Should the State of California declare Evergreen non-notification of the original term of the lease illegal, it will be a serious blow to Marlin Business Services (NASDAQ:MRLN). Evergreen clauses are illegal in four states, meaning automatic payments cannot continue, especially prevalent in ACH payments. Marlin's collection of these payments exceed their reported net income. The majority of business, especially copier leases, are in the State of California, according to Marlin's SEC filings, where Evergreen leases are legal.
If the Evergreen income ends, it will dramatically affect Marlin's income. This renewal income continually exceeds Marlin's reported net income, which the last quarter saw a company net income of $1.6 million compared to $754,000 for the first quarter in 2011. Renewal income, net of depreciation, totaled approximately $1.9 million and $2 0 million for the three-month periods ended March 31, 2012 and March 31, 2011, respectively.
At this time, these four states require the lender or lessor to inform the borrower or lessee regarding the termination of the initial lease contract: New York, Rhode Island, Texas and Illinois.
What it did not disclose in its press or SEC filing was the profit was from the Evergreen clause where the lessee is not reminded of how many payments they have made to date, thus it makes an additional profit, as noted in the SEC filing:
There were $32.7 million of residual assets retained on our Consolidated Balance Sheet, of which $26.5 million, or 80.9%, were related to copiers. No other group of equipment represented more than 10% of equipment residuals as of March 31, 2012 and December 31, 2011, respectively. Improvements in technology and other market changes, particularly in copiers, could adversely impact our ability to realize the recorded residual values of this equipment."
Marlin should disclose in their SEC filings that should Evergreen Clause be declared illegal in more states, it will greatly affect their collection of additional lease payments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.