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, 2009

Commission file number 000-50448

MARLIN BUSINESS SERVICES CORP.

(Exact name of registrant as specified in its charter)

Pennsylvania		38-3686388
(State of incorporation)		(I.R.S. Employer Identification Number)

300 Fellowship Road, Mount Laurel, NJ 08054
(Address of principal executive offices)
(Zip code)

(888) 479-9111
(Registrant’s 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company 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 29, 2009, 12,640,495 shares of Registrant’s 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, 2009

TABLE OF CONTENTS

		Page No.
Part I — Financial Information			2-53
Item 1 Condensed Consolidated Financial Statements (Unaudited)			2-25
Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008 (as restated)			2
Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2009 and 2008			3
Condensed Consolidated Statements of Stockholders’ Equity for the nine-month period ended September 30, 2009 and the year ended December 31, 2008 (as restated)			4
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2009 and 2008			5
Notes to Condensed Consolidated Financial Statements			6-25
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			26-53
Item 3 Quantitative and Qualitative Disclosure about Market Risk			53
Item 4 Controls and Procedures			53
Part II — Other Information			54-55
Item 1 Legal Proceedings			54
Item 1A Risk Factors			54
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 3 Defaults upon Senior Securities			54
Item 4 Submission of Matters to a Vote of Security Holders			54-55
Item 5 Other Information			55
Item 6 Exhibits			55
Signatures			56
RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
RULE 13a-14(b) CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PART I. Financial Information

Item 1. Condensed Consolidated Financial Statements

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Unaudited)

						December 31,
						2008
		September 30,				(as restated,
		2009				see Note 15)
		(Dollars in thousands, except per-share data)
ASSETS
Cash and due from banks		$	2,562			$	1,604
Interest-earning deposits with banks			47,879				38,666
Total cash and cash equivalents			50,441				40,270
Restricted interest-earning deposits with banks			64,920				66,212
Net investment in leases and loans			499,556				669,109
Property and equipment, net			2,635				2,961
Property tax receivables			885				3,120
Other assets			9,620				12,759
Total assets		$	628,057			$	794,431
LIABILITIES AND STOCKHOLDERS’ EQUITY
Short-term borrowings		$	87,860			$	101,923
Long-term borrowings			275,106				441,385
Deposits			80,060				63,385
Other liabilities:
Fair value of derivatives			9,851				11,528
Sales and property taxes payable			6,779				6,540
Accounts payable and accrued expenses			7,626				7,926
Net deferred income tax liability			13,317				15,119
Total liabilities			480,599				647,806
Commitments and contingencies (Note 6)
Stockholders’ equity:
Common Stock, $0.01 par value; 75,000,000 shares authorized; 12,616,826 and 12,246,405 shares issued and outstanding, respectively			126				122
Preferred Stock, $0.01 par value; 5,000,000 shares authorized; none issued			—				—
Additional paid-in capital			84,242				83,671
Stock subscription receivable			(3	)			(5	)
Accumulated other comprehensive income (loss)			(152	)			167
Retained earnings			63,245				62,670
Total stockholders’ equity			147,458				146,625
Total liabilities and stockholders’ equity		$	628,057			$	794,431

The accompanying notes are an integral part of the condensed consolidated financial statements.

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(Dollars in thousands, except per-share data)
Interest income		$	15,591			$	21,062			$	51,944			$	65,884
Fee income			4,288				5,534				13,702				16,021
Interest and fee income			19,879				26,596				65,646				81,905
Interest expense			6,448				8,790				21,724				28,396
Net interest and fee income			13,431				17,806				43,922				53,509
Provision for credit losses			5,951				8,602				21,493				22,137
Net interest and fee income after provision for credit losses			7,480				9,204				22,429				31,372
Other income:
Insurance income			1,186				1,609				4,051				4,715
Gain (loss) on derivatives			(1,164	)			(3,280	)			(1,825	)			(3,280	)
Other income			409				424				1,205				1,459
Other income (loss)			431				(1,247	)			3,431				2,894
Other expense:
Salaries and benefits			4,051				5,620				14,994				17,835
General and administrative			3,076				3,333				9,761				11,629
Financing related costs			51				370				361				967
Other expense			7,178				9,323				25,116				30,431
Income (loss) before income taxes			733				(1,366	)			744				3,835
Income tax expense (benefit)			225				(425	)			169				1,718
Net income (loss)		$	508			$	(941	)		$	575			$	2,117
Basic earnings (loss) per share		$	0.04			$	(0.08	)		$	0.05			$	0.17
Diluted earnings (loss) per share		$	0.04			$	(0.08	)		$	0.05			$	0.17
Weighted average shares used in computing basic earnings per share			12,607,147				11,843,300				12,499,578				12,199,081
Weighted average shares used in computing diluted earnings per share			12,649,800				11,843,300				12,522,685				12,258,415

The accompanying notes are an integral part of the condensed consolidated financial statements.

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

Condensed Consolidated Statements Stockholders’ Equity
(Unaudited)

																		Accumulated
										Additional				Stock				Other								Total
		Common				Stock				Paid-In				Subscription				Comprehensive				Retained				Stockholders’
		Shares				Amount				Capital				Receivable				Income (Loss)				Earnings				Equity
		(Dollars in thousands)
Balance, December 31, 2007 (as restated, see Note 15)			12,201,304			$	122			$	84,429			$	(7	)		$	(3,130	)		$	67,900			$	149,314
Issuance of common stock			36,360				—				148				—				—				—				148
Repurchase of common stock			(333,759	)			(3	)			(2,380	)			—				—				—				(2,383	)
Exercise of stock options			46,616				—				145				—				—				—				145
Tax benefit on stock options exercised			—				—				102				—				—				—				102
Stock option compensation recognized			—				—				304				—				—				—				304
Payment of receivables			—				—				—				2				—				—				2
Restricted stock grant			295,884				3				(3	)			—				—				—				—
Restricted stock compensation recognized			—				—				926				—				—				—				926
Net change related to derivatives, net of tax			—				—				—				—				3,297				—				3,297
Net income (loss)			—				—				—				—				—				(5,230	)			(5,230	)
Balance, December 31, 2008 (as restated, see Note 15)			12,246,405			$	122			$	83,671			$	(5	)		$	167			$	62,670			$	146,625
Issuance of common stock			17,750				1				53				—				—				—				54
Repurchase of common stock			(102,614	)			(1	)			(399	)			—				—				—				(400	)
Exercise of stock options			11,327				—				44				—				—				—				44
Tax benefit on stock options exercised			—				—				5				—				—				—				5
Stock option compensation recognized			—				—				216				—				—				—				216
Payment of receivables			—				—				—				2				—				—				2
Restricted stock grant			443,958				4				(4	)			—				—				—				—
Restricted stock compensation recognized			—				—				656				—				—				—				656
Net change related to derivatives, net of tax			—				—				—				—				(319	)			—				(319	)
Net income			—				—				—				—				—				575				575
Balance, September 30, 2009			12,616,826			$	126			$	84,242			$	(3	)		$	(152	)		$	63,245			$	147,458

The accompanying notes are an integral part of the condensed consolidated financial statements.

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended September 30,
		2009				2008
		(In thousands)
Cash flows from operating activities:
Net income		$	575			$	2,117
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,844				2,160
Stock-based compensation			1,006				843
Excess tax benefits from stock-based payment arrangements			(5	)			(102	)
Amortization of deferred net loss (gain) on cash flow hedge derivatives			113				(153	)
Change in fair value of derivatives			(997	)			2,160
Cash flow hedge losses (gains) reclassified from accumulated other comprehensive income			(642	)			1,120
Provision for credit losses			21,493				22,137
Net deferred income taxes			(1,726	)			(1,381	)
Amortization of deferred initial direct costs and fees			9,482				12,630
Deferred initial direct costs and fees			(2,039	)			(8,055	)
Loss on equipment disposed			1,259				638
Effect of changes in other operating items:
Other assets			4,933				360
Other liabilities			(935	)			1,257
Net cash provided by operating activities			34,361				35,731
Cash flows from investing activities:
Purchases of equipment for direct financing lease contracts and funds used to originate loans			(68,904	)			(198,456	)
Principal collections on leases and loans			207,923				232,812
Security deposits collected, net of refunds			(3,415	)			(1,998	)
Proceeds from the sale of equipment			3,754				4,134
Acquisitions of property and equipment			(366	)			(639	)
Change in restricted interest-earning deposits with banks			1,292				76,776
Net cash provided by investing activities			140,284				112,629
Cash flows from financing activities:
Issuances of common stock			56				96
Repurchases of common stock			(400	)			(1,999	)
Exercise of stock options			44				145
Excess tax benefits from stock-based payment arrangements			5				102
Debt issuance costs			(512	)			(46	)
Term securitization repayments			(166,279	)			(261,932	)
Secured bank facility advances			4,192				69,104
Secured bank facility repayments			(24,240	)			(34,276	)
Warehouse advances			37,938				25,911
Warehouse repayments			(33,153	)			(5,978	)
Other short-term borrowing advances			2,200				—
Other short-term borrowing repayments			(1,000	)			—
Increase in deposits			16,675				47,172
Net cash used in financing activities			(164,474	)			(161,701	)
Net increase (decrease) in total cash and cash equivalents			10,171				(13,341	)
Total cash and cash equivalents, beginning of period			40,270				38,708
Total cash and cash equivalents, end of period		$	50,441			$	25,367
Supplemental disclosures of cash flow information:
Cash paid for interest on deposits and borrowings		$	20,546			$	27,136
Cash paid for income taxes		$	806			$	2,660

The accompanying notes are an integral part of the condensed consolidated financial statements.

MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — Organization

Description

Through its principal operating subsidiary, Marlin Leasing Corporation, Marlin Business Services Corp. 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 100 categories of commercial equipment important to its end user customers including copiers, telephone systems, computers and certain commercial and industrial equipment. Effective March 12, 2008, the Company also opened Marlin Business Bank (“MBB”), a commercial bank chartered by the State of Utah and a member of the Federal Reserve System. MBB currently provides diversification of the Company’s funding sources through the issuance of certificates of deposit. Marlin Business Services Corp. is managed as a single business segment.

References to the “Company”, “we”, “us”, and “our” herein refer to Marlin Business Services Corp. and its wholly-owned subsidiaries, unless the context otherwise requires.

NOTE 2 — Basis of Financial Statement Presentation and Critical Accounting Policies

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the Company’s financial position at September 30, 2009 and the results of operations for the three- and nine-month periods ended September 30, 2009 and 2008, and cash flows for the nine-month periods ended September 30, 2009 and 2008. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and note disclosures included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 13, 2009. The consolidated results of operations for the three- and nine-month periods ended September 30, 2009 and 2008 are not necessarily indicative of the results for the respective full years or any other period. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current presentation, pursuant to the requirements of the Securities and Exchange Commission’s Regulation S-X, Article 9, applicable to bank holding companies.

FASB Accounting Standards Codification. In June 2009, the Financial Accounting Standards Board (“FASB”) confirmed that the FASB Accounting Standards Codification (“ASC”) would become the single official source of authoritative U.S. generally accepted accounting principles (“GAAP”) (other than guidance issued by the SEC), superseding all other accounting literature except that issued by the SEC. The Codification does not change U.S. GAAP. However, as a result, only one level of authoritative U.S. GAAP exists. All other literature is considered non-authoritative. The FASB ASC is effective for interim and annual periods ending on or after September 15, 2009. Therefore, we have changed the way specific accounting standards are referenced in our condensed consolidated financial statements.

Use of estimates. The preparation of financial statements in accordance with U.S. GAAP 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, performance assumptions for stock-based compensation awards, the probability of forecasted transactions, the fair value of financial instruments and income taxes. Actual results could differ from those 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 or loan is 90 days or more delinquent, the contract is classified as non-accrual and we do not recognize interest income on that contract until it is less than 90 days delinquent.

Fee income. Fee income consists of fees for delinquent lease and loan payments, cash collected on early termination of leases and net residual income. Net residual income includes income from lease renewals and gains and losses on the realization of residual values of leased equipment disposed at the end of term.

At the end of the original lease term, lessees may choose to purchase the equipment, renew the lease or return the equipment to the Company. The Company receives income from lease renewals when the lessee elects to retain the equipment longer than the original term of the lease. This income, net of appropriate periodic reductions in the estimated residual values of the related equipment, is included in fee income as net residual income.

When the lessee elects to return the equipment at lease termination, the equipment is transferred to other assets at the lower of its basis or fair market value. The Company generally sells returned equipment to an independent third party, rather than leasing the equipment a second time. The Company does not maintain equipment in other assets for longer than 120 days. Any loss recognized on transferring the equipment to other assets, and any gain or loss realized on the sale or disposal of equipment to the lessee or to others is included in fee income as net residual income.

Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated collection rates. Other fees are recognized when received. Management performs periodic reviews of the estimated residual values and any impairment, if other than temporary, is recognized in the current period.

Insurance 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. Other income includes various administrative transaction fees, fees received from lease syndications and gains on sales of leases.

Initial direct costs and fees. We defer initial direct costs incurred and fees received to originate our leases and loans in accordance with the Receivables Topic and the Nonrefundable Fees and Other Costs Subtopic of the FASB ASC. 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. Costs subject to deferral include evaluating the prospective customer’s 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 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 receivable plus the estimated residual value of the leased equipment, less unearned lease income. Residual values reflect the estimated amounts to be received at lease termination from lease extensions, sales or other dispositions of leased equipment. Estimates are based on industry data and management’s experience. Management performs periodic reviews of the estimated residual values recorded and any impairment, if other than temporary, is recognized in the current period.

Allowance for credit losses. In accordance with the Contingencies Topic of the FASB ASC, 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. We evaluate our portfolios on a pooled basis, due to their composition of small balance, homogenous accounts with similar general credit risk characteristics, diversified among a large cross section of variables including industry, geography, equipment type, obligor and vendor. To project probable net credit losses, we perform a migration analysis of delinquent and current accounts based on historic loss experience. 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; account modifications; recovered amounts; forecasting uncertainties; the composition of our lease and loan portfolios; economic conditions; and seasonality. The various factors used in the analysis are reviewed periodically, and no less frequently than each quarter. 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 record expense to increase the allowance for credit losses for the estimated net losses inherent in our portfolios. Actual losses may vary from current estimates.

Securitizations. Since inception, the Company has completed nine term note securitizations of which six 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 the Transfers and Servicing Topic of the FASB ASC, the Company’s 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 Company’s leases and restricted interest-earning deposits with banks 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 Company’s maximum loss exposure.

Derivatives. The Derivatives and Hedging Topic of the FASB ASC 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.

Prior to July 1, 2008, the Company entered into derivative contracts which were accounted for as cash flow hedges under hedge accounting as prescribed by U.S. GAAP. Under hedge accounting, the effective portion of the gain or loss on a derivative designated as a cash flow hedge was reported net of tax effects in accumulated other comprehensive income on the Consolidated Balance Sheets, until the pricing of the related term securitization. The derivative gain or loss recognized in accumulated other comprehensive income is then reclassified into earnings as an adjustment to interest expense over the terms of the related borrowings.

While the Company may continue to use derivative financial instruments to reduce exposure to changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, is recognized immediately in gain (loss) on derivatives. This change creates volatility in our results of operations, as the fair value of our derivative financial instruments changes over time, and this volatility may adversely impact our results of operations and financial condition.

For the forecasted transactions that are probable of occurring, the derivative gain or loss in accumulated other comprehensive income as of June 30, 2008 will be reclassified into earnings as an adjustment to interest expense over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In the event that the related forecasted borrowing is no longer probable of occurring, the related gain or loss in accumulated other comprehensive income is recognized in earnings immediately.

The Fair Value Measurements and Disclosures Topic of the FASB ASC establishes a framework for measuring fair value under U.S. GAAP and requires certain disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in a orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). Because the Company’s derivatives are not listed on an exchange, the Company values these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data.

Common stock and equity. On November 2, 2007, the Board of Directors approved a stock repurchase plan. Under the stock repurchase plan, the Company is authorized to repurchase common stock on the open market. The par value of the shares repurchased is charged to common stock with the excess of the purchase price over par charged against any available additional paid-in capital.

Stock-based compensation. The Compensation—Stock Compensation Topic of the FASB ASC establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and non-employees, except for equity instruments held by employee share ownership plans.

Income taxes. The Income Taxes Topic of the FASB ASC 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.

At September 30, 2009, there have been no material changes to the liability for uncertain tax positions and there are no significant unrecognized tax benefits. The periods subject to general examination for the Company’s federal return include the 2006 tax year to the present. The Company files state income tax returns in various states which may have different statutes of limitations. Generally, state income tax returns for years 2005 through the present are subject to examination.

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.

Earnings per share. The Company follows guidance previously promulgated in SFAS No. 128, Earnings Per Share, as clarified by the requirements of FASB Staff Position No. Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”), which were both subsequently incorporated in the Earnings Per Share Topic of the FASB ASC. This guidance concluded that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities to be included in the computation of earnings per share using the two-class method. The guidance was effective for fiscal years beginning after December 15, 2008 on a retrospective basis, including interim periods within those years.

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period using the two-class method, which includes our unvested restricted stock awards as participating securities. Diluted earnings per share is computed based on the weighted average number of common shares outstanding for the period using the two-class method, which includes our unvested restricted stock awards as participating securities, and the dilutive impact of the exercise or conversion of common stock equivalents, such as stock options, into shares of Common Stock as if those securities were exercised or converted.

In this report for the quarterly period ended September 30, 2009, the Company has retrospectively adjusted its earnings per share data to conform with the provisions of FSP EITF 03-6-1, as incorporated in the Earnings Per Share Topic of the FASB ASC. The adoption of these provisions resulted in an increase of approximately 2% in the weighted average number of shares used in computing basic and diluted earnings per share for the nine-month period ended September 30, 2008. There was no change in the weighted average number of shares used in computing basic and diluted loss per share for the three-month period ended September 30, 2008 because the inclusion of additional shares would have been anti-dilutive.

NOTE 3 — Net Investment in Leases and Loans

Net investment in leases and loans consists of the following:

						December 31,
						2008
		September 30,				(As restated,
		2009				see Note 15)
		(Dollars in thousands)
Minimum lease payments receivable		$	552,398			$	752,802
Estimated residual value of equipment			46,158				51,197
Unearned lease income, net of initial direct costs and fees deferred			(83,977	)			(119,775	)
Security deposits			(8,750	)			(12,165	)
Loans, including unamortized deferred fees and costs			6,020				12,333
Allowance for credit losses			(12,293	)			(15,283	)
		$	499,556			$	669,109

At September 30, 2009, a total of $446.9 million of minimum lease payments receivable are assigned as collateral for short-term and long-term borrowings.

Initial direct costs net of fees deferred were $12.1 million and $19.5 million as of September 30, 2009 and December 31, 2008, respectively, and are netted in unearned income and will be amortized to income using the level yield method. At September 30, 2009 and December 31, 2008, $37.3 million and $40.5 million, respectively, of the estimated residual value of equipment retained on our Consolidated Balance Sheets were related to copiers.

Minimum lease payments receivable under lease contracts and the amortization of unearned lease income, including initial direct costs and fees deferred, are as follows as of September 30, 2009:

		Minimum Lease
		Payments				Income
		Receivable				Amortization
		(Dollars in thousands)
Period Ending December 31:
2009		$	71,310			$	14,542
2010			233,920				39,490
2011			146,606				19,809
2012			71,651				7,841
2013			25,523				2,101
Thereafter			3,388				194
		$	552,398			$	83,977

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 the contract becomes less than 90 days delinquent. As of September 30, 2009 and December 31, 2008, the Company maintained total finance receivables which were on a non-accrual basis of $5.2 million and $6.4 million, respectively. As of September 30, 2009 and December 31, 2008, the Company had total finance receivables in which the terms of the original agreements had been renegotiated in the amount of $5.4 million and $8.3 million, respectively.

NOTE 4 — Allowance for Credit Losses

Net investments in leases and loans are charged-off when they are contractually past due for 121 days based on the historical net loss rates realized by the Company.

Activity in this account is as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Dollars in thousands)
Allowance for credit losses, beginning of period		$	13,978			$	12,873			$	15,283			$	10,988
Charge-offs			(8,605	)			(7,671	)			(26,947	)			(20,918	)
Recoveries			969				535				2,464				2,132
Net charge-offs			(7,636	)			(7,136	)			(24,483	)			(18,786	)
Provision for credit losses			5,951				8,602				21,493				22,137
Allowance for credit losses, end of period		$	12,293			$	14,339			$	12,293			$	14,339

NOTE 5 — Other Assets

Other assets are comprised of the following:

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Income taxes receivable		$	3,053			$	4,136
Accrued fees receivable			3,463				3,559
Deferred transaction costs			1,004				1,375
Prepaid expenses			680				1,990
Other			1,420				1,699
		$	9,620			$	12,759

NOTE 6 — Commitments and Contingencies

The Company is involved in legal proceedings, which include claims, litigation and suits arising in the ordinary course of business. In the opinion of management, these actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

NOTE 7 — Deposits

Effective March 12, 2008, the Company opened MBB. MBB currently provides diversification of the Company’s funding sources through the issuance of Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, primarily raised nationally through various brokered deposit relationships and directly from other financial institutions. As of September 30, 2009, the remaining scheduled maturities of time deposits are as follows:

		Scheduled
		Maturities
		(Dollars in thousands)
Period Ending December 31,
2009		$	10,656
2010			23,430
2011			19,563
2012			15,436
2013			8,824
Thereafter			2,151
		$	80,060

All time deposits are in denominations of less than $250,000 and are all fully insured by the FDIC. The weighted average all-in interest rate of deposits outstanding at September 30, 2009 was 3.45%.

NOTE 8 — Short-term and Long-term Borrowings

Borrowings with an original maturity of less than one year are classified as short-term borrowings. The Company’s revolving and short-term credit facilities (secured bank facility and commercial paper (“CP”) conduit warehouse facility) are classified as short-term borrowings, along with MBB’s federal funds purchased. Borrowings with an original maturity of one year or more are classified as long-term borrowings. The Company’s term note securitizations are classified as long-term borrowings.

On June 29, 2009, the Company terminated the secured bank facility and paid off the outstanding balance. In March 2009, the CP conduit warehouse facility was converted from a revolving facility to an amortizing facility, scheduled to mature in March 2010.

Scheduled principal and interest payments on outstanding borrowings as of September 30, 2009 are as follows:

		Principal				Interest(1)
		(Dollars in thousands)
Period Ending December 31,
2009		$	60,008			$	7,138
2010			207,909				7,914
2011			68,901				2,750
2012			24,139				470
2013			1,878				28
Thereafter			131				1
		$	362,966			$	18,301

NOTE 9 — Derivative Financial Instruments

The Company uses derivative financial instruments to manage exposure to the effects of changes in market interest rates and to fulfill certain covenants in our borrowing arrangements. All derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or liabilities. 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 U.S. GAAP.

The Company has entered into various forward starting interest-rate swap agreements related to anticipated term note securitization transactions. Prior to July 1, 2008, these interest-rate swap agreements were designated and accounted for as cash flow hedges of specific term note securitization transactions, as prescribed by U.S. GAAP. Under hedge accounting, the effective portion of the gain or loss on a derivative designated as a cash flow hedge was reported net of tax effects in accumulated other comprehensive income on the Consolidated Balance Sheets, until the pricing of the related term securitization.

These hedges were expected to be highly effective in offsetting the changes in cash flows of the forecasted transactions, and this expected relationship was documented at the inception of each hedge. Prior to July 1, 2008, expected hedge effectiveness was 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 interest-rate 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 retrospectively measured ineffectiveness using the same methodology. The gain or loss from the effective portion of a derivative designated as a cash flow hedge was recorded net of tax effects in other comprehensive income and the gain or loss from the ineffective portion was reported in earnings.

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 reclassified into earnings as an adjustment to interest expense over the terms of the related term securitizations.

While the Company may continue to use derivative financial instruments to reduce exposure to changing interest rates, effective July 1, 2008, the Company discontinued the use of hedge accounting. By discontinuing hedge accounting effective July 1, 2008, any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, is recognized immediately in gain (loss) on derivatives. This change creates volatility in our results of operations, as the fair value of our derivative financial instruments changes over time, and this volatility may adversely impact our results of operations and financial condition.

For the forecasted transactions that are probable of occurring, the derivative gain or loss in accumulated other comprehensive income as of September 30, 2008 will be reclassified into earnings as an adjustment to interest expense over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In the event that the related forecasted borrowing is no longer probable of occurring, the related gain or loss in accumulated other comprehensive income is recognized in earnings immediately.

During 2009, the Company concluded that certain forecasted transactions were not probable of occurring on the anticipated date or in the additional time period permitted by U.S. GAAP. As a result, a $233,000 pretax ($141,000 after-tax) gain on the related cash flow hedges was reclassified from accumulated other comprehensive income into gain (loss) on derivatives for the three-month period ended September 30, 2009. For the nine-month period ended September 30, 2009, a $642,000 pretax ($387,000 after-tax) gain on the related cash flow hedges was reclassified from accumulated other comprehensive income into gain (loss) on derivatives.

The following tables summarize specific information regarding the active and terminated interest-rate swap agreements described above:

For Active Agreements:

		March,				January,				December,				August,				August,
Inception Date		2008				2008				2007				2007				2006

		October,				October,				October,				October,				October,
Commencement Date		2009				2009				2009				2008				2008
		(Dollars in thousands)
Notional amount:
September 30, 2009		$	—			$	25,000			$	100,000			$	50,000			$	50,000
December 31, 2008		$	25,000			$	25,000			$	100,000			$	50,000			$	50,000
For active agreements:
Fair value recorded in other assets (liabilities)
September 30, 2009		$	—			$	(1,209	)		$	(5,109	)		$	(1,678	)		$	(1,855	)
December 31, 2008		$	(653	)		$	(922	)		$	(3,955	)		$	(2,823	)		$	(3,175	)
Unrealized gain, net of tax, recorded in equity
September 30, 2009		$	—			$	—			$	143			$	—			$	—
December 31, 2008		$	246			$	93			$	190			$	—			$	—

For Terminated Agreements:

										August,								October/
		March,				August,				2006/August,				June/September,				December,
Inception Date		2008				2006/2007				2007				2005				2004
		October,				October,				October,				September,				August,
Commencement Date		2009				2008				2007				2006				2005
						September/
		May,				October,				October,				September,				August,
Termination Date		2009				2008				2007				2006				2005
		(Dollars in thousands)
Notional amount		$	25,000			$	100,000			$	300,000			$	225,000			$	250,000
Realized gain (loss) at termination		$	(775	)		$	(3,312	)		$	(2,683	)		$	3,732			$	3,151
Deferred gain (loss), net of tax, recorded in equity:
September 30, 2009		$	—			$	—			$	(443	)		$	148			$	—
December 31, 2008		$	—			$	—			$	(777	)		$	399			$	16
Amortization recognized as increase (decrease) in interest expense:
Nine months ended September 30, 2009		$	—			$	—			$	557			$	(418	)		$	(26	)
Year ended December 31, 2008		$	—			$	—			$	1,136			$	(953	)		$	(354	)
Expected amortization during next 12 months as increase (decrease) in interest expense		$	—			$	—			$	450			$	(237	)		$	—

The Company recorded a gain (loss) on derivatives activities for the periods indicated as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(Dollars in thousands)
Change in fair value of derivative contracts		$	(1,397	)		$	(2,160	)		$	(2,467	)		$	(2,160	)
Cash flow hedging gains (losses) on forecasted transactions no longer probable of occurring(1)			233				(1,120	)			642				(1,120	)
Gain (loss) on derivatives		$	(1,164	)		$	(3,280	)		$	(1,825	)		$	(3,280	)

These results are based on the fair value of the derivative contracts at September 30, 2009 in a volatile market that is changing daily, and will not necessarily reflect the value at settlement. At September 30, 2009, a total of $6.8 million of interest-earning cash is assigned as collateral for interest-rate swap agreements.

Subsequent to September 30, 2009, certain interest-rate swaps terminated. These interest-rate swaps had a total notional principal of $125 million and inception dates in December 2007 and January 2008. The cash settlement approximated the fair value recorded on these interest-rate swaps as of September 30, 2009.

The Company also uses interest-rate cap agreements that are not designated for hedge accounting treatment to fulfill certain covenants in its special purpose subsidiary’s warehouse borrowing arrangements. Accordingly, these cap agreements are recorded at fair value in other assets at $181,000 and $53,000 as of September 30, 2009 and December 31, 2008, respectively. The notional amount of interest-rate caps owned as of September 30, 2009 and December 31, 2008 was $134.9 million and $175.8 million, respectively. Changes in the fair values of the caps are recorded in gain (loss) on derivatives in the accompanying Consolidated Statements of Operations.

The Company also sells interest-rate caps to partially offset the interest-rate caps required to be purchased by the Company’s 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. There were no outstanding notional amounts for interest-rate cap agreements sold at September 30, 2009. The notional amount of interest-rate cap agreements sold was $165.5 million as of December 31, 2008. The fair value of interest-rate cap agreements sold is recorded in other liabilities at $40,000 as of December 31, 2008. Changes in the fair values of the caps are recorded in gain (loss) on derivatives in the accompanying Consolidated Statements of Operations.

In March 2006, the FASB issued additional guidance on disclosures about derivative instruments and hedging activities, which was subsequently incorporated in the Derivatives and Hedging Topic of the FASB ASC. As a result, enhanced disclosures are required about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The additional requirements are effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The adoption of the new guidance did not have an impact on the consolidated earnings, financial position or cash flows of the Company because it only amended the disclosure requirements for derivatives and hedged items.

NOTE 10 — Fair Value Measurements

The Fair Value Measurements and Disclosures Topic of the FASB ASC establishes a framework for measuring fair value and requires certain disclosures about fair value measurements. Its provisions do not apply to fair value measurements for purposes of lease classification, which is addressed in the Leases Topic of the FASB ASC.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in a orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). A three-level valuation hierarchy is required for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

The three levels are defined as follows:

	•		Level 1 — Inputs to the valuation are unadjusted quoted prices in active markets for identical assets or liabilities.
	•		Level 2 — Inputs to the valuation may include quoted prices for similar assets and liabilities in active or inactive markets, and inputs other than quoted prices, such as interest rates and yield curves, that are observable for the asset or liability for substantially the full term of the financial instrument.
	•		Level 3 — Inputs to the valuation are unobservable and significant to the fair value measurement. Level 3 inputs shall be used to measure fair value only to the extent that observable inputs are not available.

The Company uses derivative financial instruments to manage exposure to the effects of changes in market interest rates and to fulfill certain covenants in our borrowing arrangements. All derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or liabilities. Because the Company’s derivatives are not listed on an exchange, the Company values these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. The Company’s methodology also incorporates the impact of both the Company’s and the counterparty’s credit standing.

Assets and liabilities measured at fair value on a recurring basis include the following as of September 30, 2009:

		Fair Value Measurements Using												Assets/Liabilities
		Level 1				Level 2				Level 3				at Fair Value
		(Dollars in thousands)
Assets
Interest-rate caps purchased		$	—			$	181			$	—			$	181
Liabilities
Interest-rate swaps			—				9,851				—				9,851

Disclosures about the Fair Value of Financial Instruments

The Financial Instruments Topic of the FASB ASC requires the disclosure of the estimated fair value of financial instruments including those financial instruments not measured at fair value on a recurring basis. This requirement excludes certain instruments, such as the net investment in leases and all nonfinancial instruments.

The fair values shown below have been derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Valuation techniques involve uncertainties and require assumptions and judgments regarding prepayments, credit risk and discount rates. Changes in these assumptions will result in different valuation estimates. The fair values presented would not necessarily be realized in an immediate sale. Derived fair value estimates cannot necessarily be substantiated by comparison to independent markets or to other companies’ fair value information.

The following summarizes the carrying amount and estimated fair value of the Company’s financial instruments:

		September 30, 2009								December 31, 2008
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	50,441			$	50,441			$	40,270			$	40,270
Restricted cash			64,920				64,920				66,212				66,212
Loans			5,454				5,194				11,452				11,201
Interest-rate caps purchased			181				181				53				53
Liabilities:
Short-term and long-term borrowings			362,966				372,621				543,308				535,042
Deposits			80,060				81,756				63,385				64,635
Accounts payable and accrued expenses (1)			14,405				14,405				14,426				14,426
Interest-rate caps sold			—				—				40				40
Interest-rate swaps			9,851				9,851				11,528				11,528

The paragraphs which follow describe the methods and assumptions used in estimating the fair values of financial instruments.

(a) Cash and Cash Equivalents

The carrying amounts of the Company’s cash and cash equivalents approximate fair value as of September 30, 2009 and December 31, 2008, because they bear interest at market rates and have maturities of less than 90 days.

(b) Restricted Cash

The Company maintains cash reserve accounts as a form of credit enhancement in connection with the Series 2007-1, 2006-1 and 2005-1 term securitizations. The book value of such cash reserve accounts is included in restricted cash on the accompanying Consolidated Balance Sheet. The reserve accounts earn a floating market rate of interest which results in a fair value approximating the carrying amount at September 30, 2009 and December 31, 2008.

(c) Loans

The fair values of loans are estimated by discounting contractual cash flows, using interest rates currently being offered by the Company for loans with similar terms and remaining maturities to borrowers with similar credit risk characteristics. Estimates utilized were based on the original credit status of the borrowers combined with the portfolio delinquency statistics.

(d) Revolving and Term Secured Borrowings

The fair value of the Company’s debt and secured borrowings was estimated by discounting cash flows at current rates offered to the Company for debt and secured borrowings of the same or similar remaining maturities.

(e) Deposits

The fair value of the Company’s deposits was estimated by discounting cash flows at current rates paid by the Company for similar certificates of deposit of the same or similar remaining maturities.

(f) Accounts Payable and Accrued Expenses

The carrying amount of the Company’s accounts payable approximates fair value as of December 31, 2008 and 2007, because of the relatively short timeframe to realization.

(g) Interest-Rate Swaps and Interest-Rate Caps

Interest-rate swaps and interest-rate caps are measured at fair value on a recurring basis in accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the FASB ASC, using the inputs and methods described previously in the Fair Value Measurements section of this Note.

NOTE 11 —Earnings Per Common Share (“EPS”)

On June 16, 2008, the FASB issued FSP EITF 03-6-1, which was subsequently incorporated in the Earnings Per Share Topic of the FASB ASC. This guidance concluded that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities to be included in the computation of EPS using the two-class method. The guidance was effective for fiscal years beginning after December 15, 2008 on a retrospective basis, including interim periods within those years.

In this report for the quarterly period ended September 30, 2009, the Company has retrospectively adjusted its earnings per share data to conform with the provisions of FSP EITF 03-6-1, as incorporated in the Earnings Per Share Topic of the FASB ASC. The adoption of these provisions resulted in an increase of approximately 2% in the weighted average number of shares used in computing basic and diluted EPS for the nine-month period ended September 30, 2008. There was no change in the weighted average number of shares used in computing basic and diluted loss per share for the three-month period ended September 30, 2008 because the inclusion of additional shares would have been anti-dilutive.

The following table provides net income and shares used in computing basic and diluted earnings per common share:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(Dollars in thousands, except per-share data)
Net income (loss)		$	508			$	(941	)		$	575			$	2,117
Weighted average common shares outstanding			11,708,401				11,843,300				11,686,120				11,899,731
Add: Unvested restricted stock awards considered participating securities			898,746				—				813,458				299,350
Adjusted weighted average common shares used in computing basic EPS			12,607,147				11,843,300				12,499,578				12,199,081
Add: Effect of dilutive stock options			42,653				—				23,107				59,334
Adjusted weighted average common shares used in computing diluted EPS			12,649,800				11,843,300				12,522,685				12,258,415
Net earnings (loss) per common share:
Basic		$	0.04			$	(0.08	)		$	0.05			$	0.17
Diluted		$	0.04			$	(0.08	)		$	0.05			$	0.17

For the three-month periods ended September 30, 2009 and September 30, 2008, options to purchase 649,672 and 757,839 shares of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, since the exercise prices of the options were greater than the average market price of the Company’s common stock for the respective periods.

When computing diluted loss per share, all potential common shares, including stock options and restricted stock, are anti-dilutive to the loss per common share calculation. Therefore, for the three-month period ended September 30, 2008, the effect of 125,009 potential common shares have not been considered for diluted EPS purposes.

For the nine-month periods ended September 30, 2009 and September 30, 2008, options to purchase 683,566 and 701,744 shares of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, since the exercise prices of the options were greater than the average market price of the Company’s common stock for the respective periods.

NOTE 12 — Comprehensive Income (Loss)

The following table details the components of comprehensive income (loss):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
						(Dollars in thousands)
Net income (loss), as reported		$	508			$	(941	)		$	575			$	2,117
Other comprehensive income (loss):
Change in fair value of derivatives			—				—				—				593
Reclassification of cash flow hedging losses (gains) on forecasted transactions no longer probable of occurring			(233	)			1,120				(642	)			1,120
Amortization of net deferred losses (gains) on cash flow hedge derivatives			47				(32	)			113				(153	)
Tax effect			74				(434	)			210				(612	)
Total other comprehensive income (loss)			(112	)			654				(319	)			948
Comprehensive income (loss)		$	396			$	(287	)		$	256			$	3,065

NOTE 13 — Stockholders’ Equity

Stockholders’ Equity

On November 2, 2007, the Board of Directors (the “Board”) approved a stock repurchase plan. Under this program, the Company 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 are 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 repurchases are funded using the Company’s working capital.

The Company purchased 88,894 shares of its common stock for $346,762 during the nine-month period ended September 30, 2009. There were no repurchases in the three-month period ended September 30, 2009. At September 30, 2009, the Company had $10.7 million remaining in its stock repurchase plan authorized by the Board. In addition to the repurchases described above, pursuant to the Company’s 2003 Equity Compensation Plan (as amended, the “2003 Plan”), participants may have shares withheld to cover income taxes. There were 13,720 shares repurchased to cover income taxes during the nine-month period ended September 30, 2009, at an average cost of $3.89. There were no repurchases in the three-month period ended September 30, 2009.

Regulatory Capital Requirements

On March 20, 2007, the FDIC approved the application of our wholly-owned subsidiary, MBB, to become an industrial bank chartered by the State of Utah. MBB commenced operations effective March 12, 2008. MBB provides diversification of the Company’s funding sources and, over time, may add other product offerings to better serve our customer base.

On December 31, 2008, Marlin Business Services Corp. received approval from the Federal Reserve Bank of San Francisco (the “FRB”) to become a bank holding company upon conversion of MBB from an industrial bank to a commercial bank. On January 13, 2009, MBB received approval from the FRB to become a member of the Federal Reserve System.

On January 13, 2009, MBB converted from an industrial bank to a commercial bank chartered and supervised by the State of Utah and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). In connection with the conversion of MBB to a commercial bank, Marlin Business Services Corp. became a bank holding company on January 13, 2009. On January 20, 2009, MBB submitted a modification request to the FDIC related to the Order issued by the FDIC on March 20, 2007 (the “Order”) that, among other limitations, restricts the growth of MBB during its first three years of operations. At this time, we are awaiting a final ruling from the FDIC on the modification request. Until we receive the FDIC’s final decision, MBB will continue to adhere to its original three-year plan approved by the FDIC.

MBB is subject to capital adequacy guidelines issued by the Federal Financial Institutions Examination Council (the “FFIEC”). These risk-based capital and leverage guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and consider off-balance sheet exposures in determining capital adequacy. The FFIEC and/or the U.S. Congress may determine to increase capital requirements in the future due to the current economic environment. Under the rules and regulations of the FFIEC, at least half of a bank’s total capital is required to be “Tier I capital” as defined in the regulations, comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual preferred stock. The remaining capital, “Tier II capital,” as defined in the regulations, may consist of other preferred stock, a limited amount of term subordinated debt or a limited amount of the reserve for possible credit losses. The FFIEC has also adopted minimum leverage ratios for banks, which are calculated by dividing Tier I capital by total quarterly average assets. Recognizing that the risk-based capital standards principally address credit risk rather than interest rate, liquidity, operational or other risks, many banks are expected to maintain capital in excess of the minimum standards. The Company will provide the necessary capital to maintain MBB at “well-capitalized” status as defined by banking regulations. MBB’s equity balance at September 30, 2009 was $15.2 million, which met all capital requirements to which MBB is subject and qualified for “well-capitalized” status. Bank holding companies are required to comply with the Federal Reserve Board’s risk-based capital guidelines that require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital is required to be Tier 1 capital. In addition to the risk-based capital guidelines, the Federal Reserve Board has adopted a minimum leverage capital ratio under which a bank holding company must maintain a level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage capital ratio of at least 4%. At September 30, 2009, Marlin Business Services Corp. also exceeded its regulatory capital requirements and is considered “well-capitalized” as defined by federal banking regulations. MBB is designated a Risk Category I institution for purposes of the risk-based assessment for FDIC deposit insurance. Risk Category I institutions pay the lowest tier of premiums for their deposit insurance.

The following table sets forth the Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio for Marlin Business Services Corp. and MBB at September 30, 2009.

										Minimum Capital								Well-Capitalized Capital
		Actual								Requirement								Requirement
		Ratio				Amount				Ratio(1)				Amount				Ratio				Amount
										(Dollars in thousands)
Tier 1 Leverage Capital
Marlin Business Services Corp.			22.31	%		$	147,611				4	%		$	26,471				5	%		$	33,089
Marlin Business Bank			15.23	%		$	15,209				5	%		$	4,994				5	%		$	4,994
Tier 1 Risk-based Capital
Marlin Business Services Corp.			27.17	%		$	147,611				4	%		$	21,735				6	%		$	32,602
Marlin Business Bank			15.17	%		$	15,209				6	%		$	6,016				6	%		$	6,016
Total Risk-based Capital
Marlin Business Services Corp.			28.43	%		$	154,471				8	%		$	43,469				10	%		$	54,337
Marlin Business Bank			16.06	%		$	16,104				15	%		$	15,040				10	%(1)		$	10,027

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires the federal regulators to take prompt corrective action against any undercapitalized institution. FDICIA establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Well-capitalized institutions significantly exceed the required minimum level for each relevant capital measure. Adequately capitalized institutions include depository institutions that meet but do not significantly exceed the required minimum level for each relevant capital measure. Undercapitalized institutions consist of those that fail to meet the required minimum level for one or more relevant capital measures. Significantly undercapitalized characterizes depository institutions with capital levels significantly below the minimum requirements for any relevant capital measure. Critically undercapitalized refers to depository institutions with minimal capital and at serious risk for government seizure.

Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions, including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized. Institutions that are adequately capitalized but not well-capitalized cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits.

The federal bank regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective powers include, among other things:

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prohibiting the payment of principal and interest on subordinated debt;

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prohibiting the holding company from making distributions without prior regulatory approval;

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placing limits on asset growth and restrictions on activities;

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placing additional restrictions on transactions with affiliates;

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restricting the interest rate the institution may pay on deposits;

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prohibiting the institution from accepting deposits from correspondent banks; and

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in the most severe cases, appointing a conservator or receiver for the institution.

A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.

Pursuant to the Order, MBB was required to have beginning paid-in capital funds of not less than $12.0 million and must keep its total risk-based capital ratio above 15%. MBB’s equity balance at September 30, 2009 was $15.2 million, which qualifies for “well capitalized” status. We are seeking to modify the Order issued when MBB became an industrial bank to eliminate certain inconsistencies between the Order and the Federal Reserve Bank of San Francisco’s approval of MBB as a commercial bank, specifically those that restrict the growth of the bank during its first three years of operations.

NOTE 14 — Stock-Based Compensation

Under the terms of the 2003 Plan, employees, certain consultants and advisors, and non-employee members of the Board 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 was increased from 2,100,000 to 3,300,000 at the annual meeting of shareholders on May 22, 2008. Not more than 1,650,000 of such shares shall be available for issuance as restricted stock grants. There were 621,039 shares available for future grants under the 2003 Plan as of September 30, 2009.

Total stock-based compensation expense was $387,000 and $394,000 for the three-month periods ended September 30, 2009 and September 30, 2008, respectively. Total stock-based compensation expense was $1.0 million and $843,000 for the nine-month periods ended September 30, 2009 and September 30, 2008, respectively. Excess tax benefits decreased cash provided by operating activities and increased cash provided by financing activities by $5,000 and $102,000 for the nine-month periods ended September 30, 2009 and September 30, 2008, respectively.

Stock Options

Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of the grant and have 7- to 10-year contractual terms. All options issued contain service conditions based on the participant’s 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. The Company has recognized expense related to performance options based on the most probable performance assumptions as of September 30, 2009.

The Company also issues stock options to non-employee independent directors. These options generally vest in one year.

There were no stock options granted during the three- and nine-month periods ended September 30, 2009. The fair value of each stock option granted during the three- and nine-month periods ended September 30, 2008 was estimated on the date of the grant using the Black-Scholes option pricing model. The weighted-average grant-date fair value of stock options issued for the three- and nine-month periods ended September 30, 2008 was $3.34 and $3.25 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, 2008:

		Three Months Ended				Nine Months Ended
		September 30, 2008				September 30, 2008
Risk-free interest rate			2.99	%			2.45	%
Expected life (years)			5				5
Expected volatility			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 represents the period each option is expected to be outstanding and was determined by applying the simplified method as defined by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (“SAB 107”), due to the limited period of time the Company’s shares have been publicly traded. The expected volatility was determined using historical volatilities based on historical stock prices. The Company does not pay dividends, and therefore did not assume expected dividends.

A summary of option activity for the nine months ended September 30, 2009 follows:

						Weighted
						Average
		Shares				Exercise Price
Options
Outstanding at January 1, 2009			885,459			$	12.32
Granted			—				—
Exercised			(11,327	)			3.87
Forfeited			(82,751	)			16.51
Expired			—				—
Outstanding at September 30, 2009			791,381				12.00

During the three-month periods ended September 30, 2009 and September 30, 2008, the Company recognized total compensation expense related to options of $69,000 and $121,000, respectively. During the nine-month periods ended September 30, 2009 and September 30, 2008, the Company recognized total compensation expense related to options of $261,000 and $320,000, respectively.

The total pretax intrinsic value of stock options exercised was $4,000 and $56,000, respectively, for the three-month periods ended September 30, 2009 and September 30, 2008. The related tax benefits realized from the exercise of stock options for the three-month periods ended September 30, 2009 and September 30, 2008 were $1,000 and $27,000, respectively. The total pretax intrinsic value of stock options exercised was $13,000 and $257,000, respectively, for the nine-month periods ended September 30, 2009 and 2008. The related tax benefits realized from the exercise of stock options for the nine-month periods ended September 30, 2009 and September 30, 2008 were $5,000 and $102,000, respectively.

The following table summarizes information about the stock options outstanding and exercisable as of September 30, 2009:

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)
$3.39			94,134				2.5			$	3.39			$	451				94,134				2.5			$	3.39			$	451
$4.23 – 5.01			54,441				0.5				4.30				211				54,441				0.5				4.30				211
$7.61 — 10.18			340,962				4.4				9.53				18				158,061				3.3				9.61				16
$14.00 — 16.02			63,484				4.3				14.63				—				56,817				4.3				14.57				—
$17.52 — 22.23			238,360				3.8				20.00				—				137,813				3.5				19.37				—
			791,381				3.7				12.00			$	680				501,266				3.0				11.11			$	678

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $8.18 as of September 30, 2009, which would have been received by the option holders had all option holders exercised their options as of that date.

As of September 30, 2009, the total future compensation cost related to non-vested stock options not yet recognized in the Consolidated Statements of Operations was $331,000 and the weighted average period over which these awards are expected to be recognized was 1.3 years, based on the most probable performance assumptions as of September 30, 2009. In the event maximum performance targets are achieved, an additional $1.0 million of compensation cost would be recognized over a weighted average period of 1.6 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 participant’s continued service with the Company, and may provide for accelerated vesting if there is a change in control as defined in the 2003 Plan.

The vesting of certain restricted shares may be accelerated to a minimum of 3 to 4 years based on achievement of various individual and Company performance measures. In addition, the Company has issued certain shares under a Management Stock Ownership Program. Under this program, restrictions on the shares lapse at the end of 10 years but may lapse (vest) in a minimum of three years if the employee continues in service at the Company and owns a matching number of other common shares in addition to the restricted shares.

Of the total restricted stock awards granted during the nine-month period ended September 30, 2009, 385,752 shares may be subject to accelerated vesting based on performance factors; no shares have vesting contingent upon performance factors. Certain of the awards granted during 2009 may result in the issuance of 167,702 additional shares of stock if achievement of certain targets is greater than 100%. The Company has recognized expense related to performance-based shares based on the most probable performance assumptions as of September 30, 2009.

The Company also issues restricted stock to non-employee independent directors. These shares generally vest in seven years from the grant date or nine months following the director’s termination from Board service.

The following table summarizes the activity of the non-vested restricted stock during the nine months ended September 30, 2009:

						Weighted
						Average
						Grant-Date
		Shares				Fair Value
Non-vested restricted stock at January 1, 2009			503,914			$	11.29
Granted			512,264				6.05
Vested			(40,177	)			18.23
Forfeited			(68,406	)			14.14
Non-vested restricted stock at September 30, 2009			907,595				7.81