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EX-31.2 - EX-31.2 - Bancorp, Inc.tbbk-20160930xex31_2.htm
EX-31.1 - EX-31.1 - Bancorp, Inc.tbbk-20160930xex31_1.htm
EX-3.3 - EX-3.3 - Bancorp, Inc.tbbk-20160930xex3_3.htm
EX-3.2 - EX-3.2 - Bancorp, Inc.tbbk-20160930xex3_2.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:     September 30, 2016



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 [ ]





 

 


 

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 November 4, 2016 there were 55,319,204 outstanding shares of common stock, $1.00 par value.





 

 

 


 

THE BANCORP, INC



Form 10-Q Index



 

 



 

Page

Part I Financial Information

Item 1

Financial Statements:

3



 

 



Consolidated Balance Sheets – September 30, 2016 (unaudited) and December 31, 2015

3



 

 



Unaudited Consolidated Statements of Operations – Three and nine months ended September 30, 2016 and 2015

4



 

 



Unaudited Consolidated Statements of Comprehensive Income – Nine months ended September 30, 2016 and 2015

6



 

 



Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Nine months ended September 30, 2016

7



 

 



Unaudited Consolidated Statements of Cash Flows – Nine months ended September 30, 2016 and 2015

8



 

 



Notes to Unaudited Consolidated Financial Statements

9



 

 

Item 2.

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

38



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

60



 

 

Item 4.

Controls and Procedures

61



 

 

Part II Other Information



 

 

Item 1.

Legal proceedings

62

Item 6.

Exhibits

63



 

 

Signatures

 

63



 

 







 

2


 



PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS





 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(unaudited)

 

 



 

(in thousands)

ASSETS

 

 

 

 

Cash and cash equivalents

 

 

 

 

Cash and due from banks

 

$                    4,061 

 

$                    7,643 

Interest earning deposits at Federal Reserve Bank

 

312,605 

 

1,147,519 

Securities purchased under agreements to resell

 

39,463 

 

 -

Total cash and cash equivalents

 

356,129 

 

1,155,162 



 

 

 

 

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

 

1,334,927 

 

1,070,098 

Investment securities, held-to-maturity (fair value $91,787 and $91,599, respectively)

 

93,495 

 

93,590 

Commercial loans held for sale

 

562,957 

 

489,938 

Loans, net of deferred loan fees and costs

 

1,198,237 

 

1,078,077 

Allowance for loan and lease losses

 

(6,058)

 

(4,400)

Loans, net

 

1,192,179 

 

1,073,677 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

 

11,014 

 

1,062 

Premises and equipment, net

 

21,797 

 

21,631 

Accrued interest receivable

 

10,496 

 

9,471 

Intangible assets, net

 

5,682 

 

4,929 

Deferred tax asset, net

 

29,765 

 

36,207 

Investment in unconsolidated entity, at fair value

 

157,396 

 

178,520 

Assets held for sale from discontinued operations

 

386,155 

 

583,909 

Other assets

 

55,519 

 

47,629 

Total assets

 

$             4,217,511 

 

$             4,765,823 



 

 

 

 

LIABILITIES

 

 

 

 

Deposits

 

 

 

 

Demand and interest checking

 

$             3,364,103 

 

$             3,602,376 

Savings and money market

 

402,832 

 

383,832 

Time deposits

 

 -

 

428,549 

Total deposits

 

3,766,935 

 

4,414,757 



 

 

 

 

Securities sold under agreements to repurchase

 

353 

 

925 

Short-term borrowings

 

70,000 

 

-

Subordinated debenture

 

13,401 

 

13,401 

Other liabilities

 

27,744 

 

16,739 

Total liabilities

 

3,878,433 

 

4,445,822 



 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Common stock - authorized, 75,000,000 shares of $1.00 par value; 55,419,204 and 37,861,218

 

 

 

 

shares issued at September 30, 2016 and December 31, 2015, respectively

 

55,419 

 

37,861 

Treasury stock, at cost (100,000 shares)

 

(866)

 

(866)

Additional paid-in capital

 

359,793 

 

300,549 

Accumulated deficit

 

(83,169)

 

(15,449)

Accumulated other comprehensive income (loss)

 

7,901 

 

(2,094)

Total shareholders' equity

 

339,078 

 

320,001 



 

 

 

 

Total liabilities and shareholders' equity

 

$             4,217,511 

 

$             4,765,823 



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



3

 


 







THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

For the three months ended September 30,

 

For the nine months ended September 30,



 

2016

 

2015

 

2016

 

2015



 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$               17,697 

 

$               12,811 

 

$               48,928 

 

$               35,042 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

8,350 

 

4,562 

 

22,782 

 

14,628 

Tax-exempt interest

 

142 

 

3,097 

 

639 

 

9,388 

Federal funds sold/securities purchased under agreements to resell

 

146 

 

143 

 

301 

 

465 

Interest earning deposits

 

397 

 

580 

 

1,677 

 

1,759 



 

26,732 

 

21,193 

 

74,327 

 

61,282 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

2,906 

 

3,277 

 

8,692 

 

9,591 

Securities sold under agreements to repurchase

 

 -

 

 

 

14 

Short-term borrowings

 

153 

 

 -

 

263 

 

 -

Subordinated debenture

 

131 

 

117 

 

383 

 

328 



 

3,190 

 

3,395 

 

9,339 

 

9,933 

Net interest income

 

23,542 

 

17,798 

 

64,988 

 

51,349 

Provision for loan and lease losses

 

750 

 

625 

 

1,810 

 

1,800 

Net interest income after provision for loan and lease losses

 

22,792 

 

17,173 

 

63,178 

 

49,549 



 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,510 

 

1,919 

 

3,335 

 

5,579 

Card payment and ACH processing fees

 

1,459 

 

1,493 

 

4,183 

 

4,242 

Prepaid card fees

 

12,249 

 

11,492 

 

39,333 

 

35,752 

Gain (loss) on sale of loans

 

903 

 

(830)

 

809 

 

6,747 

Gain on sale of investment securities

 

981 

 

(335)

 

3,131 

 

(62)

Change in value of investment in unconsolidated entity

 

811 

 

1,040 

 

(12,313)

 

3,141 

Leasing income

 

588 

 

552 

 

1,456 

 

1,727 

Debit card income (loss)

 

(45)

 

427 

 

(202)

 

1,358 

Affinity fees

 

1,091 

 

1,083 

 

3,507 

 

2,391 

Other

 

357 

 

458 

 

4,893 

 

1,925 

Total non-interest income

 

19,904 

 

17,299 

 

48,132 

 

62,800 



 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

21,508 

 

16,768 

 

62,400 

 

49,677 

Depreciation and amortization

 

1,241 

 

1,171 

 

3,751 

 

3,568 

Rent and related occupancy cost

 

1,638 

 

1,558 

 

4,797 

 

4,471 

Data processing expense

 

3,769 

 

3,747 

 

11,459 

 

10,735 

Printing and supplies

 

825 

 

622 

 

2,194 

 

1,805 

Audit expense

 

246 

 

397 

 

746 

 

1,596 

Legal expense

 

814 

 

427 

 

3,786 

 

2,480 

Amortization of intangible assets

 

394 

 

298 

 

1,032 

 

893 

FDIC insurance

 

2,436 

 

2,700 

 

7,118 

 

8,306 

Software

 

2,770 

 

1,920 

 

7,756 

 

4,793 

Insurance

 

631 

 

482 

 

1,695 

 

1,441 

Telecom and IT network communications

 

582 

 

458 

 

1,547 

 

1,420 

Securitization and servicing expense

 

 -

 

398 

 

747 

 

1,250 

Consulting

 

1,701 

 

1,125 

 

4,214 

 

3,345 

Bank Secrecy Act and lookback consulting expenses

 

1,340 

 

11,687 

 

29,076 

 

26,643 

Other

 

4,276 

 

4,037 

 

14,127 

 

12,666 

Total non-interest expense

 

44,171 

 

47,795 

 

156,445 

 

135,089 

Loss from continuing operations before income taxes

 

(1,475)

 

(13,323)

 

(45,135)

 

(22,740)

4

 


 

Income tax provision (benefit)

55 

 

(5,706)

 

(15,324)

 

(10,817)

Net loss from continuing operations

 

$               (1,530)

 

$               (7,617)

 

$             (29,811)

 

$             (11,923)

Discontinued operations

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before income taxes

 

(21,490)

 

2,997 

 

(38,073)

 

10,193 

Income tax provision (benefit)

2,531 

 

955 

 

(164)

 

3,457 

Income (loss) from discontinued operations, net of tax

 

(24,021)

 

2,042 

 

(37,909)

 

6,736 

Net income (loss) available to common shareholders

 

$             (25,551)

 

$               (5,575)

 

$             (67,720)

 

$               (5,187)



 

 

 

 

 

 

 

 

Net loss per share from continuing operations - basic

 

$                 (0.03)

 

$                 (0.20)

 

$                 (0.73)

 

$                 (0.32)

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

 

$                 (0.51)

 

$                   0.05 

 

$                 (0.92)

 

$                   0.18 

Net income (loss) per share - basic

 

$                 (0.54)

 

$                 (0.15)

 

$                 (1.65)

 

$                 (0.14)



 

 

 

 

 

 

 

 

Net loss per share from continuing operations - diluted

 

$                 (0.03)

 

$                 (0.20)

 

$                 (0.73)

 

$                 (0.32)

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

 

$                 (0.51)

 

$                   0.05 

 

$                 (0.92)

 

$                   0.18 

Net income (loss) per share - diluted

 

$                 (0.54)

 

$                 (0.15)

 

$                 (1.65)

 

$                 (0.14)



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

5

 


 





THE BANCORP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME







 

 

 



 

 

 



For the nine months



ended September 30,



2016

 

2015



(in thousands)

Net income (loss)

 

 

 

Other comprehensive income (loss) net of reclassifications into net income:

$                (67,720)

 

$                (5,187)



 

 

 

Other comprehensive income (loss)

 

 

 

Change in net unrealized gain (loss) during the period

19,207 

 

(1,598)

Reclassification adjustments for losses included in income

(3,131)

 

62 

Reclassification adjustments for foreign currency translation (gains)/losses

335 

 

(449)

Amortization of losses previously held as available-for-sale

25 

 

42 

Net unrealized gain (loss)

16,436 

 

(1,943)



 

 

 

Deferred tax expense

 

 

 

 Securities available-for-sale:

 

 

 

Change in net unrealized gain during the period

7,683 

 

(315)

Reclassification adjustments for losses included in income

(1,252)

 

29 

Amortization of losses previously held as available-for-sale

10 

 

14 

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

6,441 

 

(272)



 

 

 

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

9,995 

 

(1,671)

Comprehensive loss

$                (57,725)

 

$                (6,858)



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





 

6

 


 





THE BANCORP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY





 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, 2016

 

37,861,218 

 

$        37,861 

 

$        (866)

 

$      300,549 

 

$       (15,449)

 

$              (2,094)

 

$          320,001 

Net loss

 

 

 

 

 

 

 

 

 

(67,720)

 

 

 

(67,720)

Issuance of common stock

 

17,473,881 

 

17,474 

 

 -

 

57,338 

 

 -

 

 -

 

74,812 

Common stock issued as restricted shares,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

84,020 

 

84 

 -

 -

 

(84)

 

 -

 

 -

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

1,990 

 

 -

 

 -

 

1,990 

Other comprehensive income net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,995 

 

9,995 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2016

 

55,419,119 

 

$        55,419 

 

$        (866)

 

$      359,793 

 

$       (83,169)

 

$                7,901 

 

$          339,078 



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





7

 


 





THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS









 

 

 

 



 

 

 

 



 

 



 

For the nine months



 

ended September 30,



 

2016

 

2015



 

(in thousands)

Operating activities

 

 

 

 

Net loss from continuing operations

 

$          (29,811)

 

$          (11,923)

Net income (loss) from discontinued operations

 

(37,909)

 

6,736 

Adjustments to reconcile net income to net cash

 

 

 

 

provided by operating activities

 

 

 

 

Depreciation and amortization

 

4,783 

 

4,461 

Provision for loan and lease losses

 

1,810 

 

1,800 

Net amortization of investment securities discounts/premiums

 

6,066 

 

10,279 

Stock-based compensation expense

 

1,990 

 

1,532 

Loans originated for sale

 

(372,065)

 

(427,680)

Sale of loans originated for resale

 

299,855 

 

296,907 

Loss (gain) on sales of loans originated for resale

 

(809)

 

(6,747)

Gain on sale of fixed assets

 

(21)

 

(10)

Fair value adjustment on investment in unconsolidated entity

 

14,753 

 

 -

Loss (gain) on sales of investment securities

 

(3,131)

 

62 

Decrease (increase) in accrued interest receivable

 

(1,025)

 

19 

Increase in other assets

 

(19,290)

 

(8,190)

Increase in discontinued assets held for sale

 

(5,779)

 

(2,516)

Increase (decrease) in other liabilities

 

10,505 

 

(5,595)

 Net cash provided by (used in) operating activities

 

(130,078)

 

(140,865)



 

 

 

 

Investing activities

 

 

 

 

Purchase of investment securities available-for-sale

 

(499,969)

 

(97,045)

Proceeds from sale of investment securities available-for-sale

 

115,637 

 

94,288 

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

 

51 

 

118 

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

 

133,212 

 

167,898 

Net increase in loans

 

(120,312)

 

(121,169)

Net decrease in discontinued loans held for sale

 

203,533 

 

278,717 

Proceeds from sale of fixed assets

 

341 

 

220 

Purchases of premises and equipment

 

(4,237)

 

(4,974)

Investment in unconsolidated entity

 

6,371 

 

6,939 

 Net cash provided by (used in) by investing activities

 

(165,373)

 

324,992 



 

 

 

 

Financing activities

 

 

 

 

Net decrease in deposits

 

(647,822)

 

(242,569)

Net decrease in securities sold under agreements to repurchase

 

(572)

 

(18,380)

Proceeds of short-term borrowings and federal funds purchased

 

70,000 

 

 -

Proceeds from issuance of common stock

 

74,812 

 

 -

 Net cash used in financing activities

 

(503,582)

 

(260,949)



 

 

 

 

 Net decrease in cash and cash equivalents

 

(799,033)

 

(76,822)



 

 

 

 

Cash and cash equivalents, beginning of period

 

1,155,162 

 

1,114,235 



 

 

 

 

Cash and cash equivalents, end of period

 

$          356,129 

 

$       1,037,413 



 

 

 

 

Supplemental disclosure:

 

 

 

 

Interest paid

 

$              9,514 

 

$              9,584 

Taxes paid

 

$                 366 

 

$                 592 











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

8

 


 

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: securities-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.  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 its 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 September 30, 2016 and for the three and nine month periods ended September 30, 2016 and 2015, 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, 2015 (2015 Form 10-K Report). Note T in those financial statements presents restated interim financial statements as described therein. The results of operations for the nine month period ended September 30, 2016 may not necessarily be indicative of the results of operations for the full year ending December 31, 2016.

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 typically 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 September 30, 2016, the Company had three stock-based compensation plans, which are more fully described in its 2015 Form 10-K Report.  



The Company granted 300,000 stock options with a vesting period of four years in the first nine months of 2016. The weighted average grant-date fair value was $2.89. The Company did not grant stock options in the first nine months of 2015There were no stock options exercised in the nine month periods ended September 30, 2016 or September 30, 2015.  



9

 


 

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

Outstanding at January 1, 2016

1,977,500 

 

$                   8.58 

 

5.47 

 

$                         - 

Granted

300,000 

 

6.75 

 

3.67 

 

 -

Exercised

 -

 

 -

 

 -

 

 -

Expired

(1,000)

 

20.98 

 

 -

 

 -

Forfeited

(240,000)

 

8.28 

 

 -

 

 -

Outstanding at September 30, 2016

2,036,500 

 

$                   8.34 

 

5.49 

 

$                         - 

Exercisable at September 30, 2016

1,661,500 

 

$                   8.55 

 

4.66 

 

$                         - 





The Company granted 789,000 restricted stock units (RSUs) in the first nine months of 2016 of which 620,000 have a vesting period of three years and 169,000 have a vesting period of one year489,000 RSUs have a fair value of $4.50 and 300,000 RSUs have a fair value of $6.75.  The Company granted 86,992 RSUs with a vesting period of two years at a fair value of $9.11 in the first nine months of 2015.  The total fair value of RSUs vested for the nine months ended September 30, 2016 and 2015 was $830,000 and $517,000, respectively.



A summary of the status of the Company’s RSUs is presented below.





 

 

 

 

 



 

 

 

 

 



 

 

 

 

Average



 

 

Weighted-

 

remaining



 

 

average

 

contractual



 

 

grant date

 

term



Shares

 

fair value

 

(years)

Outstanding at January 1, 2016

168,045 

 

$                9.88

 

1.12 

Granted

789,000 

 

5.36 

 

 -

Vested

(84,020)

 

9.88 

 

                   -  

Forfeited

(41,250)

 

6.12 

 

                   -  

Outstanding at September 30, 2016

831,775 

 

$                5.77

 

1.88 



As of September 30, 2016, there was a total of $4.3 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 approximately two years.  Related compensation expense for the nine months ended September 30, 2016 and 2015 was $2.0 million and $1.5 million, respectively.



Note 4. Earnings Per Share



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.



10

 


 

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







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

September 30, 2016



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic loss per share from continuing operations

 

 

 

 

 

 

Net loss available to common shareholders

 

$               (1,530)

 

47,153,658 

 

$                 (0.03)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$               (1,530)

 

47,153,658 

 

$                 (0.03)







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

September 30, 2016



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic loss per share from discontinued operations

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (24,021)

 

47,153,658 

 

$                 (0.51)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (24,021)

 

47,153,658 

 

$                 (0.51)







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

September 30, 2016



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (25,551)

 

47,153,658 

 

$                 (0.54)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (25,551)

 

47,153,658 

 

$                 (0.54)



Stock options for 2,036,500 shares, exercisable at prices between $6.75 and $25.43 per share, were outstanding at September 30, 2016, but were not included in the dilutive shares because the Company had a net loss available to common shareholders.





11

 


 



 

 

 

 

 

 



 

 

 

 

 

 



 

For the nine months ended



 

September 30, 2016



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except share and per share data)

Basic loss per share from continuing operations

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (29,811)

 

40,957,247 

 

$                 (0.73)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (29,811)

 

40,957,247 

 

$                 (0.73)







 

 

 

 

 

 



 

 

 

 

 

 



 

For the nine months ended



 

September 30, 2016



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except share and per share data)

Basic loss per share from discontinued operations

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (37,909)

 

40,957,247 

 

$                 (0.92)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (37,909)

 

40,957,247 

 

$                 (0.92)







 

 

 

 

 

 



 

 

 

 

 

 



 

For the nine months ended



 

September 30, 2016



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (67,720)

 

40,957,247 

 

$                 (1.65)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (67,720)

 

40,957,247 

 

$                 (1.65)



Stock options for 2,036,500 shares, exercisable at prices between $6.75 and $25.43 per share, were outstanding at September 30, 2016, but were not included in the dilutive shares because the Company had a net loss available to common shareholders.



 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

September 30, 2015



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings (loss) per share from continuing operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$               (7,617)

 

37,758,322 

 

$                 (0.20)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted income (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$               (7,617)

 

37,758,322 

 

$                 (0.20)





12

 


 



 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

September 30, 2015



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings (loss) per share from discontinued operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                 2,042

 

37,758,322 

 

$                  0.05

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

262,608 

 

 -

Diluted income (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                 2,042

 

38,020,930 

 

$                  0.05







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

September 30, 2015



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$               (5,575)

 

37,758,322 

 

$                 (0.15)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$               (5,575)

 

37,758,322 

 

$                 (0.15)



Stock options for 2,348,750 shares, exercisable at prices between $7.36 and $25.43 per share, were outstanding at September 30, 2015 but were not included in dilutive shares because the exercise price per share was greater than the average market price.



 

 

 

 

 

 



 

 

 

 

 

 



 

For the nine months ended



 

September 30, 2015



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings (loss) per share from continuing operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$             (11,923)

 

37,754,110 

 

$                 (0.32)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted income (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$             (11,923)

 

37,754,110 

 

$                 (0.32)







 

 

 

 

 

 



 

 

 

 

 

 



 

For the nine months ended



 

September 30, 2015



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings (loss) per share from discontinued operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                 6,736

 

37,754,110 

 

$                  0.18

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

342,338 

 

 -

Diluted income (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$                 6,736

 

38,096,448 

 

$                  0.18





 

 

 

 

 

 



 

 

 

 

 

 

13

 


 



 

For the nine months ended



 

September 30, 2015



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$               (5,187)

 

37,754,110 

 

$                 (0.14)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$               (5,187)

 

37,754,110 

 

$                 (0.14)



Stock options for 2,348,750 shares exercisable at prices between $7.36 and $25.43 per share, were outstanding at September 30, 2015 but were not included in dilutive shares because the exercise price per share 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 September 30, 2016 and December 31, 2015 are summarized as follows (in thousands):







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Available-for-sale

 

September 30, 2016



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$               29,468 

 

$                  299 

 

$                  (51)

 

$              29,716 

Asset-backed securities

 

382,750 

 

1,386 

 

(2,793)

 

381,343 

Tax-exempt obligations of states and political subdivisions

 

44,434 

 

364 

 

(51)

 

44,747 

Taxable obligations of states and political subdivisions

 

79,260 

 

4,336 

 

(7)

 

83,589 

Residential mortgage-backed securities

 

331,004 

 

3,625 

 

(813)

 

333,816 

Collaterized mortgage obligation securities

 

174,640 

 

1,981 

 

(373)

 

176,248 

Commercial mortgage-backed securities

 

127,364 

 

3,978 

 

(107)

 

131,235 

Foreign debt securities

 

55,800 

 

875 

 

(8)

 

56,667 

Corporate debt securities

 

95,639 

 

1,956 

 

(29)

 

97,566 



 

$          1,320,359 

 

$             18,800 

 

$             (4,232)

 

$         1,334,927 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Held-to-maturity

 

September 30, 2016



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$               17,973 

 

$                  413 

 

$             (3,181)

 

$              15,205 

Other debt securities - pooled

 

75,522 

 

1,060 

 

 -

 

76,582 



 

$               93,495 

 

$               1,473 

 

$             (3,181)

 

$              91,787 





14

 


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Available-for-sale

 

December 31, 2015



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$               29,316 

 

$                    18 

 

$                  (95)

 

$              29,239 

Asset-backed securities

 

194,690 

 

46 

 

(3,642)

 

191,094 

Tax-exempt obligations of states and political subdivisions

 

95,792 

 

2,728 

 

(74)

 

98,446 

Taxable obligations of states and political subdivisions

 

94,582 

 

2,307 

 

(476)

 

96,413 

Residential mortgage-backed securities

 

210,051 

 

697 

 

(882)

 

209,866 

Collaterized mortgage obligation securities

 

172,623 

 

819 

 

(1,190)

 

172,252 

Commercial mortgage-backed securities

 

127,085 

 

386 

 

(1,361)

 

126,110 

Foreign debt securities

 

58,077 

 

64 

 

(333)

 

57,808 

Corporate debt securities

 

89,370 

 

170 

 

(670)

 

88,870 



 

$          1,071,586 

 

$               7,235 

 

$             (8,723)

 

$         1,070,098 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Held-to-maturity

 

December 31, 2015



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$               17,934 

 

$                  569 

 

$             (3,456)

 

$              15,047 

Other debt securities - pooled

 

75,656 

 

938 

 

(42)

 

76,552 



 

$               93,590 

 

$               1,507 

 

$             (3,498)

 

$              91,599 



Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $11.0 million and $1.1 million, respectively, at September 30, 2016 and December 31, 2015.



The amortized cost and fair value of the Company’s investment securities at September 30, 2016, 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

 

$               26,420 

 

$              26,412 

 

$                       - 

 

$                      - 

Due after one year through five years

 

167,777 

 

170,450 

 

7,012 

 

7,309 

Due after five years through ten years

 

428,966 

 

436,257 

 

 -

 

 -

Due after ten years

 

697,196 

 

701,808 

 

86,483 

 

84,478 



 

$          1,320,359 

 

$         1,334,927 

 

$              93,495 

 

$            91,787 



At September 30, 2016 and December 31, 2015, investment securities with a carrying value of approximately $614.0 million and $472.3 million, respectively, were pledged as collateral to secure Federal Home Loan Bank advances, letters of credit and  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 evaluation 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 nine months of 2016. 



15

 


 

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at September 30, 2016 (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

 

3

 

$              10,037 

 

$                   (51)

 

$                      - 

 

$                       - 

 

$                 10,037 

 

$                 (51)

Asset-backed securities

 

24

 

78,621 

 

(685)

 

64,595 

 

(2,108)

 

143,216 

 

(2,793)

Tax-exempt obligations of states and political subdivisions

 

42

 

17,515 

 

(13)

 

7,435 

 

(38)

 

24,950 

 

(51)

Taxable obligations of states and political subdivisions

 

4

 

2,726 

 

(7)

 

 -

 

 -

 

2,726 

 

(7)

Residential mortgage-backed securities

 

43

 

147,529 

 

(670)

 

9,992 

 

(143)

 

157,521 

 

(813)

Collaterized mortgage obligation securities

 

23

 

39,552 

 

(136)

 

19,823 

 

(237)

 

59,375 

 

(373)

Commercial mortgage-backed securities

 

21

 

12,151 

 

(64)

 

3,762 

 

(43)

 

15,913 

 

(107)

Foreign debt securities

 

6

 

3,273 

 

(6)

 

1,451 

 

(2)

 

4,724 

 

(8)

Corporate debt securities

 

8

 

3,715 

 

(21)

 

1,189 

 

(8)

 

4,904 

 

(29)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

174

 

$            315,119 

 

$              (1,653)

 

$          108,247 

 

$              (2,579)

 

$               423,366 

 

$            (4,232)







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

1

 

$                      - 

 

$                      - 

 

$                5,871 

 

$             (3,181)

 

$                  5,871 

 

$             (3,181)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                      - 

 

$                      - 

 

$                5,871 

 

$             (3,181)

 

$                  5,871 

 

$             (3,181)



The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 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

 

3

 

$              16,500 

 

$                   (95)

 

$                      - 

 

$                       - 

 

$                 16,500 

 

$                 (95)

Asset-backed securities

 

33

 

138,244 

 

(1,944)

 

41,955 

 

(1,698)

 

180,199 

 

(3,642)

Tax-exempt obligations of states and political subdivisions

 

31

 

13,580 

 

(22)

 

6,905 

 

(52)

 

20,485 

 

(74)

Taxable obligations of states and political subdivisions

 

30

 

45,136 

 

(450)

 

2,197 

 

(26)

 

47,333 

 

(476)

Residential mortgage-backed securities

 

29

 

121,997 

 

(761)

 

5,964 

 

(121)

 

127,961 

 

(882)

Collaterized mortgage obligation securities

 

26

 

56,142 

 

(600)

 

34,508 

 

(590)

 

90,650 

 

(1,190)

Commercial mortgage-backed securities

 

43

 

81,990 

 

(1,024)

 

14,520 

 

(337)

 

96,510 

 

(1,361)

Foreign debt securities

 

51

 

40,586 

 

(273)

 

2,636 

 

(60)

 

43,222 

 

(333)

Corporate debt securities

 

67

 

54,069 

 

(631)

 

1,327 

 

(39)

 

55,396 

 

(670)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

313

 

$            568,244 

 

$              (5,800)

 

$          110,012 

 

$              (2,923)

 

$               678,256 

 

$            (8,723)





16

 


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

1

 

$                      - 

 

$                      - 

 

$                5,558 

 

$             (3,456)

 

$                  5,558 

 

$             (3,456)

Pooled

 

1

 

25,563 

 

(42)

 

 -

 

 -

 

25,563 

 

(42)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

2

 

$             25,563 

 

$                  (42)

 

$                5,558 

 

$             (3,456)

 

$                31,121 

 

$             (3,498)



Other securities included in the held-to-maturity classification at September 30, 2016 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 $9.0 million was issued by an insurance company; and (ii) the book value of a bank senior note of $7.0 million. 



A total of $75.5 million of other debt securities – pooled is comprised of three securities consisting of diversified portfolios of corporate securities.



The following table provides additional information related to the Company’s single issuer trust preferred securities as of September 30, 2016 (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

Security A

 

$                1,909 

 

$                 2,025 

 

$                    116 

 

Not rated

Security B

 

9,052 

 

5,871 

 

(3,181)

 

Not rated



 

 

 

 

 

 

 

 

Class: All of the above are trust preferred 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. 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, including a 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 has several lending lines of business including SBA loans, direct lease financing, SBLOC and other specialty and consumer lending. The Company also originates loans for sale to other financial institutions which issue commercial mortgage backed securities or to secondary government guaranteed loan markets. These sales are accounted for as true sales and there is no continuing involvement in these loans after the sale. Servicing rights on these loans are not retained.   The Company has elected fair value treatment for these loans to better reflect the economics of the transactions.  At September 30, 2016, the fair value of the loans held for sale was $563.0 million and the unpaid principal balance was $550.6 million.  Included in the gain on sale of loans in the Statements of Operations were gains recognized from changes in fair value of $6.3 million for the nine months ended September 30, 2016.  There were no changes in fair value related to credit risk.  Interest earned on loans held for sale during the period held are recorded in Interest Income-Loans, including fees on the Statements of Operations.



17

 


 

In the second quarter of 2016, the Company purchased approximately $60 million in fleet vehicle leases which resulted in a customer list intangible of $1.8 million..  The balance of the $8.9 million purchase price was allocated to premium which is being amortized over the estimated average lives of the leases.  The Company expects to complete its accounting for this purchase by the end of the fourth quarter of 2016.



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, management’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):







 

 

 



 

 

 



September 30,

 

December 31,



2016

 

2015



 

 

 

SBA non real estate

$                       74,262 

 

$                       68,887 

SBA commercial mortgage

117,053 

 

114,029 

SBA construction

6,317 

 

6,977 

SBA loans *

197,632 

 

189,893 

Direct lease financing

332,632 

 

231,514 

SBLOC

621,456 

 

575,948 

Other specialty lending

20,076 

 

48,315 

Other consumer loans

19,375 

 

23,180 



1,191,171 

 

1,068,850 

Unamortized loan fees and costs

7,066 

 

9,227 

Total loans, net of deferred loan costs

$                  1,198,237 

 

$                  1,078,077 



 

 

 

Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $1.8 million and $2.8 million at September 30, 2016 and December 31, 2015, respectively.  Overdraft charge-offs and recoveries are reflected in the allowance for loan and lease losses.



* The following table shows SBA loans and SBA loans held for sale at the dates indicated (in thousands):







 

 

 



September 30,

 

December 31,



2016

 

2015



 

 

 

SBA loans, including deferred fees and costs

$                     203,196 

 

$                     197,966 

SBA loans included in held for sale

146,450 

 

109,174 

Total SBA loans

$                     349,646 

 

$                     307,140 



18

 


 

The following table provides information about impaired loans at September 30, 2016 and December 31, 2015 (in thousands):







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

September 30, 2016

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      704 

 

$                      704 

 

$                        - 

 

$                      372 

 

$                           - 

Consumer - other

317 

 

317 

 

 -

 

324 

 

 -

Consumer - home equity

1,563 

 

1,563 

 

 -

 

1,052 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 -

SBA non real estate

2,070 

 

2,070 

 

939 

 

1,050 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

827 

 

927 

 

474 

 

686 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

2,774 

 

2,774 

 

939 

 

1,422 

 

 -

Consumer - other

317 

 

317 

 

 -

 

324 

 

 -

Consumer - home equity

2,390 

 

2,490 

 

474 

 

1,738 

 

 -







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      263 

 

$                      263 

 

$                        - 

 

$                      228 

 

$                           - 

Consumer - other

330 

 

330 

 

 -

 

338 

 

 -

Consumer - home equity

368 

 

368 

 

 -

 

966 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

640 

 

640 

 

123 

 

670 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

827 

 

927 

 

26 

 

800 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

903 

 

903 

 

123 

 

898 

 

 -

Consumer - other

330 

 

330 

 

 -

 

338 

 

 -

Consumer - home equity

1,195 

 

1,295 

 

26 

 

1,766 

 

 -



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 September 30, 2016  or December 31, 2015) (in thousands):





 

 

 

 



 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

 

 

 

Non-accrual loans

 

 

 

 

SBA non real estate

 

$                 1,921 

 

$                    733 

Consumer

 

2,100 

 

1,194 

Total non-accrual loans

 

4,021 

 

1,927 



 

 

 

 

Loans past due 90 days or more

 

2,933 

 

403 

Total non-performing loans

 

6,954 

 

2,330 

Other real estate owned

 

 -

 

 -

Total non-performing assets

 

$                 6,954 

 

$                 2,330 



19

 


 

The Company’s loans that were modified as of September 30, 2016 and December 31, 2015 and considered troubled debt restructurings are as follows (dollars in thousands):



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015



 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBA non real estate

 

 

$               917 

 

$                917 

 

 

$               171 

 

$                171 

Consumer

 

 

711 

 

711 

 

 

434 

 

434 

Total

 

 

$            1,628 

 

$             1,628 

 

 

$               605 

 

$                605 



The balances below provide information as to how the loans were modified as troubled debt restructurings loans as of September 30, 2016 and December 31, 2015 (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015



 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBA non real estate

 

$                    - 

 

$               151 

 

$                766 

 

$                 - 

 

$               171 

 

$                   - 

Consumer

 

 -

 

317 

 

394 

 

 -

 

330 

 

104 

Total

 

$                    - 

 

$               468 

 

$             1,160 

 

$                 - 

 

$               501 

 

$               104 



There were no loans that had been restructured within the last 12 months that have subsequently defaulted as of September 30, 2016.





As of September 30, 2016 and December 31, 2015, 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

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                  844 

 

$                  408 

 

$                    48 

 

$               1,022 

 

$                  762 

 

$                  199 

 

$                   936 

 

$                  181 

 

$               4,400 

Charge-offs

 

(76)

 

 -

 

 -

 

(63)

 

 -

 

 -

 

(39)

 

 -

 

(178)

Recoveries

 

 

 -

 

 -

 

18 

 

 -

 

 -

 

 

 -

 

26 

Provision (credit)

 

1,179 

 

343 

 

 

568 

 

(451)

 

(143)

 

176 

 

131 

 

1,810 

Ending balance

 

$               1,948 

 

$                  751 

 

$                    55 

 

$               1,545 

 

$                  311 

 

$                    56 

 

$                1,080 

 

$                  312 

 

$               6,058 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                  939 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                   474 

 

$                      - 

 

$               1,413 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$               1,009 

 

$                  751 

 

$                    55 

 

$               1,545 

 

$                  311 

 

$                    56 

 

$                   606 

 

$                  312 

 

$               4,645 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$             74,262 

 

$           117,053 

 

$               6,317 

 

$           332,632 

 

$           621,456 

 

$             20,076 

 

$              19,375 

 

$               7,066 

 

$        1,198,237 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 


 

Ending balance: Individually evaluated for impairment

 

$               2,774 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                2,707 

 

$                      - 

 

$               5,481 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$             71,488 

 

$           117,053 

 

$               6,317 

 

$           332,632 

 

$           621,456 

 

$             20,076 

 

$              16,668 

 

$               7,066 

 

$        1,192,756 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                  385 

 

$                  461 

 

$                  114 

 

$                  836 

 

$                  562 

 

$                    66 

 

$                1,181 

 

$                    33 

 

$               3,638 

Charge-offs

 

(111)

 

 -

 

 -

 

(30)

 

 -

 

 -

 

(1,220)

 

 -

 

(1,361)

Recoveries

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

23 

 

 -

 

23 

Provision (credit)

 

570 

 

(53)

 

(66)

 

216 

 

200 

 

133 

 

952 

 

148 

 

2,100 

Ending balance

 

$                  844 

 

$                  408 

 

$                    48 

 

$               1,022 

 

$                  762 

 

$                  199 

 

$                   936 

 

$                  181 

 

$               4,400 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                  123 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                     26 

 

$                      - 

 

$                  149 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$                  721 

 

$                  408 

 

$                    48 

 

$               1,022 

 

$                  762 

 

$                  199 

 

$                   910 

 

$                  181 

 

$               4,251 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$             68,887 

 

$           114,029 

 

$               6,977 

 

$           231,514 

 

$           575,948 

 

$             48,315 

 

$              23,180 

 

$               9,227 

 

$        1,078,077 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                  904 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                1,524 

 

$                      - 

 

$               2,428 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$             67,983 

 

$           114,029 

 

$               6,977 

 

$           231,514 

 

$           575,948 

 

$             48,315 

 

$              21,656 

 

$               9,227 

 

$        1,075,649 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                  385 

 

$                  461 

 

$                  114 

 

$                  836 

 

$                  562 

 

$                    66 

 

$                1,181 

 

$                    33 

 

3,638 

Charge-offs

 

(65)

 

 -

 

 -

 

(9)

 

 -

 

 -

 

(1,177)

 

 -

 

(1,251)

Recoveries

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

Provision (credit)

 

465 

 

277 

 

(88)

 

78 

 

153 

 

(33)

 

844 

 

104 

 

1,800 

Ending balance

 

$                  785 

 

$                  738 

 

$                    26 

 

$                  905 

 

$                  715 

 

$                    33 

 

$                   855 

 

$                  137 

 

$               4,194 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                  158 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                       - 

 

$                      - 

 

$                  158 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 


 

Ending balance: Collectively evaluated for impairment

 

$                  627 

 

$                  738 

 

$                    26 

 

$                  905 

 

$                  715 

 

$                    33 

 

$                   855 

 

$                  137 

 

$               4,036 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$             64,988 

 

$           116,545 

 

$               5,191 

 

$           223,929 

 

$           539,240 

 

$             12,119 

 

$              23,502 

 

$               9,004 

 

$           994,518 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$               1,107 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                1,562 

 

$                      - 

 

$               2,669 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$             63,881 

 

$           116,545 

 

$               5,191 

 

$           223,929 

 

$           539,240 

 

$             12,119 

 

$              21,940 

 

$               9,004 

 

$           991,849 





The Company did not have loans acquired with deteriorated credit quality at either September 30, 2016 or December 31, 2015.



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

September 30, 2016

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                       - 

 

$                      - 

 

$                       - 

 

$               1,920 

 

$               1,920 

 

$               72,342 

 

$               74,262 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

117,053 

 

117,053 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

6,317 

 

6,317 

Direct lease financing

 

14,410 

 

1,289 

 

2,933 

 

 -

 

18,632 

 

314,000 

 

332,632 

SBLOC

 

16 

 

 -

 

 -

 

 -

 

16 

 

621,440 

 

621,456 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,076 

 

20,076 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

5,235 

 

5,235 

Consumer - home equity

 

159 

 

275 

 

 -

 

2,101 

 

2,535 

 

11,605 

 

14,140 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

7,066 

 

7,066 



 

$             14,585 

 

$               1,564 

 

$               2,933 

 

$               4,021 

 

$             23,103 

 

$          1,175,134 

 

$          1,198,237 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

December 31, 2015

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                       - 

 

$                      - 

 

$                       - 

 

$                  733 

 

$                  733 

 

$               68,154 

 

$               68,887 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

114,029 

 

114,029 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

6,977 

 

6,977 

Direct lease financing

 

3,957 

 

3,108 

 

403 

 

 -

 

7,468 

 

224,046 

 

231,514 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

575,948 

 

575,948 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

48,315 

 

48,315 

Consumer - other

 

 -

 

 

 -

 

 -

 

 

6,844 

 

6,845 

Consumer - home equity

 

 -

 

1,398 

 

 -

 

1,194 

 

2,592 

 

13,743 

 

16,335 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,227 

 

9,227 



 

$               3,957 

 

$               4,507 

 

$                  403 

 

$               1,927 

 

$             10,794 

 

$          1,067,283 

 

$          1,078,077 



22

 


 

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):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non real estate

 

$           56,403 

 

$               139 

 

$            3,401 

 

$                   - 

 

$                    - 

 

$                 1,030 

 

$                 13,289 

 

$              74,262 

SBA commercial mortgage

 

97,211 

 

 -

 

901 

 

 -

 

 -

 

688 

 

18,253 

 

117,053 

SBA construction

 

5,828 

 

 -

 

 -

 

 -

 

 -

 

489 

 

 -

 

6,317 

Direct lease financing

 

119,008 

 

 -

 

3,265 

 

 -

 

 -

 

9,849 

 

200,510 

 

332,632 

SBLOC

 

275,373 

 

 -

 

 -

 

 -

 

 -

 

1,000 

 

345,083 

 

621,456 

Other specialty lending

 

20,076 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,076 

Consumer

 

10,970 

 

290 

 

3,573 

 

 -

 

 -

 

 -

 

4,542 

 

19,375 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

7,066 

 

7,066 



 

$         584,869 

 

$               429 

 

$          11,140 

 

$                   - 

 

$                    - 

 

$               13,056 

 

$               588,743 

 

$         1,198,237 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$           55,682 

 

$                   - 

 

$               904 

 

$                   - 

 

$                    - 

 

$                 8,610 

 

$                   3,691 

 

$              68,887 

SBA commercial mortgage

 

92,859 

 

 -

 

 -

 

 -

 

 -

 

3,894 

 

17,276 

 

114,029 

SBA construction

 

6,977 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

6,977 

Direct lease financing

 

90,588 

 

 -

 

670 

 

 -

 

 -

 

17,200 

 

123,056 

 

231,514 

SBLOC

 

204,201 

 

 -

 

 -

 

 -

 

 -

 

19,372 

 

352,375 

 

575,948 

Other specialty lending

 

46,520 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,795 

 

48,315 

Consumer

 

7,631 

 

70 

 

3,473 

 

 -

 

 -

 

457 

 

11,549 

 

23,180 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,227 

 

9,227 



 

$         504,458 

 

$                 70 

 

$            5,047 

 

$                   - 

 

$                    - 

 

$               49,533 

 

$               518,969 

 

$         1,078,077 



* For information on targeted loan review thresholds see “Allowance for Loan Losses”  



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 former 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 former 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 $0 for the nine months ended September 30, 2016 and $9,000 for the nine months ended September 30, 2015.    



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 and was terminated 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 $0 and $35,000 for the nine months ended September 30, 2016 and 2015, respectively. 



The Bank maintains deposits for various affiliated companies totaling approximately $14.6 million and $33.4 million as of September 30, 2016 and December 31, 2015, 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. 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 BankAt September 30, 2016, these loans were current as to principal and interest payments and did not involve more than normal risk of collectability.  Loans to these related parties included in Loans, net of deferred loan fees and costs, amounted to $947,000 at September 30, 2016 and $1.8 million at December 31, 2015.



The Bank periodically purchases securities under agreements to resell and engages in other securities transactions as follows.  The Company executed transactions through 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

23

 


 

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 September 30, 2016 and had complied with all terms for all prior repurchase agreements. There were $39.4 million of repurchase agreements outstanding at September 30, 2016 and none outstanding at December 31, 2015.    



The Company entered into a consulting agreement with Betsy Z. Cohen, its former Chief Executive Officer, which was effective January 1, 2015 and expires on December 31, 2016. Under the agreement, Mrs. Cohen acts as an advisor to the Board of Directors and executive management with respect to business strategies, the performance of various lines of business, and other corporate and regulatory matters.  The agreement is intended to preserve for the Company Mrs. Cohen’s insight and experience with respect to the Company, the Bank and the financial services industry generally.  The agreement provides for a monthly consulting fee of $30,000, and the provision of office space and administrative support.  We have not paid any monthly fees under this agreement pending continuing regulatory review. 



Note 8. Fair Value Measurements

ASC 825, “ Financial Instruments Available for Sale”, 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. Accordingly, estimated fair values are determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. 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 the sale of commercial loans to secondary markets. 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 $356.1 million and $1.16 billion as of September 30, 2016 and December 31, 2015, 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.  Level 3 investment securities fair values 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.



FHLB and Atlantic Central Bankers Bank stock is held as required by those respective institutions and is carried at cost.  Federal law requires a member institution of the FHLB to hold stock according to predetermined formulas.  Atlantic Central Bankers Bank requires its correspondent banking institutions to hold stock as a condition of membership.



Commercial loans held for sale have estimated fair values based upon market indications of the sales price of such loans from recent sales transactions.

The net loan portfolio at September 30, 2016 and December 31, 2015 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.  Accrued interest receivable has a carrying value that approximates fair value

On December 30, 2014, the Bank entered into an agreement for, and closed on, the sale of a portion of its discontinued commercial loan portfolio. The purchaser of the loan portfolio was a newly formed entity, 2014-1 LLC (Walnut Street).  The price paid to the Bank for the loan portfolio which had a face value of approximately $267.6 million, was approximately $209.6 million, of which approximately $193.6 million was in the form of two notes issued by Walnut Street to the Bank; a senior note in the principal amount of approximately $178.2 million bearing interest at 1.5% per year and maturing in December 2024 and a subordinate note in the principal amount of approximately $15.4 million, bearing interest at 10.0% per year and maturing in December 2024.  The balance of these notes comprises the balance of the investment in unconsolidated entity.  The fair value was established by the sales price and subsequently subjected to

24

 


 

cash flow analysis. The change in value of investment in unconsolidated entity in the income statement includes interest paid and changes in estimated fair value.



Assets held for sale as of September 30, 2016 are held at the lower of cost basis or market value.  For loans, market value was determined using the income approach which converts expected cash flows from the loan portfolio by unit of measurement to a present value estimate.  Unit of measurement was determined by loan type and for significant loans on an individual loan basis.  The fair values of the Company’s loans classified as assets held for sale are based on “unobservable inputs” that are the best information available in the circumstances.  Level 3 fair values are based on the present value of cash flows by unit of measurement.  For commercial loans, a market adjusted rate to discount expected cash flows from outstanding principal and interest to expected maturity at the measurement date, was utilized.  For other real estate owned, market value was based upon appraisals of the underlying collateral by third party appraisers, reduced by 7% to 10% for estimated selling costs.  

The estimated fair values of demand deposits (comprising interest and non-interest bearing checking accounts, savings, and certain types of money market accounts) are equal to the amount payable on demand at the reporting date (generally, their carrying amounts).  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.

Time deposits and subordinated debentures have a fair value estimated using a discounted cash flow calculation that applies current interest rates to discount expected cash flows.  Based upon time deposit maturities at September 30, 2016, the carrying values approximate their fair values.  The carrying amount of accrued interest payable approximates its fair value.

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 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.

The following tables provide information regarding carrying amounts and estimated fair values (in thousands):









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



September 30, 2016



 

 

 

 

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

$            1,334,927 

 

$              1,334,927 

 

$                            - 

 

$               1,334,927 

 

$                           - 

Investment securities held-to-maturity

93,495 

 

91,787 

 

 -

 

85,916 

 

5,871 

Securities purchased under agreements to resell

39,463 

 

39,463 

 

39,463 

 

 -

 

 -

Federal Home Loan and Atlantic Central Bankers Bank stock

11,014 

 

11,014 

 

 -

 

 -

 

11,014 

Commercial loans held for sale

562,957 

 

562,957 

 

 -

 

 -

 

562,957 

Loans, net of deferred loan fees and costs

1,198,237 

 

1,193,085 

 

 -

 

 -

 

1,193,085 

Investment in unconsolidated entity, senior note

150,686 

 

150,686 

 

 -

 

 -

 

150,686 

Investment in unconsolidated entity, subordinated note

6,710 

 

6,710 

 

 -

 

 -

 

6,710 

Assets held for sale

386,155 

 

386,155 

 

 -

 

 -

 

386,155 

Demand and interest checking

3,364,103 

 

3,364,103 

 

3,364,103 

 

 -

 

 -

Savings and money market

402,832 

 

402,832 

 

402,832 

 

 -

 

 -

Subordinated debentures

13,401 

 

9,101 

 

 -

 

 -

 

9,101 

Securities sold under agreements to repurchase

353 

 

353 

 

353 

 

 -

 

 -

Interest rate swaps, liability

5,321 

 

5,321 

 

 -

 

5,321 

 

 -





25

 


 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



December 31, 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

$            1,070,098 

 

$              1,070,098 

 

$                            - 

 

$               1,070,098 

 

$                           - 

Investment securities held-to-maturity

93,590 

 

91,599 

 

7,490 

 

76,552 

 

7,557 

Federal Home Loan and Atlantic Central Bankers Bank stock

1,062 

 

1,062 

 

 -

 

 -

 

1,062 

Commercial loans held for sale

489,938 

 

489,938 

 

 -

 

 -

 

489,938 

Loans, net of deferred loan fees and costs

1,078,077 

 

1,068,718 

 

 -

 

 -

 

1,068,718 

Investment in unconsolidated entity, senior note

166,548 

 

166,548 

 

 -

 

 -

 

166,548 

Investment in unconsolidated entity, subordinated note

11,972 

 

11,972 

 

 -

 

 -

 

11,972 

Assets held for sale

583,909 

 

583,909 

 

 -

 

 -

 

583,909 

Demand and interest checking

3,602,376 

 

3,602,376 

 

3,602,376 

 

 -

 

 -

Savings and money market

383,832 

 

383,832 

 

383,832 

 

 -

 

 -

Time deposits

428,549 

 

428,711 

 

 -

 

 -

 

428,711 

Subordinated debentures

13,401 

 

8,529 

 

 -

 

 -

 

8,529 

Securities sold under agreements to repurchase

925 

 

925 

 

925 

 

 -

 

 -

Interest rate swaps, asset

43 

 

43 

 

 -

 

43 

 

 -



The assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy, 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



 

September 30, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$                           29,716 

 

$                                       - 

 

$                             29,716 

 

$                                       - 

Asset-backed securities

 

381,343 

 

 -

 

381,343 

 

 -

Obligations of states and political subdivisions

 

128,336 

 

 -

 

128,336 

 

 -

Residential mortgage-backed securities

 

333,816 

 

 -

 

333,816 

 

 -

Collaterized mortgage obligation securities

 

176,248 

 

 -

 

176,248 

 

 -

Commercial mortgage-backed securities

 

131,235 

 

 -

 

131,235 

 

 -

Foreign debt securities

 

56,667 

 

 -

 

56,667 

 

 -

Corporate debt securities

 

97,566 

 

 -

 

97,566 

 

 -

Total investment securities available for sale

 

1,334,927 

 

 -

 

1,334,927 

 

 -

Loans held for sale

 

562,957 

 

 -

 

 -

 

562,957 

Investment in unconsolidated entity, senior note

 

150,686 

 

 -

 

 -

 

150,686 

Investment in unconsolidated entity, subordinated note

 

6,710 

 

 -

 

 -

 

6,710 

Assets held for sale

 

386,155 

 

 -

 

 -

 

386,155 

Interest rate swaps, liability

 

5,321 

 

 -

 

5,321 

 

 -



 

$                      2,436,114 

 

$                                       - 

 

$                        1,329,606 

 

$                        1,106,508 





26

 


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

Fair Value Measurements at Reporting Date Using



 

 

 

Quoted prices in active

 

Significant other

 

Significant



 

 

 

markets for identical

 

observable

 

unobservable



 

Fair value

 

assets

 

inputs

 

inputs



 

December 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$                           29,240 

 

$                                       - 

 

$                             29,240 

 

$                                       - 

Asset-backed securities

 

191,093 

 

 -

 

191,093 

 

 -

Obligations of states and political subdivisions

 

194,859 

 

 -

 

194,859 

 

 -

Residential mortgage-backed securities

 

209,866 

 

 -

 

209,866 

 

 -

Collaterized mortgage obligation securities

 

172,252 

 

 -

 

172,252 

 

 -

Commercial mortgage-backed securities

 

126,110 

 

 -

 

126,110 

 

 -

Foreign debt securities

 

57,808 

 

 -

 

57,808 

 

 -

Corporate debt securities

 

88,870 

 

 -

 

88,870 

 

 -

Total investment securities available for sale

 

1,070,098 

 

 -

 

1,070,098 

 

 -

Loans held for sale

 

489,938 

 

 -

 

 -

 

489,938 

Investment in unconsolidated entity, senior note

 

166,548 

 

 -

 

 -

 

166,548 

Investment in unconsolidated entity, subordinated note

 

11,972 

 

 -

 

 -

 

11,972 

Assets held for sale

 

583,909 

 

 -

 

 -

 

583,909 

Interest rate swaps, asset

 

43 

 

 -

 

43 

 

 -



 

$                      2,322,508 

 

$                                       - 

 

$                        1,070,141 

 

$                        1,252,367 



 

 

 

 

 

 

 

 



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):



27

 


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Fair Value Measurements Using



 

Significant Unobservable Inputs



 

(Level 3)



 

 

 

 

 

 

 

 



 

Available-for-sale

 

Commercial loans



 

securities

 

held for sale



 

September 30, 2016

 

December 31, 2015

 

September 30, 2016

 

December 31, 2015

Beginning balance

 

$                                   - 

 

$                                1,366 

 

$                            489,938 

 

$                            217,080 

Transfers into level 3

 

 -

 

 -

 

 -

 

 -

Transfers out of level 3

 

 -

 

 -

 

 -

 

 -

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

 -

 

(23)

 

6,350 

 

1,677 

Included in other comprehensive income

 

 -

 

 -

 

 -

 

 -

Purchases, issuances, and settlements

 

 

 

 

 

 

 

 

Purchases

 

 -

 

 -

 

 -

 

 -

Issuances

 

 -

 

 -

 

372,065 

 

681,526 

Sales

 

 -

 

(1,343)

 

(305,396)

 

(410,345)

Settlements

 

 -

 

 -

 

 -

 

 -

Ending balance

 

$                                   - 

 

$                                        - 

 

$                            562,957 

 

$                            489,938 



 

 

 

 

 

 

 

 

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.

 

$                                   - 

 

$                                        - 

 

$                                7,735 

 

$                                4,321 







 

 

 

 

 

 

 

 



Fair Value Measurements Using



Significant Unobservable Inputs



(Level 3)



 

 

 

 

 

 

 

 



Investment in

 

Assets



unconsolidated entity

 

held for sale



 

September 30, 2016

 

December 31, 2015

 

September 30, 2016

 

December 31, 2015

Beginning balance

 

$                         178,520 

 

$                             193,595 

 

$                             583,909 

 

$                             887,929 

Transfers into level 3

 

 -

 

 -

 

 -

 

 -

Transfers out of level 3

 

 -

 

 -

 

 -

 

 -

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

(14,753)

 

(2,430)

 

(45,443)

 

(4,662)

Included in other comprehensive income

 

 -

 

 -

 

 -

 

 -

Purchases, issuances, and settlements

 

 

 

 

 

 

 

 

Purchases

 

 -

 

 -

 

 -

 

 -

Issuances

 

 -

 

 -

 

 -

 

 -

Sales

 

 -

 

 -

 

(64,605)

 

(149,560)

Settlements

 

(6,371)

 

(12,645)

 

(87,706)

 

(149,798)

Ending balance

 

$                         157,396 

 

$                             178,520 

 

$                             386,155 

 

$                             583,909 



 

 

 

 

 

 

 

 

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.

 

$                        (14,753)

 

$                               (2,430)

 

$                               44,884 

 

$                                 4,662 



28

 


 

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 *

Description

 

September 30, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Impaired loans - collateral dependent

 

$                             5,481 

 

$                                       - 

 

$                                       - 

 

$                               5,481 

Intangible assets

 

5,682 

 

 -

 

 -

 

5,682 



 

$                          11,163 

 

$                                       - 

 

$                                       - 

 

$                             11,163 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

Fair Value Measurements at Reporting Date Using



 

 

 

Quoted prices in active

 

Significant other

 

Significant



 

 

 

markets for identical

 

observable

 

unobservable



 

Fair value

 

assets

 

inputs

 

inputs *

Description

 

December 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Impaired loans - collateral dependent

 

$                             2,428 

 

$                                       - 

 

$                                       - 

 

2,428 

Intangible assets

 

4,929 

 

 -

 

 -

 

4,929 



 

$                             7,357 

 

$                                       - 

 

$                                       - 

 

$                               7,357 



(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.



At September 30, 2016, impaired loans and troubled debt restructuring that are measured based on the value of underlying collateral have been presented at their fair value, less costs to sell,  of $5.5 million through specific reserves and other write downs of $1.4 million or by recording charge-offs when the carrying value exceeds the fair value.  Included in the impaired balance at September 30, 2016 were six troubled debt restructured loans with a balance of $1.6 million which had specific reserves of $565,000.  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 September 30, 2016, the Company had entered into twenty-two interest rate swap agreements with an aggregate notional amount of $142.8 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 loss of $5.4 million for the nine months ended September 30, 2016 to recognize the fair value of the derivative instruments which is reported in gain (loss) on sale of loans.  The amount payable by the Company under these swap agreements was $5.3 million at September 30, 2016 which is reported in other liabilities.  The Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $7.0 million as of September 30, 2016.

29

 


 



The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s remaining interest rate swap agreements as of September 30, 2016 are summarized below (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

September 30, 2016

Maturity date

 

Notional amount

 

Interest rate paid

 

Interest rate received

 

Fair value

May 9, 2021

 

$                    3,400 

 

1.18% 

 

0.79% 

 

$               (3)

August 4, 2021

 

10,300 

 

1.12% 

 

0.77% 

 

24 

October 4, 2021

 

5,600 

 

1.19% 

 

0.00% 

 

(2)

August 17, 2025

 

4,000 

 

2.27% 

 

0.80% 

 

(296)

August 17, 2025

 

2,500 

 

2.27% 

 

0.80% 

 

(185)

August 17, 2025

 

2,500 

 

2.27% 

 

0.80% 

 

(185)

October 7, 2025

 

3,200 

 

2.06% 

 

0.66% 

 

(179)

November 27, 2025

 

1,700 

 

2.10% 

 

0.83% 

 

(103)

December 11, 2025

 

2,400 

 

2.14% 

 

0.85% 

 

(152)

December 15, 2025

 

5,300 

 

2.10% 

 

0.85% 

 

(320)

December 17, 2025

 

3,300 

 

2.18% 

 

0.86% 

 

(222)

December 23, 2025

 

6,800 

 

2.16% 

 

0.86% 

 

(442)

December 24, 2025

 

8,200 

 

2.17% 

 

0.86% 

 

(546)

December 29, 2025

 

9,900 

 

2.20% 

 

0.85% 

 

(686)

December 30, 2025

 

14,800 

 

2.19% 

 

0.84% 

 

(1,006)

January 28, 2026

 

3,000 

 

1.87% 

 

0.74% 

 

(120)

March 10, 2026

 

1,200 

 

1.69% 

 

0.85% 

 

(28)

March 29, 2026

 

1,700 

 

1.74% 

 

0.85% 

 

(47)

April 18, 2026

 

12,500 

 

1.66% 

 

0.68% 

 

(252)

April 18, 2026

 

6,600 

 

1.67% 

 

0.68% 

 

(140)

June 8, 2026

 

27,600 

 

1.61% 

 

0.84% 

 

(434)

July 20, 2026

 

6,300 

 

1.44% 

 

0.70% 

 

Total

 

$                142,800 

 

 

 

 

 

$        (5,321)





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. The Company allocated the majority of the $1.8 million 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  ($800,000 over the next five years).  The gross carrying amount of the software is $1.8 million and as of September 30, 2016  the accumulated amortization was $1.0 million.

 

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 ($3.9 million over the next five years).  The gross carrying amount of the customer list intangible is $12.0 million and as of September 30, 2016 the accumulated amortization was $8.8 million.  For both 2016 and 2015, amortization expense for the third quarter was $250,000 and for the nine months was $750,000.  In the second quarter of 2016, the Company purchased approximately $60 million in fleet vehicle leases which resulted in a customer list intangible of $1.8 million which is being amortized over a  12 year period.  Amortization expense is $176,000 per year ($880,000 over the next five years). The Company preliminarily allocated the $1.8 million to the customer list and expects to complete its accounting for this purchase by the fourth quarter of 2016. Until completion, the above allocation of purchase price is considered preliminary. As of September 30, 2016 the gross carrying amount of the customer list intangible is $1.8 million and the accumulated amortization was $149,000.  For 2016,   estimated amortization expense for the third quarter was $100,000 and for the nine months was $149,000.

30

 


 

 

Note 11. Recent Accounting Pronouncements



In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers”.  This ASU establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate and construction industries.  The revenue standard’s core principle 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, (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, 2017.  The Company does not expect this ASU to have a significant impact on its financial condition or results of operations.



In January 2016, the FASB issued ASU 2016-11, “Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities”.   This ASU revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value.  It also amends certain disclosure requirements associated with the fair value of financial instruments.  For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company.



In February 2016, the FASB issued ASU 2016-02, “Leases”.  The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements.  The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.  Early application of this ASU is permitted for all entities.  The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company.



In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting”.  This ASU simplifies several areas of accounting for share based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. For public companies, this is effective for annual periods beginning after December 15, 2016, and the interim periods within those annual periods. The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company.   



In June 2016 the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments-Update”.  The Update changes the accounting for credit losses on loans and debt securities.  For loans and held-to-maturity debt securities, the Update requires an expected credit loss model to determine the allowance for credit losses.  The expected credit loss model estimates losses for the estimated life of the financial asset.    Expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of voluntary prepayments and considering available information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.  The resulting allowance for credit losses reflects the portion of the amortized cost basis that the entity does not expect to collect.  Additional quantitative and qualitative disclosures are required upon adoption.  In addition, the Update modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods.  The guidance is effective in first quarter 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  Early adoption is permitted beginning in first quarter 2019. The Company is evaluating the impact the Update will have on the consolidated financial statements.



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

31

 


 

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, 2016.  Future payments are subject to future approval by the Federal Reserve.

The Company and the 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 under the caption of In Re The Bancorp, Inc. Securities Litigation, Case No. 14-cv-0952 (SLR).  On October 26, 2015, Lead Plaintiffs filed an amended consolidated complaint against Bancorp, Betsy Z. Cohen, Paul Frenkiel, Frank M. Mastrangelo and Jeremy Kuiper, which alleges that during a class period beginning January 26, 2011 through June 26, 2015, 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 Bank Secrecy Act (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 amended 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. This litigation is in its preliminary stages.  The defendants filed a motion to dismiss the amended consolidated complaint on November 23, 2015.  Oral argument on the defendants’ motion was held on January 29, 2016 and a court ruling on the motion has been pending.  On July 27, 2016, we and all other individually-named defendants entered into a Stipulation and Agreement of Settlement (Settlement Agreement) with respect to the consolidated class action.  Under the terms of the Settlement Agreement, we will pay $17.5 million to the plaintiffs as full and complete settlement of the litigation.  All amounts paid by us will be fully funded by the Company’s insurance carriers.  All terms of the Settlement Agreement are subject to court approval which is pending



The Company  received a subpoena from the SEC, dated March 22, 2016, relating to an investigation by the SEC of the Company's restatement of its financial statements for the years ended December 31, 2010 through December 31, 2013 and the interim periods ended March 31, 2014, June 30, 2014 and September 30, 2014, which restatement was filed with the SEC on September 28, 2015, and the facts and circumstances underlying the restatement.  The Company is cooperating fully with the SEC's investigation.  The costs to respond to the subpoena and cooperate with the SEC's investigation could be material.



On June 30, 2016, the Company received written notice from the Internal Revenue Service that it will be conducting an audit of the Company's tax returns for the tax years 2012, 2013 and 2014.  The audit is in process.



The Company received a letter, dated August 1, 2016, demanding inspection of its books and records pursuant to Section 220 of the Delaware General Corporation Law from legal counsel representing a shareholder (the "Demand Letter").  In addition to demanding access to certain of the Company's books and records, the Demand Letter states that the shareholder intends to investigate the actions of the Company's officers and directors, and that the shareholder contemplates the commencement of a shareholder's derivative suit against

32

 


 

certain officers and directors of the Company seeking the recovery of the Company's damages and other remedies.  The Company has engaged outside counsel to represent it in this matter and is in the process of responding to the Demand Letter and analyzing its rights and obligations.  We have been advised by our counsel in the matter that reasonably possible losses cannot be estimated.



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 bank balance sheet led the Company to evaluate its continuing operations.  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 the investment portfolio, 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 current operations.







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the three months ended September 30, 2016



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$            17,727 

 

$                    0 

 

$              9,005 

 

$                     - 

 

$           26,732 

Interest allocation

 

 -

 

9,005 

 

(9,005)

 

 -

 

 -

Interest expense

 

740 

 

1,975 

 

475 

 

 -

 

3,190 

Net interest income

 

16,987 

 

7,030 

 

(475)

 

 -

 

23,542 

Provision for loan and lease losses

 

750 

 

 -

 

 -

 

 -

 

750 

Non-interest income

 

4,215 

 

15,180 

 

509 

 

 -

 

19,904 

Non-interest expense

 

16,352 

 

24,081 

 

3,738 

 

 -

 

44,171 

Income (loss) from continuing operations before taxes

 

4,100 

 

(1,871)

 

(3,704)

 

 -

 

(1,475)

Income tax benefit

 

 -

 

 -

 

55 

 

 -

 

55 

Income (loss) from continuing operations

 

4,100 

 

(1,871)

 

(3,759)

 

 -

 

(1,530)

Loss from discontinued operations

 

 -

 

 -

 

 -

 

(24,021)

 

(24,021)

Net income (loss)

 

$              4,100 

 

$           (1,871)

 

$            (3,759)

 

$         (24,021)

 

$         (25,551)



 

 

 

 

 

 

 

 

 

 





33

 


 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the three months ended September 30, 2015



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$            12,789 

 

$                     - 

 

$              8,404 

 

$                     - 

 

$           21,193 

Interest allocation

 

 -

 

8,404 

 

(8,404)

 

 -

 

 -

Interest expense

 

1,267 

 

1,918 

 

209 

 

 -

 

3,395 

Net interest income

 

11,521 

 

6,486 

 

(209)

 

 -

 

17,798 

Provision for loan and lease losses

 

625 

 

 -

 

 -

 

 -

 

625 

Non-interest income

 

1,329 

 

15,949 

 

21 

 

 -

 

17,299 

Non-interest expense

 

12,036 

 

33,021 

 

2,739 

 

 -

 

47,795 

Income (loss) from continuing operations before taxes

 

190 

 

(10,586)

 

(2,927)

 

 -

 

(13,323)

Income tax benefit

 

 -

 

 -

 

(5,706)

 

 -

 

(5,706)

Income (loss) from continuing operations

 

190 

 

(10,586)

 

2,779 

 

 -

 

(7,617)

Income from discontinued operations

 

 -

 

 -

 

 -

 

2,042 

 

2,042 

Net income (loss)

 

$                 190 

 

$         (10,586)

 

$              2,779 

 

$             2,042 

 

$           (5,575)







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the nine months ended September 30, 2016



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$            48,712 

 

$                    2 

 

$            25,613 

 

$                     - 

 

$           74,327 

Interest allocation

 

 -

 

25,613 

 

(25,613)

 

 -

 

 -

Interest expense

 

2,139 

 

5,779 

 

1,421 

 

 -

 

9,339 

Net interest income

 

46,573 

 

19,836 

 

(1,421)

 

 -

 

64,988 

Provision

 

1,810 

 

 -

 

 -

 

 -

 

1,810 

Non-interest income

 

(6,787)

*

48,245 

 

6,674 

 

 -

 

48,132 

Non-interest expense

 

47,828 

 

96,376 

 

12,241 

 

 -

 

156,445 

Income (loss) from continuing operations before taxes

 

(9,852)

 

(28,295)

 

(6,988)

 

 -

 

(45,135)

Income taxes

 

 -

 

 -

 

(15,324)

 

 -

 

(15,324)

Income (loss) from continuing operations

 

(9,852)

 

(28,295)

 

8,336 

 

 -

 

(29,811)

Income from discontinued operations

 

 -

 

 -

 

 -

 

(37,909)

 

(37,909)

Net income (loss)

 

$            (9,852)

 

$         (28,295)

 

$              8,336 

 

$         (37,909)

 

$         (67,720)



 

 

 

 

 

 

 

 

 

 

* Reflects writedown of investment in unconsolidated entity







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the nine months ended September 30, 2015



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$            34,993 

 

$                   11 

 

$            26,278 

 

$                      - 

 

$            61,282 

Interest allocation

 

 -

 

26,278 

 

(26,278)

 

 -

 

 -

Interest expense

 

3,745 

 

5,568 

 

620 

 

 -

 

9,933 

Net interest income

 

31,248 

 

20,721 

 

(620)

 

 -

 

51,349 

Provision

 

1,800 

 

 -

 

 -

 

 -

 

1,800 

Non-interest income

 

14,017 

 

48,721 

 

62 

 

 -

 

62,800 

Non-interest expense

 

34,111 

 

90,174 

 

10,804 

 

 -

 

135,089 

34

 


 

Income (loss) from continuing operations before taxes

 

9,354 

 

(20,732)

 

(11,362)

 

 -

 

(22,740)

Income taxes

 

 -

 

 -

 

(10,817)

 

 -

 

(10,817)

Income (loss) from continuing operations

 

9,354 

 

(20,732)

 

(545)

 

 -

 

(11,923)

Income from discontinued operations

 

 -

 

 -

 

 -

 

6,736 

 

6,736 

Net income (loss)

 

$              9,354 

 

$          (20,732)

 

$               (545)

 

$              6,736 

 

$            (5,187)







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

September 30, 2016



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Total assets

 

$        1,918,907 

 

$             35,330 

 

$        1,877,119 

 

$           386,155 

 

$        4,217,511 

Total liabilities

 

$           561,254 

 

$        2,982,569 

 

$           334,610 

 

$                       - 

 

$        3,878,433 







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

December 31, 2015



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Total assets

 

$        1,747,558 

 

$             35,165 

 

$        2,399,191 

 

$           583,909 

 

$        4,765,823 

Total liabilities

 

$           783,866 

 

$        2,991,856 

 

$           670,100 

 

$                       - 

 

$        4,445,822 





Note 15. Discontinued Operations



The Company performed a strategic evaluation of its businesses in the third quarter of 2014 and decided to discontinue its commercial lending operations to 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 results of the third quarter of 2016 reflected a fair value charge in connection with a secured commercial real estate lending relationship held in discontinued operations.  Related loans, in the principal amount of $41.9 million, became 90 days delinquent after the quarter ended September 30, 2016 due to the failure to make required principal payments.  The loans are secured by a Florida shopping mall with multiple major department store anchors and over 70 various retail tenants.  Based on an appraisal of the collateral value by an independent certified appraiser, the fair value was reduced by $23.9 million, and that amount was recorded as a charge to earnings.  The reduction in the carrying value of the loan does not reflect any recovery on a personal guarantee that the Bank also has as additional security. There can be no assurance that any recovery will be made on the personal guarantee.    Valuation allowances against resulting cumulative deferred tax assets offset tax benefits related to the loss and no benefit was recognized. Accordingly, the after tax loss was not reduced by the statutory 34% tax rate.



35

 


 

The following table presents financial results of the commercial lending business included in net income (loss) from discontinued operations for the three months and nine months ended September 30, 2016 and 2015.





 

 

 

 

 

 

 



 

 

 

 

 

 

 



For the three months ended September 30,

 

For the nine months ended September 30,



2016

 

2015

 

2016

 

2015



(in thousands)

Interest income

$                             3,891 

 

$                            6,343 

 

$                          15,037 

 

$                          22,275 

Interest expense

 -

 

 -

 

 -

 

 -

Provision for loan and lease losses

 -

 

 -

 

 -

 

 -

Net interest income after provision

3,891 

 

6,343 

 

15,037 

 

22,275 



 

 

 

 

 

 

 

Non interest income

575 

 

120 

 

678 

 

2,456 

Non interest expense

25,956 

 

3,466 

 

53,788 

 

14,538 



 

 

 

 

 

 

 

Income (loss) before taxes

(21,490)

 

2,997 

 

(38,073)

 

10,193 

Income tax (benefit) provision

2,531 

 

955 

 

(164)

 

3,457 

Net income (loss)

$                        (24,021)

 

$                            2,042 

 

$                        (37,909)

 

$                             6,736 







 

 

 



 

 

 



September 30,

 

December 31,



2016

 

2015



(in thousands)

Loans, net

$                         365,215 

 

$                        568,748 

Other assets

20,940 

 

15,161 

Total assets

$                         386,155 

 

$                        583,909 



 

 

 



The Company utilizes lower of cost or market valuations for discontinued operations loans which are updated based on internal loan officers’ information, third party consultant information, internal loan review analysis and third party review of impairments.  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.  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, $365.2 million of loans remain in assets held for sale on the balance sheet as a result of loan sales, principal paydowns and fair value charges.  The Company is attempting to sell those remaining loans.  Additionally, the balance sheet reflects $157.4 million in investment in unconsolidated entity, which is comprised of notes owned by the Company as a result of the sale of certain discontinued loans to Walnut Street, see Note 8, Fair Value Measurements. 



Various elements of the lower of cost or market valuation are as follows:







 

 

 

 

 

 

Measured on a recurring basis

 

Valuation techniques

 

Significant unobservable inputs

 

Range



 

 

 

 

 

 

Large balance commercial loans

 

Discounted cash flows

 

Discount rate

 

3.53% - 9.15%



 

 

 

 

 

 

Small balance commercial loans

 

Discounted cash flows

 

Discount rate

 

3.59% - 8.94%



 

 

 

 

 

 



Note 16. Subsequent Events



The Company evaluated its September 30, 2016 financial statements for subsequent events through the date the financial statements were issued.  The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements, not otherwise disclosed herein.



Final Prepaid Card Rule Released by the Consumer Financial Protection Bureau



On October 5, 2016, the Consumer Financial Protection Bureau (CFPB) released its final Prepaid Card Rule (Final Prepaid Rule), which it first proposed by publication on December 23, 2014.  The effective date of the Final Prepaid Rule is October 1, 2017, but applicability

36

 


 

of certain requirements of the Final Prepaid Rule are delayed until October 1, 2018. The Final Prepaid Rule regulates certain prepaid products, including physical cards as well as codes and other access devices. The Final Prepaid Rule did not materially deviate from the terms of the proposed rule that we have disclosed in previous filing.  The Final Prepaid Rule among other things, causes prepaid products to be fully-covered by Regulation E, which implements the Electronic Fund Transfer Act, and to be covered by Regulation Z, which implements the Truth in Lending Act, to the extent the prepaid product accesses a “credit” feature.  



The Final Prepaid Rule and related commentary is over 1,600 pages in length and provides significant discussion, materials and commentary that we are currently assessing.  The Final Prepaid Rule includes a significant number of changes to the regulatory framework for prepaid products, some of which include: (a) establishing a definition of “prepaid account” within Regulation E that includes reloadable and non-reloadable physical cards, as well as codes or other devices, and focuses on how the product is issued and used;  (b) modifying Regulation E to require that  short form and long form disclosures be provided  to a consumer prior to a consumer agreeing to acquire a prepaid account with certain exceptions and with specified forms that, if used, would provide a safe harbor for financial institutions; (c) extending to  prepaid accounts the periodic transaction history and statement requirements of Regulation E, with certain specified permissible alternatives to the provision of periodic statements; (d) extending the error resolution and limited liability provisions of Regulation E to prepaid cards, with some modifications specific to prepaid cards; (e) requiring financial institutions to provide prepaid account agreements to the CFPB and to either post them to the issuer’s website or provide them upon request of the consumer in specified manner and timeframes; (f) extending Regulation Z’s credit card rules and disclosure requirements to prepaid accounts that provide overdraft protection and other credit features and incorporating into Regulation Z a new definition of “hybrid prepaid-credit card”; (g)  requiring an issuer to obtain a prepaid account holder’s consent prior to adding overdraft services or other credit features and prohibiting the issuer from adding overdraft services or other credit features for at least 30 calendar days after a consumer registers the prepaid account; (h) prohibiting the application of different terms and conditions, such as charging different fees, to a prepaid account depending on whether the consumer elects to link the prepaid account to overdraft services or other credit features.



The Final Prepaid Rule represents a material change in the rules and regulations governing prepaid cards.  We rely on prepaid cards as the largest single component of our deposits and the largest single component of our noninterest income.  We are continuing to evaluate the Prepaid Card Rule and the impact it may have on our business and our results of operations.  We are in the preliminary stages of evaluating and building implementation plans for the Prepaid Card Rule and, as such, we cannot reasonably quantify the financial impact, if any, that implementation of the Prepaid Card Rule may have on the Bank’s business, financial condition, or results of operations.

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Part I - Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Forward-Looking Statements



When used in this Form 10-Q, the words “believes”, “anticipates”, “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in Item 1A, under the caption “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2015 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 to 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 Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2015.  



 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; 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 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.  

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.  Of the approximately $1.1 billion in book value of loans in that commercial and residential portfolio as of the September 30, 2014 date of discontinuance of operations, $365.2 million of loans remain in assets held for sale on the balance sheet, which reflects related sales, paydowns and fair value charges.  Additionally, the balance sheet reflects $157.4 million in investment in unconsolidated entity, which is comprised of notes owned by the Company as a result of the sale of certain discontinued loans.  We have been exiting certain deposit accounts to reduce excess balances at the Federal Reserve Bank. 



The results of the third quarter of 2016 reflected a fair value charge in connection with a secured commercial real estate lending relationship held in discontinued operations.  Related loans, in the principal amount of $41.9 million, became 90 days delinquent after the quarter ended September 30, 2016 due to the failure to make required principal payments. The loans are secured by a Florida shopping mall with multiple major department store anchors and over 70 various retail tenants.  Based on an appraisal of the collateral value by an independent certified appraiser, the fair value was reduced by $23.9 million, and that amount was recorded as a charge to earnings. The reduction in the carrying value of the loan does not reflect any recovery on a personal guarantee that the Bank also has as additional security. There can be no assurance that any recovery will be made on the personal guarantee.



At the end of  the third quarter of 2016, we eliminated approximately 20% of  the Bank’s staff positions resulting in approximately $1.3 million in related severance expense recognized in that quarter. In addition to the elimination of the staff positions, we have developed

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a plan targeting other reductions in various non-interest expense categories including occupancy, data processing, legal, consulting, software and others. We expect to begin implementing the plan in the fourth quarter of 2016 with principal impact in 2017. BSA lookback expense for third quarter 2016 was $1.3 million, significantly less than in prior periods. Additionally, the third party performing the lookback completed its work during the quarter and no additional related third party fees are  expected to be incurred. Interest income continued to increase, reflecting growth in SBLOC, SBA, leasing and loans held for sale into secondary markets. Reflecting those increases, net interest income increased 32% in the third quarter of 2016 compared to third quarter 2015. The net interest income increase also reflected continued historically low interest rates. Rates on the largest component of funding, prepaid deposits, will only partially adjust to  increases in market rates while variable rate loans and securities should fully adjust.  Non-interest income reflected a 7% increase in quarter over prior year quarter prepaid card fees, which is the largest driver of non-interest income. Non-interest expense reflected the aforementioned reduced BSA lookback expenses which should no longer be incurred. While the quarter reflected the aforementioned $1.3 million of severance expense, future quarters should reflect related salary expense reductions.  During the quarter, we completed a stock offering which netted approximately $74.8 million of capital, with 17.4 million common shares issued. 



On August 5, 2016, we sold in a private placement to institutional and accredited investors an aggregate of 7,560,000 shares of our common stock at a purchase price of $4.50 per share, and 40,000 shares of a new series of preferred stock, Series C mandatorily convertible cumulative non-voting perpetual preferred stock, or the Series C Preferred Stock, at a purchase price of $1,000 per share, for total consideration of approximately $74 million.  The Series C Preferred Stock was mandatorily convertible into shares of common stock upon obtaining the approval of the holders of our common stock.  Also on August 5, 2016,  we entered into an agreement with certain of our directors and executive officers to sell an aggregate of 1,025,000 shares of our common stock at $4.50 per share, contingent upon the receipt of stockholder approval to convert the Series C Preferred Stock to shares of common stock, and satisfaction of stock exchange rules.  



On September 29, 2016, upon receiving the affirmative vote of a majority of the shares of common stock eligible to vote at our special meeting held on September 29, 2016, we sold 1,025,000 shares of common stock to certain of our directors and executive officers at $4.50 per share, for total consideration of approximately $4.6 million.  Also on September 29, 2016, upon receiving the affirmative vote of a majority of the shares of common stock eligible to vote at our special meeting, all shares of Series C Preferred Stock were converted into approximately 8,888,888 shares of common stock.



In connection with the private placement discussed above, two investors, Pilgrims & Indians Capital LLC, or P&I, and Castle Creek Capital, or CC, entered into side letter agreements with us. Under the terms of the side letter agreements, each of P&I and CC are each entitled to have one representative appointed to our board of directors for so long as each entity, together with its respective affiliates, owns, in the aggregate, 4% or more of all of our outstanding common stock.  If P&I or CC hold less than 4% of all of the outstanding common shares, but 50% or more of their shares purchased in the private placement, then such investor will be entitled to have one representative attend all meetings of our board of directors as a nonvoting observer for so long as such entity, together with its respective affiliates, owns, in the aggregate, 50% or more of the shares it purchased in the private placement. On August 17, 2016, our board of directors resolved to appoint John Eggemeyer as a director in satisfaction of the side letter agreement with CC.  Mr. Eggemeyer's appointment will be effective upon completion of regulatory review, non-objection or approval as required by applicable law.  During the pendency of the regulatory review period, Mr. Eggemeyer will be a non-voting observer to our board of directors. On August 17, 2016, our board of directors resolved to appoint Shivan Govindan as director in satisfaction of the side letter agreement with P&I, subject to effective completion of regulatory review, non-objection or approval as required by applicable law.  At the request of P&I and Mr. Govindan, his name has been withdrawn from consideration, and we are awaiting additional instructions from P&I as to their proposed nominee to fill P&I’s seat on the board.  In the meantime, Mr. Govindan remains a non-voting observer to our board of directors.

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 the level in which an instrument is placed 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, 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

39

 


 

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.  We currently use 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.  

Financial Statement Restatement; Regulatory Actions 

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 our 2015 filing of our Annual Report on 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 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 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. 

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. 

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Until the Bank submits to the FDIC (and the FDIC approves) a BSA report summarizing the completion of its corrective actions, 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 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 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. The consultant assisting with BSA-AML program refinement completed its work in 2014. The consultant performing the BSA lookback completed its work in July 2016 and no additional related fees are expected to be incurred. Suspicious activity reports resulting from the lookback have been filed. 

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 the Bank 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 approved the payment of the interest on our trust preferred securities which was due June 15, 2016.  Future payments are subject to future approval by the Federal Reserve.

On December 23, 2015 the Bank entered into a Stipulation and Consent to the Issuance of an Amended Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty with the FDIC, which we refer to as the 2015 Consent Order. The Bank took this action without admitting or denying any charges of violations of law or regulation.  The 2015 Consent Order supercedes in its entirety the terms of a previous consent order entered into in 2012. 



The 2015 Consent Order was based on FDIC allegations regarding electronic fund transfer, or EFT, error resolution practices, account termination practices and fee practices of various third parties with whom the Bank had previously provided, or currently provides, deposit-related products which we refer to as Third Parties.  The specific operational practices of the third parties identified by the FDIC were the following: practices related 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 on the consumer’s ability to obtain unredeemed rewards; practices performed by third parties related to the time frames within which we must respond to a consumer’s notice of error related to electronic transactions related to various types of deposit accounts; and, practices related to the timing and frequency of disclosed account fees and the manner by which the accountholder is notified of these fees in periodic statements which are generated by third parties.  The 2015 Consent Order continues the Bank's obligations originally set forth in the 2012 Consent Order, including its obligations to increase board oversight of the Bank's compliance management system, or CMS, improve the Bank's CMS, enhance its internal audit program, increase its management and oversight of Third Parties, and correct any apparent violations of law.  The 2015 Consent Order also directs the Bank’s Board to establish a Complaint and Error Claim Oversight and Review Committee, which we refer to as the Complaint and Error Claim Committee, to review and oversee the Bank’s processes and practices for handling, monitoring and resolving consumer complaints and EFT error claims (whether received directly or through Third Parties) and to review management's plans for correcting any weaknesses that may be found in such processes and practices; and implement a corrective action plan regarding those prepaid cardholders who asserted or attempted to assert EFT error claims and to provide restitution to cardholders harmed by EFT error resolution practices.  The Bank’s Board of Directors appointed the required Complaint and Error Claim Committee on January 29, 2016.  The Bank corrective action plan is in process.



We received a subpoena from the SEC, dated March 22, 2016, relating to an investigation by the SEC of the restatement of our financial statements for the years ended December 31, 2010 through December 31, 2013 and the interim periods ended March 31, 2014, June 30, 2014 and September 30, 2014, which restatement was filed with the SEC on September 28, 2015, and the facts and circumstances underlying the restatement.  We are cooperating fully with the SEC's investigation.  The costs to respond to the subpoena and cooperate with the SEC's investigation could be material.



On October 5, 2016, the Consumer Financial Protection Bureau (CFPB) released its final Prepaid Card Rule (Final Prepaid Rule), which it first proposed by publication on December 23, 2014.  The effective date of the Final Prepaid Rule is October 1, 2017, but applicability of certain requirements of the Final Prepaid Rule are delayed until October 1, 2018. The Final Prepaid Rule regulates certain prepaid products, including physical cards as well as codes and other access devices. The Final Prepaid Rule did not materially deviate from the

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terms of the proposed rule that we have disclosed in previous filing.  The Final Prepaid Rule among other things, causes prepaid products to be fully-covered by Regulation E, which implements the Electronic Fund Transfer Act, and to be covered by Regulation Z, which implements the Truth in Lending Act, to the extent the prepaid product accesses a “credit” feature



The Final Prepaid Rule and related commentary is over 1,600 pages in length and provides significant discussion, materials and commentary that we are currently assessing.  The Final Prepaid Rule includes a significant number of changes to the regulatory framework for prepaid products, some of which include: (a) establishing a definition of “prepaid account” within Regulation E that includes reloadable and non-reloadable physical cards, as well as codes or other devices, and focuses on how the product is issued and used;  (b) modifying Regulation E to require that  short form and long form disclosures be provided  to a consumer prior to a consumer agreeing to acquire a prepaid account with certain exceptions and with specified forms that, if used, would provide a safe harbor for financial institutions; (c) extending to  prepaid accounts the periodic transaction history and statement requirements of Regulation E, with certain specified permissible alternatives to the provision of periodic statements; (d) extending the error resolution and limited liability provisions of Regulation E to prepaid cards, with some modifications specific to prepaid cards; (e) requiring financial institutions to provide prepaid account agreements to the CFPB and to either post them to the issuer’s website or provide them upon request of the consumer in specified manner and timeframes; (f) extending Regulation Z’s credit card rules and disclosure requirements to prepaid accounts that provide overdraft protection and other credit features and incorporating into Regulation Z a new definition of “hybrid prepaid-credit card”; (g)  requiring an issuer to obtain a prepaid account holder’s consent prior to adding overdraft services or other credit features and prohibiting the issuer from adding overdraft services or other credit features for at least 30 calendar days after a consumer registers the prepaid account; (h) prohibiting the application of different terms and conditions, such as charging different fees, to a prepaid account depending on whether the consumer elects to link the prepaid account to overdraft services or other credit features.



The Final Prepaid Rule represents a material change in the rules and regulations governing prepaid cards. We rely on prepaid cards as the largest single component of our deposits and the largest single component of our non-interest income. We are continuing to evaluate the Prepaid Card Rule and the impact it may have on our business and our results of operations.  We are in the preliminary stages of evaluating and building implementation plans for the Prepaid Card Rule and, as such, we cannot reasonably quantify the financial impact, if any, that implementation of the Prepaid Card Rule may have on the Bank’s business, financial condition, or results of operations.





Results of Operations

Third quarter 2016 to third quarter 2015

Net Income: Net loss from continuing operations for the third quarter of 2016 was $1.5 million, or $.03 per diluted share, compared to net loss of $7.6 million, or $.20 per diluted share for the third quarter of 2015.  After discontinued operations, net loss for the third quarter of 2016 was $25.6 million compared to $5.6 million for the third quarter of 2015.  The results of the third quarter of 2016 reflected a fair value charge in connection with a secured commercial real estate lending relationship held in discontinued operations.  Related loans, in the principal amount of $41.9 million, became 90 days delinquent after the quarter ended September 30, 2016 due to the failure to make required principal payments. The loans are secured by a Florida shopping mall with multiple major department store anchors and over 70 various retail tenants.  Based on an appraisal of the collateral value by an independent certified appraiser, the fair value was reduced by $23.9 million, and that amount was recorded as a charge to earnings. The reduction in the carrying value of the loan does not reflect any recovery on a personal guarantee that the Bank also has as additional security.  There can be no assurance that any recovery will be made on the personal guarantee.



Valuation allowances against resulting cumulative deferred tax assets offset tax benefits related to the loss and no benefit was recognized. Accordingly, the after tax loss was not reduced by the statutory 34% tax rate.  Valuation allowances are expected to begin to be reversed and increase after tax income in 2017 based on our financial projections, but there can be no assurance that those projections will be realized.   Primarily as a result of the loan charge and deferred tax valuation allowance, net loss from discontinued operations was $24.0 million in the third quarter of 2016 compared to net income of $2.0 million for the third quarter of 2015. 

Results for continuing operations for the third quarter of 2016 reflected higher net interest income and non-interest income, the completion of the consultants’ BSA lookback, severance expense for end of quarter staff position reductions and planning and implementation of other non-interest expense reductions. Net interest income for the third quarter of 2016 compared to the third quarter of 2015 increased to $23.5 million from $17.8 million primarily as a result of higher loan balances and yields. Non-interest income (excluding security gains) increased $1.3 million, which reflected a $1.7 million increase in gain on sale of loans and continuing increases in prepaid fees, the largest driver of non-interest income.  Non-interest expense reflected a $10.3 million decrease in BSA lookback consulting expense, an increase of $6.7 million of other non-interest expense and a $125,000 increase in the provision for loan and lease losses.  The consultant performing the lookback completed their work in July 2016 and future related fees are not expected to be incurred. The $6.7 million increase in other non-interest expenses (excluding BSA lookback) was primarily driven by a $4.7 million increase in salaries and employee benefits. At the end of the third quarter of 2016, we eliminated approximately 20% of  the Bank’s

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staff positions resulting in approximately $1.3 million in related severance expense recognized in that quarter. In addition to the elimination of the staff positions, we have developed a plan targeting other reductions in various non-interest expense categories including occupancy, data processing, legal, consulting, software and others. We expect to begin implementing the plan in the fourth quarter of 2016 with principal impact in 2017.  Diluted loss per share was $0.54 in the third quarter of 2016 compared to $0.15 diluted loss per share in the third quarter of 2015 primarily reflecting the factors noted above.  

Net Interest Income: Our net interest income for the third quarter of 2016 increased to $23.5 million, an increase of $5.7 million or 32.3% from $17.8 million in the third quarter of  2015.  Our interest income for the third quarter of 2016 increased to $26.7 million, an increase of $5.5 million or 26.1% from $21.2 million for the third quarter of 2015.  The increase in interest income resulted primarily from higher loan balances and higher yields.  Our average loans and leases increased to $1.68 billion for third quarter 2016 from $1.32 billion for third quarter 2015, while related interest income increased $4.8 million on a tax equivalent basis.  The increase in average loans reflected the second quarter 2016 purchase of approximately $60 million of lease contracts in addition to organic growth in leasing,  SBA and SBLOC lending.  Our average investment securities decreased to $1.42 billion for third quarter 2016 from $1.46 billion for third quarter 2015, and related tax equivalent interest income decreased $759,000 on a tax equivalent basis. The decrease in the securities portfolio reflected maturities which were reinvested in  loans which carry higher yields.

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the third quarter of 2016 increased to 2.69% from 2.34% in the third quarter of 2015, an increase of 35 basis points.  The increase in the net interest margin reflected higher yields on loans and reduced balances of lower yielding deposits at the Federal Reserve Bank.  In the first quarter of 2016, we exited certain higher cost deposit relationships which reduced excess balances at the Federal Reserve Bank which lowered  third quarter 2016 averages.

In the third quarter of 2016, the average yield on our loans increased to 4.19% from 3.86% for the third quarter of 2015, an increase of 33 basis points.  The increase in loan yields reflected a greater proportion of higher yielding loans including leases and SBA loans and the impact of the December 2015 25 basis point Federal Reserve Bank increase in overnight rates.  Yields on taxable investment securities in the third quarter of 2016 increased to 2.43% compared to 1.94% for the third quarter of 2015, an increase of 49 basis points.  The increase reflected the impact of the aforementioned 25 basis point Federal Reserve Bank rate increase.  Yields on non-taxable investments were lower at 1.79% compared to 3.67%, respectively, a decrease of 188 basis points.  The reduction reflected the sale of the vast majority of our tax exempt portfolio in the fourth quarter of 2015 for tax planning purposes to expedite the utilization of deferred tax assets.  Average interest earning deposits at the Federal Reserve Bank decreased $632.9 million, or 66.1% to $324.2 million in the third quarter of 2016 from $957.1 million in the third quarter of 2015.  The decrease reflected the  impact of the first quarter 2016 exit of certain non-strategic deposits to reduce excess Federal Reserve Bank balances which earn nominal rates.  The interest cost of total deposits and interest bearing liabilities was relatively stable at 0.33% for the third quarter of 2016 compared to 0.31% in the third quarter of 2015. 

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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 September 30,



 

2016

 

2015



 

Average

 

 

 

Average

 

Average

 

 

 

Average



 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate



 

(dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans net of unearned fees and costs **

 

$                 1,661,807 

 

$             17,425 

 

4.19% 

 

$                 1,292,533 

 

$             12,466 

 

3.86% 

Leases - bank qualified*

 

21,006 

 

418 

 

7.96% 

 

30,091 

 

530 

 

7.05% 

Investment securities-taxable

 

1,373,776 

 

8,350 

 

2.43% 

 

940,590 

 

4,562 

 

1.94% 

Investment securities-nontaxable*

 

48,683 

 

218 

 

1.79% 

 

518,691 

 

4,765 

 

3.67% 

Interest earning deposits at Federal Reserve Bank

 

324,179 

 

397 

 

0.49% 

 

957,078 

 

580 

 

0.24% 

Federal funds sold  and securities purchased under agreement to resell

 

39,392 

 

146 

 

1.48% 

 

40,705 

 

143 

 

1.41% 

Net interest earning assets

 

3,468,843 

 

26,954 

 

3.11% 

 

3,779,688 

 

23,046 

 

2.44% 



 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

(5,267)

 

 

 

 

 

(4,385)

 

 

 

 

Assets held for sale from discontinued operations

 

459,400 

 

3,891 

 

3.39% 

 

627,806 

 

6,343 

 

4.04% 

Other assets

 

246,171 

 

 

 

 

 

286,839 

 

 

 

 



 

$                 4,169,147 

 

 

 

 

 

$                 4,689,948 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$                 3,249,801 

 

$               2,379 

 

0.29% 

 

$                 3,998,798 

 

$               2,850 

 

0.29% 

Savings and money market

 

392,045 

 

423 

 

0.43% 

 

337,793 

 

426 

 

0.50% 

Time

 

76,931 

 

104 

 

0.54% 

 

410 

 

 

0.98% 

Total deposits

 

3,718,777 

 

2,906 

 

0.31% 

 

4,337,001 

 

3,277 

 

0.30% 



 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

102,243 

 

153 

 

0.60% 

 

 -

 

 -

 

0.00% 

Repurchase agreements

 

376 

 

 -

 

0.00% 

 

1,606 

 

 

0.25% 

Subordinated debt

 

13,401 

 

131 

 

3.91% 

 

13,401 

 

117 

 

3.49% 

Total deposits and interest bearing liabilities

 

3,834,797 

 

3,190 

 

0.33% 

 

4,352,008 

 

3,395 

 

0.31% 



 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

19,670 

 

 

 

 

 

12,957 

 

 

 

 

Total liabilities

 

3,854,467 

 

 

 

 

 

4,364,965 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

314,680 

 

 

 

 

 

324,983 

 

 

 

 



 

$                 4,169,147 

 

 

 

 

 

$                 4,689,948 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$             27,655 

 

 

 

 

 

$             25,994 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

222 

 

 

 

 

 

1,853 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$             27,433 

 

 

 

 

 

$             24,141 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

2.69% 

 

 

 

 

 

2.34% 



 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



For the third quarter of  2016, average interest earning assets decreased to $3.47 billion, a decrease of $310.8 million, or 8.2% from the third quarter of 2015.  The decrease reflected a $36.8 million, or 2.5%, decrease of average investment securities and a $632.9 million, or 66.1% decrease, of average interest earning deposits at the Federal Reserve Bank, net of increases in average balances of loans and

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leases of $360.2 million, or 27.2%.  Average demand and interest checking deposits decreased $749.0 million, or 18.7%, which resulted from planned deposit exits to decrease such excess balances. Those exits also resulted in lower balances at the Federal Reserve Bank , which earn a nominal rate of interest.



Provision for Loan and Lease Losses.  Our provision for loan and lease losses was $750,000 for the third quarter of 2016 compared to $625,000 for the third quarter of 2015.  The allowance for loan losses increased to $6.1 million or 0.51% of total loans at September 30, 2016, from $4.4 million or 0.41% of total loans at December 31, 2015We 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 $18.9 million in the third quarter of 2016 compared to $17.6 million in the third quarter of 2015 before gains on sale of investment securities of $981,000 in the third quarter of 2016 and a loss on sale of investment securities of $335,000 in the third quarter of 2015.  The $1.3 million, or 7.3% increase, between those respective periods reflected a $1.7 million increase in gain on sale of loans to $903,000 in the third quarter of 2016.  The increase in the third quarter of 2016 compared to the third quarter of 2015 reflected a higher volume of loans held for sale which are fair valued at quarter end.  Prepaid card fees increased by $757,000, or 6.6%, to $12.2 million for third quarter 2016.  The increase reflected increased volumes and associated revenues attributable to that volume.  Debit card income decreased $472,000, or 110.5%, to a loss of $45,000 for the third quarter of 2016 from income of $427,000 for the third quarter of 2015 which reflected a decrease in income due to the sale of the majority of our health savings accounts in the fourth quarter of 2015. That sale also resulted in a reduction in service fees on deposit accounts which decreased $409,000, or 21.3%, to $1.5 million between those respective periods.  Affinity fees increased slightly by $8,000, or 0.7%, to $1.1 million for the third quarter of 2016 from $1.1 million for the third quarter of 2015.  The increase resulted from the growth in one affinity relationship.  Other non-interest income decreased $101,000, or 22.1%, to $357,000 for the third quarter of 2016 from $458,000 in the third quarter of 2015. A  $981,000 gain on sale of investment securities resulted primarily  from securities sales of municipal bonds for credit reasons, based on the recommendation of a third party specialist.



Non-Interest Expense.  Total non-interest expense was $44.2 million for the third quarter of 2016, a decrease of $3.6 million, or 7.6%, over $47.8 million for the third quarter of 2015.  The decrease included a decline of $10.3 million for BSA lookback consulting expenses, discussed previously.  Salaries and employee benefits amounted to $21.5 million, an increase of $4.7 million, or 28.3%, over $16.8 million for the third quarter of 2015.  The increase in salaries and employee benefits reflected staff additions and related expense for increased BSA and other regulatory compliance functions and included  temporary staff expense for the BSA lookback. Other increases reflected new staff positions in operations and infrastructure and leasing, including expense resulting from the purchase of lease receivables in the second quarter of 2016.  Third quarter 2016 salary expense also reflected $1.3 million of severance for the elimination of approximately 20% of staff positions throughout the Bank.  The reductions occurred at the end of the quarter and related reductions in ongoing salary expense and other expense categories will be reflected in future quarters.  Depreciation and amortization increased $70,000, or 6.0%, to $1.2 million in the third quarter of 2016 from $1.2 million in the third quarter of 2015, which reflected increased depreciation costs related to leasehold improvements and equipment for staff additions and information technology upgrades.  Rent and occupancy increased $80,000, or 5.1%, to $1.6 million in the third quarter of 2016 from $1.6 million in the third quarter of 2015.  The increase reflected a new sales office in San Francisco, leasing sales offices in Washington state and New Jersey and an SBA office in North Carolina. Data processing increased modestly by $22,000, or 0.6%, to $3.8 million in the third quarter of 2016 from $3.7 million in the third quarter of 2015.  Printing and supplies increased $203,000, or 32.6%, to $825,000 in the third quarter of 2016 from $622,000 in the third quarter of 2015, which reflected mailings related to service charge increases and other periodic communications with customers.  Audit expense decreased $151,000, or 38.0%,  to $246,000 in the third quarter of 2016 from $397,000 in the third quarter of 2015 which reflected the transfer of certain audit functions in house.  Legal expense increased $387,000, or 90.6%, to $814,000  in the third quarter of 2016 from $427,000 in the third quarter of 2015 primarily as a result of regulatory costs including fees associated with an SEC subpoena related to the restatement of the financial statements (see “Financial Statements; Regulatory Actions”).  Amortization of intangible assets increased $96,000,  or 32.2%, to $394,000 for the third quarter of 2016 from $298,000 for the third quarter of 2015.  The increase resulted primarily from the amortization of the intangible asset resulting from the second quarter 2016 purchase of  $60 million of lease receivables.    FDIC insurance expense decreased $264,000, or 9.8%, to $2.4 million for the third quarter of 2016 from $2.7 million in the third quarter of 2015 reflecting the impact of decreased average deposits.  Software expense increased $850,000, or 44.3%, to $2.8 million in the third quarter of 2016 from $1.9 million in the third quarter of 2015 as a result of additional information technology infrastructure to improve efficiency and scalability, including BSA software required to satisfy regulatory requirements.  Insurance expense increased $149,000, or 30.9%, to $631,000 in the third quarter 2016 compared to $482,000 in the third quarter of 2015. The increase reflected higher cyber and director and officer coverages. Telecom and IT network communications increased $124,000, or 27.1%,  to $582,000 in the third quarter of 2016 from $458,000 in the third quarter of 2015.  Securitization and servicing expense decreased $398,000, or 100.0%,  to $0 for the third quarter of 2016 from $398,000 for the third quarter of 2015 as there were no sales in the third quarter of 2016.  Consulting increased $576,000, or 51.2%, to $1.7 million in the third quarter of 2016 from $1.1 million in the third quarter of 2015.  The increased expense reflected consulting related to reducing European  prepaid operations expense,  a more scalable SBLOC loan processing system and consulting for internal information systems report development.  Other non-interest expense increased $239,000, or 5.9%, to $4.3 million in the third quarter of 2016 from $4.0 million in the third quarter of 2015.  The increase reflected an increase in credit bureau expense of approximately $150,000.   

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Loss on Discontinued Operations and Change in Value of Unconsolidated Entity. The results of the third quarter of 2016 reflected a fair value charge in connection with a secured commercial real estate lending relationship held in discontinued operations.  Related loans, in the principal amount of $41.9 million, became 90 days delinquent after the quarter ended September 30, 2016 due to the failure to make required principal payments.  The loans are secured by a Florida shopping mall with multiple major department store anchors and over 70 various retail tenants.  Based on an appraisal of the collateral value by an independent certified appraiser, the fair value was reduced by $23.9 million, and that amount was recorded as a charge to earnings.  The reduction in the carrying value of the loan does not reflect any recovery on a personal guarantee that the Bank also has as additional security.  There can be no assurance that any recovery will be made on the personal guarantee.    Valuation allowances against resulting cumulative deferred tax assets offset tax benefits related to the loss and no benefit was recognized.  Valuation allowances are expected to be reversed and increase after tax income in future periods based on our financial projections but there can be no assurance those projections will be realized.

   

Income Taxes.  Income tax expense for continuing operations was $55,000 for the third quarter of 2016 compared to a benefit of $5.7 million in the third quarter of 2015.  The 34% statutory rate tax benefit relating to the continuing and discontinued losses which would normally reduce the after tax losses, were offset by valuation allowances against cumulative deferred tax assets.  As noted in the previous paragraph, these valuation allowances are expected to reverse in future periods.



First nine months 2016 to first nine months 2015

Net Income:  Net loss from continuing operations for the first nine months of 2016 was $29.8 million, or $.73 per diluted share, compared to net loss of $11.9 million, or $.32 per diluted share for the first nine months of 2015.  After discontinued operations, net loss for the first nine months of 2016 was $67.7 million compared to net loss of $5.2 million for the first nine months of 2015.  A $13.6 million increase in net interest income was offset by a $17.9 million decrease in non-interest income (excluding security gains), a $2.4 million increase in BSA lookback-related consulting expenses and a $12.7 million increase in salaries and employee benefits.  Non-interest income (excluding security gains) decreased to $45.0 million in the first nine months of 2016 from $62.9 million in the first nine months of 2015, which reflected a $15.5 million decrease in change in value of investment in an unconsolidated entity and a $5.9 million decrease in gain on sale of loans.  The $15.5 million decrease between those respective periods reflected a $14.7 million second quarter 2016 charge against change in value of investment in unconsolidated entity (see “Loss on Discontinued Operations and Change in Value of Unconsolidated Entity”) in Form 10-Q for the quarter ended June 30, 2016.  The decrease in gain on sale of loans  reflected lower margins resulting from increased credit spreads. As credit spreads increase, loan sale prices and related margins decrease.  Net interest income increased to $65.0 million from $51.3 million primarily as a result of higher loan balances and yields.  The provision for loan and lease losses increased $10,000 to $1.8 million in the first nine months of 2016 compared to $1.8 million in the first nine months of 2015.  Net loss from discontinued operations was $37.9 million for the first nine months of 2016, compared to net income of $6.7 million from discontinued operations for the first nine months of 2015.  Diluted loss per share was $1.65 for the first nine months of 2016 compared to diluted loss per share of $0.14 for the first nine months of 2015.

   

 

Net Interest Income:  Our net interest income for the first nine months of 2016 increased to $65.0 million, an increase of $13.6 million, or 26.6%, from $51.3 million in the first nine months of 2015.  Our interest income for the first nine months of 2016 increased to $74.3 million, an increase of $13.0 million, or 21.3%, from $61.3 million for the first nine months of 2015.  The increase in interest income resulted primarily from higher balances of loans and higher yields.  Our average loans and leases increased to $1.56 billion for the first nine months of 2016 from $1.22 billion for the first nine months of 2015, while related interest income increased $13.9 million on a tax equivalent basis.  Our average investment securities decreased to $1.34 billion for the first nine months of 2016 from $1.51 billion for the first nine months of 2015, while related interest income decreased $5.3 million on a tax equivalent basis.  The decrease reflected the time required to reinvest the proceeds from the fourth quarter 2015 sale of our municipal portfolio and continuing loan demand which resulted in fewer investment purchases.

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the first nine months of 2016 increased to 2.57% from 2.32% in the first nine months of 2015, an increase of 25 basis points.  The increase in the net interest margin reflected higher yields on loans and reduced balances of lower yielding deposits at the Federal Reserve Bank.  In the first nine months of 2016, the average yield on our loans increased to 4.15% from 3.83% for the first nine months of 2015, an increase of 32 basis points.  The increase in loan yields reflected a greater proportion of higher yielding loans including leases and SBA loans.  The increase in loan yields also reflected a greater proportion of higher yielding loans originated for sale in secondary markets, and the impact of the December 2015, 25 basis point Federal Reserve Bank increase.  Yields on taxable investment securities were higher at 2.37% compared to 1.98% an increase of 39 basis points. The increase reflected the impact of the aforementioned 25 basis point Federal Reserve Bank rate increase.  Additionally, yields on non-taxable investments were lower at 2.19% compared to 3.67%.  The reduction reflected the sale of the vast majority of our tax exempt portfolio in the fourth quarter of 2015 for tax planning purposes to expedite the utilization of deferred tax assets.  Average interest earning deposits at the Federal Reserve Bank decreased $511.0 million, or 51.0%, to $490.0 million in the first nine months of 2016 from $1.0 billion in the first nine months of 2015.  The decrease reflected the impact of the first quarter 2016 exit of certain non-strategic deposits to reduce excess Federal Reserve Bank balances which earn a nominal rate.  The interest cost

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of total deposits and interest bearing liabilities was relatively stable at 0.32% for the first nine months of 2016 compared to 0.30% in the first nine months of 2015. 

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:



47

 


 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 30,



 

2016

 

2015



 

Average

 

 

 

Average

 

Average

 

 

 

Average



 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate



 

(dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans net of unearned fees and costs **

 

$                 1,543,448 

 

$             48,061 

 

4.15% 

 

$                 1,192,939 

 

$             34,231 

 

3.83% 

Leases - bank qualified*

 

20,618 

 

1,334 

 

8.63% 

 

23,936 

 

1,247 

 

6.95% 

Investment securities-taxable

 

1,280,692 

 

22,782 

 

2.37% 

 

983,557 

 

14,628 

 

1.98% 

Investment securities-nontaxable*

 

59,892 

 

983 

 

2.19% 

 

524,913 

 

14,443 

 

3.67% 

Interest earning deposits at Federal Reserve Bank

 

490,037 

 

1,677 

 

0.46% 

 

1,001,027 

 

1,759 

 

0.23% 

Federal funds sold  and securities purchased under agreement to resell

 

27,414 

 

301 

 

1.46% 

 

43,724 

 

465 

 

1.42% 

Net interest earning assets

 

3,422,101 

 

75,138 

 

2.93% 

 

3,770,096 

 

66,773 

 

2.36% 



 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

(4,538)

 

 

 

 

 

(4,089)

 

 

 

 

Assets held for sale from discontinued operations

 

528,168 

 

15,037 

 

3.80% 

 

743,594 

 

22,275 

 

3.99% 

Other assets

 

283,171 

 

 

 

 

 

293,561 

 

 

 

 



 

$                 4,228,902 

 

 

 

 

 

$                 4,803,162 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$                 3,325,047 

 

$               7,217 

 

0.29% 

 

$                 4,122,409 

 

$               8,293 

 

0.27% 

Savings and money market

 

390,202 

 

1,028 

 

0.35% 

 

323,307 

 

1,286 

 

0.53% 

Time

 

103,624 

 

447 

 

0.58% 

 

1,066 

 

12 

 

1.50% 

Total deposits

 

3,818,873 

 

8,692 

 

0.30% 

 

4,446,782 

 

9,591 

 

0.29% 



 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

58,056 

 

263 

 

0.60% 

 

 -

 

 -

 

0.00% 

Repurchase agreements

 

812 

 

 

0.16% 

 

6,598 

 

14 

 

0.28% 

Subordinated debt

 

13,401 

 

383 

 

3.81% 

 

13,401 

 

328 

 

3.26% 

Total deposits and interest bearing liabilities

 

3,891,142 

 

9,339 

 

0.32% 

 

4,466,781 

 

9,933 

 

0.30% 



 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

21,306 

 

 

 

 

 

9,702 

 

 

 

 

Total liabilities

 

3,912,448 

 

 

 

 

 

4,476,483 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

316,454 

 

 

 

 

 

326,679 

 

 

 

 



 

$                 4,228,902 

 

 

 

 

 

$                 4,803,162 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$             80,836 

 

 

 

 

 

$             79,115 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

811 

 

 

 

 

 

5,491 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$             80,025 

 

 

 

 

 

$             73,624 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

2.57% 

 

 

 

 

 

2.32% 



 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

For the first nine months of 2016, average interest earning assets decreased to $3.42 billion, a decrease of $348.0 million, or 9.2%, from the first nine months of 2015.  The decrease reflected decreased average balances of investment securities of $167.9 million, or 11.1%, net of increased average balances of loans and leases of $347.2 million or 28.5%.  Average demand and interest checking deposits decreased $797.4 million or 19.3%. 



Provision for Loan and Lease Losses. Our provision for loan and lease losses increased $10,000, to $1.8 million for the first nine months of 2016 compared to $1.8 million for the first nine months of 2015.  The increase 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 September 30, 2016, our

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allowance for loan and lease losses amounted to $6.1 million, or 0.51%, of total loans compared to $4.4 million, or 0.41%, of total loans at December 31, 2015.  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 $45.0 million in the first nine months of 2016 compared to $62.9 million in the first nine months of 2015, before gains on securities of $3.1 million in the first nine months of 2016 and loss on securities of $62,000 in the first nine months of 2015.  The $17.9 million, or 28.4% ,  decrease between those respective periods reflected a net of $12.3 million of charges to value of investment in an unconsolidated entity (see Loss on Discontinued Operations and Change in Value of Unconsolidated Entity in Form 10-Q for the quarter ended June 30, 2016”). Gain (loss) on sale of loans decreased $5.9 million, or 88.0%, to $809,000 for the first nine months of 2016, reflecting lower margins resulting from increased credit spreads.  Gain (loss) on sale of loans and related expense result from the sale of commercial real estate and other commercial loans to institutions which package such loans in secondary securities markets.  Service fees on deposit accounts decreased $2.2 million, or 40.2%, to $3.3 million for the first nine months of 2016 from $5.6 million for the first nine months of 2015 due to the sale of the majority of our health savings accounts in the fourth quarter of 2015.  Debit card income decreased $1.6 million, or 114.9%, to a loss of $202,000 for the first nine months of 2016 from income of $1.4 million for the first nine months of 2015 also due to that sale. Prepaid card fees increased $3.6 million, or 10.0%, to $39.3 million for the first nine months of 2016 from $35.8 for the first nine months of 2015 which reflected increased volumes and associated revenues attributable to that volume.  Leasing income decreased $271,000, or 15.7%, to $1.5 million for the first nine months of 2016 from $1.7 million for the first nine months of 2015, which reflected lower gains on disposition of leased vehicles in 2016 due to lower volume.  Affinity fees increased $1.1 million, or 46.7%, to $3.5 million for the first nine months of 2016 from $2.4 million for the first nine months of 2015. This increase resulted primarily from growth in one affinity relationship.  Other non-interest income increased $3.0 million, or 154.2%, to $4.9 million for the first nine months of 2016 from $1.9 million in the first nine months of 2015. The increase resulted primarily from a gain on the sale of Visa Europe to Visa U.S.A., in which members of Visa Europe shared in the sales proceeds.



Non-Interest Expense.  Total non-interest expense was $156.4 million for the first nine months of 2016, an increase of $21.4 million, or 15.8%, over $135.1 million for the first nine months of 2015.  Salaries and employee benefits expense amounted to $62.4 million, an increase of $12.7 million, or 25.6%, over $49.7 million for the first nine months of 2015.  The increase in salaries and employee benefits expense reflected staff additions and related expenses for increased BSA and other regulatory compliance, information technology, institutional banking and SBA loan production and included  temporary staff expense for the BSA lookback. Other increases reflected new staff positions in operations, infrastructure and leasing, including expense resulting from the purchase of lease receivables in the second quarter of 2016. Third quarter 2016 salary expense also reflected $1.3 million of severance expense for the elimination of approximately 20% of staff positions throughout the Bank.  The reductions occurred at the end of the quarter and related reductions in ongoing salary expense and other expense categories will be reflected in future quarters.  Depreciation and amortization increased $183,000, or 5.1%, to $3.8 million in the first nine months of 2016 from $3.6 million in the first nine months of 2015 which reflected increased depreciation costs related to leasehold improvements and equipment for staff additions and information technology upgrades.  Rent and occupancy increased $326,000, or 7.3%, to $4.8 million in the first nine months of 2016 from $4.5 million in the first nine months of 2015. The increase reflected a new sales office in San Francisco, leasing sales offices in Washington state and New Jersey and an SBA office in North Carolina.  Data processing expense increased $724,000, or 6.7%, to $11.5 million in the first nine months of 2016 from $10.7 million in the first nine months of 2015.  The increase reflected increased account and transaction volume.  Printing and supplies increased $389,000, or 21.6%, to $2.2 million in the first nine months of 2016 from $1.8 million in the first nine months of 2015, reflecting mailings related to service charge increases and other periodic communications with customers. Audit expense decreased $850,000, or 53.3%, to $746,000 in the first nine months of 2016 from $1.6 million in the first nine months of 2015 which reflected lower compliance audit expense and the transfer of certain audit functions in house.  Legal expense increased $1.3 million, or 52.7%, to $3.8 million for the first nine months of 2016 from $2.5 million in the first nine months of 2015 which reflected higher regulatory legal costs including fees associated with an SEC subpoena related to the restatement of the financial statements (see “Financial Statements; Regulatory Actions”) and fees associated with the purchase of $60 million of lease contracts.  Amortization of intangible assets increased $139,000, or 15.6%, to $1.0 million for the first nine months of 2016 from $893,000 for the nine months of 2015.  The increase resulted primarily from the amortization of the intangible asset resulting from the second quarter 2016 purchase of the $60 million of lease receivables.  FDIC insurance expense decreased $1.2 million, or 14.3%, to $7.1 million for the first nine months of 2016 from $8.3 million in the first nine months of 2015, which reflected the impact of decreased average deposits.  Software expense increased $3.0 million, or 61.8%, to $7.8 million in the first nine months of 2016 from $4.8 million in the first nine months of 2015 which reflected additional information technology infrastructure to improve efficiency and scalability, including BSA software required to satisfy regulatory requirements.  Insurance expense increased $254,000, or 17.6%, to $1.7 million in the first nine months of 2016 from $1.4 million in the first nine months of 2015. The increase reflected higher cyber and director and officer coverages.    Telecom and IT network communications expense increased $127,000, or 8.9%, to $1.5 million in the first nine months of 2016 from $1.4 million in the first nine months of 2015.  Securitization and servicing expense decreased $503,000,  or 40.2%, to $747,000 in the first nine months of 2016 from $1.3 million in the first nine months of 2015 which reflected  a decreased volume of sales. Consulting expense increased $869,000, or 26.0%, to $4.2 million in the first nine months of 2016 from $3.3 million in the first nine months of 2015. The increased expense reflected consulting related to reducing European  prepaid operations expense,  a more scalable SBLOC loan processing system, consulting for internal information systems report development and investor relations consulting. Other non-interest

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expense increased $1.5 million, or 11.5%, to $14.1 million in the first nine months of 2016 from $12.7 million in the first nine months of 2015. The $1.5 million increase reflected increases of $488,000 in credit bureau expense, $346,000 in small business lending loan expense, $307,000 in customer identification expense, $187,000 in travel and $161,000 in directors’ fees.



Income Taxes.  Income tax benefit for continuing operations was $15.3 million for the first nine months of 2016 compared to $10.8 million in the first nine months of 2015.  The increased tax benefit reflected the higher loss in 2016.



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 funding has been deposits.  We have been exiting deposit relationships to reduce excess balances at the Federal Reserve which earn nominal rates of interest.  Significant progress in reducing such balances was made during 2016. Investment securities available-for-sale also provide a significant source of liquidity. Loan repayments, also a source of funds, were exceeded by new loan disbursements during the first nine months of 2016.  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 believe that the rate on our deposits is at or below competitors’ rates.  However, the focus of our business model is to identify affinity groups that control significant deposits as part of their business.  A key component to the model is that the affinity group deposits are both stable and “sticky,” in the sense that they do not react to fluctuations in the market.  Nonetheless, certain components of the deposits do experience seasonality, creating greater excess liquidity at certain times during the year, especially the first quarter as a result of tax refund prepaid card balances. We plan to exit additional deposit relationships to continue to manage excess liquidity. 



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.  In the first nine months of 2016, the vast majority of our funding was derived from prepaid cards and transaction accounts.  While the FDIC now classifies prepaid and most of our other deposits obtained with the cooperation of third parties as brokered, they continue to acknowledge that such deposits are stable and low cost.  We maintain secured borrowing lines with the Federal Home Loan Bank of Pittsburgh and the Federal Reserve Bank.  As of September 30, 2016, we had a $491.9 million line of credit with the Federal Home Loan Bank and $172.5 million line of credit with the Federal Reserve Bank.  These lines may be collateralized by specified types of loans or securities. We expect to continue to maintain our facility with the Federal Home Loan Bank and Federal Reserve Bank.  We actively monitor our positions and contingent funding sources on a daily basis. As of September 30, 2016, we had $70.0 million  of a daily advance outstanding on our FHLB line. We currently utilize the FHLB line to manage our reserve requirements at the Federal Reserve Bank as a result of normal daily fluctuations in our deposit balances.



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 September 30, 2016, we had approximate cash reserves of $10.0 million at the holding company. Current quarterly interest payments on the $13.4 million of trust preferred securities are approximately $130,000 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 September 30, 2016 were $312.6 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 50 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.



Funding was directed primarily at cash outflows required for net loan growth of $120.3 million for the nine months ended September 30, 2016, and $121.2 million for the nine months ended September 30, 2015. Net purchases of investment securities for the nine months ended September 30, 2016, were $251.1 million compared to net repayments of $165.3 million for the prior year. Deposit outflows resulted from exiting higher cost deposit relationships without adequate offsetting fee income or loan production potential in the nine months ended September 30, 2016.  We had outstanding commitments to fund loans, including unused lines of credit, of $1.02 billion and $831.5 million as of September 30, 2016 and December 31, 2015, respectively. The majority of our commitments originate with security backed lines of credit.  Such commitments are normally based on the full amount of collateral in a customers investment account. However, such commitments have historically been drawn at only a fraction of the total commitment.  The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth.   Of the approximately $1.1

50

 


 

billion in book value of loans in that portfolio as of  the September 30, 2014 date of discontinuance of operations, $365.2 million of loans remain as assets held for sale on the balance sheet, which reflected related sales and paydowns. We are attempting to sell those remaining loans.  Additionally, the balance sheet reflects $157.4 million in investment in an unconsolidated entity, which is comprised of notes owned by us as a result of the sale of certain discontinued loans.    



Liquidity and capital ratios were enhanced during the quarter as a result of the completion of a common stock offering for 17.5 million common shares  which generated approximately $74.8 million in funding and Tier 1 capital.



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 8.0%, a ratio of total capital to risk-weighted assets of 10.0% and a ratio of common equity tier 1 to risk weighted assets of 6.5% 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 September 30, 2016 we were “well capitalized” under banking regulations. 



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







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

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 September 30, 2016

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

7.81% 

 

15.14% 

 

15.42% 

 

15.14% 

The Bancorp Bank

 

7.41% 

 

14.56% 

 

14.84% 

 

14.56% 

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

 

5.00% 

 

8.00% 

 

10.00% 

 

6.50% 



 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

7.17% 

 

14.67% 

 

14.88% 

 

14.67% 

The Bancorp Bank

 

6.90% 

 

13.98% 

 

14.18% 

 

13.98% 

"Well capitalized" institution (under FDIC regulations)

 

5.00% 

 

8.00% 

 

10.00% 

 

6.50% 







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.



51

 


 

The following table sets forth the estimated maturity or repricing structure of our interest earning assets and interest bearing liabilities at September 30, 2016.   We estimate the repricing characteristics of deposits based on historical performance, past experience at other institutions and other deposit behavior assumptions.  However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons.  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

 

$                   271,992 

 

$                   15,222 

 

$                   54,015 

 

$                38,254 

 

$              183,474 

Loans net of deferred loan costs

 

777,559 

 

46,781 

 

201,935 

 

161,026 

 

10,936 

Investment securities

 

502,093 

 

214,667 

 

181,172 

 

161,252 

 

369,238 

Interest earning deposits

 

312,605 

 

 -

 

 -

 

 -

 

 -

Securities purchased under agreements to resell

 

39,463 

 

 -

 

 -

 

 -

 

 -

Total interest earning assets

 

1,903,712 

 

276,670 

 

437,122 

 

360,532 

 

563,648 



 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

2,129,646 

 

141,659 

 

141,659 

 

 -

 

 -

Savings and money market

 

100,708 

 

201,416 

 

100,708 

 

 -

 

 -

Securities sold under agreements to repurchase

 

353 

 

 -

 

 -

 

 -

 

 -

Subordinated debenture

 

13,401 

 

 -

 

 -

 

 -

 

 -

Total interest bearing liabilities

 

2,244,108 

 

343,075 

 

242,367 

 

 -

 

 -

Gap

 

$                 (340,396)

 

$                 (66,405)

 

$                 194,755 

 

$              360,532 

 

$              563,648 

Cumulative gap

 

$                 (340,396)

 

$               (406,801)

 

$               (212,046)

 

$              148,486 

 

$              712,134 

Gap to assets ratio

 

-8%

 

-2%

 

5%

 

9%

 

13%

Cumulative gap to assets ratio

 

-8%

 

-10%

 

-5%

 

4%

 

17%



* 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 September 30, 2016 were $4.22 billion, of which our total loans were $1.20 billion. At December 31, 2015, our total assets were $4.77 billion, of which our total loans were $1.08 billion.    



Interest earning deposits and federal funds sold.  At September 30, 2016, we had a total of $312.6  million of interest earning deposits compared to $1.15 billion at December 31, 2015, a decrease of $834.9 million or 72.8%.  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 increased to $1.43 billion at September 30, 2016,  an increase of $264.7 million, or 22.7%, from year-end 2015.  The increase in investment securities was primarily a result of purchases of residential mortgage-backed securities and collateralized loan obligation securities.  Other securities, included in the held-to-maturity classification at September 30,

52

 


 

2016, consisted of three securities secured by diversified portfolios of corporate securities, one bank senior note and two single-issuer trust preferred securities. 



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 $9.0 million was issued by an insurance company; and (ii) the book value of a bank senior note of $7.0 million. 



A total of $75.5 million of other debt securities – pooled is comprised of three securities consisting of diversified portfolios of corporate securities.



The following table provides additional information related to our single issuer trust preferred securities as of September 30, 2016 (in thousands):



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

Security A

 

$                1,909 

 

$                 2,025 

 

$                    116 

 

Not rated

Security B

 

9,052 

 

5,871 

 

(3,181)

 

Not rated



 

 

 

 

 

 

 

 

Class: All of the above are trust preferred 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. For the nine months ended September 30, 2016 and September 30, 2015,  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 $11.0 million at September 30, 2016,  compared to $1.1 million at December 31, 2015.  The increase resulted from additional Federal Home Loan Bank stock required for larger daily advances to enhance liquidity management. 

Investment securities with a carrying value of $614.0 million at September 30, 2016 and $472.3 million at December 31, 2015, were pledged as collateral for Federal Home Loan Bank advances and letters of credit as required or permitted by law.

Loans held for sale.  Loans held for sale are comprised of commercial mortgage loans, 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 $563.0 million at September 30, 2016 from $489.9 million at December 31, 2015.

Loan portfolio. Total loans increased to $1.20 billion at September 30, 2016 from $1.08 billion at December 31, 2015.



53

 


 

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







 

 

 



 

 

 



September 30,

 

December 31,



2016

 

2015



 

 

 

SBA non real estate

$                       74,262 

 

$                       68,887 

SBA commercial mortgage

117,053 

 

114,029 

SBA construction

6,317 

 

6,977 

SBA loans *

197,632 

 

189,893 

Direct lease financing

332,632 

 

231,514 

SBLOC

621,456 

 

575,948 

Other specialty lending

20,076 

 

48,315 

Other consumer loans

19,375 

 

23,180 



1,191,171 

 

1,068,850 

Unamortized loan fees and costs

7,066 

 

9,227 

Total loans, net of deferred loan costs

$                  1,198,237 

 

$                  1,078,077 



 

 

 



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 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 Credit Officer oversees the loan review department processes and measures the adequacy of the allowance for loan and lease losses independently of loan production officers. A description of loan review coverage targets as set forth below. 



At September 30, 2016, approximately 50% of the total continuing loan portfolio had been reviewed as a result of the coverage of each loan portfolio type.  The loan review policy guidelines were revised in December 2015 to establish minimum coverages for each loan portfolio.  The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio.  These thresholds are planned to be achieved by December 31, 2016 and maintained as follows:



Securities Backed Lines of Credit – The targeted review threshold for 2016 is 40%, with the largest 25% of SBLOCs by commitment to be reviewed annually.  A random sampling of a minimum of 20 of the remaining loans will be reviewed each quarter.  At September 30, 2016, approximately 44% of the SBLOC portfolio had been reviewed. 



SBA Loans – The targeted review threshold for 2016 is 100%, less guaranteed portions of any purchased loans and loans funded within 90 days of quarter end. The 100% coverage includes loan review work performed by designated SBA department personnel.  Although loans are not typically purchased, loans for Community Reinvestment Act, or CRA,   purposes are periodically purchased.  At September 30, 2016, approximately 83% of the government guaranteed loan portfolio had been reviewed.  The review threshold for the independent loan review department is $1,000,000. The portion not reviewed includes $30 million in purchased loans which are subject to government guarantees and not subject to review and $3 million in newly funded loans which will be subject to review. 



54

 


 

Leasing – The targeted review threshold for 2016 is 50%.  At September 30, 2016, approximately 37% of the leasing portfolio had been reviewed. The review threshold is $1,000,000.



CMBS (Floating Rate) – The targeted review threshold for 2016 is 100%. Floating rate loans will be reviewed initially within 90 days of funding and will be monitored on an ongoing basis as to payment status. Subsequent reviews will be performed based on a sampling each quarter. Each floating rate loan will be reviewed if any available extension options are exercised. At September 30, 2016, approximately 85% of the CMBS floating rate portfolio had been reviewed. 



CMBS (Fixed Rate) CMBS fixed rate loans will generally not be reviewed as they are sold on the secondary market in a relatively short period of time. 100% of fixed rate loans that are unable to be readily sold on the secondary market and remain on the Bank's books after nine months will be reviewed at least annually. At September 30, 2016, 10% of the CMBS fixed rate portfolio had been reviewed.



Specialty Lending Specialty Lending, defined as commercial loans unique in nature that do not fit into other established categories, will have a review coverage threshold of 100% for non CRA loans. At September 30, 2016, approximately 91% of the non CRA loans had been reviewed.

 

Home Equity Lines of Credit (HELOC) – The targeted review threshold for 2016 is 50%.  The largest 25% of  HELOCs by commitment will be reviewed annually. A random sampling of a minimum of ten of the remaining loans will be reviewed each quarter.  At September 30, 2106 approximately 84% of the HELOC portfolio had been reviewed.



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







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

September 30, 2016

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                       - 

 

$                      - 

 

$                       - 

 

$               1,920 

 

$               1,920 

 

$               72,342 

 

$               74,262 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

117,053 

 

117,053 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

6,317 

 

6,317 

Direct lease financing

 

14,410 

 

1,289 

 

2,933 

 

 -

 

18,632 

 

314,000 

 

332,632 

SBLOC

 

16 

 

 -

 

 -

 

 -

 

16 

 

621,440 

 

621,456 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,076 

 

20,076 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

5,235 

 

5,235 

Consumer - home equity

 

159 

 

275 

 

 -

 

2,101 

 

2,535 

 

11,605 

 

14,140 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

7,066 

 

7,066 



 

$             14,585 

 

$               1,564 

 

$               2,933 

 

$               4,021 

 

$             23,103 

 

$          1,175,134 

 

$          1,198,237 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

December 31, 2015

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                       - 

 

$                      - 

 

$                       - 

 

$                  733 

 

$                  733 

 

$               68,154 

 

$               68,887 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

114,029 

 

114,029 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

6,977 

 

6,977 

Direct lease financing

 

3,957 

 

3,108 

 

403 

 

 -

 

7,468 

 

224,046 

 

231,514 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

575,948 

 

575,948 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

48,315 

 

48,315 

Consumer - other

 

 -

 

 

 -

 

 -

 

 

6,844 

 

6,845 

Consumer - home equity

 

 -

 

1,398 

 

 -

 

1,194 

 

2,592 

 

13,743 

 

16,335 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,227 

 

9,227 



 

$               3,957 

 

$               4,507 

 

$                  403 

 

$               1,927 

 

$             10,794 

 

$          1,067,283 

 

$          1,078,077 



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.

55

 


 



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



 

 

 

 



 

 

 

 



 

As of or



 

for the nine months ended



 

September 30,



 

2016

 

2015



 

 

 

 

Ratio of the allowance for loan losses to total loans

 

0.51% 

 

0.42% 

Ratio of the allowance for loan losses to nonperforming loans *

 

87.12% 

 

171.11% 

Ratio of nonperforming assets to total assets *

 

0.16% 

 

0.05% 

Ratio of net charge-offs to average loans

 

0.01% 

 

0.10% 

Ratio of net charge-offs to average loans annualized

 

0.01% 

 

0.14% 



 

 

 

 

* Includes loans 90 days past due still accruing interest

 

 

 

 

The ratio of the allowance for loan and lease losses to total loans was 0.51% at September 30, 2016, compared to 0.42% at September 30, 2015. The higher current period ratio reflected an increase in the allowance which exceeded proportional loan growth during the period.   The ratio of the allowance for loan losses to non-performing loans decreased to 87.12% at September 30, 2016, from 171.11% at September 30, 2015, primarily as a result of an increase in non-performing loans.  The ratio of non-performing assets to total assets also increased  as a result of that increase in non-performing loans.  Net charge-offs to average loans decreased to 0.01% for the nine months ended September 30, 2016, from 0.10% for the nine months ended September 30, 2015, primarily as a result of lower charge offs.

Net charge-offs.  Net charge-offs were $152,000 for the nine months ended September 30, 2016, a decrease of $1.1 million from net charge-offs for the same period of 2015.  The majority of the charge-offs in the first nine months of 2016 were associated with SBA commercial mortgage and leasing relationships.  The majority of the charge-offs in the first nine 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). 







 

 

 

 



 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

 

 

 

Non-accrual loans

 

 

 

 

SBA non real estate

 

$                 1,921 

 

$                    733 

Consumer

 

2,100 

 

1,194 

Total non-accrual loans

 

4,021 

 

1,927 



 

 

 

 

Loans past due 90 days or more

 

2,933 

 

403 

Total non-performing loans

 

6,954 

 

2,330 

Other real estate owned

 

 -

 

 -

Total non-performing assets

 

$                 6,954 

 

$                 2,330 



56

 


 

Loans that were modified as of September 30, 2016 and December 31, 2015 and considered troubled debt restructurings are as follows (dollars in thousands):

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015



 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBA non real estate

 

 

$               917 

 

$                917 

 

 

$               171 

 

$                171 

Consumer

 

 

711 

 

711 

 

 

434 

 

434 

Total

 

 

$            1,628 

 

$             1,628 

 

 

$               605 

 

$                605 



The balances below provide information as to how the loans were modified as troubled debt restructurings loans at September 30, 2016 and December 31, 2015 (in thousands).

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015



 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBA non real estate

 

$                    - 

 

$               151 

 

$                766 

 

$                 - 

 

$               171 

 

$                   - 

Consumer

 

 -

 

317 

 

394 

 

 -

 

330 

 

104 

Total

 

$                    - 

 

$               468 

 

$             1,160 

 

$                 - 

 

$               501 

 

$               104 



There were no loans that had been restructured within the last 12 months that have subsequently defaulted as of September 30, 2016.



As of September 30, 2016 and December 31, 2015,  we had no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.



57

 


 

The following table provides information about impaired loans at September 30, 2016 and December 31, 2015:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

September 30, 2016

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      704 

 

$                      704 

 

$                        - 

 

$                      372 

 

$                           - 

Consumer - other

317 

 

317 

 

 -

 

324 

 

 -

Consumer - home equity

1,563 

 

1,563 

 

 -

 

1,052 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 -

SBA non real estate

2,070 

 

2,070 

 

939 

 

1,050 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

827 

 

927 

 

474 

 

686 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

2,774 

 

2,774 

 

939 

 

1,422 

 

 -

Consumer - other

317 

 

317 

 

 -

 

324 

 

 -

Consumer - home equity

2,390 

 

2,490 

 

474 

 

1,738 

 

 -







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      263 

 

$                      263 

 

$                        - 

 

$                      228 

 

$                           - 

Consumer - other

330 

 

330 

 

 -

 

338 

 

 -

Consumer - home equity

368 

 

368 

 

 -

 

966 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

640 

 

640 

 

123 

 

670 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

827 

 

927 

 

26 

 

800 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

903 

 

903 

 

123 

 

898 

 

 -

Consumer - other

330 

 

330 

 

 -

 

338 

 

 -

Consumer - home equity

1,195 

 

1,295 

 

26 

 

1,766 

 

 -



We had $4.0 million of non-accrual loans at September 30, 2016 compared to $1.9 million of non-accrual loans at December 31, 2015. The $2.1 million increase in non-accrual loans was primarily due to $3.6 million of loans placed on non-accrual status partially offset by $837,000 of loan payments, $556,000 of participations sold and $76,000 of charge-offs.  Loans past due 90 days or more still accruing interest amounted to $2.9 million at September 30, 2016 and $403,000 at December 31, 2015.  The $2.5 million increase reflected $4.5 million of additions and $16,000 of advances on existing loans partially offset by $2.0 million of loan payments, $10,000 of charge-offs and $32,000 of loans moved to repossessed assets. 



We had no other real estate owned at September 30, 2016 and December 31, 2015



58

 


 

The following table classifies our loans (not including loans held for sale) by categories which are used throughout the industry as of September 30, 2016 and December 31, 2015:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non real estate

 

$           56,403 

 

$               139 

 

$            3,401 

 

$                   - 

 

$                    - 

 

$                 1,030 

 

$                 13,289 

 

$              74,262 

SBA commercial mortgage

 

97,211 

 

 -

 

901 

 

 -

 

 -

 

688 

 

18,253 

 

117,053 

SBA construction

 

5,828 

 

 -

 

 -

 

 -

 

 -

 

489 

 

 -

 

6,317 

Direct lease financing

 

119,008 

 

 -

 

3,265 

 

 -

 

 -

 

9,849 

 

200,510 

 

332,632 

SBLOC

 

275,373 

 

 -

 

 -

 

 -

 

 -

 

1,000 

 

345,083 

 

621,456 

Other specialty lending

 

20,076 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,076 

Consumer

 

10,970 

 

290 

 

3,573 

 

 -

 

 -

 

 -

 

4,542 

 

19,375 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

7,066 

 

7,066 



 

$         584,869 

 

$               429 

 

$          11,140 

 

$                   - 

 

$                    - 

 

$               13,056 

 

$               588,743 

 

$         1,198,237 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$           55,682 

 

$                   - 

 

$               904 

 

$                   - 

 

$                    - 

 

$                 8,610 

 

$                   3,691 

 

$              68,887 

SBA commercial mortgage

 

92,859 

 

 -

 

 -

 

 -

 

 -

 

3,894 

 

17,276 

 

114,029 

SBA construction

 

6,977 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

6,977 

Direct lease financing

 

90,588 

 

 -

 

670 

 

 -

 

 -

 

17,200 

 

123,056 

 

231,514 

SBLOC

 

204,201 

 

 -

 

 -

 

 -

 

 -

 

19,372 

 

352,375 

 

575,948 

Other specialty lending

 

46,520 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,795 

 

48,315 

Consumer

 

7,631 

 

70 

 

3,473 

 

 -

 

 -

 

457 

 

11,549 

 

23,180 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,227 

 

9,227 



 

$         504,458 

 

$                 70 

 

$            5,047 

 

$                   - 

 

$                    - 

 

$               49,533 

 

$               518,969 

 

$         1,078,077 



*  For information on targeted loan review thresholds see “Allowance for Loan Losses”



Premises and equipment, net.  Premises and equipment amounted to $21.8 million at September 30, 2016 compared to $21.6 million at December 31, 2015.  The increase reflected additional information technology upgrades.



Investment in Unconsolidated Entity.  On December 30, 2014, the Bank entered into an agreement for, and closed on, the sale of a portion of its commercial loan portfolio. The purchaser of the loan portfolio was a newly formed entity, Walnut Street 2014-1 Issuer, LLC (“Walnut Street”).  The price paid to the Bank for the loan portfolio, which had a face value of approximately $267.6 million, was approximately $209.6 million, of which approximately $193.6 million was in the form of two notes issued by Walnut Street to the Bank; a senior note in the principal amount of approximately $178.2 million bearing interest at 1.5% per year and maturing in December 2024 and a subordinate note in the principal amount of approximately $15.4 million, bearing interest at 10.0% per year and maturing in December 2024.  The balance of these notes comprise the $157.4 million investment in unconsolidated entity at September 30, 2016.  



Assets held for sale. Assets held for sale as a result of discontinued operations, primarily commercial, commercial mortgage and construction loans, amounted to $386.2 million at September 30, 2016 compared to $583.9 million at December 31, 2015.  Substantially all of the decrease resulted from  approximately $150.4 in loan principal paydowns, which included a $63.7 million loan sale in the third quarter of 2016  and fair value loan charges of approximately $43.4 million.  



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 September 30, 2016, we had total deposits of $3.77 billion compared to $4.41 billion at December 31, 2015, a decrease of $647.8 million or 14.7%.  The decrease reflected the planned exit of higher cost deposit relationships which did not have adequate income componentsThe following table presents the average balance and rates paid on deposits for the periods indicated (in thousands):



59

 


 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

For the nine months ended

 

For the year ended



 

 

September 30, 2016

 

December 31, 2015



 

 

Average

 

Average

 

Average

 

Average



 

 

balance

 

rate

 

balance

 

rate



 

 

 

 

 

Demand and interest checking *

 

$               3,325,047 

 

0.29% 

 

$              3,975,475 

 

0.28% 

Savings and money market

 

390,202 

 

0.35% 

 

337,168 

 

0.55% 

Time

 

 

103,624 

 

0.58% 

 

44,789 

 

0.61% 



Total deposits

 

$               3,818,873 

 

0.30% 

 

$              4,357,432 

 

0.30% 



 

 

 

 

 

 

 

 

 

* Non-interest bearing demand accounts are not paid interest.  The amount shown as interest reflects the fees paid to affinity groups, which are based upon a rate index, and therefore classified as interest expense.

Borrowings.  We had $70.0 million of outstanding advances from the Federal Home Loan Bank as of September 30, 2016 and $0 as of December 31, 2015.   We do not have any policy prohibiting us from incurring debt.

Other liabilities.  Other liabilities amounted to $27.7 million at September 30, 2016 compared to $16.7 million at December 31, 2015, representing an increase of $11.0 million.  Other liabilities consist primarily of investment security purchases in process and amounts payable for BSA lookback expenses.

Other-    During the quarter, we completed a stock offering which netted approximately $74.8 million of capital, with 17.4 million common shares issued. 

60

 


 

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, 2015.

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.  Members of our operational management and internal audit meet regularly to provide an established structure to report any weaknesses or other issues with controls, or any matter that has not been reported previously, to our Chief Executive Officer and Chief Financial Officer, and, in turn to the Audit Committee of our Board of Directors.  In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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

There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



 

61

 


 

PART II – OTHER INFORMATION



Item 1. Legal Proceedings



For a discussion of certain regulatory proceedings involving the FDIC and FRB, see Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Statement Restatement; Regulatory Actions”.



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 under the caption of In Re The Bancorp, Inc. Securities Litigation. Case No. 14-cv-0952(SLR).   On October 26, 2015, Lead Plaintiffs filed an amended consolidated complaint against Bancorp, Betsy Z. Cohen, Paul Frenkiel, Frank M. Mastrangelo and Jeremy Kuiper, which alleges that during a class period beginning January 26, 2011 through June 26, 2015, 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 Bank Secrecy Act (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 amended 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. This litigation is in its preliminary stages.  The defendants filed a motion to dismiss the amended consolidated complaint on November 23, 2015.  Oral argument on the defendants’ motion was held on January 29, 2016 and a court ruling on the motion has been pending.  On July 27, 2016, we and all other individually-named defendants entered into a Stipulation and Agreement of Settlement (Settlement Agreement) with respect to the consolidated class action.  Under the terms of the Settlement Agreement, we will pay $17.5 million to the plaintiffs as full and complete settlement of the litigation.  All amounts paid by  us will be fully funded by our insurance carriers.  All terms of the Settlement Agreement are subject to court approval which is pending.  



We received a subpoena from the SEC, dated March 22, 2016, relating to an investigation by the SEC of our restatement of our financial statements for the years ended December 31, 2010 through December 31, 2013 and the interim periods ended March 31, 2014, June 30, 2014 and September 30, 2014, which restatement was filed with the SEC on September 28, 2015, and the facts and circumstances underlying the restatement.  We are cooperating fully with the SEC's investigation.  Our costs to respond to the subpoena and cooperate with the SEC's investigation could be material.



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.



62

 


 

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)



 

 

November 9, 2016

 

/s/ Damian Kozlowski

Date

 

Damian Kozlowski



 

President/Chief Executive Officer



 

 

November 9, 2016

 

/s/ Paul Frenkiel

Date

 

Paul Frenkiel

Executive Vice President of Strategy,



 

Chief Financial Officer and Secretary









 

 

Exhibit No.

 

Description



 

 

3.1

 

Certificate of Incorporation dated July 20, 1999, amended July 27, 1999, amended, June 7, 2001, and amended October 8, 2002  (1)



 

 

3.2

 

Amendment to Certificate of Incorporation dated July 30, 2009 *



 

 

3.3

 

Amendment to Certificate of Incorporation dated June 1, 2016 *



 

 

3.4

 

Certificate of Designation designating Series C Mandatorily Convertible Cumulative Perpetual Non-Voting Preferred Stock dated August 5, 2016 (2)



 

 

3.5

 

Amended and Restated Bylaws (3)



 

 

10.1

 

Securities Purchase Agreement, dated August 5, 2016, between The Bancorp, Inc. and each of the Investors (2)



 

 

10.2

 

Registration Rights Agreement, dated August 5, 2016, between The Bancorp, Inc. and each of the Investors (2)



 

 

10.3

 

Subscription Agreement, dated August 5, 2016, between The Bancorp, Inc. and the purchasers named therein (2)



 

 

10.4

 

Letter Agreement with Hugh McFadden dated July 28, 2016 (4)



 

 

10.5

 

Letter Agreement with John Leto dated July 28, 2016 (4)



 

 

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 



 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document



 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

63

 


 



 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document



 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document



 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document



 

 

*

 

Filed herewith



 

 

(1)

 

Filed previously as an exhibit to the Registration Statement on From S-4 (File No. 333-117385) filed with the SEC on July 15, 2004 and incorporated herein by this reference.



 

 

(2)

 

Filed previously as an exhibit to the Current Report on Form 8-K filed with the SEC on August 8, 2016 and incorporated herein by this reference.



 

 

(3)

 

Filed previously as an exhibit to our Form 10-K for the year ended December 31, 2013 and incorporated herein by this reference.



 

 

(4)

 

Filed previously as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on August 9, 2016 and incorporated herein by this reference.





 

 



 

 







 

64