Marlin Leasing was launched in June 1997, reorganized into a holding company, Marlin Business Services (MBS), and went public with an IPO in November 2003. The initial public offering price was $14.00 per share. At the time, the lead manager on the offering noted that Marlin offered investors a superior business model that would generate returns without taking excessive risks.

At the time of the IPO, the leasing industry was coming out of the last recession of 2001-2002, when the Monitor 100 participants reported an 8% decline in 2002 new business originations, which mirrored a 6% decline in business investment in equipment the same year. As the economy started to show clear signs of recovery, 2003 new business activity reported by the Monitor swung to a 3.3% increase driven by a year-over-year increase in capital expenditures of 6%. So, from a timing perspective, it seemed that MBS, and its principal operating subsidiary, Marlin Leasing, picked an opportune time to exploit the benefit of an expanding economy that would fuel capital spending and, in turn, support higher levels of equipment leasing activity that would last until the late summer of 2007.

A quick look at Marlin’s performance over the three years subsequent to going public showed pre-tax income, after cost of funds and provision charges, of $48.9 million, $58.5 million and $67.0 million for the calendar years 2004, 2005 and 2006, respectively. Marlin’s average annual growth rate was 18.5%. Annual new business volume for the three-year period went from $272.3 million to $388.7 million in 2006. In 2007, new origination growth flattened to $390.8 million as the credit crisis began to emerge in the second half of the year. As an interesting aside, Marlin employed about 100 sales account executives in each of the three years (2004-2006), realizing a productivity gain of $1.2 million per salesperson over the period, went from $2.7 million in 2004 to $3.9 million at the end of 2006. The company’s average transaction size was in the $10.5K to $11.0K range. In 2007, however, this trend reversed as 118 salespeople generated the $390.8 million noted above, reducing the average productivity per salesperson to $3.3 million. The annual new business volume was sufficient enough to cause the portfolio to grow to about $750 million at the end of 2007, up from $480 million, or 56% higher than year-end 2004.

Up until the end of 2008, Marlin followed a business model that provided access to end-user customers through origination sources comprised of a nationwide network of small independent equipment dealers and, to a lesser extent, through relationships with lease brokers. Up through 2007, Marlin said about 69% of its new business activity was sourced through the direct dealer channel, while the remainder, or 31%, came from indirect or broker sources. In 2008, Marlin reduced its reliance on the broker channel to 19% of originations as a result of worsening credit quality metrics from these sources.

As Marlin entered 2008, its new business originations had flattened, but portfolio growth had continued unabated through 2007. But there were clear signs that the credit crisis was worsening and it was starting to show up in Marlin’s portfolio, especially during the second half of the year. Net charge-offs in 2007 were 76% higher than the previous year. Sixty-day delinquencies and non-accruals were up 48% and 64%, respectively. The company’s provision charge was $17.2 million, 73% higher than the previous year. Marlin noted in a recent investor conference call that its business tracks very closely to unemployment, which is rising, creating a particular concern with exposures in California and Florida where Marlin has a customer concentration risk of about 22%.

As the market started to respond to investor concerns with the financial services sector, Marlin was not immune. Its share price closed on December 31, 2007 at $12.06, 50% lower than its share price close at the end of the previous year. As it turned out, Marlin’s reserve build of $2.8 million in 2007 was woefully inadequate to cover the losses that were to come in 2008 as the economy worsened.

Marlin’s 2008 results compared to 2007 showed a swing from pre-tax net income of $30.4 million to a pre-tax net loss of $8.4 million. The primary drivers of the loss consisted of a $31.5 million provision charge — 83% higher than 2007 — and a $16.0 million loss on derivatives and hedging activities. Originations were down from $390.8 million in 2007 to $256.6 million and year-end outstandings dropped from $749.6 million to $664.8 million. In hindsight, it was clear that Marlin’s share price would reflect what turned out to be a very disappointing year. At the end of 2008, Marlin’s share price dropped to $2.61 — reaching a low of $1.19 on November 21, 2008 — off almost 90% from its year-end close of $24.03 in 2006.

Marlin funds most of its new business using an on-balance sheet term securitization model that was supported by a secured warehouse revolver and a commercial paper conduit. In March 2007, the company received approval from the FDIC to open its Utah-based Marlin Business Bank (MBB) subsidiary, which was a significant step in implementing a longer-term strategy to migrate to a bank-funded platform. As the economy worsened in 2008 and investors fled the securitization market, Marlin was successful in achieving bank holding company status by converting its industrial bank to a commercial bank. However, in order to take greater advantage of MBB’s funding and business platform, Marlin is actively seeking to remove an outstanding FDIC order that restricts asset growth to $104 million and $128 million, respectively, for the years 2009 and 2010. After 2010, the growth restriction that currently exists is lifted.

Company executives noted in a recent conference call with investors that until the order is lifted, the game plan is to scale back on new monthly lease production. In reviewing Marlin’s current capacity to fund new leases, CFO Lynne Wilson said that MBB had $24 million available to fund new lease originations. She noted that the removal of the FDIC growth restriction would increase availability to fund an additional $156 million in new leases.

The timing of removal of the order by the FDIC is critical as Marlin’s bank warehouse revolver was scheduled to “term” on March 31, 2009. And according to a recent 
8-K filing, Marlin said its bank facility was extended to April 29, 2009 to allow time to get FDIC approval on the “bigger bank.” However, the bank group reduced the amount of the facility from $40 million to the current outstanding balance of $4.94 million. Marlin’s ABS commercial paper conduit also came due on March 31, 2009 and although Marlin got an extension to March 30, 2010, the facility was amended to go into amortization, effective March 15, 2009. Marlin’s plan is to refinance the facility under the recently announced TALF program that was expanded to include equipment leases. Marlin says it’s anticipating using TALF as an alternative source of permanent funding in “an April, May timeframe.”

So Marlin is facing a difficult, but, hopefully, temporary funding crisis that would dramatically reduce Marlin’s ability to fund new lease activity. During the conference call, Marlin noted that if its warehouse facilities were not renewed, the company’s short-term ability would be “extremely curtailed.” The company said its new originations would be scaled back from about $15 million to $17 million per month to $5 million to $6 million. In preparation, Marlin announced in the first quarter that it reduced its workforce by 17% and closed sales offices in Chicago and Utah. Counting this 49 staff member reduction, Marlin’s full-time equivalent headcount would be about 235 versus 357 at the end of 2007. In response to a question on sales headcount posed by an analyst, CEO Daniel Dyer said Marlin would be down to approximately 58 sales reps after the announced cuts. At year-end 2008, Marlin had 86 sales staff members, down from 118 at the end of the previous year.

The unfortunate situation Marlin finds itself in has to do with a market that provides the opportunity to originate high-quality business at “pricing in the mid-14s.” However, the current funding constraint outlined above will likely translate into worsening credit quality metrics as runoff will exceed originations causing the denominator effect to reflect increasingly negative portfolio ratios. So the hope is the FDIC will honor Marlin’s request to expand into a “bigger bank” so it can more reasonably be expected to offset a deteriorating portfolio with higher quality, better-priced new business. And, lastly, if there was ever an ideal candidate for the TALF program to stimulate small business lending activity, Marlin would be the poster child.