DERIVATIVE INSTRUMENTS

9 Months Ended

Jun. 30, 2011

DERIVATIVE INSTRUMENTS [Abstract]

DERIVATIVE INSTRUMENTS

NOTE 13 – DERIVATIVE INSTRUMENTS

The Company's investments in commercial finance assets are structured on a fixed-rate basis, but some of the Company's borrowings through the related bank debt is obtained on a floating-rate basis.  As a result, the Company is exposed to a certain degree of risk if interest rates rise, which in turn will increase the Company's borrowing costs.  In addition, when the Company acquires assets, it bases its pricing in part on the spread it expects to achieve between the interest rate it charges its customers and the effective interest cost the Company will pay when it funds the respective borrowings.  Increases in interest rates that increase the Company's permanent funding costs between the time the assets are originated and the time they are funded could narrow, eliminate or even reverse this spread.

To manage interest rate risk, the Company employs a hedging strategy using derivative financial instruments such as interest rate swaps, which are designated as cash flow hedges.  Accordingly, changes in fair value of those derivatives are recorded in Accumulated Other Comprehensive Loss and are subsequently reclassified into earnings when the hedged forecasted interest payments are recognized in earnings.  The Company does not use derivative financial instruments for trading or speculative purposes.  The Company manages the credit risk of possible counterparty default in the derivative transactions by dealing exclusively with counterparties with high credit quality.  The Company has an agreement with its derivative counterparty that incorporates the loan covenant provisions of the Company's indebtedness with a lender affiliate of the derivative counterparty.  Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.  As of June 30, 2011, the fair value of derivatives in a net liability position related to these agreements was $168,000, net of accrued interest.  As of June 30, 2011, the Company has posted $148,000 in cash collateral as security for any unfunded liability related to these agreements and would be required to fund more collateral should the value of the swaps decline .  If the Company had breached any of these provisions at June 30, 2010, it could have been required to settle its obligations under the agreements at their termination value of $173,000.

Before entering into a derivative transaction for hedging purposes, the Company determines whether a high degree of initial effectiveness exists between the change in the value of the hedged forecasted transaction and the change in the value of the derivative from a movement in interest rates.  High effectiveness means that the change in the value of the derivative is expected to provide a high degree of offset against changes in the value of the hedged forecasted transactions caused by changes in interest rate risk.  The Company measures the effectiveness of each cash flow hedge throughout the hedge period.  Any hedge ineffectiveness on cash flow hedging relationships, as defined by U.S. GAAP, will be recognized in the consolidated statements of operations.

There can be no assurance that the Company's hedging strategies or techniques will be effective, that profitability will not be adversely affected during any period of change in interest rates, or that the costs of hedging will not exceed the benefits.

Derivative instruments are reported at fair value as of June 30, 2010 as follows (in thousands, except number of contracts):

	Notional Amount		Termination Date of Swap	Derivative Liability Reported in Accrued Expenses and Other Liabilities		Number of Contracts
Interest rate swaps designated as cash flow hedges	$	57,043	March 15, 2015	$	168		2

As of June 30, 2010, included in accumulated other comprehensive loss were unrealized net losses of $75,000 (net of tax benefit and noncontrolling interests of $92,000) on two swaps.  The Company recognized no gain or loss during the nine months ended June 30, 2011 for hedge ineffectiveness.  Assuming market rates remain constant with the rates at June 30, 2011, the Company estimates that approximately $184,000 (net of tax benefit of $139,000) of the loss in accumulated other comprehensive loss will be recognized into earnings over the next 12 months.

In addition, included in accumulated other comprehensive loss as of June 30, 2011 and September 30, 2010 is a net unrealized loss of $47,000 (net of tax benefit of $33,000) and a net unrealized loss of $171,000 (net of tax benefit of $146,000 and noncontrolling interest of $25,000), respectively, related to hedging instruments held by investment funds sponsored by LEAF, in which the Company owns an equity interest.