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, 2006
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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
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38-3686388
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(State of
incorporation)
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(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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None
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None
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Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.01 par value
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 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
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 National Market was approximately
$102,068,862 as of June 30, 2006. Shares of common stock
held by each executive officer and director and persons known to
us who beneficially owns 5% or more of our outstanding common
stock have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of Registrants common stock
outstanding as of February 28, 2007 was 12,110,317 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement
related to the 2007 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days
of the close of Registrants fiscal year, is incorporated
by reference into Part III of this
Form 10-K.
MARLIN
BUSINESS SERVICES CORP.
FORM 10-K
INDEX
1
PART I
FORWARD-LOOKING
STATEMENTS
Certain statements in this document may include the words or
phrases can be, expects,
plans, may, may affect,
may depend, believe,
estimate, intend, could,
should, would, if and
similar words and phrases that constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are
subject to various known and unknown risks and uncertainties and
the Company cautions that any forward-looking information
provided by or on its behalf is not a guarantee of future
performance. Statements regarding the following subjects are
forward-looking by their nature: (a) our business strategy;
(b) our projected operating results; (c) our ability
to obtain external financing; (d) our understanding of our
competition; and (e) 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 capital;
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general volatility of capital markets, in particular, the market
for securitized assets;
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changes in our industry, interest rates or the general economy
resulting in changes to our business strategy;
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the nature of our competition;
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availability 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.
Overview
We are a nationwide provider of equipment financing solutions
primarily to small businesses. We finance over 70 categories of
commercial equipment important to our end user customers,
including copiers, certain commercial and industrial equipment,
computers, telecommunications equipment, and security systems.
Our average lease transaction was approximately $10,000 at
December 31, 2006, and we typically do not exceed $250,000
for any single lease transaction. This segment of the equipment
leasing market is commonly known in the industry as the
small-ticket segment. We access our end user customers through
origination sources comprised of our existing network of over
10,900 independent commercial equipment dealers and, to a lesser
extent, through relationships with lease brokers and direct
solicitation of our end user customers. We use a highly
efficient telephonic direct sales model to market to our
origination sources. Through these origination sources, we are
able to deliver convenient and flexible equipment financing to
our end user customers. Our typical financing transaction
involves a non-cancelable, full-payout lease with payments
sufficient to recover the purchase price of the underlying
equipment plus an expected profit. As of December 31, 2006,
we serviced approximately 109,000 active equipment leases having
a total original equipment cost of $1.1 billion for
approximately 87,000 end user customers.
In addition to our goal of lease portfolio growth, in November
2006 we announced the introduction of two new financial products
targeting the small business market: factoring and business
capital loans. Factoring provides small business customers
working capital funding through the discounted sale of their
accounts receivable to us. Business capital loans provide small
business customers access to credit through term loans.
The small-ticket equipment leasing market is highly fragmented.
We estimate that there are up to 75,000 independent equipment
dealers who sell the types of equipment we finance. We focus
primarily on the segment of the market comprised of the small
and mid-size independent equipment dealers. We believe this
segment is underserved because: 1) the large commercial
finance companies and large commercial banks typically
concentrate their efforts on marketing their products and
services directly to equipment manufacturers and larger
distributors, rather than the independent equipment dealers; and
2) many smaller commercial finance companies and regional
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banking institutions have not developed the systems and
infrastructure required to service adequately these equipment
dealers on high volume, low-balance transactions. We focus on
establishing our relationships with independent equipment
dealers to meet their need for high-quality, convenient
point-of-sale
lease financing programs. We provide equipment dealers with the
ability to offer our lease financing and related services to
their customers as an integrated part of their selling process,
allowing them to increase their sales and provide better
customer service. We believe our personalized service approach
appeals to the independent equipment dealer by providing each
dealer with a single point of contact to access our flexible
lease programs, obtain rapid credit decisions and receive prompt
payment of the equipment cost. Our fully integrated account
origination platform enables us to solicit, process and service
a large number of low-balance financing transactions. From our
inception in 1997 to December 31, 2006, we processed
approximately 483,000 lease applications and originated nearly
213,000 new leases.
Reorganization
and Initial Public Offering
Marlin Leasing Corporation was incorporated in the state of
Delaware on June 16, 1997. On August 5, 2003, we
incorporated Marlin Business Services Corp. in Pennsylvania. On
November 11, 2003, we reorganized our operations into a
holding company structure by merging Marlin Leasing Corporation
with a wholly owned subsidiary of Marlin Business Services Corp.
As a result, all former shareholders of Marlin Leasing
Corporation became shareholders of Marlin Business Services
Corp. After the reorganization, Marlin Leasing Corporation
remains in existence as our primary operating subsidiary.
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our IPO. Of these shares, a total of
3,581,255 shares were sold by the company and
1,478,745 shares were sold by selling shareholders. The
initial public offering price was $14.00 per share
resulting in net proceeds to us, after payment of underwriting
discounts and commissions but before other offering costs, of
approximately $46.6 million. We did not receive any
proceeds from the shares sold by the selling shareholders.
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 typically
account for approximately 67% of our originations, involve:
1) establishing relationships with independent equipment
dealers; 2) securing endorsements from national equipment
manufacturers and distributors to become the preferred lease
financing source for the independent dealers who sell their
equipment; and 3) soliciting our existing end user customer
base for repeat business. Our indirect origination channels
typically account for approximately 33% of our originations
and consist of our relationships with brokers and certain
equipment dealers who refer transactions to us for a fee or sell
leases to us that they originated.
Highly effective account origination
platform. Our telephonic direct marketing
platform offers origination sources a high level of personalized
service through our team of 100 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
effectively manage credit risk 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, 2006, no single end user customer accounted
for more than 0.06% of our portfolio and leases from our largest
origination source accounted for only 3.4% of our
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portfolio. Our portfolio is also diversified nationwide with the
largest state portfolios existing in California (14%) and
Florida (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 collect post
charge-off recovery dollars. Our collection strategy generally
utilizes a life-cycle approach, where a single collector handles
an account through its entire delinquency period. This approach
allows the collector to communicate consistently with the end
user customers decision maker to ensure that delinquent
customers are providing consistent information. In addition, the
collections department utilizes specialist collectors who focus
on delinquent late fees, property taxes, bankrupt and large
balance accounts.
Access to multiple funding sources. We have
established and maintained diversified funding capacity through
multiple facilities with several national credit providers. Our
proven ability to access consistently funding at competitive
rates through various economic cycles provides us with the
liquidity necessary to manage our business.
Experienced management team. Our executive
officers average more than 15 years of experience in
providing financing solutions primarily to small businesses. As
we have grown, our founders have expanded the management team
with a group of successful, seasoned executives.
Disciplined
Growth Strategy
Our primary objective is to enhance our current position as a
provider of equipment financing solutions primarily to small
businesses by pursuing a strategy focused on organic growth
initiatives. We believe we can create additional lease financing
opportunities by increasing our new origination source
relationships and further penetrating our existing origination
sources. We expect to do this by adding new sales account
executives and continuing to train and season our existing sales
force. We also believe that we can increase originations in
certain regions of the country by establishing offices in
identified strategic locations. Other regional offices are
located in or near Atlanta, Georgia; Chicago, Illinois; Denver,
Colorado and Salt Lake City, Utah. Our Salt Lake City office
will also house Marlin Business Bank (in organization) subject
to regulatory approval and becoming operational.
In addition to our goal of lease portfolio growth, in November
2006 we announced the introduction of two new financial products
targeting the small business market: factoring and business
capital loans. Factoring provides small business customers
working capital funding through the discounted sale of their
accounts receivable to us. Business capital loans provide small
business customers access to credit through term loans.
Asset
Originations
Overview of Origination Process. We access our
end user customers through our extensive network of independent
equipment dealers and, to a lesser extent, through relationships
with lease brokers and 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.
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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 the origination sources to interface with
several people in various departments, such as sales support,
credit and customer service, for each application submitted.
Since many of our origination sources have little or no prior
experience in using lease financing as a sales tool, our
personalized, single point of contact approach facilitates the
leasing process for them. Other key aspects of our platform
aimed at facilitating the lease financing process for the
origination sources include:
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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 portfolio reports, such as application status and
volume of lease originations;
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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 314 total employees as of December 31, 2006, we
employed 100 sales account executives, each of whom receives a
base salary and earns commissions based on his or her lease
originations. We also employed 6 employees dedicated to
marketing as of December 31, 2006.
Sales Origination Channels. We use direct and
indirect 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 typically account for approximately 67% of our
originations, 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 $2.0 million in annual revenues and
fewer than 20 employees. Service is a key determinant in
becoming the preferred provider of financing recommended by
these equipment dealers.
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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,
they are serviced by our sales account executives in the
independent equipment dealer channel. This allows us to
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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 over 87,000 end
user customers for additional equipment leasing opportunities.
We view our existing end user customers as an excellent source
for additional business for various reasons, including
1) retained credit information; 2) consistent lease
payment histories and 3) a demonstrated propensity to
finance their equipment.
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Indirect Channels. Our indirect origination
channels typically account for approximately 33% of our
originations and consist of our relationships with lease brokers
and certain equipment dealers who refer end user customer
transactions to us for a fee or sell us leases that they
originated with an end user customer. We conduct our own
independent credit analysis on each end user customer in an
indirect lease transaction. We have written agreements with most
of our indirect origination sources whereby they provide us with
certain representations and warranties about the underlying
lease transaction. The origination sources in our indirect
channels generate leases that are similar to our direct
channels. We view these indirect channels as an opportunity to
extend our lease origination capabilities through relationships
with smaller originators who have limited access to the capital
markets and funding.
Sales
Recruiting, Training and Mentoring
Sales account executive candidates are screened for previous
sales experience and communication skills, phone presence and
teamwork orientation. Due to our extensive training program and
systematized sales approach, we do not regard previous leasing
or finance industry experience as being necessary. Our location
of offices near large urban centers gives us access to large
numbers of qualified candidates.
Each new sales account executive undergoes up to a
60-day
comprehensive training program shortly after he or she is hired.
The training program covers the fundamentals of lease finance
and introduces the sales account executive to our origination
and credit policies and procedures. It also covers technical
training on our databases and our information management tools
and techniques. At the end of the program, the sales account
executives are tested to ensure they meet our standards. In
addition to our formal training program, sales account
executives receive extensive
on-the-job
training and mentoring. All sales account executives sit in
groups, providing newer sales account executives the opportunity
to learn first-hand from their more senior peers. In addition,
our sales managers frequently monitor and coach a sales account
executive during phone calls, enabling the individual to receive
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 type 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, 2006, the average original
term of the leases in our portfolio was approximately
47 months, and we had personal guarantees on approximately
47% 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 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 contracts
automatic renewal provision.
Property Insurance on Leased Equipment. Our
lease agreements specifically require the end user customers to
obtain all-risk property insurance in an amount equal to the
replacement value of the equipment and to designate us as the
loss payee on the policy. If the end user customer already has a
commercial property policy for its business, it can satisfy its
obligation under the lease by delivering a certificate of
insurance that evidences us as a loss payee under that policy.
At December 31, 2006, approximately 58% of our end user
customers insured the equipment under their existing policies.
For the others, we offer an insurance product through a master
property insurance policy underwritten by a third party national
insurance company that is licensed to write insurance under our
program in all 50 states and the District of Columbia. This
master policy names us as the beneficiary for all of the
equipment insured under the policy and provides all-risk
coverage for the replacement cost of the equipment.
In May 2000, we established AssuranceOne, Ltd., our
Bermuda-based, wholly owned captive insurance subsidiary, to
enter into a reinsurance contract with the issuer of the master
property insurance policy. Under this contract, AssuranceOne
reinsures 100% of the risk under the master policy, and the
issuing insurer pays AssuranceOne the policy premiums, less a
ceding fee based on annual net premiums written. The reinsurance
contract expires in May 2009.
Portfolio
Overview
At December 31, 2006, we had 109,511 active leases in our
portfolio, representing an aggregate minimum lease payments
receivable of $799.7 million. With respect to our portfolio
at December 31, 2006:
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the average original lease transaction was $10,095, with an
average remaining balance of $7,285;
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the average original lease term was 47 months;
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our active leases were spread among 87,478 different end user
customers, with the largest single end user customer accounting
for only 0.06% of the aggregate minimum lease payments
receivable;
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over 72.3% of the aggregate minimum lease payments receivable
were with end user customers who had been in business more than
five years;
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the portfolio was spread among 11,606 origination sources, with
the largest source accounting for only 3.4% of the aggregate
minimum lease payments receivable, and our ten largest
origination sources accounting for only 10.1% of the aggregate
minimum lease payments receivable;
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there were 72 different equipment categories financed, with the
largest categories set forth below, as a percentage of the
December 31, 2006 aggregate minimum lease payments
receivable:
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Equipment Category
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Percentage
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Copiers
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21.32
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%
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Commercial & Industrial
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8.64
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%
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Computers
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7.40
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%
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Telecommunications equipment
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7.10
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%
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Security systems
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5.53
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%
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Restaurant equipment
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5.34
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%
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Closed Circuit TV security systems
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4.93
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%
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Automotive (no titled vehicles)
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4.08
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%
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Computer software
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4.04
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%
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Medical
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3.98
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%
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Water filtration systems
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3.69
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Cash registers
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2.78
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%
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Office Furniture
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2.19
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%
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All others (none more than 2.0%)
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18.98
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%
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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, 2006 aggregate minimum lease payments
receivable:
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State
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Percentage
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California
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14.06
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%
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Florida
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9.64
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%
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New York
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7.31
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%
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Texas
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7.12
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%
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New Jersey
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5.69
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%
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Georgia
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4.31
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%
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Pennsylvania
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4.23
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%
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Massachusetts
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3.43
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%
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North Carolina
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3.39
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%
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Ohio
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3.01
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%
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Illinois
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2.87
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%
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All others (none more than 2.5%)
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34.94
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%
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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
effectively manage that information 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:
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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;
2) systematically analyzes call activity patterns to
improve outbound calling campaigns; and 3) produces
detailed reports using a variety of data fields to evaluate the
performance and effectiveness of our sales account executives;
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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;
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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;
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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
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an integrated voice response unit that enables our end
user customers the opportunity to quickly and efficiently obtain
certain information from us about their account.
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Our information technology platform infrastructure is industry
standard and fully scalable to support future growth. Our
systems are backed up nightly and a full set of data tapes is
sent to an off-site storage provider weekly. In addition, we
have contracted with a third party for disaster recovery
services.
Credit
Underwriting
Credit underwriting is separately performed and managed apart
from asset origination. Each sales origination channel has one
or more credit teams supporting it. Our credit teams are located
in our New Jersey headquarters and each of our regional offices.
At December 31, 2006, we had 33 credit analysts managed by
7 credit managers having an average of ten years of experience.
Each credit analyst is measured monthly against a discrete set
of performance variables, including decision turnaround time,
approval and loss rates, and adherence to our underwriting
policies and procedures.
Our typical financing transaction involves three parties: the
origination source, the end user customer and us. The key
elements of our comprehensive credit underwriting process
include the pre-qualification and ongoing review of origination
sources, the performance of due diligence procedures on each end
user customer and the monitoring of overall portfolio trends and
underwriting standards.
Pre-qualification and ongoing review of origination
sources. Each origination source must be
pre-qualified before we will accept applications from it. The
origination source must submit a source profile, which we use to
review the origination sources credit information and
check references. Over time, our database has captured credit
profiles on thousands of origination sources. We regularly track
all applications and lease originations by source, assessing
whether the origination source has a high application decline
rate and analyzing the delinquency rates on the leases
originated through that source. Any unusual situations that
arise involving the origination source are noted in the
sources file. Each origination source is reviewed on a
regular basis using portfolio performance statistics as well as
any other information noted in the sources file. We will
place an origination source on watch status if its portfolio
performance statistics are consistently below our expectations.
If the origination sources statistics do not improve in a
timely manner, we often stop accepting applications from that
origination source.
End user customer review. Each end user
customers application is reviewed using our rules-based
set of underwriting guidelines that focus on commercial and
consumer credit data. These underwriting guidelines have been
developed and refined by our management team based on their
experience in extending credit to small businesses. The
guidelines are reviewed and revised as necessary by our Senior
Credit Committee, which is comprised of our Chief Executive
Officer, Chief Operating Officer, Chief Credit Officer and
Senior Vice President of Collections. Our underwriting
guidelines require a thorough credit investigation of the end
user customer. The guidelines also include an analysis of the
personal credit of the owner, who often guarantees the
transaction, and verification of the corporate name and
location. The credit analyst may also consider other factors in
the credit decision process, including:
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length of time in business;
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confirmation of actual business operations and ownership;
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management history, including prior business experience;
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size of the business, including the number of employees and
financial strength of the business;
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third-party commercial reports;
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legal structure of business; and
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fraud indicators.
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Transactions over $75,000 receive a higher level of scrutiny,
often including a review of financial statements or tax returns
and review of the business purpose of the equipment to the end
user customer.
Within two hours of receipt of the application, the credit
analyst is usually ready to render a credit decision on
transactions less than $50,000. If there is insufficient
information to render a credit decision, a request for more
information will be made by the credit analyst. Credit approvals
are valid for a
90-day
period from the date of initial approval. In the event that the
funding does not occur within the
90-day
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 audit 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 audit is to verify information on the credit
application, review the terms and conditions of the lease
contract, confirm the customers satisfaction with the
equipment, and obtain additional billing information. We will
delay paying the origination source for the equipment if the
credit analyst uncovers any material issues during the phone
audit.
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 audit and surveillance team is responsible
for ensuring that the credit department adheres to all
underwriting guidelines. The audits produced by this department
are designed to monitor our origination sources, fraud
indicators, regional office operations, appropriateness of
exceptions to credit policy and documentation quality.
Management reports are regularly generated by this department
detailing the results of these auditing activities.
Account
Servicing
We service all of the leases we originate. Account servicing
involves a variety of functions performed by numerous work
groups, including:
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entering the lease into our accounting and billing system;
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preparing the invoice information;
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filing Uniform Commercial Code financing statements on leases in
excess of $25,000;
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paying the equipment dealers for leased equipment;
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billing, collecting and remitting sales, use and property taxes
to the taxing jurisdictions;
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assuring compliance with insurance requirements; and
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providing customer service to the leasing customers.
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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 collect
post-default recovery dollars. Our collection strategy generally
utilizes a life-cycle approach, under which a single collector
handles an account through an accounts entire period of
delinquency. This approach allows the collector to communicate
consistently with the end user customers decision-maker to
ensure that delinquent customers are providing consistent
information. It also creates account ownership by the
collectors, allowing us to
10
evaluate them based on the delinquency level of their assigned
accounts. The collectors are individually accountable for their
results and a significant portion of their compensation is based
on the delinquency performance of their accounts.
Our collectors are grouped into teams that support a single
sales origination channel. By supporting a single channel, the
collector is able to gain knowledge about the origination
sources and the types of transactions and other characteristics
within that channel. Our collection activities begin with phone
contact when a payment becomes ten days past due and continue
throughout the delinquency period. We utilize a predictive
dialer that automates outbound telephone dialing. The dialer is
used to focus on and reduce the number of accounts that are
between ten and 30 days delinquent. A series of collection
notices are sent once an account reaches the 30-, 60-, 75- and
90-day
delinquency stages. Collectors input notes directly into our
servicing system, enabling the collectors to monitor the status
of problem accounts and promptly take any necessary actions. In
addition, late charges are assessed when a leasing customer
fails to remit payment on a lease by its due date. If the lease
continues to be delinquent, we may exercise our remedies under
the terms of the contract, including acceleration of the entire
lease balance, litigation
and/or
repossession.
In addition, the collections department employs specialist
collectors who focus on delinquent late fees, property taxes,
bankrupt and large balance accounts. Bankrupt accounts are
assigned to a bankruptcy paralegal and accounts with more than
$30,000 outstanding are assigned to more experienced collection
personnel.
After an account becomes 120 days or more past due, it is
charged-off and referred to our internal recovery group,
consisting of a lawyer and a team of paralegals. The group
utilizes several resources in an attempt to maximize recoveries
on charged-off accounts, including: 1) initiating
litigation against the end user customer and any personal
guarantor using our internal legal staff; 2) referring the
account to an outside law firm or collection agency;
and/or
3) repossessing and remarketing the equipment through third
parties.
At the end of the initial lease term, a customer may return the
equipment, continue leasing the equipment, or purchase the
equipment for the amount set forth in the purchase option
granted to the customer. The collections department maintains a
team of employees who seek to realize our recorded residual in
the leased equipment at the end of the lease term.
In October 2005, we submitted an application for an Industrial
Bank Charter with the Federal Deposit Insurance Corporation
(FDIC) and the State of Utah Department of Financial
Institutions to form Marlin Business Bank
(Bank). On July 28, 2006 the FDIC announced
that it placed a six-month moratorium on all industrial bank
applications, in response to the increasing number of
applications by companies not already engaged in financial
services. On January 31, 2007, the FDIC extended the
moratorium for an additional year to sunset on January 31,
2008, but the FDIC excepted from the moratorium applicants
engaged only in financial activities. Subject to regulatory
approvals, Marlin Business Bank will operate from our Salt Lake
City office. More information regarding the moratorium may be
found at http://www.fdic.gov.
Regulation
Although most states do not directly regulate the commercial
equipment lease financing business, certain states require
lenders and finance companies to be licensed, impose limitations
on interest rates and other charges, mandate disclosure of
certain contract terms and constrain collection practices and
remedies. Under certain circumstances, we also may be required
to comply with the Equal Credit Opportunity Act and the Fair
Credit Reporting Act. These acts require, among other things,
that we provide notice to credit applicants of their right to
receive a written statement of reasons for declined credit
applications. The Telephone Consumer Protection Act
(TCPA) of 1991 and similar state statutes or rules
that govern telemarketing practices are generally not applicable
to our
business-to-business
calling platform; however, we are subject to the sections of the
TCPA that regulate
business-to-business
facsimiles.
Our insurance operations are subject to various types of
governmental regulation. We are required to maintain insurance
producer licenses in states where we sell our insurance product.
Our wholly owned insurance company subsidiary, AssuranceOne
Ltd., is a Class 1 Bermuda insurance company and, as such,
is subject to the Insurance Act 1978 of Bermuda, as amended, and
related regulations.
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Subject to our application for an Industrial Bank Charter
receiving all regulatory approvals, Marlin Business Bank will be
subject to FDIC and Utah Department of Financial Institutions
banking rules and regulations.
We believe that we currently are in compliance with all material
statutes and regulations that are applicable to our business.
Competition
We compete with a variety of equipment financing sources that
are available to small businesses, including:
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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 Key Corp, De Lage Landen
Financial, GE Commercial Equipment Finance and Wells Fargo Bank,
National Association. Many of these companies are substantially
larger than we are and have significantly greater financial,
technical and marketing resources than we do. While these larger
competitors provide lease financing to the marketplace, many of
them are not our primary competitors given that our average
transaction size is relatively small and that our marketing
focus is on independent equipment dealers and their end user
customers. Nevertheless, there can be no assurances that these
providers of equipment lease financing will not increase their
focus on our market and begin to compete more directly with us.
Some of our competitors have a lower cost of funds and access to
funding sources that are not available to us. A lower cost of
funds could enable a competitor to offer leases with yields that
are less than the yields we use to price our leases, which might
force us to lower our yields or lose lease origination volume.
In addition, certain of our competitors may have higher risk
tolerances or different risk assessments, which could enable
them to establish more origination sources and end user customer
relationships and increase their market share. We compete on the
quality of service we provide to our origination sources and end
user customers. We have and will continue to encounter
significant competition.
Employees
As of December 31, 2006, we employed 314 people. None
of our employees are covered by a collective bargaining
agreement and we have never experienced any work stoppages.
We are a Pennsylvania corporation with our principal executive
offices located at 300 Fellowship Road, Mount Laurel, NJ 08054.
Our telephone number is
(888) 479-9111
and our Web site address is www.marlincorp.com. We make
available free of charge through the Investor Relations section
of our Web site our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. We include
our Web site address in this Annual Report on
Form 10-K
only as an inactive textual reference and do not intend it to be
an active link to our Web site.
Set forth below and elsewhere in this report and in other
documents we file with the Securities and Exchange Commission
are risks and uncertainties that could cause our actual results
to differ materially from the results contemplated by the
forward-looking statements contained in this report and other
periodic statements we make.
If we cannot obtain external financing, we may be unable to
fund our operations. Our business requires a
substantial amount of cash to operate. Our cash requirements
will increase if our lease originations increase. We
historically have obtained a substantial amount of the cash
required for operations through a variety of external financing
sources, such as borrowings under our revolving bank facility,
financing of leases through commercial
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paper (CP) conduit warehouse facilities and term
note securitizations. A failure to renew or increase the funding
commitment under our existing CP conduit warehouse facilities or
add new CP conduit warehouse facilities could affect our ability
to refinance leases originated through our revolving bank
facility and, accordingly, our ability to fund and originate new
leases. An inability to complete term note securitizations would
result in our inability to refinance amounts outstanding under
our CP conduit warehouse facilities and revolving bank facility
and would also negatively impact our ability to originate and
service new leases.
Our ability to complete CP conduit transactions and term note
securitizations, as well as obtain renewals of lenders
commitments, is affected by a number of factors, including:
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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;
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compliance of our leases with the eligibility requirements
established in connection with our CP conduit warehouse
facilities and term note securitizations, including the level of
lease delinquencies and defaults; 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 external financing sources to continue to
originate leases and to satisfy our other working capital needs.
We may be unable to obtain additional financing on acceptable
terms or at all, as a result of prevailing interest rates or
other factors at the time, including the presence of covenants
or other restrictions under existing financing arrangements. If
any or all of our funding sources become unavailable on
acceptable terms or at all, we may not have access to the
financing necessary to conduct our business, which would limit
our ability to fund our operations. We do not have long term
commitments from any of our current funding sources. As a
result, we may be unable to continue to access these or other
funding sources. 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
revolving bank facility, our CP conduit warehouse 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 and a maximum debt to equity ratio. In
addition, a change in our Chief Executive Officer or President
is an event of default under our revolving bank facility and CP
conduit warehouse facilities unless we hire a replacement
acceptable to our lenders within 90 days. Such a change is
also an event of servicer termination under our term note
securitizations. Marlins President resigned from his
position on December 20, 2006. Dan Dyer, the Companys
Chief Executive Officer, has assumed the title of President and
George Pelose, in his expanded role as Chief Operating Officer,
has assumed responsibility for all aspects of the Companys
lease financing business. We do not expect the change to have
any material adverse effect on our financing arrangements,
because the appropriate consents and waivers for this change
have been obtained from all affected financing sources.
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. Further, our revolving bank facility
and CP conduit warehouse 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 revolving bank facility or a CP conduit
warehouse facility could result in termination of further funds
being made available under these facilities. 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
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specialize in leasing equipment to small businesses. Small
businesses may be more vulnerable than large businesses to
economic downturns, typically depend upon the management talents
and efforts of one person or a small group of persons and often
need substantial additional capital to expand or compete. Small
business leases, therefore, may entail a greater risk of
delinquencies and defaults than leases entered into with larger,
more creditworthy leasing customers. In addition, there is
typically only limited publicly available financial and other
information about small businesses and they often do not have
audited financial statements. Accordingly, in making credit
decisions, our underwriting guidelines rely upon the accuracy of
information about these small businesses obtained from the small
business owner
and/or third
party sources, such as credit reporting agencies. If the
information we obtain from small business owners
and/or third
party sources is incorrect, our ability to make appropriate
credit decisions will be impaired. If we inaccurately assess the
creditworthiness of our end user customers, we may experience a
higher number of lease defaults and related decreases in our
earnings.
Defaulted leases and certain delinquent leases also do not
qualify as collateral against which initial advances may be made
under our revolving bank facility or CP conduit warehouse
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.
If we are unable to manage effectively any future growth, we
may suffer material operating losses. We have
grown our lease originations and overall business significantly
since we commenced operations. However, our ability to continue
to increase originations at a comparable rate depends upon our
ability to implement our disciplined growth strategy and upon
our ability to evaluate, finance and service increasing volumes
of leases of suitable yield and credit quality. Accomplishing
such a result on a cost-effective basis is largely a function of
our marketing capabilities, our management of the leasing
process, our credit underwriting guidelines, our ability to
provide competent, attentive and efficient servicing to our end
user customers, our access to financing sources on acceptable
terms and our ability to attract and retain high quality
employees in all areas of our business.
Our future success will be dependent upon our ability to manage
growth. Among the factors we need to manage are the training,
supervision and integration of new employees, as well as the
development of infrastructure, systems and procedures within our
origination, underwriting, servicing, collections and financing
functions in a manner which enables us to maintain higher volume
in originations. Failure to manage effectively these and other
factors related to growth in originations and our overall
operations may cause us to suffer material operating losses.
If losses from leases exceed our allowance for credit losses,
our operating income will be reduced or
eliminated. In connection with our financing of
leases, we record an allowance for credit losses to provide for
estimated losses. Our allowance for credit losses is based on,
among other things, past collection experience, industry data,
lease delinquency data and our assessment of prospective
collection risks. Determining the appropriate level of the
allowance is an inherently uncertain process and therefore our
determination of this allowance may prove to be inadequate to
cover losses in connection with our portfolio of leases. Factors
that could lead to the inadequacy of our allowance may include
our inability to effectively manage collections, 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 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
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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 and, to a
lesser extent, lease brokers. We rely on these relationships to
generate lease applications and originations. Most of these
relationships are not formalized in written agreements and those
that are formalized by written agreements are typically
terminable at will. Our typical relationship does not commit the
origination source to provide a minimum number of lease
transactions to us nor does it require the origination source to
direct all of its lease transactions to us. The decision by a
significant number of our origination sources to refer their
leasing transactions to another company could impede our ability
to generate lease transactions and related revenues.
If interest rates change significantly, we may be subject to
higher interest costs on future term note securitizations and we
may be unable to effectively hedge our variable-rate borrowings,
which may cause us to suffer material
losses. Because we generally fund our leases
through a revolving bank facility, CP conduit warehouse
facilities and term note securitizations, our margins could be
reduced by an increase in interest rates. Each of our leases is
structured so that the sum of all scheduled lease payments will
equal the cost of the equipment to us, less the residual, plus a
return on the amount of our investment. This return is known as
the yield. The yield on our leases is fixed because the
scheduled payments are fixed at the time of lease origination.
When we originate or acquire leases, we base our pricing in part
on the spread we expect to achieve between the yield on each
lease and the effective interest rate we expect to pay when we
finance the lease. To the extent that a lease is financed with
variable-rate funding, increases in interest rates during the
term of a lease could narrow or eliminate the spread, or result
in a negative spread. A negative spread is an interest cost
greater than the yield on the lease. Currently, our revolving
bank facility and our CP conduit warehouse facilities have
variable rates based on LIBOR, prime rate or commercial paper
interest rates. As a result, because our assets have a fixed
interest rate, increases in LIBOR, prime rate or commercial
paper interest rates would negatively impact our earnings. If
interest rates increase faster than we are able to adjust the
pricing under our new leases, our net interest margin would be
reduced. As required under our financing facility agreements, we
enter into interest rate cap agreements to hedge against the
risk of interest rate increases in our CP conduit warehouse
facilities. If our hedging strategies are imperfectly
implemented or if a counterparty defaults on a hedging
agreement, we could suffer losses relating to our hedging
activities. In addition, with respect to our fixed-rate
borrowings, such as our term note securitizations, increases in
interest rates could have the effect of increasing our borrowing
costs on future term note transactions.
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. Our operating income
may be reduced by various economic factors and business
conditions, including the level of economic activity in the
markets in which we operate. Delinquencies and credit losses
generally increase during economic slowdowns or recessions.
Because we extend credit primarily to small businesses, many of
our customers may be particularly susceptible to economic
slowdowns or recessions and may be unable to make scheduled
lease payments during these periods. Therefore, to the extent
that economic activity or business conditions deteriorate, our
delinquencies and credit losses may increase. Unfavorable
economic conditions may also make it more difficult for us to
maintain both our new lease origination volume and the credit
quality of new leases at levels previously attained. Unfavorable
economic conditions could also increase our funding costs or
operating cost structure, limit our access to the securitization
and other capital markets or result in a decision by lenders not
to extend credit to us. Any of these events could reduce our
operating income.
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 our Chief Executive Officer or
President is an event of default under our revolving bank
facility and CP conduit warehouse facilities unless we hire a
replacement acceptable to our lenders within 90 days. Such
a change is also an immediate event of servicer termination
under our term note
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securitizations. The departure of any of our executive officers
or key employees could limit our access to funding and ability
to operate our business effectively. Marlins President
resigned from his position on December 20, 2006. Dan Dyer,
the Companys Chief Executive Officer, has assumed the
title of President and George Pelose, in his expanded role as
Chief Operating Officer, has assumed responsibility for all
aspects of the Companys lease financing business. We do
not expect the change to have any material adverse effect on our
financing arrangements, because the appropriate consents and
waivers for this change have been obtained from all affected
financing sources.
The termination or interruption of, or a decrease in volume
under, our property insurance program would cause us to
experience lower revenues and may result in a significant
reduction in our net income. Our end user
customers are required to obtain all-risk property insurance for
the replacement value of the leased equipment. The end user
customer has the option of either delivering a certificate of
insurance listing us as loss payee under a commercial property
policy issued by a third party insurer or satisfying their
insurance obligation through our insurance program. Under our
program, the end user customer purchases coverage under a master
property insurance policy written by a national third party
insurer (our primary insurer) with whom our captive
insurance subsidiary, AssuranceOne, Ltd., has entered into a
100% reinsurance arrangement. Termination or interruption of our
program could occur for a variety of reasons, including:
1) adverse changes in laws or regulations affecting our
primary insurer or AssuranceOne; 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
or the equipment leasing, telemarketing and collection
processes. Any new legislation or regulation, or changes in the
interpretation of existing laws, that affect the equipment
leasing 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.
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.
We face risks relating to our accounting restatement in
2005. If we fail to maintain an effective system
of internal controls, we may not be able to report our financial
results accurately. As a result, current and potential
16
investors could lose confidence in our financial reporting which
would harm our business and the trading price of our stock.
Effective internal controls are necessary for us to provide
reliable financial statements. If we cannot provide reliable
financial statements, our business and operating results could
be harmed. We have in the past discovered, and may in the future
discover, areas of our internal controls that need improvement
including control deficiencies that may constitute material
weaknesses. A material weakness is a significant deficiency, as
defined in Public Company Accounting Oversight Board Audit
Standard No. 2 or a combination of significant
deficiencies, that results in more than a remote likelihood that
material misstatements of our annual or interim financial
statements would not be prevented or detected by company
personnel in the normal course of performing their assigned
functions.
In connection with the preparation of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, an evaluation
was performed under the supervision and with the participation
of our management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure
controls and procedures. As a result of this evaluation, during
the first fiscal quarter of 2005, management identified and
concluded that a material weakness existed at December 31,
2004 in our controls over the selection and application of
accounting policies. Specifically, management concluded that we
had misapplied generally accepted accounting principles as they
pertain to the timing of recognition of interim rental income
since our inception in 1997 and, accordingly, we restated our
financial statements for the fiscal years ended
December 31, 2003 and December 31, 2002, and for the
four quarters of fiscal years 2004 and 2003, to correct this
error. The identified material weakness was remediated during
the first fiscal quarter of 2005.
Consequently, management, including our CEO and CFO, have
concluded that our internal controls over financial reporting
were not designed or functioning effectively as of
December 31, 2004 to provide reasonable assurance that the
information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934 was recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms and accumulated and
communicated to our management, including our CEO and CFO, as
appropriate, to allow timely decisions regarding disclosure.
Any failure to implement and maintain the improvements in our
internal control over financial reporting, or difficulties
encountered in the implementation of these improvements in our
controls, could cause us to fail to meet our reporting
obligations. Any failure to improve our internal controls to
address the identified material weakness could also cause
investors to lose confidence in our reported financial
information, which could have a negative impact on the trading
price of our stock.
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 of capital; the degree of
competition we face; and general economic conditions and other
factors. The results of any one quarter may not indicate what
our performance may be in the future.
Our common stock price is volatile. The
trading price of our common stock may fluctuate substantially
depending on many factors, some of which are beyond our control
and may not be related to our operating performance. These
fluctuations could cause you to lose part or all of your
investment in our shares of common stock. Those factors that
could cause fluctuations include, but are not limited to, the
following:
|
|
|
|
|
price and volume fluctuations in the overall stock market from
time to time;
|
|
|
|
significant volatility in the market price and trading volume of
financial services companies;
|
|
|
|
actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of market analysts;
|
|
|
|
investor perceptions of the equipment leasing industry in
general and our company in particular;
|
|
|
|
the operating and stock performance of comparable companies;
|
|
|
|
general economic conditions and trends;
|
17
|
|
|
|
|
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.
Certain investors continue to own a large percentage of our
common stock and have filed a shelf registration statement,
which could result in additional shares being sold into the
public market and thereby affect the market price of our common
stock. Two institutional investors who first
purchased our common stock in private placement transactions
prior to our IPO owned approximately 27% of the outstanding
shares of our common stock as of December 31, 2006. A shelf
registration statement on
Form S-3
(No. 333-128329)
registering 4,294,947 shares of common stock owned by these
two investors became effective on December 19, 2005. In
November 2006 one of the investors sold 1,000,000 shares of
common stock pursuant to a public offering done under the shelf
registration statement. Further sales by these investors of all
or a portion of their shares pursuant to the shelf registration
statement or otherwise could ultimately affect the market price
of our common stock.
Anti-takeover provisions and our right to issue preferred
stock could make a third-party acquisition of us
difficult. We are a Pennsylvania corporation.
Anti-takeover provisions of Pennsylvania law could make it more
difficult for a third party to acquire control of us, even if
such change in control would be beneficial to our shareholders.
Our amended and restated articles of incorporation and our
bylaws contain certain other provisions that would make it more
difficult for a third party to acquire control of us, including
a provision that our board of directors may issue preferred
stock without shareholder approval.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
At December 31, 2006, we operated from six leased
facilities including our executive office facility and five
branch offices. In December 2004 we relocated our Mount Laurel,
New Jersey executive offices to a leased facility of
approximately 50,000 square feet under a lease that expires
in May 2013. We also lease 5,621 square feet of office
space in Philadelphia, Pennsylvania, where we perform our lease
recording and acceptance functions. Our Philadelphia lease
expires in May 2008. In addition, we have regional offices in
Norcross, Georgia (a suburb of Atlanta), Englewood, Colorado (a
suburb of Denver), Chicago, Illinois and Salt Lake City, Utah.
Our Georgia office is 6,043 square feet and the lease
expires in June 2008. Our Colorado office is 5,914 square
feet and the lease expires in September 2009. Our Chicago
office, which opened in January 2004, is 4,166 square feet
and the lease expires in April 2008. Our Salt Lake City office,
opened in 2006, is 5,764 square feet and the lease expires
in October 2010. We believe our leased facilities are adequate
for our current needs and sufficient to support our current
operations and growth.
|
|
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.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None
18
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Marlin Business Services Corp. completed its initial public
offering of common stock and became a publicly traded company on
November 12, 2003. The Companys common stock trades
on the NASDAQ National 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 National Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
24.35
|
|
|
$
|
20.85
|
|
|
$
|
21.67
|
|
|
$
|
17.11
|
|
Second Quarter
|
|
$
|
22.56
|
|
|
$
|
19.35
|
|
|
$
|
20.95
|
|
|
$
|
17.25
|
|
Third Quarter
|
|
$
|
22.70
|
|
|
$
|
19.56
|
|
|
$
|
24.00
|
|
|
$
|
19.95
|
|
Fourth Quarter
|
|
$
|
24.40
|
|
|
$
|
20.42
|
|
|
$
|
24.55
|
|
|
$
|
20.45
|
|
Dividend
Policy
We have not paid or declared any cash dividends on our common
stock and we presently have no intention of paying cash
dividends on the common stock in the foreseeable future. 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.
Number of
Record Holders
There were 101 holders of record of our common stock at
February 28, 2007. 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.
Sale of
Unregistered Securities
On September 21, 2006, we issued $380.2 million of
asset-backed debt securities through our special purpose
subsidiary, Marlin Leasing Receivables X LLC. The issuance was
done in reliance on the exemption from registration provided by
Rule 144A of the Securities Act of 1933. Deutsche Bank
Securities served as the initial purchaser and placement agent
for the issuance, and the aggregate initial purchasers
discounts and commissions paid was approximately
$1.2 million.
On August 18, 2005, we issued $340.6 million of
asset-backed debt securities through our special purpose
subsidiary, Marlin Leasing Receivables IX LLC. The issuance was
done in reliance on the exemption from registration provided by
Rule 144A of the Securities Act of 1933. J.P. Morgan
Securities, Inc. served as the initial purchaser and placement
agent for the issuance, and the aggregate initial
purchasers discounts and commissions paid was
approximately $1.1 million.
On July 22, 2004, we issued $304.6 million of
asset-backed debt securities through our special purpose
subsidiary, Marlin Leasing Receivables VIII LLC. The issuance
was done in reliance on the exemption from registration provided
by Rule 144A of the Securities Act of 1933. Deutsche Bank
Securities served as the initial purchaser and placement agent
for the issuance, and the aggregate initial purchasers
discounts and commissions paid was approximately
$1.2 million.
19
|
|
Item 6.
|
Selected
Financial Data
|
The following financial information should be read together with
the financial statements and notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations sections included
elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Dollars in thousands, except share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
97,955
|
|
|
$
|
85,529
|
|
|
$
|
71,168
|
|
|
$
|
56,403
|
|
|
$
|
46,328
|
|
Interest expense
|
|
|
26,562
|
|
|
|
20,835
|
|
|
|
16,675
|
|
|
|
18,069
|
|
|
|
17,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
71,393
|
|
|
|
64,694
|
|
|
|
54,493
|
|
|
|
38,334
|
|
|
|
28,429
|
|
Provision for credit losses
|
|
|
9,934
|
|
|
|
10,886
|
|
|
|
9,953
|
|
|
|
7,965
|
|
|
|
6,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income after
provision for credit losses
|
|
|
61,459
|
|
|
|
53,808
|
|
|
|
44,540
|
|
|
|
30,369
|
|
|
|
21,579
|
|
Insurance and other income
|
|
|
5,501
|
|
|
|
4,682
|
|
|
|
4,383
|
|
|
|
3,423
|
|
|
|
2,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
66,960
|
|
|
|
58,490
|
|
|
|
48,923
|
|
|
|
33,792
|
|
|
|
24,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
22,468
|
|
|
|
18,173
|
|
|
|
14,447
|
|
|
|
10,273
|
|
|
|
8,109
|
|
General and administrative
|
|
|
11,957
|
|
|
|
11,908
|
|
|
|
10,063
|
|
|
|
7,745
|
|
|
|
5,744
|
|
Financing related costs
|
|
|
1,324
|
|
|
|
1,554
|
|
|
|
2,055
|
|
|
|
1,604
|
|
|
|
1,618
|
|
Change in fair value of
warrants(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,723
|
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
35,749
|
|
|
|
31,635
|
|
|
|
26,565
|
|
|
|
25,345
|
|
|
|
16,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
31,211
|
|
|
|
26,855
|
|
|
|
22,358
|
|
|
|
8,447
|
|
|
|
7,925
|
|
Income taxes
|
|
|
12,577
|
|
|
|
10,607
|
|
|
|
8,899
|
|
|
|
5,600
|
|
|
|
3,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,634
|
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
2,847
|
|
|
$
|
4,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.58
|
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
|
$
|
0.28
|
|
|
$
|
1.50
|
|
Shares used in computing basic
earnings per share
|
|
|
11,803,973
|
|
|
|
11,551,589
|
|
|
|
11,330,132
|
|
|
|
3,001,754
|
|
|
|
1,703,820
|
|
Diluted earnings per share
|
|
$
|
1.53
|
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
|
$
|
0.25
|
|
|
$
|
0.61
|
|
Shares used in computing diluted
earnings per share
|
|
|
12,161,479
|
|
|
|
11,986,088
|
|
|
|
11,729,703
|
|
|
|
3,340,968
|
|
|
|
7,138,232
|
|
|
|
|
(1) |
|
The change in fair value of warrants is a non-cash expense. Upon
completion of our initial public offering in November 2003, all
warrants were exercised on a net issuance basis. As a result,
there are no longer any outstanding warrants and no effects on
subsequent periods. (See Earnings per Common Share in
Item 7). |
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Dollars in thousands)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new leases originated
|
|
|
34,214
|
|
|
|
32,754
|
|
|
|
31,818
|
|
|
|
30,258
|
|
|
|
25,368
|
|
Total equipment cost originated
|
|
$
|
388,661
|
|
|
$
|
318,457
|
|
|
$
|
272,271
|
|
|
$
|
242,278
|
|
|
$
|
203,458
|
|
Average net investment in direct
financing
leases(1)
|
|
|
611,348
|
|
|
|
523,948
|
|
|
|
446,965
|
|
|
|
363,853
|
|
|
|
286,589
|
|
Weighted average interest rate
(implicit) on new leases
originated(2)
|
|
|
12.72
|
%
|
|
|
12.75
|
%
|
|
|
13.82
|
%
|
|
|
14.01
|
%
|
|
|
14.17
|
%
|
Interest income as a percent of
average net investment in direct financing
leases(1)
|
|
|
12.70
|
%
|
|
|
12.90
|
%
|
|
|
12.91
|
%
|
|
|
13.09
|
%
|
|
|
13.65
|
%
|
Interest expense as percent of
average interest bearing liabilities, excluding subordinated
debt(3)
|
|
|
4.78
|
%
|
|
|
4.24
|
%
|
|
|
3.86
|
%
|
|
|
4.54
|
%
|
|
|
5.76
|
%
|
Portfolio Asset Quality
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments receivable
|
|
$
|
799,716
|
|
|
$
|
660,946
|
|
|
$
|
571,150
|
|
|
$
|
489,430
|
|
|
$
|
392,392
|
|
Delinquencies past due, greater
than 60 days
|
|
|
0.71
|
%
|
|
|
0.61
|
%
|
|
|
0.78
|
%
|
|
|
0.74
|
%
|
|
|
0.86
|
%
|
Allowance for credit losses
|
|
$
|
8,201
|
|
|
$
|
7,813
|
|
|
$
|
6,062
|
|
|
$
|
5,016
|
|
|
$
|
3,965
|
|
Allowance for credit losses to net
investment in direct financing
leases(2)
|
|
|
1.21
|
%
|
|
|
1.39
|
%
|
|
|
1.26
|
%
|
|
|
1.23
|
%
|
|
|
1.21
|
%
|
Charge-offs, net
|
|
$
|
9,546
|
|
|
$
|
9,135
|
|
|
$
|
8,907
|
|
|
$
|
6,914
|
|
|
$
|
5,944
|
|
Ratio of net charge-offs to
average net investment in direct financing Leases
|
|
|
1.56
|
%
|
|
|
1.74
|
%
|
|
|
1.99
|
%
|
|
|
1.90
|
%
|
|
|
2.07
|
%
|
Operating Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio(4)
|
|
|
44.77
|
%
|
|
|
43.36
|
%
|
|
|
41.63
|
%
|
|
|
43.15
|
%
|
|
|
44.47
|
%
|
Return on average total assets
|
|
|
2.54
|
%
|
|
|
2.57
|
%
|
|
|
2.54
|
%
|
|
|
0.66
|
%
|
|
|
1.31
|
%
|
Return on average
stockholders
equity(5)
|
|
|
14.95
|
%
|
|
|
15.96
|
%
|
|
|
16.47
|
%
|
|
|
9.18
|
%
|
|
|
19.63
|
%
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,663
|
|
|
$
|
34,472
|
|
|
$
|
16,092
|
|
|
$
|
29,435
|
|
|
$
|
6,354
|
|
Restricted cash
|
|
|
57,705
|
|
|
|
47,786
|
|
|
|
37,331
|
|
|
|
29,604
|
|
|
|
24,372
|
|
Net investment in direct financing
leases
|
|
|
693,911
|
|
|
|
572,581
|
|
|
|
489,678
|
|
|
|
419,160
|
|
|
|
335,442
|
|
Total assets
|
|
|
795,452
|
|
|
|
670,989
|
|
|
|
554,693
|
|
|
|
487,709
|
|
|
|
374,671
|
|
Revolving and term secured
borrowings
|
|
|
616,322
|
|
|
|
516,849
|
|
|
|
434,670
|
|
|
|
393,997
|
|
|
|
327,842
|
|
Subordinated debt, net of discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,520
|
|
Total liabilities
|
|
|
661,163
|
|
|
|
558,380
|
|
|
|
464,343
|
|
|
|
413,838
|
|
|
|
350,526
|
|
Redeemable convertible preferred
stock, including accrued dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,171
|
|
Total stockholders equity
|
|
|
134,289
|
|
|
|
112,609
|
|
|
|
90,350
|
|
|
|
73,871
|
|
|
|
2,974
|
|
|
|
|
(1) |
|
Includes securitized assets. |
|
(2) |
|
Excludes initial direct costs and fees deferred. |
|
(3) |
|
Excludes subordinated debt liability and accrued subordinated
debt interest for periods prior to 2004. |
|
(4) |
|
Salaries, benefits, general and administrative expenses divided
by net interest and fee income, insurance and other income. |
|
(5) |
|
Stockholders equity includes preferred stock and accrued
dividends in calculation for periods prior to our IPO. |
21
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
FORWARD-LOOKING
STATEMENTS
Certain statements in this document may include the words or
phrases can be, expects,
plans, may, may affect,
may depend, believe,
estimate, intend, could,
should, would, if and
similar words and phrases that constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are subject to
various known and unknown risks and uncertainties and the
Company cautions that any forward-looking information provided
by or on its behalf is not a guarantee of future performance.
Statements regarding the following subjects are forward-looking
by their nature: (a) our business strategy; (b) our
projected operating results; (c) our ability to obtain
external financing; (d) our understanding of our
competition; and (e) 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 capital;
|
|
|
|
general volatility of capital markets, in particular, the market
for securitized assets;
|
|
|
|
changes in our industry, interest rates or the general economy;
|
|
|
|
changes in our business strategy;
|
|
|
|
the degree and nature of our competition;
|
|
|
|
availability and retention of qualified personnel; and
|
|
|
|
the factors set forth in the section captioned Risk
Factors in Item 1A of this
Form 10-K.
|
Forward-looking statements apply only as of the date made and
the Company is not required to update forward-looking statements
for subsequent or unanticipated events or circumstances.
Overview
We are a nationwide provider of equipment financing solutions
primarily to small businesses. We finance over 70 categories of
commercial equipment important to our end user customers,
including copiers, certain commercial and industrial equipment,
computers, telecommunications equipment, and security systems.
We access our end user customers through origination sources
comprised of our existing network of independent equipment
dealers and, to a lesser extent, through relationships with
lease brokers and through direct solicitation of our end user
customers. Our leases are fixed-rate transactions with terms
generally ranging from 36 to 60 months. At
December 31, 2006, our lease portfolio consisted of
approximately 109,000 accounts, from approximately 87,000
customers, with an average original term of 47 months, and
average transaction size of approximately $10,000.
Since our founding in 1997, we have grown to $795.5 million
in total assets at December 31, 2006. Our assets are
substantially comprised of our net investment in leases which
totaled $693.9 million at December 31, 2006. Our lease
portfolio grew 21.2% in 2006. Personnel costs represent our most
significant overhead expense and we have added to our staffing
levels to both support and grow our lease portfolio. Since
inception, we have also added four regional sales offices to
help us penetrate certain targeted markets, with our most recent
office in Salt Lake City, Utah. The Salt Lake City office became
operational during 2006. Growing the lease portfolio while
maintaining asset quality remains the primary focus of
management. We expect our on-going investment in our sales teams
and regional offices to drive continued growth in our lease
portfolio.
In addition to our goal of lease portfolio growth, in November
2006 we announced the introduction of two new financial products
targeting the small business market: factoring and business
capital loans. Factoring provides small business customers
working capital funding through the discounted sale of their
accounts receivable to us. Business capital loans provide small
business customers access to credit through term loans.
Our revenue consists of interest and fees from our leases 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
22
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, 2006, our net credit losses were 1.56% of our
average net investment in leases. We establish reserves for
credit losses which require us to estimate expected losses in
our portfolio.
Our leases are classified as direct financing leases under
generally accepted accounting principles in the United States of
America, 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
investment in leases is reflected in our financial statements as
net investment in direct financing leases. Net
investment in direct financing leases consists of the sum of
total minimum lease payments receivable and the estimated
residual value of leased equipment, less unearned lease income.
Unearned lease income consists of the excess of the total future
minimum lease payments receivable plus the estimated residual
value expected to be realized at the end of the lease term plus
deferred net initial direct costs and fees less the cost of the
related equipment. Approximately 73% of our lease portfolio
amortizes over the term to a $1 residual value. For the
remainder of the portfolio, we must estimate end of term
residual values for the leased assets. Failure to estimate
residual values correctly could result in losses being realized
on the disposition of the equipment at the end of the lease term.
Since our founding, we have funded our business through a
combination of variable-rate borrowings and fixed-rate asset
securitization transactions, as well as through the issuance
from time to time of subordinated debt and equity. Our
variable-rate financing sources consist of a revolving bank
facility and two CP conduit warehouse facilities. We issue
fixed-rate term debt through the asset-backed securitization
market. Typically, leases are funded through variable-rate
borrowings until refinanced through term note securitization at
fixed rates. All of our term note securitizations have been
accounted for as on-balance sheet transactions and, therefore,
we have not recognized gains or losses from these transactions.
As of December 31 2006, all of our $616.3 million
borrowings were fixed cost term note securitizations.
Since we initially finance our fixed-rate leases with
variable-rate financing, our earnings are exposed to interest
rate risk should interest rates rise before we complete our
fixed-rate term note securitizations. We generally benefit in
times of falling and low interest rates. We are also dependent
upon obtaining future financing to refinance our warehouse lines
of credit in order to grow our lease portfolio. We currently
plan to complete a fixed-rate term note securitization at least
once a year. Failure to obtain such financing, or other
alternate financing, would significantly restrict our growth and
future financial performance. We use derivative financial
instruments to manage exposure to the effects of changes in
market interest rates and to fulfill certain covenants in our
borrowing arrangements. All derivatives are recorded on the
balance sheet 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 SFAS 133, as amended, Accounting for Derivative
Instruments and Hedging Activities.
In October 2005, we submitted an application for an Industrial
Bank Charter with the Federal Deposit Insurance Corporation
(FDIC) and the State of Utah Department of Financial
Institutions to form Marlin Business Bank
(Bank). On July 28, 2006 the FDIC announced
that it placed a six-month moratorium on all industrial bank
applications, in response to the increasing number of
applications by companies not already engaged in financial
services. On January 31, 2007, the FDIC extended the
moratorium for an additional year to sunset on January 31,
2008, but the FDIC excepted from the moratorium applicants
engaged only in financial activities. Subject to regulatory
approvals, Marlin Business Bank will operate from our Salt Lake
City office. More information regarding the moratorium may be
found at http://www.fdic.gov.
Reorganization
and Initial Public Offering
Marlin Leasing Corporation was incorporated in the state of
Delaware on June 16, 1997. On August 5, 2003, we
incorporated Marlin Business Services Corp. in Pennsylvania. On
November 11, 2003, we reorganized our operations into a
holding company structure by merging Marlin Leasing Corporation
with a wholly owned subsidiary of Marlin Business Services Corp.
As a result, all former shareholders of Marlin Leasing
Corporation became shareholders of Marlin Business Services
Corp. After the reorganization, Marlin Leasing Corporation
remains in existence as our primary operating subsidiary.
23
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our IPO. Of these shares, a total of
3,581,255 shares were sold by the company and
1,478,745 shares were sold by selling shareholders. The
initial public offering price was $14.00 per share
resulting in net proceeds to us, after payment of underwriting
discounts and commissions but before other offering costs, of
approximately $46.6 million. We did not receive any
proceeds from the shares sold by the selling shareholders.
In anticipation of the public offering, on October 12,
2003, Marlin Leasing Corporations Board of Directors
approved a stock split of its Class A Common Stock at a
ratio of 1.4 shares for every one share of Class A
Common Stock in order to increase the number of shares of
Class A Common Stock authorized and issued. All per share
amounts and outstanding shares, including all common stock
equivalents, such as stock options, warrants and convertible
preferred stock, have been retroactively restated in the
accompanying consolidated financial statements and notes to
consolidated financial statements for all periods presented to
reflect the stock split.
The following steps were taken to reorganize our operations into
a holding company structure prior to the completion of our
initial public offering of common stock in November 2003:
|
|
|
|
|
all classes of Marlin Leasing Corporations redeemable
convertible preferred stock converted into Class A common
stock of Marlin Leasing Corporation;
|
|
|
|
all warrants to purchase Class A common stock of Marlin
Leasing Corporation were exercised on a net issuance, or
cashless, basis for Class A common stock, and a selling
shareholder exercised options to purchase 60,655 shares of
Class A common stock. The exercise of warrants resulted in
the issuance of 700,046 common shares on a net issuance basis,
based on the initial public offering price of $14.00 per
share;
|
|
|
|
all warrants to purchase Class B common stock of Marlin
Leasing Corporation were exercised on a net issuance basis for
Class B common stock, and all Class B common stock was
converted by its terms into Class A common stock;
|
|
|
|
a direct, wholly owned subsidiary of Marlin Business Services
Corp. merged with and into Marlin Leasing Corporation, and each
share of Marlin Leasing Corporations Class A common
stock was exchanged for one share of Marlin Business Services
Corp. common stock under the terms of an agreement and plan of
merger dated August 27, 2003; and
|
|
|
|
the Marlin Leasing Corporation 1997 Equity Compensation Plan was
assumed by, and merged into, the Marlin Business Services Corp.
2003 Equity Compensation Plan. All outstanding options to
purchase Marlin Leasing Corporations Class A common
stock under the 1997 Plan were converted into options to
purchase shares of common stock of Marlin Business Services Corp
under the 2003 Plan.
|
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
generally accepted accounting principles in the United States of
America (GAAP). Preparation of these financial
statements requires us to make estimates and judgments that
affect reported amounts of assets and liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities at the date of our financial statements. On an
ongoing basis, we evaluate our estimates, including credit
losses, residuals, initial direct costs and fees, other fees and
realization of deferred tax assets. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Critical accounting policies are defined as
those that are reflective of significant judgments and
uncertainties. Our consolidated financial statements are based
on the selection and application of critical accounting
policies, the most significant of which are described below.
Income recognition. Interest income is
recognized under the effective interest method. The effective
interest method of income recognition applies a constant rate of
interest equal to the internal rate of return on the lease. When
a lease is 90 days or more delinquent, the lease is
classified as being on non-accrual and we do not recognize
interest income on that lease until the lease is less than
90 days delinquent.
24
Fee income consists of fees for delinquent lease payments and
cash collected on early termination of leases. Fee income also
includes net residual income which includes income from lease
renewals and gains and losses on the realization of residual
values of equipment disposed of at the end of term.
Fee income from delinquent lease payments is recognized on an
accrual basis based on anticipated collection rates. Other fees
are recognized when received. Net residual income includes
charges for the reduction in estimated residual values on
equipment for leases in renewal and is recognized during the
renewal period. Residual balances at lease termination which
remain uncollected more than 120 days are charged against
income.
Insurance income is recognized on an accrual basis as earned
over the term of the lease. Payments that are 120 days or
more past due are charged against income. Ceding commissions,
losses and loss adjustment expenses are recorded in the period
incurred and netted against insurance income.
Initial direct costs and fees. We defer
initial direct costs incurred and fees received to originate our
leases in accordance with Statement of Financial Accounting
Standards (SFAS) No. 91, Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. The
initial direct costs and fees we defer are part of the net
investment in direct financing leases 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. The costs include
evaluating the prospective lessees financial condition,
evaluating and recording guarantees and other security
arrangements, negotiating lease terms, preparing and processing
lease documents and closing the transaction. The fees we defer
are documentation fees collected at lease 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 portfolio.
Lease residual values. A direct financing
lease is recorded at the aggregate future minimum lease payments
plus the estimated residual values less unearned income.
Residual values reflect the estimated amounts to be received at
lease termination from lease extensions, sales or other
dispositions of leased equipment. These estimates are based on
industry data and on our experience. Management performs
periodic reviews of the estimated residual values and any
impairment, if other than temporary, is recognized in the
current period.
Allowance for credit losses. We maintain an
allowance for credit losses at an amount sufficient to absorb
losses inherent in our existing lease portfolio as of the
reporting dates based on our projection of probable net credit
losses. To project probable net credit losses, we perform a
migration analysis of delinquent and current accounts. A
migration analysis is a technique used to estimate the
likelihood that an account will progress through the various
delinquency stages and ultimately charge off. In addition to the
migration analysis, we also consider other factors including
recent trends in delinquencies and charge-offs; accounts filing
for bankruptcy; recovered amounts; forecasting uncertainties;
the composition of our lease portfolio; economic conditions; and
seasonality. We then establish an allowance for credit losses
for the projected probable net credit losses based on this
analysis. A provision is charged against earnings to maintain
the allowance for credit losses at the appropriate level. Our
policy is to charge-off against the allowance the estimated
unrecoverable portion of accounts once they reach 121 days
delinquent.
Our projections of probable net credit losses are inherently
uncertain, and as a result we cannot predict with certainty the
amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy
laws, and other factors could impact our actual and projected
net credit losses and the related allowance for credit losses.
To the degree we add new leases to our portfolio, or to the
degree credit quality is worse than expected, we will record
expense to increase the allowance for credit losses for the
estimated net losses expected in our lease portfolio.
Securitizations. Since inception, we have
completed eight term note securitizations of which five have
been repaid. In connection with each transaction, we established
a bankruptcy remote special-purpose subsidiary and issued term
debt to institutional investors. Under SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of Financial
Accounting Standards Board (FASB)
Statement 125, our securitizations do not qualify for sales
accounting treatment due to certain call provisions that we
maintain as well as the fact that the special purpose entities
used in connection with the securitizations also hold the
residual assets. Accordingly, assets and related debt of the
special purpose entities are
25
included in the accompanying consolidated balance sheets. Our
leases and restricted cash are assigned as collateral for these
borrowings and there is no further recourse to our general
credit. Collateral in excess of these borrowings represents our
maximum loss exposure.
Derivatives. SFAS 133, as amended,
Accounting for Derivative Instruments and Hedging
Activities, requires recognition of all derivatives at fair
value as either assets or liabilities in the consolidated
balance sheet. The accounting for subsequent changes in the fair
value of these derivatives depends on whether it has been
designated and qualifies for hedge accounting treatment pursuant
to the accounting standard. For derivatives not designated or
qualifying for hedge accounting, the related gain or loss is
recognized in earnings for each period and included in other
income or financing related costs in the consolidated statement
of operations. For derivatives designated for hedge accounting,
initial assessments are made as to whether the hedging
relationship is expected to be highly effective and on-going
periodic assessments may be required to determine the on-going
effectiveness of the hedge. The gain or loss on derivatives
qualifying for hedge accounting is recorded in other
comprehensive income on the balance sheet net of tax effects
(unrealized gain or loss on cash flow hedge derivatives) or in
current period earnings depending on the effectiveness of the
hedging relationship.
Stock-Based Compensation. We issue both
restricted shares and stock options to certain employees and
directors as part of our overall compensation strategy. In
December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment. SFAS 123(R) amended
SFAS 123, Accounting for Stock-Based Compensation
and superseded Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees. In March 2005, the SEC issued Staff
Accounting Bulletin (SAB) No. 107 to provide
guidance on the valuation of share-based payments for public
companies. SFAS 123(R) requires companies to recognize all
share-based payments, which include stock options and restricted
stock, in compensation expense over the service period of the
share-based payment award. SFAS 123(R) 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 adopted SFAS 123(R) effective January 1,
2006 using the modified prospective method in which compensation
cost is recognized over the service period for all awards
granted subsequent to the Companys adoption of
SFAS 123(R) as well as for the unvested portions of awards
outstanding as of the Companys adoption of
SFAS 123(R). In accordance with the modified prospective
method, results for prior periods have not been restated.
Prior to the adoption of SFAS 123(R), the Company applied
the recognition and measurement principles of APB 25 as
allowed by SFAS 123 and SFAS 148, Accounting for
Stock-based Compensation Transition and
Disclosure. Accordingly, no stock-based compensation was
recognized in net income for stock options granted with an
exercise price equal to the market value of the underlying
common stock on the date of the grant and the related number of
options granted were fixed at that point in time. However,
pursuant to the disclosure requirements of
SFAS No. 123, the Company discloses net income as if
compensation expense for stock grants had been determined based
upon the grant-date fair value.
Warrants. We issued warrants to purchase our
common stock to the holders of our subordinated debt that was
repaid in November 2003. In accordance with EITF Issue
No. 96-13,
codified in EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled In, a Companys Own Stock, we
initially classified the warrants fair value as a
liability since the warrant holders had the ability to put to
the Company the shares of common stock exercisable under the
warrants under certain conditions to us for cash settlement.
Subsequent changes in the fair value of the warrants were
recorded in the accompanying statement of operations. The charge
to operations in 2003 was $5.7 million. Under the terms of
the warrant agreement, the warrants were exercised into common
stock at the time of our IPO and the total warrant liability
balance of $7.1 million was reclassified back to equity
and, therefore, there are no effects on subsequent operations.
(See Earnings per Common Share in this Item 7).
Income taxes. Significant management judgment
is required in determining the provision for income taxes,
deferred tax assets and liabilities and any necessary valuation
allowance recorded against net deferred tax assets. The process
involves summarizing temporary differences resulting from the
different treatment of items, for
26
example, leases for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within the consolidated balance sheet. Our
management must then assess the likelihood that deferred tax
assets will be recovered from future taxable income or tax
carry-back availability and, to the extent our management
believes recovery is not likely, a valuation allowance must be
established. To the extent that we establish a valuation
allowance in a period, an expense must be recorded within the
tax provision in the statement of operations.
The Company has utilized net operating loss carryforwards
(NOL) for state and federal income tax purposes. The
Tax Reform Act of 1986 contains provisions that limited the
NOLs available to be used in any given year upon the
occurrence of certain events, including significant changes in
ownership interest. A change in the ownership of a company
greater than 50% within a three-year period results in an annual
limitation on a companys ability to utilize its NOLs
from tax periods prior to the ownership change.
Management believes that the corporate reorganization and
initial public offering in November 2003 did not have a material
effect on its ability to utilize these NOLs. No valuation
allowance has been established against net deferred tax assets
related to our NOLs.
Results
of Operations
Comparison
of the Years Ended December 31, 2006 and 2005
Net income. Net income was $18.6 million
for the year ended December 31, 2006. This represented a
$2.4 million, or 14.8%, increase from $16.2 million
net income reported for the year ended December 31, 2005.
Our increased earnings are primarily the result of growth in our
core leasing business.
Diluted earnings per share was $1.53 for the year ended
December 31, 2006, a 12.5% increase over $1.36 per
diluted share reported for the year ended December 31,
2005. Returns on average assets were 2.54% for the year ended
December 31, 2006 and 2.57% for the year ended
December 31, 2005. Returns on average equity were 14.95%
for the year ended December 31, 2006 and 15.96% for the
year ended December 31, 2005.
Net income for the fourth quarter of 2006 reflects an after-tax
charge of approximately $880,000, or $0.072 diluted earnings per
share, due to the separation agreement related to the departure
of Marlins President, whose resignation as President and
as a director of Marlin was effective December 20, 2006 as
reported in our
Form 8-K
filed December 21, 2006.
Net income for the third quarter of 2005 reflects the negative
impact of an after-tax increase in the provision for credit
losses due to Hurricane Katrina of $756,000, or $0.063 diluted
earnings per share. Due to better than expected collections on
leases in areas affected by Hurricane Katrina, net income for
the second quarter of 2006 was positively impacted by an
after-tax reduction of the provision for credit losses of
$545,000, or $0.045 diluted earnings per share. Therefore, the
initial recording of the additional provision for Hurricane
Katrina in 2005 and the subsequent reduction of a portion of the
provision for Hurricane Katrina in 2006 resulted in a total
favorable after-tax impact of $1.3 million, or $0.108
diluted earnings per share for the year ended 2006 compared to
2005.
27
For the year ended December 31, 2006, we generated 34,214
new leases at a cost of $388.7 million compared to 32,754
new leases at a cost of $318.5 million for the year ended
December 31, 2005. The weighted average implicit interest
rate on new leases originated was 12.72% for the year ended
December 31, 2006 compared to 12.75% for year ended
December 31, 2005. Overall, the net investment in direct
financing leases grew 21.2%, to $693.9 million at
December 31, 2006 from $572.6 million at
December 31, 2005. Our debt to equity ratio remained
unchanged at 4.59:1 at December 31, 2006 and
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
$
|
77,644
|
|
|
$
|
67,572
|
|
Fee income
|
|
|
20,311
|
|
|
|
17,957
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
97,955
|
|
|
|
85,529
|
|
Interest expense
|
|
|
26,562
|
|
|
|
20,835
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
$
|
71,393
|
|
|
$
|
64,694
|
|
|
|
|
|
|
|
|
|
|
Average net investment in direct
financing
leases(1)
|
|
$
|
611,348
|
|
|
$
|
523,948
|
|
Percent of average net investment
in direct financing leases:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12.70
|
%
|
|
|
12.90
|
%
|
Fee income
|
|
|
3.32
|
|
|
|
3.43
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
16.02
|
|
|
|
16.33
|
|
Interest expense
|
|
|
4.34
|
|
|
|
3.98
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee margin
|
|
|
11.68
|
%
|
|
|
12.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes allowance for credit losses and initial direct costs
and fees deferred. |
Net interest and fee margin. Net interest and
fee income increased $6.7 million, or 10.4%, to
$71.4 million for the year ended December 31, 2006
from $64.7 million for the year ended December 31,
2005, primarily due to continued growth in our lease portfolio
partially offset by compression in margin. The annualized net
interest and fee margin decreased 67 basis points to 11.68%
for the year ended December 31, 2006 from 12.35% for the
same period in 2005.
Interest income, net of amortized initial direct costs and fees,
increased $10.0 million, or 14.8%, to $77.6 million
for the year ended December 31, 2006 from
$67.6 million for the year ended December 31, 2005.
The increase is primarily due to a 16.7% growth in average net
investment in direct financing leases (DFL) which
increased $87.4 million to $611.3 million for the year
ended December 31, 2006 from $523.9 million for the
year ended December 31, 2005.
Our interest income as a percentage of average net investment in
DFL declined by 20 basis points for the year ended
December 31, 2006 to 12.70% from 12.90% for the year ended
December 31, 2005. This reduction is due in part to
competition in small-ticket leasing and a generally lower
interest rate environment combined with payoffs of older, higher
yielding leases.
Fee income increased $2.3 million, or 12.8%, to
$20.3 million for the year ended December 31, 2006
from $18.0 million for the year ended December 31,
2005. Fee income, as a percentage of average net investment in
DFL, decreased 11 basis points to 3.32% for the year ended
December 31, 2006 from 3.43% for the year ended
December 31, 2005. The increase in fee income resulted
primarily from a $1.3 million increase in fees for
delinquent lease payments (late fees) and an $821,000 increase
in net residual income. Late fees increased $1.3 million to
$11.4 million for the year ended December 31, 2006
compared to $10.1 million for the same period of 2005. Late
fees remained the largest component of fee income at 1.87% as a
percentage of average net investment in DFL for the year ended
December 31, 2006 compared to 1.93% for the year ended
December 31, 2005. The increase in late fee income is
attributed to the continued growth of our lease portfolio and
continued improvements in our late fee collection efforts,
partially offset by the impact of lower delinquencies resulting
in lower late fees invoiced as a percentage of DFL. Net residual
income increased $821,000 to $6.8 million for the year
ended December 31, 2006 compared to $6.0 million for
the same period of 2005. As a percentage of average net
28
investment in DFL, net residual income was 1.12% for the year
ended December 31, 2006 compared to 1.14% for the year
ended December 31, 2005. Net residual income increased
along with the growth and seasoning of our portfolio with an
increased number of lease contracts reaching end of term and
entering a renewal period.
Interest expense increased $5.8 million to
$26.6 million for the year ended December 31, 2006
from $20.8 million for the year ended December 31,
2005. Interest expense, as a percentage of the average net
investment in DFL, increased 36 basis points to 4.34% for
the year ended December 31, 2006 from 3.98% for the year
ended December 31, 2005. Borrowing costs have risen due to
the continued growth of the Company and higher interest rates on
the Companys borrowings due to increased market interest
rates. The Federal Reserve increased its targeted fed funds rate
four times for a total of 1.00% during 2006 and a total of 16
times or 4.00% since June 2004. These increases have increased
interest rates on the Companys warehouse facilities and
created a higher interest rate environment in which to issue
term note securitizations. During the year ended
December 31, 2006, average term securitization borrowings
outstanding were $488.9 million, representing 88.1% of
total borrowings, compared to $432.9 million representing
88.1% of total borrowings for the same period in 2005.
Interest expense as a percentage of weighted average borrowings
was 4.78% for the year ended December 31, 2006 compared to
4.24% for the year ended December 31, 2005. The average
balance for our warehouse facilities was $66.3 million for
the year ended December 31, 2006 compared to
$58.2 million for the year ended December 31, 2005.
The average borrowing costs for our warehouse facilities was
5.98% for the year ended December 31, 2006 compared to
4.13% for year ended December 31, 2005, reflecting the
higher interest rate environment. (See Liquidity and Capital
Resources in this Item 7).
Interest costs on our August 2005 and September 2006 issued term
securitization borrowing increased over those issued in 2003 and
2004 due to the rising interest rate environment. For the year
ended December 31, 2006, average term securitization
borrowings outstanding were $488.9 million at a weighted
average coupon of 4.29% compared with $432.9 million at a
weighted average coupon of 3.79% for the year ended
December 31, 2005. 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.
Our term securitizations include multiple classes of fixed-rate
notes with the shorter term, lower coupon classes amortizing
(maturing) faster then the longer term higher coupon classes.
This causes the blended interest expenses related to these
borrowings to change and generally increase over the term of the
borrowing.
On September 15, 2006 we elected to exercise our call
option and pay off the remaining $31.5 million of our 2003
term securitization, which carried a coupon rate of
approximately 3.19%. Our 2002 securitization was repaid in full
on August 15, 2005 when the remaining note balances
outstanding were $26.5 million at a coupon rate of
approximately 4.41%.
Insurance and other income. Insurance and
other income increased $819,000 to $5.5 million for the
year ended December 31, 2006 from $4.7 million for the
year ended December 31, 2005. The increase is primarily
related to net insurance income of $718,000 higher for 2006 than
earned in 2005. During the fourth quarter of 2005, we expensed
approximately $190,000 in insurance claims from the Gulf States
region of the USA attributed to the effects of Hurricane Katrina.
Salaries and benefits expense. Salaries and
benefits expense increased $4.3 million, or 23.6%, to
$22.5 million for the year ended December 31, 2006
from $18.2 million for the year ended December 31,
2005. Salaries and benefits expense for the fourth quarter of
2006 includes expense of approximately $1.45 million due to
the separation agreement related to the resignation of
Marlins President effective December 20, 2006. The
remainder of the increase in compensation expense is primarily
attributable to personnel growth and merit and bonus payment
increases. Total
29
personnel increased to 314 at December 31, 2006 from 296 at
December 31, 2005. In 2006, sales and credit compensation
increased $1.4 million, primarily related to additional
hiring of sales account executives and credit analysts. In
addition, compensation related to portfolio servicing increased
approximately $510,000, primarily due to increased portfolio
size. Compensation in management and support areas also
increased, primarily due to incremental stock-based compensation
expense of $896,000 recognized due to the implementation of
SFAS 123(R) and $501,000 in compensation related to Marlin
Business Bank (in organization). Salaries and benefits expense,
as a percentage of the average net investment in DFL, were 3.68%
for the year ended December 31, 2006 compared with 3.48%
for the same period in 2005.
General and administrative expense. General
and administrative expenses remained stable at
$12.0 million, or 1.96% as a percentage of average net
investment in DFL, for the year ended December 31, 2006
from $11.9 million for the year ended December 31,
2005. We incurred approximately $185,000 in professional fees
associated with a follow on offering by a selling shareholder
(pursuant to such shareholders registration rights)
completed in the fourth quarter of 2006. General and
administrative expense, as a percentage of the average net
investment in DFL, decreased 31 basis points to 1.96% for
the year ended December 31, 2006 from 2.27% for the year
ended December 31, 2005.
Financing related costs. Financing related
costs include commitment fees paid to our financing sources,
hedge costs pertaining to our interest-rate caps and
interest-rate swaps used to limit our exposure to an increase in
interest rates, and costs pertaining to our interest rate swaps
that do not qualify for hedge accounting. Financing related
costs decreased $230,000 to $1.3 million for the year ended
December 31, 2006 from $1.6 million for the year ended
December 31, 2005. The decrease was principally due to a
decrease in bank commitment fees.
Mark-to-market
expense recognized on our interest rate caps and interest rate
swaps was $101,000 for the year ended December 31, 2006
compared with net gain of $3,000 for the year ended
December 31, 2005. Commitment fees were $1.2 million
for the year ended December 31, 2006 compared with
$1.6 million for the year ended December 31, 2005.
Provision for credit losses. The provision for
credit losses decreased $952,000, or 8.7%, to $9.9 million
for the year ended December 31, 2006 from
$10.9 million for the year ended December 31, 2005.
The decrease in our provision for credit losses resulted
principally from improved credit quality of the leases affected
by Hurricane Katrina. Net charge-offs were $9.5 million for
the year ended December 31, 2006 and $9.1 million for
the year ended December 31, 2005. Net charge-offs as a
percentage of average net investment in leases decreased to
1.56% in 2006 from 1.74% in 2005. During the third quarter of
2005, we recorded additional reserves of $1.25 million for
expected losses from the areas hardest hit by Hurricane Katrina.
This additional reserve was initially estimated based on our
total estimated exposure of $4.8 million in net investment
in direct financing leases in the most affected areas at the
time. In 2005, we restructured approximately $1.0 million
in net investment in leases in the Gulf States region by
deferring payments on such leases generally until January 2006.
We did not experience significant aggregate charge-offs related
to Hurricane Katrina. Based on our ongoing monitoring of this
portfolio segment, during the second quarter of 2006 we
determined that the approximately $901,000 remaining additional
reserve for Katrina losses was no longer required, resulting in
a reduction of the provision.
In general, credit quality continued to be more favorable for
the year ended December 31, 2006 than our general
expectation for an entire business cycle. For the year ended
December 31, 2006, net charge-offs of 1.56% as a percentage
of average net investment in DFL were significantly better than
our general long-term expectation of approximately 2.00%.
Provision for income taxes. The provision for
income taxes increased to $12.6 million for the year ended
December 31, 2006 from $10.6 million for the year
ended December 31, 2005. The increase in tax expense is
primarily attributed to the increase in pretax income and an
adjustment for state taxes related to NOL utilization. Our
effective tax rate, which is a combination of federal and state
income tax rates, was 40.3% for the year ended December 31,
2006 and 39.5% for the year ended December 31, 2005. We
anticipate our effective tax rate in future years to approximate
our 2005 effective tax rate of 39.5%.
30
Comparison
of the Years Ended December 31, 2005 and 2004
Net income. Net income was $16.2 million
for the year ended December 31, 2005. This represented a
$2.7 million, or 20.0%, increase from $13.5 million
net income reported for the year ended December 31, 2004.
Our increased earnings are primarily the result of growth and
improved net interest and fee margins in our core leasing
business. During the third quarter of 2005, the Company
increased its reserves for expected credit losses based on its
initial assessments of exposure to areas significantly impacted
by Hurricane Katrina (such as New Orleans). The impact of this
increase in reserves was a reduction of approximately $756,000
in net income for the year 2005.
Diluted net earnings per share was $1.36 for the year ended
December 31, 2005 and $1.15 for the year ended
December 31, 2004.
For the year ended December 31, 2005, we generated 32,754
new leases at a cost of $318.5 million compared to 31,818
new leases at a cost of $272.3 million for the year ended
December 31, 2004. The weighted average implicit interest
rate on new leases originated was 12.75% for the year ended
December 31, 2005 compared to 13.82% for year ended
December 31, 2004. Overall, the net investment in direct
financing leases grew 16.9%, to $572.6 million at
December 31, 2005 from $489.7 million at
December 31, 2004. Returns on average assets were 2.57% for
the year ended December 31, 2005 and 2.54% for the year
ended December 31, 2004. Returns on average equity were
15.96% for the year ended December 31, 2005 and 16.47% for
the year ended December 31, 2004. Our debt to equity ratio
was 4.59:1 at December 31, 2005 compared to 4.81:1 at
December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
$
|
67,572
|
|
|
$
|
57,707
|
|
Fee income
|
|
|
17,957
|
|
|
|
13,461
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
85,529
|
|
|
|
71,168
|
|
Interest expense
|
|
|
20,835
|
|
|
|
16,675
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
$
|
64,694
|
|
|
$
|
54,493
|
|
|
|
|
|
|
|
|
|
|
Average net investment in direct
financing
leases(1)
|
|
$
|
523,948
|
|
|
$
|
446,965
|
|
Percent of average net investment
in direct financing leases:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12.90
|
%
|
|
|
12.91
|
%
|
Fee income
|
|
|
3.43
|
|
|
|
3.01
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
16.33
|
|
|
|
15.92
|
|
Interest expense
|
|
|
3.98
|
|
|
|
3.73
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee margin
|
|
|
12.35
|
%
|
|
|
12.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes allowance for credit losses and initial direct costs
and fees deferred. |
Net interest and fee margin. Net interest and
fee income increased $10.2 million, or 18.7%, to
$64.7 million for the year ended December 31, 2005
from $54.5 million for the year ended December 31,
2004. The increase in the net interest and fee margin represents
an increase of 16 basis points to 12.35% for the year ended
December 31, 2005 from 12.19% for the year ended
December 31, 2004 with the increase primarily attributed to
fee income.
Interest income, net of amortized initial direct costs and fees,
increased $9.9 million, or 17.1%, to $67.6 million for
the year ended December 31, 2005 from $57.7 million
for the year ended December 31, 2004. The increase is
primarily due to a 17.2% growth in average net investment in
direct financing leases (DFL) which increased
$76.9 million to $523.9 million for the year ended
December 31, 2005 from $447.0 million for the year
ended December 31, 2004.
Our interest income yield on assets declined by 1 basis
point for the year ended December 31, 2005 to 12.90% as a
percentage of average net investment in DFL from 12.91% for the
year ended December 31, 2004. The interest income yield on
our lease portfolio declined by 36 basis points for the
year ended December 31, 2005 to 12.37% as a
31
percentage of average net investment in DFL from 12.73% for the
year ended December 31, 2004. This decline was due in part
to lower weighted average implicit interest rates on new leases
originated in the year ended December 31, 2005 than in
years prior and the amortization and payoffs of older higher
yielding leases. This reduction was partially offset by a 35
basis point increase in earnings on cash balances which grew to
0.53% as a percentage of average net investment in DFL for the
year ended 2005 compared to 0.18% for the year ended
December 31, 2004.
Fee income increased $4.5 million, or 33.4%, to
$18.0 million for the year ended December 31, 2005
from $13.5 million for the year ended December 31,
2004. All major components of fee income contributed to the
increase in fiscal year 2005 consistent with the continued
growth and seasoning of our lease portfolio. Fee income, as a
percentage of average net investment in DFL, increased
42 basis points to 3.43% for the year ended
December 31, 2005 from 3.01% for the year ended
December 31, 2004. Fees for delinquent lease payments (late
charges) increased $2.6 million to $10.1 million for
the year ended December 31, 2005 compared to
$7.6 million for the same period of 2004. Late charges
remained the largest component of fee income at 1.93% as a
percentage of average net investment in DFL for the year ended
December 31, 2005 compared to 1.69% for the year ended
December 31, 2004. Net residual income, including income
from lease extensions, also increased, as more leases where we
retained a residual interest reached end of term. Net residual
income increased $1.3 million to $6.0 million for the
year ended December 31, 2005 compared to $4.7 million
for the same period of 2004. As a percentage of average net
investment in DFL, net residual income was 1.14% for the year
ended December 31, 2005 compared to 1.05% for the year
ended December 31, 2004.
Interest expense increased $4.1 million to
$20.8 million for the year ended December 31, 2005
from $16.7 million for the year ended December 31,
2004. Interest expense, as a percentage of the average net
investment in DFL, increased 25 basis points to 3.98% for
the year ended December 31, 2005 from 3.73% for the year
ended December 31, 2004. Borrowing costs have risen due to
the continued growth of the Company and higher interest rates on
the Companys borrowings due to increased market interest
rates. The Federal Reserve increased its targeted fed funds rate
eight times for a total of 2.00% during 2005 and a total of
twelve times or 3.00% since June 2004. These increases have
increased interest rates on LIBOR and Prime interest rate based
loans such as the Companys warehouse facilities and
created a higher interest rate environment in which to issue
term note securitizations.
Interest expense as a percentage of weighted average borrowings
was 4.24% for the year ended December 31, 2005 compared to
3.86% for the year ended December 31, 2004. The average
balance for our warehouse facilities was $58.2 million for
the year ended December 31, 2005 compared to
$69.4 million for the year ended December 31, 2004.
The average borrowing costs for our warehouse facilities was
4.13% for the year ended December 31, 2005 compared to
2.13% for year ended December 31, 2004 reflecting the
higher interest rate environment. (See Liquidity and Capital
Resources in this Item 7).
Interest costs on our August 2005 issued term securitization
borrowing increased over those issued in 2004 due to the rising
interest rate environment. For the year ended December 31,
2005, average term securitization borrowings outstanding were
$432.9 million at a weighted average coupon of 3.79%
compared with $362.3 million at a weighted average coupon
of 3.63% for the year ended December 31, 2004. 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.
In July 2004 we issued $304.6 million in term
securitizations with an approximate average total interest
expense of 4.24% over the term of the borrowing. Our term
securitizations include multiple classes of fixed-rate notes
with the shorter term, lower coupon classes amortizing
(maturing) faster then the longer term higher coupon classes.
This causes the blended interest expenses related to these
borrowings to change and generally increase over the term of the
borrowing.
On August 15, 2005 we elected to exercise our call option
and pay off our
2002-1 term
securitization when the remaining note balances outstanding were
$26.5 million at a coupon rate of approximately 4.40%. On
August 15, 2004 we exercised our call option and paid off
our 2001-1
term securitization when the remaining note balances outstanding
were $16.3 million at a coupon of approximately 6.00%.
32
Insurance and other income. Insurance and
other income increased $300,000 to $4.7 million for the
year ended December 31, 2005 from $4.4 million for the
year ended December 31, 2004. The increase is primarily
related to higher net insurance income earned in 2005. During
the fourth quarter of 2005, we expensed approximately $190,000
in insurance claims from the Gulf States region of the USA
attributed to the effects of Hurricane Katrina.
Salaries and benefits expense. Salaries and
benefits expense increased $3.8 million, or 26.4%, to
$18.2 million for the year ended December 31, 2005
from $14.4 million for the year ended December 31,
2004. The increase in compensation expense is attributable to
personnel growth and merit and bonus payment increases. Total
personnel increased to 296 at December 31, 2005 from 273 at
December 31, 2004. In 2005, sales compensation increased
$1.9 million related to additional hiring of sales account
executives and higher commissions paid. In addition, collection
and operations salaries increased $502,000 related principally
to additional personnel associated with growth in the lease
portfolio. In 2005, management and support department
compensation increased $1.3 million including an increase
of $496,000 related to accrued incentive bonuses and $187,000
related to compensation of officers hired for Marlin Business
Bank (in organization).
General and administrative expense. General
and administrative expenses increased $1.8 million, or
17.8%, to $11.9 million for the year ended
December 31, 2005 from $10.1 million for the year
ended December 31, 2004. The increase in general and
administrative expenses was due primarily to an increase in
occupancy expenses of $666,000 and increased depreciation
expenses of $204,000 primarily related to the move of our
executive offices to a new and larger facility in December 2004.
Other increases included legal, audit and other professional
fees of $505,000 of which $166,000 was associated with shelf
registration statements filed with the SEC on behalf of certain
shareholders and the Company. Additionally, we spent more on
credit bureaus, property tax administration, data processing and
postage as a result of increased lease originations and our
overall growth. We also recognized $142,000 of general and
administrative expenses related to the founding of Marlin
Business Bank (in organization). General and administrative
expense, as a percentage of the average net investment in DFL,
increased 2 basis points to 2.27% for the year ended
December 31, 2005 from 2.25% for the year ended
December 31, 2004.
Financing related costs. Financing related
costs include commitment fees paid to our financing sources and
costs pertaining to our derivative contracts used to limit our
exposure to possible increases in interest rates. Financing
related costs decreased $500,000 to $1.6 million for the
year ended December 31, 2005 from $2.1 million for the
year ended December 31, 2004. The decrease was due
principally to lower costs associated with
mark-to-market
adjustments for derivative contracts in the period.
Mark-to-market
adjustments were a net gain of $3,000 for the year ended
December 31, 2005 compared with net loss of $528,000 for
the year ended December 31, 2004. Commitment fees were
$1.6 million for the year ended December 31, 2005
compared with $1.5 for the year ended December 31, 2004.
Provision for credit losses. The provision for
credit losses increased $900,000, or 9.0%, to $10.9 million
for the year ended December 31, 2005 from
$10.0 million for the year ended December 31, 2004. In
general, we experienced positive trends in credit quality for
the year ended December 31, 2005 with lower annualized net
charge-offs and lower year-end delinquency levels than for the
year ended December 31, 2004. Net charge-offs were
$9.1 million for the year ended December 31, 2005 and
$8.9 million for the year ended December 31, 2004. Net
charge-offs as a percentage of average net investment in leases
decreased to 1.74% in 2005 from 1.99% in 2004. We generally
expect net charge-offs to approximate 2.00% of average net
investment in leases. The 2005 provision for credit losses
included a $1.25 million estimate made during the third
quarter for expected losses from the areas hardest hit by
Hurricane Katrina. This additional reserve was initially
estimated based on our total estimated exposure of
$4.8 million in net investment in direct financing leases
in the most affected areas at the time. Through
December 31, 2005, we did not experience any significant
charge-offs related to Hurricane Katrina. However, we have
restructured approximately $1.0 million in net investment
in leases in the Gulf States region by deferring payments on
such leases generally until January 2006.
Provision for income taxes. The provision for
income taxes increased to $10.6 million for the year ended
December 31, 2005 from $8.9 million for the year ended
December 31, 2004. The increase in tax expense is primarily
attributed to the increase in pretax income. Our effective tax
rate, which is a combination of federal and
33
state income tax rates, was 39.5% for the year ended
December 31, 2005 compared to 39.8% for the year ended
December 31, 2004.
Earnings
per Common Share
In conjunction with our November 2003 reorganization and IPO,
warrants were exercised and convertible preferred stock
converted, and our capital structure simplified into one class
of common stock outstanding. The number of common shares issued
as a result of these conversions was 5.86 million, or
approximately 52% of total common shares outstanding following
the IPO. Because of the significant impact on share count and
the related impact on operations from warrant valuations and
preferred dividends, we believe a pro forma analysis of diluted
EPS for the year 2003 provides a more meaningful basis to
evaluate performance of the Company over the past three fiscal
years. The following analysis reconciles 2003 EPS calculations
on a GAAP basis to pro forma EPS which assumes the exercise of
the of warrants and the conversion of the convertible preferred
stock as of the beginning of the periods reported and adds back
warrant expenses and preferred dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per-share amounts)
|
|
|
Net income attributable to common
stockholders
|
|
$
|
18,634
|
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
841
|
|
Weighted average common shares
outstanding (used for basic EPS)
|
|
|
11,804
|
|
|
|
11,552
|
|
|
|
11,330
|
|
|
|
3,002
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
357
|
|
|
|
434
|
|
|
|
400
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common
shares and assumed conversions (used for diluted EPS)
|
|
|
12,161
|
|
|
|
11,986
|
|
|
|
11,730
|
|
|
|
3,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share
(GAAP):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.58
|
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
1.53
|
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
|
$
|
0.25
|
|
Pro forma 2003 earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings used for
diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
841
|
|
Change in fair value of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,723
|
|
Preferred Stock Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,006
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common
shares and assumed conversions (used for diluted EPS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,341
|
|
Effect of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
605
|
|
Effect of Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,454
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares
used for diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.02
|
|
|
|
|
(1) |
|
The effects of convertible preferred stock in 2003 were deemed
anti-dilutive and, therefore, not considered in 2003 GAAP
diluted EPS calculations. |
34
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 expenses as a percentage
of the average net investment in direct financing leases shown
below are metrics used by management to monitor productivity and
spending levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Average net investment in direct
financing leases
|
|
$
|
611,348
|
|
|
$
|
523,948
|
|
|
$
|
446,965
|
|
Salaries and benefits expense
|
|
|
22,468
|
|
|
|
18,173
|
|
|
|
14,447
|
|
General and administrative expense
|
|
|
11,957
|
|
|
|
11,908
|
|
|
|
10,063
|
|
Efficiency ratio
|
|
|
44.77
|
%
|
|
|
43.36
|
%
|
|
|
41.63
|
%
|
Percent of average net investment
in leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
3.68
|
%
|
|
|
3.47
|
%
|
|
|
3.23
|
%
|
General and administrative
|
|
|
1.96
|
%
|
|
|
2.27
|
%
|
|
|
2.25
|
%
|
Key growth indicators management evaluates regularly are sales
account executive staffing levels and the activity of our
origination sources, which are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Number of sales account executives
|
|
|
100
|
|
|
|
103
|
|
|
|
100
|
|
|
|
84
|
|
|
|
67
|
|
Number of originating
sources(1)
|
|
|
1,295
|
|
|
|
1,295
|
|
|
|
1,244
|
|
|
|
1,147
|
|
|
|
929
|
|
|
|
|
(1) |
|
Monthly average of origination sources generating lease volume. |
Residual
Performance
Our leases offer our end user customers the option to own the
purchased equipment at lease expiration. Based on the minimum
lease payments receivable as of December 31, 2006,
approximately 73% of our leases were one dollar purchase option
leases, 21% were fair market value leases and 6% were fixed
purchase option leases, the latter of which typically are 10% of
the original equipment cost. As of December 31, 2006, there
were $48.2 million of residual assets retained on our
balance sheet of which $35.1 million or 72.8% were related
to copiers. As of December 31, 2005, there were
$44.3 million of residual assets retained on our balance
sheet of which $30.3 million or 67.6% were related to
copiers. No other group of equipment represented more than 10%
of equipment residuals as of December 31, 2006 and 2005,
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.
Our leases generally include automatic renewal provisions and
many leases continue beyond their initial term. We consider
renewal income a component of residual performance. For the
years ended December 31, 2006, 2005 and 2004 renewal
income, net of depreciation amounted to $6.5 million,
$6.1 million and $4.5 million and net gains (losses)
on residual values disposed at end of term amounted to $284,000,
($41,000) and $158,000 respectively. The increase in net
residual income is generally consistent with past customer
behavior in electing renewal options, the growth in our lease
portfolio and an increased number of leases where we retain a
residual interest reaching end of term.
Lease
Receivables and Asset Quality
Our net investment in direct financing leases grew
$121.3 million or 21.2% to $693.9 million at
December 31, 2006, from $572.6 million at
December 31, 2005. The Company continues to pursue growth
strategies designed to increase the number of independent
equipment dealers and other origination sources that generate
and develop lease customers. The Companys leases are
generally assigned as collateral for borrowings as described
below in Liquidity and Capital Resources.
35
The chart below provides our asset quality statistics for the
years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for credit losses,
beginning of period
|
|
$
|
7,813
|
|
|
$
|
6,062
|
|
|
$
|
5,016
|
|
Provision for credit losses
|
|
|
9,934
|
|
|
|
10,886
|
|
|
|
9,953
|
|
Charge-offs, net
|
|
|
(9,546
|
)
|
|
|
(9,135
|
)
|
|
|
(8,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end
of period
|
|
$
|
8,201
|
|
|
$
|
7,813
|
|
|
$
|
6,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average net
investment in direct financing
Leases(1)
|
|
|
1.56
|
%
|
|
|
1.74
|
%
|
|
|
1.99
|
%
|
Allowance for credit losses to net
investment in direct financing leases, end of
period(1)
|
|
|
1.21
|
%
|
|
|
1.39
|
%
|
|
|
1.26
|
%
|
Average net investment in direct
financing
leases(1)
|
|
$
|
611,348
|
|
|
$
|
523,948
|
|
|
$
|
446,965
|
|
Net investment in direct financing
leases, end of
period(1)
|
|
$
|
677,848
|
|
|
$
|
562,039
|
|
|
$
|
479,767
|
|
Delinquencies 60 days or more
past due
|
|
$
|
5,676
|
|
|
$
|
4,063
|
|
|
$
|
4,453
|
|
Delinquencies 60 days or more
past
due(2)
|
|
|
0.71
|
%
|
|
|
0.61
|
%
|
|
|
0.78
|
%
|
Allowance for credit losses to
delinquent accounts 60 days or more past due
|
|
|
144.49
|
%
|
|
|
192.3
|
%
|
|
|
136.13
|
%
|
Non-accrual leases
|
|
$
|
2,250
|
|
|
$
|
2,017
|
|
|
$
|
1,944
|
|
Renegotiated leases
|
|
$
|
3,819
|
|
|
$
|
4,140
|
|
|
$
|
2,896
|
|
|
|
|
(1) |
|
Net investment in leases excludes allowance for credit losses
and initial direct costs and fees deferred for purposes of asset
quality and allowance calculations. |
|
(2) |
|
Calculated as a percentage of minimum lease payments receivable. |
Net investments in direct financing leases are charged-off when
they are contractually past due 121 days and are reported
net of recoveries. Income is not recognized on leases when a
default on monthly payment exists for a period of 90 days
or more. Income recognition resumes when a lease becomes less
than 90 days delinquent.
We generally expect net charge-offs to approximate 2.00% of
average net investment in leases. Net charge-offs in 2006 were
1.56% and below our 2.00% expectation we believe principally due
to continued monitoring of our lease portfolio, favorable
recoveries and favorable general economic conditions.
In the third quarter of 2005 we recorded additional reserves for
expected credit losses of $1.25 million based on our
assessment of information available at the time on our lease
portfolios exposure to those areas most impacted by
Hurricane Katrina in late August 2005. Marlin estimates that it
had approximately $4.8 million in net investment in leases
outstanding in the areas most affected by Hurricane Katrina. As
of December 31, 2006, we have charged off approximately
$0.35 million and restructured approximately
$1.0 million of these accounts by deferring lessee payments
generally into the first quarter of 2006. Based on our ongoing
monitoring of this portfolio segment, during the second quarter
of 2006 we determined that approximately $901,000 in remaining
reserves for Katrina losses was no longer required, resulting in
a reduction of the provision. The establishment in 2005 and
subsequent recovery in 2006 of the majority of the Hurricane
Katrina reserve was the primary cause of the decrease in the
allowance for credit losses as a percentage of net investment in
leases to 1.21% at December 31, 2006 from 1.39% at
December 31, 2005.
Delinquent accounts 60 days or more past due as a
percentage of minimum lease payments receivable increased to
0.71% at December 31, 2006 from 0.61% at December 31,
2005. The performance level of 2006 is comparable to 2004
(0.78%) and 2003 (0.74%.) Our usual experience and expectation
is for slightly higher delinquency rates as of year-end as we
believe our lessees tend to adjust their payment patterns around
the year-end.
Liquidity
and Capital Resources
Our business requires a substantial amount of cash to operate
and grow. Our primary liquidity need is for new lease
originations. In addition, we need liquidity to pay interest and
principal on our borrowings, to pay fees and
36
expenses incurred in connection with our securitization
transactions, to fund infrastructure and technology investment
and to pay administrative and other operating expenses.
We are dependent upon the availability of financing from a
variety of funding sources to satisfy these liquidity needs.
Historically, we have relied upon four principal types of third
party financing to fund our operations:
|
|
|
|
|
borrowings under a revolving bank facility;
|
|
|
|
financing of leases in CP conduit warehouse facilities;
|
|
|
|
financing of leases through term note securitizations; and
|
|
|
|
equity and debt securities with third party investors.
|
New lease originations are generally funded in the short-term
with cash from operations or through borrowings under our
revolving bank facility or our CP conduit warehouse facilities.
Our current plans assume the execution of a term note
securitization approximately once a year to refinance and
relieve the bank revolver and CP conduit warehouse facilities.
As of December 31, 2006 we had no borrowings outstanding
under our bank and CP conduit warehouse facilities and,
therefore, we had approximately $265.0 million of available
borrowing capacity through these facilities in addition to
available cash and cash equivalents of $26.7 million.
Net cash provided by financing activities was
$99.6 million, $81.6 million and $39.2 million
for the years ended December 31, 2006, 2005 and 2004,
respectively.
We used cash in investing activities of $136.1 million,
$103.3 million and $89.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively. Investing
activities primarily relate to lease origination activity.
Additional liquidity is provided by our cash flow from
operations. We generated cash flow from operations of
$28.8 million, $40.1 million and $36.9 million
for the years ended December 31, 2006, 2005 and 2004,
respectively.
We expect cash from operations, additional borrowings on
existing and future credit facilities and, the completion of
additional on-balance sheet term note securitizations to be
adequate to support our operations and projected growth.
Cash and Cash Equivalents. Our objective is to
maintain a low cash balance, investing any free cash in leases.
We generally fund our lease originations and growth using
advances under our revolving bank facility and our CP conduit
warehouse facilities. We had available cash and cash equivalents
of $26.7 million at December 31, 2006 and
$34.5 million at December 31, 2005.
Restricted Cash. We had $57.7 million of
restricted cash as of December 31, 2006 compared to
$47.8 million at December 31, 2005. Restricted cash
consists primarily of the pre-funding cash reserves and advance
payment accounts related to our term note securitizations.
Borrowings. Our primary borrowing
relationships each require the pledging of eligible lease
receivables to secure amounts advanced. Our aggregate
outstanding secured borrowings amounted to $616.3 million
at December 31, 2006 and $516.8 million at
December 31, 2005. At December 31, 2006, our external
financing sources, maximum facility amounts, amounts outstanding
and unused available commitments, subject to certain minimum
equity restrictions and other covenants and conditions, are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 12 Months Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Maximum
|
|
|
Month End
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Facility
|
|
|
Amount
|
|
|
Amount
|
|
|
Average
|
|
|
Amounts
|
|
|
Average
|
|
|
Unused
|
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Coupon
|
|
|
Outstanding
|
|
|
Coupon
|
|
|
Capacity
|
|
|
|
(Dollars in thousands)
|
|
|
Revolving bank
facility(1)
|
|
$
|
40,000
|
|
|
$
|
24,390
|
|
|
$
|
6,603
|
|
|
|
7.52
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
40,000
|
|
CP conduit warehouse
facilities(1)
|
|
$
|
225,000
|
|
|
|
193,408
|
|
|
|
59,731
|
|
|
|
5.81
|
|
|
|
|
|
|
|
|
|
|
|
225,000
|
|
Term note
securitizations(2)
|
|
|
|
|
|
|
687,965
|
|
|
|
488,871
|
|
|
|
4.29
|
|
|
|
616,322
|
|
|
|
4.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
265,000
|
|
|
|
|
|
|
$
|
555,205
|
|
|
|
4.49
|
%
|
|
$
|
616,322
|
|
|
|
4.71
|
%
|
|
$
|
265,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
(1) |
|
Subject to lease eligibility and borrowing base formula. |
|
(2) |
|
Our term note securitizations are one-time fundings that pay
down over time without any ability for us to draw down
additional amounts. As of December 31, 2006, we had
completed eight on-balance-sheet term note securitizations and
had repaid five in their entirety. |
Revolving bank facility. As of
December 31, 2006 and December 31, 2005, the Company
has a committed revolving line of credit with several
participating banks to provide up to $40.0 million in
borrowings at LIBOR plus 1.87%. It is secured by leases that
meet specified eligibility criteria. Our revolving bank facility
provides temporary funding pending the accumulation of
sufficient pools of leases for financing through a CP conduit
warehouse facility or an on-balance-sheet term note
securitization. Funding under this facility is based on a
borrowing base formula and factors in an assumed discount rate
and advance rate against the pledged leases. The credit facility
expires on August 31, 2007.
Our weighted average outstanding borrowings under this facility
were $6.6 million for the year ended December 31, 2006
compared to $1.4 million for the year ended
December 31, 2005. We incurred interest expense under this
facility of $497,000 for the year ended December 31, 2006
compared to $84,000 for the year ended December 31, 2005.
As of December 31, 2006 and December 31, 2005, there
were no borrowings outstanding under the revolving bank
facility. For the years ended December 31, 2006 and
December 31, 2005, the Company incurred commitment fees on
the unused portion of the credit facility of $184,000 and
$216,000, respectively.
CP conduit warehouse facilities. We have two
Commercial Paper (CP) conduit warehouse facilities
that allow us to borrow, repay and re-borrow based on a
borrowing base formula. In these transactions, we transfer pools
of leases and interests in the related equipment to special
purpose, bankruptcy remote subsidiaries. These special purpose
entities in turn pledge their interests in the leases and
related equipment to an unaffiliated conduit entity, which
generally issues commercial paper to investors. The warehouse
facilities allow the Company on an ongoing basis to transfer
lease receivables to a wholly-owned, bankruptcy remote, special
purpose subsidiary of the Company, which issues variable-rate
notes to investors carrying an interest rate equal to the rate
on commercial paper issued to fund the notes during the interest
period. These facilities require that the Company limit its
exposure to adverse interest rate movements on the variable-rate
notes through entering into interest rate cap agreements.
Borrowings under these facilities are based on borrowing base
formulas with assumed discount rates and advance rates against
the pledged collateral combined with specific portfolio
concentration criteria. These financing arrangements have
minimum annual fee requirements based on anticipated usage of
the facilities.
00-A
Warehouse Facility This facility totals
$125 million, was renewed in September 2006 and expires in
September 2007. Prior to renewal, the
00-A
Warehouse Facility was credit enhanced through a third-party
financial guarantee insurance policy. The recent renewal removed
the credit enhancement policy requirement. For the years ended
December 31, 2006 and December 31, 2005, the weighted
average interest rates were 5.89% and 3.74%, respectively. As of
December 31, 2006 and December 31, 2005, there were no
borrowings outstanding under this facility.
02-A
Warehouse Facility This facility totals
$100 million and expires in March 2009. For the years ended
December 31, 2006 and December 31, 2005, the weighted
average interest rate was 5.75% and 4.29%, respectively. As of
December 31, 2006 and December 31, 2005, there were no
borrowings outstanding under this facility.
Term note securitizations. Since our founding
through December 31, 2006, we have completed eight
on-balance-sheet term note securitizations of which three remain
outstanding. In connection with each securitization transaction,
we have transferred leases to our wholly owned, special-purpose
bankruptcy remote subsidiaries and issued term debt
collateralized by such commercial leases to institutional
investors in private securities offerings. Our term note
securitizations differ from our CP conduit warehouse facilities
primarily in that our term note securitizations have fixed
terms, fixed interest rates and fixed principal amounts. Our
securitizations do not qualify for sales accounting treatment
due to certain call provisions that we maintain and that the
special purpose entities also hold residual assets. Accordingly,
assets and the related debt of the special purpose entities are
included in our consolidated balance sheets. Our leases and
restricted cash are assigned as collateral for these borrowings
and there
38
is no further recourse to the general credit of the Company. By
entering into term note securitizations, we reduce outstanding
borrowings under our CP conduit warehouse facilities and
revolving bank facility, which increases the amounts available
to us under these facilities to fund additional lease
originations. Failure to pay down periodically the outstanding
borrowings under our warehouse facilities, or increase such
facilities, would significantly limit our ability to grow our
lease portfolio. At December 31, 2006 and at
December 31, 2005, outstanding term securitizations
amounted to $616.3 million and $516.8 million,
respectively.
As of December 31, 2006, $608.4 million of our net
investment in direct financing leases was pledged to our term
note securitizations. Each of our outstanding term note
securitizations is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Scheduled
|
|
|
|
|
|
|
Notes Originally
|
|
|
Balance as of
|
|
|
Maturity
|
|
|
Original
|
|
|
|
Issued
|
|
|
December 31, 2006
|
|
|
Date
|
|
|
Coupon Rate
|
|
|
|
(Dollars in thousands)
|
|
|
2004 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
89,000
|
|
|
$
|
|
|
|
|
August 2005
|
|
|
|
2.04
|
%(2)
|
Class A-2
|
|
|
60,000
|
|
|
|
|
|
|
|
January 2007
|
|
|
|
2.91
|
(2)
|
Class A-3
|
|
|
24,000
|
|
|
|
|
|
|
|
June 2007
|
|
|
|
3.36
|
|
Class A-4
|
|
|
61,574
|
|
|
|
48,958
|
|
|
|
May 2011
|
|
|
|
3.88
|
(2)
|
Class B
|
|
|
49,684
|
|
|
|
19,358
|
|
|
|
May 2011
|
|
|
|
4.35
|
|
Class C
|
|
|
20,362
|
|
|
|
10,195
|
|
|
|
May 2011
|
|
|
|
5.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304,620
|
|
|
$
|
78,511
|
|
|
|
|
|
|
|
3.29
|
%(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
92,000
|
|
|
$
|
|
|
|
|
August 2006
|
|
|
|
4.05
|
%
|
Class A-2
|
|
|
73,500
|
|
|
|
29,693
|
|
|
|
January 2008
|
|
|
|
4.49
|
|
Class A-3
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
November 2008
|
|
|
|
4.63
|
|
Class A-4
|
|
|
46,749
|
|
|
|
46,749
|
|
|
|
August 2012
|
|
|
|
4.75
|
|
Class B
|
|
|
55,546
|
|
|
|
41,288
|
|
|
|
August 2012
|
|
|
|
5.09
|
|
Class C
|
|
|
22,765
|
|
|
|
16,921
|
|
|
|
August 2012
|
|
|
|
5.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
340,560
|
|
|
$
|
184,651
|
|
|
|
|
|
|
|
4.60
|
%(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
100,000
|
|
|
$
|
72,978
|
|
|
|
September 2007
|
|
|
|
5.48
|
%
|
Class A-2
|
|
|
65,000
|
|
|
|
65,000
|
|
|
|
November 2008
|
|
|
|
5.43
|
|
Class A-3
|
|
|
65,000
|
|
|
|
65,000
|
|
|
|
December 2009
|
|
|
|
5.34
|
|
Class A-4
|
|
|
62,761
|
|
|
|
62,761
|
|
|
|
September 2013
|
|
|
|
5.33
|
|
Class B
|
|
|
62,008
|
|
|
|
62,008
|
|
|
|
September 2013
|
|
|
|
5.63
|
|
Class C
|
|
|
25,413
|
|
|
|
25,413
|
|
|
|
September 2013
|
|
|
|
6.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
380,182
|
|
|
$
|
353,160
|
|
|
|
|
|
|
|
5.51
|
%(1)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Term
Note Securitizations
|
|
|
|
|
|
$
|
616,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the original weighted average initial coupon rate for
all tranches of the securitization. In addition to this coupon
interest, term securitizations also have other transaction costs
which are amortized over the life of the borrowings as
additional interest expense. |
|
(2) |
|
Original coupon rate represents fixed-rate coupon payable on
interest rate swap agreement. Certain classes of the 2004 term
note securitization were issued at variable rates to investors
with the Company simultaneously entering interest rate swap
agreements to convert the borrowings to a fixed interest cost.
For the weighted average term of the
2004-1 term
note securitization, the weighted average coupon rate will
approximate 3.81%. |
39
|
|
|
(3) |
|
The weighted average coupon rate of the
2005-1 term
note securitization will approximate 4.81% over the term of the
borrowing. |
|
(4) |
|
The weighted average coupon rate of the
2006-1 term
note securitization will approximate 5.51% over the term of the
borrowing. |
Marlin Business Bank. In October 2005, Marlin
submitted an application for an Industrial Bank Charter with the
Federal Deposit Insurance Corporation (FDIC) and the State of
Utah Department of Financial Institutions to form Marlin
Business Bank (Bank). On July 28, 2006 the FDIC
announced that it placed a six-month moratorium on all
industrial bank applications, in response to the increasing
number of applications by companies not already engaged in
financial services. On January 31, 2007, the FDIC extended
the moratorium for an additional year to sunset on
January 31, 2008, but the FDIC excepted from the moratorium
applicants engaged only in financial activities. Subject to
regulatory approvals, Marlin Business Bank will operate from our
Salt Lake City office. More information regarding the moratorium
may be found at http://www.fdic.gov.
The Bank will be wholly owned by Marlin Business Services Corp.
In addition to further diversifying our funding sources, over
time the Bank may add other product offerings to better serve
our customer base. The Bank will be subject to FDIC and Utah
Department of Financial Institutions rules and regulations.
Marlin will provide the necessary capital to maintain the Bank
at well-capitalized status as defined by banking
regulations. Initial cash capital requirements are expected to
be $15.0 million.
Initially FDIC deposits will be raised from the brokered
certificates of deposit market. All deposits will be transacted
via telephone, mail,
and/or ACH
and wire transfer. There will be limited if any
face-to-face
interaction with deposit and lease/loan customers in the
Banks office. The Banks initial asset product
offering will consist of small-ticket leasing similar to what we
originate currently.
We have assembled a team of experienced bank managers and
directors to provide leadership for the Bank. Many of the
operational aspects of the Bank will be outsourced to Marlin
Leasing Corp.
Financial
Covenants
All of our secured borrowing arrangements have financial
covenants that we must comply with in order to obtain funding
through the facilities and to avoid an event of default. These
covenants relate to, among other things, various financial
covenants and maximum lease delinquency and default levels. A
change in the Chief Executive Officer or President is an event
of default under the revolving bank facility and warehouse
facilities unless a replacement acceptable to the Companys
lenders is hired within 90 days. Such an event is also an
immediate event of servicer termination under the term
securitizations. Marlins President resigned from his
position on December 20, 2006. Dan Dyer, the Companys
Chief Executive Officer, has assumed the title of President and
George Pelose, in his expanded role as Chief Operating Officer,
has assumed responsibility for all aspects of the Companys
lease financing business. We do not expect the change to have
any material adverse effect on our financing arrangements,
because the appropriate consents and waivers for this change
have been obtained from all affected financing sources.
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. In addition, the revolving bank
facility and CP conduit warehouse facilities contain
cross-default provisions whereby certain defaults under one
facility would also be an event of default on the other
facilities, in essence simultaneously restricting our ability to
access either of these critical sources of funding. A default by
any of our term note securitizations is also considered an event
of default under the revolving bank facility and CP conduit
warehouse facilities. An event of default under any of the
facilities could result in an acceleration of amounts
outstanding under the facilities, foreclosure on all or a
portion of the leases financed by the facilities
and/or the
removal of the Company as servicer of the leases financed by the
facility. As of December 31, 2006, the Company was in
compliance with terms of the warehouse facilities and term
securitization agreements.
Some of the critical financial covenants under our borrowing
arrangements as of December 31, 2006 include:
|
|
|
|
|
Tangible net worth of not less than $79.2 million;
|
|
|
|
Debt to equity ratio of not more than
10-to-1;
|
40
|
|
|
|
|
Fixed charge coverage ratio of not less than
1.15-to-1; and
|
|
|
|
Interest coverage ratio of not less than
3.25-to-1.
|
As of December 31, 2006 we believe we were in compliance
with all covenants in our borrowing relationships.
Contractual
Obligations
In addition to our scheduled maturities on our credit facilities
and term debt, we have future cash obligations under various
types of contracts. We lease office space and office equipment
under long-term operating leases. The contractual obligations
under our agreements, credit facilities, term securitizations,
operating leases and commitments under non-cancelable contracts
as of December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Leased
|
|
|
Capital
|
|
|
|
|
|
|
Borrowings
|
|
|
Interest
|
|
|
Leases
|
|
|
Facilities
|
|
|
Leases
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
$
|
256,483
|
|
|
$
|
25,645
|
|
|
$
|
14
|
|
|
$
|
1,690
|
|
|
$
|
73
|
|
|
$
|
283,905
|
|
2008
|
|
|
183,374
|
|
|
|
14,074
|
|
|
|
3
|
|
|
|
1,506
|
|
|
|
34
|
|
|
|
198,991
|
|
2009
|
|
|
106,856
|
|
|
|
6,473
|
|
|
|
|
|
|
|
1,351
|
|
|
|
|
|
|
|
114,680
|
|
2010
|
|
|
51,933
|
|
|
|
2,318
|
|
|
|
|
|
|
|
1,281
|
|
|
|
|
|
|
|
55,532
|
|
2011
|
|
|
17,481
|
|
|
|
376
|
|
|
|
|
|
|
|
1,181
|
|
|
|
|
|
|
|
19,038
|
|
Thereafter
|
|
|
195
|
|
|
|
3
|
|
|
|
|
|
|
|
1,718
|
|
|
|
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
616,322
|
|
|
$
|
48,889
|
|
|
$
|
17
|
|
|
$
|
8,727
|
|
|
$
|
107
|
|
|
$
|
674,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Interest Rate Risk and Sensitivity
Market risk is the risk of losses arising from changes in values
of financial instruments. We engage in transactions in the
normal course of business that expose us to market risks. We
attempt to mitigate such risks through prudent management
practices and strategies such as attempting to match the
expected cash flows of our assets and liabilities.
We are exposed to market risks associated with changes in
interest rates and our earnings may fluctuate with changes in
interest rates. The lease assets we originate are almost
entirely fixed-rate. Accordingly, we generally seek to finance
these assets with fixed interest cost term note securitization
borrowings that we issue periodically. Between term note
securitization issues, we finance our new lease originations
through a combination of variable-rate warehouse facilities and
working capital. Our mix of fixed-rate and variable-rate
borrowings and our exposure to interest rate risk changes over
time. During 2006, the mix of variable-rate borrowings has
ranged from zero to 35.2% of total borrowings and averaged
11.9%. Our highest exposure to variable-rate borrowings
generally occurs just prior to the issuance of a term note
securitization.
We use derivative financial instruments to attempt to further
reduce our exposure to changing cash flows caused by possible
changes in interest rates. We use forward starting interest rate
swap agreements to reduce our exposure to changing market
interest rates prior to 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. We may
choose to hedge all or a portion of forecasted transactions. The
value of the derivative contract correlates with the movements
of interest rates and our intention is to close the derivative
contracts simultaneous with the pricing of our forecasted term
securitizations. The resulting gain or loss would then be
amortized as an adjustment to interest expense over the term of
the forecasted securitization.
In August 2006, the Company entered into forward starting
interest rate swap agreements with total underlying notional
amounts of $200.0 million to commence in October 2007
related to its forecasted October 2007 term note securitization
transaction. These interest rate swap agreements are recorded in
other liabilities on the consolidated balance sheet at their
fair value of $983,000 as of December 31, 2006. These
interest rate swap agreements were designated as cash flow
hedges of the term note securitization transaction, with
unrealized losses recorded in the
41
equity section of the balance sheet of approximately $591,000,
net of tax, as of December 31, 2006. The Company expects to
terminate these agreements simultaneously with the pricing of
its 2007 term securitization with any of the unrecognized gains
or losses amortized to interest expense over the term of the
related borrowing.
In August 2006, the Company entered into forward starting
interest rate swap agreements with total underlying notional
amounts of $100.0 million to commence in October 2008
related to its forecasted October 2008 term note securitization
transaction. These interest rate swap agreements are recorded in
other liabilities on the consolidated balance sheet at their
fair values of $624,000 as of December 31, 2006. These
interest rate swap agreements were designated as cash flow
hedges of the term note securitization transaction, with
unrealized losses recorded in the equity section of the balance
sheet of approximately $375,000, net of tax, as of
December 31, 2006. The Company expects to terminate these
agreements simultaneously with the pricing of its 2008 term
securitization with any of the unrecognized gains or losses
amortized to interest expense over the term of the related
borrowings.
In June and September 2005, the Company entered into forward
starting interest rate swap agreements with total underlying
notional amounts of $225.0 million to commence in September
2006 related to its forecasted 2006 term note securitization
transaction. The Company terminated these agreements
simultaneously with the pricing of its 2006 term securitization
issued in September 2006 and is amortizing the realized gains of
$3.7 million to interest expense over the term of the
related borrowing. These interest rate swap agreements were
designated as cash flow hedges with the gains realized deferred
and recorded in the equity section of the balance sheet at
approximately $1.9 million, net of tax, as of
December 31, 2006. During the year ended December 31,
2006, the Company amortized $573,000 of deferred gains to
decrease interest expense of the related 2006 term
securitization borrowing. The Company expects to reclassify
$928,000 net of tax, into earnings over the next twelve
months.
In October and December 2004 we entered into forward-starting
swap agreements with a total notional amount of
$250 million to partially hedge our forecasted 2005 term
securitization. In August 2005 we terminated these interest rate
swap agreements simultaneously with the pricing of our 2005 term
securitization. The realized gain of these interest rate swap
agreements on the termination date was $3.2 million. These
interest rate swap agreements were designated as cash flow
hedges with the realized gains deferred and recorded in the
equity section of the balance sheet of approximately $680,000
and $1.5 million, net of tax, as of December 31, 2006
and December 31, 2005, respectively. During the years ended
December 31, 2006 and 2005, the Company amortized
$1.3 million and $687,000, respectively, of deferred gains
to decrease interest expense of the related 2005 term
securitization borrowing. The Company expects to reclassify
$451,000, net of tax, into earnings over the next twelve months.
On July 22, 2004 we issued a term note securitization where
certain classes of notes were issued at variable rates to
investors. We simultaneously entered into interest rate swap
contracts to convert these borrowings to fixed interest costs to
the Company for the term of the borrowing. As of
December 31, 2006, we had interest rate swap agreements
related to these transactions with underlying notional amounts
of $49.0 million. These interest rate swap agreements are
recorded in other assets on the consolidated balance sheet at
their fair value of $456,000 and $1.1 million at
December 31, 2006 and December 31, 2005, respectively.
These interest rate swap agreements were designated as cash flow
hedges with unrealized gains recorded in the equity section of
the balance sheet of approximately $274,000 and $652,000, net of
tax, as of December 31, 2006 and December 31, 2005,
respectively. The ineffectiveness related to these interest rate
swap agreements designated as cash flow hedges was not material
for the years ended December 31, 2006 and December 31,
2005.
During the years ended December 31, 2006 and 2005, the
Company recognized a net loss of $74,000 and a net gain of
$70,000, respectively, in other financing related costs related
to the fair values of the interest rate swaps that did not
qualify for hedge accounting. As of December 31, 2006 and
December 31, 2005, the Company had interest rate swap
agreements related to non-hedge accounting transactions with
underlying notional amounts of $832,000 and $512,000,
respectively. These interest rate swap agreements are recorded
in other assets on the consolidated balance sheet at fair values
of $2,000 and $76,000 at December 31, 2006 and
December 31, 2005, respectively. These derivative contracts
also related to the 2004 term securitization and are intended to
offset certain prepayment risks in the lease portfolio pledged
in the 2004 term securitization.
The Company also uses interest-rate cap agreements that are not
designated for hedge accounting treatment to fulfill certain
covenants in its special purpose subsidiarys warehouse
borrowing arrangements. Accordingly, these cap agreements are
recorded at fair value in other assets at $193,000 and $103,000
as of December 31, 2006 and
42
December 31, 2005, respectively. Changes in the fair values
of the caps are recorded in financing related costs in the
accompanying statements of operations. The notional amount of
interest rate caps owned as of December 31, 2006 and
December 31, 2005 was $225 million and
$155.1 million, respectively.
The Company also sells interest rate caps to offset partially
the interest-rate caps required to be purchased by the
Companys special purpose subsidiary under its warehouse
borrowing arrangements. These sales generate premium revenues to
offset partially the premium cost of purchasing the required
interest-rate caps. On a consolidated basis, the interest-rate
cap positions sold partially offset the interest-rate cap
positions owned. As of December 31, 2006, the notional
amount of interest-rate cap sold agreements totaled
$176.9 million. The fair value of interest-rate caps sold
is recorded in other liabilities at $190,000 as of
December 31, 2006. As of December 31, 2005, the
notional amount of interest-rate cap sold agreements totaled
$64.6 million. The fair value of interest-rate caps sold
was recorded in other liabilities at $81,000 as of
December 31, 2005.
The following table provides information about our derivative
financial instruments and other financial instruments that are
sensitive to changes in interest rates, including debt
obligations. For debt obligations, the table presents the
contractually scheduled maturities and the related weighted
average interest rates as of December 31, 2006 expected as
of and for each year ended through December 31, 2010 and
for periods thereafter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturities by Calendar Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 &
|
|
|
Carrying
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt
|
|
$
|
256,483
|
|
|
$
|
183,374
|
|
|
$
|
106,856
|
|
|
$
|
51,933
|
|
|
$
|
17,676
|
|
|
$
|
616,322
|
|
Average fixed rate
|
|
|
4.63
|
%
|
|
|
4.67
|
%
|
|
|
4.83
|
%
|
|
|
5.08
|
%
|
|
|
5.48
|
%
|
|
|
4.74
|
%
|
Variable-rate debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Average variable rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
225,000
|
|
|
$
|
128,614
|
|
|
$
|
77,159
|
|
|
$
|
31,156
|
|
|
$
|
9,320
|
|
|
$
|
225,000
|
|
Ending notional balance
|
|
|
128,614
|
|
|
|
77,159
|
|
|
|
31,156
|
|
|
|
9,320
|
|
|
|
|
|
|
$
|
|
|
Average receive rate
|
|
|
6.05
|
%
|
|
|
6.02
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.03
|
%
|
Interest rate caps sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
176,932
|
|
|
$
|
116,453
|
|
|
$
|
75,666
|
|
|
$
|
31,154
|
|
|
$
|
9,320
|
|
|
$
|
176,932
|
|
Ending notional balance
|
|
|
116,453
|
|
|
|
75,666
|
|
|
|
31,154
|
|
|
|
9,320
|
|
|
|
|
|
|
$
|
|
|
Average pay rate
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
49,790
|
|
|
$
|
3,248
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
49,790
|
|
Ending notional balance
|
|
|
3,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Average pay rate
|
|
|
3.88
|
%
|
|
|
3.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.88
|
%
|
Forward starting interest rate
swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
$
|
100,000
|
|
|
$
|
|
|
|
$
|
300,000
|
|
Ending notional
balance(1)
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Average pay rate
|
|
|
5.28
|
%
|
|
|
5.28
|
%
|
|
|
5.30
|
%
|
|
|
5.34
|
%
|
|
|
|
|
|
|
5.29
|
%
|
|
|
|
(1) |
|
The Company expects to terminate these agreements simultaneously
with the pricing of its 2007 and 2008 term securitizations. |
Our earnings are sensitive to fluctuations in interest rates.
The revolving bank facility and CP conduit warehouse facilities
are charged a floating rate of interest based on LIBOR, prime
rate or commercial paper interest rates. Because our assets are
predominantly fixed-rate, increases in these market interest
rates would negatively impact earnings and decreases in the
rates would positively impact earnings because the rate charged
on our borrowings would change faster than our assets could
reprice. We would have to offset increases in borrowing costs
43
by adjusting the pricing under our new leases or our net
interest margin would be reduced. There can be no assurance that
we will be able to offset higher borrowing costs with increased
pricing of our assets.
For example, the impact of a hypothetical 100 basis point,
or 1.0%, increase in the market rates for which our borrowings
are indexed for the year ended December 31, 2006 would have
been to reduce net interest and fee income by approximately
$663,000 based on our average variable-rate warehouse borrowings
of approximately $66.3 million for the year then ended,
excluding the effects of derivatives, taxes and possible
increases in the yields from our lease portfolio due to the
origination of new leases at higher interest rates.
We manage and monitor our exposure to interest rate risk using
balance sheet simulation models. Such models incorporate many of
our assumptions about our business including new asset
production and pricing, interest rate forecasts, overhead
expense forecasts and assumed credit losses. Past experience
drives many of the assumptions used in our simulation models and
actual results could vary substantially.
Selected
Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Quarters
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Year ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
17,819
|
|
|
$
|
18,549
|
|
|
$
|
19,629
|
|
|
$
|
21,648
|
|
Fee income
|
|
|
4,907
|
|
|
|
5,097
|
|
|
|
5,241
|
|
|
|
5,066
|
|
Interest and fee income
|
|
|
22,726
|
|
|
|
23,646
|
|
|
|
24,870
|
|
|
|
26,714
|
|
Income tax expense
|
|
|
3,091
|
|
|
|
3,452
|
|
|
|
3,088
|
|
|
|
2,946
|
|
Net income
|
|
|
4,734
|
|
|
|
5,288
|
|
|
|
4,730
|
|
|
|
3,882
|
|
Basic earnings per share
|
|
|
0.40
|
|
|
|
0.45
|
|
|
|
0.40
|
|
|
|
0.33
|
|
Diluted earnings per share
|
|
|
0.39
|
|
|
|
0.44
|
|
|
|
0.39
|
|
|
|
0.32
|
|
Net investment in direct financing
leases
|
|
|
588,644
|
|
|
|
622,815
|
|
|
|
656,842
|
|
|
|
693,911
|
|
Total assets
|
|
|
670,295
|
|
|
|
698,107
|
|
|
|
886,919
|
|
|
|
795,452
|
|
Deferred tax liability
|
|
|
25,307
|
|
|
|
25,135
|
|
|
|
23,729
|
|
|
|
22,931
|
|
Total liabilities
|
|
|
551,104
|
|
|
|
571,866
|
|
|
|
757,318
|
|
|
|
661,163
|
|
Retained earnings
|
|
|
36,545
|
|
|
|
41,833
|
|
|
|
46,563
|
|
|
|
50,445
|
|
Total stockholders equity
|
|
|
119,191
|
|
|
|
126,241
|
|
|
|
129,601
|
|
|
|
134,289
|
|
Year ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
15,714
|
|
|
$
|
16,389
|
|
|
$
|
17,490
|
|
|
$
|
17,979
|
|
Fee income
|
|
|
4,448
|
|
|
|
4,586
|
|
|
|
4,225
|
|
|
|
4,699
|
|
Interest and fee income
|
|
|
20,162
|
|
|
|
20,975
|
|
|
|
21,715
|
|
|
|
22,678
|
|
Income tax expense
|
|
|
2,580
|
|
|
|
2,874
|
|
|
|
2,299
|
|
|
|
2,854
|
|
Net income
|
|
|
3,949
|
|
|
|
4,484
|
|
|
|
3,444
|
|
|
|
4,370
|
|
Basic earnings per share
|
|
|
0.34
|
|
|
|
0.39
|
|
|
|
0.30
|
|
|
|
0.38
|
|
Diluted earnings per share
|
|
|
0.33
|
|
|
|
0.38
|
|
|
|
0.29
|
|
|
|
0.36
|
|
Net investment in direct financing
leases
|
|
|
510,700
|
|
|
|
537,497
|
|
|
|
557,870
|
|
|
|
572,581
|
|
Total assets
|
|
|
580,554
|
|
|
|
601,591
|
|
|
|
732,933
|
|
|
|
670,989
|
|
Deferred tax liability
|
|
|
21,804
|
|
|
|
23,352
|
|
|
|
26,674
|
|
|
|
25,362
|
|
Total liabilities
|
|
|
483,603
|
|
|
|
500,288
|
|
|
|
625,462
|
|
|
|
558,380
|
|
Retained earnings
|
|
|
19,512
|
|
|
|
23,997
|
|
|
|
27,440
|
|
|
|
31,811
|
|
Total stockholders equity
|
|
|
96,951
|
|
|
|
101,303
|
|
|
|
107,471
|
|
|
|
112,609
|
|
44
Recently
Issued Accounting Standards
In December 2004, the FASB issued Statement No. 123(R)
Share-Based Payments, an amendment of FASB
Statements 123 and 95, requiring companies to recognize
expense on the grant-date for the fair value of stock options
and other equity-based compensation issued to employees and
non-employees. The Statement is effective for most public
companies interim or annual periods beginning after
June 15, 2005 (not later than January 1, 2006 for
calendar-year-end
companies). All public companies must use either the modified
prospective or the modified retrospective transition method. The
Company used the modified prospective method whereby awards that
are granted, modified, or settled after the date of adoption
will be measured and accounted for in accordance with
Statement 123(R). Unvested equity classified awards that
were granted prior to the effective date will be accounted for
in accordance with Statement 123(R) and expensed as the
awards vest based on their grant date fair value. Accordingly,
the Company adopted this rule in the first quarter of 2006 and
during the year ended December 31, 2006, the Company
recognized approximately $816,000 of pre-tax expense for the
vesting of stock options issued prior to January 1, 2006,
of which $106,000 was from accelerated vesting due to the
separation agreement related to the resignation of Marlins
President effective December 20, 2006.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS No. 154 changes the accounting
for and reporting of a voluntary change in accounting principle
and replaces APB Opinion No. 20 and SFAS No. 3.
Under Opinion No. 20, most changes in accounting principle
were reported in the income statement of the period of change as
a cumulative adjustment. However, under SFAS No. 154,
a voluntary change in accounting principle must be shown
retrospectively in the financial statements, if practicable, for
all periods presented. In cases where retrospective application
is impracticable, an adjustment to the assets and liabilities
and a corresponding adjustment to retained earnings can be made
as of the beginning of the earliest period for which
retrospective application is practicable rather than being
reported in the income statement. The adoption of
SFAS No. 154 did not have a material effect on the
Companys consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments an
amendment of SFAS No. 133 and No. 140. This
Statement, which becomes effective for fiscal years beginning
after September 15, 2006, addresses certain beneficial
interests in securitized financial assets. The adoption of
SFAS No. 155 is not expected to have a material impact
on the consolidated earnings or financial position of the
Company.
In June 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes. This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in a companys
financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Guidance
is also provided on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The adoption of FIN 48 is not
expected to have a material impact on the consolidated earnings
or financial position of the Company.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This Statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded
in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS 157 does
not require any new fair value measurements. The changes to
current practice resulting from the application of this
Statement relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about
fair value measurements. SFAS 157, however, does not apply
under accounting pronouncements that address share-based payment
transactions, including SFAS 123(R) and its related
interpretative pronouncements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The
adoption of SFAS No. 157 is not expected to have a
material impact on the consolidated earnings or financial
position of the Company.
45
In September 2006, the SEC staff issued SEC Staff Accounting
Bulletin Topic 1N, Financial Statements
Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements
(SAB 108). In SAB 108 the SEC staff concluded that
a dual approach should be used to compute the amount of a
misstatement. Specifically, the amount should be computed using
both a current year income statement perspective
(roll-over method) and a year-end balance sheet
perspective (iron-curtain method.) This dual
approach must be adopted for fiscal years ending after
November 15, 2006. The implementation of SAB 108 did
not have a material impact on the consolidated earnings or
financial position 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.
46
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Managements
Annual Report on Internal Control over Financial
Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act). The Companys internal control
over financial reporting is designed to provide reasonable
assurance to the Companys management and Board of
Directors regarding the preparation and fair presentation of
published financial statements. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements.
Management has assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2006. 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, 2006, 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 Companys independent registered public accounting
firm, Deloitte & Touche LLP, has issued an attestation
report on managements assessment of the Companys
internal control over financial reporting included herein.
March 6, 2007
47
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Stockholders of
Marlin Business Services Corp. and
Subsidiaries:
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
over Financial Reporting, that Marlin Business Services
Corporation and subsidiaries (the Company)
maintained effective internal control over financial reporting
as of December 31, 2006, 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. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
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, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, 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, 2006 of the Company and our report dated
March 6, 2007 expressed an unqualified opinion on those
consolidated financial statements.
Philadelphia, PA
March 6, 2007
48
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
Index to
Consolidated Financial Statements
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Stockholders of
Marlin Business Services Corp. and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Marlin Business Services Corporation and subsidiaries (the
Company) as of December 31, 2006 and 2005, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the two
years in the period ended December 31, 2006. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these 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 2006 and 2005 consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2006
and 2005, and the results of its operations and its cash flows
for each of the two years in the period ended December 31,
2006 in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 13 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation in 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, 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 6, 2007 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
Philadelphia, Pennsylvania
March 6, 2007
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Marlin Business Services Corp. and Subsidiaries:
We have audited the consolidated statements of operations,
stockholders equity, and cash flows for the year ended
December 31, 2004 of Marlin Business Services Corp. and
subsidiaries. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results
of operations and the cash flows of Marlin Business Services,
Inc. and subsidiaries for the year ended December 31, 2004,
in conformity with U.S. generally accepted accounting
principles.
March 11, 2005
51
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
26,663
|
|
|
$
|
34,472
|
|
Restricted cash
|
|
|
57,705
|
|
|
|
47,786
|
|
Net investment in direct financing
leases
|
|
|
693,911
|
|
|
|
572,581
|
|
Property and equipment, net
|
|
|
3,430
|
|
|
|
3,776
|
|
Property tax receivables
|
|
|
257
|
|
|
|
191
|
|
Fair value of cash flow hedge
derivatives
|
|
|
456
|
|
|
|
3,383
|
|
Other assets
|
|
|
13,030
|
|
|
|
8,800
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
795,452
|
|
|
$
|
670,989
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Revolving and term secured
borrowings
|
|
$
|
616,322
|
|
|
$
|
516,849
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Fair value of cash flow hedge
derivatives
|
|
|
1,607
|
|
|
|
|
|
Sales and property taxes payable
|
|
|
8,034
|
|
|
|
7,702
|
|
Accounts payable and accrued
expenses
|
|
|
12,269
|
|
|
|
8,467
|
|
Deferred income tax liability
|
|
|
22,931
|
|
|
|
25,362
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
661,163
|
|
|
|
558,380
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par
value; 75,000,000 shares authorized; 12,030,259 and
11,755,255 shares issued and outstanding, respectively
|
|
|
120
|
|
|
|
117
|
|
Preferred Stock, $0.01 par
value; 5,000,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
81,850
|
|
|
|
77,186
|
|
Stock subscription receivable
|
|
|
(18
|
)
|
|
|
(25
|
)
|
Cumulative other comprehensive
income
|
|
|
1,892
|
|
|
|
3,520
|
|
Retained earnings
|
|
|
50,445
|
|
|
|
31,811
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
134,289
|
|
|
|
112,609
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
795,452
|
|
|
$
|
670,989
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
77,644
|
|
|
$
|
67,572
|
|
|
$
|
57,707
|
|
Fee income
|
|
|
20,311
|
|
|
|
17,957
|
|
|
|
13,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
97,955
|
|
|
|
85,529
|
|
|
|
71,168
|
|
Interest expense
|
|
|
26,562
|
|
|
|
20,835
|
|
|
|
16,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
71,393
|
|
|
|
64,694
|
|
|
|
54,493
|
|
Provision for credit losses
|
|
|
9,934
|
|
|
|
10,886
|
|
|
|
9,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income after
provision for credit losses
|
|
|
61,459
|
|
|
|
53,808
|
|
|
|
44,540
|
|
Insurance and other income
|
|
|
5,501
|
|
|
|
4,682
|
|
|
|
4,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
66,960
|
|
|
|
58,490
|
|
|
|
48,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
22,468
|
|
|
|
18,173
|
|
|
|
14,447
|
|
General and administrative
|
|
|
11,957
|
|
|
|
11,908
|
|
|
|
10,063
|
|
Financing related costs
|
|
|
1,324
|
|
|
|
1,554
|
|
|
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
35,749
|
|
|
|
31,635
|
|
|
|
26,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
31,211
|
|
|
|
26,855
|
|
|
|
22,358
|
|
Income taxes
|
|
|
12,577
|
|
|
|
10,607
|
|
|
|
8,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
18,634
|
|
|
|
16,248
|
|
|
|
13,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.58
|
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
Diluted earnings per share
|
|
$
|
1.53
|
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
Weighted average shares used in
computing basic earnings per share
|
|
|
11,803,973
|
|
|
|
11,551,589
|
|
|
|
11,330,132
|
|
Weighted average shares used in
computing diluted earnings per share
|
|
|
12,161,479
|
|
|
|
11,986,088
|
|
|
|
11,729,703
|
|
See accompanying notes to consolidated financial statements.
53
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Stock
|
|
|
Paid-In
|
|
|
Subscription
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
11,213,610
|
|
|
$
|
112
|
|
|
$
|
71,868
|
|
|
$
|
(213
|
)
|
|
$
|
|
|
|
$
|
2,104
|
|
|
$
|
73,871
|
|
Issuance of common stock
|
|
|
39,116
|
|
|
|
1
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523
|
|
Exercise of stock options
|
|
|
147,599
|
|
|
|
1
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
438
|
|
Tax benefit on stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
834
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
Restricted stock grant
|
|
|
127,372
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Restricted stock compensation
recognized
|
|
|
|
|
|
|
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691
|
|
Unrealized gains on cash flow hedge
derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374
|
|
|
|
|
|
|
|
374
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,459
|
|
|
|
13,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
11,527,697
|
|
|
$
|
115
|
|
|
$
|
74,352
|
|
|
$
|
(54
|
)
|
|
$
|
374
|
|
|
$
|
15,563
|
|
|
$
|
90,350
|
|
Issuance of common stock
|
|
|
19,792
|
|
|
|
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356
|
|
Exercise of stock options
|
|
|
147,591
|
|
|
|
1
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595
|
|
Tax benefit on stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
972
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Restricted stock grant
|
|
|
60,145
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Restricted stock compensation
recognized
|
|
|
|
|
|
|
|
|
|
|
912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
912
|
|
Unrealized gains on cash flow hedge
derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,146
|
|
|
|
|
|
|
|
3,146
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,248
|
|
|
|
16,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
11,755,225
|
|
|
$
|
117
|
|
|
$
|
77,186
|
|
|
$
|
(25
|
)
|
|
$
|
3,520
|
|
|
$
|
31,811
|
|
|
$
|
112,609
|
|
Issuance of common stock
|
|
|
15,739
|
|
|
|
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343
|
|
Exercise of stock options
|
|
|
156,494
|
|
|
|
2
|
|
|
|
688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690
|
|
Tax benefit on stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,048
|
|
Stock option compensation recognized
|
|
|
|
|
|
|
|
|
|
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,090
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Restricted stock grant
|
|
|
102,801
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Restricted stock compensation
recognized
|
|
|
|
|
|
|
|
|
|
|
1,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,495
|
|
Unrealized gains (losses) on cash
flow hedge derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,628
|
)
|
|
|
|
|
|
|
(1,628
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,634
|
|
|
|
18,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
12,030,259
|
|
|
$
|
120
|
|
|
$
|
81,850
|
|
|
$
|
(18
|
)
|
|
$
|
1,892
|
|
|
$
|
50,445
|
|
|
$
|
134,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
MARLIN
BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,634
|
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,351
|
|
|
|
4,048
|
|
|
|
3,634
|
|
Excess tax benefits from
stock-based payment arrangements
|
|
|
(1,048
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred (gain) on
cash flow hedge derivatives
|
|
|
(1,907
|
)
|
|
|
(686
|
)
|
|
|
|
|
Provision for credit losses
|
|
|
9,934
|
|
|
|
10,886
|
|
|
|
9,953
|
|
Deferred taxes
|
|
|
(1,346
|
)
|
|
|
5,143
|
|
|
|
8,899
|
|
Amortization of deferred initial
direct costs and fees
|
|
|
13,264
|
|
|
|
11,916
|
|
|
|
11,869
|
|
Deferred initial direct costs and
fees
|
|
|
(19,173
|
)
|
|
|
(14,270
|
)
|
|
|
(13,117
|
)
|
Loss on fixed assets disposed
|
|
|
|
|
|
|
|
|
|
|
154
|
|
Effect of changes in other
operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
860
|
|
|
|
2,524
|
|
|
|
212
|
|
Other liabilities
|
|
|
4,219
|
|
|
|
4,274
|
|
|
|
1,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
28,788
|
|
|
|
40,083
|
|
|
|
36,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross equipment purchased for
direct financing lease contracts
|
|
|
(388,661
|
)
|
|
|
(318,413
|
)
|
|
|
(272,275
|
)
|
Principal collections on direct
financing lease receivables
|
|
|
264,528
|
|
|
|
227,575
|
|
|
|
190,534
|
|
Security deposits collected, net
of returns
|
|
|
(1,224
|
)
|
|
|
(598
|
)
|
|
|
2,518
|
|
Acquisitions of property and
equipment
|
|
|
(873
|
)
|
|
|
(1,457
|
)
|
|
|
(2,518
|
)
|
Change in restricted cash
|
|
|
(9,918
|
)
|
|
|
(10,455
|
)
|
|
|
(7,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(136,148
|
)
|
|
|
(103,348
|
)
|
|
|
(89,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock, net of
terminations
|
|
|
350
|
|
|
|
385
|
|
|
|
682
|
|
Exercise of stock options
|
|
|
690
|
|
|
|
595
|
|
|
|
438
|
|
Excess tax benefits from
stock-based payment arrangements
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(2,010
|
)
|
|
|
(1,514
|
)
|
|
|
(2,556
|
)
|
Term securitization advances
|
|
|
380,182
|
|
|
|
340,560
|
|
|
|
304,620
|
|
Term securitization repayments
|
|
|
(280,709
|
)
|
|
|
(246,348
|
)
|
|
|
(203,866
|
)
|
Secured bank facility advances
|
|
|
159,624
|
|
|
|
50,581
|
|
|
|
20,420
|
|
Secured bank facility repayments
|
|
|
(159,624
|
)
|
|
|
(50,581
|
)
|
|
|
(24,929
|
)
|
Warehouse advances
|
|
|
217,168
|
|
|
|
169,005
|
|
|
|
115,482
|
|
Warehouse repayments
|
|
|
(217,168
|
)
|
|
|
(181,038
|
)
|
|
|
(171,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
99,551
|
|
|
|
81,645
|
|
|
|
39,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(7,809
|
)
|
|
|
18,380
|
|
|
|
(13,343
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
34,472
|
|
|
|
16,092
|
|
|
|
29,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
26,663
|
|
|
$
|
34,472
|
|
|
$
|
16,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
26,423
|
|
|
$
|
19,101
|
|
|
$
|
14,507
|
|
Cash paid for income taxes
|
|
|
10,708
|
|
|
|
5,938
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
(Dollars
in thousands, except share data)
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 solutions primarily to small businesses nationwide in a
segment of the equipment leasing market commonly referred to in
the leasing industry as the small-ticket segment. The Company
finances over 70 categories of commercial equipment important to
its end user customers including copiers, telephone systems,
computers and certain commercial and industrial equipment.
Marlin Leasing Corporation is managed as a single business
segment.
References to the Company, we,
us, and our herein refer to Marlin
Business Services Corp. and its wholly-owned subsidiaries after
giving effect to the reorganization described below, unless the
context otherwise requires.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of 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
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Estimates are used
when accounting for income recognition, the residual values of
leased equipment, the allowance for credit losses, deferred
initial direct costs and fees, late fee receivables, valuations
of warrants and income taxes. Actual results could differ from
those estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Restricted
Cash
Restricted cash consists primarily of the cash reserve, advance
payment accounts and cash held by the trustee related to the
Companys term securitizations. The restricted cash balance
also includes amounts due from securitizations representing
reimbursements of servicing fees and excess spread income.
Net
Investment in Direct Financing Leases
The Company uses the direct finance method of accounting to
record direct financing leases and related interest income. At
the inception of a lease, the Company records as an asset the
minimum future lease payments receivable, plus the estimated
residual value of the leased equipment, less unearned lease
income. Initial direct costs and fees related to lease
originations are deferred as part of the investment and
amortized over the lease term. Unearned lease income is the
amount by which the total lease receivable plus the estimated
residual value exceeds the cost of the equipment. Unearned lease
income, net of initial direct costs and fees, is recognized as
revenue over the lease term using the interest method.
Residual values reflect the estimated amounts to be received at
lease termination from lease extensions, sales or other
dispositions of leased equipment. Estimates are based on
industry data or managements experience.
56
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Management performs periodic reviews of the estimated residual
values recorded and any impairment, if other than temporary, is
recognized in the current period.
Allowance
for Credit Losses
We maintain an allowance for credit losses at an amount
sufficient to absorb losses inherent in our existing lease
portfolio as of the reporting dates based on our projection of
probable net credit losses. To project probable net credit
losses, we perform a migration analysis of delinquent and
current accounts. A migration analysis is a technique used to
estimate the likelihood that an account will progress through
the various delinquency stages and ultimately charge off. In
addition to the migration analysis, we also consider other
factors including recent trends in delinquencies and
charge-offs; accounts filing for bankruptcy; recovered amounts;
forecasting uncertainties; the composition of our lease
portfolio; economic conditions; and seasonality. We then
establish an allowance for credit losses for the projected
probable net credit losses based on this analysis. A provision
is charged against earnings to maintain the allowance for credit
losses at the appropriate level. Our policy is to charge-off
against the allowance the estimated unrecoverable portion of
accounts once they reach 121 days delinquent.
Our projections of probable net credit losses are inherently
uncertain, and as a result we cannot predict with certainty the
amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy
laws, and other factors could impact our actual and projected
net credit losses and the related allowance for credit losses.
To the degree we add new leases to our portfolio, or to the
degree credit quality is worse than expected, we will record
expense to increase the allowance for credit losses for the
estimated net losses expected in our lease portfolio. Actual
losses may vary from current estimates.
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
securitization transactions that are being amortized over the
estimated lives of the related warehouse facilities and the term
securitization transactions using a method which approximates
the interest method. In addition, other assets include prepaid
expenses, accrued fee income and progress payments on equipment
purchased to lease.
Securitizations
From inception through December 31, 2006, the Company has
completed eight term note securitizations of which five have
been repaid. In connection with each transaction, the Company
has established a bankruptcy remote special-purpose subsidiary
and issued term debt to institutional investors. Under
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement 125, the
Companys securitizations do not qualify for sales
accounting treatment due to certain call provisions that the
Company maintains as well as the fact that the special purpose
entities used in connection with the securitizations also hold
the residual assets. Accordingly, assets and related debt of the
special purpose entities are included in the accompanying
consolidated balance sheets. The Companys leases and
restricted cash are assigned as collateral for these borrowings
and there is no further recourse to the general credit of the
Company. Collateral in excess of these borrowings represents the
Companys maximum loss exposure.
57
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Derivatives
SFAS 133, as amended, Accounting for Derivative
Instruments and Hedging Activities, requires recognition of
all derivatives at fair value as either assets or liabilities in
the consolidated balance sheet. The Company records the fair
value of derivative contracts based on market value indications
supplied by financial institutions who are also counterparty to
the derivative contracts. The accounting for subsequent changes
in the fair value of these derivatives depends on whether it has
been designated and qualifies for hedge accounting treatment
pursuant to the accounting standard. For derivatives not
designated or qualifying for hedge accounting, the related gain
or loss is recognized in earnings for each period and included
in other income or financing related costs in the consolidated
statement of operations. For derivatives designated for hedge
accounting, initial assessments are made as to whether the
hedging relationship is expected to be highly effective and
on-going periodic assessments may be required to determine the
on-going effectiveness of the hedge. The gain or loss on
derivatives qualifying for hedge accounting is recorded in other
comprehensive income on the balance sheet net of tax effects
(unrealized gain or loss on cash flow hedge derivatives) or in
current period earnings depending on the effectiveness of the
hedging relationship.
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 is 90 days or more
delinquent, the lease is classified as being on non-accrual and
we do not recognize interest income on that lease until the
lease is less than 90 days delinquent.
Fee
Income
Fee income consists of fees for delinquent lease payments and
cash collected on early termination of leases. Fee income also
includes net residual income, which includes income from lease
renewals and gains and losses on the realization of residual
values of equipment disposed at the end of term. Residual
balances at lease termination which remain uncollected more than
120 days are charged against income.
Fee income from delinquent lease payments is recognized on an
accrual basis based on anticipated collection rates. Other fees
are recognized when received. Net residual income includes
charges for the reduction in estimated residual values on
equipment for leases in renewal and is recognized during the
renewal period. Management performs periodic reviews of the
estimated residual values and any impairment, if other than
temporary, is recognized in the current period.
Insurance
and Other Income
Insurance income is recognized on an accrual basis as earned
over the term of the lease. Payments that are 120 days or
more past due are charged against income. Ceding commissions,
losses and loss adjustment expenses are recorded in the period
incurred and netted against insurance income. Other income
includes fees received from lease syndications and gains on
sales of leases which are recognized when received.
Initial
direct costs and fees
The Company defers initial direct costs incurred and fees
received to originate our leases in accordance with Statement of
Financial Accounting Standards (SFAS) No. 91,
Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of
Leases. The initial direct costs and fees deferred are part
of the net investment in direct financing leases 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. The
costs include evaluating the prospective lessees financial
condition, evaluating and recording guarantees and other
security arrangements, negotiating lease terms, preparing and
processing lease
58
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
documents and closing the transaction. The fees we defer are
documentation fees collected at lease 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
portfolio.
Financing
Related Costs
Financing related costs consist of bank commitment fees and the
change in fair value of derivative agreements.
Stock-Based
Compensation
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment. SFAS 123(R) amended
SFAS 123, Accounting for Stock-Based Compensation
and superseded Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees. In March 2005, the SEC issued Staff Accounting
Bulletin (SAB) No. 107 to provide guidance on
the valuation of share-based payments for public companies.
SFAS 123(R) requires companies to recognize all share-based
payments, which include stock options and restricted stock, in
compensation expense over the service period of the share-based
payment award. SFAS 123(R) 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 adopted SFAS 123(R) effective January 1,
2006 using the modified prospective method in which compensation
cost is recognized over the service period for all awards
granted subsequent to the Companys adoption of
SFAS 123(R) as well as for the unvested portions of awards
outstanding as of the Companys adoption of
SFAS 123(R). In accordance with the modified prospective
method, results for prior periods have not been restated.
Prior to the adoption of SFAS 123(R), the Company applied
the recognition and measurement principles of APB 25 as
allowed by SFAS 123 and SFAS 148, Accounting for
Stock-based Compensation Transition and
Disclosure. Accordingly, no stock-based compensation was
recognized in net income for stock options granted with an
exercise price equal to the market value of the underlying
common stock on the date of the grant and the related number of
options granted were fixed at that point in time.
Income
Taxes
The Company accounts for income taxes under the provisions of
SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires the use of
the asset and liability method under which deferred taxes are
determined based on the estimated future tax effects of
differences between the financial statement and tax bases of
assets and liabilities, given the provisions of the enacted tax
laws. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities and projected future taxable income in making this
assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of
these deductible differences.
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities
and any necessary valuation allowance recorded against net
deferred tax assets. The process involves summarizing temporary
differences resulting from the different treatment of items, for
example, leases for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within the consolidated balance sheet. Our
management must then assess the likelihood that deferred tax
assets will
59
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
be recovered from future taxable income or tax carry-back
availability and, to the extent our management believes recovery
is not likely, a valuation allowance must be established. To the
extent that we establish a valuation allowance in a period, an
expense must be recorded within the tax provision in the
statement of operations. The Company has utilized net operating
loss carryforwards (NOL) for state and federal
income tax purposes. The Tax Reform Act of 1986 contains
provisions that may limit the NOLs available to be used in
any given year upon the occurrence of certain events, including
significant changes in ownership interest. A change in the
ownership of a company greater than 50% within a three-year
period results in an annual limitation on a companys
ability to utilize its NOLs from tax periods prior to the
ownership change. Management believes that the corporate
reorganization and initial public offering in November 2003 did
not have a material effect on its ability to utilize these
NOLs. No valuation allowance has been established against
net deferred tax assets related to our NOL utilization.
Earnings
Per Share
The Company follows SFAS No. 128, Earnings Per
Share. 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. Diluted
earnings per share is computed based on the weighted average
number of common shares outstanding and the dilutive impact of
the exercise or conversion of common stock equivalents, such as
stock options, warrants and convertible preferred stock, into
shares of Common Stock as if those securities were exercised or
converted.
Reclassifications
Certain amounts in prior financial statements were reclassified
to conform to the current year presentation.
Recent
Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123(R)
Share-Based Payments, an amendment of FASB
Statements 123 and 95, requiring companies to recognize
expense on the grant-date for the fair value of stock options
and other equity-based compensation issued to employees and
non-employees. The Statement is effective for most public
companies interim or annual periods beginning after
June 15, 2005 (not later than January 1, 2006 for
calendar-year-end
companies). All public companies must use either the modified
prospective or the modified retrospective transition method. The
Company used the modified prospective method whereby awards that
are granted, modified, or settled after the date of adoption
will be measured and accounted for in accordance with
Statement 123(R). Unvested equity classified awards that
were granted prior to the effective date will be accounted for
in accordance with Statement 123(R) and expensed as the
awards vest based on their grant date fair value. Accordingly,
the Company adopted this rule in the first quarter of 2006 and
during the year ended December 31, 2006, the Company
recognized approximately $816,000 of pre-tax expense for the
vesting of stock options issued prior to January 1, 2006,
of which $106,000 was from accelerated vesting due to the
separation agreement related to the resignation of Marlins
President effective December 20, 2006.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS No. 154 changes the accounting
for and reporting of a voluntary change in accounting principle
and replaces APB Opinion No. 20 and SFAS No. 3.
Under Opinion No. 20, most changes in accounting principle
were reported in the income statement of the period of change as
a cumulative adjustment. However, under SFAS No. 154,
a voluntary change in accounting principle must be shown
retrospectively in the financial statements, if practicable, for
all periods presented. In cases where retrospective application
is impracticable, an adjustment to the assets and liabilities
and a corresponding adjustment to retained earnings can be made
as of the beginning of the earliest period for which
retrospective application is practicable rather than being
reported in the income statement. The adoption of
SFAS No. 154 did not have a material effect on the
Companys consolidated financial statements.
60
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments an
amendment of SFAS No. 133 and No. 140. This
Statement, which becomes effective for fiscal years beginning
after September 15, 2006, addresses certain beneficial
interests in securitized financial assets. The adoption of
SFAS No. 155 is not expected to have a material impact
on the consolidated earnings or financial position of the
Company.
In June 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes. This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in a companys
financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Guidance
is also provided on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. Based on the Companys tax
positions at December 31, 2006, the adoption of FIN 48
will not have a material impact on the consolidated earnings or
financial position of the Company.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This Statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded
in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS 157 does
not require any new fair value measurements. The changes to
current practice resulting from the application of this
Statement relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about
fair value measurements. SFAS 157, however, does not apply
under accounting pronouncements that address share-based payment
transactions, including SFAS 123(R) and its related
interpretative pronouncements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The
adoption of SFAS No. 157 is not expected to have a
material impact on the consolidated earnings or financial
position of the Company.
In September 2006, the SEC staff issued SEC Staff Accounting
Bulletin Topic 1N, Financial Statements
Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements
(SAB 108). In SAB 108 the SEC staff concluded that
a dual approach should be used to compute the amount of a
misstatement. Specifically, the amount should be computed using
both a current year income statement perspective
(roll-over method) and a year-end balance sheet
perspective (iron-curtain method.) This dual
approach must be adopted for fiscal years ending after
November 15, 2006. The implementation of SAB 108 did
not have a material impact on the consolidated earnings or
financial position of the Company.
|
|
3.
|
Net
Investment in Direct Financing Leases
|
Net investment in direct financing leases consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Minimum lease payments receivable
|
|
$
|
799,716
|
|
|
$
|
660,946
|
|
Estimated residual value of
equipment
|
|
|
48,188
|
|
|
|
44,279
|
|
Unearned lease income, net of
initial direct costs and fees deferred
|
|
|
(128,268
|
)
|
|
|
(106,083
|
)
|
Security deposits
|
|
|
(17,524
|
)
|
|
|
(18,748
|
)
|
Allowance for credit losses
|
|
|
(8,201
|
)
|
|
|
(7,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
693,911
|
|
|
$
|
572,581
|
|
|
|
|
|
|
|
|
|
|
61
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Minimum lease payments receivable under lease contracts and the
amortization of unearned lease income, net of initial direct
costs and fees deferred, is as follows as of December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease
|
|
|
|
|
|
|
Payments
|
|
|
Income
|
|
|
|
Receivable
|
|
|
Amortization
|
|
|
|
(Dollars in thousands)
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
316,856
|
|
|
$
|
64,935
|
|
2008
|
|
|
232,004
|
|
|
|
37,206
|
|
2009
|
|
|
145,606
|
|
|
|
18,059
|
|
2010
|
|
|
76,404
|
|
|
|
6,862
|
|
2011
|
|
|
28,197
|
|
|
|
1,199
|
|
Thereafter
|
|
|
649
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
799,716
|
|
|
$
|
128,268
|
|
|
|
|
|
|
|
|
|
|
The Companys leases are assigned as collateral for
borrowings as further discussed in note 9.
Initial direct costs and fees deferred were $24.3 million
and $18.4 million as of December 31, 2006 and 2005,
respectively, and are netted in unearned income and will be
amortized to income using the level yield method. At
December 31, 2006 and 2005, $35.1 million and
$30.3 million, respectively, of the estimated residual
value of equipment related to copiers.
Income is not recognized on leases when a default on monthly
payment exists for a period of 90 days or more. Income
recognition resumes when a lease becomes less than 90 days
delinquent. As of December 31, 2006 and 2005, the Company
maintained direct finance lease receivables which were on a
non-accrual basis of $2.3 million and $2.0 million,
respectively. As of December 31, 2006 and 2005, the Company
had minimum lease receivables in which the terms of the original
lease agreements had been renegotiated in the amount of
$3.8 million and $4.1 million, respectively.
|
|
4.
|
Concentrations
of Credit Risk
|
As of December 31, 2006, leases approximating 14% and 10%
of the net investment balance of leases by the Company were
located in the states of California and Florida, respectively.
No other state accounted for more than 10% of the net investment
balance of leases owned and serviced by the Company as of
December 31, 2006. As of December 31, 2006 no single
vendor source accounted for more than 4% 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, 2006.
Although the Companys portfolio of leases includes lessees
located throughout the United States, such lessees ability
to honor their contracts may be substantially dependent on
economic conditions in these states. All such contracts are
collateralized by the related equipment. The Company leases to a
variety of different industries, including retail, service,
manufacturing, medical and restaurant, among others. To the
extent that the economic or regulatory conditions prevalent in
such industries change, the lessees ability to honor their
lease obligations may be adversely impacted. The estimated
residual value of leased equipment was comprised of 72.8% of
copiers as of December 31, 2006. No other group of
equipment represented more than 10% of equipment residuals as of
December 31, 2006. Improvements and other changes in
technology could adversely impact the Companys ability to
realize the recorded value of this equipment.
The Company enters into derivative instruments with
counterparties that generally consist of large financial
institutions. The Company monitors its positions with these
counterparties and the credit quality of these financial
institutions. The Company does not anticipate nonperformance by
any of its counterparties. In addition to the fair
62
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
value of derivative instruments recognized in the consolidated
financial statements, the Company could be exposed to increased
interest costs in future periods if counterparties failed.
|
|
5.
|
Allowance
for Credit Losses
|
Net investments in direct financing leases are charged-off when
they are contractually past due 121 days based on the
historical net loss rates realized by the Company.
Activity in this account is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, beginning of period
|
|
$
|
7,813
|
|
|
$
|
6,062
|
|
|
$
|
5,016
|
|
Current provisions
|
|
|
9,934
|
|
|
|
10,886
|
|
|
|
9,953
|
|
Charge-offs, net
|
|
|
(9,546
|
)
|
|
|
(9,135
|
)
|
|
|
(8,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
8,201
|
|
|
$
|
7,813
|
|
|
$
|
6,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Property
and Equipment, net
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Depreciable
|
|
|
|
2006
|
|
|
2005
|
|
|
Life
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
2,503
|
|
|
$
|
2,384
|
|
|
|
7 years
|
|
Computer systems and equipment
|
|
|
5,521
|
|
|
|
4,932
|
|
|
|
3-5 years
|
|
Leasehold improvements
|
|
|
533
|
|
|
|
496
|
|
|
|
lease term
|
|
Less accumulated
depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
and amortization
|
|
|
(5,127
|
)
|
|
|
(4,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,430
|
|
|
$
|
3,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $1.1 million,
$1.1 million and $0.9 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Other assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Derivative collateral
|
|
$
|
3,099
|
|
|
$
|
784
|
|
Accrued fees receivable
|
|
|
2,687
|
|
|
|
2,012
|
|
Deferred transaction costs
|
|
|
2,427
|
|
|
|
2,050
|
|
Factoring receivables
|
|
|
1,760
|
|
|
|
|
|
Prepaid expenses
|
|
|
871
|
|
|
|
1,208
|
|
Other
|
|
|
2,186
|
|
|
|
2,746
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,030
|
|
|
$
|
8,800
|
|
|
|
|
|
|
|
|
|
|
63
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
|
|
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 or results of operations.
As of December 31, 2006, the Company leases all six of its
office locations including its executive offices in Mt. Laurel,
New Jersey, and its offices in Denver, Colorado, Atlanta,
Georgia, Philadelphia, Pennsylvania, Chicago, Illinois and Salt
Lake City, Utah. These lease commitments are accounted for as
operating leases.
The Company has entered into several capital leases to finance
corporate property and equipment.
The following is a schedule of future minimum lease payments for
capital and operating leases as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
|
(Dollars in thousands)
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
73
|
|
|
$
|
14
|
|
2008
|
|
|
34
|
|
|
|
3
|
|
2009
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
107
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
Less amount
representing interest
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease
payments
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense was $1.3 million, $1.2 million and
$0.8 million for the years ended December 31, 2006,
2005 and 2004, respectively.
The Company has employment agreements with certain senior
officers that currently extend through November 12, 2008,
with certain renewal options.
|
|
9.
|
Revolving
and Term Secured Borrowings
|
Borrowings outstanding under the Companys revolving credit
facilities and long-term debt consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Secured bank facility
|
|
$
|
|
|
|
$
|
|
|
00-A
Warehouse Facility
|
|
|
|
|
|
|
|
|
02-A
Warehouse Facility
|
|
|
|
|
|
|
|
|
03-1
Term Securitization
|
|
|
|
|
|
|
56,270
|
|
04-1
Term Securitization
|
|
|
78,511
|
|
|
|
155,499
|
|
05-1
Term Securitization
|
|
|
184,651
|
|
|
|
305,080
|
|
06-1
Term Securitization
|
|
|
353,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
$
|
616,322
|
|
|
$
|
516,849
|
|
|
|
|
|
|
|
|
|
|
64
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
At the end of each period, the Company has the following minimum
lease payments receivable assigned as collateral:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Secured bank facility
|
|
$
|
|
|
|
$
|
|
|
00-A
Warehouse Facility
|
|
|
|
|
|
|
|
|
02-A
Warehouse Facility
|
|
|
|
|
|
|
|
|
03-1
Term Securitization
|
|
|
|
|
|
|
57,868
|
|
04-1
Term Securitization
|
|
|
84,090
|
|
|
|
174,081
|
|
05-1
Term Securitization
|
|
|
212,654
|
|
|
|
350,918
|
|
06-1
Term Securitization
|
|
|
413,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
710,444
|
|
|
$
|
582,867
|
|
|
|
|
|
|
|
|
|
|
Secured
Bank Facility
As of December 31, 2006, the Company has a secured line of
credit with a group of four banks to provide up to
$40.0 million in borrowings generally at LIBOR plus 1.87%.
The credit facility expires on August 31, 2007. For the
years ended December 31, 2006 and 2005, the weighted
average interest rates were 7.52% and 6.18%, respectively. For
the years ended December 31, 2006 and 2005, the Company
incurred commitment fees on the unused portion of the credit
facility of $184,000 and $216,000, respectively.
Warehouse
Facilities
00-A
Warehouse Facility During December 2000, the Company
entered into a $75 million commercial paper warehouse
facility (the
00-A
Warehouse Facility). This facility was increased to
$125 million in May 2001. The facility was renewed in
September 2006 and expires in September 2007. Prior to renewal,
the 00-A
Warehouse Facility was credit enhanced through a third-party
financial guarantee insurance policy. The recent renewal removed
the credit enhancement policy requirement. The
00-A
Warehouse Facility allows the Company on an ongoing basis to
transfer lease receivables to a wholly-owned, bankruptcy remote,
special purpose subsidiary of the Company, which issues
variable-rate notes to investors carrying an interest rate equal
to the rate on commercial paper issued to fund the notes during
the interest period. For the years ended December 31, 2006,
2005 and 2004, the weighted average interest rates were 5.89%,
3.74% and 1.71%, respectively. As of December 31, 2006 and
December 31, 2005 there were no notes outstanding under
this facility. The
00-A
Warehouse Facility requires that the Company limit its exposure
to adverse interest rate movements on the variable-rate notes
through entering into interest rate cap agreements. As of
December 31, 2006, the Company had interest rate cap
transactions with notional values of $125.0 million, at a
weighted average rate of 6.04%. The fair value of these interest
rate cap transactions was $122,000 as of December 31, 2006.
02-A
Warehouse Facility During April 2002, the Company
entered into a $75 million commercial paper warehouse
facility (the
02-A
Warehouse Facility). In January 2004 the
02-A
Warehouse Facility was transferred to another lender and
increased to $100 million in March 2004. The facility was
renewed in March 2006 and expires in March 2009. Prior to
renewal, the
00-A
Warehouse Facility was credit enhanced through a third-party
financial guarantee insurance policy. The recent renewal removed
the credit enhancement policy requirement. The
02-A
Warehouse Facility allows the Company on an ongoing basis to
transfer lease receivables to a wholly-owned, bankruptcy remote,
special purpose subsidiary of the Company, which issues
variable-rate notes to investors carrying an interest rate equal
to the rate on commercial paper issued to fund the notes during
the interest period. For the years ended December 31, 2006,
2005 and 2004, the weighted average interest rate was 5.75%,
4.29% and
65
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
2.29%, respectively. As of December 31, 2006 and
December 31, 2005 there were no notes outstanding under
this facility. The
02-A
Warehouse Facility requires that the Company limit its exposure
to adverse interest rate movements on the variable-rate notes
through entering into interest rate cap agreements. As of
December 31, 2006, the Company had interest rate cap
transactions with notional values of $100.0 million at a
weighted average rate of 6.11%. The fair value of these interest
rate cap transactions was $71,000 as of December 31, 2006.
Term
Securitizations
03-1
Transaction On June 25, 2003, the Company
closed a $217.2 million term securitization
(Series 2003-1
Notes). In connection with the
Series 2003-1
transaction, three tranches of notes were issued to investors in
the form of $197.3 million Class A Notes,
$14.3 million Class B Notes and $5.6 million
Class C Notes. The weighted average fixed-rate coupon
payable to investors is 3.18%.
04-1
Transaction On July 22, 2004 the Company closed
a $304.6 million term securitization
(Series 2004-1
Notes). In connection with the
2004-1
transaction, 6 classes of notes were issued to investors with
three of the classes issued at variable rates but swapped to
fixed interest cost to the Company through use of derivative
interest rate swap contracts. The weighted average interest
coupon will approximate 3.81% over the term of the financing.
05-1
Transaction On August 18, 2005 the Company
closed a $340.6 million term securitization
(Series 2005-1
Notes). In connection with the
2005-1
transaction, 6 classes of fixed-rate notes were issued to
investors. The weighted average interest coupon will approximate
4.81% over the term of the financing.
06-1
Transaction On September 21, 2006 the Company
closed a $380.2 million term securitization
(Series 2006-1
Notes). In connection with the
2006-1
transaction, 6 classes of fixed-rate notes were issued to
investors. The weighted average interest coupon will approximate
5.51% over the term of the financing.
Borrowings under the Companys warehouse facilities and the
term securitizations are collateralized by the Companys
direct financing leases. The Company is restricted from selling,
transferring, or assigning the leases or placing liens or
pledges on these leases.
Under the revolving bank facility, warehouse facilities and term
securitization agreements, the Company is subject to numerous
covenants, restrictions and default provisions relating to,
among other things, maximum lease delinquency and default
levels, a minimum net worth requirement and a maximum debt to
equity ratio. A change in the Chief Executive Officer or
President is an event of default under the revolving bank
facility and warehouse facilities unless a replacement
acceptable to the Companys lenders is hired within
90 days. Such an event is also an immediate event of
servicer termination under the term securitizations.
Marlins President resigned from his position on
December 20, 2006. Dan Dyer, the Companys Chief
Executive Officer, has assumed the title of President and George
Pelose, in his expanded role as Chief Operating Officer, has
assumed responsibility for all aspects of the Companys
lease financing business. We do not expect the change to have
any material adverse effect on our financing arrangements,
because the appropriate consents and waivers for this change
have been obtained from all affected financing sources.
A merger or consolidation with another company in which the
Company is not the surviving entity is an event of default under
the financing facilities. In addition, the revolving bank
facility and warehouse facilities contain cross default
provisions whereby certain defaults under one facility would
also be an event of default on the other facilities. An event of
default under the revolving bank facility or warehouse
facilities could result in termination of further funds being
available under such facility. An event of default under any of
the facilities could result in an acceleration of amounts
outstanding under the facilities, foreclosure on all or a
portion of the leases financed by the facilities
and/or the
removal of the Company as servicer of the leases financed by the
facility. As of December 31, 2006 and 2005 the Company was
in compliance with terms of the warehouse facilities and term
securitization agreements.
66
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Scheduled principal and interest payments on outstanding debt as
of December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
|
(Dollars in thousands)
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
256,483
|
|
|
$
|
25,645
|
|
2008
|
|
|
183,374
|
|
|
|
14,074
|
|
2009
|
|
|
106,856
|
|
|
|
6,473
|
|
2010
|
|
|
51,933
|
|
|
|
2,318
|
|
2011
|
|
|
17,481
|
|
|
|
376
|
|
Thereafter
|
|
|
195
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
616,322
|
|
|
$
|
48,889
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Derivative
Financial Instruments and Hedging Activities
|
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 balance sheet 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 SFAS 133, as amended,
Accounting for Derivative Instruments and Hedging Activities.
The Company expects that its hedges will be highly effective in
offsetting the changes in cash flows of the forecasted
transactions over the terms of the hedges and has documented
this expected relationship at the inception of each hedge. Hedge
effectiveness is 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 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 will retrospectively measure ineffectiveness using the
same methodology. The gain or loss from the effective portion of
a derivative designated as a cash flow hedge is recorded in
other comprehensive income and the gain or loss from the
ineffective portion is reported in earnings.
In August 2006, the Company entered into forward starting
interest rate swap agreements with total underlying notional
amounts of $200.0 million to commence in October 2007
related to its forecasted October 2007 term note securitization
transaction. These interest rate swap agreements are recorded in
other liabilities on the consolidated balance sheet at their
fair value of $983,000 million as of December 31,
2006. These interest rate swap agreements were designated as
cash flow hedges of the forecasted term note securitization
transaction, with unrealized losses recorded in the equity
section of the balance sheet of approximately $591,000, net of
tax, as of December 31, 2006. The Company expects to
terminate these agreements simultaneously with the pricing of
its 2007 term securitization with any of the unrecognized gains
or losses amortized to interest expense over the term of the
related borrowing.
In August 2006, the Company entered into forward starting
interest rate swap agreements with total underlying notional
amounts of $100.0 million to commence in October 2008
related to its forecasted October 2008 term note securitization
transaction. These interest rate swap agreements are recorded in
other liabilities on the consolidated balance sheet at their
fair values of $624,000 as of December 31, 2006. These
interest rate swap agreements were designated as cash flow
hedges of the forecasted term note securitization transaction,
with unrealized losses recorded in the equity section of the
balance sheet of approximately $375,000 net of tax, as of
December 31, 2006. The Company expects to terminate these
agreements simultaneously with the pricing of its 2008 term
securitization with any of the unrecognized gains or losses
amortized to interest expense over the term of the related
borrowing.
In June and September 2005, the Company had entered into similar
forward starting interest rate swap agreements with total
underlying notional amounts of $225.0 million to commence
in September 2006 related to its
67
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
forecasted 2006 term note securitization transaction. The
Company terminated these agreements simultaneously with the
pricing of its 2006 term securitization issued in September 2006
and is amortizing the realized gains of $3.7 million to
interest expense over the term of the related borrowing. These
interest rate swap agreements were designated as cash flow
hedges with the gains realized deferred and recorded in the
equity section of the balance sheet at approximately
$1.9 million, net of tax, as of December 31, 2006.
During the year ended December 31, 2006, the Company
amortized $573,000 of deferred gains to decrease interest
expense of the related 2006 term securitization borrowing. The
Company expects to reclassify $928,000 million net of tax,
into earnings over the next twelve months.
In October and December 2004, the Company had entered into
similar forward starting interest rate swap agreements with
total underlying notional amounts of $250.0 million to
commence in August 2005 related to its forecasted 2005 term note
securitization transaction. The Company terminated these
agreements simultaneously with the pricing of its 2005 term
securitization issued in August 2005 and is amortizing the
realized gains of $3.2 million to interest expense over the
term of the related borrowing. These interest rate swap
agreements were designated as cash flow hedges with the gains
realized deferred and recorded in the equity section of the
balance sheet at approximately $680,000 and $1.5 million,
net of tax, as of December 31, 2006 and December 31,
2005, respectively. During the years ended December 31,
2006 and 2005, the Company amortized $1.3 million and
$687,000, respectively, of deferred gains to decrease interest
expense of the related 2005 term securitization borrowing. The
Company expects to reclassify $451,000, net of tax, into
earnings over the next twelve months.
The Company issued a term note securitization on July 22,
2004 where certain classes of notes were issued at variable
rates to investors and simultaneously entered into interest rate
swap contracts to convert these borrowings to a fixed interest
cost to the Company for the term of the borrowing. At
December 31, 2006, we had interest rate swap agreements
related to these transactions with underlying notional amounts
of $49.0 million. These interest rate swap agreements are
recorded in other assets on the consolidated balance sheet at
their fair values of $456,000 and $1.1 million as of
December 31, 2006 and December 31, 2005, respectively.
These interest rate swap agreements were designated as cash flow
hedges with unrealized gains recorded in the equity section of
the balance sheet of approximately $274,000 and $652,000, net of
tax, as of December 31, 2006 and December 31, 2005,
respectively. The ineffectiveness related to these interest rate
swap agreements designated as cash flow hedges was not material
for the year ended December 31, 2006.
During the year ended December 31, 2006, the Company
recognized a net loss of $74,000 in other financing related
costs related to the fair values of the interest rate swaps that
were not designated as cash flow hedge derivatives. During the
year ended December 31, 2005, the Company recognized a net
gain of $70,000 in other financing related costs related to
similar interest rate swaps that were terminated or did not
qualify for hedge accounting. As of December 31, 2006, the
Company had interest rate swap agreements related to non-hedge
accounting transactions with underlying notional amounts of
$832,000. These interest rate swap agreements are recorded in
other liabilities on the consolidated balance sheet at a fair
value of $2,000. These derivative contracts also related to the
2004 term securitization and are intended to offset certain
prepayment risks in the lease portfolio pledged in the 2004 term
securitization.
The Company also uses interest-rate cap agreements that are not
designated for hedge accounting treatment to fulfill certain
covenants in our warehouse borrowing arrangements. Accordingly,
these cap agreements are recorded at fair value in other assets
at $193,000 and $103,000 as of December 31, 2006 and
December 31, 2005, respectively. Changes in the fair values
of the caps are recorded in financing related costs in the
accompanying statements of operations. The notional amount of
interest rate caps owned as of December 31, 2006 and
December 31, 2005 was $225.0 million and
$155.1 million, respectively.
The Company also sells interest-rate caps to partially offset
the interest-rate caps required to be purchased by the
Companys special purpose subsidiary under its warehouse
borrowing arrangements. These sales generate premium revenues to
partially offset the premium cost of purchasing the required
interest-rate caps. On a
68
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
consolidated basis, the interest-rate cap positions sold
partially offset the interest-rate cap positions owned. The
notional amount of interest-rate cap sold agreements totaled
$176.9 million and $64.6 million at December 31,
2006 and December 31, 2005, respectively. The fair value of
interest-rate caps sold is recorded in other liabilities at
$190,000 and $81,000 as of December 31, 2006 and
December 31, 2005, respectively.
The Companys income tax provision consisted of the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,539
|
|
|
$
|
4,473
|
|
|
$
|
|
|
State
|
|
|
2,384
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
13,923
|
|
|
|
5,464
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,390
|
)
|
|
|
4,368
|
|
|
|
7,414
|
|
State
|
|
|
44
|
|
|
|
775
|
|
|
|
1,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(1,346
|
)
|
|
|
5,143
|
|
|
|
8,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
12,577
|
|
|
$
|
10,607
|
|
|
$
|
8,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense results principally from the use of
different revenue and expense recognition methods for tax and
financial accounting purposes principally 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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Net operating loss carryforwards
|
|
$
|
|
|
|
$
|
3,548
|
|
|
$
|
12,480
|
|
Allowance for credit losses
|
|
|
3,246
|
|
|
|
3,114
|
|
|
|
2,416
|
|
Lease accounting
|
|
|
(24,838
|
)
|
|
|
(28,721
|
)
|
|
|
(33,733
|
)
|
Deferred acquisition costs
|
|
|
(3,670
|
)
|
|
|
(3,274
|
)
|
|
|
|
|
Interest-rate cap agreements
|
|
|
72
|
|
|
|
95
|
|
|
|
203
|
|
Other comprehensive income
|
|
|
(1,251
|
)
|
|
|
(2,329
|
)
|
|
|
(244
|
)
|
Accrued expenses
|
|
|
431
|
|
|
|
30
|
|
|
|
60
|
|
Depreciation
|
|
|
(352
|
)
|
|
|
(405
|
)
|
|
|
(341
|
)
|
Deferred income
|
|
|
2,258
|
|
|
|
2,145
|
|
|
|
725
|
|
Deferred compensation
|
|
|
1,106
|
|
|
|
435
|
|
|
|
282
|
|
Other
|
|
|
67
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
$
|
(22,931
|
)
|
|
$
|
(25,362
|
)
|
|
$
|
(18,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005 we changed our tax accounting for certain deferred
acquisition costs and began to expense these items as incurred
for income tax purposes. This change resulted in a deferred tax
liability of $3.7 million and $3.3 million in 2006 and
2005, respectively.
69
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
As of December 31, 2006 the Company has utilized all its
federal and state net operating loss carryforwards
(NOLs) generated in prior tax years.
The following is a reconciliation of the statutory federal
income tax rate to the effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
5.1
|
%
|
|
|
4.3
|
%
|
|
|
4.3
|
%
|
Other permanent differences
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
40.3
|
%
|
|
|
39.5
|
%
|
|
|
39.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of net income and shares used
in computing basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per-share data)
|
|
|
Net income
|
|
$
|
18,634
|
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
Weighted average common shares
outstanding used in computing basic EPS
|
|
|
11,803,973
|
|
|
|
11,551,589
|
|
|
|
11,330,132
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
357,506
|
|
|
|
434,499
|
|
|
|
399,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common
shares used in computing diluted EPS
|
|
|
12,161,479
|
|
|
|
11,986,088
|
|
|
|
11,729,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.58
|
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.53
|
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The shares used in computing diluted earnings per share exclude
options to purchase 204,770, 2,700 and 148,410 shares of
common stock for the years ended December 31, 2006, 2005
and 2004, respectively, as the inclusion of such shares would be
anti-dilutive.
Under the terms of the Marlin Business Services Corp. 2003
Equity Compensation Plan (as amended, the 2003
Plan), employees, certain consultants and advisors, and
non-employee members of the Companys board of directors
have the opportunity to receive incentive and nonqualified
grants of stock options, stock appreciation rights, restricted
stock and other equity-based awards as approved by the board.
These award programs are used to attract, retain and motivate
employees and to encourage individuals in key management roles
to retain stock. The Company has a policy of issuing new shares
to satisfy awards under the 2003 Plan. The aggregate number of
shares under the 2003 Plan that may be issued pursuant to stock
options or restricted stock grants is 2,100,000. There were
362,052 shares available for future grants under the Equity
Plan as of December 31, 2006.
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based
Payment. SFAS 123(R) amended SFAS 123,
Accounting for Stock-Based Compensation and superseded
Accounting Principles Board Opinion (APB)
No. 25, Accounting
70
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
for Stock Issued to Employees. In March 2005, the SEC
issued Staff Accounting Bulletin (SAB) No. 107
to provide guidance on the valuation of share-based payments for
public companies. SFAS 123(R) requires companies to
recognize all share-based payments, which include stock options
and restricted stock, in compensation expense over the service
period of the share-based payment award. SFAS 123(R)
establishes fair value as the measurement method in accounting
for share-based payment transactions with employees.
The Company adopted SFAS 123(R) effective January 1,
2006 using the modified prospective method in which compensation
cost is recognized over the service period for all awards
granted subsequent to the Companys adoption of
SFAS 123(R) as well as for the unvested portions of awards
outstanding as of the Companys adoption of
SFAS 123(R). In accordance with the modified prospective
method, results for prior periods have not been restated.
Prior to the adoption of SFAS 123(R), the Company applied
the recognition and measurement principles of APB 25 as
allowed by SFAS 123 and SFAS 148, Accounting for
Stock-based Compensation Transition and
Disclosure. Accordingly, no stock-based
compensation was recognized in net income for stock options
granted with an exercise price equal to the market value of the
underlying common stock on the date of the grant and the related
number of options granted were fixed at that point in time.
Under SFAS No. 123, Accounting for Stock-Based
Compensation, compensation expense related to stock options
granted to employees and directors is computed using option
pricing models to determine the fair value of the stock options
at the date of grant. The Company has primarily used the
Black-Scholes option pricing model to determine fair value of
options issued. The following table presents the pro forma
impact on earnings and earnings per share for the years ended
December 31, 2005 and 2004 if the Company had applied the
fair value recognition provisions of SFAS 123, as amended
by SFAS 148 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except
|
|
|
|
per-share data)
|
|
|
Net income, as reported
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
Add: stock-option-based employee
compensation expense included in net income, net of tax
|
|
|
549
|
|
|
|
428
|
|
Deduct: total stock-option-based
employee compensation expense determined under fair-value-based
method for all awards, net of tax
|
|
|
(897
|
)
|
|
|
(686
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
15,900
|
|
|
$
|
13,201
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
Pro forma
|
|
|
1.38
|
|
|
|
1.17
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
Pro forma
|
|
|
1.33
|
|
|
|
1.13
|
|
Weighted average shares used in
computing basic earnings per share
|
|
|
11,551,589
|
|
|
|
11,330,132
|
|
Weighted average shares used in
computing diluted earnings per share
|
|
|
11,986,088
|
|
|
|
11,729,703
|
|
The adoption of SFAS 123(R) resulted in incremental
stock-based compensation expense during the year ended
December 31, 2006 of $1.1 million, of which
$0.2 million was from accelerated vesting due to the
separation agreement related to the resignation of Marlins
President effective December 20, 2006.
71
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
For the year ended December 31, 2006, the incremental
stock-based compensation expense decreased income before income
taxes by $1.1 million, decreased net income by
$0.7 million, and decreased basic and diluted earnings per
share by $0.06 and $0.05, respectively. During the year ended
December 31, 2006, excess tax benefits from stock-based
payment arrangements decreased cash provided by operating
activities and increased cash provided by financing activities
by $1.0 million.
Stock
Options
Option awards are generally granted with an exercise price equal
to the market price of the Companys stock at the date of
the grant and have 7- to
10-year
contractual terms. All options issued contain service conditions
based on the participants continued service with the
Company, and provide for accelerated vesting if there is a
change in control as defined in the 2003 Plan.
Employee stock options generally vest over four years. The
vesting of certain options is contingent on various Company
performance measures, such as earnings per share and net income.
Of the total options granted during the year ended
December 31, 2006, 58,792 shares are contingent on
performance factors. The Company has recognized expense related
to performance options based on the most probable performance
target as of December 31, 2006.
The Company also issues stock options to non-employee
independent directors. These options generally vest in one year.
The fair value of each stock option granted during the year
ended December 31, 2006 was estimated on the date of the
grant using the Black-Scholes option pricing model. The
weighted-average grant-date fair value of stock options issued
for the years ended December 31, 2006, 2005 and 2004, was
$8.50, $6.67 and $8.54 per share, respectively. The
following weighted average assumptions were used for valuing
option grants made during the years ended December 31,
2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Weighted Averages:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Risk-free interest rate
|
|
|
4.84
|
%
|
|
|
3.75
|
%
|
|
|
3.99
|
%
|
Expected life (years)
|
|
|
5.1years
|
|
|
|
5.1years
|
|
|
|
8.0years
|
|
Expected volatility
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Expected dividends
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The risk-free interest rate for periods within the contractual
life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant. The expected life for
options granted during 2006 represents the period the option is
expected to be outstanding and was determined by applying the
simplified method as allowed under SAB 107. The expected
life for options granted during 2005 was based on the average
vesting period and the average contractual life with the
weighting toward the vesting period based on historical data of
option exercises. The expected volatility was determined using
historical volatilities based on historical stock prices. The
Company does not grant dividends, and therefore did not assume
expected dividends.
72
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
A summary of option activity for the three years ended
December 31, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding, December 31, 2003
|
|
|
1,078,208
|
|
|
$
|
5.66
|
|
Granted
|
|
|
207,000
|
|
|
|
18.20
|
|
Exercised
|
|
|
(147,599
|
)
|
|
|
2.97
|
|
Forfeited
|
|
|
(42,089
|
)
|
|
|
9.83
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
1,095,520
|
|
|
$
|
8.21
|
|
Granted
|
|
|
119,765
|
|
|
|
17.96
|
|
Exercised
|
|
|
(147,591
|
)
|
|
|
4.03
|
|
Forfeited
|
|
|
(65,436
|
)
|
|
|
14.70
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
1,002,258
|
|
|
$
|
9.56
|
|
Granted
|
|
|
109,431
|
|
|
|
21.59
|
|
Exercised
|
|
|
(156,494
|
)
|
|
|
4.41
|
|
Forfeited
|
|
|
(36,218
|
)
|
|
|
16.26
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006
|
|
|
918,977
|
|
|
$
|
11.61
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2006 the Company
recognized total compensation expense related to options of
$1.1 million, of which $816,000 related to options issued
prior to 2006. The total pre-tax intrinsic value of stock
options exercised was $2.7 million for the year ended
December 31, 2006. The related tax benefits realized from
the exercise of stock options for the year ended
December 31, 2006 were $1.0 million.
The following table summarizes information about the stock
options outstanding and exercisable as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Aggregate
|
|
Range of
|
|
Number
|
|
|
Remaining Life
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Average Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
Exercise Price
|
|
Outstanding
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Exercisable
|
|
|
Life (Years)
|
|
|
Exercise Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
$1.90 3.39
|
|
|
234,292
|
|
|
|
4.3
|
|
|
$
|
3.12
|
|
|
$
|
4,899
|
|
|
|
219,067
|
|
|
|
4.2
|
|
|
$
|
3.11
|
|
|
$
|
4,583
|
|
$4.23 5.01
|
|
|
91,791
|
|
|
|
3.3
|
|
|
|
4.33
|
|
|
|
1,808
|
|
|
|
91,791
|
|
|
|
3.3
|
|
|
|
4.33
|
|
|
|
1,808
|
|
$10.18
|
|
|
164,535
|
|
|
|
4.9
|
|
|
|
10.18
|
|
|
|
2,279
|
|
|
|
159,697
|
|
|
|
4.9
|
|
|
|
10.18
|
|
|
|
2,212
|
|
$14.00 16.02
|
|
|
99,000
|
|
|
|
7.1
|
|
|
|
14.73
|
|
|
|
921
|
|
|
|
55,163
|
|
|
|
6.9
|
|
|
|
14.30
|
|
|
|
537
|
|
$17.52 22.25
|
|
|
329,359
|
|
|
|
6.2
|
|
|
|
19.45
|
|
|
|
1,508
|
|
|
|
38,042
|
|
|
|
5.6
|
|
|
|
18.32
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
918,977
|
|
|
|
5.3
|
|
|
$
|
11.61
|
|
|
$
|
11,415
|
|
|
|
563,760
|
|
|
|
4.6
|
|
|
$
|
7.43
|
|
|
$
|
9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
The aggregate intrinsic value in the preceding table represents
the total pre-tax intrinsic value, based on the Companys
closing stock price of $24.03 as of December 31, 2006,
which would have been received by the option holders had all
option holders exercised their options as of that date.
As of December 31, 2006, the total future compensation cost
related to non-vested stock options not yet recognized in the
statement of operations was $1.6 million and the weighted
average period over which these awards are expected to be
recognized was 2.9 years.
The separation agreement entered into on December 20, 2006
with Marlins President provides that, as of his
January 31, 2007 separation date, unvested options to
purchase 35,501 shares of common stock at an average
exercise price of $19.74 will become vested. Options to purchase
138,390 shares at an average exercise price of $6.06 will
remain exercisable for 90 days following his separation
date, and options to purchase 45,191 shares at an average
exercise price of $19.33 will remain exercisable for two years
following the separation date. The acceleration of the vesting
of options pursuant to the separation agreement resulted in
incremental expense of $209,000 during the year ended
December 31, 2006, in addition to the $94,000 scheduled
expense recorded during the year on the grants subsequently
accelerated.
Restricted
Stock Awards
Restricted stock awards provide that, during the applicable
vesting periods, the shares awarded may not be sold or
transferred by the participant. The vesting period for
restricted stock awards generally ranges from 3 to
10 years, though certain awards for special projects may
vest in as little as one year depending on the duration of the
project. All awards issued contain service conditions based on
the participants continued service with the Company, and
may provide for accelerated vesting if there is a change in
control as defined in the 2003 Plan.
The vesting of certain restricted shares may be accelerated to a
minimum of 3 to 4 years based on achievement of various
individual and Company performance measures. In addition, the
Company has issued certain shares under a Management Stock
Ownership Program. Under this program, restrictions on the
shares lapse at the end of 10 years but may lapse (vest) in
a minimum of three years if the employee continues in service at
the Company and owns a matching number of other common shares in
addition to the restricted shares.
Of the total restricted stock awards granted during the year
ended December 31, 2006, 22,191 shares may be subject
to accelerated vesting based on performance factors and
32,325 shares are contingent upon performance factors. The
Company has recognized expense related to performance-based
shares based on the most probable performance target as of
December 31, 2006.
The Company also issues restricted stock to non-employee
independent directors. These shares generally vest in seven
years from the grant date or six months following the
directors termination from Board service.
74
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
The following table summarizes the activity of the non-vested
restricted stock during the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested restricted stock at
December 31, 2003
|
|
|
|
|
|
|
|
|
Granted
|
|
|
127,372
|
|
|
$
|
15.88
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,947
|
)
|
|
|
15.88
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at
December 31, 2004
|
|
|
124,425
|
|
|
$
|
15.88
|
|
Granted
|
|
|
84,203
|
|
|
|
18.03
|
|
Vested
|
|
|
(46,335
|
)
|
|
|
16.45
|
|
Forfeited
|
|
|
(21,113
|
)
|
|
|
16.26
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at
December 31, 2005
|
|
|
141,180
|
|
|
$
|
16.91
|
|
Granted
|
|
|
107,396
|
|
|
|
21.79
|
|
Vested
|
|
|
(36,250
|
)
|
|
|
16.02
|
|
Forfeited
|
|
|
(4,595
|
)
|
|
|
17.51
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at
December 31, 2006
|
|
|
207,731
|
|
|
$
|
19.57
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2006, 2005 and 2004 the
Company granted restricted stock awards totaling
$2.3 million, $1.5 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 compensation expense of $1.5 million,
$0.9 million and $0.7 million related to restricted
stock for the years ended December 31, 2006, 2005 and 2004,
respectively. As of December 31, 2006, there was
$2.4 million of unrecognized compensation cost related to
non-vested restricted stock compensation scheduled to be
recognized over a weighted average period of 2.7 years. The
fair value of shares that vested was $0.8 million during
each of the years ended December 31, 2006 and 2005. No
shares of restricted stock vested during the year ended
December 31, 2004.
The separation agreement entered into with Marlins
President provides that 18,365 unvested restricted shares become
vested as of his January 31, 2007 separation date. The
acceleration of the vesting of restricted shares pursuant to the
separation agreement resulted in incremental expense of $93,000
during the year ended December 31, 2006, in addition to the
$180,000 scheduled expense recorded during the year on the
grants subsequently accelerated.
Employee
Stock Purchase Plan
In October 2003, the Company adopted the Employee Stock Purchase
Plan (the ESPP). Under the terms of the ESPP,
employees have the opportunity to purchase shares of common
stock during designated offering periods equal to the lesser of
95% of the fair market value per share on the first day of the
offering period or the purchase date. Participants are limited
to 10% of their compensation. The aggregate number of shares
under the ESPP that may be issued is 200,000. During 2006 and
2005, 15,739 and 19,792 shares, respectively, of common
stock were sold for $343,000 and $357,000, respectively pursuant
to the terms of the ESPP.
75
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
14. Employee
401(k) Plan
The Company adopted a 401(k) plan (the Plan) which
originally became effective as of January 1, 1997. The
Companys employees are entitled to participate in the
Plan, which provides savings and investment opportunities.
Employees can contribute up to the maximum annual amount
allowable per IRS guidelines. The Plan also provides for Company
contributions equal to 25% of an employees contribution
percentage up to a maximum employee contribution of 4%. The
Company elected to double the required match in 2006, 2005 and
2004. The Companys contributions to the Plan for the years
ended December 31, 2006, 2005 and 2004 were approximately
$298,000, $257,000 and $221,000, respectively.
|
|
15.
|
Other
Comprehensive Income
|
The following table details the components of comprehensive
income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Net income, as reported
|
|
$
|
18,634
|
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair values of cash
flow hedge derivatives
|
|
|
(802
|
)
|
|
|
5,916
|
|
|
|
618
|
|
Amortization of deferred loss
(gain) on cash flow hedge derivatives
|
|
|
(1,907
|
)
|
|
|
(686
|
)
|
|
|
|
|
Tax effect
|
|
|
1,081
|
|
|
|
(2,084
|
)
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
(1,628
|
)
|
|
|
3,146
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
17,006
|
|
|
$
|
19,394
|
|
|
$
|
13,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
Disclosures
about the Fair Value of Financial Instruments
|
The following summarizes the carrying amount and estimated fair
value of the Companys financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,663
|
|
|
$
|
26,663
|
|
|
$
|
34,472
|
|
|
$
|
34,472
|
|
Restricted cash
|
|
|
57,705
|
|
|
|
57,705
|
|
|
|
47,786
|
|
|
|
46,568
|
|
Interest-rate caps purchased
|
|
|
193
|
|
|
|
193
|
|
|
|
103
|
|
|
|
103
|
|
Derivative collateral
|
|
|
3,099
|
|
|
|
3,099
|
|
|
|
784
|
|
|
|
784
|
|
Interest-rate swaps
|
|
|
456
|
|
|
|
456
|
|
|
|
3,383
|
|
|
|
3,383
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving and term secured
borrowings
|
|
|
616,322
|
|
|
|
612,919
|
|
|
|
516,849
|
|
|
|
509,512
|
|
Accounts payable and accrued
expenses
|
|
|
20,113
|
|
|
|
20,113
|
|
|
|
16,088
|
|
|
|
16,088
|
|
Interest-rate caps sold
|
|
|
190
|
|
|
|
190
|
|
|
|
81
|
|
|
|
81
|
|
Interest-rate swaps
|
|
|
1,607
|
|
|
|
1,607
|
|
|
|
|
|
|
|
|
|
76
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
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|
(a)
|
Cash
and Cash Equivalents
|
The carrying amount of the Companys cash approximates fair
value as of December 31, 2006 and 2005.
The Company maintains cash reserve accounts as a form of credit
enhancement in connection with the
Series 2006-1,
2005-1 and
2004-1 term
securitizations. The book value of such cash reserve accounts is
included in restricted cash on the accompanying balance sheet.
The reserve accounts earn a market rate of interest which
results in a fair value approximating the carrying amount at
December 31, 2006.
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|
(c)
|
Revolving
and Term Secured Borrowings
|
The fair value of the Companys debt and secured borrowings
was estimated by discounting cash flows at current rates offered
to the Company for debt and secured borrowings of the same or
similar remaining maturities.
|
|
(d)
|
Accounts
Payable and Accrued Expenses
|
The carrying amount of the Companys accounts payable
approximates fair value as of December 31, 2006 and 2005.
The fair value of the Companys interest-rate cap
agreements purchased recorded in other assets was $193,000 and
$103,000 as of December 31, 2006 and 2005, respectively, as
determined by third party valuations. The fair value of the
Companys interest-rate cap agreements sold recorded in
other liabilities was $190,000 and $81,000 as of
December 31, 2006 and 2005, respectively, as determined by
third party valuations.
At December 31, 2006 the fair value of the Companys
interest-rate swap agreements recorded in other assets and other
liabilities was $0.5 million and $1.6 million,
respectively. At December 31, 2005 the fair value of the
Companys interest-rate swap agreements recorded in other
assets was $3.4 million. These amounts were determined by
third party valuations.
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|
17.
|
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 Chairman of the Board of
Directors and 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 $566,000 and $619,000 during the years ended
December 31, 2006 and 2005.
77
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Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
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|
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 Exchange Act), is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to management,
including the Companys Chief Executive Officer
(CEO) and Chief Financial Officer (CFO),
as appropriate, to allow timely decisions regarding required
disclosure.
In connection with the preparation of this Annual Report on
Form 10-K,
as of December 31, 2006, we updated our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures for purposes of filing reports under the
Securities and Exchange Act of 1934. This controls evaluation
was done under the supervision and with the participation of
management, including our CEO and our CFO. Our CEO and our CFO
have concluded that our disclosure controls and procedures (as
defined in
Rule 13(a)-15(e)
and 15(d)-15(e) under the Exchange Act) are effective to provide
reasonable assurance that information relating to us and our
subsidiaries that we are required to disclose in the reports
that we file or submit to the SEC is recorded, processed,
summarized and reported with the time periods specified in the
SECs rules and forms.
Managements Annual Report on Internal Control over
Financial Reporting Our CEO and CFO provided a
report on behalf of management on our internal control over
financial reporting. The full text of managements report
is contained in Item 8 of this
Form 10-K
and is incorporated herein by reference.
Attestation Report of the Registered Public Accounting
Firm The attestation report of our independent
registered public accounting firm on our managements
assessment of internal control over financial reporting is
contained in Item 8 of this
Form 10-K
and is incorporated herein by reference.
Change in Internal Control Over Financial
Reporting There were no changes in the
Companys internal control over financial reporting that
occurred during the Companys fourth fiscal quarter of 2006
that have materially affected, or are reasonably likely to
affect materially, the Companys internal control over
financial reporting.
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|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
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 2007 Annual Meeting of Stockholders.
We have adopted a code of ethics and business conduct that
applies to all of our directors, officers and employees,
including our principal executive officer, principal financial
officer, principal accounting officer and persons performing
similar functions. Our code of ethics and business conduct is
available free of charge within the investor relations
section of our Web site at www.marlincorp.com. We intend to post
on our Web site any amendments and waivers to the code of ethics
and business conduct that are required to be disclosed by the
rules of the Securities and Exchange Commission, or file a
Form 8-K,
Item 5.05 to the extent required by NASDAQ listing
standards.
78
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|
Item 11.
|
Executive
Compensation
|
The information required by Item 11 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2007 Annual Meeting of Stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 12 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2007 Annual Meeting of Stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by Item 13 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2007 Annual Meeting of Stockholders.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by Item 14 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2007 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 Firms
Consolidated Balance Sheets as of December 31, 2006 and
2005.
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004.
Consolidated Statements of Stockholders Equity for the
years ended December 31, 2006, 2005 and 2004.
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004.
Notes to Consolidated Financial Statements.
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|
|
|
2.
|
Financial Statement Schedules
|
Schedules, are omitted because they are not applicable or are
not required, or because the required information is included in
the consolidated and combined financial statements or notes
thereto.
(b) Exhibits.
|
|
|
|
|
Number
|
|
Description
|
|
|
1
|
.1(14)
|
|
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(3)
|
|
Amended and Restated Articles of
Incorporation of the Registrant.
|
|
3
|
.2(2)
|
|
Bylaws of the Registrant.
|
|
4
|
.1(2)
|
|
Second Amended and Restated
Registration Agreement, as amended through July 26, 2001,
by and among Marlin Leasing Corporation and certain of its
shareholders.
|
|
10
|
.1(2)
|
|
2003 Equity Compensation Plan of
the Registrant.
|
|
10
|
.2(2)
|
|
2003 Employee Stock Purchase Plan
of the Registrant.
|
79
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.3(2)
|
|
Lease Agreement, dated as of
April 9, 1998, and amendment thereto dated as of
September 22, 1999 between W9/PHC Real Estate Limited
Partnership and Marlin Leasing Corporation.
|
|
10
|
.4(4)
|
|
Lease Agreement, dated as of
October 21, 2003, between Liberty Property Limited
Partnership and Marlin Leasing Corporation
|
|
10
|
.5(2)
|
|
Employment Agreement, dated as of
October 14, 2003 between Daniel P. Dyer and the Registrant.
|
|
10
|
.6(2)
|
|
Employment Agreement, dated as of
October 14, 2003 between Gary R. Shivers and the Registrant.
|
|
10
|
.7(2)
|
|
Employment Agreement, dated as of
October 14, 2003 between George D. Pelose and the
Registrant.
|
|
10
|
.8(12)
|
|
Amendment
2006-1 dated
as of May 19, 2006 to the Employment Agreement between
George D. Pelose and the Registrant.
|
|
10
|
.9(1)
|
|
Master Lease Receivables
Asset-Backed Financing Facility Agreement, dated as of
December 1, 2000, by and among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. IV and Wells Fargo Bank
Minnesota, National Association.
|
|
10
|
.10(1)
|
|
Amended and Restated
Series 2000-A
Supplement dated as of August 7, 2001, to the Master Lease
Receivables Asset-Backed Financing Facility Agreement, dated as
of December 1, 2000, by and among Marlin Leasing
Corporation, Marlin Leasing Receivables Corp. IV, Marlin Leasing
Receivables IV LLC, Deutsche Bank AG, New York Branch, XL
Capital Assurance Inc. and Wells Fargo Bank Minnesota, National
Association.
|
|
10
|
.11(1)
|
|
Third Amendment to the Amended and
Restated
Series 2000-A
Supplement dated as of September 25, 2002, by and among
Marlin Leasing Corporation, Marlin Leasing Receivables Corp. IV,
Marlin Leasing Receivables IV LLC, Deutsche Bank AG, New
York Branch, XL Capital Assurance Inc. and Wells Fargo Bank
Minnesota, National Association.
|
|
10
|
.12(5)
|
|
Fourth Amendment to the Amended
and Restated
Series 2000-A
Supplement dated as of October 7, 2004, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. IV, Marlin
Leasing Receivables IV LLC, Deutsche Bank AG, New York
Branch, XL Capital Assurance Inc. and Wells Fargo Bank, National
Association.
|
|
10
|
.13(13)
|
|
Second Amended and Restated
Series 2000-A
Supplement to the Master Facility Agreement, dated as of
September 28, 2006, among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. IV, Marlin Leasing
Receivables IV LLC, Deutsche Bank AG, New York Branch and
Wells Fargo Bank, N.A.
|
|
10
|
.14(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
|
.15(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
|
.16(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
|
.17(9)
|
|
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
|
.18(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
|
.19(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
|
.20(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.
|
80
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|
|
|
|
Number
|
|
Description
|
|
|
10
|
.21(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
|
.22(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
|
.23(6)
|
|
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
|
.24(11)
|
|
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
|
.25(7)
|
|
Compensation Policy for
Non-Employee Independent Directors.
|
|
10
|
.26(10)
|
|
Transition & Release
Agreement made as of December 6, 2005 (effective as of
December 14, 2005) between Bruce E. Sickel and the
Registrant.
|
|
10
|
.27(15)
|
|
Separation Agreement, dated
December 20, 2006, between Marlin Business Services Corp.
and Gary R. Shivers.
|
|
16
|
.1(8)
|
|
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)
|
|
23
|
.2
|
|
Consent of KPMG 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
Form 8-K
dated October 7, 2004 filed on October 12, 2004, and
incorporated herein by reference. |
81
|
|
|
(6) |
|
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. |
|
(7) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated May 26, 2005 filed on June 2, 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 June 24, 2005 filed on June 29, 2005, and
incorporated by reference herein. |
|
(9) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated August 26, 2005 filed on August 26, 2005, and
incorporated by reference herein. |
|
(10) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated December 14, 2005 and filed on December 14,
2005, and incorporated by reference herein. |
|
(11) |
|
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. |
|
(12) |
|
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. |
|
(13) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated September 28, 2006 and filed on September 29,
2006, and incorporated by reference herein. |
|
(14) |
|
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. |
|
(15) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated December 20, 2006 and filed on December 21,
2006, and incorporated by reference herein. |
82
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 6, 2007
Marlin Business Services
Corp.
Daniel P. Dyer
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
By:
|
|
/s/ Daniel
P. Dyer
Daniel
P. Dyer
|
|
Chairman, Chief Executive
Officer
and President
(Principal Executive Officer)
|
|
March 6, 2007
|
By:
|
|
/s/ Lynne
C. Wilson
Lynne
C. Wilson
|
|
Chief Financial Officer and
Senior Vice President
(Principal Financial and
Accounting Officer)
|
|
March 6, 2007
|
By:
|
|
/s/ John
J. Calamari
John
J. Calamari
|
|
Director
|
|
March 6, 2007
|
By:
|
|
/s/ Lawrence
J. DeAngelo
Lawrence
J. DeAngelo
|
|
Director
|
|
March 6, 2007
|
By:
|
|
/s/ Edward
Grzedzinski
Edward
Grzedzinski
|
|
Director
|
|
March 6, 2007
|
By:
|
|
/s/ Kevin
J. McGinty
Kevin
J. McGinty
|
|
Director
|
|
March 6, 2007
|
By:
|
|
/s/ James
W. Wert
James
W. Wert
|
|
Director
|
|
March 6, 2007
|
83