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EX-31.1 - EX-31.1 - Bancorp, Inc.tbbk-20150630xex311.htm
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EX-31.2 - EX-31.2 - Bancorp, Inc.tbbk-20150630xex312.htm
EX-32.1 - EX-32.1 - Bancorp, Inc.tbbk-20150630xex321.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

 

 

 

[X]

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

 

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended:     June 30, 2015

 

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.)

 

 

 

 

409 Silverside Road

 

 

Wilmington, DE 

 

19809

(Address of principal

 

(Zip code)

executive offices)

 

 

 

 

 

 

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 [X]   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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes [X]   No [ ]

 

1

 


 

 

 

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

 

(Check one):  

 

 

 

 

 

Large accelerated filer [ ]   

 

Accelerated filer [X]    

 

Non-accelerated filer [ ] 

 

Smaller reporting company [ ]

 

(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 Act).

 

Yes [ ]  No [X]

 

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

 

As of September 24, 2015 there were 37,758,237 outstanding shares of common stock, $1.00 par value.

 

 

 

2

 


 

THE BANCORP, INC

 

Form 10-Q Index

 

 

 

 

 

Page

Part I Financial Information

Item 1

Financial Statements:

4

 

 

 

 

Unaudited Consolidated Balance Sheets – June 30, 2015 and December 31, 2014

4

 

 

 

 

Unaudited Consolidated Statements of Operations – Three and six months ended June 30, 2015 and 2014

5

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income – Six  months ended June 30, 2015 and 2014

7

 

 

 

 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Six months ended June 30, 2015

8

 

 

 

 

Unaudited Consolidated Statements of Cash Flows – Six months ended June 30, 2015 and 2014

9

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

10

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

Part II Other Information

 

 

 

Item 1.

Legal proceedings

50

Item 1A.

Risk Factors

50

Item 6.

Exhibits

26

 

 

 

Signatures 

 

53

 

 

 

 

 

 

 

3

 


 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

(in thousands)

ASSETS

 

 

 

 

Cash and cash equivalents

 

 

 

 

Cash and due from banks

 

$                   13,269 

 

$                     8,665 

Interest earning deposits at Federal Reserve Bank

 

936,989 

 

1,059,320 

Securities purchased under agreements to resell

 

40,068 

 

46,250 

Total cash and cash equivalents

 

990,326 

 

1,114,235 

 

 

 

 

 

Investment securities, available-for-sale, at fair value

 

1,370,027 

 

1,493,639 

Investment securities, held-to-maturity (fair value $91,934 and $91,914, respectively)

 

93,649 

 

93,765 

Commercial loans held for sale

 

284,501 

 

217,080 

Loans, net of deferred loan fees and costs

 

968,033 

 

874,593 

Allowance for loan and lease losses

 

(4,352)

 

(3,638)

Loans, net

 

963,681 

 

870,955 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

1,063 

 

1,002 

Premises and equipment, net

 

19,271 

 

17,697 

Accrued interest receivable

 

11,526 

 

11,251 

Intangible assets, net

 

5,541 

 

6,228 

Deferred tax asset, net

 

35,874 

 

33,673 

Investment in unconsolidated entity, at fair value

 

187,186 

 

193,595 

Assets held for sale

 

651,158 

 

887,929 

Other assets

 

43,804 

 

45,268 

Total assets

 

$              4,657,607 

 

$              4,986,317 

 

 

 

 

 

LIABILITIES

 

 

 

 

Deposits

 

 

 

 

Demand and interest checking

 

$              3,993,393 

 

$              4,289,586 

Savings and money market

 

321,264 

 

330,798 

Time deposits

 

1,400 

 

1,400 

Total deposits

 

4,316,057 

 

4,621,784 

 

 

 

 

 

Securities sold under agreements to repurchase

 

2,357 

 

19,414 

Subordinated debenture

 

13,401 

 

13,401 

Other liabilities

 

10,038 

 

12,695 

Total liabilities

 

4,341,853 

 

4,667,294 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par value; 37,858,237 and 37,808,777

 

 

 

 

shares issued at June 30, 2015 and December 31, 2014, respectively

 

37,858 

 

37,809 

Treasury stock, at cost (100,000 shares)

 

(866)

 

(866)

Additional paid-in capital

 

298,978 

 

297,987 

Retained earnings

 

(27,854)

 

(28,242)

Accumulated other comprehensive income

 

7,638 

 

12,335 

Total shareholders' equity

 

315,754 

 

319,023 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$              4,657,607 

 

$              4,986,317 

 

The accompanying notes are an integral part of these consolidated statements.

 

 

 

 

4

 


 

THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30,

 

For the six months ended June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

(restated)

 

 

 

(restated)

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$               11,534 

 

$                 8,802 

 

$               22,231 

 

$               17,266 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

5,006 

 

5,356 

 

10,066 

 

10,493 

Tax-exempt interest

 

3,117 

 

2,956 

 

6,291 

 

5,040 

Federal funds sold/securities purchased under agreements to resell

 

158 

 

85 

 

322 

 

191 

Interest earning deposits

 

557 

 

411 

 

1,179 

 

1,175 

 

 

20,372 

 

17,610 

 

40,089 

 

34,165 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

3,215 

 

2,695 

 

6,314 

 

5,472 

Securities sold under agreements to repurchase

 

 

11 

 

13 

 

23 

Subordinated debenture

 

116 

 

113 

 

211 

 

228 

 

 

3,335 

 

2,819 

 

6,538 

 

5,723 

Net interest income

 

17,037 

 

14,791 

 

33,551 

 

28,442 

Provision for loan and lease losses

 

510 

 

1,173 

 

1,175 

 

2,448 

Net interest income after provision for loan and lease losses

 

16,527 

 

13,618 

 

32,376 

 

25,994 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,900 

 

1,377 

 

3,660 

 

2,587 

Card payment and ACH processing fees

 

1,496 

 

1,317 

 

2,749 

 

2,620 

Prepaid card fees

 

11,128 

 

12,898 

 

24,260 

 

26,366 

Gain on sale of loans

 

5,901 

 

5,212 

 

7,577 

 

10,696 

Gain on sale of investment securities

 

193 

 

159 

 

273 

 

400 

Leasing income

 

656 

 

1,015 

 

1,175 

 

1,396 

Debit card income

 

471 

 

456 

 

931 

 

882 

Affinity fees

 

896 

 

668 

 

1,308 

 

1,202 

Other

 

2,083 

 

287 

 

3,568 

 

918 

Total non-interest income

 

24,724 

 

23,389 

 

45,501 

 

47,067 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

17,384 

 

15,744 

 

32,909 

 

30,889 

Depreciation and amortization

 

1,195 

 

1,133 

 

2,397 

 

2,183 

Rent and related occupancy cost

 

1,401 

 

1,122 

 

2,786 

 

2,149 

Data processing expense

 

3,760 

 

3,463 

 

6,988 

 

6,718 

Printing and supplies

 

568 

 

589 

 

1,183 

 

1,145 

Audit expense

 

773 

 

400 

 

1,199 

 

776 

Legal expense

 

648 

 

302 

 

2,053 

 

932 

Amortization of intangible assets

 

298 

 

304 

 

595 

 

608 

FDIC insurance

 

2,753 

 

1,116 

 

5,606 

 

2,805 

Software

 

1,523 

 

1,123 

 

2,873 

 

2,291 

Insurance

 

501 

 

485 

 

959 

 

936 

Telecom and IT network communications

 

412 

 

480 

 

962 

 

1,001 

Securitization and servicing expense

 

373 

 

703 

 

852 

 

1,281 

Consulting

 

732 

 

409 

 

2,220 

 

1,105 

Bank Secrecy Act and lookback consulting expenses

 

9,212 

 

2,169 

 

14,956 

 

2,169 

Other

 

4,901 

 

4,470 

 

8,756 

 

8,229 

Total non-interest expense

 

46,434 

 

34,012 

 

87,294 

 

65,217 

Income (loss) from continuing operations before income taxes

 

(5,183)

 

2,995 

 

(9,417)

 

7,844 

Income tax (benetit) provision

(2,684)

 

1,343 

 

(5,111)

 

2,966 

Net income (loss) from continuing operations

 

$               (2,499)

 

$                 1,652 

 

$               (4,306)

 

$                 4,878 

Discontinued operations

 

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

4,097 

 

12,063 

 

7,196 

 

9,588 

Income tax provision

1,424 

 

3,393 

 

2,502 

 

2,517 

5

 


 

Income from discontinued operations, net of tax

 

2,673 

 

8,670 

 

4,694 

 

7,071 

Net income available to common shareholders

 

$                    174 

 

$               10,322 

 

$                    388 

 

$               11,949 

 

 

 

 

 

 

 

 

 

Net income (loss) per share from continuing operations - basic

 

$                 (0.07)

 

$                   0.04 

 

$                 (0.11)

 

$                   0.13 

Net income per share from discontinued operations - basic

 

$                   0.07 

 

$                   0.23 

 

$                   0.12 

 

$                   0.19 

Net income per share - basic

 

$                   0.00 

 

$                   0.27 

 

$                   0.01 

 

$                   0.32 

 

 

 

 

 

 

 

 

 

Net income (loss) per share from continuing operations - diluted

 

$                 (0.07)

 

$                   0.04 

 

$                 (0.11)

 

$                   0.13 

Net income per share from discontinued operations - diluted

 

$                   0.07 

 

$                   0.23 

 

$                   0.12 

 

$                   0.18 

Net income per share - diluted

 

$                   0.00 

 

$                   0.27 

 

$                   0.01 

 

$                   0.31 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 


 

 

 

THE BANCORP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

For the six months

 

ended June 30,

 

2015

 

2014

 

 

 

(restated)

 

(in thousands)

Net income

 

 

 

Other comprehensive income net of reclassifications into net income:

$                      388 

 

$                 11,949 

 

 

 

 

Other comprehensive income

 

 

 

Change in net unrealized gain during the period

(6,512)

 

16,863 

Reclassification adjustments for losses included in income

(80)

 

(400)

Reclassification adjustments for foreign currency translation losses

(449)

 

 -

Amortization of losses previously held as available-for-sale

56 

 

11 

Net unrealized gain (loss) on investment securities

(6,985)

 

16,474 

 

 

 

 

Deferred tax expense

 

 

 

 Securities available-for-sale:

 

 

 

Change in net unrealized gain (loss) during the period

(2,279)

 

5,902 

Reclassification adjustments for losses included in income

(28)

 

(140)

Amortization of losses previously held as available-for-sale

19 

 

Income tax expense (benefit) related to items of other comprehensive income

(2,288)

 

5,766 

 

 

 

 

Other comprehensive income (loss) net of tax and reclassifications into net income

(4,697)

 

10,708 

Comprehensive income (loss)

$                 (4,309)

 

$                 22,657 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

 

 

 

 

 

 

 

 

 

7

 


 

 

 

THE BANCORP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

Common

 

 

 

 

 

Additional

 

 

 

other

 

 

 

 

stock

 

Common

 

Treasury

 

paid-in

 

Retained

 

comprehensive

 

 

 

 

shares

 

stock

 

stock

 

capital

 

earnings

 

income

 

Total

 

 

 

 

 

Balance at January 1, 2015

 

37,808,777 

 

$        37,809 

 

$        (866)

 

$      297,987 

 

$       (28,242)

 

$              12,335 

 

$          319,023 

Net income

 

 

 

 

 

 

 

 

 

388 

 

 

 

388 

Common stock issued from option exercises,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

Common stock issued from option exercises,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cashless exercise, net of tax benefits

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

Common stock issued as restricted shares,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

49,460 

 

49 

 

 

 

(49)

 

 -

 

 

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

1,040 

 

 -

 

 -

 

1,040 

Other comprehensive income net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

(4,697)

 

(4,697)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

37,858,237 

 

$        37,858 

 

$        (866)

 

$      298,978 

 

$       (27,854)

 

$                7,638 

 

$          315,754 

 

The accompanying notes are an integral part of this consolidated statement.

 

 

8

 


 

 

 

THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

 

 

 

 

 

For the six months

 

 

ended June 30,

 

 

2015

 

2014

 

 

 

 

(restated)

Operating activities

 

 

 

 

Net income (loss) from continuing operations

 

$            (4,306)

 

$              4,878 

Net income from discontinued operations, net of tax

 

4,694 

 

7,071 

Adjustments to reconcile net income to net cash

 

 

 

 

provided by operating activities

 

 

 

 

Depreciation and amortization

 

2,992 

 

2,791 

Provision for loan and lease losses

 

1,175 

 

2,448 

Net amortization of investment securities discounts/premiums

 

7,033 

 

4,794 

Stock-based compensation expense

 

1,040 

 

1,443 

Loans originated for sale

 

(265,021)

 

(323,926)

Sale of loans originated for resale

 

205,177 

 

250,052 

Gain on sales of loans originated for resale

 

(7,577)

 

(10,696)

Gain on sale of fixed assets

 

(10)

 

(2)

Gain on sales of investment securities

 

(273)

 

(400)

Increase in accrued interest receivable

 

(275)

 

(1,954)

Decrease (increase) in other assets

 

1,612 

 

(3,896)

Increase in discontinued assets held for sale

 

(19,264)

 

(24,377)

Decrease in other liabilities

 

(2,654)

 

(15,702)

 Net cash used in operating activities

 

(75,657)

 

(107,476)

 

 

 

 

 

Investing activities

 

 

 

 

Purchase of investment securities available-for-sale

 

(54,565)

 

(343,628)

Proceeds from sale of investment securities available-for-sale

 

58,666 

 

46,507 

Proceeds from redemptions and prepayments of securities held-to-maturity

 

90 

 

38 

Proceeds from redemptions and prepayments of securities available-for-sale

 

106,071 

 

109,559 

Net increase in loans

 

(93,901)

 

(166,285)

Net decrease in discontinued loans held for sale

 

255,723 

 

93,525 

Proceeds from sale of fixed assets

 

166 

 

11 

Purchases of premises and equipment

 

(4,127)

 

(2,768)

Investment in unconsolidated entity

 

6,409 

 

 -

 Net cash provided by (used in) investing activities

 

274,532 

 

(263,041)

 

 

 

 

 

Financing activities

 

 

 

 

Net decrease in deposits

 

(305,727)

 

(391,179)

Net decrease in securities sold under agreements to repurchase

 

(17,057)

 

(3,740)

Proceeds from the exercise of options

 

 -

 

103 

 Net cash used in financing activities

 

(322,784)

 

(394,816)

 

 

 

 

 

 Net decrease in cash and cash equivalents

 

(123,909)

 

(765,333)

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

1,114,235 

 

1,235,949 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$          990,326 

 

$          470,615 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

Interest paid

 

$              2,309 

 

$              5,734 

Taxes paid

 

$                 177 

 

$              2,093 

 

The accompanying notes are an integral part of these consolidated statements.

 

 

 

9

 


 

THE BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLDIATED FINANCIAL STATEMENTS

 

Note 1. Structure of Company

 

The Bancorp, Inc. (the Company) is a Delaware corporation and a registered financial holding company. Its primary subsidiary is The Bancorp Bank (the Bank) which is wholly owned by the Company. The Bank is a Delaware chartered commercial bank located in Wilmington, Delaware and is a Federal Deposit Insurance Corporation (FDIC) insured institution.  In its continuing operations, the Bank has four primary lines of specialty lending: security backed lines of credit (SBLOC), leasing,  Small Business Administration (SBA) loans and loans generated for sale  into capital markets primarily through commercial mortgage backed securities (CMBS). Through the Bank, the Company also provides banking services nationally, which include prepaid cards, private label banking, institutional banking, card payment and other payment processing and health savings accounts.  European operations are comprised of three operational service subsidiaries, Transact Payment Services Group Limited, Transact Payment Services Limited and Transact Payment Services Group-Bulgaria EOOD and one subsidiary, Transact Payments Limited, which offer prepaid card and electronic money issuing services.

The Company and the Bank are subject to regulation by certain state and federal agencies and, accordingly, they are examined periodically by those regulatory authorities.  As a consequence of the extensive regulation of commercial banking activities, the Company’s and the Bank’s businesses may be affected by state and federal legislation and regulations.

 

Note 2. Significant Accounting Policies

 

Basis of Presentation

The financial statements of the Company, as of June 30, 2015 and for the three and six month periods ended June 30, 2015 and 2014, 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 (U.S. GAAP) 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, 2014 (Form 10-K report). Note T in those financial statements present restated interim financial statements as described therein. The results of operations for the six month period ended June 30, 2015 may not necessarily be indicative of the results of operations for the full year ending December 31, 2014.

Note 3. Share-based Compensation

 

The Company recognizes compensation expense for stock options in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718, Stock Based Compensation. The expense of the option is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is usually the vesting period. For grants subject to a service condition, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. In accordance with ASC 718, the Company estimates the number of options for which the requisite service is expected to be rendered. At June 30, 2015, the Company had three stock-based compensation plans, which are more fully described in its Annual Report on Form 10-K for the year ended December 31, 2014, and the portions of the Company’s Proxy Statement for 2014, incorporated therein by reference.

 

The Company did not grant stock options in the first six months of 2015 or 2014.  There were no stock options exercised in the first six month period ended June 30, 2015 and 63,874 common stock options exercised in the six month period ended June 30, 2014.  The total intrinsic value of the options exercised during the six months ended June 30, 2015 and 2014 was $0 and $619,000, respectively.

 

The Company estimated the fair value of each grant on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions:

 

 

 

 

 

 

 

 

 

 

June 30,

 

2015

 

2014

Risk-free interest rate

 -

 

 -

10

 


 

Expected dividend yield

 -

 

 -

Expected volatility

 -

 

 -

Expected lives (years)

2.0 

 

 -

 

Expected volatility is based on the historical volatility of the Company’s stock and peer group comparisons over the expected life of the grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at the time of the grant. The life of the option is based on historical factors which include the contractual term, vesting period, exercise behavior and employee terminations. In accordance with ASC 718, stock based compensation expense for the six month period ended June 30, 2015 is based on awards that are ultimately expected to vest and has been reduced for estimated forfeitures. The Company estimates forfeitures using historical data based upon the groups identified by management.

 

A summary of the status of the Company’s equity compensation plans is presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

average

 

 

 

 

 

Weighted

 

remaining

 

 

 

 

 

average

 

contractual

 

Aggregate

 

 

 

exercise

 

term

 

intrinsic

 

Shares

 

price

 

(years)

 

value

 

(in thousands, except per share data)

Outstanding at January 1, 2015

2,602,000 

 

$                   9.72 

 

5.39 

 

$            5,010,208 

Granted

 -

 

 -

 

 -

 

 -

Exercised

 -

 

 -

 

 -

 

 -

Expired

(232,500)

 

14.24 

 

 -

 

 -

Forfeited

(20,750)

 

8.45 

 

 -

 

 -

Outstanding at June 30, 2015

2,348,750 

 

$                   9.28 

 

5.40 

 

$            2,030,423 

Exercisable at June 30, 2015

2,022,375 

 

$                   9.35 

 

5.13 

 

$            1,766,145 

 

 

The Company granted 86,992 restricted stock units with a vesting period of two years at a fair value of $9.11 in the first six months of 2015.  There were no restricted stock units granted in the first six months of 2014.  The total fair value of restricted stock units vested for the six months ended June 30, 2015 and 2014 was $517,000 and $886,000, respectively.

 

A summary of the status of the Company’s restricted stock units is presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Weighted-

 

remaining

 

 

 

average

 

contractual

 

 

 

grant date

 

term

 

Shares

 

fair value

 

(years)

Outstanding at January 1, 2015

148,381 

 

$                10.46 

 

2.07 

Granted

86,992 

 

9.11 

 

1.75 

Vested

(49,460)

 

10.46 

 

                   -  

Forfeited

(11,830)

 

9.39 

 

                   -  

Outstanding at June 30, 2015

174,083 

 

 

 

1.63 

 

As of June 30, 2015, there was a total of $3.3 million of unrecognized compensation cost related to unvested awards under share-based plans.  This cost is expected to be recognized over a weighted average period of 1.13 years.  Related compensation expense for the six months ended June 30, 2015 and 2014 was $1.0 million and $1.4 million respectively. 

 

Note 4. Earnings Per Share

 

11

 


 

The Company calculates earnings per share under ASC 260, Earnings Per Share. Basic earnings per share exclude dilution and are computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

 

The following tables show the Company’s earnings per share for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

June 30, 2015

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic earnings (loss) per share from continuing operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$               (2,499)

 

37,758,249 

 

$                 (0.07)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted income (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$               (2,499)

 

37,758,249 

 

$                 (0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

June 30, 2015

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic earnings (loss) per share from discontinued operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                 2,673

 

37,758,249 

 

$                  0.07

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

394,894 

 

 -

Diluted earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                 2,673

 

38,153,143 

 

$                  0.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

June 30, 2015

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                    174

 

37,758,249 

 

$                  0.00

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

394,894 

 

 -

Diluted earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                    174

 

38,153,143 

 

$                  0.00

 

Stock options for 877,000 shares, exercisable at prices between $9.82 and $25.43 per share, were outstanding at June 30, 2015, but were not included in the dilutive shares because the exercise price per share was greater than the average market price.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

June 30, 2015

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

12

 


 

Basic earnings (loss) per share from continuing operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$               (4,306)

 

37,751,969 

 

$                 (0.11)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted earnings (loss)per share

 

 

 

 

 

 

Net income available (loss) to common shareholders

 

$               (4,306)

 

37,751,969 

 

$                 (0.11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

June 30, 2015

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic income (loss) per share from discontinued operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                 4,694

 

37,751,969 

 

$                  0.12

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

894,248 

 

 -

Diluted income (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                 4,694

 

38,646,217 

 

$                  0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

June 30, 2015

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic income(loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                    388

 

37,751,969 

 

$                  0.01

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted income (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                    388

 

37,751,969 

 

$                  0.01

 

Stock options for 877,000 shares, exercisable at prices between $9.58 and $25.43 per share, were outstanding at June 30, 2015, but were not included in the dilutive shares because the exercise price per share was greater than the average market price.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

June 30, 2014

 

 

(restated)

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic earnings per share from continuing operations

 

 

 

 

 

 

Net income available to common shareholders

 

$                 1,652

 

37,706,491 

 

$                  0.04

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

560,183 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$                 1,652

 

38,266,674 

 

$                  0.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

June 30, 2014

 

 

(restated)

13

 


 

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic earnings per share from continuing operations

 

 

 

 

 

 

Net income available to common shareholders

 

$                 8,670

 

37,706,491 

 

$                  0.23

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

560,183 

 

 -

Diluted income per share

 

 

 

 

 

 

Net income available to common shareholders

 

$                 8,670

 

38,266,674 

 

$                  0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

June 30, 2014

 

 

(restated)

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               10,322

 

37,706,491 

 

$                  0.27

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

560,183 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               10,322

 

38,266,674 

 

$                  0.27

 

 

Stock options for 227,750 shares, exercisable at prices between $15.94 and $25.43 per share, were outstanding at June 30, 2014 but were not included in dilutive shares because the exercise price per share was greater than the average market price.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

June 30, 2014

 

 

(restated)

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic earnings per share from continuing operations

 

 

 

 

 

 

Net income available to common shareholders

 

$                 4,878

 

37,693,624 

 

$                  0.13

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

894,248 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$                 4,878

 

38,587,872 

 

$                  0.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

June 30, 2014

 

 

(restated)

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic earnings per share from discontinued operations

 

 

 

 

 

 

Net income available to common shareholders

 

$                 7,071

 

37,693,624 

 

$                  0.19

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

894,248 

 

(0.01)

Diluted earnings per share

 

 

 

 

 

 

14

 


 

Net income available to common shareholders

 

$                 7,071

 

38,587,872 

 

$                  0.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

June 30, 2014

 

 

(restated)

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

 

 

 

 

 

 

(dollars in thousands except per share data)

Basic earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               11,949

 

37,693,624 

 

$                  0.32

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

894,248 

 

(0.01)

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               11,949

 

38,587,872 

 

$                  0.31

 

Stock options for 3,000 shares, exercisable at prices between $20.98 and $25.43 per share, were outstanding at June 30, 2014 but were not included in dilutive shares because the exercise share price was greater than the average market price.

 

Note 5. Investment Securities

 

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities classified as available-for-sale and held-to-maturity at June 30, 2015 and December 31, 2014 are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

June 30, 2015

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$                 15,919 

 

$                    19 

 

$                      (8)

 

$             15,930 

Federally insured student loan securities

 

122,173 

 

442 

 

(882)

 

121,733 

Tax-exempt obligations of states and political subdivisions

 

515,598 

 

10,628 

 

(576)

 

525,650 

Taxable obligations of states and political subdivisions

 

56,507 

 

2,339 

 

(38)

 

58,808 

Residential mortgage-backed securities

 

383,593 

 

2,500 

 

(656)

 

385,437 

Commercial mortgage-backed securities

 

92,676 

 

847 

 

(1,038)

 

92,485 

Foreign debt securities

 

62,899 

 

191 

 

(160)

 

62,930 

Corporate and other debt securities

 

107,112 

 

257 

 

(315)

 

107,054 

 

 

$            1,356,477 

 

$             17,223 

 

$               (3,673)

 

$        1,370,027 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

June 30, 2015

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$                 17,908 

 

$                  679 

 

$                (3,795)

 

$             14,792 

Other debt securities - pooled

 

75,741 

 

1,401 

 

 -

 

77,142 

 

 

$                 93,649 

 

$               2,080 

 

$                (3,795)

 

$             91,934 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

December 31, 2014

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$                 16,519 

 

$                    42 

 

$                        - 

 

$             16,561 

Federally insured student loan securities

 

125,789 

 

613 

 

(390)

 

126,012 

Tax-exempt obligations of states and political subdivisions

 

535,622 

 

16,027 

 

(380)

 

551,269 

Taxable obligations of states and political subdivisions

 

58,868 

 

2,614 

 

(103)

 

61,379 

Residential mortgage-backed securities

 

419,503 

 

3,504 

 

(878)

 

422,129 

15

 


 

Commercial mortgage-backed securities

 

123,519 

 

1,220 

 

(1,500)

 

123,239 

Foreign debt securities

 

67,094 

 

130 

 

(346)

 

66,878 

Corporate and other debt securities

 

126,610 

 

225 

 

(663)

 

126,172 

 

 

$            1,473,524 

 

$             24,375 

 

$               (4,260)

 

$        1,493,639 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

December 31, 2014

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$                 17,882 

 

$                  531 

 

$                (3,820)

 

$             14,593 

Other debt securities - pooled

 

75,883 

 

1,438 

 

 -

 

77,321 

 

 

$                 93,765 

 

$               1,969 

 

$                (3,820)

 

$             91,914 

 

Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to  $1.1 million and $1.0 million, respectively, at June 30, 2015 and December 31, 2014.

 

The amortized cost and fair value of the Company’s investment securities at June 30, 2015, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

Held-to-maturity

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

cost

 

value

 

cost

 

value

Due before one year

 

$               277,219 

 

$            283,052 

 

$                        - 

 

$                        - 

Due after one year through five years

 

372,163 

 

373,013 

 

7,018 

 

7,599 

Due after five years through ten years

 

288,885 

 

295,488 

 

 -

 

 -

Due after ten years

 

418,210 

 

418,474 

 

86,631 

 

84,335 

 

 

$            1,356,477 

 

$         1,370,027 

 

$              93,649 

 

$              91,934 

 

At June 30, 2015 and December 31, 2014, investment securities with a book value of approximately $22.8 million and $25.7 million, respectively, were pledged to secure securities sold under repurchase agreements as required or permitted by law.

 

Fair value of available-for-sale securities are based on the fair market value supplied by a third-party market data provider while the fair value of held-to-maturity securities are based on the present value of cash flows, which discounts expected cash flows from principal and interest using yield to maturity at the measurement date. The Company periodically reviews its investment portfolio to determine whether unrealized losses are other than temporary, based on an evaluations of the creditworthiness of the issuers/guarantors as well as the underlying collateral if applicable, in addition to the continuing performance of the securities. The amount of the credit impairment is calculated by estimating the discounted cash flows for those securities.  The Company did not recognize any other-than-temporary impairment charges in the first six months of 2015.

 

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at June 30, 2015 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

2

 

$              12,261 

 

$                      (8)

 

$                        - 

 

$                     - 

 

$                 12,261 

 

$                   (8)

Federally insured student loan securities

 

10

 

25,260 

 

(257)

 

40,316 

 

(625)

 

65,576 

 

(882)

Tax-exempt obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

118

 

58,419 

 

(369)

 

30,353 

 

(207)

 

88,772 

 

(576)

Taxable obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

5

 

1,216 

 

(1)

 

4,127 

 

(37)

 

5,343 

 

(38)

Residential mortgage-backed securities

 

29

 

31,353 

 

(69)

 

56,896 

 

(587)

 

88,249 

 

(656)

Commercial mortgage-backed securities

 

34

 

19,306 

 

(90)

 

34,438 

 

(948)

 

53,744 

 

(1,038)

16

 


 

Foreign debt securities

 

23

 

16,004 

 

(115)

 

7,627 

 

(45)

 

23,631 

 

(160)

Corporate and other debt securities

 

47

 

49,319 

 

(269)

 

3,897 

 

(46)

 

53,216 

 

(315)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

268

 

$            213,138 

 

$               (1,178)

 

$            177,654 

 

$            (2,495)

 

$               390,792 

 

$            (3,673)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

1

 

$                      - 

 

$                        - 

 

$              5,193 

 

$             (3,795)

 

$                  5,193 

 

$             (3,795)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                      - 

 

$                        - 

 

$              5,193 

 

$             (3,795)

 

$                  5,193 

 

$             (3,795)

 

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2014 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federally insured student loan securities

 

9

 

$              28,435 

 

$                   (169)

 

$              34,274 

 

$                (221)

 

$                 62,709 

 

$                (390)

Tax-exempt obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

97

 

21,458 

 

(134)

 

46,412 

 

(245)

 

67,870 

 

(379)

Taxable obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

24

 

499 

 

(1)

 

21,088 

 

(102)

 

21,587 

 

(103)

Residential mortgage-backed securities

 

29

 

43,946 

 

(231)

 

67,023 

 

(647)

 

110,969 

 

(878)

Commercial mortgage-backed securities

 

30

 

41,231 

 

(883)

 

47,549 

 

(617)

 

88,780 

 

(1,500)

Foreign debt securities

 

53

 

24,681 

 

(203)

 

14,943 

 

(144)

 

39,624 

 

(347)

Corporate and other debt securities

 

61

 

62,984 

 

(568)

 

16,609 

 

(95)

 

79,593 

 

(663)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

303

 

$            223,234 

 

$                (2,189)

 

$            247,898 

 

$             (2,071)

 

$               471,132 

 

$             (4,260)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

1

 

$                      - 

 

$                        - 

 

$              5,144 

 

$             (3,820)

 

$                  5,144 

 

$             (3,820)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                      - 

 

$                        - 

 

$              5,144 

 

$             (3,820)

 

$                  5,144 

 

$             (3,820)

 

Other securities, included in the held-to-maturity classification at June 30, 2015, consisted of three securities secured by diversified portfolios of corporate securities, one bank senior note, two single issuer trust preferred securities and one pooled trust preferred security.

 

A total of $18.0 million of other debt securities - single issuers is comprised of the following: (i) amortized cost of the two single issuer trust preferred securities of $10.9 million, of which one security for $1.9 million was issued by a bank and one security for $8.9 million was issued by an insurance company; and (ii) the book value of a bank senior note of $7.0 million. 

 

A total of $75.7 million of other debt securities – pooled is comprised of the following: (i) one pooled trust preferred security for $82,000, which was collateralized by bank trust preferred securities; and (ii) book value of three securities consisting of diversified portfolios of corporate securities of $75.7 million.

 

The following table provides additional information related to the Company’s single issuer trust preferred securities as of June 30, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

17

 


 

Security A

 

$                1,902 

 

$                 2,000 

 

$                      98 

 

Not rated

Security B

 

8,988 

 

5,193 

 

(3,795)

 

Not rated

 

 

 

 

 

 

 

 

 

Class: All of the above are trust preferred securities.

 

 

 

 

 

 

 

 

 

 

 

The following table provides additional information related to the Company’s pooled trust preferred securities as of June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pooled issue

 

Class

 

Book value

 

Fair value

 

Unrealized gain

 

Credit rating

 

Excess subordination

 

Pool A (7 performing issuers)

 

Mezzanine

 

$                     82 

 

$                   174 

 

$                     92 

 

CAA1

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* There is no excess subordination for these securities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company has evaluated the securities in the above tables and has concluded that none of these securities has impairment that is other-than-temporary. The Company evaluates whether a credit impairment exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security. The Company’s best estimate of expected future cash flows which is used to determine the credit loss amount is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments regarding the future performance of the security. The Company concluded that most of the securities that are in an unrealized loss position are in a loss position because of changes in market interest rates after the securities were purchased. The securities that have been in an unrealized loss position for 12 months or longer include other securities whose market values are sensitive to market interest rates and changes in credit quality. The Company’s unrealized loss for other of the debt securities, which include three single issuer trust preferred securities and one pooled trust preferred security, is primarily related to general market conditions and the resultant lack of liquidity in the market. The severity of the temporary impairments in relation to the carrying amounts of the individual investments is consistent with market developments. The Company’s analysis for each investment is performed at the security level. As a result of its review, the Company concluded that other-than-temporary impairment did not exist due to the Company’s ability and intention to hold these securities to recover their amortized cost basis.

 

Note 6. Loans

 

The Company originates loans for sale to other financial institutions which issue commercial mortgage backed securities or to secondary government guaranteed loan markets.  The Company has elected fair value treatment for these loans to better reflect the economics of the transactions.  At June 30, 2015, the fair value of these loans held for sale was $284.5 million and the unpaid principal balance was $278.9 million.  Included in the gain on sale of loans in the Statement of Operations were gains recognized from changes in the fair value of $1.3 million for the six months ended June 30, 2015.  There were no amounts of changes in fair value related to credit risk.  Intterest earned on loans held for sale during the period held are recorded in Interest Income-Loans, including fees on the Statement of Operations..

 

The Company analyzes credit risk prior to making loans on an individual loan basis.  The Company considers relevant aspects of the borrowers’ financial position and cash flow, past borrower performance, managements’s knowledge of market conditions, collateral and the ratio of loan amounts to estimated collateral value in making its credit determinations.

 

Major classifications of loans, excluding loans held for sale, are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

 

 

 

 

SBA non real estate

$                       63,390 

 

$                       62,425 

SBA commercial mortgage

85,234 

 

82,317 

SBA construction

16,977 

 

20,392 

Total SBA loans

165,601 

 

165,134 

Direct lease financing

222,169 

 

194,464 

SBLOC

512,269 

 

421,862 

Other specialty lending

32,118 

 

48,625 

Other consumer loans

27,044 

 

36,168 

18

 


 

 

959,201 

 

866,253 

Unamortized loan fees and costs

8,832 

 

8,340 

Total loans, net of deferred loan costs

$                     968,033 

 

$                     874,593 

 

 

 

 

Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $1.7 million and $1.8 million at June 30, 2015 and December 31, 2014, respectively.  Overdraft charge-offs and recoveries are reflected in the allowance for loan and lease losses.

 

The following table provides information about impaired loans at June 30, 2015 and December 31, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

June 30, 2015

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      263 

 

$                      263 

 

$                        - 

 

$                      205 

 

$                           - 

Consumer - other

338 

 

338 

 

 -

 

342 

 

 -

Consumer - home equity

861 

 

1,257 

 

 -

 

1,078 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 -

SBA non real estate

976 

 

976 

 

259 

 

710 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

750 

 

750 

 

750 

 

970 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

1,239 

 

1,239 

 

259 

 

915 

 

 -

Consumer - other

338 

 

338 

 

 -

 

342 

 

 -

Consumer - home equity

1,611 

 

2,007 

 

750 

 

2,048 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                          - 

 

$                          - 

 

$                        - 

 

$                          - 

 

$                          - 

Consumer - other

346 

 

346 

 

 -

 

139 

 

 

Consumer - home equity

827 

 

927 

 

 -

 

1,043 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

197 

 

197 

 

40 

 

967 

 

 -

Consumer - other

 -

 

 -

 

 -

 

369 

 

 

Consumer - home equity

1,080 

 

1,080 

 

271 

 

885 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

197 

 

197 

 

40 

 

967 

 

 -

Consumer - other

346 

 

346 

 

 -

 

508 

 

 -

Consumer - home equity

1,907 

 

2,007 

 

271 

 

1,928 

 

 -

 

The following tables summarize the Company’s non-accrual loans, loans past due 90 days and still accruing and other real estate owned for the periods indicated (the Company had no non-accrual leases at June 30, 2015,  June 30, 2014, or December 31, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

June 30,

 

December 31,

 

 

2015

 

2014

 

2014

 

 

 

 

(restated)

 

 

Non-accrual loans

 

 

 

 

 

 

SBA non real estate

 

$                 1,055 

 

$                  1,233 

 

$                        - 

Consumer

 

1,611 

 

2,180 

 

1,907 

19

 


 

Total non-accrual loans

 

2,666 

 

3,413 

 

1,907 

 

 

 

 

 

 

 

Loans past due 90 days or more

 

620 

 

119 

 

149 

Total non-performing loans

 

3,286 

 

3,532 

 

2,056 

Other real estate owned

 

 -

 

 -

 

 -

Total non-performing assets

 

$                 3,286 

 

$                  3,532 

 

$                 2,056 

 

The Company’s loans that were modified as of June 30, 2015 and December 31, 2014 and considered troubled debt restructurings are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBA non real estate

 

 

$               184 

 

$                184 

 

 

$               197 

 

$                197 

SBA commercial mortgage

 

 

16,998 

 

16,998 

 

 -

 

 -

 

 -

Consumer

 

 

443 

 

443 

 

 

346 

 

346 

Total

 

 

$          17,625 

 

$           17,625 

 

 

$               543 

 

$                543 

 

The balances below provide information as to how the loans were modified as troubled debt restructurings loans as of June 30, 2015 and December 31, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBA non real estate

 

$                    - 

 

$               184 

 

$                    - 

 

$                 - 

 

$               197 

 

$                   - 

SBA commercial mortgage

 

 -

 

14,050 

 

2,948 

 

 -

 

 -

 

 -

Consumer

 

 -

 

338 

 

105 

 

 -

 

346 

 

 -

Total

 

$                    - 

 

$          14,572 

 

$            3,053 

 

$                 - 

 

$               543 

 

$                   - 

 

As of June 30, 2015,  there were no loans that had been restructured within the last 12 months that have subsequently defaulted.

 

As of June 30, 2015 and December 31, 2014, the Company had no commitments to lend additional funds to loan customers whose loan terms have been modified in troubled debt restructurings.

 

A detail of the changes in the allowance for loan and lease losses by loan category is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

SBA commercial mortgage

 

SBA construction

 

Direct lease financing

 

SBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                  385 

 

$                  461 

 

$                  114 

 

$                  836 

 

$                  562 

 

$                    66 

 

$                1,181 

 

$                    33 

 

$               3,638 

Charge-offs

 

(65)

 

 -

 

 -

 

(9)

 

 -

 

 -

 

(393)

 

 -

 

(467)

Recoveries

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

Provision (credit)

 

576 

 

(159)

 

(23)

 

41 

 

112 

 

21 

 

638 

 

(31)

 

1,175 

Ending balance

 

$                  896 

 

$                  302 

 

$                    91 

 

$                  868 

 

$                  674 

 

$                    87 

 

$                1,432 

 

$                      2 

 

$               4,352 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 


 

Ending balance: Individually evaluated for impairment

 

$                  242 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                   767 

 

$                      - 

 

$               1,009 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$                  654 

 

$                  302 

 

$                    91 

 

$                  868 

 

$                  674 

 

$                    87 

 

$                   665 

 

$                      2 

 

$               3,343 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$             63,390 

 

$             85,234 

 

$             16,977 

 

$           222,169 

 

$           512,269 

 

$             32,118 

 

$              27,044 

 

$               8,832 

 

$           968,033 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                  976 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                2,212 

 

$                      - 

 

$               3,188 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$             62,414 

 

$             85,234 

 

$             16,977 

 

$           222,169 

 

$           512,269 

 

$             32,118 

 

$              24,832 

 

$               8,832 

 

$           964,845 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance (restated)

 

$                  419 

 

$                  496 

 

$                      - 

 

$                  311 

 

$                  293 

 

$                      1 

 

$                2,361 

 

$                      - 

 

$               3,881 

Charge-offs

 

(307)

 

 -

 

 -

 

(323)

 

(3)

 

 -

 

(871)

 

 -

 

(1,504)

Recoveries

 

12 

 

 -

 

 -

 

25 

 

 -

 

 -

 

22 

 

 -

 

59 

Provision (credit)

 

261 

 

(35)

 

114 

 

823 

 

272 

 

65 

 

(331)

 

33 

 

1,202 

Ending balance

 

$                  385 

 

$                  461 

 

$                  114 

 

$                  836 

 

$                  562 

 

$                    66 

 

$                1,181 

 

$                    33 

 

$               3,638 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                    40 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                   271 

 

$                      - 

 

$                  311 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$                  345 

 

$                  461 

 

$                  114 

 

$                  836 

 

$                  562 

 

$                    66 

 

$                   910 

 

$                    33 

 

$               3,327 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$             62,425 

 

$             82,317 

 

$             20,392 

 

$           194,464 

 

$           421,862 

 

$             48,625 

 

$              36,168 

 

$               8,340 

 

$           874,593 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                  197 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                2,253 

 

$                      - 

 

$               2,450 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$             62,228 

 

$             82,317 

 

$             20,392 

 

$           194,464 

 

$           421,862 

 

$             48,625 

 

$              33,915 

 

$               8,340 

 

$           872,143 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                  419 

 

$                  496 

 

$                      - 

 

$                  311 

 

$                  293 

 

$                      1 

 

$                2,361 

 

$                      - 

 

$               3,881 

21

 


 

Charge-offs

 

 -

 

 -

 

 -

 

(1)

 

 -

 

 -

 

(548)

 

 -

 

(549)

Recoveries

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

20 

 

 -

 

20 

Provision (credit)

 

235 

 

(5)

 

52 

 

678 

 

74 

 

54 

 

967 

 

393 

 

2,448 

Ending balance

 

$                  654 

 

$                  491 

 

$                    52 

 

$                  988 

 

$                  367 

 

$                    55 

 

$                2,800 

 

$                  393 

 

$               5,800 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                  385 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                   607 

 

$                      - 

 

$                  992 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$                  269 

 

$                  491 

 

$                    52 

 

$                  988 

 

$                  367 

 

$                    55 

 

$                2,193 

 

$                  393 

 

$               4,808 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$             53,046 

 

$             86,600 

 

$               4,748 

 

$           181,007 

 

$           319,854 

 

$             42,209 

 

$              47,884 

 

$               5,399 

 

$           740,747 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$               1,307 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                2,969 

 

$                      - 

 

$               4,276 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$             51,739 

 

$             86,600 

 

$               4,748 

 

$           181,007 

 

$           319,854 

 

$             42,209 

 

$              44,915 

 

$               5,399 

 

$           736,471 

 

 

 

The Company did not have loans acquired with deteriorated credit quality at either June 30, 2015 or December 31, 2014.

 

A detail of the Company’s delinquent loans by loan category is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

June 30, 2015

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                       - 

 

$                      - 

 

$                       - 

 

$                  792 

 

$                  792 

 

$               62,598 

 

$               63,390 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

85,234 

 

85,234 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

16,977 

 

16,977 

Direct lease financing

 

4,319 

 

662 

 

516 

 

 -

 

5,497 

 

216,672 

 

222,169 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

512,269 

 

512,269 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

32,118 

 

32,118 

Consumer - other

 

 

 -

 

 -

 

 -

 

 

5,659 

 

5,660 

Consumer - home equity

 

74 

 

 -

 

104 

 

1,874 

 

2,052 

 

19,332 

 

21,384 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,832 

 

8,832 

 

 

$               4,394 

 

$                  662 

 

$                  620 

 

$               2,666 

 

$               8,342 

 

$             959,691 

 

$             968,033 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

December 31, 2014

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                       - 

 

$                      - 

 

$                       - 

 

$                       - 

 

$                       - 

 

$               62,425 

 

$               62,425 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

82,317 

 

82,317 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,392 

 

20,392 

Direct lease financing

 

5,083 

 

1,832 

 

149 

 

 -

 

7,064 

 

187,400 

 

194,464 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

421,862 

 

421,862 

22

 


 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

48,625 

 

48,625 

Consumer - other

 

 

 -

 

 -

 

 -

 

 

8,654 

 

8,663 

Consumer - home equity

 

 -

 

457 

 

 -

 

1,907 

 

2,364 

 

25,141 

 

27,505 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,340 

 

8,340 

 

 

$               5,092 

 

$               2,289 

 

$                  149 

 

$               1,907 

 

$               9,437 

 

$             865,156 

 

$             874,593 

 

The Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans.  The following table provides information by credit risk rating indicator for each segment of the loan portfolio, excluding loans held for sale, at the dates indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non real estate

 

$           61,729 

 

$                  - 

 

$              976 

 

$                  - 

 

$                    - 

 

$                 1,595 

 

$                    (910)

 

$              63,390 

SBA commercial mortgage

 

63,754 

 

 -

 

 -

 

 -

 

 -

 

3,591 

 

17,889 

 

85,234 

SBA construction

 

13,663 

 

 -

 

 -

 

 -

 

 -

 

1,481 

 

1,833 

 

16,977 

Direct lease financing

 

78,123 

 

 -

 

519 

 

 -

 

 -

 

4,013 

 

139,514 

 

222,169 

SBLOC

 

188,239 

 

 -

 

 -

 

 -

 

 -

 

6,210 

 

317,820 

 

512,269 

Other specialty lending

 

30,328 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,790 

 

32,118 

Consumer

 

7,171 

 

 

 

3,176 

 

 -

 

 -

 

 -

 

16,697 

 

27,044 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,832 

 

8,832 

 

 

$         443,007 

 

$                  - 

 

$           4,671 

 

$                  - 

 

$                    - 

 

$               16,890 

 

$              503,465 

 

$            968,033 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$           49,214 

 

$                  - 

 

$              197 

 

$                  - 

 

$                    - 

 

$                    669 

 

$                12,345 

 

$              62,425 

SBA commercial mortgage

 

59,086 

 

 -

 

 -

 

 -

 

 -

 

965 

 

22,266 

 

82,317 

SBA construction

 

18,911 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,481 

 

20,392 

Direct lease financing

 

58,994 

 

 -

 

99 

 

 -

 

 -

 

 -

 

135,371 

 

194,464 

SBLOC

 

142,286 

 

 -

 

 -

 

 -

 

 -

 

57,360 

 

222,216 

 

421,862 

Other specialty lending

 

46,990 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,635 

 

48,625 

Consumer

 

14,196 

 

346 

 

1,907 

 

 -

 

 -

 

73 

 

19,646 

 

36,168 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,340 

 

8,340 

 

 

$         389,677 

 

$              346 

 

$           2,203 

 

$                  - 

 

$                    - 

 

$               59,067 

 

$              423,300 

 

$            874,593 

 

 

* Unrated loans consist of performing loans which did not exhibit any negative characteristics which would require the loan to be evaluated, or fell below the dollar threshold requiring review under the Bank’s internal policy and are not loans otherwise selected in ongoing portfolio evaluation.  The scope of the Bank’s loan review policy encompasses commercial and construction loans and leases which singly, or in aggregate for loans to related borrowers, exceed $3.0 million.  The loan portfolio review coverage was approximately 46% at June 30, 2015 and approximately 45% at December 31, 2014.  As a result of transferring loans into “Discontinued Operations” (see Note 15), management is currently assessing the review scope for the remaining portfolio to ensure appropriate coverage levels are maintained.  This review is performed by the loan review department, which is independent of the loan origination department and reports directly to the audit committee.  Potential problem loans, which are identified by either the independent loan review department or line management, are reviewed.    Adversely classified loans are reviewed quarterly by the independent loan review function of the Bank. Additionally, all loans are subject to ongoing monitoring by portfolio managers and loan officers.  Also, many of the Bank’s loans are relatively short term, and are subject to reconsideration with a full review in loan committee between one and three years after the loan is made and after the prior review.  

 

Note 7. Transactions with Affiliates

 

The Company entered into a space sharing agreement for office space in New York, New York with Resource America,   Inc. commencing in September 2011 which terminated January 31, 2015.  The Company paid only its proportionate share of the lease rate to a lessor which was an unrelated third party.  The Chairman of the Board of Resource America, Inc. is the father of the  Chairman of the Board and the spouse of the former Chief Executive Officer of the Company.  The Chief Executive Officer of Resource America, Inc. is the brother of the Chairman of the Board and the son of the former Chief Executive Officer of the Company.  Rent expense was  50% of the fixed rent, real estate tax  and the base expense charges.  Rent expense was $9,000 for the six months ended June 30, 2015 and $51,000  for the  six months ended June 30, 2014.    

 

23

 


 

The Company entered into a space sharing agreement for office space in New York, New York with Atlas Energy, L.P. commencing in May 2012. This agreement expired in May 2015. The Company paid only its proportionate share of the lease rate to a lessor which was an unrelated third party.  The Chairman of the Board of the general partner of Atlas Energy, L.P. is the brother of the Chairman of the Board and the son of the former Chief Executive Officer of the Company.  The Chief Executive Officer and President of Atlas Energy, L.P. is the father of the Chairman of the Board and the spouse of the former Chief Executive Officer of the Company.  Rent expense was 50% of the fixed rent, real estate tax payment and the base expense charges.  Rent expense was $35,000 and $52,000 for the six months ended June 30, 2015 and 2014, respectively. 

 

The Bank maintains deposits for various affiliated companies totaling approximately $9.3 million and $15.1 million as of June 30, 2015 and December 31, 2014, respectively. 

 

The Bank 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. All loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to the lender.  At June 30, 2015, these loans were current as to principal and interest payments and did not involve more than normal risk of collectability. At June 30, 2015, loans to these related parties included in other assets held for sale amounted to $4.9 million at June 30, 2015 and $30.8 million at December 31, 2014.

 

The Bank periodically purchases securities under agreements to resell and engages in other securities transactions as follows.The Company executed transactions through PrinceRidge Group LLC, now know as J.V.B. Financial Group, LLC, (JVB), a broker dealer in which the Company’s Chairman has a minority interest. The Company’s Chairman also serves as Vice Chairman of Institutional Financial Markets Inc., the parent company of JVB. The Company purchased securities under agreements to resell through JVB primarily consisting of G.N.M.A. certificates which are full faith and credit obligations of the United States government issued at competitive rates.  JVB was in compliance with all of the terms of the agreements at June 30, 2015 and had complied with all terms for all prior repurchase agreements. A total of $40.1 million of such agreements were outstanding at June 30, 2015 and $46.3 million were outstanding at December 31, 2014.    

 

Note 8. Fair Value Measurements

ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities, except for certain loans. For fair value disclosure purposes, the Company utilized certain value measurement criteria required under the ASC 820, Fair Value Measurements and Disclosures, and discussed below.

Estimated fair values have been determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Cash and cash equivalents, which are comprised of cash and due from banks, the Company’s balance at the Federal Reserve Bank and securities purchased under agreements to resell, had recorded values of $990.3 million and $1.11 billion as of June 30, 2015 and December 31, 2014, respectively, which approximated fair values. 

The estimated fair values of investment securities are based on quoted market prices, if available, or estimated using a methodology based on management’s inputs. The fair values of the Company’s investment securities held-to-maturity and loans held for sale are based on using “unobservable inputs” that are the best information available in the circumstances.

The net loan portfolio at June 30, 2015 and December 31, 2014 has been valued using the present value of discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The carrying value of accrued interest receivable approximates fair value.

Investment in unconsolidated entity, senior note has a carrying value based upon the exit price from a December 30, 2014 sale to a private securitization entity.  The par value of the principal approximated the carrying value of the underlying notes as determined by a third party valuation.  The exit price approximates fair value as December 31, 2014.  

24

 


 

Investment in unconsolidated entity, subordinated note has a carrying value based upon the closing price from a December 30, 2014 sale to a private securitization entity.  The fair value was based on a market rate approach for similar yielding securities. The exit price approximates fair value as December 31, 2014.   

For the senior and subordinated notes discussed above, based upon a third party review, there has not been material impairment since December 31, 2014. The market rate for those notes  approximates stated rates.

 

Assets held for sale at June 30, 2015 have been valued based upon an independent third party review.  The third party reviewed the majority of the credit portfolio and determined fair value for each specific loan that was reviewed.  Based on that review, weighted average fair values were applied to the loans not specifically reviewed. Assets held for sale at December 31, 2014 have been valued using the present value of discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The carrying value of accrued interest receivable approximates fair value.

The estimated fair values of demand deposits (comprising interest-and noninterest-bearing checking accounts, savings, and certain types of demand and money market accounts) are equal to the amount payable on demand at the reporting date (generally, their carrying amounts). Liabilities held for sale primarily consist of deposit accounts with fair values approximating carrying values. The fair values of securities sold under agreements to repurchase and short term borrowings are equal to their carrying amounts as they are overnight borrowings.

The fair values of interest rate swaps are determined using models that use readily observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period to maturity and interest rate indices.

The fair values of certificates of deposit and subordinated debentures are estimated using a discounted cash flow calculation that applies current interest rates to discounted expected cash flows. Based upon time deposit maturities at June 30, 2015, the carrying values approximate their fair values. The carrying amount of accrued interest payable approximates its fair value.  The following tables provide information regarding carrying amounts and estimated fair values (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

Quoted prices in

 

Significant other

 

Significant

 

 

 

 

 

active markets for

 

observable

 

unobservable

   

Carrying

 

Estimated

 

identical assets

 

inputs

 

inputs

 

amount

 

fair value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(in thousands)

Investment securities available-for-sale

$            1,370,027 

 

$              1,370,027 

 

$                    51,137 

 

$               1,318,890 

 

$                           - 

Investment securities held-to-maturity

93,649 

 

91,934 

 

7,599 

 

 -

 

84,335 

Securities purchased under agreements to resell

40,068 

 

40,068 

 

40,068 

 

 -

 

 -

Federal Home Loan and Atlantic Central Bankers Bank stock

1,063 

 

1,063 

 

 -

 

 -

 

1,063 

Commercial loans held for sale

284,501 

 

284,501 

 

 -

 

 -

 

284,501 

Loans, net

968,033 

 

961,673 

 

 -

 

 -

 

961,673 

Investment in unconsolidated entity, senior note

172,288 

 

172,288 

 

 -

 

 -

 

172,288 

Investment in unconsolidated entity, subordinated note

14,898 

 

14,898 

 

 -

 

 -

 

14,898 

Assets held for sale

651,158 

 

651,158 

 

 -

 

 -

 

651,158 

Demand and interest checking

3,993,393 

 

3,993,393 

 

3,993,393 

 

 -

 

 -

Savings and money market

321,264 

 

321,264 

 

321,264 

 

 -

 

 -

Time deposits

1,400 

 

1,412 

 

 -

 

 -

 

1,412 

Subordinated debentures

13,401 

 

8,140 

 

 -

 

 -

 

8,140 

Securities sold under agreements to repurchase

2,357 

 

2,357 

 

2,357 

 

 -

 

 -

Interest rate swaps, asset

625 

 

625 

 

 -

 

625 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

25

 


 

 

 

 

 

 

Quoted prices in

 

Significant other

 

Significant

 

 

 

 

 

active markets for

 

observable

 

unobservable

   

Carrying

 

Estimated

 

identical assets

 

inputs

 

inputs

 

amount

 

fair value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(in thousands)

Investment securities available-for-sale

$            1,493,639 

 

$              1,493,639 

 

$                    66,287 

 

$               1,425,986 

 

$                    1,366 

Investment securities held-to-maturity

93,765 

 

91,914 

 

7,448 

 

 -

 

84,466 

Securities purchased under agreements to resell

46,250 

 

46,250 

 

46,250 

 

 -

 

 -

Federal Home Loan and Atlantic Central Bankers Bank stock

1,002 

 

1,002 

 

 -

 

 -

 

1,002 

Commercial loans held for sale

217,080 

 

217,080 

 

 -

 

 -

 

217,080 

Loans, net

874,593 

 

869,871 

 

 -

 

 -

 

869,871 

Investment in unconsolidated entity, senior note

178,187 

 

178,187 

 

 -

 

 -

 

178,187 

Investment in unconsolidated entity, subordinated note

15,408 

 

15,408 

 

 -

 

 -

 

15,408 

Assets held for sale

887,929 

 

887,929 

 

 -

 

 -

 

887,929 

Demand and interest checking

4,289,586 

 

4,289,586 

 

4,289,586 

 

 -

 

 -

Savings and money market

330,798 

 

330,798 

 

330,798 

 

 -

 

 -

Time deposits

1,400 

 

1,412 

 

 -

 

 -

 

1,412 

Subordinated debentures

13,401 

 

8,042 

 

 -

 

 -

 

8,042 

Securities sold under agreements to repurchase

19,414 

 

19,414 

 

19,414 

 

 -

 

 -

Interest rate swaps, liability

942 

 

942 

 

 -

 

942 

 

 -

 

 

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments, including commitments to extend credit, and the fair value of letters of credit are considered immaterial.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

Quoted prices in active

 

Significant other

 

Significant

 

 

 

 

markets for identical

 

observable

 

unobservable

 

 

Fair value

 

assets

 

inputs

 

inputs

 

 

June 30, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$                           15,930 

 

$                                       - 

 

$                             15,930 

 

$                                       - 

Federally insured student loan securities

 

121,733 

 

 -

 

121,733 

 

 -

Obligations of states and political subdivisions

 

584,458 

 

1,153 

 

583,305 

 

 -

Residential mortgage-backed securities

 

385,437 

 

 -

 

385,437 

 

 -

Commercial mortgage-backed securities

 

92,485 

 

 -

 

92,485 

 

 -

Foreign debt securities

 

62,930 

 

12,808 

 

50,122 

 

 -

Other debt securities

 

107,054 

 

37,176 

 

69,878 

 

 -

Total investment securities available for sale

 

1,370,027 

 

51,137 

 

1,318,890 

 

 -

Loans held for sale

 

284,501 

 

 -

 

 -

 

284,501 

Investment in unconsolidated entity, senior note

 

172,288 

 

 -

 

 -

 

172,288 

Investment in unconsolidated entity, subordinated note

 

14,898 

 

 -

 

 -

 

14,898 

Interest rate swaps, asset

 

625 

 

 -

 

625 

 

 -

 

 

$                      1,842,339 

 

$                             51,137 

 

$                        1,319,515 

 

$                           471,687 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

Quoted prices in active

 

Significant other

 

Significant

 

 

 

 

markets for identical

 

observable

 

unobservable

26

 


 

 

 

Fair value

 

assets

 

inputs

 

inputs

 

 

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$                           16,561 

 

$                                       - 

 

$                             16,561 

 

$                                       - 

Federally insured student loan securities

 

126,012 

 

 -

 

126,012 

 

 -

Obligations of states and political subdivisions

 

612,648 

 

1,182 

 

611,466 

 

 -

Residential mortgage-backed securities

 

422,129 

 

 -

 

422,129 

 

 -

Commercial mortgage-backed securities

 

123,239 

 

 -

 

123,239 

 

 -

Foreign debt securities

 

66,878 

 

14,098 

 

52,235 

 

545 

Other debt securities

 

126,172 

 

51,007 

 

74,344 

 

821 

Total investment securities available for sale

 

1,493,639 

 

66,287 

 

1,425,986 

 

1,366 

Loans held for sale

 

217,080 

 

 -

 

 -

 

217,080 

Investment in unconsolidated entity, senior note

 

178,187 

 

 -

 

 -

 

178,187 

Investment in unconsolidated entity, subordinated note

 

15,408 

 

 -

 

 -

 

15,408 

Interest rate swaps, liability

 

942 

 

 -

 

942 

 

 -

 

 

$                      1,903,372 

 

$                             66,287 

 

$                        1,425,044 

 

$                           412,041 

 

 

 

 

 

 

 

 

 

 

In addition, ASC 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to assets and liabilities. It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosures concerning fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date. Level 2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based on “unobservable inputs” which the Company believes is the best information available in the circumstances. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The changes in the Company’s Level 3 assets measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

Significant Unobservable Inputs

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

Commercial loans

 

 

securities

 

held for sale

 

 

June 30, 2015

 

December 31, 2014

 

June 30, 2015

 

December 31, 2014

Beginning balance

 

$                             1,366 

 

$                                   551 

 

$                            217,080 

 

$                              69,904 

Transfers into level 3

 

 -

 

1,279 

 

 -

 

 -

Transfers out of level 3

 

 -

 

(551)

 

 -

 

 -

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

(23)

 

 -

 

1,289 

 

1,846 

Included in other comprehensive income

 

 -

 

87 

 

 -

 

 -

Purchases, issuances, and settlements

 

 

 

 

 

 

 

 

Purchases

 

 -

 

 

 

 -

 

 -

Issuances

 

 -

 

 -

 

265,021 

 

630,165 

Sales

 

(1,343)

 

 -

 

(198,889)

 

(484,835)

Settlements

 

 -

 

 -

 

 -

 

 -

Ending balance

 

$                                   - 

 

$                                1,366 

 

$                            284,501 

 

$                            217,080 

 

 

 

 

 

 

 

 

 

The amount of total gains or losses for the period

 

 

 

 

 

 

 

 

included in earnings attributable to the change in

 

 

 

 

 

 

 

 

unrealized gains or losses relating to assets still

 

 

 

 

 

 

 

 

27

 


 

held at the reporting date.

 

$                                   - 

 

$                                        - 

 

$                                3,910 

 

$                                3,587 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Significant Unobservable Inputs

 

 

 

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in

 

 

 

 

 

unconsolidated entity

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

 

Beginning balance

 

$                         193,595 

 

$                                       - 

 

 

 

 

Transfers into level 3

 

 -

 

 -

 

 

 

 

Transfers out of level 3

 

 -

 

 -

 

 

 

 

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

 -

 

 -

 

 

 

 

Included in other comprehensive income

 

 -

 

 -

 

 

 

 

Purchases, issuances, and settlements

 

 

 

 

 

 

 

 

Purchases

 

 -

 

193,595 

 

 

 

 

Issuances

 

 -

 

 -

 

 

 

 

Sales

 

 -

 

 -

 

 

 

 

Settlements

 

(6,409)

 

 -

 

 

 

 

Ending balance

 

$                         187,186 

 

$                           193,595 

 

 

 

 

 

 

 

 

 

 

 

 

 

The amount of total gains or losses for the period

 

 

 

 

 

 

 

 

included in earnings attributable to the change in

 

 

 

 

 

 

 

 

unrealized gains or losses relating to assets still

 

 

 

 

 

 

 

 

held at the reporting date.

 

$                                    - 

 

$                                       - 

 

 

 

 

 

 

Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, during the periods shown are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

Quoted prices in active

 

Significant other

 

Significant

 

 

 

 

markets for identical

 

observable

 

unobservable

 

 

Fair value

 

assets

 

inputs

 

inputs (1)

Description

 

June 30, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

Impaired loans

 

$                             3,188 

 

$                                       - 

 

$                                       - 

 

$                               3,188 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

Quoted prices in active

 

Significant other

 

Significant

 

 

 

 

markets for identical

 

observable

 

unobservable

 

 

Fair value

 

assets

 

inputs

 

inputs (1)

Description

 

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

Impaired loans

 

$                             2,450 

 

$                                       - 

 

$                                       - 

 

$                               2,450 

Intangible assets

 

6,228 

 

 -

 

 -

 

6,228 

 

 

$                             8,678 

 

$                                       - 

 

$                                       - 

 

$                               8,678 

 

(1)

The method of valuation approach for the impaired loans was the market value approach based upon appraisals of the underlying collateral by external appraisers, reduced by 7-10% for estimated selling costs. Intangible assets are valued based upon internal analyses.

28

 


 

 

At June 30, 2015, impaired loans that are measured based on the value of underlying collateral have been presented at their fair value, less costs to sell, of $3.2 million through specific reserves and other write downs of $1.0 million or by recording charge-offs when the carrying value exceeds the fair value. Included in the impaired balance at June 30, 2015 were troubled debt restructured loans with a balance of $522,000 which had specific reserves of $27,000.  Valuation techniques consistent with the market and/or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy. The fair value of other real estate owned is based on an appraisal of the property using the market approach for valuation.

 

Note 9. Derivatives

 

The Company utilizes derivative instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics on commercial real estate loans held for sale. These instruments are not accounted for as hedges.  As of June 30, 2015, the Company had entered into eight interest rate swap agreements with an aggregate notional amount of $52.8 million. These swap agreements provide for the Company to receive an adjustable rate of interest based upon the three-month London Interbank Offering Rate (LIBOR).  The Company recorded a gain of $1.6 million for the six months ended June 30, 2015 on derivative instruments.  The amount receivable by the Company under these swap agreements was  $520,000 at June 30, 2015.  At June 30, 2015, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $750,000.

 

The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s remaining interest rate swap agreements as of June 30, 2015 are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

Maturity date

 

Notional amount

 

Interest rate paid

 

Interest rate received

 

Fair value

April 16, 2025

 

$                    2,700 

 

2.0% 

 

0.28% 

 

$              116 

May 6, 2025

 

20,300 

 

2.2% 

 

0.28% 

 

426 

May 19, 2025

 

5,500 

 

2.2% 

 

0.28% 

 

120 

June 5, 2025

 

6,800 

 

2.5% 

 

0.28% 

 

June 12, 2025

 

5,100 

 

2.6% 

 

0.29% 

 

(46)

June 16, 2025

 

4,700 

 

2.4% 

 

0.29% 

 

June 19, 2025

 

2,400 

 

2.5% 

 

0.29% 

 

July 2, 2025

 

5,300 

 

2.5% 

 

0.28% 

 

(1)

Total

 

$                  52,800 

 

 

 

 

 

$              625 

 

 

Note 10. Other Identifiable Intangible Assets

 

On November 29, 2012, the Company acquired certain software rights and personnel of a prepaid card program manager in Europe for approximately $1.8 million.  With this acquisition the Company expects to establish a European prepaid card presence.  The Company allocated the majority of the $1.8 acquisition cost to software used for its prepaid card business, with related services provided by its European data processing subsidiary.  The software is being amortized over eight years.  Amortization expense is $217,000 per year ($1.1 million over the next five years).  The gross carrying amount of the software is $1.8 million and as of June 30, 2015 and the accumulated amortization was $687,000.

 

The Company accounts for its customer list in accordance with ASC 350, Intangibles—Goodwill and Other. The acquisition of the Stored Value Solutions division of Marshall Bank First in 2007 resulted in a customer list intangible of $12.0 million which is being amortized over a 12 year period. Amortization expense is $1.0 million per year ($5.0 million over the next five years).  The gross carrying amount of the customer list intangible is $12.0 million and as of June 30, 2015 the accumulated amortization was $4.5 million.  For both 2015 and 2014, amortization expense for the second quarter was $250,000 and for the six months was $500,000.

 

Note 11. Recent Accounting Pronouncements

 

In January 2014, FASB Accounting Standards Update (“ASU”) No. 2014-04, amended ASC Sub-Topic 310-40 “Receivables—Troubled Debt Restructurings by Creditors.” The amendments clarify that an in substance repossession or foreclosure occurs, and the Company  is considered to have received physical possession of residential real estate property collateralizing a mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all

29

 


 

interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  The amendments in this update are effective for the annual periods beginning on or after December 15, 2014 and an entity can elect to adopt the amendments in this update using either a modified retrospective transition method or a prospective transition method as allowed in ASU No. 2014-04.  The implementation of ASU No. 2014-04 did not have a material effect on the Company’s consolidated financial statements.

 

In April 2014, the FASB issued ASU No. 2014-08 (ASU 2014-08), “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)”.  ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations.  Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations.  This new accounting guidance is effective for annual periods beginning after December 15, 2014.  The Company adopted ASU 2014-08 as presented in the Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Cash Flows and Note W, Discontinued Operations.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”.  This ASU establishes a comprehensive revenue recognition standard for virtually all industries, including those that previously followed industry-specific guidance such as the real estate and construction industries.  The revenue standard’s core principal is built on the contract between a vendor and a customer for the provision of goods and services.  It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.  To accomplish this, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) identify the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies the performance obligation.  Three basic transition methods are available - full retrospective, retrospective with certain practical expedients, and a cumulative effect approach.  Under the cumulative effect alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings.  The guidance in this ASU is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2016.  The Company does not expect this ASU to have a significant impact on its financial condition or results of operations.

 

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing”.  The amendments in this update require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements.  In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement.  The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction.  In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions.  The guidance in this ASU was effective for annual and interim periods beginning after December 15, 2014.  The adoption of this ASU did not have a significant impact on the Company’s financial condition or results of operations.

 

In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”.  The guidance in this ASU affects creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration and the Veterans Administration.  It requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if the following conditions are met:

 

1.

The loan has a government guarantee that is not separable from the loan before foreclosure.

2.

At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under the claim.

3.

At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.

 

Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and

interest) expected to be recovered from the guarantor.  The guidance in this ASU was effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  The guidance may be applied using a prospective transition method in which a reporting entity applies the guidance to foreclosures that occur after the date of adoption, or a modified retrospective transition using a cumulative-effect adjustment (through a reclassification to a separate other receivable) as of the beginning of the annual period of adoption.  Prior periods should not be adjusted.  A reporting entity must apply the same method of transition as elected under ASU 2014-04.  The adoption of this ASU did not have a significant impact on the Company's financial condition or results of operations. 

30

 


 

 

 

Note 12.  Regulatory Matters

 

It is the policy of the Federal Reserve that financial holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.  The policy provides that a financial holding company should not maintain a level of cash dividends that undermines the financial holding company’s ability to serve as a source of strength to its banking subsidiaries.  

 

Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval.  Under Delaware banking law, the Bank’s directors may declare dividends on common or preferred stock of so much of its net profits as they judge expedient, but the Bank must, before the declaration of a dividend on common stock from net profits, carry 50% of its net profits from the preceding period for which the dividend is paid to its surplus fund until its surplus fund amounts to 50% of its capital stock and thereafter must carry 25% of its net profits for the preceding period for which the dividend is paid to its surplus fund until its surplus fund amounts to 100% of its capital stock.

 

In addition to these explicit limitations, federal and state regulatory agencies are authorized to prohibit a banking subsidiary or financial holding company from engaging in an unsafe or unsound practice.  Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. In August, 2015, the Bank entered into an Amendment to a 2014 Consent Order with the FDIC pursuant to which the Bank may not pay dividends without prior FDIC approval. On May 11, 2015, the Company had received a Supervisory Letter pursuant to which the Company may not pay dividends without prior Federal Reserve approval. The Federal Reserve approved the payment of the interest on the Company’s trust preferred securities due September 15, 2015. Future payments are subject to future approval by the Federal Reserve.

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification of the Company and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Note 13.  Legal

 

On July 17, 2014, a class action securities complaint captioned Fletcher v. The Bancorp Inc., et al., was filed in the United States District Court for the District of Delaware.   A consolidated version of that class action complaint was filed before the same court on January 23, 2015 on behalf of Lead Plaintiffs Arkansas Public Employees Retirement System and Arkansas Teacher Retirement System.  Filed under the caption of In re The Bancorp Inc. Securities Litigation, the consolidated complaint asserts claims against Bancorp, Betsy Z. Cohen, Paul Frenkiel, Frank M. Mastrangelo and Jeremy Kuiper, and alleges that during a class period beginning April 24, 2013 through July 23, 2014, the defendants made materially false and/or misleading statements and/or failed to disclose that (i) Bancorp had wrongfully extended and modified problem loans and under-reserved for loan losses due to adverse loans, (ii) Bancorp’s operations and credit practices were in violation of the BSA, and (iii) as a result, Bancorp’s financial statements, press releases and public statements were materially false and misleading during the relevant period.   The consolidated complaint further alleges that, as a result, the price of Bancorp’s common stock was artificially inflated and fell once the defendants’ misstatements and omissions were revealed, causing damage to the plaintiffs and the other members of the class.   The complaint asks for an unspecified amount of damages, prejudgment and post-judgment interest and attorneys’ fees.  The defendants filed a motion to dismiss the consolidated complaint on March 24, 2015.  Following Bancorp’s April 1, 2015 announcement that it would be restating its financial statements, the parties entered into a stipulation dated April 10, 2015 allowing the plaintiffs to file an amended complaint within 28 days of Bancorp filing its restated financial statements, and giving the defendants 28 days to respond to the amended complaint.  The court approved the parties’ stipulation on April 14, 2015.  This litigation is in its preliminary stages.  We have been advised by our counsel in the matter that reasonably possible losses cannot be estimated.  We believe that the complaint is without merit and we intend to defend vigorously.

 

In addition, we are a party to various routine legal proceedings arising out of the ordinary course of our business.   Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or operations. 

 

 

Note 14. Segment Financials

 

The Company performed a strategic evaluation of its businesses in the third quarter of 2014.  As a result of the evaluation the Company decided to discontinue its commercial lending operations, as described in Note 15. Discontinued Operations.  The shift from a traditional

31

 


 

bank balance sheet led the Company to evaluate the remaining business structure.  Based on the continuing operations of the Company, it was determined that there would be four segments of the business; specialty finance, payments, corporate and discontinued operations.  Specialty finance includes commercial loan sales, SBA loans, leasing and SBLOCs and any deposits generated by those business lines.  Payments include prepaid cards, merchant payments and healthcare accounts.  Corporate includes our investment portfolio and corporate overhead and other non-allocated expenses.  Investment income is allocated to the payments segment.  These operating segments reflect the way the Company views its operations. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2015

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(in thousands)

Interest income

 

$                 11,516 

 

$                        0 

 

$                   8,856 

 

$                        - 

 

$                  20,372 

Interest allocation

 

 -

 

8,856 

 

(8,856)

 

 -

 

 -

Interest expense

 

1,265 

 

1,860 

 

210 

 

 -

 

3,335 

Net interest income

 

10,250 

 

6,996 

 

(210)

 

 -

 

17,037 

Provision for loan and lease losses

 

510 

 

 -

 

 -

 

 -

 

510 

Non-interest income

 

10,901 

 

16,034 

 

(2,211)

 

 -

 

24,724 

Non-interest expense

 

11,627 

 

31,174 

 

3,633 

 

 -

 

46,434 

Income (loss) from continuing operations before taxes

 

9,015 

 

(8,144)

 

(6,054)

 

 -

 

(5,183)

Income taxes

 

 -

 

 -

 

(2,684)

 

 -

 

(2,684)

Income (loss) from continuing operations

 

9,015 

 

(8,144)

 

(3,370)

 

 -

 

(2,499)

Income from discontinued operations

 

 -

 

 -

 

 -

 

2,673 

 

2,673 

Net income (loss)

 

$                   9,015 

 

$               (8,144)

 

$                  (3,370)

 

$                2,673 

 

$                       174 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2014

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

(in thousands)

Interest income

 

$                   8,787 

 

$                       14 

 

$                   8,809 

 

$                        - 

 

$                  17,610 

Interest allocation

 

 -

 

8,809 

 

(8,809)

 

 -

 

 -

Interest expense

 

987 

 

1,541 

 

291 

 

 -

 

2,819 

Net interest income

 

7,800 

 

7,282 

 

(291)

 

 -

 

14,791 

Provision for loan and lease losses

 

1,173 

 

 -

 

 -

 

 -

 

1,173 

Non-interest income

 

7,179 

 

16,194 

 

16 

 

 -

 

23,389 

Non-interest expense

 

10,188 

 

26,100 

 

(2,276)

 

 -

 

34,012 

Income (loss) from continuing operations before taxes

 

3,618 

 

(2,624)

 

2,001 

 

 -

 

2,995 

Income taxes

 

 -

 

 -

 

1,343 

 

 -

 

1,343 

Income (loss) from continuing operations

 

3,618 

 

(2,624)

 

658 

 

 -

 

1,652 

Loss from discontinued operations

 

 -

 

 -

 

 -

 

8,670 

 

8,670 

Net income (loss)

 

$                   3,618 

 

$                (2,624)

 

$                      658 

 

$                8,670 

 

$                  10,322 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2015

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(in thousands)

Interest income

 

$                 22,204 

 

$                       10 

 

$                 17,875 

 

$                        - 

 

$                  40,089 

32

 


 

Interest allocation

 

 -

 

17,875 

 

(17,875)

 

 -

 

 -

Interest expense

 

2,477 

 

3,650 

 

410 

 

 -

 

6,538 

Net interest income

 

19,726 

 

14,235 

 

(410)

 

 -

 

33,551 

Provision

 

1,175 

 

 -

 

 -

 

 -

 

1,175 

Non-interest income

 

14,914 

 

32,772 

 

(2,185)

 

 -

 

45,501 

Non-interest expense

 

22,076 

 

57,153 

 

8,065 

 

 -

 

87,294 

Income (loss) from continuing operations before taxes

 

11,389 

 

(10,145)

 

(10,661)

 

 -

 

(9,417)

Income taxes

 

 -

 

 -

 

(5,111)

 

 -

 

(5,111)

Income (loss) from continuing operations

 

11,389 

 

(10,145)

 

(5,550)

 

 -

 

(4,306)

Loss from discontinued operations

 

 -

 

 -

 

 -

 

4,694 

 

4,694 

Net income (loss)

 

$                 11,389 

 

$              (10,145)

 

$                  (5,550)

 

$                4,694 

 

$                       388 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2014

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

(in thousands)

Interest income

 

$                 17,235 

 

$                       29 

 

$                 16,900 

 

$                        - 

 

$                  34,165 

Interest allocation

 

 -

 

16,900 

 

(16,900)

 

 -

 

 -

Interest expense

 

1,993 

 

3,028 

 

702 

 

 -

 

5,723 

Net interest income

 

15,243 

 

13,902 

 

(702)

 

 -

 

28,442 

Provision

 

2,448 

 

 -

 

 -

 

 -

 

2,448 

Non-interest income

 

14,081 

 

32,956 

 

30 

 

 -

 

47,067 

Non-interest expense

 

20,159 

 

43,993 

 

1,065 

 

 -

 

65,217 

Income (loss) from continuing operations before taxes

 

6,716 

 

2,865 

 

(1,737)

 

 -

 

7,844 

Income taxes

 

 -

 

 -

 

2,966 

 

 -

 

2,966 

Income (loss) from continuing operations

 

6,716 

 

2,865 

 

(4,703)

 

 -

 

4,878 

Income from discontinued operations

 

 -

 

 -

 

 -

 

7,071 

 

7,071 

Net income (loss)

 

$                   6,716 

 

$                  2,865 

 

$                  (4,703)

 

$                7,071 

 

$                  11,949 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(in thousands)

Total assets

 

$             1,248,477 

 

$                 30,320 

 

$             2,727,651 

 

$              651,158 

 

$              4,657,607 

Total liabilities

 

$             1,213,905 

 

$            3,025,623 

 

$                102,324 

 

$                          - 

 

$              4,341,853 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(in thousands)

Total assets

 

$             1,099,914 

 

$                 30,503 

 

$             2,967,971 

 

$              887,929 

 

$              4,986,317 

Total liabilities

 

$             1,165,567 

 

$            3,198,129 

 

$                303,598 

 

$                          - 

 

$              4,667,294 

 

 

 

Note 15.  Discontinued Operations

 

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The Company performed a strategic evaluation of its businesses in the third quarter of 2014 and decided to discontinue its commercial lending operations and will focus on its specialty finance lending.  The loans which constitute the commercial loan portfolio are in the process of disposition. As such, financial results of the commercial lending operations are presented as separate from continuing operations on the consolidated statements of operations and assets  of the commercial lending operations to be disposed are presented as assets held for sale  on the consolidated balance sheets.

 

The following table presents financial results of the commercial lending business included in net income (loss) from discontinued operations for the three months and six months ended June 30, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30,

 

For the six months ended June 30,

 

2015

 

2014

 

2015

 

2014

 

 

 

(restated)

 

 

 

(restated)

 

(in thousands)

 

 

 

 

Interest income

$                             7,397 

 

$                          12,962 

 

$                          15,932 

 

$                          25,623 

Interest expense

 -

 

 -

 

 -

 

 -

Provision for loan and lease losses

 -

 

(598)

 

 -

 

13,262 

Net interest income (loss) after provision

7,397 

 

13,560 

 

15,932 

 

12,361 

 

 

 

 

 

 

 

 

Non interest income

2,288 

 

321 

 

2,336 

 

798 

Non interest expense

5,588 

 

1,818 

 

11,072 

 

3,571 

 

 

 

 

 

 

 

 

Income (loss) before taxes

4,097 

 

12,063 

 

7,196 

 

9,588 

Income taxes

1,424 

 

3,393 

 

2,502 

 

2,517 

Net income (loss)

$                             2,673 

 

$                            8,670 

 

$                             4,694 

 

$                             7,071 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

 

(in thousands)

Loans, net

$                         629,314 

 

$                        867,399 

Other assets

21,844 

 

20,530 

Total assets

$                         651,158 

 

$                        887,929 

 

 

 

 

 

Based upon an independent third party review, the Company marked the  commercial lending portfolio in discontinued operations to lower of cost or market.  The third party reviewed the majority of the credit portfolio and determined fair value for each specific loan that was reviewed.  Based on that review, weighted average fair values were applied to the loans not specifically reviewed   The results of discontinued operations do not include any future severance payments.  The Company has begun the process of selling its commercial portfolio and has sold loans with a book value of approximately $342.2 million,  of the approximately $1.1 billion in book value of loans in that portfolio as of the September  30, 2014 date of discontinuance of operations. The $342.2 million of loans sold had a face value of approximately $417.1 million.  These sales were comprised of the following:  Loans with an approximate face and book value of $267.6 million and $192.7 million, respectively, were sold in the fourth quarter of 2014 to a private securitization entity. The securitization is managed by an independent investor, which contributed $16 million of equity to that entity.  The balance of the sale was financed by the Bank and is reflected on the consolidated balance sheet as investment in unconsolidated subsidiary.  After $74.9 million of loan charges reflected in the difference between the face value and book value of the loans sold to the securitization, the Company recognized a gain of $17.0 million.  In the second quarter of 2015, an additional $149.6 million of loans were sold at a gain of approximately $2.2 million.

 

Note 16. Subsequent Events

 

The Company evaluated its June 30, 2015 financial statements for subsequent events through the date the financial statements were issued. 

 

In August 2015, the Bank entered into an Amendment to a 2014 Consent Order with the FDIC pursuant to which the Bank may not pay dividends without prior FDIC approval. The Bank took this action without admitting or denying any additional charges of unsafe or

34

 


 

unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA compliance program.  On May 11, 2015, the Company had received a Supervisory Letter pursuant to which the Company may not pay dividends without prior Federal Reserve approval. The Federal Reserve approved the payment of the interest on the Company’s trust preferred securities due September 15, 2015.  Future payments are subject to future approval by the Federal Reserve.

 

 

 

Part I - 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 Part II, Item 1A, under caption “Risk Factors” in this Form 10-Q and in Item 1A, under the caption “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2013 and in other of our public filings with the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially from those expressed or implied in this Form 10-Q. We caution readers not place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report except as required by applicable law.

 

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, 2013.  

 

 Overview

 

We are a Delaware financial holding company and our primary subsidiary, wholly owned, is The Bancorp Bank, which we refer to as the Bank. The vast majority of our revenue and income is currently generated through the Bank.  In our continuing lending operations we have four primary lines of specialty lending: securities backed lines of credit, or SBLOC, automobile fleet and other equipment leasing, Small Business Administration, or SBA, loans and loans generated for sale into capital markets primarily through commercial mortgage backed securities, or CMBS.  SBLOCs are loans which are generated through institutional banking affinity groups and are collateralized by marketable securities. SBLOCs are typically offered in conjunction with brokerage accounts and are offered nationally.  Automobile fleet and other equipment leases are generated in a number of Atlantic Coast and other states.  SBA loans and loans generated for sale into CMBS capital markets are made nationally.   

In our banking operations, we focus on providing our services on a national basis to organizations with a pre-existing customer base who can use one or more selected banking services tailored to support or complement the services provided by these organizations to their customers.  These services include private label banking; credit and debit card processing for merchants affiliated with independent service organizations; healthcare savings accounts for healthcare providers and third-party plan administrators; and prepaid cards, also known as stored value cards, for insurers, incentive plans, large retail chains and consumer service organizations.  We typically provide these services under the name and through the facilities of each organization with whom we develop a relationship.  We refer to this, generally, as affinity group banking. Our private label banking, merchant processing, healthcare accounts and prepaid card programs are a source of fee income and low-cost deposits. 

In Europe, we maintain three operational service subsidiaries and one subsidiary through which we offer prepaid card issuing services.  

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 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, our determination of the fair value of financial instruments and leveling within the valuation hierarchy, our determination of other than temporary impairment, and income taxes involve 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,

35

 


 

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 general amounts for historical loss experience. We also evaluate economic conditions and uncertainties in estimating losses and inherent risks in our loan portfolio. To the extent actual outcomes differ from our estimates, we may need additional provisions for loan losses. Any such additional provisions for loan losses will be a direct charge to our earnings.  See “Allowance for Loan and Lease Losses”.

The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. Our valuation methods and inputs consider factors such as types of underlying assets or liabilities, rates of estimated credit losses, interest rate or discount rate and collateral. Our best estimate of fair value involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, current delinquency rates, loan-to value ratios and the possibility of obligor refinancing.

At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period.

We periodically review our investment portfolio to determine whether unrealized losses on securities are temporary, based on evaluations of the creditworthiness of the issuers or guarantors, and underlying collateral, as applicable. In addition, we consider the continuing performance of the securities. We recognize credit losses through the income statement. If management believes market value losses are temporary and that we have the ability and intention to hold those securities to maturity, we recognize the reduction in other comprehensive income, through equity.

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. The Company is currently utilizing the tax expenses as calculated on year-to-date numbers, since small changes in annual estimates would have a significant change in the annual effective rate.  The Company is currently utilizing the tax expenses as calculated on year-to-date numbers, since small changes in annual estimates would have a significant change in the annual effective rate.

Recent Developments

In the third quarter of 2014, we decided to discontinue our Philadelphia-based commercial lending operations.  The loans which constitute that portfolio are in the process of disposition.  This represents a strategic shift to a focus on our national specialty lending programs including small fleet leasing, SBLOC, CMBS origination and SBA lending.  We anticipate using the proceeds from disposition to acquire investment securities and to provide liquidity to fund growth in our continuing specialty lending lines.  Yields we obtain from reinvestment of the proceeds will be subject to economic and other conditions at the time of reinvestment, including market interest rates, many of which will be beyond our control.  We cannot predict whether income resulting from the reinvestment of loans we hold for sale resulting from discontinued operations will match or exceed the amount from the sold loans.  To dispose of our commercial loan portfolio, we have engaged several intermediaries which are in the business of selling loans, primarily to other financial institutions, to assist in completing loan sales.  As of June 30, 2015, we had sold loans with a book value of approximately $342.2 million, of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations.  The $342.2 million of loans sold had a face value of approximately $417.1 million. These sales were comprised of the following:  Loans with an approximate face and book value of $267.6 million and $192.7 million, respectively, were sold in the fourth quarter of 2014 to a private securitization entity.  The securitization is managed by an independent investor, which contributed $16 million of equity to that entity. The balance of the sale was financed by the Bank and is reflected on the consolidated balance sheet as investment in unconsolidated subsidiary. See “Financial Condition-Investment in Unconsolidated Subsidiary” below.  After $74.9 million of loan charges  reflected in the difference between the face value and book value of the loans sold to the securitization, we recognized a gain of  $17.0 million.  In the second quarter of 2015, an additional $149.6 million of loans were sold at a gain of approximately $2.2 million. 

We have adjusted our financial statement presentation for items related to discontinued operations. Separately, we have restated our financial statements for periods from 2010 through September 30, 2014, the last date through which financial statements previously had been filed prior to  Form 10-K for the year ended December 31, 2014.  The restatement reflected the recognition of provisions for loan losses and loan charge-offs for discontinued operations in periods earlier than those in which  those charges were initially recognized. The majority of these loan charges were originally recognized in 2014, primarily in the third quarter, when commercial lending

36

 


 

operations were discontinued.  An additional $28.5 million of discontinued operations losses that were not previously reported were included within these periods.  Also, $12.7 million of losses incurred in 2015 related to loans that were resolved before the issuance date of our financial statements and were reflected in our 2014 financial statements.  Substantially all of the losses and corresponding restatement adjustments resulted from the discontinued commercial loan operations.

The Bank has entered into a Stipulation and Consent to the Issuance of a Consent Order, or the 2014 Consent Order, with the Federal Deposit Insurance Corporation , or FDIC, which became effective on June 5, 2014.  The Bank took this action without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation relating to the Bank’s Bank Secrecy Act, or BSA, compliance program. 

The 2014 Consent Order requires the Bank to take certain affirmative actions to comply with its BSA obligations, among them: appoint a qualified BSA/OFAC (Office of Foreign Assets Control) officer; revise the written BSA Compliance Program; develop and implement additional policies and procedures for suspicious activity monitoring and reporting; review and enhance customer due diligence and risk assessment processes; review past account activity to determine whether suspicious activity was properly identified and reported; strengthen internal controls, including augmenting oversight by the Bank’s Board of Directors of BSA activities; establish an independent testing program; and develop policies and procedures to govern staffing and training for BSA compliance.  The Bank has and expects to continue to expend significant management and financial resources to address the Bank’s BSA compliance program which will reduce our net income.

To date, the Bank has implemented multiple upgrades that address the requirements of the 2014 Consent Order, such as appointing a qualified BSA/OFAC officer, increasing oversight and staffing of the BSA compliance function, improving practices and procedures to monitor and report transactions, and increasing training, as well as adopting an independent testing program to ensure adherence to more effective BSA standards.  Although these measures have increased and will continue to add to non-interest expense, including significant initial consulting fees, we expect that the growth in our continuing lines of business should, over time, offset these expenses.  See “Non- Interest Expense”

Until the Bank submits to the FDIC a BSA report summarizing the completion of certain corrective action, the 2014 Consent Order places some restrictions on certain activities: the Bank is restricted from signing and boarding new independent sales organizations, issuing new non-benefit related reloadable prepaid card programs, establishing new distribution channels for existing non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments. Until such time as we receive the FDIC’s approval, restrictions in these specific areas may potentially impact their growth.  We do not believe that these restrictions will have a material impact on current revenue levels.  The Bank has utilized one primary consultant related to its BSA-AML (Anti-Money Laundering) program refinement and one primary consultant related to conducting a lookback review of historical transactions to confirm that suspicious activity was properly identified and reported in accordance with applicable law.  Subsequent to December 31, 2014 the primary BSA-AML consultant performed services resulting in $638,000 in billings reflected as expense in 2015, with no additional billings expected.  The primary consultant for the lookback performed services resulting in $5.2 million in billings and expense in the first quarter of 2015 and  $9.1 million in billings and expense in the second quarter of 2015. We cannot now estimate expenses for remaining lookback services; however, we expect that the lookback will be completed in the second quarter of 2016.

On August 27, 2015, the Bank entered into an Amendment to Consent Order, or the Amendment, with the FDIC, amending the 2014 Consent Order.  The Bank took this action without admitting or denying any additional charges of unsafe or unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA compliance program.  The Amendment provides that the Bank may not declare or pay any dividend without the prior written consent of the FDIC and for certain assurances regarding management.

On May 11, 2015, the Federal Reserve issued a letter, or the Supervisory Letter, to us as a result of the 2014 Consent Order and the Amendment, (which, at the time of the Supervisory Letter, was in proposed form), which provides that we may not pay any dividends on our common stock,   make any distributions to our European entities or make any interest payments on our trust preferred securities, without the prior written approval of the Federal Reserve.  It further provides that we may not incur any debt (excluding payables in the ordinary course of business) or redeem any shares of our stock, without the prior written approval of the Federal Reserve. The Federal Reserve has approved the payment of the interest on the Company’s trust preferred securities due September 15, 2015. Future payments are subject to future approval by the Federal Reserve.

We learned through a compliance examination that certain actions of third parties through which we issue cards are being scrutinized by the FDIC.  The FDIC has informed us that it is analyzing  certain operational aspects related to these card programs which may constitute unfair or deceptive acts or practices regulations under Section 5 of the Federal Trade Commission Act.  The operational practices of the third parties identified by the FDIC were the following: practices relating to the termination of a third-party rewards program tied to deposit accounts, including the timing of the notice of termination, and the disclosure of the effects of such termination

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on the consumer’s ability to obtain unredeemed rewards; practices performed by third parties relating to the time frames within which we must respond to a consumer’s notice of error with respect to electronic transactions in various types of deposit accounts; and practices relating to the timing and frequency of disclosed account fees and the manner by which the account holder is notified of these fees in periodic statements  generated by third parties.  While the Bank is contractually indemnified for related losses, civil money penalties, if assessed against the Bank, are not indemnified. 

In December, 2014, the FDIC issued new guidance which reclassified the Bank’s prepaid card deposits and most other deposits as brokered deposits because such deposits are obtained with the assistance of third parties. The reclassification resulted in a 10 basis point increase in our fourth quarter assessment, or approximately a $1.0 million increase in FDIC expense for that quarter.  A reduction in the assessment rate will depend on future FDIC evaluations of the Bank. The Bank’s deposits do not exhibit the volatility normally associated with brokered deposits obtained through deposit brokers, and are considered to be stable and low cost.

We are a defendant in a class action filed in July 2014 which, if resolved adversely to us, could materially adversely affect our financial condition and results of operations.  This litigation is in its preliminary stages.  We believe that the complaint is without merit and intend to defend vigorously.

 

Results of Operations

Second quarter 2015 to second quarter 2014

Net Income: Net loss from continuing operations for the second quarter of 2015 was $2.5 million, or $.07 per diluted share, compared to net income of $1.7 million, or $.04 per diluted share for the second quarter of 2014.   After discontinued operations, net income for the second quarter of 2015 was $174,000 compared to net income of $10.3 million for the second quarter of 2014. A $5.2 million pre-tax loss in continuing operations reflected $9.2 million of BSA- related consulting expense, $2.2 million increase in net interest income and a $1.3 million increase in non-interest income (excluding security gains) and a $663,000 decrease in the provision for loan and lease losses between those respective periods. Non-interest income (excluding security gains) increased to $24.5 million in second quarter 2015 from $23.2 million in second quarter 2014, reflecting increases in several categories which totaled $3.4 million, partially offset by a $1.8 million reduction in prepaid card fees and a $359,000 decrease in leasing income. The decrease in prepaid card fees  reflected  a reduction of certain fees on existing business and the exit in November 2014 of one of the Bank’s prepaid card clients as described in the Company’s 8-K filed April 15, 2014. The $3.4 million increase in the various other income categories reflected a $1.1 million increase in income on investment in unconsolidated subsidiary, which resulted from the sale of loans from discontinued operations on December 30, 2014.  Gain on sale of loans was $5.9 million for the second quarter of 2015, compared to $5.2 million in second quarter 2014 reflecting higher margins, but lower volume than the previous year.  Net income from discontinued operations was $2.7 million in second quarter 2015, compared to $8.7 million of net income from  discontinued operations for the second quarter of 2014 reflecting lower interest income due to loan sales and loan paydowns.  Diluted loss per share was $0.00 in second quarter 2015 compared to diluted earnings per share of $0.27 in the second quarter of 2014.  Return on average assets and return on average equity were .01% and .22% for the second quarter of 2015,  compared to .95% and 16.49% for the second quarter of 2014.  

 

Net Interest Income:  Our net interest income for second quarter 2015 increased to $17.0 million, an increase of $2.2 million or 15.2% from $14.8 million in second quarter 2014.   Our interest income for second quarter 2015 increased to $20.4 million, an increase of $2.8 million or 15.7% from $17.6 million for second quarter 2014.  The increase in interest income resulted primarily from higher balances of loans.   Our average loans and leases increased to $1.26 billion for second quarter 2015 from $864.5 million for second quarter 2014, while related interest income increased $2.8 million on a tax equivalent basis.  Our average investment securities decreased to $1.51 billion for second quarter 2015 from $1.52 billion for second quarter 2014, while related interest income decreased $323,000 on a tax equivalent basis.

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for second quarter 2015 decreased to 2.23% from 2.69% in the second quarter of 2014, a decrease of 46 basis points.  The decrease in the net interest margin reflected lower yields on loans and higher balances of lower yielding deposits at the Federal Reserve Bank.    In second quarter 2015, the average yield on our loans decreased to 3.63% from 4.09% for second quarter 2014, a decrease of 46 basis points. The decrease in loan yields reflected a higher proportion of SBLOC loans, which have lower yields and low levels of losses. Yields on taxable investment securities in second quarter 2015 were comparable at 2.00% compared to 2.02% for second quarter 2014, an increase of 2 basis points.  Yields on non-taxable investments were lower at 3.57% compared to 3.96%, respectively, a decrease of 39 basis points.  Average interest earning deposits increased $299.0 million, or 45.9% to $950.0 million in second quarter 2015 from $651.0 million in second quarter 2014, as overnight investments were deployed into investment securities and loans.  The interest cost of total deposits and interest bearing liabilities was comparable at 0.30% for second quarter 2015 compared to 0.28% in second quarter 2014. 

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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 annualized rates, for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

2015

 

2014

 

 

 

 

 

 

 

 

(restated)

 

 

Average

 

 

 

Average

 

Average

 

 

 

Average

 

 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate

 

 

(dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans net of unearned fees and costs **

 

$                 1,240,932 

 

$             11,258 

 

3.63% 

 

$                    846,171 

 

$               8,644 

 

4.09% 

Leases - bank qualified*

 

24,023 

 

424 

 

7.06% 

 

18,293 

 

244 

 

5.34% 

Investment securities-taxable

 

982,332 

 

4,906 

 

2.00% 

 

1,062,951 

 

5,356 

 

2.02% 

Investment securities-nontaxable*

 

523,843 

 

4,674 

 

3.57% 

 

459,164 

 

4,547 

 

3.96% 

Interest earning deposits at Federal Reserve Bank

 

950,019 

 

557 

 

0.23% 

 

651,002 

 

411 

 

0.25% 

Federal funds sold  and securities purchased under agreement to resell

 

44,280 

 

158 

 

1.43% 

 

24,133 

 

85 

 

1.41% 

Net interest earning assets

 

3,765,429 

 

21,977 

 

2.33% 

 

3,061,714 

 

19,287 

 

2.52% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

(4,234)

 

 

 

 

 

(7,414)

 

 

 

 

Assets held for sale

 

679,581 

 

7,397 

 

4.35% 

 

1,294,532 

 

13,124 

 

4.06% 

Other assets

 

302,973 

 

 

 

 

 

(11,070)

 

 

 

 

 

 

$                 4,743,749 

 

 

 

 

 

$                 4,337,762 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$                 4,080,804 

 

$               2,835 

 

0.28% 

 

$                 3,698,142 

 

$               2,298 

 

0.25% 

Savings and money market

 

313,142 

 

374 

 

0.48% 

 

332,973 

 

364 

 

0.44% 

Time

 

1,400 

 

 

0.00% 

 

10,844 

 

33 

 

0.00% 

Total deposits

 

4,395,346 

 

3,215 

 

0.29% 

 

4,041,959 

 

2,695 

 

0.27% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

 -

 

 -

 

0.00% 

 

 -

 

 -

 

0.00% 

Repurchase agreements

 

5,167 

 

 

0.31% 

 

16,320 

 

11 

 

0.27% 

Subordinated debt

 

13,401 

 

116 

 

3.46% 

 

13,401 

 

113 

 

3.37% 

Total deposits and interest bearing liabilities

 

4,413,914 

 

3,335 

 

0.30% 

 

4,071,680 

 

2,819 

 

0.28% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

10,933 

 

 

 

 

 

15,007 

 

 

 

 

Total liabilities

 

4,424,847 

 

 

 

 

 

4,086,687 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

318,902 

 

 

 

 

 

251,075 

 

 

 

 

 

 

$                 4,743,749 

 

 

 

 

 

$                 4,337,762 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$             26,039 

 

 

 

 

 

$             29,592 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

1,784 

 

 

 

 

 

1,677 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$             24,255 

 

 

 

 

 

$             27,915 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

2.23% 

 

 

 

 

 

2.69% 

 

 

 

 

 

 

 

 

 

* Full taxable equivalent basis, using a 35% statutory tax rate.

 

 

 

 

 

 

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For second quarter 2015, average interest earning assets increased to $3.77 billion, an increase of $703.7 million or 23.0% from second quarter 2014.  The increase reflected increased average balances of loans and leases of $400.5 million or 46.3%,  net of decreases in 

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average balances of investment securities of $15.9 million or 1.0%.  Average demand and interest checking deposits increased $382.7 million or 10.3%.  We experienced growth in prepaid, institutional banking, payment acceptance (card payment and ACH processing) and other deposit categories, due to the acquisition of new customers. 

 

Provision for Loan and Lease Losses.  Our provision for loan and lease losses was $510,000 for the second quarter of 2015 compared to $1.2 million for the second quarter of 2014.   The $663,000 decrease reflects higher reserves on specific loans in the second quarter of 2014 .  The allowance for loan losses increased to $4.4 million or 0.45% of total loans at June 30, 2015, from $3.6 million or 0.42% of total loans at December 31, 2014.   We believe that our allowance is adequate to cover expected losses   For more information about our provision and allowance for loan and lease losses and our loss experience, see “Financial Condition-Allowance for loan and lease losses”, “-Net charge-offs,” and “-Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings,” below and Note 6 to the financial statements

 

Non-Interest Income. Non-interest income was $24.5 million in second quarter 2015 compared to $23.2 million in second quarter 2014 before gain on sale of investment securities of $193,000 in the second quarter of 2015 and $159,000 in the second quarter of 2014.  The $1.3 million or 5.6% increase between those respective periods reflected increases in several categories. These increases were partially offset by a $1.8 million or 13.7% decrease in prepaid card fees to $11.1 million for second quarter 2015.  The decrease reflected a reduction of certain fees on existing business and the exit in November, 2014 of one of the Bank’s prepaid card clients as described in the Company’s Current Report on Form 8-K filed April 15, 2014.  Gain on sale of loans, reflecting higher margins but lower volume, increased $689,000 or 13.2% to $5.9 million for second quarter 2015.  Gain on sale of loans and related expense result from the sale of commercial real estate loans to institutions which package such loans in secondary commercial mortgage backed securities markets.  Service fees on deposit accounts increased $523,000 or 38.0% to $1.9 million for second quarter 2015 from $1.4 million for second quarter 2014 reflecting health savings account service charges assessed on a larger number of accounts. Leasing income decreased $359,000 between those respective periods reflecting gains on disposition of leased vehicles in 2014 due to a higher volume of such dispositions.  Affinity fees increased $228,000 or 34.1% to $896,000 for second quarter 2015 from $668,000 for second quarter 2014.  The increase resulted from the growth in one affinity relationship.  Other non-interest income increased $1.8 million or 625.8% to $2.1 million for second quarter 2015 from $287,000 in second quarter 2014The increase reflected a $1.1 million increase in income on investment in unconsolidated subsidiary. The investment resulted from the sale of loans from discontinued operations on December 30, 2014 .

 

Non-Interest Expense. Total non-interest expense was $46.4 million for second quarter 2015, an increase of $12.4 million or 36.5% over $34.0 million for second quarter 2014.  The increase reflected an increase of $7.0 million of BSA and lookback consulting expenses.  Lookback expenses are being incurred to analyze historical transactions for potential BSA exceptions as required by the 2014 Order.  Salaries and employee benefits amounted to $17.4 million, an increase of $1.6 million or 10.4% over $15.7 million for second quarter 2014.  The increase in salaries and employee benefits reflected staff additions and related expense for increased BSA and other compliance, SBA loan production and leasing business development.  Depreciation and amortization increased $62,000 or 5.5% to $1.2 million in second quarter 2015 from $1.1 million in second quarter 2014 which reflected increased depreciation costs related to leasehold improvements and equipment for staff additions and information technology upgrades. Rent and occupancy increased $279,000 or 24.9% to $1.4 million in second quarter 2015 from $1.1 million in second quarter 2014 which reflected additional main office operations and compliance space and new Florida office space for BSA staff.  Data processing increased $297,000 or 8.6% to $3.8 million in second quarter 2015 from $3.5 million in second quarter 2014.  The increase reflected increased account and transaction volume.  Printing and supplies decreased $21,000 or 3.6% to $568,000 in second quarter 2015 from $589,000 in second quarter 2014.  Audit expense increased $373,000 or 93.3% to $773,000 in second quarter 2015 from $400,000 in second quarter 2014. The increase reflected additional external audit expense including expense related to compliance audits. Legal expense increased $346,000 or 114.6% to $648,000 in second quarter 2015 from $302,000 in second quarter 2014. The increase reflected additional legal fees relating to regulatory matters. FDIC insurance expense increased $1.6 million or 146.7% to $2.8 million for second quarter 2015 from $1.1 million in second quarter 2014, reflecting a higher assessment rate (see “Recent Developments”) and increased average deposits.  Software expense increased $400,000 or 35.6% to $1.5 million in second quarter 2014 from $1.1 million  in second quarter 2014 reflecting additional information technology infrastructure to improve efficiency and scalability. Securitization and servicing expense decreased $330,000 or 46.9% to $373,000 for second quarter 2015 from $703,000 for second quarter 2014 as a result of decreased volume. Consulting increased $323,000 or 79.0% to $732,000 in second quarter 2015 from $409,000 in second quarter 2014 reflecting  $200,000 of expense for an independent review of  our BSA and AML compliance programs including consulting related to the internal audit of  these programs.  Other non-interest expense increased $431,000 or 9.6% to $4.9 million in second quarter 2015 from $4.5 million in second quarter 2014.  The increase reflected an increase of $221,000 in prepaid card fraud losses and increased travel expense.   

 

Income Taxes.    Income tax benefit for continuing operations was $2.7 million for the second quarter 2015 compared to $1.3 million of expense in the second quarter 2014. 

 

First six months 2015 to first six months 2014

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Net Income: Net loss from continuing operations for the first six months of 2015 was $4.3 million, or $.11 per diluted share, compared to net income of $4.9 million, or $.13 per diluted share for the first six months  of 2014. After discontinued operations, net income for the first six months of 2015 was $388,000 compared to net income of $11.9 million for the first six months of 2014.  A $5.1 million increase in net interest income and a $1.3 million decrease in the provision for loan and lease losses were more than offset by a $1.4 decrease in non-interest income (excluding security gains), a  $12.8 million increase in BSA related consulting expenses and a  $9.3 million increase in other non-interest expense.   Non-interest income (excluding security gains) decreased to $45.2 million in the first six months of 2015 from $46.7 million in the first six months of 2014, reflecting increases in several categories which totaled $4.0 million which were more than offset by a $2.1 decrease in prepaid card fees and a $3.1 million decrease in gain on sale of loans. The decrease in prepaid card fees  reflected  a reduction of certain fees on existing business and the exit in November 2014 of one of the Bank’s prepaid card clients as described in the Company’s 8-K filed April 15, 2014. The decrease in gain on sale of loans primarily reflected a decrease in volume.  The $4.0 million increase in the various other income categories reflected a $2.1 million increase in income on investment in unconsolidated subsidiary, which resulted from the sale of loans from discontinued operations on Deceimber 30, 2014.    Net interest income increased to $33.6 million from $28.4 million primarily as a result of higher loan and investment security balances.  The provision for loan and lease losses decreased $1.3 million to $1.2 million in the first six months of 2015, compared to $2.4 in the first six months of 2014. Net income from discontinued operations was $4.7 million for the first six months of 2015, compared to net income of $7.1 million from discontinued operations for the first six months of 2014.  Diluted earnings per share was $0.12 for the first six months of 2015 compared to diluted earnings per share of $0.18 in the first six months of 2014.  Return on average assets   and return on average equity were .02% and .25% for the first six months of 2015, compared to 0.52% and 9.35% for the first six months of 2014.  

 

Net Interest Income:  Our net interest income for the first six months of 2015 increased to $33.6 million, an increase of $5.1 million, or 18.0%, from $28.4 million in the first six months of 2014. Our interest income for first the six months of 2015 increased to $40.1 million, an increase of $5.9 million or 17.3% from $34.2 million for the first six months of 2014. The increase in interest income resulted primarily from higher balances of loans and investment securities.  Investment security balances have been increased to achieve higher returns compared to overnight investments.  Our average loans and leases increased to $1.25 billion for the first six months of 2015 from $852.3  million for the first six months of 2014, while related interest income increased $5.0 million on a tax equivalent basis.  Our average investment securities increased to $1.53 billion for the first six months of 2015 from $1.47 billion for the first six months of 2014, while related interest income increased $1.5 million on a tax equivalent basis.   

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the first six months of 2015 decreased to 2.23% from 2.48% in the first six months of 2014, a decrease of 25 basis points.  The decrease in the net interest margin reflected lower yields on loans and higher balances of lower yielding deposits at the Federal Reserve Bank. In the first six months of 2015, the average yield on our loans decreased to 3.55% from 4.06% for the first six months of 2014, a decrease of 51 basis points. The decrease in loan yields reflected a higher proportion of SBLOC loans, which have lower yields and low levels of losses.  Yields on taxable investment securities were comparable at 2.00% compared to 2.02% an increase of 2 basis points.  Additionally, yields on non-taxable investments were higher at 3.67% compared to 3.65%, respectively, an increase of 2 basis points.  Average interest earning deposits increased $71.1 million, or 7.5% to $1.02  billion in the first six months of 2015 from $952.0 million in the first six months of 2014.  The interest cost of total deposits and interest bearing liabilities was comparable at 0.29% for the first six months of 2015 compared to 0.27% in the first six months of 2014.    

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 annualized rates, for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

2015

 

2014

 

 

 

 

 

 

 

 

(restated)

 

 

Average

 

 

 

Average

 

Average

 

 

 

Average

 

 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate

 

 

(dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans net of unearned fees and costs **

 

$                 1,227,728 

 

$             21,765 

 

3.55% 

 

$                    833,973 

 

$             16,945 

 

4.06% 

Leases - bank qualified*

 

20,807 

 

716 

 

6.88% 

 

18,290 

 

490 

 

5.36% 

Investment securities-taxable

 

1,005,397 

 

10,066 

 

2.00% 

 

1,041,218 

 

10,493 

 

2.02% 

Investment securities-nontaxable*

 

528,060 

 

9,680 

 

3.67% 

 

425,512 

 

7,757 

 

3.65% 

Interest earning deposits at Federal Reserve Bank

 

1,023,112 

 

1,179 

 

0.23% 

 

951,983 

 

1,175 

 

0.25% 

Federal funds sold  and securities purchased under agreement to resell

 

45,259 

 

322 

 

1.42% 

 

27,321 

 

191 

 

1.40% 

Net interest earning assets

 

3,850,363 

 

43,728 

 

2.27% 

 

3,298,297 

 

37,051 

 

2.25% 

 

 

 

 

 

 

 

 

 

 

 

 

 

41

 


 

Allowance for loan and lease losses

 

(3,938)

 

 

 

 

 

(3,192)

 

 

 

 

Assets held for sale

 

718,630 

 

15,931 

 

4.43% 

 

1,290,719 

 

26,042 

 

4.04% 

Other assets

 

288,981 

 

 

 

 

 

5,740 

 

 

 

 

 

 

$                 4,854,036 

 

 

 

 

 

$                 4,591,564 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$                 4,185,239 

 

$               5,442 

 

0.26% 

 

$                 3,857,839 

 

$               4,535 

 

0.24% 

Savings and money market

 

315,943 

 

860 

 

0.54% 

 

415,122 

 

868 

 

0.42% 

Time

 

1,400 

 

12 

 

1.71% 

 

12,086 

 

69 

 

1.14% 

Total deposits

 

4,502,582 

 

6,314 

 

0.28% 

 

4,285,047 

 

5,472 

 

0.26% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

 -

 

 -

 

0.00% 

 

11 

 

 -

 

0.00% 

Repurchase agreements

 

9,135 

 

13 

 

0.28% 

 

16,686 

 

23 

 

0.28% 

Subordinated debt

 

13,401 

 

211 

 

3.15% 

 

13,401 

 

228 

 

3.40% 

Total deposits and interest bearing liabilities

 

4,525,118 

 

6,538 

 

0.29% 

 

4,315,145 

 

5,723 

 

0.27% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

9,976 

 

 

 

 

 

18,593 

 

 

 

 

Total liabilities

 

4,535,094 

 

 

 

 

 

4,333,738 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

318,942 

 

 

 

 

 

257,826 

 

 

 

 

 

 

$                 4,854,036 

 

 

 

 

 

$                 4,591,564 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$             53,121 

 

 

 

 

 

$             57,370 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

3,638 

 

 

 

 

 

2,886 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$             49,483 

 

 

 

 

 

$             54,484 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

2.23% 

 

 

 

 

 

2.48% 

 

 

 

 

 

 

 

 

 

* Full taxable equivalent basis, using a 35% statutory tax rate.

 

 

 

 

 

 

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the first six months of 2015, average interest earning assets increased to $3.85 billion, an increase of $552.1 million or 16.7% from the first six months of 2014.  The increase reflected increased average balances of loans and leases of $396.3 million or 46.5%, and increased average balances of investment securities of $66.7 million or 4.5%.    Average demand and interest checking deposits increased $327.4 million or 8.5%.  We experienced growth in prepaid, institutional banking, payment acceptance (card payment and ACH processing) and other deposit categories, due to the acquisition of new customers. 

 

Provision for Loan and Lease Losses. Our provision for loan and lease losses was $1.2 million for the first six months of 2015 compared to $2.4 million for the first six months of 2014.  The $1.3 million decrease in the provision reflects higher reserves on specific loans in 2014.  The decrease in the provision is based on our evaluation of the adequacy of our allowance for loan and leases losses, particularly in light of current economic conditions.  At June 30, 2015, our allowance for loan and lease losses amounted to $4.4 million or 0.45% of total loans  compared to $3.6 million or 0.42% of total loans at December 31, 2014.  For more information about our provision and allowance for loan and lease losses and our loss experience, see “Financial Condition-Allowance for loan and lease losses”, “-Net charge-offs,” and “-Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings,” below and Note 6 to the financial statements

 

Non-Interest Income. Non-interest income was $45.2 million in the first six months of 2015 compared to $46.7 million in the first six months of 2014 before gains on securities of $273,000 and $400,000 respectively.  The $1.4 million or 3.1% decrease between those respective periods reflected a $2.1 million or 8.0% decrease in prepaid fees to $24.3 million for the first six months of 2015.  The decrease reflected a reduction of certain fees on existing business and the exit in November, 2014 of one of the Bank’s prepaid card clients as described in the Company’s Current Report on Form  8-K filed April 15, 2014.  Gain on sale of loans decreased $3.1 million or 29.2% to $7.6 million for the first six months of 2015 primarily due to a decrease in volume.  Gain on sale of loans and related expense result from the sale of commercial real estate loans to institutions which package such loans in secondary commercial mortgage backed securities markets.  Service fees on deposit accounts increased $1.1 million or 41.5% to $3.7 million for the first six months of 2015 from $2.6 million for the first six months of 2014 reflecting health savings account service charges assessed on a larger number of accounts.  Affinity fees increased $106,000 or 8.8% to $1.3 million for the first six months of 2015 from $1.2 million for the first six months of 2014.  This increase resulted primarily from growth in  one affinity relationship .  Other non-interest income increased $2.7 

42

 


 

million or 288.7% to $3.6 million for the first six months of 2015 from $918,000 in the first six months of 2014This increase reflected a $2.1 million increase in income on investment in  unconsolidated subsidiary, which resulted from the sale of loans from discontinued operations on December 30, 2014.    

 

Non-Interest Expense. Total non-interest expense was $87.3 million for the first six months of 2015, an increase of $22.1 million or 33.9% over $65.2 million for the first six months of 2014.  The increase reflected an increase of $12.8 million in BSA and lookback consulting expenses.  Lookback expenses are being incurred to analyze historical transactions for potential BSA exceptions as required by the 2014 Order.   Salaries and employee benefits amounted to $32.9 million, an increase of $2.0 million or 6.5% over $30.9 million for the first six months of 2014.  The increase in salaries and employee benefits reflected staff additions and related expense for increased BSA and other compliance, SBA loan production and leasing business development.  Depreciation and amortization increased $214,000 or 9.8% to $2.4 million in the first six months of 2015 from $2.2 million in the first six months of 2014 which reflected increased depreciation costs related to leasehold improvements and equipment for staff additions and information technology upgrades.  Rent and occupancy increased $637,000 or 29.6% to $2.8 million in the first six months of 2015 from $2.1 million in the first six months of 2014 which reflected increased main office operations space and new Florida office space for BSA staff.  Data processing expense increased $270,000 or 4.0% to $7.0 million in the first six months of 2015 from $6.7 million in the first six months of 2014.  The increase reflected increased account and transaction volume.  Printing and supplies increased $38,000 or 3.3% to $1.2 million in the first six months of 2015 from $1.1 million in the first six months of 2014.  Audit expense increased $423,000 or 54.5% to $1.2 million in the first six months of 2015 from $776,000 in the first six months of 2014.  The increase reflected additional external audit expense including expense related to compliance audits.  Legal expense increased $1.1 million or 120.3% to $2.1 million for the first six months of 2015 from $932,000 in the first six months of 2014.  The increase in legal expense reflected  higher fees related to regulatory matters.  FDIC insurance expense increased $2.8 million or 99.9% to $5.6 million for the first six months of 2015 from $2.8 million in the first six months of 2014, reflecting a higher assessment rate (see “Recent Developments”) and increased average deposits.  Software expense increased $582,000 or 25.4% to $2.9 million in the first six months of 2015 from $2.3 million in the first six months of 2014  reflecting additional information technology infrastructure to improve efficiency and scalabilitySecuritization and servicing expense decreased $429,000 or 33.5% to $852,000 in the first six months of 2015 from $1.3 million in the first six months of 2014 reflecting decreased volume. Consulting expense increased $1.1 million or 100.9% to $2.2 million in the first six months of 2015 from $1.1 million in the first six months of 2014 reflecting $586,000 of expense for an independent review of our  BSA and AML compliance programs including consulting related to the internal audit of these programs.  Other non-interest expense increased $527,000 or 6.4% to $8.8 million in the first six months of 2015 from $8.2 million in the first six months of 2014.  The $527,000 increase reflected an increase of $277,000 in prepaid card fraud losses and increased travel expense

 

Income Taxes.  Income tax benefit for continuing operations was $5.1 million for the first six months of 2015 compared to an expense of $3.0 million in the first six months of 2014.  

 

 

 

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 daily operations primarily in overnight federal funds or in our interest-bearing account at the Federal Reserve.

 

Our primary source of funds for our financing activities has been cash inflows from net increases in deposits.  While net deposits decreased $305.7 million in the first six months of 2015, the balance of  interest earning deposits at the Federal Reserve Bank on June 30, 2015 was $937.0 million and represented a significant amount of on balance sheet liquidity.  The decrease in deposits reflected the exit of less profitable relationships. Loan repayments, also a source of funds, were exceeded by new loan disbursements during that period and securities maturities and repayments were exceeded by new purchases.  While we do not have a traditional branch system, we believe that our core deposits, which include our demand, interest checking, savings and money market accounts, have similar characteristics to those of a bank with a branch system. We seek to set rates on our deposits at levels competitive with the rates offered in our market; however we do not seek to compete principally on rate. The focus of our business model is to identify affinity groups that control significant amounts of deposits as part of their business. A key component to the model is that the deposits are both stable and “sticky,” in the sense that they do not react to fluctuations in the market. However, certain components of the deposits do experience seasonality, creating excess liquidity at certain times.  We have been taking steps to reduce excess liquidity as a result of low overnight rates, by exiting less profitable relationships and deploying overnight investments into loans and securities.

 

Historically, we have also used sources outside of our deposit products to fund our loan growth, including Federal Home Loan Bank advances, repurchase agreements, and institutional (brokered) certificates of deposit as a significant funding source. We have shifted to primarily using our deposits as our funding source as a result of deposit growth. We still maintain our secured borrowing lines with the Federal Home Loan Bank of Pittsburgh and other unsecured lines from our correspondent banks, which include Atlantic Central Bankers Bank and PNC Bank. We have a $511.5 million line of credit with the Federal Home Loan Bank and $34.0 million in additional lines

43

 


 

of credit with correspondent banks. As of  June 30, 2015, we had no amounts outstanding on our borrowing lines.  We expect to continue to maintain our facility with the Federal Home Loan Bank and our correspondent banks. 

 

To manage excess cash balances maintained at the Federal Reserve, the Bank has exited and will likely continue to exit less profitable deposit relationships.  We have historically down streamed the majority of the capital funding we have generated from common stock offerings to the Bank. The holding company has, as of August 2015 in excess of $10 million in available cash.  We have historically not paid dividends and have no plans to do so in the foreseeable future. In addition, as a result of a supervisory letter, Federal Reserve approval is required for any dividend from us, and FDIC approval is required for any dividend from the Bank.  The Federal Reserve approved the payment of the interest on the Company’s trust preferred securities due September 15, 2015.  Future payments are subject to future approval by the Federal Reserve.

 

As a holding company conducting substantially all of our business through our subsidiaries, our need for liquidity consists principally of cash needed to make required interest payments on our trust preferred securities.  As of August, 2015, we had approximate cash reserves of $10 million at the holding company. Current quarterly interest payments on the $13.4 million of trust preferred securities are approximately $125,000 based on a floating rate of 3.25% over LIBOR.  We expect that the conditions under which the Amendment to the 2014 Consent Order was issued will have been remediated and the FDIC will permit the Bank to resume paying dividends to us to fund holding company operations.  There can, however, be no assurance that the FDIC will, in fact allow the resumption of Bank dividends to us at the end of that period or at all and, accordingly, there is risk that we will need to obtain alternate sources of funding.  There can be no assurance that such sources would be available to us on acceptable terms or at all.

 

Included in our cash and cash-equivalents at June 30, 2015 were $937.0 million of interest earning deposits which primarily consisted of deposits with the Federal Reserve and included deposits for reserve requirements. Traditionally, we sell our excess funds overnight to other financial institutions, with which we have correspondent relationships, to obtain better returns. As the federal funds rates decreased to the same 25 basis point level offered by the Federal Reserve, we have adjusted our strategy to retain our excess funds at the Federal Reserve, which also offers the full guarantee of the federal government. In addition, we diverted a portion of our excess funds to short term securities to generate better returns.

 

Funding was directed primarily at cash outflows required for purchases of investment securities (net of repayments), which were $(110.3) million for the year to date ended June 30, 2015 and $187.5 million for the prior year to date ended June 30, 2014 and funding for net loan growth, which was $93.1 million and $166.3 million, respectivelyDeposit outflows resulted from exiting less profitable customer deposit relationships in the six months ended June 30, 2015.  We had outstanding commitments to fund loans, including unused lines of credit of $797.4 million and $709.1 million as of June 30, 2015 and December 31, 2014, respectively. We have begun the process of selling our discontinued  loan portfolio and have sold loans with a book value of approximately $342.2 million,  of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations. The $342.2 million  of loans sold had a face value of approximately $417.1 million. These sales were comprised of the following:  Loans with an approximate face and book value of $267.6 million and $192.7 million, respectively, were sold in the fourth quarter of 2014 to a private securitization entity. The securitization is managed by an independent investor, which contributed $16 million of equity to that entity.  The balance of the sale was financed by the Bank and is reflected on the  consolidated balance sheet as investment in unconsolidated subsidiary.  After $74.9 million of loan charges  reflected in the difference between the face value and book value of the loans sold to the securitization, we recognized a gain of  $17.0 million.   In the second quarter of 2015, an additional $149.6 million of loans were sold at a gain of approximately $2.2 million which was recorded in discontinued operations.

 

We must comply with capital adequacy guidelines issued by the FDIC.  A bank must, in general, have a Tier 1 leverage ratio of 5.00%, a ratio of Tier I capital to risk-weighted assets of 8% and a ratio of total capital to risk-weighted assets of 10.0% in order to be considered “well capitalized.” The Tier I leverage ratio is the ratio of Tier 1 capital to 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 intangibles.  At June 30, 2015 we were “well capitalized” under banking regulations. 

 

The following table sets forth our regulatory capital amounts and ratios for the periods indicated. Basel III capital changes became effective January 1, 2015. Basel III added an additional ratio which measures common equity to risk weighted assets which  is included  below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital

 

Tier 1 capital

 

Total capital

 

Common equity

 

 

to average

 

to risk-weighted

 

to risk-weighted

 

tier 1 to risk

 

 

assets ratio

 

assets ratio

 

assets ratio

 

weighted assets

 

 

 

 

 

 

 

 

 

As of June 30, 2015

 

 

 

 

 

 

 

 

The Bancorp

 

6.46% 

 

13.68% 

 

13.88% 

 

13.68% 

The Bancorp Bank

 

6.08% 

 

12.89% 

 

13.08% 

 

12.89% 

44

 


 

"Well capitalized" institution (under FDIC regulations-Basel III)

 

5.00% 

 

8.00% 

 

10.00% 

 

6.50% 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

 

 

 

 

 

 

 

The Bancorp

 

7.07% 

 

11.54% 

 

11.67% 

 

n/a

The Bancorp Bank

 

6.46% 

 

10.46% 

 

10.59% 

 

n/a

"Well capitalized" institution (under FDIC regulations)

 

5.00% 

 

6.00% 

 

10.00% 

 

n/a

 

 

 

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 an institution’s interest margin resulting from changes in market interest rates.

 

We monitor, manage and control interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as “gap analysis”) and an interest rate risk management model. With the interest rate risk management model, we project future net interest income and then estimate the effect of various changes in interest rates and balance sheet growth rates on that projected net interest income. We also use the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios. 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 we estimate will reprice during each time period and cumulatively through the end of each time period.

 

Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest earning assets and interest bearing liabilities will respond to general changes in market rates, future cash flows and discount rates. 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 interest income while a negative gap would tend to affect net interest income adversely.

 

The following table sets forth the estimated maturity or repricing structure of our interest earning assets and interest bearing liabilities at June 30, 2015. We estimate the repricing characteristics of deposits based on historical performance, past experience at other institutions, wholly judgmental predictions 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.  The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities, which 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:

 

 

 

 

 

 

 

 

 

 

Commercial loans held for sale

 

$                   157,355 

 

$                     2,962 

 

$                   41,444 

 

$                13,124 

 

$                69,616 

Loans net of deferred loan costs

 

672,799 

 

46,884 

 

140,551 

 

104,751 

 

3,048 

Investment securities

 

267,957 

 

226,215 

 

245,066 

 

134,966 

 

589,472 

Interest earning deposits

 

936,989 

 

 -

 

 -

 

 -

 

 -

Securities purchased under agreements to resell

 

40,068 

 

 -

 

 -

 

 -

 

 -

Total interest earning assets

 

1,917,813 

 

273,099 

 

385,617 

 

239,717 

 

592,520 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

45

 


 

Demand and interest checking

 

2,501,342 

 

209,839 

 

209,839 

 

 -

 

 -

Savings and money market

 

80,316 

 

160,632 

 

80,316 

 

 -

 

 -

Time deposits

 

1,400 

 

 -

 

 -

 

 -

 

 -

Securities sold under agreements to repurchase

 

2,357 

 

 -

 

 -

 

 -

 

 -

Subordinated debenture

 

13,401 

 

 -

 

 -

 

 -

 

 -

Total interest bearing liabilities

 

2,598,816 

 

370,471 

 

290,155 

 

 -

 

 -

Gap

 

$                 (681,003)

 

$                 (97,372)

 

$                   95,462 

 

$              239,717 

 

$              592,520 

Cumulative gap

 

$                 (681,003)

 

$               (778,375)

 

$               (682,913)

 

$            (443,196)

 

$              149,324 

Gap to assets ratio

 

-15%

 

-2%

 

2%

 

5%

 

13%

Cumulative gap to assets ratio

 

-15%

 

-17%

 

-15%

 

-10%

 

3%

 

* While demand deposits are non-interest bearing, related fees paid to affinity groups may reprice according to specified indices.

 

The methods used to analyze interest rate sensitivity in this table have 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 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.   Accordingly actual results can and often do differ from projections.

Financial Condition

 

General.    Our total assets at June 30, 2015 were $4.66 billion, of which our total loans were $968.0 million. At December 31, 2014 our total assets were $4.99 billion, of which our total loans were $874.6 million.    

 

Interest earning deposits and federal funds sold.  At June 30, 2015, we had a total of $937.0 million of interest earning deposits compared to $1.06 billion at December 31, 2014 a decrease of $122.3 million or 11.5%.  These deposits were comprised primarily of balances at the Federal Reserve, which pays interest on such balances.  Reductions in such balances reflected deployment of such funds into higher yielding loans and securities and the exit of less profitable deposit relationships.

Investment portfolio.  For detailed information on the composition and maturity distribution of our investment portfolio, see Note 5 to the Financial Statements. Total investment securities decreased to $1.46 billion at June 30, 2015, a decrease of $123.7 million or 7.8% from year-end 2014. The decrease in investment securities was primarily a result of paydowns of residential and commercial mortgage-backed securitiesOther securities, included in the held-to-maturity classification at June 30, 2015, consisted of three securities secured by diversified portfolios of corporate securities, one bank senior note, two single issuer trust preferred securities and one pooled trust preferred security. 

 

A total of $18.0 million of other debt securities - single issuers is comprised of the following: (i) amortized cost of  two single issuer trust preferred securities of $10.9 million, of which one security for $1.9 million was issued by a bank and one security for $8.9 million was issued by an insurance company;  and (ii) the book value of a bank senior note of $7.0 million. 

 

A total of $75.7 million of other debt securities – pooled is comprised of the following: (i) one pooled trust preferred security for $82,000, which was collateralized by bank trust preferred securities;  and (ii) book value of three securities consisting of diversified portfolios of corporate securities of $75.7 million.

 

The following table provides additional information related to our single issuer trust preferred securities as of June 30, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

Security A

 

$                1,902 

 

$                 2,000 

 

$                      98 

 

Not rated

Security B

 

8,988 

 

5,193 

 

(3,795)

 

Not rated

 

 

 

 

 

 

 

 

 

Class: All of the above are trust preferred securities.

 

 

 

 

 

 

 

 

 

The following table provides additional information related to our pooled trust preferred securities as of June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46

 


 

Pooled issue

 

Class

 

Book value

 

Fair value

 

Unrealized gain

 

Credit rating

 

Excess subordination

 

Pool A (7 performing issuers)

 

Mezzanine

 

$                     82 

 

$                   174 

 

$                     92 

 

CAA1

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* There is no excess subordination for these securities.

 

 

 

 

 

 

 

 

 

 

 

 

 

Under the accounting guidance related to the recognition of other-than-temporary impairment charges on debt securities an impairment on a debt security is deemed to be other-than-temporary if it meets the following conditions: (i) we intend to sell or it is more likely than not we will be required to sell the security before a recovery in value, or (ii) we do not expect to recover the entire amortized cost basis of the security. If we intend to sell or it is more likely than not we will be required to sell the security before a recovery in value, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. For those other-than-temporarily impaired debt securities which do not meet the first condition and for which we do not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit impairment, which is recorded in net realized capital losses, and the remaining impairment, which is recorded in other comprehensive income. Generally, a security’s credit impairment is the difference between its amortized cost basis and the best estimate of its expected future cash flows discounted at the security’s effective yield prior to impairment. The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s new cost basis. As prescribed by accounting standards, for year to date June 30, 2015 and June 30, 2014 respectively, we recognized no other-than-temporary impairment charges related to trust preferred securities classified in our held-to-maturity portfolio.

Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $1.1 million at June 30, 2015 compared to $1.0 million at December 31, 2014.  

Investment securities with a carrying value of $22.8 million at June 30, 2015 and $25.7 million at December 31, 2014, were pledged as collateral for Federal Home Loan Bank advances and to secure securities sold under repurchase agreements as required or permitted by law.

Loans held for sale.  Loans held for sale are comprised of commercial mortgage loans, Small Business Administration, or SBA loans and residential mortgage loans originated for sale in the secondary market.  The fair value of commercial mortgage loans and the SBA loans originated for sale is based on purchase commitments or quoted prices for the same or similar loans.  Commercial loans held for sale increased to $284.5 million at June 30, 2015 from $217.1 million at December 31, 2014.

Loan portfolio. Total loans increased to $968.0 million at June 30, 2015 from $874.6 million at December 31, 2014.

 

The following table summarizes our loan portfolio, not including loans held for sale, by loan category for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

 

 

 

 

SBA non real estate

$                       63,390 

 

$                       62,425 

SBA commercial mortgage

85,234 

 

82,317 

SBA construction

16,977 

 

20,392 

Total SBA loans

165,601 

 

165,134 

Direct lease financing

222,169 

 

194,464 

SBLOC

512,269 

 

421,862 

Other specialty lending

32,118 

 

48,625 

Other consumer loans

27,044 

 

36,168 

 

959,201 

 

866,253 

Unamortized loan fees and costs

8,832 

 

8,340 

Total loans, net of deferred loan costs

$                     968,033 

 

$                     874,593 

 

 

 

 

 

Allowance for loan and lease  losses.  We review the adequacy of our allowance for loan and lease losses on at least a quarterly basis to determine that the provision for loan losses is made in an amount necessary to maintain our allowance at a level that is appropriate, based on management’s estimate of inherent 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 ASC 450, Contingencies, and ASC 310, Receivables. The

47

 


 

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 reserve all losses inherent in the portfolio at the time we classify the loan or lease. This “specific” portion of the allowance is the total of potential, although unconfirmed, losses for individually classified loans. In this process, we establish specific reserves based on an analysis of the most probable sources of repayment and liquidation of collateral. While each impaired loan is individually evaluated, not every loan requires a reserve when the collateral value and estimated cash flows exceed the current balance.

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 including management’s experience with similar loan and lease portfolios at other institutions, the historic loss experience of our peers and a review of statistical information from various industry reports to determine the 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: SBLOCs, SBA loans,  direct lease financing and other specialty lending and consumer loans.  We augment historical experience for each loan pool 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, average loan size and other factors as appropriate.  Our Chief Risk Officer, who reports directly to our audit committee, oversees the loan review department processes and measures the adequacy of the allowance independently of management.  The loan review department’s oversight parameters include borrower relationships over $3.0 million, whether they are performing or not, and loans that are 90 days or more past due or which have been previously adversely classified.  Approximately 46% and 45% the continuing loan portfolio was reviewed at June 30, 2015 and December 31, 2014, respectively.  The loan review policy guideline specifies a minimum of 60% of total loan balances are reviewed annually. As of June 30, 2015 and December 31, 2014 that percentage was maintained based upon the total of discontinued and continuing operations loans.  As a result of transferring loans into “Discontinued Operations”, management is currently assessing the review scope for the remaining portfolio for appropriate coverage levels for its continuing loan portfolio. In 2014,the loan review department performed additional loan review procedures for commercial  loans which were partially or fully subject to charge off in 2012, 2013 and 2014, all criticized loans ( loans classified as special mention, substandard and doubtful) and loans which had been assigned a potential loss allocation by an independent third party loan review consultant. In 2014 that loan review consultant reviewed all commercial loan relationships greater than  $2 million and non accrual loans  and continues to update such coverage on a quarterly basis.

The following table presents delinquencies by type of loan as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

June 30, 2015

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                       - 

 

$                      - 

 

$                       - 

 

$                  792 

 

$                  792 

 

$               62,598 

 

$               63,390 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

85,234 

 

85,234 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

16,977 

 

16,977 

Direct lease financing

 

4,319 

 

662 

 

516 

 

 -

 

5,497 

 

216,672 

 

222,169 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

512,269 

 

512,269 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

32,118 

 

32,118 

Consumer - other

 

 

 -

 

 -

 

 -

 

 

5,659 

 

5,660 

Consumer - home equity

 

74 

 

 -

 

104 

 

1,874 

 

2,052 

 

19,332 

 

21,384 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,832 

 

8,832 

 

 

$               4,394 

 

$                  662 

 

$                  620 

 

$               2,666 

 

$               8,342 

 

$             959,691 

 

$             968,033 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

December 31, 2014

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                       - 

 

$                      - 

 

$                       - 

 

$                       - 

 

$                       - 

 

$               62,425 

 

$               62,425 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

82,317 

 

82,317 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,392 

 

20,392 

Direct lease financing

 

5,083 

 

1,832 

 

149 

 

 -

 

7,064 

 

187,400 

 

194,464 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

421,862 

 

421,862 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

48,625 

 

48,625 

Consumer - other

 

 

 -

 

 -

 

 -

 

 

8,654 

 

8,663 

48

 


 

Consumer - home equity

 

 -

 

457 

 

 -

 

1,907 

 

2,364 

 

25,141 

 

27,505 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,340 

 

8,340 

 

 

$               5,092 

 

$               2,289 

 

$                  149 

 

$               1,907 

 

$               9,437 

 

$             865,156 

 

$             874,593 

 

Although 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, our ongoing loss experience and that of our peers, changes in management’s assumptions as to future delinquencies, recoveries and losses, deterioration of specific credits and management’s intent with regard to the disposition of loans and leases.

 

The following table summarizes select asset quality ratios for each of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

As of or

 

 

for the six months ended

 

 

June 30,

 

 

2015

 

2014

 

 

 

 

(restated)

 

 

 

 

 

Ratio of the allowance for loan losses to total loans

 

0.45% 

 

0.72% 

Ratio of the allowance for loan losses to nonperforming loans (1)

 

132.44% 

 

164.21% 

Ratio of nonperforming assets to total assets (1)

 

0.07% 

 

0.08% 

Ratio of net charge-offs to average loans

 

0.04% 

 

0.06% 

Ratio of net charge-offs to average loans annualized

 

0.07% 

 

0.12% 

 

 

 

 

 

(1) Includes loans 90 days past due still accruing interest

 

 

 

 

The ratio of the allowance for loan and lease losses to total loans  decreased to 0.45% at June 30, 2015 from 0.72% at June 30, 2014.  The increase reflected the impact of lower reserves on specific loans.  The ratio of the allowance for loan losses to non-performing loans decreased to 132.44% at June 30, 2015 from 164.21% at June 30, 2014 primarily as a result of decreases in the allowance which exceeded the relative decrease in the non-performing loans.  The ratio of non-performing assets to total assets decreased primarily as a result of decreases in the allowance .  Net charge-offs to average loans decreased to 0.04% for the six months ended June 30, 2015 from 0.06% for the six months ended June 30, 2014, primarily due to lower charge-offs which decreased more than the relative increase in loan balances.

Net charge-offs.  Net charge-offs were $461,000 for the six months ended June 30, 2015, a decrease of $68,000 over net charge-offs for the same period of 2014The majority of the charge-offs in the first six months of 2015 were associated with consumer loan relationships.

 

Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings.  Loans are considered to be non-performing if they are on a non-accrual basis or they are past due 90 days or more and still accruing interest. 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 interest, and is in the process of collection.  Troubled debt restructurings are loans with terms that have been renegotiated to provide a reduction or deferral of interest or principal because of a weakening in the financial positions of the borrowers.  The following tables summarize our non-performing loans, other real estate owned and loans past due 90 days or more still accruing interest (in thousands). 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

June 30,

 

December 31,

 

 

2015

 

2014

 

2014

 

 

 

 

(restated)

 

 

Non-accrual loans

 

 

 

 

 

 

SBA non real estate

 

$                 1,055 

 

$                  1,233 

 

$                        - 

Consumer

 

1,611 

 

2,180 

 

1,907 

Total non-accrual loans

 

2,666 

 

3,413 

 

1,907 

 

 

 

 

 

 

 

Loans past due 90 days or more

 

620 

 

119 

 

149 

Total non-performing loans

 

3,286 

 

3,532 

 

2,056 

49

 


 

Other real estate owned

 

 -

 

 -

 

 -

Total non-performing assets

 

$                 3,286 

 

$                  3,532 

 

$                 2,056 

 

Loans that were modified as of June 30, 2015 and December 31, 2014 and considered troubled debt restructurings are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBA non real estate

 

 

$               184 

 

$                184 

 

 

$               197 

 

$                197 

SBA commercial mortgage

 

 

16,998 

 

16,998 

 

 -

 

 -

 

 -

Consumer

 

 

443 

 

443 

 

 

346 

 

346 

Total

 

 

$          17,625 

 

$           17,625 

 

 

$               543 

 

$                543 

 

The balances below provide information as to how the loans were modified as troubled debt restructurings loans at June 30, 2015 and December 31, 2014 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBA non real estate

 

$                    - 

 

$               184 

 

$                    - 

 

$                 - 

 

$               197 

 

$                   - 

SBA commercial mortgage

 

 -

 

14,050 

 

2,948 

 

 -

 

 -

 

 -

Consumer

 

 -

 

338 

 

105 

 

 -

 

346 

 

 -

Total

 

$                    - 

 

$          14,572 

 

$            3,053 

 

$                 - 

 

$               543 

 

$                   - 

 

As of June 30, 2015 loans there were no loans that were restructured within the last 12 months that have subsequently defaulted  .

As of June 30, 2015 and December 31, 2014,  we had no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

 

The following table provides information about impaired loans at June 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

June 30, 2015

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      263 

 

$                      263 

 

$                        - 

 

$                      205 

 

$                           - 

Consumer - other

338 

 

338 

 

 -

 

342 

 

 -

Consumer - home equity

861 

 

1,257 

 

 -

 

1,078 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 -

SBA non real estate

976 

 

976 

 

259 

 

710 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

750 

 

750 

 

750 

 

970 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

1,239 

 

1,239 

 

259 

 

915 

 

 -

Consumer - other

338 

 

338 

 

 -

 

342 

 

 -

50

 


 

Consumer - home equity

1,611 

 

2,007 

 

750 

 

2,048 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                          - 

 

$                          - 

 

$                        - 

 

$                          - 

 

$                          - 

Consumer - other

346 

 

346 

 

 -

 

139 

 

 

Consumer - home equity

827 

 

927 

 

 -

 

1,043 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

197 

 

197 

 

40 

 

967 

 

 -

Consumer - other

 -

 

 -

 

 -

 

369 

 

 

Consumer - home equity

1,080 

 

1,080 

 

271 

 

885 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

197 

 

197 

 

40 

 

967 

 

 -

Consumer - other

346 

 

346 

 

 -

 

508 

 

 -

Consumer - home equity

1,907 

 

2,007 

 

271 

 

1,928 

 

 -

 

 

We had $2.7 million of non-accrual loans at June 30, 2015 compared to $1.9 million of non-accrual loans at December 31, 2014. The $759,000 increase in non-accrual loans was primarily due to $1.8 million of loans placed on non-accrual status partially offset by $353,000 of loan charge-offs and $726,000 of loan payments.  Loans past due 90 days or more still accruing interest amounted to $620,000 at June 30, 2015 and $149,000 at December 31, 2014. The $471,000 increase reflected $1.4 million of additions partially offset by $918,000 of loan payments. 

 

We had no other real estate owned at June 30, 2015 and December 31, 2014

 

The following table classifies our loans (not including loans held for sale) by categories which are used throughout the industry as of June 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non real estate

 

$           61,729 

 

$                  - 

 

$              976 

 

$                  - 

 

$                    - 

 

$                 1,595 

 

$                    (910)

 

$              63,390 

SBA commercial mortgage

 

63,754 

 

 -

 

 -

 

 -

 

 -

 

3,591 

 

17,889 

 

85,234 

SBA construction

 

13,663 

 

 -

 

 -

 

 -

 

 -

 

1,481 

 

1,833 

 

16,977 

Direct lease financing

 

78,123 

 

 -

 

519 

 

 -

 

 -

 

4,013 

 

139,514 

 

222,169 

SBLOC

 

188,239 

 

 -

 

 -

 

 -

 

 -

 

6,210 

 

317,820 

 

512,269 

Other specialty lending

 

30,328 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,790 

 

32,118 

Consumer

 

7,171 

 

 

 

3,176 

 

 -

 

 -

 

 -

 

16,697 

 

27,044 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,832 

 

8,832 

 

 

$         443,007 

 

$                  - 

 

$           4,671 

 

$                  - 

 

$                    - 

 

$               16,890 

 

$              503,465 

 

$            968,033 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$           49,214 

 

$                  - 

 

$              197 

 

$                  - 

 

$                    - 

 

$                    669 

 

$                12,345 

 

$              62,425 

SBA commercial mortgage

 

59,086 

 

 -

 

 -

 

 -

 

 -

 

965 

 

22,266 

 

82,317 

SBA construction

 

18,911 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,481 

 

20,392 

Direct lease financing

 

58,994 

 

 -

 

99 

 

 -

 

 -

 

 -

 

135,371 

 

194,464 

SBLOC

 

142,286 

 

 -

 

 -

 

 -

 

 -

 

57,360 

 

222,216 

 

421,862 

Other specialty lending

 

46,990 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,635 

 

48,625 

Consumer

 

14,196 

 

346 

 

1,907 

 

 -

 

 -

 

73 

 

19,646 

 

36,168 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,340 

 

8,340 

 

 

$         389,677 

 

$              346 

 

$           2,203 

 

$                  - 

 

$                    - 

 

$               59,067 

 

$              423,300 

 

$            874,593 

 

* Unrated loans consist of performing loans which did not exhibit any negative characteristics which would require the loan to be evaluated, or fell below the dollar threshold requiring review and are not loans otherwise selected in ongoing portfolio evaluation.  The 

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scope of the Bank’s loan review policy encompasses commercial and construction loans and leases which singly or in the aggregate in the case of loans with related borrowers, equal or exceed $3.0 million.  The loan portfolio review coverage was approximately 46%  at  June 30, 2015 and approximately 45% at December 31, 2014.  As a result of transferring loans into “Discontinued Operations”, management is currently assessing the review scope for the remaining portfolio to ensure appropriate coverage levels are maintained. This review is performed by the loan review department, which is independent of the loan department and reports directly to the audit committee.  All classified loans are reviewed by the independent loan review function of the Bank. Potential problem loans, which are identified by either the independent loan review department or line management, are also reviewed.    All loans are subject to review by their relationship manager and senior loan personnel.  Also, many of the Bank’s loans are relatively short term, and are subject to reconsideration with a full review in loan committee between one and three years after the loan is made and after the prior review.

 

Premises and equipment, netPremises and equipment amounted to $19.3 million at June 30, 2015 compared to $17.7 million at December 31, 2014.  The increase reflected additional information technology upgrades.

 

Assets held for sale. Assets held for sale as a result of discontinued operations, primarily commercial, commercial mortgage and construction loans, amounted to $651.1 million at June 30, 2015 compared to $887.9 million at December 31, 2014.  The decrease reflected loan sales of approximately $149.6 million and other principal paydowns. 

 

Deposits.    Our primary source of funding is deposit acquisition. We offer a variety of deposit accounts with a range of interest rates and terms, including demand, checking and money market accounts. One strategic focus is growing these accounts through affinity groups.  At June 30, 2015, we had total deposits of $4.32 billion compared to $4.62 billion at December 31, 2014, a decrease of $305.7 million or 6.6%. The decrease reflected the planned exit of higher cost deposit relationships which did not have adequate income components.  Increases in average deposit trends have allowed us to virtually eliminate time deposits, which may bear higher interest rates than transaction accounts. The following table presents the average balance and rates paid on deposits for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

For the year ended

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

Average

 

Average

 

Average

 

Average

 

 

 

balance

 

rate

 

balance

 

rate

 

 

 

 

 

 

Demand and interest checking *

 

$               4,185,239 

 

0.26% 

 

$              3,746,958 

 

0.24% 

Savings and money market

 

315,943 

 

0.54% 

 

366,160 

 

0.43% 

Time

 

 

1,400 

 

1.71% 

 

7,974 

 

1.20% 

 

Total deposits

 

$               4,502,582 

 

0.28% 

 

$              4,121,092 

 

0.26% 

 

 

 

 

 

 

 

 

 

 

Borrowings.  We had no outstanding advances from the Federal Home Loan Bank as of June 30, 2015 and December 31, 2014.  Additionally, we had no outstanding balances on the Bank’s lines of credit as of June 30, 2015 and December 31, 2014We do not have any policy prohibiting us from incurring debt.

Other liabilities.    Other liabilities amounted to $10.0 million at June 30, 2015 compared to $12.7 million at December 31, 2014, representing a decrease of $2.7 million

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except as discussed in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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, 2014.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, 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. Other than the changes discussed below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2015. As described in Part 2, Item 9A: Controls and Procedures, in our annual report on Form 10-K for the year ended December 31, 2014, management identified  material weaknesses in our internal control over financial control surrounding our disclosure controls and procedures, with respect to:  Credit file maintenance and evaluation – We did not properly maintain credit files, including the evaluation of loan collateral and industry-specific information, relevant in determining the appropriate risk-ratings of our loans, in identifying the ultimate occurrence of loss events, and in calculating impairment under ASC 310 “Receivables”. Discontinued Operations – Our controls were not effective in identifying the appropriate classification of items to be included as discontinued operations.

Management identified various remedial steps to be implemented with respect to the material weakness in internal control over financial reporting.

Credit File Maintenance: First, the Bank discontinued its Philadelphia-based commercial loan operations effective September 30, 2014.  Next, for the continuing lines of businesses, management has and will, on an ongoing basis, reevaluate its loan policies surrounding risk-rating and the evaluation of collateral, including industry-specific information to timely identify factors which might indicate loss events and loan impairments.  Additionally, the Bank’s appraisal policies have been modified to require that new appraisals must be ordered for all identified impaired loans every 18 months or more frequently, if needed, and that these appraisals will be controlled by the Chief Credit Officer, who reports directly to the Audit Committee. Finally, the Bank will establish a separate loan committee for each remaining line of business: security backed lines of credit, Small Business Administration, commercial mortgage backed loan sales, leasing and consumer. These new separate committees will review all identified impaired loans each quarter and consider recommendations by the loan review department as to the potential weaknesses in these identified loans and whether earlier loss recognition or further impairment is required.

Discontinued Operations (non-routine transactions):

We have enhanced our internal controls over our financial close process to ensure that appropriate research is conducted in determining the proper accounting treatment for all non-recurring transactions, including transactions and balances that qualify as discontinued operations.  Such accounting analysis and conclusions are reviewed and approved by senior financial management.

Subject to satisfactory completion of the design and testing of these new procedures for effectiveness, management believes that the implementation of these new procedures will remediate the material weakness.

Except for the changes discussed above there has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

53

 


 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

For a discussion of a consent order issued by the FDIC, captioned In the Matter of the Bancorp Bank, Wilmington, Delaware, effective June 5, 2014, see Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Recent Developments.”

 

On July 17, 2014, a class action securities complaint captioned Fletcher v. The Bancorp Inc., et al., was filed in the United States District Court for the District of Delaware.   A consolidated version of that class action complaint was filed before the same court on January 23, 2015 on behalf of Lead Plaintiffs Arkansas Public Employees Retirement System and Arkansas Teacher Retirement System.  Filed under the caption of In re The Bancorp Inc. Securities Litigation, the consolidated complaint asserts claims against Bancorp, Betsy Z. Cohen, Paul Frenkiel, Frank M. Mastrangelo and Jeremy Kuiper, and alleges that during a class period beginning April 24, 2013 through July 23, 2014, the defendants made materially false and/or misleading statements and/or failed to disclose that (i) Bancorp had wrongfully extended and modified problem loans and under-reserved for loan losses due to adverse loans, (ii) Bancorp’s operations and credit practices were in violation of the BSA, and (iii) as a result, Bancorp’s financial statements, press releases and public statements were materially false and misleading during the relevant period.   The consolidated complaint further alleges that, as a result, the price of Bancorp’s common stock was artificially inflated and fell once the defendants’ misstatements and omissions were revealed, causing damage to the plaintiffs and the other members of the class.   The complaint asks for an unspecified amount of damages, prejudgment and post-judgment interest and attorneys’ fees.  The defendants filed a motion to dismiss the consolidated complaint on March 24, 2015.  Following Bancorp’s April 1, 2015 announcement that it would be restating its financial statements, the parties entered into a stipulation dated April 10, 2015 allowing the plaintiffs to file an amended complaint within 28 days of Bancorp filing its restated financial statements, and giving the defendants 28 days to respond to the amended complaint.  The court approved the parties’ stipulation on April 14, 2015.  This litigation is in its preliminary stages.  We have been advised by our counsel in the matter that reasonably possible losses cannot be estimated.  We believe that the complaint is without merit and we intend to defend vigorously.

 

In addition, we are a party to various routine legal proceedings arising out of the ordinary course of our business.   Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or operations. 

 

54

 


 

 

Item 6. Exhibits

 

The Exhibits furnished as part of this Quarterly Report on Form 10-Q are identified in the Exhibit Index immediately following the signature page of this Report.  Such Exhibit Index is incorporated herein by reference.

 

SIGNATURES

 

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)

 

 

 

September 28, 2015

 

/s/ Frank Mastrangelo

Date

 

Frank Mastrangelo

 

 

President/Chief Executive Officer

 

 

 

September 28, 2015

 

/s/ Paul Frenkiel

Date

 

Paul Frenkiel

Executive Vice President of Strategy,

 

 

Chief Financial Officer and Secretary

 

 

 

 

 

 

 

 

Exhibit No.

 

Description

 

 

3.1

Certificate of Incorporation (1)

 

 

3.2

Bylaws (1)

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certifications

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certifications

 

 

32.1

Section 1350 Certifications

 

 

32.2

Section 1350 Certifications

101.INS

XBRL Instance Document (2)

101.SCH

XBRL Taxonomy Extension Schema Document(2)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document(2)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document(2)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document(2)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document(2)

 

 

 

(1)

Filed previously as an exhibit to our Registration Statement on Form S-4, as amended, registration number 333-117385, and by this reference incorporated herein.

 

 

55