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, 2011

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 þ 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 26, 2011, 12,811,675 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, 2011

TABLE OF CONTENTS

		Page No.
Part I – Financial Information			2
Item 1 Condensed Consolidated Financial Statements (Unaudited)			2
Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010			2
Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2011 and 2010			3
Condensed Consolidated Statements of Stockholders’ Equity for the nine-month period ended September 30, 2011 and the year ended December 31, 2010			4
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3 Quantitative and Qualitative Disclosure about Market Risk			51
Item 4 Controls and Procedures			51
Part II – Other Information			51
Item 1 Legal Proceedings			51
Item 1A Risk Factors			51
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3 Defaults upon Senior Securities			52
Item 4 [Removed and Reserved]			52
Item 5 Other Information			52
Item 6 Exhibits			53
Signatures			54
Certifications
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
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. Financial Information

Item 1.		Condensed Consolidated Financial Statements

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

		September 30,				December 31,
		2011				2010
		(Dollars in thousands, except per-
		share data)
ASSETS
Cash and due from banks		$	1,289			$	2,557
Interest-earning deposits with banks			47,056				34,469
Total cash and cash equivalents			48,345				37,026
Restricted interest-earning deposits with banks (includes $24.1 million and $44.7 million at September 30, 2011 and December 31, 2010, respectively, related to consolidated variable interest entities (“VIEs”))			29,419				47,107
Securities available for sale (amortized cost of $1.7 million and $1.5 million at September 30, 2011 and December 31, 2010, respectively)			1,767				1,534
Net investment in leases and loans (includes $76.5 million and $154.1 million at September 30, 2011 and December 31, 2010, respectively, related to consolidated VIEs)			367,000				351,569
Property and equipment, net			2,183				2,180
Property tax receivables			44				197
Other assets			24,624				28,449
Total assets		$	473,382			$	468,062
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits		$	157,398			$	92,919
Long-term borrowings (includes $59.8 million and $128.2 million at September 30, 2011 and December 31, 2010, respectively, related to consolidated VIEs)			115,089				178,650
Other liabilities:
Sales and property taxes payable			4,095				1,978
Accounts payable and accrued expenses			8,923				8,019
Net deferred income tax liability			25,470				26,493
Total liabilities			310,975				308,059
Commitments and contingencies (Note 6)
Stockholders’ equity:
Common Stock, $0.01 par value; 75,000,000 shares authorized; 12,780,673 and 12,864,665 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively			128				129
Preferred Stock, $0.01 par value; 5,000,000 shares authorized; none issued			—				—
Additional paid-in capital			85,159				86,987
Stock subscription receivable			(2	)			(2	)
Accumulated other comprehensive loss			(14	)			(132	)
Retained earnings			77,136				73,021
Total stockholders’ equity			162,407				160,003
Total liabilities and stockholders’ equity		$	473,382			$	468,062

The accompanying notes are an integral part of the unaudited 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,
		2011				2010				2011				2010
		(Dollars in thousands, except per-share data)
Interest income		$	11,073			$	11,421			$	32,836			$	36,245
Fee income			3,105				3,567				9,163				10,884
Interest and fee income			14,178				14,988				41,999				47,129
Interest expense			2,706				3,590				9,061				12,204
Net interest and fee income			11,472				11,398				32,938				34,925
Provision for credit losses			837				2,083				2,940				7,700
Net interest and fee income after provision for credit losses			10,635				9,315				29,998				27,225
Other income:
Insurance income			761				985				2,690				3,130
Loss on derivatives			(8	)			(9	)			(52	)			(128	)
Other income			574				354				1,290				948
Other income			1,327				1,330				3,928				3,950
Other expense:
Salaries and benefits			5,559				4,947				16,880				14,659
General and administrative			3,226				3,156				9,842				9,275
Financing related costs			177				131				523				433
Other expense			8,962				8,234				27,245				24,367
Income before income taxes			3,000				2,411				6,681				6,808
Income tax expense			1,169				977				2,566				2,586
Net income		$	1,831			$	1,434			$	4,115			$	4,222
Basic earnings per share		$	0.14			$	0.11			$	0.32			$	0.33
Diluted earnings per share		$	0.14			$	0.11			$	0.32			$	0.33
Weighted average shares used in computing basic earnings per share			12,803,343				12,872,123				12,905,582				12,826,263
Weighted average shares used in computing diluted earnings per share			12,868,740				12,933,439				12,978,024				12,888,662

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

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

																		Accumulated
						Common				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, 2009			12,778,935			$	128			$	84,674			$	(3	)		$	(267	)		$	67,353			$	151,885
Issuance of common stock			21,398				—				172				—				—				—				172
Repurchase of common stock			(80,925	)			(1	)			(771	)			—				—				—				(772	)
Exercise of stock options			35,864				1				161				—				—				—				162
Tax benefit on stock options exercised			—				—				72				—				—				—				72
Stock option compensation recognized			—				—				194				—				—				—				194
Payment of receivables			—				—				—				1				—				—				1
Restricted stock grant			109,393				1				(1	)			—				—				—				—
Restricted stock compensation recognized			—				—				2,486				—				—				—				2,486
Net change related to derivatives, net of tax			—				—				—				—				138				—				138
Net change in unrealized gain/loss on securities available for sale, net of tax			—				—				—				—				(3	)			—				(3	)
Net income			—				—				—				—				—				5,668				5,668
Balance, December 31, 2010			12,864,665			$	129			$	86,987			$	(2	)		$	(132	)		$	73,021			$	160,003
Issuance of common stock			8,598				—				101				—				—				—				101
Repurchase of common stock			(476,276	)			(5	)			(5,573	)			—				—				—				(5,578	)
Exercise of stock options			103,215				1				1,028				—				—				—				1,029
Stock option compensation recognized			—				—				72				—				—				—				72
Restricted stock grant			280,471				3				(3	)			—				—				—				—
Restricted stock compensation recognized			—				—				2,547				—				—				—				2,547
Net change related to derivatives, net of tax			—				—				—				—				83				—				83
Net change in unrealized gain/loss on securities available for sale, net of tax			—				—				—				—				35				—				35
Net income			—				—				—				—				—				4,115				4,115
Balance, September 30, 2011			12,780,673			$	128			$	85,159			$	(2	)		$	(14	)		$	77,136			$	162,407

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

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

		Nine Months Ended September 30,
		2011				2010
		(Dollars in thousands)
Cash flows from operating activities:
Net income		$	4,115			$	4,222
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,905				1,938
Stock-based compensation			2,033				2,190
Excess tax benefits from stock-based payment arrangements			(627	)			(72	)
Amortization of deferred net loss on cash flow hedge derivatives			138				158
Change in fair value of derivatives			52				(2,291	)
Provision for credit losses			2,940				7,700
Net deferred income taxes			(1,100	)			(4,021	)
Amortization of deferred initial direct costs and fees			3,914				5,488
Deferred initial direct costs and fees			(4,004	)			(2,449	)
Loss on equipment disposed			2,154				1,806
Effect of changes in other operating items:
Other assets			3,416				4,467
Other liabilities			2,970				668
Net cash provided by operating activities			17,906				19,804
Cash flows from investing activities:
Purchases of equipment for direct financing lease contracts and funds used to originate loans			(160,627	)			(91,477	)
Principal collections on leases and loans			138,085				164,783
Security deposits collected, net of refunds			(1,574	)			(2,110	)
Proceeds from the sale of equipment			3,681				3,727
Acquisitions of property and equipment			(706	)			(332	)
Change in restricted interest-earning deposits with banks			17,688				16,016
Purchases of securities available for sale			(176	)			(1,527	)
Net cash provided by (used in) investing activities			(3,629	)			89,080
Cash flows from financing activities:
Issuances of common stock			101				74
Repurchases of common stock			(5,578	)			(562	)
Exercise of stock options			988				162
Excess tax benefits from stock-based payment arrangements			627				72
Debt issuance costs			(14	)			(1,529	)
Term securitization advances			—				68,169
Term securitization repayments			(68,398	)			(135,383	)
Warehouse and bank facility advances			37,681				24,488
Warehouse and bank facility repayments			(32,844	)			(72,402	)
Increase in deposits			64,479				15,070
Net cash used in financing activities			(2,958	)			(101,841	)
Net increase in total cash and cash equivalents			11,319				7,043
Total cash and cash equivalents, beginning of period			37,026				37,057
Total cash and cash equivalents, end of period		$	48,345			$	44,100
Supplemental disclosures of cash flow information:
Cash paid for interest on deposits and borrowings		$	7,983			$	10,957
Net cash paid (refunds received) for income taxes		$	231			$	3,710

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

MARLIN BUSINESS SERVICES CORP. AND SUBSIDIARIES

NOTE 1 — Organization

Description

Through its principal operating subsidiary, Marlin Leasing Corporation, Marlin Business Services Corp. provides equipment leasing solutions nationwide, primarily to small and mid-sized businesses in a segment of the equipment leasing market commonly referred to in the industry as the “small-ticket” segment. The Company finances over 100 categories of commercial equipment important to its end user customers, including copiers, security systems, computers, telecommunications equipment and certain commercial and industrial equipment. Effective March 12, 2008, the Company 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. Marlin Business Services Corp. is a bank holding company and a financial holding company regulated by the Federal Reserve Board under the Bank Holding Company Act.

References to the “Company,” “Marlin,” “Registrant,” “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 of normal recurring items) necessary to present fairly the Company’s financial position at September 30, 2011 and the results of operations for the three- and nine-month periods ended September 30, 2011 and 2010, and cash flows for the nine-month periods ended September 30, 2011 and 2010. 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 (“SEC”) on March 16, 2011. The consolidated results of operations for the three- and nine-month periods ended September 30, 2011 and 2010 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.

Use of estimates. The preparation of financial statements in accordance with generally accepted accounting principles in the United States (“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 fair value of financial instruments and income taxes. Actual results could differ from those estimates.

Interest income. 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 each lease. Generally, 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.

Modifications to leases are accounted for in accordance with Topic 840 of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”). Modifications resulting in renegotiated leases may include reductions in payment and extensions in term. However, such renegotiated leases are not granted concessions regarding implicit rates or reductions in total amounts due. Modifications may be granted on a one-time basis in situations that indicate the lessee is experiencing a temporary, timing issue and has a high likelihood of success with a revised payment plan. After a modification, a lease’s accrual status is based on compliance with the modified terms.

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 of at the end of a lease’s term. Residual income is recognized as earned.

Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated collection rates. At a minimum of every quarter, an analysis of anticipated collection rates is performed based on updates to collection history. Adjustments in the anticipated collection rate assumptions are made as needed based on this analysis. Other fees are recognized when received.

Insurance income. Insurance income is recognized on an accrual basis as earned over the term of each lease. Generally, insurance 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.

Securities available for sale. Securities available for sale consist of mutual funds. Securities available for sale are measured at fair value on a recurring basis, computed using fair value measurements classified as Level 1 (as defined in Note 9, Fair Value Measurements and Disclosures about the Fair Value of Financial Instruments), since prices are obtained from quoted prices in an active market. Unrealized holding gains or losses, net of related deferred income taxes, are reported in accumulated other comprehensive income.

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 each prospective customer’s financial condition, evaluating and recording guarantees and other security arrangements, negotiating terms, preparing and processing documents and closing each transaction. The fees we defer are documentation fees collected at inception. The realization of the initial direct costs, net of fees deferred, is predicated on the net future cash flows generated by our lease and loan portfolios.

Net Investment in Leases and Loans. The Company uses the direct financing method of accounting to record its direct financing leases and related interest income. At the inception of a lease, the Company records as an asset the aggregate future minimum lease payments receivable, plus the estimated residual value of the leased equipment, less unearned lease income. Residual values generally 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.

The Company records an estimated residual value at lease inception for all fair market value and fixed purchase option leases based on a percentage of the equipment cost of the asset being leased. The percentages used depend on equipment type and term. In setting and reviewing estimated residual values, the Company focuses its analysis primarily on total historical and expected realization statistics pertaining to both lease renewals and sales of equipment.

At the end of an 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 a 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 a lessee elects to return 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 independent third parties, 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 equipment to other assets and any gain or loss realized on the sale or disposal of equipment to a lessee or to others are included in fee income as net residual income.

Based on the Company’s experience, the amount of ultimate realization of the residual value tends to relate more to the customer’s election at the end of the lease term to enter into a renewal period, to purchase the leased equipment or to return the leased equipment than it does to the equipment type. Management performs periodic reviews of the estimated residual values and historic realization statistics no less frequently than quarterly 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.

We consider both quantitative and qualitative factors in determining the allowance for credit losses. Quantitative factors considered include a migration analysis, historic delinquencies and charge-offs, historic bankruptcies, historic performance of restructured accounts and a static pool analysis of historic recoveries. A migration analysis is a technique used to estimate the likelihood that an account will progress through the various delinquency stages and ultimately reach charge-off. Qualitative factors that may result in further adjustments to the quantitative analysis include items such as forecasting uncertainties, changes in the composition of our lease and loan portfolios (including geography, industry, equipment type and vendor source), seasonality, economic conditions and trends or business practices at the reporting date that are different from the periods used in the quantitative analysis.

The various factors used in the analysis are reviewed periodically, and no less frequently than quarterly. 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 extent 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 to reflect the estimated net losses inherent in our portfolios. Actual losses may vary from current estimates.

As previously disclosed, based on feedback the Company received from the Federal Reserve Bank of Philadelphia in April 2011, the Company is operating under its established methodology for determining its allowance for credit losses, which methodology will be reviewed by the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions during their next regularly scheduled commercial bank examination of Marlin Business Bank.

Securitizations. In connection with each of its term note securitization transactions, the Company established a bankruptcy remote special-purpose subsidiary (“SPE”) and issued term debt to institutional investors. These SPEs are each considered VIEs under U.S. GAAP. The Company is required to consolidate VIEs in which it is deemed to be the primary beneficiary through having (1) power over the significant activities of the entity and (2) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. The Company continues to service the assets of its VIEs and retain equity and/or residual interests. Accordingly, assets and related debt of these VIEs 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 our general credit. Collateral in excess of these borrowings represents the Company’s maximum loss exposure.

Common stock and equity. On November 2, 2007, the Company’s Board of Directors approved a stock repurchase plan. Under the stock repurchase plan, the Company is authorized to repurchase its 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.

The Company measures stock-based compensation cost at grant date, based on the fair value of the awards ultimately expected to vest. Compensation cost is recognized on a straight-line basis over the service period. We generally use the Black-Scholes valuation model to measure the fair value of our stock options utilizing various assumptions with respect to expected holding period, risk-free interest rates, stock price volatility and dividend yield. The assumptions are based on management’s judgment concerning future events.

The Company uses its judgment in estimating the amount of awards that are expected to be forfeited, with subsequent revisions to the assumptions if actual forfeitures differ from those estimates. In addition, for performance-based awards, the Company estimates the degree to which the performance conditions will be met to estimate the number of shares expected to vest and the related compensation expense. Compensation expense is adjusted in the period such performance estimates change.

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 that 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, such as leases, for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are included within the Consolidated Balance Sheets. Management then assesses the likelihood that deferred tax assets will be recovered from future taxable income or tax carry-back availability and, to the extent management believes recovery is not likely, a valuation allowance is established. To the extent that we establish a valuation allowance in a period, an expense is recorded within the tax provision in the Consolidated Statements of Operations.

In accordance with U.S. GAAP, uncertain tax positions taken or expected to be taken in a tax return are subject to potential financial statement recognition based on prescribed recognition and measurement criteria. Based on our evaluation, we concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. At September 30, 2011, 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 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 the years 2005 through the present are subject to examination. The Company has amended its previously filed income tax returns for the years 2006 through 2009 to claim refunds of approximately $15.4 million as discussed in Note 13 to the Company’s Form 10-K for December 31, 2010. These amendments are subject to review by the various jurisdictions.

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. Pursuant to the Earnings Per Share Topic of the FASB ASC, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share (“EPS”) using the two-class method.

Basic EPS 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 EPS 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.

NOTE 3 — Net Investment in Leases and Loans

Net investment in leases and loans consists of the following:

		September 30,				December 31,
		2011				2010
		(Dollars in thousands)
Minimum lease payments receivable		$	411,233			$	389,247
Estimated residual value of equipment			33,868				37,320
Unearned lease income, net of initial direct costs and fees deferred			(69,898	)			(63,355	)
Security deposits			(3,451	)			(5,026	)
Loans, including unamortized deferred fees and costs			707				1,101
Allowance for credit losses			(5,459	)			(7,718	)
		$	367,000			$	351,569

At September 30, 2011, a total of $160.5 million of minimum lease payments receivable is assigned as collateral for borrowings, including the amounts related to consolidated VIEs.

Initial direct costs net of fees deferred were $6.9 million and $6.8 million as of September 30, 2011 and December 31, 2010, respectively, and are netted in unearned income and will be amortized to income using the effective interest method. At September 30, 2011 and December 31, 2010, $27.6 million and $30.6 million, respectively, of the estimated residual value of equipment retained on our Consolidated Balance Sheets was 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, 2011:

		Minimum Lease
		Payments				Income
		Receivable				Amortization
		(Dollars in thousands)
Period Ending December 31,
2011		$	48,512			$	10,829
2012			161,232				30,932
2013			102,021				16,859
2014			57,596				7,966
2015			32,459				2,938
Thereafter			9,413				374
		$	411,233			$	69,898

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, 2011 and December 31, 2010, the Company maintained total finance receivables which were on a non-accrual basis of $1.2 million and $2.0 million, respectively. As of September 30, 2011 and December 31, 2010, the Company had total finance receivables in which the terms of the original agreements had been renegotiated in the amount of $1.3 million and $2.2 million, respectively. (See Note 4 for additional asset quality information.)

NOTE 4 — 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 estimate of probable net credit losses.

The chart which follows provides activity in the allowance for credit losses and asset quality statistics.

		Three Months Ended								Nine Months Ended								Year Ended
		September 30,								September 30,								December 31,
		2011				2010				2011				2010				2010
		(Dollars in thousands)
Allowance for credit losses, beginning of period		$	6,175			$	9,151			$	7,718			$	12,193			$	12,193
Charge-offs			(2,029	)			(3,659	)			(6,904	)			(14,023	)			(17,095	)
Recoveries			476				780				1,705				2,485				3,182
Net charge-offs			(1,553	)			(2,879	)			(5,199	)			(11,538	)			(13,913	)
Provision for credit losses			837				2,083				2,940				7,700				9,438
Allowance for credit losses, end of period(1)		$	5,459			$	8,355			$	5,459			$	8,355			$	7,718
Annualized net charge-offs to average total finance receivables (2)			1.73	%			3.10	%			1.96	%			3.85	%			3.58	%
Allowance for credit losses to total finance receivables, end of period (2)			1.49	%			2.31	%			1.49	%			2.31	%			2.19	%
Average total finance receivables (2)		$	359,451			$	371,833			$	353,348			$	399,638			$	389,001
Total finance receivables, end of period (2)		$	365,610			$	362,328			$	365,610			$	362,328			$	352,527
Delinquencies greater than 60 days past due		$	1,934			$	4,213			$	1,934			$	4,213			$	3,504
Delinquencies greater than 60 days past due (3)			0.47	%			1.05	%			0.47	%			1.05	%			0.90	%
Allowance for credit losses to delinquent accounts greater than 60 days past due (3)			282.26	%			198.31	%			282.26	%			198.31	%			220.26	%
Non-accrual leases and loans, end of period		$	1,151			$	2,398			$	1,151			$	2,398			$	1,996
Renegotiated leases and loans, end of period		$	1,304			$	2,640			$	1,304			$	2,640			$	2,221

Net investments in finance receivables are generally charged-off when they are contractually past due for 121 days. Income is not recognized on leases or loans when a default on monthly payment exists for a period of 90 days or more. Income recognition resumes when a lease or loan becomes less than 90 days delinquent. At September 30, 2011, September 30, 2010 and December 31, 2010, there were no finance receivables past due 90 days or more and still accruing.

Net charge-offs for the three-month period ended September 30, 2011 were $1.6 million (1.73% of average total finance receivables on an annualized basis), compared to $1.6 million (1.86% of average total finance receivables on an annualized basis) for the three-month period ended June 30, 2011. The decrease in net charge-offs during the three-month period ended September 30, 2011 compared to recent previous periods is primarily due to improving delinquency migrations and lower portfolio balances. Our key credit quality indicator is delinquency status.

As previously disclosed, based on feedback the Company received from the Federal Reserve Bank of Philadelphia in April 2011, the Company is operating under its established methodology for determining its allowance for credit losses, which methodology will be reviewed by the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions during their next regularly scheduled commercial bank examination of Marlin Business Bank.

NOTE 5 — Other Assets

Other assets are comprised of the following:

		September 30,				December 31,
		2011				2010
		(Dollars in thousands)
Accrued fees receivable		$	1,765			$	2,250
Deferred transaction costs			1,474				2,420
Prepaid expenses			1,334				1,674
Income taxes receivable			17,903				20,711
Other			2,148				1,394
		$	24,624			$	28,449

NOTE 6 — Commitments and Contingencies

MBB is a member bank in a non-profit, multi-financial institution consortium serving as a catalyst for community development by offering flexible financing for affordable, quality housing to low- and moderate-income residents. Currently, MBB receives approximately 1.142% participation in each funded loan under the program. MBB records loans in its financial statements when they have been funded or become payable. At September 30, 2011, MBB had an unfunded commitment of $1.4 million for this activity. Unless renewed prior to termination, MBB’s membership in the consortium will expire in June 2013.

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 impact 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 primarily through the issuance of Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit raised nationally through various brokered deposit relationships and through FDIC-insured retail deposits directly from other financial institutions. As of September 30, 2011, the remaining scheduled maturities of time deposits are as follows:

		Scheduled
		Maturities
		(Dollars in
		thousands)
Period Ending December 31,
2011		$	9,355
2012			60,343
2013			38,993
2014			30,454
2015			15,949
Thereafter			2,304
Total		$	157,398

All time deposits are in denominations of less than $250,000 and all are fully insured by the FDIC. The weighted average all-in interest rate of deposits outstanding at September 30, 2011 was 1.73%.

NOTE 8 — Short-term and Long-term Borrowings

Borrowings with an original maturity of less than one year are classified as short-term borrowings. MBB’s federal funds purchased are classified as short-term borrowings. Borrowings with an original maturity of one year or more are classified as long-term borrowings. The Company’s term note securitizations and long-term loan facilities are classified as long-term borrowings.

Scheduled principal and interest payments on outstanding borrowings as of September 30, 2011 are as follows:

		Principal				Interest(1)
		(Dollars in thousands)
Period Ending December 31,
2011		$	14,354			$	2,347
2012			89,155				2,856
2013			8,606				212
2014			1,736				89
2015			1,110				16
Thereafter			128				—
Total		$	115,089			$	5,520

NOTE 9 — Fair Value Measurements and Disclosures about the Fair Value of Financial Instruments

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 and measurement, 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 an 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, which 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 using measurements classified as Level 2. 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. These inputs include the forward London Interbank Offered Rate (“LIBOR”) curve on which the variable payments are based and the applicable interest-rate swap market curve. The Company’s methodology also incorporates the impact of both the Company’s and the counterparty’s credit standing.

All of the Company’s derivatives are measured at fair value on a recurring basis, computed using fair value measurements classified as Level 2. The fair value of securities available for sale is computed using fair value measurements classified as Level 1, since prices are obtained from quoted prices in an active market. The Company’s balances measured at fair value on a recurring basis include the following:

		September 30, 2011								December 31, 2010
		Fair Value Measurements Using								Fair Value Measurements Using
		Level 1				Level 2				Level 1				Level 2
		(Dollars in thousands)
Assets
Securities available for sale		$	1,767			$	—			$	1,534			$	—
Interest-rate caps purchased			—				7				—				14

At this time, the Company has not elected to report any assets and liabilities using the fair value option available under the Financial Instruments Topic of the FASB ASC.

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, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(Dollars in thousands)
Assets
Cash and cash equivalents		$	48,345			$	48,345			$	37,026			$	37,026
Restricted interest-earning deposits with banks			29,419				29,419				47,107				47,107
Securities available for sale			1,767				1,767				1,534				1,534
Loans			707				707				1,040				1,025
Interest-rate caps purchased			7				7				14				14
Liabilities
Deposits			157,398				159,160				92,919				94,602
Long-term borrowings			115,089				117,203				178,650				183,088
Accounts payable and accrued expenses (1)			13,018				13,018				9,997				9,997

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, 2011 and December 31, 2010, because they bear interest at market rates and have maturities of less than 90 days.

(b) Restricted Interest-Earning Deposits with Banks

The Company maintains various interest-earning trust accounts related to our secured debt facilities. The book value of such accounts is included in restricted interest-earning deposits with banks on the accompanying Consolidated Balance Sheet. These accounts earn a floating market rate of interest which results in a fair value approximating the carrying amount at September 30, 2011 and December 31, 2010.

(c) Securities Available for Sale

The fair value of securities available for sale is recorded using prices obtained from quoted prices in an active market.

(d) Loans

The fair value of loans is 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.

(e) Interest-Rate Caps

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 first section of this Note 9.

(f) Deposits

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

(g) Long-Term Borrowings

The fair value of the Company’s debt and secured borrowings is estimated by discounting cash flows at indicative market rates applicable to the Company’s debt and secured borrowings of the same or similar remaining maturities.

(h) Accounts Payable and Accrued Expenses

The carrying amount of the Company’s accounts payable and accrued expenses approximates fair value as of September 30, 2011 and December 31, 2010, because of the relatively short timeframe to realization.

NOTE 10 — Earnings Per Common Share

Pursuant to the Earnings Per Share Topic of the FASB ASC, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of EPS using the two-class method.

Basic EPS 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 EPS 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.

The following table provides net income and shares used in computing basic and diluted EPS:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(Dollars in thousands, except per-share data)
Net income		$	1,831			$	1,434			$	4,115			$	4,222
Weighted average common shares outstanding			11,880,834				11,919,693				11,931,519				11,876,168
Add: Unvested restricted stock awards considered participating securities			922,509				952,430				974,063				950,095
Adjusted weighted average common shares used in computing basic EPS			12,803,343				12,872,123				12,905,582				12,826,263
Add: Effect of dilutive stock options			65,397				61,316				72,442				62,399
Adjusted weighted average common shares used in computing diluted EPS			12,868,740				12,933,439				12,978,024				12,888,662
Net earnings per common share:
Basic		$	0.14			$	0.11			$	0.32			$	0.33
Diluted		$	0.14			$	0.11			$	0.32			$	0.33

For the three-month periods ended September 30, 2011 and September 30, 2010, options to purchase 322,817 and 344,950 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.

For the nine-month periods ended September 30, 2011 and September 30, 2010, options to purchase 343,490 and 406,827 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 11 — Comprehensive Income

The following table details the components of comprehensive income:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(Dollars in thousands)
Net income		$	1,831			$	1,434			$	4,115			$	4,222
Other comprehensive income:
Amortization of net deferred losses on cash flow hedge derivatives			34				76				138				158
Change in fair value of securities available for sale			41				11				57				31
Tax effect			(29	)			(35	)			(77	)			(75	)
Total other comprehensive income			46				52				118				114
Comprehensive income		$	1,877			$	1,486			$	4,233			$	4,336

NOTE 12 — Stockholders’ Equity

Stockholders’ Equity

On November 2, 2007, the Company’s Board of Directors approved a stock repurchase plan. Under this program, the Company is authorized to repurchase up to $15 million in value 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 repurchases are funded using the Company’s working capital.

The Company purchased 207,470 shares of its common stock at an average cost of $11.49 per share during the three-month period ended September 30, 2011. The Company purchased 378,668 shares of its common stock at an average cost of $11.71 per share during the nine-month period ended September 30, 2011. The Company purchased 2,847 shares of its common stock at an average cost of $10.43 per share during the three- and nine-month periods ended September 30, 2010. At September 30, 2011, the Company had $6.0 million remaining in its stock repurchase plan authorized by the Board of Directors.

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 10,683 and 97,608 shares repurchased to cover income taxes during the three- and nine-month periods ended September 30, 2011, at average per-share costs of $12.58 and $11.73, respectively. There were 425 and 58,595 shares repurchased to cover income taxes during the three- and nine-month periods ended September 30, 2010, at average per-share costs of $10.87 and $9.09, respectively.

Regulatory Capital Requirements

On March 20, 2007, the FDIC approved the application of 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, MBB received approval from the Federal Reserve Bank of San Francisco to (i) convert from an industrial bank to a state-chartered commercial bank and (ii) become a member of the Federal Reserve System. In addition, on December 31, 2008, Marlin Business Services Corp. received approval from the Federal Reserve Bank of Philadelphia to become a bank holding company upon conversion of MBB from an industrial bank to a commercial bank. On January 13, 2009, pursuant to the December 31, 2008 approval from the Federal Reserve Bank of San Francisco, MBB converted from an industrial bank to a commercial bank chartered in the State of Utah and supervised by the State of Utah and the Federal Reserve Board. In connection with MBB’s conversion to a commercial bank and pursuant to the December 31, 2008 approval from the Federal Reserve Bank of Philadelphia, on January 13, 2009 Marlin Business Services Corp. became a bank holding company, and is subject to the Bank Holding Company Act and supervised by the Federal Reserve Board. Until March 12, 2011, MBB operated in accordance with its original de novo three-year business plan (as required by the original FDIC order issued on March 20, 2007 (the “FDIC Order”)), which assumed total assets of up to $128 million by March 12, 2011 (when its three-year de novo period expired). In March 2011, following the expiration of the de novo period, the Company provided MBB with $25.0 million of additional capital to support future growth.

On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of Marlin Business Services Corp.’s election to become a financial holding company (while remaining a bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section 225.82 of the Federal Reserve Board’s Regulation Y. Such election permits the Company to engage in activities that are financial in nature or incidental to a financial activity, including the maintenance and expansion of our reinsurance activities conducted through our wholly-owned subsidiary, AssuranceOne, Ltd.

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 1 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 2 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 1 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 plans to provide the necessary capital to maintain MBB at “well-capitalized” status as defined by banking regulations. MBB’s equity balance at September 30, 2011 was $48.4 million, which met all capital requirements to which MBB is subject and qualified MBB 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 ratio 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, 2011, Marlin Business Services Corp. also exceeded its regulatory capital requirements and was considered “well-capitalized” as defined by federal banking regulations.

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, 2011.

										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.			34.46	%		$	162,421				4	%		$	18,852				5	%		$	23,565
Marlin Business Bank			24.45	%		$	48,379				5	%		$	9,892				5	%		$	9,892
Tier 1 Risk-based Capital
Marlin Business Services Corp.			39.23	%		$	162,421				4	%		$	16,562				6	%		$	24,843
Marlin Business Bank			23.34	%		$	48,379				6	%		$	12,434				6	%		$	12,434
Total Risk-based Capital
Marlin Business Services Corp.			40.48	%		$	167,623				8	%		$	33,124				10	%		$	41,405
Marlin Business Bank			24.24	%		$	50,227				15	%		$	31,085				10	% (1)		$	20,724

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:

	•		prohibiting the payment of principal and interest on subordinated debt;
	•		prohibiting the holding company from making distributions without prior regulatory approval;
	•		placing limits on asset growth and restrictions on activities;
	•		placing additional restrictions on transactions with affiliates;
	•		restricting the interest rate the institution may pay on deposits;
	•		prohibiting the institution from accepting deposits from correspondent banks; and
	•		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 FDIC Order, MBB must keep its total risk-based capital ratio above 15%. MBB’s equity balance at September 30, 2011 was $48.4 million, which qualifies MBB for “well capitalized” status.

Dividends. The Federal Reserve Board has issued policy statements which provide that, as a general matter, insured banks and bank holding companies should pay dividends only out of current operating earnings. Additionally, pursuant to the FDIC Order, MBB was not permitted to pay dividends during its first three years of operations without the prior written approval of the FDIC and the State of Utah (such initial three-year period ended on March 12, 2011).

NOTE 13 — Stock-Based Compensation

Under the terms of the 2003 Plan, employees, certain consultants and advisors and non-employee members of the Company’s Board of Directors have the opportunity to receive incentive and nonqualified grants of stock options, stock appreciation rights, restricted stock and other equity-based awards as approved by the Company’s Board of Directors. These award programs are used to attract, retain and motivate employees and to encourage individuals in key management roles to retain stock. The Company has a policy of issuing new shares to satisfy awards under the 2003 Plan. The aggregate number of shares under the 2003 Plan that may be issued pursuant to stock options or restricted stock grants is 3,300,000. Not more than 1,650,000 of such shares shall be available for issuance as restricted stock grants. There were 194,697 shares available for future grants under the 2003 Plan as of September 30, 2011, of which 56,680 shares were available to be issued as restricted stock grants.

Total stock-based compensation expense was $0.4 million for the three-month period ended September 30, 2011 and $0.4 million for the three-month period ended September 30, 2010. Total stock-based compensation expense was $2.0 million and $2.2 million for the nine-month periods ended September 30, 2011 and September 30, 2010, respectively. Excess tax benefits from stock-based payment arrangements decreased cash provided by operating activities and increased cash provided by financing activities by $0.6 million and $0.1 million for the nine-month periods ended September 30, 2011 and September 30, 2010, 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, 2011. There were no revisions to performance assumptions during the nine-month periods ended September 30, 2011 and September 30, 2010.

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-month and nine-month periods ended September 30, 2011. In addition to the stock options granted pursuant to the May 2010 stock option exchange program, there were no stock options granted during the three-month period ended September 30, 2010 and 5,000 stock options granted during the nine-month period ended September 30, 2010.

A summary of option activity for the nine month period ended September 30, 2011 follows:

						Weighted
						Average
		Number of				Exercise Price
Options		Shares				Per Share
Outstanding, December 31, 2010			648,153			$	9.99
Granted			—				—
Exercised			(103,215	)			9.57
Forfeited			(1,013	)			12.41
Expired			—				—
Outstanding, September 30, 2011			543,925				10.06

During the three-month periods ended September 30, 2011 and September 30, 2010, the Company recognized total compensation expense related to options of $0.1 million and $0.1 million, respectively. During the nine-month periods ended September 30, 2011 and September 30, 2010, the Company recognized total compensation expense related to options of $0.1 million and $0.2 million, respectively.

There were 93,940 stock options exercised during the three-month period ended September 30, 2011. There were no stock options exercised for the three-month period ended September 30, 2010. The total pretax intrinsic value of stock options exercised was $0.1 million for the three-month period ended September 30, 2011. The related tax benefit realized from the exercise of stock options for the three-month period ended September 30, 2011 was $0.1 million.

The total pretax intrinsic values of stock options exercised were $0.1 million and $0.2 million for the nine-month periods ended September 30, 2011 and September 30, 2010, respectively. The related tax benefits realized from the exercise of stock options for the nine-month periods ended September 30, 2011 and September 30, 2010 were $0.1 million and $0.1 million, respectively.

The following table summarizes information about the stock options outstanding and exercisable as of September 30, 2011:

Options Outstanding																		Options Exercisable
						Weighted				Weighted				Aggregate								Weighted				Weighted				Aggregate
						Average				Average				Intrinsic								Average				Average				Intrinsic
Range of		Number				Remaining				Exercise				Value				Number				Remaining				Exercise				Value
Exercise Prices		Outstanding				Life (Years)				Price				(In thousands)				Exercisable				Life (Years)				Price				(In thousands)
$3.39			76,650				0.6			$	3.39			$	553				76,650				0.6			$	3.39			$	553
$7.17 - 10.18			260,588				3.5				9.16				375				122,911				3.5				8.79				222
$12.08 - 12.41			144,599				5.6				12.40				—				29,942				5.6				12.40				—
$14.00 - 16.01			39,984				2.3				14.33				—				37,253				2.2				14.33				—
$19.78 - 21.50			22,104				1.7				20.80				—				22,104				1.7				20.81				—
			543,925				3.5				10.06			$	928				288,860				2.6				9.37			$	775

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $10.60 as of September 30, 2011, which would have been received by the option holders had all option holders exercised their options as of that date.

As of September 30, 2011, the total future compensation cost related to non-vested stock options not yet recognized in the Consolidated Statements of Operations was $0.1 million 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, 2011. In the event maximum performance targets are achieved, an additional $0.4 million of compensation cost would be recognized over a weighted average period of 0.4 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 three 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 three to four 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, 2011, 212,360 shares may be subject to accelerated vesting based on performance factors; no shares have vesting contingent upon performance factors. The Company has recognized expense related to performance-based shares based on the most probable performance assumptions as of September 30, 2011. There were no revisions to performance assumptions for the nine-month periods ended September 30, 2011 and September 30, 2010, although vesting was accelerated in 2011 on certain awards based on an annual evaluation of the achievement of performance criteria, as described below.

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

The following table summarizes the activity of the non-vested restricted stock during the nine months ended September 30, 2011:

						Weighted
						Average
						Grant-Date
Non-vested restricted stock		Shares				Fair Value
Outstanding at December 31, 2010			954,029			$	7.90
Granted			288,571				11.11
Vested			(302,535	)			6.86
Forfeited			(8,100	)			12.90
Outstanding at September 30, 2011			931,965				9.19

During the three-month periods ended September 30, 2011 and September 30, 2010, the Company granted restricted stock awards with grant date fair values totaling $0.2 million and $0.1 million, respectively. During the nine-month periods ended September 30, 2011 and September 30, 2010, the Company granted restricted stock awards with grant date fair values totaling $3.2 million and $1.3 million, respectively.

As vesting occurs, or is deemed likely to occur, compensation expense is recognized over the requisite service period and additional paid-in capital is increased. The Company recognized $0.4 million and $0.4 million of compensation expense related to restricted stock for the three-month periods ended September 30, 2011 and September 30, 2010, respectively. The Company recognized $2.0 million and $2.0 million of compensation expense related to restricted stock for the nine-month periods ended September 30, 2011 and September 30, 2010, respectively. Of the $2.0 million total compensation expense related to restricted stock for the nine-month period ended September 30, 2011, approximately $0.6 million related to the acceleration of vesting based on an annual evaluation of the achievement of certain performance criteria during the first quarter 2011.

As of September 30, 2011, there was $5.4 million of unrecognized compensation cost related to non-vested restricted stock compensation scheduled to be recognized over a weighted average period of 4.4 years, based on the most probable performance assumptions as of September 30, 2011. In the event performance targets are achieved, $2.5 million of the unrecognized compensation cost would accelerate to be recognized over a weighted average period of 1.2 years. In addition, certain of the awards granted may result in the issuance of 163,783 additional shares of stock if achievement of certain targets is greater than 100%. The expense related to the additional shares awarded will be dependent on the Company’s stock price when the achievement level is determined.

The fair values of shares that vested during the three-month periods ended September 30, 2011 and September 30, 2010 were $0.4 million and $0.1 million, respectively. The fair values of shares that vested during the nine-month periods ended September 30, 2011 and September 30, 2010 were $3.6 million and $1.6 million, respectively.

NOTE 14 – Subsequent Events

On October 20, 2011, the Company’s Board of Directors approved the commencement of a regular quarterly cash dividend, with the first quarterly dividend of $0.06 per share declared on November 3, 2011. The quarterly dividend is scheduled to be paid on November 28, 2011, to shareholders of record on the close of business on November 14, 2011, which is expected to result in a dividend payment of approximately $0.8 million. The payment of future dividends will be subject to approval by the Company’s Board of Directors.

Item 2.		Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto in our Form 10-K for the year ended December 31, 2010 filed with the SEC. This discussion contains certain statements of a forward-looking nature that involve risks and uncertainties.

FORWARD-LOOKING STATEMENTS

Certain statements in this document may include the words or phrases “can be,” “expects,” “plans,” “may,” “may affect,” “may depend,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “if” and similar words and phrases that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Forward-looking statements are subject to various known and unknown risks and uncertainties and the Company cautions that any forward-looking information provided by or on its behalf is not a guarantee of future performance. Statements regarding the following subjects are forward-looking by their nature: (a) our business strategy; (b) our projected operating results; (c) our ability to obtain external financing; (d) the effectiveness of our hedges; (e) our understanding of our competition; and (f) industry and market trends. The Company’s actual results could differ materially from those anticipated by such forward-looking statements due to a number of factors, some of which are beyond the Company’s control, including, without limitation:

	•		availability, terms and deployment of funding and capital;
	•		changes in our industry, interest rates, the regulatory environment or the general economy resulting in changes to our business strategy;
	•		the degree and nature of our competition;
	•		availability and retention of qualified personnel;
	•		general volatility of the capital markets; and
	•		the factors set forth in the section captioned “Risk Factors” in Item 1 of our Form 10-K for the year ended December 31, 2010 filed with the SEC.

Forward-looking statements apply only as of the date made and the Company is not required to update forward-looking statements for subsequent or unanticipated events or circumstances.

Overview

We are a nationwide provider of equipment financing solutions, primarily to small businesses. We finance over 100 categories of commercial equipment important to our end user customers including copiers, security systems, computers, telecommunications equipment and certain commercial and industrial equipment. We access our end user customers through origination sources comprised of our existing network of independent equipment dealers and, to a much lesser extent, through direct solicitation of our end user customers and through relationships with select lease brokers. Our leases are fixed-rate transactions with terms generally ranging from 36 to 60 months. At September 30, 2011, our lease portfolio consisted of approximately 66,000 accounts with an average original term of 50 months and average original transaction size of approximately $11,500.

Since our founding in 1997, we have grown to $473.4 million in total assets at September 30, 2011. Our assets are substantially comprised of our net investment in leases and loans which totaled $367.0 million at September 30, 2011.

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, MBB received approval from the Federal Reserve Bank of San Francisco to (i) convert from an industrial bank to a state-chartered commercial bank and (ii) become a member of the Federal Reserve System. In addition, on December 31, 2008, Marlin Business Services Corp. received approval from the Federal Reserve Bank of Philadelphia to become a bank holding company upon conversion of MBB from an industrial bank to a commercial bank. On January 13, 2009, pursuant to the December 31, 2008 approval from the Federal Reserve Bank of San Francisco, MBB converted from an industrial bank to a state-chartered commercial bank chartered in the State of Utah and supervised by the State of Utah and the Federal Reserve Board. In connection with MBB’s conversion to a commercial bank and pursuant to the December 31, 2008 approval from the Federal Reserve Bank of Philadelphia, on January 13, 2009 Marlin Business Services Corp. became a bank holding company, and is subject to the Bank Holding Company Act and supervised by the Federal Reserve Board.

On September 15, 2010, the Federal Reserve Bank of Philadelphia confirmed the effectiveness of Marlin Business Services Corp.’s election to become a financial holding company (while remaining a bank holding company) pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and Section 225.82 of the Federal Reserve Board’s Regulation Y. Such election permits Marlin Business Services Corp. to engage in activities that are financial in nature or incidental to a financial activity, including the maintenance and expansion of its reinsurance activities conducted through its wholly-owned subsidiary, AssuranceOne, Ltd.

We generally reach our lessees through a network of independent equipment dealers and, to a much lesser extent, lease brokers. The number of dealers and brokers with whom we conduct business depends on, among other things, the number of sales account executives we have. Sales account executive staffing levels and the activity of our origination sources are shown below.

		Nine Months
		Ended
		September 30,				As of or For the Year Ended December 31,
		2011				2010				2009				2008				2007				2006
Number of sales account executives			95				87				38				86				118				100
Number of originating sources(1)			799				604				465				1,014				1,246				1,295

Our revenue consists of interest and fees from our leases and loans and, to a lesser extent, income from our property insurance program and other fee income. Our expenses consist of interest expense and operating expenses, which include salaries and benefits and other general and administrative expenses. As a credit lender, our earnings are also significantly impacted by credit losses. For the quarter ended September 30, 2011, our annualized net credit losses were 1.73% of our average total finance receivables. We establish reserves for credit losses which require us to estimate inherent losses in our portfolio as of the reporting date.

Our leases are classified under U.S. GAAP as direct financing leases, and we recognize interest income over the term of the lease. Direct financing leases transfer substantially all of the benefits and risks of ownership to the equipment lessee. Our net investment in direct finance leases is included in our consolidated financial statements in “net investment in leases and loans.” Net investment in direct financing leases consists of the sum of total minimum lease payments receivable and the estimated residual value of leased equipment, less unearned lease income. Unearned lease income consists of the excess of the total future minimum lease payments receivable plus the estimated residual value expected to be realized at the end of the lease term plus deferred net initial direct costs and fees less the cost of the related equipment. Approximately 65% of our lease portfolio at September 30, 2011 amortizes over the lease term to a $1 residual value. For the remainder of the portfolio, we must estimate end of term residual values for the leased assets. Failure to correctly estimate residual values could result in losses being realized on the disposition of the equipment at the end of the lease term.

Since our founding, we have funded our business through a combination of variable-rate borrowings and fixed-rate asset securitization transactions, as well as through the issuance from time to time of subordinated debt and equity securities. Our variable-rate borrowing currently consists of long-term loan facilities. We have traditionally issued fixed-rate term debt through the asset-backed securitization market. Historically, leases were funded through variable-rate warehouse facilities until they were refinanced through term note securitizations at fixed rates. All of our term note securitizations have been accounted for as on-balance sheet transactions and, therefore, we have not recognized gains or losses from these transactions. As of September 30, 2011, $59.8 million, or 51.9%, of our borrowings were fixed-rate term note securitizations.

In addition, since its opening on March 12, 2008, MBB has provided diversification of the Company’s funding sources through the issuance of FDIC-insured certificates of deposit raised nationally primarily through various brokered deposit relationships and FDIC-insured retail deposits directly from other financial institutions. As of September 30, 2011, total MBB deposits were $157.4 million.

Fixed rate leases not funded with deposits are financed with variable-rate debt. Therefore, our earnings may be exposed to interest rate risk should interest rates rise. We generally benefit in times of falling and low interest rates. In contrast to previous warehouse facilities, our current long-term loan facilities do not require annual refinancing, but failure to renew the existing facilities or to obtain additional financing could restrict our growth and future financial performance.

On October 9, 2009, Marlin Business Services Corp.’s wholly-owned subsidiary, Marlin Receivables Corp. (“MRC”), closed on a $75,000,000, three-year committed loan facility with the Lender Finance division of Wells Fargo Capital Finance. The facility is secured by a lien on MRC’s assets and is supported by guaranties from Marlin Business Services Corp. and Marlin Leasing Corporation. Advances under the facility are made pursuant to a borrowing base formula, and the proceeds are used to fund lease originations. The maturity date of the facility is October 9, 2012.

On February 12, 2010, we completed an $80.7 million TALF-eligible term asset-backed securitization. This transaction was Marlin’s tenth term note securitization and the fifth to earn a AAA rating. As with all of the Company’s prior term note securitizations, this financing provided the Company with fixed-cost borrowing and is recorded in long-term borrowings in the Consolidated Balance Sheets. A portion of the proceeds of this securitization was used to repay the full amount outstanding under the Company’s commercial paper (“CP”) conduit warehouse facility.

On September 24, 2010, the Company’s affiliate, Marlin Leasing Receivables XIII LLC (“MLR XIII”), closed on a $50.0 million three-year committed loan facility with Key Equipment Finance Inc. The facility is secured by a lien on MLR XIII’s assets. Advances under the facility are made pursuant to a borrowing base formula, and the proceeds are used to fund lease originations. The maturity date of the facility is September 23, 2013. An event of default such as non-payment of amounts when due under the loan agreement or a breach of covenants may accelerate the maturity date of the facility.

From time to time we may use derivative financial instruments to manage exposure to the effects of changes in market interest rates and to fulfill certain covenants in our borrowing arrangements. All derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or liabilities. The Company was not a party to any active interest-rate swap agreements at September 30, 2011.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Preparation of these financial statements requires us to make estimates and judgments that affect reported amounts of assets, liabilities, revenues and expenses and affect related disclosure of contingent assets and liabilities at the date of our financial statements. On an ongoing basis, we evaluate our estimates, including credit losses, residuals, initial direct costs and fees, other fees, performance assumptions for stock-based compensation awards, the probability of forecasted transactions, the fair value of financial instruments and the realization of deferred tax assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties. Our consolidated financial statements are based on the selection and application of critical accounting policies, the most significant of which are described below.

Income recognition. Interest income is recognized under the effective interest method. The effective interest method of income recognition applies a constant rate of interest equal to the internal rate of return on the lease. When a lease or loan is 90 days or more delinquent, the contract is classified as being on non-accrual and we do not recognize interest income on that contract until it is less than 90 days delinquent.

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 a lease’s term. Residual income is recognized as earned.

Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated collection rates. At a minimum of every quarter, an analysis of anticipated collection rates is performed based on updates to collection experience. Adjustments in anticipated collection rate assumptions are made as needed based on this analysis. Other fees are recognized when received.

Insurance income is recognized on an accrual basis as earned over the term of a lease. Generally, insurance payments that are 120 days or more past due are charged against income. Ceding commissions, losses and loss adjustment expenses are recorded in the period incurred and netted against insurance income.

Initial direct costs and fees. We defer initial direct costs incurred and fees received to originate our leases and loans in accordance with 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 each prospective customer’s financial condition, evaluating and recording guarantees and other security arrangements, negotiating terms, preparing and processing documents and closing each transaction. Estimates of costs subject to deferral are updated periodically, and no less frequently than each year. 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 plus the estimated residual value less unearned income. Residual values generally reflect the estimated amounts to be received at lease termination from lease extensions, sales or other dispositions of leased equipment. These estimates are based on industry data and on our experience.

The Company records an estimated residual value at lease inception for all fair market value and fixed purchase option leases based on a percentage of the equipment cost of the asset being leased. The percentages used depend on equipment type and term. In setting and reviewing estimated residual values, the Company focuses its analysis primarily on total historical and expected realization statistics pertaining to both lease renewals and sales of equipment.

At the end of an 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 a lessee elects to return 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 independent third parties, 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 equipment to other assets, and any gain or loss realized on the sale or disposal of equipment to a lessee or to others is included in fee income as net residual income.

Based on the Company’s experience, the amount of ultimate realization of the residual value tends to relate more to the customer’s election at the end of the lease term to enter into a renewal period, to purchase the leased equipment or to return the leased equipment than it does to the equipment type. Management performs periodic reviews of the estimated residual values and historic realization statistics no less frequently than quarterly 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. We consider both quantitative and qualitative factors in determining the allowance for credit losses. Quantitative factors considered include a migration analysis, historic delinquencies and charge-offs, historic bankruptcies, historic performance of restructured accounts and a static pool analysis of historic recoveries. 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. Qualitative factors that may result in further adjustments to the quantitative analysis include items such as forecasting uncertainties, changes in the composition of our lease and loan portfolios, seasonality, economic conditions and trends or business practices at the reporting date that are different from the periods used in the quantitative analysis. Adjustments due to such qualitative factors increased the allowance for credit losses by approximately $0.3 million and $0.2 million at September 30, 2011 and December 31, 2010, respectively.

The various factors used in the analysis are reviewed periodically, and no less frequently than quarterly. 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 portfolios, bankruptcy laws and other factors could impact our actual and projected net credit losses and the related allowance for credit losses. To the extent 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.

As previously disclosed, based on feedback the Company received from the Federal Reserve Bank of Philadelphia in April 2011, the Company is operating under its established methodology for determining its allowance for credit losses, which methodology will be reviewed by the Federal Reserve Bank of San Francisco and the Utah Department of Financial Institutions during their next regularly scheduled commercial bank examination of Marlin Business Bank.

Securitizations. In connection with each term note securitization transaction, we established bankruptcy remote SPEs and issued term debt to institutional investors. These SPEs are each considered VIEs under U.S. GAAP. We are required to consolidate VIEs in which we are deemed to be the primary beneficiary through having (1) power over the significant activities of the entity and (2) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. We continue to service the assets of our VIEs and retain equity and/or residual interests. Accordingly, assets and related debt of these VIEs are included in the accompanying Consolidated Balance Sheets. Our leases and restricted interest-earning deposits with banks are assigned as collateral for these borrowings and there is no further recourse to our general credit. Collateral in excess of these borrowings represents our maximum loss exposure.

Stock-based compensation. We issue both restricted shares and stock options to certain employees and directors as part of our overall compensation strategy. 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, except for equity instruments held by employee share ownership plans.

The Company measures stock-based compensation cost at grant date, based on the fair value of the awards ultimately expected to vest. Compensation cost is recognized on a straight-line basis over the service period. We generally use the Black-Scholes valuation model to measure the fair value of our stock options utilizing various assumptions with respect to expected holding period, risk-free interest rates, stock price volatility and dividend yield. The assumptions are based on subjective future expectations combined with management judgment.

The Company uses its judgment in estimating the amount of awards that are expected to be forfeited, with subsequent revisions to the assumptions if actual forfeitures differ from those estimates. In addition, for performance-based awards the Company estimates the degree to which the performance conditions will be met to estimate the number of shares expected to vest and the related compensation expense. Compensation expense is adjusted in the period such performance estimates change.

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 that 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 such as 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 then assesses 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 is established. To the extent that we establish a valuation allowance in a period, an expense is recorded within the tax provision in the Consolidated Statements of Operations.

At September 30, 2011, 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 has amended its previously filed income tax returns for the years 2006 through 2009 to claim refunds of approximately $15.4 million as discussed in Note 13 to the Company’s Form 10-K for December 31, 2010. These amendments are subject to review by the various jurisdictions.

The Company records penalties and accrued interest related to uncertain tax positions in income tax expense. Such adjustments have historically been minimal and immaterial to our financial results.

RESULTS OF OPERATIONS

Comparison of the Three-Month Periods Ended September 30, 2011 and September 30, 2010

Net income. Net income of $1.8 million was reported for the three-month period ended September 30, 2011, resulting in diluted earnings per share of $0.14, compared to net income of $1.4 million and diluted earnings per share of $0.11 for the three-month period ended September 30, 2010.

Return on average assets was 1.56% for the three-month period ended September 30, 2011, compared to 1.19% for the three-month period ended September 30, 2010. Return on average equity was 4.53% for the three-month period ended September 30, 2011, compared to 3.73% for the three-month period ended September 30, 2010.

Overall, our average net investment in total finance receivables for the three-month period ended September 30, 2011 decreased 3.3% to $359.5 million, compared to $371.8 million for the three-month period ended September 30, 2010. We continue to assess and adjust our credit underwriting guidelines in response to economic conditions, and over the past twelve months we have added to the sales organization to increase originations.

During the three months ended September 30, 2011, we generated 4,580 new leases with a cost of $59.7 million, compared to 3,253 new leases with a cost of $35.8 million generated for the three months ended September 30, 2010. Much of the change in volume is the result of increasing sales staffing levels from 84 sales account executives at September 30, 2010 to 95 sales account executives at September 30, 2011. Approval rates also rose from 49% for the quarter ended September 30, 2010 to 60% for the quarter ended September 30, 2011 due to the improved credit quality of the applications received and adjustments made to credit policy in light of the continued strong performance of recent years’ lease originations.

The provision for credit losses decreased $1.3 million, or 61.9%, to $0.8 million for the three-month period ended September 30, 2011 from $2.1 million for the same period in 2010, primarily due to lower charge-offs, improved delinquencies and a reduced portfolio size. For the three-month period ended September 30, 2011 compared to the three-month period ended September 30, 2010, net interest and fee income increased $0.1 million, or 0.9%, primarily due to a lower cost of funds on liabilities, partially offset by the impact of the 3.3% decrease in average total finance receivables. Other expenses increased $0.8 million, or 9.8%, for the three-month period ended September 30, 2011 compared to the three-month period ended September 30, 2010, primarily due to increased salaries and benefits expense related to increased sales staffing levels.

Average balances and net interest margin. The following table summarizes the Company’s average balances, interest income, interest expense and average yields and rates on major categories of interest-earning assets and interest-bearing liabilities for the three-month periods ended September 30, 2011 and September 30, 2010.

		Three Months Ended September 30,
		2011												2010
		(Dollars in thousands)
										Average												Average
		Average								Yields/				Average								Yields/
		Balance(1)				Interest				Rates(2)				Balance(1)				Interest				Rates(2)
Interest-earning assets:
Interest-earning deposits with banks		$	47,173			$	7				0.06	%		$	35,647			$	17				0.19	%
Restricted interest-earning deposits with banks			29,533				1				0.02				62,293				23				0.15
Securities available for sale			1,744				14				3.11				1,541				13				3.37
Net investment in leases(3)			358,753				11,041				12.31				369,973				11,317				12.24
Loans receivable(3)			699				10				5.47				1,860				51				10.97
Total interest-earning assets			437,902				11,073				10.11				471,314				11,421				9.70
Non-interest-earning assets:
Cash and due from banks			1,291												1,267
Property and equipment, net			2,128												2,125
Property tax receivables			196												718
Other assets(4)			26,670												6,083
Total non-interest-earning assets			30,285												10,193
Total assets		$	468,187											$	481,507
Interest-bearing liabilities:
Deposits(5)		$	139,331			$	678				1.95	%			96,294			$	650				2.70	%
Long-term borrowings(5)			128,860				2,028				6.29				205,896				2,940				5.71
Total interest-bearing liabilities			268,191				2,706				4.04				302,190				3,590				4.75
Non-interest-bearing liabilities:
Sales and property taxes payable			4,529												5,468
Accounts payable and accrued expenses			8,180												6,504
Net deferred income tax liability			25,642												13,704
Total non-interest-bearing liabilities			38,351												25,676
Total liabilities			306,542												327,866
Stockholders’ equity			161,645												153,641
Total liabilities and stockholders’ equity		$	468,187											$	481,507
Net interest income						$	8,367											$	7,831
Interest rate spread(6)											6.07	%											4.95	%
Net interest margin(7)											7.64	%											6.65	%
Ratio of average interest-earning assets to average interest-bearing liabilities											163.28	%											155.97	%