Bancorp, Inc. - Annual Report: 2012 (Form 10-K)

 

 

 

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

 

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

 

 

 

Delaware		23-3016517
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

409 Silverside Road, Wilmington, DE		19809
(Address of principal executive offices)		(Zip Code)

 

Title of each Class		Name of each Exchange on which Registered
Common Stock, par value $1.00 per share		NASDAQ Global Select

Title of each Class		Name of each Exchange on which Registered
None		None

Yes  ¨

No  x

 

Yes  ¨

No  x

 

Yes  x

No  ¨

 

Yes  x

No  ¨

 

 

 

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨	Smaller Reporting Company ¨

Yes  ¨

No  x

 

 

 

 

 

 

 

 

		Page
PART I
	Forward-looking statements	1
Item 1:	Business	2
Item 1A:	Risk Factors	21
Item 1B:	Unresolved Staff Comments	30
Item 2:	Properties	30
Item 3:	Legal Proceedings	30
Item 4:	Mine Safety Disclosures	30
PART II
Item 5:	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
Item 6:	Selected Financial Data	34
Item 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 7A:	Quantitative and Qualitative Disclosures About Market Risk	67
Item 8:	Financial Statements and Supplementary Data	68
Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	112
Item 9A:	Controls and Procedures	112
Item 9B:	Other Information	115
PART III
Item 10:	Directors and Executive Officers of the Registrant	115
Item 11:	Executive Compensation	115
Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	115
Item 13:	Certain Relationships and Related Transactions	115
Item 14:	Principal Accountant Fees and Services	115
PART IV
Item 15:	Exhibits and Financial Statement Schedules	116
SIGNATURES		118

 

 

 

 

 

•	the risk factors discussed and identified in Item 1A of this report and in other of our public filings with the SEC;

•

recessionary and slow growth conditions in the U.S. economy and significant dislocations in the credit markets have had, and may continue to have, significant adverse effects on our assets and operating results, including increases in payment defaults and other credit risks, decreases in the fair value of some assets and increases in our provision for loan losses;

•	current economic and credit market conditions, if they continue, may result in a reduction in our capital base, reducing our ability to maintain deposits at current levels;

•	operating costs may increase;

•	adverse governmental or regulatory policies may be enacted;

•	management and other key personnel may be lost;

•	competition may increase;

•	the costs of our interest-bearing liabilities, principally deposits, may increase relative to the interest received on our interest-bearing assets, principally loans, thereby decreasing our net interest income;

•	loan and investment yields may decrease for various reasons resulting in a lower net interest margin;

•	the geographic concentration of our loans could result in our loan portfolio being adversely affected by economic factors unique to the geographic area and not reflected in other regions of the country;

•

the market value of real estate that secures our loans has been, and may continue to be, adversely affected by current economic and market conditions, and may be affected by other conditions outside of our control such as lack of demand for real estate of the type securing our loans, natural disasters, changes in neighborhood values, competitive overbuilding, weather, casualty losses, occupancy rates and other similar factors.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

•

checking accounts, featuring no required minimum balance, no monthly maintenance fees, competitive interest rates, rebates on automated teller machine fees, free debit Visa check card and overdraft protection plans; and premium checking accounts with free online bill paying, an enhanced debit Visa check card or an automated teller machine (ATM) card;

•	savings accounts;

•	healthcare interest bearing accounts;

•	money market accounts;

•	commercial accounts, including general commercial checking, small business checking, business savings and business money market accounts;

•	certificates of deposit; and

Lending Activities.  At December 31, 2012, we had a net loan portfolio of $1.90 billion, representing 51.4% of our total assets at that date. We originate substantially all of our portfolio loans, although from time to time we purchase residential mortgages and leases. Where a proposed loan exceeds our lending limit, we typically sell a participation in the loan to another financial institution. We generally separate our lending function into commercial term loans, commercial mortgage loans, commercial lines of credit, construction loans, direct lease financing and personal (consumer) loans. We focus primarily on lending to small to mid-size businesses and their principals. As a result, commercial, construction and commercial mortgage loans have comprised a majority of our loan portfolio since we commenced operations. At December 31, 2012, commercial, construction and commercial mortgage loans comprised $1.35 billion, or 71.0%, of our total loan portfolio. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans and are typically larger than residential real estate and consumer loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•

fulfillment functions and similar operating services, including check processing, check imaging, electronic bill payment and statement rendering;

•

fulfillment and servicing of prepaid cards;

•

compliance and internal audit;

•

call center customer support;

•

access to automated teller machine networks;

•

processing and temporarily funding residential mortgage loans we will not hold in our portfolio;

•

bank accounting and general ledger system;

•

data warehousing services; and

•

certain software development.

 

 

 

 

•

invitation-only, private receptions with prominent business leaders in the Philadelphia community;

•

advertisements in local media outlets, principally newspapers and radio stations; and

•

charitable sponsorships.

 

 

 

 

 

 

 

 

 

 

 

 

•

print advertising;

 

•

direct mail; and

•

direct contact with potential affinity organizations by our marketing staff, with relationship managers focusing on particular regional markets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

·	our ability to build upon the customer relationships developed by our senior management and through our marketing programs;

·	our ability to expand our affinity group banking program;

·	competitors’ interest rates and service fees;

·	the scope of our products and services;

·	the relevance of our products and services to customer needs and demands and the rate at which we and our competitors introduce them;

·	satisfaction of our customers with our customer service;

·	our perceived safety as a depository institution, including our size, credit rating, capital strength and earnings strength;

·	our perceived ability to withstand current turbulent economic conditions;

·	ease of use of our banking website; and

·	the capacity, reliability and security of our network infrastructure.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•

the financial holding company has a class of securities registered under Section 12 of the Securities Exchange Act of 1934; or

•

no other person will own or control a greater percentage of that class of voting securities immediately after the transaction.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•	prohibiting the payment of principal and interest on subordinated debt;

 

•	prohibiting the holding company from making distributions without prior regulatory approval;

 

•	placing limits on asset growth and restrictions on activities;

 

•	placing additional restrictions on transactions with affiliates;

 

•	restricting the interest rate the institution may pay on deposits;

 

•	prohibiting the institution from accepting deposits from correspondent banks; and

 

•	in the most severe cases, appointing a conservator or receiver for the institution.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•

identify relevant red flags for covered accounts and incorporate those red flags into the program;

•

detect red flags that have been incorporated into the program;

•

respond appropriately to any red flags that are detected to prevent and mitigate identity theft; and

•

ensure the program is updated periodically, to reflect changes in risks to customers or to the safety and soundness of the financial institution or creditor from identity theft.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•

the federal “Truth-In-Lending Act,” governing disclosures of credit terms to consumer borrowers;

 

•

the “Home Mortgage Disclosure Act of 1975,” requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

•

the “Equal Credit Opportunity Act,” prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

 

 

 

 

 

 

 

 

 

 

 

 

•

the “Fair Credit Reporting Act of 1978,” as amended by the “Fair and Accurate Credit Transactions Act,” governing the use and provision of information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures;

 

•

the “Fair Debt Collection Practices Act,” governing the manner in which consumer debts may be collected by collection agencies;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•

the “Home Ownership and Equity Protection Act” prohibiting unfair, abusive or deceptive home mortgage lending practices, restricting mortgage lending activities and providing advertising and mortgage disclosure standards.

•

the “Service Members Civil Relief Act;” postponing or suspending some civil obligations of service members during periods of transition, deployment and other times; and

•

the rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws;

•

the “Truth in Savings Act,” which imposes disclosure obligations to enable consumers to make informed decisions about accounts at depository institutions;

•

the “Right to Financial Privacy Act,” which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

•

the “Expedited Funds Availability Act” which establishes standards related to when financial institutions must make various deposit items available for withdrawal, and requires depository institutions to disclose their availability policies to their depositors;

•

the “Electronic Fund Transfer Act” and which governs electronic fund transfers to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

•

the rules and regulations of various federal agencies charged with the responsibility of implementing these federal laws.

 

 

•

a lending test which compares the institution’s market share of loans in low-and moderate-income areas to its market share of loans in its entire service area and the percentage of the institution’s outstanding loans to low-and moderate-income areas or individuals;

•

a service test, which evaluates the provision of services that promote the availability of credit to low-and moderate-income areas; and

•

an investment test, which evaluates an institution’s record of investments in organizations designed to foster community development, small-and- minority-owned businesses and affordable housing lending, including state and local government housing or revenue bonds.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On December 12, 2008, we received funding under TARP in the amount of $45.2 million in exchange for 45,220 shares of our Series B preferred stock and common stock warrants and, as a result, we were subject to the Treasury Department’s standards for executive compensation and corporate governance, for the period during which the Treasury Department held equity issued under the CPP. We repurchased all of the Series B preferred stock on March 10, 2010 and repurchased all of the outstanding warrants on September 8, 2010 for $4.7 million, which together constituted all of our obligations under TARP.  Since we have repaid all obligations under TARP, we will experience no further financial impact from it.
 

·

Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the “CFPB”), with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and certain others, including the examination and enforcement powers with respect to any bank with more than $10 billion in assets. The CFPB has been officially established and has begun issuing rules, taking consumer complaints and performing its other core functions.

 

 

 

 

 

 

 

·

Restrict the preemption of state consumer financial protection law by federal law and disallow subsidiaries and affiliates of national banks, from availing themselves of such preemption.

 

·

Require new capital rules and apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies.

 

·

Require the Office of the Comptroller of the Currency to seek to make its capital requirements for national banks, countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.

 

·

Require publicly-traded bank holding companies with assets of $10 billion or more to establish a risk committee responsible for enterprise-wide risk management practices.

 

·

Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated average assets less tangible capital.

 

·

Increase the minimum ratio of net worth to insured deposits of the DIF from 1.15% to 1.35% and require the FDIC, in setting assessments, to offset the effect of the increase on institutions with assets of less than $10 billion.

 

·

Provide for new disclosure and other requirements relating to executive compensation and corporate governance, including guidelines or regulations on incentive-based compensation and a prohibition on compensation arrangements that encourage inappropriate risks or that could provide excessive compensation.

 

·

Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts and IOLTA accounts at all insured depository institutions.

 

·

Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

 

·

Allow de novo interstate branching by banks.

 

·

Give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.  The Federal Reserve has issued final rules under this provision that limit the swipe fees that a debit card issuer can charge merchants to 21 cents per transaction plus 5 basis points of the transaction value, subject to an adjustment for fraud prevention costs.  Final regulations are due nine months after enactment of the Dodd-Frank Act.

 

·

Increase the authority of the Federal Reserve to examine the holding companies and their non-bank subsidiaries.

 

·

Require all bank holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress.

 

·

Restrict proprietary trading by banks, bank holding companies and others, and their acquisition and retention of ownership interests in and sponsorship of hedge funds and private equity funds.  This restriction is commonly referred to as the “Volcker Rule.”  There is an exception in the Volcker Rule to allow a bank to organize and offer hedge funds and private equity funds to customers if certain conditions are met.  These conditions include, among others, requirements that the bank provides bona fide investment advisory services; the funds are organized only in connection with such services and to customers of such services; the bank does not have more than a de minimis interest in the funds, limited to a 3% ownership interest in any single fund and an aggregated investment in all funds of 3% of Tier 1 capital; the bank does not guarantee the obligations or performance of the funds; and no director or employee of the bank has an ownership interest in the fund unless he or she provides services directly to the funds.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We operate in a highly competitive market and geographic area.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•

exposure to potential asset quality issues of the target entity;

•

difficulty and expense of integrating the operations and personnel of the target entity;

•

potential disruption to our business;

•

potential diversion of our management’s time and attention;

•

the possible loss of key employees and customers of the target entity;

•

difficulty in estimating the value of the target entity; and

•

potential changes in banking or tax laws or regulations that may affect the target entity.

 

 

 

 

 

 

 

 

·	Effective October 1, 2011, payment card networks must allow merchants to direct transactions to all networks enabled on debit cards.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

·	Effective April 1, 2012, most debit card issuers must comply with the outlined regulations; issuers with cards not currently offering an unaffiliated PIN network must do so by this date.

 

·	Effective April 1, 2013, the network exclusivity compliance extension for certain types of previously excluded debit cards will expire.

 

·	Effective May 1, 2013, all reloadable general-use prepaid cards sold and reloaded prior to April 1, 2013, must comply with network exclusivity requirements. If such cards are reloaded on or after April 1, 2013, the effective date for compliance is 30 days after the reloading date.

 

It is difficult to predict at this time what specific impact many aspects of the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on regional banks;  however, we expect that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

 

 

 

 

 

 

 

 

Future offerings of debt, which would be senior to our common stock upon liquidation, and/or preferred equity securities which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may reduce the market price at which our common stock trades.

 

 

 

 

 

 

 

 

 

 

 

Location	Expiration	Square Feet		Monthly Rent
United States
Crofton, Maryland	2013	3,243		$                       5,199
Kennesaw, Georgia	2013	140		749
Sioux Falls, South Dakota	2013	28,279		66,341
Orlando, Florida	2014	12,400		9,896
Philadelphia, Pennsylvania	2014	24,531		56,225
New York, New York	2015	1,519		8,382
Minneapolis, Minnesota	2017	3,181		4,431
King Of Prussia, Pennsylvania	2017	2,728		4,249
Wilmington, Delaware	2018	41,537		77,193
Chicago, Illinois	2020	6,864		6,640
New York, New York	2020	2,627		8,662
Europe (1)
Newcastle Upon Tyne, United Kingdom	2013	350		1,220
Lozenetaz, Sofia Bulgaria	2014	4,413		1,764
Ocean Village, Gibraltar	2022	4,585		14,814
(1) Office space in Europe is expressed in square feet and U.S. Dollars.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended		Price Range
		High				Low
2012
March 31, 2012		$	10.24			$	7.14
June 30, 2012		$	10.50			$	8.26
September 30, 2012		$	10.72			$	8.61
December 31, 2012		$	12.73			$	10.24
2011
March 31, 2011		$	10.32			$	8.09
June 30, 2011		$	10.58			$	8.82
September 30, 2011		$	10.64			$	6.31
December 30, 2011		$	9.00			$	6.51

 

		Common shares repurchased (1)				Weighted- average per share price				Maximum number of shares that may yet be purchased under the authorization
November 1- 30, 2011			100,000			$	8.66				650,000
Total			100,000			$	8.66				650,000

 

 

 

 

 

 

 

 

  

		As of
Index		12/31/2007				12/31/2008				12/31/2009				12/31/2010				12/31/2011				12/31/2012
The Bancorp, Inc.			100.00				27.86				50.97				75.56				53.71				81.50
NASDAQ Bank Stock Index			100.00				76.08				62.00				69.37				60.75				70.34
NASDAQ Composite Stock Index			100.00				59.46				85.55				100.02				98.22				113.85

 

 

 

 

 

 

 

 

 

 

		As of
Index		12/31/2008				12/31/2009				12/31/2010				12/31/2011				12/31/2012
The Bancorp, Inc.			100.00				182.93				271.20				192.80				292.54
KBW BANK INDEX			100.00				96.37				117.80				88.85				115.70

 

Net interest margin			2.58	%			2.96	%			3.28	%			3.74	%			3.44	%
Book value per common share		$	9.06			$	8.18			$	7.60			$	7.64			$	9.21
Selected Capital and Asset Quality Ratios:
Equity/assets			9.10	%			9.02	%			8.30	%			12.00	%			10.07	%
Tier I capital to average assets			10.00	%			8.69	%			8.37	%			12.68	%			10.10	%
Tier 1 capital to total risk-weighted assets			16.39	%			14.64	%			11.99	%			15.81	%			11.72	%
Total capital to total risk-weighted assets			17.64	%			15.89	%			13.24	%			17.06	%			12.87	%
Allowance for loan and lease losses to total
loans			1.74	%			1.69	%			1.49	%			1.26	%			1.20	%
nm--not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following discussion provides information to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8 of this report.
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

		Year ended December 31,
		2012												2011
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
		(dollars in thousands)
Assets:
Interest-earning assets:
Loans net of unearned discount **		$	1,807,770			$	77,685				4.30	%		$	1,671,940			$	74,347				4.45	%
Leases - bank qualified*			13,571				826				6.09	%			4,976				438				8.80	%
Investment securities-taxable			482,463				13,378				2.77	%			289,002				9,682				3.35	%
Investment securities-nontaxable*			103,900				4,331				4.17	%			77,509				4,111				5.30	%
Interest earning deposits at Federal Reserve Bank			974,762				2,433				0.25	%			588,689				1,461				0.25	%
Federal funds sold and securities sold under agreements to resell			425				7				1.65	%			-				-				0.00	%
Net interest earning assets			3,382,891				98,660				2.92	%			2,632,116				90,039				3.42	%
Allowance for loan and lease losses			(32,320	)											(26,999	)
Other assets			127,485												255,444
		$	3,478,056											$	2,860,561
Liabilities and Shareholders' Equity:
Deposits:
Demand and interest checking		$	2,666,493			$	7,691				0.29	%		$	2,175,972			$	8,035				0.37	%
Savings and money market			455,860				2,401				0.53	%			355,094				2,550				0.72	%
Time			26,624				356				1.34	%			31,066				354				1.14	%
Total deposits			3,148,977				10,448				0.33	%			2,562,132				10,939				0.43	%
Short-term borrowings			-				-				0.00	%			745				3				0.40	%
Repurchase agreements			22,508				95				0.42	%			23,113				231				1.00	%
Subordinated debt			13,401				869				6.48	%			13,401				863				6.44	%
Total deposits and interest bearing liabilities			3,184,886				11,412				0.36	%			2,599,391				12,036				0.46	%
Other liabilities			9,438												9,138
Total liabilities			3,194,324												2,608,529
Shareholders' equity			283,732												252,032
		$	3,478,056											$	2,860,561
Net interest income on tax equivalent basis *							87,248												78,003
Tax equivalent adjustment							1,804												1,597
Net interest income						$	85,444											$	76,406
Net interest margin *											2.58	%											2.96	%
* Full taxable equivalent basis, using a 35% statutory tax rate.
** Includes loans held for sale.