Bancorp, Inc. - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: March 31, 2005

	OR

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

For the transition period from:___________ to_____________

Commission file number: 51018

THE BANCORP, INC.
(Exact name of registrant as specified in its charter)

Delaware		23-3016517

(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

405 Silverside Road Wilmington, DE 19809

(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (302) 385-5000

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of May 9, 2005 there were 12,238,499 outstanding shares of Common Stock, $1.00 par value.

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PART I – FINANCIAL INFORMATION
Item 1. Financial statements

The Bancorp, Inc.
Consolidated Balance Sheets
(in thousands)

			March 31,			December 31,
			2005			2004

			(unaudited)
ASSETS
Cash and cash equivalents
	Cash and due from banks		$	14,269		$	10,184
	Interest bearing deposits			1,029			1,028
	Federal funds sold			34,055			8,291

		Total cash and cash equivalents		49,353			19,503

	Investment securities, available-for-sale			98,675			120,252
	Loans, net of deferred loan costs			497,782			427,881
	Allowance for loan and lease losses			(4,101	)		(3,593	)

	Loans, net			493,681			424,288
	Premises and equipment, net			3,267			2,958
	Accrued interest receivable			3,096			3,439
	Goodwill			2,943			—
	Other assets			7,589			5,839

		Total assets	$	658,604		$	576,279


LIABILITIES
Deposits
	Demand (non-interest bearing)		$	68,225		$	51,832
	Savings, money market and interest checking			200,595			153,417
	Time deposits			191,623			166,682
	Time deposits, $100,000 and over			23,647			16,150

		Total deposits		484,090			388,081

Securities sold under agreements to repurchase				6,837			5,052
Federal Home Loan Bank advances				40,000			55,000
Accrued interest payable				320			407
Subordinated debt				—			5,413
Other liabilities				2,239			924

		Total liabilities		533,486			454,877


SHAREHOLDER'S EQUITY
	Preferred stock -authorized 5,000,000 shares of $0.01 par value; issued shares 1,035,513 and 1,133,237 for March 31, 2005 and December 31, 2004, respectively			10			11
	Common stock - authorized, 20,000,000 shares of $1.00 par value; issued shares 12,238,499 and 11,888,061 for March 31, 2005 and December 31, 2004, respectively			12,238			11,888
	Additional paid-in capital			121,337			117,668
	Accumulated deficit			(7,572	)		(7,934	)
	Accumulated other comprehensive loss			(895	)		(231	)

		Total shareholder's equity		125,118			121,402

		Total liabilities and shareholder's equity	$	658,604		$	576,279

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The Bancorp Inc.
Consolidated Statements of Income

			For the three months
			ended March 31,
			2005			2004

			(unaudited)
Interest income
	Loans, including fees		$	7,733		$	3,782
	Investment securities			1,281			799
	Federal funds sold			134			97
	Interest bearing deposits			—			5

				9,148			4,683

Interest expense
	Deposits			2,189			1,229
	Securities sold under agreements to repurchase			20			—
	Federal Home Loan Bank advances			331			26
	Subordinated debt			138			138

				2,678			1,393


Net interest income				6,470			3,290
Provision for loan and lease losses				500			332

	Net interest income after provision for loan and lease losses			5,970			2,958


Non-interest income
	Service fees on deposit accounts			141			191
	Merchant credit card deposit fees			265			172
	Gain on sales of investment securities			67			101
	Leasing income			355			62
	Other			186			182

		Total non-interest income		1,014			708


Non-interest expense
	Salaries and employee benefits			2,442			1,774
	Occupancy expense			575			383
	Data processing expense			281			237
	Advertising			104			93
	Professional fees			266			92
	Other			1,204			829
	Prepayment premium on subordinated debt			1,285			—

		Total non-interest expense		6,157			3,408

	Net income before income tax			827			258
Income tax				261			—

	Net income			566			258

	Less preferred stock dividends and accretion			(204	)		(223	)
	Income allocated to Series A preferred shareholders			(45	)		(24	)

	Net income available to common shareholders		$	317		$	11

	Net income per share - basic		$	0.03		$	—

	Net income per share - diluted		$	0.03		$	—

	Weighted average shares - basic			12,195,521			7,059,894
	Weighted average shares - diluted			12,642,681			7,257,823

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The Bancorp Inc.
Statements of Changes in Shareholder's Equity
For the three months ended March 31, 2005 (unaudited) and for the year ended December 31, 2004

												Accumulated
						Additional						other
	Common		Preferred			paid-in			Accumulated			comprehensive			Comprehensive
	Stock		Stock			capital			deficit			loss			income			Total

Balance at December 31, 2003	$	2,284	$	11		$	30,369		$	(10,835	)	$	(156	)				$	21,673
Net Income										3,718					$	3,718			3,718
Warrant Exercise		1,337					12,031												13,368
Common Stock issued in reorganization		8,266					74,612												82,878
Common Stock issued from option exercise		1					8												9
Cash dividends on Series A preferred stock										(169	)								(169	)
Stock dividends on Series A preferred stock							200			(200	)								—
Accretion of series A preferred stock							448			(448	)								—
Other comprehensive loss, net of
reclassification adjustments and tax		—		—			—			—			(75	)		(75	)		(75	)

Total other comprehensive income															$	3,643

Balance at December 31, 2004 (unaudited)		11,888		11			117,668			(7,934	)		(231	)					121,402

Net Income										566									566
Common Stock issued during the acquisition of
Mears Leasing		253					3,716												3,969
Preferred Shares converted to Common Shares		97		(1	)		(96	)											—
Cash dividends on Series A preferred stock																			(155	)
Accretion of Series A Preferred stock							49			(49	)								—
Other comprehensive loss, net of
reclassification adjustments and tax		—		—			—			—			(664	)		(664	)		(664	)

															$	2,979

Balance at March 31, 2005 (unaudited)	$	12,238	$	10		$	121,337		$	(7,572	)	$	(895	)				$	125,118

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The Bancorp, Inc.
Statements of Cash Flows
(in thousands)
(unaudited)

					For the three months ended
					March 31,
					2005			2004

Operating activities
	Net income			$	566		$	258
	Adjustments to reconcile net income to net cash provided by operating activities
		Depreciation and amortization			258			180
		Provision for loan and lease losses			500			332
		Net amortization (accretions) of premium (discount)			(37	)		(9	)
		Net gain on sales of investment securities			(67	)		(101	)
		Decrease (increase) in accrued interest receivable			343			(495	)
		Decrease in interest payable			(87	)		(57	)
		Increase in other assets			(456	)		(832	)
		Increase in other liabilities			472			4,961

			Net cash provided by operating activities		1,492			4,237


Investing activities
	Purchase of investment securities				(22,208	)		(109,015	)
	Proceeds from sales of investment securities				2,159			1,270
	Proceeds from calls/maturity of investment securities				40,879			1,049
	Cash paid in excess of cash equivalents from acquisition				(666	)		—
	Net increase in loans				(63,784	)		(42,446	)
	Purchases of premises and equipment				(385	)		(463	)

			Net cash used in investing activities		(44,005	)		(149,605	)


Financing activities
	Net increase in deposits				96,009			43,366
	Net increase in securities sold under agreements to repurchase				1,785			—
	Federal Home Loan Bank advances				—			20,000
	Repayment of Federal Home Loan advances				(15,000	)		—
	Repayment of notes payable				(5,026	)		—
	Cash dividends on Series A preferred stock				(155	)		—
	Net proceeds from sale of common stock				—			82,883
	Redemption of subordinated debentures				(5,250	)		—

			Net cash provided by financing activities		72,363			146,249


			Net increase in cash and cash equivalents		29,850			881

Cash and cash equivalents, beginning of year					19,503			42,183


Cash and cash equivalents, end of period				$	49,353		$	43,064

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Note 1. Significant Accounting Policies

Basis of Presentation

The financial statements of The Bancorp, Inc. (Company) as of March 31, 2005 and for the three month periods ended March 31, 2005 and 2004 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, these interim financial statements include all necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The results of operations for the three month period ended March 31, 2005 may not necessarily be indicative of the results of operations for the full year ending December 31, 2005.

Note 2. Stock-based Compensation

The Company accounts for its stock options under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which contains a fair value-based method for valuing stock-based compensation that entities may use that measures compensation cost at the grant date based on the fair value of the award. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied.

At March 31, 2005, the Company had one stock-based compensation plan, which is more fully described in its Form 10-K report. The Company accounts for that plan under the recognition and measurement principles of APB Opinion No. 25 and related interpretations. Stock-based employee compensation costs are not reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 for the Company plan to stock-based employee compensation (in thousands).

	For the three months ended

	March 31,			March 31,
	2005			2004

Net income, as reported	$	566		$	258
Less stock-based compensation costs under fair value based method for all awards		(1,769	)		(758	)

Pro forma net (loss) income		(1,203	)		(500	)
Less preferred stock dividends and accretion		(204	)		(223	)

Net loss available to common shareholders	$	(1,407	)	$	(723	)

Net income per share basic, as reported	$	0.03		$	—

Net (loss) per share basic, pro forma	$	(0.11	)	$	(0.10	)

Net income per share diluted, as reported	$	0.03		$	—

Net (loss) per share diluted, pro forma	$	(0.11	)	$	(0.10	)

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Stock options outstanding were 1,385,477 and 1,101,101 at March 31, 2005 and 2004, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2005: expected volatility of 38%, risk-free interest rate of 4.26% and expected lives of 10 years.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123(R), all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statemen ts. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. SFAS No. 123(R) is effective for public companies as of the beginning of the first fiscal year that begins after June 15, 2005. All public companies that used the fair-value-based method for either recognition or disclosure under SFAS No. 123 will apply SFAS No. 123(R) using a modified method of prospective application. Under this transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. The impact of this new standard, if it had been in effect, on the net earnings and related per share amounts for the quarters ended March 31, 2005 and 2004 is disclosed in the table above.

On March 29, 2005, the SEC released Staff Accounting Bulletin 107, Share Based Payments (SAB 107). The interpretations in SAB 107 express views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB 107 provides interpretive guidance related to the interaction between Statement 123(R) and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. On April 14, 2005, the SEC adopted a new rule amending the effective dates of SFAS 123(R) for public companies by issuing Release 33-8568. The new rule allows registrants to implement SFAS 123(R) at the beginning of their next fiscal year, instead of the next interim period, that beings after June 15, 2005. SFAS 123(R) will therefore be effective for the Company beginning the first quarter of 2006. The Company is evaluating the impact that the implementation of SAB 107 and SFAS No. 123 (R) will have on future option grants.

Note 3. Earnings Per Share

Basic earnings per share for a particular period of time is calculated by dividing net income by the weighted average number of common shares outstanding during that period.

Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares and common share equivalents. The Company’s only outstanding “common share equivalents” are options to purchase its common stock.

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The following schedule shows the Company’s earnings per share for the periods presented:

	For the three months ended March 31, 2005

	Income		Shares	Per share
	(numerator)		(denominator)	amount

	(dollars in thousands)
Basic earnings per share
Net income available to common shareholders	$	317	12,195,521	$	0.03
Effect of dilutive securities
Options		—	283,009		—
Warrants		—	164,151		—

Diluted earnings per share
Net income available to common stockholders
plus assumed conversions	$	317	12,642,681	$	0.03

Stock options of 289,000 for $14.24 per share were outstanding at March 31, 2005 but were not included in the weighted average shares because the exercise price was greater than the market price.

	For the three months ended March 31, 2004

	Income		Shares	Per share
	(numerator)		(denominator)	amount

	(dollars in thousands)
Basic earnings per share
Net income available to common shareholders	$	11	7,059,894	$	—
Effect of dilutive securities
Options		—	48,172		—
Warrants		—	178,216		—

Diluted earnings per share
Net income available to common stockholders
plus assumed conversions	$	11	7,286,282	$	—

Note 4. Investment securities

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities available-for-sale are summarized as follows (in thousands):

	March 31, 2005

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value

U.S. Government agency securities	$	59,925	$	—	$	—		$	59,925
Mortgage backed securities		7,289		9		(1,501	)		5,797
Other securities		32,818		329		(194	)		32,953

	$	100,032	$	338	$	(1,695	)	$	98,675

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	December 31, 2004

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value

U.S. Government agency securities	$	80,000	$	—	$	(247	)	$	79,753
Mortgage backed securities		7,319		8		(427	)		6,900
Other securities		33,284		471		(156	)		33,599

	$	120,603	$	479	$	(830	)	$	120,252

The amortized cost and fair value of the Company’s investment securities available-for-sale at March 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	cost		value

Due before one year	$	3,000	$	2,993
Due after one year through five years		25,639		25,607
Due after five years through ten years		5,895		5,726
Due after ten years		63,238		62,089
Federal Home Loan and Atlantic
Central Bankers Bank stock		2,260		2,260

	$	100,032	$	98,675

Note 5. Loans

Major classifications of loans are as follows (in thousands):

	March 31,			December 31,
	2005			2004
	Amount			Amount

		(unaudited)
Commercial	$	90,264		$	89,327
Commercial mortgage		149,883			140,755
Construction		116,014			97,239

Total commercial loans		356,161			327,321
Direct financing leases, net		72,566			44,795
Residential mortgage		43,148			31,388
Consumer loans and others		26,488			24,894

		498,363			428,398
Unamortized costs		(581	)		(517	)

Total loans, net of unamortized fees and costs	$	497,782		$	427,881

Note 6. Transaction with affiliates

The Company purchased a total of $2,654,000 in loans from Resource America, Inc. in 2001. The outstanding balance of the loans purchased from Resource America was $1,969,000 at December 31, 2004. The loan was paid in full on February 25, 2005. The Chairman and the

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Chief Executive Officer of the Company are the brother and parent, respectively, of the Chief Executive Officer of Resource America and the son and spouse, respectively, of Resource America's Chairman.

The Company paid $16,900 and $9,200 to Cohen Bros. & Company (Cohen Bros.) for investment securities brokerage services performed for the periods ended March 31, 2005 and March 31, 2004. The Chairman of the Company is the principal of Cohen Bros. Financial LLC which owns 100% of Cohen Bros. & Company. A member of the Company’s Board of Directors is the Chief Operating Officer of Cohen Bros. & Company.

The Company entered into a sublease for office space in Philadelphia, Pennsylvania and a technical support agreement with RAIT Investment Trust (RAIT) commencing in October 2000. The Chief Executive Officer of RAIT is the Chief Executive Officer of the Company. Under the sublease, RAIT pays the Company rent equal to 45% of the rent paid by the Company and an allocation of common area expenses. Under the technical support agreements, which commenced in January 2001, the Company also provides technical support for RAIT for a fee of $5,000 a month. RAIT paid the Bank $15,000 for such services for the three months ended March 31, 2005 and 2004. RAIT paid the Company approximately $62,000 for rent for each of the three months ended March 31, 2005 and 2004.

The Company also has a sublease for office space in Philadelphia, Pennsylvania with Cohen Bros. commencing in July 2002 under which Cohen Bros. pays rent of $6,761 per month. Cohen Bros. paid $20,283 in rent for the three months ended March 31, 2005 and 2004.

In July 2002, Cohen Bros. entered into an agreement with the Company under which Cohen Bros. pays fees of $1,000 per month for technical support and $3,600 per month for telephone system support services. Technical and telephone support fees for Cohen Bros. were $13,800 for the periods ended March 31, 2005 and 2004.

The Company maintains deposits for various affiliated companies totaling approximately $31,441,000 and $41,793,000 as of March 31, 2005 and December 31, 2004, respectively. The majority of these deposits are short-term in nature and rates are consistent with market rates.

The Company has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons on the same terms as those prevailing for comparable transactions with other borrowers. At March 31, 2005, these loans were current as to principal and interest payments and, in the opinion of management, do not involve more than normal risk of collectibility. At March 31, 20015 loans to these related parties amounted to $1,804,000.

Note 7. Reclassifications

Certain reclassifications to the merchant credit card fees have been made to the 2004 financial statements to conform to the 2005 presentation. The Company has reclassed the merchant expense to show the net merchant credit card fees in non-interest income.

Note 8. Acquisitions

On January 3, 2005, the Company completed the acquisition of Mears Motor Livery Corp. (Mears) pursuant to which Mears was merged into the Company. Mears shareholders had received $1.0 million in cash and 253,126 shares of the Company’s stock. The total purchase price was $4.9 million. As a result of the acquisition, the

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Company recorded $2.9 million in goodwill however, management is currently completing its analysis and anticipates additional adjustments in the second quarter. The transaction was accounted for under the purchase method of accounting. The results of operations include Mears results of operations from January 3, 2005 forward.

Note 9. Repayment of Subordinated Debentures

In March 2005, the Company redeemed the trust preferred securities at their face value including accrued interest through March 31, 2005 and a prepayment premium representing the discounted present value of dividends payable on the trust preferred securities through June 12, 2007, the date the Company could call these securities. The aggregate redemption price was $6.1 million. The Company recorded an expenses of approximately $1.3 million for the three months ended March 31, 2005, reflecting a prepayment premium of $819,000 and the remaining unamortized offering expenses of $466,000. The proceeds for the redemption came from the Company’s repayment of the subordinated debenture of $5.4 million.

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Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward-Looking Statements

When used in this Form 10-Q, the words “believes” “anticipates” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in Item 1, under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2004. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

In the following discussion we provide information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” included in our Annual Report on Form 10-K for the year ended December 31, 2004.

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

We believe that the determination of our allowance for loan and lease losses involves a higher degree of judgment and complexity than our other significant accounting policies. We determine our allowance for loan and lease losses with the objective of maintaining a reserve level we believe to be sufficient to absorb our estimated probable credit losses. We base our determination of the adequacy of the allowance on periodic evaluations of our loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amount of loss we may incur on a defaulted loan, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and historical loss experience. We also evaluate economic conditions, uncertainties in estimating l osses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from our estimates, we may need additional provisions for loan losses that would adversely impact our earnings.

We capitalize costs associated with internally developed and purchased software systems for new products and enhancements to existing products that have reached the application stage and meet recoverability tests. Capitalized costs include external direct costs of materials and services used in developing or obtaining internal-use software, payroll and payroll related expenses for employees who are directly associated with and devote time to internal-use software

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projects and interest costs incurred, if material, while developing internal-use software. Capitalization of these costs begins when we complete the preliminary project stage, and ceases no later than the point at which the project is substantially complete and ready for its intended purpose.

We account for income taxes under the liability method whereby we determine deferred tax assets and liabilities based on the difference between the carrying values on our financial statements and the tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

Results of Operations

Net Income: Net income for the first quarter of 2005 was $566,000, compared to net income of $258,000 for the first quarter of 2004. Diluted earnings per share were $0.03 in the first quarter of 2005. Return on average assets was .37% and return on average equity was 1.85% for the first quarter of 2005. During the first quarter of 2005, we redeemed our trust preferred securities which resulted in a one-time charge to earnings of approximately $1.3 million reflecting a premium of $819,000 and unamortized offering expenses of $466,000. The aggregate redemption price was $6.1 million.

Net Interest Income: Our interest income for the first quarter of 2005 increased to $9.1 million from $4.7 million in the first quarter of 2004, while our net interest income increased to $6.5 million from $3.3 million. Our average loans increased to $ 453.2 million for the first quarter of 2005 from $245.3 million for the first quarter of 2004. The primary reason for the increases in our interest income and net interest income was our ability to increase our earning assets through continued organic growth of our loan portfolio, as well as the acquisition of Mears in January 2005 which increased our portfolio of direct financing leases.

Our net interest margin (representing the spread between our cost of funds and the rates we receive on our interest-earning assets) for the first quarter 2005 increased to 4.44% from 3.75% for the first quarter of 2004, an increase of 69 basis points (.69%). The increased net interest margin resulted from the following:

•	the acquisition of Mears, whose portfolio yields were higher than our existing portfolio.

•	an increase in rates by the Federal Reserve Board which increased the rates on our variable rate and new loans, and

•	maintenance of rates we pay on deposits at previous levels.

In general, changes in rates immediately affect our variable rate loans, while deposit rates tend to take a longer period to adjust. For the first quarter of 2005 the average yield on our interest-earning assets increased to 6.27% from 5.34% for first quarter of 2004, an increase of 93 basis points (.93%). Cost of interest-bearing deposits increased to 2.42% for the first quarter of 2005 from 2.12% for the first quarter of 2004, an increase of 30 basis points (.30%). The increase in the cost of interest-bearing deposits was the result of interest rate increases by the Federal Reserve Board in the first quarter of 2005 over those prevailing in the first quarter of 2004. Average interest bearing deposits increased to $361.3 million from $231.6 million, an increase of $129.7 million or 56.0%.

Average Daily Balances. The following table presents the average daily balances of assets, liabilities and stockholders’ equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average rates, for the periods indicated:

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		Three Months ended March 31,

		2005							2004

		Average				Average			Average				Average
		Balance			Interest	Rate			Balance			Interest	Rate

		(dollars in thousands)
Assets:
Interest-earning assets:
Loans net of unearned discount	$	453,158		$	7,733	6.83	%	$	245,261		$	3,782	6.17	%
Investment securities		109,260			1,281	4.69	%		62,285			799	5.13	%
Interest bearing deposits		1,029			—	0.00	%		3,465			5	0.58	%
Federal funds sold		20,066			134	2.67	%		39,481			97	0.98	%

Net interest-earning assets		583,513			9,148	6.27	%		350,492			4,683	5.34	%
Allowance for loan and lease losses		(3,671	)						(2,037	)
Other assets		29,135							13,348

	$	608,977						$	361,803

Liabilities and Shareholders' Equity:
Deposits:
Demand (non-interest bearing)	$	64,538						$	48,279
Interest bearing deposits
Interest checking		26,006		$	68	1.05	%		22,416		$	72	1.28	%
Savings and money market		141,875			838	2.36	%		93,304			490	2.10	%
Time		193,436			1,283	2.65	%		115,924			667	2.30	%

Total interest bearing deposits		361,317			2,189	2.42	%		231,644			1,229	2.12	%
FHLB advances		50,111			331	2.64	%		7,912			26	1.31	%
Other borrowed funds		4,226			20	1.89	%		3			—	0.00	%
Subordinated debt		5,250			138	10.51	%		5,250			138	10.51	%

Net interest bearing liabilities		420,904			2,678	2.54	%		244,809			1,393	2.28	%
Other liabilities		747							83
Shareholders' equity		122,788							68,632

	$	608,977						$	361,803


Net yield on average interest earning assets				$	6,470	4.44	%				$	3,290	3.75	%

In the first quarter of 2005, average interest-earning assets increased to $583.5 million, an increase of $233.0 million, or 66.5%, from the first quarter of 2004.

Provision for Loan and Lease Losses. Our provision for loan and lease losses was $500,000 for the first quarter of 2005 compared to $332,000 for the first quarter of 2004. At March 31, 2005, our allowance for loan and lease losses amounted to $4.1 million or .82% of total loans. We believe that our allowance is adequate to cover expected losses. For more

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information about our provisions and allowance for loan and lease losses and our loss experience see “ – Allowance for Loan and Lease Losses” and “ – Summary of Loan and Lease Loss Experience,” below.

Non-Interest Income. Non-interest income, exclusive of gains on sales of investment securities, was $947,000 for the first quarter of 2005 as compared to $607,000 for the first quarter of 2004, an increase of $340,000 million or 56.0%. The gains on sales of investment securities totaled $67,000 in the first quarter of 2005 compared to a $101,000 gain on sale investment securities for the same period last year. The principal reasons for the increase of non-interest income were an increase in income from merchant credit card fees and an increase in leasing income. Our merchant credit card income was $265,000 for the first quarter of 2005, an increase of $93,000 or 54.1% as compared to the first quarter of 2004. This increase was substantially the result of one of the independent service organizations with which we have an existing relationship transferring a merchant portf olio to us from another institution. Leasing income increased $293,000 or 472.6% to $355,000 for the first three months of 2005 over the same period in 2004. The increase was the result of the acquisition of Mears and its portfolio of leases of $25.7 million in January 2005.

Non-Interest Expense. Total non-interest expense was $6.2 million for the first quarter of 2005, as compared to $3.4 million for first quarter of 2004, an increase of $2.7 million or 80.7%. Salaries and employee benefits amounted to $2.4 million for the first quarter of 2005 as compared to $1.8 million for the first quarter of 2004. The increase reflects the addition of twenty-three Mears employees as a result of the acquisition in January 2005 as well as increases in the commercial lending and affinity group staffs. In the first quarter of 2005, we redeemed our outstanding subordinated debentures, which supported our trust preferred securities, for a premium of $869,000. The redemption of the subordinated debentures also resulted in the write-off $466,000 of the unamortized offering costs from the trust preferred securities offering in 2002. The total expense associated with the redemption of the subordinated debentures in the first quarter of 2005 was $1.3 million.

Liquidity and Capital Resources

Liquidity defines our ability to generate funds to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis. We invest the funds we do not need for operation primarily in overnight federal funds.

Since commencement of operations, the primary source of funds for our financing activities have been cash inflows from net increases in deposits, which were $96.0 million in the first three months of 2005, and from an offering of common stock by our subsidiary bank in February 2004 which resulted in net proceeds of $82.9 million. We have also used sources outside of our core deposit products to fund our loan growth including the Federal Home Loan Bank and repurchase agreements. As of March 31, 2005, we had $40.0 million of outstanding Federal Home Loan Bank advances and $6.8 million in repurchase agreements.

Funding was directed primarily at cash outflows required for loans, which were $69.9 million in the first three months of 2005. At March 31, 2005, we had outstanding commitments to fund loans, including unused lines of credit, of $147.3 million.

We must comply with capital adequacy guidelines issued by the Federal Deposit Insurance Corporation, or FDIC. A bank must, in general, have a leverage ratio of 5.0%, a ratio of Tier I capital to risk-weighted assets of 6.0% and a ratio of total capital to risk-weighted assets of 10.0% in order to be considered “well capitalized.” A Tier I leverage ratio is the ratio of Tier 1 capital to

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average assets for the period. “Tier I capital” includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill. At March 31, 2005 we were “well capitalized” under banking regulations.

The following table sets forth the regulatory capital amounts and ratios for the periods indicated:

	Tier 1 capital		Tier 1 capital		Total Capital
	to average		to risk-weighted		to risk-weighted
	assets ration		assets ratio		assets ratio

As of March 31, 2005:
The Company	20.26	%	22.03	%	22.77	%
The Bancorp Bank	19.11	%	20.86	%	21.59	%
"Well capitalized" institution (under FDIC regulations)	5.00	%	6.00	%	10.00	%

As of December 31, 2004:
The Company	22.88	%	26.29	%	27.04	%
The Bancorp Bank	20.54	%	23.74	%	24.49	%
"Well capitalized" institution (under FDIC regulations)	5.00	%	6.00	%	10.00	%

Asset and Liability Management

The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of a bank’s interest margin resulting from changes in market interest rates.

We monitor and control interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as “gap analysis”). Traditional gap analysis involves arranging our interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference (or “interest rate sensitivity gap”) between the assets and liabilities that are estimated to reprice during each time period and cumulatively through the end of each time period.

Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other pressures. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net int erest income while a negative gap would tend to affect net interest income adversely.

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The following table sets forth the estimated maturity/repricing structure of our interest-earning assets and interest-bearing liabilities at March 31, 2005. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of interest-bearing demand deposits and savings deposits are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates. Therefore, 50% of the core interest checking deposits and 25% of core savings and money market deposits are shown as maturing or repricing within the “1 – 90 days” column with the remainder shown in the “1 – 3 years” column. We estimate the repricing characteristics of these deposits based on historical performance, past experience at other institutions and other deposit behavior assumptions. However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons. Payments of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing of certain categories of assets and liabilities is beyond our control as, for example, prepayments of loans and withdrawal of deposits. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels.

		1-90			91-364			1-3			3-5			Over 5
		Days			Days			Years			Years			Years

	(dollars in thousands)
Interest earning assets:
Loans net of unearned discount	$	228,329		$	19,322		$	113,190		$	54,580		$	82,361
Investments, available for sale		2,993			25,607			5,726			62,089			2,260
Interest bearing deposits		1,029			—			—			—			—
Federal funds sold		34,055			—			—			—			—

Total interest earning assets		266,406			44,929			118,916			116,669			84,621

Interest bearing liabilities:
Interest checking		15,580			—			15,580			—			—
Savings and money market		42,359			—			127,076			—			—
Time deposits		70,828			119,391			25,051
Securities sold under agreements to repurchase		6,837			—			—			—			—
Federal Home Loan Bank advances		40,000			—			—			—			—

Total interest bearing liabilities		175,604			119,391			167,707			—			—

Gap	$	90,802		$	(74,462	)	$	(48,791	)	$	116,669		$	84,621

Cumulative gap	$	90,802		$	16,340		$	(32,451	)	$	84,218		$	168,839

Gap to assets ratio		14	%		-11	%		-7	%		18	%		13	%
Cumulative gap to assets ratio		14	%		2	%		-5	%		13	%		26	%

The method used to analyze interest rate sensitivity in this table has a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same or similar time periods. The interest rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market

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rates. Additionally, the actual prepayments and withdrawals we experience when interest rates change may deviate significantly from those assumed in calculating the data shown in the table.

Financial Condition

General. Our total assets at March 31, 2005 were $658.6 million, of which our total loans were $497.8 million. At December 31, 2004 our total assets were $576.3 million, of which our total loans were $427.9 million. Our portfolio of commercial, commercial mortgage and construction loans grew $28.8 million, or 8.8%, from year-end 2004 to $356.1 million at March 31, 2005.

Investment portfolio. For detailed information on the composition and maturity distribution of our investment portfolio, see Note 3 to the Notes to Financial Statements contained in this Quarterly Report on Form 10-Q. Total investment securities decreased to $98.7 million on March 31, 2005, a decrease of $21.6 million or 17.9% from year-end 2004. Investments decreased due to a $40 million investment security being called in the first quarter of 2005. We purchased approximately $20 million in investment securities to replace the called security and the remaining funds were used to fund loan growth.

Loan Portfolio. Total loans increased to $497.8 million at March 31, 2005 from $427.9 million at December 31, 2004, an increase of $69.9 million or 16.4%.

The following table summarizes our loan portfolio by loan category for the periods indicated:

		March 31,			December 31,
		2005			2004
		Amount			Amount

		(unaudited)
Commercial	$	90,264		$	89,327
Commercial mortgage		149,883			140,755
Construction		116,014			97,239

Total commercial loans		356,161			327,321
Direct financing leases, net		72,566			44,795
Residential mortgage		43,148			31,388
Consumer loans and others		26,488			24,894

		498,363			428,398
Deferred loan costs		(581	)		(517	)

Total loans, net of deferred loan costs	$	497,782		$	427,881

Allowance for Loan and Lease Losses. Management reviews the adequacy of our allowance for loan and lease losses on at least a quarterly basis to ensure that the provision for loan losses which has been charged against earnings is in the amount necessary to maintain our allowance at a level that is appropriate, based on management’s estimate of probable losses. Our estimates of loan and lease losses are intended to, and, in management’s opinion, do, meet the criteria for accrual of loss contingencies in accordance with Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting for Contingencies,” and SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” The process of evaluating this adequacy has two basic elements: first, the identification of problem loans or leases based on current financial information and the fair value of the underlying collateral; and second, a methodology for estimating general loss reserves. For loans or leases classified as “special mention,” “substandard” or “doubtful,” we record all estimated losses at the time we classify the loan or lease. This “specific” portion of the allowance

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is the total of potential, although unconfirmed, losses for individually classified loans. Because we immediately charge off all identified losses, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The second phase of our analysis represents an allocation of the allowance. This methodology analyzes pools of loans that have similar characteristics and applies historical loss experience and other factors for each pool to determine its allocable portion of the allowance. This estimate is intended to represent the potential unconfirmed and inherent losses within the portfolio. Individual loan pools are created for major loan categories: commercial loans, commercial mortgages, construction loans and direct lease financing, and for the various types of loans to individuals. The historical experience for each loan pool is augmented by accounting for such items as: current economic conditions, current loan portfolio performance, loan policy or management changes, loan concentrations, increases in our lending limit, the average loan size, and other factors as appropriate. For example, as a result of significant growth in construction lending, whic h was the result of a construction lending group being hired at the end of the third quarter of 2003, our allocation to the construction loan pool increased in the last half of 2003 and the first nine months of 2004. In fiscal 2004 we enhanced our allowance methodology through the efforts of our newly hired chief risk officer, who directly oversees the loan review processes and measures the adequacy of the allowance independently from management. The chief risk officer reports directly to the Bank’s audit committee. The chief risk officer’s individual loan oversight parameters include: borrower relationships over $2.0 million and loans 90 days or more past due or that have been previously classified as substandard. Pursuant to these parameters, approximately 67% of our loans, by dollar amount, are subject to the chief risk officer’s oversight.

Although the performance of our loan portfolio has been above that of our peers, and we do not currently foresee a change in that performance, our analysis for purposes of deriving the historical loss component of the allowance includes factors in addition to our historical loss experience, such as management’s experience with similar loan and lease portfolios at other institutions, the historic loss experience of our peers and statistical information from various industry reports such as the FDIC’s Quarterly Banking Profile.

While we consider our allowance for loan and lease losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions or management’s assumptions as to future delinquencies, recoveries and losses and management’s intent with regard to the disposition of loans and leases. We review the adequacy of the allowance on at least on a quarterly basis to ensure that the provision for loan and lease losses that has been charged against earnings is an amount necessary to maintain the allowance at a level that is appropriate based on management's assessment of probable estimated losses. The following table summarizes our credit loss experience for each of the periods indicated:

		Three months ended March 31,			For the year ended December 31,
		Three months ended March 31,			For the year ended December 31,

		2005		2004		2004
		(dollars in thousands)

Balance in the allowance for loan and lease losses at beginning of period	$	3,593	$	1,991	$	1,991


Loans charged-off:
Commercial		43				10

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Lease financing		—			—		—
Consumer		—			—		20

Total		43			—		30


Recoveries:
Lease financing		51			—		—

Total		51			—		—

Net charge-offs (recoveries)		(8	)		—		30
Provision charged to operations		500			332		1,632

Balance in allowance for loan and lease losses at end of period	$	4,101		$	2,323	$	3,593

Net charge-offs/average loans		0.01	%		*		0.01	%



* Less than .01%

Non-Performing Loans. Loans are considered to be non-performing if they are on a non-accrual basis or terms have been renegotiated to provide a reduction or deferral of interest or principal because of a weakening in the financial positions of the borrowers. A loan which is past due 90 days or more and still accruing interest remains on accrual status only when it is both adequately secured as to principal and is in the process of collection. We had $205,000 of non-accrual loans at March 31, 2005 compared to $0 of non-accrual loans at March 31, 2004. Loans past due 90 days or more still accruing interest amounted to $703,000 and $14,000 at March 31, 2005 and 2004, respectively. A significant amount of the increase was due to billing issues related to the conversion of the Mears lease portfolio.

Deposits. A primary source for funding our growth is through deposit accumulation. We offer a variety of deposit accounts with a range of interest rates and terms, including savings accounts, checking accounts, money market savings accounts and certificates of deposit. At March 31, 2005, we had total deposits of $484.1 million as compared to $388.1 million at December 31, 2004, an increase of $96.0 million or 24.7%. The following table presents the average balance and rates paid on deposits for the periods indicated:

		For the three months ended
		March 31, 2005				December 31, 2004

		Average	Average			Average	Average
		balance	Rate			balance	Rate

Demand (non-interest bearing)	$	64,538	—		$	48,279	—
Interest checking		26,006	1.05	%		22,416	1.28	%
Savings and money market		141,875	2.36	%		93,304	2.10	%
Time		193,439	2.65	%		115,924	2.30	%

Total deposits	$	425,858	2.06	%	$	279,923	1.76	%

Borrowings

At March 31, 2005 we had $40.0 million in advances from the Federal Home Loan Bank. The advances mature on a daily basis and are collateralized with investment securities.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There has been no material change in our assessment of our sensitivity to market risk since our presentation in our Annual Report on Form 10-K for the year ended December 31, 2004 except as set forth in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in Securities and Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

There have been no significant changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting during our most recent quarter.

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PART II OTHER INFORMATION

Item 6.

Exhibits


Exhibit No.		Description

3.1		Certificate of Incorporation ⁽¹⁾
3.2		Bylaws ⁽¹⁾
4.1		Specimen stock certificate ⁽²⁾
4.2		Investor Rights Agreement (1999) ⁽¹⁾
4.3		Investor Rights Agreement (2002) ⁽¹⁾
10.1		1999 Stock Option Plan (as amended through June 18, 2003) ⁽³⁾
10.2		Form of Grant pursuant to the 1999 Stock Option Plan ⁽³⁾
10.3		Employee and Non-employee Director Non-cash Compensation
		Plan ⁽¹⁾
10.5		Sublease and Technical Support Agreement with RAIT
		Investment Trust ⁽¹⁾
10.6		Sublease and Technical Support Agreement with Cohen Bros. ⁽¹⁾
10.7		TRM and The Bancorp ATM Agreement ⁽¹⁾
31.1		Rule 13a-14(a)/15d-14(a) Certification
31.2		Rule 13a-14(a)/15d-14(a) Certification
32.1		Section 1350 Certification
32.2		Section 1350 Certification


(1)	Previously filed as an exhibit to the registrant’s registration statement on Form S-4 (File No. 333-117385) filed on July 15, 2004.

(2)	Previously filed as an exhibit to Amendment No. 1 of the registrant’s registration statement on Form S-4 (File No. 333-117385) filed on September 28, 2004.

(3)	Previously filed as an exhibit to the registrant’s statement on Form S-8 (file No. 333-124338) filed on April 26, 2005.

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	The Bancorp Inc.

	(Registrant)

	/s/ Betsy Z. Cohen

	Betsy Z. Cohen
	Chief Executive Officer


	/s/ Martin F. Egan

	Martin F. Egan
	Senior Vice President and
	Chief Financial Officer

May 13, 2005

Date