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Bancorp, Inc. - Annual Report: 2014 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

 

FORM 10-K

________________

(Mark One)

 

 

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

 

For the fiscal year ended December 31, 2014

OR

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 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

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

409 Silverside Road, Wilmington, DE

 

19809

(Address of principal executive offices)

 

(Zip Code)

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

________________

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

 

Name of each exchange on which registered

Common Stock,  par value $1.00 per share

 

NASDAQ Global Select

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

 

 

Title of class

                                                                                        None

 

________________

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(a) of the Act.    Yes      No   

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      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      No   

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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

Large accelerated filer Accelerated filer

Non-accelerated filer 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   

The aggregate market value of the common shares of the registrant held by non-affiliates of the registrant, based upon the closing price of such shares on June 30, 2014 of $11.91, was approximately $431.4 million. 

As of September 24, 2015, 37,758,237 shares of common stock, par value $1.00 per share, of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for registrant’s 2015 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

 


 

THE BANCORP, INC.

INDEX TO ANNUAL REPORT

ON FORM 10-K

 

 

 

 

 

Page

PART I

 

 

 

 

 

Forward-looking statements...........................................................................................................................

1

 

 

 

Item 1:

Business.........................................................................................................................................................

3

 

 

 

Item 1A:

Risk Factors.................................................................................................................................................

22

 

 

 

Item 1B:

Unresolved Staff Comments...........................................................................................................................

34

 

 

 

Item 2:

Properties.......................................................................................................................................................

34

 

 

 

Item 3:

Legal Proceedings.........................................................................................................................................

35

 

 

 

Item 4:

Mine Safety Disclosures.................................................................................................................................

35

 

 

 

PART II 

 

 

 

 

Item 5:

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
.........

 

35

 

 

 

Item 6:

Selected Financial Data...................................................................................................................................

39

 

 

 

Item 7:

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

41

 

 

 

Item 7A:

Quantitative and Qualitative Disclosures About Market Risk.................................................................................

69

 

 

 

Item 8:

Financial Statements and Supplementary Data...................................................................................................

70

 

 

 

Item 9:

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................................

151

 

 

 

Item 9A:

Controls and Procedures.................................................................................................................................

151

 

 

 

Item 9B:

Other Information.........................................................................................................................................

155

 

 

 

PART III 

 

 

 

 

Item 10:

Directors, Executive Officers and Corporate Governance.....................................................................................

155

 

 

 

Item 11:

Executive Compensation.................................................................................................................................

161

 

 

 

Item 12:

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...........................

172

 

 

 

Item 13:

Certain Relationships and Related Transactions, and Director Independence...........................................................

174

 

 

 

Item 14:

Principal Accountant Fees and Services.............................................................................................................

175

 

 

 

PART IV 

 

 

 

 

Item 15:

Exhibits and Financial Statement Schedules .......................................................................................................

177

 

 

 

SIGNATURES...................................................................................................................................................................

179

 

 


 

FORWARD-LOOKING STATEMENTS

 

The Securities and Exchange Commission, or SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report contains such “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act.

 

Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,”  “should” and words and terms of similar substance used in connection with any discussion of future operating and financial performance identify forward-looking statements. Unless we have indicated otherwise, or the context otherwise requires, references in this report to “we,” “us,” and “our” or similar terms, are to The Bancorp, Inc. and its subsidiaries.

 

We claim the protection of safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this report and they may also be incorporated by reference in this report to other documents filed with the SEC, and include, but are not limited to, statements about future financial and operating results and performance, statements about our plans, objectives, expectations and intentions with respect to future operations, products and services, and other statements that are not historical facts. These forward-looking statements are based upon the current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and generally beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  Actual results may differ materially from the anticipated results discussed in these forward-looking statements.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: 

 

·

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

·

weak economic and slow growth conditions in the U.S. economy and significant dislocations in the credit markets have had, and may in the future 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;

·

weak economic and credit market conditions 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 promulgated;

·

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;

·

possible geographic concentration of certain 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 certain of our loans has been, and may continue to be, adversely affected by recent 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;

·

we must satisfy our regulators with respect to Bank Secrecy Act, Anti-Money Laundering and other regulatory mandates to prevent additional restrictions on adding customers and to remove current restrictions on adding certain customers;

·

the loans from our discontinued operations are now held for sale and were marked to fair value by an independent third party; however, the actual sales price could differ from those third party fair values. The reinvestment rate for the proceeds of those sales in investment securities depends on future market interest rates; and

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·

we may not be able to sustain our historical growth rate in our loan, prepaid card and other lines of business.

 

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.

 

 

 

EXPLANATORY NOTE

 

 

As reported in our Current Report on Form 8-K, filed April 1, 2015, we analyzed the amount and timing of our recognition of impairment losses with respect to certain loan relationships that we had originally recognized in the quarter ended March 31, 2014.  As a result of this analysis, the audit committee of our board of directors determined that such charges should be restated to prior periods and, accordingly, that our financial statements for the years ended December 31, 2012 and 2013, for the quarterly periods within such years, and for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014 could not be relied upon.  In connection with these analyses, we reviewed other, unrelated loan charges and determined that it was necessary to restate certain of these losses, together with previously unreported losses, to prior periods.  These determinations affected the financial statements contained in our Annual Reports on Form 10-K for the years ended December 31, 2010, 2011, 2012 and 2013, in our Quarterly Reports on Form 10-Q for the interim periods included within such years, and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014.  Rather than amending each of the affected Annual and Quarterly Reports, we have included the restated financial statements for each of such years and quarterly periods, showing adjustments, in Notes C and T to the financial Statements included in this Annual Report on Form 10-K.                       

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PART I

Item 1. Business.  

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 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.  At December 31, 2014, SBLOC, leasing, SBA and CMBS loans totaled $421.9 million, $194.5 million, $211.4 million (including SBA loans held for sale) and $138.9 million, respectively,    and comprised 39%, 18%, 19% and 13% of our loan portfolio and loans held for sale.  Additionally, we have been increasing our investment portfolio which amounted to $1.59 billion at December 31, 2014.

For our institutional banking,  including SBLOC and our other  deposit generating activities, we focus on providing our services 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 for investment advisory companies; credit and debit card processing for merchants affiliated with independent service organizations; healthcare savings accounts for healthcare providers and third-party plan administrators; and prepaid cards for general purpose card sponsors, insurers, incentive plans, large retail chains, consumer service organizations and others. 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 prepaid card, private label banking, card payment processing and healthcare accounts programs are our primary source of deposits. The vast majority of our services are provided in the United States although we have some prepaid card operations in Europe.

Our main office is located at 409 Silverside Road, Wilmington, Delaware 19809 and our telephone number is (302) 385-5000. Our web address is www.thebancorp.com. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports and our proxy statements as soon as reasonably practicable after we file them with the SEC.  Investors are encouraged to access these reports and other information about our business on our website, www.thebancorp.com.  Information found on our website is not part of this Annual Report on Form 10-K.  We also will provide copies of our Annual Report on Form 10-K, free of charge, upon written request to our Investor Relations Department at the Company’s address for its principal executive offices, 409 Silverside Road, Wilmington, Delaware 19809.  Also posted on our website, and available in print upon request by any shareholder to our Investor Relations Department, are the charters of the standing committees of our Board of Directors and standards of conduct governing our directors, officers and employees.

Our Strategies    

Our principal strategies are to:

 

Fund our Loan and Investment Portfolio Growth through Low-cost  Deposits and Generate Noninterest Income from Prepaid Cards and Other Areas. Our principal focus is to grow our specialty lending operations and investment portfolio, and fund the loans  and investments through a variety of sources that provide low cost and stable deposits.  Funding sources include prepaid cards, institutional banking money market accounts, healthcare accounts and card payment processingThe largest component of our deposits is prepaid cards and the largest component of our noninterest income is derived from prepaid cards.       

  

Develop Relationships with Affinity Groups to Gain Sponsored Access to their Membership, Client or Customer Bases to Market our Services.  We seek to develop relationships with organizations with established membership, client or customer bases. Through these affinity group relationships, we gain access to an organization’s members, clients and customers under the organization’s sponsorship. We believe that by marketing targeted products and services to these constituencies through their pre-existing relationships with the organizations, we will continue to generate lower cost deposits, generate fee income and, with respect to private label banking, lower our customer acquisition costs and build close customer relationships.

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Use Our Existing Infrastructure as a Platform for Growth.  We have made significant investments in our banking infrastructure to support our growth. We believe that this infrastructure can accommodate significant additional growth without proportionate increases in expense. We believe that this infrastructure enables us to maximize efficiencies through economies of scale as we grow without adversely affecting our relationships with our customers.

 

Deposit Products and Services.  

 

We offer a range of products and services to our affinity groups and their client bases, including:

 

·

checking accounts;

·

savings accounts;

·

healthcare accounts;

·

money market accounts;

·

commercial accounts; and

·

various types of prepaid and payroll cards.

 

Lending Activities

 

In the third quarter of 2014, we discontinued our commercial lending operations following our determination that those operations were inconsistent with our strategic focus on generating low cost deposits and deploying that funding into lower risk, more granular and national lines of business.  We have begun the process of selling our portfolio and have sold loans with a book value of approximately $342.2 million,  of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations. The $342.2 million  of loans sold had a face value of approximately $417.1 million. These sales were comprised of the following:  Loans with an approximate face and book value of $267.6 million and $192.7 million, respectively, were sold in the fourth quarter of 2014 to a private securitization entity. The securitization is managed by an independent investor, which contributed $16 million of equity to that entity.  The balance of the sale was financed by the Bank and is reflected on the  consolidated balance sheet as investment in unconsolidated subsidiary.  After $74.9 million of loan charges  reflected in the difference between the face value and book value of the loans sold to the securitization, we recognized a gain of  $17.0 million.  In the second quarter of 2015, an additional $149.6 million of loans were sold at a gain of approximately $2.2 million.  We currently focus our lending activities upon four specialty lending segments:  SBLOC loans, automobile fleet and other equipment leasing, SBA loans and loans originated for sale into CMBS capital markets.

 

SBLOC.  We make loans to individuals, trusts and entities which are secured by a pledge of marketable securities maintained in one or more accounts with respect to which we obtain a securities account control agreement.  The securities pledged may be either debt or equity securities or a combination thereof, but all such securities must be listed for trading on a national securities exchange or automated inter-dealer quotation system. SBLOCs are typically payable on demand.  Most of our SBLOCs are drawn to meet a specific need of the borrower (such as for bridge financing of real estate) and are typically drawn for 12 to 18 months at a time.  Maximum SBLOC line amounts are calculated by applying a standard ‘advance rate’ calculation against the eligible security type depending on asset class:  typically up to 60% for equity securities and mutual fund securities and 90% for investment grade (Standard & Poors rating of BBB- or higher or Moody’s rating of Baa3 or higher) municipal or corporate debt securities. Borrowers generally must have a credit score of 660 or higher, although we may allow exceptions based upon a review of the borrower’s income, assets and other credit information. All SBLOCs are with full recourse to the borrower. The underlying securities that act as collateral for our SBLOC commitments are monitored on a daily basis to confirm the composition of the client portfolio and its daily market value.  Although these accounts are closely monitored, severely falling markets or sudden drops in price with respect to individual pledged securities could result in the loan being under-collateralized and consequently in default and, upon sale of the collateral, could result in losses to the Bank

 

Leases.  We provide lease financing for commercial and government automobile fleets and, to a lesser extent, provide lease financing for other equipment. Our leases are either open end or closed end. An open end lease is one in which, at the end of the lease term, the lessee must pay us the difference between the amount at which we sell the leased asset and the stated “residual value.” “Residual value” is a contractual value agreed to by the parties at the inception of a lease as to the value of the leased asset at the end of the lease term. A closed end lease is one in which no such payment is due on lease termination.  In a closed end lease, the risk that

4


 

the amount received on a sale of the leased asset will be less than the residual value is assumed by us, as lessor. While we do not have specific underwriting criteria for our lease financing, we analyze information we obtain about the lessee, including financial statements and credit reports, to determine the lessee’s ability to perform its obligations.

 

SBA Loans.    We participate in two loan programs established by the SBA: the 7(a) Loan Guarantee Program and the 504 Fixed Asset Financing Program.  The 7(a) Loan Guarantee Program is designed to help small entrepreneurs start or expand their businesses by providing partial guarantees of loans made by banks and non-bank lending institutions for specific business purposes, including long or short term working capital; funds for the purchase of equipment, machinery, supplies and materials; funds for the purchase, construction or renovation of real estate; and funds to acquire, operate or expand an existing business or  refinance existing debt, all under conditions set by the SBA.  The terms of the loans must come within parameters set by the SBA, including borrower eligibility, loan maturity, and maximum loan amount. 7(a) loans must be secured by all available assets (both business and personal) until the recovery value equals the loan amount or until all assets of the borrower have been pledged.  Personal guarantees are required from all owners of 20% or more of the equity of the business, although lenders may also require personal guarantees of owners of less than 20%.  Loan guarantees can range to 85% of loan principal for loans of up to $150,000 and 75% for loans in excess of that amount.

 

The SBA loan guaranty is paid to the lender after the liquidation of all collateral, mitigating the losses due to collateral deficiencies up to the percentage of the guarantee. To maintain the guarantee, we must comply with applicable SBA regulations and we risk loss of the guarantee should we fail to comply for any reason.    7(a) loan amounts are not limited to a percentage of estimated collateral value.  If the business generates inadequate cash flow to repay principal and interest and borrowers are otherwise unable to repay the loan, losses may result if related collateral is sold for less than the unguaranteed balance of the loan.  Because these loans are generally at variable rates, higher rate environments will increase required payments from borrowers, with increased payment default risk.  As a result of a wide variety of collateral with very specific uses, markets for resale may negatively impact amounts realized upon sale.  The 7(a) program is funded through annual appropriations approved by Congress matching funding requirements for loans approved within the budget year.  Should those appropriations be reduced or cease, our ability to make 7(a) loans will be curtailed or terminated.

 

The 504 Fixed Asset Financing Program is designed to provide small businesses with financing for the purchase of fixed assets, including real estate and buildings; the purchase of improvements to real estate; the construction of new facilities or modernizing, renovating or converting existing facilities; and the purchase of long-term machinery and equipment.  A 504 loan may not be used for working capital, debt refinancing or investment in rental real estate.  In a 504 financing, the borrower must supply 10% of the financing amount, we provide 50% of the financing amount and a Certified Development Company, or CDC, provides 40% of the financing amount.  If the borrower has less than two years of operating history or if the assets being financed are considered “special purpose,” the funding percentages are 15%, 50% and 30%, respectively.  We receive a first lien on the assets being financed and the CDC receives a second lien.  Personal guarantees of the principal owners of the business are required.  The funds for the CDC loans are raised through a monthly auction of bonds that are guaranteed by the U.S. government and, accordingly, if the government guarantees are curtailed or terminated, our ability to make 504 loans would be curtailed or terminated.  Certain basic loan terms, as with the 7(a) program, are established by the SBA, including borrower eligibility, maximum loan amount, maximum maturity date, interest rates and loan fees.  While real estate is appraised and values are established for other collateral, and the loan amount is limited to a percentage of cost of the assets being acquired by the borrower, such amounts may not be realized upon resale if the borrower defaults and the Bank forecloses on the collateral.

 

SBA 7(a) and 504 loans may include construction advances which are subject to risk inherent to construction projects, including environmental risks, engineering defects, contractor risk, and risk of project completion.  Delays in construction may also compromise the owner’s business plan and result in additional stresses on cash flow required to service the loan.  Higher than expected construction costs may also result, impacting repayment capability and collateral values. 

 

Additionally, the Bank makes SBA loans to franchisees of various business concepts, including loans to multiple franchisees with the same concept.  In making loans to franchisees, the Bank considers franchisee failure rates for the specific franchise concept. However, factors adversely affecting a specific type of franchisor or franchise concept, including in particular risks that a franchise concept loses popularity with consumers or encounters negative publicity about its products or services, could harm the value not only of a particular franchisee’s business but also of multiple loans to other franchisees with the same concept.

 

Capital Markets:  Loans Originated for Sale into Secondary Securities Markets.We originate loans for sale into secondary securities markets.  These loans are typically collateralized by various types of commercial real estate, including retail space, office space, apartments and hotels, and are with recourse only to the properties securing the loans, are not guaranteed by the borrower and,

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accordingly, depend on cash reserves and cash generated by the underlying properties for repayment.  Some of these loans are variable rate and, as a result, higher market rates will result in higher payments and greater cash flow requirements.  Inadequate sales at retail properties and inadequate occupancy rates for office space, apartments and hotels may negatively impact loan repayment.  Should cash flow and available cash reserves prove inadequate to cover debt service on these loans, repayment will depend upon the sales price of the property.  Because these loans are being originated for resale, the underwriting criteria used are those that buyers in the capital markets indicate are the parameters under which they are willing to buy the loans, including interest rate, loan to value ratio and maturity; however, in the period during which we hold a loan prior to sale, property values may fall below appraised values and below the outstanding balance of the loan which would reduce the price at which we could sell the loan.  Inadequate retail sales or occupancy, in addition to impacting repayment, may also result in a lower realizable sales price.  While we historically have been successful in selling to these markets, adverse market conditions may delay, or possibly preclude, expected sales into the secondary market or cause losses upon any resale. To mitigate these risks, we establish guidelines for the maximum amounts of such loans we will hold on our balance sheet.

 

Affinity Banking

Private Label Banking.  For our private label banking, we create unique banking websites for each affinity group, enabling the affinity group to provide its members with the banking services and products we offer or just those banking services and products it believes will be of interest to its members. We design each website to carry the brand of the affinity group and carry the “look and feel” of the affinity group’s own website.  Each such website, however, indicates that we are the provider of such banking services.  To facilitate the creation of these individualized banking websites, we have packaged our products and services into a series of modules, with each module providing a specific service, such as deposit products, electronic payment systems and loans.   Each affinity group selects from our menu of service modules those that it wants to offer its members or customers. We and the affinity group also may create products and services, or modify products and services already on our menu, that specifically relate to the needs and interests of the affinity group’s members or customers. We pay fees to certain affinity groups based upon deposits and loans they generate. These fees vary, and certain fees increase as market interest rates increase, while other fee rates are fixed.  We include these fees as a component of interest expense in calculating our net interest margin.  These fees totaled $7.2 million, $5.7 million and $4.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.  These amounts include fees paid related to prepaid cards, healthcare accounts, card payment processing and institutional banking which are described below.

Prepaid Cards.  We have developed prepaid card programs for general purpose re-loadable cards, insurance indemnity payments, flexible spending account funds, corporate and incentive rewards, payroll cards, consumer gift cards and others.  Our cards are offered to end users through our relationships with insurers, benefits administrators, third-party administrators, corporate incentive companies, rebate fulfillment organizations, payroll administrators, large retail chains and consumer service organizations.  Our cards are network-branded through our agreements with Visa, MasterCard, and Discover.  The majority of fees we earn result from contractual fees paid by third party sponsors, computed on a per transaction basis, and monthly service fees. Additionally, we earn interchange fees paid through settlement associations such as Visa, which are also determined on a per transaction basis.  Prepaid cards also provide us with low cost deposits from the amounts delivered to us to fund the cards.  Our prepaid card programs are offered predominantly in the United States. However, we also offer our services in Europe through subsidiaries which offer prepaid card and electronic money issuing services.  Our European operations contributed less than 2% of total prepaid card revenue. For information relating to current constraints on our prepaid card programs resulting from a consent order we have entered into with the FDIC, see “Risk Factors-Risks Relating to Our Business-The entry into the 2012 and 2014 consent orders, as amended, and the supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements on us and the Bank. “

Healthcare Accounts. We have developed relationships with healthcare providers and third-party benefit administrators who facilitate the enrollment of both groups and individuals in high deductible health plans and health savings accounts.  Our healthcare account program provides these organizations with a turnkey, low-cost benefit for their members. Under these programs, we provide private label interest-bearing healthcare accounts, which enable affinity group members to access account information, conduct transactions and process payments to healthcare providers.  The healthcare accounts provide us with a source of interest-bearing checking deposits.

Card Payment Processing.  We act as the depository institution for the processing of credit and debit card payments made to various businesses.  We also act as the bank sponsor and depository institution for independent service organizations that process such payments.   We have designed products that enable those organizations to more easily process electronic payments and to better manage their risk of loss.  Our services also enable independent service organizations to provide their members with access to their account balances through the Internet.  These relationships are a source of demand deposits and fee income.

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Institutional BankingWe have developed strategic relationships with limited-purpose trust companies, registered investment advisers, broker-dealers and other firms offering institutional banking services.   We provide customized, private label demand, money market and security backed loan products to the client base of these groups.

 

Other Operations

 

Account Services.  Account holders may access our products through the website of their affinity group or other organizational affiliate, or through our website, from any personal computer with a secure web browser, regardless of its location.  This access allows account holders to apply for loans, review account activity, enter transactions into an online account register, pay bills electronically, receive statements electronically and print bank statements.  

 

Call Centers.  We have call center operations that serve as inbound customer support.  The call centers provide account holders or potential account holders with assistance accessing the Bank’s products and services, and in resolving any problems that may arise in the servicing of accounts or other banking products.  Call Center services are operated in three locations: Domestically in Wilmington, Delaware, the Bank’s Customer Care center operates from 8:00 a.m. to 8:00 p.m. EST Monday through Friday and handles complex calls and escalations In addition, two third party servicers provide ‘first tier’ customer support.  Located in Manila, Philippines,  TELUS International operates 24 hours a day, seven days a week and Ubiquity Global Services operates from 8:00 a.m. to 10:00 p.m. EST Monday through Friday.  

Third-Party Service Providers.   To reduce operating costs and capitalize on the technical capabilities of selected vendors, we outsource certain bank operations and systems to third-party service providers, principally the following:

·

data processing services, including check processing, check imaging, loan processing, electronic bill payment and statement rendering;

·

fulfillment and servicing of prepaid cards;

·

call center customer support;

·

access to automated teller machine networks;

·

bank accounting and general ledger system;

·

data warehousing services; and

·

certain software development.

Because we outsource these operational functions to experienced third-party service providers that have the capacity to process a high volume of transactions, we believe we can more readily and cost-effectively respond to growth than if we sought to develop these capabilities internally.  Should any of our current relationships terminate, we believe we could secure the required services from an alternative source without material interruption of our operations.

European Prepaid Operations.  Transact Payments Limited, or TPL, our wholly-owned subsidiary, is a prepaid product issuer (termed electronic money in Europe) organized in Gibraltar and licensed by the Gibraltar Financial Services Commission or the FSC.  TPL issues prepaid products throughout the European Union (EU) and European Economic Area (EEA) through three operational service subsidiaries. 

Sales and Marketing

Affinity Group Banking.  Because of the national scope of our affinity group banking operation, we use a personal sales/targeted media advertising approach to market to existing and potential commercial affinity group organizations.  The affinity group organizations with which we have a relationship perform marketing functions to ultimate individual customers. Our marketing program to affinity group organizations consists of:

·

print advertising;

·

attending and making presentations at trade shows and other events for targeted affinity organizations;

·

direct mail; and

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·

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

Loan Administration Offices.    We maintain offices to market and administer our leasing programs in Crofton, Maryland, King of Prussia, Pennsylvania, Kent, Washington and Orlando, Florida.  We maintain an SBA loan office in Chicago, Illinois.

Technology

 

Primary Domestic System Architecture.  We provide financial products and services through a highly-secure three-tiered architecture using state of the art commercially available software.  We maintain an agile platform of several web technologies, databases, firewalls, and licensed and proprietary financial services software to support our unique client base.  User activity is distributed using load-balance technologies and our proprietary design, with internally developed software and third-party equipment. We also use third party data processors.  The goal of our systems designs is to service our client requirements efficiently which has been accomplished using data and service replication between multiple data centers.  The system’s flexible architecture is designed to meet current capacity needs and allow expansion for future demands.  In addition to built-in redundancies, we continuously operate automated internal monitoring tools and use independent third parties to continuously monitor our systems.

European Prepaid Card and Electronic Money Operation.  European prepaid card infrastructure includes consumer servicing functions and program management.  Related software includes risk management, reporting, a dynamic security system and transaction management.

European Prepaid System Architecture.  We have a primary data center in Sofia, Bulgaria that supports our European prepaid business with a fully redundant network system that connects to a back-up center in London (UK).  Our architecture allows for rapid expansion and flexibility. 

Domestic and European Prepaid Security.  All our systems are subject to continuous certification for data security standards under multiple certification requirements. 

Intellectual Property and Other Proprietary Rights

A  significant portion of the core and Internet banking systems and operations we use comes from third-party providers.   Our proprietary intellectual property includes the software for creating affinity group bank websites.  We rely principally upon trade secret and trademark law to protect our intellectual property.  We do not typically enter into intellectual property-related confidentiality agreements with our affinity group customers because we maintain control over the software used to create the sites and their banking functions rather than licensing them for customers to use.  Moreover, we believe that factors such as the relationships we develop with our affinity group and banking customers, the quality of our banking products, the level and reliability of the service we provide, and the customization of our products and services to meet the needs of our affinity groups are substantially more significant to our ability to succeed. 

Competition

We compete with numerous other banks and other financial institutions such as finance companies, leasing companies, credit unions, insurance companies, money market funds, investment firms and private lenders, as well as on-line lenders and other non-traditional competitors.  Our primary competitors in each  of our business lines differ significantly from those in our other business lines principally because few financial institutions compete against us in all business segments in which we operate.  A number of banks and other financial institutions compete with us in the prepaid card market; however, we do not believe that any single bank or group of banks is a predominant provider.    We believe that our ability to compete successfully depends on a number of factors, including:

·

our ability to expand our affinity group banking program;

·

competitors’ interest rates and service fees;

·

the scope of our products and services;

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·

the relevance of our products and services to customer needs 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, earnings strength and regulatory posture;

·

ease of use of our banking websites and other customer interfaces; and

·

the capacity, reliability and security of our network infrastructure.

 

If we experience difficulty in any of these areas, our competitive position could be materially adversely affected, which would affect our growth, our profitability and, possibly, our ability to continue operations. With respect to our affinity group operations, we believe we can compete effectively as a result of our ability to customize our product offerings to the affinity group’s needs.  We believe that the costs of entry, especially compliance costs, to offering prepaid cards through affinity groups are relatively high and somewhat prohibitive to new competitors.  We have competed successfully with institutions much larger than ourselves; however, many of our competitors have larger customer bases, greater name recognition, greater financial and other resources and longer operating histories which may impact our ability to compete.   Our future success will depend on our ability to compete effectively in a highly competitive market.

 

Regulation Under Banking Law

 

Overview

We are regulated extensively under both federal and state banking law and related regulations in the United States, and TPL is extensively regulated by the laws and related regulations of Gibraltar and of EU and EEA member countries in which it issues prepaid products.  We are a Delaware corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System, or the Federal Reserve.  We are subject to supervision and regulation by the Federal Reserve and the Delaware Office of the State Bank Commissioner, or the Commissioner.  The Bank, as a state-chartered, nonmember depository institution, is supervised by the Commissioner, as well as the Federal Deposit Insurance Corporation, or FDIC.  TPL is a Gibraltar e-money licensee and is supervised by the Gibraltar Financial Services Commission.

The Bank is subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amount of loans that may be made and the interest that may be charged, and limitations on the types of investments that may be made and the types of services that may be offered.  Various consumer laws and regulations also affect the Bank’s operations.  Any change in the regulatory requirements and policies by the Federal Reserve, the FDIC, the Commissioner or the United States Congress could have a material adverse impact on us, the Bank and our operations. We have entered into consent orders with the FDIC and have received a supervisory letter from the Federal Reserve which have imposed certain restrictions upon us and the Bank. See “Risk Factors-Risks Relating to Our Business-The entry into the 2012 and 2014 Consent Orders, as amended, and a supervisory letter from the Federal Reserve have imposed certain restrictions and requirements on us and the Bank.”

Certain regulatory requirements applicable to us and the Bank are referred to below or elsewhere herein.  The description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations or their effects on the Bank or us and is qualified in its entirety by reference to the actual statutes and regulations.

Federal Regulation

As a financial holding company, we are subject to regular examination by the Federal Reserve and must file annual reports and provide any additional information that the Federal Reserve may request.  Under the Bank Holding Company Act of 1956, as amended, which we refer to as the BHCA, a financial holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank, or merge or consolidate with another financial holding company, without the prior approval of the Federal Reserve.

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Permitted Activities.  The BHCA generally limits the activities of a financial holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is determined to be so closely related to banking or to managing or controlling banks that an exception is allowed for those activities.  These activities include, among other things, and subject to limitations, operating a mortgage company, finance company, credit card company or factoring company; performing data processing operations; the issuance and sale of consumer-type payment instruments; provide investment and financial advice; acting as an insurance agent for particular types of credit related insurance and providing specified securities brokerage services for customers.  In November 2012, we began conducting permissible activities through TPL, an electronic money issuer organized and licensed in Gibraltar.

Change in Control.    The BHCA prohibits a company from acquiring control of a financial holding company without prior Federal Reserve approval.  Similarly, the Change in Bank Control Act, which we refer to as the CBCA, prohibits a person or group of persons from acquiring “control” of a financial holding company unless the Federal Reserve has been notified and has not objected to the transaction.  In general, under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of any class of voting securities of a financial holding company is presumed to be an acquisition of control of the holding company if: 

 

 

 

 

 

 

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.

An acquisition of 25% or more of the outstanding shares of any class of voting securities of a financial holding company is conclusively deemed to be the acquisition of control.  In determining percentage ownership for a person, Federal Reserve policy is to count securities obtainable by that person through the exercise of options or warrants, even if the options or warrants have not then vested.

The Federal Reserve has revised its minority investment policy statement, under which, subject to the filing of certain commitments with the Federal Reserve, an investor can acquire up to one-third of our equity without being deemed to have engaged in a change in control, provided that no more than 15% of the investor’s equity is voting stock.  This revised policy statement also permits non-controlling passive investors to engage in interactions with our management without being considered as controlling our operations.

Regulatory Restrictions on Dividends.  It is the policy of the Federal Reserve that financial holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.  The policy provides that financial holding companies 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.  See “Holding Company Liability,” below.  Federal Reserve policies also affect the ability of a financial holding company to pay in-kind dividends.

Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval.  The Bank is also subject to limitations under state law regarding the payment of dividends, including the requirement that dividends may be paid only out of net profits.  See “Delaware Regulation” below.  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 unsafe or unsound banking practices.  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, we consented to the issuance of a consent order amendment pursuant to which the payment of dividends by the Bank to us would require prior FDIC approval, and received a Federal Reserve supervisory letter pursuant to which any payment of dividends by us would require prior approval from the Federal Reserve. See “Risk Factors-Risks Relating to Our Business-The entry into the 2012 and 2014 Consent Orders, as amended, and a supervisory letter from the Federal Reserve have imposed certain restrictions and requirements on us and the Bank.”

 Because we are a legal entity separate and distinct from the Bank, our right to participate in the distribution of assets of the Bank, or any other subsidiary, upon the Bank’s or the subsidiary’s liquidation or reorganization will be subject to the prior claims of the Bank’s or subsidiary’s creditors.  In the event of liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors have priority of payment over the claims of holders of any obligation of the institution’s holding company or any of the holding company’s shareholders or creditors.

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Holding Company Liability.   Under Federal Reserve policy, a financial holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, codified this policy as a statutory requirement.  Under this requirement, we are expected to commit resources to support the Bank, including at times when we may not be in a financial position to provide such resources.  As discussed below under “Prompt Corrective Action,” a financial holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary.

In the event of a financial holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed, and is required to cure immediately, any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims.

Capital Adequacy.  The Federal Reserve and the FDIC have issued standards for measuring capital adequacy for financial holding companies and banks.  These standards are designed to provide risk-based capital guidelines and to incorporate a consistent framework.  The risk-based guidelines are used by the agencies in their examination and supervisory process, as well as in the analysis of any applications.  As discussed below under “Prompt Corrective Action,” a failure to meet minimum capital requirements could subject us or the Bank to a variety of enforcement remedies available to federal regulatory authorities, including, in the most severe cases, termination of deposit insurance by the FDIC and placing the Bank into conservatorship or receivership.

In general, these risk-related standards require banks and financial holding companies to maintain capital based on “risk-adjusted” assets so that the categories of assets with potentially higher credit risk will require more capital backing than categories with lower credit risk.  In addition, banks and financial holding companies are required to maintain capital to support off-balance sheet activities such as loan commitments.    

As a result of the Dodd-Frank Act,  our financial holding company status depends upon our maintaining our status as “well capitalized” and “well managed” under applicable Federal Reserve regulations.  If a financial holding company ceases to meet these requirements, the Federal Reserve may impose corrective capital and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies.  In addition, the Federal Reserve may require divestiture of the holding company’s depository institution if the deficiencies persist. 

The standards classify total capital for this risk-based measure into two tiers, referred to as Tier 1 and Tier 2.  Tier 1 capital consists of common shareholders’ equity, certain non-cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less certain adjustments.  Tier 2 capital consists of the allowance for loan and lease losses (within certain limits), perpetual preferred stock not included in Tier 1, hybrid capital instruments, term subordinate debt, and intermediate-term preferred stock, less certain adjustments.  Together, these two categories of capital comprise a bank’s or financial holding company’s “qualifying total capital.” However, capital that qualifies as Tier 2 capital is limited in amount to 100% of Tier 1 capital in testing compliance with the total risk-based capital minimum standards.  Banks and financial holding companies must have a minimum ratio of 8% of qualifying total capital to total risk-weighted assets, and a minimum ratio of 4% of qualifying Tier 1 capital to total risk-weighted assets.  At December 31, 2014, we and the Bank had total capital to risk-adjusted assets ratios of 11.67% and 10.59%, respectively, and Tier 1 capital to risk-adjusted assets ratios of 11.54% and 10.46%, respectively.

In addition, the Federal Reserve and the FDIC have established minimum leverage ratio guidelines.  The principal objective of these guidelines is to constrain the maximum degree to which a financial institution can leverage its equity capital base.  It is intended to be used as a supplement to the risk-based capital guidelines.  These guidelines provide for a minimum ratio of Tier 1 capital to adjusted average total assets of 3% for financial holding companies that meet certain specified criteria, including those having the highest regulatory rating.  Other financial institutions generally must maintain a leverage ratio of at least 3% plus 100 to 200 basis points.  The guidelines also provide that financial institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above minimum supervisory levels, without significant reliance on intangible assets.  Furthermore, the banking agencies have indicated that they may consider other indicia of capital strength in evaluating proposals for expansion or new activities.  At December 31, 2014 we and the Bank had leverage ratios of 7.07% and 6.46%, respectively.

The federal banking agencies’ standards provide that concentration of credit risk and certain risks arising from nontraditional activities, as well as an institution’s ability to manage these risks, are important factors to be taken into account by them in assessing a

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financial institution’s overall capital adequacy.  The risk-based capital standards also provide for the consideration of interest rate risk in the agency’s determination of a financial institution’s capital adequacy.  The standards require financial institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk.  These standards can be expected to be amended from time to time.

The Dodd-Frank Act includes certain related provisions which are often referred to as the “Collins Amendment.”  These provisions are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital.  Under the Collins Amendment, trust preferred securities issued by a company, such as our company, with total consolidated assets of less than $15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible as regulatory capital.  The federal banking regulators issued final rules setting minimum risk-based and leverage capital requirements for holding companies and banks on a consolidated basis that are no less stringent than the generally applicable requirements in effect for depository institutions under the prompt corrective action regulations discussed below and other components of the Collins Amendment.  

 

 

Basel III Capital Rules

In July 2013, the Company’s primary federal regulator, the Federal Reserve, and the Bank’s primary federal regulator, the FDIC, approved final rules, which we refer to as the New Capital Rules, establishing a new comprehensive capital framework for U.S. banking organizations.  The New Capital Rules generally implement the Basel Committee on Banking Supervision’s December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards.  The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including us and the Bank, as compared to the current U.S. general risk-based capital rules.  The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios.  The New Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords.  In addition, the New Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies’ rules.  The New Capital Rules became effective for us and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.

 

Among other matters, the New Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1,”  or CET1 and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations.  Under the New Capital Rules, for most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New Capital Rules’ specific requirements.

 

Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015, with the first measurement date as of March 31, 2015, are as follows:

 

·

4.5% CET1 to risk-weighted assets;

·

6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

·

8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

·

4% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

 

The New Capital Rules also introduce a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-weighted asset ratios.  The capital conservation buffer is designed to absorb losses during periods of economic stress.

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Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.  Thus, when fully phased-in on January 1, 2019, we and the Bank will be required to maintain such additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

 

The New Capital Rules provide for a number of deductions from and adjustments to CET1.  These include, for example, the requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

 

In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss, or AOCI, items included in shareholders’ equity (for example, marks-to-market of securities held in the available for sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios.  Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approaches banking organizations, including us and the Bank, may make a one-time permanent election to continue to exclude these items.  This election must be made concurrently with the first filing of certain of our and the Bank’s periodic regulatory reports in the beginning of 2015.  We and the Bank made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of our securities portfolio.  The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital, subject to grandfathering in the case of bank holding companies, such as us, that had less than $15 billion in total consolidated assets as of December 31, 2009.  Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter).  The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.

 

With respect to the Bank, the New Capital Rules revise the “prompt corrective action” or PCA, regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act, by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized.  The New Capital Rules do not change the total risk-based capital requirement for any PCA category.

 

The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset classes. 

We believe that we and the Bank will continue to be able to meet targeted capital ratios..

 

Prompt Corrective Action.  Federal banking agencies must take prompt supervisory and regulatory actions against undercapitalized depository institutions pursuant to the Prompt Corrective Action provisions of the Federal Deposit Insurance Act.  Depository institutions are assigned one of five capital categories—“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”—and are subjected to differential regulation corresponding to the capital category within which the institution falls.  Under certain circumstances, a well capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category.  As we describe in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” an institution is deemed to be well capitalized if it has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5%.  An institution is adequately capitalized if it has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a leverage ratio of at least 4%.  At December 31, 2014, our total risk-based capital ratio was 11.67%, our Tier 1 risk-based capital ratio was 11.54% and our leverage ratio was 7.07% while the Bank’s ratios were 10.59%, 10.46% and 6.46%, respectively and, accordingly, both we and the Bank were “well capitalized” within the meaning of the regulations.  A depository institution is generally prohibited from making capital distributions (including paying dividends) or paying management fees to a holding company if the institution would thereafter be undercapitalized.  Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on

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the interest rates that can be paid on such deposits.  Undercapitalized institutions may not accept, renew, or roll over brokered deposits.

Bank regulatory agencies are permitted or, in certain cases, required to take action with respect to institutions falling within one of the three undercapitalized categories.  Depending on the level of an institution’s capital, the agency’s corrective powers include, among other things:

·

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.

A banking institution that is undercapitalized must submit a capital restoration plan.  This plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to an agreed-upon amount.  Any guarantee by a depository institution’s holding company is entitled to a priority of payment in bankruptcy.    Failure to implement a capital plan, or failure to have a capital restoration plan accepted, may result in a conservatorship or receivership.

As noted above, the New Capital Rules became effective as of January 1, 2015, with the first measurement date as of March 31, 2015 subject to phased implementation in certain respects,  and revise the PCA regulations.

Insurance of Deposit Accounts.  The Bank’s deposits are insured to the maximum extent permitted by the Deposit Insurance Fund or DIF.  Upon enactment of the Emergency Economic Stabilization Act of 2008 on October 3, 2008, federal deposit insurance coverage levels under the DIF temporarily increased from $100,000 to $250,000 per deposit category, per depositor, per institution, through December 31, 2009.  On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase through December 31, 2012.  The Dodd-Frank Act permanently increases the maximum amount of deposit insurance to $250,000 per deposit category, per depositor, per institution retroactive to January 1, 2008.  The Dodd-Frank Act provided unlimited deposit insurance coverage on noninterest-bearing transaction accounts through December 31, 2012.  Due to the expiration of this unlimited deposit insurance on December 31, 2012 beginning January 1, 2013 deposits held in noninterest-bearing transaction accounts are aggregated with any interest-bearing deposits the owner my hold in the same ownership category, and the combined total is insured up to at least $250,000. 

As the insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions.  The FDIC also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF.  The FDIC also has the authority to initiate enforcement actions against banks.

The FDIC has implemented a risk-based assessment system under which FDIC-insured depository institutions pay annual premiums at rates based on their risk classification.  A bank’s risk classification is based on its capital levels and the level of supervisory concern the bank poses to the regulators.  Institutions assigned to higher risk classifications (that is, institutions that pose a greater risk of loss to the DIF) pay assessments at higher rates than institutions that pose a lower risk.  A decrease in the Bank’s capital ratios or the occurrence of events that have an adverse effect on a bank’s asset quality, management, earnings, liquidity or sensitivity to market risk could result in a substantial increase in deposit insurance premiums paid by the Bank, which would adversely affect earnings.  In addition, the FDIC can impose special assessments in certain instances.  The range of assessments in the risk-based system is a function of the reserve ratio in the DIF.  Each insured institution is assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors.  An institution’s assessment rate depends upon the category to which it is assigned.  Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information.  Assessment rates are determined by the FDIC and, including potential adjustments to reflect an institution’s risk profile, currently range from five to nine basis points for the healthiest institutions (Risk Category I) to 35 basis points of assessable liabilities for the riskiest (Risk Category IV). Rates may be increased an additional ten basis points depending on the amount of brokered deposits utilized.  The above rates apply to institutions with assets

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under $10 billion.  Other rates apply for larger or “highly complex” institutions.  The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points.  At December 31, 2014, the Bank’s DIF assessment rate was 24  basis points.  A reduction in the assessment rate will depend on future FDIC evaluations of the Bank.

On November 12, 2009, in order to strengthen the cash position of the FDIC’s DIF immediately, the FDIC required banks to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.  In addition, the FDIC adopted a three-basis point increase in assessment rates effective on January 1, 2011.  Under the rule each institution’s deposit assessment base would be calculated using its third quarter 2009 deposit assessment base, adjusted quarterly for an estimated 5 percent annual growth rate in the deposit assessment base through the end of 2012.  The prepaid assessment was collected on December 30, 2009 and was mandatory for all institutions (subject to the exercise of the FDIC’s discretion to exempt an institution if the FDIC determined that the prepayment would affect the safety and soundness of the institution).  We recorded a prepaid assessment of approximately $10.0 million which, according to the rule, was recorded as a prepaid expense (asset) as of December 30, 2009 and was amortized over a three year period; as of December 31, 2012 we had fully amortized the prepaid assessment.    

 

On February 9, 2011, the FDIC adopted a final rule which redefined the deposit insurance assessment base as required by the Dodd-Frank Act.  The final rule set the deposit insurance assessment base as average consolidated total assets minus average tangible equity.  It also set a new assessment rate schedule which reflects assessment rate adjustments including potentially reduced rates tied to unsecured debt and potentially increased rates for brokered deposits.  The final rule generally became effective on April 1, 2011. 

Loans-to-One Borrower.  Generally, a bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus.  An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by specified collateral, generally readily marketable collateral (which is defined to include certain financial instruments and bullion) and real estate.  At December 31, 2014, the Bank’s limit on loans-to-one borrower was $41.4 million ($69.0 million for secured loans).  

Transactions with Affiliates and other Related Parties.  There are various legal restrictions on the extent to which a financial holding company and its nonbank subsidiaries can borrow or otherwise obtain credit from banking subsidiaries or engage in other transactions with or involving those banking subsidiaries.  The Bank’s authority to engage in transactions with related parties or “affiliates” (that is, any entity that controls, controlled by or is under common control with an institution, including us and our non-bank subsidiaries) is limited by Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunderSection 23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the Bank’s capital and surplus.  At December 31, 2014, we were not indebted to the Bank.  The aggregate amount of covered transactions with all affiliates is limited to 20% of the Bank’s capital and surplus.  Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited.  Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.

 

The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied.  Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions.  Restrictions are also placed on certain assets sales to and from an insider to an institution including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

The Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve.  Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.  In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors.    At December 31, 2014, loans to related parties amounted to $30.9 million and at December 31, 2013 such loans amounted to $28.5 million.

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Standards for Safety and Soundness.  The Federal Deposit Insurance Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, fees, benefits and such other operational and managerial standards as the agency deems appropriate.  The federal banking agencies have adopted final regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these safety and soundness standards.  The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

Privacy.  Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party.  Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.    The Bank has adopted privacy standards that we believe will satisfy regulatory scrutiny, and communicates its privacy practices to its customers through privacy disclosures designed in a manner consistent with recommended model forms.  

The Fair and Accurate Credit Transactions Act of 2003, known as the FACT Act, provides consumers with the ability to restrict companies from using certain information obtained from affiliates to make marketing solicitations.  In general, a person is prohibited from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and had a reasonable opportunity to opt out of such solicitations.  The rule permits opt-out notices to be given by any affiliate that has a pre-existing business relationship with the consumer and permits a joint notice from two or more affiliates.  Moreover, such notice would not be applicable if the company using the information has a pre-existing business relationship with the consumer.  This notice may be combined with other required disclosures, including notices required under other applicable privacy provisions.

 

Section 315 of the FACT Act requires each financial institution or creditor to develop and implement a written Identity Theft Prevention Program to detect, prevent and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. In accordance with this rule, the Bank was required to adopt “reasonable policies and procedures” to:

 

·

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.

Bank Secrecy Act- Anti-Money Laundering and Related Regulations.  The Bank Secrecy Act, which we refer to as BSA, requires the Bank to implement a risk-based compliance program in order to protect the Bank from being used as a conduit for financial or other illicit crimes including but not limited to money laundering and terrorist financing.  These rules are administered by the Financial Crimes Enforcement Network, a bureau of the U.S. Treasury Department, which we refer to as FinCEN.  Under the law, the Bank must have a board-approved written BSA-Anti-Money Laundering, which we refer to as AML, program which must contain the following key requirements:  (1)  appointing responsible persons to manage the program, including a BSA Officer; (2)  ongoing training of all appropriate Bank staff and management on BSA-AML compliance;  (3) developing a system of internal controls (including appropriate policies, procedures and processes); and (4) requiring independent testing to ensure effective implementation of the program and appropriate compliance.  Under BSA regulations, the Bank is subject to various reporting requirements such as currency transaction reporting (CTR)  for all cash transactions initiated by or on behalf of a customer which, when aggregated, exceed $10,000 per day.  The Bank is also required to monitor customer activity and transactions and file a suspicious activity report, or SAR, when suspicious activity is observed and the applicable dollar threshold for the observed suspicious activity is met.  The BSA also contains numerous recordkeeping requirements.  For a description of a consent order with the FDIC under the BSA that imposes certain requirements on the Bank, see  Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments” and  “Risk Factors-Risks Relating to Our Business-The entry into the 2012 and 2014 Consent Orders, as amended, and a supervisory letter from the Federal Reserve have imposed certain restrictions and requirements on us and the Bank.”

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On June 21, 2010, FinCEN proposed new rules as directed by the Credit Card Accountability Responsibility and Disclosure Act of 2009 to expand the reach of BSA-AML related compliance responsibilities to certain defined “prepaid access providers and sellers, a class of money services businesses formerly either outside or lightly regulated under the BSA.”  On July 26, 2011, FinCEN issued its final rule imposing these affirmative BSA-AML compliance obligations.  The Bank has evaluated the impact of these rules on its operations and its third-party relationships, and has established internal processes accordingly. 

USA PATRIOT Act.  The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, which we refer to as the USA PATRIOT Act, amended, in part, the BSA, by, in pertinent part, criminalizing the financing of terrorism and augmenting the existing BSA framework by strengthening customer identification procedures, requiring financial institutions to have due diligence procedures, including enhanced due diligence procedures and, most significantly, improving information sharing between financial institutions and the U.S. government. 

Under the USA PATRIOT Act, FinCEN can send bank regulatory agencies lists of the names of persons suspected of involvement in terrorist activities or money laundering.  The Bank must search its records for any relationships or transactions with persons on those lists.  If the Bank finds any relationships or transactions, it must report specific information to FinCEN and implement other internal compliance procedures in accordance with the Bank’s BSA-AML compliance procedures. 

The Office of Foreign Assets Control, which we refer to as OFAC,  is a division of the U.S. Treasury Department,  and administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction.  OFAC functions under the President’s wartime and national emergency powers, as well as under authority granted by specific legislation, to impose controls on transactions and freeze assets under U.S. jurisdiction.  In addition, many of the sanctions are based on United Nations and other international mandates, and typically involve close cooperation with allied governments.  OFAC maintains lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, as well as sanctions programs for certain countries.   If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, the Bank must freeze or block such account, and perform additional procedures as required by OFAC regulations.  The Bank filters its customer base and transactional activity against OFAC-issued lists.  The Bank performs these checks utilizing purpose directed software, which is updated each time a modification is made to the lists provided by OFAC and other agencies.

Other Consumer Protection Regulations.    The Bank is subject to a wide range of consumer protection regulations which may have an enterprise-wide impact or may principally govern its lending or deposit operations.  To the extent the Bank engages third party service providers in any aspect of its products and services, these third parties may also be subject to compliance with applicable law, and must therefore be subject to Bank oversight.

Unfair or Deceptive or Abusive Acts or Practices.  Section 5 of the Federal Trade Commission Act prohibits all persons, including financial institutions, from engaging in any unfair or deceptive acts or practices in or affecting commerce.  The Dodd-Frank Act codifies this prohibition, and expands it even further by prohibiting “abusive” practices as well.  These prohibitions, which we refer to as UDAAP, apply in all areas of the Bank, including marketing and advertising practices,  product features, terms and conditions,  operational practices, and the conduct of third parties with whom the Bank may partner or on whom the Bank may rely in bringing Bank products and services to consumers.

The Bank’s loan operations are also subject to federal consumer protection laws applicable to credit transactions, including:

·

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;

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·

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;

 

In addition, interest and other charges collected or contracted for by the Bank will be subject to state usury laws and federal laws concerning interest rates.

 

The deposit operations of the Bank are subject to various consumer protection laws including but not limited to:  

 

·

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.

Community Reinvestment Act.  Under the Community Reinvestment Act of 1977, which we refer to as the CRA, a federally-insured institution has a continuing and affirmative obligation to help meet the credit needs of its community, including low-and moderate-income neighborhoods, consistent with the safe and sound operation of the institution.  The CRA requires the board of directors of federally-insured institutions, such as the Bank, to adopt a CRA statement for its assessment area that, among other things, describes its efforts to help meet community credit needs and the specific types of credit that the institution is willing to extend.  The CRA further requires that a record be kept of whether a financial institution meets its community’s credit needs, which record will be taken into account when evaluating applications for, among other things, domestic branches and mergers and acquisitions.  The regulations promulgated pursuant to the CRA contain three evaluation tests:

·

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.

 

The Bank was examined for CRA compliance in 2012 and received a “satisfactory” rating for the 2012 examination. The regularly  scheduled CRA examination is being performed in the second and third quarters of 2015. However, results of the examination have not yet been issued.

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Enforcement.  Under the Federal Deposit Insurance Act, the FDIC has the authority to bring actions against a bank and all affiliated parties, including stockholders, attorneys, appraisers and accountants, who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on the bank.  Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership or conservatorship proceedings, or termination of deposit insurance.  Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases.  Federal law also establishes criminal penalties for certain violations.

 

Federal Reserve System. Federal Reserve regulations require banks to maintain non-interest bearing reserves against their transaction accounts (primarily negotiated order of withdrawal, or NOW, and regular checking accounts).  For 2014, Federal Reserve regulations generally required that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $79.5 million or less (subject to adjustment by the Federal Reserve), the reserve requirement is 3%; and, for accounts aggregating greater than $79.5 million, the reserve requirement is 10% (subject to adjustment by the Federal Reserve to between 8% and 14%).  The first $13.3 million of otherwise reservable balances (subject to adjustments by the Federal Reserve) are exempt from the reserve requirements.  At December 31, 2014, the Bank met these requirements by maintaining $280.4 million in cash and balances at the Federal Reserve Bank.

 

Regulatory Reform

 

On July 21, 2010, the Dodd-Frank Act was signed into law.  The Dodd-Frank Act (as amended) implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will or have already:

 

·

Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, or 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 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.  

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·

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.  

 

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years.  Specific rulemaking intended to implement provisions of the Dodd-Frank Act is underway and is addressed elsewhere in this section as applicable.  It is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations may impact us.  However, compliance with these new laws and regulations may increase our costs, limit our ability to pursue attractive business opportunities, cause us to modify our strategies and business operations and increase our capital requirements and constraints, any of which may have a material adverse impact on our business, financial condition, liquidity or results of operations.  We cannot predict whether, or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

 

Volcker Rule Adoption.  On December 10, 2013, five financial regulatory agencies, including our primary federal regulators the Federal Reserve and the FDIC, adopted final rules (the “Final Volcker Rules”) implementing the Volcker Rule embodied in Section 13 of the Bank Holding Company Act, which was added by Section 619 of the Dodd-Frank Act.  The Final Volcker Rules prohibit banking entities from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in and relationships with hedge funds or private equity funds (“covered funds”).  The Final Volcker Rules also require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Final Volcker Rules, which must include (for the largest entities) making regular reports about those activities to regulators.  Smaller banks and community banks, including the Bank, are afforded some relief under the Final Volcker Rules.  Smaller banks, including the Bank, that are engaged only in exempted proprietary trading, such as trading in U.S. government, agency, state and municipal obligations, are exempt from compliance program requirements.  Moreover, even if a community or small bank engages in proprietary trading or covered fund activities under the Final Volcker Rules, they need only incorporate references to the Volcker Rule into their existing policies and procedures.  The Final Rules became effective April 1, 2014, but the conformance period was extended from its statutory end date of July 21, 2014 until July 21, 2015.  We do not at this time expect the Final Volcker Rules to have a material impact on our operations. 

 

Prepaid Rules Proposed by the CFPB.  On December 23, 2014, the CFPB published a proposed rule that would regulate prepaid products, including physical cards as well as codes and other devices.  The proposed rule would, among other things, cause 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 proposed rule and related commentary is over 230 pages in length and provides significant discussion, materials and commentary that we are currently assessing.  The proposed 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 currently applicable to payroll and Federal government benefit accounts; (d) extending the error resolution and limited liability provisions of Regulation E currently applicable to payroll cards to registered network branded prepaid cards; (e) requiring financial institutions to post prepaid account agreements to the issuers’ websites and to submit them to the CFPB; (f) extending Regulation Z’s credit card rules and disclosure requirements to prepaid accounts that provide overdraft protection and other credit features; (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

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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.

 

As of the date of this filing, it is not clear if the CFPB will adopt the proposed rule in whole or in part, or with modifications, and there is no known timeframe for the CFPB taking further action on the proposed rule.

 

 Consumer Protections for Remittance Transfers.  On February 7, 2012, the CFPB published a final rule to implement Section 1073 of the Dodd-Frank Act.  The final rule creates a comprehensive set of consumer protections for remittance transfers sent by consumers in the United States to parties in foreign countries.  The final rule, among other things, mandates certain disclosures and consumer cancellation rights for foreign remittances covered by the rule.

 

Federal Regulatory Guidance on Incentive Compensation.  On June 21, 2010, federal banking regulators released final guidance on sound incentive compensation policies for banking organizations.    This guidance, which covers all employees that have the ability to materially affect the risk profile of an organization either individually or as part of a group, is based upon  key principles including: (1) incentive compensation arrangements at a banking organization should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (2) these arrangements should be compatible with effective controls and risk-management; and (3) these arrangements should be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.  The final guidance seeks to address the safety and soundness risks of incentive compensation practices to ultimately be sure that compensation practices are not structured in a manner to give employees incentives to take imprudent risks. Federal regulators intend to actively monitor the actions being taken by banking organizations with respect to incentive compensation arrangements and will review and update their guidance as appropriate to incorporate best practices that emerge.

 

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations such as ours that are not considered “large, complex banking organizations.”  These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements.  The findings of the supervisory initiatives will be included in reports of examination.  Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.  Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management controls or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

 

In February 2011, the Federal Reserve, the Office of Comptroller of the Currency and the FDIC approved a joint proposed rulemaking to implement Section 956 of the Dodd-Frank Act, which prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and that are deemed to be excessive, or that may lead to material losses. 

Effect of Governmental Monetary Policies.  The commercial banking business is affected not only by general economic conditions but also by both U.S. fiscal policy and the monetary policies of the Federal Reserve.  Some of the instruments of fiscal and monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements against member banks’ deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates, and the placing of limits on interest rates that member banks may pay on time and savings deposits.  Such policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on time and savings deposits (see “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations”).   We cannot predict the nature of future fiscal and monetary policies and the effect of such policies on the future business and our earnings.

Delaware Regulation

 

General. As a Delaware financial holding company, we are subject to the supervision of and periodic examination by the Delaware Office of the State Bank Commissioner and must comply with the reporting requirements of the Delaware Office of the State Bank Commissioner.  The Bank, as a banking corporation chartered under Delaware law, is subject to comprehensive regulation by the Delaware Office of the State Bank Commissioner, including regulation of the conduct of its internal affairs, the extent and exercise of its banking powers, the issuance of capital notes or debentures, any mergers, consolidations or conversions, its lending and

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investment practices and its revolving and closed-end credit practices.  The Bank also is subject to periodic examination by the Delaware Office of the State Bank Commissioner and must comply with the reporting requirements of the Delaware Office of the State Bank Commissioner.  The Delaware Office of the State Bank Commissioner has the power to issue cease and desist orders prohibiting unsafe and unsound practices in the conduct of a banking business.

 

Limitation on Dividends.  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 of 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.  The Bank’s payment of dividends is also governed by federal banking laws and regulations promulgated by the FDIC, and by an amendment to the 2014 Consent Order with the FDIC which provides that any payment of dividends by the Bank must receive prior approval from the FDIC.

 

Gibraltar and European Union Regulation

 

TPL, our wholly-owned subsidiary, is an electronic money issuer organized in Gibraltar and licensed by the Gibraltar Financial Services Commission or the FSC.  As a licensed e-money issuer operating in Gibraltar and in other countries in the  EU and EEA, TPL is subject to the laws and regulations of Gibraltar and any EU or EEA countries in which it does or may operate.  TPL is subject to supervision and regulation by the FSC.  As TPL’s primary regulator, the FSC conducts regular examinations of TPL and TPL must file annual and other periodic reports.

 

Laws applicable to TPL include, without limitation, the Financial Services (Electronic Money) Regulations of 2011, which we refer to as the E-Money Regulations,  promulgated by the FSC and the Data Protection Directive (Directive 95/46/EC).  In January 2012, the European Commission proposed a comprehensive reform of the Data Protection Directive.  As of December 31, 2014, the proposed rules had not been passed by the European Parliament.  The E-Money Regulations impose upon TPL substantive rules governing TPL’s operation of e-money services, including rules requiring TPL to maintain certain minimum capital levels, governing the safeguarding of cardholder funds, and penalties for any violations.  Any change in the laws, regulations and policies of the Gibraltar Parliament, the European Union, its member countries, or any other country in which TPL operates, could have a material adverse impact on TPL and its operations.

 

Employees

As of December 31, 2014, we had 684 full-time employees and believe our relationships with our employees to be good. Our employees are not employed under a collective bargaining agreement.

Item 1A. Risk Factors

Risks Relating to Our Business

Our business may be affected materially by various risks and uncertainties.  Any of the risks described below or elsewhere in this Annual Report on Form 10-K or our other SEC filings, as well as other risks we have not identified, may have a material negative impact on  our financial condition and operating results. 

The Bank’s allowance for loan losses may not be adequate to cover actual losses.

 

Like all financial institutions, the Bank maintains an allowance for loan losses to provide for probable losses inherent in its loan portfolio. At December 31, 2014, the ratio of the allowance for loan losses to loans was 0.42%.  The Bank’s allowance for loan losses may not be adequate to cover actual loan losses and future provisions for loan losses could materially and adversely affect the Bank’s operating results. The Bank’s allowance for loan losses is determined by management after analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, changes in the size and composition of the loan portfolio and industry information.  Also included in management’s estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which are uncertain.  The determination by management of the allowance for loan losses involves a high degree of subjectivity and requires management to estimate current and future credit risk based on both qualitative and quantitative facts, each of which is subject to significant change.  The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond the Bank’s control, and these loan

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losses may exceed current estimates.  Bank regulatory agencies, as an integral part of their examination process, review the Bank’s loans and allowance for loan losses.  Although we believe that the Bank’s allowance for loan losses is adequate to provide for probable losses and that the methodology used by the Bank to determine the amount of both the allowance and provision is effective, we cannot assure you that we will not need to increase the Bank’s allowance for loan losses, change our methodology for determining our allowance and provision for loan losses or that our regulators will not require us to increase this allowance.  Any of these occurrences could materially reduce our earnings and profitability and could result in our sustaining losses.  For risks which are specific to the different types of loans we make and which could impact the allowance for loan losses, see  Item 1,” Business –Lending Activities.”

 

The Bank may suffer losses in its loan portfolio despite its underwriting practices.

 

The Bank seeks to mitigate the risks inherent in its loan portfolio by adhering to specific underwriting practices.  These practices vary depending on the facts and circumstances of each loan, but generally include analysis of a borrower’s prior credit history, financial statements, tax returns and cash flow projections, valuation of certain types of collateral based on reports of independent appraisers and verification of liquid assets.  Although the Bank believes that its underwriting criteria are appropriate for the various kinds of loans it makes, the Bank may incur losses on loans that meet its underwriting criteria, and these losses may exceed the amounts set aside as reserves in the Bank’s allowance for loan losses.  If the level of non-performing assets increases, interest income will be reduced.  If we experience loan defaults in excess of amounts that we have included in our allowance for loan losses, we will have to increase the provision for loan losses which will reduce our income and might cause us to incur losses.

 

Weak conditions in the U.S. economy and the credit markets have had, and may continue to have, significant adverse effects on our assets and operating results.

 

For a multi-year period, the financial system in the United States, including credit markets and markets for real estate and real-estate related assets, has been subject to weakness although there have been some recent improvements.  These weaknesses have resulted in declines in the availability of credit, reduction in the values of real estate and real estate–related assets, the reduction of markets for those assets and impairment of the ability of certain borrowers to repay their obligations.  As a result of these conditions, we increased our provision for loan losses, and experienced an increase in the amount of loans charged off and non-performing assets in our commercial loan portfolio which are now reflected in discontinued operations. Rated investment securities, generally considered to be less risky than loans have in recent economic periods, in certain instances, experienced greater than expected losses, which could recur. The Federal Reserve  has continued to maintain interest rates at historically low levels to foster a more rapid and full recovery. However, a continuation of weak economic conditions could further harm our financial condition and results of operations.  

 

We are subject to extensive government regulation and supervision.

 

The Bancorp, Inc. and its subsidiary The Bancorp Bank, are subject to extensive federal and state regulation and supervision.  Our subsidiary in the European Union, TPL, is also subject to the laws of Gibraltar and all other European Union and European Economic Areas countries in which it operates.  Banking regulations are primarily intended to protect customers, depositors’ funds, the federal deposit insurance funds and the banking system as a whole, not stockholders.  These regulations affect the Bank’s lending practices, capital structure and requirements, investment activities, dividend policy, product offerings, expansionary strategies and growth, among other things.  The legal and regulatory landscape is frequently changing as Congress and the regulatory agencies having jurisdiction over our operations adopt or amend laws, or change interpretation of existing statutes, regulations or policies.  These changes could affect the Company, the Bank and TPL in substantial and unpredictable ways.  Additionally, while we have policies and procedures designed to prevent violations of the extensive federal and state regulations that we are subject to, there can be no assurance that such violations will not occur.  Failure to comply with these statutes, regulations or policies could result in sanctions against the Company or the Bank by regulatory agencies, civil money penalties, reputational damage, and a downgrade in the Bank’s ratings for capital adequacy, asset quality, management, earnings, liquidity and market sensitivity, any of which alone or in combination could have a material adverse effect on our financial condition and results of operations

 

The entry into the 2012 and 2014 Consent Orders, as amended, and a supervisory Letter from the Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank.

 

The Bank entered into a Stipulation and Consent to the Issuance of a Consent Order effective August 7, 2012, which we refer to as the 2012 Consent Order.  The Bank took this action without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation.  Under the 2012 Consent Order, the Bank agreed to increase its supervision of third party

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relationships,  develop new written compliance and related  internal audit compliance programs, develop a new third-party risk management program, and screen new third party relationships as provided in the Consent Order.  The Consent Order also requires the Bank to provide certain materials and reports to the FDIC within allotted timeframes.  Additionally, as part of the Consent Order, the Bank agreed to pay a civil money penalty in the amount of $172,000, which was paid in 2012.

 

On June 5, 2014, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC, which we refer to as the 2014 Consent Order.  The Bank took this action without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation relating to the Bank’s Bank Secrecy Act, or BSA, compliance program. The 2014 Consent Order requires the Bank to take certain affirmative actions to comply with its BSA obligations.  See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Recent Developments. ”  Satisfaction of the requirements of the 2014 Consent Order is subject to the review of the FDIC and the Delaware State Bank Commissioner.  The Bank has and expects to continue to expend significant management and financial resources to address the Bank’s BSA compliance program which will reduce our net income.

Until the Bank submits to the FDIC a BSA report summarizing the completion of certain corrective action, the 2014 Consent Order restricts the Bank from signing and boarding new independent sales organizations, establishing new non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments.  Until the BSA Report is submitted to and approved by the FDIC and Delaware State Bank Commissioner, those aspects of the growth of our card payment processing and prepaid card operations will be affected,  which, unless offset by growth from existing customers and new customers in other areas of our prepaid card operations, could reduce growth of our deposits and non-interest income and, possibly, limit our ability to raise additional capital on acceptable terms. 

 

                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 shall not declare or pay any dividend without the prior written consent of the FDIC and for certain assurances regarding management.

 

On May 11, 2015, the Federal Reserve issued a letter, or the Supervisory Letter, to us as a result of the 2014 Consent Order and the Amendment, (which, at the time of the Supervisory Letter, was in proposed form), which provides that we shall not pay any dividends on our common stock or make any distributions to TPL or its subsidiaries, 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.

We cannot assure you that that our regulators will ultimately determine that we have met all of the requirements of the 2012 Consent Order, 2014 Consent Order, the Amendment or the Supervisory Letter to their satisfaction.  If our regulators believe that we have not made sufficient progress in complying with these Consent Orders, they could seek to impose additional regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties.  If any of these measures is imposed in the future, it could have a material adverse effect on our financial condition and results of operations and on our ability to raise additional capital on acceptable terms.

 

Our reputation and business could be damaged by our entry into the consent orders with the FDIC and other negative publicity.

 

Reputational risk, or the risk to our business, earnings and capital from negative publicity, is inherent in our business.  Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from actions taken by regulators and others as a result of that conduct.  Damage to our reputation, including as a result of negative publicity associated with the FDIC consent orders, or the Federal Reserve supervisory letter  and the class action filed in July 2014, now or in the future could impact our ability to attract new and maintain existing loan and deposit customers, employees and business relationships, and could result in the imposition of additional regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties.  Such damage could also adversely affect our ability to raise additional capital on acceptable terms.

 

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The provisions contained in the Consent Orders present interpretive challenges that may give rise to a difference of interpretation by us and our regulators.

 

The provisions of the 2012 Consent Order, 2014 Consent Order and the Amendment are subject to interpretation and may give rise to differing views between us and our regulators with respect to their scope and application.  Accordingly, management, employees at all levels, and legal counsel of the Bank face significant challenges in applying the terms of the Consent Orders to the myriad factual scenarios that arise in the ordinary course of business.  While we have sought, and will continue to seek, guidance from our regulators as to the application of the Consent Orders on our business, there can be no assurance that our regulators will provide such guidance or that we and our regulators will interpret the terms of Consent Orders and the Amendment uniformly in every instance. 

 

If the FDIC interprets either Consent Order or the Amendment in a manner contrary to our interpretation despite our good faith efforts to comply, the FDIC may conclude a violation has occurred, which may result in the imposition of additional regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties.

 

 

 

We may have difficulty managing our growth which may divert resources and limit our ability to expand our operations successfully.

 

We expect to continue to experience significant growth in the amount of our assets, the level of our deposits and the scale of our operations.  Our future profitability will depend in part on our continued ability to grow; however, we may not be able to sustain our historical growth rate or be able to grow.  Our future success will depend on the ability of our officers and key employees to continue to implement and improve our operational, financial and management controls, reporting systems and procedures and manage a growing number of customer relationships.  We may not implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.  Consequently, our continued growth may place a strain on our administrative and operational infrastructure.  Any such strain could increase our costs, reduce or eliminate our profitability and reduce the price at which our common shares trade.

 

New lines of business, and new products and services may result in exposure to new risks. 

 

The Bank has introduced, and in the future may introduce, new products and services to differing markets either alone or in conjunction with third parties.  New lines of business, products or services could have a significant impact on the effectiveness of our system of internal controls or the controls of third parties and could reduce our revenues and potentially generate losses.  There are material inherent risks and uncertainties associated with offering new products and services, especially when new markets are not fully developed or when the laws and regulations regarding a new product are not mature.  New products and services, or entrance into new markets, may require substantial time, resources and capital, and profitability targets may not be achieved.  Factors outside of our control, such as developing laws and regulations, regulatory orders, competitive product offerings and changes in commercial and consumer demand for products or services may also materially impact the successful launch and implementation of new products or services.  Failure to manage these risks, or failure of any product or service offerings to be successful and profitable, could have a material adverse effect on our financial condition and results of operations.

 

Changes in interest rates could reduce our income, cash flows and asset values.

 

Our income and cash flows depend to a great extent on the difference between the interest rates we earn on interest earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities such as deposits and borrowings.  The value of our assets, and particularly loans with fixed or capped rates of interest, may also vary with interest rate changes.  We discuss the effects of interest rate changes on the market value of our portfolio and net interest income in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Asset and Liability Management.” Interest rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve.  Changes in monetary policy, including changes in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits, but also our ability to originate loans and obtain deposits and our costs in doing so.  If the rate of interest we pay on our deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest income, and therefore our earnings, could decline or we could sustain losses.  Our earnings could also decline or we could sustain losses if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings.  While the

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Bank is generally asset sensitive, which implies that significant increases in market rates would generally increase margins, while decreases in interest rates would generally decrease margins, we cannot assure you that increases or decreases in margins will follow such a pattern in the future.      

 

We are subject to lending risks.

 

There are risks inherent in making all loans.  These risks include interest rate changes over the time period in which loans may be repaid and changes in the national economy or the economy that impact the ability of our borrowers to repay their loans or the value of the collateral securing those loans.  Although we have discontinued our Philadelphia based commercial lending operations, we still hold  a significant number of commercial, construction and commercial mortgage loans with relatively large balances. The deterioration of one or a few of these loans would cause a significant increase in non-performing loans, notwithstanding that such loans are now held for sale.  Weak economic conditions have caused increases in our delinquent and defaulted loans in recent years.  We cannot assure you that we will not experience further increases in delinquencies and defaults or that any such increases will not be material.  On a consolidated basis, an increase in non-performing loans could result in an increase in our provision for loan losses or in loan charge-offs and consequent reductions in our earnings.  Our specialty lending operations are subject to additional risks including, with respect to our SBA loans, the risk that the U.S.  government’s partial guaranty on SBA loans is withdrawn due to noncompliance with regulations.  For other risks which are specific to the different types of loans we make and which could impact our allowance for loan losses, see  Item 1,” Business –Lending Activities.”

 

There is a significant concentration in prepaid card fee income which is subject to various risks.

 

We realize a significant portion of our revenues from prepaid card and other prepaid products and services offered by our Payment Solutions Group.  Actions by government agencies relating to service charges, or increased regulatory compliance costs, could result in reductions in income which may not be offset by reductions in expense.  Prepaid card deposits comprise a significant portion of the Bank’s deposits.

 

Regulatory and legal requirements applicable to the prepaid card industry are unique and frequently changing.

 

Achieving and maintaining compliance with frequently changing legal and regulatory requirements requires a significant investment in qualified personnel, hardware, software and other technology platforms, external legal counsel and consultants and other infrastructure components both in the United States and the European Union.  These investments may not ensure compliance or otherwise mitigate risks involved in this business.  Our failure to satisfy regulatory mandates applicable to prepaid financial products could result in actions against us by our regulators, legal proceedings being instituted against us by consumers, or other losses, each of which could have a material adverse effect on financial condition and operating results.  Other risks related to prepaid cards include competition for prepaid and other payment mediums, possible changes in the rules of networks, such as Visa and MasterCard and others, in which the Bank operates and state regulations related to prepaid cards including escheatment.

 

The potential for fraud in the card payment industry is significant.

 

Issuers of prepaid cards and other companies have suffered significant losses in recent years with respect to the theft of cardholder data that has been illegally exploited for personal gain.  The theft of such information is regularly reported and affects individuals and businesses.  Losses from various types of fraud have been substantial for certain card industry participants.  The Bank in many cases has indemnification agreements with third parties; however, such indemnifications may not fully cover losses.  Although fraud has not had a material impact on the profitability of the Bank, it is possible that such activity could impact this division at some time in the future.

 

Risk management processes and strategies must be effective, and concentration of risk increases the potential for losses.

 

Our risk management processes and strategies must be effective, otherwise losses may result.  We manage asset quality, liquidity, market sensitivity, operational, regulatory, third-party vendor and partner relationship risks and other risks through various processes and strategies throughout the organization.  If our risk management judgments and strategies are not effective, or unanticipated risks arise, our income could be reduced or we could sustain losses.

 

We may depend in part upon wholesale and brokered certificates of deposit to satisfy funding needs.

 

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In the future we may rely in part on funds provided by wholesale deposits and brokered certificates of deposit to support the growth of our loan portfolio.  Wholesale and brokered certificates of deposit are highly sensitive to changes in interest and, accordingly, can be a more volatile source of funding. 

 

Use of wholesale and brokered deposits involves the risk that growth supported by such deposits would be halted, or the Bank’s total assets could contract, if the rates offered by the Bank were less than offered by other institutions seeking such deposits, or if the depositors were to perceive a decline in the Bank’s safety and soundness, or both.  In addition, if we were unable to match the maturities of the interest rates we pay for wholesale and brokered certificates of deposit to the maturities of the loans we make using those funds, increases in the interest rates we pay for such funds could decrease our consolidated net interest income.  Moreover, if the Bank ceases to be categorized as “well capitalized” under banking regulations, it will be prohibited from accepting, renewing or rolling over brokered deposits without  the consent of the FDIC. 

 

Our prepaid card and other deposits obtained with the assistance of third parties have been classified as brokered. 

 

In December 2014 the FDIC issued new guidance classifying prepaid deposits and other deposits obtained in cooperation with third parties as brokered deposits, resulting in the vast majority of the Bank’s deposits being  classified as brokered.  We do not believe that these deposits are subject to the volatility risks associated with brokered wholesale deposits or brokered certificates of deposit. However, if the Bank ceases to be categorized as “well capitalized” under banking regulations, it will be prohibited from accepting, renewing or rolling over brokered deposits without  the consent of the FDIC.  

We operate in highly competitive markets.

We face substantial competition in all phases of our operations from a variety of different competitors, including commercial banks and their holding companies, savings and loan associations, mutual savings banks, credit unions, leasing companies, consumer finance companies, factoring companies, insurance companies and money market mutual funds and card issuers.

We face national and even global competition with respect to our other products and services, including payment acceptance products and services, healthcare payment solutions, private label banking, fleet leasing, government guaranteed lending and prepaid payment solutions.  Our commercial partners and banking customers for these products and services are located throughout the United States and, with respect to prepaid and electronic money payment solutions, the United States and the European Union, and the competition is strong in each category.  We encounter competition from some of the largest financial institutions in the world as well as smaller specialized regional banks and financial service companies.  Increased competition with any of these product or service offerings could result in the reduced pricing and resultant profit margins, fragmented market share and a failure to enjoy economies of scale, loss of customer and depositor base, and other risks that individually, or in the aggregate, could have a material adverse effect on our financial condition and results of operations.

Some of the financial services organizations with which we compete are not subject to the same degree of regulation as federally-insured and regulated financial institutions such as ours.  As a result, those competitors may be able to access funding and provide various services more easily or at less cost than we can.

We derive a significant percentage of our deposits, total assets and income from deposit accounts we generate through affinity groups.

 

We derive a significant percentage of our deposits, total assets and income from deposit accounts we generate through affinity groups.  Deposits related to our top twenty affinity groups totaled $2.64 billion at December 31, 2014.  We provide oversight over our affinity groups which must meet all internal and regulatory requirements.  We may exit relationships where such requirements are not met or be required by our regulators to exit such relationships.  If an affinity group relationship were to be terminated, it could materially reduce our deposits, assets and income.  We cannot assure you that we could replace such relationship. If we cannot replace such relationship, we may be required to seek higher rate funding sources as compared to the exiting affinity group and interest expense might increase.  We may also be required to sell securities or other assets to meet funding needs which would reduce revenues or potentially generate losses.

Our affinity group marketing strategy has been adopted by other institutions with which we compete.

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Several online banking operations as well as the online banking programs of conventional banks have instituted affinity group marketing strategies similar to ours.  As a consequence, we have encountered competition in this area and anticipate that we will continue to do so in the future.  This competition may increase our costs, reduce our revenues or revenue growth or, because we are a relatively small banking operation without the name recognition of other, more established banking operations, make it difficult for us to compete effectively in obtaining affinity group relationships.

Our lending limit may adversely affect our competitiveness.

Our regulatory lending limit as of December 31, 2014 to any one customer or related group of customers was $41.4 million for unsecured loans and $69.0 million for secured loans.  Our lending limit is substantially smaller than that of many financial institutions with which we compete.  While we believe that our lending limit is sufficient for our targeted market of small to mid-size businesses, individuals and affinity group members, it may in the future affect our ability to attract or maintain customers or to compete with other financial institutions.  Moreover, to the extent that we incur losses and do not obtain additional capital, our lending limit, which depends upon the amount of our capital, will decrease.

Environmental liability associated with lending activities could result in losses.

In the course of our business, we may foreclose on and take title to properties securing our loans.  If hazardous substances were discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage.  Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination.  In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site.  Environmental laws may require us to incur substantial expenses and may materially limit use of properties we acquired through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

As a financial institution whose principal medium for delivery of banking services is the Internet, we are subject to risks particular to that medium and other technological risks and costs.

We utilize the Internet and other automated electronic processing in our banking services without physical locations, as distinguished from the Internet banking service of an established conventional bank.  Independent Internet banks often have found it difficult to achieve profitability and revenue growth.  Several factors contribute to the unique problems that Internet banks face.  These include concerns for the security of personal information, the absence of personal relationships between bankers and customers, the absence of loyalty to a conventional hometown bank, the customer’s difficulty in understanding and assessing the substance and financial strength of an Internet bank, a lack of confidence in the likelihood of success and permanence of Internet banks and many individuals’ unwillingness to trust their personal assets to a relatively new technological medium such as the Internet.  As a result, many potential customers may be unwilling to establish a relationship with us.

Many conventional financial institutions offer the option of Internet banking and financial services to their existing and prospective customers.  The public may perceive conventional financial institutions as being safer, more responsive, more comfortable to deal with and more accountable as providers of their banking and financial services, including their Internet banking services.  We may not be able to offer Internet banking and financial services and personal relationship characteristics that have sufficient advantages over the Internet banking and financial services and other characteristics of established conventional financial institutions to enable us to compete successfully.

Moreover, both the Internet and the financial services industry are undergoing rapid technological changes, with frequent introductions of new technology-driven products and services.  In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.  Our ability to compete will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.  Many of our competitors have substantially greater resources to invest in technological improvements.  We may not be able to implement effectively new technology-driven products and services or be successful in marketing these products and services to our customers.  Such products may also prove costly to develop or acquire.

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Our operations may be interrupted if our network or computer systems, or those of our providers, fail.

Because we deliver our products and services over the Internet and outsource several critical functions to third parties, our operations depend on our ability, as well as that of our service providers, to protect computer systems and network infrastructure against interruptions in service due to damage from fire, power loss, telecommunications failure, physical break-ins and computer hacking or similar catastrophic events.  Our operations also depend upon our ability to replace a third-party provider if it experiences difficulties that interrupt our operations or if an operationally essential third-party service terminates.  Service interruptions to customers may adversely affect our ability to obtain or retain customers and could result in regulatory sanctions.  Moreover, if a customer were unable to access his or her account or complete a financial transaction due to a service interruption, we could be subject to a claim by the customer for his or her loss.  While our accounts and other agreements contain disclaimers of liability for these kinds of losses, we cannot predict the outcome of litigation if a customer were to make a claim against us.

A failure of cyber security may result in a loss of customers and our being liable for damages for such failure.

A significant barrier to online and other financial transactions is the secure transmission of confidential information over public networks and other mediums.  The systems we use rely on encryption and authentication technology to provide secure transmission of confidential information.  Advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms used to protect customer transaction data.  If we, or another provider of financial services through the Internet, were to suffer damage from a security breach, public acceptance and use of the Internet as a medium for financial transactions could suffer.  Any security breach could deter potential customers or cause existing customers to leave, thereby impairing our ability to grow and maintain profitability and, possibly, our ability to continue delivering our products and services through the Internet.  We could also be liable for any customer damages arising from such a breach.  Other cyber threats involving theft of confidential information could also result in liability.  Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent security breaches, these measures may not be successful.

We outsource many essential services to third-party providers who may terminate their agreements with us, resulting in interruptions to our banking operations.

We obtain essential technological and customer services support for the systems we use from third-party providers.  We outsource our check processing, check imaging, transaction processing, electronic bill payment, statement rendering, and other services to third- party vendors.  For a description of these services, you should read Item 1, “Business—Other Operations—Third-Party Service Providers.” Our agreements with each service provider are generally cancelable without cause by either party upon specified notice periods.  If one of our third-party service providers terminates its agreement with us and we are unable to replace it with another service provider, our operations may be interrupted.  Even a temporary disruption in services could result in our losing customers, incurring liability for any damages our customers may sustain, or losing revenues.    Moreover, there can be no assurance that a replacement service provider will provide its services at the same or a lower cost than the service provider it replaces.

We may be affected by government regulation including those mandating capital levels.

We are subject to extensive federal and state banking regulation and supervision, which has increased in the past several years as a result of stresses the financial system has undergone for an extended period of years.  The regulations are intended primarily to protect our depositors’ funds, the federal deposit insurance funds and the safety and soundness of the Bank, not our shareholders. Regulatory requirements affect lending practices, product offerings, capital structure, investment practices, dividend policy and growth.  A failure by either the Bank or us to meet regulatory capital requirements will result in the imposition of limitations on our operations and could, if capital levels drop significantly, result in our being required to cease operations.  Regulatory capital requirements must also be satisfied such that mandated capital ratios are maintained as the Bank grows, or growth may be required to be curtailed.  Moreover, a failure by either the Bank or us to comply with regulatory requirements regarding lending practices, investment practices, customer relationships, anti-money laundering detection and prevention, and other operational practices (see "Business--Regulation Under Banking Law") could result in regulatory sanctions and possibly third-party liabilities.  Changes in governing law, regulations or regulatory practices could impose additional costs on us or impair our ability to obtain deposits or make loans and, as a consequence, our consolidated revenues and profitability.

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As a Delaware-chartered bank whose depositors and financial services customers are located in several states, the Bank may be subject to additional licensure requirements or other regulation of its activities by state regulatory authorities and laws outside of Delaware.  If the Bank’s compliance with licensure requirements or other regulation becomes overly burdensome, we may seek to convert its state charter to a federal charter in order to gain the benefits of federal preemption of some of those laws and regulations. Conversion of the Bank to a federal charter will require the prior approval of the relevant federal bank regulatory authorities, which we may not be able to obtain.  Moreover, even if we obtain approval, there could be a significant period of time between our application and receipt of the approval, and/or any approval we do obtain may be subject to burdensome conditions or restrictions.

Implemented, proposed and future regulatory and legislative financial reforms may result in new laws and regulations that we expect will increase our compliance burdens and operating costs.

 

The passage of new laws and the adoption of new rules and regulations cannot be fully or accurately predicted.  Any such proposed laws and regulations may limit our operations, require higher levels of capital and liquidity, create additional compliance burdens, or otherwise impact our operations.  Most recently, passage of the Dodd-Frank Act in 2010, and the rules and regulations emanating therefrom, have significantly changed, and will continue to, change, the bank regulatory structure, and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.  The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress.  While a significant number of regulations have already been promulgated to implement the Dodd-Frank Act, many of the details and much of the impact of the Dodd-Frank Act may not be known for lengthy periods, which could have a material adverse effect on the financial services industry, generally and our company in particular.

We expect that the Dodd-Frank Act’s “Durbin Amendment,” which applies to all banks, regardless of asset size, will continue to affect us.  The Durbin Amendment required the Federal Reserve to adopt a rule establishing debit card interchange fee standards and limits and prohibiting network exclusivity and routing requirements.  The Dodd-Frank Act exempts from the debit card interchange fee standards any issuing bank that, together with its affiliates, have assets of less than $10 billion.  Because of our asset size, we are exempt from the debit card interchange fee standards and will continue to be exempt unless the exemption is amended or we, together with our subsidiaries, surpass $10 billion in assets.

On June 29, 2011, the Federal Reserve implemented final routing regulatory requirements to prohibit network exclusivity arrangements on debit card transactions and ensure merchants will have choices in debit card routing, which apply to us.  The regulations require issuers to make at least two unaffiliated networks available to the merchant, without regard to the method of authentication (PIN or signature), for both debit cards and prepaid cards.  As currently applied, a card issuer can guarantee compliance with the network exclusivity regulations by enabling the debit card to process transactions through one signature network and one unaffiliated PIN network.  Cards usable only with PINs must be enabled with two unaffiliated PIN networks.

On March 21, 2014, the United States Court of Appeals for the District of Columbia Circuit upheld the Federal Reserve’s rules on network exclusivity and interchange fees as written and thereby rejected a challenge brought by a group of merchant trade associations.  On January 21, 2015, the Supreme Court of the United States declined to take an appeal filed by the plaintiff merchant trade associations, effectively ending the litigation and upholding the Federal Reserve’s final rules regarding network exclusivity and interchange fees as written.

 

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 obligations, which could have a material adverse effect on our financial condition and results of operations.

A further downgrade of the U.S. government credit rating could negatively impact our investment portfolio and other operations.       

A significant amount of our investment portfolio is rated by outside ratings agencies as explicitly or implicitly backed by the United States government.  In 2011, the credit rating of the United States government was lowered, and it is possible it may be downgraded further, based upon rating agencies’ evaluations of the effect of increasing levels of government debt and related Congressional actions.  A lowering of the United States government credit ratings may reduce the market value or liquidity of our investment portfolio.

30


 

Potential acquisitions may disrupt our business and dilute stockholder value.  

 

Acquiring other banks or businesses involves various risks commonly associated with acquisitions, including, among other things:

 

·

potential exposure to unknown or contingent liabilities of the target entity;

·

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;

·

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

·

difficulty navigating and integrating legal, operating cultural differences between the United States and the countries of the target entity’s operations.

 

From time to time we evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies.  As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time.  Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction.  Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.

 

We may be subject to potential liability and business risk from actions by our regulators related to supervision of third parties.

 

Oversight management by us of third parties by which we acquire deposit accounts and offer products and services, may be required to be expanded by our auditors or regulators.  Although we have added significant compliance staff and have used outside consultants, our internal and external compliance examiners must be satisfied with the results of such augmentation and enhancement. We cannot assure you that we will satisfy all related requirements.  Not achieving a compliance management system which is deemed adequate could result in sanctions against the Bank.  Our ongoing review and analysis of our compliance management system and implementation of any changes resulting from that review and analysis will likely result in increased noninterest expense.

 

We are named as a defendant in a class action securities lawsuit, the adverse resolution of which could have a material adverse effect on our financial condition and results of operations.  

We were named as a defendant in a class action securities lawsuit filed in July 2014 in the United States District Court for the District of Delaware.  See Part I, Item 3, “Legal Proceedings.” An adverse resolution of this matter could result in substantial damages, which could materially adversely affect our financial condition and results of operations.

 

The Bank may be subject to civil money penalties in connection with examination findings.

 

Like all regulated banking institutions, we are at risk of the imposition of civil money penalties by our regulators, based on, among other things, apparent violations of law, repeat violations, or supervisory determinations of non-compliance with any consent order.  Depending on the circumstances, the imposition and size of any such penalty is at the discretion of the regulator.  The FDIC has informed us that certain actions of third parties through which we issue prepaid cards are being scrutinized by the FDIC.  The FDIC has further informed us that it may take the position that certain operational aspects related to these card programs may implicate non-compliance with unfair or deceptive acts or practices laws or other regulations.  While the Bank is contractually indemnified for related losses, civil money penalties, if assessed against the Bank, are not indemnified.

 

31


 

The appraised fair value of the assets in our discontinued commercial loan operations may be more than the amounts received upon sale.

 

In connection with the discontinuance of our commercial loan portfolio and the resulting charge to earnings, an independent third party expert has provided a fair value analysis of the commercial loan portfolio for purposes of reflecting discontinued assets on our consolidated balance sheet.  This valuation is an estimate only, based on current circumstances, and the actual sales price could be significantly less than the estimate, which could materially affect results of operations in future quarters.

 

We cannot predict whether income resulting from the reinvestment of proceeds from the loans we hold will match or exceed the income from the sold loans.

 

We are seeking to sell the loans in our discontinued commercial loan operations and expect that we will obtain a significant amount of cash from the sale.  Although we believe, based upon current market conditions, that we will be able to invest such proceeds profitably, reinvestment income is difficult to predict and depends upon a number of economic and market conditions beyond our control, including interest rates and the availability of suitable investments. We cannot assure you that we will be able to generate the same level of income from the reinvested proceeds as we generated from the loan portfolio being sold, or that suitable investments will be available to us.  If not, our revenues and net income could be reduced materially.

 

Any future FDIC insurance premium increases will adversely affect our earnings.

   

Any further assessments or special assessments that the FDIC levies will be recorded as an expense during the appropriate period and will decrease our earnings.  On February 9, 2011, the FDIC adopted a final rule which redefines the deposit insurance assessment base as required by the Dodd-Frank Act.  The final rule sets the deposit insurance assessment base as average consolidated total assets minus average tangible equity.  It also sets a new assessment rate schedule which reflects assessment rate adjustments based upon regulatory examination classification with increased rates for brokered deposits.  The final rule became effective on April 1, 2011.  If the Bank’s rating is changed, insurance premiums will be increased which will adversely affect our earnings.  In the fourth quarter of 2014, the Bank’s FDIC premium was increased to 24 basis points as a result of new guidance by the FDIC which reclassified the vast  majority of the Bank’s deposits as brokered.  A reduction in the assessment rate will depend on future FDIC evaluations of the Bank.

 

We have had material weaknesses in internal control over financial reporting in the past and cannot assure you that additional material weaknesses will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements which could require us to restate financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on our stock price.

 

As previously reported, our management has identified material weaknesses in our internal control over financial reporting that affected our financial statements for the fiscal years ended December 31, 2012, 2013 and 2014 and prior periods. See Item 9A, “Controls and Procedures.”  These weaknesses related to the timing of the recognition of loan losses and the recognition of other loan losses and have resulted in a restatement of our financial statements for such periods. We cannot assure you that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated under Section 404. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors or customers to lose confidence in our reported financial information, leading to a decline in our stock price or a loss of business

 

Risks related to ownership of our common stock.

 

The trading volume in our common stock is less than that of many financial services companies, which may reduce the price at which our common stock would otherwise trade.

 

32


 

Although our common stock is traded on The NASDAQ Global Select Market, the trading volume is less than that of many financial services companies.  A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time.  This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control.  Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.

 

An investment in our common stock is not an insured deposit.

 

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity.  Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and is subject to the same market forces that affect the price of common stock in any company.  As a result, if you acquire our common stock, you may lose some or all of your investment.

 

Our ability to issue additional shares of our common stock, or the issuance of such additional shares, may reduce the price at which our common stock trades.

 

We cannot predict whether future issuances of shares of our common stock or the availability of shares for resale in the open market will decrease the market price per share of our common stock.  We are not restricted from issuing additional shares of common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive shares of common stock.  Sales of a substantial number of shares of our common stock in the public market or the perception that such sales might occur could materially adversely affect the market price of the shares of our common stock.  The exercise of any options granted to directors, executive officers and other employees under our stock compensation plans, the vesting of restricted stock grants, the issuance of shares of common stock in acquisitions and other issuances of our common stock also could have an adverse effect on the market price of the shares of our common stock.  The existence of options, or shares of our common stock reserved for issuance as restricted shares of our common stock may materially adversely affect the terms upon which we may be able to obtain additional capital in the future through the sale of equity securities. 

 

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.

 

In the future, we may attempt to increase our capital resources or, if the Bank’s capital ratios fall below the required minimums, we could be forced to raise additional capital by making additional offerings of debt or preferred equity securities, including medium-term notes senior or subordinated notes or preferred stock.  Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock.  Holders of our common stock are not entitled to preemptive rights or other protections against dilution.

 

The Bank’s ability to pay dividends is subject to regulatory limitations which, to the extent we require such dividends in the future, may affect our ability to pay our obligations and pay dividends.

 

We are a separate legal entity from the Bank and our other subsidiaries, and we do not have significant operations of our own.  We have historically depended on the Bank’s cash and liquidity as well as dividends to pay our operating expenses.  Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval.  The Bank is also subject to limitations under state law regarding the payment of dividends, including the requirement that dividends may be paid only out of net profits.  In addition to these explicit limitations, it is possible, depending upon the financial condition of the Bank and other factors, that  federal and state regulatory agencies could take the position that payment of dividends by the Bank would constitute an unsafe or unsound banking practice and may therefore seek to prevent the Bank from paying such dividends.  Moreover, under the Amendment to the 2014 Consent Order, the Bank may not pay dividends without the approval of the FDIC. See “Risk Factors-Risks Relating to Our Business-The entry into the 2012 and 2014 Consent Orders, as amended, and a supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank.” Although we believe we have sufficient existing liquidity for our needs for the foreseeable future, there is risk that, if the Amendment remains undischarged for a lengthy period and the Bank is unable to obtain FDIC approval for one or more dividends,  we may not be able to service our obligations as they become due or to pay dividends on our common stock or preferred stock. Even if, absent the Amendment,  the Bank has the capacity to pay dividends,  it is not obligated to pay the dividends.  Its Board of Directors may determine, as it did in the past, to retain some or all of its earnings to support or increase its capital base.

33


 

 

Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may make it more difficult for holders of our common stock to receive a change in control premium.

 

Certain provisions of our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest more difficult, even if such events were perceived by many of our stockholders as beneficial to their interests.  These provisions include in particular our ability to issue shares of our common stock and preferred stock with such provisions as our board of directors may approve without further shareholder approval.  In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more of a corporation’s outstanding voting stock, from engaging in a business combination with our company for three years following the date that person became an interested stockholder unless certain specified conditions are satisfied.

 

Item 1B. Unresolved Staff Comments.

 

The staff of the SEC  has commented on three of our loan relationships, now included in discontinued operations, requesting detailed information concerning the amount and timing of our recognition of impairment losses originally reported in the first quarter of 2014, with respect to those relationships.  As a result of these comments, we analyzed the relationships and on March 29, 2015 our audit committee, as reported in a Form 8-K filed April 1, 2015, determined that certain of  our financial statements could not be relied upon as noted in the “Explanatory Note” which precedes Part I above and that such charges should be restated to prior periods.  Upon resulting analysis of other unrelated loan charges, losses on other loans were also restated to prior periods including previously unreported losses.  The restatement of such losses is  presented  in  Note C and Note T to the financial statements in this Form 10-K. We cannot assure you that the staff of the SEC will not have further comments related to the foregoing. 

 

Item 2. Properties.  

Our executive office and banking facility are located at 409 Silverside Rd. Wilmington, Delaware.  We maintain loan production offices in Philadelphia, Pennsylvania, New York, New York, King of Prussia, Pennsylvania and Chicago Illinois, leasing offices in Crofton, Maryland, Orlando, Florida and Kent, Washington, prepaid card offices in Sioux Falls, South Dakota and Minneapolis, Minnesota, BSA/AML offices in Tampa, Florida and our European prepaid card offices in Lozenetaz, Sofia Bulgaria and Ocean Village, Gibraltar.  Locations and certain additional information regarding our offices and other material properties at December 31, 2014 are listed below.

 

 

 

 

 

 

Location

Expiration

 

Square Feet

 

Monthly Rent

United States

 

 

 

 

 

Chicago, Illinois

2020

 

6,864 

 

$                     10,608 

Crofton, Maryland

2015

 

3,243 

 

5,160 

King of Prussia, Pennsylvania

2017

 

2,728 

 

4,461 

King, Washington

2016

 

4,500 

 

4,500 

Minneapolis, Minnesota

2017

 

3,181 

 

2,585 

New York, New York

2015 - 2025

 

13,479 

 

72,961 

Orlando, Florida

2015

 

12,400 

 

6,433 

Philadelphia, Pennsylvania

2025

 

14,839 

 

24,983 

Sioux Falls, South Dakota

2022

 

38,611 

 

54,674 

Tampa, Florida

2020

 

10,303 

 

15,621 

Wilmington, Delaware

2025

 

62,136 

 

121,301 

 

 

 

 

 

 

 

 

 

 

 

 

Europe(1)

 

 

 

 

 

Lozenetaz, Sofia Bulgaria

2016

 

4,413 

 

5,182 

34


 

Ocean Village, Gibraltar

2022

 

4,585 

 

15,603 

 

 

 

 

 

 

(1) Office space in Europe is expressed in square feet and U.S. dollars.

 

 

 

 

 

We believe that our offices are suitable and adequate for our operations.

Item 3. Legal Proceedings.  

 

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

 

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

Item 4. Mine Safety Disclosures.  

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock trades on the NASDAQ National Market under the symbol “TBBK.” The following table sets forth the range of high and low sales prices for the indicated periods for our common stock.

 

 

 

 

 

 

 

Quarter Ended

 

Price Range

 

 

High

 

Low

2014

 

 

 

 

March 31, 2014

 

$                 20.14 

 

$                 17.66 

June 30, 2014

 

$                 19.69 

 

$                 11.60 

September 30, 2014

 

$                 11.94 

 

$                   8.75 

December 31, 2014

 

$                 10.96 

 

$                   8.29 

 

 

 

 

 

2013

 

 

 

 

35


 

March 31, 2013

 

$                 14.24 

 

$                   7.14 

June 30, 2013

 

$                 15.14 

 

$                 12.10 

September 30, 2013

 

$                 18.61 

 

$                 14.75 

December 31, 2013

 

$                 19.14 

 

$                 15.78 

 

As of June 29, 2015, there were 37,758,237 shares of common stock outstanding held of record by 3,494 persons.

 

We have not paid cash dividends on our common stock since our inception, and do not plan to pay cash dividends on our common stock for the foreseeable future.  We intend to retain earnings, if any, to increase our capital and fund the development and growth of our operations.  Our board of directors will determine any changes in our dividend policy based upon its analysis of factors it deems relevant.  We expect that these factors will include our earnings, financial condition, cash requirements, regulatory capital levels and available investment opportunities.    Our payment of dividends is subject to restrictions discussed in Item 1, “Business—Regulation under Banking Law,”  and to a Supervisory Letter issued by the Federal Reserve discussed in Item 1A, “Risk Factors-Risks Relating to Our Business-The entry into the 2012 and 2014 Consent Orders, as amended, and a supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank.”

36


 

Performance graph

 

The following graph compares the performance of our common stock to the NASDAQ Composite Index and the NASDAQ Bank Stock Index.  The graph shows the value of $100 invested in our common stock and both indices on December 31, 2009 for a five year period and the change in the value of our common stock compared to the indices as of the end of each year.  The graph assumes the reinvestment of all dividends.  Historical stock price performance is not necessarily indicative of future stock price performance.

 

Picture 3

 

 

 

 

 

 

 

 

 

 

 

 

Index

12/31/2009

12/31/2010

12/31/2011

12/31/2012

12/31/2013

12/31/2014

The Bancorp, Inc.

100.00 
148.25 
105.39 
159.91 
261.08 
158.75 

NASDAQ Bank Stock Index

100.00 
111.89 
97.98 
113.45 
157.59 
162.07 

NASDAQ Composite Stock Index

100.00 
116.91 
114.81 
133.07 
184.06 
208.71 

 

37


 

 

The following graph reflects stock performance since 2008, compared to the KBW bank index,  which is an industry recognized peer group of regional and money center banks.

 

Picture 4

 

 

 

 

 

 

 

 

 

 

 

 

As of

Index

12/31/2008

12/31/2009

12/31/2010

12/31/2011

12/31/2012

12/31/2013

12/31/2014

The Bancorp, Inc.

100.00 
182.93 
271.20 
192.80 
292.53 
477.60 
290.40 

KBW Bank Index

100.00 
99.46 
121.59 
91.71 
119.42 
161.29 
172.94 

 

 

 

 

 

38


 

Item 6. Selected Financial Data.

 

The following table sets forth selected financial data as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010.  We derived the selected financial data from our consolidated financial statements for those periods included in this annual report on Form 10-K or our prior annual reports on Form 10-K.   Our historical financial information for the four years ended December 31, 2013 has been adjusted to reflect our discontinued operations of our commercial lending operations.  As a result, our results of operations for those years ended December 31, 2013 may not be comparative to our results of operations reported for the prior periods .  In addition, we have reclassified certain amounts in our historical audited consolidated financial statements, including amounts related to certain assets and liabilities reclassified as held for sale during these periods.  These reclassifications had no effect on our reported net income (loss).  Separate from discontinued operations, the historical financial information has also been restated as described in Notes C and T to the financial statements. The financial statements and the tables below reflect applicable restatement adjustments for periods from 2010 through September 30, 2014, the last date through which financial statements previously had been issued and as noted .  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.  Approximately $28.5 million of losses that were not previously reported were restated. Also, $12.7 million of losses related to loans made before December 31, 2014 that were resolved after that date but before the issuance date of these financial statements, were recognized in the 2014 financial statements.

 

You should read the selected financial data in this table together with, and such selected financial data is qualified by reference to, our consolidated financial statements and the notes to those restated consolidated financial statements in Item 8 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report.

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the years ended

 

December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

(restated)

 

(restated)

 

(restated)

 

(restated)

Income Statement Data:

(in thousands, except per share data)

Interest income

$                 70,720 

 

$                   51,150 

 

$               39,479 

 

$               31,087 

 

$                24,368 

Interest expense

11,295 

 

10,768 

 

11,411 

 

12,036 

 

14,539 

Net interest income

59,425 

 

40,382 

 

28,068 

 

19,051 

 

9,829 

Provision for loan and lease losses

1,202 

 

355 

 

6,642 

 

1,638 

 

1,377 

Net interest income after provision for loan

 

 

 

 

 

 

 

 

 

   and lease losses

58,223 

 

40,027 

 

21,426 

 

17,413 

 

8,452 

Non-interest income

85,049 

 

82,073 

 

49,501 

 

30,424 

 

20,566 

Non-interest expense

135,980 

 

101,817 

 

80,188 

 

69,080 

 

58,158 

Income (loss) before income tax benefit

7,292 

 

20,283 

 

(9,261)

 

(21,243)

 

(29,140)

Income tax provision (benefit)

(14,523)

 

6,767 

 

(3,492)

 

(7,878)

 

(10,164)

Net income (loss) from continuing operations

21,815 

 

13,516 

 

(5,769)

 

(13,365)

 

(18,976)

Less preferred stock dividends and accretion

 -

 

 -

 

 -

 

 -

 

(6,242)

 Net income (loss) before discontinued operations

21,815 

 

13,516 

 

(5,769)

 

(13,365)

 

(25,218)

Net income (loss) discontinued operations net of tax

35,294 

 

(27,938)

 

(37,384)

 

18,183 

 

15,131 

 Net income (loss) available to common shareholders

$                 57,109 

 

$                 (14,422)

 

$              (43,153)

 

$                 4,818 

 

$               (10,087)

 

 

 

 

 

 

 

 

 

 

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

$                     0.58 

 

$                       0.36 

 

$                  (0.17)

 

$                  (0.42)

 

$                   (0.97)

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

$                     0.94 

 

$                     (0.75)

 

$                  (1.13)

 

$                   0.57 

 

$                    0.58 

Net income (loss) per share - basic

$                     1.52 

 

$                     (0.39)

 

$                  (1.30)

 

$                   0.15 

 

$                   (0.39)

 

 

 

 

 

 

 

 

 

 

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

$                     0.57 

 

$                       0.35 

 

$                  (0.17)

 

$                  (0.42)

 

$                   (0.97)

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

$                     0.92 

 

$                     (0.75)

 

$                  (1.13)

 

$                   0.57 

 

$                    0.58 

39


 

Net income (loss) per share - diluted

$                     1.49 

 

$                     (0.40)

 

$                  (1.30)

 

$                   0.15 

 

$                   (0.39)

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

Total assets

$            4,986,317 

 

$              4,593,588 

 

$          3,626,712 

 

$          2,997,513 

 

$           2,386,656 

Total loans, net of unearned costs

874,593 

 

636,001 

 

535,141 

 

365,395 

 

292,861 

Allowance for loan and lease losses

3,638 

 

3,881 

 

3,985 

 

1,707 

 

1,382 

Total cash and cash equivalents

1,114,235 

 

1,235,949 

 

966,588 

 

748,068 

 

470,353 

Deposits

4,621,784 

 

4,272,989 

 

3,313,221 

 

2,682,551 

 

2,024,097 

Federal Home Loan Bank advances

 -

 

 -

 

 -

 

 -

 

87,000 

Shareholders' equity

319,023 

 

247,127 

 

263,733 

 

258,311 

 

189,700 

 

 

 

 

 

 

 

 

 

 

Selected Ratios:

 

 

 

 

 

 

 

 

 

Return on average assets

1.28% 

 

nm

 

nm

 

0.17% 

 

nm

Return on average common equity

20.17% 

 

nm

 

nm

 

2.15% 

 

nm

Net interest margin

2.60% 

 

2.44% 

 

2.58% 

 

2.96% 

 

3.28% 

Book value per common share

$                     8.46 

 

$                       6.57 

 

$                   7.10 

 

$                   7.80 

 

$                    7.25 

 

 

 

 

 

 

 

 

 

 

Selected Capital and Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

Equity/assets

6.40% 

 

5.38% 

 

7.27% 

 

8.62% 

 

7.95% 

Tier I capital to average assets

7.07% 

 

6.09% 

 

8.89% 

 

8.26% 

 

7.99% 

Tier 1 capital to total risk-weighted assets

11.54% 

 

10.55% 

 

14.57% 

 

13.91% 

 

11.44% 

Total capital to total risk-weighted assets

11.67% 

 

11.87% 

 

15.82% 

 

15.16% 

 

12.69% 

Allowance for loan and lease losses to total loans

0.42% 

 

0.61% 

 

0.74% 

 

0.47% 

 

0.47% 

 

 

 

 

 

 

 

 

 

 

nm = not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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.

 

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 consolidated 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 consolidated 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 and our determination of the fair value of financial instruments 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 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 consolidated statement of operations.   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 evaluate whether an other than temporary 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.  If other than temporary impairment is determined, we estimate expected future cash flows to determine the credit loss amount with 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.

We account for our stock-based compensation plans based on the fair value of the awards made, which include stock options, restricted stock, and performance based shares.  To assess the fair value of the awards made, management makes assumptions as to

41


 

expected stock price volatility, option terms, forfeiture rates and dividend rates.  All of these estimates and assumptions may be susceptible to significant change that may impact earnings in future periods.

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 consolidated 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.

Overview 

In the third quarter of 2014, we discontinued our Philadelphia commercial lending operations as discussed in “Recent Developments,” below, following our determination that those operations were inconsistent with our strategic focus on generating low cost deposits and deploying that funding into lower risk, more granular and national lines of business and investment securities.   We currently focus our lending activities upon four specialty lending segments: SBLOC loans, automobile fleet and other equipment leasing, SBA loans and loans originated for sale into CMBS capital markets. We have sold a portion of our discontinued loans and are pursuing additional sales. As described in Note C and Note T to the financial statements, and separate from discontinued operations, the financial statements  reflect applicable restatement adjustments for periods from 2010 through September 30, 2014, the last date through which financial statements previously had been issued.  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.  Approximately $28.5 million of losses that were not previously reported were restated. Also, $12.7 million of losses related to loans made before December 31, 2014 that were resolved after that date but before the issuance date of our financial statements, were recognized in our 2014 financial statements. Substantially all of the losses and corresponding restatement adjustments resulted from the discontinued commercial loan operations. To manage high cash balances resulting from deposit growth, we have become more selective in our  focus on more profitable overall  relationships. In certain instances we have and may in the future, exit less profitable relationships to manage cash balances.  We are working with our regulators to satisfy BSA requirements and believe we are progressing. Our BSA efforts include the use of BSA consultants in 2014 and 2015 at significant expense and hiring additional BSA staff.

Recent Developments

          In the third quarter of 2014, we decided to discontinue our Philadelphia-based commercial lending operations.  The loans which constitute that portfolio are in the process of disposition.  This represents a strategic shift to a focus on our national specialty lending programs including small fleet leasing, SBLOC, CMBS origination and SBA lending.  As a result of the discontinuation, we expect to dispose of approximately $867 million of commercial loans.  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.  See Part II, Item IA, “Risk Factors—Risks Relating to Our Business We cannot predict whether income resulting from the reinvestment of loans we hold for sale resulting from discontinued operations will match or exceed the amount from the sold loans.”  To dispose of our commercial loan portfolio, we have engaged several intermediaries which are in the business of selling loans, primarily to other financial institutions, to assist in completing loan sales.  As of June 30, 2015 had sold loans with a book value of approximately $342.2 million, of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations.  The $342.2 million of loans sold had a face value of approximately $417.1 million. These sales were comprised of the following:  Loans with an approximate face and book value of $267.6 million and $192.7 million, respectively, were sold in the fourth quarter of 2014 to a private securitization entity.  The securitization is managed by an independent investor, which contributed $16 million of equity to that entity.  The balance of the sale was financed by the Bank and is reflected on the consolidated balance sheet as investment in unconsolidated subsidiary. See “ Financial Condition-Investment in Unconsolidated Subsidiary” later in this Item 7.  After $74.9 million of loan charges  reflected in the difference between the face value and book value of the loans sold to the securitization, we recognized a gain of  $17.0 million.  In the second quarter of 2015, an additional $149.6 million of loans were sold at a gain of approximately $2.2 million. We continue to pursue additional loan sales. (See Note W to the financial statements.)

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 this Form 10-K.  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

42


 

these loan charges were originally recognized in 2014, primarily in the third quarter, when commercial lending operations were discontinued.  Approximately $28.5 million of discontinued operations losses that were not previously reported were included during 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. Significant  losses  incurred related to the loan portfolio prior to the filing of the Form 10-K, are generally required to be included in the financial statements  of that 10-K.  In Note C and Note T to the financial statements, we restated the annual and quarterly financial statements which are shown with  applicable restatement adjustments.    Substantially all of the losses and corresponding restatement adjustments resulted from the discontinued commercial loan operations.

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

 

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

 

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

 

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

 

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

 

             On May 11, 2015, the Federal Reserve issued a letter, or the Supervisory Letter, to us as a result of the 2014 Consent Order and the Amendment, (which, at the time of the Supervisory Letter, was in proposed form), which provides that we shall not pay any dividends on our common stock or make any distributions to TPL or its subsidiaries, 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

43


 

Reserve  approved the payment of the interest on the  Company’s trust preferred securities due September 15, 2015. Future payments are subject to future approval by the Federal Reserve.

 

We learned through a compliance examination that certain actions of third parties through which we issue cards are being scrutinized by the FDIC.  The FDIC has informed us that it is analyzing  certain operational aspects related to these card programs which may constitute unfair or deceptive acts or practices regulations under Section 5 of the Federal Trade Commission Act.  The operational practices of the third parties identified by the FDIC were the following:  practices 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 with respect to electronic transactions in various types of deposit accounts; and practices related to the timing and frequency of disclosed account fees and the manner by which the account holder is notified of these fees in periodic statements  generated by third parties.  While the Bank is contractually indemnified for related losses, civil money penalties, if assessed against the Bank, are not indemnified. 

 

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

We are a defendant in a class action filed in July 2014 which, if resolved adversely to us, could materially adversely affect our financial condition and results of operations.  See Part II, Item 1A, “Risk Factors- We are named as a defendant in a class action securities lawsuit and the adverse resolution of this matter could have a material adverse effect on our financial condition and results of operations.” This litigation is in its preliminary stages.  We believe that the complaint is without merit and intend to defend vigorously.

Results of Operations

Overview: Net interest income continued its upward trend in 2014 and 2013 as a result of higher loan and securities balances, notwithstanding historically low market interest rates resulting from continuing Federal Reserve actions to maintain low rates for extended periods.  As a result of continued low rates,  loan and securities yields declined to a greater degree than  deposit rates which are now minimally in excess of 0%.  Net interest income grew primarily because of loan growth in targeted specialty lending segments and a strategy to significantly expand the investment securities portfolio.  Non-interest income increased in 2014, reflecting increased numbers of accounts and transactions in our prepaid card and card payments businesses.  Additional personnel for BSA and other regulatory compliance, especially for prepaid cards, and additional staffing expense for the CMBS division were, with other infrastructure costs, reflected in higher non-interest expense.  In 2014, the Bank discontinued its regional Philadelphia commercial loan division to focus on its national specialty lending lines of business.  We anticipate selling the approximate $867 million of related loans and using the proceeds to acquire investment securities and to provide liquidity to fund growth in our continuing specialty lending lines. We have begun the process of selling our portfolio and have sold loans with a book value of approximately $342.2 million,  of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations. The $342.2 million  of loans sold had a face value of approximately $417.1 million. These sales were comprised of the following:  Loans with an approximate face and book value of $267.6 million and $192.7 million, respectively, were sold in the fourth quarter of 2014 to a private securitization entity. The securitization is managed by an independent investor, which contributed $16 million of equity to that entity.  The balance of the sale was financed by the Bank and is reflected on the balance sheet as investment in unconsolidated subsidiary.  After $74.9 million of loan charges  reflected in the difference between the face value and book value of the loans sold to the securitization, we recognized a gain on  sale of $17.0 million.  In the second quarter of 2015, an additional $149.6 million of loans were sold at a gain of approximately $2.2 million.  At December 31, 2014 our continuing specialty lending total loans amounted to $874.6 million, an increase of $238.6 million over the $636.0 balance at December 31, 2013.  Our investment securities available for sale increased $240.5 million to $1.49 billion from $1.25 billion between those respective dates.

Net Income: 2014 compared to 2013. Income from continuing operations before income taxes was $7.3 million in 2014 compared to $20.3 million in 2013. While in 2014 there was a $4.4 million increase in non-interest income (excluding securities gains and other-than-temporary impairment (OTTI) charges), and a $19.0 million increase in net interest income,   these increases were more than offset by an  $847,000 increase in the provision for loan and lease losses,  $8.8 million of BSA related consulting expenses and a $25.4 million increase in other non-interest expense.  Of that $25.4 million increase, $8.3 million resulted from higher salary and

44


 

employee benefits expense primarily as a result of staff additions, with the balance of the increase resulting from other expenses including higher FDIC insurance and data processing expense.  The staff additions were made to our BSA and regulatory compliance functions due to increased regulatory requirements and for prepaid card and commercial loan sales departments to accommodate their growth.  Data processing and software expense categories increased $3.7 million as a result of an increased number of accounts and transaction volume and for prepaid card  and other software to improve efficiency and scalability. FDIC insurance expense increased $3.1 million, reflecting deposit growth and the reclassification of the majority of the Bank’s deposits as brokered, with reductions in future assessment rates dependent on future FDIC evaluations of the Bank. Depreciation, rent and other occupancy costs increased $1.7 million  reflecting additional main office operations and compliance space and new Florida office space for BSA staff.  The $4.4 million increase in non-interest income (excluding securities gains and OTTI charges) reflected: a $5.9 million increase in prepaid card fees which reflected higher volumes of transactions and accounts; a $4.7 million decrease in gain on sale of loans resulting from lower spreads; a $1.4 million increase in both service fees on deposits and card payment income and increases in other non-interest income categories. Higher net interest income resulted primarily from higher securities and loan balances. Reflecting  a tax benefit resulting from the reversal of valuation allowances, income tax benefit for continuing operations increased to $14.5 million in 2014 compared to expense of $6.8 million in 2013. Reflecting the tax benefit,  net income from continuing operations amounted to $21.8 million in 2014, compared to  $13.5 million in 2013, or a continuing operations income per diluted share of $.57 compared to continuing operations income per diluted share of $.35 in 2013.  Net income from discontinued operations was $35.3 million for 2014 compared to net loss of $27.9 million for 2013. Net income in 2014 reflected the reversal of loan charges restated back to prior periods including 2013, which resulted in a loss in that year (See Notes C and T to the financial statements). Including discontinued operations, diluted income per share was $1.49 for 2014 compared to diluted loss per share of $0.40 for 2013 on net income of $57.1 million and net loss of $14.4 million, respectively. 

Net Income: 2013 compared to 2012.  Net income from continuing operations for 2013 was $13.5 million, or $0.35 diluted earnings per share, compared to net loss from continuing operations of $5.8 million,  or $0.17 diluted loss per share for 2012.  The $19.3 million increase reflected a $31.2 million increase in non-interest income (excluding securities gains and other-than-temporary impairment (OTTI) charges), and a $12.3 million increase in net interest income which were partially offset by a $21.6 million increase in non-interest expense.  The increase in non-interest income reflected a $12.0 million increase in prepaid card fees which reflected higher volumes of transactions and accounts.  The increase also reflected a $15.3 million increase in gain on sale of loans as 2013 was the first full year of operations for a  new department which originates and sells CMBS loans.  Higher net interest income resulted primarily from higher securities and loan balances. Deposits grew between the periods; however, interest expense was lower as a result of lower rates.  Of the $21.6 million increase in non-interest expense, $12.3 million resulted from higher salaries and employee benefits primarily as a result of staff additions to our prepaid card, regulatory compliance and commercial loan sales departments to accommodate their growth, with the balance of the increase resulting from other expenses including higher software and data processing expenses.  Net loss from discontinued operations amounted to $27.9 million  in 2013, compared to net loss of $37.4 million in 2012. The losses resulted from the restatement of loan charges originally recognized in 2014 and restated to those  years.  Including discontinued operations, diluted loss per share of $0.40 for 2013 compared to diluted loss per share of $1.30 for 2012, on net loss of $14.4 million and $43.2 million respectively.

Net Interest Income: 2014 compared to 2013. Our net interest income for 2014 increased to $59.4 million, an increase of $19.0 million or 47.2%, from $40.4 million for 2013, reflecting a $19.6 million or 38.3% increase in interest income to $70.7 million from $51.2 million for 2013.  The increase in net interest income resulted primarily from higher balances of securities and loans.  Our average loans and leases increased 43.4% to $921.1 million in 2014 from $642.4 million for 2013, while related interest income increased $8.8 million on a tax equivalent basis.  Our average investment securities increased 42.6% to $1.51 billion for 2014 from $1.06 billion for 2013, while related interest income increased $14.8 million on a tax equivalent basis.  We increased our investment portfolio in 2014 to increase yields earned on funds which would otherwise be invested in lower yielding overnight investments.  The impact of the reductions in rates by the Federal Reserve which began in the second half of 2007 continued as rates remained at historic lows in 2014.  Interest expense increased by $527,000 in 2014 compared to 2013, reflecting higher deposit balances. 

Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for 2014 increased 16 basis points to 2.60% from 2.44% for 2013.  The increase in net interest margin resulted primarily from deploying balances at the Federal Reserve into higher yielding loans and investments.  Deposits invested at the Federal Reserve bore interest at only 25 basis points.  For 2014, the average yield on our interest-earning assets increased to 2.42% from 2.03% for 2013, an increase of 39 basis points.  The cost of total deposits decreased to 0.26% for 2014 from 0.27% for 2013, a decrease of 1 basis point.  The cost of total deposits and interest bearing liabilities decreased to 0.27% in 2014 compared to 0.29% in 2013, a decrease of 2 basis pointsIn 2014, average demand and interest checking deposits amounted to $3.75 billion, compared to $3.19 billion in 2013, an increase of 17.6%.  The increase primarily reflected increased balances in prepaid card and card payment processing deposits.  In 2014, average total

45


 

deposits increased 11.3% to $4.12 billion, compared to $3.70 billion in 2013. Average savings and money market balances were lower in 2014 reflecting the exit of higher cost deposits.

Net Interest Income: 2013 compared to 2012. Our net interest income for 2013 increased to $40.4 million, an increase of $12.3 million or 43.9%, from $28.1 million for 2012, reflecting an $11.7 million or 29.6% increase in interest income to $51.2 million from $39.5 million for 2012. The increase in net interest income resulted primarily from higher balances of securities and loans while interest expense was reduced.  Our average loans and leases increased 35.3% to $642.4 million in 2013 from $474.9 million for 2012, while related interest income increased $6.8 million on a tax equivalent basis.  Our average investment securities increased 80.4% to $1.06 billion for 2013 from $586.4 million for 2012, while related interest income increased $5.6 million on a tax equivalent basisWe increased our investment portfolio in 2013 to increase yields earned on funds which would otherwise be invested in lower yielding overnight investments.  The impact of the reductions in rates by the Federal Reserve which began in the second half of 2007 continued as rates remained at historic lows. Interest expense decreased by $644,000 in 2013 compared to 2012, reflecting lower deposit rates. 

 

Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for 2013 decreased 14 basis points to 2.44% from 2.58% for 2012.  The decrease in net interest margin reflected continuing disproportionately high balances at the Federal Reserve Bank, resulting from continuing high deposit growth, and continued downward pressure on loan and security yields.  Deposits invested at the Federal Reserve Bank bore interest at only 25 basis points.  For 2013 the average yield on our interest-earning assets remained at 2.03%,   the same as in 2012.  The cost of total deposits decreased to 0.27% for 2013 from 0.33% for 2012, a decrease of 6 basis points.  The cost of total deposits and interest bearing liabilities decreased to 0.29% in 2013 compared to 0.36% in 2012, a decrease of 7 basis points.  This decrease reflected our continuing decreases in deposit rates and changes in the mix of our deposits, in particular a significant increase in demand and interest checking deposits.  In 2013, average demand and interest checking deposits amounted to $3.18 billion, compared to $2.67 billion in 2012, an increase of 19.5%.  The increase primarily reflected increased balances in prepaid card and institutional banking deposits.  In 2013, average total deposits increased 17.6% to $3.70 billion, compared to $3.15 billion in 2012.  The growth reflected increases in balances associated with our prepaid card, institutional banking, card payment processing and healthcare categories.  

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2014

 

2013

 

 

 

 

 

 

 

 

(restated)

 

 

Average

 

 

 

Average

 

Average

 

 

 

Average

 

 

balance

 

Interest

 

rate

 

balance

 

Interest

 

rate

 

 

(dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans net of unearned fees and costs **

 

$               903,681 

 

$          35,849 

 

3.97% 

 

$               626,158 

 

$          27,048 

 

4.32% 

Leases - bank qualified*

 

17,400 

 

938 

 

5.39% 

 

16,209 

 

910 

 

5.61% 

Investment securities-taxable

 

1,031,584 

 

20,662 

 

2.00% 

 

811,440 

 

15,999 

 

1.97% 

Investment securities-nontaxable*

 

477,384 

 

17,454 

 

3.66% 

 

246,490 

 

7,320 

 

2.97% 

Interest earning deposits at Federal Reserve Bank

 

720,240 

 

1,792 

 

0.25% 

 

931,468 

 

2,328 

 

0.25% 

Federal funds sold and securities sold under agreements to resell

 

33,814 

 

462 

 

1.37% 

 

34,589 

 

425 

 

1.23% 

Net interest earning assets

 

3,184,103 

 

77,157 

 

2.42% 

 

2,666,354 

 

54,030 

 

2.03% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

(3,521)

 

 

 

 

 

(2,320)

 

 

 

 

Assets held for sale

 

1,162,319 

 

49,891 

 

4.29% 

 

1,271,576 

 

55,400 

 

4.36% 

Other assets

 

115,003 

 

 

 

 

 

95,629 

 

 

 

 

 

 

$            4,457,904 

 

 

 

 

 

$            4,031,239 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$            3,746,958 

 

$            9,097 

 

0.24% 

 

$            3,185,919 

 

$            7,851 

 

0.25% 

46


 

Savings and money market

 

366,160 

 

1,574 

 

0.43% 

 

500,113 

 

2,133 

 

0.43% 

Time

 

7,974 

 

96 

 

1.20% 

 

17,443 

 

182 

 

1.04% 

Total deposits

 

4,121,092 

 

10,767 

 

0.26% 

 

3,703,475 

 

10,166 

 

0.27% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

 

 -

 

0.00% 

 

 -

 

 -

 

0.00% 

Repurchase agreements

 

17,496 

 

50 

 

0.29% 

 

18,442 

 

54 

 

0.29% 

Subordinated debt

 

13,401 

 

478 

 

3.57% 

 

13,401 

 

548 

 

4.09% 

Total deposits and interest bearing liabilities

 

4,151,994 

 

11,295 

 

0.27% 

 

3,735,318 

 

10,768 

 

0.29% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

17,721 

 

 

 

 

 

25,277 

 

 

 

 

Total liabilities

 

4,169,715 

 

 

 

 

 

3,760,595 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

283,074 

 

 

 

 

 

255,430 

 

 

 

 

 

 

$            4,452,789 

 

 

 

 

 

$            4,016,025 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$        115,753 

 

 

 

 

 

$          98,662 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

6,437 

 

 

 

 

 

2,880 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$        109,316 

 

 

 

 

 

$          95,782 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

2.60% 

 

 

 

 

 

2.44% 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2012

 

 

(restated)

 

 

Average

 

 

 

Average

 

 

balance

 

Interest

 

rate

 

 

 

 

(dollars in thousands)

 

 

Assets:

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

Loans net of unearned fees and costs **

 

$               461,308 

 

$          20,309 

 

4.40% 

Leases - bank qualified*

 

13,571 

 

826 

 

6.09% 

Investment securities-taxable

 

482,463 

 

13,378 

 

2.77% 

Investment securities-nontaxable*

 

103,900 

 

4,331 

 

4.17% 

Interest earning deposits at Federal Reserve Bank

 

974,762 

 

2,433 

 

0.25% 

Federal funds sold and securities sold under agreements to resell

 

425 

 

 

1.65% 

Net interest earning assets

 

2,036,429 

 

41,284 

 

2.03% 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

(1,971)

 

 

 

 

Assets held for sale

 

1,307,517 

 

57,376 

 

4.39% 

Other assets

 

116,283 

 

 

 

 

 

 

$            3,458,258 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand and interest checking

 

$            2,666,493 

 

$            7,691 

 

0.29% 

Savings and money market

 

455,860 

 

2,401 

 

0.53% 

Time

 

26,624 

 

356 

 

1.34% 

47


 

Total deposits

 

3,148,977 

 

10,448 

 

0.33% 

 

 

 

 

 

 

 

Repurchase agreements

 

22,508 

 

95 

 

0.42% 

Subordinated debt

 

13,401 

 

869 

 

6.48% 

Total deposits and interest bearing liabilities

 

3,184,886 

 

11,412 

 

0.36% 

 

 

 

 

 

 

 

Other liabilities

 

9,438 

 

 

 

 

Total liabilities

 

3,194,324 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

261,022 

 

 

 

 

 

 

$            3,455,346 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$          87,248 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

1,804 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$          85,444 

 

 

 

 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

2.58% 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 

 

In 2014, average interest-earning assets increased to $3.18 billion, an increase of $517.7 million, or 19.4%, from 2013. The increase reflected increased average balances of loans and leases of $278.7 million, or a 43.4% increase, and increased average balances of investment securities of $451.0 million, or a 42.6% increase.  Average demand and interest checking deposits increased $561.0 million, or a 17.6% increase as the prepaid card and card payment processing deposits grew as a result of clients added through marketing efforts.   Average savings and money market deposits decreased $134.0 million, or 26.8%. 

 

Volume and Rate Analysis.   The following table sets forth the changes in net interest income attributable to either changes in volume (average balances) or to changes in average rates from 2012 through 2014 on a tax equivalent basis.   The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014 versus 2013

 

2013 versus 2012

 

 

 

 

(restated)

 

 

Due to change in:

 

Due to change in:

 

 

Volume

 

Rate

 

Total

 

Volume

 

Rate

 

Total

 

 

(in thousands)

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable loans net of unearned discount

 

$           10,788 

 

$              (1,987)

 

$            8,801 

 

$             7,113 

 

$               (374)

 

$           6,739 

Bank qualified tax free leases net of

 

 

 

 

 

 

 

 

 

 

 

 

unearned discount

 

61 

 

(33)

 

28 

 

140 

 

(56)

 

84 

Investment securities-taxable

 

4,406 

 

257 

 

4,663 

 

4,548 

 

(1,927)

 

2,621 

Investment securities-nontaxable

 

8,128 

 

2,006 

 

10,134 

 

3,781 

 

(792)

 

2,989 

Interest earning deposits

 

(526)

 

(10)

 

(536)

 

(108)

 

 

(105)

Federal funds sold

 

(9)

 

46 

 

37 

 

419 

 

(1)

 

418 

Assets held for sale

 

(4,700)

 

(809)

 

(5,509)

 

(1,568)

 

(408)

 

(1,976)

Total interest earning assets

 

18,148 

 

(530)

 

17,618 

 

14,325 

 

(3,555)

 

10,770 

48


 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$             1,383 

 

$                 (137)

 

$            1,246 

 

$             1,498 

 

$            (1,338)

 

$              160 

Savings and money market

 

(576)

 

17 

 

(559)

 

279 

 

(547)

 

(268)

Time

 

(120)

 

34 

 

(86)

 

(106)

 

(68)

 

(174)

Total deposit interest expense

 

687 

 

(86)

 

601 

 

1,671 

 

(1,953)

 

(282)

Subordinated debt

 

 -

 

(70)

 

(70)

 

 -

 

(321)

 

(321)

Other borrowed funds

 

(3)

 

(1)

 

(4)

 

(15)

 

(26)

 

(41)

Total interest expense

 

684 

 

(157)

 

527 

 

1,656 

 

(2,300)

 

(644)

Net interest income:

 

$           17,464 

 

$                 (373)

 

$          17,091 

 

$           12,669 

 

$            (1,255)

 

$         11,414 

Provision for Loan and Lease Losses.   Our provision for loan and lease losses was $1.2 million for 2014, $355,000 for 2013, and $6.6 million for 2012.  Provisions are based on our evaluation of the adequacy of our allowance for loan and lease losses, particularly in light of current economic conditions.  That evaluation reflected the impact of the levels of charge-offs which totaled $1.5 million, $520,000 and $4.4 million respectively, in 2014, 2013 and 2012.  At December 31, 2014, our allowance for loan and lease losses amounted to $3.6 million or 0.42% of total loans.  We believe that our allowance is adequate to cover expected losses.  For more information about our provision and allowance for loan and lease losses and our loss experience see “Financial Condition —Allowance for Loan and Lease Losses” and “—Summary of Loan and Lease Loss Experience,” below.

Non-Interest Income.   Non-interest income was $85.0 million for 2014, compared to $82.1 million for 2013 and  $49.7 million for 2012 before other than temporary impairment on securities of $0, $20,000 and $202,000 in those respective years.  The $3.0 million, or 3.6%, increase in non-interest income in 2014 compared to 2013 reflected the $5.9 million  impact of net increases in transaction volumes and accounts on prepaid card fees.  Prepaid card fees increased 13.1%, to $51.3 million from $45.3 million in 2013.  Commercial loan sales income decreased  $4.7 million to $12.5 million. While the volume of loans sold increased significantly, spreads narrowed, resulting in the decrease.  In 2014, service fees on deposit accounts increased $1.4 million, or 27.4%, reflecting increased service charges on retirement accounts, and card payment processing fees increased $1.4 million, or 33.5% as a result of higher volumes of card payment processing and clearing house payments, or ACH, transactionsThe $32.6 million, or 65.2%, increase in non-interest income in 2013 compared to 2012 primarily reflected the $12.0 million impact of increases in transaction volume and accounts on prepaid card fees.  Prepaid card fees increased 36.1% to $45.3 million from $33.3 million in 2012.  Increases in commercial loan sales income of $15.3 million reflected the full year operation of the CMBS department which originates and sells loans into secondary securities markets; increases in service fees on deposit accounts of $1.4 million, or 40.3%, reflected an increased number of healthcare accounts; and increases in card payment processing fees of $1.1 million, or 35.9%, reflected higher volumes of card payment processing and ACH transactions.

 

Non-Interest ExpenseTotal non-interest expense in 2014 was $136.0 million, an increase of $34.2 million or 33.6% over the $101.8 million in 2013. The increase reflected $8.8 million of BSA and lookback consulting expenses.  Lookback expenses are being incurred to analyze historical transactions for potential BSA exceptions as required by the 2014 Consent Order.  Salaries and employee benefits amounted to $60.5 million in 2014, an increase of $8.3 million or 15.8% over the $52.2 million in 2013.  The increase reflected staff additions and related expense for BSA compliance, commercial loan sales and infrastructure. The increase included $1.2 million of supplemental executive retirement expense reflecting the release of new actuarial assumptions in October, 2014 and the former Chief Executive Officer’s retirement on December 31, 2014. The former Chief Executive Officer was the sole executive covered by a retirement plan of any type.  Depreciation and amortization increased $829,000 to $4.5 million, or 22.4%, from $3.7 million in 2013, which reflected additional leasehold improvements and equipment for staff additions and information technology upgrades to existing equipment.  Rent and occupancy increased $836,000 to $4.7 million, or 21.7%, from $3.9 million in 2013, which reflected additional main office operations and compliance space and new Florida office space for BSA staff.  Data processing expense increased to $13.2 million, an increase of approximately $2.3 million or 21.3% from $10.9 million in 2013, reflecting increased account and transaction volume.  Printing and supplies increased $631,000 or 39.5% to $2.2 million from $1.6 million in 2013.  Professional fees, primarily audit related, decreased $14,000 or 1.0% to $1.4 million from $1.4 million in 2013.  Legal expense increased $54,000, or 2.6%, to $2.1 million from $2.0 million in 2013. FDIC insurance increased $3.1 million or 84.8% to $6.8 million from $3.7 million for 2013. The increase resulted primarily from a higher assessment rate and increased average deposits.  In December, 2014, the FDIC issued new guidance which reclassified the Bank’s prepaid card deposits and most of its other deposits as brokered, which resulted in a 10 basis point increase in the fourth quarter assessment, or approximately a $1.0 million increase in FDIC expense for that quarter.  A reduction in the assessment rate will depend on future FDIC evaluations of the Bank.  Software expense increased $1.4 million or 38.1% to $4.9 million from $3.5 million in 2013.    The increase included software for prepaid cards

49


 

and for information technology to improve efficiency and scalability.  Insurance expense increased $389,000 or 29.7% to $1.7 million from $1.3 million in 2013.  The increase reflected the impact of additional coverage for prepaid cards.  Telecom and information technology network communications increased $1.0 million or 70.7% to $2.5 million from $1.5 million in 2013 reflecting costs associated with the new Florida location for BSA staff and increased costs for European IT operations.  Securitization and servicing expense increased $1.1 million or 140.3% to $1.8 million from $767,000 in 2013.  The increase primarily reflects an increased volume of loans sold in 2014 compared to the prior year.  Consulting increased $1.8 million or 103.1% to $3.5 million from $1.7 million in 2013.  The increase reflected increased information technology costs and CMBS consulting fees.  Other non-interest expense increased $3.6 million or 29.3% to $16.0 million from $12.4 million in 2013.  The $3.6 million increase primarily reflected increases as follows: $500,000 for a legal settlement, $400,000 in lodging,  $495,000 in prepaid card losses, $185,000 in association fees, $176,000 in postage, $167,000 in recruitment fees and $135,000 in correspondent bank fees.

 

 Total non-interest expense in 2013 was $101.8 million, an increase of $21.6 million or 27.0% over the $80.2 million in 2012. Salaries and employee benefits amounted to $52.2 million in 2013, an increase of $12.3 million or 30.9% over the $39.9 million in 2012.  The increase reflected staff additions to our prepaid card, regulatory compliance, commercial loan sales departments and other infrastructure.  The prepaid card staff additions reflected staff acquired in December 2012 in connection with European operations and regulatory compliance staff additions reflected personnel for third party risk management and staff for compliance with various regulations including BSA.  Commercial loan sales staff increases reflected additional originators.  Depreciation and amortization increased $932,000 to $3.7 million, or 33.7%, from $2.8 million in 2012, which reflected additional leasehold improvements and equipment for staff additions and information technology upgrades to existing equipment.  Rent and occupancy increased $833,000 to $3.9 million, or 27.5%, from $3.0 million in 2012, which reflected additional space to accommodate growth in our prepaid card and compliance staff.  Data processing expense increased to $10.9 million, an increase of approximately $950,000 or 9.6% from $9.9 million in 2012, reflecting increases in the number of deposit accounts and related transaction volume.  Printing and supplies decreased $39,000 or 2.4% to $1.6 million from $1.6 million in 2012.  Professional fees, primarily audit related, increased $296,000 or 25.9% to $1.4 million from $1.1 million in 2012.  The increase reflected additional audit expense for data security.  Legal expense increased $337,000, or 19.7%, to $2.0 million from $1.7 million in 2012.  Legal expense continued to reflect additional expense for European operations, which included obtaining licenses in various countries in the European Union.  FDIC insurance increased $510,000 or 16.1% to $3.7 million from $3.2 million for 2012.  The increase resulted primarily from growth in average assets against which the assessment rate is applied.  Software expense increased $1.2 million or 51.1% to $3.6 million from $2.4 million in 2012.  The increase included software for prepaid cards, SBA loan processing, increased security, storage capacity and software used for deposit products and increased amortization costs for internally developed software related to our affinity programs.  Insurance increased $335,000 or 34.3% to $1.3 million from $976,000.  The increase reflected additional coverages for prepaid cards.  Telecom and information technology network communications increased $302,000 or 25.6% to $1.5 million from $1.2 million reflecting costs associated with additional infrastructure.  Securitization and servicing increased $669,000 to $767,000 from $98,000.  The increase reflected the full year operations of the commercial loan sales department and the resulting increased volume of loans sold.  Consulting increased $577,000 or 51.4% to $1.7 million from $1.1 million.  The increase reflected consulting expenses in connection with the commercial loan sales departmentOther non-interest expense increased $2.2 million or 22.1% to $12.4 million from $10.2 million in 2012.  The $2.2 million increase primarily reflected increases as follows: $697,000 in travel, which includes business development,  $349,000 in marketing, $255,000 in check card losses, $263,000 related to our European operations and $203,000 in correspondent bank fees. 

Income Tax Benefit and Expense

Income tax benefit for continuing operations was $14.5  million for 2014 versus $6.8 million of expense for 2013 and a benefit of $3.5 million for 2012.  The tax benefit in 2014 primarily resulted from  the reversal of the valuation allowances.  The effective tax rate for 2013 was 33.3% compared to a 37.7% benefit rate in 2012. The effective tax rate in 2013 reflected the impact of higher amounts of tax exempt municipal securities income.

 

 

Liquidity and Capital Resources

50


 

Liquidity defines our ability to generate funds to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis.  We invest the funds we do not need for daily operations primarily in overnight federal funds or in our interest-bearing account at the Federal Reserve.

Our primary source of funds has been cash inflows from net increases in deposits, which were $348.8 million in 2014 and $959.8 million in 2013.   Our deposit growth in these years has exceeded our ability to deploy the funds in prudent loans, resulting in relatively high levels of cash and cash equivalents which we discuss below.  Loan repayments, also a source of funds, were exceeded by new loan disbursements during 2014.  While we do not have a traditional branch system, we believe that our core deposits, which include our demand, interest checking, savings and money market accounts, have similar characteristics to those of a bank with a branch system.  We seek to set rates on our deposits at levels competitive with the rates offered in our market; however we do not seek to compete principally on rate.  The focus of our business model is to identify affinity groups that control significant amounts of deposits as part of their business.  A key component to the model is that the affinity group deposits are both stable and “sticky,” in the sense that they do not react to fluctuations in the market.  However, certain components of the deposits do experience seasonality, creating greater excess liquidity at certain times in 2014. We have been reducing excess liquidity as a result of low overnight rates.  Accordingly, excess liquidity maintained as interest earning deposits at the Federal Reserve  has decreased.  These reductions resulted from deployment of overnight funds into investments and loans and exiting less profitable relationships.

 

 

Historically, we have also used sources outside of our deposit products to fund our loan growth, including Federal Home Loan Bank (FHLB) advances, repurchase agreements, and institutional (brokered) certificates of deposit as a significant funding source.  We have shifted to primarily using deposits for our funding as a result of our deposit growth. While the FDIC now classifies prepaid and other deposits obtained with the cooperation of third parties as brokered, they continue to acknowledge that such deposits are stable and low cost.  We still maintain our secured borrowing lines with the Federal Home Loan Bank of Pittsburgh and other unsecured lines from our correspondent banks, which include Atlantic Central Bankers Bank and PNC Bank.  We have a $355.8 million line of credit with the Federal Home Loan Bank and $34.0 million in additional lines of credit with correspondent banks.  As of December 31, 2014, we had no amounts outstanding on our borrowing lines.  We expect to continue to maintain our facility with the Federal Home Loan Bank and our correspondent banks. At no time during the year did we experience any difficulties accessing these lines.  We actively monitor our positions and contingent funding sources on a daily basis. 

 

In 2011, we adopted a common stock repurchase program.  Shares repurchased will reduce the amount of shares outstanding.  Repurchased shares may be reissued for various corporate purposes.  As of December 31, 2014, we had repurchased 100,000 shares of a total 750,000 maximum number of shares authorized by the Board of Directors.  The 100,000 shares were repurchased in 2011 at an average cost of $8.66.  We did not repurchase any shares in 2014, 2013 and 2012. 

 

As a result of the discontinuance of our commercial loan operations we have received and expect to continue to receive during 2015, substantial cash proceeds.  We currently anticipate that these proceeds will be deployed into investment securities.   We have begun the process of selling our portfolio and have sold loans with a book value of approximately $342.2 million, of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations. The $342.2 million of loans sold had a face value of approximately $417.1 million. These sales were comprised of the following:  Loans with an approximate face and book value of $267.6 million and $192.7 million, respectively, were sold in the fourth quarter of 2014 to a private securitization entity. The securitization is managed by an independent investor, which contributed $16 million of equity to that entity.  The balance of the sale was financed by the Bank and is reflected on the consolidated balance sheet as investment in unconsolidated subsidiary.  After $74.9 million of loan charges  reflected in the difference between the face value and book value of the loans sold to the securitization, we recognized a gain on sale of $17.0 million.  In the second quarter of 2015, an additional $149.6 million of loans were sold at a gain of approximately $2.2 million.

 

Included in our cash and cash-equivalents at December 31, 2014, were $1.06 billion of interest-earning deposits which primarily consisted of deposits with the Federal Reserve Bank.  Traditionally, we sell our excess funds overnight to other financial institutions, with which we have correspondent relationships, to obtain better returns.  As federal funds rates became comparable to the 25 basis point level offered by the Federal Reserve Bank, we adjusted our strategy to retain our excess funds at the Federal Reserve, which also offers the full guarantee of the federal government.  In addition, we deployed a portion of our excess funds to various securities investments to generate better returns.

 

Funding was directed primarily at cash outflows required for purchases of investment securities (net of repayments), which were $232.6 million in 2014, $596.5 million in 2013 and $291.3 million in 2012 and net loans of $240.0 million in 2014, $134.1

51


 

million in 2013 and $174.1 million in 2012.   At December 31, 2014, we had outstanding commitments to fund loans, including unused lines of credit, of $709.1 million. 

 

To manage excess cash balances maintained at the Federal Reserve, the Bank has exited and will likely continue to exit less profitable deposit relationships.  We have historically down streamed the majority of the capital funding we have generated from common stock offerings to the Bank. The holding company has, as of August 2015 in excess of $10 million in available cash.  We have historically not paid dividends and have no plans to do so in the foreseeable future. In addition, as a result of a supervisory letter, Federal Reserve approval is required for any dividend from us, and FDIC approval is required for any dividend from the Bank.  See Item 1, “Business—Regulation under Banking Law,”  and Item 1A, “Risk Factors-Risks Relating to Our Business-The entry into the 2012 and 2014 Consent Orders, as amended, and a supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank”. The Federal Reserve approved the payment of the interest on the Company’s trust preferred securities due September 15, 2015.  Future payments are subject to future approval by the Federal Reserve.

 

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

 

We must comply with capital adequacy guidelines issued by the FDIC.  A bank must, in general, have a Tier 1 leverage ratio of 5.0%, a ratio of Tier I capital to risk-weighted assets of 6.0% and a ratio of total capital to risk-weighted assets of 10.0% in order to be considered “well capitalized.” 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 December 31, 2014, 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

 

 

to average

 

to risk-weighted

 

to risk-weighted

 

 

assets ratio

 

assets ratio

 

assets ratio

 

 

 

 

 

 

 

As of December 31, 2014

 

 

 

 

 

 

The Bancorp

 

7.07% 

 

11.54% 

 

11.67% 

The Bancorp Bank

 

6.46% 

 

10.46% 

 

10.59% 

"Well capitalized" institution (under FDIC regulations)

 

5.00% 

 

6.00% 

 

10.00% 

 

 

 

 

 

 

 

As of December 31, 2013 (restated)

 

 

 

 

 

 

The Bancorp

 

6.09% 

 

10.55% 

 

11.87% 

The Bancorp Bank

 

4.17% 

 

7.22% 

 

8.53% 

The Bancorp Bank pro forma (1)

 

5.58% 

 

9.62% 

 

10.92% 

"Well capitalized" institution (under FDIC regulations)

 

5.00% 

   

6.00% 

   

10.00% 

 

 

 

 

 

 

 

 

(1) The Company downstreamed $58.0 million in capital to the Bank in 2014. If charges related to the restatement had occurred in 2013 the Company would have made the capital injection at that time.  Based on the pro forma calculations the Bank would have maintained its well capitalized status at December 31, 2013.

The liquidity of the Bancorp, Inc. considered as an entity apart from the Bank, depends almost entirely upon the ability of the Bank to pay dividends to The Bancorp, Inc., which is subject to regulatory constraints.  For a discussion of these constraints, see Item

52


 

1, “Business – Federal Regulation Regulatory Restrictions on Dividends” and “Delaware Regulation: Limitation on Dividends.”  During 2014, 2013 and 2012, no dividends were paid and these regulatory constraints had no material effect on The Bancorp, Inc.

 

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.

 

As a financial institution, potential interest rate volatility is a primary component of our market risk.  Fluctuations in interest rates will ultimately impact the level of our earnings and the market value of all of our interest-earning assets, other than those with short-term maturities.  We do not own any trading assets.  We use hedging transactions only for commercial loans originated for sale into secondary securities markets. 

 

We have adopted policies designed to stabilize net interest income and preserve capital over a broad range of interest rate movements.  To effectively administer the policies and to monitor our exposure to fluctuations in interest rates, we maintain an asset/liability committee, consisting of the Bank’s Chief Executive Officer, Chief Accounting Officer, Chief Financial Officer and Chief Credit Officer. This committee meets quarterly to review our financial results, develop strategies to implement the policies and to respond to market conditions.  The primary goal of our policies is to optimize margin and manage interest rate risk, subject to overall policy constraints for prudent management of interest rate risk.

 

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, all else equal.   During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely.

 

The following table sets forth the estimated maturity or repricing structure of our interest-earning assets and interest-bearing liabilities at December 31, 2014.   Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability.  Loans currently at their interest rate floors are classified at their maturity date, though they are tied to variable interest rates.  The majority of demand and interest-bearing demand deposits and savings deposits are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates.  We estimate the repricing characteristics of these deposits based on historical performance, past experience, judgmental predictions and other deposit behavior assumptionsHowever, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons.  Additionally, although non-interest bearing demand accounts are not paid interest we estimate certain of the balances will reprice as a result of the fees that are paid to the affinity groups which are based upon a rate index and therefore included in interest expense.  The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends.  The table does not necessarily indicate the impact of general interest rate movements on our

53


 

net interest income because the repricing and related behavior 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

 

$             41,736 

 

$                    - 

 

$           30,933 

 

$            4,743 

 

$        139,668 

Loans net of deferred loan costs

 

575,039 

 

52,144 

 

124,445 

 

118,216 

 

4,749 

Investment securities

 

282,014 

 

212,546 

 

346,743 

 

230,939 

 

515,162 

Interest earning deposits

 

1,059,320 

 

 -

 

 -

 

 -

 

 -

Securities purchased under agreements to resell

 

46,250 

 

 -

 

 -

 

 -

 

 -

Total interest earning assets

 

2,004,359 

 

264,690 

 

502,121 

 

353,898 

 

659,579 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

2,705,016 

 

197,047 

 

197,047 

 

 -

 

 -

Savings and money market

 

82,700 

 

165,398 

 

82,700 

 

 -

 

 -

Time deposits

 

 -

 

1,400 

 

 -

 

 -

 

 -

Securities sold under agreements to repurchase

 

19,414 

 

 -

 

 -

 

 -

 

 -

Subordinated debenture

 

13,401 

 

 -

 

 -

 

 -

 

 -

Total interest bearing liabilities

 

2,820,531 

 

363,845 

 

279,747 

 

 -

 

 -

Gap

 

$          (816,172)

 

$         (99,155)

 

$         222,374 

 

$        353,898 

 

$        659,579 

Cumulative gap

 

$          (816,172)

 

$       (915,327)

 

$       (692,953)

 

$      (339,055)

 

$        320,524 

Gap to assets ratio

 

-16%

 

-2%

 

4%

 

7%

 

13%

Cumulative gap to assets ratio

 

-16%

 

-18%

 

-14%

 

-7%

 

6%

 

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

 

Because of the limitations in the gap analysis discussed above, we believe that interest sensitivity modeling may more accurately reflect the effects of our exposure to changes in interest rates, notwithstanding its own limitations.   Net interest income simulation considers the relative sensitivities of the consolidated balance sheet including the effects of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits.  As such, net interest income simulation is designed to address the probability of interest rate changes and the behavioral response of the consolidated balance sheet to those changes.  Market Value of Portfolio Equity, or MVPE, represents the fair value of the net present value of assets, liabilities and off-balance sheet items.

 

We believe that the assumptions utilized in evaluating our estimated net interest income are reasonable; however, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments as well as the estimated effect of changes in interest rates on estimated net interest income could vary substantially if different assumptions are used or actual experience differs from presumed behavior of various deposit and loan categories.  The following table shows the effects of interest rate shocks on our MVPE and net interest income.  Rate shocks assume that current interest rates change immediately and sustain parallel shifts.  For interest rate increases or decreases of 100 and 200 basis points, our policy includes a guideline that our MVPE ratio should not decrease more than 10% and 15%, respectively, and that net interest income should not decrease more than 10% and 15%, respectively.  While the percentage change of 17.87% in the down 200 basis point scenario, exceeds the 15% guideline, the fact that short term rates are approximately .25% implies that a 200 basis point decrease is not currently realistic.  As illustrated in the following table, we complied with our asset/liability policy at December 31, 2014.  While our modeling suggests an increase in market rates will have a

54


 

positive impact on margin (as shown in the table below), the amount of such increase cannot be determined, and there can be no assurance any increase will be realized.    

 

 

 

 

 

 

 

 

 

 

 

 

 

Net portfolio value at

 

 

 

 

December 31, 2014

 

Net interest income

 

 

 

 

Percentage

 

 

 

Percentage

Rate scenario

 

Amount

 

change

 

Amount

 

change

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

+200 basis points

 

$        623,422 

 

-0.75%

 

$           90,853 

 

1.76% 

+100 basis points

 

626,028 

 

-0.34%

 

89,955 

 

0.75% 

Flat rate

 

628,154 

 

0.00% 

 

89,282 

 

0.00% 

-100 basis points

 

584,317 

 

-6.98%

 

91,712 

 

2.72% 

-200 basis points

 

515,896 

 

-17.87%

 

83,679 

 

-6.28%

 

If we should experience a mismatch in our desired gap ranges or an excessive decline in our MVPE subsequent to an immediate and sustained change in interest rate, we have a number of options available to remedy such a mismatch.  We could restructure our investment portfolio through the sale or purchase of securities with more favorable repricing attributes.  We could also emphasize loan products with appropriate maturities or repricing attributes, or we could emphasize deposits or obtain borrowings with desired maturities.

 

Historically, we have used variable rate commercial loans as the principal means of limiting interest rate risk. Both the Bank’s SBLOC and SBA loans are primarily variable rate.  We continue to evaluate market conditions and may change our current gap strategy in response to changes in those conditions.

Financial Condition

General.  Our total assets at December 31, 2014 were $4.99 billion, of which our total loans and loans held for sale  from continuing operations were $1.09 billion  and our assets held for sale (from discontinued operations) were $887.9 million, $867.4 million of which were loans.   At December 31, 2013 our total assets were $4.60 billion, of which our total loans and loans held for sale  from continuing operations were $705.9 million and our assets held for sale (from discontinued operations) were $1.18 billion, $1.18 billion of which were loans. Investment securities available for sale increased to $1.49 billion at December 31, 2014 from $1.25 billion at December 31, 2013.  Most of the increase in total assets at December 31, 2014 reflected increases in both loans from continuing operations and investment securities.

Interest earning deposits and federal funds sold.  At December 31, 2014, we had a total of $1.06 billion of interest earning deposits, comprised primarily of balances at the Federal Reserve Bank, which pays interest on such balances.

Investment portfolio. The Financial Accounting Standards Board Accounting Standards Codification (ASC) 320, Investments—Debt and Equity Securities, requires that debt and equity securities classified as available-for-sale be reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Accordingly, marking an available-for-sale portfolio to market results in fluctuations in the level of shareholders’ equity and equity-related financial ratios as market interest rates and market demand for such securities cause the fair value of fixed-rate securities to fluctuate.  Debt securities which we have the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost.

For detailed information on the composition and maturity distribution of our investment portfolio, see Note E to the Consolidated Financial Statements.  Total investment securities increased to $1.59 billion on December 31, 2014, an increase of $237.1 million or 17.6% from a year earlier.  The increase in investment securities was primarily a result of increased purchases of municipal and residential mortgage-backed securities.

55


 

Other securities, included in the held-to-maturity classification at December 31, 2014, 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 $17.8 million of other debt securities - single issuers is comprised of the following: (i) amortized cost of the two single issuer trust preferred securities of $10.8 million, of which one security for $1.9 million was issued by a bank and one security totaling $8.9 million was issued by an insurance company; and (ii) book value of a bank senior note of $7.0 million. 

 

A total of $75.9 million of other debt securities – pooled is comprised of the following: (i) one pooled trust preferred security for $174,000, which was collateralized by bank trust preferred securities; and (ii) book value of three securities consisting of diversified portfolios of corporate securities of $75.7 million.

 

The following table provides additional information related to our single issuer trust preferred securities as of December 31, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

Security A

 

$        1,897 

 

$          2,000 

 

$              103 

 

Not rated

Security B

 

8,964 

 

5,144 

 

(3,820)

 

Not rated

 

 

 

 

 

 

 

 

 

Class: All of the above are trust preferred securities.

 

 

 

 

 

 

 

 

 

The following table provides additional information related to our pooled trust preferred securities as of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pooled issue

 

Class

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

 

Excess subordination

Pool A (7 performing issuers)

 

Mezzanine

 

$             174 

 

$              260 

 

$                   86 

 

CAA3

 

*

 

* There is no excess subordination for these securities.

 

 

 

 

 

 

 

 

 

 

 

 

Under the accounting guidance related to the recognition of other-than-temporary impairment charges on debt securities, an impairment on a debt security is deemed to be other-than-temporary if it meets either of 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 losses in the consolidated statement of operations 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 losses in the consolidated statement of operations, 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 losses on the consolidated income statement becomes the security’s new cost basis.  As prescribed by accounting standards, for 2014, 2013 and 2012, respectively, we recognized other-than-temporary impairment charges of $0, $20,000 and $202,000 related to trust preferred securities classified in our held-to-maturity portfolio. 

The following table presents the book value and the approximate fair value for each major category of our investment securities portfolio.  At December 31, 2014 and 2013, our investments were categorized as either available-for-sale or held-to-maturity (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

Held-to-maturity

 

December 31, 2014

 

December 31, 2014

 

Amortized

 

Fair

 

Amortized

 

Fair

 

cost

 

value

 

cost

 

value

56


 

U.S. Government agency securities

$              16,519 

 

$             16,561 

 

$                    - 

 

$                    - 

Federally insured student loan securities

125,789 

 

126,012 

 

 -

 

 -

Tax-exempt obligations of states and political subdivisions

535,622 

 

551,269 

 

 -

 

 -

Taxable obligations of states and political subdivisions

58,868 

 

61,379 

 

 -

 

 -

Residential mortgage-backed securities

419,503 

 

422,129 

 

 -

 

 -

Commercial mortgage-backed securities

123,519 

 

123,239 

 

 -

 

 -

Foreign debt securities

67,094 

 

66,878 

 

 -

 

 -

Corporate and other debt securities

126,610 

 

126,172 

 

93,765 

 

91,914 

 

$         1,473,524 

 

$        1,493,639 

 

$           93,765 

 

$           91,914 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

Held-to-maturity

 

December 31, 2013

 

December 31, 2013

 

Amortized

 

Fair

 

Amortized

 

Fair

 

cost

 

value

 

cost

 

value

U.S. Government agency securities

$              10,680 

 

$             10,726 

 

$                    - 

 

$                    - 

Federally insured student loan securities

147,717 

 

147,573 

 

 -

 

 -

Tax-exempt obligations of states and political subdivisions

378,180 

 

378,950 

 

 -

 

 -

Taxable obligations of states and political subdivisions

78,638 

 

79,168 

 

 -

 

 -

Residential mortgage-backed securities

323,199 

 

322,774 

 

 -

 

 -

Commercial mortgage-backed securities

118,838 

 

120,347 

 

 -

 

 -

Foreign debt securities

72,729 

 

72,202 

 

 -

 

 -

Corporate and other debt securities

121,281 

 

121,377 

 

97,205 

 

95,030 

 

$         1,251,262 

 

$        1,253,117 

 

$           97,205 

 

$           95,030 

 

Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $1.0 million at December 31, 2014 and $3.2 million at December 31, 2013.    

 

Investment securities with a carrying value of $25.7 million at December 31, 2014 and $29.1 million at December 31, 2013, were pledged as collateral to secure securities sold under repurchase agreements as required or permitted by law.

 

The following tables show the contractual maturity distribution and the weighted average yields of our investment securities portfolio as of December 31, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After

 

 

 

After

 

 

 

 

 

 

 

 

 

Zero

 

 

 

one to

 

 

 

five to

 

 

 

Over

 

 

 

 

 

to one

 

Average

 

five

 

Average

 

ten

 

Average

 

ten

 

Average

 

 

Available-for-sale

year

 

yield

 

years

 

yield

 

years

 

yield

 

years

 

yield

 

Total

U.S. Government agency securities

$                      - 

 

-

 

$                    - 

 

-

 

$           2,140 

 

3.73% 

 

$          14,421 

 

2.02% 

 

$             16,561 

Federally insured student loan securities

 -

 

-

 

 -

 

-

 

75,302 

 

1.37% 

 

50,710 

 

1.21% 

 

126,012 

Tax-exempt obligations of states and political subdivisions*

36,934 

 

0.68% 

 

99,633 

 

1.18% 

 

214,070 

 

2.61% 

 

200,632 

 

3.45% 

 

551,269 

Taxable obligations of states and political subdivisions

12,409 

 

2.09% 

 

18,949 

 

1.18% 

 

5,322 

 

4.64% 

 

24,699 

 

5.48% 

 

61,379 

Residential mortgage-backed securities

3,244 

 

3.30% 

 

4,562 

 

2.02% 

 

27,317 

 

2.63% 

 

387,006 

 

1.82% 

 

422,129 

Commercial mortgage-backed securities

39,742 

 

1.27% 

 

52,898 

 

2.02% 

 

 -

 

-

 

30,599 

 

4.01% 

 

123,239 

Foreign debt securities

3,074 

 

1.89% 

 

55,687 

 

1.91% 

 

6,971 

 

2.65% 

 

1,146 

 

5.55% 

 

66,878 

Corporate and other debt securities

9,425 

 

2.61% 

 

76,507 

 

2.23% 

 

39,343 

 

1.95% 

 

897 

 

1.09% 

 

126,172 

Total

$           104,828 

 

 

 

$         308,236 

 

 

 

$       370,465 

 

 

 

$        710,110 

 

 

 

$        1,493,639 

57


 

Weighted average yield

 

 

1.61% 

 

 

 

1.60% 

 

 

 

2.35% 

 

 

 

2.19% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*  The yield shown, if adjusted to its taxable equivalent, would approximately 1.05%, 1.82%, 4.02% and 5.31% for zero to one year, one to five years, five to ten years and over ten years, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After

 

 

 

After

 

 

 

 

 

 

 

 

 

Zero

 

 

 

one to

 

 

 

five to

 

 

 

Over

 

 

 

 

 

to one

 

Average

 

five

 

Average

 

ten

 

Average

 

ten

 

Average

 

 

Held-to-maturity

year

 

yield

 

years

 

yield

 

years

 

yield

 

years

 

yield

 

Total

Corporate and other debt securities

$                      - 

 

-

 

$              7,048 

 

3.22% 

 

$                  - 

 

-

 

$          86,717 

 

1.57% 

 

$             93,765 

Total

$                      - 

 

 

 

$              7,048 

 

 

 

$                  - 

 

 

 

$          86,717 

 

 

 

$             93,765 

Weighted average yield

 

 

 

 

 

 

3.22% 

 

 

 

 

 

 

 

1.57% 

 

 

 

Loan Portfolio. We have developed a detailed credit policy for our lending activities and we utilize loan committees to oversee the lending function.  SBLOC and other consumer loans, SBA, Leases and CMBS each have their own loan committee.  The Chief Executive Officer, Chief Credit Officer and the Bank’s Senior Credit Officer serve on all committees.  Each committee also includes lenders from that particular type of specialty lending.  The Chief Credit Officer is responsible for both regulatory compliance and adherence to our internal credit policy.  Key committee members have lengthy experience and certain of them have had similar positions at substantially larger institutions.

We originate substantially all of our portfolio loans, although from time to time we purchase lease pools. If a proposed loan should exceed our lending limit, we would sell a participation in the loan to another financial institution.  The following table summarizes our loan portfolio, not including loans held for sale, by loan category for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

 

 

 

 

 

 

 

 

SBA non real estate

$            62,425 

 

$             45,875 

 

$             50,059 

 

$             16,829 

 

$              2,159 

SBA commercial mortgage

82,317 

 

69,730 

 

30,824 

 

10,338 

 

 -

SBA construction

20,392 

 

51 

 

7,411 

 

4,118 

 

 -

Total SBA loans

165,134 

 

115,656 

 

88,294 

 

31,285 

 

2,159 

Direct lease financing

194,464 

 

175,610 

 

156,697 

 

129,682 

 

103,289 

SBLOC

421,862 

 

293,109 

 

235,184 

 

144,668 

 

127,487 

Other specialty lending

48,625 

 

1,588 

 

1,212 

 

1,165 

 

1,091 

Other consumer loans

36,168 

 

45,152 

 

50,893 

 

57,411 

 

58,520 

 

866,253 

 

631,115 

 

532,280 

 

364,211 

 

292,546 

Unamortized loan fees and costs

8,340 

 

4,886 

 

2,861 

 

1,184 

 

315 

Total loans, net of deferred loan costs

$          874,593 

 

$           636,001 

 

$           535,141 

 

$           365,395 

 

$          292,861 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents selected loan categories by maturity for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Within

 

One to five

 

After

 

 

 

 

one year

 

years

 

five years

 

Total

 

 

(in thousands)

SBA non real estate

 

$                                   58 

 

$                        4,975 

 

$                     57,392 

 

$                      62,425 

SBA commercial mortgage

 

5,022 

 

 -

 

77,295 

 

82,317 

58


 

SBA construction

 

4,279 

 

1,481 

 

14,632 

 

20,392 

 

 

$                              9,359 

 

$                        6,456 

 

$                   149,319 

 

$                    165,134 

 

 

 

 

 

 

 

 

 

Loans at fixed rates

 

 

 

$                                - 

 

$                               - 

 

$                                - 

Loans at variable rates

 

 

 

6,456 

 

149,319 

 

155,775 

    Total

 

 

 

$                        6,456 

 

$                   149,319 

 

$                    155,775 

 

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

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

The following table presents delinquencies by type of loan for December 31, 2014 and 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

30-59 Days past due

 

60-89 Days past due

 

Greater than 90 days

 

Non accrual

 

Total past due

 

Current

 

Total loans

SBA non real estate

 

$                  - 

 

$                  - 

 

$                  - 

 

$                  - 

 

$                  - 

 

$        62,425 

 

$        62,425 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

82,317 

 

82,317 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,392 

 

20,392 

Direct lease financing

 

5,083 

 

1,832 

 

149 

 

 -

 

7,064 

 

187,400 

 

194,464 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

421,862 

 

421,862 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

48,625 

 

48,625 

59


 

Consumer - other

 

 

 

 

 -

 

 -

 

 

8,654 

 

8,663 

Consumer - home equity

 

 -

 

457 

 

 -

 

1,907 

 

2,364 

 

25,141 

 

27,505 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,340 

 

8,340 

 

 

$          5,092 

 

$          2,289 

 

$              149 

 

$          1,907 

 

$          9,437 

 

$      865,156 

 

$      874,593 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$                  - 

 

$                  - 

 

$                  - 

 

$             168 

 

$             168 

 

$        45,707 

 

$        45,875 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

69,730 

 

69,730 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

51 

 

51 

Direct lease financing

 

3,427 

 

1,293 

 

110 

 

 -

 

4,830 

 

170,780 

 

175,610 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

293,109 

 

293,109 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,588 

 

1,588 

Consumer - other

 

425 

 

 -

 

 -

 

1,356 

 

1,781 

 

8,793 

 

10,574 

Consumer - home equity

 

18 

 

 -

 

 -

 

 -

 

18 

 

34,560 

 

34,578 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

4,886 

 

4,886 

 

 

$          3,870 

 

$          1,293 

 

$              110 

 

$          1,524 

 

$          6,797 

 

$      629,204 

 

$      636,001 

 

Although we consider our allowance for loan and lease losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions, our ongoing loss experience and that of our peers, changes in management’s assumptions as to future delinquencies, recoveries and losses, deterioration of specific credits and management’s intent with regard to the disposition of loans and leases.

 

The following table presents an allocation of the allowance for loan and lease losses among the types of loans or leases in our portfolio at December 31, 2014, 2013, 2012, 2011 and 2010  (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

December 31, 2012

 

 

 

 

 

 

(restated)

 

(restated)

 

 

 

 

% Loan

 

 

 

% Loan

 

 

 

% Loan

 

 

 

 

type to

 

 

 

type to

 

 

 

type to

 

 

Allowance

 

total loans

 

Allowance

 

total loans

 

Allowance

 

total loans

SBA non real estate

 

$               385 

 

7.21% 

 

$               419 

 

7.27% 

 

$               193 

 

9.40% 

SBA commercial mortgage

 

461 

 

9.50% 

 

496 

 

11.05% 

 

104 

 

5.79% 

SBA construction

 

114 

 

2.35% 

 

 -

 

0.01% 

 

42 

 

1.39% 

Direct lease financing

 

836 

 

22.45% 

 

311 

 

27.83% 

 

239 

 

29.44% 

SBLOC

 

562 

 

48.70% 

 

293 

 

46.44% 

 

236 

 

44.18% 

Other specialty lending

 

66 

 

5.61% 

 

 

0.25% 

 

 -

 

0.23% 

Consumer loans

 

1,181 

 

4.18% 

 

2,361 

 

7.15% 

 

3,171 

 

9.57% 

Unallocated

 

33 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

$            3,638 

 

100.00% 

 

$            3,881 

 

100.00% 

 

$            3,985 

 

100.00% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

December 31, 2010

 

 

 

 

(restated)

 

(restated)

 

 

 

 

 

 

 

 

% Loan

 

 

 

% Loan

 

 

 

 

 

 

 

 

type to

 

 

 

type to

 

 

 

 

 

 

Allowance

 

total loans

 

Allowance

 

total loans

 

 

 

 

SBA non real estate

 

$                 54 

 

4.62% 

 

$                   5 

 

0.74% 

 

 

 

 

SBA commercial mortgage

 

43 

 

2.84% 

 

 -

 

0.00% 

 

 

 

 

SBA construction

 

 

1.13% 

 

 -

 

0.00% 

 

 

 

 

Direct lease financing

 

256 

 

35.61% 

 

164 

 

35.31% 

 

 

 

 

60


 

SBLOC

 

73 

 

39.72% 

 

81 

 

43.59% 

 

 

 

 

Other specialty lending

 

 -

 

0.32% 

 

 -

 

0.37% 

 

 

 

 

Consumer loans

 

1,273 

 

15.77% 

 

1,132 

 

20.00% 

 

 

 

 

Unallocated

 

 -

 

 -

 

 -

 

 -

 

 

 

 

 

 

$            1,707 

 

100.00% 

 

$            1,382 

 

100.00% 

 

 

 

 

 

Summary of Loan and Lease Loss Experience.   The following tables summarize our credit loss experience for each of the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

SBA commercial mortgage

 

SBA construction

 

Direct lease financing

 

SBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance (restated)

 

$               419 

 

$               496 

 

$                   - 

 

$               311 

 

$               293 

 

$                   1 

 

$            2,361 

 

$                   - 

 

$            3,881 

Charge-offs

 

(307)

 

 -

 

 -

 

(323)

 

(3)

 

 -

 

(871)

 

 -

 

(1,504)

Recoveries

 

12 

 

 -

 

 -

 

25 

 

 -

 

 -

 

22 

 

 -

 

59 

Provision (credit)

 

261 

 

(35)

 

114 

 

823 

 

272 

 

65 

 

(331)

 

33 

 

1,202 

Ending balance

 

$               385 

 

$               461 

 

$               114 

 

$               836 

 

$               562 

 

$                 66 

 

$            1,181 

 

$                 33 

 

$            3,638 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                 40 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$               271 

 

$                   - 

 

$               311 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$               345 

 

$               461 

 

$               114 

 

$               836 

 

$               562 

 

$                 66 

 

$               910 

 

$                 33 

 

$            3,327 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$          62,425 

 

$          82,317 

 

$          20,392 

 

$        194,464 

 

$        421,862 

 

$          48,625 

 

$          36,168 

 

$            8,340 

 

$        874,593 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$               197 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$            2,253 

 

$                   - 

 

$            2,450 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$          62,228 

 

$          82,317 

 

$          20,392 

 

$        194,464 

 

$        421,862 

 

$          48,625 

 

$          33,915 

 

$            8,340 

 

$        872,143 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$               193 

 

$               104 

 

$                 42 

 

$               239 

 

$               236 

 

$                   - 

 

$            3,171 

 

$                   - 

 

$            3,985 

Charge-offs

 

(44)

 

 -

 

 -

 

(29)

 

 -

 

 -

 

(447)

 

 -

 

(520)

Recoveries

 

 -

 

 -

 

 -

 

 

 -

 

 -

 

53 

 

 -

 

61 

Provision (credit)

 

270 

 

392 

 

(42)

 

93 

 

57 

 

 

(416)

 

 -

 

355 

Ending balance

 

$               419 

 

$               496 

 

$                   - 

 

$               311 

 

$               293 

 

$                   1 

 

$            2,361 

 

$                   - 

 

$            3,881 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                 95 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$               135 

 

$                   - 

 

$               230 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$               324 

 

$               496 

 

$                   - 

 

$               311 

 

$               293 

 

$                   1 

 

$            2,226 

 

$                   - 

 

$            3,651 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$          45,875 

 

$          69,730 

 

$                 51 

 

$        175,610 

 

$        293,109 

 

$            1,588 

 

$          45,152 

 

$            4,886 

 

$        636,001 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$               385 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$            1,356 

 

$                   - 

 

$            1,741 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$          45,490 

 

$          69,730 

 

$                 51 

 

$        175,610 

 

$        293,109 

 

$            1,588 

 

$          43,796 

 

$            4,886 

 

$        634,260 

61


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                 54 

 

$                 43 

 

$                   8 

 

$               256 

 

$                 73 

 

$                   - 

 

$            1,273 

 

$                   - 

 

$            1,707 

Charge-offs

 

 -

 

 -

 

 -

 

(87)

 

 -

 

 -

 

(4,290)

 

 -

 

(4,377)

Recoveries

 

 -

 

 -

 

 -

 

13 

 

 -

 

 -

 

 -

 

 -

 

13 

Provision (credit)

 

139 

 

61 

 

34 

 

57 

 

163 

 

 -

 

6,188 

 

 -

 

6,642 

Ending balance

 

$               193 

 

$               104 

 

$                 42 

 

$               239 

 

$               236 

 

$                   - 

 

$            3,171 

 

$                   - 

 

$            3,985 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$               193 

 

$               104 

 

$                 42 

 

$               239 

 

$               236 

 

$                   - 

 

$            3,171 

 

$                   - 

 

$            3,985 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$          50,059 

 

$          30,824 

 

$            7,411 

 

$        156,697 

 

$        235,184 

 

$            1,212 

 

$          50,893 

 

$            2,861 

 

$        535,141 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$               927 

 

$                   - 

 

$               927 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$          50,059 

 

$          30,824 

 

$            7,411 

 

$        156,697 

 

$        235,184 

 

$            1,212 

 

$          49,966 

 

$            2,861 

 

$        534,214 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                   5 

 

$                   - 

 

$                   - 

 

$               164 

 

$                 81 

 

$                   - 

 

$            1,132 

 

$                   - 

 

$            1,382 

Charge-offs

 

 -

 

 -

 

 -

 

(39)

 

(1)

 

 -

 

(1,279)

 

 -

 

(1,319)

Recoveries

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

Provision (credit)

 

49 

 

43 

 

 

131 

 

(7)

 

 -

 

1,414 

 

 -

 

1,638 

Ending balance

 

$                 54 

 

$                 43 

 

$                   8 

 

$               256 

 

$                 73 

 

$                   - 

 

$            1,273 

 

$                   - 

 

$            1,707 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$               205 

 

$                   - 

 

$               205 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$                 54 

 

$                 43 

 

$                   8 

 

$               256 

 

$                 73 

 

$                   - 

 

$            1,068 

 

$                   - 

 

$            1,502 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$          16,829 

 

$          10,338 

 

$            4,118 

 

$        129,682 

 

$        144,668 

 

$            1,165 

 

$          57,411 

 

$            1,184 

 

$        365,395 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$            1,252 

 

$                   - 

 

$            1,252 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$          16,829 

 

$          10,338 

 

$            4,118 

 

$        129,682 

 

$        144,668 

 

$            1,165 

 

$          56,159 

 

$            1,184 

 

$        364,143 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                   - 

 

$                   - 

 

$                   - 

 

$               151 

 

$               159 

 

$                   - 

 

$               301 

 

$                   - 

 

$               611 

Charge-offs

 

 -

 

 -

 

 -

 

(3)

 

 -

 

 -

 

(619)

 

 -

 

(622)

Recoveries

 

 -

 

 -

 

 -

 

10 

 

 -

 

 -

 

 

 -

 

16 

Provision (credit)

 

 

 -

 

 -

 

 

(78)

 

 -

 

1,444 

 

 -

 

1,377 

Ending balance

 

$                   5 

 

$                   - 

 

$                   - 

 

$               164 

 

$                 81 

 

$                   - 

 

$            1,132 

 

$                   - 

 

$            1,382 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62


 

Ending balance: Individually evaluated for impairment

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$               752 

 

$                   - 

 

$               752 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$                   5 

 

$                   - 

 

$                   - 

 

$               164 

 

$                 81 

 

$                   - 

 

$               380 

 

$                   - 

 

$               630 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$            2,159 

 

$                   - 

 

$                   - 

 

$        103,289 

 

$        127,487 

 

$            1,091 

 

$          58,520 

 

$               315 

 

$        292,861 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$               960 

 

$                   - 

 

$               960 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$            2,159 

 

$                   - 

 

$                   - 

 

$        103,289 

 

$        127,487 

 

$            1,091 

 

$          57,560 

 

$               315 

 

$        291,901 

 

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

 

 

 

 

 

As of or

 

for the years ended

 

December 31,

 

2014

 

2013

 

 

 

(restated)

 

 

 

 

Ratio of the allowance for loan losses to total loans

0.42% 

 

0.61% 

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

176.95% 

 

237.52% 

Ratio of nonperforming assets to total assets (1)

0.04% 

 

0.04% 

Ratio of net charge-offs to average loans

0.16% 

 

0.07% 

 

(1) Nonperforming loans are defined as nonaccrual loans and loans 90 days past due and still accruing interest and are both included in our ratios.

The ratio of the allowance for loan and lease losses to total loans decreased to 0.42% at December 31, 2014 from 0.61% at December 31, 2013, reflecting loan growth which did not result in a proportionately higher allowance as a result of our allowance for loan loss methodology.  That methodology includes the measurement of historical net charge-offs by loan category.  The resulting ratios are applied against current outstanding balances for each loan category.  Those computed reserves are added to reserves on specific loans and, with an allocation for economic and other factors, comprise the required level of the allowance for loan losses (see “Allowance for Loan and Lease Losses”). In the year ended December 31, 2014, the fastest growing segment of the loan portfolio was SBLOC, which has historically experienced low levels of losses as a result of the marketable securities collateralizing these loans and related loan to value requirements (see Item 1. “Business-Lending-SBA Loans”). The ratio of the allowance for loan losses to non-performing loans decreased to 176.95% at December 31, 2014 from 237.52%  reflecting an increase in non performing loans to $2.1 million compared to $1.6 million at December 31, 2013. The ratio of non performing-assets to total assets was relatively flat between those two dates.  The ratio of net charge-offs to average loans was 0.16% for 2014 compared to 0.07% for the prior year,  primarily  as result of increased net charge-offs in 2014. 

Net charge-offsNet charge-offs of $1.4 million for 2014 increased $986,000 over net charge-offs for 2013.  The increase in net charge-offs  reflected $871,000 million of other consumer loan charge-offs in 2014, primarily home equity lines of credit.  

Non-performing loans,  loans 90 days delinquent and still accruing, and troubled debt restructuringsLoans 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 (OREO) and our loans past due 90 days or more still accruing interest (in thousands). 

 

 

 

 

 

 

 

 

 

 

 

 

 

63


 

 

 

December 31,

 

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Non-accrual loans

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$                  - 

 

$              168 

 

$                  - 

 

$                  - 

 

$                  - 

Consumer

 

1,907 

 

1,356 

 

927 

 

1,252 

 

960 

Total non-accrual loans

 

1,907 

 

1,524 

 

927 

 

1,252 

 

960 

 

 

 

 

 

 

 

 

 

 

 

Loans past due 90 days or more

 

149 

 

110 

 

 

745 

 

60 

Total non-performing loans

 

2,056 

 

1,634 

 

933 

 

1,997 

 

1,020 

Other real estate owned

 

 -

 

 -

 

 -

 

 -

 

 -

Total non-performing assets

 

$           2,056 

 

$           1,634 

 

$              933 

 

$           1,997 

 

$           1,020 

 

 

The loans that were modified during the years ended December 31, 2014 and 2013 and considered troubled debt restructurings are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

(restated)

 

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

Commercial

 

 

$               197 

 

$             197 

 

 

$             217 

 

$             217 

Consumer

 

 

346 

 

346 

 

 -

 

 -

 

 -

Total

 

 

$               543 

 

$             543 

 

 

$             217 

 

$             217 

 

 

The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2014 and 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

(restated)

 

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

Commercial

 

$                 - 

 

$               197 

 

$                 - 

 

$               - 

 

$             217 

 

$                 - 

Consumer

 

 -

 

346 

 

 -

 

 -

 

 -

 

 -

Total

 

$                 - 

 

$               543 

 

$                 - 

 

$               - 

 

$             217 

 

$                 - 

 

None of the loans that were restructured within the last 12 months have subsequently defaulted.

 

 

The following table provides information about impaired loans at December 31, 2014 and 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

December 31, 2014

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

64


 

SBA non real estate

$                      - 

 

$                      - 

 

$                    - 

 

$                      - 

 

$                      - 

Consumer - other

346 

 

346 

 

 -

 

139 

 

 -

Consumer - home equity

827 

 

927 

 

 -

 

1,043 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

197 

 

197 

 

40 

 

967 

 

 -

Consumer - other

 -

 

 -

 

 -

 

369 

 

 -

Consumer - home equity

1,080 

 

1,080 

 

271 

 

885 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

197 

 

197 

 

40 

 

967 

 

 -

Consumer - other

346 

 

346 

 

 -

 

508 

 

 -

Consumer - home equity

1,907 

 

2,007 

 

271 

 

1,928 

 

 -

 

 

 

 

 

 

 

 

 

 

December 31, 2013 (restated)

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      - 

 

$                      - 

 

$                    - 

 

$                      - 

 

$                      - 

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

927 

 

927 

 

 -

 

927 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

385 

 

385 

 

95 

 

251 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

429 

 

429 

 

135 

 

190 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

385 

 

385 

 

95 

 

251 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

1,356 

 

1,356 

 

135 

 

1,117 

 

 -

 

We had $1.9 million of non-accrual loans at December 31, 2014 compared to $1.5 million of non-accrual loans at December 31, 2013.  The increase in non-accrual loans reflects $4.8 million of loans placed on non-accrual status, partially offset by $1.8 million of loan charge-offs, $725,000 of transfers to other real estate owned, or OREO, $878,000 of loans sold and $1.0 million of loan payments.  Included within the non-accrual loans at December 31, 2014 are two troubled debt restructured loans with a balance of $543,000.  Loans past due 90 days or more still accruing interest amounted to $149,000 and $110,000 at December 31, 2014 and December 31, 2013, respectively.  The $39,000 increase reflected $679,000 of loans transferred to non-accrual status, partially offset by $542,000 of loan payments and $98,000 of transfers to repossessed assets. We had no OREO at December 31, 2014 and December 31, 2013. 

 

We evaluate 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non real estate

 

$         49,214 

 

$                  - 

 

$              197 

 

$                  - 

 

$                  - 

 

$                669 

 

$             12,345 

 

$         62,425 

SBA commercial mortgage

 

59,086 

 

 -

 

 -

 

 -

 

 -

 

965 

 

22,266 

 

82,317 

SBA construction

 

18,911 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,481 

 

20,392 

Direct lease financing

 

58,994 

 

 -

 

99 

 

 -

 

 -

 

 -

 

135,371 

 

194,464 

65


 

SBLOC

 

142,286 

 

 -

 

 -

 

 -

 

 -

 

57,360 

 

222,216 

 

421,862 

Other specialty lending

 

46,990 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,635 

 

48,625 

Consumer

 

14,196 

 

346 

 

1,907 

 

 -

 

 -

 

73 

 

19,646 

 

36,168 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,340 

 

8,340 

 

 

$       389,677 

 

$              346 

 

$           2,203 

 

$                  - 

 

$                  - 

 

$           59,067 

 

$           423,300 

 

$       874,593 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$         51,645 

 

$                  - 

 

$              385 

 

$                  - 

 

$                  - 

 

$                643 

 

$             (6,798)

 

$         45,875 

SBA commercial mortgage

 

57,162 

 

 -

 

 -

 

 -

 

 -

 

6,619 

 

5,949 

 

69,730 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

51 

 

 -

 

51 

Direct lease financing

 

58,545 

 

 -

 

 -

 

 -

 

 -

 

2,244 

 

114,821 

 

175,610 

SBLOC

 

94,487 

 

 -

 

 -

 

 -

 

 -

 

500 

 

198,122 

 

293,109 

Other specialty lending

 

67 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,521 

 

1,588 

Consumer

 

15,013 

 

1,348 

 

1,356 

 

 -

 

 -

 

24 

 

27,411 

 

45,152 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

4,886 

 

4,886 

 

 

$       276,919 

 

$           1,348 

 

$           1,741 

 

$                  - 

 

$                  - 

 

$           10,081 

 

$           345,912 

 

$       636,001 

 

 

*The loan review scope does not encompass performing loans in the absence of negative characteristics or which fell below the dollar threshold requiring review. Accordingly,  such loans are not rated and not subject to review.  The loan portfolio review coverage was approximately 45% at December 31, 2014 and approximately 44% at December 31, 2013.  This review is performed by the loan review department, which is independent of the loan departments and reports directly to the audit committee.  All classified loans are reviewed by our independent loan review function.  Potential problem loans which are identified by either the independent loan review department or line management are also reviewed.    Loans are subject to review by their relationship manager and senior loan personnel.  As a result of transferring loans into “Discontinued Operations”, management is currently reassessing the review scope for the continuing operations portfolio.

 

Investment in Unconsolidated Subsidiary   On December 30, 2014, the Bancorp Bank (the “Bank”), a wholly owned subsidiary of the Company, entered into an agreement for, and closed on, the sale of a portion of its commercial loan portfolio, which the Company had previously disclosed it was in the process of selling.  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 with 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 balance of the investment in unconsolidated subsidiary.  

 

Deposits.  A primary source of funding is deposit acquisition.  We offer a variety of deposit accounts with a range of interest rates and terms, including demand and money market accounts.  Our primary strategic focus is growing these accounts through affinity groups.  At December 31, 2014, we had total deposits of $4.62 billion compared to $4.27 billion at December 31, 2013, which reflected an increase of $348.8 million or 8.2% between 2014 and 2013.   The following table presents the average balance and rates paid on deposits for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

December 31, 2012

 

 

Average

 

Average

 

Average

 

Average

 

Average

 

Average

 

 

balance

 

rate

 

balance

 

rate

 

balance

 

rate

Demand and interest checking *

 

$      3,746,958 

 

0.24% 

 

$      3,185,919 

 

0.25% 

 

$      2,666,493 

 

0.29% 

Savings and money market

 

366,160 

 

0.43% 

 

500,113 

 

0.43% 

 

455,860 

 

0.53% 

Time

 

7,974 

 

1.20% 

 

17,443 

 

1.04% 

 

26,624 

 

1.34% 

Total deposits

 

$      4,121,092 

 

0.26% 

 

$      3,703,475 

 

0.27% 

 

$      3,148,977 

 

0.33% 

 

66


 

* 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 no outstanding advances from the FHLB at December 31, 2014. The Bank also has several lines of credit, which we discuss in “Liquidity and Capital Resources”.  We used these lines minimally in 2014, as a result of deposit growth.  We had no outstanding balances on the Bank’s lines of credit at December 31, 2014.   We do not have any policy prohibiting us from incurring debt.

 

 

 

 

 

 

 

 

 

 

As of or for the year ended December 31,

 

 

2014

 

2013

 

2012

 

 

(dollars in thousands)

Securities sold under repurchase agreements

 

 

 

 

 

 

Balance at year-end

 

$           19,414

 

$          21,221

 

$           18,548

Average during the year

 

17,497 

 

18,442 

 

22,508 

Maximum month-end balance

 

21,496 

 

22,523 

 

30,964 

Weighted average rate during the year

 

0.29% 

 

0.29% 

 

0.42% 

Rate at December 31

 

0.29% 

 

0.28% 

 

0.37% 

 

 

 

 

 

 

 

 

 

 

 

As of or for the year ended December 31,

 

 

2014

 

2013

 

2012

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Short-term borrowings and federal funds purchased

 

 

 

 

 

 

Balance at year-end

 

$                   -

 

$                  -

 

$                    -

Average during the year

 

 -

 

 -

 

 -

Maximum month-end balance

 

 -

 

 -

 

 -

Weighted average rate during the year

 

0.00% 

 

0.00% 

 

0.00% 

Rate at December 31

 

0.27% 

 

0.25% 

 

0.25% 

 

As of December 31, 2014, we have two established statutory business trusts: The Bancorp Capital Trust II and The Bancorp Capital Trust III; which we refer to as the Trusts.  In each case, we own all the common securities of the Trust.  These Trusts issued preferred capital securities to investors and invested the proceeds in us through the purchase of junior subordinated debentures issued by us.  These debentures are the sole assets of the trusts.  The $10.3 million of debentures issued to The Bancorp Capital Trust II on November 28, 2007, mature on March 15, 2038 and bear interest equal to 3-month LIBOR plus 3.25%.  The $3.1 million of debentures issued to The Bancorp Capital Trust III on November 28, 2007 mature on March 15, 2038, and bear interest at a floating annual rate equal to 3-month LIBOR plus 3.25%.

Shareholders’ Equity

At December 31, 2014,  we had $319.0 million in shareholders’ equity.  In December 2012, we issued 4,000,000 shares of our common stock, par value $1.00, at a public offering price of $11.00 per share in an underwritten public offering.  The sale of the common stock resulted in net proceeds to us, after underwriting discounts, commissions and expenses, of approximately $41.7 million.

 

Discontinued Operations  

 

 As of December 31, 2014 “Assets Held For Sale” reflected the $887.9 million balance of discontinued operations assets,  which included $867.4 million of loans and $17.7 of other real estate owned.  To dispose of our discontinued commercial loan portfolio, we have engaged several intermediaries which are in the business of selling loans, primarily to other financial institutions, to assist in completing loan sales.  A total of approximately $267.6  million par value of loans were sold in the fourth quarter of 2014 as described in “Investment in Unconsolidated Subsidiary” above.  In the second quarter of 2015, $150 million of loans were sold at a net gain of $2.2 million.  (See Note W to the financial statements.)    

 

67


 

Off-balance Sheet Commitments

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers.  These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated financial statements.

Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract.  The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments.  We use the same underwriting standards and policies in making credit commitments as we do for on-balance sheet instruments.

Financial instruments whose contract amounts represent potential credit risk for us at December 31, 2014, were our commitments to extend credit, which were approximately $709.1 million, and standby letters of credit, which were approximately $22.1 million, at December 31, 2014.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee.  Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party.  Since we expect that many of the commitments or letters of credit we issue will not be fully drawn upon, the total commitment or letter of credit amounts do not necessarily represent future cash requirements.  We evaluate each customer’s creditworthiness on a case-by-case basis.  We base the amount of collateral we obtain when we extend credit on our credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.

Contractual Obligations and Other Commitments

The following table sets forth our contractual obligations and other commitments, including off-balance sheet commitments, representing required and potential cash outflows as of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than

 

One to

 

Three to

 

After

 

 

Total

 

one year

 

three years

 

five years

 

five years

 

 

(in thousands)

Minimum annual rentals on

 

 

 

 

 

 

 

 

 

 

noncancellable operating leases

 

$           37,524 

 

$            3,997 

 

$            7,543 

 

$            7,564 

 

$           18,420 

Remaining contractual maturities of

 

 

 

 

 

 

 

 

 

 

time deposits

 

14,225 

 

11,212 

 

2,982 

 

31 

 

 -

Loan commitments

 

709,080 

 

69,024 

 

41,044 

 

13,005 

 

586,007 

Subordinated debenture

 

13,401 

 

 -

 

 -

 

 -

 

13,401 

Interest expense on subordinated

 

 

 

 

 

 

 

 

 

 

debenture (1)

 

10,619 

 

458 

 

915 

 

915 

 

8,331 

Standby letters of credit

 

22,057 

 

20,373 

 

1,684 

 

 -

 

 -

Total

 

$         806,906 

 

$        105,064 

 

$          54,168 

 

$          21,515 

 

$         626,159 

(1) Presentation assumes a weighted average interest rate of 3.52%

 

 

 

 

 

 

 

 

 

 

Impact of Inflation

The primary impact of inflation on our operations is on our operating costs.  Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.  Interest rates do not necessarily move in the same

68


 

direction or in the same magnitude as the price of goods and services.  While we anticipate that inflation will affect our future operating costs, we cannot predict the timing or amounts of any such effects.

Recently Issued Accounting Standards

Information on recent accounting pronouncements is set forth in Note B, item 19, to the  consolidated financial statements included in this report and is incorporated herein by this reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Information with respect to quantitative and qualitative disclosures about market risk is included under the section entitled “Asset and Liability Management” in Part 2 Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 

69


 

 

Item 8. Financial Statements and Supplementary Data.

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

The Bancorp, Inc.

 

We have audited the accompanying consolidated balance sheets of The Bancorp, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Bancorp, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note C to the consolidated financial statements, the Company has restated its consolidated financial statements to correct an error.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 25, 2015 expressed an adverse opinion.

 

 

/s/ GRANT THORNTON LLP

 

Philadelphia, Pennsylvania

September 25, 2015

.

 

.

 

 

 

 

 

 

 

70


 

THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

 

2014

 

2013

 

 

 

 

(restated)

 

 

(in thousands)

ASSETS

 

 

 

 

Cash and cash equivalents

 

 

 

 

Cash and due from banks

 

$                  8,665 

 

$               31,890 

Interest earning deposits at Federal Reserve Bank

 

1,059,320 

 

1,196,515 

Securities purchased under agreements to resell

 

46,250 

 

7,544 

Total cash and cash equivalents

 

1,114,235 

 

1,235,949 

 

 

 

 

 

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

 

1,493,639 

 

1,253,117 

Investment securities, held-to-maturity (fair value $91,914 and $95,030, respectively)

 

93,765 

 

97,205 

Commercial loans held for sale

 

217,080 

 

69,904 

Loans, net of deferred loan fees and costs

 

874,593 

 

636,001 

Allowance for loan and lease losses

 

(3,638)

 

(3,881)

Loans, net

 

870,955 

 

632,120 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

1,002 

 

3,209 

Premises and equipment, net

 

17,697 

 

15,659 

Accrued interest receivable

 

11,251 

 

8,522 

Intangible assets, net

 

6,228 

 

7,612 

Deferred tax asset, net

 

33,673 

 

59,836 

Investment in unconsolidated entity, at fair value

 

193,595 

 

 -

Assets held for sale

 

887,929 

 

1,179,277 

Other assets

 

45,268 

 

31,178 

Total assets

 

$           4,986,317 

 

$          4,593,588 

 

 

 

 

 

LIABILITIES

 

 

 

 

Deposits

 

 

 

 

Demand and interest checking

 

$           4,289,586 

 

$          3,722,602 

Savings and money market

 

330,798 

 

536,162 

Time deposits

 

1,400 

 

9,773 

Time deposits, $100,000 and over

 

 -

 

4,452 

Total deposits

 

4,621,784 

 

4,272,989 

 

 

 

 

 

Securities sold under agreements to repurchase

 

19,414 

 

21,221 

Subordinated debenture

 

13,401 

 

13,401 

Other liabilities

 

12,695 

 

38,850 

Total liabilities

 

4,667,294 

 

4,346,461 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par value; 37,808,777 and 37,720,945

 

 

 

 

shares issued at December 31, 2014 and December 31, 2013, respectively

 

37,809 

 

37,721 

Treasury stock, at cost (100,000 shares)

 

(866)

 

(866)

Additional paid-in capital

 

297,987 

 

294,576 

Retained earnings

 

(28,242)

 

(84,862)

Accumulated other comprehensive income

 

12,335 

 

558 

Total shareholders' equity

 

319,023 

 

247,127 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$           4,986,317 

 

$          4,593,588 

 

 

 

 

 

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

71


 

THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

2014

 

2013

 

2012

 

 

 

 

(restated)

 

(restated)

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

Loans, including fees

 

$                  36,459 

 

$                27,640 

 

$                20,846 

Interest on investment securities:

 

 

 

 

 

 

Taxable interest

 

20,662 

 

15,999 

 

13,378 

Tax-exempt interest

 

11,345 

 

4,758 

 

2,815 

Federal funds sold/securities purchased under agreements to resell

 

462 

 

425 

 

Interest earning deposits

 

1,792 

 

2,328 

 

2,433 

 

 

70,720 

 

51,150 

 

39,479 

Interest expense

 

 

 

 

 

 

Deposits

 

10,767 

 

10,166 

 

10,447 

Securities sold under agreements to repurchase

 

50 

 

54 

 

95 

Subordinated debenture

 

478 

 

548 

 

869 

 

 

11,295 

 

10,768 

 

11,411 

Net interest income

 

59,425 

 

40,382 

 

28,068 

Provision for loan and lease losses

 

1,202 

 

355 

 

6,642 

Net interest income after provision for loan and lease losses

 

58,223 

 

40,027 

 

21,426 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

Service fees on deposit accounts

 

6,339 

 

4,977 

 

3,548 

Card payment and ACH processing fees

 

5,402 

 

4,046 

 

2,977 

Prepaid card fees

 

51,287 

 

45,339 

 

33,311 

Gain on sale of loans

 

12,542 

 

17,225 

 

1,885 

Gain on sale of investment securities

 

450 

 

1,889 

 

661 

Other than temporary impairment on securities held-to-maturity

 

 -

 

(20)

 

(202)

Leasing income

 

2,899 

 

2,560 

 

2,954 

Debit card income

 

1,679 

 

892 

 

482 

Affinity fees

 

2,596 

 

2,986 

 

2,794 

Other

 

1,855 

 

2,179 

 

1,091 

Total non-interest income

 

85,049 

 

82,073 

 

49,501 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

Salaries and employee benefits

 

60,509 

 

52,248 

 

39,907 

Depreciation and amortization

 

4,523 

 

3,694 

 

2,762 

Rent and related occupancy cost

 

4,694 

 

3,858 

 

3,025 

Data processing expense

 

13,207 

 

10,888 

 

9,938 

Printing and supplies

 

2,229 

 

1,598 

 

1,637 

Professional fees

 

1,427 

 

1,441 

 

1,145 

Legal expense

 

2,102 

 

2,048 

 

1,711 

Amortization of intangible assets

 

1,211 

 

1,142 

 

1,001 

FDIC Insurance

 

6,805 

 

3,682 

 

3,172 

Software

 

4,908 

 

3,553 

 

2,351 

Insurance

 

1,700 

 

1,311 

 

976 

Telecom and IT network communications

 

2,531 

 

1,483 

 

1,181 

Securitization and servicing expense

 

1,843 

 

767 

 

98 

Consulting

 

3,452 

 

1,700 

 

1,123 

Bank Secrecy Act and lookback consulting expenses

 

8,801 

 

 -

 

 -

Other

 

16,038 

 

12,404 

 

10,161 

72


 

Total non-interest expense

 

135,980 

 

101,817 

 

80,188 

Income (loss) from continuing operations before income taxes

 

7,292 

 

20,283 

 

(9,261)

Income tax (benefit) provision

(14,523)

 

6,767 

 

(3,492)

Net income (loss) from continuing operations

 

$                  21,815 

 

$                13,516 

 

$                (5,769)

Discontinued operations

 

 

 

 

 

 

Income (loss) from discontinued operations before income taxes

 

54,625 

 

(11,669)

 

(57,557)

Income tax (benefit) provision

19,331 

 

16,269 

 

(20,173)

Income (loss) from discontinued operations, net of tax

 

35,294 

 

(27,938)

 

(37,384)

Net income (loss) available to common shareholders

 

$                  57,109 

 

$              (14,422)

 

$              (43,153)

 

 

 

 

 

 

 

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

 

$                      0.58 

 

$                    0.36 

 

$                  (0.17)

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

 

$                      0.94 

 

$                  (0.75)

 

$                  (1.13)

Net income (loss) per share - basic

 

$                      1.52 

 

$                  (0.39)

 

$                  (1.30)

 

 

 

 

 

 

 

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

 

$                      0.57 

 

$                    0.35 

 

$                  (0.17)

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

 

$                      0.92 

 

$                  (0.75)

 

$                  (1.13)

Net income (loss) per share - diluted

 

$                      1.49 

 

$                  (0.40)

 

$                  (1.30)

 

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

73


 

 

 

 

 

 

 

 

 

THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

For the year ended December 31,

 

2014

 

2013

 

2012

 

 

 

(restated)

 

(restated)

 

(in thousands)

Net income (loss)

$                  57,109 

 

$                (14,422)

 

$                 (43,153)

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

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

Change in net unrealized gain/(loss) during the period

18,710 

 

(12,905)

 

6,198 

Reclassification adjustments for gains included in income

(450)

 

(1,889)

 

(661)

Reclassification adjustment for called securities

 -

 

(133)

 

297 

Amortization of (gains)/losses previously held as available-for-sale

(141)

 

30 

 

30 

Net unrealized gain/(loss) on investment securities

18,119 

 

(14,897)

 

5,864 

 

 

 

 

 

 

Deferred tax expense (benefit)

 

 

 

 

 

Change in net unrealized gain/(loss) during the period

6,549 

 

(4,517)

 

2,169 

Reclassification adjustments for gains included in income

(158)

 

(661)

 

(232)

Reclassification adjustment for called securities

 -

 

(47)

 

104 

Amortization of (gains)/losses previously held as available-for-sale

(49)

 

11 

 

11 

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

6,342 

 

(5,214)

 

2,052 

 

 

 

 

 

 

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

11,777 

 

(9,683)

 

3,812 

Comprehensive income (loss)

$                  68,886 

 

$                (24,105)

 

$                 (39,341)

 

 

 

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

74


 

THE BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the years ended December 31, 2014, 2013 and 2012

(in thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

Common

 

 

 

 

 

Additional

 

earnings/

 

other

 

 

 

 

stock

 

Common

 

Treasury

 

paid-in

 

(accumulated

 

comprehensive

 

 

 

 

shares

 

stock

 

stock

 

capital

 

deficit)

 

income

 

Total

 

 

 

 

 

Balance at January 1, 2012, as reported

 

33,196,281 

 

$             33,196 

 

$                (866)

 

$              241,997 

 

$                 (9,277)

 

$                   6,429 

 

271,479 

Restatement adjustments

 

 -

 

 -

 

 -

 

 -

 

(13,168)

 

 -

 

(13,168)

Balance at January 1, 2012, as restated

 

33,196,281 

 

$             33,196 

 

$                (866)

 

$              241,997 

 

$               (22,445)

 

$                   6,429 

 

258,311 

Net loss, as restated

 

 

 

 

 

 

 

 

 

(43,153)

 

 

 

(43,153)

Common stock issued from option exercises,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

50,374 

 

51 

 

 -

 

403 

 

 -

 

 -

 

454 

Issuance of common stock

 

4,000,000 

 

4,000 

 

 -

 

37,713 

 

 -

 

 -

 

41,713 

Stock-based compensation

 

 -

 

 -

 

 -

 

2,595 

 

 -

 

 -

 

2,595 

Other comprehensive income, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

3,812 

 

3,812 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012, as restated

 

37,246,655 

 

37,247 

 

(866)

 

282,708 

 

(65,598)

 

10,241 

 

263,732 

Net loss, as restated

 

 

 

 

 

 

 

 

 

(14,422)

 

 

 

(14,422)

Issuance of common stock

 

175,790 

 

176 

 

 -

 

1,453 

 

 -

 

 

 

1,629 

Common stock issued from option exercises,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

158,272 

 

158 

 

 -

 

1,495 

 

 -

 

 -

 

1,653 

Common stock issued from cashless option

 

 

 

 

 

 

 

 

 

 

 

 

 

 

exercises, net of tax benefits

 

140,228 

 

140 

 

 -

 

4,702 

 

(4,842)

 

 -

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

3,157 

 

 -

 

 -

 

3,157 

Stock-based income tax benefit

 

 -

 

 -

 

 -

 

1,061 

 

 -

 

 -

 

1,061 

Other comprehensive loss, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

(9,683)

 

(9,683)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013, as restated

 

37,720,945 

 

$             37,721 

 

$                (866)

 

$              294,576 

 

$               (84,862)

 

$                      558 

 

$              247,127 

Net income

 

 

 

 

 

 

 

 

 

57,109 

 

 

 

57,109 

Common stock issued from option exercises,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

9,249 

 

 

 -

 

94 

 

 -

 

 

 

103 

Common stock issued from cashless option

 

 

 

 

 

 

 

 

 

 

 

 

 

 

exercises, net of tax benefits

 

29,208 

 

30 

 

 -

 

459 

 

(489)

 

 -

 

 -

Common stock issued from vested stock,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

49,375 

 

49 

 

 -

 

(49)

 

 -

 

 -

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

2,641 

 

 -

 

 -

 

2,641 

Stock-based income tax benefit

 

 -

 

 -

 

 -

 

266 

 

 -

 

 -

 

266 

Other comprehensive income, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

11,777 

 

11,777 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

37,808,777 

 

$             37,809 

 

$                (866)

 

$              297,987 

 

$               (28,242)

 

$                 12,335 

 

$              319,023 

 

 

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

75


 

THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2014

 

2013

 

2012

 

 

 

 

(restated)

 

(restated)

Operating activities

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$                 21,815 

 

$                 13,516 

 

$                  (5,769)

Net income (loss) from discontinued operations, net of tax

 

35,294 

 

(27,938)

 

(37,384)

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

provided by operating activities

 

 

 

 

 

 

Depreciation and amortization

 

5,734 

 

4,836 

 

3,763 

Provision for loan and lease losses

 

1,202 

 

355 

 

6,642 

Net amortization of investment securities discounts/premiums

 

14,059 

 

6,811 

 

2,090 

Stock-based compensation expense

 

2,641 

 

3,157 

 

2,595 

Loans originated for sale

 

(630,165)

 

(276,562)

 

(28,876)

Sale of loans originated for resale

 

495,531 

 

268,019 

 

19,420 

Gain on sales of loans originated for resale

 

(12,542)

 

(17,225)

 

(1,885)

Deferred income tax

 

(13,590)

 

(200)

 

(1,188)

Gain on sale of fixed assets

 

(14)

 

(24)

 

(31)

Other than temporary impairment on securities held-to-maturity

 

 -

 

20 

 

202 

Gain on sales of investment securities

 

(450)

 

(1,889)

 

(661)

Increase in accrued interest receivable

 

(2,729)

 

(3,553)

 

(1,574)

Decrease (increase) in other assets

 

21,966 

 

(222)

 

(42,056)

Decrease (increase) in discontinued assets held for sale

 

37,410 

 

(23,390)

 

(2,310)

Increase (decrease) in other liabilities

 

(26,155)

 

15,284 

 

7,739 

 Net cash (used in) provided by operating activities

 

(49,993)

 

(39,005)

 

(79,283)

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(533,168)

 

(884,050)

 

(473,828)

Purchase of investment securities held-to-maturity

 

 -

 

(52,899)

 

 -

Proceeds from sale of investment securities available-for-sale

 

109,322 

 

106,243 

 

26,209 

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

 

3,022 

 

963 

 

2,076 

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

 

188,252 

 

233,262 

 

154,246 

Net increase in loans

 

(240,036)

 

(134,114)

 

(174,110)

Net decrease in discontinued loans held for sale

 

253,938 

 

82,199 

 

109,743 

Proceeds from sale of fixed assets

 

64 

 

137 

 

357 

Purchases of premises and equipment

 

(6,611)

 

(9,098)

 

(5,098)

Investment in unconsolidated entity

 

(193,595)

 

 -

 

 -

Net cash used in investing activities

 

(418,812)

 

(657,357)

 

(360,405)

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Net increase in deposits

 

348,795 

 

959,768 

 

630,670 

Net increase (decrease) in securities sold under agreements to repurchase

 

(1,807)

 

2,673 

 

(14,629)

Proceeds from issuance of common stock

 

 -

 

1,629 

 

41,713 

Proceeds from the exercise of options

 

103 

 

1,653 

 

454 

Net cash provided by financing activities

 

347,091 

 

965,723 

 

658,208 

 

 

 

 

 

 

 

76


 

Net (decrease) increase in cash and cash equivalents

 

(121,714)

 

269,361 

 

218,520 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

1,235,949 

 

966,588 

 

748,068 

 

 

 

 

 

 

 

Cash and cash equivalents, end of year

 

$            1,114,235 

 

$            1,235,949 

 

$               966,588 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

Interest paid

 

$                 10,768 

 

$                 10,792 

 

$                 11,431 

Taxes paid

 

$                   2,578 

 

$                 17,602 

 

$                 11,049 

Transfers of loans to other real estate owned

 

$                      725 

 

$                           - 

 

$                           - 

Transfer of loans to held for sale

 

$                           - 

 

$                 32,795 

 

$                           - 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

77


 

THE BANCORP, INC. AND SUBSIDIARIES 

NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS

Note A—Organization and Nature of Operations

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

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

Note B—Summary of Significant Accounting Policies

 

1. Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking industry.  The consolidated financial statements include the accounts of the Company and all its subsidiaries.   All inter-company balances have been eliminated.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

The principal estimates that are particularly susceptible to a significant change in the near term relate to the allowance for loan and lease losses, investment other than temporary impairment (OTTI) and deferred income taxes.  

The Company periodically reviews its 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, it considers the continuing performance of the securities.  Credit losses are recognized in the consolidated statement of operations.  If management believes market value losses are temporary and it believes the Company has the ability and intention to hold those securities to maturity, for available for sale securities the reduction in value is recognized in other comprehensive income, through equity and for held to maturity securities the securities are held at the amortized cost.  

Deferred tax assets are recorded on the consolidated balance sheet at their net realizable value.  The Company performs an assessment each reporting period to evaluate the amount of deferred tax asset it is more likely than not to realize.  Realization of deferred tax assets is dependent upon the amount of taxable income expected in future periods, as tax benefits require taxable income to be realized.  If a valuation allowance is required, the deferred tax asset on the consolidated balance sheet is reduced via a corresponding income tax expense in the consolidated statement of operations.

2. Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand and amounts due from banks with an original maturity of three months or less and federal funds sold.    The Company at times maintains balances in excess of insured limits at various financial institutions

78

 


 

including the FRB, the FHLB and other private institutions.  The Company does not believe these instruments carry a significant risk of loss, but cannot provide assurances that no losses could occur if these institutions were to become insolvent.

3. Investment Securities 

Investments in debt securities which the Company has both the ability and intent to hold to maturity are carried at cost, adjusted for the amortization of premiums and accretion of discounts computed by the effective interest method.  Investments in debt and equity securities which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk, liquidity requirements, or other factors, are classified as available-for-sale.  Net unrealized gains for such securities, net of tax effect, are reported as other comprehensive income and excluded from the determination of net income.  The unrealized losses for both the held-to-maturity and available-for-sale securities are evaluated to determine first if the impairment is other than temporary then to determine the amount of other than temporary impairment that is attributable to credit loss versus non-credit loss.   If a credit loss is determined, an other than temporary charge is recorded within the consolidated statement of operations.  The Company does not engage in securities trading.  Gains or losses on disposition of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method.

The Company evaluates whether an other than temporary 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 used to determine the amount of other than temporary impairment attributable to credit loss is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future performance of the security.  The Company’s best estimate of future cash flows 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.  These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value.  In addition, projections of expected future cash flows from a debt security may change based upon new information regarding the performance of the issuer and/or underlying collateral such as changes in the projections of the underlying property value estimates.  The Company recognized other than temporary impairment charges of $0 in 2014, $20,000 in 2013 and $202,000 in 2012.  The $20,000 charge in 2013 resulted from the write-down of the amortized cost to the present value of the cash flows expected to be collected for one pooled trust preferred security.  The $202,000 charge in 2012 resulted from the write-down of the amortized cost to the present value of the cash flows expected to be collected for one pooled trust preferred security.

4. Loans and Allowance for Loan and Lease Losses

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal and are net of unearned discounts, unearned loan fees and an allowance for loan and lease losses.  The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense.  Loan principal considered to be uncollectible by management is charged against the allowance for loan and lease losses.  The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible based upon an evaluation of known and inherent risks in the loan portfolio.  The evaluation takes into consideration such factors as changes in the nature and size of the loan portfolio, overall portfolio quality, specific problem loans and current economic conditions which may affect the borrowers’ ability to pay.  The evaluation also details historical losses by loan category, the resulting loss rates for which are projected at current loan total amounts.  Loss estimates for specified problem loans are also detailed.

Interest income is accrued as earned on a simple interest basis.  Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful.  The Company recognizes income on impaired loans when they are placed into non-accrual status on a cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company.  If these factors do not exist, the Company will not recognize income on such loans.

When a loan is placed on non-accrual status, all accumulated accrued interest receivable applicable to periods prior to the current year is charged off to the allowance for loan and lease losses.  Interest that had accrued in the current year is reversed out of current period income.  Loans reported as having missed four or more consecutive monthly payments and still accruing interest must

79

 


 

have both principal and accruing interest adequately secured and must be in the process of collection.  Such loans are reported as 90 days delinquent and still accruing.  For all loan types, the Company uses the method of reporting delinquencies which considers a loan past due or delinquent if a monthly payment has not been received by the close of business on the loan’s next due date.  In the Company’s reporting, two missed payments are reflected as 30 to 59 day delinquencies and three missed payments are reflected as 60 to 89 day delinquencies.

 

The allowance for loan losses represents management's estimate of losses inherent in the loan and lease portfolio as of the consolidated balance sheet date and is recorded as a reduction to loans and leases.  The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries.  Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.  All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.  Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

 

The evaluation of the adequacy of the allowance for loan and lease losses includes, among other factors, an analysis of historical loss rates and environmental factors by category, applied to current loan totals.  However, actual losses may be higher or lower than historical trends, which vary.  Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from those estimated loss percentages, which are established based upon a limited number of potential loss classifications.

 

Management performs a quarterly evaluation of the adequacy of the allowance, which is based on the Company's past loan loss experience, known and inherent risks in the portfolio, the volume and mix of the existing loan and lease portfolios, including the volume and severity of non-performing and adversely classified credits, an analysis of net charge-offs experienced on previously classified credits, the trend in loan and lease growth, including any rapid increase in loan and lease volume within a relatively short time period, general and local economic conditions affecting the collectability of the Company’s loans and leases, previous loan and lease experience by type, including net charge-offs, as a percentage of average loans and leases over the past several years and other relevant factors.  This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

 

The allowance consists of specific, general and unallocated components.  The specific component relates to loans and leases that are classified as impaired.  For such loans and leases, an allowance is established when the discounted cash flows, or collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan.  Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. 

 

The allowance calculation methodology includes further segregation of loan classes into regulatory risk rating categories of special mention, substandard, doubtful and loss.  Loans classified as special mention have potential weaknesses that deserve management's close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans rated as special mention and substandard are reserved for based on the average charge-off history for loans and leases previously classified in those categories.  Loans classified as doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses.  Loans not classified are included in the general component of the reserve calculation.

 

The general component covers pools of loans by loan type.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for relevant qualitative factors.  Separate qualitative adjustments are made for higher-risk criticized loans that are not impaired.  These qualitative risk factors include:

 

·

Changes in lending policies or procedures;

·

Changes in  economic conditions;

·

Portfolio growth;

·

Changes in the nature or volume of the portfolio;

·

Changes in management’s experience;

80

 


 

·

Past due volume;

·

Non-accrual volume;

·

Adversely classified loans;

·

Quality of the loan review system;

·

Changes in the value of underlying collateral;

·

Concentrations of credit; and

·

External factors.

Applicable factors are considered based on management's best judgment using relevant information available at the time of the evaluation.  An unallocated component is also maintained to cover additional uncertainties that could affect management's estimate of probable losses.

A loan is considered impaired when, based on current information and events, it is probable that the loan will not be collected according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for all impaired loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent.  An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value.  The estimated fair values of substantially all of the Company's impaired loans are measured based on the estimated fair value of the loan's collateral.

For SBA commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals or evaluations. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary.  This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property.  Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.  The discounts also include estimated costs to sell the property.

For SBA commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices.  Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.  Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Loans originated from continuing operations and intended for sale in the secondary market are carried at estimated fair value.   Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.  The Company originates specific commercial mortgage loans for sale in  secondary markets.  These loans are accounted for under the fair value option and amounted to $217.1 million at December 31, 2014 and $69.9 million at December 31, 2013.  These loans were classified as held for sale. 

Loans from discontinued operations intended for sale primarily to other financial institutions are carried at the lower of cost or market on the balance sheet, determined by loan type or, for larger loans, on an individual loan basis. See Note W to the financial statements.

5. Premises and Equipment

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Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation.  Depreciation expense is computed on the straight-line method over the useful lives of the assets.  Leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the terms of the related leases.

6. Internal Use Software

The Company capitalizes costs associated with internally developed and/or purchased software systems for new products and enhancements to existing products that have reached the application stage and meet recoverability tests.  Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal use software, payroll and payroll related expenses for employees who are directly associated with and devote time to the internal use software project and interest costs incurred, if material, while developing internal use software.  Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose.

The carrying value of the Company’s software is periodically reviewed and a loss is recognized if the value of the estimated undiscounted cash flow benefit related to the asset falls below the unamortized cost.  Amortization is provided using the straight-line method over the estimated useful life of the related software, which is generally seven years.  As of December 31, 2014 and 2013, the Company had net capitalized software costs of approximately $5.4 million and $4.2 million, respectively.  The Company recorded amortization expense of approximately $1.2 million,  $907,000 and $669,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

7. Income Taxes

The Company accounts for income taxes under the liability method whereby deferred tax assets and liabilities are determined based on the difference between their carrying values on the consolidated financial statements and their tax basis as measured by the enacted tax rates which will be in effect when these differences reverse.  Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

The Company recognizes the benefit of a tax position in the consolidated financial statements only after determining that the relevant tax authority would more likely than not sustain the position following an audit.  For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.  For these analyses, the Company may engage attorneys to provide opinions related to the positions.  The Company applies this policy to all tax positions for which the statute of limitations remain open, but this application does not materially impact the Company’s consolidated balance sheet or statement of operations.  Any interest and penalties related to uncertain tax positions are recognized in income tax (benefit) expense in the consolidated statement of operations.

8. Share-Based Compensation

The Company recognizes compensation expense for stock options in accordance with Accounting Standards Codification (“ASC”) 718, Stock Based Compensation.   The expense of the option is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is usually the vesting period.  For grants subject to a service condition, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value of each option on the date of grant.  The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested.  In accordance with ASC 718, the Company estimates the number of options for which the requisite service is expected to be rendered.

9. Other Real Estate Owned

Other real estate owned is recorded at estimated fair market value less cost of disposal; which establishes a new cost basis or carrying value.   When property is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance for loan and lease losses.  Periodically thereafter, the asset is reviewed for subsequent declines in the estimated fair market value 

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against the carrying value.  Subsequent declines, if any, and holding costs, as well as gains and losses on subsequent sale, are included in the consolidated statements of operations.

10. Advertising Costs

 

The Company expenses advertising costs as incurred.  Advertising costs amounted to $621,000,  $706,000 and $393,000 for the years ended December 31, 2014, 2013 and 2012, respectively.  

11. 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 take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

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

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

(dollars in thousands except per share data)

Basic earnings (loss) per share from continuing operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$            21,815

 

37,701,306 

 

$                0.58

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

628,438 

 

(0.01)

Diluted earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$            21,815

 

38,329,744 

 

$                0.57

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

(dollars in thousands except per share data)

Basic earnings (loss) per share from discontinued operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$            35,294

 

37,701,306 

 

$                0.94

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

628,438 

 

(0.02)

Diluted (loss) earnings per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$            35,294

 

38,329,744 

 

$                0.92

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

(dollars in thousands except per share data)

Basic earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$            57,109

 

$     37,701,306

 

$                1.52

Effect of dilutive securities

 

 

 

 

 

 

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Common stock options

 

 -

 

628,438 

 

(0.03)

Diluted (loss) earnings per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$            57,109

 

38,329,744 

 

$                1.49

 

Stock options for 505,250 shares, exercisable at prices between $9.82 and $25.43 per share, were outstanding at December 31, 2014 but were not included in the dilutive earnings per share computation because the exercise price per share was greater than the average market price.

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2013

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

(restated)

 

(restated)

 

(restated)

 

 

(dollars in thousands except per share data)

Basic earnings (loss) per share from continuing operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$            13,516

 

37,425,197 

 

$                0.36

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

695,887 

 

(0.01)

Diluted earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$            13,516

 

38,121,084 

 

$                0.35

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2013

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

(restated)

 

(restated)

 

(restated)

 

 

(dollars in thousands except per share data)

Basic earnings (loss) per share from discontinued operations

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$           (27,938)

 

37,425,197 

 

$               (0.75)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted (loss) earnings per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$           (27,938)

 

37,425,197 

 

$               (0.75)

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2013

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

(restated)

 

(restated)

 

(restated)

 

 

(dollars in thousands except per share data)

Basic earnings (loss) per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$           (14,422)

 

$     37,425,197

 

$               (0.39)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

(0.01)

Diluted (loss) earnings per share

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$           (14,422)

 

37,425,197 

 

$               (0.40)

 

Stock options for 13,000 shares, exercisable at prices between $20.98 and $25.43 per share, were outstanding at December 31, 2013, but were not included in the dilutive earnings per share computation because the Company had a net loss available to common shareholders.

 

 

 

 

 

 

 

 

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Year ended December 31, 2012

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

(restated)

 

(restated)

 

(restated)

 

 

(dollars in thousands except per share data)

Basic loss per share from continuing operations

 

 

 

 

 

 

Net loss available to common shareholders

 

$            (5,769)

 

33,227,755 

 

$              (0.17)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$            (5,769)

 

33,227,755 

 

$              (0.17)

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2012

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

(restated)

 

(restated)

 

(restated)

 

 

(dollars in thousands except per share data)

Basic loss per share from discontinued operations

 

 

 

 

 

 

Net loss available to common shareholders

 

$           (37,384)

 

33,227,755 

 

$               (1.13)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$           (37,384)

 

33,227,755 

 

$               (1.13)

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2012

 

 

Income

 

Shares

 

Per share

 

 

(numerator)

 

(denominator)

 

amount

 

 

(restated)

 

(restated)

 

(restated)

 

 

(dollars in thousands except per share data)

Basic loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$           (43,153)

 

$     33,227,755

 

$               (1.30)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$           (43,153)

 

33,227,755 

 

$               (1.30)

 

Stock options for 2,401,493 shares, exercisable at prices between $7.36 and $25.43 per share, were outstanding at December 31, 2012 but were not included in the diluted earnings per share because the Company had a net loss available to common shareholders.

 

12. Other Comprehensive Income

 

Other comprehensive income consists of revenues, expenses, gains and losses that bypass the statement of operations and are reported directly in a separate component of equity.

 

 

 

 

 

 

 

85

 


 

 

For the year ended December 31,

 

2014

 

2013

 

2012

 

 

 

(restated)

 

(restated)

 

(in thousands)

Other comprehensive income (loss)

 

 

 

 

 

Change in net unrealized gain/(loss) during the period

$              18,710 

 

$             (12,905)

 

$                6,198 

Reclassification adjustments for gains included in income

(450)

 

(1,889)

 

(661)

Reclassification adjustment for called securities

 -

 

(133)

 

297 

Amortization of (gains)/losses previously held as available-for-sale

(141)

 

30 

 

30 

Net unrealized gain/(loss) on investment securities

18,119 

 

(14,897)

 

5,864 

 

 

 

 

 

 

Deferred tax expense (benefit)

 

 

 

 

 

 Securities available-for-sale:

 

 

 

 

 

Change in net unrealized gain/(loss) during the period

6,549 

 

(4,517)

 

2,169 

Reclassification adjustments for gains included in income

(158)

 

(661)

 

(232)

Reclassification adjustment for called securities

 -

 

(47)

 

104 

Amortization of (gains)/losses previously held as available-for-sale

(49)

 

11 

 

11 

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

6,342 

 

(5,214)

 

2,052 

 

 

 

 

 

 

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

$              11,777 

 

$               (9,683)

 

$                3,812 

 

13. Restrictions on Cash and Due from Banks

The Bank is required to maintain reserves against customer demand deposits by keeping cash on hand or balances with the Federal Reserve Bank.  The amount of those required reserves at December 31, 2014 and 2013 was approximately $280.4 million and $238.7 million, respectively.

14. Other Identifiable Intangible Assets

On November 29, 2012, the Company acquired certain software rights and personnel of a prepaid program manager in Europe for approximately $1.8 million to establish a European prepaid card presence.  The Company allocated the majority of the $1.8 million acquisition cost to software used for fraud monitoring and other utilities for its prepaid card business, with related services provided by its European data processing subsidiary.  The software is being amortized over eight years.

The Company accounts for its customer list in accordance with ASC 350, Intangibles—Goodwill and Other.  The acquisition of the Stored Value Solutions division of Marshall Bank First in 2007 resulted in a customer list intangible of $12.0 million which is being amortized over a 12 year period.  Amortization expense is $1.0 million per year ($5.0 million over the next five years).

The gross carrying value and accumulated amortization related to the Company’s intangible items at December 31, 2014 and 2013 are presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

2014

 

2013

 

 

Gross

 

 

 

Gross

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

Amount

 

Amortization

 

Amount

 

Amortization

86

 


 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Customer list intangible

 

$              12,006 

 

$              7,003 

 

$           12,006 

 

$              6,003 

Software intangible

 

1,817 

 

592 

 

1,817 

 

208 

Total

 

$              13,823 

 

$              7,595 

 

$           13,823 

 

$              6,211 

 

The approximate future annual amortization of both the Company’s intangible items are as follows (in thousands):

 

 

 

 

 

Year ending December 31,

 

 

2015

 

$                1,189 

2016

 

1,189 

2017

 

1,189 

2018

 

1,189 

2019

 

1,189 

Thereafter

 

283 

 

 

$                6,228 

 

 

 

15. Reclassifications

 

Certain reclassifications have been made to the 2013 and 2012 restated consolidated financial statements to conform to the 2014 presentation, separate from the restatement of the financial statements and discontinued operations.  Reclassifications relating to discontinued operations are presented in Note W.

 

 

 

 

16.  Prepaid Card Fees

 

The Company recognizes prepaid card fees in the periods in which they are earned by performance of the related services. The majority of fees the Company earns result from contractual transaction fees paid by third party sponsors to the Company and monthly service fees. Additionally, the Company earns interchange fees paid through settlement associations such as Visa, which are also determined on a per transaction basis. The Company records this revenue net of costs such as association fees and interchange transaction charges.    

 

17. Common Stock Repurchase Program

 

In 2011, the Company adopted a common stock repurchase program in which share repurchases reduce the amount of shares outstanding.  Repurchased shares may be reissued for various corporate purposes.  As of December 31, 2011, the Company had repurchased 100,000 shares of the total 750,000 maximum number of shares authorized by the Board of Directors.  The 100,000 shares were repurchased at an average cost of $8.66.  The Company did not repurchase shares in 2014,  2013 or 2012.

 

18. Derivative Financial Instruments

 

The Company utilizes derivatives to hedge interest rate risk on the loans it originates for sale into commercial mortgage backed securities markets.  These derivatives are recorded on the consolidated balance sheet at fair value.  Changes in the fair value of these derivatives are designated as fair value hedges, which are recorded in earnings together and in the same consolidated income statement line item with, changes in the fair value of the related hedged item.  All derivatives are utilized to hedge against interest rate changes between the time commercial mortgages are funded and sold.  Accordingly such derivatives serve as a hedge against interest rate movements which might otherwise decrease sales proceeds.

 

19. Recent Accounting Pronouncements

 

In January 2014, FASB Accounting Standards Update (ASU) No. 2014-04, amended ASC Sub-Topic 310-40 “Receivables—Troubled Debt Restructurings by Creditors.” The amendments clarify that an in substance repossession or foreclosure occurs, and the

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Company  is considered to have received physical possession of residential real estate property collateralizing a mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  The amendments in this update are effective for the annual periods beginning on or after December 15, 2014 and an entity can elect to adopt the amendments in this update using either a modified retrospective transition method or a prospective transition method as allowed in ASU No. 2014-04.  The adoption of ASU No. 2014-04 did not have a material effect on the Company’s consolidated financial statements.

 

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

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”.  This ASU establishes a comprehensive revenue recognition standard for virtually all industries 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 principal is built on the contract between a vendor and a customer for the provision of goods and services.  It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.  To accomplish this, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) identify the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (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 June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing”.  The amendments in this update require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements.  In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement.  The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction.  In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions.  The guidance in this ASU was effective for annual and interim periods beginning after December 15, 2014.  The Company does not expect this ASU to have a significant impact on its financial condition or results of operations.

 

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

 

1.

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

2.

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

3.

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

 

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

  

Note C— Restatement of Previously Issued Financial Statements

 

In this Note C and subsequent Note T, and prior to the discontinued operations, the financial statements reflect applicable restatement adjustments for periods from 2010 through September 30, 2014, the last date through which financial statements previously had been issued.  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 loan operations were discontinued.  Approximately $28.5 million of losses that were not previously reported were restated. Also, $12.7 million of losses related to loans made before December 31, 2014 that were resolved after that date but before the issuance date of these financial statements, were recognized in the 2014 financial statements. Substantially all of the losses and corresponding restatement adjustments resulted from the discontinued commercial loan operations. The Company performed a strategic evaluation of its businesses in the third quarter of 2014 and decided to discontinue its commercial lending operations and will focus on its specialty finance lending.  The loans which constitute the commercial loan portfolio are in the process of disposition to independent purchasers.  As such, financial results of the commercial lending operations are presented as separate from continuing operations on the consolidated statements of operations, and the commercial lending operations loans to be disposed are presented as assets held for sale on the consolidated balance sheets.

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Cash and due from banks

 

$                 33,883 

 

$                           - 

 

$                 (1,993)

 

$                          31,890 

Interest earning deposits at Federal Reserve Bank

 

1,196,515 

 

 -

 

 -

 

1,196,515 

Securities purchased under agreements to resell

 

7,544 

 

 -

 

 -

 

7,544 

Total cash and cash equivalents

 

1,237,942 

 

 -

 

(1,993)

 

1,235,949 

 

 

 

 

 

 

 

 

 

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

 

1,253,117 

 

 -

 

 -

 

1,253,117 

Investment securities, held-to-maturity (fair value $95,030)

 

97,205 

 

 -

 

 -

 

97,205 

Commercial loans held for sale

 

69,904 

 

 -

 

 -

 

69,904 

Loans, net of deferred loan fees and costs

 

1,958,445 

 

(113,653)

 

(1,208,791)

 

636,001 

Allowance for loan and lease losses

 

(38,182)

 

(28,245)

 

62,546 

 

(3,881)

Loans, net

 

1,920,263 

 

(141,898)

 

(1,146,245)

 

632,120 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

3,209 

 

 -

 

 -

 

3,209 

Premises and equipment, net

 

15,659 

 

 -

 

 -

 

15,659 

Accrued interest receivable

 

13,131 

 

 -

 

(4,609)

 

8,522 

Intangible assets, net

 

7,612 

 

 -

 

 -

 

7,612 

Other real estate owned

 

26,295 

 

 -

 

(26,295)

 

Deferred tax asset, net

 

30,415 

 

29,421 

 

 -

 

59,836 

Assets held for sale

 

 -

 

 -

 

1,179,277 

 

1,179,277 

Other assets

 

31,313 

 

 -

 

(135)

 

31,178 

Total assets

 

$            4,706,065 

 

$             (112,477)

 

$                          0 

 

$                     4,593,588 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

89

 


 

Demand and interest checking

 

$            3,722,602 

 

$                           - 

 

$                           - 

 

$                     3,722,602 

Savings and money market

 

536,162 

 

 -

 

 -

 

536,162 

Time deposits

 

9,773 

 

 -

 

 -

 

9,773 

Time deposits, $100,000 and over

 

4,452 

 

 -

 

 -

 

4,452 

Total deposits

 

4,272,989 

 

 -

 

 -

 

4,272,989 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

21,221 

 

 -

 

 -

 

21,221 

Subordinated debenture

 

13,401 

 

 -

 

 -

 

13,401 

Other liabilities

 

38,850 

 

 -

 

 -

 

38,850 

Total liabilities

 

4,346,461 

 

 -

 

 -

 

4,346,461 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par

 

 

 

 

 

 

 

 

value: 37,720,945 shares issued at December 31, 2013

 

37,721 

 

 -

 

 -

 

37,721 

Treasury stock, at cost (100,000 shares)

 

(866)

 

 -

 

 -

 

(866)

Additional paid-in capital

 

294,576 

 

 -

 

 -

 

294,576 

Retained earnings

 

27,615 

 

(112,477)

 

 -

 

(84,862)

Accumulated other comprehensive income

 

558 

 

 -

 

 -

 

558 

Total shareholders' equity

 

359,604 

 

(112,477)

 

 -

 

247,127 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$            4,706,065 

 

$             (112,477)

 

$                           - 

 

$                     4,593,588 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Cash and due from banks

 

$                 19,981 

 

$                           - 

 

$                 (1,504)

 

$                          18,477 

Interest earning deposits at Federal Reserve Bank

 

948,111 

 

 -

 

 -

 

948,111 

Total cash and cash equivalents

 

968,092 

 

 -

 

(1,504)

 

966,588 

 

 

 

 

 

 

 

 

 

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

 

718,065 

 

 -

 

 -

 

718,065 

Investment securities, held-to-maturity (fair value $41,008)

 

45,179 

 

 -

 

 -

 

45,179 

Commercial loans held for sale

 

11,341 

 

 -

 

 -

 

11,341 

Loans, net of deferred loan fees and costs

 

1,902,854 

 

(85,729)

 

(1,281,984)

 

535,141 

Allowance for loan and lease losses

 

(33,040)

 

(25,848)

 

54,904 

 

(3,984)

Loans, net

 

1,869,814 

 

(111,577)

 

(1,227,080)

 

531,157 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

3,621 

 

 -

 

 -

 

3,621 

Premises and equipment, net

 

10,368 

 

 -

 

 -

 

10,368 

Accrued interest receivable

 

9,857 

 

 -

 

(4,888)

 

4,969 

Intangible assets, net

 

7,004 

 

 -

 

 -

 

7,004 

Other real estate owned

 

4,241 

 

 -

 

(4,241)

 

(0)

Deferred tax asset, net

 

22,789 

 

38,632 

 

 -

 

61,421 

Assets held for sale

 

 -

 

 -

 

1,238,086 

 

1,238,086 

Other assets

 

29,287 

 

 -

 

(373)

 

28,915 

Total assets

 

$            3,699,659 

 

$               (72,945)

 

$                        (0)

 

$                     3,626,714 

 

 

 

 

 

 

 

 

 

90

 


 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand and interest checking

 

$            2,775,207 

 

$                           - 

 

$                           - 

 

$                     2,775,207 

Savings and money market

 

517,098 

 

 -

 

 -

 

517,098 

Time deposits

 

12,582 

 

 -

 

 -

 

12,582 

Time deposits, $100,000 and over

 

8,334 

 

 -

 

 -

 

8,334 

Total deposits

 

3,313,221 

 

 -

 

 -

 

3,313,221 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

18,548 

 

 -

 

 -

 

18,548 

Subordinated debenture

 

13,401 

 

 -

 

 -

 

13,401 

Other liabilities

 

17,812 

 

 -

 

 -

 

17,812 

Total liabilities

 

3,362,982 

 

 -

 

 -

 

3,362,982 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par

 

 

 

 

 

 

 

 

value: 37,246,655 shares issued at December 31, 2012

 

37,247 

 

 -

 

 -

 

37,247 

Treasury stock, at cost (100,000 shares)

 

(866)

 

 -

 

 -

 

(866)

Additional paid-in capital

 

282,708 

 

 -

 

 -

 

282,708 

Retained earnings

 

7,347 

 

(72,945)

 

 -

 

(65,598)

Accumulated other comprehensive income

 

10,241 

 

 -

 

 -

 

10,241 

Total shareholders' equity

 

336,677 

 

(72,945)

 

 -

 

263,732 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$            3,699,659 

 

$               (72,945)

 

$                           - 

 

$                     3,626,714 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$             83,040 

 

$              (1,428)

 

$           (53,972)

 

$             27,640 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

15,999 

 

 -

 

 -

 

15,999 

Tax-exempt interest

 

4,758 

 

 -

 

 -

 

4,758 

Federal funds sold/securities purchased under agreements to resell

 

425 

 

 -

 

 -

 

425 

Interest earning deposits

 

2,328 

 

 -

 

 -

 

2,328 

 

 

106,550 

 

(1,428)

 

(53,972)

 

51,150 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

10,166 

 

 -

 

 -

 

10,166 

Securities sold under agreements to repurchase

 

54 

 

 -

 

 -

 

54 

Subordinated debenture

 

548 

 

 -

 

 -

 

548 

 

 

10,768 

 

 -

 

 -

 

10,768 

Net interest income

 

95,782 

 

(1,428)

 

(53,972)

 

40,382 

Provision for loan and lease losses

 

29,500 

 

28,894 

 

(58,039)

 

355 

Net interest income after provision for loan and lease losses

 

66,282 

 

(30,322)

 

4,067 

 

40,027 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

4,977 

 

 -

 

 -

 

4,977 

Card payment and ACH processing fees

 

4,046 

 

 -

 

 -

 

4,046 

Prepaid card fees

 

45,339 

 

 -

 

 -

 

45,339 

Gain on sale of loans

 

17,225 

 

 -

 

 -

 

17,225 

Gain on sale of investment securities

 

1,889 

 

 -

 

 -

 

1,889 

91

 


 

Other than temporary impairment on securities held-to-maturity

 

(20)

 

 -

 

 -

 

(20)

Leasing income

 

2,560 

 

 -

 

 -

 

2,560 

Debit card income

 

892 

 

 -

 

 -

 

892 

Affinity fees

 

2,986 

 

 -

 

 -

 

2,986 

Other

 

3,536 

 

 -

 

(1,357)

 

2,179 

Total non-interest income

 

83,430 

 

 -

 

(1,357)

 

82,073 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

53,086 

 

 -

 

(838)

 

52,248 

Depreciation and amortization

 

3,694 

 

 -

 

 -

 

3,694 

Rent and related occupancy cost

 

4,073 

 

 -

 

(215)

 

3,858 

Data processing expense

 

11,193 

 

 -

 

(305)

 

10,888 

Printing and supplies

 

1,660 

 

 -

 

(62)

 

1,598 

Professional fees

 

1,441 

 

 -

 

 -

 

1,441 

Legal expense

 

5,717 

 

 -

 

(3,669)

 

2,048 

Amortization of intangible assets

 

1,142 

 

 -

 

 -

 

1,142 

Loss on sale and write-downs on other real estate owned

 

1,461 

 

 -

 

(1,461)

 

 -

FDIC Insurance

 

3,682 

 

 -

 

 -

 

3,682 

Software

 

3,621 

 

 -

 

(68)

 

3,553 

Other real estate owned

 

840 

 

 -

 

(840)

 

 -

Insurance

 

1,311 

 

 -

 

 -

 

1,311 

Telecom and IT network communications

 

1,570 

 

 -

 

(87)

 

1,483 

Securitization and servicing expense

 

767 

 

 -

 

 -

 

767 

Consulting

 

1,700 

 

 -

 

 -

 

1,700 

Other

 

13,819 

 

 -

 

(1,415)

 

12,404 

Total non-interest expense

 

110,777 

 

 -

 

(8,960)

 

101,817 

Income from continuing operations before income taxes

 

38,935 

 

(30,322)

 

11,670 

 

20,283 

Income tax provision

13,825 

 

9,211 

 

(16,269)

 

6,767 

Net income from continuing operations

 

25,110 

 

(39,533)

 

27,939 

 

13,516 

Discontinued operations

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 -

 

 -

 

(11,670)

 

(11,670)

Income tax provision

 -

 

 -

 

16,269 

 

16,269 

Loss from discontinued operations, net of tax

 

 -

 

 -

 

(27,939)

 

(27,939)

Net income (loss) available to common shareholders

 

$             25,110 

 

$            (39,533)

 

$                      - 

 

$            (14,423)

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                 0.67 

 

$                (1.06)

 

$                 0.75 

 

$                 0.36 

Net loss per share from discontinued operations - basic

 

$                       - 

 

$                       - 

 

$               (0.75)

 

$                (0.75)

Net income (loss) per share - basic

 

$                 0.67 

 

$                (1.06)

 

$                      - 

 

$                (0.39)

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                 0.66 

 

$                (1.06)

 

$                 0.75 

 

$                 0.35 

Net loss per share from discontinued operations - diluted

 

$                       - 

 

$                       - 

 

$               (0.75)

 

$                (0.75)

Net income (loss) per share - diluted

 

$                 0.66 

 

$                (1.06)

 

$                      - 

 

$                (0.40)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2012

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$             78,222 

 

$                 (747)

 

$           (56,629)

 

$             20,846 

Interest on investment securities:

 

 

 

 

 

 

 

 

92

 


 

Taxable interest

 

13,378 

 

 -

 

 -

 

13,378 

Tax-exempt interest

 

2,815 

 

 -

 

 -

 

2,815 

Federal funds sold/securities purchased under agreements to resell

 

 

 -

 

 -

 

Interest earning deposits

 

2,433 

 

 -

 

 -

 

2,433 

 

 

96,855 

 

(747)

 

(56,629)

 

39,479 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

10,447 

 

 -

 

 -

 

10,447 

Securities sold under agreements to repurchase

 

95 

 

 -

 

 -

 

95 

Subordinated debenture

 

869 

 

 -

 

 -

 

869 

 

 

11,411 

 

 -

 

 -

 

11,411 

Net interest income

 

85,444 

 

(747)

 

(56,629)

 

28,068 

Provision for loan and lease losses

 

22,438 

 

90,489 

 

(106,285)

 

6,642 

Net interest income after provision for loan and lease losses

 

63,006 

 

(91,236)

 

49,656 

 

21,426 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

3,548 

 

 -

 

 -

 

3,548 

Card payment and ACH processing fees

 

2,977 

 

 -

 

 -

 

2,977 

Prepaid card fees

 

33,311 

 

 -

 

 -

 

33,311 

Gain on sale of loans

 

1,885 

 

 -

 

 -

 

1,885 

Gain on sale of investment securities

 

661 

 

 -

 

 -

 

661 

Other than temporary impairment on securities held-to-maturity

 

(202)

 

 -

 

 -

 

(202)

Leasing income

 

2,954 

 

 -

 

 -

 

2,954 

Debit card income

 

482 

 

 -

 

 -

 

482 

Affinity fees

 

2,794 

 

 -

 

 -

 

2,794 

Other

 

1,188 

 

 -

 

(97)

 

1,091 

Total non-interest income

 

49,598 

 

 -

 

(97)

 

49,501 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

40,057 

 

 -

 

(150)

 

39,907 

Depreciation and amortization

 

2,762 

 

 -

 

 -

 

2,762 

Rent and related occupancy cost

 

3,352 

 

 -

 

(327)

 

3,025 

Data processing expense

 

10,231 

 

 -

 

(293)

 

9,938 

Printing and supplies

 

1,721 

 

 -

 

(84)

 

1,637 

Professional fees

 

1,145 

 

 -

 

 -

 

1,145 

Legal expense

 

3,888 

 

 -

 

(2,177)

 

1,711 

Amortization of intangible assets

 

1,001 

 

 -

 

 -

 

1,001 

Loss on sale and write-downs on other real estate owned

 

2,508 

 

 -

 

(2,508)

 

 -

FDIC Insurance

 

3,172 

 

 -

 

 -

 

3,172 

Software

 

2,351 

 

 -

 

 -

 

2,351 

Other real estate owned

 

560 

 

 -

 

(560)

 

 -

Insurance

 

976 

 

 -

 

 -

 

976 

Telecom and IT network communications

 

1,452 

 

 -

 

(271)

 

1,181 

Securitization and servicing expense

 

98 

 

 -

 

 -

 

98 

Consulting

 

1,123 

 

 -

 

 -

 

1,123 

Other

 

11,789 

 

 -

 

(1,628)

 

10,161 

Total non-interest expense

 

88,186 

 

 -

 

(7,998)

 

80,188 

Income (loss) from continuing operations before income taxes

 

24,418 

 

(91,236)

 

57,557 

 

(9,261)

Income tax provision (benefit)

7,794 

 

(31,459)

 

20,173 

 

(3,492)

Net income (loss) from continuing operations

 

16,624 

 

(59,777)

 

37,384 

 

(5,769)

Discontinued operations

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 -

 

 -

 

(57,557)

 

(57,557)

Income tax benefit

 -

 

 -

 

(20,173)

 

(20,173)

Loss from discontinued operations, net of tax

 

 -

 

 -

 

(37,384)

 

(37,384)

Net income (loss) available to common shareholders

 

$             16,624 

 

$            (59,777)

 

$                      - 

 

$            (43,153)

93

 


 

 

 

 

 

 

 

 

 

 

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

 

$                 0.50 

 

$                (1.80)

 

$                 1.13 

 

$                (0.17)

Net loss per share from discontinued operations - basic

 

$                       - 

 

$                       - 

 

$               (1.13)

 

$                (1.13)

Net income (loss) per share - basic

 

$                 0.50 

 

$                (1.80)

 

$                      - 

 

$                (1.30)

 

 

 

 

 

 

 

 

 

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

 

$                 0.50 

 

$                (1.80)

 

$                 1.13 

 

$                (0.17)

Net loss per share from discontinued operations - diluted

 

$                       - 

 

$                       - 

 

$               (1.13)

 

$                (1.13)

Net income (loss) per share - diluted

 

$                 0.50 

 

$                (1.80)

 

$                      - 

 

$                (1.30)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Operating activities

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$             25,110 

 

$           (21,177)

 

$               9,583 

 

$             13,516 

Net loss from discontinued operations

 

 -

 

 -

 

(27,938)

 

(27,938)

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

4,836 

 

 -

 

 -

 

4,836 

Provision for loan and lease losses

 

29,500 

 

31,037 

 

(60,182)

 

355 

Net amortization of investment securities discounts/premiums

 

6,811 

 

 -

 

 -

 

6,811 

Stock-based compensation expense

 

3,157 

 

 -

 

 -

 

3,157 

Loans originated for sale

 

(276,562)

 

 -

 

 -

 

(276,562)

Sale of loans originated for resale

 

268,019 

 

 -

 

 -

 

268,019 

Gain on sales of loans originated for resale

 

(17,225)

 

 -

 

 -

 

(17,225)

Deferred income tax benefit

 

(199)

 

(13,502)

 

13,501 

 

(200)

Gain on sale of fixed assets

 

(24)

 

 -

 

 -

 

(24)

Other than temporary impairment on securities held-to-maturity

 

20 

 

 -

 

 -

 

20 

Losses on sale and write downs on other real estate owned

 

1,461 

 

 -

 

(1,461)

 

 -

Gain on sales of investment securities

 

(1,889)

 

 -

 

 -

 

(1,889)

Increase in accrued interest receivable

 

(3,274)

 

 -

 

(279)

 

(3,553)

(Increase) decrease in other assets

 

(9,197)

 

2,214 

 

6,761 

 

(222)

Increase in discontinued assets held for sale

 

 -

 

 -

 

(23,390)

 

(23,390)

Increase in other liabilities

 

15,284 

 

 -

 

 -

 

15,284 

 Net cash provided by operating activities

 

45,828 

 

(1,428)

 

(83,405)

 

(39,005)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(884,050)

 

 -

 

 -

 

(884,050)

Purchase of investment securities held-to-maturity

 

(52,899)

 

 -

 

 -

 

(52,899)

Proceeds from sale of investment securities available-for-sale

 

106,243 

 

 -

 

 -

 

106,243 

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

 

963 

 

 -

 

 -

 

963 

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

 

233,262 

 

 -

 

 -

 

233,262 

Proceeds from sale of other real estate owned

 

2,373 

 

 -

 

(2,373)

 

 -

Net increase in loans

 

(138,632)

 

1,428 

 

3,090 

 

(134,114)

Net decrease in discontinued loans held for sale

 

 -

 

 -

 

82,199 

 

82,199 

Proceeds from sale of fixed assets

 

137 

 

 -

 

 -

 

137 

Purchases of premises and equipment

 

(9,098)

 

 -

 

 -

 

(9,098)

 Net cash used in investing activities

 

(741,701)

 

1,428 

 

82,916 

 

(657,357)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

959,768 

 

 -

 

 -

 

959,768 

94

 


 

Net increase in securities sold under agreements to repurchase

 

2,673 

 

 -

 

 -

 

2,673 

Proceeds from issuance of common stock

 

1,629 

 

 -

 

 -

 

1,629 

Proceeds from the exercise of options

 

1,653 

 

 -

 

 -

 

1,653 

 Net cash provided by financing activities

 

965,723 

 

 -

 

 -

 

965,723 

 

 

 

 

 

 

 

 

 

 Net increase in cash and cash equivalents

 

269,850 

 

 -

 

(489)

 -

269,361 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

968,092 

 

 -

 

(1,504)

 

966,588 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$        1,237,942 

 

$                       - 

 

$             (1,993)

 

$        1,235,949 

 

 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Interest paid

 

$             10,792 

 

$                       - 

 

$                       - 

 

$             10,792 

Taxes paid

 

$             17,602 

 

$                       - 

 

$                       - 

 

$             17,602 

Transfers of loans to held for sale

 

$             32,795 

 

$                       - 

 

$                       - 

 

$             32,795 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2012

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Operating activities

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$             16,624 

 

$           (53,531)

 

$             31,138 

 

$             (5,769)

Net loss from discontinued operations

 

 -

 

 -

 

(37,384)

 

(37,384)

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

3,763 

 

 -

 

 -

 

3,763 

Provision for loan and lease losses

 

22,438 

 

80,831 

 

(96,627)

 

6,642 

Net amortization of investment securities discounts/premiums

 

2,090 

 

 -

 

 -

 

2,090 

Stock-based compensation expense

 

2,595 

 

 -

 

 -

 

2,595 

Loans originated for sale

 

(28,876)

 

 -

 

 -

 

(28,876)

Sale of loans originated for resale

 

19,420 

 

 -

 

 -

 

19,420 

Gain on sales of loans originated for resale

 

(1,885)

 

 -

 

 -

 

(1,885)

Deferred income tax benefit

 

(2,899)

 

(25,978)

 

27,689 

 

(1,188)

Gain on sale of fixed assets

 

(31)

 

 -

 

 -

 

(31)

Other than temporary impairment on securities held-to-maturity

 

202 

 

 -

 

 -

 

202 

Losses on sale and write downs on other real estate owned

 

2,508 

 

 -

 

(2,508)

 

 -

Gain on sales of investment securities

 

(661)

 

 -

 

 -

 

(661)

Increase in accrued interest receivable

 

(1,381)

 

 -

 

(193)

 

(1,574)

Increase in other assets

 

(8,561)

 

(2,070)

 

(31,425)

 

(42,056)

Decrease in discontinued assets held for sale

 

 -

 

 -

 

(2,310)

 

(2,310)

Increase in other liabilities

 

7,739 

 

 -

 

 -

 

7,739 

 Net cash provided by operating activities

 

33,085 

 

(748)

 

(111,620)

 

(79,283)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(473,828)

 

 -

 

 -

 

(473,828)

Proceeds from sale of investment securities available-for-sale

 

26,209 

 

 -

 

 -

 

26,209 

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

 

2,076 

 

 -

 

 -

 

2,076 

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

 

154,246 

 

 -

 

 -

 

154,246 

Proceeds from sale of other real estate owned

 

5,535 

 

 -

 

(5,535)

 

 -

Net increase in loans

 

(181,872)

 

748 

 

7,014 

 

(174,110)

Net decrease in discontinued loans held for sale

 

 -

 

 -

 

109,743 

 

109,743 

Proceeds from sale of fixed assets

 

357 

 

 -

 

 -

 

357 

95

 


 

Purchases of premises and equipment

 

(5,098)

 

 -

 

 -

 

(5,098)

 Net cash used in investing activities

 

(472,375)

 

748 

 

111,222 

 

(360,405)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

630,670 

 

 -

 

 -

 

630,670 

Net decrease in securities sold under agreements to repurchase

 

(14,629)

 

 -

 

 -

 

(14,629)

Proceeds from issuance of common stock

 

41,713 

 

 -

 

 -

 

41,713 

Proceeds from the exercise of options

 

454 

 

 -

 

 -

 

454 

 Net provided by in financing activities

 

658,208 

 

 -

 

 -

 

658,208 

 

 

 

 

 

 

 

 

 

 Net increase in cash and cash equivalents

 

218,918 

 

 -

 

(398)

 -

218,520 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

749,174 

 

 -

 

(1,106)

 

748,068 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$           968,092 

 

$                       - 

 

$             (1,504)

 

$           966,588 

 

 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Interest paid

 

$             11,431 

 

$                       - 

 

$                       - 

 

$             11,431 

Taxes paid

 

$             11,049 

 

$                       - 

 

$                       - 

 

$             11,049 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note D— Subsequent Events

 

          The Company evaluated its December 31, 2014 consolidated financial statements for subsequent events through the date the consolidated financial statements were issued.  In the second quarter of 2015, approximately $150 million of loans from discontinued operations were sold at a net gain of approximately $2.2 million. 

 

In August, 2015, the Bank entered into an Amendment to a 2014 Consent Order with the FDIC pursuant to which the Bank may not pay dividends without prior FDIC approval. The Bank took this action without admitting or denying any additional charges of unsafe or unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA compliance program. On May 11, 2015, the Company had received a Supervisory Letter pursuant to which the Company may not pay dividends without prior Federal Reserve approval. The Federal Reserve approved the payment of the interest on the Company’s trust preferred securities due September 15, 2015. Future payments are subject to future approval by the Federal Reserve.

 

 

 

 

Note E—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 are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

December 31, 2014

 

 

 

 

Gross

 

Gross

 

 

96

 


 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$           16,519 

 

$                  42 

 

$                     - 

 

$           16,561 

Federally insured student loan securities

 

125,789 

 

613 

 

(390)

 

126,012 

Tax-exempt obligations of states and political subdivisions

 

535,622 

 

16,027 

 

(380)

 

551,269 

Taxable obligations of states and political subdivisions

 

58,868 

 

2,614 

 

(103)

 

61,379 

Residential mortgage-backed securities

 

419,503 

 

3,504 

 

(878)

 

422,129 

Commercial mortgage-backed securities

 

123,519 

 

1,220 

 

(1,500)

 

123,239 

Foreign debt securities

 

67,094 

 

130 

 

(346)

 

66,878 

Corporate and other debt securities

 

126,610 

 

225 

 

(663)

 

126,172 

 

 

$      1,473,524 

 

$           24,375 

 

$           (4,260)

 

$      1,493,639 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

December 31, 2014

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$           17,882 

 

$                531 

 

$            (3,820)

 

$           14,593 

Other debt securities - pooled

 

75,883 

 

1,438 

 

 -

 

77,321 

 

 

$           93,765 

 

$             1,969 

 

$            (3,820)

 

$           91,914 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

December 31, 2013

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$           10,680 

 

$                  46 

 

$                     - 

 

$           10,726 

Federally insured student loan securities

 

147,717 

 

575 

 

(719)

 

147,573 

Tax-exempt obligations of states and political subdivisions

 

378,180 

 

2,721 

 

(1,951)

 

378,950 

Taxable obligations of states and political subdivisions

 

78,638 

 

1,276 

 

(746)

 

79,168 

Residential mortgage-backed securities

 

323,199 

 

1,838 

 

(2,263)

 

322,774 

Commercial mortgage-backed securities

 

118,838 

 

1,919 

 

(410)

 

120,347 

Foreign debt securities

 

72,729 

 

90 

 

(618)

 

72,202 

Corporate and other debt securities

 

121,281 

 

699 

 

(602)

 

121,377 

 

 

$      1,251,262 

 

$             9,164 

 

$           (7,309)

 

$      1,253,117 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

December 31, 2013

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$           21,027 

 

$                367 

 

$            (4,222)

 

$           17,172 

Other debt securities - pooled

 

76,178 

 

1,680 

 

 -

 

77,858 

 

 

$           97,205 

 

$             2,047 

 

$            (4,222)

 

$           95,030 

The amortized cost and fair value of the Company’s investment securities at December 31, 2014, by contractual maturity are shown below.  Expected maturities may differ from contractual maturities because borrowers may 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

 

$         104,938 

 

$         104,828 

 

$                     - 

 

$                     - 

97

 


 

Due after one year through five years

 

307,415 

 

308,236 

 

7,048 

 

7,448 

Due after five years through ten years

 

363,759 

 

370,465 

 

 -

 

 -

Due after ten years

 

697,412 

 

710,110 

 

86,717 

 

84,466 

 

 

$      1,473,524 

 

$      1,493,639 

 

$           93,765 

 

$           91,914 

At December 31, 2014 and 2013, investment securities with a fair value of approximately $25.7 million and $29.1 million, respectively, were pledged to secure securities sold under repurchase agreements as required or permitted by law.  Gross gains on sales of securities were $657,000,  $2.1 million and $661,000 for the years ended December 31, 2014, 2013 and 2012, respectively.  Gross losses on sales of securities were $207,000,  $182,000 and $0 for the years ended December 31, 2014, 2013 and 2012, respectively.

Available-for-sale securities fair values are based on a fair market value supplied by a third-party market data provider while 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 evaluations of the creditworthiness of the issuers/guarantors as well as the underlying collateral if applicable, in addition to the continuing performance of the securities.  The Company recognized other-than-temporary impairment charges of $0 in 2014, $20,000 in 2013 and $202,000 in 2012, for securities in its held-to-maturity portfolio.  The amount of the credit impairment was calculated by estimating the discounted cash flows for those securities.

 

Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $1.0 million at December 31, 2014 and $3.2 million at December 31, 2013. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federally insured student loan securities

 

9

 

$           28,435 

 

$               (169)

 

$           34,274 

 

$                    (221)

 

$           62,709 

 

$            (390)

Tax-exempt obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

97

 

21,458 

 

(134)

 

46,412 

 

(245)

 

67,870 

 

(379)

Taxable obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

24

 

499 

 

(1)

 

21,088 

 

(102)

 

21,587 

 

(103)

Residential mortgage-backed securities

 

29

 

43,946 

 

(231)

 

67,023 

 

(647)

 

110,969 

 

(878)

Commercial mortgage-backed securities

 

30

 

41,231 

 

(883)

 

47,549 

 

(617)

 

88,780 

 

(1,500)

Foreign debt securities

 

53

 

24,681 

 

(203)

 

14,943 

 

(144)

 

39,624 

 

(347)

Corporate and other debt securities

 

61

 

62,984 

 

(568)

 

16,609 

 

(95)

 

79,593 

 

(663)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

303

 

$         223,234 

 

$            (2,189)

 

$         247,898 

 

$                 (2,071)

 

$         471,132 

 

$         (4,260)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

1

 

$                   - 

 

$                     - 

 

$           5,144 

 

$                 (3,820)

 

$            5,144 

 

$          (3,820)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                   - 

 

$                     - 

 

$           5,144 

 

$                 (3,820)

 

$            5,144 

 

$          (3,820)

 

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

98

 


 

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

 

4

 

$            3,300 

 

$                     - 

 

$                    - 

 

$                         - 

 

$            3,300 

 

$                  - 

Federally insured student loan securities

 

9

 

50,498 

 

(676)

 

6,202 

 

(44)

 

56,700 

 

(720)

Tax-exempt obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

229

 

169,995 

 

(1,951)

 

 -

 

 -

 

169,995 

 

(1,951)

Taxable obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

52

 

46,888 

 

(737)

 

1,808 

 

(9)

 

48,696 

 

(746)

Residential mortgage-backed securities

 

38

 

147,717 

 

(1,656)

 

55,064 

 

(606)

 

202,781 

 

(2,262)

Commercial mortgage-backed securities

 

26

 

76,668 

 

(399)

 

405 

 

(11)

 

77,073 

 

(410)

Foreign debt securities

 

47

 

50,589 

 

(618)

 

 -

 

 -

 

50,589 

 

(618)

Corporate and other debt securities

 

54

 

47,315 

 

(406)

 

4,255 

 

(196)

 

51,570 

 

(602)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

459

 

$        592,970 

 

$           (6,443)

 

$          67,734 

 

$                   (866)

 

$        660,704 

 

$         (7,309)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

2

 

$                   - 

 

$                     - 

 

$           7,887 

 

$                 (4,222)

 

$            7,887 

 

$          (4,222)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

2

 

$                   - 

 

$                     - 

 

$           7,887 

 

$                 (4,222)

 

$            7,887 

 

$          (4,222)

 

The following table provides additional information related to the Company’s single issuer trust preferred securities as of December 31, 2014:

 

 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

Security A

 

$        1,897 

 

$          2,000 

 

$              103 

 

Not rated

Security B

 

8,964 

 

5,144 

 

(3,820)

 

Not rated

 

 

 

 

 

 

 

 

 

Class: All of the above are trust preferred securities.

 

 

 

 

 

 

 

 

 

The following table provides additional information related to our pooled trust preferred securities as of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pooled issue

 

Class

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

 

Excess subordination

Pool A (7 performing issuers)

 

Mezzanine

 

$             174 

 

$              260 

 

$                   86 

 

CAA3

 

*

 

* There is no excess subordination for these securities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company has evaluated the securities in the above tables as of December 31, 2014 and has concluded that none of these securities has impairment that is other-than-temporary.  The Company evaluates whether an other than temporary 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.  If other than temporary impairment is determined, the Company estimates expected future cash flows to determine the credit loss amount with 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.  Based upon this evaluation, the Company concluded that most of the securities that are in an unrealized loss position are in a

99

 


 

loss position because of changes in interest rates after the securities were purchased.  The securities that have been in an unrealized loss position for 12 months or longer include other securities whose market values are sensitive to interest rates and changes in credit quality.  The Company’s unrealized loss for the debt securities, which includes two single issuer trust preferred securities and one pooled trust preferred security, is primarily related to general market conditions and the resultant lack of liquidity in the market.  The severity of the 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 FLoans

 

The Company originates loans for sale to other financial institutions which issue commercial mortgage backed securities or to secondary government guaranteed loan marketsThe Company has elected the fair value option for the balance of these loans classified as commercial loans held for sale to better reflect the economics of the transactions.  At December 31, 2014 and 2013, the fair value of these loans was $217.1 million and $69.9 million and the unpaid principal balance was $212.8 million and $67.5 million, respectively.  Included in gain on sale of loans in the Statement of Operations were gains recognized from changes in fair value of $1.9 million and $2.4 million during the years ended December 31, 2014 and 2013, respectively.  There were no amounts of changes in fair value related to instrument-specific credit risk.  Interest earned on loans held for sale during the period held are recorded in Interest Income – Loans, including fees on the Statement of Operations. 

 

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

 

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

 

 

 

 

 

 

 

December 31,

 

December 31,

 

2014

 

2013

 

 

 

(restated)

 

 

 

 

SBA non real estate

$            62,425 

 

$             45,875 

SBA commercial mortgage

82,317 

 

69,730 

SBA construction

20,392 

 

51 

Total SBA loans

165,134 

 

115,656 

Direct lease financing

194,464 

 

175,610 

SBLOC

421,862 

 

293,109 

Other specialty lending

48,625 

 

1,588 

Other consumer loans

36,168 

 

45,152 

 

866,253 

 

631,115 

Unamortized loan fees and costs

8,340 

 

4,886 

Total loans, net of deferred loan costs

$          874,593 

 

$           636,001 

 

 

 

 

 

Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $1.8 million and $2.0 million at December 31, 2014 and 2013, respectively.  Overdraft charge-offs and recoveries are reflected in the allowance for loan and lease losses.

The following table provides information about impaired loans at December 31, 2014 and 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

100

 


 

December 31, 2014

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      - 

 

$                      - 

 

$                    - 

 

$                      - 

 

$                      - 

Consumer - other

346 

 

346 

 

 -

 

139 

 

 -

Consumer - home equity

827 

 

927 

 

 -

 

1,043 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

197 

 

197 

 

40 

 

967 

 

 -

Consumer - other

 -

 

 -

 

 -

 

369 

 

 -

Consumer - home equity

1,080 

 

1,080 

 

271 

 

885 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

197 

 

197 

 

40 

 

967 

 

 -

Consumer - other

346 

 

346 

 

 -

 

508 

 

 -

Consumer - home equity

1,907 

 

2,007 

 

271 

 

1,928 

 

 -

 

 

 

 

 

 

 

 

 

 

December 31, 2013 (restated)

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      - 

 

$                      - 

 

$                    - 

 

$                      - 

 

$                      - 

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

927 

 

927 

 

 -

 

927 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

385 

 

385 

 

95 

 

251 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

429 

 

429 

 

135 

 

190 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

385 

 

385 

 

95 

 

251 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

1,356 

 

1,356 

 

135 

 

1,117 

 

 -

 

 

The following table summarizes the Company’s non-accrual loans, loans past due 90 days and other real estate owned at December 31, 2014 and 2013, respectively (the Company had no non-accrual leases at December 31, 2014 or December 31, 2013):

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

2014

 

2013

 

 

 

 

(restated)

 

 

(in thousands)

 

 

 

 

 

Non-accrual loans

 

 

 

 

SBA non real estate

 

$                  - 

 

$              168 

Consumer

 

1,907 

 

1,356 

Total non-accrual loans

 

1,907 

 

1,524 

 

 

 

 

 

Loans past due 90 days or more

 

149 

 

110 

Total non-performing loans

 

2,056 

 

1,634 

Other real estate owned

 

 -

 

 -

Total non-performing assets

 

$           2,056 

 

$           1,634 

 

101

 


 

The Company’s loans that were modified during the years ended December 31, 2014 and 2013 and considered troubled debt restructurings are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

(restated)

 

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

Commercial

 

 

$               197 

 

$             197 

 

 

$             217 

 

$             217 

Consumer

 

 

346 

 

346 

 

 -

 

 -

 

 -

Total

 

 

$               543 

 

$             543 

 

 

$             217 

 

$             217 

 

The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2014 and 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

(restated)

 

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

Commercial

 

$                 - 

 

$               197 

 

$                 - 

 

$               - 

 

$             217 

 

$                 - 

Consumer

 

 -

 

346 

 

 -

 

 -

 

 -

 

 -

Total

 

$                 - 

 

$               543 

 

$                 - 

 

$               - 

 

$             217 

 

$                 - 

 

 

As of December 31, 2014 and December 31, 2013, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.  There were no loans that were restructured within the last 12 months that have subsequently defaulted.

 

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

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance (restated)

 

$               419 

 

$               496 

 

$                   - 

 

$               311 

 

$               293 

 

$                   1 

 

$            2,361 

 

$                   - 

 

$            3,881 

Charge-offs

 

(307)

 

 -

 

 -

 

(323)

 

(3)

 

 -

 

(871)

 

 -

 

(1,504)

Recoveries

 

12 

 

 -

 

 -

 

25 

 

 -

 

 -

 

22 

 

 -

 

59 

Provision (credit)

 

261 

 

(35)

 

114 

 

823 

 

272 

 

65 

 

(331)

 

33 

 

1,202 

Ending balance

 

$               385 

 

$               461 

 

$               114 

 

$               836 

 

$               562 

 

$                 66 

 

$            1,181 

 

$                 33 

 

$            3,638 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                 40 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$               271 

 

$                   - 

 

$               311 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$               345 

 

$               461 

 

$               114 

 

$               836 

 

$               562 

 

$                 66 

 

$               910 

 

$                 33 

 

$            3,327 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$          62,425 

 

$          82,317 

 

$          20,392 

 

$        194,464 

 

$        421,862 

 

$          48,625 

 

$          36,168 

 

$            8,340 

 

$        874,593 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102

 


 

Ending balance: Individually evaluated for impairment

 

$               197 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$            2,253 

 

$                   - 

 

$            2,450 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$          62,228 

 

$          82,317 

 

$          20,392 

 

$        194,464 

 

$        421,862 

 

$          48,625 

 

$          33,915 

 

$            8,340 

 

$        872,143 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$               193 

 

$               104 

 

$                 42 

 

$               239 

 

$               236 

 

$                   - 

 

$            3,171 

 

$                   - 

 

$            3,985 

Charge-offs

 

(44)

 

 -

 

 -

 

(29)

 

 -

 

 -

 

(447)

 

 -

 

(520)

Recoveries

 

 -

 

 -

 

 -

 

 

 -

 

 -

 

53 

 

 -

 

61 

Provision (credit)

 

270 

 

392 

 

(42)

 

93 

 

57 

 

 

(416)

 

 -

 

355 

Ending balance

 

$               419 

 

$               496 

 

$                   - 

 

$               311 

 

$               293 

 

$                   1 

 

$            2,361 

 

$                   - 

 

$            3,881 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                 95 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$               135 

 

$                   - 

 

$               230 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$               324 

 

$               496 

 

$                   - 

 

$               311 

 

$               293 

 

$                   1 

 

$            2,226 

 

$                   - 

 

$            3,651 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$          45,875 

 

$          69,730 

 

$                 51 

 

$        175,610 

 

$        293,109 

 

$            1,588 

 

$          45,152 

 

$            4,886 

 

$        636,001 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$               385 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$                   - 

 

$            1,356 

 

$                   - 

 

$            1,741 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$          45,490 

 

$          69,730 

 

$                 51 

 

$        175,610 

 

$        293,109 

 

$            1,588 

 

$          43,796 

 

$            4,886 

 

$        634,260 

 

The Company did not have loans acquired with deteriorated credit quality at either December 31, 2014 or December 31, 2013.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

30-59 Days past due

 

60-89 Days past due

 

Greater than 90 days

 

Non accrual

 

Total past due

 

Current

 

Total loans

SBA non real estate

 

$                  - 

 

$                  - 

 

$                  - 

 

$                  - 

 

$                  - 

 

$        62,425 

 

$        62,425 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

82,317 

 

82,317 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,392 

 

20,392 

Direct lease financing

 

5,083 

 

1,832 

 

149 

 

 -

 

7,064 

 

187,400 

 

194,464 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

421,862 

 

421,862 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

48,625 

 

48,625 

Consumer - other

 

 

 

 

 -

 

 -

 

 

8,654 

 

8,663 

Consumer - home equity

 

 -

 

457 

 

 -

 

1,907 

 

2,364 

 

25,141 

 

27,505 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,340 

 

8,340 

 

 

$          5,092 

 

$          2,289 

 

$              149 

 

$          1,907 

 

$          9,437 

 

$      865,156 

 

$      874,593 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$                  - 

 

$                  - 

 

$                  - 

 

$             168 

 

$             168 

 

$        45,707 

 

$        45,875 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

69,730 

 

69,730 

103

 


 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

51 

 

51 

Direct lease financing

 

3,427 

 

1,293 

 

110 

 

 -

 

4,830 

 

170,780 

 

175,610 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

293,109 

 

293,109 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,588 

 

1,588 

Consumer - other

 

425 

 

 -

 

 -

 

1,356 

 

1,781 

 

8,793 

 

10,574 

Consumer - home equity

 

18 

 

 -

 

 -

 

 -

 

18 

 

34,560 

 

34,578 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

4,886 

 

4,886 

 

 

$          3,870 

 

$          1,293 

 

$              110 

 

$          1,524 

 

$          6,797 

 

$      629,204 

 

$      636,001 

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non real estate

 

$         49,214 

 

$                  - 

 

$              197 

 

$                  - 

 

$                  - 

 

$                669 

 

$             12,345 

 

$         62,425 

SBA commercial mortgage

 

59,086 

 

 -

 

 -

 

 -

 

 -

 

965 

 

22,266 

 

82,317 

SBA construction

 

18,911 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,481 

 

20,392 

Direct lease financing

 

58,994 

 

 -

 

99 

 

 -

 

 -

 

 -

 

135,371 

 

194,464 

SBLOC

 

142,286 

 

 -

 

 -

 

 -

 

 -

 

57,360 

 

222,216 

 

421,862 

Other specialty lending

 

46,990 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,635 

 

48,625 

Consumer

 

14,196 

 

346 

 

1,907 

 

 -

 

 -

 

73 

 

19,646 

 

36,168 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,340 

 

8,340 

 

 

$       389,677 

 

$              346 

 

$           2,203 

 

$                  - 

 

$                  - 

 

$           59,067 

 

$           423,300 

 

$       874,593 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$         51,645 

 

$                  - 

 

$              385 

 

$                  - 

 

$                  - 

 

$                643 

 

$             (6,798)

 

$         45,875 

SBA commercial mortgage

 

57,162 

 

 -

 

 -

 

 -

 

 -

 

6,619 

 

5,949 

 

69,730 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

51 

 

 -

 

51 

Direct lease financing

 

58,545 

 

 -

 

 -

 

 -

 

 -

 

2,244 

 

114,821 

 

175,610 

SBLOC

 

94,487 

 

 -

 

 -

 

 -

 

 -

 

500 

 

198,122 

 

293,109 

Other specialty lending

 

67 

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,521 

 

1,588 

Consumer

 

15,013 

 

1,348 

 

1,356 

 

 -

 

 -

 

24 

 

27,411 

 

45,152 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

4,886 

 

4,886 

 

 

$       276,919 

 

$           1,348 

 

$           1,741 

 

$                  - 

 

$                  - 

 

$           10,081 

 

$           345,912 

 

$       636,001 

 

*The loan review scope does not encompass performing loans in the absence of negative characteristics or which fell below the dollar threshold requiring review. Accordingly,  such loans are not rated and not subject to review.   The loan portfolio review coverage was approximately 45% at December 31, 2014 and approximately 44% at December 31, 2013.  This review is performed by the loan review department, which is independent of the loan departments and reports directly to the audit committee.  All classified loans are reviewed by our independent loan review function.  Potential problem loans which are identified by either the independent loan review department or line management are also reviewed.  Loans are subject to review by their relationship manager and senior loan personnel.    As a result of transferring loans into “Discontinued Operations”, management is currently reassessing the review scope for the continuing operations portfolio.

 

Note G—Premises and Equipment

 

Premises and equipment are as follows (in thousands):

 

 

 

 

 

 

 

 

 

104

 


 

 

 

 

 

December 31,

 

 

Estimated

 

 

 

 

 

 

useful lives

 

2014

 

2013

Furniture, fixtures, and equipment

 

3 to 12 years

 

$               41,765

 

$             35,754

Leasehold improvements

 

6 to 10 years

 

7,098 

 

6,623 

 

 

 

 

48,863 

 

42,377 

Accumulated depreciation

 

 

 

(31,166)

 

(26,718)

 

 

 

 

$               17,697

 

$             15,659

Depreciation expense for the years ended December 31, 2014, 2013 and 2012 was approximately $4.5 million, $3.7 million and $2.8 million, respectively.

 

Note H—Variable Interest Entity (“VIE”)

 

VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.

 

The most common type of VIE is a special purpose entity (“SPE”).  SPEs are commonly used in securitization transactions in order to isolate certain assets and distribute the cash flows from those assets to investors.  The basic SPE structure involves a company selling assets to the SPE with the SPE funding the purchase of those assets by issuing securities to investors.  The legal documents that govern the transaction specify how the cash earned on the assets must be allocated to the SPE’s investors and other parties that have rights to those cash flows.  SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other entities, including the creditors of the seller of the assets.  The primary beneficiary of a VIE (i.e., the party that has a controlling financial interest) is required to consolidate the assets and liabilities of the VIE.  The primary beneficiary is the party that has both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

The Company holds variable interests in Walnut Street 2014-1 LLC (“ WS 2014”), accounted for as a debt security and the Company elected the fair value option, after acquiring a 49% equity interest in WS 2014, as well as 100% of the A-Notes and 49% of the B-Notes that WS 2014 issued in a securitization transaction.  The variable interests relate to the economic interests held by the Company in WS 2014 and the asset management contract between the Company and WS 2014.  The Company is not the primary beneficiary, as it does not have the controlling financial interest in WS 2014 and therefore does not consolidate.  At December 31, 2014, the Company’s investment in the WS 2014 was $193.6 million and was classified as investment in unconsolidated entity in the consolidated balance sheet.  The Company’s maximum exposure to loss is equal to the balance of the Company’s interest, or $193.6 million.

 

The following table presents the total unpaid principal amount of assets held in private securitization entities, including those in which the Company has continuing involvement.  Continuing involvement includes servicing the loans and holding senior interests or subordinated interests.

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal amount outstanding

 

The Company's

 

 

 

 

 

 

Assets held in

 

interest

 

 

Total assets

 

Assets held in

 

nonconsolidated

 

in securitized

 

 

held by

 

consolidated

 

VIEs with

 

assets in

 

 

securitization

 

securitization

 

continuing

 

nonconsolidated

December 31, 2014

 

VIEs

 

VIEs

 

involvement

 

VIEs (b)

Commercial and other (a)

 

$                209,632 

 

 -

 

$                     209,632 

 

$                      193,595 

105

 


 

 

 

 

 

 

 

 

 

 

(a) Consists of notes backed by commercial loans predominately secured by real estate.

(b) The retained interest in the commercial and other securitization trusts are non-rated and are accounted for under the equity method of accounting.

 

 

 

 

Note I—Debt

 

1.

Short-term borrowings

 

At December 31, 2014, the Bank maintained $49.0 million in unsecured lines of credit that bear interest at variable rates and are renewed annually. Additionally, the Bank has overnight borrowing capacity with the Federal Home Loan Bank of Pittsburgh of $355.8 million at December 31, 2014.   Borrowings under this arrangement have a variable interest rate. As of December 31, 2014,  the Bank did not have any borrowings outstanding on these lines.  The details of these categories are presented below:

 

 

 

 

 

 

 

 

 

 

 

As of or for the year ended December 31,

 

 

2014

 

2013

 

2012

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Short-term borrowings and federal funds purchased

 

 

 

 

 

 

Balance at year-end

 

$                      -

 

$                      -

 

$                      -

Average during the year

 

 -

 

 -

 

 -

Maximum month-end balance

 

 -

 

 -

 

 -

Weighted average rate during the year

 

0.00% 

 

0.00% 

 

0.00% 

Rate at December 31

 

0.27% 

 

0.25% 

 

0.25% 

 

2.Securities sold under agreements to repurchase

 

Securities sold under agreements to repurchase generally mature within 30 days from the date of the transactions.  The detail of securities sold under agreements to repurchase is presented below:

 

 

 

 

 

 

 

 

 

 

 

As of or for the year ended December 31,

 

 

2014

 

2013

 

2012

 

 

(dollars in thousands)

Securities sold under repurchase agreements

 

 

 

 

 

 

Balance at year-end

 

$              19,414

 

$             21,221

 

$               18,548

Average during the year

 

17,497 

 

18,442 

 

22,508 

Maximum month-end balance

 

21,496 

 

22,523 

 

30,964 

Weighted average rate during the year

 

0.29% 

 

0.29% 

 

0.42% 

Rate at December 31

 

0.29% 

 

0.28% 

 

0.37% 

3. Guaranteed Preferred Beneficiary Interest in Company’s Subordinated Debt

 

As of December 31, 2014, the Company held  two statutory business trusts: The Bancorp Capital Trust II and The Bancorp Capital Trust III (Trusts).  In each case, the Company owns all the common securities of the trust.  The Trusts issued preferred capital securities to investors and invested the proceeds in the Company through the purchase of junior subordinated debentures issued by the Company.  These debentures are the sole assets of the Trusts.

 

106

 


 

·

The $10.3 million of debentures issued to The Bancorp Capital Trust II on November 28, 2007 mature on March 15, 2038, and bear interest at an annual rate equal to 3-month LIBOR plus 3.25%

·

The $3.1 million of debentures issued to The Bancorp Capital Trust III on November 28, 2007 mature on March 15, 2038, and bear interest at a floating annual rate equal to 3-month LIBOR plus 3.25%

 

As of December 31, 2014, the Trusts qualify as variable interest entities under ASC 810, Consolidation.   The Company is not considered the primary beneficiary and therefore the Trusts are not consolidated in the Company’s consolidated financial statements. The Trusts are accounted for under the equity method of accounting. 

 

Note J—Shareholders’ Equity

 

In December 2012, the Company issued 4,000,000 shares of the Company’s common stock, par value $1.00, at a public offering price of $11.00 per share in an underwritten public offering.  The sale of the common stock resulted in net proceeds to the Company, after underwriting discounts, commissions and expenses, of approximately $41.7 million.

 

In 2011, the Company adopted a common stock repurchase program in which shares repurchases reduce the amount of shares outstanding.  Repurchased shares may be reissued for various corporate purposes.  As of December 31, 2011, the Company had repurchased 100,000 shares of the total 750,000 maximum number of shares authorized by the Board of Directors.  The 100,000 shares were repurchased at an average cost of $8.66.  Shares were repurchased at market price and were recorded as treasury stock at that amount, using the cost method.  The Company did not repurchase shares in 2012, 2013 or 2014.

In March 2011, the Company issued 7,015,000 shares of the Company’s common stock, par value $1.00, at a public offering price of $8.25 per share in an underwritten public offering.  The sale of the common stock resulted in net proceeds to the Company, after underwriting discounts, commissions and expenses, of approximately $54.5 million.

Note K—Benefit Plans

 

401 (k) Plan

 

The Company maintains a 401(k) savings plan covering substantially all employees of the Company.  Under the plan, the Company matches 50% of the employee contributions for all participants, not to exceed 6% of their salary.  Contributions made by the Company were approximately $921,000,  $813,000 and $679,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

 

Supplemental Executive Retirement Plan

In 2005, the Company began contributing to a supplemental executive retirement plan for its former Chief Executive Officer that provides annual retirement benefits of $25,000 per month until death.   There were no disbursements under the plan in 2014 or prior years.   In 2014 the Company expensed $1.3 million based upon actuarial tables  for which the appropriate actuarial data for 2014 was utilized. The actuarial assumptions reflected a discount rate of 3.37%, a maximum potential life expectancy of 120 years and a monthly benefit of $25,000. The Company expensed $112,000 and $125,000 for this plan for the years ended December 31, 2013 and 2012 respectively. As of December 31, 2014 the Company had accrued $4.3 million for potential future payouts.

Note L—Income Taxes

 

The company operates predominately in the United States and is subject to corporate net income taxes for Federal and State purposes.  The company also has minimal operations in foreign jurisdictions but these taxes are not considered material to the overall financial statements.

 

The components of income tax expense (benefit) included in the statements of continuing operations are as follows:

 

 

 

 

 

 

 

 

 

 

 

For the years ended

 

 

December 31,

107

 


 

 

 

2014

 

2013

 

2012

 

 

 

 

(restated)

 

(restated)

 

 

(in thousands)

Current tax provision (benefit)

 

 

 

 

 

 

Federal

 

$            (3,663)

 

$              4,723 

 

$            (3,533)

State

 

2,730 

 

2,244 

 

1,229 

 

 

(933)

 

6,967 

 

(2,304)

Deferred tax provision (benefit)

 

 

 

 

 

 

Federal

 

(13,705)

 

(208)

 

(1,125)

State

 

115 

 

 

(63)

 

 

(13,590)

 

(200)

 

(1,188)

 

 

$          (14,523)

 

$              6,767 

 

$            (3,492)

 

The differences between applicable income tax expense (benefit) from continuing operations and the amounts computed by applying the statutory federal income tax rate of 34% for 2014, 2013 and 2012, respectively, are as follows:

 

 

 

 

 

 

 

 

 

 

 

For the years ended

 

 

December 31,

 

 

2014

 

2013

 

2012

 

 

 

 

(restated)

 

(restated)

 

 

(in thousands)

 

 

 

 

 

 

 

Computed tax expense at statutory rate

 

$              2,479 

 

$              6,897 

 

$            (3,150)

State taxes

 

1,877 

 

1,486 

 

769 

Tax-exempt interest income

 

(4,304)

 

(1,898)

 

(1,213)

Foreign income tax rate difference

 

(591)

 

 -

 

 -

Valuation allowance - domestic

 

(14,485)

 

 -

 

 -

Valuation allowance - foreign

 

354 

 

 -

 

 -

Other

 

147 

 

282 

 

102 

 

 

$          (14,523)

 

$              6,767 

 

$            (3,492)

 

Deferred income taxes are provided for the temporary difference between the financial reporting basis and the tax basis of the Company’s assets and liabilities.  Cumulative temporary differences recognized in the financial statement of position are as follows:

 

 

 

 

 

 

 

 

 

For the years ended

 

 

December 31,

 

 

2014

 

2013

 

 

 

 

(restated)

 

 

(in thousands)

Deferred tax assets:

 

 

 

 

Allowance for loan and lease losses

 

$              1,236 

 

$            12,983 

Non-accrual interest

 

1,223 

 

1,402 

Deferred compensation

 

1,451 

 

1,014 

State taxes

 

2,107 

 

2,840 

108

 


 

Nonqualified stock options

 

2,962 

 

2,576 

Stock appreciation rights

 

100 

 

100 

Tax deductible goodwill

 

9,082 

 

10,100 

Depreciation

 

206 

 

205 

Other than temporary impairment

 

147 

 

147 

Partnership interest, Walnut St basis difference

 

1,654 

 

 -

Loan charges

 

16,745 

 

48,245 

AMT tax credit

 

1,092 

 

 

Federal net operating loss

 

5,940 

 

 

Foreign net operating loss

 

637 

 

 -

Other

 

3,748 

 

277 

Total gross deferred tax assets

 

48,330 

 

79,889 

Federal and state valuation allowance

 

(5,252)

 

(19,754)

Foreign valuation allowance

 

(637)

 

 -

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

Unrealized gains on investment securities available for sale

 

6,642 

 

300 

Discount on Class A notes

 

2,126 

 

 -

Leasing

 

 -

 

 -

Total deferred tax liabilities

 

8,768 

 

300 

Net deferred tax asset (liability)

 

$            33,673 

 

$            59,835 

 

The Company has a federal net operating loss carryforward of approximately $17 million that will expire in 2034.  The Company has approximately $73 million of state net operating losses from several states that will expire at varying times over the next 20 years.  Additionally, the Company has alternative minimum tax credits of $1.1 million to offset taxable income in the future that may be carried forward indefinitely.

 

Management assesses all available positive and negative evidence to determine whether it is more likely than not that the Company will able to recognize the existing deferred tax assets.  For the year ended December 31, 2013, the Company recorded a valuation allowance on the deferrerd tax assets of approximately $19.7 million.  Management determined these assets were no longer more likely-than-not to be realized due to increasing losses and deferred tax assets in discontinued operations.  Accordingly, the income tax expense related to the recording of the valuation allowance was allocated to discontinued operations.  For the year ended December 31, 2014, the valuation allowance recorded on the deferred tax assets remained consistent until opportunities arose in the fourth quarter of 2014 for a prudent and feasible tax planning strategy.  This resulted in a reduction of the required valuation allowance of approximately $14.5 million.  The income tax benefit of this reduction was recorded in continuing operations.  The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if the negative evidence is no longer present or diminishes due to growth of positive evidence.

 

The Company does not provide for deferred taxes on the excess of the financial reporting over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration.  The determination of the additional deferred taxes that have not been provided for is not practicable.  From its European operations, the Company has net operating loss carryforwards of approximately $6.4 million which may be carried forward indefinitely provided there is no change in ownership or nature of trade of the company within a period of expire over the next three years.  These losses have generated deferred tax assets in the amount of $637,000 which have a full valuation allowance at December 31, 2014. 

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

 

 

 

 

 

 

 

 

 

 

For the years ended

109

 


 

 

 

December 31,

 

 

2014

 

2013

 

2012

 

 

 

 

(restated)

 

(restated)

 

 

(in thousands)

 

 

 

 

 

 

 

Beginning balance at January 1

 

$                352 

 

$                230 

 

$                119 

Increases(decreases) in tax provisions for prior years

 

(39)

 

122 

 

111 

Gross unrecognized tax benefits at December 31

 

$                313 

 

$                352 

 

$                230 

 

Management does not believe these amounts will significantly increase or decrease within 12 months of December 31, 2014.  The total amount of unrecognized tax benefits, if recognized, will impact the effective tax rate.

The Company files federal and state returns in jurisdictions with varying statutes of limitations.  The 2011 through 2013 tax years generally remain subject to examination by federal and most state tax authorities.  The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense for all periods presented.  To date, no amounts of interest or penalties relating to unrecognized tax benefits have been recorded.

Note M—Stock-Based Compensation

 

In May 2013, the Company adopted a stock option and equity plan (the 2013 Plan).  Employees and directors of the Company and the Bank and consultants (with restrictions) are eligible to participate in the 2013 plan.  The option term may not exceed 10 years from the date of the grant.  An employee or consultant who possesses more than 10 percent of voting power of all classes of stock of the Company, or any parent or subsidiary, may not have options with terms exceeding 5 years from the date of grant.  An aggregate of 2,200,000 shares of common stock were reserved for issuance by the 2013 plan.

 

In May 2011, the Company adopted a Stock Option and Equity Plan (the 2011 Plan).  Employees and directors of the Company and the Bank and consultants (with restrictions) are eligible to participate in the 2011 Plan.  The option term may not exceed 10 years from the date of the grant.  An employee or consultant who possesses more than 10 percent of voting power of all classes of stock of the Company, or any parent or subsidiary, may not have options with terms exceeding 5 years from the date of grant.  An aggregate of 1,400,000 shares of common stock were reserved for issuance by the 2011 plan.

 

In June 2005, the Company adopted an omnibus equity compensation plan (the 2005 plan).  Employees and directors of the Company and the Bank are eligible to participate in the 2005 Plan.  An aggregate of 1,000,000 shares of common stock were reserved for issuance by the 2005 plan.  Options granted under the 2005 plan expire on the tenth anniversary of their grant.

 

In October 1999, the Company adopted a stock option plan (the 1999 Plan).  Employees and directors of the Company and the Bank were eligible to participate in the 1999 Plan.  An aggregate of 1,000,000 shares of common stock were reserved under the 1999 Plan, with no more than 75,000 shares being issuable to non-employee directors.  Options vested over four years and expire on the tenth anniversary of the grant.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

average

 

 

 

 

 

Weighted

 

remaining

 

 

 

 

 

average

 

contractual

 

Aggregate

 

 

 

exercise

 

term

 

intrinsic

 

Shares

 

price

 

(years)

 

value

 

(in thousands except per share data)

 

 

 

 

 

 

 

 

110

 


 

Outstanding at January 1, 2014

2,620,874 

 

$                     9.70 

 

6.32 

 

 

Granted

45,000 

 

9.82 

 

9.92 

 

 -

Exercised

(63,874)

 

9.27 

 

 -

 

 -

Expired

 -

 

 -

 

 -

 

 -

Forfeited

 -

 

 -

 

 -

 

 -

Outstanding at December 31, 2014

2,602,000 

 

$                     9.72 

 

5.39 

 

$           5,010,208 

Exercisable at December 31, 2014

2,099,250 

 

$                     9.91 

 

4.89 

 

$           4,006,688 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Weighted

 

remaining

 

 

 

average

 

contractual

 

 

 

exercise

 

term

 

Shares

 

price

 

(years)

Outstanding at January 1, 2014

197,841 

 

$                   10.46 

 

3.07 

Granted

 -

 

 -

 

 -

Vested

(49,460)

 

10.46 

 

 -

Forfeited

 -

 

 -

 

 -

Outstanding at December 31, 2014

148,381 

 

10.46 

 

2.07 

 

The Company granted 197,481 restricted stock units with a vesting period of four years at a fair value of $10.46 in 2013.  There were no restricted stock units granted in 2014 or 2012.

 

A summary of the status of the Company’s non-vested options under the plans as of December 31, 2014, and changes during the year then ended, is presented below:

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

average

 

 

 

grant-date

 

Shares

 

fair value

Non-Vested at January 1, 2014

997,125 

 

$                     4.71 

Granted

45,000 

 

4.16 

Vested

(539,375)

 

4.66 

Expired

 -

 

 -

Forfeited

 -

 

 -

Non-Vested at December 31, 2014

502,750 

 

$                     4.72 

 

The Company granted 45,000 common stock options in 2014, with a vesting period of four years.  The weighted-average fair value of the stock options issued was  $4.16.  The Company granted 215,000 common stock options in 2013, 35,000 with a vesting period of one year and 180,000 with a vesting period of four years.  The weighted-average fair value of the stock options issued was $4.85.  The Company granted 500,000 common stock options in 2012, 40,000 with a vesting period of one year and 460,000 with a vesting period of four years.  The weighted-average fair value of the stock options issued was $5.06.  There were 63,874 options exercised in 2014 and 605,494 options exercised in 2013 and 50,374 options exercised in 2012.  The total intrinsic value of the options exercised in 2014, 2013 and 2012 was $1.5 million, $3.0 million and $116,000, respectively.  The total fair value of options that vested during the year ended December 31, 2014 was $2.5 million. 

As of December 31, 2014, there was a total of $2.6 million of unrecognized compensation cost related to unvested awards under share-based plans.  This cost is expected to be recognized over a weighted average period of 1.3 years.  For the years ended

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December 31, 2014, 2013 and 2012 total compensation expense under share based payment arrangements was $2.6 million, $3.2 million and $2.6 million respectively and the related tax benefits recognized were $915,000,  $1.1 million and $910,000, respectively.

For the years ended December 31, 2014, 2013 and 2012, the Company estimated the fair value of each grant on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions:

 

 

 

 

 

 

 

 

 

December 31,

 

2014

 

2013

 

2012

Risk-free interest rate

2.36% 

 

1.86% 

 

1.97% 

Expected dividend yield

 -

 

 -

 

 -

Expected volatility

41.74% 

 

49.71%-55.65%

 

72.90% 

Expected lives (years)

5.71 

 

4.03-4.22

 

4.83 

 

Expected volatility is based on the historical volatility of the Company’s stock and peer group comparisons over the expected life of the grant.  The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at the time of the grant.  The life of the option is based on historical factors which include the contractual term, vesting period, exercise behavior and employee terminations.  In accordance with the ASC 718, Stock Based Compensation, stock based compensation expense for the year ended December 31, 2014 is based on awards that are ultimately expected to vest and has been reduced for estimated forfeitures. The Company estimates forfeitures using historical data based upon the groups identified by management.

Note N—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.  The Company pays only its proportionate share of the lease rate to a lessor which is an unrelated third party.  The Chairman of the Board of Resource America, Inc. is the father of the Chairman of the Board and the spouse of the former Chief Executive Officer of the Company.  The Chief Executive Officer of Resource America is the brother of the Chairman of the Board and the son of the former Chief Executive Officer of the Company.  Rent expense is 50% of the fixed rent, real estate tax payment and the base expense charges.  Rent expense was $112,000,  $102,000 and $102,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

 

The Company entered into a space sharing agreement for office space in New York, New York with Atlas Energy, L.P. commencing May 2012. As a result of certain transactions, Atlas Energy, L.P. assigned the lease to its successor, Atlas Energy Group, LLC. in 2015.  The Company pays only its proportionate share of the lease rate to a lessor which is an unrelated third party.  The Executive Chairman of the Board of Atlas Energy Group. LLC and , prior thereto, of the general partner of Atlas Energy, L.P. is the brother of the Chairman of the Board and son of the former Chief Executive Officer of the Company.  The Chief Executive Officer and President of Atlas Energy Group LLC and , prior thereto, of the general partner of Atlas Energy, L.P is the father of the Chairman of the Board and spouse of the former Chief Executive Officer of the Company.  Rent expense is 50% of the fixed rent, real estate tax payment, and the base expense charges.  Rent expense was $104,000, $104,000 and $104,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

 

The Bank maintains deposits for various affiliated companies totaling approximately $15.1 million and $36.7 million as of December 31, 2014 and 2013, 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 lender.  At December 31, 2014, these loans were current as to principal and interest payments, and did not involve more than normal risk of collectability.  At December 31, 2014 and 2013, loans to these related parties included in Assets held for sale amounted to $28.1 million and $26.4 million.  At December 31, 2014 and 2013, loans to these related parties included in Loans, net of deferred loan fees and costs amounted to $2.8 million and $2.1 million

 

In addition to these lending transactions, the Bank periodically purchases securities under agreement to resell and engages in other securities transactions as follows.    The Company executed securities transactions through J.V.B. Financial Group, LLC (JVB), a

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broker dealer in which the Companys Chairman has a minority interest.  The Company’s Chairman also serves as Vice Chairman of Institutional Financial Markets Inc., the parent company of JVB.  For the twelve months ended December 31, 2014, the Company purchased $3.4 million of AAA rated SBA loans for Community Reinvestment Act purposes through JVB.  The Company had no security purchases from JVB for the twelve months ended December 31, 2014.  From time to time, the Company may also purchase securities under agreements to resell through JVB primarily consisting of Government National Mortgage Association. certificates which are full faith and credit obligations of the United States government issued at competitive rates.  JVB was in full compliance with all of the terms of the repurchase agreements at December 31, 2014 and had complied with the terms for all prior repurchase agreements.  A total of $46.3 million of such agreements were outstanding at December 31, 2014 and $6.4 million were outstanding at December 31, 2013.

 

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 will act 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 service fee of $30,000, and the provision of office space and administrative support.  We have not paid any monthly fees under this agreement pending regulatory review. 

 

 

Note O—Commitments and Contingencies

 

1. Operating Leases

 

The Company leases its operations facility for a term expiring on October 31, 2025, and leases its Philadelphia offices for a term expiring in 2025.   The Company also has leases for business production offices in Pennsylvania, Maryland, Florida, Washington and Minnesota that expire at various times through 2017.   The Company leases space in South Dakota, USA, Gibraltar and Bulgaria for its prepaid card division.   The leases on these spaces expire at various times through 2022.  The Company leases space in Illinois for its Small Business Lending division for a term expiring in 2020.   The Company leases space in Florida for compliance operations for a term expiring in 2020.  The Company leases executive office space in New York for a term expiring in 2025.  These leases require the Company to pay the real estate taxes and insurance on the leased properties in addition to rent.  The approximate future minimum annual rental payments, including any additional rents due to escalation clauses, required by these leases are as follows (in thousands):

 

 

 

 

 

Year ending December 31,

 

 

 

 

 

2015 

 

$                        3,997

2016 

 

3,786 
2017 

 

3,757 
2018 

 

3,749 
2019 

 

3,815 

Thereafter

 

18,420 

 

 

$                      37,524

 

Rent expense for the years ended December 31, 2014, 2013 and 2012 was approximately $4.0 million, $3.1 million and $2.6 million, net of sublease rentals of approximately $78,000,  $110,000 and $122,000, respectively.  The sublease expired in 2014.

 

2.

Legal Proceedings

 

On July 17, 2014, a class action securities complaint, captioned Fletcher v. The Bancorp Inc., et al., was filed in the United States District Court for the District of Delaware.  A consolidated version of that class action complaint was filed before the same court on January 23, 2015 on behalf of Lead Plaintiffs Arkansas Public Employees Retirement System and Arkansas Teacher Retirement System.  Filed under the caption of In re The Bancorp Inc. Securities Litigation, the consolidated complaint asserts claims against Bancorp, Betsy Z. Cohen, Paul Frenkiel, Frank M. Mastrangelo and Jeremy Kuiper, and alleges that during a class period beginning April 24, 2013 through July 23, 2014, the defendants made materially false and/or misleading statements and/or failed to

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disclose that (i) Bancorp had wrongfully extended and modified problem loans and under-reserved for loan losses due to adverse loans, (ii) Bancorp’s operations and credit practices were in violation of the BSA, and (iii) as a result, Bancorp’s financial statements, press releases and public statements were materially false and misleading during the relevant period.  The consolidated complaint further alleges that, as a result, the price of Bancorp’s common stock was artificially inflated and fell once the defendants’ misstatements and omissions were revealed, causing damage to the plaintiffs and the other members of the class.  The complaint asks for an unspecified amount of damages, prejudgment and post-judgment interest and attorneys’ fees.  The defendants filed a motion to dismiss the consolidated complaint on March 24, 2015.  Following Bancorp’s April 1, 2015 announcement that it would be restating its financial statements, the parties entered into a stipulation dated April 10, 2015 allowing the plaintiffs to file an amended complaint within 28 days of Bancorp filing its restated financial statements, and giving the defendants 28 days to respond to the amended complaint.  The court approved the parties’ stipulation on April 14, 2015.  This litigation is in its preliminary stages.  We have been advised by our counsel in the matter that reasonably possible losses cannot be estimated.  We believe that the complaint is without merit and we intend to defend vigorously.

 

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

 

Note P—Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk

 

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Such financial instruments are recorded in the consolidated financial statements when they become payable.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.  The contractual, or notional, amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The approximate contract amounts and maturity term of the Company’s credit commitments are as follows:

 

 

 

 

 

 

 

 

December 31,

 

2014

 

2013

 

(in thousands)

Financial instruments whose contract amounts represent credit risk

 

 

 

Commitments to extend credit

$            709,080 

 

$           590,121 

Standby letters of credit

22,057 

 

22,424 

 

$            731,137 

 

$           612,545 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Company holds residential or commercial real estate, accounts receivable, inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary.  Based upon periodic analysis of the Company’s standby letters of credit, management has determined that a reserve is not necessary at December 31, 2014. The Company reduces any potential liability on its standby letters of credit based upon its estimate of the proceeds obtainable upon the liquidation of the collateral held.  Fair values of unrecognized financial instruments, including commitments to extend credit and the fair value of letters of credit, are considered immaterial.  The standby letters of credit expire as follows: $607,000 in 2014, $19.8 million in 2015 and the remaining $1.7 million in 2016.

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The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Note Q—Fair Value of Financial Instruments

ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments.  For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments.  However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.  Also, it is the Company’s general practice and intent to hold its financial instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities, except for certain loans.  For fair value disclosure purposes, the Company utilized certain fair value measurement criteria as required under 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 $1.11 billion and $1.24 billion at December 31, 2014 and 2013, respectively, which approximated fair values.

 

Investment securities have estimated fair values based on quoted market prices, if available, or by an estimation methodology based on management’s inputs.  The fair values of the Company’s investment securities held-to-maturity 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.

 

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

 

Loans, net of deferred loan fees and costs, have an estimated fair value using the present value of discounted cash flow where market prices were not available.  The discount rate used in these calculations is the estimated current market rate adjusted for credit risk.  The carrying value of accrued interest approximates fair value.

 

Federal Home Loan and Atlantic Central Bankers Bank stock are held as required by those respective institutions and are 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.

 

Accrued interest receivable has a carrying value that approximates fair value. 

 

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

 

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

 

Assets held for sale as of December 31, 2014 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

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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 7-10% for estimated selling costs.

 

Demand deposits (comprising interest-and noninterest-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 December 31, 2014, the carrying values approximate their fair values.  The carrying amount of accrued interest payable approximates its fair value.

 

Interest rate swaps have a fair value estimated 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.

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” that are 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.  There were no transfers between levels in 2014 or 2013.

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December 31, 2014

 

 

 

 

 

Quoted prices

 

Significant

 

 

 

 

 

 

 

in active

 

other

 

Significant

 

 

 

 

 

markets for

 

observable

 

unobservable

   

Carrying

 

Estimated

 

identical assets

 

inputs

 

inputs

 

amount

 

fair value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(in thousands)

Investment securities available-for-sale

$                 1,493,639 

 

$                 1,493,639 

 

$                66,287 

 

$             1,425,986 

 

$              1,366 

Investment securities held-to-maturity

93,765 

 

91,914 

 

7,448 

 

 -

 

84,466 

Securities purchased under agreements to resell

46,250 

 

46,250 

 

46,250 

 

 -

 

 -

Federal Home Loan and Atlantic Central Bankers Bank stock

1,002 

 

1,002 

 

 -

 

 -

 

1,002 

Commercial loans held for sale

217,080 

 

217,080 

 

 -

 

 -

 

217,080 

Loans, net

874,593 

 

869,871 

 

 -

 

 -

 

869,871 

Investment in unconsolidated entity, senior note

178,187 

 

178,187 

 

 -

 

 -

 

178,187 

Investment in unconsolidated entity, subordinated note

15,408 

 

15,408 

 

 -

 

 -

 

15,408 

Assets held for sale

887,929 

 

887,929 

 

 -

 

 -

 

887,929 

Demand and interest checking

4,289,586 

 

4,289,586 

 

4,289,586 

 

 -

 

 -

Savings and money market

330,798 

 

330,798 

 

330,798 

 

 -

 

 -

Time deposits

1,400 

 

1,412 

 

 -

 

 -

 

1,412 

Subordinated debentures

13,401 

 

8,042 

 

 -

 

 -

 

8,042 

Securities sold under agreements to repurchase

19,414 

 

19,414 

 

19,414 

 

 -

 

 -

Interest rate swaps, liability

942 

 

942 

 

 -

 

942 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013 (restated)

 

 

 

 

 

Quoted prices

 

Significant

 

 

 

 

 

 

 

in active

 

other

 

Significant

 

 

 

 

 

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

$                 1,253,117 

 

$                 1,253,117 

 

$                64,971 

 

$             1,187,595 

 

$                551 

Investment securities held-to-maturity

97,205 

 

95,030 

 

7,286 

 

 -

 

87,744 

Securities purchased under agreements to resell

7,544 

 

7,544 

 

7,544 

 

 -

 

 -

Federal Home Loan and Atlantic Central Bankers Bank stock

3,209 

 

3,209 

 

 -

 

 -

 

3,209 

Commercial loans held for sale

69,904 

 

69,904 

 

 -

 

 -

 

69,904 

Loans, net

636,001 

 

630,464 

 

 -

 

 -

 

630,464 

Assets held for sale

1,179,277 

 

1,179,277 

 

 -

 

 -

 

1,179,277 

Demand and interest checking

3,722,602 

 

3,722,602 

 

3,722,602 

 

 -

 

 -

Savings and money market

536,162 

 

536,162 

 

536,162 

 

 -

 

 -

Time deposits

14,225 

 

242 

 

 -

 

 -

 

242 

Subordinated debentures

13,401 

 

9,287 

 

 -

 

 -

 

9,287 

Securities sold under agreements to repurchase

21,221 

 

21,221 

 

21,221 

 

 -

 

 -

Interest rate swaps, asset

481 

 

481 

 

 -

 

481 

 

 -

 

 

The assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy, are summarized below (in thousands):

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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, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

 

 

 

 

 

U.S. Government agency securities

$                            16,561 

 

$                                    - 

 

$                              16,561 

 

$                                        - 

Federally insured student loan securities

126,012 

 

 -

 

126,012 

 

 -

Obligations of states and political subdivisions

612,648 

 

1,182 

 

611,466 

 

 -

Residential mortgage-backed securities

422,129 

 

 -

 

422,129 

 

 -

Commercial mortgage-backed securities

123,239 

 

 -

 

123,239 

 

 -

Foreign debt securities

66,878 

 

14,098 

 

52,235 

 

545 

Other debt securities

126,172 

 

51,007 

 

74,344 

 

821 

Total investment securities available for sale

1,493,639 

 

66,287 

 

1,425,986 

 

1,366 

Loans held for sale

217,080 

 

 -

 

 -

 

217,080 

Investment in unconsolidated entity, senior note

178,187 

 

 -

 

 -

 

178,187 

Investment in unconsolidated entity, subordinated note

15,408 

 

 -

 

 -

 

15,408 

Interest rate swaps, liability

942 

 

 -

 

942 

 

 -

 

$                       1,903,372 

 

$                          66,287 

 

$                         1,425,044 

 

$                            412,041 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2013

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

 

 

 

 

 

U.S. Government agency securities

$                            10,726 

 

$                                400 

 

$                              10,326 

 

$                                        - 

Federally insured student loan securities

147,573 

 

 -

 

147,573 

 

 -

Obligations of states and political subdivisions

458,118 

 

2,277 

 

455,841 

 

 -

Residential mortgage-backed securities

322,774 

 

 -

 

322,774 

 

 -

Commercial mortgage-backed securities

120,347 

 

 -

 

120,347 

 

 -

Other debt securities

193,579 

 

62,294 

 

130,734 

 

551 

Total investment securities available for sale

1,253,117 

 

64,971 

 

1,187,595 

 

551 

Loans held for sale

69,904 

 

 -

 

 -

 

69,904 

Interest rate swaps, asset

481 

 

 -

 

481 

 

 -

 

$                       1,323,502 

 

$                           64,971 

 

$                         1,188,076 

 

$                              70,455 

 

The Company’s Level 3 assets are listed below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

Significant Unobservable Inputs

 

(Level 3)

 

 

 

 

 

 

 

 

 

Available-for-sale

 

Commercial loans

 

securities

 

held for sale

118

 


 

 

December 31, 2014

 

December 31, 2013

 

December 31, 2014

 

December 31, 2013

Beginning balance

$                                551 

 

$                                597 

 

$                              69,904 

 

$                              11,341 

Transfers into level 3

1,279 

 

 -

 

 -

 

 -

Transfers out of level 3

(551)

 

 -

 

 -

 

 -

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

Included in earnings

 -

 

(1)

 

1,846 

 

3,082 

Included in other comprehensive income

87 

 

21 

 

 -

 

 -

Purchases, issuances, and settlements

 

 

 

 

 

 

 

Purchases

 -

 

 -

 

 

 

 

Issuances

 -

 

 -

 

630,165 

 

309,358 

Sales

 -

 

 -

 

(484,835)

 

(253,832)

Settlements

 -

 

(66)

 

 -

 

(45)

Ending balance

$                             1,366 

 

$                                551 

 

$                            217,080 

 

$                              69,904 

 

 

 

 

 

 

 

 

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.

$                                     - 

 

$                                     - 

 

$                                3,587 

 

$                                   222 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

Significant Unobservable Inputs

 

 

 

 

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in

 

 

 

 

 

 

unconsolidated entity

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

Beginning balance

$                                    - 

 

$                                    - 

 

 

 

 

 

Transfers into level 3

 -

 

 -

 

 

 

 

 

Transfers out of level 3

 -

 

 -

 

 

 

 

 

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 -

 

 -

 

 

 

 

 

Included in other comprehensive income

 -

 

 -

 

 

 

 

 

Purchases, issuances, and settlements

 

 

 

 

 

 

 

 

Purchases

193,595 

 

 -

 

 

 

 

 

Issuances

 -

 

 -

 

 

 

 

 

Sales

 -

 

 -

 

 

 

 

 

Settlements

 -

 

 -

 

 

 

 

 

Ending balance

$                        193,595 

 

$                                    - 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The amount of total gains or losses for the period

 

 

 

 

 

 

 

 

included in earnings attributable to the change in

 

 

 

 

 

 

 

 

unrealized gains or losses relating to assets still

 

 

 

 

 

 

 

 

held at the reporting date.

$                                    - 

 

$                                    - 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, at December 31, 2014 and 2013 are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Quoted prices in active

 

Significant other

 

Significant

119

 


 

 

 

 

markets for identical

 

observable

 

unobservable

 

 

 

assets

 

inputs

 

inputs (1)

Description

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

Impaired loans

$                             2,450 

 

$                                    - 

 

$                                       - 

 

$                               2,450 

Intangible assets

6,228 

 

 -

 

 -

 

6,228 

 

$                             8,678 

 

$                                    - 

 

$                                       - 

 

$                               8,678 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Quoted prices in active

 

Significant other

 

Significant

 

 

 

markets for identical

 

observable

 

unobservable

 

Fair value

 

assets

 

inputs

 

inputs (1)

Description

December 31, 2013

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

 

 

 

 

 

 

Impaired loans

$                             1,741 

 

$                                    - 

 

$                                       - 

 

$                               1,741 

Intangible assets

7,612 

 

 -

 

 -

 

7,612 

 

$                             9,353 

 

$                                    - 

 

$                                       - 

 

$                               9,353 

(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.

Impaired loans that are measured based on the value of underlying collateral have been presented at their fair value, less costs to sell, of $2.5 million through the establishment of specific reserves and other writedowns of $331,000 or by recording charge-offs when the carrying value exceeds the fair value.  Included in the impaired balance at December 31, 2014, were troubled debt restructured loans with a balance of $543,000 which had specific reserves of $40,000.  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 R –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 December 31, 2014, the Company had entered into fifteen interest rate swap agreements with an aggregate notional amount of $115.8 million.  These swap agreements provide for the Company to receive an adjustable rate of interest based upon the three-month London Interbank Offered Rate (LIBOR).  The Company recorded a loss of $1.4 million for the year ended December 31, 2014 and recorded income of $436,000 and $45,000 for the years ended December 31, 2013 and 2012 to recognize the fair value of derivative instruments.  The amount payable by the Company under these swap agreements was $1.1 million at December 31, 2014 and the amount receivable by the Company at December 31, 2013 was $423,000At December 31, 2014 and 2013, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $3.6 million and $0, respectively.

 

The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s remaining interest rate swap agreements as of December 31, 2014 are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

Maturity date

 

Notional amount

 

Interest rate paid

 

Interest rate received

 

Fair value

December 19, 2019

 

$                  19,100 

 

1.70% 

 

0.25% 

 

$               31 

120

 


 

December 19, 2019

 

9,000 

 

1.70% 

 

0.25% 

 

15 

September 2, 2024

 

4,800 

 

2.50% 

 

0.23% 

 

(103)

September 9, 2024

 

1,000 

 

2.59% 

 

0.23% 

 

(30)

October 8, 2024

 

6,500 

 

2.60% 

 

0.23% 

 

(199)

October 10, 2024

 

4,000 

 

2.47% 

 

0.23% 

 

(77)

October 14, 2024

 

4,300 

 

2.47% 

 

0.23% 

 

(82)

October 20, 2024

 

3,100 

 

2.28% 

 

0.23% 

 

(4)

November 10, 2024

 

10,800 

 

2.52% 

 

0.23% 

 

(251)

November 28, 2024

 

4,800 

 

2.42% 

 

0.24% 

 

(68)

December 3, 2024

 

4,300 

 

2.33% 

 

0.23% 

 

(22)

December 5, 2024

 

4,300 

 

2.43% 

 

0.23% 

 

(64)

January 2, 2025

 

15,500 

 

2.31% 

 

0.26% 

 

(46)

January 5, 2025

 

3,700 

 

2.29% 

 

0.26% 

 

(5)

January 5, 2025

 

20,600 

 

2.30% 

 

0.26% 

 

(37)

Total

 

$                115,800 

 

 

 

 

 

$           (942)

 

 

 

Note S—Regulatory Matters

It is the policy of the Federal Reserve that financial holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.  The policy provides that financial holding companies 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 the 2014 Consent Order pursuant to which the Bank may not pay dividends without prior FDIC approval. Previously, the Company had received a Supervisory Letter pursuant to which the Company may not pay dividends without prior Federal Reserve approval. The Federal Reserve  approved the payment of the interest on the  Company’s trust preferred securities due September 15, 2015. Future payments are subject to future approval by the Federal Reserve. (See Note D) 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

121

 


 

 

 

 

 

 

 

 

 

 

 

To be well

 

 

 

 

 

 

 

 

 

 

capitalized under

 

 

 

 

 

 

For capital

 

prompt corrective

 

 

Actual

 

adequacy purposes

 

action provisions

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

(dollars in thousands)

As of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Total capital

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp

 

$       302,458 

 

11.67% 

 

$         216,440 

 

>=8.00

 

N/A

 

 N/A

The Bancorp Bank

 

276,003 

 

10.59% 

 

217,778 

 

8.00 

 

272,222 

 

>= 10.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp

 

298,819 

 

11.54% 

 

108,220 

 

>=4.00

 

N/A

 

 N/A

The Bancorp Bank

 

272,366 

 

10.46% 

 

108,889 

 

4.00 

 

163,333 

 

>= 6.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

 

 

 

 

 

 

 

 

 

 

(to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp

 

298,819 

 

7.07% 

 

175,209 

 

>=4.00

 

N/A

 

 N/A

The Bancorp Bank

 

272,366 

 

6.46% 

 

175,258 

 

4.00 

 

219,073 

 

>= 5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013 (restated)

 

 

 

 

 

 

 

 

 

 

 

 

Total capital

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp

 

$       283,304 

 

11.87% 

 

$         200,072 

 

>=8.00

 

N/A

 

 N/A

The Bancorp Bank

 

202,798 

 

8.53% 

 

199,251 

 

8.00 

 

249,064 

 

>= 10.00%

Adjustment (1)

 

58,000 

 

 

 

 

 

 

 

 

 

 

The Bancorp Bank pro forma

 

260,798 

 

10.92% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp

 

251,957 

 

10.55% 

 

100,036 

 

>=4.00

 

N/A

 

 N/A

The Bancorp Bank

 

171,578 

 

7.22% 

 

99,626 

 

4.00 

 

149,438 

 

>= 6.00%

Adjustment (1)

 

58,000 

 

 

 

 

 

 

 

 

 

 

The Bancorp Bank pro forma

 

229,578 

 

9.62% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

 

 

 

 

 

 

 

 

 

 

(to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp

 

251,957 

 

6.09% 

 

169,994 

 

>=4.00

 

N/A

 

 N/A

The Bancorp Bank

 

171,578 

 

4.17% 

 

169,120 

 

4.00 

 

211,400 

 

>= 5.00%

Adjustment (1)

 

58,000 

 

 

 

 

 

 

 

 

 

 

The Bancorp Bank pro forma

 

229,578 

 

5.58% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

122

 


 

(1) The Company downstreamed $58.0 million in capital to the Bank in 2014. If charges related to the restatement had occurred in 2013 the Company would have made the capital injection at that time.  Based on the pro forma calculations the Bank would have maintained its well capitalized status at December 31, 2013.

As of December 31, 2014, the Company and the Bank met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action.  Effective January 1, 2015, with the first measurement date of March 31, 2015, capital rules will begin to be modified as part of a multi year phase in period.  The new rules emphasize common equity capital of which the vast majority of the Company and the Bank’s capital is comprised.

 In 2012, the Company paid a $172,000 civil money penalty as part of an administrative agreement with the FDIC which also requires additional quarterly reporting on the part of the Bank to the FDIC.  On June 4, 2014, an Order with the FDIC became effective and encompassed Bank Secrecy Act, or BSA, Anti-Money Laundering Act , or AML, and other areas.  As a result of the Order, the Bank incurred significant remediation expenses for third party consultants in 2014, which will continue into 2015, to create an expanded BSA/AML function and to perform “lookbacks” to analyze historical transactions.  Additional permanent expenses have and will result due to a significant increase in the number of employees performing BSA/AML related functions.  The 2014 consent order restricts the Bank from signing and boarding new independent sales organizations, establishing new non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments.  The removal of these limitations depends upon  the Bank’s issuance of a BSA report to the FDIC summarizing the completion of certain corrective action and the FDIC’s approval thereof.

Note TRestated Quarterly Financial Data (Unaudited)

 

The following represents summarized quarterly financial data of the Company which, in the opinion of management, reflects all adjustments (comprised of normal accruals) necessary for fair presentation. Following the summarized quarterly data the restated quarterly financial statements shown reflect applicable restatement adjustments for periods from March 31, 2013 through September 30, 2014, the last date through which financial statements previously had been issued. The data reflects restatement of the financial statements and the subsequent discontinued operations. Explanations for the discontinued operations adjustments below are as follows. The amount of cash attributable to discontinued operations was transferred to discontinued operations as the amount of such cash on deposit. The amount of loans transferred to discontinued operations was the book value of discontinued loans, which were then valued at the lower of cost or market. The allowance for loan losses attributable to discontinued loans was netted against the book value of discontinued loans and that net value including accrued interest receivable was adjusted to the lower of cost or market. That amount and other real estate owned were transferred to assets held for sale.  Also.see Note C.

 Quarterly amounts shown may not equal annual amounts due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

2014

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

 

(restated)

 

(restated)

 

(restated)

 

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

Interest income

 

$                 16,555 

 

$                 17,610 

 

$                 18,033 

 

$                 18,522 

Net interest income

 

13,651 

 

14,791 

 

15,268 

 

15,715 

Provision for loan and lease losses

 

1,275 

 

1,173 

 

158 

 

(1,404)

Non-interest income

 

23,678 

 

23,389 

 

20,307 

 

17,675 

Non-interest expense

 

31,205 

 

34,012 

 

33,135 

 

37,628 

Income (loss) from continuing operations before income tax expense

 

4,849 

 

2,995 

 

2,282 

 

(2,834)

Income tax expense (benefit)

 

1,623 

 

1,343 

 

(3,560)

 

(13,929)

Net income (loss) from continuing operations

 

3,226 

 

1,652 

 

5,842 

 

11,095 

Net income (loss) from discontinued operations, net of tax

 

(1,599)

 

8,670 

 

19,127 

 

9,096 

Net income available to common shareholders

 

$                   1,627 

 

10,322 

 

24,969 

 

20,191 

 

 

 

 

 

 

 

 

 

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

 

$                     0.08 

 

$                     0.04 

 

$                     0.15 

 

$                     0.31 

123

 


 

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

 

$                   (0.04)

 

$                     0.23 

 

$                     0.51 

 

$                     0.24 

Net income per share - basic

 

$                     0.04 

 

$                     0.27 

 

$                     0.66 

 

$                     0.55 

 

 

 

 

 

 

 

 

 

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

 

$                     0.08 

 

$                     0.04 

 

$                     0.15 

 

$                     0.30 

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

 

$                   (0.04)

 

$                     0.23 

 

$                     0.51 

 

$                     0.22 

Net income per share - diluted

 

$                     0.04 

 

$                     0.27 

 

$                     0.66 

 

$                     0.52 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

2013

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

Interest income

 

$                 11,472 

 

$                 12,094 

 

$                 13,176 

 

$                 14,408 

Net interest income

 

8,760 

 

9,488 

 

10,470 

 

11,664 

Provision for loan and lease losses

 

(165)

 

247 

 

379 

 

(106)

Non-interest income

 

19,040 

 

21,989 

 

19,224 

 

21,820 

Non-interest expense

 

22,954 

 

25,353 

 

26,384 

 

27,126 

Income from continuing operations before income tax expense

 

5,011 

 

5,877 

 

2,931 

 

6,464 

Income tax expense

 

1,672 

 

1,961 

 

978 

 

2,156 

Net income from continuing operations

 

3,339 

 

3,916 

 

1,953 

 

4,308 

Net income (loss) from discontinued operations, net of tax

 

(14,163)

 

8,804 

 

(752)

 

(21,828)

Net income (loss) available to common shareholders

 

$               (10,824)

 

12,720 

 

1,201 

 

(17,520)

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                     0.10 

 

$                     0.10 

 

$                     0.05 

 

$                     0.12 

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

 

$                   (0.39)

 

$                     0.24 

 

$                   (0.02)

 

$                   (0.58)

Net income (loss) per share - basic

 

$                   (0.29)

 

$                     0.34 

 

$                     0.03 

 

$                   (0.46)

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                     0.09 

 

$                     0.10 

 

$                     0.05 

 

$                     0.11 

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

 

$                   (0.39)

 

$                     0.24 

 

$                   (0.02)

 

$                   (0.58)

Net income (loss) per share - diluted

 

$                   (0.30)

 

$                     0.34 

 

$                     0.03 

 

$                   (0.47)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

As previously reported (1)

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Cash and due from banks

 

$                 11,641 

 

$                           - 

 

$                 (1,728)

 

$                            9,913 

Interest earning deposits at Federal Reserve Bank

 

430,117 

 

 -

 

 -

 

430,117 

Securities purchased under agreements to resell

 

55,450 

 

 -

 

 -

 

55,450 

Total cash and cash equivalents

 

497,208 

 

 -

 

(1,728)

 

495,480 

 

 

 

 

 

 

 

 

 

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

 

1,442,049 

 

 -

 

 -

 

1,442,049 

Investment securities, held-to-maturity (fair value $94,889)

 

96,951 

 

 -

 

 -

 

96,951 

Commercial loans held for sale

 

136,115 

 

 -

 

 -

 

136,115 

Loans, net of deferred loan fees and costs

 

1,980,567 

 

(53,669)

 

(1,070,470)

 

856,428 

Allowance for loan and lease losses

 

(4,390)

 

558 

 

(1,468)

 

(5,300)

Loans, net

 

1,976,177 

 

(53,111)

 

(1,071,938)

 

851,128 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

3,409 

 

 -

 

 -

 

3,409 

Premises and equipment, net

 

17,536 

 

 -

 

 -

 

17,536 

Accrued interest receivable

 

15,028 

 

 -

 

(3,967)

 

11,061 

124

 


 

Intangible assets, net

 

6,573 

 

 -

 

 -

 

6,573 

Other real estate owned

 

24,718 

 

 -

 

(23,993)

 

725 

Deferred tax asset, net

 

41,601 

 

29,420 

 

 -

 

71,021 

Assets held for sale

 

 -

 

(35,698)

 

1,101,727 

 

1,066,029 

Other assets

 

39,147 

 

 -

 

(101)

 

39,046 

Total assets

 

$            4,296,512 

 

$               (59,389)

 

$                           - 

 

$                     4,237,123 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand and interest checking

 

$            3,554,484 

 

$                           - 

 

$                           - 

 

$                     3,554,484 

Savings and money market

 

324,015 

 

 -

 

 -

 

324,015 

Time deposits

 

231 

 

 -

 

 -

 

231 

Time deposits, $100,000 and over

 

2,895 

 

 -

 

 -

 

2,895 

Total deposits

 

3,881,625 

 

 -

 

 -

 

3,881,625 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

21,496 

 

 -

 

 -

 

21,496 

Subordinated debenture

 

13,401 

 

 -

 

 -

 

13,401 

Liabilities held for sale

 

 -

 

 -

 

 -

 

 -

Other liabilities

 

23,603 

 

 -

 

 -

 

23,603 

Total liabilities

 

3,940,125 

 

 -

 

 -

 

3,940,125 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par

 

 

 

 

 

 

 

 

value: 37,808,777 shares issued at September 30, 2014

 

37,809 

 

 -

 

 -

 

37,809 

Treasury stock, at cost (100,000 shares)

 

(866)

 

 -

 

 -

 

(866)

Additional paid-in capital

 

297,122 

 

 -

 

 -

 

297,122 

Retained earnings

 

10,954 

 

(59,389)

 

 -

 

(48,435)

Accumulated other comprehensive income

 

11,368 

 

 -

 

 -

 

11,368 

Total shareholders' equity

 

356,387 

 

(59,389)

 

 -

 

296,998 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$            4,296,512 

 

$               (59,389)

 

$                           - 

 

$                     4,237,123 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

As previously reported excluding adjustments for discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Cash and due from banks

 

$                 15,192 

 

$                           - 

 

$                 (1,904)

 

$                          13,288 

Interest earning deposits at Federal Reserve Bank

 

441,422 

 

 -

 

 -

 

441,422 

Securities purchased under agreements to resell

 

15,906 

 

 -

 

 -

 

15,906 

Total cash and cash equivalents

 

472,520 

 

 -

 

(1,904)

 

470,616 

 

 

 

 

 

 

 

 

 

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

 

1,459,626 

 

 -

 

 -

 

1,459,626 

Investment securities, held-to-maturity (fair value $94,927)

 

97,130 

 

 -

 

 -

 

97,130 

Commercial loans held for sale

 

154,474 

 

 -

 

 -

 

154,474 

Loans, net of deferred loan fees and costs

 

2,049,561 

 

(101,030)

 

(1,146,776)

 

801,755 

Allowance for loan and lease losses

 

(46,945)

 

(22,966)

 

64,112 

 

(5,799)

Loans, net

 

2,002,616 

 

(123,996)

 

(1,082,664)

 

795,956 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

3,409 

 

 -

 

 -

 

3,409 

125

 


 

Premises and equipment, net

 

16,236 

 

 -

 

 -

 

16,236 

Accrued interest receivable

 

14,508 

 

 -

 

(4,032)

 

10,476 

Intangible assets, net

 

6,988 

 

 -

 

 -

 

6,988 

Other real estate owned

 

26,781 

 

 -

 

(26,781)

 

(0)

Deferred tax asset, net

 

24,606 

 

29,420 

 

 -

 

54,026 

Assets held for sale

 

 -

 

(6,588)

 

1,115,560 

 

1,108,972 

Other assets

 

36,270 

 

 -

 

(179)

 

36,091 

Total assets

 

$            4,315,164 

 

$             (101,164)

 

$                          0 

 

$                     4,214,000 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand and interest checking

 

$            3,563,447 

 

$                           - 

 

$                           - 

 

$                     3,563,447 

Savings and money market

 

307,927 

 

 -

 

 -

 

307,927 

Time deposits

 

8,962 

 

 -

 

 -

 

8,962 

Time deposits, $100,000 and over

 

1,474 

 

 -

 

 -

 

1,474 

Total deposits

 

3,881,810 

 

 -

 

 -

 

3,881,810 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

17,481 

 

 -

 

 -

 

17,481 

Subordinated debenture

 

13,401 

 

 -

 

 -

 

13,401 

Other liabilities

 

29,978 

 

 -

 

 -

 

29,978 

Total liabilities

 

3,942,670 

 

 -

 

 -

 

3,942,670 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par

 

 

 

 

 

 

 

 

value: 37,808,777 shares issued at June 30, 2014

 

37,809 

 

 -

 

 -

 

37,809 

Treasury stock, at cost (100,000 shares)

 

(866)

 

 -

 

 -

 

(866)

Additional paid-in capital

 

296,523 

 

 -

 

 -

 

296,523 

Retained earnings

 

27,762 

 

(101,164)

 

 -

 

(73,402)

Accumulated other comprehensive income

 

11,266 

 

 -

 

 -

 

11,266 

Total shareholders' equity

 

372,494 

 

(101,164)

 

 -

 

271,330 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$            4,315,164 

 

$             (101,164)

 

$                           - 

 

$                     4,214,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Cash and due from banks

 

$                 15,298 

 

$                           - 

 

$                 (1,927)

 

$                          13,371 

Interest earning deposits at Federal Reserve Bank

 

796,385 

 

 -

 

 -

 

796,385 

Securities purchased under agreements to resell

 

24,926 

 

 -

 

 -

 

24,926 

Total cash and cash equivalents

 

836,609 

 

 -

 

(1,927)

 

834,682 

 

 

 

 

 

 

 

 

 

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

 

1,411,708 

 

 -

 

 -

 

1,411,708 

Investment securities, held-to-maturity (fair value $95,077)

 

97,149 

 

 -

 

 -

 

97,149 

Commercial loans held for sale

 

222,024 

 

 -

 

 -

 

222,024 

Loans, net of deferred loan fees and costs

 

2,044,004 

 

(111,131)

 

(1,197,366)

 

735,507 

Allowance for loan and lease losses

 

(46,409)

 

(27,628)

 

68,989 

 

(5,048)

Loans, net

 

1,997,595 

 

(138,759)

 

(1,128,377)

 

730,459 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

3,209 

 

 -

 

 -

 

3,209 

126

 


 

Premises and equipment, net

 

15,692 

 

 -

 

 -

 

15,692 

Accrued interest receivable

 

14,715 

 

 -

 

(4,265)

 

10,450 

Intangible assets, net

 

7,407 

 

 -

 

 -

 

7,407 

Other real estate owned

 

27,763 

 

 -

 

(27,763)

 

(0)

Deferred tax asset, net

 

27,451 

 

29,420 

 

 -

 

56,871 

Assets held for sale

 

 -

 

(1,809)

 

1,162,603 

 

1,160,794 

Other assets

 

38,301 

 

 -

 

(271)

 

38,030 

Total assets

 

$            4,699,623 

 

$             (111,148)

 

$                          0 

 

$                     4,588,475 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand and interest checking

 

$            3,842,569 

 

$                           - 

 

$                           - 

 

$                     3,842,569 

Savings and money market

 

393,329 

 

 -

 

 -

 

393,329 

Time deposits

 

9,115 

 

 -

 

 -

 

9,115 

Time deposits, $100,000 and over

 

2,195 

 

 -

 

 -

 

2,195 

Total deposits

 

4,247,208 

 

 -

 

 -

 

4,247,208 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

16,491 

 

 -

 

 -

 

16,491 

Subordinated debenture

 

13,401 

 

 -

 

 -

 

13,401 

Other liabilities

 

56,353 

 

 -

 

 -

 

56,353 

Total liabilities

 

4,333,453 

 

 -

 

 -

 

4,333,453 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par

 

 

 

 

 

 

 

 

value: 37,804,902 shares issued at March 31, 2014

 

37,805 

 

 -

 

 -

 

37,805 

Treasury stock, at cost (100,000 shares)

 

(866)

 

 -

 

 -

 

(866)

Additional paid-in capital

 

295,824 

 

 -

 

 -

 

295,824 

Retained earnings

 

27,424 

 

(111,148)

 

 -

 

(83,724)

Accumulated other comprehensive income

 

5,983 

 

 -

 

 -

 

5,983 

Total shareholders' equity

 

366,170 

 

(111,148)

 

 -

 

255,022 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$            4,699,623 

 

$             (111,148)

 

$                           - 

 

$                     4,588,475 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Cash and due from banks

 

$                 32,026 

 

$                           - 

 

$                 (1,970)

 

$                          30,056 

Interest earning deposits at Federal Reserve Bank

 

657,618 

 

 -

 

 -

 

657,618 

Securities purchased under agreements to resell

 

40,811 

 

 -

 

 -

 

40,811 

Total cash and cash equivalents

 

730,455 

 

 -

 

(1,970)

 

728,485 

 

 

 

 

 

 

 

 

 

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

 

1,083,154 

 

 -

 

 -

 

1,083,154 

Investment securities, held-to-maturity (fair value $94,806)

 

97,459 

 

 -

 

 -

 

97,459 

Commercial loans held for sale

 

25,557 

 

 -

 

 -

 

25,557 

Loans, net of deferred loan fees and costs

 

1,991,455 

 

(100,872)

 

(1,270,318)

 

620,265 

Allowance for loan and lease losses

 

(39,151)

 

(26,951)

 

61,983 

 

(4,119)

Loans, net

 

1,952,304 

 

(127,823)

 

(1,208,335)

 

616,146 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

3,209 

 

 -

 

 -

 

3,209 

127

 


 

Premises and equipment, net

 

14,252 

 

 -

 

 -

 

14,252 

Accrued interest receivable

 

12,556 

 

 -

 

(4,626)

 

7,930 

Intangible assets, net

 

6,253 

 

 -

 

 -

 

6,253 

Other real estate owned

 

20,111 

 

 -

 

(20,111)

 

Deferred tax asset, net

 

26,434 

 

38,632 

 

 -

 

65,066 

Assets held for sale

 

 -

 

1,558 

 

1,235,310 

 

1,236,868 

Other assets

 

28,538 

 

 -

 

(268)

 

28,270 

Total assets

 

$            4,000,282 

 

$               (87,633)

 

$                          0 

 

$                     3,912,649 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand and interest checking

 

$            3,050,167 

 

$                           - 

 

$                           - 

 

$                     3,050,167 

Savings and money market

 

504,447 

 

 -

 

 -

 

504,447 

Time deposits

 

9,920 

 

 -

 

 -

 

9,920 

Time deposits, $100,000 and over

 

4,683 

 

 -

 

 -

 

4,683 

Total deposits

 

3,569,217 

 

 -

 

 -

 

3,569,217 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

22,057 

 

 -

 

 -

 

22,057 

Subordinated debenture

 

13,401 

 

 -

 

 -

 

13,401 

Other liabilities

 

42,274 

 

 -

 

 -

 

42,274 

Total liabilities

 

3,646,949 

 

 -

 

 -

 

3,646,949 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par

 

 

 

 

 

 

 

 

value: 37,720,945 shares issued at September 30, 2013

 

37,721 

 

 -

 

 -

 

37,721 

Treasury stock, at cost (100,000 shares)

 

(866)

 

 -

 

 -

 

(866)

Additional paid-in capital

 

292,715 

 

 -

 

 -

 

292,715 

Retained earnings

 

20,291 

 

(87,633)

 

 -

 

(67,342)

Accumulated other comprehensive income

 

3,472 

 

 -

 

 -

 

3,472 

Total shareholders' equity

 

353,333 

 

(87,633)

 

 -

 

265,700 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$            4,000,282 

 

$               (87,633)

 

$                           - 

 

$                     3,912,649 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Cash and due from banks

 

$                 21,560 

 

$                           - 

 

$                    (198)

 

$                          21,362 

Interest earning deposits at Federal Reserve Bank

 

622,989 

 

 -

 

 -

 

622,989 

Securities purchased under agreements to resell

 

40,240 

 

 -

 

 -

 

40,240 

Total cash and cash equivalents

 

684,789 

 

 -

 

(198)

 

684,591 

 

 

 

 

 

 

 

 

 

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

 

1,021,848 

 

 -

 

 -

 

1,021,848 

Investment securities, held-to-maturity (fair value $91,777)

 

95,662 

 

 -

 

 -

 

95,662 

Commercial loans held for sale

 

49,355 

 

 -

 

 -

 

49,355 

Loans, net of deferred loan fees and costs

 

1,967,382 

 

(98,218)

 

(1,304,627)

 

564,537 

Allowance for loan and lease losses

 

(40,274)

 

(25,400)

 

61,737 

 

(3,937)

Loans, net

 

1,927,108 

 

(123,618)

 

(1,242,890)

 

560,600 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

3,209 

 

 -

 

 -

 

3,209 

128

 


 

Premises and equipment, net

 

13,709 

 

 -

 

 -

 

13,709 

Accrued interest receivable

 

12,360 

 

 -

 

(4,875)

 

7,485 

Intangible assets, net

 

6,503 

 

 -

 

 -

 

6,503 

Other real estate owned

 

6,308 

 

 -

 

(6,308)

 

(0)

Deferred tax asset, net

 

27,613 

 

38,632 

 

 -

 

66,245 

Assets held for sale

 

 -

 

940 

 

1,254,619 

 

1,255,559 

Other assets

 

28,031 

 

 -

 

(348)

 

27,683 

Total assets

 

$            3,876,495 

 

$               (84,046)

 

$                          0 

 

$                     3,792,449 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand and interest checking

 

$            2,963,170 

 

$                           - 

 

$                           - 

 

$                     2,963,170 

Savings and money market

 

469,238 

 

 -

 

 -

 

469,238 

Time deposits

 

12,502 

 

 -

 

 -

 

12,502 

Time deposits, $100,000 and over

 

5,747 

 

 -

 

 -

 

5,747 

Total deposits

 

3,450,657 

 

 -

 

 -

 

3,450,657 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

19,059 

 

 -

 

 -

 

19,059 

Subordinated debenture

 

13,401 

 

 -

 

 -

 

13,401 

Other liabilities

 

49,186 

 

 -

 

 -

 

49,186 

Total liabilities

 

3,532,303 

 

 -

 

 -

 

3,532,303 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par

 

 

 

 

 

 

 

 

value: 37,462,939 shares issued at June 30, 2013

 

37,463 

 

 -

 

 -

 

37,463 

Treasury stock, at cost (100,000 shares)

 

(866)

 

 -

 

 -

 

(866)

Additional paid-in capital

 

286,321 

 

 -

 

 -

 

286,321 

Retained earnings

 

19,993 

 

(84,046)

 

 -

 

(64,053)

Accumulated other comprehensive income

 

1,281 

 

 -

 

 -

 

1,281 

Total shareholders' equity

 

344,192 

 

(84,046)

 

 -

 

260,146 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$            3,876,495 

 

$               (84,046)

 

$                           - 

 

$                     3,792,449 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Cash and due from banks

 

$                 14,108 

 

$                           - 

 

$                    (936)

 

$                          13,172 

Interest earning deposits at Federal Reserve Bank

 

1,102,217 

 

 -

 

 -

 

1,102,217 

Securities purchased under agreements to resell

 

22,831 

 

 -

 

 -

 

22,831 

Total cash and cash equivalents

 

1,139,156 

 

 -

 

(936)

 

1,138,220 

 

 

 

 

 

 

 

 

 

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

 

898,653 

 

 -

 

 -

 

898,653 

Investment securities, held-to-maturity (fair value $40,999)

 

45,064 

 

 -

 

 -

 

45,064 

Commercial loans held for sale

 

28,402 

 

 -

 

 -

 

28,402 

Loans, net of deferred loan fees and costs

 

1,968,890 

 

(95,330)

 

(1,308,124)

 

565,436 

Allowance for loan and lease losses

 

(34,883)

 

(28,988)

 

60,065 

 

(3,806)

Loans, net

 

1,934,007 

 

(124,318)

 

(1,248,059)

 

561,630 

Federal Home Loan and Atlantic Central Bankers Bank stock

 

3,094 

 

 -

 

 -

 

3,094 

129

 


 

Premises and equipment, net

 

10,965 

 

 -

 

 -

 

10,965 

Accrued interest receivable

 

11,521 

 

 -

 

(4,863)

 

6,658 

Intangible assets, net

 

6,753 

 

 -

 

 -

 

6,753 

Other real estate owned

 

4,543 

 

 -

 

(4,543)

 

(0)

Deferred tax asset, net

 

23,055 

 

38,632 

 

 -

 

61,687 

Assets held for sale

 

 -

 

(5,488)

 

1,258,805 

 

1,253,317 

Other assets

 

26,882 

 

 -

 

(404)

 

26,478 

Total assets

 

$            4,132,095 

 

$               (91,174)

 

$                          0 

 

$                     4,040,921 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand and interest checking

 

$            3,197,039 

 

$                           - 

 

$                           - 

 

$                     3,197,039 

Savings and money market

 

495,001 

 

 -

 

 -

 

495,001 

Time deposits

 

12,602 

 

 -

 

 -

 

12,602 

Time deposits, $100,000 and over

 

8,343 

 

 -

 

 -

 

8,343 

Total deposits

 

3,712,985 

 

 -

 

 -

 

3,712,985 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

16,672 

 

 -

 

 -

 

16,672 

Subordinated debenture

 

13,401 

 

 -

 

 -

 

13,401 

Other liabilities

 

42,961 

 

 -

 

 -

 

42,961 

Total liabilities

 

3,786,019 

 

 -

 

 -

 

3,786,019 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock - authorized, 50,000,000 shares of $1.00 par

 

 

 

 

 

 

 

 

value: 37,433,594 shares issued at March 31, 2013

 

37,434 

 

 -

 

 -

 

37,434 

Treasury stock, at cost (100,000 shares)

 

(866)

 

 -

 

 -

 

(866)

Additional paid-in capital

 

285,009 

 

 -

 

 -

 

285,009 

Retained earnings

 

14,753 

 

(91,174)

 

 -

 

(76,421)

Accumulated other comprehensive income

 

9,746 

 

 -

 

 -

 

9,746 

Total shareholders' equity

 

346,076 

 

(91,174)

 

 -

 

254,902 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$            4,132,095 

 

$               (91,174)

 

$                           - 

 

$                     4,040,921 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2014

 

 

As previously reported (1)

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$             21,864 

 

$                       - 

 

$           (12,689)

 

$               9,175 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

5,311 

 

 -

 

 -

 

5,311 

Tax-exempt interest

 

3,157 

 

 -

 

 -

 

3,157 

Federal funds sold/securities purchased under agreements to resell

 

105 

 

 -

 

 -

 

105 

Interest earning deposits

 

285 

 

 -

 

 -

 

285 

 

 

30,722 

 

 -

 

(12,689)

 

18,033 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

2,635 

 

 -

 

 -

 

2,635 

Securities sold under agreements to repurchase

 

14 

 

 -

 

 -

 

14 

Subordinated debenture

 

116 

 

 -

 

 -

 

116 

 

 

2,765 

 

 -

 

 -

 

2,765 

Net interest income

 

27,957 

 

 -

 

(12,689)

 

15,268 

130

 


 

Provision for loan and lease losses

 

965 

 

(71,113)

 

70,306 

 

158 

Net interest income after provision for loan and lease losses

 

26,992 

 

71,113 

 

(82,995)

 

15,110 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,692 

 

 -

 

 -

 

1,692 

Card payment and ACH processing fees

 

1,369 

 

 -

 

 -

 

1,369 

Prepaid card fees

 

12,307 

 

 -

 

 -

 

12,307 

Gain on sale of loans

 

2,772 

 

 -

 

 -

 

2,772 

Loss on sale of investment securities

 

(35)

 

 -

 

 -

 

(35)

Leasing income

 

840 

 

 -

 

 -

 

840 

Debit card income

 

414 

 

 -

 

 -

 

414 

Affinity fees

 

649 

 

 -

 

 -

 

649 

Other

 

748 

 

 -

 

(449)

 

299 

Total non-interest income

 

20,756 

 

 -

 

(449)

 

20,307 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

14,606 

 

 -

 

(671)

 

13,935 

Depreciation and amortization

 

1,178 

 

 -

 

 -

 

1,178 

Rent and related occupancy cost

 

1,309 

 

 -

 

(35)

 

1,274 

Data processing expense

 

3,394 

 

 -

 

(79)

 

3,315 

Printing and supplies

 

542 

 

 -

 

(50)

 

492 

Professional fees

 

356 

 

 -

 

 -

 

356 

Legal expense

 

1,497 

 

 -

 

(940)

 

557 

Amortization of intangible assets

 

304 

 

 -

 

 -

 

304 

Loss on sale and write-downs on other real estate owned

 

2,568 

 

 -

 

(2,568)

 

 -

FDIC Insurance

 

1,492 

 

 -

 

 -

 

1,492 

Software

 

1,166 

 

 -

 

(8)

 

1,158 

Other real estate owned

 

434 

 

 -

 

(434)

 

 -

Insurance

 

404 

 

 -

 

 -

 

404 

Telecom and IT network communications

 

931 

 

 -

 

(168)

 

763 

Securitization and servicing expense

 

573 

 

 -

 

 -

 

573 

Consulting

 

1,157 

 

 -

 

 -

 

1,157 

Bank Secrecy Act and lookback consulting expenses

 

2,749 

 

 -

 

 -

 

2,749 

Losses on discontinued operations

 

43,441 

 

 -

 

(43,441)

 

 -

Other

 

3,624 

 

 -

 

(196)

 

3,428 

Total non-interest expense

 

81,725 

 

 -

 

(48,590)

 

33,135 

Income (loss) from continuing operations before income taxes

 

(33,977)

 

71,113 

 

(34,854)

 

2,282 

Income tax benefit

(17,172)

 

29,339 

 

(15,727)

 

(3,560)

Net income (loss) from continuing operations

 

(16,805)

 

41,774 

 

(19,127)

 

5,842 

Discontinued operations

 

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

 -

 

 -

 

34,854 

 

34,854 

Income tax provision 

 -

 

 -

 

15,727 

 

15,727 

Income from discontinued operations, net of tax

 

 -

 

 -

 

19,127 

 

19,127 

Net income (loss) available to common shareholders

 

$            (16,805)

 

$             41,774 

 

$                      - 

 

$             24,969 

 

 

 

 

 

 

 

 

 

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

 

$                (0.45)

 

$                 1.11 

 

$               (0.51)

 

$                 0.15 

Net income per share from discontinued operations - basic

 

$                       - 

 

$                       - 

 

$                 0.51 

 

$                 0.51 

Net income (loss) per share - basic

 

$                (0.45)

 

$                 1.11 

 

$                      - 

 

$                 0.66 

 

 

 

 

 

 

 

 

 

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

 

$                (0.45)

 

$                 1.11 

 

$               (0.51)

 

$                 0.15 

Net income per share from discontinued operations - diluted

 

$                       - 

 

$                       - 

 

$                 0.51 

 

$                 0.51 

Net income (loss) per share - diluted

 

$                (0.45)

 

$                 1.11 

 

$                      - 

 

$                 0.66 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

131

 


 

 

(1)

As previously reported excluding adjustments for discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2014

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$             21,926 

 

$                 (162)

 

$           (12,962)

 

$               8,802 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

5,356 

 

 -

 

 -

 

5,356 

Tax-exempt interest

 

2,956 

 

 -

 

 -

 

2,956 

Federal funds sold/securities purchased under agreements to resell

 

85 

 

 -

 

 -

 

85 

Interest earning deposits

 

411 

 

 -

 

 -

 

411 

 

 

30,734 

 

(162)

 

(12,962)

 

17,610 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

2,695 

 

 -

 

 -

 

2,695 

Securities sold under agreements to repurchase

 

11 

 

 -

 

 -

 

11 

Subordinated debenture

 

113 

 

 -

 

 -

 

113 

 

 

2,819 

 

 -

 

 -

 

2,819 

Net interest income

 

27,915 

 

(162)

 

(12,962)

 

14,791 

Provision for loan and lease losses

 

15,500 

 

(14,925)

 

598 

 

1,173 

Net interest income after provision for loan and lease losses

 

12,415 

 

14,763 

 

(13,560)

 

13,618 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,377 

 

 -

 

 -

 

1,377 

Card payment and ACH processing fees

 

1,317 

 

 -

 

 -

 

1,317 

Prepaid card fees

 

12,898 

 

 -

 

 -

 

12,898 

Gain on sale of loans

 

5,212 

 

 -

 

 -

 

5,212 

Gain on sale of investment securities

 

159 

 

 -

 

 -

 

159 

Leasing income

 

1,015 

 

 -

 

 -

 

1,015 

Debit card income

 

456 

 

 -

 

 -

 

456 

Affinity fees

 

668 

 

 -

 

 -

 

668 

Other

 

608 

 

 -

 

(321)

 

287 

Total non-interest income

 

23,710 

 

 -

 

(321)

 

23,389 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

16,324 

 

 -

 

(580)

 

15,744 

Depreciation and amortization

 

1,133 

 

 -

 

 -

 

1,133 

Rent and related occupancy cost

 

1,177 

 

 -

 

(55)

 

1,122 

Data processing expense

 

3,535 

 

 -

 

(72)

 

3,463 

Printing and supplies

 

626 

 

 -

 

(37)

 

589 

Professional fees

 

400 

 

 -

 

 -

 

400 

Legal expense

 

915 

 

 -

 

(613)

 

302 

Amortization of intangible assets

 

304 

 

 -

 

 -

 

304 

Loss on sale and write-downs on other real estate owned

 

(92)

 

 -

 

92 

 

 -

FDIC Insurance

 

1,116 

 

 -

 

 -

 

1,116 

Software

 

1,133 

 

 -

 

(10)

 

1,123 

Other real estate owned

 

325 

 

 -

 

(325)

 

 -

Insurance

 

485 

 

 -

 

 -

 

485 

Telecom and IT network communications

 

480 

 

 -

 

 -

 

480 

Securitization and servicing expense

 

703 

 

 -

 

 -

 

703 

Consulting

 

409 

 

 -

 

 -

 

409 

132

 


 

Bank Secrecy Act and lookback consulting expenses

 

2,169 

 

 -

 

 -

 

2,169 

Other

 

4,688 

 

 -

 

(218)

 

4,470 

Total non-interest expense

 

35,830 

 

 -

 

(1,818)

 

34,012 

Income from continuing operations before income taxes

 

295 

 

14,763 

 

(12,063)

 

2,995 

Income tax (benefit) provision

(43)

 

4,779 

 

(3,393)

 

1,343 

Net income from continuing operations

 

338 

 

9,984 

 

(8,670)

 

1,652 

Discontinued operations

 

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

 -

 

 -

 

12,063 

 

12,063 

Income tax provision

 -

 

 -

 

3,393 

 

3,393 

Income from discontinued operations, net of tax

 

 -

 

 -

 

8,670 

 

8,670 

Net income available to common shareholders

 

$                  338 

 

$               9,984 

 

$                      - 

 

$             10,322 

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                 0.01 

 

$                 0.26 

 

$               (0.23)

 

$                 0.04 

Net income per share from discontinued operations - basic

 

$                       - 

 

$                       - 

 

$                 0.23 

 

$                 0.23 

Net income per share - basic

 

$                 0.01 

 

$                 0.26 

 

$                      - 

 

$                 0.27 

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                 0.01 

 

$                 0.26 

 

$               (0.23)

 

$                 0.04 

Net income per share from discontinued operations - diluted

 

$                       - 

 

$                       - 

 

$                 0.23 

 

$                 0.23 

Net income per share - diluted

 

$                 0.01 

 

$                 0.26 

 

$                      - 

 

$                 0.27 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2014

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$             21,381 

 

$                 (257)

 

$           (12,660)

 

$               8,464 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

5,137 

 

 -

 

 -

 

5,137 

Tax-exempt interest

 

2,084 

 

 -

 

 -

 

2,084 

Federal funds sold/securities purchased under agreements to resell

 

106 

 

 -

 

 -

 

106 

Interest earning deposits

 

764 

 

 -

 

 -

 

764 

 

 

29,472 

 

(257)

 

(12,660)

 

16,555 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

2,777 

 

 -

 

 -

 

2,777 

Securities sold under agreements to repurchase

 

12 

 

 -

 

 -

 

12 

Subordinated debenture

 

115 

 

 -

 

 -

 

115 

 

 

2,904 

 

 -

 

 -

 

2,904 

Net interest income

 

26,568 

 

(257)

 

(12,660)

 

13,651 

Provision for loan and lease losses

 

17,300 

 

(2,165)

 

(13,860)

 

1,275 

Net interest income after provision for loan and lease losses

 

9,268 

 

1,908 

 

1,200 

 

12,376 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,210 

 

 -

 

 -

 

1,210 

Card payment and ACH processing fees

 

1,303 

 

 -

 

 -

 

1,303 

Prepaid card fees

 

13,468 

 

 -

 

 -

 

13,468 

Gain on sale of loans

 

5,484 

 

 -

 

 -

 

5,484 

Gain on sale of investment securities

 

241 

 

 -

 

 -

 

241 

Leasing income

 

381 

 

 -

 

 -

 

381 

Debit card income

 

426 

 

 -

 

 -

 

426 

Affinity fees

 

534 

 

 -

 

 -

 

534 

Other

 

1,108 

 

 -

 

(477)

 

631 

133

 


 

Total non-interest income

 

24,155 

 

 -

 

(477)

 

23,678 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

15,361 

 

 -

 

(216)

 

15,145 

Depreciation and amortization

 

1,050 

 

 -

 

 -

 

1,050 

Rent and related occupancy cost

 

1,082 

 

 -

 

(55)

 

1,027 

Data processing expense

 

3,336 

 

 -

 

(81)

 

3,255 

Printing and supplies

 

571 

 

 -

 

(15)

 

556 

Professional fees

 

376 

 

 -

 

 -

 

376 

Legal expense

 

1,332 

 

 -

 

(702)

 

630 

Amortization of intangible assets

 

304 

 

 -

 

 -

 

304 

Loss on sale and write-downs on other real estate owned

 

62 

 

 -

 

(62)

 

 -

FDIC Insurance

 

1,689 

 

 -

 

 -

 

1,689 

Software

 

1,175 

 

 -

 

(7)

 

1,168 

Other real estate owned

 

326 

 

 -

 

(326)

 

 -

Insurance

 

451 

 

 -

 

 -

 

451 

Telecom and IT network communications

 

521 

 

 -

 

 -

 

521 

Securitization and servicing expense

 

578 

 

 -

 

 -

 

578 

Consulting

 

696 

 

 -

 

 -

 

696 

Other

 

4,047 

 

 -

 

(288)

 

3,759 

Total non-interest expense

 

32,957 

 

 -

 

(1,752)

 

31,205 

Income from continuing operations before income taxes

 

466 

 

1,908 

 

2,475 

 

4,849 

Income tax provision

168 

 

579 

 

876 

 

1,623 

Net income from continuing operations

 

298 

 

1,329 

 

1,599 

 

3,226 

Discontinued operations

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 -

 

 -

 

(2,475)

 

(2,475)

Income tax benefit    

 -

 

 -

 

(876)

 

(876)

Loss from discontinued operations, net of tax

 

 -

 

 -

 

(1,599)

 

(1,599)

Net income available to common shareholders

 

$                  298 

 

$               1,329 

 

$                      - 

 

$               1,627 

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                 0.01 

 

$                 0.03 

 

$                 0.04 

 

$                 0.08 

Net loss per share from discontinued operations - basic

 

$                       - 

 

$                       - 

 

$               (0.04)

 

$                (0.04)

Net income per share - basic

 

$                 0.01 

 

$                 0.03 

 

$                      - 

 

$                 0.04 

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                 0.01 

 

$                 0.03 

 

$                 0.09 

 

$                 0.08 

Net loss per share from discontinued operations - diluted

 

$                       - 

 

$                       - 

 

$               (0.09)

 

$                (0.04)

Net income per share - diluted

 

$                 0.01 

 

$                 0.03 

 

$                      - 

 

$                 0.04 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended December 31, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$             20,966 

 

$                 (343)

 

$           (13,395)

 

$               7,228 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

4,654 

 

 -

 

 -

 

4,654 

Tax-exempt interest

 

1,834 

 

 -

 

 -

 

1,834 

Federal funds sold/securities purchased under agreements to resell

 

146 

 

 -

 

 -

 

146 

Interest earning deposits

 

546 

 

 -

 

 -

 

546 

 

 

28,146 

 

(343)

 

(13,395)

 

14,408 

Interest expense

 

 

 

 

 

 

 

 

134

 


 

Deposits

 

2,614 

 

 -

 

 -

 

2,614 

Securities sold under agreements to repurchase

 

15 

 

 -

 

 -

 

15 

Subordinated debenture

 

115 

 

 -

 

 -

 

115 

 

 

2,744 

 

 -

 

 -

 

2,744 

Net interest income

 

25,402 

 

(343)

 

(13,395)

 

11,664 

Provision for loan and lease losses

 

6,500 

 

13,733 

 

(20,339)

 

(106)

Net interest income after provision for loan and lease losses

 

18,902 

 

(14,076)

 

6,944 

 

11,770 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,547 

 

 -

 

 -

 

1,547 

Card payment and ACH processing fees

 

1,106 

 

 -

 

 -

 

1,106 

Prepaid card fees

 

11,657 

 

 -

 

 -

 

11,657 

Gain on sale of loans

 

4,560 

 

 -

 

 -

 

4,560 

Gain on sale of investment securities

 

1,104 

 

 -

 

 -

 

1,104 

Leasing income

 

707 

 

 -

 

 -

 

707 

Debit card income

 

337 

 

 -

 

 -

 

337 

Affinity fees

 

558 

 

 -

 

 -

 

558 

Other

 

759 

 

 -

 

(515)

 

244 

Total non-interest income

 

22,335 

 

 -

 

(515)

 

21,820 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

13,416 

 

 -

 

(96)

 

13,320 

Depreciation and amortization

 

1,029 

 

 -

 

 -

 

1,029 

Rent and related occupancy cost

 

1,087 

 

 -

 

(56)

 

1,031 

Data processing expense

 

3,007 

 

 -

 

(76)

 

2,931 

Printing and supplies

 

422 

 

 -

 

(15)

 

407 

Professional fees

 

478 

 

 -

 

 -

 

478 

Legal expense

 

2,785 

 

 -

 

(1,670)

 

1,115 

Amortization of intangible assets

 

392 

 

 -

 

 -

 

392 

Loss on sale and write-downs on other real estate owned

 

(8)

 

 -

 

 

 -

FDIC Insurance

 

953 

 

 -

 

 -

 

953 

Software

 

892 

 

 -

 

(11)

 

881 

Other real estate owned

 

320 

 

 -

 

(320)

 

 -

Insurance

 

415 

 

 -

 

 -

 

415 

Telecom and IT network communications

 

139 

 

 -

 

(1)

 

138 

Securitization and servicing expense

 

278 

 

 -

 

 -

 

278 

Consulting

 

501 

 

 -

 

 -

 

501 

Other

 

3,707 

 

 -

 

(450)

 

3,257 

Total non-interest expense

 

29,813 

 

 -

 

(2,687)

 

27,126 

Income from continuing operations before income taxes

 

11,424 

 

(14,076)

 

9,116 

 

6,464 

Income tax provision

4,098 

 

10,769 

 

(12,711)

 

2,156 

Net income from continuing operations

 

7,326 

 

(24,845)

 

21,827 

 

4,308 

Discontinued operations

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 -

 

 -

 

(9,116)

 

(9,116)

Income tax provision

 -

 

 -

 

12,711 

 

12,711 

Loss from discontinued operations, net of tax

 

 -

 

 -

 

(21,827)

 

(21,827)

Net income (loss) available to common shareholders

 

$               7,326 

 

$            (24,845)

 

$                      - 

 

$            (17,519)

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                 0.20 

 

$                (0.66)

 

$                 0.58 

 

$                 0.12 

Net loss per share from discontinued operations - basic

 

$                       - 

 

$                       - 

 

$               (0.58)

 

$                (0.58)

Net income (loss) per share - basic

 

$                 0.20 

 

$                (0.66)

 

$                      - 

 

$                (0.46)

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                 0.19 

 

$                (0.66)

 

$                 0.58 

 

$                 0.11 

Net loss per share from discontinued operations - diluted

 

$                       - 

 

$                       - 

 

$               (0.58)

 

$                (0.58)

135

 


 

Net income (loss) per share - diluted

 

$                 0.19 

 

$                (0.66)

 

$                      - 

 

$                (0.47)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$             20,845 

 

$                 (342)

 

$           (13,305)

 

$               7,198 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

4,057 

 

 -

 

 -

 

4,057 

Tax-exempt interest

 

1,326 

 

 -

 

 -

 

1,326 

Federal funds sold/securities purchased under agreements to resell

 

157 

 

 -

 

 -

 

157 

Interest earning deposits

 

438 

 

 -

 

 -

 

438 

 

 

26,823 

 

(342)

 

(13,305)

 

13,176 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

2,578 

 

 -

 

 -

 

2,578 

Securities sold under agreements to repurchase

 

13 

 

 -

 

 -

 

13 

Subordinated debenture

 

115 

 

 -

 

 -

 

115 

 

 

2,706 

 

 -

 

 -

 

2,706 

Net interest income

 

24,117 

 

(342)

 

(13,305)

 

10,470 

Provision for loan and lease losses

 

8,000 

 

3,863 

 

(11,484)

 

379 

Net interest income after provision for loan and lease losses

 

16,117 

 

(4,205)

 

(1,821)

 

10,091 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,286 

 

 -

 

 -

 

1,286 

Card payment and ACH processing fees

 

1,027 

 

 -

 

 -

 

1,027 

Prepaid card fees

 

10,177 

 

 -

 

 -

 

10,177 

Gain on sale of loans

 

4,739 

 

 -

 

 -

 

4,739 

Gain on sale of investment securities

 

42 

 

 -

 

 -

 

42 

Leasing income

 

624 

 

 -

 

 -

 

624 

Debit card income

 

158 

 

 -

 

 -

 

158 

Affinity fees

 

722 

 

 -

 

 -

 

722 

Other

 

827 

 

 -

 

(378)

 

449 

Total non-interest income

 

19,602 

 

 -

 

(378)

 

19,224 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

13,766 

 

 -

 

(445)

 

13,321 

Depreciation and amortization

 

934 

 

 -

 

 -

 

934 

Rent and related occupancy cost

 

1,041 

 

 -

 

(55)

 

986 

Data processing expense

 

2,783 

 

 -

 

(73)

 

2,710 

Printing and supplies

 

369 

 

 -

 

(17)

 

352 

Professional fees

 

347 

 

 -

 

 -

 

347 

Legal expense

 

1,522 

 

 -

 

(880)

 

642 

Amortization of intangible assets

 

250 

 

 -

 

 -

 

250 

Loss on sale and write-downs on other real estate owned

 

403 

 

 -

 

(403)

 

 -

FDIC Insurance

 

895 

 

 -

 

 -

 

895 

Software

 

938 

 

 -

 

(5)

 

933 

Other real estate owned

 

286 

 

 -

 

(286)

 

 -

Insurance

 

352 

 

 -

 

 -

 

352 

Telecom and IT network communications

 

752 

 

 -

 

(2)

 

750 

Securitization and servicing expense

 

343 

 

 -

 

 -

 

343 

136

 


 

Consulting

 

464 

 

 -

 

 -

 

464 

Other

 

3,452 

 

 -

 

(347)

 

3,105 

Total non-interest expense

 

28,897 

 

 -

 

(2,513)

 

26,384 

Income from continuing operations before income taxes

 

6,822 

 

(4,205)

 

314 

 

2,931 

Income tax provision

2,034 

 

(618)

 

(438)

 

978 

Net income from continuing operations

 

4,788 

 

(3,587)

 

752 

 

1,953 

Discontinued operations

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 -

 

 -

 

(314)

 

(314)

Income tax provision

 -

 

 -

 

438 

 

438 

Loss from discontinued operations, net of tax

 

 -

 

 -

 

(752)

 

(752)

Net income available to common shareholders

 

$               4,788 

 

$              (3,587)

 

$                      - 

 

$               1,201 

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                 0.13 

 

$                (0.10)

 

$                 0.02 

 

$                 0.05 

Net loss per share from discontinued operations - basic

 

$                       - 

 

$                       - 

 

$               (0.02)

 

$                (0.02)

Net income per share - basic

 

$                 0.13 

 

$                (0.10)

 

$                      - 

 

$                 0.03 

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                 0.13 

 

$                (0.10)

 

$                 0.02 

 

$                 0.05 

Net loss per share from discontinued operations - diluted

 

$                       - 

 

$                       - 

 

$               (0.02)

 

$                (0.02)

Net income per share - diluted

 

$                 0.13 

 

$                (0.10)

 

$                      - 

 

$                 0.03 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$             20,908 

 

$                 (340)

 

$           (13,751)

 

$               6,817 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

3,801 

 

 -

 

 -

 

3,801 

Tax-exempt interest

 

873 

 

 -

 

 -

 

873 

Federal funds sold/securities purchased under agreements to resell

 

98 

 

 -

 

 -

 

98 

Interest earning deposits

 

505 

 

 -

 

 -

 

505 

 

 

26,185 

 

(340)

 

(13,751)

 

12,094 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

2,476 

 

 -

 

 -

 

2,476 

Securities sold under agreements to repurchase

 

12 

 

 -

 

 -

 

12 

Subordinated debenture

 

118 

 

 -

 

 -

 

118 

 

 

2,606 

 

 -

 

 -

 

2,606 

Net interest income

 

23,579 

 

(340)

 

(13,751)

 

9,488 

Provision for loan and lease losses

 

9,500 

 

(1,040)

 

(8,213)

 

247 

Net interest income after provision for loan and lease losses

 

14,079 

 

700 

 

(5,538)

 

9,241 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,084 

 

 -

 

 -

 

1,084 

Card payment and ACH processing fees

 

1,046 

 

 -

 

 -

 

1,046 

Prepaid card fees

 

11,531 

 

 -

 

 -

 

11,531 

Gain on sale of loans

 

5,748 

 

 -

 

 -

 

5,748 

Gain on sale of investment securities

 

476 

 

 -

 

 -

 

476 

Leasing income

 

642 

 

 -

 

 -

 

642 

Debit card income

 

201 

 

 -

 

 -

 

201 

Affinity fees

 

850 

 

 -

 

 -

 

850 

Other

 

784 

 

 -

 

(373)

 

411 

137

 


 

Total non-interest income

 

22,362 

 

 -

 

(373)

 

21,989 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

13,615 

 

 -

 

(177)

 

13,438 

Depreciation and amortization

 

935 

 

 -

 

 -

 

935 

Rent and related occupancy cost

 

1,064 

 

 -

 

(47)

 

1,017 

Data processing expense

 

2,796 

 

 -

 

(72)

 

2,724 

Printing and supplies

 

437 

 

 -

 

(15)

 

422 

Professional fees

 

305 

 

 -

 

 -

 

305 

Legal expense

 

791 

 

 -

 

(591)

 

200 

Amortization of intangible assets

 

250 

 

 -

 

 -

 

250 

Loss on sale and write-downs on other real estate owned

 

815 

 

 -

 

(815)

 

 -

FDIC Insurance

 

858 

 

 -

 

 -

 

858 

Software

 

982 

 

 -

 

(17)

 

965 

Other real estate owned

 

125 

 

 -

 

(125)

 

 -

Insurance

 

298 

 

 -

 

 -

 

298 

Telecom and IT network communications

 

350 

 

 -

 

(9)

 

341 

Consulting

 

308 

 

 -

 

 -

 

308 

Other

 

3,658 

 

 -

 

(366)

 

3,292 

Total non-interest expense

 

27,587 

 

 -

 

(2,234)

 

25,353 

Income from continuing operations before income taxes

 

8,854 

 

700 

 

(3,677)

 

5,877 

Income tax provision

3,262 

 

(6,428)

 

5,127 

 

1,961 

Net income from continuing operations

 

5,592 

 

7,128 

 

(8,804)

 

3,916 

Discontinued operations

 

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

 -

 

 -

 

3,677 

 

3,677 

Income tax benefit

 -

 

 -

 

(5,127)

 

(5,127)

Income from discontinued operations, net of tax

 

 -

 

 -

 

8,804 

 

8,804 

Net income available to common shareholders

 

$               5,592 

 

$               7,128 

 

$                      - 

 

$             12,720 

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                 0.15 

 

$                 0.19 

 

$               (0.24)

 

$                 0.10 

Net income per share from discontinued operations - basic

 

$                       - 

 

$                       - 

 

$                 0.24 

 

$                 0.24 

Net income per share - basic

 

$                 0.15 

 

$                 0.19 

 

$                      - 

 

$                 0.34 

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                 0.15 

 

$                 0.19 

 

$               (0.24)

 

$                 0.10 

Net income per share from discontinued operations - diluted

 

$                       - 

 

$                       - 

 

$                 0.24 

 

$                 0.24 

Net income per share - diluted

 

$                 0.15 

 

$                 0.19 

 

$                      - 

 

$                 0.34 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

 

 

Loans, including fees

 

$             20,322 

 

$                 (403)

 

$           (13,521)

 

$               6,398 

Interest on investment securities:

 

 

 

 

 

 

 

 

Taxable interest

 

3,487 

 

 -

 

 -

 

3,487 

Tax-exempt interest

 

725 

 

 -

 

 -

 

725 

Federal funds sold/securities purchased under agreements to resell

 

24 

 

 -

 

 -

 

24 

Interest earning deposits

 

838 

 

 -

 

 -

 

838 

 

 

25,396 

 

(403)

 

(13,521)

 

11,472 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

2,498 

 

 -

 

 -

 

2,498 

138

 


 

Securities sold under agreements to repurchase

 

14 

 

 -

 

 -

 

14 

Subordinated debenture

 

200 

 

 -

 

 -

 

200 

 

 

2,712 

 

 -

 

 -

 

2,712 

Net interest income

 

22,684 

 

(403)

 

(13,521)

 

8,760 

Provision for loan and lease losses

 

5,500 

 

12,338 

 

(18,003)

 

(165)

Net interest income after provision for loan and lease losses

 

17,184 

 

(12,741)

 

4,482 

 

8,925 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

1,060 

 

 -

 

 -

 

1,060 

Card payment and ACH processing fees

 

867 

 

 -

 

 -

 

867 

Prepaid card fees

 

11,974 

 

 -

 

 -

 

11,974 

Gain on sale of loans

 

2,178 

 

 -

 

 -

 

2,178 

Gain on sale of investment securities

 

267 

 

 -

 

 -

 

267 

Other than temporary impairment on securities held-to-maturity

 

(20)

 

 -

 

 -

 

(20)

Leasing income

 

587 

 

 -

 

 -

 

587 

Debit card income

 

196 

 

 -

 

 -

 

196 

Affinity fees

 

856 

 

 -

 

 -

 

856 

Other

 

1,167 

 

 -

 

(92)

 

1,075 

Total non-interest income

 

19,132 

 

 -

 

(92)

 

19,040 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

12,289 

 

 -

 

(120)

 

12,169 

Depreciation and amortization

 

796 

 

 -

 

 -

 

796 

Rent and related occupancy cost

 

881 

 

 -

 

(57)

 

824 

Data processing expense

 

2,607 

 

 -

 

(84)

 

2,523 

Printing and supplies

 

432 

 

 -

 

(15)

 

417 

Professional fees

 

311 

 

 -

 

 -

 

311 

Legal expense

 

619 

 

 -

 

(528)

 

91 

Amortization of intangible assets

 

250 

 

 -

 

 -

 

250 

Loss on sale and write-downs on other real estate owned

 

251 

 

 -

 

(251)

 

 -

FDIC Insurance

 

976 

 

 -

 

 -

 

976 

Software

 

809 

 

 -

 

(35)

 

774 

Other real estate owned

 

110 

 

 -

 

(110)

 

 -

Insurance

 

246 

 

 -

 

 -

 

246 

Telecom and IT network communications

 

329 

 

 -

 

(75)

 

254 

Securitization and servicing expense

 

146 

 

 -

 

 -

 

146 

Consulting

 

427 

 

 -

 

 -

 

427 

Other

 

3,000 

 

 -

 

(250)

 

2,750 

Total non-interest expense

 

24,479 

 

 -

 

(1,525)

 

22,954 

Income from continuing operations before income taxes

 

11,837 

 

(12,741)

 

5,915 

 

5,011 

Income tax provision

4,432 

 

5,488 

 

(8,248)

 

1,672 

Net income from continuing operations

 

7,405 

 

(18,229)

 

14,163 

 

3,339 

Discontinued operations

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 -

 

 -

 

(5,915)

 

(5,915)

Income tax provision

 -

 

 -

 

8,248 

 

8,248 

Loss from discontinued operations, net of tax

 

 -

 

 -

 

(14,163)

 

(14,163)

Net income (loss) available to common shareholders

 

$               7,405 

 

$            (18,229)

 

$                      - 

 

$            (10,824)

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                 0.20 

 

$                (0.49)

 

$                 0.39 

 

$                 0.10 

Net loss per share from discontinued operations - basic

 

$                       - 

 

$                       - 

 

$               (0.39)

 

$                (0.39)

Net income (loss) per share - basic

 

$                 0.20 

 

$                (0.49)

 

$                      - 

 

$                (0.29)

 

 

 

 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                 0.20 

 

$                (0.50)

 

$                 0.39 

 

$                 0.09 

Net loss per share from discontinued operations - diluted

 

$                       - 

 

$                       - 

 

$               (0.39)

 

$                (0.39)

139

 


 

Net income (loss) per share - diluted

 

$                 0.20 

 

$                (0.50)

 

$                      - 

 

$                (0.30)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2014

 

 

As previously reported (1)

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Operating activities

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$           (16,169)

 

$             31,829 

 

$             (4,940)

 

$             10,720 

Net income from discontinued operations

 

 -

 

 -

 

26,198 

 

26,198 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

4,273 

 

 -

 

 -

 

4,273 

Provision for loan and lease losses

 

33,765 

 

(80,062)

 

48,903 

 

2,606 

Net amortization of investment securities discounts/premiums

 

7,448 

 

 -

 

 -

 

7,448 

Stock-based compensation expense

 

2,042 

 

 -

 

 -

 

2,042 

Loans originated for sale

 

(427,937)

 

 -

 

 -

 

(427,937)

Sale of loans originated for resale

 

375,194 

 

 -

 

 -

 

375,194 

Gain on sales of loans originated for resale

 

(13,468)

 

 -

 

 -

 

(13,468)

Deferred income tax provision

 

 -

 

47,814 

 

(47,814)

 

 -

Gain on sale of fixed assets

 

(2)

 

 -

 

 -

 

(2)

Loss on sale and write downs on other real estate owned

 

2,538 

 

 -

 

(2,538)

 

 -

Gain on sales of investment securities

 

(365)

 

 -

 

 -

 

(365)

Increase in accrued interest receivable

 

(1,897)

 

 -

 

(642)

 

(2,539)

Increase in other assets

 

(24,916)

 

 -

 

(42,306)

 

(67,222)

Increase in discontinued assets held for sale

 

 

 -

 

34,903 

 

34,903 

Decrease in other liabilities

 

(15,247)

 

 -

 

(2)

 

(15,249)

 Net cash used in operating activities

 

(74,741)

 

(419)

 

11,762 

 

(63,398)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(402,168)

 

 -

 

 -

 

(402,168)

Proceeds from sale of investment securities available-for-sale

 

78,793 

 

 -

 

 -

 

78,793 

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

 

195 

 

 -

 

 -

 

195 

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

 

144,051 

 

 -

 

 -

 

144,051 

Proceeds from sale of other real estate owned

 

5,832 

 

 -

 

(5,832)

 

 -

Net increase in loans

 

(96,473)

 

419 

 

(126,284)

 

(222,338)

Net decrease in discontinued loans held for sale

 

 -

 

 -

 

120,300 

 

120,300 

Proceeds from sale of fixed assets

 

14 

 

 -

 

 -

 

14 

Purchases of premises and equipment

 

(5,250)

 

 -

 

 -

 

(5,250)

 Net cash used in investing activities

 

(275,006)

 

419 

 

(11,816)

 

(286,403)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net decrease in deposits

 

(391,364)

 

 -

 

 -

 

(391,364)

Net increase in securities sold under agreements to repurchase

 

275 

 

 -

 

 -

 

275 

Proceeds from the exercise of options

 

103 

 

 -

 

 -

 

103 

 Net used in financing activities

 

(390,986)

 

 -

 

 -

 

(390,986)

 

 

 

 

 

 

 

 

 

 Net decrease in cash and cash equivalents

 

(740,733)

 

 -

 

(54)

 

(740,787)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

1,237,942 

 

 -

 

(1,993)

 

1,235,949 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$           497,209 

 

$                       - 

 

$             (2,047)

 

$           495,162 

140

 


 

 

 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Interest paid

 

$               8,104 

 

$                       - 

 

$                       - 

 

$               8,104 

Taxes paid

 

$               2,578 

 

$                       - 

 

$                       - 

 

$               2,578 

Transfers of loans to other real estate owned

 

$                  725 

 

$                       - 

 

$                       - 

 

$                  725 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

As previously reported excluding adjustments for discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2014

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Operating activities

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$                 636 

 

$              6,843 

 

$            (2,601)

 

$              4,878 

Net income from discontinued operations

 

 -

 

 -

 

7,071 

 

7,071 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

2,791 

 

 -

 

 -

 

2,791 

Provision for loan and lease losses

 

32,800 

 

(21,831)

 

(8,521)

 

2,448 

Net amortization of investment securities discounts/premiums

 

4,794 

 

 -

 

 -

 

4,794 

Stock-based compensation expense

 

1,443 

 

 -

 

 -

 

1,443 

Loans originated for sale

 

(323,926)

 

 -

 

 -

 

(323,926)

Sale of loans originated for resale

 

250,052 

 

 -

 

 -

 

250,052 

Gain on sales of loans originated for resale

 

(10,696)

 

 -

 

 -

 

(10,696)

Deferred income tax provision

 

 -

 

14,569 

 

(14,569)

 

 -

Gain on sale of fixed assets

 

(2)

 

 -

 

 -

 

(2)

Gain on sale and write downs on other real estate owned

 

30 

 

 -

 

(30)

 

 -

Gain on sales of investment securities

 

(400)

 

 -

 

 -

 

(400)

Increase in accrued interest receivable

 

(1,377)

 

 -

 

(577)

 

(1,954)

Increase in other assets

 

(5,098)

 

 -

 

1,202 

 

(3,896)

Increase in discontinued assets held for sale

 

 

 -

 

(24,376)

 

(24,377)

Decrease in other liabilities

 

(15,704)

 

 -

 

 -

 

(15,704)

 Net cash used in operating activities

 

(64,657)

 

(419)

 

(42,401)

 

(107,478)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(343,628)

 

 -

 

 -

 

(343,628)

Proceeds from sale of investment securities available-for-sale

 

46,507 

 

 -

 

 -

 

46,507 

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

 

38 

 

 -

 

 -

 

38 

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

 

109,559 

 

 -

 

 -

 

109,559 

Proceeds from sale of other real estate owned

 

3,844 

 

 -

 

(3,844)

 

 -

Net increase in loans

 

(119,512)

 

419 

 

(47,192)

 

(166,285)

Net decrease in discontinued loans held for sale

 

 -

 

 -

 

93,526 

 

93,526 

Proceeds from sale of fixed assets

 

11 

 

 -

 

 -

 

11 

Purchases of premises and equipment

 

(2,768)

 

 -

 

 -

 

(2,768)

 Net cash used in investing activities

 

(305,949)

 

419 

 

42,490 

 

(263,040)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net decrease in deposits

 

(391,179)

 

 -

 

 -

 

(391,179)

Net decrease in securities sold under agreements to repurchase

 

(3,740)

 

 -

 

 -

 

(3,740)

Proceeds from the exercise of options

 

103 

 

 -

 

 -

 

103 

141

 


 

 Net used in financing activities

 

(394,816)

 

 -

 

 -

 

(394,816)

 

 

 

 

 

 

 

 

 

 Net decrease in cash and cash equivalents

 

(765,422)

 

 -

 

89 

 

(765,334)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

1,237,942 

 

 -

 

(1,993)

 

1,235,949 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$          472,520 

 

$                      - 

 

$            (1,904)

 

$          470,614 

 

 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Interest paid

 

$              5,734 

 

$                      - 

 

$                      - 

 

$              5,734 

Taxes paid

 

$              2,093 

 

$                      - 

 

$                      - 

 

$              2,093 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2014

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Operating activities

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$                 298 

 

$              1,054 

 

$              1,874 

 

$              3,226 

Net loss from discontinued operations

 

 -

 

 -

 

(1,599)

 

(1,599)

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

1,354 

 

 -

 

 -

 

1,354 

Provision for loan and lease losses

 

17,300 

 

(3,800)

 

(12,225)

 

1,275 

Net amortization of investment securities discounts/premiums

 

3,441 

 

 -

 

 -

 

3,441 

Stock-based compensation expense

 

772 

 

 -

 

 -

 

772 

Loans originated for sale

 

(218,587)

 

 -

 

 -

 

(218,587)

Sale of loans originated for resale

 

75,441 

 

 -

 

 -

 

75,441 

Gain on sales of loans originated for resale

 

(5,484)

 

 -

 

 -

 

(5,484)

Deferred income tax provision

 

 -

 

2,489 

 

(2,489)

 

 -

Gain on sale of fixed assets

 

(2)

 

 -

 

 -

 

(2)

Losses on sale and write downs on other real estate owned

 

62 

 

 -

 

(62)

 

 -

Gain on sales of investment securities

 

(241)

 

 -

 

 -

 

(241)

Increase in accrued interest receivable

 

(1,584)

 

 -

 

(344)

 

(1,928)

Increase in other assets

 

(7,043)

 

 -

 

43,444 

 

36,401 

Decrease in discontinued assets held for sale

 

 -

 

 -

 

(43,923)

 

(43,923)

Decrease in other liabilities

 

(1,552)

 

 -

 

 -

 

(1,552)

 Net cash used in operating activities

 

(135,825)

 

(257)

 

(15,324)

 

(151,406)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(222,550)

 

 -

 

 -

 

(222,550)

Proceeds from sale of investment securities available-for-sale

 

24,173 

 

 -

 

 -

 

24,173 

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

 

38 

 

 -

 

 -

 

38 

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

 

64,004 

 

 -

 

 -

 

64,004 

Proceeds from sale of other real estate owned

 

2,404 

 

 -

 

(2,404)

 

 -

Net increase in loans

 

(102,056)

 

257 

 

(1,304)

 

(103,103)

Net decrease in discontinued loans held for sale

 

 -

 

 -

 

19,098 

 

19,098 

Proceeds from sale of fixed assets

 

11 

 

 -

 

 -

 

11 

Purchases of premises and equipment

 

(1,092)

 

 -

 

 -

 

(1,092)

 Net cash used in investing activities

 

(235,068)

 

257 

 

15,390 

 

(219,421)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

142

 


 

Net decrease in deposits

 

(25,781)

 

 -

 

 -

 

(25,781)

Net decrease in securities sold under agreements to repurchase

 

(4,730)

 

 -

 

 -

 

(4,730)

Proceeds from the exercise of options

 

71 

 

 -

 

 -

 

71 

 Net used in financing activities

 

(30,440)

 

 -

 

 -

 

(30,440)

 

 

 

 

 

 

 

 

 

 Net decrease in cash and cash equivalents

 

(401,333)

 

 -

 

66 

 

(401,267)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

1,237,942 

 

 -

 

(1,993)

 

1,235,949 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$          836,609 

 

$                      - 

 

$            (1,927)

 

$          834,682 

 

 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Interest paid

 

$              2,911 

 

$                      - 

 

$                      - 

 

$              2,911 

Taxes paid

 

$              1,129 

 

$                      - 

 

$                      - 

 

$              1,129 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Operating activities

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$             17,785 

 

$           (10,419)

 

$               1,842 

 

$               9,208 

Net loss from discontinued operations

 

 -

 

 -

 

(6,111)

 

(6,111)

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

3,415 

 

 -

 

 -

 

3,415 

Provision for loan and lease losses

 

23,000 

 

14,309 

 

(36,848)

 

461 

Net amortization of investment securities discounts/premiums

 

4,660 

 

 -

 

 -

 

4,660 

Stock-based compensation expense

 

2,357 

 

 -

 

 -

 

2,357 

Loans originated for sale

 

(189,327)

 

 -

 

 -

 

(189,327)

Sale of loans originated for resale

 

215,092 

 

 -

 

 -

 

215,092 

Gain on sales of loans originated for resale

 

(12,665)

 

 -

 

 -

 

(12,665)

Deferred income tax provision

 

 -

 

(4,975)

 

4,975 

 

 -

Loss on sale of fixed assets

 

 

 -

 

 -

 

Other than temporary impairment on securities held-to-maturity

 

20 

 

 -

 

 -

 

20 

Losses on sale and write downs on other real estate owned

 

1,469 

 

 -

 

(1,469)

 

 -

Gain on sales of investment securities

 

(785)

 

 -

 

 -

 

(785)

Increase in accrued interest receivable

 

(2,699)

 

 -

 

(262)

 

(2,961)

Decrease (increase) in other assets

 

751 

 

 -

 

(5,619)

 

(4,868)

Increase in discontinued assets held for sale

 

 -

 

 -

 

(8,671)

 

(8,671)

Increase in other liabilities

 

16,161 

 

 -

 

 -

 

16,161 

 Net cash provided by investing activities

 

79,235 

 

(1,085)

 

(52,162)

 

25,988 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(607,528)

 

 -

 

 -

 

(607,528)

Purchase of investment securities held-to-maturity

 

(52,899)

 

 -

 

 -

 

(52,899)

Proceeds from sale of investment securities available-for-sale

 

61,962 

 

 -

 

 -

 

61,962 

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

 

606 

 

 -

 

 -

 

606 

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

 

174,895 

 

 -

 

 -

 

174,895 

Proceeds from sale of other real estate owned

 

1,979 

 

 -

 

(1,979)

 

 -

Net increase in loans

 

(152,124)

 

1,085 

 

38,272 

 

(112,767)

Net decrease in discontinued loans held for sale

 

 -

 

 -

 

15,404 

 

15,404 

Proceeds from sale of fixed assets

 

99 

 

 -

 

 -

 

99 

143

 


 

Purchases of premises and equipment

 

(6,649)

 

 -

 

 -

 

(6,649)

 Net cash used in investing activities

 

(579,659)

 

1,085 

 

51,697 

 

(526,877)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

255,996 

 

 -

 

 -

 

255,996 

Net increase in securities sold under agreements to repurchase

 

3,509 

 

 -

 

 -

 

3,509 

Proceeds from issuance of common stock

 

1,629 

 

 -

 

 -

 

1,629 

Proceeds from the exercise of options

 

1,653 

 

 -

 

 -

 

1,653 

 Net provided by in financing activities

 

262,787 

 

 -

 

 -

 

262,787 

 

 

 

 

 

 

 

 

 

 Net decrease in cash and cash equivalents

 

(237,637)

 

 -

 

(465)

 

(238,102)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

968,092 

 

 -

 

(1,504)

 

966,588 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$           730,455 

 

$                       - 

 

$             (1,970)

 

$           728,485 

 

 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Interest paid

 

$               8,054 

 

$                       - 

 

$                       - 

 

$               8,054 

Taxes paid

 

$             11,445 

 

$                       - 

 

$                       - 

 

$             11,445 

Transfers of loans to held for sale

 

$             27,316 

 

$                       - 

 

$                       - 

 

$             27,316 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Operating activities

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$             12,997 

 

$             (7,828)

 

$               2,086 

 

$               7,255 

Net loss from discontinued operations

 

 -

 

 -

 

(5,359)

 

(5,359)

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

2,231 

 

 -

 

 -

 

2,231 

Provision for loan and lease losses

 

15,000 

 

11,444 

 

(26,362)

 

82 

Net amortization of investment securities discounts/premiums

 

2,615 

 

 -

 

 -

 

2,615 

Stock-based compensation expense

 

1,558 

 

 -

 

 -

 

1,558 

Loans originated for sale

 

(110,117)

 

 -

 

 -

 

(110,117)

Sale of loans originated for resale

 

101,721 

 

 -

 

 -

 

101,721 

Gain on sales of loans originated for resale

 

(7,926)

 

 -

 

 -

 

(7,926)

Deferred income tax provision

 

 -

 

(4,358)

 

4,358 

 

 -

Loss on sale of fixed assets

 

 

 -

 

 -

 

Other than temporary impairment on securities held-to-maturity

 

20 

 

 -

 

 -

 

20 

Loss on sale and write downs on other real estate owned

 

1,066 

 

 -

 

(1,066)

 

 -

Gain on sales of investment securities

 

(743)

 

 -

 

 -

 

(743)

Increase in accrued interest receivable

 

(2,503)

 

 -

 

(13)

 

(2,516)

Decrease (increase) in other assets

 

1,257 

 

 -

 

(5,540)

 

(4,283)

Decrease in discontinued assets held for sale

 

 -

 

 -

 

3,852 

 

3,852 

Increase in other liabilities

 

1,438 

 

 -

 

 -

 

1,438 

 Net cash provided by (used in) investing activities

 

18,615 

 

(742)

 

(28,044)

 

(10,171)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(442,958)

 

 -

 

 -

 

(442,958)

144

 


 

Purchase of investment securities held-to-maturity

 

(50,875)

 

 -

 

 -

 

(50,875)

Proceeds from sale of investment securities available-for-sale

 

51,149 

 

 -

 

 -

 

51,149 

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

 

 -

 

 -

 

 -

 

 -

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

 

103,091 

 

 -

 

 -

 

103,091 

Proceeds from sale of other real estate owned

 

693 

 

 -

 

(693)

 

 -

Net increase in loans

 

(97,812)

 

742 

 

45,852 

 

(51,218)

Net increase in discontinued loans held for sale

 

 -

 

 -

 

(15,809)

 

(15,809)

Proceeds from sale of fixed assets

 

79 

 

 -

 

 -

 

79 

Purchases of premises and equipment

 

(5,151)

 

 -

 

 -

 

(5,151)

 Net cash used in investing activities

 

(441,784)

 

742 

 

29,350 

 

(411,692)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

137,436 

 

 -

 

 -

 

137,436 

Net increase in securities sold under agreements to repurchase

 

511 

 

 -

 

 -

 

511 

Proceeds from issuance of common stock

 

1,629 

 

 -

 

 -

 

1,629 

Proceeds from the exercise of options

 

290 

 

 -

 

 -

 

290 

 Net provided by in financing activities

 

139,866 

 

 -

 

 -

 

139,866 

 

 

 

 

 

 

 

 

 

 Net decrease in cash and cash equivalents

 

(283,303)

 

 -

 

1,306 

 

(281,997)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

968,092 

 

 -

 

(1,504)

 

966,588 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$           684,789 

 

$                       - 

 

$                (198)

 

$           684,591 

 

 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Interest paid

 

$               5,326 

 

$                       - 

 

$                       - 

 

$               5,326 

Taxes paid

 

$               2,244 

 

$                       - 

 

$                       - 

 

$               2,244 

Transfers of loans to held for sale

 

$             21,692 

 

$                       - 

 

$                       - 

 

$             21,692 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2013

 

 

As previously reported

 

Restatement adjustments

 

Discontinued operations adjustments

 

As restated

 

 

(in thousands, except per share data)

Operating activities

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$              7,405 

 

$            (8,298)

 

$              4,232 

 

$              3,339 

Net loss from discontinued operations

 

 -

 

 -

 

(14,163)

 

(14,163)

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

1,046 

 

 -

 

 -

 

1,046 

Provision for loan and lease losses

 

5,500 

 

12,904 

 

(18,569)

 

(165)

Net amortization of investment securities discounts/premiums

 

823 

 

 -

 

 -

 

823 

Stock-based compensation expense

 

745 

 

 -

 

 -

 

745 

Loans originated for sale

 

(28,402)

 

 -

 

 -

 

(28,402)

Sale of loans originated for resale

 

13,519 

 

 -

 

 -

 

13,519 

Gain on sales of loans originated for resale

 

(2,178)

 

 -

 

 -

 

(2,178)

Deferred income tax provision

 

 -

 

(5,008)

 

5,008 

 

 -

Other than temporary impairment on securities held-to-maturity

 

20 

 

 -

 

 -

 

20 

Losses on sale and write downs on other real estate owned

 

251 

 

 -

 

(251)

 

 -

Gain on sales of investment securities

 

(267)

 

 -

 

 -

 

(267)

Increase in accrued interest receivable

 

(1,664)

 

 -

 

(25)

 

(1,689)

145

 


 

Decrease (increase) in other assets

 

2,407 

 

 -

 

(5,483)

 

(3,076)

Decrease in discontinued assets held for sale

 

 -

 

 -

 

11,263 

 

11,263 

Increase in other liabilities

 

25,149 

 

 -

 

 -

 

25,149 

 Net cash provided by investing activities

 

24,354 

 

(402)

 

(17,988)

 

5,964 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(250,581)

 

 -

 

 -

 

(250,581)

Proceeds from sale of investment securities available-for-sale

 

9,356 

 

 -

 

 -

 

9,356 

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

 

59,942 

 

 -

 

 -

 

59,942 

Proceeds from sale of other real estate owned

 

693 

 

 -

 

(693)

 

 -

Net increase in loans

 

(70,939)

 

402 

 

40,228 

 

(30,309)

Net increase in discontinued loans held for sale

 

 -

 

 -

 

(20,979)

 

(20,979)

Purchases of premises and equipment

 

(1,392)

 

 -

 

 -

 

(1,392)

 Net cash used in investing activities

 

(252,921)

 

402 

 

18,556 

 

(233,963)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

399,764 

 

 -

 

 -

 

399,764 

Net decrease in securities sold under agreements to repurchase

 

(1,876)

 

 -

 

 -

 

(1,876)

Proceeds from issuance of common stock

 

1,629 

 

 -

 

 -

 

1,629 

Proceeds from the exercise of options

 

114 

 

 -

 

 -

 

114 

 Net provided by in financing activities

 

399,631 

 

 -

 

 -

 

399,631 

 

 

 

 

 

 

 

 

 

 Net increase in cash and cash equivalents

 

171,064 

 

 -

 

568 

 

171,632 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

968,092 

 

 -

 

(1,504)

 

966,588 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$       1,139,156 

 

$                      - 

 

$               (936)

 

$       1,138,220 

 

 

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

Interest paid

 

$              2,720 

 

$                      - 

 

$                      - 

 

$              2,720 

Taxes paid

 

$              2,244 

 

$                      - 

 

$                      - 

 

$              2,244 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note U—Condensed Financial Information—Parent Only

 

Condensed Balance Sheets

 

 

 

 

 

 

 

 

 

December 31,

 

 

2014

 

2013

 

 

 

 

(restated)

 

 

(in thousands)

Assets

 

 

 

 

Cash and due from banks

 

$          6,386

 

$        70,612

Intercompany loans

 

3,857 

 

 -

Investment in subsidiaries

 

310,507 

 

181,533 

Other assets

 

11,713 

 

8,401 

Total assets

 

$      332,463

 

$      260,546

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

Other liabilities

 

$               39

 

$               18

146

 


 

Subordinated debentures

 

13,401 

 

13,401 

Stockholders' equity

 

319,023 

 

247,127 

Total liabilities and stockholders' equity

 

$      332,463

 

$      260,546

 

Condensed Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

 

December 31,

 

 

2014

 

2013

 

2012

 

 

 

 

(restated)

 

(restated)

 

 

(in thousands)

Income

 

 

 

 

 

 

Interest on intercompany loans

 

$               13

 

$              -

 

$              -

Other income

 

30,235 

 

27,415 

 

23,802 

Total income

 

30,248 

 

27,415 

 

23,802 

 

 

 

 

 

 

 

Expense

 

 

 

 

 

 

Interest on subordinated debentures

 

478 

 

548 

 

869 

Non-interest expense

 

32,351 

 

29,507 

 

24,563 

Total expense

 

32,829 

 

30,055 

 

25,432 

Equity in undistributed income of subsidiaries

 

58,802 

 

(12,939)

 

(42,341)

Income (loss) before tax benefit

 

56,221 

 

(15,579)

 

(43,971)

Income tax provision (benefit)

 

(888)

 

(1,157)

 

(818)

Net income (loss) available to common shareholders

 

$        57,109

 

$   (14,422)

 

$   (43,153)

 

 

Condensed Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

 

December 31,

 

 

2014

 

2013

 

2012

 

 

 

 

(restated)

 

(restated)

 

 

(in thousands)

Operating activities

 

 

 

 

 

 

Net income (loss)

 

$        57,109

 

$      (14,422)

 

$      (43,153)

Increase in other assets

 

(3,441)

 

(1,735)

 

(1,749)

Increase (decrease) in other liabilities

 

21 

 

(73)

 

53 

Stock based compensation expense

 

2,641 

 

3,157 

 

2,595 

Equity in undistributed income

 

(58,802)

 

12,939 

 

42,341 

Net cash used in (provided by) operating activities

 

(2,472)

 

(134)

 

87 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Net increase in loans

 

(3,857)

 

 -

 

 -

Contribution to subsidiary

 

(58,000)

 

(16,798)

 

(31,283)

147

 


 

Net cash used in investing activities

 

(61,857)

 

(16,798)

 

(31,283)

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Proceeds from the issuance of common stock

 

 -

 

1,629 

 

41,713 

Proceeds from the exercise of common stock options

 

103 

 

1,653 

 

454 

Net cash provided by financing activities

 

103 

 

3,282 

 

42,167 

Net increase (decrease) in cash and cash equivalents

 

(64,226)

 

(13,650)

 

10,971 

Cash and cash equivalents, beginning of year

 

70,612 

 

84,262 

 

73,291 

Cash and cash equivalents, end of year

 

$          6,386

 

$       70,612

 

$       84,262

 

 

 

 

 

 

 

 

 

 

 

Note VSegment 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 W- Discontinued Operations.  The shift from a traditional bank balance sheet led the Company to evaluate its remaining business structure.  Based on the continuing operations of the Company, it was determined that there would be four segments of the business: specialty finance, payments, corporate and discontinued operations.  Specialty finance includes commercial mortgage loan sales, Small Business Administration loans, leasing and security backed lines of credit and any deposits generated by those business lines.  Payments include prepaid cards, card payments, ACH processing and healthcare accounts.  Corporate includes the Company’s investment portfolio and corporate overhead and other non-allocated expenses.  Investment income is allocated to the payments segment.  These operating segments reflect the way the Company views its current operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2014

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(in thousands)

Interest income

 

$           36,402 

 

$                  58 

 

$           34,260 

 

$                    - 

 

$           70,720 

Interest allocation

 

 -

 

34,261 

 

(34,261)

 

 -

 

 -

Interest expense

 

3,964 

 

6,137 

 

1,194 

 

 -

 

11,295 

Net interest income

 

32,438 

 

28,182 

 

(1,195)

 

 -

 

59,425 

Provision for loan and lease losses

 

1,202 

 

 -

 

 -

 

 -

 

1,202 

Non-interest income

 

19,030 

 

65,509 

 

510 

 

 -

 

85,049 

Non-interest expense

 

37,933 

 

79,145 

 

18,902 

 

 -

 

135,980 

Income (loss) from continuing operations before taxes

 

12,333 

 

14,546 

 

(19,587)

 

 -

 

7,292 

Income taxes

 

 -

 

 -

 

(14,523)

 

 -

 

(14,523)

Income (loss) from continuing operations

 

12,333 

 

14,546 

 

(5,064)

 

 -

 

21,815 

Income from discontinued operations

 

 -

 

 -

 

 -

 

35,294 

 

35,294 

Net income (loss)

 

$           12,333 

 

$           14,546 

 

$           (5,064)

 

$           35,294 

 

$           57,109 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2013

148

 


 

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

(in thousands)

Interest income

 

$           27,577 

 

$                  64 

 

$           23,509 

 

$                    - 

 

$           51,150 

Interest allocation

 

 -

 

23,510 

 

(23,510)

 

 -

 

 -

Interest expense

 

3,762 

 

4,796 

 

2,210 

 

 -

 

10,768 

Net interest income

 

23,815 

 

18,778 

 

(2,211)

 

 -

 

40,382 

Provision for loan and lease losses

 

355 

 

 -

 

 -

 

 -

 

355 

Non-interest income

 

23,049 

 

57,129 

 

1,895 

 

 -

 

82,073 

Non-interest expense

 

30,190 

 

59,202 

 

12,425 

 

 -

 

101,817 

Income (loss) from continuing operations before taxes

 

16,319 

 

16,705 

 

(12,741)

 

 -

 

20,283 

Income taxes

 

 -

 

 -

 

6,767 

 

 -

 

6,767 

Income (loss) from continuing operations

 

16,319 

 

16,705 

 

(19,508)

 

 -

 

13,516 

Loss from discontinued operations

 

 -

 

 -

 

 -

 

(27,938)

 

(27,938)

Net income (loss)

 

$           16,319 

 

$           16,705 

 

$         (19,508)

 

$         (27,938)

 

$         (14,422)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2012

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

(in thousands)

Interest income

 

$           20,776 

 

$                  70 

 

$           18,633 

 

$                    - 

 

$           39,479 

Interest allocation

 

 -

 

18,633 

 

(18,633)

 

 -

 

 -

Interest expense

 

3,155 

 

4,979 

 

3,277 

 

 -

 

11,411 

Net interest income

 

17,621 

 

13,724 

 

(3,277)

 

 -

 

28,068 

Provision for loan and lease losses

 

6,642 

 

 -

 

 -

 

 -

 

6,642 

Non-interest income

 

6,387 

 

42,654 

 

460 

 

 -

 

49,501 

Non-interest expense

 

20,894 

 

46,990 

 

12,304 

 

 -

 

80,188 

Income (loss) from continuing operations before taxes

 

(3,528)

 

9,388 

 

(15,121)

 

 -

 

(9,261)

Income taxes

 

 -

 

 -

 

(3,492)

 

 -

 

(3,492)

Income (loss) from continuing operations

 

(3,528)

 

9,388 

 

(11,629)

 

 -

 

(5,769)

Loss from discontinued operations

 

 -

 

 -

 

 -

 

(37,384)

 

(37,384)

Net income (loss)

 

$           (3,528)

 

$             9,388 

 

$         (11,629)

 

$         (37,384)

 

$         (43,153)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(in thousands)

Total assets

 

$       1,099,914 

 

$            30,503 

 

$       2,967,971 

 

$          887,929 

 

$       4,986,317 

Total liabilities

 

$       1,165,567 

 

$       3,198,129 

 

$          303,598 

 

$                     - 

 

$       4,667,294 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

149

 


 

 

 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total

 

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

(restated)

 

 

(in thousands)

Total assets

 

$          739,559 

 

$            26,190 

 

$       2,648,562 

 

$       1,179,277 

 

$       4,593,588 

Total liabilities

 

$       1,033,616 

 

$       2,649,358 

 

$          663,487 

 

$                     - 

 

$       4,346,461 

 

 

 

 

 

 

Note WDiscontinued Operations

 

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

 

The following table presents financial results of the commercial lending business included in net income (loss) from discontinued operations for the twelve months ended December 31, 2014, 2013 and 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

2014

 

2013

 

2012

 

 

 

(restated)

 

(restated)

 

 

(in thousands)

 

Interest income

$                     44,097 

 

$                     53,972 

 

$                     56,627 

Interest expense

 -

 

 -

 

 -

Provision for loan and lease losses

26,919 

 

58,038 

 

106,285 

Net interest income (loss) after provision

17,178 

 

(4,066)

 

(49,658)

 

 

 

 

 

 

Non interest income

1,624 

 

1,357 

 

97 

Non interest expense

(35,823)

 

8,960 

 

7,996 

 

 

 

 

 

 

Income (loss) before taxes

54,625 

 

(11,669)

 

(57,557)

Income taxes

19,331 

 

16,269 

 

(20,173)

Net income (loss)

$                     35,294 

 

$                    (27,938)

 

$                    (37,384)

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

2014

 

2013

 

 

 

(restated)

 

(in thousands)

Loans, net

$                    867,399 

 

$                 1,182,493 

Other assets

20,530 

 

(3,216)

Total assets

$                    887,929 

 

$                 1,179,277 

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Based upon an independent third party review performed as of September 30, 2014, the first reporting date after discontinuance of commercial loan operations, the Company marked the $1.20 billion commercial lending portfolio balance as of that date to lower of cost or marketAn independent third party financial advisory firm performed the lower of cost or market valuation, using the income approach in a discounted cash flow model.  Large balance commercial loans were modeled on a loan level basis. Small balance commercial loans were modeled on a pool basis where loans are grouped by common characteristics including loan type, loan collateral, amortization type and coupon.  The expected cash flows for the loans or pools were derived from the contractual loan terms, adjusted for prepayments and credit considerations as applicable.  The loan level credit analysis was also performed by an independent third party which reviewed the majority of the credit portfolio for credit inputs into the model. Based on that review, weighted average fair values were applied to the loans not specifically reviewed. Discount rates used in the model were derived from observable market interest rates or credit spreads for comparable loans including national and regional commercial loan pricing surveys, dealer market research and market pricing quotations for new issuance.  Market quoted interest rates were adjusted for the subject loan or pool to account for differences in loan characteristics including loan term, loan size, loan vintage and loan credit quality.

 

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

 

1.87%-7.93%

 

 

 

 

 

 

 

Small balance commercial loans

 

Discounted cash flows

 

Discount rate

 

4.12%-6.77%

 

 

 

 

 

 

 

 

   As of December 31, 2014, independent third parties also performed a fair valuation.  The results of discontinued operations do not include any future severance payments. 

 

 

   The Company has begun the process of selling the discontinued loan portfolio and has sold loans with a book value of approximately $342.2 million, of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations. The $342.2 million  of loans sold had a face value of approximately $417.1 million. These sales were comprised of the following:  Loans with an approximate face and book value of $267.6 million and $192.7 million, respectively, were sold in the fourth quarter of 2014 to a private securitization entity. The securitization is managed by an independent investor, which contributed $16 million of equity to that entity.  The balance of the sale was financed by the Bank and is reflected on the consolidated balance sheet as investment in unconsolidated subsidiary.  After $74.9 million of loan charges  reflected in the difference between the face value and book value of the loans sold to the securitization, the Company recognized a gain on sale of $17.0 million.  In the second quarter of 2015, an additional $149.6 million of loans were sold at a gain of approximately $2.2 million. The Company continues to pursue additional loan sales.        

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. 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

151

 


 

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, and as a result of the material weaknesses in our internal controls over financial reporting discussed below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the end of the period covered by this report.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

  •   pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

  •   provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

•   provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.  Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.  Internal control over financial reporting also can be circumvented by collusion or improper management override.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process.  Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

A material weakness is defined as a deficiency or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2014 based on the control criteria established in the 2013 Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission and concluded that our internal control over financial reporting was not effective as of December 31, 2014 as a result of the material weaknesses discussed below.

 

·

Credit file maintenance and evaluation – We did not properly maintain credit files, including the evaluation of loan collateral and industry-specific information, relevant in determining the appropriate risk-ratings of our loans, in identifying the ultimate occurrence of loss events, and in calculating impairment under ASC 310 “Receivables”.   

 

·

Discontinued Operations – Our controls were not effective in identifying the appropriate classification of items to be included as discontinued operations.

 

Our independent registered public accounting firm, Grant Thornton LLP, audited our internal control over financial reporting as of December 31, 2014.  Their report dated September 25, 2015, which is included following this Item 9A, expressed an adverse opinion on our internal control over financial reporting.

 

152

 


 

Changes in Internal Control Over Financial Reporting

 

During the fourth quarter of the fiscal year ended December 31, 2014, there were no changes in our internal control over financial reporting other than those discussed below that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

Remediation Plan for Material Weaknesses in Internal Control Over Financial Reporting for Implementation in 2015

 

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

 

Credit File Maintenance and Evaluation:

 

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

 

Discontinued Operations:

 

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

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

The Bancorp, Inc.

 

 

Board of Directors and Shareholders

The Bancorp, Inc.

We have audited the internal control over financial reporting of The Bancorp, Inc.  (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal

153

 


 

control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment.

Management has identified a material weakness related to the Company’s failure to maintain controls over credit file maintenance, including the risk-rating of borrowers and the evaluation of collateral and industry-specific information that they believed to be relevant in determining the occurrence of a loss event and measuring impairment under ASC 310 – Receivables. A material weakness was also identified by management related to the Company’s failure to maintain controls over the identification of appropriate classification of items to be included as discontinued operations.    

In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2014. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 consolidated financial statements, and this report does not affect our report dated September 25, 2015, which expressed an unqualified opinion on those consolidated financial statements.

 

 

Philadelphia, Pennsylvania

September 25, 2015

 

154

 


 

Item 9B. Other Information

None.

 

PART III

Item 10. Directors, Executive Officers and Corporate Governance 

 

Following are summaries of the background, business experience and principal occupations of the nominees and current directors and Betsy Z. Cohen, who retired effective December 31, 2014.

 

Daniel G. Cohen, age 45, has been the Chairman of The Bancorp, Inc. and Chairman of the Executive Committee of its Board of Directors and the Bank since 1999; he was also named Chairman of the Board of Directors of the Company’s wholly-owned subsidiary, The Bancorp Bank (the “Bank”), effective January 1, 2015. He had previously been Chairman of the Bank’s Board of Directors from September 2000 to November 2003 and, from July 2000 to September 2000, had been the Bank’s Chief Executive Officer. Additionally, Mr. Cohen is an Executive Vice President at The Bancorp, and oversees the commercial mortgage-backed securities origination and sales division of the Company. Since November 2013, Mr. Cohen has served as a director of FinTech Acquisition Corp., and has been its President and Chief Executive Officer since August 2014. Mr. Cohen has served as President of Cohen & Company Financial Limited (formerly Euro DeKania Management LTD), a wholly-owned subsidiary of Institutional Financial Markets, Inc. (IFMI), formerly Cohen & Company Inc., and Alesco Financial, Inc. (which merged into IFMI), investment firms specializing in credit-related fixed income investments, since September 2013. Mr. Cohen has also served since September 2013 as President and Chief Executive Officer of all businesses of IFMI arising out of or related to Europe. Mr. Cohen served as Chief Executive Officer and Chief Investment Officer of IFMI from December 2009 through September 2013, as their respective Chairman of the Board of Directors since October 2006 and as Executive Chairman from October 2006 through December 2009. Mr. Cohen was Chairman of PrinceRidge LLC, when it was consolidated with JVB Financial Group LLC into a single broker-dealer subsidiary of IFMI in October 2013. In addition, before its merger with and into Alesco Financial, Mr. Cohen served as the Chairman of the Board of Managers of Cohen Brothers LLC from 2001, as Chief Investment Officer from October 2008 and as Chief Executive Officer from December 2009. He previously served as Chief Executive Officer of RAIT Financial Trust (a real estate investment trust) from December 2006 when it merged with Taberna Realty Finance Trust to February 2009, and served as a trustee from the date RAIT acquired Taberna until his resignation from that position in February 2010. Mr. Cohen was Chairman of the Board of Trustees and Chief Executive Officer of Taberna Realty Financial Trust from its inception in March 2005 until its December 2006 acquisition by RAIT. Mr. Cohen served as a director of Star Asia, a joint venture investing in Asian commercial real estate, from February 2007 to February 2014, and as a director of Muni Funding Company of American, LLC, a company investing in middle-market non-profit organizations, from April 2007 to June 2011. He also served as the Chairman of the Board of Dekania Acquisition Corp., a business combination company focused on acquiring businesses that operate within the insurance industry, from its inception in February 2006 until December 2006, and remained a director of Dekania Acquisition Corp until its liquidation in February 2009. Mr. Cohen served as a member of the board of directors of TRM Corporation, a consumer services company, from 2000 to September 2006 and as its Chairman from 2003 to September 2006.

 

Walter T. Beach, age 48, has been a director of The Bancorp, Inc. and the Bank since 1999. Mr. Beach has served as Managing Director of Beach Investment Counsel, Inc. since 1997. Previously, Mr. Beach was a Senior Analyst and Director of Research at Widmann, Siff and Co., Inc., an investment management firm where he was, beginning in 1994, responsible for the firm’s investment decisions for its principal equity product. Mr. Beach has served as an analyst at both Essex Financial Group and Industry Analysis Group, and since 2005 has served as a director of Resource Capital Corp., a real estate investment trust. Mr. Beach has also been a director of FinTech Acquisition Corp. since November 2014 and served as a director of Institutional Financial Markets, Inc. from December 2009 to September 2013.

 

Michael J. Bradley, age 70, has been a director of The Bancorp, Inc. and the Bank since 2005. Since 1998, Mr. Bradley has been a co-owner and Managing Director of BF Healthcare, Inc., a supplier of physician services to hospitals and assisted living facilities. Mr. Bradley has served on the Board of Directors of Resource America, Inc., a specialized asset management company, since 2005, and SourceCorp, a provider of business outsourcing solutions, since 1996. Mr. Bradley has also served on the Managing Board of Atlas Pipeline Partners GP, LLC, the general partner of Atlas Pipeline Partners L.P., an oil and gas pipeline company, since 2004. Previously, Mr. Bradley served as Chairman of First Executive Bank, and as Vice Chairman of First Republic Bank. Mr. Bradley is a certified public accountant.

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John C. Chrystal, age 56, has been a director of The Bancorp, Inc. and the Bank since 2013. Mr. Chrystal has been as director of Javelin Mortgage Investment Corp. since July 2012; since 2010 Mr. Chrystal has been an independent director of Morgan Stanley Derivative Products, Inc., and has served as an independent director and member of the audit committee of the Trust for Advised Portfolios since 2010. Previously, Mr. Chrystal served as Chief Risk Officer and Head of Structured Products for DiMaio Ahmad Capital and held several senior positions, including Head of Credit Products Europe, Global Head of Structured Credit Products Europe, Global Head of CDOs and Liability Management, with Credit Suisse, Credit Suisse Financial Products and Credit Suisse Asset Management. Mr. Chrystal also served as a member of several risk management and operating committees with both Credit Suisse and Credit Suisse Asset Management. Mr. Chrystal began his Wall Street career in 1985 at Bankers Trust Company.

 

Matthew Cohn, age 45, has been a director of The Bancorp, Inc. and the Bank since 1999. Mr. Cohn founded and serves as Vice Chairman of The ASI Show, a leading producer of trade shows throughout the country and the recipient of prestigious awards, including the INC 500 Award twice. In addition, since 1992, Mr. Cohn has been the Chief Executive Officer of the Medical Data Institute, the Chairman of ASI Computer Systems, and the Vice Chairman of the Advertising Specialty Institute, a multi-year winner of the “Best Place to Work” award. Mr. Cohn serves on the international boards of YPO (the Young Presidents’ Organization) and of the JDRF (formerly known as the Juvenile Diabetes Research Foundation). Mr. Cohn was a past board member of The Society of Independent Show Organizers and Changing Attitudes, Decisions and Environments for Kids (CADEKids)CADE.

 

Hersh Kozlov, age 67, has been a director of The Bancorp, Inc. and the Bank since 2014. He has been a partner at Duane Morris LLP (an international law firm) since 2009. Previously, he was a partner at Wolf, Block, Schorr and Solis-Cohen LLP (a law firm) from 2001 to 2009. Mr. Kozlov is a member of the board of directors of Resource America, Inc. and was previously a member of the board of directors of JeffBanks, Inc., TRM Corporation, Hudson United Bank, US Healthcare Life Insurance Company, and Princeton Insurance Company. Mr. Kozlov has also served as counsel to the board of directors of US Healthcare, Inc. and was appointed by the President of the United States to be a member of the Advisory Committee for Trade Policy & Negotiations, serving in that role from 2002 to 2004.

   

William H. Lamb, age 74, has been a director of The Bancorp, Inc. and the Bank since 2004. Mr. Lamb currently serves as Chairman of Lamb McErlane PC and directs the firm's Post-Trial and Appellate Advocacy Group. From January 2003 through January 2004, Mr. Lamb served as a Justice of the Pennsylvania Supreme Court and is the only former Pennsylvania Supreme Court Justice currently in practice. Mr. Lamb has been recognized as a Top 100 Pennsylvania Super Lawyer for appellate law and as a Pennsylvania Super Lawyer since 2005. Mr. Lamb previously served as director and corporate secretary of JeffBanks, Inc. and Jefferson Bank until their acquisition by Hudson United Bank in 1999. Since 2004, Mr. Lamb has been appointed to the President's Advisory Committee on the Arts, the Commonwealth of Pennsylvania's Court of Judicial Discipline, and the Pennsylvania Elections Reform Task Force.

 

Frank M. Mastrangelo, age 47, was appointed Chief Executive Officer effective January 1, 2015; he has served as the President, as well as a director of The Bancorp, Inc. and the Bank, since 1999. Mr. Mastrangelo previously served as Chief Operating Officer until December 31, 2014. Under his leadership, The Bancorp has grown to become a global leader in financial services and technologies; Bank Innovation, a leading industry journal, recently named Mr. Mastrangelo one of the 40 “Innovators to Watch,” citing him as one of the thinkers shaping the future of financial services. Previously, Mr. Mastrangelo served as Senior Vice President and Chief Technology Officer for Jefferson Bank, Systems Specialist for PNC Bank’s Family Wealth Management Division, and Systems Manager to Walter H. Annenberg and The Annenberg Foundation. Mr. Mastrangelo is currently a member of the UnionPay International Product Committee.

 

James J. McEntee III, age 57, has been a director of both The Bancorp, Inc. and the Bank since 2000. Since August 2014, Mr. McEntee has been the Chief Operating Officer and Chief Financial Officer of FinTech Acquisition Corp. Mr. McEntee was the Chief Executive Officer of Alesco Financial, Inc. from its incorporation in 2006 until its merger with Cohen & Company in December 2009 and was the Chief Operating Officer of Cohen & Company from March 2003 until December 2009, and was a managing director of Institutional Financial Markets, Inc. (a successor company to Cohen & Company) through October 2013. Previously, Mr. McEntee served as Vice Chairman and Co-Chief Operating Officer of PrinceRidge through October 2013, and also served as a principal in Harron Capital, L.P., a media and communications venture capital fund. From 1990 through 1999, Mr. McEntee was a stockholder at Lamb McErlane PC, and, from 2000 until 2004, was of counsel to Lamb McErlane. Mr. McEntee was previously a director of Pegasus Communications Corporation, a publicly held provider of communications and other services.

 

Mei-Mei Tuan,  age 48, has been a director of  both The Bancorp, Inc. and its U.S. subsidiary since 2013. Ms. Tuan is the co-founder and managing partner of Notch Partners LLC, a firm providing leadership capital and management-led buyout strategies

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exclusively for institutional leveraged buyout funds. As an investment banker with Goldman Sachs, BankAmerica and BankAustria, Ms. Tuan led domestic and international transactions in project finance, mergers and acquisitions, real estate, syndications and sale leasebacks. Ms. Tuan’s operating experience includes serving as Chief Financial Officer and Chief Operating Officer at the Sierra Foundation, from 1996 through 1997, and the San Francisco Food Bank, from 1997 through 1998. Ms. Tuan is an active board member of Friends of Thirteen, Montclair Kimberley Academy, and the Harvard Business School Asian-American Association (HBS4A). She has also served recently on boards for the Wellesley College Alumnae Association, New Jersey Women’s Forum, New Jersey Network (NJN), Museum of Chinese in America (MOCA), Mid-Manhattan Performing Arts Foundation, and New Jersey Wellesley Club, in which she was President. Ms. Tuan is a member of Business Leadership Council (BLC) at Wellesley, New Jersey Women’s Forum, and the Committee of 100--an international, non-profit, non-partisan membership organization that brings Chinese-American perspective to issues concerning US-China relations.

The Board of Directors has not adopted specific minimum qualifications for service on the board, but rather seeks a mixture of skills that are relevant to the Company’s business as a bank holding company and the business of its subsidiary bank.  The following presents a brief summary of the attributes of each director that led to the conclusion that he or she should serve as such:

 

Mr. Cohen has served as a director of, and in other significant management capacities with, a number of financial companies.  In addition to experience in commercial real estate, he has considerable experience in securities, investment management and capital markets. 

Mr. Beach has extensive experience in investment management, corporate finance and capital markets.  He is deemed an audit committee financial expert which, among other factors, reflects the quantitative and analytical skills developed in his experience as a director of research for an investment management firm.

 

Mr. Bradley has served as chairman and in other significant capacities for financial institutions and served as Chief Executive Officer of several University hospitals, including Columbia Presbyterian Medical Center and Thomas Jefferson University Hospital. Within these capacities, he was involved in significant management functions with respect to business and financial matters.

 

Mr. Chrystal has extensive financial, investment and financial risk management experience, enabling him to provide the Company with advice and oversight regarding financial markets, risk management and investments.  

 

Mr. Cohn has significant experience in founding, leading and having senior roles in a variety of companies, including mid-size businesses of the type that are the Bank’s primary clients.  In addition, he has considerable experience with electronic distribution and technology based companies.

 

Mr. Kozlov has extensive legal and business experience resulting from his partnerships at prominent law firms where he represented companies which included banks, insurance companies and other financial institutions. He has board of directors experience at multiple financial institutions. His experience in general business matters also reflects service within the Advisory Committee for Trade Policy and Negotiations.

 

Mr. Lamb has extensive experience as a director of public bank holding companies, beginning in 1974.  Additionally, he has significant legal experience with respect to business and financial matters and has particular knowledge of the southeastern region of Pennsylvania, which is one of the primary markets served by the Company.

 

Mr. Mastrangelo has broad operational and managerial experience in the banking industry.  Additionally, he has significant technology and payment systems expertise.

 

Mr. McEntee has extensive experience in corporate law and financial institution management, as well as significant managerial experience in real estate, investments and capital markets operations.

  

Ms. Tuan has significant experience in financing real estate projects and a variety of other investment banking experience. She has served as a Chief Financial Officer and Chief Operating Officer and holds an M.B.A. from Harvard Business School.

 

NON-DIRECTOR EXECUTIVE OFFICERS

 

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Information is set forth below regarding the background of each of the Company’s executive officers who is not also a director. For the Company’s officer who is a director nominee, Frank M. Mastrangelo, this information can be found above under “Proposal 1. Election of Directors—Directors and Nominees.”

 

Betsy Z. Cohen, age 73, retired effective December 31, 2014 after having served as Chief Executive Officer of both the Company and the Bank since September 2000 and Chairman of the Bank since November 2003. She has served as a director of FinTech Acquisition Corp. (NASDAQ:FNTC) since November 2013 and as the Chairman of its Board of Directors since July 2014. She served as the Chairman of the Board of Trustees and as a trustee of RAIT Financial Trust (NYSE: RAS), a real estate investment trust (“RAIT”), since its founding in August 1997, through her resignation as of December 31, 2010, and served as  RAIT’s Chief Executive Officer from 1997 to 2006.  Mrs. Cohen served as a director of Hudson United Bancorp (a bank holding company), the successor to JeffBanks, Inc., from December 1999 until July 2000 and as the Chairman of the Jefferson Bank Division of Hudson United Bank (Hudson United Bancorp’s banking subsidiary) from December 1999 through March 2000. Before the merger of JeffBanks, Inc. with Hudson United Bancorp in December 1999, Mrs. Cohen was Chairman and Chief Executive Officer of JeffBanks, Inc. from its inception in 1981 and also served as Chairman and Chief Executive Officer of each of its subsidiaries, Jefferson Bank, which she founded in 1974, and Jefferson Bank New Jersey, which she founded in 1987. From 1985 until 1993, Mrs. Cohen was a director of First Union Corp. of Virginia (a bank holding company) and its predecessor, Dominion Bancshares, Inc. In 1969, Mrs. Cohen co-founded a commercial law firm and served as a senior partner until 1984. Mrs. Cohen is also a director of Aetna, Inc. (NYSE: AET), an insurance company.

 

Arthur M. Birenbaum, age 56, resigned effective January 8, 2015 after having served as Executive Vice President-Commercial Loans and, before that, Senior Vice President-Commercial Loans of both the Company and the Bank since January 2001. From 1993 through December 2000, Mr. Birenbaum was at Jefferson Bank, ending as its Senior Vice President-Philadelphia Business Banking Lending Group, and serving as co-Chairman of its Government Lending Task Force, coordinator of asset-based lending and member of its Loan Production Oversight Committee. From 1987 through 1993 he was a Vice President of Commercial Lending for Meridian Bank and the Bank of Old York Road and, from 1980 through 1987; he was employed at Westinghouse Credit Corporation, General Electric Capital Corporation, Suburban Bank and First National Bank of Maryland in the Washington, D.C. metropolitan region.  .

 

Paul Frenkiel, age 62, has served as Chief Financial Officer and Executive Vice President of Strategy at The Bancorp since joining the organization in September 2009; he also serves as the organization’s Principal Accounting Officer. From November 2000 through October 2008 he was Chief Financial Officer and Executive Vice President of Republic First Bancorp Inc. From January 2005 through September 2009, Mr. Frenkiel also served as Chief Financial Officer and in other capacities for First Bank of Delaware, which was spun off from Republic First Bancorp Inc. Additionally, he served as Chief Financial Officer of JeffBanks, Inc., from 1987 through its acquisition by Hudson United Bancorp in 2000, and also served as Chief Financial Officer at Dominion Bank. A chartered bank auditor and certified public accountant, Mr. Frenkiel is a member of the American Institute of Certified Public Accountants.

 

Jeremy Kuiper, age 52, has served as Managing Director of the Payment Solutions division of The Bancorp since 2007. Previously, he served as Director of Financial Management, Operations and Credit Risk Management at BankFirst and served in other positions at that company between 2000 and 2004. From 1997 through 2000, he served as Senior Vice President of United Credit National Bank where he oversaw card products. From 1994 through 1997, he served as Senior Vice President of Specialized Card Services, where he was responsible for all information services, customer service and other aspects of card management. Mr. Kuiper participates on industry boards, including the Network Branded Prepaid Card Association, of which he is a former Chairman.

 

Thomas G. Pareigat, age 55, has served as Senior Vice President and General Counsel since February 2011 and leads the Company’s Legal, Compliance and Third-Party Risk Management division. From 2003 to 2005 and from 2007 to 2011 he was a partner in the Minneapolis, Minnesota law firm of Lindquist & Vennum PLLP, where he concentrated his practice on banking law and regulatory compliance matters as a member of the firm’s Financial Institutions Practice Group. During his tenure at the firm, he served as Senior Vice President and Regulatory Counsel for Marshall BankFirst Corp. From 2001 to 2003, Mr. Pareigat was Vice President and Corporate Counsel for Marquette Bancshares, Inc. and its subsidiary banks until their acquisition by Wells Fargo. From 1989 to 2001 he served as Senior Attorney with Bankers Systems, Inc. (now Wolters Kluwer Financial Services). Mr. Pareigat serves on the Editorial Board of the American Bankers Association’s Bank Compliance magazine, and the faculty of the ABA’s National Compliance School and Graduate School for Compliance Risk Management.

 

Donald F. McGraw, Jr.,  age 57, has served as Executive Vice President and Chief Credit Officer of The Bancorp since 1999, overseeing both Loan Operations and Credit Administration. Mr. McGraw is also responsible for implementing credit policy, serving as senior member of the Loan Committee, and acts in the capacity of  Assistant Secretary to the Board of Directors.

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Additionally, he has served as Regulatory Examination Manager, supervising all examinations conducted by the FDIC and the State of Delaware. From 1986 through 1998, he was Senior Vice President, Credit Administration, for Jefferson Bank. From 1977 to 1986, he was a bank examiner at the FDIC.

 

CORPORATE GOVERNANCE

 

Director Independence

 

The Company’s Common Shares are listed on the NASDAQ Global Select Market under the symbol “TBBK” and the Company is subject to the listing standards thereof. The Board of Directors has determined that Mr. Beach, Mr. Bradley, Mr. Cohn, Mr. Chrystal, Mr. Kozlov, Mr. Lamb, Mr. McEntee and Ms. Tuan, each meet the definition of an independent director set forth in the NASDAQ rules. In making these determinations, the Board of Directors reviewed information from each of these directors concerning all their respective relationships with the Company and its affiliates and analyzed the materiality of those relationships.

 

Board Leadership Structure and Role in Risk Oversight

 

 The Audit Committee is primarily responsible for overseeing the Company’s risk management processes on behalf of the Board of Directors, although the Board of Directors and all of its committees are sensitive to risks relating to the Company and its operations. The Audit Committee focuses on financial reporting risk, oversees the entire audit function and evaluates the effectiveness of internal and external audit efforts. It receives reports from management regularly regarding the Company’s assessment of risks and the adequacy and effectiveness of internal control systems. Through its interaction with the Company’s senior management, the Audit Committee oversees credit risk, market risk (including liquidity and interest rate risk) and operational risk (including compliance and legal risk). The Chief Risk Officer meets at least quarterly with the Audit Committee to discuss potential risk or control issues involving management. The Audit Committee reports regularly to the Board of Directors, which also considers the Company’s entire risk profile, including additional strategic and reputational risks. While the Board of Directors oversees the Company’s risk management, management is responsible for the day-to-day risk management processes. Senior management comprises the Bank’s Enterprise Risk Management Committee which meets on a monthly basis and addresses various risks, controls and related monitoring.  While the Board of Directors believes that this division of responsibility is the most effective approach for addressing the risks facing the Company, it will continue to re-examine this structure on a regular basis, recognizing that different structures may be appropriate in different situations faced by the Company.

 

Board Meetings

 

The Board of Directors held a total of 14 meetings during fiscal 2014. During fiscal 2014, all directors attended at least 75% of the aggregate of (a) the total number of meetings of the Board of Directors held during the period for which the director had been a director and (b) the total number of meetings held by all committees of the Board of Directors on which the director served during the periods that the director served. It is the policy of the Board of Directors that all directors attend the annual meeting of stockholders of the Company, if practicable. All directors, with one exception, attended the last annual meeting.

 

Communications with the Board

 

Stockholders, employees and others who wish to communicate with the Board of Directors may do so by sending their correspondence to The Bancorp, Inc., Attention: Secretary Paul Frenkiel, 409 Silverside Road Suite 105, Wilmington, Delaware 19809. The mailing envelope must contain a clear notation indicating that the enclosed letter is a “Stockholder-Board Communication.” All such letters must identify the author as a stockholder of the Company and clearly state whether the intended recipients are all or individual members of the Board. The Secretary will make copies of all such letters and circulate them to the appropriate director or directors. The Secretary has been authorized to screen commercial solicitations and materials which pose security risks, are unrelated to the business or governance of the Company, or are otherwise inappropriate.

 

Corporate Governance Materials

 

The Company’s Code of Business Conduct and Ethics (the “Code of Business Conduct”), Corporate Governance Guidelines and the charters of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee are available on the Company’s website: http://www.snl.com/irweblinkx/govdocs.aspx?iid=4054569.

 

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Copies of these documents are available, free of charge, upon written request to: The Bancorp, Inc., Attention: Andres Viroslav, Investor Relations, 409 Silverside Road Suite 105, Wilmington, Delaware 19809.  The Company will satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Business Conduct  by posting such information on the Company's website.

 

Board Committees 

The Board of Directors currently has four standing committees: the Audit Committee, the Compensation Committee, the Executive Committee and the Nominating and Governance Committee. The committees on which directors serve, the chairman of each committee, and the number of meetings held during 2014 are set forth below.

 

 

 

 

 

 

 

 

 

 

 

 

Board member

  

Audit

 

Compensation

 

Nominating

and

governance

 

Executive

 

 

 

 

 

 

 

 

 

Daniel G. Cohen

  

   

  

   

  

   

 

Chairman

Walter T. Beach

  

X

  

Chairman

  

   

 

             X

Michael J. Bradley

  

X

  

X

   

   

 

            

John Chrystal

   

X

   

   

   

   

 

             X

Matthew Cohn

  

Chairman

  

   

  

X

 

   

William H. Lamb

  

   

  

X

  

Chairman

 

             X

Frank M. Mastrangelo

  

   

  

   

  

   

 

X

   

   

   

   

   

   

   

 

   

Meetings held in 2014

  

5

  

3

  

1

 

0

 

 Audit Committee. The Audit Committee is appointed by the Board of Directors to assist Board of Directors audit oversight of (a) the integrity of the Company’s financial statements, (b) the Company’s risk management processes (c) the Company’s compliance with legal and regulatory requirements, (d) the independent auditor’s qualifications and independence and (e) the performance of the Company’s internal audit function and independent auditors. The Audit Committee also prepares the audit committee report required by the rules of the SEC to be included in the Company’s annual proxy statement.

 

Each member of the Audit Committee meets the independence standards for audit committee members set forth in applicable NASDAQ rules, as well as those set forth in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended  (the “Exchange Act”). The Board of Directors has determined that Mr. Beach qualifies as an “audit committee financial expert” as that term is defined in applicable rules and regulations under the Exchange Act.

 

Nominating and Governance Committee. The Nominating and Governance Committee is appointed by the Board of Directors to (a) assist the Company and the Board of Directors in maintaining an effective and knowledgeable Board of Directors, including assisting the Board of Directors in identifying individuals qualified to become directors and recommending to the Board of Directors the director nominees for the next annual meeting of stockholders and the directors to be appointed to each committee, and (b) develop and recommend for the Board of Director’s consideration governance guidelines for the Company. All of the members of this committee have been determined by the Board of Directors to be independent under applicable NASDAQ and Exchange Act rules.

 

The Nominating and Governance Committee will consider candidates for nomination as a director recommended by stockholders, directors, officers, third party search firms and other sources. The Company describes the procedures for nominations by stockholders in “Stockholder Proposals and Nominations.” In evaluating candidates, the Nominating and Governance Committee considers the attributes of the candidate (including skills, experience, diversity, age, and legal and regulatory requirements) and the needs of the Board of Directors, and will review all candidates in the same manner, regardless of the source of the recommendation.

 

The Nominating and Governance Committee has not adopted specific, minimum qualifications or specific qualities or skills that must be met by a Nominating and Governance Committee-recommended nominee. The Nominating and Governance Committee seeks to insure that the membership of the Board of Directors and each committee of the Board of Directors satisfies all relevant NASDAQ rules and applicable laws and regulations and all requirements of the Company’s governance documents. The Nominating and Governance Committee seeks to achieve a mixture of skills that are related to the Company’s business. The nature of the specific

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qualifications, qualities or skills that the Nominating and Governance Committee may look for in any particular director nominee depends on the qualifications, qualities and skills of the rest of the directors at the time of any vacancy on the Board of Directors.

 

Executive Committee. The Executive Committee has the delegated authority to act in lieu of the Company’s Board of Directors in between meetings of the Board.

 

Compensation Committee. The Compensation Committee is appointed by the Board of Directors to have direct responsibility for approving the compensation of the Chief Executive Officer and certain other officers and the non-management directors of the Company as described in “Compensation Committee Report” and the related “Compensation Discussion and Analysis,” in Item 11, “Executive Compensation”. At all times during 2014, the Compensation Committee had direct responsibility for (a) administering the Company’s equity-based compensation plans and (b) reviewing any extraordinary bonus or other compensatory payments to any employee of the Company.  For officers and employees reporting to named executive officers, or NEOs, as set forth in item 11, the Compensation Committee has delegated primary responsibility for recommending salary changes to the Chief Executive Officer and President.

  

Compensation Committee Interlocks and Insider Participation. The Compensation Committee consisted of Messrs. Beach, Bradley and Lamb.  None of such persons was an officer or employee of the Company or any of its subsidiaries during fiscal 2014 or was formerly an officer or employee of the Company. During fiscal 2014, none of the Company’s executive officers served as a director or on the compensation committee of another entity, one of whose executive officers served on the Compensation Committee.  During fiscal 2014, none of the Company’s executive officers served on the compensation committee of another entity, one of whose executive officers served on the Company’s Board of Directors.

 

AUDIT COMMITTEE REPORT

 

In connection with the preparation and filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Annual Report on Form 10-K”):

 

   

(1)

the Audit Committee reviewed and discussed the audited financial statements included in the 2014 Annual Report on Form 10-K with the Company’s management;

 

 

 

   

(2)

the Audit Committee discussed with the Company’s independent registered public accounting firm, Grant Thornton LLP (“Grant Thornton”), the matters required to be discussed by Auditing Standard 16;  

 

 

 

 

   

(3)

the Audit Committee received and reviewed the written disclosures and the letter from Grant Thornton required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and has discussed with Grant Thornton the independence of Grant Thornton and satisfied itself as to Grant Thornton’s independence; and

 

 

 

 

 

   

(4)

based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors of the Company that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

The Audit Committee of the Board of Directors of the Company has provided this report. This report shall not be deemed to be filed under, nor shall it be deemed to be incorporated by reference by any general statement incorporating this 2014 Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, and the Exchange Act (collectively, the “Acts”), except to the extent the Company specifically incorporates this information by reference.

 

 

 

 

 

 

   

Matthew  Cohn, Chairman

Walter T. Beach

Michael J. Bradley

John C. Chrystal

Item 11. Executive Compensation 

 

General

 

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The Company is required to provide information regarding the compensation program in place for its Chief Executive Officer, Chief Financial Officer and its three other most highly compensated executive officers. The Company must also provide compensation information for up to two additional individuals who would have been included but for the fact that they were not executive officers at the end of the fiscal year. This discussion refers to the Company’s Chief Executive Officer, Chief Financial Officer and the other three most highly-compensated executive officers as the “Named Executive Officers” or “NEOs.” This discussion should be read in conjunction with the detailed tables and narrative descriptions under “Executive and Director Compensation.”

 

The Compensation Committee is responsible for formulating and presenting recommendations to the Board of Directors with respect to the compensation of the Company’s NEOs. The Compensation Committee is also responsible for administering the Company’s employee benefit plans, including incentive plans. The Compensation Committee is comprised solely of independent directors.

 

Executive Summary

 

The Company’s compensation policies are intended to provide appropriate compensation packages to motivate, reward, attract and retain talented and experienced executive officers while at the same time controlling the Company’s compensation costs. The primary components of the Company’s executive compensation program have historically been base pay and equity-based compensation. The Compensation Committee generally determines compensation amounts for individual NEOs for 12 month periods beginning on particular review dates. The review for NEOs was conducted in the first quarter of 2014. There were no salary increases, stock compensation or bonuses granted to NEO’s in 2014. 

 

In establishing compensation for the Company’s NEOs, the Compensation Committee  focuses on performance based compensation (“pay for performance”) and weights stock option grants accordingly.  The Compensation Committee utilizes criteria which it believes will create long term shareholder value and is forward looking. It evaluates the overall performance of the Company, the performance of the Company relative to the performance of the national and regional economies, the performance of the Company in comparison with its peers and the contributions of the respective NEOs to the Company’s performance.  Base salary reflects ongoing performance and level of achievement. In addition, the Compensation Committee evaluates the NEOs’ base salary relative to the base salary paid for similar positions within a peer group of institutions, seeking to maintain a competitive advantage in light of the NEOs’ performance. The Compensation Committee believes that, by focusing on a NEOs overall performance rather than pre-set criteria, the Company substantially lessens the risk of a NEO taking actions  to increase his or her compensation without due regard for potential adverse impacts on the Company.

 

Compensation Objectives and the Focus of Compensation Awards

 

The Compensation Committee believes that an appropriate compensation program should draw a balance between providing rewards to executive officers while at the same time effectively controlling compensation costs. Executive officers are rewarded in order to attract and retain highly qualified individuals and to motivate them to perform in a manner that maximizes corporate performance.

  

The Company’s executive compensation program consists of three elements to reward and motivate its executive officers in line with the Compensation Committee’s objectives described above:

 

 

 

 

   

base salary;

 

   

bonuses; and

 

 

 

 

   

long-term equity incentives reflected in grants of stock options, restricted stock awards and phantom units.

 

 

The Compensation Committee annually reviews the Company’s mix of short-term performance incentives versus longer-term incentives.  It primarily focuses compensation on base salary and equity incentives. The Compensation Committee has not established set percentages of short-term versus long-term incentives. Instead, it looks to provide a reasonable balance of those incentives, while emphasizing stock options to promote pay for performance. The Compensation Committee’s policy for allocating between long-term and currently paid compensation is to set base compensation at levels adequate to attract and retain personnel, while providing incentives to maximize long-term shareholder value for the Company and its stockholders. As discussed in “Specific Elements of the Compensation Program,” below, the Company provides cash compensation in the form of base salary to meet competitive salary

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norms. The Company also provides non-cash equity compensation to reward superior performance in assisting the Company in meeting its long-term strategic goals. Historically, the Company has not awarded bonuses.

 

The Compensation Committee also “benchmarks” the Company’s compensation programs to a peer group of banking institutions based upon its review of financial statements and other publicly available data.  In 2014, the Compensation Committee utilized regional banks with total assets in the $3 billion to $4 billion range as a peer group. While the Company’s payment processing business differentiates it from these institutions, this peer group represented one source for comparisons. The peer group institutions consist of the following: The Dime Savings Bank, S&T Bancorp, Flushing Financial (Flushing Savings), TrustCo Bank, WSFS Financial and Beneficial Mutual.

 

The level of an institution’s total assets and its regional location are primary factors the Compensation Committee considered in establishing the peer group.

 

Although considerable knowledge about the competitiveness of the Company’s compensation programs is gained through the benchmarking process, the Compensation Committee recognizes that each financial institution is unique and that significant differences between institutions in regard to executive compensation practices exist. The Compensation Committee believes that the combination of short and long-term compensation that the Company provides fulfills its objectives of providing a competitive level of compensation and benefits in order to attract and retain key executives. The Compensation Committee also believes that the Company’s incentive programs appropriately reward performance to achieve profitability and growth while at the same time allowing the Company to maintain controls over its compensation costs.

 

Compensation Methodology

 

The Compensation Committee ordinarily determines compensation amounts for individual NEOs for 12 month periods.  The Chief Executive Officer typically provides the Compensation Committee with key elements of both the Company’s and the NEOs’ (other than the Chief Executive Officer’s) performance as well as recommendations to assist it in determining compensation levels.

In the case of long-term incentive compensation and bonus, if any, the Compensation Committee determines the amount of awards based on the then concluded fiscal year. The Compensation Committee has the discretion to issue compensation awards at other times during the fiscal year. In 2014, the Compensation Committee reviewed performance during the first quarter of 2014. In 2015, through the date of this proxy, NEOs have not been reviewed, nor has additional compensation been awarded to any NEO as a result of the restatement of the financial statements which are utilized in their evaluations.

 

Specific Elements of the Compensation Program

 

Below are the specific elements of the Company’s compensation program for executive officers.

 

Salary. The Company believes that it is important to maintain a competitive salary structure in order to retain its existing qualified executive officers and a base pay structure consistent with similarly situated executives at similarly sized banking institutions. The Company believes that a key objective of its salary structure is to maintain reasonable “fixed” compensation costs by targeting base salaries at a competitive average, taking into account  the Company’s and the individual’s performance.

 

Base salaries are paid to executive officers on a bi-weekly basis, and are reviewed annually by the Compensation Committee as described in “Compensation Methodology,” above. The Compensation Committee determines if any base pay changes should be made for executive officers. Base pay change, if any, is normally determined after considering:

 

   

the executive’s total itemized compensation for the prior year;

 

 

 

 

   

the executive’s current base pay position relative to the peer group;

 

   

the Company’s performance and the individual’s contribution to that performance for the prior year; and

 

 

 

 

   

national and regional economic conditions, their effect upon the Company and how the executive has dealt with them within his or her area of responsibility.

 

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In 2014, the Compensation Committee awarded no increases in base salary.  With respect to base salary increases in 2012 and 2013, the Compensation Committee considered that no cash bonuses had been paid in the three years ended 2012.

 

Bonus.    While historically the Compensation Committee has not awarded bonuses since it prefers long-term equity incentive compensation (discussed below), it retains the discretion to do so.  In determining whether a bonus award for one or more officers would be appropriate, the Compensation Committee would consider the Company’s financial performance, including net income, return on assets, return on equity, the efficiency ratio and earnings per share and would particularly focus  on the contribution made to the Company by the NEO under consideration. As with base salary, the Compensation Committee also considers national and regional economic conditions. The Chief Executive Officer makes recommendations to the Compensation Committee with respect to annual bonuses for the other executive officers, based on their respective contributions to the performance of the areas for which they are responsible. Generally, the Compensation Committee has utilized non-cash equity compensation and not bonuses as the primary non-base salary form of compensation.

 

Long-Term Incentive Compensation. Long-term incentives are provided to executive officers through The Bancorp, Inc. Stock Option and Equity Plan of 2013 (the “2013 Plan”) and similar prior plans. The plans permit the grant of stock options, restricted stock awards, stock appreciation rights and phantom units. Stock options are granted to executive officers at exercise prices equal to the then current market price of the Company’s Common Shares. Options and restricted stock awards under the 2013 Plan are granted on a discretionary basis taking into account the Company’s financial performance and each executive’s contribution to such performance. Overall, the objective of long-term incentive compensation awards is to tie the interests of executive officers directly to increases in stockholder value.  Stock options and stock grants were awarded to each NEO, in varying amounts, in 2010 through 2013.  There were no stock options or grants awarded in 2014.

 

Compensation Risk Analysis

 

As a financial holding company regulated by the Federal Reserve Bank, which has a subsidiary bank regulated by the FDIC and the State of Delaware, the Company adheres to defined risk guidelines, practices and controls to ensure the safety and soundness of the institution.  The Company’s management and Board of Directors conduct regular reviews of its business to ensure that it is operating within appropriate regulatory guidelines and with appropriate practices, supplemented by its internal audit function.

 

During 2014, the Compensation Committee  reviewed  the Company’s compensation practices to ensure that (1) base salaries are appropriately competitive in light of overall compensation; (2) the Company’s use of equity grants provide appropriate long-term incentives; and (3) the Company offered an appropriate mix of cash and equity compensation to facilitate the alignment of the interests of the Company’s senior executives with those of the Company and its stockholders.  In light of regulatory releases, the ultimate goal of the review was to assess the design, governance, policies and procedures of the Company’s compensation structure to ensure that, as designed and executed, it does not motivate excessive risk-taking that could adversely impact the long-term value of the Company.

 

After conducting the review, the Compensation Committee concluded that the Company’s incentive programs do not motivate or encourage unnecessary or excessive risk taking.  This conclusion reflected a review of the Company’s structure to determine that credit and other new business approvals are independent of new business efforts.  Other factors, such as fostering an appropriate risk management culture, were also considered. The Company will continue to review and monitor its compensation programs to ensure that they continue to not motivate excessive risk taking that could adversely impact the long-term value of the Company.

 

Determination of Compensation Amounts

 

In 2015, through the date of this proxy, NEOs have not been reviewed, nor has additional compensation been awarded to any NEO . In 2014, the Compensation Committee reviewed the compensation of the NEOs in the first quarter of 2014. After consideration, the Compensation Committee concluded that no salary increases, stock compensation or bonuses should be awarded to the Chief Executive Officer in 2014. In 2013, the Compensation Committee had awarded a $100,000 increase to base salary for the Chief Executive Officer, which amounted to 8.7% of the total compensation of all types received in 2012.  No bonus was awarded to the Chief Executive Officer in 2013.  In 2012, the Compensation Committee had increased the Chief Executive Officer’s salary by 3.2% of all types of compensation for the prior year.  In 2014, the Compensation Committee also concluded that no salary increase, stock compensation or bonus should be awarded to any of the other NEOs.  In 2013, the Chief Financial Officer received a $35,000 increase, the President and Chief Operating Officer received a $75,000 increase, the Executive Vice President-Commercial Loans received a $ 20,000 increase, the Senior Vice President and General Counsel received a $17,500 increase, and no bonuses were awarded.  Options and share awards were also granted to NEOs in 2013 to continue to align management with long term shareholder value and to balance issues of profitability and appropriate risk management. All options and share awards vest over a four year period

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to further shareholder and management alignment and to emphasize long term risk management.  The Compensation Committee decided to forego any bonuses to the Chief Executive Officer or NEOs for 2010 through 2012.

 

For its 2014 evaluation, the Compensation Committee believed that adjusted operating earnings and long term shareholder value, rather than shorter term movements in stock price, should be emphasized in the Chief Executive Officer’s compensation methodology. The Compensation Committee believes that pay for performance should be emphasized and considers stock options as its primary pay for performance component. To further tie stock option grants to pay for performance, all NEO options require a four year period over which such options ratably vest.  To emphasize the importance of long term risk management and performance, cash bonuses have not been paid to NEOs for five years. 

  

A primary objective of long term compensation equity awards is to tie interests of NEOs to increasing shareholder value. In 2014, the Compensation Committee reviewed performance during the first quarter of 2014. The committee concluded that long term shareholder growth was enhanced by low cost deposit growth notwithstanding that such growth depressed return on assets in the short term, in the current below normal rate environment.  Additionally, the Compensation Committee considered progress made in executing management’s strategy emphasizing non-interest income over interest income principally through the development of its prepaid, or stored value, card division.  Further, the Compensation Committee considered statistics which continue to show that contracts and new relationships for prepaid card fees, which is the most significant element of non-interest income growth, require multiple year periods in which expense is incurred, prior to generating revenue. The Compensation Committee also reviewed the continuing costs of the prepaid card-related infrastructure build-out, which represented significant fixed costs which can be used to generate larger fee growth. Related historical statistics were reviewed which validated the Compensation Committee’s view. Expansion of compliance infrastructure had continued. Additionally, the Company continued to execute its strategy of growing low cost deposits and, as a result, its interest costs continued to be lower than its peers. The Compensation Committee reviewed the strategy for increased growth in leases, SBA loans and security backed lines of credit, noting that additional progress had been made. Accordingly, the Compensation Committee concluded that a balanced view of long term shareholder value versus current stock price should be considered in its decisions. After consideration, the Compensation Committee did not award any salary increases, stock compensation or bonuses in 2014.  The Compensation Committee also determined to continue to monitor progress in managing the growth in non-interest income’s impact on operating earnings and net income, which would be a primary determinant of any future bonus awards.

 

The Compensation Committee reiterated its previously approved compensation recoupment policy as follows:

 

Compensation Recoupment Policy  

 

The compensation recoupment policy applies if the Company is required to provide an accounting restatement for any of the prior three fiscal years for which audited financial statements have been completed, due to material noncompliance with any financial reporting requirement under the federal securities laws. In the event of such a restatement, the Compensation Committee will determine, in its discretion, whether (1) NEOs, regardless of whether they were directly responsible for the restatement, or (2) all other recipients of cash-based or equity-based incentive compensation who were directly responsible for the restatement, have received any cash-based or equity-based incentive compensation that they would not have been entitled to receive under the restated results. The Compensation Committee then will take such actions as it deems necessary or appropriate, depending on all the facts and circumstances as determined during its review, including (i) the recoupment of all or part of any such excess compensation, (ii) recommending disciplinary actions to the Board, up to and including termination, and/or (iii) the pursuit of other available remedies.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis above and has discussed that analysis with management. Based on its review and discussions with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

 

 

   

Walter T. Beach, Chairman

   

Michael J. Bradley

   

William H. Lamb

 

EXECUTIVE AND DIRECTOR COMPENSATION

165

 


 

 

Summary Compensation Table

 

The following table provides information concerning total compensation earned or paid to the NEOs for the years ended December 31, 2014, 2013 and 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name and

Principal Position

Year

Salary ($)

Bonus ($)

Stock

awards ($)

Option

awards ($)

Change in pension value and nonqualified deferred compensation earnings ($)

All other compensation ($)

Total ($)

   

   

   

   

(1)

(2)

(3)

(4)

   

Betsy Z. Cohen (5)

2014

655,000 

-

-

-

1,282,700 
19,163 
1,956,863 

  Chief Executive Officer

2013

653,426 

-

653,125 

-

112,049 
18,925 
1,437,525 

 

2012

554,039 

-

-

459,900 
124,642 
12,208 
1,150,789 

   

 

   

   

 

   

   

   

   

Paul Frenkiel

2014

312,200 

-

-

-

-

9,888 
322,088 

  Chief Financial Officer/

2013

310,805 

-

104,500 
99,400 

-

10,614 
525,319 

    Secretary

2012

277,200 

-

-

204,400 

-

9,038 
490,638 

 

 

 

 

 

 

 

 

 

Frank M. Mastrangelo

2014

510,000 

-

-

-

-

16,864 
526,864 

  President/Chief Operating

2013

509,508 

-

470,250 

-

-

18,330 
998,088 

    Officer

2012

435,000 

-

-

255,500 

-

17,029 
707,529 

 

 

 

 

 

 

 

 

 

Arthur Birenbaum (6)

2014

425,000 

-

-

-

-

10,969 
435,969 

  Executive Vice President

2013

423,207 

-

52,250 
49,700 

-

18,041 
543,198 

    Commercial Loans

2012

405,000 

-

 

127,750 

-

15,260 
548,010 

   

 

   

   

 

   

   

   

   

Jeremy L. Kuiper

2014

458,060 

-

-

-

-

17,531 
475,591 

 Senior Vice President

2013

451,931 

-

104,500 
99,400 

-

15,287 
671,118 

    and Managing Director

2012

391,560 

-

-

204,400 

-

12,099 
608,059 

 

 

 

 

 

 

 

 

 

Daniel G. Cohen

2014

300,000 

-

-

-

-

600 
300,600 

 Executive Vice President

2013

294,410 

-

418,000 

-

-

-

712,410 

 

2012

225,000 

-

-

255,500 

-

-

480,500 

 

 

 

 

(1)

The column reflects the aggregate grant date fair value of stock awards granted during each of the last three fiscal years in accordance with FASB ASC Topic 718.  There were no stock awards in 2014 .

 

 

 

 

(2)

The column reflects the aggregate grant date fair value of stock options granted during each of the last three fiscal years in accordance with FASB ASC Topic 718. There were no option awards in 2014.

 

 

 

 

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(3)

Represents the change in the present value of the accumulated benefit of the Supplemental Executive Retirement Plan             established for the benefit of  Mrs. Cohen.  In 2014, the Company expensed $1,283, 000 based upon actuarial tables which, in October 2014 were reformulated  with longer life expectancies. The actuarial assumptions reflected a discount rate of 3.37%, a maximum potential life expectancy of 120 years and a monthly benefit of $25,000.

 

 

 

(4)

Represents the aggregate dollar amount for each NEO for perquisites and other personal benefits comprised of the Company’s contributions to its 401(k) savings plan, insurance premiums and personal use of automobiles.

 

(5)

Retired effective December 31, 2014.

 

(6)

Resigned effective January 8, 2015.

 

Grants of Plan-Based Awards

 

The table providing information on the grant of options or other plan-based awards in 2014 is omitted because no such awards or grants were made.

 

Equity Compensation Plan Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

   

Number of

securities to be

issued upon

exercise of

outstanding options,

warrants and rights

   

Weighted-

average exercise

price of

outstanding

options,

warrants and

rights

   

Number of

securities remaining

available for future

issuance under

equity

compensation plans

(excluding

securities reflected

in column (a)

   

   

(a)

   

(b)

   

(c)

1999 Omnibus plan

  

675,000 

  

$11.28

  

93,000 

2005 Omnibus plan

  

787,500 

  

$10.19

  

109,125 

Stock option and equity plan of 2011

  

1,287,881 

  

$7.49

  

25,534 

Stock option and equity plan of 2013

  

 

  

n/a

  

2,200,000 

Total

  

2,750,381 

  

$9.19

  

2,427,659 

 

 

 

* All plans authorized have been approved by shareholders.

 

Employment Agreement

 

Employment Agreement. The Company had entered into one employment agreement, dated April 20, 2005 and amended December 10, 2008, with Betsy Z. Cohen, its former Chief Executive Officer. The material terms of this agreement are described below. Information concerning estimated payments pursuant to the post-termination and severance provisions of this agreement is discussed in “Potential Payments on Termination or Change-In-Control,” below. Mrs. Cohen retired effective December 31, 2014 and, as of July 31, 2015 the Company has paid $175,000 to Mrs. Cohen under the employment agreement. The amount paid represents a monthly payment of $25,000 to be made throughout Mrs. Cohen’s lifetime under her Supplemental Executive Retirement Plan benefit.

 

The employment agreement with Mrs. Cohen  provided that she would devote such time to the Company as was reasonably required to fulfill her duties. Under the agreement, Mrs. Cohen received an annual base salary determined by the Compensation Committee. Mrs. Cohen was also eligible for bonuses as determined by the Compensation Committee. The agreement had a term of five years that was automatically renewable so that, on any day that the agreement was in effect, it would have a then current term of five years. The Company had the right to terminate Mrs. Cohen without cause and Mrs. Cohen had the right to resign for good reason

167

 


 

upon sixty days’ notice. Additionally, upon or after a change of control of the Company, the Company had the right to terminate Mrs. Cohen without cause and she had the right to resign for good reason upon sixty days’ notice. Upon any such termination or resignation, Mrs. Cohen was entitled to receive only the amount due to her under the Company’s severance pay plans, if any; provided that, if she executed a mutual release of claims with the Company, she would receive (a) a lump sum cash payment equal to one month of her base salary for each month she was employed by the Company, up to a maximum of five years, at the rate in effect immediately before her termination, and (b) a prorated bonus, if any, for the year in which the termination occurred. Mrs. Cohen could also resign upon thirty days’ notice, in which event no further payments would be due other than accrued benefits. If Mrs. Cohen were disabled for ninety consecutive days in any twelve month period, the Company could terminate her employment. If Mrs. Cohen’s employment terminated on account of disability, (a) the vesting of the Supplemental Executive Retirement Plan (“SERP”), described below, would accelerate, (b) Mrs. Cohen would receive any amounts of salary or bonus earned, accrued and owing but not paid and (c) Mrs. Cohen received a prorated bonus, if any, for the year in which the termination occurred. If Mrs. Cohen died during her term of employment, the Company was required to pay her estate all amounts of salary and bonus earned, accrued and owing but not paid and a pro-rated bonus, if any, for the year in which death occurred. The Company could terminate Mrs. Cohen’s employment at any time for cause. Upon termination for cause, Mrs. Cohen was entitled to any base salary and benefits accrued and earned before her termination.

 

The agreement defined “cause,” generally, as conviction of a felony, intentional and continuous failure to substantially perform duties or a breach of the confidentiality and intellectual property provisions of the agreement. The agreement defined “good reason,” generally, as the Company demoting Mrs. Cohen or materially reducing her duties, the Company requiring Mrs. Cohen to be based outside of Philadelphia, Pennsylvania, the failure of Mrs. Cohen to be elected to the Board of Directors or a material breach of the agreement by the Company. The agreement defined a “change of control,” generally, as having occurred if (a) any person became a beneficial owner of securities representing more than 25% of the voting power of the then outstanding securities or (b) the consummation of (i) a merger or consolidation of the Company where the directors of the Company immediately before the transaction constituted less than a majority of the board of directors of the surviving corporation or (ii) a sale or other disposition of all or substantially all of the assets of the Company or (c) during a period of two consecutive years, the incumbent directors ceased for any reason to constitute at least two-thirds of the Board of Directors, provided that if either the election or nomination of any new director was approved by a vote of at least two-thirds of the incumbent directors before such election or nomination, the new director was considered a member of the incumbent directors.

 

The employment agreement provided for the establishment of a SERP for Mrs. Cohen. Mrs. Cohen became fully vested in the amount of the SERP benefit earned and the benefit became fully accrued upon her attainment of age 70. The employment agreement required the Company to establish a trust to serve as the funding vehicle for the SERP benefits and to make contributions to the trust in such amounts or in such number of Common Shares as the Company reasonably determined to be sufficient to provide the present value of the benefit as accrued at the time of the contribution. The value of this benefit was calculated as 100% of the average of Mrs. Cohen’s base salary over the 36 months during the term that provides the highest average except that the average could not exceed $300,000 nor be less than $150,000. Upon a change of control of the Company, the Company  agreed to immediately contribute to the trust an amount sufficient to permit the full payment of the SERP benefit due to Mrs. Cohen. Notwithstanding the establishment of a trust, the Company’s obligation to pay the benefit constitutes a general, unsecured obligation of the Company, payable out of its general assets, and the assets of the trust will be available to pay the claims of the Company’s creditors.

 

Pension Benefits

 

The following table provides information about Mrs. Cohen’s SERP, which is described above. See “Executive and Director Compensation—Employment Agreement” and Note K to the Company’s financial statements in its Annual Report on Form 10-K for the year ended December 31, 2014. The Company does not have any other pension plan.

 

 

 

 

 

 

 

 

 

 

 

Name

 

Plan name

 

Present value of

accumulated benefits

 

Payments during

the last fiscal year

Betsy Z. Cohen

  

Supplemental Executive

Retirement Plan

  

$4,200,000

  

$0

 

Potential Payments on Termination or Change-In-Control

 

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As described under “Executive and Director Compensation—Employment Agreement,” the employment agreement with Mrs. Cohen provided for payments and other benefits if her employment with the Company terminated under circumstances specified in her agreement, including a “change in control” of the Company (as defined in the agreement). Mrs. Cohen’s rights upon the termination of her employment depended upon the circumstances of the termination. The table below summarizes these rights and the amount of any payments and benefits due under the specified circumstances.

 

                                                                                                                        

 

 

Termination without

Resignation for 

Change in

Tax

 

Severance (5)

cause (1) (2)

good reason (1) (2)

control (1)

gross-up

Compensation   (3) (5)                                                                                               

 

$

$

3,236,500 

$

3,236,500 

$

3,236,500 

$

1,742,731 

SERP Benefit (4)                                                                                                

 

   

   

4,200,000 

   

4,200,000 

   

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Assumed the execution of a written mutual release in a form acceptable to the Company of any and all claims against the Company that Mrs. Cohen may have relating to matters arising out of her employment by the Company. Without this release, Mrs. Cohen would only have been entitled to any amounts due under the Company’s severance pay plan, if any. As of the date this report was filed, the Company did not have a severance pay plan.

 

 

 

(2)

Mrs. Cohen would also have been entitled to any base salary that was accrued as of the date of her termination.

 

 

 

(3)

Equal to five times Mrs. Cohen’s base salary at the date of termination (assumed to be $655,000).

 

 

 

(4)

Represents the value of Mrs. Cohen’s SERP calculated as of December 31, 2014, based upon $25,000 per month lifetime payments.

 

 

 

 (5)

Mrs. Cohen retired effective December 31, 2014.

 

With the exception of the SERP benefit, if any of the above payments are deemed to constitute a “parachute payment” as defined in Section 280(g) of the Internal Revenue Code, Mrs. Cohen was also to be paid an amount in cash equal to the sum of the excise taxes payable by her by reason of receiving such payment plus the amount necessary to put her in the same after-tax position as if no excise taxes had been paid.

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Outstanding Equity Awards at Fiscal Year-End Table

 

The following table provides information on the current holdings of stock options and stock that has not vested by the Company’s NEOs.

 

 

 

 

 

 

 

 

 

   

 

Option awards (1)

 

Stock awards

   

 

Number of

Number of

  

   

 

   

Market value 

   

 

Securities

securities

  

   

 

Number of

of Shares or 

   

 

underlying

underlying

  

   

 

shares or

 units of stock

   

 

unexercised

unexercised

 Option

Option

 

units of stock

 that have 

   

Grant

options (#)

options (#)

 exercise

expiration

 

that have

not vested 

   

Date

exercisable

unexercisable

 price ($)

date

 

not  vested (2)

($) (3)

Betsy Z. Cohen

01/26/2005

100,000 

 —

14.24 

01/26/2015

 

 

 

   

10/20/2005

100,000 

 —

15.94 

10/20/2015

 

 

 

   

05/07/2010

180,000 

                     —  

7.81 

05/06/2020

 

 

 

   

12/24/2010

90,000 

                     —

9.84 

12/24/2020

 

 

 

   

08/11/2011

67,500 
22,500 
7.36 

08/11/2021

 

 

 

 

01/25/2012

67,500 
22,500 
8.50 

01/25/2022

 

 

 

 

01/23/2013

 —

 —

 —

 —

 

31,250 
340,313 

 

Totals

605,000 
45,000 

 —

 —

 

31,250 
340,313 

   

 

  

  

 

   

 

  

  

Paul Frenkiel

05/07/2010

25,000 

                     —  

7.81 

05/06/2020

 

 

 

   

12/24/2010

38,000 

                      —  

9.84 

12/24/2020

 

 

 

   

08/11/2011

28,500 
9,500 
7.36 

08/11/2021

 

 

 

 

01/25/2012

30,000 
10,000 
8.50 

01/25/2022

 

 

 

 

01/23/2013

10,000 
10,000 
10.45 

01/23/2023

 

5,000 
54,450 

   

Totals

131,500 
29,500 

 —

 —

 

5,000 
54,450 

   

 

  

  

  

   

 

  

  

Frank M. Mastrangelo

01/26/2005

12,500 

 —

14.24 

01/26/2015

 

 

 

   

10/20/2005

25,000 

 —

15.94 

10/20/2015

 

 

 

   

05/07/2010

90,000 

                      — 

7.81 

05/06/2020

 

 

 

   

12/24/2010

50,000 

                      —  

9.84 

12/24/2020

 

 

 

   

08/11/2011

37,500 
12,500 
7.36 

08/11/2021

 

 

 

 

01/25/2012

37,500 
12,500 
8.50 

01/25/2022

 

 

 

 

01/23/2013

 —

 —

 —

 —

 

22,500 
245,025 

   

Totals

252,500 
25,000 

 —

 —

 

22,500 
245,025 

   

 

  

  

  

   

 

  

  

Arthur Birenbaum

01/26/2005

10,000 

 —

14.24 

01/26/2015

 

 

 

   

10/20/2005

13,750 

 —

15.94 

10/20/2015

 

 

 

   

05/07/2010

55,000 

                      —  

7.81 

05/06/2020

 

 

 

   

12/24/2010

38,000 

                       —  

9.84 

12/24/2020

 

 

 

   

08/11/2011

28,500 
9,500 
7.36 

08/11/2021

 

 

 

170

 


 

   

01/25/2012

18,750 
6,250 
8.50 

01/25/2022

 

 

 

   

01/23/2013

5,000 
5,000 
10.45 

01/23/2023

 

2,500 
27,225 

   

Totals

169,000 
20,750 

 —

 —

 

2,500 
27,225 

 

 

 

 

 

 

 

 

 

Jeremy L. Kuiper

05/07/2010

25,000 

                     —  

7.81 

05/06/2020

 

 

 

 

12/24/2010

34,000 

                       —  

9.84 

12/24/2020

 

 

 

 

08/11/2011

25,500 
8,500 
7.36 

08/11/2021

 

 

 

 

01/25/2012

30,000 
10,000 
8.50 

01/25/2022

 

 

 

 

01/23/2013

10,000 
10,000 
10.45 

01/23/2023

 

5,000 
54,450 

 

Totals

124,500 
28,500 

 —

 —

 

5,000 
54,450 

 

 

 

 

 

 

 

 

 

Daniel G. Cohen

01/26/2005

75,000 

 —

14.24 

01/26/2015

 

 

 

   

10/20/2005

50,000 

 —

15.94 

10/20/2015

 

 

 

   

05/07/2010

55,000 

                      —  

7.81 

05/06/2020

 

 

 

   

12/24/2010

45,000 

                       —  

9.84 

12/24/2020

 

 

 

   

08/11/2011

37,500 
12,500 
7.36 

08/11/2021

 

 

 

 

01/25/2012

37,500 
12,500 
8.50 

01/25/2022

 

 

 

 

01/23/2013

 —

 —

 —

 —

 

20,000 
217,800 

 

Totals

300,000 
25,000 

 —

 —

 

20,000 
217,800 

 

(1)  All options listed vest at a rate of 25% per year over a period of four years from grant date.

(2) All stock awards vest at a rate of 25% per year over a period of four years from grant date.

(3) Market value is based on the closing market price of the Company's common stock on December 31, 2014, which was $10.89.

 

Option Exercises and Stock Vested in 2014*

 

The following table provides information for the Company’s NEOs regarding stock vested and options exercised.

 

 

 

 

 

 

Stock awards

 

Number of shares

 

Value realized

 

acquired on vesting

 

on vesting ($)

 

 

 

 

Betsy Z. Cohen

                           15,625

 

           280,156

Frank M. Mastrangelo

                           11,250

 

           201,713

Arthur Birenbaum

                             1,250

 

             22,413

Paul Frenkiel

                             2,500

 

             44,825

Jeremy Kuiper

                             2,500

 

             44,825

Daniel G. Cohen

                           10,000

 

           179,300

 

* No options were exercised in 2014.

 

Director Compensation Table

 

The following table provides information concerning the compensation of the Company’s non-employee directors for fiscal 2014. Directors who are employees or officers of the Company receive no compensation for their services as members of the Board of

171

 


 

Directors or any committees. Each non-employee director received an annual retainer of $55,000. Each non-employee director, except for Mr. Cohen, also receives $500 for each meeting of a committee of the Board of Directors he or she attends; the Chairman of the Audit Committee receives $1,500 for each committee meeting attended; and the chairmen of the other committees receive $1,000 for each committee meeting attended. No stock or option awards were made in 2014.

 

 

 

 

 

 

 

 

Name

Fees earned or paid

in cash ($)

Stock

awards ($)

Option

awards ($)

Total ($)

Walter T. Beach

60,000

-

 

-

 

60,000

Michael J. Bradley

59,000

-

 

-

 

59,000

John C. Chrystal

58,000

-

 

-

 

58,000

Matthew Cohn

64,000

-

 

-

 

64,000

Hersh Kozlov

55,000

-

 

-

 

55,000

William H. Lamb

56,000

-

 

-

 

56,000

James J. McEntee

55,000

-

 

-

 

55,000

Mei-Mei Tuan

55,000

-

 

-

 

55,000

 

 

 

 

 

 

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 

The following table sets forth the number and percentage of the Company’s common shares owned as of July 15, 2015, by each of the Company’s directors and executive officers, all of the directors and executive officers as a group and other persons who beneficially own more than 5% of the Company’s outstanding voting securities. This information is reported in accordance with the beneficial ownership rules of the SEC under which a person is deemed to be the beneficial owner of a security if that person has or shares voting power or investment power with respect to such security or has the right to acquire such ownership within 60 days. Shares issuable pursuant to options or warrants are deemed to be outstanding for purposes of computing the percentage of the person or group holding such options or warrants but are not deemed to be outstanding for purposes of computing the percentage of any other person.

 

 

 

 

 

 

 

 

 

 

 

 

Directors (2)

 

Common

shares (1)

 

 

 

Percent

of class

 

Cohen, Daniel

 

 

895,033 

 

(3)

 

 

2.36 

%

Beach, Walter

 

 

1,117,818 

 

(4)

 

 

2.96 

%

Bradley, Michael

 

 

51,000 

 

(5)

 

 

*

 

Chrystal, John

 

 

18,500 

 

(6)

 

 

*

 

Cohn, Matt

 

 

68,063 

 

(7)

 

 

*

 

Kozlov, Hersh

 

 

15,500 

 

(8)

 

 

*  

 

Lamb, William

 

 

179,750 

 

(9)

 

 

*

 

McEntee, James

 

 

124,084 

 

(10)

 

 

*

 

Mastrangelo, Frank

 

 

325,216 

 

(11)

 

 

*

 

Tuan, Mei-Mei

 

 

1,000 

 

(12)

 

 

*  

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

Executive Officers (2)

 

 

 

 

 

 

 

 

 

Cohen, Betsy

 

 

1,944,682 

 

(13)

 

 

5.09 

%

Birenbaum, Arthur

 

 

180,751 

 

(14)

 

 

*

 

Frenkiel, Paul

 

 

150,243 

 

(15)

 

 

*

 

Kuiper, Jeremy

 

 

138,672 

 

(16)

 

 

*

 

McGraw, Donald

 

 

168,065 

 

(17)

 

 

*

 

Pareigat, Thomas

 

 

29,544 

 

(18)

 

 

*

 

 

 

 

 

 

 

 

 

 

 

172

 


 

All executive officers and directors (16 persons)

 

 

5,092,921 

 

(23)

 

 

12.91 

%

   

 

 

 

 

 

 

 

 

 

Other owners of 5% or more outstanding shares 

 

 

 

 

 

 

 

 

 

Wellington Management

 

 

2,491,999 

 

(19)

 

 

6.61 

%

Second Curve Capital LLC

 

 

2,204,003 

 

(20)

 

 

5.85 

%

BlackRock, Inc.

 

 

2,226,870 

 

(21)

 

 

5.91 

%

State Street Corporation

 

 

1,903,412 

 

(22)

 

 

5.05 

%

 

 

 

  *

Less than 1%

 

 

 

 (1)

Includes: (a) Common Shares and (b) Common Shares receivable upon exercise of options held by such person which are vested or will vest within 60 days of July 15, 2015.

 

 

 (2)

The address of all of the Company’s directors and executive officers is c/o The Bancorp, Inc., 409 Silverside Road Suite 105, Wilmington, Delaware 19809.

 

 

 

 (3)

Consists of: (a) 342,281 Common Shares owned directly; (b) 237,500 Common Shares issuable upon exercise of options; (c) 252 Common Shares held in a 401(k) plan account for the benefit of Mr. Cohen; and (d) 315,000 Common Shares owned by a charitable foundation of which Mr. Cohen is a co-trustee.

 

 

 

 

 (4)

Consists of: (a) 150,829 Common Shares owned directly; (b) options to purchase 28,000 Common Shares; and (c) 938,989, Common Shares owned by various accounts managed by Beach Investment Counsel, Inc., Beach Asset Management, LLC or Beach Investment Management, LLC, investment management firms for which Mr. Beach is a principal and which possess investment and/or voting power over the shares. The address for these investment management firms is Five Tower Bridge, 300 Barr Harbor Drive, Suite 220, West Conshohocken, PA 19428.

 

 (5)

Consists of: (a) 25,000 Common Shares owned directly and (b) 26,000 Common Shares issuable upon exercise of options.

 

 (6)

Consists of: (a) 13,500 Common Shares owned directly and (b) 5,000 Common Shares issuable upon exercise of options.

 

 

 

 (7)

Consists of: (a) 41,063 Common Shares owned directly and (b) 27,000 Common Shares issuable upon exercise of options.

 

 

 (8)

Consists of 15,500 Common Shares owned directly.

 

 

 

 (9)

Consists of: (a) 124,463 Common Shares owned directly, (b) 30,287 Common Shares held in trusts for the benefit of members of Mr. Lamb’s immediate family and (c) 25,000 Common Shares issuable upon exercise of options.

 

(10)

Consists of: (a) 98,084 Common Shares owned directly and (b) 26,000 Common Shares issuable upon exercise of options.

 

In

 

(11)

Consists of: (a) 61,145 Common Shares owned directly, (b) 2,787 Common Shares held by the Individual Retirement Account, or IRA, of Mr. Mastrangelo’ s spouse, (c) 252,500 Common Shares issuable upon exercise of options and (d) 8,784 Common Shares held in a 401(k) plan account for the benefit of Mr. Mastrangelo.

 

(12)

Consists of 1,000 Common Shares owned directly.

 

 

 

173

 


 

(13)

Consists of: (a) 515,059 Common Shares owned directly; (b) 301,794 Common Shares held by Solomon Investment Partnership, L.P., of which Mrs. Cohen and her spouse are the sole limited partners and the sole shareholders, officers and directors of the corporate general partner; (c) 527,500 Common Shares issuable upon exercise of options; (d) 131,924 Common Shares held by the IRA of Mrs. Cohen’s spouse; (e) 150,000 Common Shares held by her spouse; (f) 3,405 Common Shares held in a 401(k) plan account for the benefit of Mrs. Cohen; and (g) 315,000 Common Shares owned by a charitable foundation of which Mrs. Cohen is a co-trustee.  Excludes (a) 100,000 shares owned by the Resource America, Inc. Supplemental Employee Retirement Plan trust, of which Mrs. Cohen’s spouse is the beneficiary; and (b) 18,972 Common Shares owned by Resource America, of which Mrs. Cohen’s spouse is chairman.  Mrs. Cohen retired as an officer and director of the Company effective December 31, 2014.

 

 

 

(14)

Consists of: (a) 14,220 Common Shares owned directly, (b) 159,000 Common Shares issuable upon exercise of options, (c) 1,149 Common Shares held by Mr. Birenbaum’s spouse and (d) 6,382 Common Shares held in a 401(k) plan account for the benefit of Mr. Birenbaum.  Mr. Birenbaum resigned as an officer of the Company effective January 8, 2015.

 

 

(15)

Consists of: (a) 5,000 Common Shares owned directly, (b) 141,000 Common Shares issuable upon exercise of options and (c) 4,243 Common Shares held in a 401(k) plan account for the benefit of Mr. Frenkiel.

 

 

(16)

Consists of: (a) 5,000 Common Shares owned directly, (b) 133,000 Common Shares issuable upon exercise of options and (c) 672 Common Shares held in a 401(k) plan account for the benefit of Mr. Kuiper.

 

 

 

(17)   

Consists of: (a) 22,165 Common Shares owned directly, (b) 139,250 Common Shares issuable upon exercise of options and (c) 6,650 Common Shares held in a 401 (k) plan account for the benefit of Mr. McGraw.

 

 

 

(18)  

Consists of: (a) 2,500 Common Shares owned directly, (b) 23,750 Common Shares issuable upon exercise of options and (c) 3,294 Common shares held in a 401 (k) plan account for the benefit of  Mr. Pareigat.

 

 

(19)

Based solely on a Form 13G/A filed by Wellington Management Company, LLP. on February 12, 2015. The address of Wellington Management Company, LLP is 280 Congress Street, Boston, MA 02210.

 

 

(20)

Based solely on Form 13G/A filed by Second Curve Capital, LLC on February 4, 2015.  The address of Second Curve Capital, LLC is 237 Park Avenue, 9th Floor, New York, NY 10017.

 

 

(21)

Based solely on a Form 13G/A filed by BlackRock, Inc. on January 30, 2015. The address of BlackRock, Inc. is 55 East 52nd Street, New York, NY 10022.

 

(22)

Based solely on a Form 13G/A filed by State Street Corporation, Inc. on February 12, 2015. The address of State Street Corporation is One Lincoln Street, Boston, Massachusetts 02111.

(23)

This number has been adjusted to exclude 315,000 Common Shares which were included in both Mrs. Cohen’s beneficial ownership amount and Mr. Cohen’s beneficial ownership amount.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company’s officers, directors and persons who own more than ten percent of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the SEC and to furnish the Company with copies of all such reports.

 

Based solely on its review of the reports received by it, the Company believes that, during fiscal 2014, no officers, directors or beneficial owners failed to file reports of ownership and changes of ownership on a timely basis.

174

 


 

 

Information included in the 2015 Proxy Statement to be filed is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Under the Code of Business Conduct, the Company has established a procedure regarding the review and approval of transactions that would be required to be reported under Item 404 of Regulation S-K. Under this procedure, the Audit Committee must approve any such transaction and find it to be on terms comparable to those available on an arms’ length basis from an unaffiliated third party, or find that it otherwise does not create a conflict of interest. The Code of Business Conduct exempts from the review and approval process any employment or other business connection of an officer, director, employee or affiliate with Resource America, Inc., Institutional Financial Markets, Inc. including J.V.B. Financial Group, LLC, the Bank and their affiliates. If the Audit Committee finds a conflict of interest to exist with respect to a particular transaction, that transaction is prohibited unless a waiver of the Code of Business Conduct is approved by the Audit Committee.

 

The Company entered into a space sharing agreement for office space in New York, New York with Resource America Inc. commencing in September 2011.  The Company pays only its proportionate share of the lease rate to a lessor which is an unrelated third party.  The Chairman of the Board of Resource America, Inc. is the father of the Chairman of the Board and the spouse of the former Chief Executive Officer of the Company.  The Chief Executive Officer of Resource America is the brother of the Chairman of the Board and the son of the former Chief Executive Officer of the Company.  Rent expense is 50% of the fixed rent, real estate tax payment and the base expense charges.  Rent expense was $112,000, $102,000, and $102,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

 

The Company entered into a space sharing agreement for office space in New York, New York with Atlas Energy, L.P. commencing May 2012.  As a result of certain transactions, Atlas Energy, L.P. assigned the lease to its successor, Atlas Energy Group, LLC, in 2015. The Company pays only its proportionate share of the lease rate to a lessor which is an unrelated third party.  The Executive Chairman of the Board of Atlas Energy Group, LLC and, prior thereto, of the general partner of Atlas Energy, L.P. is the brother of the Chairman of the Board and son of the former Chief Executive Officer of the Company.  The Chief Executive Officer and President of Atlas Energy Group, LLC and, prior thereto, of the general partner of Atlas Energy, L.P is the father of the Chairman of the Board and spouse of the former Chief Executive Officer of the Company.  Rent expense is 50% of the fixed rent, real estate tax payment, and the base expense charges.  Rent expense was $104,000, $104,000 and $104,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

 

The Bank maintains deposits for various affiliated companies totaling approximately $15.1 million and $36.7 million as of December 31, 2014 and 2013, 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 in the ordinary course of business and on substantially the same terms,  including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to the lender.  At December 31, 2014, these loans were current as to principal and interest payments, and did not involve more than normal risk of collectability.  At December 31, 2014, loans to these related parties included in other assets held for sale amounted to $30.9  million and at December 31, 2013 such loans amounted to $28.5 million. 

 

In addition to these lending transactions, the Bank periodically purchases securities under agreements to resell and engages in other securities transactions with affiliates.    The Company executed securities 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 of JVB.  For the twelve months ended December 31, 2014, the Company purchased $3.4 million of AAA rated SBA loans for Community Reinvestment Act purposes through JVB.  The Company had no security purchases from JVB for the twelve months ended December 31, 2014.  From time to time, the Company may also purchase 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 full compliance with all of the terms of the repurchase agreements at December 31, 2014 and had complied with the terms for all prior repurchase agreements.  A total of $46.3 million of such agreements were outstanding at December 31, 2014 and $6.4 million were outstanding at December 31, 2013.

 

Item 14. Principal Accountant Fees and Services

 

175

 


 

 

The following table presents the aggregate fees billed by Grant Thornton for each of the services listed below for each of the Company’s last two fiscal years.

 

Audit Fees

 

f

 

 

 

 

 

 

   

   

2014

   

2013

Audit fees (1)

   

$

3,638,500 

   

$

620,117 

Audit-related fees (2)

   

   

131,848 

   

   

19,925 

Tax fees (3)

   

   

180,000 

   

   

179,773 

All other fees (4)

   

   

85,825 

   

   

131,763 

Total

   

$

4,036,173 

   

$

951,578 

 

 

 

(1)

Audit fees consisted of the aggregate fees billed for professional services rendered by Grant Thornton in connection with its audit of the Company’s consolidated financial statements and its limited reviews of the unaudited consolidated interim financial statements that are normally provided in connection with statutory and regulatory filings or engagements for these fiscal years. Audit fees in 2014 include fees incurred in 2015 relating to prior years in connection with the restatement of the  financial statements.

 

 

 

(2)

Audit-related fees consisted of the aggregate fees billed for assurance and related services rendered by Grant Thornton that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not disclosed under “Audit Fees” above.

 

 

 

(3)

Tax fees consisted of the aggregate fees billed for professional services rendered by Grant Thornton for tax compliance, tax advice and tax planning in 2014 and 2013.

 

 

 

(4)

All other fees consist of the aggregate fees billed for products and services provided by Grant Thornton other than the services described under audit fees, audit-related fees and tax fees. All other fees in 2014 consisted primarily of permitted information technology services pre-approved by the audit committee.

 

Exchange Act rules generally require any engagement by a public company of an accountant to provide audit or non-audit services to be pre-approved by the audit committee of that public company. This pre-approval requirement is waived with respect to the provision of services other than audit, review or attest services if certain conditions set forth in rule 2-01(c)(7)(i)(C) under the Exchange Act are met. None of the audit-related and tax services described above were subject to this Rule and the approval procedures set forth therein. All services provided to the Company by Grant Thornton in 2014 and 2013 were pre-approved by the Audit Committee.

. 

176

 


 

PART IV

Item 15. Exhibits and Financial Statement Schedules.

 

 

(a)

The following documents are filed as part of this Annual Report on Form 10-K:

 

 

 

 

 

1.

Financial Statements 

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheet at December 31, 2014 and 2013

Consolidated Statement of Operations for each of the three years in the period ended December 31, 2014

Consolidated Statement of Changes in Shareholders’ Equity for each of the three years in the period ended December 31, 2014

Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2014

Notes to Consolidated Financial Statements

 

 

 

2.

Financial Statement Schedules 

 

None

 

 

 

3.

Exhibits 

 

Exhibit No.Description

3.1Certificate of Incorporation(1)

3.2Amended and Restated Bylaws(12)

4.1Specimen stock certificate(1)

10.11999 Stock Option Plan (the “1999 SOP”)(2)

10.2Form of Grant of Non-Qualified Stock Options under the 1999 SOP(2)

10.3Form of Grant of Incentive Stock Options under the 1999 SOP(2)

10.4The Bancorp, Inc. 2005 Omnibus Equity Compensation Plan (the “2005 Plan”)(3)

10.5Form of Grant of Non-Qualified Stock Option under the 2005 Plan(4)

10.6Form of Grant of Incentive Stock Option under the 2005 Plan(4)

10.7Form of Stock Unit Award Agreement under the 2005 Plan(5)

10.8Employee and Non-employee Director Non-Cash Compensation Plan(1)

10.9Stock Option and Equity Plan of 2011(6) 

10.10Form of Grant of Stock Option under the 2011 Plan (6) 

10.11 Form of Restricted Stock Unit Award Agreement  (8)

 

10.12The Bancorp, Inc. Stock Option and Equity Plan of 2013  (9)

 

10.13Form of Grant of Stock Option under the 2013 Plan(10)

 

177

 


 

10.14Form of Grant of Restricted Stock under the 2013 Plan(10)

 

10.15Sales Agreement dated July 10, 2014 among the Bancorp, Inc., The Bancorp Bank and Cantor Fitzgerald & Co.(11)

 

10.15             Sales Agreement dated July 10, 2014 among the Bancorp, Inc., The Bancorp Bank and BTIG, LLC (11)

 

10.16Sales agreement dated December 30, 2014 among The Bancorp Bank and Walnut Street 2014-1 Issuer, LLC

 

12.1Ratio of earnings to fixed changes

 

21.1Subsidiaries of Registrant

23.1Consent of Grant Thornton LLP

31.1Rule 13a-14(a)/15d-14(a) Certifications

31.2Rule 13a-14(a)/15d-14(a) Certifications

32.1Section 1350 Certifications

32.2Section 1350 Certifications

 

*

    Filed herewith.

 

 

(1)

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

(2)

Filed previously as an exhibit to our Registration Statement on Form S-8, registration number 333-124339, and by this reference incorporated herein.

(3)

Filed previously as an appendix to the definitive proxy statement on Schedule 14A filed on May 2, 2005, and by this reference incorporated herein.

(4)

Filed previously as an exhibit to our current report on Form 8-K filed December 30, 2005, and by this reference incorporated herein.

(5)

Filed previously as an exhibit to our current report on Form 8-K filed January 20, 2006, and by this reference incorporated herein.

(6)

Filed previously as an exhibit to our Registration Statement on Form S-8, registration number 333-176208, and by this reference incorporated herein.

(7)

Filed previously as an exhibit to our current report on Form 8-K filed March 22, 2011.

(8)

Filed previously as an exhibit to our current report on Form 8-K filed January 29, 2013.

(9)

Filed previously as an appendix to our proxy statement filed March 20, 2013.

(10)

(11)

Filed previously as an exhibit to our quarterly report on Form 10-Q filed May 10, 2013.

Filed previously as n exhibit to our current report on Form 8-K filed July 11, 2014.

(12)

Filed previously as an exhibit to our annual report on Form 10-K filed March 17, 2014.

 

 

178

 


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

 

 

 

 

 

 

 

THE BANCORP, INC. (Registrant)

 

 

 

September 25, 2015

 

By:

 

/s/ Frank M. Mastrangelo

 

 

 

 

Frank M. Mastrangelo

 

 

 

 

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Frank M. Mastrangelo

FRANK M. MASTRANGELO

 

President, Chief Executive Officer and Director

(principal executive officer)

 

September 25, 2015

 

 

 

/s/ Daniel G. Cohen

DANIEL G. COHEN

 

Director

 

September 25, 2015

 

 

 

/s/ Walter T. Beach

WALTER T. BEACH

 

Director

 

September 25, 2015

 

 

 

/s/ Michael J. Bradley

MICHAEL J. BRADLEY

 

Director

 

September 25, 2015

 

   Director

 

/s/ John Chrystal

JOHN CHRYSTAL

   September 25, 2015

 

 

 

 

 

/s/ Matthew Cohn

MATTHEW COHN

 

Director

 

September 25, 2015

 

 

 

/s/ William H. Lamb

WILLIAM H. LAMB

 

Director

 

September 25, 2015

 

 

 

/s/ James J. McEntee III

JAMES J. MCENTEE III

 

Director

 

September 25, 2015

 

 

 

/s/ Mei-Mei Tuan

MEI-MEI TUAN

 

Director

 

 

 

September 25, 2015

 

 

 

 

 

 

 

/s/ Hersh Kozlov

HERSH KOZLOV

 

Director

 

September 25, 2015

 

 

 

 

 

 

 

 

/s/ Paul Frenkiel

PAUL FRENKIEL

 

Executive Vice President of Strategy, Chief Financial Officer and Secretary

(principal accounting officer)

 

September 25, 2015

 

 

 

 

179