e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

Commission File No. 1-14771

MICROFINANCIAL INCORPORATED

(Exact name of registrant as specified in its charter)


Massachusetts		04-2962824
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

16 New England Executive Park, Suite 200, Burlington, MA 01803
(Address of principal executive offices)

(781) 994-4800
(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(b) of the Securities and 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. þ Yes o No

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 the registrant was required to submit and post such files). þ Yes o No

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 definition 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 o	Non-accelerated filer o	Smaller reporting company þ
		(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 Exchange Act). o Yes þ No

As of October 31, 2011, 14,257,324 shares of the registrant’s common stock were outstanding.

MICROFINANCIAL INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)


	September 30,			December 31,
	2011			2010
ASSETS
Cash and cash equivalents	$	1,647		$	1,528
Restricted cash		1,058			753
Net investment in leases:
Receivables due in installments		195,964			191,067
Estimated residual value		22,870			21,832
Initial direct costs		1,404			1,490
Less:
Advance lease payments and deposits		(3,595	)		(3,479	)
Unearned income		(59,291	)		(59,245	)
Allowance for credit losses		(13,188	)		(13,132	)

Net investment in leases		144,164			138,533
Investment in rental contracts, net		860			461
Property and equipment, net		2,020			800
Other assets		1,214			1,530

Total assets	$	150,963		$	143,605


LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving line of credit	$	60,527		$	62,650
Accounts payable		2,382			2,435
Capital lease obligation		4			26
Dividends payable		15			5
Other liabilities		3,068			1,375
Income taxes payable		321			—
Deferred income taxes		10,453			7,627

Total liabilities		76,770			74,118

Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued at September 30, 2011 and December 31, 2010		—			—
Common stock, $.01 par value; 25,000,000 shares authorized; 14,257,324 and 14,231,933 shares issued at September 30, 2011 and December 31, 2010, respectively		143			142
Additional paid-in capital		46,692			46,475
Retained earnings		27,358			22,870

Total stockholders’ equity		74,193			69,487

Total liabilities and stockholders’ equity	$	150,963		$	143,605

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

MICROFINANCIAL INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Revenues:
Income on financing leases	$	9,306	$	8,790	$	27,543	$	25,421
Rental income		2,192		1,917		6,271		5,795
Income on service contracts		97		124		308		397
Loss and damage waiver fees		1,241		1,154		3,662		3,377
Service fees and other		935		912		2,798		2,846

Total revenues		13,771		12,897		40,582		37,836


Expenses:
Selling, general and administrative		3,900		3,356		11,890		10,167
Provision for credit losses		4,517		4,969		13,520		17,462
Depreciation and amortization		873		731		2,337		1,633
Interest		700		743		2,043		2,439

Total expenses		9,990		9,799		29,790		31,701


Income before provision for income taxes		3,781		3,098		10,792		6,135
Provision for income taxes		1,456		1,192		4,155		2,363


Net income	$	2,325	$	1,906	$	6,637	$	3,772


Net income per common share — basic	$	0.16	$	0.13	$	0.47	$	0.26

Net income per common share — diluted	$	0.16	$	0.13	$	0.46	$	0.26


Weighted-average shares:
Basic		14,253,702		14,263,726		14,244,074		14,235,086

Diluted		14,538,910		14,492,842		14,513,708		14,454,201

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

MICROFINANCIAL INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share data)
(Unaudited)


						Additional						Total
	Common Stock					Paid-in			Retained			Stockholders’
	Shares			Amount		Capital			Earnings			Equity

Balance at December 31, 2009		14,174,326		$	142	$	46,197		$	20,426		$	66,765

Stock issued for deferred compensation		88,269			—		295			—			295
Stock-based compensation		—			—		112			—			112
Amortization of unearned compensation		3,750			—		10			—			10
Stock repurchase program		(34,412	)				(139	)					(139	)
Common stock dividends ($0.20 per share)		—			—		—			(2,852	)		(2,852	)
Net income		—			—		—			5,296			5,296


Balance at December 31, 2010		14,231,933		$	142	$	46,475		$	22,870		$	69,487

Stock issued for deferred compensation		77,274			1		354			—			355
Stock-based compensation		—			—		103			—			103
Stock repurchase program		(51,883	)		—		(240	)		—			(240	)
Common stock dividends ($0.15 per share)		—			—		—			(2,149	)		(2,149	)
Net income		—			—		—			6,637			6,637


Balance at September 30, 2011		14,257,324		$	143	$	46,692		$	27,358		$	74,193

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

MICROFINANCIAL INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)


	Nine Months Ended
	September 30,
	2011			2010
Cash flows from operating activities:
Cash received from customers	$	79,414		$	69,054
Cash paid to suppliers and employees		(13,962	)		(11,980	)
Income taxes paid		(675	)		(960	)
Interest paid		(1,844	)		(1,919	)
Interest received		1			1

Net cash provided by operating activities		62,934			54,196


Cash flows from investing activities:
Investment in lease and rental contracts		(56,367	)		(58,120	)
Investment in direct costs		(760	)		(853	)
Investment in property and equipment		(804	)		(114	)

Net cash used in investing activities		(57,931	)		(59,087	)


Cash flows from financing activities:
Proceeds from secured debt		76,394			75,678
Repayment of secured debt		(78,517	)		(67,629	)
Payments of debt closing costs		(55	)		(711	)
Increase in restricted cash		(305	)		(139	)
Repayment of capital lease obligations		(22	)		(50	)
Repurchase of common stock		(240	)		—
Payment of dividends		(2,139	)		(2,134	)

Net cash (used in) provided by financing activities		(4,884	)		5,015


Net change in cash and cash equivalents		119			124
Cash and cash equivalents, beginning of period		1,528			391

Cash and cash equivalents, end of period	$	1,647		$	515


Reconciliation of net income to net cash provided by operating activities:
Net income	$	6,637		$	3,772
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of unearned income, net of initial direct costs		(27,543	)		(25,421	)
Depreciation and amortization		2,337			1,633
Provision for credit losses		13,520			17,462
Recovery of equipment cost and residual value		63,214			54,144
Stock-based compensation expense		103			93
Changes in assets and liabilities:
Current taxes payable		321			454
Deferred income taxes		2,826			949
Other assets		316			112
Accounts payable		301			420
Other liabilities		902			578

Net cash provided by operating activities	$	62,934		$	54,196


Supplemental disclosure of non-cash activities:
Acquisition of property and equipment through lease incentives	$	791		$	—
Fair market value of stock issued for compensation	$	354		$	296

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

MICROFINANCIAL INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

A. Nature of Business

MicroFinancial Incorporated (referred to as “MicroFinancial,” “we,” “us” or “our”) operates primarily through its wholly-owned subsidiaries, TimePayment Corp. and LeaseComm Corporation. TimePayment is a specialized commercial finance company that leases and rents “microticket” equipment and provides other financing services. LeaseComm started originating leases in January 1986 and in October 2002 suspended virtually all originations due to an interruption in financing. TimePayment commenced originating leases in July 2004. The average amount financed by TimePayment during 2010 was approximately $5,800 compared to the 2011 year to date average of $6,000. LeaseComm historically financed contracts of approximately $1,900. We primarily source our originations through a nationwide network of independent equipment vendors, sales organizations and other dealer-based origination networks. We fund our operations through cash provided by operating activities and borrowings under our revolving line of credit.

B. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial statements. Accordingly, our interim statements do not include all of the information and disclosures required for our annual financial statements. In the opinion of our management, the condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of these interim results. These financial statements should be read in conjunction with our consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011.

The balance sheet at December 31, 2010 has been derived from the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Allowance for Credit Losses and Credit Quality

We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses in our portfolio. Given the nature of the “microticket” market and the individual size of each transaction, we do not have a formal credit review committee to review individual transactions. Rather, we developed a sophisticated, multi-tiered pricing model and have automated the credit scoring, approval and collection processes. We believe that with the proper pricing model, we can grant credit to a wide range of applicants provided we have priced appropriately for the associated risk. As a result of approving a wide range of credits, we experience a relatively high level of delinquency and write-offs in our portfolio. We periodically review the credit scoring and approval process to ensure that the automated system is making appropriate credit decisions. Contracts in our portfolio are not re-graded subsequent to the initial extension of credit and the allowance is not allocated to specific contracts. Rather, we view the contracts as having common characteristics and maintain a general allowance against our entire portfolio utilizing historical collection statistics and an assessment of current credit risk in the portfolio as the basis for the amount.

We have adopted a consistent, systematic procedure for establishing and maintaining an appropriate allowance for credit losses for our microticket transactions. We estimate the likelihood of credit losses net of recoveries in the portfolio at each reporting period based upon a combination of the lessee’s bureau reported credit score at lease inception and the current delinquency status of the account. In addition to these elements, we also consider other relevant factors including general economic trends, trends in delinquencies and credit losses, static pool analysis of our portfolio, trends in recoveries made on charged off accounts, and other relevant factors which might affect the performance of our portfolio. This combination of historical experience, credit scores, delinquency levels, trends in credit losses, and the review of current factors provide the basis for our analysis of the adequacy of the allowance for credit losses. We take charge-offs against our receivables when such receivables are deemed uncollectible. In

MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

general a receivable is uncollectable when it is 360 days past due or earlier, if other adverse events occur with respect to an account. Historically, the typical monthly payment under our microticket leases has been small and as a result, our experience is that lessees will pay past due amounts later in the process because of the relatively small amount necessary to bring an account current.

In 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” requiring us to provide detailed disclosures about the nature of credit risk inherent in our financing receivables, how we analyze that risk in estimating our allowance for credit losses, and the changes in the allowance for credit losses.

We segregate our lease portfolio between TimePayment Corp. and LeaseComm Corp. to perform the calculation and analysis of the allowance for credit losses. Each subsidiary consists of a single portfolio segment which we refer to as microticket equipment. We take charge-offs against our receivables when such receivables are deemed uncollectible. None of our receivables are placed on nonaccrual status as they are charged off when deemed uncollectible.

A summary of the activity in our allowance for credit losses is as follows:


	Nine Months Ended
	September 30,
	2011			2010
Allowance for credit losses, beginning	$	13,132		$	13,856
Provision for credit losses		13,520			17,462
Charge-offs		(17,227	)		(21,598	)
Recoveries		3,763			3,273

Allowance for credit losses, ending	$	13,188		$	12,993

The following table reconciles the activity in the allowance for credit losses by portfolio segment at September 30, 2011:


	LeaseComm			TimePayment
	Microticket			Microticket
	equipment			equipment			Total
Allowance for Credit Losses:
Beginning balance	$	231		$	12,901		$	13,132
Charge-offs		(551	)		(16,676	)		(17,227	)
Recoveries		917			2,846			3,763
Provisions (credits)		(430	)		13,950			13,520

Ending balance	$	167		$	13,021		$	13,188


Ending balance: Individually evaluated for impairment		—			—			—

Ending balance: Collectively evaluated for impairment		167			13,021			13,188

Ending balance: Contracts acquired with deteriorated credit quality		—			—			—
Financing Receivables:
Ending balance		368			156,984			157,352	⁽¹⁾
Ending balance: Individually evaluated for impairment		—			—			—

Ending balance: Collectively evaluated for impairment		368			156,984			157,352	⁽¹⁾

Ending balance: Contracts acquired with deteriorated credit quality		—			—			—


(1)		Total financing receivables include net investment in leases. For purposes of asset quality and allowance calculations, the allowance for credit losses is excluded.

MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

Each period the provision for credit losses in the income statement results from the combination of an estimate by management of credit losses that occurred during the current period and the ongoing adjustment of prior estimates of losses occurring in prior periods.

To serve as a basis for making this provision, we maintain an internally developed proprietary scoring model that considers several factors including the lessee’s bureau reported credit score at lease inception. We also consider other relevant factors including general economic trends, trends in delinquencies and credit losses, static pool analysis of our portfolio, trends in recoveries made on charged off accounts, and other relevant factors which might affect the performance of our portfolio. The combination of historical experience, credit scores, delinquency levels, trends in credit losses, and the review of current factors provide the basis for our analysis of the adequacy of the allowance for credit losses.

We assign internal risk ratings for all lessees and determine the credit worthiness of each lease based upon this internally developed proprietary scoring model. The LeaseComm portfolio is evaluated in total with a reserve of 50% of the outstanding amount greater than 90 days plus 25% of the amount outstanding from 1 to 89 days as that portfolio is decreasing. For the TimePayment portfolio, the scoring model generates one of nine acceptable risk ratings based upon the credit worthiness of each lease or it rejects the lease application. The scores are assigned at lease inception and these scores are maintained over the lease term regardless of payment performance. To facilitate review and reporting, management aggregates these nine scores into one of three categories with similar risk profiles and delinquency characteristics identified as Gold, Silver or Bronze.

	•		Leases assigned a Gold rating represent those transactions which exhibit the highest rating based on our internal credit risk scoring model. They are considered of sufficient quality to preclude an otherwise adverse rating. Gold rated leases are typically represented by lessees with high bureau reported credit scores at lease inception or are supported by established businesses for those transactions which are not personally guaranteed by the lessee.

	•		Leases assigned a Silver rating fall in the middle range of the nine acceptable scores generated by the scoring model. These transactions possess a reasonable amount of risk based on their profile and may exhibit vulnerability to deterioration if adverse factors are encountered. These accounts typically demonstrate adequate coverage but warrant a higher level of monitoring by management to ensure that weaknesses do not advance.

	•		A Bronze rating applies to leases at the lower end of the nine acceptable scores generated by the scoring model whereby the lessee may have difficulty meeting the lease obligation if adverse factors are encountered. Bronze rated transactions typically have lower reported credit scores at lease inception and will typically have other less desirable credit attributes.

The following table presents the aging of the recorded investment in leases as of September 30, 2011, by our internally graded score:

MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)


	Current		Past Due		Total
TimePayment Corp.
Grade
Gold	$	47,133	$	3,747	$	50,880
Silver		80,155		18,811		98,966
Bronze		4,752		2,386		7,138

Total		132,040		24,944		156,984

LeaseComm		169		199		368


Total	$	132,209	$	25,143	$	157,352

The following table presents the aged analysis of past due financing receivables by our internally developed proprietary scoring model in leases as of September 30, 2011:


				31 to 60			61 to 90
				days			days			Over 90 Days						Over 90 Days
	Current			Past Due			Past Due			Past Due			Total			Accruing
LeaseComm:	$	169		$	9		$	7		$	183		$	368		$	183

TimePayment Corp.
Gold		47,133			1,292			751			1,704			50,880			1,704
Silver		80,155			2,299			2,670			13,842			98,966			13,842
Bronze		4,752			305			217			1,864			7,138			1,864

TimePayment Corp. subtotal		132,040			3,896			3,638			17,410			156,984			17,410



Total	$	132,209		$	3,905		$	3,645		$	17,593		$	157,352		$	17,593

Percent of Total Financing Receivables		84.0	%		2.5	%		2.3	%		11.2	%		100	%		11.2	%

Fair Value of Financial Instruments

For financial instruments including cash and cash equivalents, restricted cash, accounts payable, the revolving line of credit, and other liabilities, we believe that the carrying amount approximates fair value. The fair value of the revolving line of credit is calculated based on incremental borrowing rates currently available on loans with similar terms and maturities. The fair value of our revolving line of credit at September 30, 2011 approximates its carrying value.

Net Income Per Share

Basic net income per common share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net income per common share gives effect to all potentially dilutive common shares outstanding during the period. The computation of diluted net income per share does not assume the issuance of common shares that would have an antidilutive effect on net income per common share. For the three months ended September 30, 2011, 409,305 options were excluded from the computation of diluted net income per share because their effect was antidilutive. For the nine months ended September 30, 2011, 409,305 options were excluded from the computation of diluted net income per share

MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

because their effect was antidilutive. For the three months ended September 30, 2010, 499,305 options were excluded from the computation of diluted net income per share because their effect was antidilutive. For the nine months ended September 30, 2010, 849,305 options were excluded from the computation of diluted net income per share because their effect was antidilutive.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Net income	$	2,325	$	1,906	$	6,637	$	3,772


Weighted average common shares outstanding		14,253,702		14,263,726		14,244,074		14,235,086
Dilutive effect of common stock options, warrants and restricted stock		285,208		229,116		269,634		219,115

Shares used in computation of net income per common share — diluted		14,538,910		14,492,842		14,513,708		14,454,201


Net income per common share — basic	$	0.16	$	0.13	$	0.47	$	0.26


Net income per common share — diluted	$	0.16	$	0.13	$	0.46	$	0.26

Stock-Based Employee Compensation

Under our 2008 Equity Incentive Plan, we reserved 1,000,000 shares of common stock for issuance. In February 2011, under our 2008 Equity Incentive Plan the Compensation and Benefits Committee of our Board of Directors granted 33,044 restricted stock units to our executive officers. The restricted stock units vest over five years at 25% annually beginning on the second anniversary of the grant date. The restricted stock units were valued on the date of grant and the fair value of these awards was $4.11 per share. For the nine months ended September 30, 2011 the expense related to these units is $18,000.

During the nine months ended September 30, 2011, 90,000 options originally granted to members of the Board of Directors in February 2001 expired. During the nine months ended September 30, 2010, 350,000 options originally granted to members of the Board of Directors in February of 2000 expired. There were no options granted or exercised during the nine months ended September 30, 2011.

The following summarizes stock option activity for the nine months ended September 30, 2011:


						Weighted-
						Average
	Shares			Price Per Share		Exercise Price
Outstanding at December 31, 2010		908,028		$	1.585 to $13.10	$	5.07
Granted		—
Expired		(90,000	)	$	13.10	$	13.10
Forfeited		—

Outstanding at September 30, 2011		818,028		$	1.585 to $6.70	$	4.19

In February 2011, we granted our non-employee directors a total of 51,642 shares of stock with immediate vesting and a fair value of $4.11 per share, for a total grant date fair value of $212,000, in accordance with our director compensation policy.

In July 2011, we granted our non-employee directors a total of 25,632 shares of stock with immediate vesting and a fair value of $5.54 per share, for a total grant date value of $142,000, in accordance with our director compensation policy.

MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

The following table summarizes unvested restricted stock activity:


	Restricted Stock			Restricted Stock
	Number			Units Number
	of Shares			of Shares
Non-vested at December 31, 2010		—			33,518
Granted		77,274			33,044
Vested		(77,274	)		—

Non-vested at September 30, 2011		—			66,562

During the three months ended September 30, 2011, amortized compensation expense related to the restricted stock units was $12,000. During the nine months ended September 30, 2011, amortized compensation expense related to the restricted stock units was $34,000.

Information relating to our outstanding stock options at September 30, 2011 is as follows:


			Outstanding						Exercisable

			Weighted-				Weighted-
Exercise			Average		Intrinsic		Average				Intrinsic
Price	Shares		Life (Years)		Value		Exercise Price		Shares		Value
$ 6.70		235,000		0.41	$	—	$	6.70		235,000	$	—
1.59		150,000		1.16		602		1.59		150,000		602
5.77		31,923		5.42		—		5.77		—		—
5.85		142,382		6.33		—		5.85		71,191		—
2.30		258,723		7.42		854		2.30		64,681		213

		818,028		3.99	$	1,456		4.56		520,872	$	815

During the three months ended September 30, 2011 and 2010, the total share based compensation cost recognized was $35,000 and $32,000, respectively. During the nine months ended September 30, 2011 and 2010, the total share based employee compensation cost recognized was $103,000 and $93,000, respectively.

Dividends

On January 21, 2011 we declared a dividend of $0.05 per share payable on February 15, 2011 to stockholders of record on February 1, 2011.

On April 21, 2011, we declared a dividend of $0.05 per share payable on May 13, 2011 to stockholders of record on May 2, 2011.

On July 21, 2011, we declared a dividend of $0.05 per share payable on August 15, 2011 to stockholders of record on August 1, 2011.

On October 25, 2011, we declared a dividend of $0.06 per share payable on November 15, 2011 to stockholders of record on November 4, 2011.

MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits with various commercial banks and highly liquid investments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value.

Concentration of Credit Risk

We deposit our cash and invest in short-term investments primarily through national commercial banks. Deposits in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) are exposed to loss in the event of nonperformance by the institution. The Company maintains cash deposits in excess of the FDIC insurance coverage.

C. Revolving line of credit

In October 2011, we signed an amendment that further reduced the borrowing rate to Prime plus 0.75% or LIBOR plus 2.75%. As a part this amendment, the leverage ratio that the Company agrees not to exceed was lowered from 4.0 to 1 to 3.5 to 1 and the maturity date of the facility was extended to August 2, 2014. At our option upon maturity, the unpaid principal balance may be converted to a six-month term loan. The amendment has an effective date of September 30, 2011.

At September 30, 2011, $57.0 million of our loans were LIBOR loans and $3.5 million of our loans were Prime Rate Loans. The interest rate on our loans at September 30, 2011 was between 3.5% and 4.5%. The amount available on our revolving line of credit at September 30, 2011 was $39.5 million. The revolving line of credit has financial covenants that we must comply with to obtain funding and avoid an event of default. As of September 30, 2011, we were in compliance with all covenants under the revolving line of credit.

D. Commitments and Contingencies

Legal Matters

We are involved from time to time in litigation incidental to the conduct of our business. Although we do not expect that the outcome of any of these matters, individually or collectively, will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, judgments could be rendered, or settlements entered, that could adversely affect our operating results or cash flows in a particular period. We routinely assess all of our litigation and threatened litigation as to the probability of ultimately incurring a liability, and record our best estimate of the ultimate loss in situations where we access the likelihood of loss as probable.

MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

Lease Commitments

We accept lease applications on a daily basis and, as a result, we have a pipeline of applications that have been approved, where a lease has not been originated. Our commitment to lend does not become binding until all of the steps in the lease origination process have been completed, including the receipt of the lease, supporting documentation and verification with the lessee. Since we fund on the same day a lease is verified, we have no outstanding commitments to lend.

Stock Repurchase

During the first quarter of fiscal year 2011 we repurchased and retired 51,883 shares of our common stock under our stock buyback program. We did not repurchase any shares of our common stock during the second and third quarters of fiscal year 2011.

E. Subsequent Events

We have evaluated all events or transactions that occurred through the date on which we issued these financial statements. Other than the declaration of dividend and amendment of our line of credit as previously discussed, we did not have any material subsequent events that impacted our consolidated financial statements.

In October 2011 we signed an amendment to our revolving line of credit reducing the interest rate payable and extending the maturity date, among other things. See Note C to these unaudited consolidated financial statements.

F. Recent Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures.” This update provides amendments to FASB 820-10 – Fair Value Measurements and Disclosures that require new disclosures as follows:

	•		Transfers in and out of Levels 1 and 2. A reporting entry should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.

	•		Activity in level 3 fair value measurements

	•		A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities.

In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the provisions of ASU 2010-6 which are required for the current year and the adoption did not have a material effect on our consolidated financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This guidance expands the disclosures pertaining to the credit quality of loans and should provide users of the financial statements with a better overall understanding of the credit risk in the loan portfolio. This guidance is effective for interim and annual periods ending after December 15, 2010. We adopted the required provisions of ASU 2010-20 during the year ended December 31, 2010. In connection with the adoption of ASU 2010-20 certain additional disclosure are required for reporting periods ending after December 31, 2010, related to the activity within the Company’s portfolio segments. These disclosures have been included in these notes to unaudited condensed consolidated financial statements.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following information should be read in conjunction with our condensed consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

Forward-Looking Information

Statements in this document that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as “believes,” “anticipates,” “expects,” and similar expressions are intended to identify forward-looking statements. We caution that a number of important factors could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Such statements contain a number of risks and uncertainties, including but not limited to: our need for financing in order to originate leases and contracts; our dependence on point-of-sale authorization systems and expansion into new markets; our significant capital requirements; risks associated with economic downturns including the higher delinquency rates associated with such downturns; higher interest rates; intense competition; changes in our regulatory environment; the availability of qualified personnel, and risks associated with acquisitions. Readers should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. We cannot assure that we will be able to anticipate or respond timely to changes which could adversely affect our operating results. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of our common stock. Statements relating to past dividend payments or our current dividend policy should not be construed as a guarantee that any future dividends will be paid. For a more complete description of the prominent risks and uncertainties inherent in our business, see the risk factors included in our most recent Annual Report on Form 10-K and other documents we file from time to time with the Securities and Exchange Commission.

Overview

We are a specialized commercial finance company that provides “microticket” equipment leasing and other financing services. The average amount financed by TimePayment during 2010 was approximately $5,800 compared to the 2011 year to date average of $6,000. LeaseComm historically financed contracts of approximately $1,900, and no longer originates leases. Our existing portfolio consists of business equipment leased or rented primarily to small commercial enterprises.

We finance the funding of our leases and contracts primarily through cash provided by operating activities and our revolving line of credit. On August 2, 2007, we entered into a three-year line of credit with Sovereign Bank based on qualified TimePayment lease receivables. The total commitment under the facility was originally $30 million, and was subsequently increased to $60 million in July 2008, to $85 million in February 2009, and to $100 million in July 2010. Outstanding borrowings are collateralized by eligible lease contracts and a security interest in all of our other assets. Prior to the July 2010 amendment, outstanding borrowings bore interest at Prime plus 1.75% or at LIBOR plus 3.75%, in each case subject to a minimum rate of 5%. Following the July 2010 amendment, outstanding borrowings bore interest at Prime plus 1.25% or LIBOR plus 3.25%, without being subject to any minimum rate. Under the terms of the facility, loans are Prime Rate Loans, unless we elect LIBOR Loans. If a LIBOR Loan is not renewed at maturity it automatically coverts to a Prime Rate Loan.

In October 2011 we signed an amendment that further reduced the interest rate to Prime plus 0.75% or LIBOR plus 2.75%. As part this amendment, the maturity date of the facility was extended to August 2, 2014. At the same time, the leverage ratio we agreed not to exceed was lowered from 4:1 to 3.5:1. At our option upon maturity, the unpaid principal balance may be converted to a six-month term loan. The amendment has an effective date of September 30, 2011.

In a typical lease transaction, we originate a lease through a nationwide network of equipment vendors, independent sales organizations and brokers. Upon our approval of a lease application and verification that the lessee has received the equipment and signed the lease, we pay the dealer for the cost of the equipment, plus the dealer’s profit margin.

Substantially all leases originated or acquired by us are non-cancelable. During the term of the lease, we are scheduled to receive payments sufficient to cover our borrowing costs and the cost of the underlying equipment and provide us with an appropriate profit. We pass along some of the costs of our leases and contracts by charging late fees, prepayment penalties, loss and damage waiver fees and other service fees, when applicable. Collection fees are imposed based on our estimate of the costs of collection. The loss and damage waiver fees are charged if a customer fails to provide proof of insurance and are reasonably related to the cost of replacing the lost or damaged equipment or product. The initial non-cancelable term of the lease is equal to or less than the equipment’s estimated economic life and often provides us with additional revenues based on the residual value of the equipment at the end of the lease. Initial terms of the leases in our portfolio generally range from 12 to 60 months, with an average initial term of 45 months as of December 31, 2010.

Critical Accounting Policies

Our significant accounting policies are more fully described in Note B to the condensed consolidated financial statements included in this Quarterly Report and in Note B to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission. Certain accounting policies are particularly important to the portrayal of our consolidated financial position and results of operations. These policies require the application of significant judgment by us and as a result, are subject to an inherent degree of uncertainty. In applying these policies, we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. We base our estimates and judgments on historical experience, terms of existing contracts, observance of trends in the industry, information obtained from dealers and other sources, and on various other assumptions that we believe to be reasonable and appropriate 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. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies, including revenue recognition, maintaining the allowance for credit losses, determining provisions for income taxes, and accounting for share-based compensation are each discussed in more detail in our Annual Report on Form 10-K. We have reviewed and determined that those policies remain our critical accounting policies and we did not make any changes in those policies during the nine months ended September 30, 2011.

Results of Operations — Three months ended September 30, 2011 compared to the three months ended September 30, 2010

Revenue


	Three Months Ended
	September 30,
	2011		Change			2010
	(Dollars in thousands)
Income on financing leases	$	9,306		5.9	%	$	8,790
Rental income		2,192		14.3			1,917
Income on service contracts		97		(21.8	)		124
Loss and damage waiver fees		1,241		7.5			1,154
Service fees and other income		935		2.5			912

Total revenues	$	13,771		6.8	%	$	12,897

Our lease contracts are accounted for as financing leases. At origination, we record the gross lease receivable, the estimated residual value of the leased equipment, initial direct costs incurred and the unearned lease income. Unearned lease income is the amount by which the gross lease receivable plus the estimated residual value exceeds the cost of the equipment. Unearned lease income and initial direct costs incurred are amortized over the related lease term using the interest method. Other revenues such as loss and damage waiver fees, service fees relating to the leases and contracts, and rental revenues are recognized as they are earned.

Total revenues for the three months ended September 30, 2011 were $13.8 million, an increase of $0.9 million, or 6.8%, from the three months ended September 30, 2010. The overall increase was due to an increase of $0.5 million in income on financing leases and an increase of $0.3 million in rental income. Other revenue components increased by $0.1 million. The increase in income on financing leases is a result of the continued growth in new lease originations. The increase in rental income is a result of TimePayment lease contracts coming to term and converting to rental status offset by the attrition of LeaseComm rental contracts.

Selling, General and Administrative


	Three Months Ended
	September 30,
	2011			Change			2010
	(Dollars in thousands)
Selling, general and administrative	$	3,900			16.2	%	$	3,356
As a percent of revenue		28.3	%					26.0	%

Our selling, general and administrative (SG&A) expenses include costs of maintaining corporate functions including accounting, finance, collections, legal, human resources, sales and underwriting, and information systems. SG&A expenses also include service fees and other marketing costs associated with our portfolio of leases and rental contracts. For the three months ended September 30, 2011, SG&A expenses increased by $0.5 million over the same period in the prior year. The increase is primarily due to increases in compensation related expenses as a result of increases in employee head count as well as increased rent expense associated with our new California office location. Headcount as of September 30, 2011 was 133 as compared to 111 at the same period in 2010.

Provision for Credit Losses


	Three Months Ended
	September 30,
	2011			Change			2010
	(Dollars in thousands)
Provision for credit losses	$	4,517			(9.1)	%	$	4,969
As a percent of revenue		32.8	%					38.5	%

We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses in our portfolio. Our provision for credit losses decreased by $0.5 million, or 9.1%, for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010, while net charge-offs decreased by 21.9% to $4.2 million. The 90-day delinquent lease payments receivable on an exposure basis decreased by 1.6% to $19.6 million at September 30, 2011 compared to $19.9 million at September 30, 2010. The decrease in the provision reflects improvements in delinquency levels and reductions in the level of net charge-offs in the lease portfolio.

Depreciation and Amortization


	Three Months Ended
	September 30,
	2011			Change			2010
	(Dollars in thousands)
Depreciation — fixed assets	$	134			(56.6)	%	$	309
Depreciation — rental equipment		739			75.1			422

Total depreciation and amortization	$	873			19.4	%	$	731

As a percent of revenue		6.3	%					5.7	%

Depreciation and amortization expense consists of depreciation on fixed assets and rental equipment, and the amortization of service contracts. Fixed assets are recorded at cost and depreciated over their expected useful lives. Certain rental contracts are originated as a result of the renewal provisions of our lease agreements where at the end of lease term, the customer may elect to continue to rent the equipment on a month-to-month basis. The rental equipment is recorded at its residual value and depreciated over a term of 12 months. This term represents the estimated life of a previously leased piece of equipment and is based upon our historical experience. In the event the contract terminates prior to the end of the 12 month period, the remaining net book value is expensed.

Depreciation expense on rental contracts increased by $0.3 million for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010. The increase in depreciation is due to an increase in the TimePayment lease contracts coming to term and converting to rentals. Depreciation of property and equipment decreased by $0.2 million for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010 primarily due to the abandonment of a proposed software platform and the related depreciation of costs capitalized in connection with that project in 2010.

Interest Expense


	Three Months Ended
	September 30,
	2011			Change			2010
	(Dollars in thousands)
Interest	$	700			(5.8)	%	$	743
As a percent of revenue		5.1	%					5.8	%

We pay interest on borrowings under our revolving line of credit. Interest expense decreased by $43,000 for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010. Interest expense remained relatively flat as increases in the amounts outstanding under our revolving line of credit were offset by reductions in the interest rate being charged as our line of credit since July 2010, is no longer subject to a minimum rate. At September 30, 2011, the outstanding balance under our revolving line of credit was $60.5 million compared to a balance of $60.0 million at September 30, 2010.

Provision for Income Taxes


	Three Months Ended
	September 30,
	2011			Change			2010
	(Dollars in thousands)
Provision for income taxes	$	1,456			22.1	%	$	1,192
As a percent of revenue		10.6	%					9.2	%
As a percent of income before taxes		38.5	%					38.5	%

The provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets, 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 recorded on the balance sheet. We then assess the likelihood that deferred tax assets will be recovered from future taxable income or tax carry-back availability and to the extent we believe recovery is more likely than not, a valuation allowance is unnecessary. The provision for income taxes increased by $264,000 for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010. This increase resulted primarily from the $683,000 increase in pre-tax income for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.

As of September 30, 2011 we had a liability of $17,000 for unrecognized tax benefits and a liability of $4,000 for accrued interest and penalties related to various state income tax matters. Of these amounts, approximately $14,000 would impact our effective tax rate after a $7,000 federal tax benefit for state income taxes. It is reasonably possible that the total amount of unrecognized tax benefits may change significantly within the next 12 months; however at this time we are unable to estimate the change.

Our federal income tax returns are subject to examination for tax years ended on or after December 31, 2008 and our state income tax returns are subject to examination for tax years ended on or after December 31, 2007.

Other Operating Data

Dealer funding was $19.6 million for the three months ended September 30, 2011, an increase of $271,000 or 1.4%, compared to the three months ended September 30, 2010. We continue to concentrate on our business development efforts, which include increasing the size of our vendor base and sourcing a larger number of applications from those vendors. Receivables due in installments, estimated residual values, net investment in service contracts and net investment in rental contracts increased from $218.9 million at June 30, 2011 to $221.8 million at September 30, 2011. Net cash provided by operating activities increased by $2.0 million, or 10.2%, to $21.2 million during the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.

Results of Operations — Nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

Revenue


	Nine Months Ended
	September 30,
	2011		Change			2010
	(Dollars in thousands)
Income on financing leases	$	27,543		8.3	%	$	25,421
Rental income		6,271		8.2			5,795
Income on service contracts		308		(22.4	)		397
Loss and damage waiver fees		3,662		8.4			3,377
Service fees and other income		2,798		(1.7	)		2,846

Total revenues	$	40,582		7.3	%	$	37,836

Total revenues for the nine months ended September 30, 2011 were $40.6 million, an increase of $2.7 million, or 7.3%, from the nine months ended September 30, 2010. The overall increase was due to an increase of $2.1 million in income on financing leases, an increase of $0.4 million in rental income, and a $0.2 million increase in fees and other income partially offset by a decrease of $89,000 in income on service contracts. The increase in income on financing leases is a result of the continued growth in our lease portfolio. The increase in rental income is the result of TimePayment lease contracts coming to term and converting to rentals offset by attrition of LeaseComm rental contracts. Service contract revenue continues to decline since we have not been actively funding new service contracts.

Selling, General and Administrative


	Nine Months Ended
	September 30,
	2011			Change			2010
	(Dollars in thousands)
Selling, general and administrative	$	11,890			16.9	%	$	10,167
As a percent of revenue		29.3	%					26.9	%

Our selling, general and administrative (SG&A) expenses include costs of maintaining corporate functions including accounting, finance, collections, legal, human resources, sales and underwriting, and information systems. SG&A expenses also include service fees and other marketing costs associated with our portfolio of leases and rental contracts. SG&A expenses increased by $1.7 for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010. The increase was primarily driven by increases in payroll and payroll taxes of $945,000, an increase in employee benefits of $359,000 and an increase of $192,000 in rent expense associated with the opening of our California office.

Provision for Credit Losses


	Nine Months Ended
	September 30,
	2011			Change			2010
	(Dollars in thousands)
Provision for credit losses	$	13,520			(22.6	)%	$	17,462
As a percent of revenue		33.3	%					46.2	%

We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses in our portfolio. Our provision for credit losses decreased by $3.9 million, or 22.6%, for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010, while net charge-offs decreased by 26.5% to $13.5 million. The 90-day delinquent lease payments receivable on an exposure basis decreased by 1.6% to $19.6 million at September 30, 2011 compared to $19.9 million at September 30, 2010. The decrease in the provision for credit losses reflects an improvement in delinquency levels and reduction in charge off levels which is partially offset by the growth in receivables associated with the new lease originations.

Depreciation and Amortization


				Nine Months Ended
	September 30,
	2011				Change			2010
	(Dollars in thousands)
Depreciation — fixed assets	$	375				(30.0	)%	$	536
Depreciation — rental equipment		1,962				78.9			1,097

Total depreciation and amortization	$	2,337				43.1	%	$	1,633

As a percent of revenue		5.8	%						4.3	%

Depreciation and amortization expense consists of depreciation on fixed assets and rental equipment, and the amortization of service contracts. Fixed assets are recorded at cost and depreciated over their expected useful lives. Certain rental contracts are originated as a result of the renewal provisions of our lease agreements where at the end of lease term, the customer may elect to continue to rent the leased equipment on a month-to-month basis. The rental equipment is recorded at its residual value and depreciated over a term of 12 months. This term represents the estimated life of a previously leased piece of equipment and is based upon our historical experience. In the event the contract terminates prior to the end of the 12 month period, the remaining net book value is expensed.

Depreciation expense on rental contracts increased by $0.9 million for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010. The increase in depreciation is due primarily to the increase in the number of TimePayment lease contracts coming to term and converting to rentals. Depreciation and amortization of property and equipment decreased by $161,000 for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010 primarily due to the abandonment of a proposed software platform and the related depreciation of costs capitalized in connection with that project in 2010.

Interest Expense


	Nine Months Ended
	September 30,
	2011			Change			2010
	(Dollars in thousands)
Interest	$	2,043			(16.2	)%	$	2,439
As a percent of revenue		5.0	%					6.4	%

We pay interest on borrowings under our revolving line of credit. Interest expense decreased by $0.4 million for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010. This decrease resulted primarily from reductions in the interest rate being charged as our line of credit since July 2010, is no longer subject to a minimum rate. At September 30, 2011, the outstanding balance under our revolving line of credit was $60.5 million compared to $60.0 million, at September 30, 2010.

Provision for Income Taxes


	Nine Months Ended
	September 30,
	2011			Change			2010
	(Dollars in thousands)
Provision for income taxes	$	4,155			75.8	%	$	2,363
As a percent of revenue		10.2	%					6.2	%
As a percent of income before taxes		38.5	%					38.5	%

The provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets, 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 recorded on the balance sheet. We then assess the likelihood that deferred tax assets will be recovered from future taxable income or tax carry-back availability and to the extent we believe recovery is more likely than not, a valuation allowance is unnecessary. The provision for income taxes increased by $1.8 million for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010. This increase resulted primarily from the $4.7 million increase in pre-tax income.

As of December 31, 2010, we had a liability of $15,000 for unrecognized tax benefits and a liability of $6,000 for accrued interest and penalties related to various state income tax matters. As of September 30, 2011 we had a liability of $17,000 for unrecognized tax benefits and a liability of $4,000 for accrued interest and penalties. Of these amounts, approximately $14,000 would impact our effective tax rate after a $7,000 federal tax benefit for state income taxes. The change in the unrecognized tax benefit relates to the closing of an audit and the opening of a new one. It is reasonably possible that the total amount of unrecognized tax benefits may change significantly within the next 12 months; however, at this time we are unable to estimate the change.

Other Operating Data

Dealer funding was $56.7 million for the nine months ended September 30, 2011, representing a decrease of $1.7 million or 2.9%, compared to the nine months ended September 30, 2010. We continue to concentrate on our business development efforts, which include increasing the size of our vendor base and sourcing a larger number of applications from those vendors. Receivables due in installments, estimated residual values, net investments in service contracts and investment in rental contracts increased from $215.7 million at December 31, 2010 to $221.8 million at September 30, 2011. Net cash provided by operating activities increased by $8.7 million, or 16.1%, to $62.9 million during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.

Exposure to Credit Losses

The amounts in the table below represent the balance of delinquent receivables on an exposure basis for all leases, rental contracts, and service contracts in our portfolio. An exposure basis aging classifies the entire receivable based on the invoice that is the most delinquent. For example, in the case of a rental or service contract, if a receivable is 90 days past due, all amounts billed and unpaid are placed in the over 90 days past due category. In the case of lease receivables, where the minimum contractual obligation of the lessee is booked as a receivable at the inception of the lease, if a receivable is 90 days past due, the entire receivable, including all amounts billed and unpaid as well as the minimum contractual obligation yet to be billed, will be placed in the over 90 days past due category.


(dollars in thousands)	September 30, 2011				December 31, 2010
Current	$	167,040	85.3	%	$	160,674	84.1	%
31-60 days past due		4,926	2.5			6,142	3.2
61-90 days past due		4,373	2.2			4,369	2.3
Over 90 days past due		19,625	10.0			19,882	10.4

Gross receivables due in installments	$	195,964	100.0	%	$	191,067	100.0	%

Liquidity and Capital Resources

General

Our lease and finance business is capital-intensive and requires access to substantial credit to fund lease originations. Since inception, we have funded our operations primarily through borrowings under our credit

facilities, on-balance sheet securitizations, the issuance of subordinated debt, free cash flow and our initial public offering completed in February 1999. We will continue to require significant additional capital to maintain and expand our funding of leases and contracts, as well as to fund any future acquisitions of leasing companies or portfolios. In the near term, we expect to finance our business utilizing the cash on hand and our revolving line of credit which matures in August 2014. Additionally, our uses of cash include the payment of interest and principal on borrowings, selling, general and administrative expenses, income taxes and capital expenditures.

For the nine months ended September 30, 2011 and 2010, our primary sources of liquidity were cash provided by operating activities and borrowings on our revolving line of credit. We generated cash flow from operations of $62.9 million for the nine months ended September 30, 2011 compared to $54.2 million for the nine months ended September 30, 2010. At September 30, 2011, we had approximately $60.5 million outstanding under our revolving credit facility and had available borrowing capacity of approximately $39.5 million as described below.

We used net cash in investing activities of $57.9 million during the nine months ended September 30, 2011 and $59.1 million for the nine months ended September 30, 2010. Investing activities primarily relate to the origination of leases and the increase in cash used is consistent with our focused and targeted sales and marketing effort.

Net cash used in financing activities was $4.9 million for the nine months ended September 30, 2011 and net cash provided by financing activities was $5.0 million for the nine months ended September 30, 2010. Financing activities primarily consist of the borrowings and repayments under our revolving line of credit and dividend payments.

The maturity date of our revolving line of credit is August 2014, at which time the outstanding loan balance plus interest becomes due and payable. At our option upon maturity, the unpaid principal balance may be converted to a six-month term loan.

Borrowings

We utilize our credit facility to fund the origination and acquisition of leases that satisfy the eligibility requirements established pursuant to the facility. Borrowings outstanding consist of the following:

September 30, 2011

December 31, 2010

Maximum

Amounts

Interest

Unused

Facility

Amounts

Interest

Unused

Facility

(dollars in 000)

Outstanding

Rate

Capacity

Amount

Outstanding

Rate

Capacity

Amount

Revolving credit facility⁽¹⁾

60,527

3.53%-4.50%

39,473

100,000

62,650

3.52%-4.50%

37,350

100,000


(1)		The unused capacity is subject to the borrowing base formula.

On August 2, 2007, we entered into a three-year revolving line of credit with a bank syndicate led by Sovereign Bank (“Sovereign”) based on qualified TimePayment lease receivables. The total commitment under the facility was originally $30 million, and was subsequently increased to $60 million in July 2008, to $85 million in February 2009, and to $100 million in July 2010. Outstanding borrowings are collateralized by eligible lease contracts and a security interest in all of our other assets. Prior to the July 2010 amendment, outstanding borrowings bore interest at Prime plus 1.75% or at a London Interbank Offered Rate (“LIBOR”) plus 3.75%, in each case subject to a minimum rate of 5.00%. Following the July 2010 amendment, outstanding borrowings bore interest at Prime plus 1.25% or LIBOR plus 3.25%, without being subject to any minimum rate. In October 2011 we signed an amendment that further reduced the interest rate to Prime plus 0.75% or LIBOR plus 2.75. Under the terms of the facility, loans are Prime Rate Loans, unless we elect LIBOR Loans. If a LIBOR Loan is not renewed at maturity it automatically converts to a Prime Rate Loan. As a part of the October 2011 amendment, the maturity date of the facility was extended to August 2, 2014. At our option upon maturity, the unpaid principal balance may be converted to a six-month term loan. At September 30, 2011, $57.0 million of our loans were LIBOR Loans and $3.5 million of our loans were Prime Rate Loans. The interest rate on the revolving line of credit was between 3.53% and 4.5% at September 30, 2011. As of September 30, 2011, the qualified lease receivables eligible under the borrowing base exceeded the $100 million revolving line of credit.

Dividends

On October 25, 2011, we declared a dividend of $0.06 per share payable on November 15, 2011 to stockholders of record on November 4, 2011. On July 21, 2011, we declared a dividend of $0.05 per share payable on August 15, 2011 to shareholders of record on August 1, 2011. On April 21, 2011, we declared a dividend of $0.05 per share payable on May 13, 2011 to stockholders of record on May 2, 2011. On January 21, 2011 we declared a dividend of $0.05 per share payable on February 15, 2011 to stockholders of record on February 1, 2011.

On January 22, 2010, we declared a dividend of $0.05per share payable on February 15, 2010 to shareholders of record on February 1, 2010. On April 20, 2010, we declared a dividend of $0.05 per share payable on May 14, 2010 to shareholders of record on May 3, 2010. On July 19, 2010, we declared a dividend of $0.05 per share payable on August 13, 2010 to shareholders of record on July 29, 2010

Future dividend payments are subject to ongoing review and evaluation by our Board of Directors. The decision as to the amount and timing of future dividends, if any, will be made in light of our financial condition, capital requirements and growth plans, as well as our external financing arrangements and any other factors our Board of Directors may deem relevant. We can give no assurance as to the amount and timing of future dividends.

Share repurchases

On August 10, 2010, our Board of Directors approved a common stock repurchase program under which we are authorized to purchase up to 250,000 of our outstanding shares from time to time. The repurchases may take place in either the open market or through block trades. The repurchase program will be funded by our working capital and may be suspended or discontinued at anytime. During the quarter ended March 31, 2011 we repurchased and retired 51,883 shares of our common stock under our stock buyback program, at a total cost of $240,000. During the quarters ended September 30, 2011 and June 30, 2011 we did not repurchase any shares.

Contractual Obligations and Lease Commitments

Contractual Obligations

We have entered into various agreements, such as debt and operating lease agreements that require future payments. During the nine months ended September 30, 2011 we borrowed $76.4 million against our revolving line of credit and repaid $78.5 million. The $60.5 million of outstanding borrowings as of September 30, 2011 will be repaid by the application of TimePayment receipts and other payments to our outstanding balance.

Our future minimum cash lease payments under non-cancelable operating leases are as follows:


	2011		2012		2013		2014		2015		Thereafter
Operating lease obligations	$	139	$	622	$	644	$	638	$	595	$	1,587

Lease Commitments

We accept lease applications on a daily basis and have a pipeline of applications that have been approved, where a lease has not been originated. Our commitment to lend does not become binding until all of the steps in the lease origination process have been completed, including but not limited to the receipt of a complete and accurate lease document, all required supporting information and successful verification with the lessee. Since we fund on the same day a lease is successfully verified, we have no firm outstanding commitments to lend.

Recent Accounting Pronouncements

See Note F of the notes to the unaudited condensed consolidated financial statements for a discussion of the impact of recent accounting pronouncements.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The following discussion about our risk management activities includes forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In the normal course of operations, we also face risks that are either non-financial or non-quantifiable. Such risks principally include credit risk and legal risk, and are not represented in the analysis that follows.

The implicit yield on all of our leases and contracts is on a fixed interest rate basis due to the leases and contracts having scheduled payments that are fixed at the time of origination. When we originate or acquire leases or contracts, we base our pricing in part on the spread we expect to achieve between the implicit yield on each lease or contract and the effective interest rate we expect to incur in financing such lease or contract through our credit facility. Increases in interest rates during the term of each lease or contract could narrow or eliminate the spread, or result in a negative spread.

Given the relatively short average life of our leases and contracts, our goal is to maintain a blend of fixed and variable interest rate obligations which limits our interest rate risk. As of September 30, 2011, we had repaid all of our fixed-rate debt and had $60.5 million of outstanding variable interest rate obligations under our revolving line of credit.

Our revolving line of credit bears interest at rates which fluctuate with changes in the Prime Rate or LIBOR; therefore, our interest expense is sensitive to changes in market interest rates. The effect of a 10% adverse change in market interest rates, sustained for one year, on our interest expense would be immaterial.

We maintain an investment portfolio in accordance with our investment policy guidelines. The primary objectives of the investment guidelines are to preserve capital, maintain sufficient liquidity to meet our operating needs, and to maximize return. We minimize investment risk by limiting the amount invested in any single security and by focusing on conservative investment choices with short terms and high credit quality standards. We do not use derivative financial instruments or invest for speculative trading purposes.

ITEM 4. Controls and Procedures

Disclosure controls and procedures: As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Internal controls over financial reporting: During the fiscal quarter ended September 30, 2011, no changes were made in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

ITEM 1. Legal Proceedings

ITEM 1A. Risk Factors

For a discussion of the material risks that we face relating to our business, financial performance and industry, as well as other risks that an investor in our common stock may face, see the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010. The risks described in our Annual Report on Form 10-K and elsewhere in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended September 30, 2011 we did not repurchase any shares of our common stock under our stock buyback program.

ITEM 6. Exhibits

(a) Exhibits index


3.1		Restated Articles of Organization, as amended (incorporated by reference to Exhibit 3.1 in the Registrant’s Registration Statement on Form S-1, No. 333-56639, filed with the Securities and Exchange Commission on June 9, 1998).

3.2		Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 in the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2007).

10.1		Agreement and Amendment No. 3, dated October 12, 2011, to Amended and Restated Credit Agreement dated July 28, 2010 (incorporated by reference to Exhibit 10.1 in the Registrant’s Current Report on Form 8-K filed October 18, 2011).

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101**		The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, (ii) Condensed Consolidated Statements of Income for the three and six months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Stockholders’ Equity as of September 30, 2011 and December 31, 2010, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010, (iv) Condensed Consolidated Statements of Stockholders’ Equity as of September 30, 2011 and December 31, 2010 and 2009 and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.


*		Filed herewith

**		Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections


	Page
Part I- FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets - September 30, 2011 and December 31, 2010		3
Condensed Consolidated Statements of Income - Three and nine months ended September 30, 2011 and 2010		4
Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2011 and the twelve months ended December 31, 2010		5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2011 and 2010		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures about Market Risk		24
Item 4. Controls and Procedures		24
Part II — OTHER INFORMATION
Item 1. Legal Proceedings		25
Item 1A. Risk Factors		25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 6. Exhibits		26
Signatures		27
EX-31.1
EX-31.2
EX-32.1
EX-32.2
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


	MicroFinancial Incorporated
	By:	/s/ Richard F. Latour
		President and Chief Executive Officer


	By:	/s/ James R. Jackson Jr.
		Vice President and Chief Financial Officer

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