UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 000-50448

MARLIN BUSINESS SERVICES CORP.

(Exact name of registrant as specified in its charter)

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

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

(888) 479-9111
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes o No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		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 July 30, 2010, 12,874,213 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 June 30, 2010

TABLE OF CONTENTS

		Page No.
Part I — Financial Information			2
Item 1 Condensed Consolidated Financial Statements (Unaudited)			2
Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009			2
Condensed Consolidated Statements of Operations for the three- and six-month periods ended June 30, 2010 and 2009			3
Condensed Consolidated Statements of Stockholders’ Equity for the six-month period ended June 30, 2010 and the year ended December 31, 2009			4
Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2010 and 2009			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			52
Item 4 Controls and Procedures			52
Part II — Other Information			52
Item 1 Legal Proceedings			52
Item 1A Risk Factors			52
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3 Defaults upon Senior Securities			53
Item 4 [Removed and Reserved]			53
Item 5 Other Information			53
Item 6 Exhibits			54
Signatures			55
RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
RULE 13a-14(b) CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PART I. Financial Information

Item 1.		Condensed Consolidated Financial Statements

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

		June 30,				December 31,
		2010				2009
		(Dollars in thousands, except per- share data)
ASSETS
Cash and due from banks		$	991			$	1,372
Interest-earning deposits with banks			34,187				35,685
Total cash and cash equivalents			35,178				37,057
Restricted interest-earning deposits with banks (includes $64.4 million and $57.1 million, respectively, related to consolidated variable interest entities (“VIEs”))			66,546				63,400
Securities available for sale (amortized cost of $1.5 million)			1,533				—
Net investment in leases and loans (includes $228.4 million and $238.0 million, respectively, related to consolidated VIEs)			380,660				448,610
Property and equipment, net			2,228				2,431
Property tax receivables			1,127				1,135
Other assets			7,723				13,170
Total assets		$	494,995			$	565,803
LIABILITIES AND STOCKHOLDERS’ EQUITY
Short-term borrowings		$	—			$	62,541
Long-term borrowings (includes $202.9 million and $226.7 million, respectively, related to consolidated VIEs)			218,987				244,445
Deposits			96,852				80,288
Other liabilities:
Fair value of derivatives			—				2,408
Sales and property taxes payable			6,342				4,197
Accounts payable and accrued expenses			7,376				7,649
Net deferred income tax liability			12,816				16,037
Total liabilities			342,373				417,565
Commitments and contingencies (Note 6)
Stockholders’ equity:
Common Stock, $0.01 par value; 75,000,000 shares authorized; 12,861,656 and 12,778,935 shares issued and outstanding, respectively			129				128
Preferred Stock, $0.01 par value; 5,000,000 shares authorized; none issued			—				—
Additional paid-in capital			86,206				84,674
Stock subscription receivable			(2	)			(3	)
Accumulated other comprehensive loss			(205	)			(267	)
Retained earnings			66,494				63,706
Total stockholders’ equity			152,622				148,238
Total liabilities and stockholders’ equity		$	494,995			$	565,803

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

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(Dollars in thousands, except per-share data)
Interest income		$	11,994			$	17,281			$	24,823			$	36,353
Fee income			3,501				4,380				7,317				9,414
Interest and fee income			15,495				21,661				32,140				45,767
Interest expense			3,955				7,444				8,614				15,276
Net interest and fee income			11,540				14,217				23,526				30,491
Provision for credit losses			2,494				6,793				5,617				15,542
Net interest and fee income after provision for credit losses			9,046				7,424				17,909				14,949
Other income:
Insurance income			987				1,322				2,144				2,865
Gain (loss) on derivatives			(25	)			646				(119	)			(661	)
Other income			306				387				596				795
Other income			1,268				2,355				2,621				2,999
Other expense:
Salaries and benefits			4,588				5,057				9,713				10,942
General and administrative			3,073				3,287				6,118				6,686
Financing related costs			155				55				302				310
Other expense			7,816				8,399				16,133				17,938
Income before income taxes			2,498				1,380				4,397				10
Income tax expense (benefit)			947				434				1,609				(57	)
Net income		$	1,551			$	946			$	2,788			$	67
Basic earnings per share		$	0.12			$	0.08			$	0.22			$	0.01
Diluted earnings per share		$	0.12			$	0.08			$	0.22			$	0.01
Weighted average shares used in computing basic earnings per share			12,832,792				12,593,514				12,802,579				12,456,874
Weighted average shares used in computing diluted earnings per share			12,904,163				12,603,305				12,865,857				12,465,312

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

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

																		Accumulated
										Additional				Stock				Other								Total
		Common				Stock				Paid-In				Subscription				Comprehensive				Retained				Stockholders’
		Shares				Amount				Capital				Receivable				Income (Loss)				Earnings				Equity
		(Dollars in thousands)
Balance, December 31, 2008			12,246,405			$	122			$	83,671			$	(5	)		$	167			$	62,670			$	146,625
Issuance of common stock			35,004				1				105				—				—				—				106
Repurchase of common stock			(102,614	)			(1	)			(399	)			—				—				—				(400	)
Exercise of stock options			40,424				—				167				—				—				—				167
Tax benefit on stock options exercised			—				—				48				—				—				—				48
Stock option compensation recognized			—				—				298				—				—				—				298
Payment of receivables			—				—				—				2				—				—				2
Restricted stock grant			559,716				6				(6	)			—				—				—				—
Restricted stock compensation recognized			—				—				790				—				—				—				790
Net change related to derivatives, net of tax			—				—				—				—				(434	)			—				(434	)
Net income			—				—				—				—				—				1,036				1,036
Balance, December 31, 2009			12,778,935			$	128			$	84,674			$	(3	)		$	(267	)		$	63,706			$	148,238
Issuance of common stock			10,479				—				73				—				—				—				73
Repurchase of common stock			(58,170	)			(1	)			(527	)			—				—				—				(528	)
Exercise of stock options			35,864				1				161				—				—				—				162
Tax benefit on stock options exercised			—				—				72				—				—				—				72
Stock option compensation recognized			—				—				125				—				—				—				125
Payment of receivables			—				—				—				1				—				—				1
Restricted stock grant			94,548				1				(1	)			—				—				—				—
Restricted stock compensation recognized			—				—				1,629				—				—				—				1,629
Net change related to derivatives, net of tax			—				—				—				—				50				—				50
Net change in unrealized gain/loss on securities available for sale, net of tax			—				—				—				—				12				—				12
Net income			—				—				—				—				—				2,788				2,788
Balance, June 30, 2010			12,861,656			$	129			$	86,206			$	(2	)		$	(205	)		$	66,494			$	152,622

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

MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES

		Six Months Ended June 30,
		2010				2009
		(In thousands)
Cash flows from operating activities:
Net income		$	2,788			$	67
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,319				1,230
Stock-based compensation			1,754				624
Excess tax benefits from stock-based payment arrangements			(72	)			(4	)
Amortization of deferred net loss on cash flow hedge derivatives			82				66
Change in fair value of derivatives			(2,300	)			(1,195	)
Cash flow hedge gains reclassified from accumulated other comprehensive income			—				(409	)
Provision for credit losses			5,617				15,542
Net deferred income taxes			(3,261	)			(2,137	)
Amortization of deferred initial direct costs and fees			3,883				6,739
Deferred initial direct costs and fees			(1,508	)			(1,598	)
Loss on equipment disposed			1,229				764
Effect of changes in other operating items:
Other assets			5,483				4,254
Other liabilities			1,960				2,501
Net cash provided by operating activities			16,974				26,444
Cash flows from investing activities:
Purchases of equipment for direct financing lease contracts and funds used to originate loans			(55,708	)			(52,091	)
Principal collections on leases and loans			113,462				143,629
Security deposits collected, net of refunds			(1,546	)			(1,571	)
Proceeds from the sale of equipment			2,521				2,613
Acquisitions of property and equipment			(299	)			(330	)
Change in restricted interest-earning deposits with banks			(3,146	)			(1,539	)
Purchases of securities available for sale			(1,513	)			—
Net cash provided by investing activities			53,771				90,711
Cash flows from financing activities:
Issuances of common stock			74				56
Repurchases of common stock			(528	)			(400	)
Exercise of stock options			162				26
Excess tax benefits from stock-based payment arrangements			72				4
Debt issuance costs			(969	)			(397	)
Term securitization advances			68,169				—
Term securitization repayments			(92,027	)			(113,314	)
Warehouse and bank facility advances			4,425				42,130
Warehouse and bank facility repayments			(68,566	)			(45,921	)
Increase in deposits			16,564				13,920
Net cash used in financing activities			(72,624	)			(103,896	)
Net increase (decrease) in total cash and cash equivalents			(1,879	)			13,259
Total cash and cash equivalents, beginning of period			37,057				40,270
Total cash and cash equivalents, end of period		$	35,178			$	53,529
Supplemental disclosures of cash flow information:
Cash paid for interest on deposits and borrowings		$	7,901			$	14,621
Cash paid (refunds received) for income taxes		$	(1,115	)		$	273

The accompanying notes are an integral part of the 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 businesses in a segment of the equipment leasing market commonly referred to as the “small-ticket” segment. The Company finances over 100 categories of commercial equipment important to its end user customers including copiers, telephone systems, computers and certain commercial and industrial equipment. Effective March 12, 2008, the Company also opened Marlin Business Bank (“MBB”), a commercial bank chartered by the State of Utah and a member of the Federal Reserve System. MBB currently provides diversification of the Company’s funding sources through the issuance of certificates of deposit. Marlin Business Services Corp. is managed as a single business segment.

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

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) necessary to present fairly the Company’s financial position at June 30, 2010 and the results of operations for the three- and six-month periods ended June 30, 2010 and 2009, and cash flows for the six-month periods ended June 30, 2010 and 2009. 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 5, 2010. The consolidated results of operations for the three- and six-month periods ended June 30, 2010 and 2009 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 U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for income recognition, the residual values of leased equipment, the allowance for credit losses, deferred initial direct costs and fees, late fee receivables, performance assumptions for stock-based compensation awards, the probability of forecasted transactions, the fair value of financial instruments and income taxes. Actual results could differ from those estimates.

Income recognition on leases and loans. 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.

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

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 an independent third party, rather than leasing the equipment a second time. The Company does not maintain equipment in other assets for longer than 120 days. Any loss recognized on transferring 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. Management performs periodic reviews of the estimated residual values and any impairment, if other than temporary, is recognized in the current period.

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 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 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.

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, since prices are obtained from a quoted 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 Financial Accounting Standards Board Accounting Standards Codification (“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 deferred initial direct costs, net of fees deferred, is predicated on the net future cash flows generated by our lease and loan portfolios.

Lease residual values. A direct financing lease is recorded at the aggregate future minimum lease payments receivable plus the estimated residual value of the leased equipment, less unearned lease income. Residual values reflect the estimated amounts to be received at lease termination from lease extensions, sales or other dispositions of leased equipment. Estimates are based on industry data and management’s experience. Management performs periodic reviews of the estimated residual values recorded and any impairment, if other than temporary, is recognized in the current period.

Allowance for credit losses. In accordance with the Contingencies Topic of the FASB ASC, we maintain an allowance for credit losses at an amount sufficient to absorb losses inherent in our existing lease and loan portfolios as of the reporting dates based on our projection of probable net credit losses. We evaluate our portfolios on a pooled basis, due to their composition of small balance, homogenous accounts with similar general credit risk characteristics, diversified among a large cross section of variables including industry, geography, equipment type, obligor and vendor. To project probable net credit losses, we perform a migration analysis of delinquent and current accounts based on historic loss experience. A migration analysis is a technique used to estimate the likelihood that an account will progress through the various delinquency stages and ultimately charge off. In addition to the migration analysis, we also consider other factors including recent trends in delinquencies and charge-offs; accounts filing for bankruptcy; account modifications; recovered amounts; forecasting uncertainties; the composition of our lease and loan portfolios; economic conditions; and seasonality. The various factors used in the analysis are reviewed periodically, and no less frequently than each quarter. We then establish an allowance for credit losses for the projected probable net credit losses based on this analysis. A provision is charged against earnings to maintain the allowance for credit losses at the appropriate level. Our policy is to charge-off against the allowance the estimated unrecoverable portion of accounts once they reach 121 days delinquent.

Our projections of probable net credit losses are inherently uncertain, and as a result we cannot predict with certainty the amount of such losses. Changes in economic conditions, the risk characteristics and composition of the portfolio, bankruptcy laws, and other factors could impact our actual and projected net credit losses and the related allowance for credit losses. To the degree we add new leases and loans to our portfolios, or to the degree credit quality is worse than expected, we record expense to increase the allowance for credit losses to reflect the estimated net losses inherent in our portfolios. Actual losses may vary from current estimates.

The Company is currently in discussions with the Federal Reserve Bank in connection with the Federal Reserve Bank’s interpretation of the Interagency Policy Statement on the Allowance for Loan and Lease Losses (SR 06-17) dated December 13, 2006 (the “ALLL Policy Statement”) and the appropriate application of the ALLL Policy Statement to management’s estimates used in determining the Company’s allowance for loan and lease losses (the “Allowance”). We do not know when or if the Company will receive a written determination from the Federal Reserve Bank in connection with such discussions, nor do we know what the contents of any such written determination will be. If, as a result of the review, management determines that it should revise its estimates used to compute the Allowance, such changes could have a material impact on the size of the Allowance.

Securitizations. From inception to June 30, 2010, the Company has completed ten term note securitizations of which six have been repaid. In connection with each transaction, the Company established a bankruptcy remote special-purpose subsidiary (“SPE”) and issued term debt to institutional investors. These SPEs are 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.

Derivatives. The Derivatives and Hedging Topic of the FASB ASC requires recognition of all derivatives at fair value as either assets or liabilities in the Consolidated Balance Sheets. The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment pursuant to U.S. GAAP.

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

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

For the forecasted transactions that were probable of occurring, the derivative gain or loss in accumulated other comprehensive income as of June 30, 2008 would have been reclassified into earnings as an adjustment to interest expense over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. At the time that any related forecasted borrowing was no longer probable of occurring, the related gain or loss in accumulated other comprehensive income became recognized immediately in earnings.

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

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

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

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 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 June 30, 2010, there have been no material changes to the liability for uncertain tax positions and there are no significant unrecognized tax benefits. The periods subject to general examination for the Company’s federal return include the 2006 tax year to the present. The Company files state income tax returns in various states which may have different statutes of limitations. Generally, state income tax returns for years 2005 through the present are subject to examination.

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

Earnings per share. 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 using the two-class method.

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

NOTE 3 — Net Investment in Leases and Loans

Net investment in leases and loans consists of the following:

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Minimum lease payments receivable		$	418,117			$	494,954
Estimated residual value of equipment			40,266				43,928
Unearned lease income, net of initial direct costs and fees deferred			(64,752	)			(74,823	)
Security deposits			(6,134	)			(7,681	)
Loans, including unamortized deferred fees and costs			2,314				4,425
Allowance for credit losses			(9,151	)			(12,193	)
		$	380,660			$	448,610

At June 30, 2010, a total of $260.4 million of minimum lease payments receivable are assigned as collateral for short-term and long-term borrowings, including the amounts related to consolidated VIEs.

Initial direct costs net of fees deferred were $7.8 million and $10.2 million as of June 30, 2010, and December 31, 2009, respectively, and are netted in unearned income and will be amortized to income using the effective interest method. At June 30, 2010 and December 31, 2009, $32.4 million and $35.1 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 June 30, 2010:

		Minimum Lease
		Payments				Income
		Receivable				Amortization
		(Dollars in thousands)
Period Ending December 31,
2010		$	109,652			$	20,789
2011			163,584				25,987
2012			90,150				12,133
2013			39,050				4,504
2014			13,232				1,233
Thereafter			2,449				107
		$	418,117			$	64,753

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 June 30, 2010 and December 31, 2009, the Company maintained total finance receivables which were on a non-accrual basis of $2.8 million and $4.6 million, respectively. As of June 30, 2010 and December 31, 2009, the Company had total finance receivables in which the terms of the original agreements had been renegotiated in the amount of $3.0 million and $4.5 million, respectively.

NOTE 4 — Allowance for Credit Losses

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

Activity in this account is as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(Dollars in thousands)								(Dollars in thousands)
Allowance for credit losses, beginning of period		$	10,253			$	15,309			$	12,193			$	15,283
Charge-offs			(4,438	)			(8,944	)			(10,364	)			(18,342	)
Recoveries			842				820				1,705				1,495
Net charge-offs			(3,596	)			(8,124	)			(8,659	)			(16,847	)
Provision for credit losses			2,494				6,793				5,617				15,542
Allowance for credit losses, end of period		$	9,151			$	13,978			$	9,151			$	13,978

The Company is currently in discussions with the Federal Reserve Bank in connection with the Federal Reserve Bank’s interpretation of the Interagency Policy Statement on the Allowance for Loan and Lease Losses (SR 06-17) dated December 13, 2006 (the “ALLL Policy Statement”) and the appropriate application of the ALLL Policy Statement to management’s estimates used in determining the Company’s allowance for loan and lease losses (the “Allowance”). We do not know when or if the Company will receive a written determination from the Federal Reserve Bank in connection with such discussions, nor do we know what the contents of any such written determination will be. If, as a result of the review, management determines that it should revise its estimates used to compute the Allowance, such changes could have a material impact on the size of the Allowance.

NOTE 5 — Other Assets

Other assets are comprised of the following:

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Accrued fees receivable		$	2,594			$	3,189
Deferred transaction costs			2,157				1,893
Prepaid expenses			1,444				1,360
Income taxes receivable			—				5,178
Other			1,528				1,550
		$	7,723			$	13,170

NOTE 6 — Commitments and Contingencies

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

NOTE 7 — Short-term and Long-term Borrowings

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

Scheduled principal and interest payments on outstanding borrowings as of June 30, 2010 are as follows:

		Principal				Interest(1)
		(Dollars in thousands)
Period Ending December 31,
2010		$	74,775			$	6,278
2011			86,091				3,895
2012			50,411				1,297
2013			7,416				57
2014			287				1
Thereafter			7				—
Total		$	218,987			$	11,528

On February 12, 2010, the Company completed an $80.7 million term asset-backed securitization, of which it elected to defer the issuance of subordinated notes totaling $12.5 million. The two senior classes of notes issued under the securitization constitute eligible collateral under the Federal Reserve Bank of New York’s Term Asset-Backed Securities Loan Facility (“TALF”) program. This financing provides the Company with fixed-cost borrowing and is recorded in long-term borrowings in the Consolidated Balance Sheets. A portion of the proceeds of the new securitization was used to repay the full amount outstanding under the CP conduit warehouse facility.

NOTE 8 — 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 FDIC-insured retail deposits directly from other financial institutions. As of June 30, 2010, the remaining scheduled maturities of time deposits are as follows:

		Scheduled
		Maturities
		(Dollars in
		thousands)
Period Ending December 31,
2010		$	18,933
2011			31,428
2012			24,290
2013			12,700
2014			6,302
Thereafter			3,199
		$	96,852

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 June 30, 2010 was 2.68%.

NOTE 9 — Derivative Financial Instruments

The Company uses derivative financial instruments to manage exposure to the effects of changes in market interest rates and to fulfill certain covenants in our borrowing arrangements. All derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or liabilities. The recorded amounts reflect the fair value of the Company’s derivatives as of each reporting date presented, and will not necessarily reflect the value at settlement due to inherent volatility in the financial markets. The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment pursuant to U.S. GAAP.

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

These hedges were expected to be highly effective in offsetting the changes in cash flows of the forecasted transactions, and this expected relationship was documented at the inception of each hedge. Prior to July 1, 2008, expected hedge effectiveness was assessed using the dollar-offset “change in variable cash flows” method which involves a comparison of the present value of the cumulative change in the expected future cash flows on the variable side of the interest-rate swap to the present value of the cumulative change in the expected future cash flows on the hedged floating-rate asset or liability. The Company retrospectively measured ineffectiveness using the same methodology. The gain or loss from the effective portion of a derivative designated as a cash flow hedge was recorded net of tax effects in other comprehensive income and the gain or loss from the ineffective portion was reported in earnings.

Certain of these agreements were terminated simultaneously with the pricing of the related term securitization transactions. For each terminated agreement, the realized gain or loss was deferred and recorded in the equity section of the Consolidated Balance Sheets, and is being reclassified into earnings as an adjustment to interest expense over the terms of the related term securitizations.

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

For the forecasted transactions that were probable of occurring, the derivative gain or loss in accumulated other comprehensive income as of June 30, 2008 would have been reclassified into earnings as an adjustment to interest expense over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. At the time that any related forecasted borrowing was no longer probable of occurring, the related gain or loss in accumulated other comprehensive income became recognized immediately in earnings.

During the second quarter of 2009, the Company concluded that certain forecasted transactions were not probable of occurring on the anticipated date or in the additional time period permitted by U.S. GAAP. As a result, a $0.4 million pretax ($0.2 million after tax) gain on the related cash flow hedges was reclassified from accumulated other comprehensive income into gain (loss) on derivatives for the three-month period ended June 30, 2009. The Company also terminated the related interest-rate swap agreement.

The Company was not a party to any active interest-rate swap agreements at June 30, 2010. The following table summarizes specific information regarding the terminated interest-rate swap agreements described above:

For Terminated Agreements:

														June/
		August,				Various,				August 2006/				September
Inception Date		2006/2007				2007/2008				2007				2005
		October,				October,				October,				September,
Commencement Date		2008				2009				2007				2006
		June				May/October,				October,				September,
Termination Date		2010				2009				2007				2006
		(Dollars in thousands)
Notional amount		$	100,000			$	150,000			$	300,000			$	225,000
Realized gain (loss) at termination		$	—			$	(7,316	)		$	(2,683	)		$	3,732
Deferred gain (loss), net of tax, recorded in equity:
June 30, 2010		$	—			$	—			$	(222	)		$	5
December 31, 2009		$	—			$	—			$	(357	)		$	90
Amortization recognized as increase (decrease) in interest expense:
Six months ended June 30, 2010		$	—			$	—			$	223			$	(141	)
Year ended December 31, 2009		$	—			$	—			$	699			$	(514	)
Expected amortization during next 12 months as increase (decrease) in interest expense		$	—			$	—			$	260			$	(9	)

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(Dollars in thousands)
Change in fair value of derivative contracts		$	(25	)		$	237			$	(119	)		$	(1,070	)
Cash flow hedging gains on forecasted transactions no longer probable of occurring(1)			—				409				—				409
Gain (loss) on derivatives		$	(25	)		$	646			$	(119	)		$	(661	)

The Company also uses interest-rate cap agreements that are not designated for hedge accounting treatment to fulfill certain covenants in its special purpose subsidiary’s warehouse borrowing arrangements and for overall interest-rate risk management. Accordingly, these cap agreements are recorded at fair value in other assets at $0.1 million and $0.1 million as of June 30, 2010 and December 31, 2009, respectively. The notional amount of interest-rate caps owned as of June 30, 2010 and December 31, 2009 was $94.5 million and $121.4 million, respectively. Changes in the fair values of the caps are recorded in gain (loss) on derivatives in the accompanying Consolidated Statements of Operations.

NOTE 10 — Fair Value Measurements

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

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in 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, that are observable for the asset or liability for substantially the full term of the financial instrument.

•

Level 3 — Inputs to the valuation are unobservable and significant to the fair value measurement. Level 3 inputs shall be used to measure fair value only to the extent that observable inputs are not available.

The Company uses derivative financial instruments to manage exposure to the effects of changes in market interest rates and to fulfill certain covenants in our borrowing arrangements. All derivatives are recorded on the Consolidated Balance Sheets at their fair value as either assets or liabilities 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 a quoted market. The Company’s balances measured at fair value on a recurring basis include the following as of June 30, 2010:

		June 30, 2010								December 31, 2009
		Fair Value Measurements Using								Fair Value Measurements Using
		Level 1				Level 2				Level 1				Level 2
		(Dollars in thousands)								(Dollars in thousands)
Assets
Securities available for sale		$	1,533			$	—			$	—			$	—
Interest-rate caps purchased			—				11				—				119
Liabilities
Interest-rate swaps		$	—			$	—			$	—			$	2,408

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:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(Dollars in thousands)
Assets
Cash and cash equivalents		$	35,178			$	35,178			$	37,057			$	37,057
Restricted interest-earning deposits with banks			66,546				66,546				63,400				63,400
Securities available for sale			1,533				1,533				—				—
Loans			2,101				2,004				4,026				3,969
Interest-rate caps purchased			11				11				119				119
Liabilities
Short-term borrowings			—				—				62,541				62,541
Long-term borrowings			218,987				226,562				244,445				244,477
Deposits			96,852				98,498				80,288				81,903
Accounts payable and accrued expenses (1)			13,718				13,718				11,846				11,846
Interest-rate swaps			—				—				2,408				2,408

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 June 30, 2010, and December 31, 2009, 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 June 30, 2010 and December 31, 2009.

(c) Securities Available for Sale

The fair value of securities available for sale is recorded using prices obtained from a quoted 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) Short-term and 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.

(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) Accounts Payable and Accrued Expenses

The carrying amount of the Company’s accounts payable approximates fair value as of June 30, 2010 and December 31, 2009, because of the relatively short timeframe to realization.

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

Interest-rate swaps and interest-rate caps are measured at fair value on a recurring basis in accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the FASB ASC, using the inputs and methods described previously in the first section of this Note 10.

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

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 using the two-class method.

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

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(Dollars in thousands, except per-share data)
Net income		$	1,551			$	946			$	2,788			$	67
Weighted average common shares outstanding			11,899,847				11,672,352				11,854,044				11,674,795
Add: Unvested restricted stock awards considered participating securities			932,945				921,162				948,535				782,079
Adjusted weighted average common shares used in computing basic EPS			12,832,792				12,593,514				12,802,579				12,456,874
Add: Effect of dilutive stock options			71,371				9,791				63,278				8,438
Adjusted weighted average common shares used in computing diluted EPS			12,904,163				12,603,305				12,865,857				12,465,312
Net earnings per common share:
Basic		$	0.12			$	0.08			$	0.22			$	0.01
Diluted		$	0.12			$	0.08			$	0.22			$	0.01

For the three-month periods ended June 30, 2010 and June 30, 2009, options to purchase 381,378 and 731,740 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 six-month periods ended June 30, 2010 and June 30, 2009, options to purchase 428,405 and 747,882 shares of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, since the exercise prices of the options were greater than the average market price of the Company’s common stock for the respective periods.

NOTE 12 — Comprehensive Income (Loss)

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(Dollars in thousands)
Net income, as reported		$	1,551			$	946			$	2,788			$	67
Other comprehensive income:
Reclassification of cash flow hedging gains on forecasted transactions no longer probable of occurring			—				(409	)			—				(409	)
Amortization of net deferred losses on cash flow hedge derivatives			40				47				82				66
Change in fair value of securities available for sale			20				—				20				—
Tax effect			(23	)			144				(40	)			136
Total other comprehensive income (loss)			37				(218	)			62				(207	)
Comprehensive income (loss)		$	1,588			$	728			$	2,850			$	(140	)

NOTE 13 — Stockholders’ Equity

Stockholders’ Equity

On November 2, 2007, the Board 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 did not purchase any shares of its common stock on the open market during the three-month periods ended June 30, 2010 or June 30, 2009, or during the six-month period ended June 30, 2010. The Company purchased 88,894 shares of its common stock for $0.3 million during the six-month period ended June 30, 2009. At June 30, 2010, the Company had $10.7 million remaining in its stock repurchase plan authorized by the Board.

In addition to the repurchases described above, pursuant to the Company’s 2003 Equity Compensation Plan (as amended, the “2003 Plan”), participants may have shares withheld to cover income taxes. There were 3,570 and 58,170 shares repurchased to cover income taxes during the three- and six-month periods ended June 30, 2010, at average per-share costs of $12.08 and $9.08, respectively. There were 7,838 and 13,720 shares repurchased to cover income taxes during the three- and six-month periods ended June 30, 2009, at average costs of $3.88 and $3.89, respectively.

Regulatory Capital Requirements

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

On December 31, 2008, MBB received approval from the Federal Reserve Bank of San Francisco (the “FRB”) 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 to become a bank holding company upon conversion of MBB from an industrial bank to a commercial bank.

On January 13, 2009, MBB converted from an industrial bank to a commercial bank chartered and supervised by the State of Utah and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). In connection with the conversion of MBB to a commercial bank, Marlin Business Services Corp. became a bank holding company on January 13, 2009.

On January 20, 2009, MBB submitted a modification request to the FDIC related to the order issued by the FDIC on March 20, 2007 (the “Order”) to eliminate certain inconsistencies between the Order and the FRB approval of MBB as a commercial bank. Until we receive the FDIC’s response to our submission, MBB intends to continue operating in accordance with its original de novo three-year business plan, which assumed total assets of up to $128 million by March 2011 (the end of the three-year de novo period.)

MBB is subject to capital adequacy guidelines issued by the Federal Financial Institutions Examination Council (the “FFIEC”). These risk-based capital and leverage guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and consider off-balance sheet exposures in determining capital adequacy. The FFIEC and/or the U.S. Congress may determine to increase capital requirements in the future due to the current economic environment. Under the rules and regulations of the FFIEC, at least half of a bank’s total capital is required to be “Tier I capital” as defined in the regulations, comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual preferred stock. The remaining capital, “Tier II capital,” as defined in the regulations, may consist of other preferred stock, a limited amount of term subordinated debt or a limited amount of the reserve for possible credit losses. The FFIEC has also adopted minimum leverage ratios for banks, which are calculated by dividing Tier I capital by total quarterly average assets. Recognizing that the risk-based capital standards principally address credit risk rather than interest rate, liquidity, operational or other risks, many banks are expected to maintain capital in excess of the minimum standards. The Company will provide the necessary capital to maintain MBB at “well-capitalized” status as defined by banking regulations. MBB’s equity balance at June 30, 2010 was $17.9 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 June 30, 2010, Marlin Business Services Corp. also exceeded its regulatory capital requirements and was considered “well-capitalized” as defined by federal banking regulations. MBB is designated a Risk Category I institution for purposes of the risk-based assessment for FDIC deposit insurance. Risk Category I institutions pay the lowest tier of premiums for their deposit insurance.

The following table sets forth the Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio for Marlin Business Services Corp. and MBB at June 30, 2010.

										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.			29.43	%		$	152,839				4	%		$	20,770				5	%		$	25,963
Marlin Business Bank			15.22	%		$	17,890				5	%		$	5,877				5	%		$	5,877
Tier 1 Risk-based Capital
Marlin Business Services Corp.			36.61	%		$	152,839				4	%		$	16,699				6	%		$	25,048
Marlin Business Bank			15.47	%		$	17,890				6	%		$	6,940				6	%		$	6,940
Total Risk-based Capital
Marlin Business Services Corp.			37.87	%		$	158,106				8	%		$	33,398				10	%		$	41,747
Marlin Business Bank			16.38	%		$	18,942				15	%		$	17,351				10	%(1)		$	11,567

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 Order, MBB was required to have beginning paid-in capital funds of not less than $12.0 million and must keep its total risk-based capital ratio above 15%. MBB’s equity balance at June 30, 2010 was $17.9 million, which qualifies 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. Pursuant to the Order, MBB is not permitted to pay dividends during the first three years of operations without the prior written approval of the FDIC and the State of Utah.

NOTE 14 — Stock-Based Compensation

Under the terms of the 2003 Plan, employees, certain consultants and advisors and non-employee members of the Board have the opportunity to receive incentive and nonqualified grants of stock options, stock appreciation rights, restricted stock and other equity-based awards as approved by the Board. These award programs are used to attract, retain and motivate employees and to encourage individuals in key management roles to retain stock. The Company has a policy of issuing new shares to satisfy awards under the 2003 Plan. The aggregate number of shares under the 2003 Plan that may be issued pursuant to stock options or restricted stock grants is 3,300,000. Not more than 1,650,000 of such shares shall be available for issuance as restricted stock grants. There were 489,000 shares available for future grants under the 2003 Plan as of June 30, 2010.

Total stock-based compensation expense was $0.4 million and $0.2 million for the three-month periods ended June 30, 2010 and June 30, 2009, respectively. Total stock-based compensation expense was $1.7 million and $0.6 million for the six-month periods ended June 30, 2010 and June 30, 2009, respectively. Excess tax benefits from stock-based payment arrangements decreased cash provided by operating activities and increased cash provided by financing activities by $0.1 million and $0.1 million for the six-month periods ended June 30, 2010 and June 30, 2009, 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 June 30, 2010. There were no revisions to performance assumptions during the six-month periods ended June 30, 2010 and June 30, 2009.

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

In addition to the stock options granted pursuant to the stock option exchange program discussed below, there were 5,000 stock options granted during the three-month period ended June 30, 2010, and no stock options granted during the three- or six-month periods ended June 30, 2009, or the three-month period ended March 31, 2010.

The fair value of each stock option granted during the three-month period ended June 30, 2010 was estimated on the date of the grant using the Black-Scholes option pricing model. The weighted-average grant-date fair value of stock options issued for the three-month period ended June 30, 2010 was $7.64 per share.

The following weighted average assumptions were used for valuing option grants made during the three-month period ended June 30, 2010:

		Assumption
Risk-free interest rate			2.18	%
Expected life (years)			5
Expected volatility			79	%
Expected dividends			—

The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life for options granted represents the period each option is expected to be outstanding and was determined by applying the simplified method as defined by the SEC’s Staff Accounting Bulletin No. 107 (“SAB 107”), due to the limited period of time the Company’s shares have been publicly traded. The expected volatility was determined using historical volatilities based on historical stock prices. The Company does not pay dividends, and therefore did not assume expected dividends.

At the October 28, 2009 annual stockholders’ meeting, the shareholders voted to approve an amendment to the 2003 Plan to allow a one-time stock option exchange program for the Company’s employees, to commence within six months following the annual meeting. The exchange program tender offer was issued on April 23, 2010. Based on employees’ elections, the program allowed us to cancel, on May 24, 2010, 208,774 underwater stock options with an average exercise price of $19.13 in exchange for the grant of 141,421 stock options with an exercise price of $12.41, equal to the closing price of our common stock on the date of grant. The new option grants also have a new vesting schedule and 7-year term. No incremental compensation expense was recognized as a result of the exchange program. The options cancelled and the new grants issued pursuant to this exchange are included in the table below as forfeited and granted option activity, respectively.

A summary of option activity for the six months ended June 30, 2010 follows:

						Weighted
						Average
		Number of				Exercise Price
Options		Shares				Per Share
Outstanding, December 31, 2009			778,161			$	12.20
Granted			146,421				12.40
Exercised			(35,864	)			4.49
Forfeited			(240,565	)			19.42
Expired			—				—
Outstanding, June 30, 2010			648,153				9.99

During the three-month periods ended June 30, 2010 and June 30, 2009, the Company recognized total compensation expense related to options of $0.1 million and $0.1 million, respectively. During the six-month periods ended June 30, 2010 and June 30, 2009, the Company recognized total compensation expense related to options of $0.1 million and $0.2 million, respectively.

The total pretax intrinsic values of stock options exercised were $0.1 million and $0.1 million for the three-month periods ended June 30, 2010 and June 30, 2009, respectively. The related tax benefits realized from the exercise of stock options for the three-month periods ended June 30, 2010 and June 30, 2009 were $0.1 million and $0.1 million, respectively. There were 7,361 and 7,636 stock options exercised for the three-month periods ended June 30, 2010 and June 30, 2009, respectively.

The total pretax intrinsic values of stock options exercised were $0.2 million and $0.1 for the six-month periods ended June 30, 2010 and June 30, 2009, respectively. The related tax benefits realized from the exercise of stock options for the six-month periods ended June 30, 2010 and June 30, 2009 were $0.1 million and $0.1 million, respectively.

The following table summarizes information about the stock options outstanding and exercisable as of June 30, 2010:

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			85,925				1.8			$	3.39			$	748				85,925				1.8			$	3.39			$	748
$7.17 - 10.18			354,528				3.8				9.43				943				177,541				2.8				9.58				445
$12.08 - 12.41			145,612				6.9				12.40				—				—				n/a				n/a				n/a
$14.00 - 16.01			39,984				3.5				14.33				—				36,835				3.5				14.33				—
$19.78 - 21.50			22,104				3.0				20.80				—				22,104				3.0				20.80				—
			648,153				4.2				9.99			$	1,691				322,405				2.6				9.24			$	1,193

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $12.09 as of June 30, 2010, which would have been received by the option holders had all option holders exercised their options as of that date.

As of June 30, 2010, the total future compensation cost related to non-vested stock options not yet recognized in the Consolidated Statements of Operations was $0.2 million and the weighted average period over which these awards are expected to be recognized was 1.6 years, based on the most probable performance assumptions as of June 30, 2010. In the event maximum performance targets are achieved, an additional $0.7 million of compensation cost would be recognized over a weighted average period of 2.2 years.

Restricted Stock Awards

Restricted stock awards provide that, during the applicable vesting periods, the shares awarded may not be sold or transferred by the participant. The vesting period for restricted stock awards generally ranges from 3 to 10 years, though certain awards for special projects may vest in as little as one year depending on the duration of the project. All awards issued contain service conditions based on the participant’s continued service with the Company, and may provide for accelerated vesting if there is a change in control as defined in the 2003 Plan.

The vesting of certain restricted shares may be accelerated to a minimum of 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 six-month period ended June 30, 2010, 35,069 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 June 30, 2010. There were no revisions to performance assumptions for the six-month periods ended June 30, 2010 and June 30, 2009, although vesting was accelerated 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 service.

The following table summarizes the activity of the non-vested restricted stock during the six months ended June 30, 2010:

						Weighted
						Average
						Grant-Date
Non-vested restricted stock		Shares				Fair Value
Outstanding at December 31, 2009			1,023,403			$	7.74
Granted			105,290				10.45
Vested			(175,753	)			8.06
Forfeited			(10,792	)			17.87
Outstanding at June 30, 2010			942,148				7.87

During the three-month periods ended June 30, 2010 and June 30, 2009, the Company granted restricted stock awards with grant date fair values totaling $0.5 million and $0.1 million, respectively. During the six-month periods ended June 30, 2010 and June 30, 2009, the Company granted restricted stock awards with grant date fair values totaling $1.1 million and $2.2 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 $0.1 million of compensation expense related to restricted stock for the three-month periods ended June 30, 2010 and June 30, 2009, respectively. The Company recognized $1.6 million and $0.4 million of compensation expense related to restricted stock for the six-month periods ended June 30, 2010 and June 30, 2009, respectively.

Of the $1.6 million total compensation expense related to restricted stock for the six-month period ended June 30, 2010, approximately $0.8 million related to the acceleration of vesting based on an annual evaluation of the achievement of certain performance criteria during the first quarter 2010.

As of June 30, 2010, there was $4.9 million of unrecognized compensation cost related to non-vested restricted stock compensation scheduled to be recognized over a weighted average period of 4.2 years, based on the most probable performance assumptions as of June 30, 2010. In the event performance targets are achieved, $1.7 million of the unrecognized compensation cost would accelerate to be recognized over a weighted average period of 1.1 years, and an additional $0.1 million of compensation cost would be recognized over a weighted average period of 1.1 years. In addition, certain of the awards granted during 2009 may result in the issuance of 142,633 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 June 30, 2010 and June 30, 2009 were $0.1 million and $0.1 million, respectively. The fair values of shares that vested during the six-month periods ended June 30, 2010 and June 30, 2009 were $1.6 million and $0.2 million, respectively.

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, 2009 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 and Section 21E of the Securities Exchange Act of 1934. 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 beyond the Company’s control, including, without limitation:

•

availability, terms and deployment of funding and capital;

•

general volatility of the securitization and capital markets;

•

changes in our industry, interest rates or the general economy resulting in changes to our business strategy;

•

the degree and nature of our competition;

•

availability and retention of qualified personnel; and

•

the factors set forth in the section captioned “Risk Factors” in our Form 10-K for the year ended December 31, 2009 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, certain commercial and industrial equipment, security systems, computers and telecommunications 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 relationships with lease brokers and through direct solicitation of our end user customers. Our leases are fixed-rate transactions with terms generally ranging from 36 to 60 months. At June 30, 2010, our lease portfolio consisted of approximately 78,000 accounts with an average original term of 50 months and average original transaction size of approximately $11,300.

Since our founding in 1997, we have grown to $495.0 million in total assets at June 30, 2010. Our assets are substantially comprised of our net investment in leases and loans which totaled $380.7 million at June 30, 2010.

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 FRB 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 to become a bank holding company upon conversion of MBB from an industrial bank to a commercial bank.

On January 13, 2009, MBB converted from an industrial bank to a commercial bank chartered and supervised by the State of Utah and the Federal Reserve Board. In connection with the conversion of MBB to a commercial bank, Marlin Business Services Corp. became a bank holding company on January 13, 2009.

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.

		Six Months
		Ended
		June 30,				As of or For the Year Ended December 31,
		2010				2009				2008				2007				2006				2005
Number of sales account executives			69				38				86				118				100				103
Number of originating sources(1)			533				465				1,014				1,246				1,295				1,295