 we completed an $80.7 million
TALF-eligible term asset-backed securitization, of which we
elected to defer the issuance of subordinated notes totaling
$12.5 million. This transaction was Marlins tenth
term note securitization and the fifth to earn a AAA rating. As
with all of the Companys prior term note securitizations,
this financing provides the Company with fixed-cost borrowing
and is recorded in long-term borrowings in the Consolidated
Balance Sheets. This was a private offering made to qualified
institutional buyers pursuant to Rule 144A under the
1933 Act by Marlin Leasing Receivables XII LLC, a
wholly-owned subsidiary of Marlin Leasing Corporation. DBRS,
Inc. and Standard & Poors Ratings Services
assigned a AAA rating to the senior tranche of this offering.
The effective weighted average interest expense over the term of
the financing is expected to be approximately 3.13%. A portion
of the proceeds of the new securitization was used to repay the
full amount outstanding under the CP conduit warehouse facility.
On September 24, 2010, the Companys affiliate, Marlin
Leasing Receivables XIII LLC (MLR XIII), closed on a
$50.0 million three-year committed loan facility with Key
Equipment Finance Inc. The facility is secured by a lien on MLR
XIIIs assets. Advances under the facility will be made
pursuant to a borrowing base formula, and the proceeds will be
used to fund lease originations. The maturity date of the
facility is September 23, 2013. An event of default such as
non-payment of amounts when due under the loan agreement or a
breach of covenants may accelerate the maturity date of the
facility. (See Financial Covenants section which follows
in this Item 7.)
At December 31, 2010 we have approximately
$76.1 million of available borrowing capacity through these
facilities in addition to available cash and cash equivalents of
$37.0 million. Our debt to equity ratio was 1.70 to 1 at
December 31, 2010 and 2.55 to 1 at December 31, 2009.
Net cash provided by investing activities was $95.9 million
for the year ended December 31, 2010, compared to net cash
provided by investing activities of $184.7 million for the
year ended December 31, 2009 and net cash provided by
investing activities of $130.4 million for the year ended
December 31, 2008. Investing activities primarily relate to
lease payment activity.
Net cash used in financing activities was $118.0 million
for the year ended December 31, 2010, compared to net cash
used in financing activities of $221.2 million for the year
ended December 31, 2009 and net cash used in financing
activities of $168.6 million for the year ended
December 31, 2008. 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
$22.1 million for the year ended December 31, 2010,
compared to net cash provided by operating activities of
$33.4 million for the year ended December 31, 2009 and
$39.7 million for the year ended December 31, 2008.
We expect cash from operations, additional borrowings on
existing and future credit facilities, funds from certificates
of deposit through brokers and other financial institutions and
the completion of additional on-balance-sheet term note
securitizations to be adequate to support our operations and
projected growth.
53
Total Cash and Cash Equivalents. Our objective
is to maintain an adequate level of cash, investing any free
cash in leases and loans. We primarily fund our originations and
growth using advances under our long-term bank facilities and
certificates of deposit issued through MBB. Total cash and cash
equivalents available as of December 31, 2010 totaled
$37.0 million compared to $37.1 million at
December 31, 2009.
Restricted Interest-earning Deposits with
Banks. As of December 31, 2010, we also had
$47.1 million of cash that was classified as restricted
interest-earning deposits with banks, compared to
$63.4 million at December 31, 2009. Restricted
interest-earning deposits with banks consist primarily of
various trust accounts related to our secured debt facilities.
Borrowings. Our primary borrowing
relationships each require the pledging of eligible lease and
loan receivables to secure amounts advanced. Our aggregate
outstanding secured borrowings amounted to $178.7 million
at December 31, 2010 and $307.0 million at
December 31, 2009. Borrowings outstanding under the
Companys short-term and long-term debt consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ended December 31, 2010
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Month End
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Facility
|
|
|
Amount
|
|
|
Amount
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
Unused
|
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Coupon
|
|
|
Outstanding
|
|
|
Coupon
|
|
|
Capacity(1)
|
|
|
|
(Dollars in thousands)
|
|
|
Federal funds purchased
|
|
$
|
1,600
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
1,600
|
|
CP conduit warehouse
facility(2)
|
|
|
|
|
|
|
59,692
|
|
|
|
7,213
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
Term note
securitizations(3)
|
|
|
|
|
|
|
265,883
|
|
|
|
196,232
|
|
|
|
5.09
|
%
|
|
|
128,183
|
|
|
|
5.33
|
%
|
|
|
|
|
Long-term loan facilities
|
|
|
125,000
|
|
|
|
50,467
|
|
|
|
25,560
|
|
|
|
5.50
|
%
|
|
|
50,467
|
|
|
|
5.50
|
%
|
|
|
74,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,600
|
|
|
|
|
|
|
$
|
229,005
|
|
|
|
5.09
|
%
|
|
$
|
178,650
|
|
|
|
5.38
|
%
|
|
$
|
76,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include MBBs access to the Federal Reserve
Discount Window, which is based on the amount of assets MBB
chooses to pledge. Based on assets pledged at December 31,
2010, MBB had $8.3 million in unused, secured borrowing
capacity at the Federal Reserve Discount Window. |
|
(2) |
|
Converted from a revolving facility to an amortizing facility in
March 2009, and was fully repaid in February 2010. |
|
(3) |
|
Our term note securitizations are one-time fundings that pay
down over time without any ability for us to draw down
additional amounts. |
Federal Funds Line of Credit with Correspondent
Bank. MBB has established a federal funds line of
credit with a correspondent bank. This line allows for both
selling and purchasing of federal funds. The amount that can be
drawn against the line is limited to $1.6 million.
Federal Reserve Discount Window. In addition,
MBB has received approval to borrow from the Federal Reserve
Discount Window based on the amount of assets MBB chooses to
pledge. Based on assets pledged at December 31, 2010, MBB
had $8.3 million in unused, secured borrowing capacity at
the Federal Reserve Discount Window.
CP Conduit Warehouse Facility. The CP conduit
warehouse facility was repaid in full with the proceeds of the
February 12, 2010 term securitization. There is no
additional borrowing capacity under this facility.
Term Note Securitizations. On
February 12, 2010 we completed an $80.7 million
TALF-eligible term asset-backed securitization, of which we
elected to defer the issuance of subordinated notes totaling
$12.5 million. This transaction was Marlins tenth
term note securitization and the fifth to earn a AAA rating. As
with all of the Companys prior term note securitizations,
this financing provided the Company with fixed-cost borrowing
and is recorded in long-term borrowings in the Consolidated
Balance Sheets.
This was a private offering made to qualified institutional
buyers pursuant to Rule 144A under the 1933 Act by
Marlin Leasing Receivables XII LLC, a wholly-owned subsidiary of
Marlin Leasing Corporation. DBRS, Inc. and Standard &
Poors Ratings Services assigned a AAA rating to the senior
tranche of this offering. The effective weighted average
interest expense over the term of the financing is expected to
be approximately 3.13%. A portion
54
of the proceeds of the new securitization was used to repay the
full amount outstanding under the CP conduit warehouse facility.
Since our founding through December 31, 2010, we have
completed 10 on-balance-sheet term note securitizations of which
three remain outstanding. In connection with each securitization
transaction, we have transferred leases to our wholly-owned SPEs
and issued term debt collateralized by such commercial leases to
institutional investors in private securities offerings. These
SPEs are considered VIEs under U.S. GAAP. We are required
to consolidate VIEs in which we are deemed to be the primary
beneficiary through having (1) power over the significant
activities of the entity and (2) an obligation to absorb
losses or the right to receive benefits from the VIE which are
potentially significant to the VIE. We continue to service the
assets of our VIEs and retain equity
and/or
residual interests. Accordingly, assets and related debt of
these VIEs are included in the accompanying Consolidated Balance
Sheets. Our leases and restricted interest-earning deposits with
banks are assigned as collateral for these borrowings and there
is no further recourse to our general credit. Collateral in
excess of these borrowings represents our maximum loss exposure.
Our term note securitizations have fixed terms, fixed interest
rates and fixed principal amounts. At December 31, 2010 and
at December 31, 2009, outstanding term securitizations
amounted to $128.2 million and $226.7 million,
respectively.
As of December 31, 2010, $152.5 million of minimum
lease payments receivable are assigned as collateral for the
term note securitizations. Each of our outstanding term note
securitizations is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Scheduled
|
|
|
|
|
|
|
Notes Originally
|
|
|
Balance as of
|
|
|
Maturity
|
|
|
Original
|
|
|
|
Issued
|
|
|
December 31, 2010
|
|
|
Date
|
|
|
Coupon Rate
|
|
|
|
(Dollars in thousands)
|
|
|
2006 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
100,000
|
|
|
$
|
|
|
|
|
September 2007
|
|
|
|
5.48
|
%
|
Class A-2
|
|
|
65,000
|
|
|
|
|
|
|
|
November 2008
|
|
|
|
5.43
|
|
Class A-3
|
|
|
65,000
|
|
|
|
|
|
|
|
December 2009
|
|
|
|
5.34
|
|
Class A-4
|
|
|
62,761
|
|
|
|
|
|
|
|
September 2013
|
|
|
|
5.33
|
|
Class B
|
|
|
62,008
|
|
|
|
6,329
|
|
|
|
September 2013
|
|
|
|
5.63
|
|
Class C
|
|
|
25,413
|
|
|
|
12,967
|
|
|
|
September 2013
|
|
|
|
6.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
380,182
|
|
|
$
|
19,296
|
|
|
|
|
|
|
|
5.51
|
%(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
112,000
|
|
|
$
|
|
|
|
|
July 2008
|
|
|
|
5.21
|
%
|
Class A-2
|
|
|
80,000
|
|
|
|
|
|
|
|
April 2009
|
|
|
|
5.35
|
|
Class A-3
|
|
|
75,000
|
|
|
|
|
|
|
|
April 2010
|
|
|
|
5.32
|
|
Class A-4
|
|
|
72,174
|
|
|
|
24,397
|
|
|
|
May 2011
|
|
|
|
5.37
|
|
Class B
|
|
|
32,975
|
|
|
|
12,841
|
|
|
|
May 2011
|
|
|
|
5.82
|
|
Class C
|
|
|
38,864
|
|
|
|
18,087
|
|
|
|
May 2011
|
|
|
|
6.31
|
|
Class D
|
|
|
29,442
|
|
|
|
16,649
|
|
|
|
May 2011
|
|
|
|
7.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
440,455
|
|
|
$
|
71,974
|
|
|
|
|
|
|
|
5.70
|
%(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
29,000
|
|
|
$
|
|
|
|
|
February 2011
|
|
|
|
0.44
|
%
|
Class A-2
|
|
|
33,689
|
|
|
|
31,706
|
|
|
|
January 2016
|
|
|
|
2.44
|
|
Class B
|
|
|
5,480
|
|
|
|
5,207
|
|
|
|
January 2016
|
|
|
|
3.86
|
|
Class C(5)
|
|
|
6,357
|
|
|
|
|
|
|
|
January 2016
|
|
|
|
5.14
|
|
Class D(5)
|
|
|
6,137
|
|
|
|
|
|
|
|
January 2016
|
|
|
|
5.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,663
|
|
|
$
|
36,913
|
|
|
|
|
|
|
|
3.13
|
%(1)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Term Note Securitizations
|
|
|
|
|
|
$
|
128,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
(1) |
|
Represents the original weighted average initial coupon rate for
all tranches of the securitization. In addition to this coupon
interest, term note securitizations also have other transaction
costs which are amortized over the life of the borrowings as
additional interest expense. |
|
(2) |
|
The weighted average coupon rate of the
2006-1 term
note securitization will approximate 5.51% over the term of the
borrowing. |
|
(3) |
|
The weighted average coupon rate of the
2007-1 term
note securitization will approximate 5.70% over the term of the
borrowing. |
|
(4) |
|
The weighted average coupon rate of the
2010-1 term
note securitization will approximate 3.13% over the term of the
borrowing. |
|
(5) |
|
Issuance of $12.5 million of subordinated notes was
deferred. |
Long-term Loan Facilities. On October 9,
2009, Marlin Business Services Corp.s wholly-owned
subsidiary, MRC, closed on a $75.0 million, three-year
committed loan facility with the Lender Finance division of
Wells Fargo Capital Finance. The facility is secured by a lien
on MRCs assets and is supported by guaranties from the
Marlin Business Services Corp. and Marlin Leasing Corporation.
Advances under the facility are made pursuant to a borrowing
base formula, and the proceeds are used as a warehouse facility
to fund lease originations. In contrast to previous warehouse
facilities, this long-term loan facility does not require annual
refinancing. The maturity date of the facility is
October 9, 2012. An event of default, such as non-payment
of amounts when due under the loan agreement or a breach of
covenants, may accelerate the maturity date of the facility.
On September 24, 2010, the Companys affiliate, MLR
XIII, closed on a $50.0 million three-year committed loan
facility with Key Equipment Finance Inc. The facility is secured
by a lien on MLR XIIIs assets. Advances under the facility
will be made pursuant to a borrowing base formula, and the
proceeds will be used to fund lease originations. The maturity
date of the facility is September 23, 2013. An event of
default such as non-payment of amounts when due under the loan
agreement or a breach of covenants may accelerate the maturity
date of the facility.
Financial
Covenants
Our secured borrowing arrangements contain numerous covenants,
restrictions and default provisions that we must comply with in
order to obtain funding through the facilities and to avoid an
event of default. A change in the Chief Executive Officer, Chief
Operating Officer or Chief Financial Officer is an event of
default under our long-term loan facilities, unless we hire a
replacement acceptable to our lenders within 120 days. A
change in the Chief Executive Officer or Chief Operating Officer
is an immediate event of servicer termination under the
2006-1 term
note securitization.
A merger or consolidation with another company in which the
Company is not the surviving entity is also an event of default
under the financing facilities. The Companys long-term
loan facilities contain acceleration clauses allowing the
creditor to accelerate the scheduled maturities of the
obligation under certain conditions that may not be objectively
determinable (for example, if a material adverse
change occurs). An event of default under any of the
facilities could result in an acceleration of amounts
outstanding under the facilities, foreclosure on all or a
portion of the leases financed by the facilities
and/or the
removal of the Company as servicer of the leases financed by the
facility.
56
Some of the critical financial and credit quality covenants
under our borrowing arrangements as of December 31, 2010
include:
|
|
|
|
|
|
|
|
|
|
|
Actual(1)
|
|
|
Requirement
|
|
|
Tangible net worth minimum
|
|
$
|
160 million
|
|
|
$
|
141.1 million
|
|
Debt-to-equity
ratio maximum
|
|
|
1.74 to 1
|
|
|
|
10.0 to 1
|
|
Maximum servicer senior leverage ratio
|
|
|
1.28 to 1
|
|
|
|
4.0 to 1
|
|
Four-quarter rolling average interest coverage ratio minimum
|
|
|
2.03 to 1
|
|
|
|
1.50 to 1
|
|
Maximum portfolio delinquency ratio
|
|
|
0.89
|
%
|
|
|
3.50
|
%
|
Maximum gross charge-off ratio
|
|
|
4.28
|
%
|
|
|
7.00
|
%
|
|
|
|
(1) |
|
Calculations are based on specific contractual definitions and
subsidiaries per the applicable debt agreements, which may
differ from ratios or amounts presented elsewhere in this
document. |
As of December 31, 2010, the Company was in compliance with
terms of the long-term loan facilities and the term note
securitization agreements.
Bank
Capital and Regulatory Oversight
On January 13, 2009, in connection with the conversion of
MBB from an industrial bank to a commercial bank, we became a
bank holding company by order of the Federal Reserve Board and
are subject to regulation under the Bank Holding Company Act.
All of our subsidiaries may be subject to examination by the
Federal Reserve Board even if not otherwise regulated by the
Federal Reserve Board. On September 15, 2010, the Federal
Reserve Bank of Philadelphia confirmed the effectiveness of our
election to become a financial holding company (while remaining
a bank holding company) pursuant to Sections 4(k) and
(l) of the Bank Holding Company Act and Section 225.82
of the Federal Reserve Boards Regulation Y. Such
election permits us to engage in activities that are financial
in nature or incidental to a financial activity, including the
maintenance and expansion of our reinsurance activities
conducted through our wholly-owned subsidiary, AssuranceOne.
MBB is also subject to comprehensive federal and state
regulations dealing with a wide variety of subjects, including
minimum capital standards, reserve requirements, terms on which
a bank may engage in transactions with its affiliates,
restrictions as to dividend payments and numerous other aspects
of its operations. These regulations generally have been adopted
to protect depositors and creditors rather than shareholders.
There are a number of restrictions on bank holding companies
that are designed to minimize potential loss to depositors and
the FDIC insurance funds. If an FDIC-insured depository
subsidiary is undercapitalized, the bank holding
company is required to ensure (subject to certain limits) the
subsidiarys compliance with the terms of any capital
restoration plan filed with its appropriate banking agency.
Also, a bank holding company is required to serve as a source of
financial strength to its depository institution subsidiaries
and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. Under
the Bank Holding Company Act, the Federal Reserve Board has the
authority to require a bank holding company to terminate any
activity or to relinquish control of a non-bank subsidiary upon
the Federal Reserve Boards determination that such
activity or control constitutes a serious risk to the financial
soundness and stability of a depository institution subsidiary
of the bank holding company.
Capital Adequacy. Under the risk-based capital
requirements applicable to them, bank holding companies must
maintain a ratio of total capital to risk-weighted assets
(including the asset equivalent of certain off-balance sheet
activities such as acceptances and letters of credit) of not
less than 8% (10% in order to be considered
well-capitalized). At least 4% out of the total
capital (6% to be well-capitalized) must be composed of common
stock, related surplus, retained earnings, qualifying perpetual
preferred stock and minority interests in the equity accounts of
certain consolidated subsidiaries, after deducting goodwill and
certain other intangibles (Tier 1 Capital). The
remainder of total capital (Tier 2 Capital) may
consist of certain perpetual debt securities, mandatory
convertible debt securities, hybrid capital instruments and
limited amounts of subordinated debt, qualifying preferred
stock, allowance for loan and lease losses, allowance for credit
losses on off-balance-sheet credit exposures and unrealized
gains on equity securities.
57
The Federal Reserve Board has also established minimum leverage
ratio guidelines for bank holding companies. These guidelines
mandate a minimum leverage ratio of Tier 1 Capital to
adjusted quarterly average total assets less certain amounts
(leverage amounts) equal to 3% for bank holding
companies meeting certain criteria (including those having the
highest regulatory rating). All other banking organizations are
generally required to maintain a leverage ratio of at least 3%
plus an additional cushion of at least 100 basis points and
in some cases more. The Federal Reserve Boards guidelines
also provide that bank holding companies experiencing internal
growth or making acquisitions are expected to maintain capital
positions substantially above the minimum supervisory levels
without significant reliance on intangible assets. Furthermore,
the guidelines indicate that the Federal Reserve Board will
continue to consider a tangible tier 1 leverage
ratio (i.e., after deducting all intangibles) in
evaluating proposals for expansion or new activities. MBB is
subject to similar capital standards promulgated by the Federal
Reserve Board.
Bank holding companies are required to comply with the Federal
Reserve Boards risk-based capital guidelines that require
a minimum ratio of total capital to risk-weighted assets of 8%.
At least half of the total capital is required to be Tier 1
Capital. In addition to the risk-based capital guidelines, the
Federal Reserve Board has adopted a minimum leverage capital
ratio under which a bank holding company must maintain a level
of Tier 1 Capital to average total consolidated assets of
at least 3% in the case of a bank holding company which has the
highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding
companies are expected to maintain a leverage capital ratio of
at least 4%.
At December 31, 2010, MBBs Tier 1 leverage
ratio, Tier 1 risk-based capital ratio and total risk-based
capital ratio were 16.58%, 17.39% and 18.65%, respectively,
compared to requirements for well-capitalized status of 5%, 6%
and 10%, respectively. At December 31, 2010, Marlin
Business Services Corp.s Tier 1 leverage ratio,
Tier 1 risk-based capital ratio and total risk-based
capital ratio were 34.87%, 39.58% and 40.84%, respectively,
compared to requirements for well-capitalized status of 5%, 6%
and 10%, respectively.
Pursuant to the FDIC Order, MBB is required to keep its total
risk-based capital ratio above 15%. MBBs equity balance at
December 31, 2010 was $20.2 million, which qualifies
for well capitalized status. Until March 12,
2011, MBB operated in accordance with the FDIC Order and in
accordance with its original de novo three-year business plan,
which assumed total assets of up to $128 million by
March 12, 2011 (when its three-year de novo period expired.)
Information
on Stock Repurchases
Information on Stock Repurchases is provided in
Part II, Item 5, Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities, herein.
Contractual
Obligations (excluding Deposits)
In addition to our scheduled maturities on our credit facilities
and term debt, we have future cash obligations under various
types of contracts. We lease office space and office equipment
under long-term operating leases. The contractual obligations
under our agreements, credit facilities, term note
securitizations, operating leases and commitments under
non-cancelable contracts as of December 31, 2010 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of December 31, 2010
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Leased
|
|
|
Capital
|
|
|
|
|
Period Ending December 31,
|
|
Borrowings
|
|
|
Interest(1)
|
|
|
Leases
|
|
|
Facilities
|
|
|
Leases
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
2011
|
|
$
|
84,791
|
|
|
$
|
4,282
|
|
|
$
|
8
|
|
|
$
|
1,595
|
|
|
$
|
121
|
|
|
$
|
90,797
|
|
2012
|
|
|
85,031
|
|
|
|
4,403
|
|
|
|
4
|
|
|
|
1,621
|
|
|
|
103
|
|
|
|
91,162
|
|
2013
|
|
|
7,839
|
|
|
|
2,425
|
|
|
|
4
|
|
|
|
789
|
|
|
|
86
|
|
|
|
11,143
|
|
2014
|
|
|
682
|
|
|
|
49
|
|
|
|
4
|
|
|
|
141
|
|
|
|
21
|
|
|
|
897
|
|
2015
|
|
|
301
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316
|
|
Thereafter
|
|
|
6
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
178,650
|
|
|
$
|
11,175
|
|
|
$
|
20
|
|
|
$
|
4,146
|
|
|
$
|
331
|
|
|
$
|
194,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on the long-term loan facilities is assumed at the
December 31, 2010 rate for the remaining term. |
58
This table excludes time deposits. Deposit maturities are
presented in Note 10 to the Consolidated Financial
Statements in Item 8 herein.
Market
Interest-Rate Risk and Sensitivity
Market risk is the risk of losses arising from changes in values
of financial instruments. We engage in transactions in the
normal course of business that expose us to market risks. We
attempt to mitigate such risks through prudent management
practices and strategies such as attempting to match the
expected cash flows of our assets and liabilities.
We are exposed to market risks associated with changes in
interest rates and our earnings may fluctuate with changes in
interest rates. The lease assets we originate are almost
entirely fixed-rate. Accordingly, we generally seek to finance
these assets with fixed interest borrowings and certificates of
deposit that the Company issues periodically. Between term note
securitization issues, we have historically financed our new
lease originations through a combination of variable-rate
warehouse facilities and working capital. Most recently, we have
also used variable-rate long-term loan facilities to finance our
new lease originations. Our mix of fixed- and variable-rate
borrowings and our exposure to interest rate risk changes over
time. Over the past twelve months, the mix of variable-rate
borrowings to total borrowings has ranged from 7.1% to 28.2% and
averaged 14.8%. At December 31, 2010, $50.5 million,
or 28.2%, of our borrowings were variable-rate borrowings.
From time to time, we use derivative financial instruments to
attempt to further reduce our exposure to changing cash flows
caused by possible changes in interest rates. We use forward
starting interest-rate swap agreements to reduce our exposure to
changing market interest rates prior to issuing a term note
securitization. In this scenario, we usually enter into a
forward starting swap to coincide with the forecasted pricing
date of future term note securitizations. The intention of this
derivative is to reduce possible variations in future cash flows
caused by changes in interest rates prior to our forecasted
securitization. The value of the derivative contract correlates
with the movements of interest rates, and we may choose to hedge
all or a portion of forecasted transactions.
All derivatives are recorded on the Consolidated Balance Sheets
at their fair value as either assets or liabilities. The
accounting for subsequent changes in the fair value of these
derivatives depends on whether each has been designated and
qualifies for hedge accounting treatment pursuant to the
Derivatives and Hedging Topic of the FASB ASC.
Prior to July 1, 2008, these interest-rate swap agreements
were designated and accounted for as cash flow hedges of
specific term note securitization transactions, as prescribed by
U.S. GAAP. Under hedge accounting, the effective portion of
the gain or loss on a derivative designated as a cash flow hedge
was reported net of tax effects in accumulated other
comprehensive income on the Consolidated Balance Sheets, until
the pricing of the related term securitization was established.
Certain of these agreements were terminated simultaneously with
the pricing of the related term securitization transactions. For
each terminated agreement, the realized gain or loss was
deferred and recorded in the equity section of the Consolidated
Balance Sheets, and is being reclassified into earnings as an
adjustment to interest expense over the terms of the related
term securitizations.
While the Company may continue to use derivative financial
instruments to reduce exposure to changing interest rates,
effective July 1, 2008, the Company discontinued the use of
hedge accounting. By discontinuing hedge accounting effective
July 1, 2008, any subsequent changes in the fair value of
derivative instruments, including those that had previously been
accounted for under hedge accounting, are recognized immediately
in gain (loss) on derivatives. This change creates volatility in
our results of operations, as the fair value of our derivative
financial instruments changes over time, and this volatility may
adversely impact our results of operations and financial
condition. At December 31, 2010, there was no notional
principal outstanding under interest-rate swap agreements.
For the forecasted transactions that were probable of occurring,
the derivative gain or loss in accumulated other comprehensive
income as of June 30, 2008 was reclassified into earnings
as an adjustment to interest expense over the terms of the
related forecasted borrowings, consistent with hedge accounting
treatment. At the time that any
59
related forecasted borrowing was no longer probable of
occurring, the related gain or loss in accumulated other
comprehensive income became immediately recognized in earnings.
During 2009 and 2008, the Company concluded that certain
forecasted transactions were not probable of occurring on the
anticipated date or in the additional time period permitted by
U.S. GAAP. As a result, during 2009 a $0.9 million
pretax ($0.5 million after-tax) gain on the related cash
flow hedges was reclassified from accumulated other
comprehensive income into loss on derivatives. During 2008, a
$5.0 million pretax ($3.0 million after-tax) loss on
the related cash flow hedges was reclassified from accumulated
other comprehensive income into loss on derivatives.
The tables in Note 11 of the Companys Consolidated
Financial Statements summarize specific information regarding
the terminated interest-rate swap agreements described above.
There were no cash payments related to the termination of
derivative contracts for the year ended December 31, 2010.
Cash payments related to the termination of derivative contracts
totaled $7.3 million and $3.3 million for the years
ended December 31, 2009 and 2008, respectively. Cash
payments pursuant to the terms of active derivative contracts
totaled $2.4 million, $4.7 million and
$0.3 million for the years ended December 31, 2010,
2009 and 2008, respectively.
The Company also uses interest-rate cap agreements that are not
designated for hedge accounting treatment to fulfill certain
covenants in its SPEs warehouse borrowing arrangements and
for overall interest-rate risk management. Accordingly, these
interest-rate cap agreements are recorded at fair value in other
assets at $14 thousand and $0.1 million as of
December 31, 2010 and December 31, 2009, respectively.
The notional amount of interest-rate caps owned as of
December 31, 2010 and December 31, 2009 was
$70.1 million and $121.4 million, respectively.
Changes in the fair values of the caps are recorded in gain
(loss) on derivatives in the accompanying Consolidated
Statements of Operations.
The following table provides information about our financial
instruments that are sensitive to changes in interest rates,
including debt obligations. For debt obligations, the table
presents the contractually scheduled maturities and the related
weighted average interest rates as of December 31, 2010
expected as of and for each year ended through December 31,
2014 and for periods thereafter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturities by Calendar Year
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
2015 &
|
|
Carrying
|
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Thereafter
|
|
Amount
|
|
|
(Dollars in thousands)
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt
|
|
$
|
84,791
|
|
|
$
|
34,564
|
|
|
$
|
7,839
|
|
|
$
|
682
|
|
|
$
|
307
|
|
|
$
|
128,183
|
|
Average fixed rate
|
|
|
5.32
|
%
|
|
|
5.03
|
%
|
|
|
3.66
|
%
|
|
|
5.51
|
%
|
|
|
6.20
|
%
|
|
|
5.14
|
%
|
Variable-rate debt
|
|
$
|
|
|
|
$
|
50,467
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,467
|
|
Average variable rate
|
|
|
|
%
|
|
|
5.50
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
5.50
|
%
|
Interest-rate caps purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
70,102
|
|
|
$
|
28,107
|
|
|
$
|
6,000
|
|
|
$
|
1,000
|
|
|
$
|
|
|
|
$
|
70,102
|
|
Ending notional balance
|
|
|
28,107
|
|
|
|
6,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average receive rate
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
|
%
|
|
|
6.00
|
%
|
Our earnings are sensitive to fluctuations in interest rates.
The long-term loan facilities charge a variable rate of interest
based on LIBOR. Because our assets are predominately fixed-rate,
increases in this market interest rate would negatively impact
earnings and decreases in the rate would positively impact
earnings because the rate charged on our borrowings would change
faster than our assets could reprice. We would have to offset
increases in borrowing costs by adjusting the pricing under our
new leases or our net interest margin would be reduced. There
can be no assurance that we will be able to offset higher
borrowing costs with increased pricing of our assets.
For example, the impact of each hypothetical 100-basis point, or
1.00%, increase in the market rates to which our borrowings are
indexed for the twelve month period ended December 31,
2010, generally would have been to reduce net interest and fee
income by approximately $0.3 million based on our average
variable-rate borrowings of
60
approximately $32.8 million for the twelve months then
ended, excluding the effects of any changes in the value of
derivatives, taxes and possible increases in the yields from our
lease and loan portfolios due to the origination of new
contracts at higher interest rates. However, at
December 31, 2010, due to an index floor on certain
variable-rate borrowings combined with the current interest rate
environment, a 100-basis point increase in the market rates to
which the borrowings are indexed would have had no impact on the
cost of the borrowing.
We manage and monitor our exposure to interest rate risk using
balance sheet simulation models. Such models incorporate many of
our assumptions about our business including new asset
production and pricing, interest rate forecasts, overhead
expense forecasts and assumed credit losses. Many of the
assumptions we use in our simulation models are based on past
experience and actual results could vary substantially.
Recently
Issued Accounting Standards
In July 2010, the FASB issued Accounting Standards Update
2010-20,
Receivables (Topic 310): Disclosure about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses
(ASU
2010-20).
This guidance requires an entity to provide additional
disclosures regarding the nature of credit risk inherent in its
financing receivables, how the risk is analyzed and assessed in
arriving at the allowance for credit losses and the changes and
reasons for those changes in the allowance for credit losses.
Required disclosures include credit quality indicators and
delinquencies. The guidance was effective for interim and annual
reporting periods ending on or after December 15, 2010.
Because ASU
2010-20
impacts disclosures only, it did not affect the consolidated
earnings or financial position of the Company. Such disclosures
have been included in the Companys Notes to Consolidated
Financial Statements.
In June 2009, the FASB issued two standards changing the
accounting for securitizations. FASB ASC
860-10-65-3
requires more information about transfers of financial assets,
including securitization transactions, and where entities have
continuing exposure to the risks related to transferred
financial assets. It also changes the requirements for
derecognizing financial assets, and requires additional
disclosures. FASB
ASC 810-10-65-2
changes how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. It requires
additional disclosures about involvement with variable interest
entities, the related risk exposure due to that involvement and
the impact on the entitys financial statements. The new
guidance for the accounting for securitizations was effective
for the Company on January 1, 2010. The adoption of the new
requirements did not have a material impact on the consolidated
earnings, financial position or cash flows of the Company.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The information appearing in the section captioned
Managements Discussion and Analysis of Operations
and Financial Condition Market Interest-Rate Risk
and Sensitivity under Item 7 of this
Form 10-K
is incorporated herein by reference.
61
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Managements
Annual Report on Internal Control over Financial
Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rule 13a-15(f)
under the 1934 Act. The Companys internal control
over financial reporting is designed to provide reasonable
assurance to the Companys management and Board of
Directors regarding the preparation and fair presentation of
published financial statements. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements.
Management has assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2010. In making its assessment of internal
control over financial reporting, management used the criteria
set forth by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission in Internal
Control Integrated Framework.
Management has concluded that, as of December 31, 2010, the
Companys internal control over financial reporting was
effective based on the criteria set forth by the COSO of the
Treadway Commission in Internal Control
Integrated Framework.
The effectiveness of our internal control over financial
reporting as of December 31, 2010 has been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report, which is
included herein.
March 16, 2011
62
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
Marlin Business Services Corp. and
Subsidiaries
Mount Laurel, New Jersey
We have audited the internal control over financial reporting of
Marlin Business Services Corp. and subsidiaries (the
Company) as of December 31, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2010 of the Company and our report dated
March 16, 2011 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 16, 2011
63
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
Page No.
|
|
|
|
|
65
|
|
|
|
|
66
|
|
|
|
|
67
|
|
|
|
|
68
|
|
|
|
|
69
|
|
|
|
|
70
|
|
64
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Marlin Business Services Corp. and Subsidiaries
Mount Laurel, New Jersey
We have audited the accompanying consolidated balance sheets of
Marlin Business Services Corp. and subsidiaries (the
Company) as of December 31, 2010 and 2009, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2010. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Marlin Business Services Corp. and subsidiaries as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2010, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 16, 2011 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 16, 2011
65
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
2,557
|
|
|
$
|
1,372
|
|
Interest-earning deposits with banks
|
|
|
34,469
|
|
|
|
35,685
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
37,026
|
|
|
|
37,057
|
|
Restricted interest-earning deposits with banks (includes
$44.7 million and $57.1 million at December 31,
2010 and December 31, 2009, respectively, related to
consolidated variable interest entities (VIEs))
|
|
|
47,107
|
|
|
|
63,400
|
|
Securities available for sale (amortized cost of
$1.5 million at December 31, 2010)
|
|
|
1,534
|
|
|
|
|
|
Net investment in leases and loans (includes $154.1 million
and $238.0 million at December 31, 2010 and
December 31, 2009, respectively, related to consolidated
VIEs)
|
|
|
351,569
|
|
|
|
448,610
|
|
Property and equipment, net
|
|
|
2,180
|
|
|
|
2,431
|
|
Property tax receivables
|
|
|
197
|
|
|
|
1,135
|
|
Other assets
|
|
|
28,449
|
|
|
|
13,170
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
468,062
|
|
|
$
|
565,803
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Short-term borrowings
|
|
$
|
|
|
|
$
|
62,541
|
|
Long-term borrowings (includes $128.2 million and
$226.7 million at December 31, 2010 and
December 31, 2009, respectively, related to consolidated
VIEs)
|
|
|
178,650
|
|
|
|
244,445
|
|
Deposits
|
|
|
92,919
|
|
|
|
80,288
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Fair value of derivatives
|
|
|
|
|
|
|
2,408
|
|
Sales and property taxes payable
|
|
|
1,978
|
|
|
|
4,197
|
|
Accounts payable and accrued expenses
|
|
|
8,019
|
|
|
|
7,649
|
|
Net deferred income tax liability
|
|
|
26,493
|
|
|
|
12,390
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
308,059
|
|
|
|
413,918
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par value; 75,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
12,864,665 and 12,778,935 shares issued and outstanding at
December 31, 2010 and 2009 respectively
|
|
|
129
|
|
|
|
128
|
|
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
86,987
|
|
|
|
84,674
|
|
Stock subscription receivable
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Accumulated other comprehensive loss
|
|
|
(132
|
)
|
|
|
(267
|
)
|
Retained earnings
|
|
|
73,021
|
|
|
|
67,353
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
160,003
|
|
|
|
151,885
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
468,062
|
|
|
$
|
565,803
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
66
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
47,296
|
|
|
$
|
66,039
|
|
|
$
|
86,099
|
|
Fee income
|
|
|
14,041
|
|
|
|
17,405
|
|
|
|
21,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
61,337
|
|
|
|
83,444
|
|
|
|
107,453
|
|
Interest expense
|
|
|
15,613
|
|
|
|
27,338
|
|
|
|
36,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
45,724
|
|
|
|
56,106
|
|
|
|
70,573
|
|
Provision for credit losses
|
|
|
9,438
|
|
|
|
27,189
|
|
|
|
31,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income after provision for credit losses
|
|
|
36,286
|
|
|
|
28,917
|
|
|
|
39,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance income
|
|
|
4,106
|
|
|
|
5,330
|
|
|
|
6,252
|
|
Loss on derivatives
|
|
|
(116
|
)
|
|
|
(1,959
|
)
|
|
|
(16,039
|
)
|
Other income
|
|
|
1,295
|
|
|
|
1,525
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
|
5,285
|
|
|
|
4,896
|
|
|
|
(7,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
19,966
|
|
|
|
19,071
|
|
|
|
22,916
|
|
General and administrative
|
|
|
12,762
|
|
|
|
12,854
|
|
|
|
15,241
|
|
Financing related costs
|
|
|
680
|
|
|
|
505
|
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
33,408
|
|
|
|
32,430
|
|
|
|
39,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
8,163
|
|
|
|
1,383
|
|
|
|
(8,391
|
)
|
Income tax expense (benefit)
|
|
|
2,495
|
|
|
|
347
|
|
|
|
(3,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,668
|
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.44
|
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.44
|
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
Weighted average shares used in computing basic earnings (loss)
per share
|
|
|
12,836,340
|
|
|
|
12,549,167
|
|
|
|
11,874,647
|
|
Weighted average shares used in computing diluted earnings
(loss) per share
|
|
|
12,902,151
|
|
|
|
12,579,806
|
|
|
|
11,874,647
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
67
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
Stock
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Stock
|
|
|
Paid-In
|
|
|
Subscription
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2007, as previously reported
|
|
|
12,201,304
|
|
|
$
|
122
|
|
|
$
|
84,429
|
|
|
$
|
(7
|
)
|
|
$
|
(3,130
|
)
|
|
$
|
67,900
|
|
|
$
|
149,314
|
|
Restatement adjustment (Note 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,647
|
|
|
|
3,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007, as restated
|
|
|
12,201,304
|
|
|
$
|
122
|
|
|
$
|
84,429
|
|
|
$
|
(7
|
)
|
|
$
|
(3,130
|
)
|
|
$
|
71,547
|
|
|
$
|
152,961
|
|
Issuance of common stock
|
|
|
36,360
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
Repurchase of common stock
|
|
|
(333,759
|
)
|
|
|
(3
|
)
|
|
|
(2,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,383
|
)
|
Exercise of stock options
|
|
|
46,616
|
|
|
|
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145
|
|
Tax benefit on stock options exercised
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
Stock option compensation recognized
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Restricted stock grant
|
|
|
295,884
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation recognized
|
|
|
|
|
|
|
|
|
|
|
926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
926
|
|
Net change related to derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,297
|
|
|
|
|
|
|
|
3,297
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,230
|
)
|
|
|
(5,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008, as restated
|
|
|
12,246,405
|
|
|
$
|
122
|
|
|
$
|
83,671
|
|
|
$
|
(5
|
)
|
|
$
|
167
|
|
|
$
|
66,317
|
|
|
$
|
150,272
|
|
Issuance of common stock
|
|
|
35,004
|
|
|
|
1
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
Repurchase of common stock
|
|
|
(102,614
|
)
|
|
|
(1
|
)
|
|
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(400
|
)
|
Exercise of stock options
|
|
|
40,424
|
|
|
|
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
Tax benefit on stock options exercised
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
Stock option compensation recognized
|
|
|
|
|
|
|
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Restricted stock grant
|
|
|
559,716
|
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation recognized
|
|
|
|
|
|
|
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
790
|
|
Net change related to derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
(434
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,036
|
|
|
|
1,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009, as restated
|
|
|
12,778,935
|
|
|
$
|
128
|
|
|
$
|
84,674
|
|
|
$
|
(3
|
)
|
|
$
|
(267
|
)
|
|
$
|
67,353
|
|
|
$
|
151,885
|
|
Issuance of common stock
|
|
|
21,398
|
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
Repurchase of common stock
|
|
|
(80,925
|
)
|
|
|
(1
|
)
|
|
|
(771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(772
|
)
|
Exercise of stock options
|
|
|
35,864
|
|
|
|
1
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
Tax benefit on stock options exercised
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
Stock option compensation recognized
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Restricted stock grant
|
|
|
109,393
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation recognized
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
Net change related to derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
138
|
|
Net change in unrealized gain/loss on securities available for
sale, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,668
|
|
|
|
5,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
12,864,665
|
|
|
$
|
129
|
|
|
$
|
86,987
|
|
|
$
|
(2
|
)
|
|
$
|
(132
|
)
|
|
$
|
73,021
|
|
|
$
|
160,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
68
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,668
|
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,578
|
|
|
|
2,481
|
|
|
|
2,845
|
|
Stock-based compensation
|
|
|
2,617
|
|
|
|
1,450
|
|
|
|
1,178
|
|
Excess tax benefits from stock-based payment arrangements
|
|
|
(72
|
)
|
|
|
(48
|
)
|
|
|
(101
|
)
|
Amortization of deferred net loss on cash flow hedge derivatives
|
|
|
229
|
|
|
|
159
|
|
|
|
(172
|
)
|
Change in fair value of derivatives
|
|
|
(2,303
|
)
|
|
|
(1,837
|
)
|
|
|
10,998
|
|
Cash flow hedge gains reclassified from accumulated other
comprehensive income
|
|
|
|
|
|
|
(880
|
)
|
|
|
5,041
|
|
Provision for credit losses
|
|
|
9,438
|
|
|
|
27,189
|
|
|
|
31,494
|
|
Net deferred income taxes
|
|
|
14,078
|
|
|
|
255
|
|
|
|
(2,146
|
)
|
Amortization of deferred initial direct costs and fees
|
|
|
6,999
|
|
|
|
11,843
|
|
|
|
16,493
|
|
Deferred initial direct costs and fees
|
|
|
(3,551
|
)
|
|
|
(2,561
|
)
|
|
|
(10,126
|
)
|
Loss on equipment disposed
|
|
|
2,562
|
|
|
|
1,767
|
|
|
|
1,072
|
|
Effect of changes in other operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(14,108
|
)
|
|
|
2,528
|
|
|
|
(6,556
|
)
|
Other liabilities
|
|
|
(2,071
|
)
|
|
|
(10,026
|
)
|
|
|
(5,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
22,064
|
|
|
|
33,356
|
|
|
|
39,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of equipment for direct financing lease contracts and
funds used to originate loans
|
|
|
(134,705
|
)
|
|
|
(88,934
|
)
|
|
|
(256,554
|
)
|
Principal collections on leases and loans
|
|
|
213,973
|
|
|
|
270,680
|
|
|
|
310,600
|
|
Security deposits collected, net of refunds
|
|
|
(2,656
|
)
|
|
|
(4,484
|
)
|
|
|
(2,979
|
)
|
Proceeds from the sale of equipment
|
|
|
4,981
|
|
|
|
4,999
|
|
|
|
5,445
|
|
Acquisitions of property and equipment
|
|
|
(472
|
)
|
|
|
(418
|
)
|
|
|
(938
|
)
|
Change in restricted interest-earning deposits with banks
|
|
|
16,293
|
|
|
|
2,812
|
|
|
|
74,858
|
|
Purchases of securities available for sale
|
|
|
(1,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
95,875
|
|
|
|
184,655
|
|
|
|
130,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
173
|
|
|
|
108
|
|
|
|
150
|
|
Repurchases of common stock
|
|
|
(772
|
)
|
|
|
(400
|
)
|
|
|
(2,383
|
)
|
Exercise of stock options
|
|
|
162
|
|
|
|
167
|
|
|
|
145
|
|
Excess tax benefits from stock-based payment arrangements
|
|
|
72
|
|
|
|
48
|
|
|
|
101
|
|
Debt issuance costs
|
|
|
(1,900
|
)
|
|
|
(1,728
|
)
|
|
|
(175
|
)
|
Term securitization advances
|
|
|
68,169
|
|
|
|
|
|
|
|
|
|
Term securitization repayments
|
|
|
(166,701
|
)
|
|
|
(214,669
|
)
|
|
|
(331,700
|
)
|
Warehouse and bank facility advances
|
|
|
48,109
|
|
|
|
61,166
|
|
|
|
192,353
|
|
Warehouse and bank facility repayments
|
|
|
(77,913
|
)
|
|
|
(82,819
|
)
|
|
|
(90,430
|
)
|
Other short-term borrowing advances
|
|
|
|
|
|
|
2,200
|
|
|
|
|
|
Other short-term borrowing repayments
|
|
|
|
|
|
|
(2,200
|
)
|
|
|
|
|
Increase in deposits
|
|
|
12,631
|
|
|
|
16,903
|
|
|
|
63,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(117,970
|
)
|
|
|
(221,224
|
)
|
|
|
(168,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in total cash and cash equivalents
|
|
|
(31
|
)
|
|
|
(3,213
|
)
|
|
|
1,562
|
|
Total cash and cash equivalents, beginning of period
|
|
|
37,057
|
|
|
|
40,270
|
|
|
|
38,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents, end of period
|
|
$
|
37,026
|
|
|
$
|
37,057
|
|
|
$
|
40,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest on deposits and borrowings
|
|
$
|
14,147
|
|
|
$
|
26,059
|
|
|
$
|
35,051
|
|
Cash paid for income taxes, net of refunds received
|
|
$
|
3,878
|
|
|
$
|
499
|
|
|
$
|
2,758
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
69
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTE 1
The Company
Marlin Business Services Corp. (Company) was
incorporated in the Commonwealth of Pennsylvania on
August 5, 2003. Through its principal operating subsidiary,
Marlin Leasing Corporation, the Company provides equipment
leasing and working capital solutions nationwide, primarily to
small and mid-sized businesses nationwide in a segment of the
equipment leasing market commonly referred to in the leasing
industry as the small-ticket segment. The Company
finances over 100 categories of commercial equipment important
to its end user customers including copiers, security systems,
computers, telecommunications equipment and certain commercial
and industrial equipment. Effective March 12, 2008, the
Company also opened Marlin Business Bank (MBB), a
commercial bank chartered by the State of Utah and a member of
the Federal Reserve System. MBB currently provides
diversification of the Companys funding sources through
the issuance of certificates of deposit. Marlin Business
Services Corp. is managed as a single business segment. Marlin
Business Services Corp. is a bank holding company and a
financial holding company regulated by the Federal Reserve Board
under the Bank Holding Company Act.
References to the Company, Marlin,
we, us and our herein refer
to Marlin Business Services Corp. and its wholly-owned
subsidiaries, unless the context otherwise requires.
NOTE 2
Summary of Significant Accounting Policies
Basis
of Financial Statement Presentation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles in the United States
(U.S. GAAP) requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Estimates are used when accounting for income
recognition, the residual values of leased equipment, the
allowance for credit losses, deferred initial direct costs and
fees, late fee receivables, performance assumptions for
stock-based compensation awards, the probability of forecasted
transactions, the fair value of financial instruments and income
taxes. Actual results could differ from those estimates.
At this time, the Company has not elected to report any assets
and liabilities using the fair value option available under the
Financial Instruments Topic of the Financial Accounting
Standards Board (FASB) Accounting Standards
Codification (ASC).
Cash
and Cash Equivalents
Cash and cash equivalents include cash and interest-bearing
money market funds. For purposes of the consolidated statement
of cash flows, the Company considers all highly liquid
investments purchased with a maturity of three months or less to
be cash equivalents.
Restricted
Interest-Earning Deposits with Banks
Restricted interest-earning deposits with banks consist
primarily of various interest-earning trust accounts related to
the Companys secured debt facilities. The balance also
includes amounts due from securitizations representing
reimbursements of servicing fees and excess spread income.
70
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net
Investment in Leases and Loans
As required by U.S. GAAP, the Company uses the direct
finance method of accounting to record its direct financing
leases and related interest income. At the inception of a lease,
the Company records as an asset the aggregate future minimum
lease payments receivable, plus the estimated residual value of
the leased equipment, less unearned lease income.
Residual values generally reflect the estimated amounts to be
received at lease termination from lease extensions, sales or
other dispositions of leased equipment. Estimates are based on
industry data and managements experience. The Company
records an estimated residual value at lease inception for all
fair market value and fixed purchase option leases based on a
percentage of the equipment cost of the asset being leased. The
percentages used depend on equipment type and term. In setting
and reviewing estimated residual values, the Company focuses its
analysis primarily on total historical and expected realization
statistics pertaining to both lease renewals and sales of
equipment.
At the end of an original lease term, lessees may choose to
purchase the equipment, renew the lease or return the equipment
to the Company. The Company receives income from lease renewals
when the lessee elects to retain the equipment longer than the
original term of the lease. This income, net of appropriate
periodic reductions in the estimated residual values of the
related equipment, is included in fee income as net residual
income.
When a lessee elects to return equipment at lease termination,
the equipment is transferred to other assets at the lower of its
basis or fair market value. The Company generally sells returned
equipment to independent third parties, rather than leasing the
equipment a second time. The Company does not maintain equipment
in other assets for longer than 120 days. Any loss
recognized on transferring equipment to other assets, and any
gain or loss realized on the sale or disposal of equipment to a
lessee or to others is included in fee income as net residual
income.
Based on the Companys experience, the amount of ultimate
realization of the residual value tends to relate more to the
customers election at the end of the lease term to enter
into a renewal period, to purchase the leased equipment or to
return the leased equipment than it does to the equipment type.
Management performs periodic reviews of the estimated residual
values and historic realization statistics no less frequently
than quarterly and any impairment, if other than temporary, is
recognized in the current period.
Initial direct costs and fees related to lease originations are
deferred as part of the investment and amortized over the lease
term. Unearned lease income is the amount by which the total
lease receivable plus the estimated residual value exceeds the
cost of the equipment. Unearned lease income, net of initial
direct costs and fees, is recognized as revenue over the lease
term using the effective interest method.
Allowance
for Credit Losses
In accordance with the Contingencies Topic of the FASB ASC, we
maintain an allowance for credit losses at an amount sufficient
to absorb losses inherent in our existing lease and loan
portfolios as of the reporting dates based on our projection of
probable net credit losses. We evaluate our portfolios on a
pooled basis, due to their composition of small balance,
homogenous accounts with similar general credit risk
characteristics, diversified among a large cross-section of
variables including industry, geography, equipment type, obligor
and vendor.
We consider both quantitative and qualitative factors in
determining the allowance for credit losses. Quantitative
factors considered include a migration analysis, historic
delinquencies and charge-offs, historic bankruptcies, historic
performance of restructured accounts and a static pool analysis
of historic recoveries. A migration analysis is a technique used
to estimate the likelihood that an account will progress through
the various delinquency stages and ultimately charge off.
Qualitative factors that may result in further adjustments to
the quantitative analysis include items such as forecasting
uncertainties, changes in the composition of our lease and loan
portfolios (including geography, industry, equipment type and
vendor source), seasonality, economic conditions and trends or
business practices at the reporting date that are different from
the periods used in the quantitative analysis.
71
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The various factors used in the analysis are reviewed
periodically, and no less frequently than quarterly. We then
establish an allowance for credit losses for the projected
probable net credit losses based on this analysis. A provision
is charged against earnings to maintain the allowance for credit
losses at the appropriate level. Our policy is to charge-off
against the allowance the estimated unrecoverable portion of
accounts once they reach 121 days delinquent.
Our projections of probable net credit losses are inherently
uncertain, and as a result we cannot predict with certainty the
amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy
laws, and other factors could impact our actual and projected
net credit losses and the related allowance for credit losses.
To the extent we add new leases and loans to our portfolios, or
to the degree credit quality is worse than expected, we record
expense to increase the allowance for credit losses to reflect
the estimated net losses inherent in our portfolios. Actual
losses may vary from current estimates.
In 2010, we disclosed that we were in discussions with the
Federal Reserve Bank in connection with the Federal Reserve
Banks interpretation of the Interagency Policy Statement
on the Allowance for Loan and Lease Losses (SR
06-17) dated
December 13, 2006 (the ALLL Policy Statement)
and the appropriate application of the ALLL Policy Statement to
managements estimates used in determining the
Companys allowance for credit losses (the
Allowance). On October 27, 2010, MBB received a
written determination from the Federal Reserve Bank of
San Francisco and the Utah Department of Financial
Institutions (the MBB Report). On December 22,
2010, the Company received a written determination from the
Federal Reserve Bank of Philadelphia (the MBSC
Report). While we have not received a final determination
from the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank of Philadelphia in connection with our
implementation of the recommendations contained in the MBB
Report and the MBSC Report, we believe that we have properly
implemented the recommendations and that such implementation did
not require material adjustments or significant changes to the
methodology used to determine the Allowance. If the Company
receives additional information from the Federal Reserve Bank of
San Francisco or the Federal Reserve Bank of Philadelphia
in connection with our implementation of the recommendations and
if, as a result of its review of such additional information,
management determines that such additional information requires
adjustments or changes to the methodology used to determine the
Allowance, such adjustments or changes could have a material
impact on the size of the Allowance.
Property
and Equipment
The Company records property and equipment at cost. Equipment
capitalized under capital leases is recorded at the present
value of the minimum lease payments due over the lease term.
Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the
related assets or lease term, whichever is shorter. The Company
generally uses depreciable lives that range from three to seven
years based on equipment type.
Other
Assets
Included in other assets on the Consolidated Balance Sheets are
transaction costs associated with warehouse facilities and term
note securitization transactions that are being amortized over
the estimated lives of the related warehouse facilities and the
term note securitization transactions using a method which
approximates the effective interest method. In addition, other
assets include derivative collateral, income taxes receivable,
prepaid expenses, accrued fee income and progress payments on
equipment purchased to lease.
Securitizations
In connection with each of its term note securitization
transactions, the Company established a bankruptcy remote
special-purpose subsidiary (SPE) and issued term
debt to institutional investors. These SPEs are each considered
a variable interest entity (VIE) under
U.S. GAAP. The Company is required to consolidate VIEs in
which it is deemed to be the primary beneficiary through having
(1) power over the significant activities of the entity
72
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and (2) an obligation to absorb losses or the right to
receive benefits from the VIE which are potentially significant
to the VIE. The Company continues to service the assets of its
VIEs and retain equity
and/or
residual interests. Accordingly, assets and related debt of
these VIEs are included in the accompanying Consolidated Balance
Sheets. The Companys leases and restricted
interest-earning deposits with banks are assigned as collateral
for these borrowings and there is no further recourse to our
general credit. Collateral in excess of these borrowings
represents the Companys maximum loss exposure.
Derivatives
The Derivatives and Hedging Topic of the FASB ASC requires
recognition of all derivatives at fair value as either assets or
liabilities in the Consolidated Balance Sheets. The accounting
for subsequent changes in the fair value of these derivatives
depends on whether each has been designated and qualifies for
hedge accounting treatment pursuant to U.S. GAAP.
Prior to July 1, 2008, the Company entered into derivative
contracts which were accounted for as cash flow hedges under
hedge accounting as prescribed by U.S. GAAP. Under hedge
accounting, the effective portion of the gain or loss on a
derivative designated as a cash flow hedge was reported net of
tax effects in accumulated other comprehensive income on the
Consolidated Balance Sheets, until the pricing of the related
term note securitization. The derivative gain or loss recognized
in accumulated other comprehensive income was then reclassified
into earnings as an adjustment to interest expense over the
terms of the related borrowings.
While the Company may continue to use derivative financial
instruments to reduce exposure to changing interest rates,
effective July 1, 2008, the Company discontinued the use of
hedge accounting. By discontinuing hedge accounting effective
July 1, 2008, any subsequent changes in the fair value of
derivative instruments, including those that had previously been
accounted for under hedge accounting, is recognized immediately
in loss on derivatives. This change creates volatility in our
results of operations, as the fair value of our derivative
financial instruments changes over time, and this volatility may
adversely impact our results of operations and financial
condition.
For the forecasted transactions that were probable of occurring,
the derivative gain or loss in accumulated other comprehensive
income as of June 30, 2008 was reclassified into earnings
as an adjustment to interest expense over the terms of the
related forecasted borrowings, consistent with hedge accounting
treatment. At the time that any related forecasted borrowing was
no longer probable of occurring, the related gain or loss in
accumulated other comprehensive income became recognized
immediately in earnings.
The Fair Value Measurements and Disclosures Topic of the FASB
ASC establishes a framework for measuring fair value under
U.S. GAAP and requires certain disclosures about fair value
measurements. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants in the principal
or most advantageous market for the asset or liability at the
measurement date (exit price). Because the Companys
derivatives are not listed on an exchange, the Company values
these instruments using a valuation model with pricing inputs
that are observable in the market or that can be derived
principally from or corroborated by observable market data.
Interest
Income
Interest income is recognized under the effective interest
method. The effective interest method of income recognition
applies a constant rate of interest equal to the internal rate
of return on the lease. Generally, when a lease or loan is
90 days or more delinquent, the contract is classified as
non-accrual and we do not recognize interest income on that
contract until it is less than 90 days delinquent.
Modifications to leases are accounted for in accordance with
Topic 840 of the FASB ASC. Modifications resulting in
renegotiated leases may include reductions in payment and
extensions in term. However, such renegotiated leases are not
granted concessions regarding implicit rates or reductions in
total amounts due.
73
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Modifications may be granted on a one-time basis in situations
that indicate the lessee is experiencing a temporary, timing
issue and has a high likelihood of success with a revised
payment plan. After a modification, a leases accrual
status is based on compliance with the modified terms.
Fee
Income
Fee income consists of fees for delinquent lease and loan
payments, cash collected on early termination of leases and net
residual income. Net residual income includes income from lease
renewals and gains and losses on the realization of residual
values of leased equipment disposed at the end of a leases
term. Residual income is recognized as earned.
Fee income from delinquent lease payments is recognized on an
accrual basis based on anticipated collection rates. At a
minimum of every quarter, an analysis of anticipated collection
rates is performed based on updates to collection history.
Adjustments in the anticipated collection rate assumptions are
made as needed based on this analysis. Other fees are recognized
when received.
Insurance
Income
Insurance income is recognized on an accrual basis as earned
over the term of the lease. Generally, insurance payments that
are 120 days or more past due are charged against income.
Ceding commissions, losses and loss adjustment expenses are
recorded in the period incurred and netted against insurance
income.
Other
Income
Other income includes various administrative transaction fees,
fees received from lease syndications and gains on sales of
leases.
Securities
Available for Sale
Securities available for sale consist of mutual funds.
Securities available for sale are measured at fair value on a
recurring basis, computed using fair value measurements
classified as Level 1 (as defined in Note 12, Fair
Value Measurements and Disclosures about the Fair Value of
Financial Instruments), since prices are obtained from a quoted
market. Unrealized holding gains or losses, net of related
deferred income taxes, are reported in accumulated other
comprehensive income.
Initial
Direct Costs and Fees
We defer initial direct costs incurred and fees received to
originate our leases and loans in accordance with the
Receivables Topic and the Nonrefundable Fees and Other Costs
Subtopic of the FASB ASC. The initial direct costs and fees we
defer are part of the net investment in leases and loans and are
amortized to interest income using the effective interest
method. We defer third-party commission costs as well as certain
internal costs directly related to the origination activity.
Costs subject to deferral include evaluating each prospective
customers financial condition, evaluating and recording
guarantees and other security arrangements, negotiating terms,
preparing and processing documents and closing each transaction.
The fees we defer are documentation fees collected at inception.
The realization of the deferred initial direct costs, net of
fees deferred, is predicated on the net future cash flows
generated by our lease and loan portfolios.
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 its common stock on the open
market. The par value of the shares repurchased is charged to
common stock with the excess of the purchase price over par
charged against any available additional paid-in capital.
74
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Financing
Related Costs
Financing related costs primarily consist of bank commitment
fees paid to our financing sources.
Stock-Based
Compensation
The Compensation Stock Compensation Topic of the
FASB ASC establishes fair value as the measurement objective in
accounting for share-based payment arrangements and requires all
entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees
and non-employees, except for equity instruments held by
employee share ownership plans.
The Company measures stock-based compensation cost at grant
date, based on the fair value of the awards ultimately expected
to vest. Compensation cost is recognized on a straight-line
basis over the service period. We generally use the
Black-Scholes valuation model to measure the fair value of our
stock options utilizing various assumptions with respect to
expected holding period, risk-free interest rates, stock price
volatility, and dividend yield. The assumptions are based on
managements judgment concerning future events.
The fair value calculations for the one-time stock option
exchange program the Company effected through an
October 28, 2009 amendment to its 2003 Equity Compensation
Plan were based on a binomial valuation model which considered
many variables, such as the volatility of our stock and the
expected term of an option, including consideration of the ratio
of stock price to the exercise price at which exercise is
expected to occur. The binomial valuation model was used for
both the surrendered stock options and the new replacement
options under the stock option exchange program.
As required by U.S. GAAP, the Company uses its judgment in
estimating the amount of awards that are expected to be
forfeited, with subsequent revisions to the assumptions if
actual forfeitures differ from those estimates. In addition, for
performance-based awards the Company estimates the degree to
which the performance conditions will be met to estimate the
number of shares expected to vest and the related compensation
expense. Compensation expense is adjusted in the period such
performance estimates change.
Income
Taxes
The Income Taxes Topic of the FASB ASC requires the use of the
asset and liability method under which deferred taxes are
determined based on the estimated future tax effects of
differences between the financial statement and tax bases of
assets and liabilities, given the provisions of the enacted tax
laws. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities and projected future taxable income in making this
assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of
these deductible differences.
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities
and any necessary valuation allowance recorded against net
deferred tax assets. The process involves summarizing temporary
differences resulting from the different treatment of items,
such as leases, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities which
are included within the Consolidated Balance Sheets. Management
then assesses the likelihood that deferred tax assets will be
recovered from future taxable income or tax carry-back
availability and, to the extent our management believes recovery
is not likely, a valuation allowance is established. To the
extent that we establish a valuation allowance in a period, an
expense is recorded within the tax provision in the Consolidated
Statements of Operations.
75
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with U.S. GAAP, uncertain tax positions taken
or expected to be taken in a tax return are subject to potential
financial statement recognition based on prescribed recognition
and measurement criteria. Based on our evaluation, we concluded
that there are no significant uncertain tax positions requiring
recognition in our financial statements. At December 31,
2010 and 2009, there have been no material changes to the
liability for uncertain tax positions and there are no
significant unrecognized tax benefits.
The periods subject to examination for the Companys
federal return include the 2006 tax year to the present. The
Company files state income tax returns in various states which
may have different statutes of limitations. Generally, state
income tax returns for the years 2005 through the present are
subject to examination.
The Company records penalties and accrued interest related to
uncertain tax positions in income tax expense. Such adjustments
have historically been minimal and immaterial to our financial
results.
Earnings
Per Share
Pursuant to the Earnings Per Share Topic of the FASB ASC,
unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and are included in the
computation of earnings per share using the two-class method.
Basic earnings per share is computed by dividing net income
available to common stockholders by the weighted average number
of common shares outstanding for the period using the two-class
method, which includes our unvested restricted stock awards as
participating securities. Diluted earnings per share is computed
based on the weighted average number of common shares
outstanding for the period using the two-class method, which
includes our unvested restricted stock awards as participating
securities, and the dilutive impact of the exercise or
conversion of common stock equivalents, such as stock options,
into shares of common stock as if those securities were
exercised or converted.
Recent
Accounting Pronouncements
In July 2010, the FASB issued Accounting Standards Update
2010-20,
Receivables (Topic 310): Disclosure about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses
(ASU
2010-20).
This guidance requires an entity to provide additional
disclosures regarding the nature of credit risk inherent in its
financing receivables, how the risk is analyzed and assessed in
arriving at the allowance for credit losses and the changes and
reasons for those changes in the allowance for credit losses.
Required disclosures include credit quality indicators and
delinquencies. The guidance was effective for interim and annual
reporting periods ending on or after December 15, 2010.
Because ASU
2010-20
impacts disclosures only, it did not affect the consolidated
earnings or financial position of the Company. Such disclosures
have been included in the Companys Notes to Consolidated
Financial Statements.
In June 2009, the FASB issued two standards changing the
accounting for securitizations. FASB ASC
860-10-65-3
requires more information about transfers of financial assets,
including securitization transactions, and where entities have
continuing exposure to the risks related to transferred
financial assets. It also changes the requirements for
derecognizing financial assets, and requires additional
disclosures. FASB
ASC 810-10-65-2
changes how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. It requires
additional disclosures about involvement with variable interest
entities, the related risk exposure due to that involvement and
the impact on the entitys financial statements. The new
guidance for the accounting for securitizations was effective
for the Company on January 1, 2010. The adoption of the new
requirements did not have a material impact on the consolidated
earnings, financial position or cash flows of the Company.
76
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 3
Net Investment in Leases and Loans
Net investment in leases and loans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Minimum lease payments receivable
|
|
$
|
389,247
|
|
|
$
|
494,954
|
|
Estimated residual value of equipment
|
|
|
37,320
|
|
|
|
43,928
|
|
Unearned lease income, net of initial direct costs and fees
deferred
|
|
|
(63,355
|
)
|
|
|
(74,823
|
)
|
Security deposits
|
|
|
(5,026
|
)
|
|
|
(7,681
|
)
|
Loans, including unamortized deferred fees and costs
|
|
|
1,101
|
|
|
|
4,425
|
|
Allowance for credit losses
|
|
|
(7,718
|
)
|
|
|
(12,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
351,569
|
|
|
$
|
448,610
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, a total of $229.7 million of
minimum lease payments receivable are assigned as collateral for
borrowings, including the amounts related to consolidated VIEs,
as further discussed in Note 9.
Initial direct costs net of fees deferred were $6.8 million
and $10.2 million as of December 31, 2010, and
December 31, 2009, respectively, and are netted in unearned
income and will be amortized to income using the effective
interest method. At December 31, 2010 and December 31,
2009, $30.6 million and $35.1 million, respectively,
of the estimated residual value of equipment retained on our
Consolidated Balance Sheets was related to copiers.
Minimum lease payments receivable under lease contracts and the
amortization of unearned lease income, including initial direct
costs and fees deferred, are as follows as of December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease
|
|
|
|
|
|
|
Payments
|
|
|
Income
|
|
|
|
Receivable
|
|
|
Amortization
|
|
|
|
(Dollars in thousands)
|
|
|
Period Ending December 31,
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
183,059
|
|
|
$
|
34,067
|
|
2012
|
|
|
112,152
|
|
|
|
17,756
|
|
2013
|
|
|
58,334
|
|
|
|
7,921
|
|
2014
|
|
|
25,028
|
|
|
|
2,961
|
|
2015
|
|
|
10,449
|
|
|
|
644
|
|
Thereafter
|
|
|
225
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
389,247
|
|
|
$
|
63,355
|
|
|
|
|
|
|
|
|
|
|
Income is not recognized on leases or loans when a default on
monthly payment exists for a period of 90 days or more.
Income recognition resumes when the contract becomes less than
90 days delinquent. As of December 31, 2010 and
December 31, 2009, the Company maintained total finance
receivables which were on a non-accrual basis of
$2.0 million and $4.6 million, respectively. As of
December 31, 2010 and December 31, 2009, the Company
had total finance receivables in which the terms of the original
agreements had been renegotiated in the amount of
$2.2 million and $4.5 million, respectively. (See
Note 5 for additional asset quality information.)
NOTE 4
Concentrations of Risk
As of December 31, 2010, leases approximating 11% and 9% of
the net investment balance of leases by the Company were located
in the states of California and New York, respectively. No other
state accounted for more
77
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
than 9% of the net investment balance of leases owned and
serviced by the Company as of December 31, 2010. As of
December 31, 2010, no single vendor source accounted for
more than 2% of the net investment balance of leases owned by
the Company. The largest single obligor accounted for less than
1% of the net investment balance of leases owned by the Company
as of December 31, 2010. Although the Companys
portfolio of leases includes lessees located throughout the
United States, such lessees ability to honor their
contracts may be substantially dependent on economic conditions
in these states. All such contracts are collateralized by the
related equipment. The Company leases to a variety of different
industries, including the medical, retail, service,
manufacturing and restaurant industries, among others. To the
extent that the economic or regulatory conditions prevalent in
such industries change, the lessees ability to honor their
lease obligations may be adversely impacted. As of
December 31, 2010, copiers comprised 82.0% of the estimated
residual value of leased equipment. No other group of equipment
represented more than 10% of equipment residuals as of
December 31, 2010. Improvements and other changes in
technology could adversely impact the Companys ability to
realize the recorded value of this equipment. There were no
impairments of estimated residual value recorded during the
years ended December 31, 2010, 2009 or 2008.
NOTE 5
Allowance for Credit Losses
In accordance with the Contingencies Topic of the FASB ASC, we
maintain an allowance for credit losses at an amount sufficient
to absorb losses inherent in our existing lease and loan
portfolios as of the reporting dates based on our estimate of
probable net credit losses.
The chart which follows provides activity in the allowance for
credit losses and asset quality statistics for each of the years
ended December 31, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for credit losses, beginning of period
|
|
$
|
12,193
|
|
|
$
|
15,283
|
|
|
$
|
10,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(17,095
|
)
|
|
|
(33,575
|
)
|
|
|
(30,231
|
)
|
Recoveries
|
|
|
3,182
|
|
|
|
3,296
|
|
|
|
3,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(13,913
|
)
|
|
|
(30,279
|
)
|
|
|
(27,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
9,438
|
|
|
|
27,189
|
|
|
|
31,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end of
period(1)
|
|
$
|
7,718
|
|
|
$
|
12,193
|
|
|
$
|
15,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average total finance
receivables(2)
|
|
|
3.58
|
%
|
|
|
5.42
|
%
|
|
|
3.80
|
%
|
Allowance for credit losses to total finance receivables, end of
period(2)
|
|
|
2.19
|
%
|
|
|
2.71
|
%
|
|
|
2.30
|
%
|
Average total finance
receivables(2)
|
|
$
|
389,001
|
|
|
$
|
558,311
|
|
|
$
|
715,649
|
|
Total finance receivables, end of
period(2)
|
|
$
|
352,527
|
|
|
$
|
450,595
|
|
|
$
|
664,902
|
|
Delinquencies greater than 60 days past due
|
|
$
|
3,504
|
|
|
$
|
8,334
|
|
|
$
|
12,203
|
|
Delinquencies greater than 60 days past
due(3)
|
|
|
0.90
|
%
|
|
|
1.67
|
%
|
|
|
1.59
|
%
|
Allowance for credit losses to delinquent
|
|
|
|
|
|
|
|
|
|
|
|
|
accounts greater than 60 days past
due(3)
|
|
|
220.26
|
%
|
|
|
146.30
|
%
|
|
|
125.24
|
%
|
Non-accrual leases and loans, end of period
|
|
$
|
1,996
|
|
|
$
|
4,557
|
|
|
$
|
6,380
|
|
Renegotiated leases and loans, end of period
|
|
$
|
2,221
|
|
|
$
|
4,521
|
|
|
$
|
8,256
|
|
|
|
|
(1) |
|
The allowance for credit losses allocated to loans at
December 31, 2010, 2009 and 2008, was $0.1 million,
$0.4 million and $0.9 million, respectively. |
78
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(2) |
|
Total finance receivables include net investment in direct
financing leases and loans. For purposes of asset quality and
allowance calculations, the effects of (i) the allowance
for credit losses and (ii) initial direct costs and fees
deferred are excluded. |
|
(3) |
|
Calculated as a percent of total minimum lease payments
receivable for leases and as a percent of principal outstanding
for loans. |
Net investments in finance receivables are generally charged-off
when they are contractually past due for 121 days. Income
is not recognized on leases or loans when a default on monthly
payment exists for a period of 90 days or more. Income
recognition resumes when a lease or loan becomes less than
90 days delinquent. At December 31, 2010 and 2009,
there were no finance receivables past due 90 days or more
and still accruing.
Net charge-offs for the year ended December 31, 2010 were
$13.9 million, or 3.58% of average total finance
receivables, compared to $30.3 million, or 5.42% of average
total finance receivables, for the year ended December 31,
2009. The decrease in net charge-offs during year ended
December 31, 2010 compared to recent years is primarily due
to improving delinquency migrations and lower portfolio
balances. Our key credit quality indicator is delinquency status.
In 2010, we disclosed that we were in discussions with the
Federal Reserve Bank in connection with the Federal Reserve
Banks interpretation of the Interagency Policy Statement
on the Allowance for Loan and Lease Losses (SR
06-17) dated
December 13, 2006 (the ALLL Policy Statement)
and the appropriate application of the ALLL Policy Statement to
managements estimates used in determining the
Companys allowance for credit losses (the
Allowance). On October 27, 2010, MBB received a
written determination from the Federal Reserve Bank of
San Francisco and the Utah Department of Financial
Institutions (the MBB Report). On December 22,
2010, the Company received a written determination from the
Federal Reserve Bank of Philadelphia (the MBSC
Report). While we have not received a final determination
from the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank of Philadelphia in connection with our
implementation of the recommendations contained in the MBB
Report and the MBSC Report, we believe that we have properly
implemented the recommendations and that such implementation did
not require material adjustments or significant changes to the
methodology used to determine the Allowance. If the Company
receives additional information from the Federal Reserve Bank of
San Francisco or the Federal Reserve Bank of Philadelphia
in connection with our implementation of the recommendations and
if, as a result of its review of such information, management
determines that such information requires adjustments or changes
to the methodology used to determine the Allowance, such
adjustments or changes could have a material impact on the size
of the Allowance.
NOTE 6
Property and Equipment, Net
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Depreciable Life
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
2,746
|
|
|
$
|
2,719
|
|
|
|
7 years
|
|
Computer systems and equipment
|
|
|
8,017
|
|
|
|
7,351
|
|
|
|
3-5 years
|
|
Leasehold improvements
|
|
|
567
|
|
|
|
566
|
|
|
|
Shorter of estimated useful life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or remaining lease term
|
|
Total property and equipment
|
|
|
11,330
|
|
|
|
10,636
|
|
|
|
|
|
Less Accumulated depreciation and amortization
|
|
|
(9,150
|
)
|
|
|
(8,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,180
|
|
|
$
|
2,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation and amortization expense was $0.9 million,
$1.2 million and $1.2 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
NOTE 7
Other Assets
Other assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Accrued fees receivable
|
|
$
|
2,250
|
|
|
$
|
3,189
|
|
Deferred transaction costs
|
|
|
2,420
|
|
|
|
1,893
|
|
Prepaid expenses
|
|
|
1,674
|
|
|
|
1,360
|
|
Income taxes receivable (See Note 13 for further discussion)
|
|
|
20,711
|
|
|
|
5,178
|
|
Other
|
|
|
1,394
|
|
|
|
1,550
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,449
|
|
|
$
|
13,170
|
|
|
|
|
|
|
|
|
|
|
NOTE 8
Commitments and Contingencies
The Company is involved in legal proceedings, which include
claims, litigation and suits arising in the ordinary course of
business. In the opinion of management, these actions will not
have a material adverse effect on the Companys
consolidated financial position, results of operations or cash
flows.
As of December 31, 2010, the Company leases all five of its
office locations including its executive offices in Mt. Laurel,
New Jersey, and its offices in or near Atlanta, Georgia;
Philadelphia, Pennsylvania; Salt Lake City, Utah; and Sherwood,
Oregon. These lease commitments are accounted for as operating
leases.
The Company has entered into several capital leases to finance
corporate property and equipment.
The following is a schedule of future minimum lease payments for
capital and operating leases as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Minimum Lease Payment Obligations
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Period Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
121
|
|
|
$
|
1,603
|
|
|
$
|
1,724
|
|
2012
|
|
|
103
|
|
|
|
1,625
|
|
|
|
1,728
|
|
2013
|
|
|
86
|
|
|
|
793
|
|
|
|
879
|
|
2014
|
|
|
21
|
|
|
|
145
|
|
|
|
166
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
331
|
|
|
$
|
4,166
|
|
|
$
|
4,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount representing interest
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense was $1.1 million, $1.1 million and
$1.3 million for the years ended December 31, 2010,
2009, and 2008, respectively.
80
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has employment agreements with certain senior
officers that currently extend through November 12, 2012,
with certain renewal options.
NOTE 9
Short-term and Long-term Borrowings
Borrowings with an original maturity of less than one year are
classified as short-term borrowings. The Companys
commercial paper (CP) conduit warehouse facility
(which was repaid in full with a portion of the proceeds of our
February 12, 2010 term asset-backed securitization) is
classified as short-term borrowings, along with MBBs
federal funds purchased. Borrowings with an original maturity of
one year or more are classified as long-term borrowings. The
Companys term note securitizations and long-term loan
facilities are classified as long-term borrowings.
The Companys total borrowings outstanding consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
CP Conduit Warehouse Facility
|
|
$
|
|
|
|
$
|
62,541
|
|
05-1 Term
Note Securitization
|
|
|
|
|
|
|
13,835
|
|
06-1 Term
Note Securitization
|
|
|
19,296
|
|
|
|
60,923
|
|
07-1 Term
Note Securitization
|
|
|
71,974
|
|
|
|
151,958
|
|
10-1 Term
Note Securitization
|
|
|
36,913
|
|
|
|
|
|
Long-term Loan Facilities
|
|
|
50,467
|
|
|
|
17,729
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
178,650
|
|
|
$
|
306,986
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008, the
Company incurred commitment fees on the unused portion of the
loan facilities of $0.4 million, $0.1 million, and
$0.1 million, respectively.
The Companys short-term and long-term borrowings are
collateralized by certain of the Companys direct financing
leases. The Company is restricted from selling, transferring or
assigning these leases or placing liens or pledges on these
leases. At the end of each period, the Company has the following
minimum lease payments receivable assigned as collateral:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
CP Conduit Warehouse Facility
|
|
$
|
|
|
|
$
|
100,746
|
|
05-1 Term
Note Securitization
|
|
|
|
|
|
|
13,397
|
|
06-1 Term
Note Securitization
|
|
|
18,758
|
|
|
|
65,229
|
|
07-1 Term
Note Securitization
|
|
|
76,774
|
|
|
|
167,703
|
|
10-1 Term
Note Securitization
|
|
|
56,947
|
|
|
|
|
|
Long-term Loan Facilities
|
|
|
77,192
|
|
|
|
26,325
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
229,671
|
|
|
$
|
373,400
|
|
|
|
|
|
|
|
|
|
|
Federal
Funds Line of Credit with Correspondent Bank
MBB has established a federal funds line of credit with a
correspondent bank. This line allows for both selling and
purchasing of federal funds. The amount that can be drawn
against the line is limited to $1.6 million.
81
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Federal
Reserve Discount Window
In addition, MBB has received approval to borrow from the
Federal Reserve Discount Window based on the amount of assets
MBB chooses to pledge. Based on assets pledged at
December 31, 2010, MBB had $8.3 million in unused,
secured borrowing capacity at the Federal Reserve Discount
Window.
CP
Conduit Warehouse Facility
We had a CP conduit warehouse facility that, until
March 31, 2009, allowed us to borrow, repay and re-borrow
based on a borrowing base formula. In these transactions, we
transferred pools of leases and interests in the related
equipment to special purpose, bankruptcy-remote subsidiaries.
These special purpose entities in turn pledged their interests
in the leases and related equipment to an unaffiliated conduit
entity, which generally issued CP to investors. The warehouse
facility allowed the Company on an ongoing basis to transfer
lease receivables to a wholly-owned, bankruptcy remote special
purpose subsidiary of the Company, which issued variable-rate
notes to investors carrying an interest rate equal to the rate
on CP issued to fund the notes during the interest period.
This facility was repaid in full with a portion of the proceeds
of the February 12, 2010 term securitization. For the years
ended December 31, 2010, 2009 and 2008, the weighted
average interest rate was 3.26%, 4.88% and 5.37%, respectively.
At December 31, 2009, borrowings outstanding under this
facility were $62.5 million. There is no additional
borrowing capacity under this facility.
Term
Note Securitizations
05-1
Transaction On August 18, 2005, the Company
closed a $340.6 million term note securitization. In
connection with the
2005-1
transaction, six classes of fixed-rate notes were issued to
investors. The weighted average interest coupon will approximate
4.81% over the term of the financing. After the effects of
hedging and other transaction costs are considered, total
interest expense on the
2005-1 term
transaction averaged approximately 4.50% over the term of the
borrowing. On August 16, 2010, we elected to exercise our
call option and pay off the remaining $3.9 million of our
2005 term securitization.
06-1
Transaction On September 21, 2006, the Company
closed a $380.2 million term note securitization. In
connection with the
2006-1
transaction, six classes of fixed-rate notes were issued to
investors. The weighted average interest coupon will approximate
5.51% over the term of the financing. After the effects of
hedging and other transaction costs are considered, we expect
total interest expense on the
2006-1 term
transaction to approximate an average of 5.21% over the term of
the financing.
07-1
Transaction On October 24, 2007, the Company
closed a $440.5 million term note securitization. In
connection with the
2007-1
transaction, seven classes of fixed-rate notes were issued to
investors. The weighted average interest coupon will approximate
5.70% over the term of the financing. After the effects of
hedging and other transaction costs are considered, we expect
total interest expense on the
2007-1 term
transaction to approximate an average of 6.32% over the term of
the financing.
10-1
Transaction On February 12, 2010, the Company
completed an $80.7 million term asset-backed
securitization, of which it elected to defer the issuance of
subordinated notes totaling $12.5 million. The two senior
classes of notes issued under the securitization constitute
eligible collateral under the Federal Reserve Bank of New
Yorks Term Asset-Backed Securities Loan Facility
(TALF) program. This financing provides the Company
with fixed-cost borrowing and is recorded in long-term
borrowings in the Consolidated Balance Sheets. A portion of the
proceeds of the new securitization was used to repay the full
amount outstanding under the CP conduit warehouse facility. We
expect total interest expense on the
2010-1 term
transaction to approximate an average of 3.13% over the term of
the financing.
82
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term
Loan Facilities
On October 9, 2009, Marlin Business Services Corp.s
wholly-owned subsidiary, Marlin Receivables Corp.
(MRC), closed on a $75.0 million, three-year
committed loan facility with the lender finance division of
Wells Fargo Capital Finance. The facility is secured by a lien
on MRCs assets and is supported by guaranties from the
Marlin Business Services Corp. and Marlin Leasing Corporation.
Advances under the facility are made pursuant to a borrowing
base formula, and the proceeds are used to fund lease
originations. The maturity date of the facility is
October 9, 2012. An event of default such as non-payment of
amounts when due under the loan agreement or a breach of
covenants may accelerate the maturity date of the facility.
On September 24, 2010, the Companys affiliate, Marlin
Leasing Receivables XIII LLC (MLR XIII), closed on a
$50.0 million three-year committed loan facility with Key
Equipment Finance Inc. The facility is secured by a lien on MLR
XIIIs assets. Advances under the facility will be made
pursuant to a borrowing base formula, and the proceeds will be
used to fund lease originations. The maturity date of the
facility is September 23, 2013. An event of default such as
non-payment of amounts when due under the loan agreement or a
breach of covenants may accelerate the maturity date of the
facility.
Financial
Covenants
Our secured borrowing arrangements contain numerous covenants,
restrictions and default provisions that we must comply with in
order to obtain funding through the facilities and to avoid an
event of default. Some of the critical financial and credit
quality covenants under our borrowing arrangements as of
December 31, 2010 include:
|
|
|
|
|
|
|
|
|
|
|
Actual(1)
|
|
|
Requirement
|
|
|
Tangible net worth minimum
|
|
$
|
160 million
|
|
|
$
|
141.1 million
|
|
Debt-to-equity
ratio maximum
|
|
|
1.74 to 1
|
|
|
|
10.0 to 1
|
|
Maximum servicer senior leverage ratio
|
|
|
1.28 to 1
|
|
|
|
4.0 to 1
|
|
Four-quarter rolling average interest coverage ratio minimum
|
|
|
2.03 to 1
|
|
|
|
1.50 to 1
|
|
Maximum portfolio delinquency ratio
|
|
|
0.89
|
%
|
|
|
3.50
|
%
|
Maximum gross charge-off ratio
|
|
|
4.28
|
%
|
|
|
7.00
|
%
|
|
|
|
(1) |
|
Calculations are based on specific contractual definitions and
subsidiaries per the applicable debt agreements, which may
differ from ratios or amounts presented elsewhere in this
document. |
A change in the Chief Executive Officer, Chief Operating Officer
or Chief Financial Officer is an event of default under the
long-term loan facilities unless a replacement acceptable to the
Companys lenders is hired within 120 days. A change
in the Chief Executive Officer or Chief Operating Officer is an
immediate event of servicer termination under the
2006-1 term
note securitization. A merger or consolidation with another
company in which the Company is not the surviving entity is an
event of default under the financing facilities. The
Companys long-term loan facilities contain acceleration
clauses allowing the creditor to accelerate the scheduled
maturities of the obligation under certain conditions that may
not be objectively determinable (for example, if a
material adverse change occurs). An event of default under
any of the facilities could result in an acceleration of amounts
outstanding under the facilities, foreclosure on all or a
portion of the leases financed by the facilities
and/or the
removal of the Company as servicer of the leases financed by the
facility.
As of December 31, 2010, the Company was in compliance with
the terms of the long-term loan facilities and the term note
securitization agreements.
83
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Scheduled principal and interest payments on outstanding
borrowings as of December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest(1)
|
|
|
|
(Dollars in thousands)
|
|
|
Period Ending December 31,
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
84,791
|
|
|
$
|
4,282
|
|
2012
|
|
|
85,031
|
|
|
|
4,403
|
|
2013
|
|
|
7,839
|
|
|
|
2,425
|
|
2014
|
|
|
682
|
|
|
|
49
|
|
2015
|
|
|
301
|
|
|
|
15
|
|
Thereafter
|
|
|
6
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
178,650
|
|
|
$
|
11,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on variable-rate long-term loan facilities is assumed
at the December 31, 2010 rate for the remaining term. |
NOTE 10
Deposits
Effective March 12, 2008, the Company opened MBB. MBB
currently provides diversification of the Companys funding
sources primarily through the issuance of Federal Deposit
Insurance Corporation (FDIC) insured certificates of
deposit raised nationally through various brokered deposit
relationships and FDIC-insured retail deposits directly from
other financial institutions. As of December 31, 2010, the
remaining scheduled maturities of time deposits are as follows:
|
|
|
|
|
|
|
Scheduled
|
|
Period Ending December 31,
|
|
Maturities
|
|
|
|
(Dollars in thousands)
|
|
|
2011
|
|
$
|
31,428
|
|
2012
|
|
|
28,349
|
|
2013
|
|
|
20,641
|
|
2014
|
|
|
9,302
|
|
2015
|
|
|
3,199
|
|
|
|
|
|
|
|
|
$
|
92,919
|
|
|
|
|
|
|
All time deposits are in denominations of less than $250,000 and
all are fully insured by the FDIC. The weighted average all-in
interest rate of deposits outstanding at December 31, 2010
was 2.59%.
NOTE 11
Derivative Financial Instruments
The Company uses derivative financial instruments in the
ordinary course of business to manage exposure to the effects of
changes in market interest rates and to fulfill certain
covenants in our borrowing arrangements. All derivatives are
recorded on the Consolidated Balance Sheets at their fair value
as either assets or liabilities. The recorded amounts reflect
the fair value of the Companys derivatives as of each
reporting date presented, and will not necessarily reflect the
value at settlement due to inherent volatility in the financial
markets. The accounting for subsequent changes in the fair value
of these derivatives depends on whether each has been designated
and qualifies for hedge accounting treatment pursuant to
U.S. GAAP.
The Company has entered into various forward starting
interest-rate swap agreements related to anticipated term note
securitization transactions. Prior to July 1, 2008, these
interest-rate swap agreements were designated and accounted for
as cash flow hedges of specific term note securitization
transactions, as prescribed by U.S. GAAP.
84
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under hedge accounting, the effective portion of the gain or
loss on a derivative designated as a cash flow hedge was
reported net of tax effects in accumulated other comprehensive
income on the Consolidated Balance Sheets, until the pricing of
the related term securitization was established.
These hedges were expected to be highly effective in offsetting
the changes in cash flows of the forecasted transactions, and
this expected relationship was documented at the inception of
each hedge. Prior to July 1, 2008, expected hedge
effectiveness was assessed using the dollar-offset change
in variable cash flows method which involves a comparison
of the present value of the cumulative change in the expected
future cash flows on the variable side of the interest-rate swap
to the present value of the cumulative change in the expected
future cash flows on the hedged floating-rate asset or
liability. The Company retrospectively measured ineffectiveness
using the same methodology. The gain or loss from the effective
portion of a derivative designated as a cash flow hedge was
recorded net of tax effects in other comprehensive income and
the gain or loss from the ineffective portion was reported in
earnings.
Certain of these agreements were terminated simultaneously with
the pricing of the related term securitization transactions. For
each terminated agreement, the realized gain or loss was
deferred and recorded in the equity section of the Consolidated
Balance Sheets, and is being reclassified into earnings as an
adjustment to interest expense over the terms of the related
term securitizations.
While the Company may continue to use derivative financial
instruments to reduce exposure to changing interest rates,
effective July 1, 2008, the Company discontinued the use of
hedge accounting. By discontinuing hedge accounting effective
July 1, 2008, any subsequent changes in the fair value of
derivative instruments, including those that had previously been
accounted for under hedge accounting, are recognized immediately
in gain (loss) on derivatives. This change creates volatility in
our results of operations, as the fair value of our derivative
financial instruments changes over time, and this volatility may
adversely impact our results of operations and financial
condition. At December 31, 2010, there was no notional
principal outstanding under interest-rate swap agreements.
For the forecasted transactions that were probable of occurring,
the derivative gain or loss in accumulated other comprehensive
income as of June 30, 2008 was reclassified into earnings
as an adjustment to interest expense over the terms of the
related forecasted borrowings, consistent with hedge accounting
treatment. At the time that any related forecasted borrowing was
no longer probable of occurring, the related gain or loss in
accumulated other comprehensive income became recognized
immediately in earnings.
During 2008 and 2009, the Company concluded that certain
forecasted transactions were not probable of occurring on the
anticipated dates or in the additional time period permitted by
U.S. GAAP. As a result, a $0.9 million pretax
($0.5 million after-tax) gain on the related cash flow
hedges was reclassified from accumulated other comprehensive
income into loss on derivatives for the year ended
December 31, 2009, and a $5.0 million pretax
($3.0 million after-tax) loss on the related cash flow
hedges was reclassified from accumulated other comprehensive
income into loss on derivatives for the year ended
December 31, 2008.
85
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes specific information regarding
the terminated interest-rate swap agreements described above:
For
Terminated Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception Date
|
|
August, 2006/2007
|
|
Various, 2007/2008
|
|
August 2006/2007
|
|
August 2006/ 2007
|
|
June/September 2005
|
Commencement Date
|
|
October, 2008
|
|
October, 2009
|
|
October, 2008
|
|
October, 2007
|
|
September, 2006
|
Termination Date
|
|
June 2010
|
|
May/October, 2009
|
|
September/October 2008
|
|
October, 2007
|
|
September, 2006
|
|
|
(Dollars in thousands)
|
|
Notional amount
|
|
$
|
100,000
|
|
|
$
|
150,000
|
|
|
$
|
100,000
|
|
|
$
|
300,000
|
|
|
$
|
225,000
|
|
Realized gain (loss) at termination
|
|
$
|
|
|
|
$
|
(7,316
|
)
|
|
$
|
(3,312
|
)
|
|
$
|
(2,683
|
)
|
|
$
|
3,732
|
|
Deferred gain (loss), net of tax, recorded in equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(129
|
)
|
|
$
|
|
|
December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(357
|
)
|
|
$
|
90
|
|
Amortization recognized as increase (decrease) in interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
379
|
|
|
$
|
(150
|
)
|
Year ended December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
699
|
|
|
$
|
(514
|
)
|
Expected amortization during next 12 months as an increase
in interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
161
|
|
|
$
|
|
|
The Company recorded a gain (loss) on derivatives activities for
the periods indicated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
(Dollars in thousands)
|
|
|
Change in fair value of derivative contracts
|
|
$
|
(116
|
)
|
|
$
|
(2,839
|
)
|
|
$
|
(10,998
|
)
|
Cash flow hedging gains on forecasted transactions no longer
probable of
occurring(2)
|
|
|
|
|
|
|
880
|
|
|
|
(5,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives
|
|
$
|
(116
|
)
|
|
$
|
(1,959
|
)
|
|
$
|
(16,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior to July 1, 2008, the Companys derivatives were
designated and accounted for as cash flow hedges. Effective
July 1, 2008, the Company discontinued the use of hedge
accounting and subsequent changes in the fair value of
derivative instruments began to be recognized immediately in
loss on derivatives in the Consolidated Statements of Operations. |
|
(2) |
|
Reclassified from accumulated other comprehensive income |
There were no cash payments related to the termination of
derivative contracts for the year ended December 31, 2010.
Cash payments related to the termination of derivative contracts
totaled $7.3 million and $3.3 million for the years
ended December 31, 2009 and 2008, respectively. Cash
payments pursuant to the terms of active derivative contracts
totaled $2.4 million, $4.7 million and
$0.3 million for the years ended December 31, 2010,
2009 and 2008, respectively.
The Company also uses interest-rate cap agreements that are not
designated for hedge accounting treatment to fulfill certain
covenants in its SPEs warehouse borrowing arrangements and
for overall interest-rate risk management. Accordingly, these
cap agreements are recorded at fair value in other assets at $14
thousand and $0.1 million as of December 31, 2010 and
December 31, 2009, respectively. The notional amount of
interest-rate caps owned as of December 31, 2010 and
December 31, 2009 was $70.1 million and
$121.4 million, respectively. Changes in the fair values of
the caps are recorded in loss on derivatives in the accompanying
Consolidated Statements of Operations.
86
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 12
Fair Value Measurements and Disclosures about the Fair Value of
Financial Instruments
Fair
Value Measurements
The Fair Value Measurements and Disclosures Topic of the FASB
ASC establishes a framework for measuring fair value and
requires certain disclosures about fair value measurements. Its
provisions do not apply to fair value measurements for purposes
of lease classification and measurement, which is addressed in
the Leases Topic of the FASB ASC.
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal or most
advantageous market for the asset or liability at the
measurement date (exit price). A three-level valuation hierarchy
is required for disclosure of fair value measurements based upon
the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The fair value hierarchy
gives the highest priority to quoted prices (unadjusted) in
active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable
inputs (Level 3). The level in the fair value hierarchy
within which the fair value measurement in its entirety falls is
determined based on the lowest level input that is significant
to the measurement in its entirety.
The three levels are defined as follows:
|
|
|
|
|
Level 1 Inputs to the valuation are unadjusted
quoted prices in active markets for identical assets or
liabilities.
|
|
|
|
Level 2 Inputs to the valuation may include
quoted prices for similar assets and liabilities in active or
inactive markets, and inputs other than quoted prices, such as
interest rates and yield curves, which are observable for the
asset or liability for substantially the full term of the
financial instrument.
|
|
|
|
Level 3 Inputs to the valuation are
unobservable and significant to the fair value measurement.
Level 3 inputs shall be used to measure fair value only to
the extent that observable inputs are not available.
|
The Company uses derivative financial instruments to manage
exposure to the effects of changes in market interest rates and
to fulfill certain covenants in our borrowing arrangements. All
derivatives are recorded on the Consolidated Balance Sheets at
their fair value as either assets or liabilities using
measurements classified as Level 2. Because the
Companys derivatives are not listed on an exchange, the
Company values these instruments using a valuation model with
pricing inputs that are observable in the market or that can be
derived principally from or corroborated by observable market
data. These inputs include the forward London Interbank Offered
Rate (LIBOR) curve on which the variable payments
are based and the applicable interest-rate swap market curve.
The Companys methodology also incorporates the impact of
both the Companys and the counterpartys credit
standing.
All of the Companys derivatives are measured at fair value
on a recurring basis, computed using fair value measurements
classified as Level 2. The fair value of securities
available for sale is computed using fair value measurements
classified as Level 1, since prices are obtained from a
quoted market. The Companys balances measured at fair
value on a recurring basis include the following as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
December 31, 2009
|
|
|
Fair Value Measurements Using
|
|
Fair Value Measurements Using
|
|
|
Level 1
|
|
Level 2
|
|
Level 1
|
|
Level 2
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
$
|
1,534
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest-rate caps purchased
|
|
$
|
|
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
119
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,408
|
|
87
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At this time, the Company has not elected to report any assets
and liabilities using the fair value option available under the
Financial Instruments Topic of the FASB ASC.
Disclosures
about the Fair Value of Financial Instruments
The Financial Instruments Topic of the FASB ASC requires the
disclosure of the estimated fair value of financial instruments
including those financial instruments not measured at fair value
on a recurring basis. This requirement excludes certain
instruments, such as the net investment in leases and all
nonfinancial instruments.
The fair values shown below have been derived, in part, by
managements assumptions, the estimated amount and timing
of future cash flows and estimated discount rates. Valuation
techniques involve uncertainties and require assumptions and
judgments regarding prepayments, credit risk and discount rates.
Changes in these assumptions will result in different valuation
estimates. The fair values presented would not necessarily be
realized in an immediate sale. Derived fair value estimates
cannot necessarily be substantiated by comparison to independent
markets or to other companies fair value information.
The following summarizes the carrying amount and estimated fair
value of the Companys financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,026
|
|
|
$
|
37,026
|
|
|
$
|
37,057
|
|
|
$
|
37,057
|
|
Restricted interest-earning deposits with banks
|
|
|
47,107
|
|
|
|
47,107
|
|
|
|
63,400
|
|
|
|
63,400
|
|
Securities available for sale
|
|
|
1,534
|
|
|
|
1,534
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,040
|
|
|
|
1,025
|
|
|
|
4,026
|
|
|
|
3,969
|
|
Interest-rate caps purchased
|
|
|
14
|
|
|
|
14
|
|
|
|
119
|
|
|
|
119
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
62,541
|
|
|
|
62,541
|
|
Long-term borrowings
|
|
|
178,650
|
|
|
|
183,088
|
|
|
|
244,445
|
|
|
|
244,477
|
|
Deposits
|
|
|
92,919
|
|
|
|
94,602
|
|
|
|
80,288
|
|
|
|
81,903
|
|
Accounts payable and accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses(1)
|
|
|
9,997
|
|
|
|
9,997
|
|
|
|
11,846
|
|
|
|
11,846
|
|
Interest-rate swaps
|
|
|
|
|
|
|
|
|
|
|
2,408
|
|
|
|
2,408
|
|
|
|
|
(1) |
|
Includes sales and property taxes payable. |
The paragraphs which follow describe the methods and assumptions
used in estimating the fair values of financial instruments.
|
|
(a)
|
Cash
and Cash Equivalents
|
The carrying amounts of the Companys cash and cash
equivalents approximate fair value as of December 31, 2010,
and December 31, 2009, because they bear interest at market
rates and have maturities of less than 90 days.
|
|
(b)
|
Restricted
Interest-Earning Deposits with Banks
|
The Company maintains various interest-earning trust accounts
related to our secured debt facilities. The book value of such
accounts is included in restricted interest-earning deposits
with banks on the accompanying
88
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated Balance Sheet. These accounts earn a floating
market rate of interest which results in a fair value
approximating the carrying amount at December 31, 2010 and
December 31, 2009.
|
|
(c)
|
Securities
Available for Sale
|
The fair value of securities available for sale is recorded
using prices obtained from a quoted market.
The fair value of loans is estimated by discounting contractual
cash flows, using interest rates currently being offered by the
Company for loans with similar terms and remaining maturities to
borrowers with similar credit risk characteristics. Estimates
utilized were based on the original credit status of the
borrowers combined with the portfolio delinquency statistics.
|
|
(e)
|
Short-Term
and Long-Term Borrowings
|
The fair value of the Companys debt and secured borrowings
is estimated by discounting cash flows at indicative market
rates applicable to the Companys debt and secured
borrowings of the same or similar remaining maturities.
The fair value of the Companys deposits is estimated by
discounting cash flows at current rates paid by the Company for
similar certificates of deposit of the same or similar remaining
maturities.
|
|
(g)
|
Accounts
Payable and Accrued Expenses
|
The carrying amount of the Companys accounts payable and
accrued expenses approximates fair value as of December 31,
2010 and December 31, 2009, because of the relatively short
timeframe to realization.
|
|
(h)
|
Interest-Rate
Swaps and Interest-Rate Caps
|
Interest-rate swaps and interest-rate caps are measured at fair
value on a recurring basis in accordance with the requirements
of the Fair Value Measurements and Disclosures Topic of the FASB
ASC, using the inputs and methods described previously in the
first section of this Note 12.
89
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 13
Income Taxes
The Companys income tax provision consisted of the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(10,054
|
)
|
|
$
|
(54
|
)
|
|
$
|
(2,147
|
)
|
State
|
|
|
(1,462
|
)
|
|
|
146
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(11,516
|
)
|
|
|
92
|
|
|
|
(1,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
11,976
|
|
|
|
483
|
|
|
|
(928
|
)
|
State
|
|
|
2,035
|
|
|
|
(228
|
)
|
|
|
(1,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
14,011
|
|
|
|
255
|
|
|
|
(2,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
2,495
|
|
|
$
|
347
|
|
|
$
|
(3,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with U.S. GAAP, uncertain tax positions taken
or expected to be taken in a tax return are subject to potential
financial statement recognition based on prescribed recognition
and measurement criteria. Based on our evaluation, we concluded
that there are no significant uncertain tax positions requiring
recognition in our financial statements. For the years ended
December 31, 2010, 2009 and 2008, there have been no
material changes to the liability for uncertain tax positions
and there are no significant unrecognized tax benefits. We do
not expect our unrecognized tax positions to change
significantly over the next 12 months.
The periods subject to examination for the Companys
federal return include the 2006 tax year to the present. The
Company files state income tax returns in various states which
may have different statutes of limitations. Generally, state
income tax returns for the years 2005 through the present are
subject to examination.
90
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income tax expense results principally from the use of
different revenue and expense recognition methods for tax and
financial accounting purposes, primarily related to lease
accounting. The Company estimates these differences and adjusts
to actual upon preparation of the income tax returns. The
sources of these temporary differences and the related tax
effects were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
3,261
|
|
|
$
|
4,802
|
|
Interest-rate swaps and caps
|
|
|
52
|
|
|
|
1,003
|
|
Accrued expenses
|
|
|
718
|
|
|
|
278
|
|
Deferred income
|
|
|
1,341
|
|
|
|
1,443
|
|
Deferred compensation
|
|
|
2,252
|
|
|
|
1,789
|
|
Other comprehensive income
|
|
|
88
|
|
|
|
177
|
|
Other
|
|
|
373
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
8,085
|
|
|
|
9,634
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Lease accounting
|
|
|
(32,615
|
)
|
|
|
(19,804
|
)
|
Deferred acquisition costs
|
|
|
(1,661
|
)
|
|
|
(1,954
|
)
|
Depreciation
|
|
|
(302
|
)
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(34,578
|
)
|
|
|
(22,024
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
(26,493
|
)
|
|
$
|
(12,390
|
)
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of 2010, the Company completed an
analysis of its deferred tax assets and liabilities. As a result
of that analysis, the Company determined that it had
over-reported lease revenues in its previously filed income tax
returns. The Company plans to amend its previously filed income
tax returns to adjust the over-reported lease revenues and claim
appropriate refunds in the years subject to amendment. In
connection with the plan to file amended returns, the Company
increased its current income taxes receivable by
$15.4 million and recognized a current tax benefit of
approximately $0.5 million to reflect interest receivable
on such amended returns. For certain years, the Company is
unable to amend its previously filed income tax returns because
those returns are closed by statute (see Note 20 for
additional information).
As of December 31, 2010, the Company has approximately
$1.0 million of federal net operating loss carryforwards
(NOLs). These NOLs will expire in 2030.
The following is a reconciliation of the statutory federal
income tax rate to the effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
State taxes, net of federal benefit
|
|
|
4.6
|
%
|
|
|
(9.6
|
)%
|
|
|
(5.7
|
)%
|
Other permanent differences
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
|
|
0.1
|
%
|
Interest on amended returns
|
|
|
(6.1
|
)%
|
|
|
|
%
|
|
|
|
%
|
Other
|
|
|
(3.0
|
)%
|
|
|
(0.8
|
)%
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
30.6
|
%
|
|
|
25.1
|
%
|
|
|
(37.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 14
Earnings Per Common Share (EPS)
Pursuant to the Earnings Per Share Topic of the FASB ASC,
unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and are included in the
computation of EPS using the two-class method.
Basic EPS is computed by dividing net income available to common
stockholders by the weighted average number of common shares
outstanding for the period using the two-class method, which
includes our unvested restricted stock awards as participating
securities. Diluted EPS is computed based on the weighted
average number of common shares outstanding for the period using
the two-class method, which includes our unvested restricted
stock awards as participating securities, and the dilutive
impact of the exercise or conversion of common stock
equivalents, such as stock options, into shares of common stock
as if those securities were exercised or converted.
The following table provides net income and shares used in
computing basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
Net income (loss)
|
|
$
|
5,668
|
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
11,885,365
|
|
|
|
11,693,720
|
|
|
|
11,874,647
|
|
Add: Unvested restricted stock awards considered participating
securities
|
|
|
950,975
|
|
|
|
855,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares used in computing basic
EPS
|
|
|
12,836,340
|
|
|
|
12,549,167
|
|
|
|
11,874,647
|
|
Add: Effect of dilutive stock options
|
|
|
65,811
|
|
|
|
30,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares used in computing
diluted EPS
|
|
|
12,902,151
|
|
|
|
12,579,806
|
|
|
|
11,874,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.44
|
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.44
|
|
|
$
|
0.08
|
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008,
options to purchase 376,151, 670,776 and 711,510 shares of
common stock were not considered in the computation of potential
common shares for purposes of diluted EPS, since the exercise
prices of the options were greater than the average market price
of the Companys common stock for the respective periods.
When computing diluted loss per share for the year ended
December 31, 2008, all potential common shares, including
stock options and restricted stock, are anti-dilutive to the
loss per common share calculation. Therefore, for the year ended
December 31, 2008, the effect of 391,372 potential common
shares have not been considered for diluted EPS purposes.
92
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 15
Comprehensive Income (Loss)
The following table details the components of comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Net income (loss), as reported
|
|
$
|
5,668
|
|
|
$
|
1,036
|
|
|
$
|
(5,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
593
|
|
Reclassification of cash flow hedging (gains) losses on
forecasted transactions no longer probable of
occurring(1)
|
|
|
|
|
|
|
(880
|
)
|
|
|
5,041
|
|
Amortization of net deferred (gains) losses on cash flow hedge
derivatives
|
|
|
229
|
|
|
|
159
|
|
|
|
(171
|
)
|
Change in fair value of securities available for sale
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Tax effect
|
|
|
(89
|
)
|
|
|
287
|
|
|
|
(2,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
135
|
|
|
|
(434
|
)
|
|
|
3,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
5,803
|
|
|
$
|
602
|
|
|
$
|
(1,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reclassified to loss on derivatives. |
NOTE 16
Stockholders Equity
Stockholders
Equity
On November 2, 2007, the Companys Board of Directors
approved a stock repurchase plan. Under this program, the
Company is authorized to repurchase up to $15 million in
value of its outstanding shares of common stock. This authority
may be exercised from time to time and in such amounts as market
conditions warrant. Any shares purchased under this plan are
returned to the status of authorized but unissued shares of
common stock. The repurchases may be made on the open market, in
block trades or otherwise. The program may be suspended or
discontinued at any time. The repurchases are funded using the
Companys working capital.
The Company purchased 21,822 shares of its common stock for
$0.2 million during the year ended December 31, 2010.
The Company purchased 88,894 shares of its common stock for
$0.3 million during the year ended December 31, 2009.
At December 31, 2010, the Company had $10.4 million
remaining in its stock repurchase plan authorized by the Board
of Directors.
In addition to the repurchases described above, pursuant to the
Companys 2003 Equity Compensation Plan (as amended, the
2003 Plan), participants may have shares withheld to
cover income taxes. There were 59,103 and 13,720 shares
repurchased to cover income taxes during the years ended
December 31, 2010 and 2009, respectively, at average
per-share costs of $9.12 and $3.89, respectively.
Regulatory
Capital Requirements
On March 20, 2007, the FDIC approved the application of our
wholly-owned subsidiary, MBB, to become an industrial bank
chartered by the State of Utah. MBB commenced operations
effective March 12, 2008. MBB provides diversification of
the Companys funding sources and, over time, may add other
product offerings to better serve our customer base.
On December 31, 2008, MBB received approval from the
Federal Reserve Bank of San Francisco to (i) convert
from an industrial bank to a state-chartered commercial bank and
(ii) become a member of the Federal Reserve
93
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
System. In addition, on December 31, 2008, Marlin Business
Services Corp. received approval to become a bank holding
company upon conversion of MBB from an industrial bank to a
commercial bank.
On January 13, 2009, MBB converted from an industrial bank
to a commercial bank chartered and supervised by the State of
Utah and the Federal Reserve Board. In connection with the
conversion of MBB to a commercial bank, Marlin Business Services
Corp. became a bank holding company on January 13, 2009.
Until March 12, 2011, MBB operated in accordance with the
FDIC Order and in accordance with its original de novo
three-year business plan, which assumed total assets of up to
$128 million by March 12, 2011 (when its three-year de
novo period expired).
On September 15, 2010, the Federal Reserve Bank of
Philadelphia confirmed the effectiveness of Marlin Business
Services Corp.s election to become a financial holding
company (while remaining a bank holding company) pursuant to
Sections 4(k) and (l) of the Bank Holding Company Act
and Section 225.82 of the Federal Reserve Boards
Regulation Y. Such election permits the Company to engage
in activities that are financial in nature or incidental to a
financial activity, including the maintenance and expansion of
our reinsurance activities conducted through our wholly-owned
subsidiary, AssuranceOne, Ltd.
MBB is subject to capital adequacy guidelines issued by the
Federal Financial Institutions Examination Council (the
FFIEC). These risk-based capital and leverage
guidelines make regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations and
consider off-balance sheet exposures in determining capital
adequacy. The FFIEC
and/or the
U.S. Congress may determine to increase capital
requirements in the future due to the current economic
environment. Under the rules and regulations of the FFIEC, at
least half of a banks total capital is required to be
Tier 1 Capital as defined in the regulations,
comprised of common equity, retained earnings and a limited
amount of non-cumulative perpetual preferred stock. The
remaining capital, Tier 2 Capital, as defined
in the regulations, may consist of other preferred stock, a
limited amount of term subordinated debt or a limited amount of
the reserve for possible credit losses. The FFIEC has also
adopted minimum leverage ratios for banks, which are calculated
by dividing Tier 1 Capital by total quarterly average
assets. Recognizing that the risk-based capital standards
principally address credit risk rather than interest rate,
liquidity, operational or other risks, many banks are expected
to maintain capital in excess of the minimum standards. The
Company plans to provide the necessary capital to maintain MBB
at well-capitalized status as defined by banking
regulations. MBBs equity balance at December 31, 2010
was $20.2 million, which met all capital requirements to
which MBB is subject and qualified MBB for
well-capitalized status. Bank holding companies are
required to comply with the Federal Reserve Boards
risk-based capital guidelines that require a minimum ratio of
total capital to risk-weighted assets of 8%. At least half of
the total capital is required to be Tier 1 Capital. In
addition to the risk-based capital guidelines, the Federal
Reserve Board has adopted a minimum leverage capital ratio under
which a bank holding company must maintain a ratio of
Tier 1 Capital to average total consolidated assets of at
least 3% in the case of a bank holding company which has the
highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding
companies are expected to maintain a leverage capital ratio of
at least 4%. At December 31, 2010, Marlin Business Services
Corp. also exceeded its regulatory capital requirements and was
considered well-capitalized as defined by federal
banking regulations.
94
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the Tier 1 leverage ratio,
Tier 1 risk-based capital ratio and total risk-based
capital ratio for Marlin Business Services Corp. and MBB at
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital
|
|
Well-Capitalized Capital
|
|
|
Actual
|
|
Requirement
|
|
Requirement
|
|
|
Ratio
|
|
Amount
|
|
Ratio(1)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
|
(Dollars in thousands)
|
|
Tier 1 Leverage Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp.
|
|
|
34.87
|
%
|
|
$
|
160,135
|
|
|
|
4
|
%
|
|
$
|
18,371
|
|
|
|
5
|
%
|
|
$
|
22,964
|
|
Marlin Business Bank
|
|
|
16.58
|
%
|
|
$
|
20,175
|
|
|
|
5
|
%
|
|
$
|
6,086
|
|
|
|
5
|
%
|
|
$
|
6,086
|
|
Tier 1 Risk-based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp.
|
|
|
39.58
|
%
|
|
$
|
160,135
|
|
|
|
4
|
%
|
|
$
|
16,183
|
|
|
|
6
|
%
|
|
$
|
24,275
|
|
Marlin Business Bank
|
|
|
17.39
|
%
|
|
$
|
20,175
|
|
|
|
6
|
%
|
|
$
|
6,959
|
|
|
|
6
|
%
|
|
$
|
6,959
|
|
Total Risk-based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Business Services Corp.
|
|
|
40.84
|
%
|
|
$
|
165,225
|
|
|
|
8
|
%
|
|
$
|
32,367
|
|
|
|
10
|
%
|
|
$
|
40,459
|
|
Marlin Business Bank
|
|
|
18.65
|
%
|
|
$
|
21,626
|
|
|
|
15
|
%
|
|
$
|
17,398
|
|
|
|
10
|
%(1)
|
|
$
|
11,599
|
|
|
|
|
(1) |
|
MBB is required to maintain well-capitalized status.
In addition, MBB must maintain a total risk-based capital ratio
greater than 15% pursuant to the original order issued by the
FDIC on March 20, 2007 (the FDIC Order). |
Prompt Corrective Action. The Federal Deposit
Insurance Corporation Improvement Act of 1991
(FDICIA) requires the federal regulators to take
prompt corrective action against any undercapitalized
institution. FDICIA establishes five capital categories:
well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
Well-capitalized institutions significantly exceed the required
minimum level for each relevant capital measure. Adequately
capitalized institutions include depository institutions that
meet but do not significantly exceed the required minimum level
for each relevant capital measure. Undercapitalized institutions
consist of those that fail to meet the required minimum level
for one or more relevant capital measures. Significantly
undercapitalized characterizes depository institutions with
capital levels significantly below the minimum requirements for
any relevant capital measure. Critically undercapitalized refers
to depository institutions with minimal capital and at serious
risk for government seizure.
Under certain circumstances, a well-capitalized, adequately
capitalized or undercapitalized institution may be treated as if
the institution were in the next lower capital category. A
depository institution is generally prohibited from making
capital distributions, including paying dividends, or paying
management fees to a holding company if the institution would
thereafter be undercapitalized. Institutions that are adequately
capitalized but not well-capitalized cannot accept, renew or
roll over brokered deposits except with a waiver from the FDIC
and are subject to restrictions on the interest rates that can
be paid on such deposits. Undercapitalized institutions may not
accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or, in
certain cases, required to take certain actions with respect to
institutions falling within one of the three undercapitalized
categories. Depending on the level of an institutions
capital, the agencys corrective powers include, among
other things:
|
|
|
|
|
prohibiting the payment of principal and interest on
subordinated debt;
|
|
|
|
prohibiting the holding company from making distributions
without prior regulatory approval;
|
|
|
|
placing limits on asset growth and restrictions on activities;
|
|
|
|
placing additional restrictions on transactions with affiliates;
|
|
|
|
restricting the interest rate the institution may pay on
deposits;
|
95
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
prohibiting the institution from accepting deposits from
correspondent banks; and
|
|
|
|
in the most severe cases, appointing a conservator or receiver
for the institution.
|
A banking institution that is undercapitalized is required to
submit a capital restoration plan, and such a plan will not be
accepted unless, among other things, the banking
institutions holding company guarantees the plan up to a
certain specified amount. Any such guarantee from a depository
institutions holding company is entitled to a priority of
payment in bankruptcy.
Pursuant to the FDIC Order, MBB must keep its total risk-based
capital ratio above 15%. MBBs equity balance at
December 31, 2010 was $20.2 million, which qualifies
for well capitalized status.
Dividends. The Federal Reserve Board has
issued policy statements which provide that, as a general
matter, insured banks and bank holding companies should pay
dividends only out of current operating earnings. Pursuant to
the FDIC Order, MBB was not permitted to pay dividends during
its first three years of operations without the prior written
approval of the FDIC and the State of Utah (such initial
three-year period ended on March 12, 2011).
NOTE 17
Stock-Based Compensation
Under the terms of the 2003 Plan, employees, certain consultants
and advisors and non-employee members of the Companys
Board of Directors have the opportunity to receive incentive and
nonqualified grants of stock options, stock appreciation rights,
restricted stock and other equity-based awards as approved by
the Companys Board of Directors. These award programs are
used to attract, retain and motivate employees and to encourage
individuals in key management roles to retain stock. The Company
has a policy of issuing new shares to satisfy awards under the
2003 Plan. The aggregate number of shares under the 2003 Plan
that may be issued pursuant to stock options or restricted stock
grants is 3,300,000. Not more than 1,650,000 of such shares
shall be available for issuance as restricted stock grants.
There were 474,155 shares available for future grants under
the 2003 Plan as of December 31, 2010.
Total stock-based compensation expense was $2.6 million,
$1.5 million and $1.2 million for the years ended
December 31, 2010, 2009 and 2008, respectively. Excess tax
benefits from stock-based payment arrangements decreased cash
provided by operating activities and increased cash provided by
financing activities by $0.1 million, $0.1 million and
$0.1 million for the years ended December 31, 2010,
2009 and 2008, respectively.
Stock
Options
Option awards are generally granted with an exercise price equal
to the market price of the Companys stock at the date of
the grant and have 7- to
10-year
contractual terms. All options issued contain service conditions
based on the participants continued service with the
Company, and provide for accelerated vesting if there is a
change in control as defined in the 2003 Plan.
Employee stock options generally vest over four years. The
vesting of certain options is contingent on various Company
performance measures, such as earnings per share and net income.
The Company has recognized expense related to performance
options based on the most probable performance assumptions as of
December 31, 2010. There were no revisions to performance
assumptions during the years ended December 31, 2010, 2009
and 2008.
The Company also issues stock options to non-employee
independent directors. These options generally vest in one year.
In addition to the stock options granted pursuant to the stock
option exchange program discussed below, there were 5,000 stock
options granted during the year ended December 31, 2010.
The fair value of each stock option granted during the years
ended December 31, 2010, 2009 and 2008 was estimated on the
date of the grant using the Black-Scholes option pricing model.
The weighted-average grant-date
96
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair value of stock options issued for the years ended
December 31, 2010, 2009 and 2008 was $7.64, $4.49 and $3.25
per share, excluding the stock options granted pursuant to the
stock option exchange program discussed below.
The following weighted average assumptions were used for valuing
option grants made during the years ended December 31,
2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions, December 31,
|
Weighted Averages:
|
|
2010
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
|
2.18
|
%
|
|
|
1.97
|
%
|
|
|
2.45
|
%
|
Expected life (years)
|
|
|
4.8
|
|
|
|
4.0
|
|
|
|
5.1
|
|
Expected volatility
|
|
|
79
|
%
|
|
|
84
|
%
|
|
|
35
|
%
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
The risk-free interest rate for periods within the contractual
life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant. The expected life for
options granted represents the period each option is expected to
be outstanding and was determined by applying the simplified
method as defined by the Securities and Exchange
Commissions Staff Accounting Bulletin No. 107,
due to the limited period of time the Companys shares have
been publicly traded. The expected volatility was determined
using historical volatilities based on historical stock prices.
To date, the Company has not paid dividends, and therefore has
not assumed expected dividends.
At the October 28, 2009 annual stockholders meeting,
the shareholders voted to approve an amendment to the 2003 Plan
to allow a one-time stock option exchange program for the
Companys employees, to commence within six months
following the annual meeting. The exchange program tender offer
was issued on April 23, 2010. Based on employees
elections, the program allowed us to cancel, on May 24,
2010, 208,774 underwater stock options with an average exercise
price of $19.13 in exchange for the grant of 141,421 stock
options with an exercise price of $12.41, equal to the closing
price of our common stock on the date of grant. The new option
grants also have a new vesting schedule and seven-year term. No
incremental compensation expense was recognized as a result of
the exchange program. The options cancelled and the new grants
issued pursuant to this exchange are included in the table below
as forfeited and granted option activity, respectively.
The fair value calculations for the one-time stock option
exchange program were based on a binomial valuation model which
considered many variables, such as the volatility of our stock
and the expected term of an option, including consideration of
the ratio of stock price to the exercise price at which exercise
is expected to occur. The binomial valuation model with
consistent assumptions was used for both the surrendered stock
options and the new replacement options under the stock option
exchange program.
97
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of option activity for the each of the three years in
the period ended December 31, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
Options
|
|
Shares
|
|
|
Per Share
|
|
|
Outstanding, December 31, 2007
|
|
|
727,184
|
|
|
$
|
13.20
|
|
Granted
|
|
|
271,926
|
|
|
|
9.29
|
|
Exercised
|
|
|
(46,616
|
)
|
|
|
3.12
|
|
Forfeited
|
|
|
(67,035
|
)
|
|
|
15.98
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
885,459
|
|
|
$
|
12.32
|
|
Granted
|
|
|
15,877
|
|
|
|
7.30
|
|
Exercised
|
|
|
(40,424
|
)
|
|
|
4.13
|
|
Forfeited
|
|
|
(82,751
|
)
|
|
|
16.51
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
778,161
|
|
|
$
|
12.20
|
|
Granted
|
|
|
146,421
|
|
|
|
12.40
|
|
Exercised
|
|
|
(35,864
|
)
|
|
|
4.49
|
|
Forfeited
|
|
|
(240,565
|
)
|
|
|
19.42
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
648,153
|
|
|
$
|
9.99
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2010, 2009 and 2008,
the Company recognized total compensation expense related to
options of $0.2 million, $0.3 million and
$0.4 million, respectively.
There were 35,864, 40,424 and 46,616 stock options exercised
during the years ended December 31, 2010, 2009 and 2008,
respectively. The total pretax intrinsic value of stock options
exercised was $0.2 million, $0.1 million and
$0.3 million for the years ended December 31, 2010,
2009 and 2008, respectively. The related tax benefits realized
from the exercise of stock options for the years ended
December 31, 2010, 2009 and 2008 were $0.1 million,
$0.1 million and $0.1 million, respectively.
The following table summarizes information about the stock
options outstanding and exercisable as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
Range of
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Exercisable
|
|
|
Life (Years)
|
|
|
Exercise Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
$3.39
|
|
|
85,925
|
|
|
|
1.3
|
|
|
$
|
3.39
|
|
|
$
|
796
|
|
|
|
85,925
|
|
|
|
1.3
|
|
|
$
|
3.39
|
|
|
$
|
796
|
|
7.17 10.18
|
|
|
354,528
|
|
|
|
3.3
|
|
|
|
9.43
|
|
|
|
1,142
|
|
|
|
194,241
|
|
|
|
2.6
|
|
|
|
9.39
|
|
|
|
633
|
|
12.08 12.41
|
|
|
145,612
|
|
|
|
6.4
|
|
|
|
12.40
|
|
|
|
36
|
|
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
14.00 16.01
|
|
|
39,984
|
|
|
|
3.0
|
|
|
|
14.33
|
|
|
|
|
|
|
|
37,253
|
|
|
|
3.0
|
|
|
|
14.33
|
|
|
|
|
|
19.78 21.50
|
|
|
22,104
|
|
|
|
2.5
|
|
|
|
20.80
|
|
|
|
|
|
|
|
22,104
|
|
|
|
2.5
|
|
|
|
20.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648,153
|
|
|
|
3.7
|
|
|
|
9.99
|
|
|
$
|
1,974
|
|
|
|
339,523
|
|
|
|
2.3
|
|
|
|
9.16
|
|
|
$
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate intrinsic value in the preceding table represents
the total pretax intrinsic value, based on the Companys
closing stock price of $12.65 as of December 31, 2010,
which would have been received by the option holders had all
option holders exercised their options as of that date.
As of December 31, 2010, the total future compensation cost
related to non-vested stock options not yet recognized in the
Consolidated Statements of Operations was $0.2 million and
the weighted average period over which these awards are expected
to be recognized was 1.5 years, based on the most probable
performance assumptions as of December 31, 2010. In the
event maximum performance targets are achieved, an additional
$0.7 million of compensation cost would be recognized over
a weighted average period of 1.7 years.
Restricted
Stock Awards
Restricted stock awards provide that, during the applicable
vesting periods, the shares awarded may not be sold or
transferred by the participant. The vesting period for
restricted stock awards generally ranges from three to
10 years, though certain awards for special projects may
vest in as little as one year depending on the duration of the
project. All awards issued contain service conditions based on
the participants continued service with the Company, and
provide for accelerated vesting if there is a change in control
as defined in the 2003 Plan.
The vesting of certain restricted shares may be accelerated to a
minimum of three to four years based on achievement of various
individual and Company performance measures. In addition, the
Company has issued certain shares under a Management Stock
Ownership Program. Under this program, restrictions on the
shares lapse at the end of 10 years but may lapse (vest) in
a minimum of three years if the employee continues in service at
the Company and owns a matching number of other common shares in
addition to the restricted shares.
Of the total restricted stock awards granted during the year
ended December 31, 2010, 40,140 shares may be subject
to accelerated vesting based on performance factors. No shares
have vesting contingent upon performance factors. The Company
has recognized expense related to performance-based shares based
on the most probable performance assumptions as of
December 31, 2010. There were no revisions to performance
assumptions for the years ended December 31, 2010, 2009 and
2008, although vesting was accelerated in 2010 on certain awards
based on an annual evaluation of the achievement of performance
criteria, as described below.
The Company also issues restricted stock to non-employee
independent directors. These shares generally vest in seven
years from the grant date or six months following the
directors termination from Board of Directors service.
99
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity of the non-vested
restricted stock during the each of the three years in the
period ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
Non-Vested Restricted Stock
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding at December 31, 2007
|
|
|
218,248
|
|
|
$
|
20.17
|
|
Granted
|
|
|
330,168
|
|
|
|
6.13
|
|
Vested
|
|
|
(15,684
|
)
|
|
|
18.58
|
|
Forfeited
|
|
|
(28,818
|
)
|
|
|
15.49
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
503,914
|
|
|
$
|
11.29
|
|
Granted
|
|
|
628,772
|
|
|
|
6.26
|
|
Vested
|
|
|
(40,177
|
)
|
|
|
18.23
|
|
Forfeited
|
|
|
(69,106
|
)
|
|
|
14.06
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
1,023,403
|
|
|
$
|
7.74
|
|
Granted
|
|
|
125,485
|
|
|
|
10.58
|
|
Vested
|
|
|
(178,717
|
)
|
|
|
8.22
|
|
Forfeited
|
|
|
(16,142
|
)
|
|
|
15.27
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
954,029
|
|
|
|
7.90
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2010, 2009 and 2008,
the Company granted restricted stock awards with grant date fair
values totaling $1.3 million, $3.9 million and
$2.0 million, respectively.
As vesting occurs, or is deemed likely to occur, compensation
expense is recognized over the requisite service period and
additional paid-in capital is increased. The Company recognized
$2.4 million, $1.1 million and $0.7 million of
compensation expense related to restricted stock for the years
ended December 31, 2010, 2009 and 2008, respectively.
Of the $2.4 million total compensation expense related to
restricted stock for the year ended December 31, 2010,
approximately $0.8 million related to the acceleration of
vesting based on an annual evaluation of the achievement of
certain performance criteria during the first quarter 2010.
As of December 31, 2010, there was $4.2 million of
unrecognized compensation cost related to non-vested restricted
stock compensation scheduled to be recognized over a weighted
average period of 3.9 years, based on the most probable
performance assumptions as of December 31, 2010. In the
event performance targets are achieved, $1.6 million of the
unrecognized compensation cost would accelerate to be recognized
over a weighted average period of 0.6 years, and an
additional $0.1 million of compensation cost would be
recognized over a weighted average period of 0.6 years. In
addition, certain of the awards granted during 2009 may
result in the issuance of 143,119 additional shares of stock if
achievement of certain targets is greater than 100%. The expense
related to the additional shares awarded will be dependent on
the Companys stock price when the achievement level is
determined.
The fair values of shares that vested during the years ended
December 31, 2010, 2009 and 2008 were $1.6 million,
$0.2 million and $0.1 million, respectively.
Employee
Stock Purchase Plan
In October 2003, the Company adopted the Employee Stock Purchase
Plan (the ESPP). Under the terms of the ESPP,
employees have the opportunity to purchase shares of common
stock during designated offering periods
100
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equal to the lesser of 95% of the fair market value per share on
the first day of the offering period or the purchase date.
Participants are limited to 10% of their compensation. The
aggregate number of shares under the ESPP that may be issued is
200,000. During the years ended December 31, 2010, 2009 and
2008, 21,398, 35,004 and 36,360 shares, respectively, of
common stock were sold for $0.2 million, $0.1 million
and $0.1 million, respectively, pursuant to the terms of
the ESPP. As of December 31, 2010, 14,597 shares
remain available for issuance under the ESPP.
NOTE 18
Employee 401(k) Plan
The Company adopted a 401(k) plan (the 401(k) Plan)
which originally became effective as of January 1, 1997.
The Companys employees are entitled to participate in the
401(k) Plan, which provides savings and investment
opportunities. Employees can contribute up to the maximum annual
amount allowable per Internal Revenue Service guidelines.
Effective July 1, 2007, the 401(k) Plan provides for
Company contributions equal to 25% of an employees
contribution percentage up to a maximum employee contribution of
6%. The Companys contributions to the 401(k) Plan for the
years ended December 31, 2010, 2009 and 2008 were
approximately $0.1 million, $0.1 million and
$0.2 million, respectively.
NOTE 19
Related Party Transactions
The Company obtains all of its commercial, healthcare and other
insurance coverage through The Selzer Company, an insurance
broker located in Warrington, Pennsylvania. Richard Dyer, the
brother of Daniel P. Dyer, the Companys Chief Executive
Officer, is the President of The Selzer Company. We do not have
any contractual arrangement with The Selzer Group or Richard
Dyer, nor do we pay either of them any direct fees. Insurance
premiums paid to The Selzer Company were $0.5 million,
$0.5 million and $0.6 million during the years ended
December 31, 2010, 2009 and 2008, respectively.
NOTE 20
Restatement of Prior Financial Statements
As discussed in Note 13, during the fourth quarter of 2010,
the Company completed an analysis of its deferred tax assets and
liabilities. As a result of that analysis, the Company
determined that it had over-reported lease revenues in its
previously filed tax returns. Because certain tax years were
closed by statute, the Company will be unable to amend all years
affected and determined that there was an error in the
previously filed consolidated financial statements. In addition,
as part of the analysis discussed above, the Company determined
that it had provided excess reserves due to overstating income
tax expense over certain previous years. As a result of these
errors, the Company has recorded an adjustment of
$3.6 million to increase retained earnings and decrease net
deferred income tax liability.
The impact on the consolidated financial statements encompassed
multiple fiscal years prior to December 31, 2007. Under the
Companys current credit facilities, it did not adversely
affect compliance with covenants. The Company concluded that the
impact of correcting the error on the previously filed
consolidated financial statements was not material.
101
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accordingly, the Company has restated the accompanying
consolidated financial statements as of December 31, 2009
from amounts previously reported to correct the error by
reducing its net deferred income tax liability and increasing
retained earnings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
As Previously
|
|
|
|
|
|
|
Reported
|
|
Adjustment
|
|
As Restated
|
|
|
(Dollars in thousands)
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
16,037
|
|
|
$
|
(3,647
|
)
|
|
$
|
12,390
|
|
Total liabilities
|
|
|
417,565
|
|
|
|
(3,647
|
)
|
|
|
413,918
|
|
Retained earnings
|
|
|
63,706
|
|
|
|
3,647
|
|
|
|
67,353
|
|
Total stockholders equity
|
|
|
148,238
|
|
|
|
3,647
|
|
|
|
151,885
|
|
Total liabilities and stockholders equity
|
|
|
565,803
|
|
|
|
|
|
|
|
565,803
|
|
The cumulative effect of this adjustment was recorded as an
adjustment to retained earnings in the Consolidated Statements
of Stockholders Equity as of December 31, 2007 of
approximately $3.6 million.
102
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplementary
Data
The selected quarterly financial data presented below should be
read in conjunction with the Consolidated Financial Statements
and related notes.
Selected
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Quarters
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
(Dollars in thousands, except per-share data)
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
12,829
|
|
|
$
|
11,994
|
|
|
$
|
11,421
|
|
|
$
|
11,052
|
|
Fee income
|
|
|
3,816
|
|
|
|
3,501
|
|
|
|
3,567
|
|
|
|
3,157
|
|
Interest and fee income
|
|
|
16,645
|
|
|
|
15,495
|
|
|
|
14,988
|
|
|
|
14,209
|
|
Interest expense
|
|
|
4,658
|
|
|
|
3,955
|
|
|
|
3,590
|
|
|
|
3,410
|
|
Provision for credit losses
|
|
|
3,123
|
|
|
|
2,494
|
|
|
|
2,083
|
|
|
|
1,738
|
|
Gain (loss) on derivatives
|
|
|
(94
|
)
|
|
|
(25
|
)
|
|
|
(9
|
)
|
|
|
12
|
|
Income tax expense (benefit)
|
|
|
662
|
|
|
|
947
|
|
|
|
977
|
|
|
|
(91
|
)
|
Net income (loss)
|
|
|
1,237
|
|
|
|
1,551
|
|
|
|
1,434
|
|
|
|
1,446
|
|
Basic earnings (loss) per share
|
|
|
0.10
|
|
|
|
0.12
|
|
|
|
0.11
|
|
|
|
0.11
|
|
Diluted earnings (loss) per share
|
|
|
0.10
|
|
|
|
0.12
|
|
|
|
0.11
|
|
|
|
0.11
|
|
Net investment in leases and loans
|
|
|
408,205
|
|
|
|
380,660
|
|
|
|
361,143
|
|
|
|
351,569
|
|
Total assets
|
|
|
534,521
|
|
|
|
494,995
|
|
|
|
466,305
|
|
|
|
468,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
19,072
|
|
|
$
|
17,281
|
|
|
$
|
15,591
|
|
|
$
|
14,095
|
|
Fee income
|
|
|
5,034
|
|
|
|
4,380
|
|
|
|
4,288
|
|
|
|
3,703
|
|
Interest and fee income
|
|
|
24,106
|
|
|
|
21,661
|
|
|
|
19,879
|
|
|
|
17,798
|
|
Interest expense
|
|
|
7,832
|
|
|
|
7,444
|
|
|
|
6,448
|
|
|
|
5,614
|
|
Provision for credit losses
|
|
|
8,748
|
|
|
|
6,793
|
|
|
|
5,951
|
|
|
|
5,697
|
|
Gain (loss) on derivatives
|
|
|
(1,306
|
)
|
|
|
646
|
|
|
|
(1,164
|
)
|
|
|
(135
|
)
|
Income tax expense (benefit)
|
|
|
(491
|
)
|
|
|
434
|
|
|
|
225
|
|
|
|
179
|
|
Net income (loss)
|
|
|
(879
|
)
|
|
|
946
|
|
|
|
508
|
|
|
|
461
|
|
Basic earnings (loss) per share
|
|
|
(0.08
|
)
|
|
|
0.08
|
|
|
|
0.04
|
|
|
|
0.04
|
|
Diluted earnings (loss) per share
|
|
|
(0.08
|
)
|
|
|
0.08
|
|
|
|
0.04
|
|
|
|
0.04
|
|
Net investment in leases and loans
|
|
|
620,934
|
|
|
|
555,082
|
|
|
|
499,556
|
|
|
|
448,610
|
|
Total assets
|
|
|
763,639
|
|
|
|
690,646
|
|
|
|
628,057
|
|
|
|
565,803
|
|
103
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure Controls and Procedures The
Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in
the Companys reports under the Securities Exchange Act of
1934, as amended (the 1934 Act) is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules
and forms, and that such information is accumulated and
communicated to management, including the Companys Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report on
Form 10-K,
as of December 31, 2010, we updated our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures for purposes of filing reports under the
1934 Act. This controls evaluation was done under the
supervision and with the participation of management, including
our Chief Executive Officer and our Chief Financial Officer. Our
Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures (as
defined in
Rule 13(a)-15(e)
and 15(d)-15(e) under the 1934 Act) are designed and
operating effectively to provide reasonable assurance that
information relating to us and our subsidiaries that we are
required to disclose in the reports that we file or submit to
the Securities and Exchange Commission is accumulated and
communicated to management as appropriate to allow timely
decisions regarding required disclosure, and is recorded,
processed, summarized and reported with the time periods
specified in the Securities and Exchange Commissions rules
and forms.
Managements Annual Report on Internal Control over
Financial Reporting Our Chief Executive Officer
and Chief Financial Officer provided a report on behalf of
management on our internal control over financial reporting. The
full text of managements report is contained in
Item 8 of this
Form 10-K
and is incorporated herein by reference.
Attestation Report of the Registered Public Accounting
Firm The attestation report of our independent
registered public accounting firm on their assessment of
internal control over financial reporting is contained in
Item 8 of this
Form 10-K
and is incorporated herein by reference.
Changes in Internal Control Over Financial
Reporting Upon analyzing the events that
precipitated the restatement described in Note 20 to the
Consolidated Financial Statements, management identified
deficiencies in the Companys income tax controls. During
the fourth quarter of 2010, the Company implemented new
procedures related to such deficiencies in order to mitigate the
risk of ineffective internal controls and to strengthen the
Companys internal control over financial reporting. The
Company enhanced the design, documentation and validation around
the reporting and review of information for its tax returns and
its tax provision estimation process, including the
relationships between the financial statement and tax bases of
assets and liabilities. The Company believes these changes have
remediated the deficiencies that were identified by management,
and that our internal control over financial reporting was
effective at December 31, 2010.
There were no other changes in internal control over financial
reporting identified in connection with managements
evaluation that occurred during the three months ended
December 31, 2010 that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
104
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by Item 10 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2011 Annual Meeting of Stockholders.
We have adopted a code of ethics and business conduct that
applies to all of our directors, officers and employees,
including our principal executive officer, principal financial
officer, principal accounting officer and persons performing
similar functions. Our code of ethics and business conduct is
available free of charge within the investor relations section
of our website at www.marlincorp.com. We intend to post
on our website any amendments and waivers to the code of ethics
and business conduct that are required to be disclosed by the
rules of the Securities and Exchange Commission, or file a
Form 8-K,
Item 5.05 to the extent required by NASDAQ listing
standards.
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|
Item 11.
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Executive
Compensation
|
The information required by Item 11 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2011 Annual Meeting of Stockholders.
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|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 12 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2011 Annual Meeting of Stockholders.
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Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by Item 13 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2011 Annual Meeting of Stockholders.
|
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Item 14.
|
Principal
Accountant Fees and Services
|
The information required by Item 14 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2011 Annual Meeting of Stockholders.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as part of this Report
The following is a list of consolidated and combined financial
statements and supplementary data included in this report under
Item 8 of Part II hereof:
1. Financial Statements and Supplemental Data
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and
2009.
Consolidated Statements of Operations for the years ended
December 31, 2010, 2009 and 2008.
Consolidated Statements of Stockholders Equity for the
years ended December 31, 2010, 2009 and 2008.
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
105
Schedules are omitted because they are not applicable or are not
required or because the required information is included in the
consolidated and combined financial statements or notes thereto.
(b) Exhibits.
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|
|
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Number
|
|
Description
|
|
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1
|
.1(10)
|
|
Purchase Agreement, dated November 15, 2006, between Piper
Jaffray & Co., Primus Capital Fund IV Limited
Partnership and its affiliate and Marlin Business Services Corp.
|
|
3
|
.1(13)
|
|
Amended and Restated Articles of Incorporation of the Registrant.
|
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3
|
.2(2)
|
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Bylaws of the Registrant.
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4
|
.1(2)
|
|
Second Amended and Restated Registration Agreement, as amended
through July 26, 2001, by and among Marlin Leasing
Corporation and certain of its shareholders.
|
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10
|
.1(15)
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2003 Equity Compensation Plan of the Registrant, as amended.
|
|
10
|
.2(24)
|
|
Amendment
2009-1 to
the Marlin Business Services Corp. 2003 Equity Compensation
Plan, as amended.
|
|
10
|
.3(24)
|
|
Amendment
2009-2 to
the Marlin Business Services Corp. 2003 Equity Compensation
Plan, as amended.
|
|
10
|
.4(24)
|
|
Amendment
2009-3 to
the Marlin Business Services Corp. 2003 Equity Compensation
Plan, as amended.
|
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10
|
.5(2)
|
|
2003 Employee Stock Purchase Plan of the Registrant.
|
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10
|
.6(4)
|
|
Lease Agreement, dated as of October 21, 2003, between
Liberty Property Limited Partnership and Marlin Leasing
Corporation.
|
|
10
|
.7(2)
|
|
Employment Agreement, dated as of October 14, 2003 between
Daniel P. Dyer and the Registrant.
|
|
10
|
.8(18)
|
|
Amendment
2008-1 dated
as of December 31, 2008 to the Employment Agreement between
Daniel P. Dyer and the Registrant.
|
|
10
|
.9(2)
|
|
Employment Agreement, dated as of October 14, 2003 between
George D. Pelose and the Registrant.
|
|
10
|
.10(9)
|
|
Amendment
2006-1 dated
as of May 19, 2006 to the Employment Agreement between
George D. Pelose and the Registrant.
|
|
10
|
.11(18)
|
|
Amendment
2008-1 dated
as of December 31, 2008 to the Employment Agreement between
George D. Pelose and the Registrant.
|
|
10
|
.12(1)
|
|
Second Amended and Restated Warehouse Revolving Credit Facility
Agreement dated as of August 31, 2001, by and among Marlin
Leasing Corporation, the Lenders and National City Bank.
|
|
10
|
.13(1)
|
|
First Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement dated as of July 28,
2003, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
|
10
|
.14(3)
|
|
Second Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement dated as of October 16,
2003, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
|
10
|
.15(7)
|
|
Third Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement dated as of August 26,
2005, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
|
10
|
.16(11)
|
|
Fourth Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement, dated as of April 2,
2007, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
|
10
|
.17(17)
|
|
Fifth Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement, dated as of
September 12, 2008, by and among Marlin Leasing
Corporation, the Lenders and National City Bank.
|
|
10
|
.18(19)
|
|
Sixth Amendment to Second Amended and Restated Warehouse
Revolving Credit Facility Agreement, dated as of March 31,
2009, by and among Marlin Leasing Corporation, the Lenders and
National City Bank.
|
106
|
|
|
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Number
|
|
Description
|
|
|
10
|
.19(1)
|
|
Master Lease Receivables Asset-Backed Financing Facility
Agreement, dated as of April 1, 2002, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. II and
Wells Fargo Bank Minnesota, National Association.
|
|
10
|
.20(1)
|
|
Series 2002-A
Supplement, dated as of April 1, 2002, to the Master Lease
Receivables Asset-Backed Financing Facility Agreement, dated as
of April 1, 2002, by and among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. II, Marlin Leasing
Receivables II LLC, National City Bank and Wells Fargo Bank
Minnesota, National Association.
|
|
10
|
.21(1)
|
|
First Amendment to
Series 2002-A
Supplement and Consent to Assignment of
2002-A Note,
dated as of July 10, 2003, by and among Marlin Leasing
Corporation, Marlin Leasing Receivables Corp. II, Marlin Leasing
Receivables II LLC, ABN AMRO Bank N.V. and Wells Fargo Bank
Minnesota, National Association.
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|
10
|
.22(4)
|
|
Second Amendment to
Series 2002-A
Supplement, dated as of January 13, 2004, by and among
Marlin Leasing Corporation, Marlin Leasing Receivables Corp. II,
Marlin Leasing Receivables II LLC, Bank One, N.A., and
Wells Fargo Bank Minnesota, National Association.
|
|
10
|
.23(4)
|
|
Third Amendment to
Series 2002-A
Supplement, dated as of March 19, 2004, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. II, Marlin
Leasing Receivables II LLC, Bank One, N.A., and Wells Fargo
Bank Minnesota, National Association.
|
|
10
|
.24(5)
|
|
Fifth Amendment to
Series 2002-A
Supplement, dated as of March 18, 2005, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. II, Marlin
Leasing Receivables II LLC, JP Morgan Chase Bank, N.A.,
(successor by merger to Bank One, N.A.), and Wells Fargo Bank
Minnesota, National Association.
|
|
10
|
.25(8)
|
|
Amended & Restated
Series 2002-A
Supplement to the Master Facility Agreement, dated as of
March 15, 2006, by and among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. II, Marlin Leasing
Receivables II LLC, JPMorgan Chase Bank, N.A. and Wells
Fargo Bank, N.A.
|
|
10
|
.26(20)
|
|
Consent and Amendment to the Amended and Restated
Series 2002-A
Supplement, dated as of June 29, 2009, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. II, Marlin
Leasing Receivables II LLC, JP Morgan Chase Bank, N.A., and
Wells Fargo Bank Minnesota, N.A., as the trustee.
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10
|
.27(12)
|
|
First Amendment to the Amended and Restated
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement, dated as of August 30, 2007,
by and among Marlin Leasing Corporation, JP Morgan Chase Bank,
N.A., (successor by merger to Bank One, N.A.), and Wells Fargo
Bank Minnesota, National Association.
|
|
10
|
.28(16)
|
|
First Amendment to the Amended & Restated
Series 2002-A
Supplement to the Master Facility Agreement, dated as of
August 29, 2008, by and among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. II, Marlin Leasing
Receivables II LLC, JPMorgan Chase Bank, N.A. and Wells
Fargo Bank, N.A.
|
|
10
|
.29(21)
|
|
Second Amendment to the Amended and Restated
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement, dated as of March 15, 2009,
among Marlin Leasing Corporation, Marlin Leasing Receivables
Corp. II, Marlin Leasing Receivables II LLC, JPMorgan Chase
Bank, N.A., as the agent and Wells Fargo Bank, N.A., as the
trustee.
|
|
10
|
.30(22)
|
|
Third Amendment to the Amended and Restated
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement, dated as of March 31, 2009,
among Marlin Leasing Corporation, Marlin Leasing Receivables
Corp. II, Marlin Leasing Receivables II LLC, JPMorgan Chase
Bank, N.A., as the agent and Wells Fargo Bank, N.A., as the
trustee.
|
|
10
|
.31
|
|
Compensation Policy for Non-Employee Independent Directors
(Filed herewith).
|
|
10
|
.32(14)
|
|
Letter Agreement, dated as of June 11, 2007 and effective
as of March 11, 2008, by and between the Registrant,
Peachtree Equity Investment Management, Inc. and WCI (Private
Equity) LLC.
|
|
10
|
.33(23)
|
|
Loan and Security Agreement, dated as of October 9, 2009,
by and among Marlin Receivables Corp., Marlin Leasing
Corporation, Marlin Business Services Corp. and Wells Fargo
Foothill, LLC.
|
|
10
|
.34(25)
|
|
Receivables Loan and Security Agreement, dated as of
September 24, 2010, by and among Marlin Leasing Receivables
XIII LLC, Marlin Leasing Corporation, Key Equipment Finance
Inc., the lenders party thereto and Wells Fargo Bank, National
Association.
|
107
|
|
|
|
|
Number
|
|
Description
|
|
|
16
|
.1(6)
|
|
Letter on Change in Certifying Accountant dated June 27,
2005 from KPMG LLP to the Securities and Exchange Commission.
|
|
21
|
.1
|
|
List of Subsidiaries (Filed herewith)
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP (Filed herewith)
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer of Marlin Business
Services Corp. required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended. (Filed
herewith)
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer of Marlin Business
Services Corp. required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended. (Filed
herewith)
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer of Marlin Business Services Corp. required by
Rule 13a-14(b)
under the Securities Exchange Act of 1934, as amended. (This
exhibit shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Exchange Act of
1933, as amended, or the Securities Exchange Act of 1934, as
amended.). (Furnished herewith)
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|
|
|
|
|
Management contract or compensatory plan or arrangement. |
|
(1) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Registration Statement on
Form S-1
(File
No. 333-108530),
filed on September 5, 2003, and incorporated by reference
herein. |
|
(2) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Amendment No. 1 to
Registration Statement on
Form S-1
(File
No. 333-108530),
filed on October 14, 2003, and incorporated by reference
herein. |
|
(3) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Amendment No. 2 to
Registration Statement on
Form S-1
filed on October 28, 2003 (File
No. 333-108530),
and incorporated by reference herein. |
|
(4) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003 filed on
March 29, 2004, and incorporated by reference herein. |
|
(5) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2005 filed on
May 9, 2005, and incorporated by reference herein. |
|
(6) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated June 24, 2005 filed on June 29, 2005, and
incorporated by reference herein. |
|
(7) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated August 26, 2005 filed on August 26, 2005, and
incorporated by reference herein. |
|
(8) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 15, 2006 and filed on March 17, 2006, and
incorporated by reference herein. |
|
(9) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated May 19, 2006 and filed on May 25, 2006, and
incorporated by reference herein. |
|
(10) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated November 15, 2006 and filed on November 17,
2006, and incorporated by reference herein. |
|
(11) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated April 2, 2007 and filed on April 6, 2007, and
incorporated by reference herein. |
|
(12) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated August 30, 2007 and filed on September 5, 2007,
and incorporated by reference herein. |
|
(13) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007 filed on
March 5, 2008, and incorporated by reference herein. |
108
|
|
|
(14) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 11, 2008 and filed on March 17, 2008, and
incorporated by reference herein. |
|
(15) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Registration Statement on
Form S-8
(File
No. 333-151358)
filed on June 2, 2008, and incorporated by reference herein. |
|
(16) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated August 29, 2008 and filed on September 5, 2008,
and incorporated by reference herein. |
|
(17) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated September 12, 2008 and filed on September 16,
2008, and incorporated by reference herein. |
|
(18) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated December 31, 2008 and filed on January 7, 2009,
and incorporated by reference herein. |
|
(19) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 31, 2009 and filed on April 2, 2009, and
incorporated by reference herein. |
|
(20) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated June 29, 2009 and filed on July 2, 2009, and
incorporated by reference herein. |
|
(21) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 15, 2009 and filed on March 17, 2009, and
incorporated by reference herein. |
|
(22) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated March 31, 2009 and filed on April 2, 2009, and
incorporated by reference herein. |
|
(23) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated October 9, 2009 and filed on October 13, 2009,
and incorporated by reference herein. |
|
(24) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated October 28, 2009 and filed on November 2, 2009,
and incorporated by reference herein. |
|
(25) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated September 24, 2010 and filed on September 27,
2010, and incorporated by reference herein. |
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 16, 2011
Marlin Business Services
Corp.
Daniel P. Dyer
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
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|
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Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Daniel
P. Dyer
Daniel
P. Dyer
|
|
Chief Executive Officer and President
(Principal Executive Officer)
|
|
March 16, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ Lynne
C. Wilson
Lynne
C. Wilson
|
|
Chief Financial Officer and Senior Vice President (Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Kevin
J. McGinty
Kevin
J. McGinty
|
|
Chairman of the Board of Directors
|
|
March 16, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ John
J. Calamari
John
J. Calamari
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ Lawrence
J. DeAngelo
Lawrence
J. DeAngelo
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ Edward
Grzedzinski
Edward
Grzedzinski
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ Matthew
J. Sullivan
Matthew
J. Sullivan
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ J.
Christopher Teets
J.
Christopher Teets
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ James
W. Wert
James
W. Wert
|
|
Director
|
|
March 16, 2011
|
110