e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2007
Commission
file number 000-50448
MARLIN BUSINESS SERVICES CORP.
(Exact name of registrant as specified in its charter)
|
|
|
Pennsylvania
(State of incorporation)
|
|
38-3686388
(I.R.S. Employer Identification Number) |
300 Fellowship Road, Mount Laurel, NJ 08054
(Address of principal executive offices)
(Zip code)
(888) 479-9111
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and a 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 Rule 12b-2 of the
Securities Exchange Act of 1934).
Yes o No þ
At October 31, 2007, 12,323,412 shares of Registrants common stock, $.01 par value, were
outstanding.
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2007
TABLE OF CONTENTS
1
PART I. Financial Information
Item 1. Financial Statements
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands, except per-share data) |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
10,964 |
|
|
$ |
26,663 |
|
Restricted cash |
|
|
68,634 |
|
|
|
57,705 |
|
Net investment in leases and loans |
|
|
755,928 |
|
|
|
693,911 |
|
Property and equipment, net |
|
|
3,281 |
|
|
|
3,430 |
|
Property tax receivables |
|
|
852 |
|
|
|
257 |
|
Fair value of cash flow hedge derivatives |
|
|
43 |
|
|
|
456 |
|
Other assets |
|
|
11,855 |
|
|
|
13,030 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
851,557 |
|
|
$ |
795,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Revolving and term secured borrowings |
|
$ |
659,561 |
|
|
$ |
616,322 |
|
Other liabilities: |
|
|
|
|
|
|
|
|
Fair value of cash flow hedge derivatives |
|
|
4,172 |
|
|
|
1,607 |
|
Sales and property taxes payable |
|
|
9,804 |
|
|
|
8,034 |
|
Accounts payable and accrued expenses |
|
|
9,974 |
|
|
|
12,269 |
|
Deferred income tax liability |
|
|
17,613 |
|
|
|
22,931 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
701,124 |
|
|
|
661,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common Stock, $0.01 par value; 75,000,000 shares
authorized; 12,288,036 and 12,030,259 shares
issued and outstanding, respectively |
|
|
123 |
|
|
|
120 |
|
Preferred Stock, $0.01 par value;
5,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
85,645 |
|
|
|
81,850 |
|
Stock subscription receivable |
|
|
(7 |
) |
|
|
(18 |
) |
Accumulated other comprehensive income (expense) |
|
|
(1,006 |
) |
|
|
1,892 |
|
Retained earnings |
|
|
65,678 |
|
|
|
50,445 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
150,433 |
|
|
|
134,289 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
851,557 |
|
|
$ |
795,452 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
2
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands, except per-share data) |
|
|
|
(Unaudited) |
|
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
22,622 |
|
|
$ |
19,629 |
|
|
$ |
66,210 |
|
|
$ |
55,996 |
|
Fee income |
|
|
5,685 |
|
|
|
5,241 |
|
|
|
16,486 |
|
|
|
15,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
28,307 |
|
|
|
24,870 |
|
|
|
82,696 |
|
|
|
71,241 |
|
Interest expense |
|
|
8,768 |
|
|
|
6,888 |
|
|
|
24,735 |
|
|
|
18,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income |
|
|
19,539 |
|
|
|
17,982 |
|
|
|
57,961 |
|
|
|
52,852 |
|
Provision for credit losses |
|
|
3,966 |
|
|
|
3,082 |
|
|
|
10,826 |
|
|
|
7,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income after provision for
credit losses |
|
|
15,573 |
|
|
|
14,900 |
|
|
|
47,135 |
|
|
|
45,756 |
|
Insurance and other income |
|
|
1,659 |
|
|
|
1,365 |
|
|
|
4,888 |
|
|
|
3,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
17,232 |
|
|
|
16,265 |
|
|
|
52,023 |
|
|
|
49,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
5,257 |
|
|
|
5,171 |
|
|
|
16,087 |
|
|
|
15,570 |
|
General and administrative |
|
|
3,447 |
|
|
|
2,868 |
|
|
|
10,080 |
|
|
|
8,692 |
|
Financing related costs |
|
|
202 |
|
|
|
408 |
|
|
|
662 |
|
|
|
1,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense |
|
|
8,906 |
|
|
|
8,447 |
|
|
|
26,829 |
|
|
|
25,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,326 |
|
|
|
7,818 |
|
|
|
25,194 |
|
|
|
24,383 |
|
Income taxes |
|
|
3,298 |
|
|
|
3,088 |
|
|
|
9,961 |
|
|
|
9,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,028 |
|
|
$ |
4,730 |
|
|
$ |
15,233 |
|
|
$ |
14,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
$ |
1.26 |
|
|
$ |
1.25 |
|
Diluted earnings per share |
|
$ |
0.41 |
|
|
$ |
0.39 |
|
|
$ |
1.24 |
|
|
$ |
1.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic
earnings per share |
|
|
12,155,152 |
|
|
|
11,838,677 |
|
|
|
12,066,077 |
|
|
|
11,755,028 |
|
Weighted average shares used in computing
diluted earnings per share |
|
|
12,355,484 |
|
|
|
12,154,889 |
|
|
|
12,310,198 |
|
|
|
12,114,655 |
|
The accompanying notes are an integral part of the consolidated financial statements.
3
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Stock |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Common |
|
|
Stock |
|
|
Paid-In |
|
|
Subscription |
|
|
Comprehensive |
|
|
Retained |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Receivable |
|
|
Income |
|
|
Earnings |
|
|
Equity |
|
|
|
(Dollars in thousands) |
|
|
|
(Unaudited) |
|
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 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
7,568 |
|
|
|
|
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171 |
|
Exercise of stock options |
|
|
206,792 |
|
|
|
2 |
|
|
|
1,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,648 |
|
Tax benefit on stock options
exercised |
|
|
|
|
|
|
|
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,197 |
|
Stock option compensation recognized |
|
|
|
|
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360 |
|
Payment of receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Restricted stock grant |
|
|
43,417 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Restricted stock compensation
recognized |
|
|
|
|
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421 |
|
Unrealized losses on cash flow
hedge derivatives, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,898 |
) |
|
|
|
|
|
|
(2,898 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,233 |
|
|
|
15,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007 |
|
|
12,288,036 |
|
|
$ |
123 |
|
|
$ |
85,645 |
|
|
$ |
(7 |
) |
|
$ |
(1,006 |
) |
|
$ |
65,678 |
|
|
$ |
150,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
4
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
2006 |
|
|
(In thousands) |
|
|
|
(Unaudited) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,233 |
|
|
$ |
14,752 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,148 |
|
|
|
1,966 |
|
Stock-based compensation |
|
|
781 |
|
|
|
1,632 |
|
Excess tax benefits from stock-based payment
arrangements |
|
|
(1,197 |
) |
|
|
(960 |
) |
Amortization of deferred gain on cash flow hedge
derivatives |
|
|
(1,826 |
) |
|
|
(1,149 |
) |
Provision for credit losses |
|
|
10,826 |
|
|
|
7,096 |
|
Deferred taxes |
|
|
(3,413 |
) |
|
|
(870 |
) |
Amortization of deferred initial direct costs and fees |
|
|
11,847 |
|
|
|
9,677 |
|
Deferred initial direct costs and fees |
|
|
(14,631 |
) |
|
|
(13,817 |
) |
Effect of changes in other operating items: |
|
|
|
|
|
|
|
|
Other assets |
|
|
658 |
|
|
|
2,767 |
|
Other liabilities |
|
|
(499 |
) |
|
|
3,326 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
19,927 |
|
|
|
24,420 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of equipment for direct financing lease contracts
and funds used to originate loans |
|
|
(294,790 |
) |
|
|
(281,882 |
) |
Principal collections on leases and loans |
|
|
226,326 |
|
|
|
195,384 |
|
Security deposits collected, net of returns |
|
|
(1,595 |
) |
|
|
(719 |
) |
Acquisitions of property and equipment |
|
|
(773 |
) |
|
|
(702 |
) |
Change in restricted cash |
|
|
(10,929 |
) |
|
|
(132,178 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(81,761 |
) |
|
|
(220,097 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuances of common stock, net of terminations |
|
|
182 |
|
|
|
165 |
|
Exercise of stock options |
|
|
1,648 |
|
|
|
634 |
|
Excess tax benefits from stock-based payment arrangements |
|
|
1,197 |
|
|
|
960 |
|
Debt issuance costs |
|
|
(131 |
) |
|
|
(1,901 |
) |
Term securitization advances |
|
|
|
|
|
|
380,182 |
|
Term securitization repayments |
|
|
(204,180 |
) |
|
|
(209,066 |
) |
Secured bank facility advances |
|
|
160,652 |
|
|
|
154,558 |
|
Secured bank facility repayments |
|
|
(133,960 |
) |
|
|
(130,168 |
) |
Warehouse advances |
|
|
242,046 |
|
|
|
217,168 |
|
Warehouse repayments |
|
|
(21,319 |
) |
|
|
(217,168 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
46,135 |
|
|
|
195,364 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(15,699 |
) |
|
|
(313 |
) |
Cash and cash equivalents, beginning of period |
|
|
26,663 |
|
|
|
34,472 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
10,964 |
|
|
$ |
34,159 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
25,230 |
|
|
$ |
18,132 |
|
Cash paid for income taxes |
|
|
13,366 |
|
|
|
8,161 |
|
The accompanying notes are an integral part of the consolidated financial statements.
5
MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Organization
Description
Marlin Leasing Corporation provides equipment leasing and working capital solutions nationwide,
primarily to small businesses in a segment of the equipment leasing market commonly referred to as
the small-ticket segment. The Company finances over 70 categories of commercial equipment
important to its end user customers including copiers, telephone systems, computers and certain
commercial and industrial equipment. Marlin Leasing Corporation is managed as a single business
segment.
In November 2003, Marlin Leasing Corporation merged into a wholly-owned subsidiary of Marlin
Business Services Corp., a Pennsylvania business corporation, as part of a corporate reorganization
in connection with our initial public offering. Marlin Leasing Corporation is the principal
operating subsidiary of Marlin Business Services Corp.
References to the Company, we, us, and our herein refer to Marlin Business Services Corp.
and its wholly-owned subsidiaries, unless the context otherwise requires.
NOTE 2 Basis of Financial Statement Presentation and Critical Accounting Policies
In the opinion of the management, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring items) necessary to present fairly the
Companys financial position at September 30, 2007 and the results of operations for the three- and
nine-month periods ended September 30, 2007 and 2006, and cash flows for the nine-month periods
ended September 30, 2007 and 2006. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and note disclosures included in the
Companys Form 10-K filed with the Securities and Exchange Commission on March 9, 2007. The
consolidated results of operations for the three- and nine-month periods ended September 30, 2007
and 2006 are not necessarily indicative of the results for the respective full years. All
intercompany accounts and transactions have been eliminated in consolidation. Certain prior period
amounts have been reclassified to conform to the current presentation.
Use of Estimates. The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Estimates are used when accounting for income
recognition, the residual values of leased equipment, the allowance for credit losses, deferred
initial direct costs and fees, late fee receivables and income taxes. Actual results could differ
from estimates.
Income recognition. Interest income is recognized under the effective interest method. The
effective interest method of income recognition applies a constant rate of interest equal to the
internal rate of return on the lease. When a lease is 90 days or more delinquent, the lease is
classified as 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, cash collected on early
termination of leases and other administrative fees. Fee income also includes net residual income
which includes income from lease renewals and gains and losses on the realization of residual
values of equipment disposed of at the end of term.
Fee income from delinquent lease payments is recognized on the 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 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.
6
Initial direct costs and fees. We defer initial direct costs incurred and fees received to
originate our leases and loans in accordance with Statement of Financial Accounting Standards
(SFAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. The initial direct costs and fees we defer are
part of the net investment in leases and loans, and are amortized to interest income using the
effective interest method. We defer third party commission costs as well as certain internal costs
directly related to the origination activity. The costs include evaluating the prospective
lessees financial condition, evaluating and recording guarantees and other security arrangements,
negotiating terms, preparing and processing documents and closing the transaction. The fees we
defer are documentation fees collected at 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 and loan portfolios.
Lease residual values. A direct financing lease is recorded at the aggregate future minimum lease
payments plus the estimated residual values less unearned income. Residual values reflect the
estimated amounts to be received at lease termination from lease extensions, sales or other
dispositions of leased equipment. These estimates are based on industry data and on our
experience. Management performs periodic reviews of the estimated residual values and any
impairment, if other than temporary, is recognized in the current period.
Allowance for credit losses. We maintain an allowance for credit losses at an amount sufficient to
absorb losses inherent in our existing lease and loan portfolios as of the reporting dates based on
our projection of probable net credit losses. To project probable net credit losses, we perform a
migration analysis of delinquent and current accounts. A migration analysis is a technique used to
estimate the likelihood that an account will progress through the various delinquency stages and
ultimately charge off. In addition to the migration analysis, we also consider other factors
including recent trends in delinquencies and charge-offs; accounts filing for bankruptcy; recovered
amounts; forecasting uncertainties; the composition of our lease and loan portfolios; economic
conditions; and seasonality. We then establish an allowance for credit losses for the projected
probable net credit losses based on this analysis. A provision is charged against earnings to
maintain the allowance for credit losses at the appropriate level. Our policy is to charge-off
against the allowance the estimated unrecoverable portion of accounts once they reach 121 days
delinquent.
Our projections of probable net credit losses are inherently uncertain, and as a result we cannot
predict with certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy laws, and other factors could impact
our actual and projected net credit losses and the related allowance for credit losses. To the
degree we add new leases and loans to our portfolios, or to the degree credit quality is worse than
expected, we will record expense to increase the allowance for credit losses for the estimated net
losses expected in our portfolios. Actual losses may vary from current estimates.
Securitizations. Since inception, 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 Financial Accounting Standards Board (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.
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 Sheets. The Company records the fair value of derivative contracts based on
market value indications supplied by financial institutions that are also counterparty to the
derivative contracts. The accounting for subsequent changes in the fair value of these derivatives
depends on whether a contract 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 Statements 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 ongoing periodic assessments may be required to
determine the ongoing effectiveness of the hedge. The gain or loss on derivatives qualifying for
hedge accounting is recorded in other comprehensive income on the Consolidated Balance Sheets 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. SFAS No. 123(R), Share-Based Payments requires companies to recognize all
share-based payments, which include stock options and restricted stock, in compensation expense
over the service period of the share-based payment award.
7
SFAS No. 123(R) establishes fair value as the measurement method in accounting for share-based
payment transactions with employees, except for equity instruments held by employee share ownership
plans.
Income taxes. The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires the use of the asset and liability method under
which deferred taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities, given the provisions of
the enacted tax laws. In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities and projected future
taxable income in making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will realize the benefits of
these deductible differences.
Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax
assets. The process involves summarizing temporary differences resulting from the different
treatment of items, for example, leases for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included within the Consolidated Balance Sheets.
Our management must then assess the likelihood that deferred tax assets will be recovered from
future taxable income or tax carry-back availability and, to the extent our management believes
recovery is not likely, a valuation allowance must be established. To the extent that we establish
a valuation allowance in a period, an expense must be recorded within the tax provision in the
Consolidated Statements of Operations.
The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, on January 1, 2007. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Guidance is also provided on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we concluded that there are no significant uncertain tax positions
requiring recognition in our financial statements. There was no effect on our financial condition
or results of operations as a result of implementing FIN 48, and we did not have any unrecognized
tax benefits. At September 30, 2007, there have been no changes to the liability for uncertain tax
positions and no unrecognized tax benefits. The periods subject to examination for the Companys
federal return include the 1997 tax year to the present.
The Company records penalties and accrued interest related to uncertain tax positions in income tax
expense. Such adjustments have historically been minimal and immaterial to our financial results.
NOTE 3 Net Investment in Leases and Loans
Net investment in leases and loans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Minimum lease payments receivable |
|
$ |
859,139 |
|
|
$ |
797,697 |
|
Estimated residual value of equipment |
|
|
50,620 |
|
|
|
48,188 |
|
Unearned lease income, net of initial direct
costs and fees deferred |
|
|
(137,696 |
) |
|
|
(128,252 |
) |
Security deposits |
|
|
(15,929 |
) |
|
|
(17,524 |
) |
Loans, net of unamortized deferred fees and costs |
|
|
9,189 |
|
|
|
2,003 |
|
Allowance for credit losses |
|
|
(9,395 |
) |
|
|
(8,201 |
) |
|
|
|
|
|
|
|
|
|
$ |
755,928 |
|
|
$ |
693,911 |
|
|
|
|
|
|
|
|
Substantially all of the Companys leases are assigned as collateral for borrowings.
Initial direct costs net of fees deferred were $27.1 million and $24.3 million as of September 30,
2007 and December 31, 2006, respectively, and are netted in unearned income and will be amortized
to income using the level yield method. At September 30, 2007 and December 31, 2006, $38.1 million
and $35.1 million, respectively, of residual assets retained on our Consolidated Balance Sheets
8
were related to copiers. Minimum lease payments receivable under lease contracts and the
amortization of unearned lease income, net of initial direct costs and fees deferred, is as follows
as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease |
|
|
|
|
|
|
Payments |
|
|
Income |
|
|
|
Receivable |
|
|
Amortization |
|
|
|
(Dollars in thousands) |
|
Period Ending December 31: |
|
|
|
|
|
|
|
|
2007 |
|
$ |
93,616 |
|
|
$ |
20,548 |
|
2008 |
|
|
318,474 |
|
|
|
61,653 |
|
2009 |
|
|
226,653 |
|
|
|
34,085 |
|
2010 |
|
|
135,664 |
|
|
|
15,664 |
|
2011 |
|
|
69,175 |
|
|
|
5,179 |
|
Thereafter |
|
|
15,557 |
|
|
|
567 |
|
|
|
|
|
|
|
|
|
|
$ |
859,139 |
|
|
$ |
137,696 |
|
|
|
|
|
|
|
|
NOTE 4 Other Assets
Other assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Derivative collateral |
|
$ |
4,195 |
|
|
$ |
3,099 |
|
Accrued fees receivable |
|
|
3,046 |
|
|
|
2,687 |
|
Deferred transaction costs |
|
|
1,306 |
|
|
|
2,427 |
|
Factoring receivables |
|
|
95 |
|
|
|
1,760 |
|
Prepaid expenses |
|
|
654 |
|
|
|
871 |
|
Other |
|
|
2,559 |
|
|
|
2,186 |
|
|
|
|
|
|
|
|
|
|
$ |
11,855 |
|
|
$ |
13,030 |
|
|
|
|
|
|
|
|
During the first quarter of 2007 the Company refinanced a real estate related factoring receivable
of $469,000 into a 42-month fully amortizing term loan at a market rate of 14.00%. Effective
November 2007 the Company is discontinuing the origination of new factoring agreements, and plans
to withdraw from its factoring business that was in the pilot phase.
NOTE 5 Revolving and Term Secured Borrowings
Scheduled principal and interest payments on outstanding debt as of September 30, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Interest(1) |
|
|
|
(Dollars in thousands) |
|
2007 |
|
$ |
269,538 |
|
|
$ |
10,520 |
|
2008 |
|
|
190,508 |
|
|
|
13,237 |
|
2009 |
|
|
115,148 |
|
|
|
6,119 |
|
2010 |
|
|
56,575 |
|
|
|
2,279 |
|
2011 |
|
|
26,354 |
|
|
|
400 |
|
Thereafter |
|
|
1,438 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total |
|
$ |
659,561 |
|
|
$ |
32,558 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest on term note securitizations only. Excludes interest on $247.4
million of revolving bank facilities and CP conduit warehouse facilities. |
On October 24, 2007 the Company closed a $440 million term securitization which is not included in
the schedule above. In connection with the transaction, 7 classes of notes were issued to
investors. We expect total interest expense on the 2007 term transaction to approximate an average
of 6.32% over the term of the borrowing.
9
NOTE 6 Derivative Financial Instruments
We use derivative financial instruments to manage exposure to the effects of changes in market
interest rates and to fulfill certain covenants in our borrowing arrangements. All derivatives are
recorded on the Consolidated Balance Sheets at their fair value as either assets or liabilities.
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.
The Company has entered into various forward starting interest rate swap agreements related to
anticipated term note securitization transactions. These interest rate swap agreements are
designated as cash flow hedges of specific term note securitization transactions. During the term
of each agreement, the fair value is recorded in other assets or other liabilities on the
Consolidated Balance Sheets, and unrealized gains or losses are recorded in the equity section of
the Consolidated Balance Sheets. The Company expects to terminate each agreement simultaneously
with the pricing of the related term securitization, and amortize any realized gain or loss as an
adjustment to interest expense over the term of the related borrowing.
Certain of these agreements were terminated simultaneously with the pricing of the related term
securitization transactions. For each terminated agreement, the realized gain or loss was deferred
and recorded in the equity section of the Consolidated Balance Sheets, and is being amortized as an
adjustment to interest expense over the term of the related borrowing.
We issued a term note securitization in July, 2004 with certain classes of notes issued at variable
rates to investors. We simultaneously entered into interest rate swap contracts to convert these
borrowings to a fixed interest cost to the Company for the term of the borrowing. These interest
rate swap agreements are designated as cash flow hedges of the term note securitization. The fair
value is recorded in other assets or other liabilities on the Consolidated Balance Sheets, and
unrealized gains or losses are recorded in the equity section of the Consolidated Balance Sheets.
The ineffectiveness related to these interest rate swap agreements designated as cash flow hedges
was not material for the nine-month period ended September 30, 2007. The following tables summarize
specific information regarding the interest rate swap agreements described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Active Agreements: |
|
|
|
|
|
|
|
|
|
|
Inception Date |
|
August, 2007 |
|
August, 2006 |
|
August, 2007 |
|
August, 2006 |
|
July, 2004 |
Commencement Date |
|
October, 2007 |
|
October, 2007 |
|
October, 2008 |
|
October, 2008 |
|
July, 2004 |
|
|
(Dollars in thousands) |
Notional amount |
|
$ |
100,000 |
|
|
$ |
200,000 |
|
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
$ |
11,603 |
|
For active agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value recorded in other assets (liabilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
$ |
(275 |
) |
|
$ |
(2,104 |
) |
|
$ |
(572 |
) |
|
$ |
(1,221 |
) |
|
$ |
43 |
|
December 31, 2006 |
|
$ |
|
|
|
$ |
(983 |
) |
|
$ |
|
|
|
$ |
(624 |
) |
|
$ |
456 |
|
Unrealized gains (losses), net of tax, recorded
in equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
$ |
(166 |
) |
|
$ |
(1,271 |
) |
|
$ |
(346 |
) |
|
$ |
(737 |
) |
|
$ |
26 |
|
December 31, 2006 |
|
$ |
|
|
|
$ |
(591 |
) |
|
$ |
|
|
|
$ |
(375 |
) |
|
$ |
274 |
|
10
|
|
|
|
|
|
|
|
|
For Terminated Agreements: |
|
|
|
|
Inception Date |
|
June/September, 2005 |
|
October/December, 2004 |
Commencement Date |
|
September, 2006 |
|
August, 2005 |
Termination Date |
|
September, 2006 |
|
August, 2005 |
|
|
(Dollars in thousands) |
Notional amount |
|
$ |
225,000 |
|
|
$ |
250,000 |
|
Realized gain at termination |
|
$ |
3,732 |
|
|
$ |
3,151 |
|
Deferred gain, net of tax, recorded in equity |
|
|
|
|
|
|
|
|
September 30, 2007 |
|
$ |
1,171 |
|
|
$ |
317 |
|
December 31, 2006 |
|
$ |
1,900 |
|
|
$ |
680 |
|
Amortization recognized as decrease in
interest expense |
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
$ |
(1,220 |
) |
|
$ |
(605 |
) |
Twelve months ended December 31, 2006 |
|
$ |
(573 |
) |
|
$ |
(1,334 |
) |
Expected amortization during next 12 months
as decrease in interest expense |
|
$ |
(1,198 |
) |
|
$ |
(436 |
) |
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
$361,000 and $193,000 as of September 30, 2007 and December 31, 2006, respectively. Changes in
the fair values of the caps are recorded in financing related costs in the accompanying
Consolidated Statements of Operations. The notional amount of interest-rate caps owned as of
September 30, 2007 and December 31, 2006 was $228.5 million and $225.0 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 consolidated basis, the interest-rate cap positions sold
partially offset the interest-rate cap positions owned. As of September 30, 2007 and December 31,
2006, the notional amount of interest-rate cap sold agreements totaled $206.3 million and $176.9
million, respectively. The fair value of interest-rate caps sold is recorded in other liabilities
at $361,000 and $190,000 as of September 30, 2007 and December 31, 2006, respectively.
NOTE 7 Comprehensive Income
The following table details the components of comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Net income, as reported |
|
$ |
5,028 |
|
|
$ |
4,730 |
|
|
$ |
15,233 |
|
|
$ |
14,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair values of cash flow hedge derivatives |
|
|
(4,366 |
) |
|
|
(3,486 |
) |
|
|
(2,978 |
) |
|
|
(762 |
) |
Amortization of deferred gain on cash flow hedge
derivatives |
|
|
(536 |
) |
|
|
(393 |
) |
|
|
(1,826 |
) |
|
|
(1,149 |
) |
Tax effect |
|
|
1,940 |
|
|
|
1,544 |
|
|
|
1,906 |
|
|
|
761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
(2,962 |
) |
|
|
(2,335 |
) |
|
|
(2,898 |
) |
|
|
(1,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
2,066 |
|
|
$ |
2,395 |
|
|
$ |
12,335 |
|
|
$ |
13,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
NOTE 8 Earnings Per Common Share
The following is a reconciliation of net income and shares used in computing basic and diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(Dollars in thousands, except per-share data) |
|
|
|
|
|
Net income |
|
$ |
5,028 |
|
|
$ |
4,730 |
|
|
$ |
15,233 |
|
|
$ |
14,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in
computing basic EPS |
|
|
12,155,152 |
|
|
|
11,838,677 |
|
|
|
12,066,077 |
|
|
|
11,775,028 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock |
|
|
200,332 |
|
|
|
316,212 |
|
|
|
244,121 |
|
|
|
339,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares used in
computing diluted EPS |
|
|
12,355,484 |
|
|
|
12,154,889 |
|
|
|
12,310,198 |
|
|
|
12,114,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
$ |
1.26 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.41 |
|
|
$ |
0.39 |
|
|
$ |
1.24 |
|
|
$ |
1.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The shares used in computing diluted earnings per share exclude options to purchase 379,955 and
355,215 shares of common stock for the three-month periods ended September 30, 2007 and September
30, 2006, respectively, as inclusion of such shares would be anti-dilutive.
The shares used in computing diluted earnings per share exclude options to purchase 268,291 and
316,217 shares of common stock for the nine-month periods ended September 30, 2007 and September
30, 2006, respectively, as inclusion of such shares would be anti-dilutive.
On November 2, 2007 the Board of Directors approved a stock repurchase plan. Under this program
Marlin is authorized to repurchase up to $15 million of its outstanding shares of common stock.
This authority may be exercised from time to time and in such amounts as market conditions warrant.
Any shares purchased under this plan would be returned to the status of authorized but unissued
shares of common stock. The repurchases may be made on the open market, in block trades or
otherwise. The program may be suspended or discontinued at any time. The stock repurchase will be
funded using the Companys working capital.
NOTE 9 Stock-Based Compensation
Under the terms of the Companys 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.
Stock Options
Option awards are generally granted with an exercise price equal to the market price of the
Companys stock at the date of the grant and have 7- to 10-year contractual terms. All options
issued contain service conditions based on the participants continued service with the Company,
and provide for accelerated vesting if there is a change in control as defined in the 2003 Plan.
Employee stock options generally vest over four years. The vesting of certain options is contingent
on various Company performance measures, such as earnings per share and net income. Of the total
options
granted during the nine-month period ended September 30, 2007, 55,761 shares are contingent on
performance factors. The Company has recognized expense related to performance options based on
the most probable performance target as of September 30, 2007. Revised performance assumptions as
of June 30, 2007 resulted in a reduction of $140,000 in expense related to stock options during the
nine-month period ended September 30, 2007.
12
The Company also issues stock options to non-employee independent directors. These options
generally vest in one year.
The fair value of each stock option granted during the three- and nine-month periods ended
September 30, 2007 and 2006 was estimated on the date of the grant using the Black-Scholes option
pricing model. There were no stock options issued during the three-month periods ended September
30, 2007 and September 30, 2006. The weighted-average grant-date fair value of stock options issued for the nine-month periods ended September 30, 2007 and 2006 was $8.02 and $8.50 per share,
respectively. The following weighted average assumptions were used for valuing option grants made
during the three- and nine-month periods ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Risk-free interest rate |
|
|
n/a |
|
|
|
n/a |
|
|
|
4.51 |
% |
|
|
4.84 |
% |
Expected life (years) |
|
|
n/a |
|
|
|
n/a |
|
|
|
5 |
|
|
|
5 |
|
Expected volatility |
|
|
n/a |
|
|
|
n/a |
|
|
|
35 |
% |
|
|
35 |
% |
Expected dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The risk-free interest rate for periods within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. The expected life for options granted
during 2007 and 2006 represents the period the option is expected to be outstanding and was
determined by applying the simplified method as allowed under the Securities and Exchange
Commissions Staff Accounting Bulletin No. 107 (SAB 107). The expected volatility was determined
using historical volatilities based on historical stock prices. The Company does not grant
dividends, and therefore did not assume expected dividends.
The following is a summary of option activity for the nine months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
Options |
|
Shares |
|
Exercise Price |
Outstanding at January 1, 2007 |
|
|
918,977 |
|
|
$ |
11.61 |
|
Granted |
|
|
104,425 |
|
|
|
20.73 |
|
Exercised |
|
|
(206,792 |
) |
|
|
7.97 |
|
Forfeited |
|
|
(58,009 |
) |
|
|
19.75 |
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
758,601 |
|
|
|
13.23 |
|
During the three-month periods ended September 30, 2007 and September 30, 2006, the Company
recognized total compensation expense related to options of $100,000 and $240,000 respectively.
During the nine-month periods ended September 30, 2007 and September 30, 2006, the Company
recognized total compensation expense related to options of $360,000 and $657,000, respectively.
The total pretax intrinsic value of stock options exercised was $93,000 and $504,000, respectively,
for the three-month periods ended September 30, 2007 and September 30, 2006. The total pretax
intrinsic value of stock options exercised was $2.9 million and $2.5 million, respectively, for the
nine-month periods ended September 30, 2007 and September 30, 2006. The related tax benefits
realized from the exercise of stock options for the three-month periods ended September 30, 2007
and September 30, 2006 were $37,000 and $200,000, respectively. The related tax benefits realized
from the exercise of stock options for the nine-month periods ended September 30, 2007 and
September 30, 2006 were $1.2 million and $960,000, respectively.
13
The following table summarizes information about the stock options outstanding and exercisable as
of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
Intrinsic |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Intrinsic |
|
Range of |
|
Number |
|
|
Remaining |
|
|
Average |
|
|
Value |
|
|
Number |
|
|
Average Remaining |
|
|
Average |
|
|
Value |
|
Exercise Prices |
|
Outstanding |
|
|
Life (Years) |
|
|
Exercise Price |
|
|
(In thousands) |
|
|
Exercisable |
|
|
Life (Years) |
|
|
Exercise Price |
|
|
(In thousands) |
|
$2.81 - 3.39 |
|
|
157,761 |
|
|
|
4.0 |
|
|
$ |
3.31 |
|
|
$ |
1,739 |
|
|
|
157,761 |
|
|
|
4.0 |
|
|
$ |
3.31 |
|
|
$ |
1,739 |
|
$4.23 - 5.01 |
|
|
58,641 |
|
|
|
2.5 |
|
|
|
4.34 |
|
|
|
586 |
|
|
|
58,641 |
|
|
|
2.5 |
|
|
|
4.34 |
|
|
|
586 |
|
$10.18 |
|
|
106,645 |
|
|
|
4.2 |
|
|
|
10.18 |
|
|
|
443 |
|
|
|
106,645 |
|
|
|
4.2 |
|
|
|
10.18 |
|
|
|
443 |
|
$14.00-16.02 |
|
|
95,125 |
|
|
|
6.3 |
|
|
|
14.72 |
|
|
|
|
|
|
|
67,650 |
|
|
|
6.3 |
|
|
|
14.61 |
|
|
|
|
|
$17.52-22.25 |
|
|
340,429 |
|
|
|
5.7 |
|
|
|
19.90 |
|
|
|
|
|
|
|
124,190 |
|
|
|
5.5 |
|
|
|
19.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
758,601 |
|
|
|
5.0 |
|
|
|
13.23 |
|
|
$ |
2,768 |
|
|
|
514,887 |
|
|
|
4.5 |
|
|
|
10.18 |
|
|
$ |
2,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value,
based on the Companys closing stock price of $14.33 as of September 30, 2007, which would have
been received by the option holders had all option holders exercised their options as of that date.
As of September 30, 2007, the total future compensation cost related to non-vested stock options
not yet recognized in the Consolidated Statements of Operations was $1.1 million and the weighted
average period over which these awards are expected to be recognized was 2.7 years, based on the
most probable performance target as of September 30, 2007. In the event maximum performance targets
are achieved, an additional $488,000 of compensation cost would be recognized over a weighted
average period of 3.0 years.
Restricted Stock Awards
Restricted stock awards provide that, during the applicable vesting periods, the shares awarded may
not be sold or transferred by the participant. The vesting period for restricted stock awards
generally ranges from 3 to 10 years, though 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 employment at the Company and owns a matching number of other common shares in
addition to the restricted shares.
Of the total restricted stock awards granted during the nine-month period ended September 30, 2007,
69,193 shares may be subject to accelerated vesting based on performance factors; 2,500 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 September 30, 2007.
Revised performance assumptions as of June 30, 2007 resulted in a reduction of $203,000 in expense
related to restricted stock awards during the nine-month period ended September 30, 2007.
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.
The following table summarizes the activity of the non-vested restricted stock during the nine
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Non-vested restricted stock at January 1, 2007 |
|
|
207,731 |
|
|
$ |
19.57 |
|
Granted |
|
|
80,828 |
|
|
|
20.71 |
|
Vested |
|
|
(47,117 |
) |
|
|
17.61 |
|
Forfeited |
|
|
(37,411 |
) |
|
|
19.08 |
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at September 30, 2007 |
|
|
204,031 |
|
|
|
20.56 |
|
|
|
|
|
|
|
|
|
14
During the three-month periods ended September 30, 2007 and September 30, 2006 the Company granted
restricted stock awards totaling $165,000 and $94,000, respectively. During the nine-month periods
ended September 30, 2007 and September 30, 2006 the Company granted restricted stock awards
totaling $1.7 million and $2.3 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
$49,000 and $414,000 of compensation expense related to restricted stock for the three-month
periods ended September 30, 2007 and September 30, 2006, respectively. The Company recognized
$421,000 and $975,000 of compensation expense related to restricted stock for the nine-month
periods ended September 30, 2007 and September 30, 2006, respectively.
As of September 30, 2007, there was $2.4 million of unrecognized compensation cost related to
non-vested restricted stock compensation to be recognized over a weighted average period of 3.0
years, based on the most probable performance target as of September 30, 2007. In the event maximum
performance targets are achieved, an additional $470,000 of compensation cost would be recognized
over a weighted average period of 1.9 years.
There were 3,500 shares that vested during the three-month period ended September 30, 2007 and
47,117 shares that vested during the nine-month period ended September 30, 2007. The fair value of
shares that vested during the three-month period ended September 30, 2007 was $73,000. The fair
value of shares that vested during the nine-month period ended September 30, 2007 was $1.1 million.
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the related notes thereto in
our Form 10-K filed with the Securities and Exchange Commission. This discussion contains certain
statements of a forward-looking nature that involve risks and uncertainties.
FORWARD-LOOKING STATEMENTS
Certain statements in this document may include the words or phrases can be, expects, plans,
may, may affect, may depend, believe, estimate, intend, could, should, would,
if and similar words and phrases that constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements are subject to various known and unknown risks and uncertainties
and the Company cautions that any forward-looking information provided by or on its behalf is not a
guarantee of future performance. Statements regarding the following subjects are forward-looking by
their nature: (a) our business strategy; (b) our projected operating results; (c) our ability to
obtain external financing; (d) 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 beyond the Companys control,
including, without limitation:
|
|
|
availability, terms and deployment of capital; |
|
|
|
|
general volatility of the securitization and capital markets; |
|
|
|
|
changes in our industry, interest rates or the general economy; |
|
|
|
|
changes in our business strategy; |
|
|
|
|
the degree and nature of our competition; |
|
|
|
|
availability of qualified personnel; and |
|
|
|
|
the factors set forth in the section captioned Risk Factors in our
Form 10-K filed with the Securities and Exchange Commission. |
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 leasing and working capital solutions, primarily to small
businesses. We finance over 70 categories of commercial equipment important to businesses
including copiers, telephone systems, computers, and certain commercial and industrial equipment.
We access our end user customers through origination sources comprised of our existing network of
independent equipment dealers and, to a lesser extent, through relationships with lease brokers and
through direct solicitation of our end user customers. Our leases are fixed-rate transactions with
terms generally ranging from 36 to 60 months. At September 30, 2007,
15
our lease portfolio consisted of approximately 115,000 accounts with an average original term of
47 months and average original transaction size of approximately $10,700.
Since our founding in 1997, we have grown to $851.6 million in total assets at September 30, 2007.
Our assets are substantially comprised of our net investment in leases which totaled $746.9 million
at September 30, 2007. Our lease portfolio grew approximately 13.9% in the past twelve months.
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
opening in Salt Lake City, Utah in 2006. Growing the lease portfolio while maintaining asset
quality remains the primary focus of management. We expect our ongoing 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 the Company. Business capital loans provide small business
customers access to credit through term loans. Effective November 2007 the Company is discontinuing
the origination of new factoring agreements, and plans to withdraw from its factoring business that
was in the pilot phase.
We generally reach our lessees through a network of independent equipment dealers and lease
brokers. The number of dealers and brokers that we conduct business with depends on, among other
things, the number of sales account executives we have. Accordingly, growth indicators that
management evaluates regularly are sales account executive staffing levels and the activity of our
origination sources, which are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
As of or For the Year Ended December 31, |
|
|
|
|
2007 |
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
Number of sales account executives |
|
|
|
105 |
|
|
|
|
|
|
100 |
|
|
|
103 |
|
|
|
100 |
|
|
|
84 |
|
|
|
67 |
|
Number of originating
sources(1) |
|
|
|
1,266 |
|
|
|
|
|
|
1,295 |
|
|
|
1,295 |
|
|
|
1,244 |
|
|
|
1,147 |
|
|
|
929 |
|
|
|
|
(1) |
|
Monthly average of origination sources generating lease volume |
Our revenue consists of interest and fees from our leases and loans and, to a lesser extent, income
from our property insurance program and other fee income. Our expenses consist of interest expense
and operating expenses, which include salaries and benefits and other general and administrative
expenses. As a credit lender, our earnings are also significantly impacted by credit losses. For
the quarter ended September 30, 2007, our annualized net credit losses were 1.85% of our average
total finance receivables. We establish reserves for credit losses which require us to estimate
expected losses in our portfolio.
Our leases are classified under generally accepted accounting principles in the United States of
America as direct financing leases, and we recognize interest income over the term of the lease.
Direct financing leases transfer substantially all of the benefits and risks of ownership to the
equipment lessee. Our net investment in direct finance leases is included in our consolidated
financial statements in net investment in leases and loans. Net investment in direct financing
leases consists of the sum of total minimum lease payments receivable and the estimated residual
value of leased equipment, less unearned lease income. Unearned lease income consists of the
excess of the total future minimum lease payments receivable plus the estimated residual value
expected to be realized at the end of the lease term plus deferred net initial direct costs and
fees less the cost of the related equipment. Approximately 73% of our lease portfolio at September
30, 2007 amortizes over the term to a $1 residual value. For the remainder of the portfolio, we
must estimate end of term residual values for the leased assets. Failure to correctly estimate
residual values could result in losses being realized on the disposition of the equipment at the
end of the lease term.
Since our founding, we have funded our business through a combination of variable-rate borrowings
and fixed-rate asset securitization transactions, as well as through the issuance from time to time
of subordinated debt and equity. Our variable-rate financing sources consist of a revolving bank
facility and two commercial paper (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 they are refinanced through the term note securitization at fixed
rates. All of our term note securitizations have been accounted for as on-balance sheet
16
transactions and, therefore, we have not recognized gains or losses from these transactions. As of
September 30, 2007, $412.1 million or 62.5% of our borrowings were fixed-rate term note
securitizations.
Since we initially finance our fixed-rate leases with variable-rate financing, our earnings are
exposed to interest rate risk should interest rates rise before we complete our fixed-rate term
note securitizations. We generally benefit in times of falling and low interest rates. We are
also dependent upon obtaining future financing to refinance our 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 Consolidated
Balance Sheets at their fair value as either assets or liabilities. Accounting for the changes in
fair value of derivatives depends on whether the derivative has been designated and qualifies for
hedge accounting treatment pursuant to Statement of Financial Accounting Standards (SFAS) 133, as
amended, Accounting for Derivative Instruments and Hedging Activities.
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.
Fee income consists of fees for delinquent lease payments, cash collected on early termination of
leases and other administrative fees. Fee income also includes net residual income which includes
income from lease renewals and gains and losses on the realization of residual values of equipment
disposed 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 and loans in accordance with SFAS No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. The
initial direct costs and fees we defer are part of the net investment in leases and loans, and are
amortized to interest income using the
effective interest method. We defer third party commission costs as well as certain internal costs
directly related to the origination activity. The costs include evaluating the prospective
lessees financial condition, evaluating and recording guarantees and other security arrangements,
negotiating terms, preparing and processing documents and closing the transaction. The fees we
defer are documentation fees collected at 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 and loan portfolios.
Lease residual values. A direct financing lease is recorded at the aggregate future minimum lease
payments plus the estimated residual values less unearned income. Residual values reflect the
estimated amounts to be received at lease termination from lease extensions,
17
sales or other
dispositions of leased equipment. These estimates are based on industry data and on our
experience. Management performs periodic reviews of the estimated residual values and any
impairment, if other than temporary, is recognized in the current period.
Allowance for credit losses. We maintain an allowance for credit losses at an amount sufficient to
absorb losses inherent in our existing lease and loan 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 and loan portfolios; economic
conditions; and seasonality. We then establish an allowance for credit losses for the projected
probable net credit losses based on this analysis. A provision is charged against earnings to
maintain the allowance for credit losses at the appropriate level. Our policy is to charge-off
against the allowance the estimated unrecoverable portion of accounts once they reach 121 days
delinquent.
Our projections of probable net credit losses are inherently uncertain, and as a result we cannot
predict with certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy laws, and other factors could impact
our actual and projected net credit losses and the related allowance for credit losses. To the
degree we add new leases and loans to our portfolio, or to the degree credit quality is worse than
expected, we will record expense to increase the allowance for credit losses for the estimated net
losses expected in our lease and loan portfolios.
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
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 Sheets. The accounting for subsequent changes in the fair value of these
derivatives depends on whether each has been designated and qualifies for hedge accounting
treatment pursuant to the accounting standard. 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 Statements 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 ongoing periodic assessments may be required to
determine the ongoing effectiveness of the hedge. The gain or loss on derivatives qualifying for
hedge accounting is recorded in other comprehensive income on the Consolidated Balance Sheets 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. SFAS No. 123(R), Share-Based Payments
requires companies to recognize all share-based payments, which include stock options and
restricted stock, in compensation expense over the service period of the share-based payment award.
SFAS No. 123(R) establishes fair value as the measurement method in accounting for share-based
payment transactions with employees, except for equity instruments held by employee share ownership
plans.
Income taxes. Significant management judgment is required in determining the provision for income
taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against
net deferred tax assets. The process involves summarizing temporary differences resulting from the
different treatment of items, for example, leases for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included within the
Consolidated Balance Sheets. Our management must then assess the likelihood that deferred tax
assets will be recovered from future taxable income or tax carry-back availability and, to the
extent our management believes recovery is not likely, a valuation allowance must be established.
To the extent that we establish a valuation allowance in a period, an expense must be recorded
within the tax provision in the Consolidated Statements of Operations.
The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, on January 1, 2007. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
18
measurement of a tax position
taken or expected to be taken in a tax return. Guidance is also provided on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we concluded that there are no significant uncertain tax positions
requiring recognition in our financial statements. There was no effect on our financial condition
or results of operations as a result of implementing FIN 48, and we did not have any unrecognized
tax benefits. At September 30, 2007, there have been no changes to the liability for uncertain tax
positions and no unrecognized tax benefits. The periods subject to examination for the Companys
federal return include the 1997 tax year to the present.
The Company records penalties and accrued interest related to uncertain tax positions in income tax
expense. Such adjustments have historically been minimal and immaterial to our financial results.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2007 and 2006
Net income. Net income was $5.0 million for the three-month period ended September 30, 2007,
resulting in diluted earnings per share of $0.41. Net income for the same period in 2006 was $4.7
million, or $0.39 diluted earnings per share.
Net income for the third quarter of 2007 increased 6.3%, or $298,000, compared to third quarter
2006 net income. Diluted earnings per share for the third quarter of 2007 increased 5.1%, or $0.02,
compared to third quarter 2006. During the three months ended September 30, 2007, net interest and
fee income increased primarily due to growth in our investment in direct financing leases and
loans, partially offset by increased interest expense.
During the three months ended September 30, 2007, we generated 7,609 new leases with a cost of
$86.2 million compared to 8,824 leases with a cost of $101.0 million generated for the three months
ended September 30, 2006. Overall, our average net investment in total finance receivables at
September 30, 2007 increased 17.4% to $733.3 million compared to $624.7 million at September 30,
2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
22,622 |
|
|
$ |
19,629 |
|
Fee income |
|
|
5,685 |
|
|
|
5,241 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
28,307 |
|
|
|
24,870 |
|
Interest expense |
|
|
8,768 |
|
|
|
6,888 |
|
|
|
|
|
|
|
|
Net interest and fee income |
|
$ |
19,539 |
|
|
$ |
17,982 |
|
|
|
|
|
|
|
|
|
Average total finance receivables (1) |
|
$ |
733,304 |
|
|
$ |
624,711 |
|
|
Percent of average total finance receivables: |
|
|
|
|
|
|
|
|
Interest income |
|
|
12.34 |
% |
|
|
12.57 |
% |
Fee income |
|
|
3.10 |
|
|
|
3.35 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
15.44 |
|
|
|
15.92 |
|
Interest expense |
|
|
4.78 |
|
|
|
4.41 |
|
|
|
|
|
|
|
|
Net interest and fee margin |
|
|
10.66 |
% |
|
|
11.51 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables includes net investment in direct financing leases, loans
and factoring receivables. For the calculations above, the effects of (1) the allowance for
credit losses, and (2) initial direct costs and fees deferred, are excluded. |
Net interest and fee margin. Net interest and fee income increased $1.5 million, or 8.3%, to $19.5
million for the three months ended September 30, 2007 from $18.0 million for the three months ended
September 30, 2006. The annualized net interest and fee margin decreased 85 basis points to
10.66% in the three-month period ended September 30, 2007 from 11.51% for the same period in 2006. |
|
Interest income, net of amortized initial direct costs and fees, increased $3.0 million, or 15.3%,
to $22.6 million for the three-month period ended September 30, 2007 from $19.6 million for the
three-month period ended September 30, 2006. The increase in interest income was due principally to
a 17.4% growth in average total finance receivables, which increased $108.6 million to $733.3
million at September 30, 2007 from $624.7 million at September 30, 2006. The weighted average
implicit interest rate on new leases originated |
19
increased 33 basis points to 13.06% for the three-month period ended September 30, 2007 compared to
12.73% for the three month period ended September 30, 2006.
Fee income increased $444,000, or 9.6%, to $5.7 million for the three-month period ended September
30, 2007 from $5.2 million for the same period in 2006. The largest increase came from higher
administrative and late fee income that grew $636,000 to $3.6 million for the three-month period
ended September 30, 2007, compared to $3.0 million for the same period in 2006, partially offset by
net residual income that declined $186,000 to $1.6 million for the three-month period ended
September 30, 2007, compared to $1.7 million for the same period in 2006. The increase in
administrative and late fee income is primarily attributable to the continued growth of our lease
and loan portfolios. The decline in residual income is primarily due to lower proceeds received
from the sale of returned
equipment. Fee income, as an annualized percentage of average total finance receivables, decreased
25 basis points to 3.10% for the three-month period ended September 30, 2007 from 3.35% for the
same period in 2006, primarily due to lower net residual income.
Interest expense increased $1.9 million to $8.8 million for the three-month period ended September
30, 2007 from $6.9 million for the same period in 2006. The dollar increase in interest expense is
attributed to a combination of higher borrowings needed to fund the continued growth of the Company
and increased interest rates on the Companys borrowed monies. Interest expense, as an annualized percentage of average total finance receivables,
increased 37 basis points to 4.78% for the three-month period ended September 30, 2007, from 4.41%
for the same period in 2006. This increase is primarily due to higher interest rates on the
Companys borrowings due to increased market interest rates.
Interest expense as an annualized percentage of weighted average borrowings was 5.39% for the
quarter ended September 30, 2007 compared to 4.98% for the same period in 2006. The higher
interest costs reflect a generally rising interest rate environment
which may affect both our
variable-rate warehouse lines and our fixed-rate term securitizations. The average balance for our
warehouse facilities was $207.8 million for the three months ended September 30, 2007 compared to
$155.1 million for the same period ended September 30, 2006. The average borrowing cost for our
warehouse facilities was 6.07% for the quarter ended September 30, 2007, unchanged from the quarter
ended September 30, 2006.
Interest costs on our August 2005 and September 2006 issued term securitization borrowings
increased over those issued in 2003 and 2004 due to the rising interest rate environment. For the
three months ended September 30, 2007, average term securitization borrowings outstanding were
$443.3 million at a weighted average coupon of 4.72% compared with $397.9 million at a weighted
average coupon of 4.23% for the same period in 2006. 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 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%.
Insurance and other income. Insurance and other income was $1.7 million for the three-month period
ended September 30, 2007, compared to $1.4 million for the same period ended September 30, 2006,
primarily due to higher insurance billings.
Salaries and benefits expense. Salaries and benefits expense increased $86,000, or 1.9%, to $5.3
million for the three months ended September 30, 2007 from $5.2 million for the same period in
2006. Expense related to stock-based compensation decreased by $509,000 for the three months ended
September 30, 2007 compared to the same period in 2006, primarily due to revised performance and forfeiture
assumptions. For the three months ended September 30, 2007 sales related compensation decreased
$174,000 compared to the same period in 2006, primarily due to decreased commissions earned for the
period. Compensation related to the factoring business totaled $73,000, compared to $58,000 for
the same period in 2006. Compensation related to Marlin Business Bank (in organization) totaled
$118,000, comparable to $144,000 for the same period in 2006. Total personnel increased to 331 at
September 30, 2007 from 310 at September 30, 2006.
General and administrative expense. General and administrative expenses increased $579,000, or
17.2%, to $3.4 million for the three months ended September 30, 2007 from $2.9 million for the same
period in 2006. Of this increase, $213,000 relates to increased marketing expenses. General and
administrative expense as an annualized percentage of average total finance receivables was 1.88%
for the three-month period ended September 30, 2007, compared to 1.84% for the three-month period
ended September 30, 2006.
20
Financing related costs. Financing related costs include commitment fees paid to our financing
sources and costs pertaining to our derivative contracts used to manage interest rate exposure that
do not qualify for hedge accounting treatment. Financing related costs decreased $206,000, to
$202,000 for the three-month period ended September 30, 2007 compared to the same period in 2006,
primarily due to decreased mark-to-market expense. Mark-to-market expense of $2,000 was recorded
on our interest rate caps for the three-month period ended September 30, 2007 compared to $170,000
of expense for the three-month period ended September 30, 2006. Commitment fees were $200,000 for
the three-month period ended September 30, 2007 compared with $238,000 for the three-month period
ended September 30, 2006.
Provision for credit losses. The provision for credit losses increased $884,000, or 29.0%, to
$4.0 million for the three-month period ended September 30, 2007 from $3.1 million for the same
period in 2006. The increase in the provision for credit losses was primarily the result of higher
net charge-offs. Net charge-offs were $3.4 million for the three-month period ended September 30,
2007, compared to $2.7 million for the same period in 2006.
Provision for income taxes. The provision for income taxes increased 6.5% to $3.3 million for the
three-month period ended September 30, 2007 from $3.1 million for the same period in 2006. The
increase is primarily attributable to the increase in pretax income. Our effective tax rate was
39.6% for the three-month period ended September 30, 2007, compared to 39.5% for the three-month
period ended September 30, 2006.
Comparison of the Nine Months Ended September 30, 2007 and 2006
Net income. Net income was $15.2 million for the nine-month period ended September 30, 2007,
resulting in diluted earnings per share of $1.24. Net income for the same period in 2006 was $14.8
million, or $1.22 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
allowance for credit losses of $545,000, or $0.045 diluted earnings per share. Excluding the
favorable impact of this allowance reduction, net income for the nine-month period ended September
30, 2006, was $14.2 million and diluted earnings per share was $1.17.
Net income for the nine-month period ended September 30, 2007 increased 7.0%, or $1.0 million,
compared to net income for the same period of 2006 excluding the impact of the allowance reduction.
Diluted earnings per share for the nine-month period ended September 30, 2007 increased 6.0%, or
$0.07, compared to the same period of 2006 excluding the impact of the allowance reduction. During
the nine months ended September 30, 2007, net interest and fee income increased due to growth in
our investment in direct financing leases and loans, partially offset by increased interest
expense.
During the nine months ended September 30, 2007, we generated 24,671 new leases with a cost of
$286.1 million compared to 25,111 leases with a cost of $280.9 million generated for the nine
months
ended September 30, 2006. Overall, our average net investment in total finance receivables at
September 30, 2007 increased 20.0% to $714.2 million compared to $595.0 million at September 30,
2006.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
66,210 |
|
|
$ |
55,996 |
|
Fee income |
|
|
16,486 |
|
|
|
15,245 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
82,696 |
|
|
|
71,241 |
|
Interest expense |
|
|
24,735 |
|
|
|
18,389 |
|
|
|
|
|
|
|
|
Net interest and fee income |
|
$ |
57,961 |
|
|
$ |
52,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total finance receivables (1) |
|
$ |
714,150 |
|
|
$ |
594,955 |
|
|
|
|
|
|
|
|
|
|
Percent of average total finance receivables: |
|
|
|
|
|
|
|
|
Interest income |
|
|
12.36 |
% |
|
|
12.55 |
% |
Fee income |
|
|
3.08 |
|
|
|
3.41 |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
15.44 |
|
|
|
15.96 |
|
Interest expense |
|
|
4.62 |
|
|
|
4.12 |
|
|
|
|
|
|
|
|
Net interest and fee margin |
|
|
10.82 |
% |
|
|
11.84 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total finance receivables includes net investment in direct financing leases, loans
and factoring receivables. For the calculations above, the effects of (1) the allowance for
credit losses, and (2) initial direct costs and fees deferred, are excluded. |
21
Net interest and fee margin. Net interest and fee income increased $5.1 million, or 9.6%, to
$58.0 million for the nine months ended September 30, 2007 from $52.9 million for the nine months
ended September 30, 2006. The annualized net interest and fee margin decreased 102 basis points
to 10.82% in the nine-month period ended September 30, 2007 from 11.84% for the same period in
2006.
Interest income, net of amortized initial direct costs and fees, increased $10.2 million, or 18.2%,
to $66.2 million for the nine-month period ended September 30, 2007 from $56.0 million for the
nine-month period ended September 30, 2006. The increase in interest income was due principally to
a 20.0% growth in average total finance receivables, which increased $119.2 million to
$714.2 million at September 30, 2007 from $595.0 million at September 30, 2006. The weighted
average implicit interest rate on new leases originated was 12.96% for the nine-month period ended
September 30, 2007, representing an increase of 22 basis points compared to 12.74% for the
nine-month period ended September 30, 2006.
Fee income increased $1.3 million, or 8.6%, to $16.5 million for the nine-month period ended
September 30, 2007 from $15.2 million for the same period in 2006. The largest increase came from
higher administrative and late fee income that grew $2.0 million to $10.4 million for the
nine-month period ended September 30, 2007, compared to $8.4 million for the same period in 2006,
partially offset by net residual income that declined $747,000 to $4.5 million for the nine-month
period ended September 30, 2007, compared to $5.3 million for the same period in 2006. The
increase in administrative and late fee income is primarily attributable to the continued growth of
our lease and loan portfolios. The decline in residual income is primarily due to lower proceeds
received from the sale of returned equipment. Fee income, as an annualized percentage of average
total finance receivables, decreased 33 basis points to 3.08% for the nine-month period ended
September 30, 2007 from 3.41% for the same period in 2006, primarily due to lower net residual
income.
Interest expense increased $6.3 million to $24.7 million for the nine-month period ended September
30, 2007, from $18.4 million for the same period in 2006. The dollar increase in interest expense
is attributed to a combination of higher borrowings needed to fund the continued growth of the
Company and increased interest rates on the Companys borrowed monies. Interest expense, as an annualized percentage of average total finance
receivables, increased 50 basis points to 4.62% for the nine-month period ended September 30, 2007,
from 4.12% for the same period in 2006. This increase is primarily due to higher interest rates on
the Companys borrowings due to increased market interest rates.
Interest expense as an annualized percentage of weighted average borrowings was 5.21% for the
nine-month period ended September 30, 2007 compared to 4.70% for the same period in 2006. The
higher interest costs reflect a generally rising interest rate
environment which may affect both
our variable-rate warehouse lines and our fixed-rate term securitizations. The average balance for
our warehouse facilities was $122.7 million for the nine months ended September 30, 2007 compared
to $87.4 million for the same period ended September 30, 2006. The average borrowing cost for our
warehouse facilities was 5.98% for the nine-month period ended September 30, 2007 and 5.97% for the
nine-month period September 30, 2006.
Interest costs on our August 2005 and September 2006 issued term securitization borrowings
increased over those issued in 2003 and 2004 due to the rising interest rate environment. For the
nine months ended September 30, 2007, average term securitization borrowings outstanding were
$510.3 million at a weighted average coupon of 4.70% compared with $434.4 million at a weighted
average coupon of 4.10% for the same period in 2006. 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 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%.
Insurance and other income. Insurance and other income increased $939,000, or 25.6%, to $4.9
million for the nine-month period ended September 30, 2007, compared to $3.9 million for the same
period ended September 30, 2006, primarily due to higher insurance billings.
Salaries and benefits expense. Salaries and benefits expense increased $517,000, or 3.2%, to $16.1
million for the nine months ended September 30, 2007 from $15.6 million for the same period in
2006. Expense related to stock-based compensation decreased by $809,000 for the nine months ended
September 30, 2007 compared to the same period in 2006, primarily due to revised performance
22
and
forfeiture assumptions. For the nine months ended September 30, 2007 sales related compensation
increased $253,000 compared to the same period in 2006, primarily due to an increased number of
sales and marketing representatives during 2007. Compensation related to the factoring business
totaled $302,000, compared to $75,000 for the same period in 2006. Compensation related to Marlin
Business Bank (in organization) totaled $365,000, compared to $391,000 for the same period in 2006.
Total personnel increased to 331 at September 30, 2007 from 310 at September 30, 2006.
General and administrative expense. General and administrative expenses increased $1.4 million, or
16.1%, to $10.1 million for the nine months ended September 30, 2007 from $8.7 million for the same
period in 2006. General and administrative expense as an annualized percentage of average total
finance receivables was 1.88% for the nine-month period ended September 30, 2007, compared to 1.95%
for the nine-month period ended September 30, 2006.
Financing related costs. Financing related costs include commitment fees paid to our financing
sources and costs pertaining to our derivative contracts used to manage interest rate exposure that
do not qualify for hedge accounting treatment. Financing related costs decreased $398,000 to
$662,000 for the nine-month period ended September 30, 2007 from $1.1 million for the same period
in 2006. Mark-to-market expense of $10,000 was recorded on our interest rate caps for the
nine-month period ended September 30, 2007 compared to $100,000 for the nine-month period ended
September 30, 2006. Commitment fees were $652,000 for the nine-month period ended September 30,
2007 compared with $960,000 for the nine-month period ended September 30, 2006.
Provision for credit losses. The provision for credit losses increased $3.7 million, or 52.1%, to
$10.8 million for the nine-month period ended September 30, 2007 from $7.1 million for the same
period in 2006. A significant portion of the increase in our provision for credit losses was the
result of a second quarter 2006 provision reduction of $901,000, due to lower losses than
originally anticipated in areas affected by Hurricane Katrina. The remainder of the increase in
the provision for credit losses resulted primarily from higher net charge-offs. Net charge-offs
increased $2.5 million to $9.6 million for the nine-month period ended September 30, 2007, from
$7.1 million for the same period in 2006.
Provision for income taxes. The provision for income taxes increased 4.2% to $10.0 million for the
nine-month period ended September 30, 2007 from $9.6 million for the same period in 2006. The
increase is primarily attributable to the increase in pretax income. Our effective tax rate was
39.5% for both nine-month periods ended September 30, 2007 and September 30, 2006.
FINANCE RECEIVABLES AND ASSET QUALITY
Our net investment in leases and loans grew $62.0 million or 8.9% to $755.9 million at September
30, 2007, from $693.9 million at December 31, 2006. 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.
23
The activity of the allowance for credit losses and delinquent accounts follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 30, |
|
|
Nine Months Ended September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Allowance for credit losses, beginning of period |
|
$ |
8,829 |
|
|
$ |
7,370 |
|
|
$ |
8,201 |
|
|
$ |
7,813 |
|
|
$ |
7,813 |
|
Provision for credit losses |
|
|
3,966 |
|
|
|
3,082 |
|
|
|
10,826 |
|
|
|
7,096 |
|
|
|
9,934 |
|
Charge-offs, net |
|
|
(3,400 |
) |
|
|
(2,685 |
) |
|
|
(9,632 |
) |
|
|
(7,142 |
) |
|
|
(9,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end of period |
|
$ |
9,395 |
|
|
$ |
7,767 |
|
|
$ |
9,395 |
|
|
$ |
7,767 |
|
|
$ |
8,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs to average total finance receivables
(1) |
|
|
1.85 |
% |
|
|
1.72 |
% |
|
|
1.80 |
% |
|
|
1.60 |
% |
|
|
1.56 |
% |
Allowance for credit losses to total finance receivables, end of
period (1) |
|
|
1.27 |
% |
|
|
1.21 |
% |
|
|
1.27 |
% |
|
|
1.21 |
% |
|
|
1.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average net investment in total finance receivables (1) |
|
$ |
733,304 |
|
|
$ |
624,711 |
|
|
$ |
714,150 |
|
|
$ |
594,955 |
|
|
$ |
611,348 |
|
Net investment in total finance receivables, end of period
(1) |
|
$ |
738,373 |
|
|
$ |
642,419 |
|
|
$ |
738,373 |
|
|
$ |
642,419 |
|
|
$ |
679,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies 60 days or more past due |
|
$ |
7,951 |
|
|
$ |
4,411 |
|
|
$ |
7,951 |
|
|
$ |
4,411 |
|
|
$ |
5,715 |
|
Delinquencies 60 days or more past due (2) |
|
|
0.91 |
% |
|
|
0.58 |
% |
|
|
0.91 |
% |
|
|
0.58 |
% |
|
|
0.71 |
% |
Allowance for credit losses to delinquent accounts 60 days or
more past due(2) |
|
|
118.16 |
% |
|
|
176.08 |
% |
|
|
118.16 |
% |
|
|
176.08 |
% |
|
|
143.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual leases and loans |
|
$ |
3,438 |
|
|
$ |
1,876 |
|
|
$ |
3,438 |
|
|
$ |
1,876 |
|
|
$ |
2,250 |
|
Renegotiated leases and loans |
|
$ |
5,042 |
|
|
$ |
3,859 |
|
|
$ |
5,042 |
|
|
$ |
3,859 |
|
|
$ |
3,819 |
|
|
|
|
(1) |
|
Net investment in total finance receivables includes net investment in direct
financing leases, loans and factoring receivables. For purposes of asset quality and
allowance calculations the effects of (1) the allowance for credit losses, and (2) initial
direct costs and fees deferred, are excluded. |
|
(2) |
|
Calculated as a percent of minimum lease payments receivable for leases and as a
percent of principal outstanding for loans and factoring receivables. |
Net investments in finance receivables are charged-off when they are contractually past due
121 days and are reported net of recoveries. Income is not recognized on leases or loans when a
default on monthly payment exists for a period of 90 days or more. Income recognition resumes when
a lease or loan becomes less than 90 days delinquent.
Delinquent accounts 60 days or more past due as a percentage of minimum lease payments receivable
increased to 0.91% at September 30, 2007 from 0.71% at December 31, 2006.
Residual Performance
Our leases offer our end user customers the option to own the purchased equipment at lease
expiration. As of September 30, 2007, approximately 72% of our leases were one dollar purchase
option leases, 22% 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 September 30, 2007, there
were $50.6 million of residual assets retained on our Consolidated Balance Sheet, of which
$38.1 million were related to copiers.
Our leases generally include automatic renewal provisions and many leases continue beyond their
initial contractual term. We consider renewal income a component of residual performance. Renewal
income net of depreciation totaled $1.7 million for both three-month periods ended September 30,
2007 and September 30, 2006. Renewal income net of depreciation totaled $4.9 million for both
nine-month periods ended September 30, 2007 and September 30, 2006. For the three months ended
September 30, 2007 net losses on residual values disposed at end of term totaled $162,000, compared
to gains of $68,000 for the three months ended September 30, 2006. For the nine months ended
September 30, 2007 net losses on residual values disposed at end of term totaled $345,000, compared
to gains of $360,000 for the nine months ended September 30, 2006.
24
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 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. |
We used net cash in investing activities of $81.8 million for the nine-month period ended September
30, 2007, and $220.1 million for the nine-month period ended September 30, 2006. Investing
activities primarily relate to lease origination activity.
Net cash provided by financing activities was $46.1 million for the nine-month period ended
September 30, 2007, and $195.4 million for the nine-month period ended September 30, 2006.
Financing activities include net advances and repayments on our various borrowing sources.
Additional liquidity is provided by or used by our cash flow from operations. Net cash provided by
operating activities was $19.9 million for the nine-month period ended September 30, 2007, compared
to $24.4 million for the nine-month period ended September 30, 2006.
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 and loans. We generally fund our lease originations and growth using advances under our
revolving bank facility and our CP conduit warehouse facilities. Total cash and cash equivalents as
of September 30, 2007 was $11.0 million compared to $26.7 million at December 31, 2006.
As of September 30, 2007, we also had $68.6 million of cash that was classified as restricted cash,
compared to $57.7 million at December 31, 2006. Restricted cash consists primarily of the
pre-funding cash reserve, 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. Borrowings outstanding under the Companys revolving credit
facilities and long-term debt consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2007 |
|
|
As of September 30, 2007 |
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
26,692 |
|
|
$ |
5,839 |
|
|
|
7.84 |
% |
|
$ |
26,692 |
|
|
|
7.70% |
|
|
$ |
13,308 |
|
CP conduit warehouse
facilities(1) |
|
|
300,000 |
|
|
|
220,727 |
|
|
|
116,893 |
|
|
|
5.88 |
% |
|
|
220,727 |
|
|
|
6.03% |
|
|
|
79,273 |
|
Term note securitizations(2) |
|
|
|
|
|
|
591,501 |
|
|
|
510,277 |
|
|
|
4.70 |
% |
|
|
412,142 |
|
|
|
4.76% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
340,000 |
|
|
|
|
|
|
$ |
633,009 |
|
|
|
4.95 |
% |
|
$ |
659,561 |
|
|
|
5.30% |
|
|
$ |
92,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
25
Revolving Bank Facility
As of September 30, 2007 and December 31, 2006, 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%. The credit facility was scheduled to expire on August 31, 2007. On April 2, 2007, the
Company renewed this facility and extended the expiration date to March 31, 2009. There was $26.7
million outstanding under this facility at September 30, 2007 and no balance outstanding at
December 31, 2006. For the nine months ended September 30, 2007 and the year ended December 31,
2006, the Company incurred commitment fees on the unused portion of the credit facility of $142,000
and $184,000, 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.
00-A Warehouse Facility This facility totals $125 million, was renewed in September 2007, and
expires in March 2008. For the nine-month period ended September 30, 2007 and the year ended
December 31, 2006, the weighted average interest rates were 5.68% and 5.89%, respectively. There
was $114.8 million outstanding under this facility at September 30, 2007 and there were no
outstanding borrowings under this facility at December 31, 2006.
02-A Warehouse Facility At the beginning of the current quarter, this facility totaled
$100 million and expires in March 2009. In September 2007 the facility was amended to increase the
available amount to $175 million and to add Marlins business capital loan product to the borrowing
base. For the nine-month period ended September 30, 2007 and the year ended December 31, 2006, the
weighted average interest rate was 6.09% and 5.75%, respectively. There was $105.9 million
outstanding under this facility at September 30, 2007 and there were no outstanding borrowings
under this facility at December 31, 2006.
Term Note Securitizations
Since our founding, 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 because the special purpose entities also hold residual assets.
Accordingly, assets and the related debt of the special purpose entities are included in our
Consolidated Balance Sheets. Our leases and restricted cash are assigned as collateral for these
borrowings and there is no further recourse to the general credit of the Company. By entering into
term note securitizations, we reduce outstanding borrowings under our CP conduit warehouse
facilities and revolving bank facility, which increases the amounts available to us under these
facilities to fund additional lease originations. Failure to periodically pay down the outstanding
borrowings under our warehouse facilities, or increase such facilities, would significantly limit
our ability to grow our lease portfolio. At September 30, 2007 and at December 31, 2006,
outstanding term securitizations amounted to $412.1 million and $616.3 million, respectively.
On September 21, 2006 we closed on the issuance of our eighth term note securitization transaction
in the amount of $380.2 million. This issuance has a similar structure to our 2005 term
securitization with six different classes of notes. Each class of notes has its own interest rate,
repayment term and rating. The weighted average interest coupon of the 2006 term securitization
will approximate 5.51% over the term of the financing. We entered into forward-starting interest
rate swap agreements in advance of pricing our 2006 term securitization to hedge against rising
interest rates. The Company terminated these swap agreements simultaneously with the pricing of
the term securitization issued in September 2006 and is amortizing the realized gains of $3.7
million to reduce recorded interest expense over the term of the related borrowing. As a result of
hedging activity and other transaction costs, we expect total interest expense on the 2006 term
transaction to approximate an average of 5.21% over the term of the borrowing.
26
On September 15, 2006 we elected to exercise our call option and pay off the remaining $31.5
million of our 2003-1 term securitization, which carried a coupon rate of approximately 3.19%. At
September 30, 2007 the Company had three remaining term securitization transactions outstanding.
On August 18, 2005 we closed on the issuance of our seventh term note securitization transaction in
the amount of $340.6 million. This issuance has a similar structure to our 2004 term
securitization with six different classes of notes. Each class of notes has its own interest rate,
repayment term and rating. The weighted average interest coupon of the 2005 term securitization
will approximate 4.81% over the term of the financing. We entered into forward-starting interest
rate swap agreements in advance of pricing our 2005 term securitization to hedge against rising
interest rates. The Company terminated these swap agreements simultaneously with the pricing of
the term securitization issued in August 2005 and is amortizing the realized gains of $3.2 million
to reduce recorded interest expense over the term of the related borrowing. As a result of this
hedging activity, we expect total interest expense on the 2005 term transaction to approximate an
average of 4.50% over the term of the borrowings. Our borrowings, including our term note
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 of
$92.7 million and a maximum debt to equity ratio of 10 to 1. A change in the Chief Executive
Officer or Chief Operating Officer 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 service termination under the term
securitizations. A merger or consolidation with another company in which the Company is not the
surviving entity is an event of default under the financing facilities. In addition, 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 September 30, 2007, the Company was in compliance with
the terms of the revolving bank facility, the warehouse facilities and the term securitization
agreements. None of the Companys debt facilities contain subjective acceleration clauses allowing
the creditor to accelerate the scheduled maturities of the obligation under conditions that are not
objectively determinable (for example, if the debtor fails to maintain satisfactory operations or
if a material adverse change occurs).
Items
Subsequent to September 30, 2007
On October 24, 2007 the Company closed a $440 million term securitization resulting in the issuance
of 7 classes of notes to investors. This transaction represents our ninth term debt securitization,
and will result in making available the full $340 million of bank and warehouse facilities for
future growth. In connection with the transaction, 7 classes of notes were issued to investors. We
expect total interest expense on the 2007 term transaction to approximate an average of 6.32% over
the term of the borrowing.
On November 2, 2007 the Board of Directors approved a stock repurchase plan. Under this program
Marlin is authorized to repurchase up to $15 million of its outstanding shares of common stock.
This authority may be exercised from time to time and in such amounts as market conditions warrant.
Any shares purchased under this plan would be returned to the status of authorized but unissued
shares of common stock. The repurchases may be made on the open market, in block trades or
otherwise. The program may be suspended or discontinued at any time. The stock repurchase will be
funded using the Companys working capital.
Other
In October 2005, the Company submitted an application for an Industrial Bank Charter with the
Federal Deposit Insurance Corporation (FDIC) and the State of Utah Department of Financial
Institutions. On March 26, 2007, the Company announced that it received correspondence from the
FDIC approving the application for FDIC deposit insurance made by the Companys proposed Utah
Industrial Bank (Marlin Business Bank), subject to the conditions set forth in the Order issued by
the FDIC. The Company has filed a request to modify its initial approved
plan for the bank. Subject to FDIC approved of the modifications,
Marlin plans to proceed with the launch of Marlin Business Bank in
2008. The FDICs Order, the conditions of the
approval and other related documents are available on the FDICs website at www.fdic.gov.
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
27
agreements, credit facilities, term securitizations, operating leases and commitments under
non-cancelable contracts as of September 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Leased |
|
|
Capital |
|
|
|
|
|
|
Borrowings |
|
|
Interest(1) |
|
|
Leases |
|
|
Facilities |
|
|
Leases |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
2007 |
|
$ |
269,538 |
|
|
$ |
10,520 |
|
|
$ |
2 |
|
|
$ |
434 |
|
|
$ |
20 |
|
|
$ |
280,514 |
|
2008 |
|
|
190,508 |
|
|
|
13,237 |
|
|
|
3 |
|
|
|
1,548 |
|
|
|
45 |
|
|
|
205,341 |
|
2009 |
|
|
115,148 |
|
|
|
6,119 |
|
|
|
|
|
|
|
1,394 |
|
|
|
11 |
|
|
|
122,672 |
|
2010 |
|
|
56,575 |
|
|
|
2,279 |
|
|
|
|
|
|
|
1,323 |
|
|
|
3 |
|
|
|
60,180 |
|
2011 |
|
|
26,354 |
|
|
|
400 |
|
|
|
|
|
|
|
1,223 |
|
|
|
|
|
|
|
27,977 |
|
Thereafter |
|
|
1,438 |
|
|
|
3 |
|
|
|
|
|
|
|
2,193 |
|
|
|
|
|
|
|
3,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
659,561 |
|
|
$ |
32,558 |
|
|
$ |
5 |
|
|
$ |
8,115 |
|
|
$ |
79 |
|
|
$ |
700,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest on term note securitizations only. Excludes interest on $247.4
million of revolving bank facilities and CP conduit warehouse facilities. |
MARKET INTEREST RATE RISK AND SENSITIVITY
Market risk is the risk of losses arising from changes in values of financial instruments. We
engage in transactions in the normal course of business that expose us to market risks. We attempt
to mitigate such risks through prudent management practices and strategies such as attempting to
match the expected cash flows of our assets and liabilities.
We are exposed to market risks associated with changes in interest rates and our earnings may
fluctuate with changes in interest rates. The lease assets we originate are almost entirely
fixed-rate. Accordingly, we generally seek to finance these assets with fixed interest cost term
note securitization borrowings that we issue periodically. Between term note securitization
issues, we finance our new lease originations through a combination of variable-rate warehouse
facilities and working capital. Our mix of fixed- and variable-rate borrowings and our exposure to
interest rate risk changes over time. Over the past twelve months, the mix of variable-rate
borrowings has ranged from zero to 37.5% of total borrowings and averaged 14.9%. 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. The value of the derivative contract correlates with the movements
of interest rates, and we may choose to hedge all or a portion of forecasted transactions.
These interest rate swap agreements are designated as cash flow hedges of specific term note
securitization transactions. During the term of each agreement, the fair value is recorded in other
assets or other liabilities on the Consolidated Balance Sheets, and unrealized gains or losses are
recorded in the equity section of the Consolidated Balance Sheets. The Company expects to terminate
each agreement simultaneously with the pricing of the related term securitization, and amortize any
realized gain or loss as an adjustment to interest expense over the term of the related borrowing.
Certain of these agreements were terminated simultaneously with the pricing of the related term
securitization transactions. For each terminated agreement, the realized gain or loss was deferred
and recorded in the equity section of the Consolidated Balance Sheets, and is being amortized as an
adjustment to interest expense over the term of the related borrowing.
We issued a term note securitization in July, 2004 with certain classes of notes issued at variable
rates to investors. We simultaneously entered into interest rate swap contracts to convert these
borrowings to a fixed interest cost to the Company for the term of the borrowing. These interest
rate swap agreements are designated as cash flow hedges of the term note securitization. The fair
value is recorded in other assets or other liabilities on the Consolidated Balance Sheets, and
unrealized gains or losses are recorded in the equity section of the Consolidated Balance Sheets.
28
The ineffectiveness related to these interest rate swap agreements designated as cash flow hedges
was not material for the nine-month period ended September 30, 2007. The following tables summarize
specific information regarding the interest rate swap agreements described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Active Agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception Date |
|
August, 2007 |
|
August, 2006 |
|
August, 2007 |
|
August, 2006 |
|
July, 2004 |
|
|
|
|
Commencement Date |
|
October, 2007 |
|
October, 2007 |
|
October, 2008 |
|
October, 2008 |
|
July, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
100,000 |
|
|
$ |
200,000 |
|
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
$ |
11,603 |
|
|
|
|
|
For active agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value recorded in other assets (liabilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
$ |
(275 |
) |
|
$ |
(2,104 |
) |
|
$ |
(572 |
) |
|
$ |
(1,221 |
) |
|
$ |
43 |
|
|
|
|
|
December 31, 2006 |
|
$ |
|
|
|
$ |
(983 |
) |
|
$ |
|
|
|
$ |
(624 |
) |
|
$ |
456 |
|
|
|
|
|
Unrealized gains (losses), net of tax, recorded
in equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
$ |
(166 |
) |
|
$ |
(1,271 |
) |
|
$ |
(346 |
) |
|
$ |
(737 |
) |
|
$ |
26 |
|
|
|
|
|
December 31, 2006 |
|
$ |
|
|
|
$ |
(591 |
) |
|
$ |
|
|
|
$ |
(375 |
) |
|
$ |
274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Terminated Agreements: |
|
|
|
|
|
|
|
|
Inception Date |
|
June/September, 2005 |
|
October/December, 2004 |
|
|
|
|
Commencement Date |
|
September, 2006 |
|
August, 2005 |
|
|
|
|
Termination Date |
|
September, 2006 |
|
August, 2005 |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Notional amount |
|
$ |
225,000 |
|
|
$ |
250,000 |
|
|
|
|
|
Realized gain at termination |
|
$ |
3,732 |
|
|
$ |
3,151 |
|
|
|
|
|
Deferred gain, net of tax, recorded in equity |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
$ |
1,171 |
|
|
$ |
317 |
|
|
|
|
|
December 31, 2006 |
|
$ |
1,900 |
|
|
$ |
680 |
|
|
|
|
|
Amortization recognized as decrease in
interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
$ |
(1,220 |
) |
|
$ |
(605 |
) |
|
|
|
|
Twelve months ended December 31, 2006 |
|
$ |
(573 |
) |
|
$ |
(1,334 |
) |
|
|
|
|
Expected amortization during next 12 months
as decrease in interest expense |
|
$ |
(1,198 |
) |
|
$ |
(436 |
) |
|
|
|
|
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 $361,000 and $193,000 as of September 30, 2007
and December 31, 2006, respectively. Changes in the fair values of the caps are recorded in financing related costs in the accompanying Consolidated Statements of Operations. The notional amount of interest-rate caps owned as of September 30, 2007 and December 31, 2006 was $228.5 million and $225.0 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 consolidated basis, the interest-rate cap positions sold partially offset the interest-rate cap positions owned. As of September 30, 2007 and December 31, 2006, the notional amount of interest-rate cap sold agreements totaled $206.3 million and $176.9 million, respectively. The fair value of interest-rate caps sold is recorded in other liabilities at $361,000 and $190,000 as of September 30, 2007 and December 31, 2006, respectively.
29
The following table presents the scheduled principal repayment of our debt and the related weighted average interest rates as of
September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturities by Calendar Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 & |
|
Carrying |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Amount |
|
|
(Dollars in thousands) |
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
$ |
22,119 |
|
|
$ |
190,508 |
|
|
$ |
115,147 |
|
|
$ |
56,575 |
|
|
$ |
27,793 |
|
|
$ |
412,142 |
|
Average fixed rate |
|
|
4.33 |
% |
|
|
4.73 |
% |
|
|
4.83 |
% |
|
|
4.97 |
% |
|
|
5.49 |
% |
|
|
4.82 |
% |
Variable-rate debt |
|
$ |
247,419 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
247,419 |
|
Average variable rate |
|
|
6.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.21 |
% |
Our warehouse facilities charge variable rates of interest based on LIBOR, prime rate or commercial
paper interest rates. Because our assets are predominately fixed-rate, increases in these market
interest rates would negatively impact earnings and decreases in the rates would positively impact
earnings because the rate charged on our borrowings would change faster than our assets could
reprice. We would have to offset increases in borrowing costs by adjusting the pricing under our
new leases or our net interest margin would be reduced. There can be no assurance that we will be
able to offset higher borrowing costs with increased pricing of our assets.
For example, the impact of a hypothetical 100 basis point, or 1.00%, increase in the market rates
for which our borrowings are indexed for the twelve month period ended September 30, 2007 would
have been to reduce net interest and fee income by approximately $956,000 based on our average
variable-rate borrowings of approximately $95.6 million for the twelve months then ended, excluding
the effects of any changes in the value of derivatives 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 we use in our simulation models and actual results could
vary substantially.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 became effective for fiscal years
beginning after September 15, 2006, addresses certain beneficial interests in securitized financial
assets. The adoption of SFAS No. 155 did not 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. In May 2007, the FASB issued FASB Staff Position
No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1), which
clarifies when a tax position is considered settled under FIN 48. FSP FIN 48-1 is applicable at the
adoption of FIN 48. The adoption of FIN 48 and the subsequent guidance in FSP FIN 48-1 did 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, in which the Board
previously concluded in those 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,
30
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.
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115. This Statement permits an
entity to irrevocably elect to report selected financial assets and liabilities at fair value, with
subsequent changes in fair value reported in earnings. The election may be applied on an
instrument-by-instrument basis. The Statement also establishes additional presentation and
disclosure requirements for items measured using the fair value option. SFAS 159 is effective for
all financial statements issued for fiscal years beginning after November 15, 2007. Marlin is
currently evaluating this Statement. However, the Statement is not expected to have a material
impact on the consolidated earnings or financial position of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information appearing in the section captioned Managements Discussion and Analysis of
Financial Condition and Results of Operations Market Interest Rate Risk and Sensitivity under
Item 2 of this Form 10-Q is incorporated herein by reference.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (CEO), and Chief Financial
Officer (CFO) evaluated the effectiveness of our disclosure controls and procedures as of the end
of the period covered by this report.
Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures as
of the end of the period covered by this report are designed and functioning effectively to provide
reasonable assurance that the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and (ii) accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions regarding
disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys third fiscal quarter of 2007 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
31
PART II. Other Information
Item 1. Legal Proceedings
We are party to various legal proceedings, which include claims and litigation arising in
the ordinary course of business. In the opinion of management, these actions will not have
a material adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in the risk factors from those disclosed in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters To A Vote Of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Chief Executive Officer of Marlin Business Services Corp. required by
Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (Filed herewith) |
|
31.2 |
|
|
Certification of the Chief Financial Officer of Marlin Business Services Corp. required by
Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (Filed herewith) |
|
32.1 |
|
|
Certification of the Chief Executive Officer and Chief Financial Officer of Marlin Business
Services Corp. required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as
amended. (This exhibit shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be incorporated by reference into any
filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended.) (Furnished herewith) |
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
MARLIN BUSINESS SERVICES CORP. |
|
|
|
|
|
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Daniel P. Dyer
Daniel
P. Dyer
|
|
Chief Executive Officer
(Chief Executive Officer) |
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Lynne C. Wilson
Lynne
C. Wilson
|
|
Chief Financial Officer & Senior Vice President
(Principal Financial Officer) |
|
|
Date: November 7, 2007
33