Mail Stop 4561
January 10, 2006
By U.S. Mail and Facsimile to (781) 994-4710
James R. Jackson, Jr.
Vice President and Chief Financial Officer
MicroFinancial Incorporated
10M Commerce Way
Woburn, MA 01801
Re: MicroFinancial Incorporated
Form 10-K for Fiscal Year Ended December 31, 2004
Filed March 30, 2005
File No. 001-14771
Dear Mr. Jackson:
We have reviewed your response filed with the Commission on
December 14, 2005, and have the following additional comments.
Please provide us with the requested information so we may better
understand your disclosure. Please be as detailed as necessary in
your explanation. After reviewing this information, we may raise
additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Management`s Discussion and Analysis
Critical Accounting Policies, Revenue Recognition page 15
1. We note your response to our prior comment 1 of our letter
dated
November 14, 2005. Please tell us how you determined that
including
estimated cash flows to be received after the contractual lease
term
in your determination of the residual value of the leased asset is
in
compliance with SFAS 13. In your response, please explain how you
considered paragraph 5(h) - which defines the estimated residual
value of the leased property to be the estimated fair value of the
leased property at the end of the lease term, and paragraph 5(c) -
which defines the fair value of leased property as the price for
which the property could be sold in an arm`s-length transaction
between unrelated parties.
2. Please tell us how you determined a 30% required rate of return
to
be an appropriate discount to measure the present value of
estimated
cash flows to be received after the contractual lease term.
3. In your response to comment 1 of our letter dated November 14,
2005, you provided a sample calculation that resulted in a
calculated
residual value equal to 12.5% of the original receivable balance.
However, you estimate the residual value of the leased asset to be
only 10% of the original receivable balance, resulting in a 20%
discount to the calculated balance. Please explain your rationale
for discounting your calculated residual value and tell us how you
determined that a 20% discount was appropriate.
Financial Statements
Note C - Net Investment in Leases, page F-14
4. We note your response to comment 5 of our letter dated November
14, 2005. In your response you state that you applied the
guidance
in SAB Topic 6L when determining your allowance for credit losses.
In SAB Topic 6L.6 the staff concluded that a registrant`s loan
loss
allowance is considered valid when it accurately estimates the
amount
of loss contained in the portfolio. Please provide us with a
quantitative analysis that validates your assertion that your
allowance for credit losses was an accurate estimate of losses
inherent in your portfolio as of each balance sheet date.
5. On page F-14 you state that you provide an allowance for credit
losses for leases that are considered impaired. Paragraph 8 of
SFAS
5 requires recognition of a loss when (a) information available
prior
to the issuance of financial statements indicates that it is
probable
that an asset has been impaired and (b) the amount of the loss can
be
reasonably estimated. Please tell us how you determine when it is
probable that a lease has been impaired.
6. In your response to comment 5 of our letter dated September 13,
2005 you state that you establish as your allowance, on a monthly
basis, an amount equal to or greater than 50% of the 90-day
delinquency balance. We also note that you typically don`t
charge-
off receivables until they are 360 days past due. Please tell us
at
what point you record a loss for the remaining 50% of those
receivables which are greater than 90 days delinquent but not yet
charged-off. For example, if a receivable is 270 days delinquent
but
not yet charged off, do you still maintain an allowance for only
50%
of its balance? Wouldn`t your estimate of expected future cash
flows
from the receivable change the longer the receivable remained
delinquent?
7. In your response to comment 5 you state that you believe your
methodology is sound and is appropriate in the long term estimate
of
future losses. Please tell us how you determined that a policy of
reserving for future losses complies with GAAP which requires the
allowance for credit losses to be based on management`s estimate
of
probable incurred losses that are inherent in the portfolio.
Refer
to SFAS 5 and EITF Topic D-80.
* * *
Please respond to these comments within 10 business days
or
tell us when you will provide us with a response. Please furnish
a
cover letter with your response indicating your intent to provide
the
requested disclosures in future filings. Please provide us drafts
of
your proposed revisions, where applicable, and any requested
information. Detailed cover letters greatly facilitate our
review.
Please understand that we may have additional comments after
reviewing your responses to our comments.
You may contact Margaret Fitzgerald at (202) 551-3556 or me
at
(202) 551-3426 if you have questions regarding comments on the
financial statements and related matters.
Sincerely,
Angela Connell
Senior Accountant
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James R. Jackson, Jr.
MicroFinancial Incorporated
January 10, 2006
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