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Bancorp, Inc. - Quarter Report: 2017 March (Form 10-Q)



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q





 

 

[X]

 

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



 

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended:     March 31, 2017





 

 



 

 

[  ]

 

TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE



 

SECURITIES EXCHANGE ACT OF 1934



For the transition period from: _____ to _____



Commission file number: 51018



THE BANCORP, INC.



(Exact name of registrant as specified in its charter)





 

 

Delaware

 

23-3016517

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)



 

 

409 Silverside Road, Wilmington, DE 19809

 

(302) 385-5000

(Address of principal executive offices and zip code)

 

(Registrant's telephone number, including area code)



    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X]   No [ ]

    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]   No [ ]



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

 



 

 

Large accelerated filer [ ]   

Accelerated filer [X]    

Non-accelerated filer [ ] 

Smaller reporting company [ ]

Emerging growth company [ ]

 



    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]



    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]  No [X]



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

As of May 4, 2017 there were 55,689,187 outstanding shares of common stock, $1.00 par value.

 

 


 





 

 

 


 

THE BANCORP, INC



Form 10-Q Index



 

 



 

Page

Part I Financial Information

Item 1

Financial Statements:

3



 

 



Consolidated Balance Sheets – March 31, 2017 (unaudited) and December 31, 2016

3



 

 



Unaudited Consolidated Statements of Operations – Three months ended March 31, 2017 and 2016

4



 

 



Unaudited Consolidated Statements of Comprehensive Income – Three months ended March 31, 2017 and 2016

6



 

 



Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Three months ended March 31, 2017

7



 

 



Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2017 and 2016

8



 

 



Notes to Unaudited Consolidated Financial Statements

9



 

 

Item 2.

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

36



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53



 

 

Item 4.

Controls and Procedures

54



 

 

Part II Other Information



 

 

Item 1.

Legal proceedings

55

Item 6.

Exhibits

56



 

 

Signatures

 

56



 

 







 

2


 



PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS





 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

(unaudited)

 

 



 

(in thousands)

ASSETS

 

 

 

 

Cash and cash equivalents

 

 

 

 

Cash and due from banks

 

$                    4,671 

 

$                    4,127 

Interest earning deposits at Federal Reserve Bank

 

669,042 

 

955,733 

Securities purchased under agreements to resell

 

65,248 

 

39,199 

Total cash and cash equivalents

 

738,961 

 

999,059 



 

 

 

 

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

 

1,215,892 

 

1,248,614 

Investment securities, held-to-maturity (fair value $92,158 and $91,799, respectively)

 

93,443 

 

93,467 

Commercial loans held for sale

 

480,913 

 

663,140 

Loans, net of deferred loan fees and costs

 

1,264,127 

 

1,222,911 

Allowance for loan and lease losses

 

(7,294)

 

(6,332)

Loans, net

 

1,256,833 

 

1,216,579 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

 

2,589 

 

1,613 

Premises and equipment, net

 

22,993 

 

24,125 

Accrued interest receivable

 

10,296 

 

10,589 

Intangible assets, net

 

5,844 

 

6,906 

Other real estate owned

 

104 

 

104 

Deferred tax asset, net

 

54,155 

 

55,666 

Investment in unconsolidated entity, at fair value

 

125,982 

 

126,930 

Assets held for sale from discontinued operations

 

341,286 

 

360,711 

Other assets

 

55,351 

 

50,611 

Total assets

 

$             4,404,642 

 

$             4,858,114 



 

 

 

 

LIABILITIES

 

 

 

 

Deposits

 

 

 

 

Demand and interest checking

 

$             3,607,076 

 

$             3,816,524 

Savings and money market

 

428,723 

 

421,780 

Total deposits

 

4,035,799 

 

4,238,304 



 

 

 

 

Securities sold under agreements to repurchase

 

273 

 

274 

Subordinated debentures

 

13,401 

 

13,401 

Long-term borrowings

 

 -

 

263,099 

Other liabilities

 

45,400 

 

44,073 

Total liabilities

 

4,094,873 

 

4,559,151 



 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Common stock - authorized, 75,000,000 shares of $1.00 par value; 55,757,559 and 55,419,204

 

 

 

 

shares issued at March 31, 2017 and December 31, 2016, respectively

 

55,758 

 

55,419 

Treasury stock, at cost (100,000 shares)

 

(866)

 

(866)

Additional paid-in capital

 

360,801 

 

360,564 

Accumulated deficit

 

(103,978)

 

(111,941)

Accumulated other comprehensive loss

 

(1,946)

 

(4,213)

Total shareholders' equity

 

309,769 

 

298,963 



 

 

 

 

Total liabilities and shareholders' equity

 

$             4,404,642 

 

$             4,858,114 



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



3

 


 







THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS







 

 

 

 



 

 

 

 



 

For the three months ended March 31,



 

2017

 

2016



 

(in thousands, except per share data)

Interest income

 

 

 

 

Loans, including fees

 

$               17,629 

 

$               15,869 

Interest on investment securities:

 

 

 

 

Taxable interest

 

9,005 

 

6,532 

Tax-exempt interest

 

72 

 

321 

Federal funds sold/securities purchased under agreements to resell

 

227 

 

27 

Interest earning deposits

 

1,516 

 

902 



 

28,449 

 

23,651 

Interest expense

 

 

 

 

Deposits

 

3,434 

 

2,971 

Subordinated debenture

 

138 

 

124 



 

3,572 

 

3,095 

Net interest income

 

24,877 

 

20,556 

Provision for loan and lease losses

 

1,000 

 

 -

Net interest income after provision for loan and lease losses

 

23,877 

 

20,556 



 

 

 

 

Non-interest income

 

 

 

 

Service fees on deposit accounts

 

1,675 

 

847 

Card payment and ACH processing fees

 

1,528 

 

1,267 

Prepaid card fees

 

13,547 

 

13,574 

Gain (loss) on sale of loans

 

5,383 

 

(1,433)

Gain on sale of investment securities

 

503 

 

2,026 

Change in value of investment in unconsolidated entity

 

(19)

 

812 

Leasing income

 

551 

 

404 

Affinity fees

 

1,021 

 

1,094 

Other

 

30 

 

97 

Total non-interest income

 

24,219 

 

18,688 



 

 

 

 

Non-interest expense

 

 

 

 

Salaries and employee benefits

 

18,006 

 

19,584 

Depreciation and amortization

 

1,206 

 

1,239 

Rent and related occupancy cost

 

1,461 

 

1,459 

Data processing expense

 

3,480 

 

3,960 

Printing and supplies

 

505 

 

543 

Audit expense

 

421 

 

255 

Legal expense

 

1,738 

 

749 

Amortization of intangible assets

 

379 

 

294 

FDIC insurance

 

2,065 

 

2,350 

Software

 

3,228 

 

2,168 

Insurance

 

678 

 

510 

Telecom and IT network communications

 

592 

 

378 

Securitization and servicing expense

 

(5)

 

569 

Consulting

 

534 

 

1,677 

Bank Secrecy Act and lookback consulting expenses

 

 -

 

14,315 

Other

 

3,495 

 

5,088 

Total non-interest expense

 

37,783 

 

55,138 

Income (loss) from continuing operations before income taxes

 

10,313 

 

(15,894)

Income tax provision (benefit)

4,011 

 

(5,272)

Net income (loss) from continuing operations

 

$                 6,302 

 

$             (10,622)

Discontinued operations

 

 

 

 

Income (loss) from discontinued operations before income taxes

 

2,667 

 

(369)

4

 


 

Income tax benefit

1,006 

 

(79)

Income (loss) from discontinued operations, net of tax

 

1,661 

 

(290)

Net income (loss) available to common shareholders

 

$                 7,963 

 

$             (10,912)



 

 

 

 

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

 

$                   0.11 

 

$                 (0.28)

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

 

$                   0.03 

 

$                 (0.01)

Net income (loss) per share - basic

 

$                   0.14 

 

$                 (0.29)



 

 

 

 

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

 

$                   0.11 

 

$                 (0.28)

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

 

$                   0.03 

 

$                 (0.01)

Net income (loss) per share - diluted

 

$                   0.14 

 

$                 (0.29)



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

5

 


 





THE BANCORP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME







 

 

 



 

 

 



For the three months



ended March 31,



2017

 

2016



(in thousands)

Net income (loss)

 

 

 

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

$                        7,963 

 

$                  (10,912)



 

 

 

Other comprehensive income (loss)

 

 

 

Change in net unrealized gain during the period

4,273 

 

11,373 

Reclassification adjustments for losses included in income

(503)

 

(2,026)

Reclassification adjustments for foreign currency translation gains

 -

 

335 

Amortization of losses previously held as available-for-sale

 

Net unrealized gain

3,779 

 

9,690 



 

 

 

Deferred tax expense

 

 

 

 Securities available-for-sale:

 

 

 

Change in net unrealized (loss) gain during the period

1,709 

 

4,550 

Reclassification adjustments for losses included in income

(201)

 

(810)

Amortization of losses previously held as available-for-sale

 

Income tax expense related to items of other comprehensive income

1,512 

 

3,743 



 

 

 

Other comprehensive income net of tax and reclassifications into net income

2,267 

 

5,947 

Comprehensive income (loss)

$                      10,230 

 

$                    (4,965)



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





 

6

 


 





THE BANCORP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY





 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 



 

Common

 

 

 

 

 

Additional

 

 

 

other

 

 



 

stock

 

Common

 

Treasury

 

paid-in

 

Retained

 

comprehensive

 

 



 

shares

 

stock

 

stock

 

capital

 

earnings

 

income

 

Total



 

 

 

 

Balance at January 1, 2017

 

55,419,204 

 

$        55,419 

 

$        (866)

 

$      360,564 

 

$      (111,941)

 

$              (4,213)

 

$          298,963 

Net income

 

 

 

 

 

 

 

 

 

7,963 

 

 

 

7,963 

Common stock issuance expense

 

 -

 

 -

 

 -

 

(200)

 

 -

 

 -

 

(200)

Common stock issued from restricted shares,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cashless exercise, net of tax benefits

 

338,355 

 

339 

 

 -

 

(338)

 

 -

 

 -

 

Stock-based compensation

 

 -

 

 -

 

 -

 

775 

 

 -

 

 -

 

775 

Other comprehensive income net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

2,267 

 

2,267 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2017

 

55,757,559 

 

$        55,758 

 

$        (866)

 

$      360,801 

 

$      (103,978)

 

$              (1,946)

 

$          309,769 



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





7

 


 





THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS









 

 

 

 



 

 

 

 



 

 



 

For the three months



 

ended March 31,



 

2017

 

2016



 

(in thousands)

Operating activities

 

 

 

 

Net income (loss) from continuing operations

 

$              6,302 

 

$          (10,622)

Net income (loss) from discontinued operations

 

1,661 

 

(290)

Adjustments to reconcile net income to net cash

 

 

 

 

provided by operating activities

 

 

 

 

Depreciation and amortization

 

1,585 

 

1,533 

Provision for loan and lease losses

 

1,000 

 

 -

Net amortization of investment securities discounts/premiums

 

2,219 

 

2,057 

Stock-based compensation expense

 

775 

 

553 

Loans originated for sale

 

(100,618)

 

(75,313)

Sale of loans originated for resale

 

25,129 

 

250,223 

Gain on sales of loans originated for resale

 

(5,383)

 

1,433 

Gain on sale of fixed assets

 

(13)

 

(6)

Fair value adjustment on investment in unconsolidated entity

 

(19)

 

179 

Gain on sales of investment securities

 

(503)

 

(2,026)

Decrease in accrued interest receivable

 

293 

 

299 

Increase in other assets

 

(5,033)

 

(2,873)

Decrease (increase) in discontinued assets held for sale

 

5,102 

 

2,223 

Increase in other liabilities

 

1,328 

 

34,363 

 Net cash provided by (used in) operating activities

 

(66,175)

 

201,733 



 

 

 

 

Investing activities

 

 

 

 

Purchase of investment securities available-for-sale

 

(36,693)

 

(292,345)

Proceeds from sale of investment securities available-for-sale

 

30,374 

 

78,971 

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

 

 -

 

28 

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

 

41,127 

 

40,053 

Net increase in loans

 

(41,254)

 

(35,998)

Net decrease in discontinued loans held for sale

 

14,323 

 

45,138 

Proceeds from sale of fixed assets

 

132 

 

Purchases of premises and equipment

 

(193)

 

(1,302)

Investment in unconsolidated entity

 

967 

 

1,130 

 Net cash provided by (used in) investing activities

 

8,783 

 

(164,317)



 

 

 

 

Financing activities

 

 

 

 

Net decrease in deposits

 

(202,505)

 

(415,801)

Net decrease in securities sold under agreements to repurchase

 

(1)

 

(254)

Common stock issuance expense

 

(200)

 

 -

 Net cash used in financing activities

 

(202,706)

 

(416,055)



 

 

 

 

 Net decrease in cash and cash equivalents

 

(260,098)

 

(378,639)



 

 

 

 

Cash and cash equivalents, beginning of period

 

999,059 

 

1,155,162 



 

 

 

 

Cash and cash equivalents, end of period

 

$          738,961 

 

$          776,523 



 

 

 

 

Supplemental disclosure:

 

 

 

 

Interest paid

 

$              3,566 

 

$              3,268 

Taxes paid

 

$                   35 

 

$                 141 











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

8

 


 

THE BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLDIATED FINANCIAL STATEMENTS



Note 1. Structure of Company

The Bancorp, Inc. (the Company) is a Delaware corporation and a registered financial holding company. Its primary subsidiary is The Bancorp Bank (the Bank) which is wholly owned by the Company. The Bank is a Delaware chartered commercial bank located in Wilmington, Delaware and is a Federal Deposit Insurance Corporation (FDIC) insured institution.  In its continuing operations, the Bank has four primary lines of specialty lending: securities-backed lines of credit (SBLOC), leasing, Small Business Administration (SBA) loans and loans generated for sale into capital markets primarily through commercial mortgage backed securities (CMBS). Through the Bank, the Company also provides banking services nationally, which include prepaid cards, private label banking, institutional banking, card payment and other payment processing. 

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

Note 2. Significant Accounting Policies



Basis of Presentation

The financial statements of the Company, as of March 31, 2017 and for the three month periods ended March 31, 2017 and 2016, are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP)  have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, these interim financial statements include all necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Form 10-K Report). The results of operations for the three month period ended March 31, 2017 may not necessarily be indicative of the results of operations for the full year ending December 31, 2017.

Note 3. Share-based Compensation



The Company recognizes compensation expense for stock options in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718, Stock Based Compensation. The expense of the option is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is typically the vesting period. For grants subject to a service condition, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. In accordance with ASC 718, the Company estimates the number of options for which the requisite service is expected to be rendered. At March 31, 2017, the Company had  four  stock-based compensation plans, which are more fully described in its 2016 Form 10-K Report.  



The Company did not  grant stock options during the three month periods ended March 31, 2017 or March 31, 2016. There were no common stock options exercised in the three month periods ended March 31, 2017 or March 31, 2016. 

9

 


 

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







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Weighted average

 

 



 

 

 

 

remaining

 

 



 

 

Weighted average

 

contractual

 

Aggregate



Shares

 

exercise price

 

term (years)

 

intrinsic value

Outstanding at January 1, 2017

2,021,625 

 

$                     8.32 

 

5.24 

 

$                         - 

Granted

 -

 

 -

 

 -

 

 -

Exercised

 -

 

 -

 

 -

 

 -

Expired

 -

 

 -

 

 -

 

 -

Forfeited

(2,500)

 

10.45 

 

 -

 

 -

Outstanding at March 31, 2017

2,019,125 

 

$                     8.32 

 

4.99 

 

$                         - 

Exercisable at March 31, 2017

1,696,625 

 

$                     8.58 

 

4.22 

 

$                         - 





The Company granted 799,559 restricted stock units (RSUs) in the first three months of 2017, of which 664,559 have a vesting period of three years, and 135,000 have a vesting period of one yearAll the RSUs granted in the first quarter of 2017 had a fair value of $5.06 at issuance.  In the first three months of 2016, the Company granted 489,000 RSUs, of which 320,000 RSUs have a vesting period of three years, and 169,000 have a vesting period of one year.  All the RSUs granted in the first quarter of 2016 had a fair value of $4.50 at issuance.  The total fair value of RSUs vested for the three months ended March 31, 2017 and 2016 was $1.9 million and $829,000, respectively.



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





 

 

 

 

 



 

 

 

 

 



 

 

Weighted average

 

Average remaining



 

 

grant date

 

contractual



Shares

 

fair value

 

term (years)

Outstanding at January 1, 2017

831,775 

 

$                5.77

 

1.62 

Granted

799,559 

 

5.06 

 

 

Vested

(338,355)

 

5.64 

 

 

Forfeited

(39,525)

 

5.06 

 

 

Outstanding at March 31, 2017

1,253,454 

 

$                5.38

 

2.31 



As of March 31, 2017, there was a total of $6.8 million of unrecognized compensation cost related to unvested awards under share-based plans.  This cost is expected to be recognized over a weighted average period of approximately 2.5 years.  Related compensation expense for the three months ended March 31, 2017 and 2016 was $775,000 and $553,000, respectively.



Note 4. Earnings Per Share



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



10

 


 

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







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

March 31, 2017



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings per share from continuing operations

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 6,302

 

55,534,279 

 

$                  0.11

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

218,217 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 6,302

 

55,752,496 

 

$                  0.11







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

March 31, 2017



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings per share from discontinued operations

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 1,661

 

55,534,279 

 

$                  0.03

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

218,217 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 1,661

 

55,752,496 

 

$                  0.03







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

March 31, 2017



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 7,963

 

55,534,279 

 

$                  0.14

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

218,217 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 7,963

 

55,752,496 

 

$                  0.14



Stock options for 2,019,125 shares, exercisable at prices between $6.75 and $25.43 per share, were outstanding at March 31, 2017, but were not included in the dilutive earnings per share because the exercise price per share was greater than the average market price.







11

 


 



 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

March 31, 2016



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic loss per share from continuing operations

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (10,622)

 

37,804,741 

 

$                 (0.28)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (10,622)

 

37,804,741 

 

$                 (0.28)







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

March 31, 2016



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic loss per share from discontinued operations

 

 

 

 

 

 

Net loss available to common shareholders

 

$                  (290)

 

37,804,741 

 

$                 (0.01)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$                  (290)

 

37,804,741 

 

$                 (0.01)







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

March 31, 2016



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

 

 

 

 

 



 

(dollars in thousands except share and per share data)

Basic loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (10,912)

 

37,804,741 

 

$                 (0.29)

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

 -

 

 -

Diluted loss per share

 

 

 

 

 

 

Net loss available to common shareholders

 

$             (10,912)

 

37,804,741 

 

$                 (0.29)



Stock options for 1,976,500 shares, exercisable at prices between $7.36 and $25.43 per share, were outstanding at March 31, 2016, but were not included in the dilutive shares because the Company had a net loss available to common shareholders.





12

 


 

Note 5. Investment Securities



The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities classified as available-for-sale and held-to-maturity at March 31, 2017 and December 31, 2016 are summarized as follows (in thousands):







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Available-for-sale

 

March 31, 2017



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$               28,580 

 

$                    41 

 

$                  (85)

 

$              28,536 

Asset-backed securities *

 

315,525 

 

1,778 

 

(785)

 

316,518 

Tax-exempt obligations of states and political subdivisions

 

15,339 

 

146 

 

(46)

 

15,439 

Taxable obligations of states and political subdivisions

 

77,085 

 

1,678 

 

(389)

 

78,374 

Residential mortgage-backed securities

 

340,819 

 

877 

 

(4,511)

 

337,185 

Collateralized mortgage obligation securities

 

152,805 

 

629 

 

(1,200)

 

152,234 

Commercial mortgage-backed securities

 

133,608 

 

267 

 

(621)

 

133,254 

Foreign debt securities

 

56,056 

 

200 

 

(172)

 

56,084 

Corporate debt securities

 

97,947 

 

620 

 

(299)

 

98,268 



 

$          1,217,764 

 

$               6,236 

 

$             (8,108)

 

$         1,215,892 







 

 

 

 

 

 

 

 



 

March 31, 2017



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

* Asset-backed securities as shown above

 

cost

 

gains

 

losses

 

value

Federally insured student loan securities

 

$              109,638 

 

$                  152 

 

$                (750)

 

$            109,040 

Collateralized loan obligation securities

 

188,380 

 

1,499 

 

(15)

 

189,864 

Other

 

17,507 

 

127 

 

(20)

 

17,614 



 

$              315,525 

 

$               1,778 

 

$                (785)

 

$            316,518 









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Held-to-maturity

 

March 31, 2017



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$               17,995 

 

$                  327 

 

$             (2,901)

 

$              15,421 

Other debt securities - pooled

 

75,448 

 

1,289 

 

 -

 

76,737 



 

$               93,443 

 

$               1,616 

 

$             (2,901)

 

$              92,158 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Available-for-sale

 

December 31, 2016



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$               27,771 

 

$                    23 

 

$                  (92)

 

$              27,702 

Asset-backed securities *

 

355,622 

 

1,811 

 

(2,037)

 

355,396 

Tax-exempt obligations of states and political subdivisions

 

15,492 

 

129 

 

(137)

 

15,484 

Taxable obligations of states and political subdivisions

 

78,143 

 

1,539 

 

(633)

 

79,049 

Residential mortgage-backed securities

 

347,120 

 

598 

 

(5,149)

 

342,569 

Collateralized mortgage obligation securities

 

160,649 

 

619 

 

(1,445)

 

159,823 

Commercial mortgage-backed securities

 

117,844 

 

250 

 

(1,008)

 

117,086 

Foreign debt securities

 

56,603 

 

168 

 

(274)

 

56,497 

Corporate debt securities

 

95,005 

 

421 

 

(418)

 

95,008 



 

$          1,254,249 

 

$               5,558 

 

$           (11,193)

 

$         1,248,614 





13

 


 



 

 

 

 

 

 

 

 



 

December 31, 2016



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

* Asset-backed securities as shown above

 

cost

 

gains

 

losses

 

value

Federally insured student loan securities

 

$              122,579 

 

$                  346 

 

$             (2,000)

 

$            120,925 

Collateralized loan obligation securities

 

215,117 

 

1,294 

 

(14)

 

216,397 

Other

 

17,926 

 

171 

 

(23)

 

18,074 



 

$              355,622 

 

$               1,811 

 

$             (2,037)

 

$            355,396 









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Held-to-maturity

 

December 31, 2016



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$               17,983 

 

$                  179 

 

$             (3,026)

 

$              15,136 

Other debt securities - pooled

 

75,484 

 

1,179 

 

 -

 

76,663 



 

$               93,467 

 

$               1,358 

 

$             (3,026)

 

$              91,799 



Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $2.6  million and $1.6 million, respectively, at March 31, 2017 and December 31, 2016.



The amortized cost and fair value of the Company’s investment securities at March 31, 2017, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Available-for-sale

 

Held-to-maturity



 

Amortized

 

Fair

 

Amortized

 

Fair



 

cost

 

value

 

cost

 

value

Due before one year

 

$                 7,040 

 

$                7,030 

 

$                       - 

 

$                      - 

Due after one year through five years

 

154,682 

 

155,192 

 

7,006 

 

7,238 

Due after five years through ten years

 

414,421 

 

412,866 

 

 -

 

 -

Due after ten years

 

641,621 

 

640,804 

 

86,437 

 

84,920 



 

$          1,217,764 

 

$         1,215,892 

 

$              93,443 

 

$            92,158 



At March 31, 2017 and December 31, 2016,  there were no investment securities pledged to secure securities sold under repurchase agreements as required or permitted by law.  The balance of pledged securities was reduced to $0 as balances requiring pledging were not expected to increase from minimal levels exceeded by deposit insurance.  At March 31, 2017 and December 31, 2016, investment securities with a fair value of approximately $594.1 million and $607.2 million, respectively, were pledged to secure a line of credit with the FHLB and a letter of credit with that institution.



Fair value of available-for-sale securities are based on the fair market value supplied by a third-party market data provider, while the fair value of held-to-maturity securities are based on the present value of cash flows, which discounts expected cash flows from principal and interest using yield to maturity at the measurement date. The Company periodically reviews its investment portfolio to determine whether unrealized losses are other than temporary, based on an evaluation of the creditworthiness of the issuers/guarantors as well as the underlying collateral, if applicable, in addition to the continuing performance of the securities. The amount of the credit impairment is calculated by estimating the discounted cash flows for those securities.  The Company did not recognize any other-than-temporary impairment charges in the first three months of 2017. 



14

 


 

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at March 31, 2017 (dollars in thousands):

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

Less than 12 months

 

12 months or longer

 

Total



 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

10

 

$              19,255 

 

$                   (30)

 

$                7,719 

 

$                   (55)

 

$                 26,974 

 

$                 (85)

Asset-backed securities

 

22

 

6,646 

 

(28)

 

90,808 

 

(757)

 

97,454 

 

(785)

Tax-exempt obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

8

 

6,127 

 

(38)

 

3,277 

 

(8)

 

9,404 

 

(46)

Taxable obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

21

 

30,742 

 

(389)

 

 -

 

 -

 

30,742 

 

(389)

Residential mortgage-backed securities

 

67

 

178,043 

 

(4,262)

 

35,738 

 

(249)

 

213,781 

 

(4,511)

Collateralized mortgage obligation securities

 

26

 

69,385 

 

(793)

 

33,828 

 

(407)

 

103,213 

 

(1,200)

Commercial mortgage-backed securities

 

21

 

74,023 

 

(611)

 

2,332 

 

(10)

 

76,355 

 

(621)

Foreign debt securities

 

29

 

25,862 

 

(172)

 

 -

 

 -

 

25,862 

 

(172)

Corporate debt securities

 

35

 

30,144 

 

(299)

 

 -

 

 -

 

30,144 

 

(299)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

239

 

$            440,227 

 

$              (6,622)

 

$            173,702 

 

$              (1,486)

 

$               613,929 

 

$            (8,108)









 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

Less than 12 months

 

12 months or longer

 

Total



 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

1

 

$                      - 

 

$                      - 

 

$                6,177 

 

$             (2,901)

 

$                  6,177 

 

$             (2,901)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                      - 

 

$                      - 

 

$                6,177 

 

$             (2,901)

 

$                  6,177 

 

$             (2,901)



The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2016 (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

Less than 12 months

 

12 months or longer

 

Total



 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

5

 

$                7,414 

 

$                   (36)

 

$                7,824 

 

$                   (56)

 

$                 15,238 

 

$                 (92)

Asset-backed securities

 

23

 

10,186 

 

(49)

 

93,375 

 

(1,988)

 

103,561 

 

(2,037)

Tax-exempt obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

8

 

6,056 

 

(118)

 

3,301 

 

(19)

 

9,357 

 

(137)

Taxable obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

27

 

42,963 

 

(633)

 

 -

 

 -

 

42,963 

 

(633)

Residential mortgage-backed securities

 

68

 

180,357 

 

(4,833)

 

54,254 

 

(316)

 

234,611 

 

(5,149)

Collateralized mortgage obligation securities

 

28

 

88,936 

 

(1,004)

 

30,386 

 

(441)

 

119,322 

 

(1,445)

Commercial mortgage-backed securities

 

28

 

79,345 

 

(963)

 

4,547 

 

(45)

 

83,892 

 

(1,008)

Foreign debt securities

 

34

 

26,696 

 

(274)

 

700 

 

 -

 

27,396 

 

(274)

Corporate debt securities

 

39

 

30,418 

 

(414)

 

645 

 

(4)

 

31,063 

 

(418)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

260

 

$            472,371 

 

$              (8,324)

 

$            195,032 

 

$              (2,869)

 

$               667,403 

 

$          (11,193)





15

 


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

Less than 12 months

 

12 months or longer

 

Total



 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and other debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

1

 

$                      - 

 

$                      - 

 

$                6,039 

 

$             (3,026)

 

$                  6,039 

 

$             (3,026)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                      - 

 

$                      - 

 

$                6,039 

 

$             (3,026)

 

$                  6,039 

 

$             (3,026)



Other securities included in the held-to-maturity classification at March  31, 2017 consisted of three securities secured by diversified portfolios of corporate securities, one bank senior note, two single-issuer trust preferred securities and one pooled trust preferred security.



A total of $18.0 million of other debt securities - single issuers is comprised of the following: (i) amortized cost of the two single-issuer trust preferred securities of $11.0 million, of which one security for $1.9 million was issued by a bank and one security for $9.1 million was issued by an insurance company; and (ii) the book value of a bank senior note of $7.0 million. 



A total of $75.4 million of other debt securities – pooled is comprised of three securities consisting of diversified portfolios of corporate securities.



The following table provides additional information related to the Company’s single issuer trust preferred securities as of March 31, 2017 (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

Security A

 

$                1,911 

 

$                 2,005 

 

$                      94 

 

Not rated

Security B

 

9,078 

 

6,177 

 

(2,901)

 

Not rated



 

 

 

 

 

 

 

 

Class: All of the above are trust preferred securities.

 

 

 

 

 

 

 

 







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



Note 6. Loans



The Company has several lending lines of business including SBA loans, direct lease financing, SBLOC and other specialty and consumer lending. The Company also originates loans for sale to other financial institutions which issue commercial mortgage backed securities or to secondary government guaranteed loan markets. These sales are accounted for as true sales, and there is no continuing involvement in these loans after the sale. Servicing rights on these loans are not retained.   The Company has elected fair value treatment for these loans to better reflect the economics of the transactions.  At March 31, 2017, the fair value of the loans held for sale was $480.9 million and the unpaid principal balance was $478.2  million.  Included in the gain on sale of loans in the Statements of Operations were losses recognized from changes in fair value of $155,000 for the three months ended March 31, 2017.  There were no significant changes in fair value related to credit risk.  Interest earned on loans held for sale during the period held are recorded in Interest Income-Loans, including fees on the Statements of Operations.



In the second quarter of 2016, the Company purchased approximately $60 million in fleet vehicle leases which resulted in a customer

16

 


 

list intangible of $3.4 million.  The balance of the $8.0 million purchase price was allocated to premium which is being amortized over the estimated average lives of the purchased leases. 



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



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







 

 

 



 

 

 



March 31,

 

December 31,



2017

 

2016



 

 

 

SBA non real estate

$                       75,800 

 

$                       74,644 

SBA commercial mortgage

114,703 

 

126,159 

SBA construction

12,985 

 

8,826 

SBA loans *

203,488 

 

209,629 

Direct lease financing

363,172 

 

346,645 

SBLOC

660,423 

 

630,400 

Other specialty lending

12,443 

 

11,073 

Other consumer loans

16,318 

 

17,374 



1,255,844 

 

1,215,121 

Unamortized loan fees and costs

8,283 

 

7,790 

Total loans, net of deferred loan costs

$                  1,264,127 

 

$                  1,222,911 



 

 

 

Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $2.4 million at both March 31, 2017 and December 31, 2016.  Overdraft charge-offs and recoveries are reflected in the allowance for loan and lease losses.



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







 

 

 



March 31,

 

December 31,



2017

 

2016



 

 

 

SBA loans, including deferred fees and costs

$                     209,980 

 

$                     215,786 

SBA loans included in held for sale

159,831 

 

154,016 

Total SBA loans

$                     369,811 

 

$                     369,802 



The following table provides information about impaired loans at March 31, 2017 and December 31, 2016 (in thousands):







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

March 31, 2017

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      181 

 

$                      181 

 

$                        - 

 

$                      187 

 

$                           - 

SBA commercial mortgage

 -

 

 -

 

 -

 

 -

 

 -

Direct lease financing

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

1,719 

 

1,719 

 

 -

 

1,724 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 -

SBA non real estate

2,990 

 

2,990 

 

1,569 

 

2,586 

 

 -

SBA commercial mortgage

908 

 

908 

 

145 

 

454 

 

 -

Direct lease financing

684 

 

684 

 

166 

 

709 

 

 -

Consumer - home equity

 -

 

 -

 

 -

 

 -

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

3,171 

 

3,171 

 

1,569 

 

2,773 

 

 -

17

 


 

SBA commercial mortgage

908 

 

908 

 

145 

 

454 

 

 -

Direct lease financing

684 

 

684 

 

166 

 

709 

 

 -

Consumer - home equity

1,719 

 

1,719 

 

 -

 

1,724 

 

 -



6,482 

 

6,482 

 

1,880 

 

5,660 

 

 -







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      191 

 

$                      191 

 

$                        - 

 

$                      336 

 

$                           - 

Direct lease financing

 -

 

 -

 

 -

 

 -

 

 -

Consumer - other

 -

 

 -

 

 -

 

259 

 

 -

Consumer - home equity

1,730 

 

1,730 

 

 -

 

1,187 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

2,183 

 

2,183 

 

938 

 

1,277 

 

 -

Direct lease financing

734 

 

734 

 

216 

 

147 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

 -

 

 -

 

 -

 

549 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

2,374 

 

2,374 

 

938 

 

1,613 

 

 -

Direct lease financing

734 

 

734 

 

216 

 

147 

 

 -

Consumer - other

 -

 

 -

 

 -

 

259 

 

 -

Consumer - home equity

1,730 

 

1,730 

 

 -

 

1,736 

 

 -



4,838 

 

4,838 

 

1,154 

 

3,755 

 

 -



The following tables summarize the Company’s non-accrual loans, loans past due 90 days and still accruing and other real estate owned for the periods indicated (the Company had no non-accrual leases at March 31, 2017  or December 31, 2016) (in thousands):





 

 

 

 



 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

 

 

 

Non-accrual loans

 

 

 

 

SBA non real estate

 

$                 3,028 

 

$                  1,530 

SBA commercial mortgage

 

908 

 

 -

Consumer

 

1,433 

 

1,442 

Total non-accrual loans

 

5,369 

 

2,972 



 

 

 

 

Loans past due 90 days or more

 

1,534 

 

661 

Total non-performing loans

 

6,903 

 

3,633 

Other real estate owned

 

104 

 

104 

Total non-performing assets

 

$                 7,007 

 

$                  3,737 



18

 


 

The Company’s loans that were modified as of March 31, 2017 and December 31, 2016 and considered troubled debt restructurings are as follows (dollars in thousands):



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017

 

December 31, 2016



 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBA non real estate

 

 

$            1,041 

 

$             1,041 

 

 

$               844 

 

$                844 

Direct lease financing

 

 

684 

 

684 

 

 

734 

 

734 

Consumer

 

 

286 

 

286 

 

 

288 

 

288 

Total

 

 

$            2,011 

 

$             2,011 

 

 

$            1,866 

 

$             1,866 



The balances below provide information as to how the loans were modified as troubled debt restructurings as of March  31, 2017 and December 31, 2016 (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017

 

December 31, 2016



 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBA non real estate

 

$                    - 

 

$               144 

 

$                897 

 

$                 - 

 

$               144 

 

$                700 

Direct lease financing

 

 -

 

 -

 

684 

 

 -

 

 -

 

734 

Consumer

 

 -

 

 -

 

286 

 

 -

 

 -

 

288 

Total

 

$                    - 

 

$               144 

 

$             1,867 

 

$                 - 

 

$               144 

 

$             1,722 



The following table summarizes, as of March 31, 2017,  loans that had been restructured within the last 12 months that have subsequently defaulted.









 

 

 

 



 

 

 

 



 

Number

 

Pre-modification recorded investment

SBA non real estate

 

 

$               897 

Total

 

 

$               897 





As of March 31, 2017 and December 31, 2016, the Company had no commitments to lend additional funds to loan customers whose loan terms have been modified in troubled debt restructurings.



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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

SBA non real estate

 

SBA commercial mortgage

 

SBA construction

 

Direct lease financing

 

SBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$             1,976 

 

$               737 

 

$                  76 

 

$             1,994 

 

$                315 

 

$                  32 

 

$                 975 

 

$                227 

 

$               6,332 

Charge-offs

 

 -

 

 -

 

 -

 

(35)

 

 -

 

 -

 

(12)

 

 -

 

(47)

Recoveries

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

Provision (credit)

 

1,096 

 

151 

 

38 

 

(372)

 

15 

 

10 

 

100 

 

(38)

 

1,000 

Ending balance

 

$              3,072 

 

$               888 

 

$                 114 

 

$              1,587 

 

$                 330 

 

$                   42 

 

$              1,072 

 

$                189 

 

$              7,294 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$              1,569 

 

$               145 

 

$                     - 

 

$                166 

 

$                    - 

 

$                    - 

 

$                      - 

 

$                    - 

 

$               1,880 

19

 


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$              1,503 

 

$               743 

 

$                 114 

 

$               1,421 

 

$                  330 

 

$                  42 

 

$              1,072 

 

$               189 

 

$               5,414 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$            75,800 

 

$        114,703 

 

$            12,985 

 

$          363,172 

 

$          660,423 

 

$            12,443 

 

$            16,318 

 

$            8,283 

 

$       1,264,127 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$              3,171 

 

$               908 

 

$                    - 

 

$                  684 

 

$                    - 

 

$                    - 

 

$             1,719 

 

$                    - 

 

$              6,482 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$           72,629 

 

$        113,795 

 

$            12,985 

 

$         362,488 

 

$          660,423 

 

$           12,443 

 

$            14,599 

 

$             8,283 

 

$        1,257,645 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                  844 

 

$                  408 

 

$                    48 

 

$               1,022 

 

$                  762 

 

$                  199 

 

$                   936 

 

$                  181 

 

$               4,400 

Charge-offs

 

(128)

 

 -

 

 -

 

(119)

 

 -

 

 -

 

(1,211)

 

 -

 

(1,458)

Recoveries

 

 

 -

 

 -

 

17 

 

 

 

 

 

12 

 

 -

 

30 

Provision (credit)

 

1,259 

 

329 

 

28 

 

1,074 

 

(447)

 

(167)

 

1,238 

 

46 

 

3,360 

Ending balance

 

$               1,976 

 

$                  737 

 

$                    76 

 

$               1,994 

 

$                  315 

 

$                    32 

 

$                   975 

 

$                  227 

 

$               6,332 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                  938 

 

$                      - 

 

$                      - 

 

$                  216 

 

$                      - 

 

$                      - 

 

$                       - 

 

$                      - 

 

$               1,154 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$               1,038 

 

$                  737 

 

$                    76 

 

$               1,778 

 

$                  315 

 

$                    32 

 

$                   975 

 

$                  227 

 

$               5,178 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$             74,644 

 

$           126,159 

 

$               8,826 

 

$           346,645 

 

$           630,400 

 

$             11,073 

 

$              17,374 

 

$               7,790 

 

$        1,222,911 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$               2,374 

 

$                      - 

 

$                      - 

 

$                  734 

 

$                      - 

 

$                      - 

 

$                1,730 

 

$                      - 

 

$               4,838 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$             72,270 

 

$           126,159 

 

$               8,826 

 

$           345,911 

 

$           630,400 

 

$             11,073 

 

$              15,644 

 

$               7,790 

 

$        1,218,073 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$                  844 

 

$                  408 

 

$                    48 

 

$               1,022 

 

$                  762 

 

$                  199 

 

$                   936 

 

$                  181 

 

4,400 

Charge-offs

 

 -

 

 -

 

 -

 

(20)

 

 -

 

 -

 

(12)

 

 -

 

(32)

Recoveries

 

 -

 

 -

 

 -

 

 

 -

 

 -

 

 

 -

 

10 

Provision (credit)

 

78 

 

302 

 

37 

 

(174)

 

(169)

 

(69)

 

(1)

 

(4)

 

 -

Ending balance

 

$                  922 

 

$                  710 

 

$                    85 

 

$                  834 

 

$                  593 

 

$                  130 

 

$                   927 

 

$                  177 

 

$               4,378 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 


 

Ending balance: Individually evaluated for impairment

 

$                  121 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                     44 

 

$                      - 

 

$                  165 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$                  801 

 

$                  710 

 

$                    85 

 

$                  834 

 

$                  593 

 

$                  130 

 

$                   883 

 

$                  177 

 

$               4,213 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$             71,220 

 

$           120,415 

 

$               9,736 

 

$           240,670 

 

$           592,656 

 

$             48,153 

 

$              21,782 

 

$               9,421 

 

$        1,114,053 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$                  808 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                      - 

 

$                1,591 

 

$                      - 

 

$               2,399 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$             70,412 

 

$           120,415 

 

$               9,736 

 

$           240,670 

 

$           592,656 

 

$             48,153 

 

$              20,191 

 

$               9,421 

 

$        1,111,654 





The Company did not have loans acquired with deteriorated credit quality at either March 31, 2017 or December 31, 2016.



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

March 31, 2017

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                   203 

 

$                   393 

 

$                        - 

 

$                3,028 

 

$                3,624 

 

$               72,176 

 

$               75,800 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

908 

 

908 

 

113,795 

 

114,703 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

12,985 

 

12,985 

Direct lease financing

 

2,538 

 

754 

 

1,534 

 

 -

 

4,826 

 

358,346 

 

363,172 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

660,423 

 

660,423 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

12,443 

 

12,443 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

5,165 

 

5,165 

Consumer - home equity

 

 -

 

 -

 

 -

 

1,433 

 

1,433 

 

9,720 

 

11,153 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,283 

 

8,283 



 

$                2,741 

 

$                1,147 

 

$                1,534 

 

$                5,369 

 

$              10,791 

 

$          1,253,336 

 

$          1,264,127 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

December 31, 2016

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                   559 

 

$                      - 

 

$                        - 

 

$                1,530 

 

$                2,089 

 

$               72,555 

 

$               74,644 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

126,159 

 

126,159 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,826 

 

8,826 

Direct lease financing

 

11,856 

 

1,998 

 

661 

 

 -

 

14,515 

 

332,130 

 

346,645 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

630,400 

 

630,400 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

11,073 

 

11,073 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

5,403 

 

5,403 

Consumer - home equity

 

155 

 

 -

 

 -

 

1,442 

 

1,597 

 

10,374 

 

11,971 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

7,790 

 

7,790 



 

$              12,570 

 

$               1,998 

 

$                   661 

 

$                2,972 

 

$              18,201 

 

$          1,204,710 

 

$          1,222,911 

21

 


 



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):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non real estate

 

$           50,145 

 

$            3,011 

 

$            4,664 

 

$                   - 

 

$                    - 

 

$                        - 

 

$                 17,980 

 

$              75,800 

SBA commercial mortgage

 

84,925 

 

 -

 

908 

 

 -

 

 -

 

10,335 

 

18,535 

 

114,703 

SBA construction

 

12,985 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

12,985 

Direct lease financing

 

138,829 

 

 -

 

4,426 

 

 -

 

 -

 

20,233 

 

199,684 

 

363,172 

SBLOC

 

295,012 

 

 -

 

 -

 

 -

 

 -

 

11,365 

 

354,046 

 

660,423 

Other specialty lending

 

12,443 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

12,443 

Consumer

 

9,087 

 

286 

 

2,265 

 

 -

 

 -

 

 -

 

4,680 

 

16,318 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,283 

 

8,283 



 

$         603,426 

 

$            3,297 

 

$          12,263 

 

$                   - 

 

$                    - 

 

$              41,933 

 

$               603,208 

 

$         1,264,127 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$           51,437 

 

$            2,723 

 

$            3,628 

 

$                   - 

 

$                    - 

 

$                        - 

 

$                 16,856 

 

$              74,644 

SBA commercial mortgage

 

92,485 

 

 -

 

 -

 

 -

 

 -

 

15,164 

 

18,510 

 

126,159 

SBA construction

 

8,060 

 

 -

 

 -

 

 -

 

 -

 

 -

 

766 

 

8,826 

Direct lease financing

 

122,571 

 

 -

 

3,736 

 

 -

 

 -

 

30,881 

 

189,457 

 

346,645 

SBLOC

 

277,489 

 

 -

 

 -

 

 -

 

 -

 

 -

 

352,911 

 

630,400 

Other specialty lending

 

11,073 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

11,073 

Consumer

 

9,837 

 

288 

 

2,312 

 

 -

 

 -

 

 -

 

4,937 

 

17,374 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

7,790 

 

7,790 



 

$         572,952 

 

$            3,011 

 

$            9,676 

 

$                   - 

 

$                    - 

 

$              46,045 

 

$               591,227 

 

$         1,222,911 



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



Note 7. Transactions with Affiliates  



The Bank maintains deposits for various affiliated companies totaling approximately $18.4  million and $5.5 million as of March 31, 2017 and December 31, 2016, respectively. 



The Bank has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons. All loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to the BankAt March 31, 2017, these loans were current as to principal and interest payments and did not involve more than normal risk of collectability.  Loans to these related parties included in Assets held for sale, amounted to $385,000 at March 31, 2017 and $649,000 at December 31, 2016.



The Bank periodically purchases securities under agreements to resell and engages in other securities transactions as follows: The Company executed transactions through J.V.B. Financial Group, LLC, (JVB), a broker dealer in which the Company’s Chairman has a minority interest. The Company’s Chairman also serves as Vice Chairman of Institutional Financial Markets Inc., the parent company of JVB. The Company purchased 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 compliance with all of the terms of the agreements at March 31, 2017 and had complied with all terms for all prior repurchase agreements. There were $65.2 million and $39.2 million of repurchase agreements outstanding at March 31, 2017 and at December 31, 2016, respectively.     



Mr. Hersh Kozlov, a director of the Company, is a partner at Duane Morris LLP, an international law firm.  The Company paid Duane Morris LLP $1.0 million and $45,000 for legal services for the three months ended March 31, 2017 and March 31, 2016, respectively.  



Note 8. Fair Value Measurements

ASC 825, “Financial Instruments Available for Sale”, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Accordingly, estimated fair values are determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. Also, it is

22

 


 

the Company’s general practice and intent to hold its financial instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities, except for the sale of commercial loans to secondary markets. For fair value disclosure purposes, the Company utilized certain value measurement criteria required under the ASC 820, Fair Value Measurements and Disclosures, 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 $739.0 million and $999.1  million as of March 31, 2017 and December 31, 2016, respectively, which approximated fair values. 

The estimated fair values of investment securities are based on quoted market prices, if available, or estimated using a methodology based on management’s inputs.  The fair values of the Company’s investment securities held-to-maturity and loans held for sale are based on using “unobservable inputs” that are the best information available in the circumstances.  Level 3 investment securities fair values are based on the present value of cash flows, which discounts expected cash flows from principal and interest using yield to maturity at the measurement date.



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



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

The net loan portfolio at March 31, 2017 and December 31, 2016 has been valued using the present value of discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk.  Accrued interest receivable has a carrying value that approximates fair value.

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



Assets held for sale as of March 31, 2017 are held at the lower of cost basis or market value.  For loans, market value was determined using the income approach which converts expected cash flows from the loan portfolio by unit of measurement to a present value estimate.  Unit of measurement was determined by loan type and for significant loans on an individual loan basis.  The fair values of the Company’s loans classified as assets held for sale are based on “unobservable inputs” that are the best information available in the circumstances.  Level 3 fair values are based on the present value of cash flows by unit of measurement.  For commercial loans, a market adjusted rate to discount expected cash flows from outstanding principal and interest to expected maturity at the measurement date, was utilized.  For other real estate owned, market value was based upon appraisals of the underlying collateral by third party appraisers, reduced by 7% to 10% for estimated selling costs.  

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

Time deposits and subordinated debentures have a fair value estimated using a discounted cash flow calculation that applies current interest rates to discount expected cash flows.  Based upon time deposit maturities at March 31, 2017, the carrying values approximate their fair values.  The carrying amount of accrued interest payable approximates its fair value.

23

 


 

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

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

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









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



March 31, 2017



 

 

 

 

Quoted prices in

 

Significant other

 

Significant



 

 

 

 

active markets for

 

observable

 

unobservable

   

Carrying

 

Estimated

 

identical assets

 

inputs

 

inputs



amount

 

fair value

 

(Level 1)

 

(Level 2)

 

(Level 3)



(in thousands)

Investment securities available-for-sale

$            1,215,892 

 

$              1,215,892 

 

$                            - 

 

$               1,215,892 

 

$                           - 

Investment securities held-to-maturity

93,443 

 

92,158 

 

 -

 

85,981 

 

6,177 

Securities purchased under agreements to resell

65,248 

 

65,248 

 

65,248 

 

 -

 

 -

Federal Home Loan and Atlantic Central Bankers Bank stock

2,589 

 

2,589 

 

 -

 

 -

 

2,589 

Commercial loans held for sale

480,913 

 

480,913 

 

 -

 

 -

 

480,913 

Loans, net of deferred loan fees and costs

1,264,127 

 

1,261,591 

 

 -

 

 -

 

1,261,591 

Investment in unconsolidated entity, senior note

117,799 

 

117,799 

 

 -

 

 -

 

117,799 

Investment in unconsolidated entity, subordinated note

8,183 

 

8,183 

 

 -

 

 -

 

8,183 

Assets held for sale

341,286 

 

341,286 

 

 -

 

 -

 

341,286 

Demand and interest checking

3,607,076 

 

3,607,076 

 

3,607,076 

 

 -

 

 -

Savings and money market

428,723 

 

428,723 

 

428,723 

 

 -

 

 -

Subordinated debentures

13,401 

 

9,558 

 

 -

 

 -

 

9,558 

Securities sold under agreements to repurchase

273 

 

273 

 

273 

 

 -

 

 -

Interest rate swaps, asset

3,657 

 

3,657 

 

 -

 

3,657 

 

 -





24

 


 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



December 31, 2016



 

 

 

 

Quoted prices in

 

Significant other

 

Significant



 

 

 

 

active markets for

 

observable

 

unobservable

   

Carrying

 

Estimated

 

identical assets

 

inputs

 

inputs



amount

 

fair value

 

(Level 1)

 

(Level 2)

 

(Level 3)



(in thousands)

Investment securities available-for-sale

$            1,248,614 

 

$              1,248,614 

 

$                            - 

 

$               1,248,614 

 

$                           - 

Investment securities held-to-maturity

93,467 

 

91,799 

 

 -

 

85,760 

 

6,039 

Securities purchased under agreements to resell

39,199 

 

39,199 

 

39,199 

 

 -

 

 -

Federal Home Loan and Atlantic Central Bankers Bank stock

1,613 

 

1,613 

 

 -

 

 -

 

1,613 

Commercial loans held for sale

663,140 

 

663,140 

 

 -

 

 -

 

663,140 

Loans, net of deferred loan fees and costs

1,222,911 

 

1,219,625 

 

 -

 

 -

 

1,219,625 

Investment in unconsolidated entity, senior note

118,389 

 

118,389 

 

 -

 

 -

 

118,389 

Investment in unconsolidated entity, subordinated note

8,541 

 

8,541 

 

 -

 

 -

 

8,541 

Assets held for sale

360,711 

 

360,711 

 

 -

 

 -

 

360,711 

Demand and interest checking

3,816,524 

 

3,816,524 

 

3,816,524 

 

 -

 

 -

Savings and money market

421,780 

 

421,780 

 

421,780 

 

 -

 

 -

Subordinated debentures

13,401 

 

9,290 

 

 -

 

 -

 

9,290 

Securities sold under agreements to repurchase

274 

 

274 

 

274 

 

 -

 

 -

Interest rate swaps, asset

3,207 

 

3,207 

 

 -

 

3,207 

 

 -



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







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

Fair Value Measurements at Reporting Date Using



 

 

 

Quoted prices in active

 

Significant other

 

Significant



 

 

 

markets for identical

 

observable

 

unobservable



 

Fair value

 

assets

 

inputs

 

inputs



 

March 31, 2017

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$                           28,536 

 

$                                       - 

 

$                             28,536 

 

$                                       - 

Asset-backed securities

 

316,518 

 

 -

 

316,518 

 

 -

Obligations of states and political subdivisions

 

93,813 

 

 -

 

93,813 

 

 -

Residential mortgage-backed securities

 

337,185 

 

 -

 

337,185 

 

 -

Collaterized mortgage obligation securities

 

152,234 

 

 -

 

152,234 

 

 -

Commercial mortgage-backed securities

 

133,254 

 

 -

 

133,254 

 

 -

Foreign debt securities

 

56,084 

 

 -

 

56,084 

 

 -

Corporate debt securities

 

98,268 

 

 -

 

98,268 

 

 -

Total investment securities available for sale

 

1,215,892 

 

 -

 

1,215,892 

 

 -

Loans held for sale

 

480,913 

 

 -

 

 -

 

480,913 

Investment in unconsolidated entity, senior note

 

117,799 

 

 -

 

 -

 

117,799 

Investment in unconsolidated entity, subordinated note

 

8,183 

 

 -

 

 -

 

8,183 

Interest rate swaps, asset

 

3,657 

 

 -

 

3,657 

 

 -



 

$                      1,826,444 

 

$                                       - 

 

$                        1,219,549 

 

$                           606,895 





25

 


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

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, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$                           27,702 

 

$                                       - 

 

$                             27,702 

 

$                                       - 

Asset-backed securities

 

355,396 

 

 -

 

355,396 

 

 -

Obligations of states and political subdivisions

 

94,533 

 

 -

 

94,533 

 

 -

Residential mortgage-backed securities

 

342,569 

 

 -

 

342,569 

 

 -

Collaterized mortgage obligation securities

 

159,823 

 

 -

 

159,823 

 

 -

Commercial mortgage-backed securities

 

117,086 

 

 -

 

117,086 

 

 -

Foreign debt securities

 

56,497 

 

 -

 

56,497 

 

 -

Corporate debt securities

 

95,008 

 

 -

 

95,008 

 

 -

Total investment securities available for sale

 

1,248,614 

 

 -

 

1,248,614 

 

 -

Loans held for sale

 

663,140 

 

 -

 

 -

 

663,140 

Investment in unconsolidated entity, senior note

 

118,389 

 

 -

 

 -

 

118,389 

Investment in unconsolidated entity, subordinated note

 

8,541 

 

 -

 

 -

 

8,541 

Interest rate swaps, asset

 

3,207 

 

 -

 

3,207 

 

 -



 

$                      2,041,891 

 

$                                       - 

 

$                        1,251,821 

 

$                           790,070 



 

 

 

 

 

 

 

 



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



26

 


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Fair Value Measurements Using

 

 

 

 



 

Significant Unobservable Inputs

 

 

 

 



 

(Level 3)

 

 

 

 



 

 

 

 

 

 

 

 



 

Commercial loans

 

 

 

 



 

held for sale

 

 

 

 



 

March 31, 2017

 

December 31, 2016

 

 

 

 

Beginning balance

 

$                         663,140 

 

$                             489,938 

 

 

 

 

Transfers into level 3

 

 -

 

 -

 

 

 

 

Transfers out of level 3

 

-

 

 -

 

 

 

 

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

(155)

 

(3,078)

 

 

 

 

Included in other comprehensive income

 

 -

 

 -

 

 

 

 

Purchases, issuances, and settlements

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

 

 

Issuances

 

100,618 

 

528,584 

 

 

 

 

Sales

 

(282,690)

 

(352,304)

 

 

 

 

Settlements

 

 -

 

 -

 

 

 

 

Ending balance

 

$                         480,913 

 

$                             663,140 

 

 

 

 



 

 

 

 

 

 

 

 

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.

 

$                                155 

 

$                               (2,674)

 

 

 

 







 

 

 

 

 

 

 

 



Fair Value Measurements Using



Significant Unobservable Inputs



(Level 3)



 

 

 

 

 

 

 

 



Investment in

 

Assets



unconsolidated entity

 

held for sale



 

March 31, 2017

 

December 31, 2016

 

March 31, 2017

 

December 31, 2016

Beginning balance

 

$                         126,930 

 

$                             178,520 

 

$                             360,711 

 

$                             583,909 

Transfers into level 3

 

 -

 

 -

 

 -

 

 -

Transfers out of level 3

 

 -

 

 -

 

 -

 

 -

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

(19)

 

(39,816)

 

 -

 

(48,836)

Included in other comprehensive income

 

 -

 

 -

 

 -

 

 -

Purchases, issuances, and settlements

 

 

 

 

 

 

 

 

Purchases

 

 -

 

 -

 

 -

 

 -

Issuances

 

 -

 

 -

 

 -

 

 -

Sales

 

 -

 

 -

 

 -

 

(63,712)

Settlements

 

(929)

 

(11,774)

 

(19,425)

 

(110,650)

Ending balance

 

$                         125,982 

 

$                             126,930 

 

$                             341,286 

 

$                             360,711 



 

 

 

 

 

 

 

 

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.

 

$                               (19)

 

$                             (39,816)

 

$                                         - 

 

$                             (48,836)



27

 


 

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



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

Fair Value Measurements at Reporting Date Using



 

 

 

Quoted prices in active

 

Significant other

 

Significant



 

 

 

markets for identical

 

observable

 

unobservable



 

Fair value

 

assets

 

inputs

 

inputs *

Description

 

March 31, 2017

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Impaired loans - collateral dependent

 

$                             6,482 

 

$                                       - 

 

$                                       - 

 

$                               6,482 

Other real estate owned

 

104 

 

 -

 

 -

 

104 

Intangible assets

 

5,844 

 

 -

 

 -

 

5,844 



 

$                          12,430 

 

$                                       - 

 

$                                       - 

 

$                             12,430 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

Fair Value Measurements at Reporting Date Using



 

 

 

Quoted prices in active

 

Significant other

 

Significant



 

 

 

markets for identical

 

observable

 

unobservable



 

Fair value

 

assets

 

inputs

 

inputs *

Description

 

December 31, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Impaired loans - collateral dependent

 

$                             4,838 

 

$                                       - 

 

$                                       - 

 

4,838 

Other real estate owned

 

104 

 

 -

 

 -

 

104 

Intangible assets

 

6,906 

 

 -

 

 -

 

6,906 



 

$                          11,848 

 

$                                       - 

 

$                                       - 

 

$                             11,848 



(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 to 10% for estimated selling costs. Intangible assets are valued based upon internal analyses.



At March 31, 2017, impaired loans and troubled debt restructuring that are measured based on the value of underlying collateral have been presented at their fair value, less costs to sell, are $6.5 million through specific reserves and other write downs of $1.9 million or by recording charge-offs when the carrying value exceeds the fair value.  Included in the impaired balance at March 31, 2017 were troubled debt restructured loans with a balance of $2.0 million which had specific reserves of $732,000.  Valuation techniques consistent with the market and/or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy.  The fair value of other real estate owned is based on an appraisal of the property using the market approach for valuation.



Note 9. Derivatives



The Company utilizes derivative instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics on commercial real estate loans held for sale.  These instruments are not accounted for as hedges.  As of March 31, 2017, the Company had entered into twenty-four interest rate swap agreements with an aggregate notional amount of $158.7 million.  These swap agreements provide for the Company to receive an adjustable rate of interest based upon the three-month London Interbank Offering Rate (LIBOR).  The Company recorded a gain of $450,000 for the three months ended March 31, 2017 to recognize the fair value of the derivative instruments which is reported in gain (loss) on sale of loans.  The amount receivable by the Company under these swap agreements was $3.7 million at March 31, 2017, which is reported in other assets.  The Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $1.1 million as of March 31, 2017.

28

 


 





The maturity dates, notional amounts, interest rates paid and received, and fair value of the Company’s remaining interest rate swap agreements as of March 31, 2017 are summarized below (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31, 2017

Maturity date

 

Notional amount

 

Interest rate paid

 

Interest rate received

 

Fair value

August 4, 2021

 

$                  10,300 

 

1.12% 

 

1.03% 

 

$              373 

August 17, 2025

 

4,000 

 

2.27% 

 

1.04% 

 

11 

August 17, 2025

 

2,500 

 

2.27% 

 

1.04% 

 

August 17, 2025

 

2,500 

 

2.27% 

 

1.04% 

 

November 27, 2025

 

1,700 

 

2.10% 

 

1.05% 

 

30 

December 11, 2025

 

2,400 

 

2.14% 

 

1.12% 

 

36 

December 17, 2025

 

3,300 

 

2.18% 

 

1.15% 

 

38 

December 23, 2025

 

6,800 

 

2.16% 

 

1.16% 

 

94 

December 24, 2025

 

8,200 

 

2.17% 

 

1.16% 

 

102 

December 29, 2025

 

9,900 

 

2.20% 

 

1.15% 

 

100 

December 30, 2025

 

14,800 

 

2.19% 

 

1.15% 

 

167 

January 28, 2026

 

3,000 

 

1.87% 

 

1.04% 

 

112 

June 8, 2026

 

27,600 

 

1.61% 

 

1.11% 

 

1,711 

July 20, 2026

 

6,300 

 

1.44% 

 

1.03% 

 

490 

November 3, 2026

 

4,500 

 

1.73% 

 

1.03% 

 

251 

November 25, 2026

 

6,900 

 

2.14% 

 

1.05% 

 

137 

December 12, 2026

 

3,200 

 

2.26% 

 

1.12% 

 

32 

December 15, 2026

 

6,600 

 

2.35% 

 

1.13% 

 

15 

December 19, 2026

 

11,400 

 

2.51% 

 

1.15% 

 

(137)

December 29, 2026

 

1,900 

 

2.47% 

 

1.15% 

 

(15)

January 4, 2027

 

10,100 

 

2.35% 

 

1.00% 

 

25 

January 11, 2027

 

3,200 

 

2.26% 

 

1.01% 

 

33 

January 17, 2027

 

1,900 

 

2.21% 

 

1.02% 

 

28 

February 2, 2027

 

5,700 

 

2.36% 

 

1.03% 

 

10 

Total

 

$                158,700 

 

 

 

 

 

$           3,657 





Note 10. Other Identifiable Intangible Assets



On November 29, 2012, the Company acquired certain software rights for approximately $1.8 million for use in managing prepaid cards in connection with an acquisition.  The software is being amortized over eight years.  Amortization expense is $217,000 per year  ($682,000 over the remainder of the amortization period).  The gross carrying amount of the software is $1.8 million, and as of March 31, 2017, the accumulated amortization was $1.1 million.

 

The Company accounts for its prepaid card 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 ($2.7 million over the remainder of the amortization period).  The gross carrying amount of the customer list intangible is $12.0 million, and as of March 31, 2017, the accumulated amortization was $9.2 million.  For both 2017 and 2016, amortization expense for the first quarter was $250,000. 



In May 2016, the Company purchased approximately $60 million of lease receivables which resulted in a customer list intangible of $3.4 million which is being amortized over a 10 year period.  For 2017, amortization expense for the first quarter was $85,000. Over the next five years amortization will be $1,700,000The gross carrying amount of the customer list intangible is $3.4 million, and as of March 31, 2017, the accumulated amortization was $312,000.

29

 


 

 

Note 11. Recent Accounting Pronouncements



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 will 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.



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 guidance of this ASU did not have a significant impact on the Company’s financial condition.



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



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



In March 2016, the FASB issued ASU 2016-09 – Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The Update simplifies the accounting for share-based payment awards issued to employees. There are income tax effects resulting from changes in stock price from the grant date to the vesting date of the employee stock compensation. The Update will require these income tax effects to be recognized in the statement of income within income tax expense instead of within additional paid-in capital. In addition, the Update requires changes to the Statement of Cash Flows including the classification between the operating and financing section for tax activity related to employee stock compensation. The Company adopted the guidance in first quarter 2017 and the adoption did not have material impact on first quarter results.



30

 


 

In June 2016, the FASB issued an update to Accounting Standards Update (ASU or Update) 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Update changes the accounting for credit losses on loans and debt securities. For loans and held-to-maturity debt securities, the Update requires a current expected credit loss (CECL) approach to determine the allowance for credit losses. CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Also, the Update eliminates the existing guidance for purchased credit impaired loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination. In addition, the Update modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. The guidance is effective in first quarter 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in the first quarter of 2019, the Company does not expect to elect that option. The Company is evaluating the impact of the Update on the consolidated financial statements. The Company expects the Update will result in an increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments, as well as the addition of an allowance for debt securities. The amount of the increase will be impacted by the portfolio composition and credit quality at the adoption date as well as economic conditions and forecasts at that time. 



Note 12.  Regulatory Matters 



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



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



In addition to these explicit limitations, federal and state regulatory agencies are authorized to prohibit a banking subsidiary or financial holding company from engaging in an unsafe or unsound practice.  Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.  In August 2015, the Bank entered into an Amendment to a 2014 Consent Order with the FDIC pursuant to which the Bank may not pay dividends without prior FDIC approval.  On May 11, 2015, the Company had received a Supervisory Letter pursuant to which the Company may not pay dividends without prior Federal Reserve approval.  The Federal Reserve approved the payment of the interest on the Company’s trust preferred securities due September 15, 2016.  Future payments are subject to future approval by the Federal Reserve.

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

Note 13. Legal



On July 17, 2014, a class action securities complaint captioned Fletcher v. The Bancorp Inc., et al., was filed in the United States District Court for the District of Delaware.   A consolidated version of that class action complaint was filed before the same court on January 23, 2015 on behalf of Lead Plaintiffs Arkansas Public Employees Retirement System and Arkansas Teacher Retirement System under the caption of In Re The Bancorp, Inc. Securities Litigation, Case No. 14-cv-0952 (SLR).  On October 26, 2015, Lead Plaintiffs filed an amended consolidated complaint against Bancorp, Betsy Z. Cohen, Paul Frenkiel, Frank M. Mastrangelo and Jeremy Kuiper, which alleges that during a class period beginning January 26, 2011 through June 26, 2015, the defendants made materially false and/or misleading statements and/or failed to disclose that (i) Bancorp had wrongfully extended and modified problem loans and under-reserved for loan losses due to adverse loans, (ii) Bancorp’s operations and credit practices were in violation of the Bank Secrecy Act (BSA), and (iii) as a result, Bancorp’s financial statements, press releases and public statements were materially false and misleading during the relevant period. The amended consolidated complaint further alleged 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 asked for an unspecified amount of damages, prejudgment and post-judgment interest and

31

 


 

attorneys’ fees.  On July 27, 2016, we and all other individually-named defendants entered into a Stipulation and Agreement of Settlement (Settlement Agreement) with respect to the consolidated class action.  Under the terms of the Settlement Agreement, we agreed to pay $17.5 million to the plaintiffs as full and complete settlement of the litigation.  All amounts paid by us were fully funded by the Company’s insurance carriers.  All terms of the Settlement Agreement were approved by the Court on December 15, 2016.



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



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



The Company received a letter, dated August 1, 2016, demanding inspection of its books and records pursuant to Section 220 of the Delaware General Corporation Law, or DCGL, from legal counsel representing a shareholder (the "Demand Letter"). The Company, through outside legal counsel, responded to the Demand Letter by permitting the shareholder to inspect certain of the Company’s books and records and by objecting to other requests.  On January 30, 2017, the shareholder filed a complaint in the Court of Chancery of the State of Delaware seeking an order from the court, pursuant to Section 220 of the DGCL, compelling the Company to permit the shareholder to inspect additional books and records of the Company.  The Company believes that its original response to the Demand Letter was appropriate in all respects and intends to defend against the complaint. Both the Demand Letter and the complaint threaten the commencement of a shareholder’s derivative suit against certain officers and directors of the Company seeking damages and other remedies on behalf of the Company.  We have been advised by our counsel in the matter that reasonably possible losses cannot be estimated.



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



Note 14. Segment Financials



The Company performed a strategic evaluation of its businesses in the third quarter of 2014.  As a result of the evaluation, the Company decided to discontinue its commercial lending operations, as described in Note 15, Discontinued Operations.  The shift from a traditional bank balance sheet led the Company to evaluate its continuing operations.  Based on the continuing operations of the Company, it was determined that there would be four segments of the business: specialty finance, payments, corporate and discontinued operations.  Specialty finance includes commercial loan sales, SBA loans, leasing and SBLOCs and any deposits generated by those business lines.  Payments include prepaid cards, merchant payments and healthcare accounts.  Corporate includes the investment portfolio, corporate overhead and other non-allocated expenses.  Investment income is allocated to the payments segment.  These operating segments reflect the way the Company views its current operations.





32

 


 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the three months ended March 31, 2017



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$            17,929 

 

$                     - 

 

$            10,520 

 

$                     - 

 

$           28,449 

Interest allocation

 

 -

 

10,520 

 

(10,520)

 

 -

 

 -

Interest expense

 

966 

 

2,364 

 

242 

 

 -

 

3,572 

Net interest income

 

16,963 

 

8,156 

 

(242)

 

 -

 

24,877 

Provision for loan and lease losses

 

1,000 

 

 -

 

 -

 

 -

 

1,000 

Non-interest income

 

7,440 

 

16,640 

 

139 

 

 -

 

24,219 

Non-interest expense

 

13,674 

 

19,647 

 

4,463 

 

 -

 

37,783 

Income (loss) from continuing operations before taxes

 

9,729 

 

5,149 

 

(4,565)

 

 -

 

10,313 

Income tax

 

 -

 

 -

 

4,011 

 

 -

 

4,011 

Income (loss) from continuing operations

 

9,729 

 

5,149 

 

(8,576)

 

 -

 

6,302 

Income from discontinued operations

 

 -

 

 -

 

 -

 

1,661 

 

1,661 

Net income (loss)

 

$              9,729 

 

$             5,149 

 

$            (8,576)

 

$             1,661 

 

$             7,963 



 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the three months ended March 31, 2016



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$            15,851 

 

$                    1 

 

$              7,799 

 

$                     - 

 

$           23,651 

Interest allocation

 

 -

 

7,799 

 

(7,799)

 

 -

 

 -

Interest expense

 

684 

 

1,871 

 

540 

 

 -

 

3,095 

Net interest income

 

15,166 

 

5,929 

 

(540)

 

 -

 

20,556 

Provision for loan and lease losses

 

 -

 

 -

 

 -

 

 -

 

 -

Non-interest income

 

282 

 

16,350 

 

2,056 

 

 -

 

18,688 

Non-interest expense

 

14,655 

 

35,901 

 

4,582 

 

 -

 

55,138 

Income (loss) from continuing operations before taxes

 

794 

 

(13,622)

 

(3,066)

 

 -

 

(15,894)

Income tax benefit

 

 -

 

 -

 

(5,272)

 

 -

 

(5,272)

Income (loss) from continuing operations

 

794 

 

(13,622)

 

2,206 

 

 -

 

(10,622)

Income from discontinued operations

 

 -

 

 -

 

 -

 

(290)

 

(290)

Net income (loss)

 

$                 794 

 

$         (13,622)

 

$              2,206 

 

$              (290)

 

$         (10,912)













 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

March 31, 2017



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Total assets

 

$        1,881,214 

 

$             32,056 

 

$        2,150,087 

 

$           341,286 

 

$        4,404,642 

Total liabilities

 

$           592,330 

 

$        3,210,411 

 

$           292,132 

 

$                       - 

 

$        4,094,873 





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December 31, 2016



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Total assets

 

$        2,019,180 

 

$             27,935 

 

$        2,450,288 

 

$           360,711 

 

$        4,858,114 

Total liabilities

 

$           596,574 

 

$        3,401,142 

 

$           561,435 

 

$                       - 

 

$        4,559,151 





Note 15. Discontinued Operations



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



The following table presents financial results of the commercial lending business included in net income (loss) from discontinued operations for the three months ended March 31, 2017 and 2016.





 

 

 



 

 

 



For the three months ended March 31,



2017

 

2016



(in thousands)

Interest income

$                             3,361 

 

$                            5,819 

Interest expense

 -

 

 -

Provision for loan and lease losses

 -

 

 -

Net interest income after provision

3,361 

 

5,819 



 

 

 

Non interest income

106 

 

52 

Non interest expense

800 

 

6,240 



 

 

 

Income (loss) before taxes

2,667 

 

(369)

Income tax (benefit) provision

1,006 

 

(79)

Net income (loss)

$                             1,661 

 

$                             (290)







 

 

 



 

 

 



March 31,

 

December 31,



2017

 

2016



(in thousands)

Loans, net

$                         308,043 

 

$                        340,396 

Other assets

33,243 

 

20,315 

Total assets

$                         341,286 

 

$                        360,711 



 

 

 



The Company utilizes lower of cost or market valuations for discontinued operations loans which are updated based on internal loan officers’ information, third party consultant information, internal loan review analysis and third party review of impairments.  Based on that review, weighted average fair values were applied to the loans not specifically reviewed.  The results of discontinued operations do not include any future severance payments.  Of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations, $308.0 million of loans remain in assets held for sale on the balance sheet as a result of loan sales, principal paydowns and fair value charges.  The Company is attempting to sell those remaining loans.  Additionally, the balance sheet reflects $126.0 million in investment in unconsolidated entity, which is comprised of notes owned by the Company as a result of the sale of certain discontinued loans to Walnut Street, see Note 8, Fair Value Measurements. 

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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

 

4.07% - 10.12%



 

 

 

 

 

 

Small balance commercial loans

 

Discounted cash flows

 

Discount rate

 

4.04 - 9.39%



 

 

 

 

 

 



Note 16. Subsequent Events



The Company evaluated its March 31, 2017 financial statements for subsequent events through the date the financial statements were issued. The sale of the Company’s minimal prepaid European operations closed on April 3, 2017 and is planned to be accounted for as a sale in the second quarter of 2017. As part of the sales agreement, the Company sold all of its equity interests in three operating subsidiaries that constituted the Gibraltar-based European prepaid operation for one Great Britain pound and other good and valuable consideration, while agreeing with the buyer that certain assets owned by the subsidiaries would be excluded and that the subsidiaries, collectively, would have a minimum $2.6 million level of working capital at the closing. The remaining fourth European subsidiary that supported the Company’s European operations terminated all operations and initiated a wind-down and liquidation process that we expect will be completed in the third or fourth quarter. It is estimated that non-interest expenses in excess of $400,000 per quarter will be eliminated as a result of the sale. Multiple sales of approximately $100 million, which are comprised of the Company’s remaining health savings accounts, received approval from regulatory authorities, and are scheduled to close in the second quarter of 2017. The transactions with a sales price of approximately $3 million are planned to be accounted for when the transactions close.

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



Forward-Looking Statements



When used in this Form 10-Q, the words “believes”, “anticipates”, “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in Item 1A, under the caption “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2016 and in other of our public filings with the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially from those expressed or implied in this Form 10-Q. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report except as required by applicable law.



In the following discussion we provide information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.  



 Overview



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

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

In the third quarter of 2014, we decided to discontinue our Philadelphia-based commercial lending operations. The loans which constitute that portfolio are in the process of disposition.  This represents a strategic shift to a focus on our national specialty lending programs including small fleet leasing, SBLOC, CMBS origination and SBA lending.  We anticipate using the proceeds from disposition to acquire investment securities and to provide liquidity to fund growth in our continuing specialty lending lines.  Yields we obtain from reinvestment of the proceeds will be subject to economic and other conditions at the time of reinvestment, including market interest rates, many of which will be beyond our control.  We cannot predict whether income resulting from the reinvestment of loans we hold for sale resulting from discontinued operations will match or exceed the amount from the sold loans.  Of the approximately $1.1 billion in book value of loans in that commercial and residential portfolio as of the September 30, 2014 date of discontinuance of operations, $308.0 million of loans remain in assets held for sale on the balance sheet, which reflects related sales, paydowns and fair value charges.  Additionally, the balance sheet reflects $126.0 million in investment in unconsolidated entity, which is comprised of notes owned by the Company as a result of the sale of certain discontinued loans.  We have been exiting certain deposit relationships to reduce excess balances at the Federal Reserve Bank. 



The results of the first quarter of 2017 reflected a return to profitability, consistent with our business plan and budget. Net income was $8.0 million. Continuing growth in revenue resulted from loan growth including leasing balances which grew 51% year over year reflecting organic growth and the purchase of lease receivables. Yields continue to exceed 6% on that portfolio and contributed to a higher net interest margin. Expense reductions also contributed to first quarter earnings and non-interest expense was $3.0 million less than the prior year first quarter. Additional expense reductions are in progress and will impact the remainder of 2017; however, timing of such expense reductions is difficult to project. A gain on sale of loans into a securitization yielded approximately a $5.0 million gain for the quarter. We continue to pursue additional loan originations and are anticipating at least one additional sale into a securitization in 2017. Prepaid card fees are the largest driver of non-interest income and were $13.5 million, or $1.5 million higher than the fourth quarter of 2016. The increase reflected the seasonal fees associated with tax refund prepaid cards. Fees were comparable to the prior year first quarter reflecting the exit of a client which changed ownership and the termination of several programs whose sponsors decided to exit prepaid cards. Those volumes were partially offset by organic growth.

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Critical Accounting Policies and Estimates

Our accounting and reporting policies conform with accounting principles generally accepted in the United States and general practices within the financial services industry.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes.  Actual results could differ from those estimates.  We believe that the determination of our allowance for loan and lease losses, our determination of the fair value of financial instruments and the level in which an instrument is placed within the valuation hierarchy, our determination of other than temporary impairment, and income taxes involve a higher degree of judgment and complexity than our other significant accounting policies.

We determine our allowance for loan and lease losses with the objective of maintaining a reserve level we believe to be sufficient to absorb our estimated probable credit losses.  We base our determination of the adequacy of the allowance on periodic evaluations of our loan portfolio and other relevant factors.  However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amount of loss we may incur on a defaulted loan, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience.  We also evaluate economic conditions and uncertainties in estimating losses and inherent risks in our loan portfolio.  To the extent actual outcomes differ from our estimates, we may need additional provisions for loan losses.  Any such additional provisions for loan losses will be a direct charge to our earnings.  See “Allowance for Loan and Lease Losses”.

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

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

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

We account for income taxes under the liability method whereby we determine deferred tax assets and liabilities based on the difference between the carrying values on our financial statements and the tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse.  Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.  We currently use the tax expenses as calculated on year-to-date numbers, since small changes in annual estimates would have a significant change in the annual effective rate.  

Financial Statement Restatement; Regulatory Actions 

We have adjusted our financial statement presentation for items related to discontinued operations.  Separately, we have restated our financial statements for periods from 2010 through September 30, 2014, the last date through which financial statements previously had been filed prior to our 2015 filing of our Annual Report on Form 10-K for the year ended December 31, 2014. The restatement reflected the recognition of provisions for loan losses and loan charge-offs for discontinued operations in periods earlier than those in which those charges were initially recognized. The majority of these loan charges were originally recognized in 2014, primarily in the third quarter, when commercial lending operations were discontinued.  An additional $28.5 million of discontinued operations losses that were not previously reported were included within these periods.  Also, $12.7 million of losses incurred in 2015 related to loans that were resolved

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before the issuance date of our financial statements and were reflected in our 2014 financial statements.  Substantially all of the losses and corresponding restatement adjustments resulted from the discontinued commercial loan operations. 

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

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

To date, the Bank has implemented multiple upgrades that address the requirements of the 2014 Consent Order, such as appointing a qualified BSA/OFAC officer, increasing oversight and staffing of the BSA compliance function, improving practices and procedures to monitor and report transactions, and increasing training, as well as adopting an independent testing program to ensure adherence to more effective BSA standards. 

Until the Bank submits to the FDIC (and the FDIC approves) a BSA report summarizing the completion of its corrective actions, the 2014 Consent Order places some restrictions on certain activities: the Bank is restricted from signing and boarding new independent sales organizations, issuing new non-benefit related reloadable prepaid card programs, establishing new distribution channels for existing non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments.  Until we receive the FDIC’s approval, restrictions in these specific areas may potentially impact their growth.  We do not believe that these restrictions will have a material impact on current revenue levels.  The Bank utilized one primary consultant related to its BSA-AML (Anti-Money Laundering) program refinement and one primary consultant related to conducting a lookback review of historical transactions to confirm that suspicious activity was properly identified and reported in accordance with applicable law. The consultant assisting with BSA-AML program refinement completed its work in 2014. The consultant performing the BSA lookback completed its work in July 2016 and no additional related fees are expected to be incurred. Suspicious activity reports resulting from the lookback have been filed. 

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

On May 11, 2015, the Federal Reserve issued a letter, or the Supervisory Letter, to the Bank as a result of the 2014 Consent Order and the Amendment, (which, at the time of the Supervisory Letter, was in proposed form), which provides that we may not pay any dividends on our common stock, make any distributions to our European entities or make any interest payments on our trust preferred securities, without the prior written approval of the Federal Reserve.  It further provides that we may not incur any debt (excluding payables in the ordinary course of business) or redeem any shares of our stock, without the prior written approval of the Federal Reserve.  The Federal Reserve approved the payment of the interest on our trust preferred securities which was due June 15, 2016.  Future payments are subject to future approval by the Federal Reserve.

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



The 2015 Consent Order was based on FDIC allegations regarding electronic fund transfer, or EFT, error resolution practices, account termination practices and fee practices of various third parties with whom the Bank had previously provided, or currently provides, deposit-related products which we refer to as Third Parties.  The specific operational practices of the third parties identified by the FDIC were the following: practices related to the termination of a third-party rewards program tied to deposit accounts, including the timing of the notice of termination, and the disclosure of the effects of such termination on the consumer’s ability to obtain unredeemed rewards; practices performed by third parties related to the time frames within which we must respond to a consumer’s notice of error related to electronic transactions related to various types of deposit accounts; and, practices related to the timing and frequency of disclosed account fees and the manner by which the accountholder is notified of these fees in periodic statements which are generated by third

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parties.  The 2015 Consent Order continues the Bank's obligations originally set forth in the 2012 Consent Order, including its obligations to increase board oversight of the Bank's compliance management system, or CMS, improve the Bank's CMS, enhance its internal audit program, increase its management and oversight of Third Parties, and correct any apparent violations of law.  The 2015 Consent Order also directs the Bank’s Board to establish a Complaint and Error Claim Oversight and Review Committee, which we refer to as the Complaint and Error Claim Committee, to review and oversee the Bank’s processes and practices for handling, monitoring and resolving consumer complaints and EFT error claims (whether received directly or through Third Parties) and to review management's plans for correcting any weaknesses that may be found in such processes and practices; and implement a corrective action plan regarding those prepaid cardholders who asserted or attempted to assert EFT error claims and to provide restitution to cardholders harmed by EFT error resolution practices.  The Bank’s Board of Directors appointed the required Complaint and Error Claim Committee on January 29, 2016.  The Bank corrective action plan is in process.



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



On October 5, 2016, the Consumer Financial Protection Bureau (CFPB) released its final Prepaid Card Rule (Final Prepaid Rule), which it first proposed by publication on December 23, 2014.  The effective date of the Final Prepaid Rule is October 1, 2017, but applicability of certain requirements of the Final Prepaid Rule are delayed until October 1, 2018. The Final Prepaid Rule regulates certain prepaid products, including physical cards as well as codes and other access devices. The Final Prepaid Rule did not materially deviate from the terms of the proposed rule that we have disclosed in previous filings.  The Final Prepaid Rule among other things, causes prepaid products to be fully-covered by Regulation E, which implements the Electronic Fund Transfer Act, and to be covered by Regulation Z, which implements the Truth in Lending Act, to the extent the prepaid product accesses a “credit” feature



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



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





Results of Operations

First quarter 2017 to first quarter 2016

Net Income: Net income from continuing operations for the first quarter of 2017 was $6.3 million, or $0.11 per diluted share, compared to net loss of $10.6 million, or $.28 per diluted share for the first quarter of 2016.  After discontinued operations, net income for the first quarter of 2017 was $8.0 million compared to a net loss of $10.9 million for the first quarter of 2016.   Net interest income for the first quarter of 2017 compared to the first quarter of 2016 increased to $24.9 million from $20.6 million primarily as a result of higher loan balances and yields. Non-interest income (excluding security gains and losses) increased $7.1 million, which reflected a $6.8 million increase in gain on sale of loans and an $828,000 increase in service fees on deposit accounts.  Non-interest expense reflected a $14.3 

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million decrease in BSA lookback consulting expense, a decrease of $3.0 million of other non-interest expense and a $1.0 million increase in the provision for loan and lease losses.  The $3.0 million decrease in other non-interest expenses (excluding BSA lookback) included a $1.6 million decrease in salaries and employee benefits expense.  At the end of the third quarter of 2016, we eliminated approximately 20% of  the Bank’s staff positionsDiluted income per share was $0.14 in the first quarter of 2017 compared to $0.29 loss per share in the first quarter of 2016 primarily reflecting the factors noted above.

 

Net Interest Income: Our net interest income for the first quarter of 2017 increased to $24.9 million, an increase of $4.3 million, or 21.0%, from $20.6 million in the first quarter of  2016.  Our interest income for the first quarter of 2017 increased to $28.4 million, an increase of $4.8 million, or 20.3%, from $23.7 million for the first quarter of 2016.  The increase in interest income resulted primarily from higher loan balances and higher yields.  Our average loans and leases increased to $1.66 billion for first quarter 2017 from $1.50 billion for first quarter 2016, while related interest income increased $1.7 million on a tax equivalent basis.  The increase in average loans reflected the second quarter 2016 purchase of approximately $60 million of lease contracts in addition to organic growth in leasing, SBA and SBLOC lending.  Our average investment securities increased slightly to $1.34 billion for first quarter 2017 from $1.22 billion for first quarter 2016, and related tax equivalent interest income increased $2.1 million on a tax equivalent basis.

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the first quarter of 2017 increased to 2.70% from 2.56% in the first quarter of 2016, an increase of 14 basis points. The increase in the net interest margin reflected higher yields on loans and reduced balances of lower yielding deposits at the Federal Reserve Bank.

In the first quarter of 2017, the average yield on our loans increased to 4.25% from 4.22% for the first quarter of 2016, an increase of 3 basis points.  The increase in loan yields reflected a greater proportion of  higher yielding loans, especially lease balances which increased approximately 51% reflecting organic growth and lease receivables purchased. Yields on taxable investment securities in the first quarter of 2017 increased to 2.72% compared to 2.27% for the first quarter of 2016, an increase of 45 basis points.  The increase reflected the impact of a 25 basis point Federal Reserve Bank rate increase in December 2016.  Yields on non-taxable investments were higher at 2.88% compared to 2.60%, respectively, an increase of 28 basis points, reflecting the sale and maturity of shorter term, lower yielding securities.  Average interest earning deposits at the Federal Reserve Bank decreased $27.9 million, or 3.5%, to $771.5 million in the first quarter of 2017 from $799.4 million in the first quarter of 2016.  While the Bank continues to exit certain non strategic relationships to reduce excess Federal Reserve Balances, most of the reductions were offset by growth in other deposit relationships. The interest cost of total deposits and interest bearing liabilities increased to 0.35% for the first quarter of 2017 compared to 0.30% in the first quarter of 2016. 

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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31,



 

2017

 

2016



 

Average

 

 

 

Average

 

Average

 

 

 

Average



 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate



 

(dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans net of unearned fees and costs **

 

$                 1,634,136 

 

$             17,371 

 

4.25% 

 

$                 1,476,112 

 

$             15,556 

 

4.22% 

Leases - bank qualified*

 

21,180 

 

396 

 

7.48% 

 

27,798 

 

482 

 

6.94% 

Investment securities-taxable

 

1,325,247 

 

9,005 

 

2.72% 

 

1,149,101 

 

6,532 

 

2.27% 

Investment securities-nontaxable*

 

15,423 

 

111 

 

2.88% 

 

75,846 

 

493 

 

2.60% 

Interest earning deposits at Federal Reserve Bank

 

771,529 

 

1,516 

 

0.79% 

 

799,398 

 

902 

 

0.45% 

Federal funds sold  and securities purchased under agreement to resell

 

49,829 

 

227 

 

1.82% 

 

7,422 

 

27 

 

1.46% 

Net interest earning assets

 

3,817,344 

 

28,626 

 

3.00% 

 

3,535,677 

 

23,992 

 

2.71% 



 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

(6,221)

 

 

 

 

 

(4,399)

 

 

 

 

Assets held for sale from discontinued operations

 

335,929 

 

3,361 

 

4.00% 

 

588,685 

 

5,819 

 

3.95% 

Other assets

 

280,505 

 

 

 

 

 

299,551 

 

 

 

 



 

$                 4,427,557 

 

 

 

 

 

$                 4,419,514 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$                 3,657,413 

 

$               2,787 

 

0.30% 

 

$                 3,471,909 

 

$               2,441 

 

0.28% 

Savings and money market

 

429,713 

 

647 

 

0.60% 

 

387,651 

 

225 

 

0.23% 

Time

 

 -

 

 -

 

0.00% 

 

206,393 

 

305 

 

0.59% 

Total deposits

 

4,087,126 

 

3,434 

 

0.34% 

 

4,065,953 

 

2,971 

 

0.29% 



 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

275 

 

 -

 

0.00% 

 

856 

 

 -

 

0.00% 

Subordinated debt

 

13,401 

 

138 

 

4.12% 

 

13,401 

 

124 

 

3.70% 

Total deposits and interest bearing liabilities

 

4,100,802 

 

3,572 

 

0.35% 

 

4,080,210 

 

3,095 

 

0.30% 



 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

20,234 

 

 

 

 

 

21,329 

 

 

 

 

Total liabilities

 

4,121,036 

 

 

 

 

 

4,101,539 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

306,521 

 

 

 

 

 

317,975 

 

 

 

 



 

$                 4,427,557 

 

 

 

 

 

$                 4,419,514 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$             28,415 

 

 

 

 

 

$             26,716 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

177 

 

 

 

 

 

341 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$             28,238 

 

 

 

 

 

$             26,375 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

2.70% 

 

 

 

 

 

2.56% 



 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



For the first quarter of 2017, average interest earning assets increased to $3.82 billion, an increase of $281.7 million, or 8.0% from the first quarter of 2016.  The increase reflected a $151.4 million, or 10.1%, increase in average loans and a $115.7 million, or 9.4%, increase of average investment securities.  Average demand and interest checking deposits increased $185.5 million, or 5.3% which resulted primarily from growth in prepaid card deposits.    

41

 


 



Provision for Loan and Lease Losses.  Our provision for loan and lease losses was $1.0 million for the first quarter of 2017 compared to $0 for the first quarter of 2016.  The allowance for loan losses increased to $7.3 million or 0.58% of total loans at March 31, 2017, from $6.3 million, or 0.52%, of total loans at December 31, 2016.  The higher provision in 2017 resulted primarily from the unguaranteed portion of non-real estate secured SBA 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”, “-Net charge-offs,” and “-Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings,” below and Note 6 to the financial statements. 



Non-Interest Income. Non-interest income was $23.7 million in the first quarter of 2017 compared to $16.7 million in the first quarter of 2016 before gains on sale of investment securities of $503,000 in the first quarter of 2017 and $2.0 million in the first quarter of 2016.  The $7.1 million, or 42.3% increase, between those respective periods reflected a $6.8 million increase in gain on sale of loans to $5.4 million in the first quarter of 2017.  The increase primarily reflected a $5.0 million gain on sale of loans into a securitization in 2017.  Prepaid card fees decreased slightly by $27,000, or 0.2%, to $13.5 million for first quarter 2017. Prepaid card volume and fees decreased  as a result of a client which exited to another bank due to a change in ownership and also from the termination of two programs whose sponsors decided to exit prepaid cards. Those volumes were partially offset by organic growth. Service fees on deposit accounts increased $828,000, or 97.8%, to $1.7 million for the first quarter of 2017, reflecting increases in service charges on safe harbor individual retirement accounts.  Affinity fees decreased slightly by $73,000, or 6.7%, to $1.0 million for the first quarter of 2017 from $1.1 million for the first quarter of 2016 reflecting lower transaction volume.  Other non-interest income decreased $67,000, or 69.1%, to $30,000 for the first quarter of 2017 from $97,000 in the first quarter of 2016.



Non-Interest Expense. Total non-interest expense was $37.8 million for the first quarter of 2017, a decrease of  $17.4 million, or 31.5%, from $55.1 million for the first quarter of 2016.  The decrease included the end of consulting expenses for the BSA lookback which amounted to $14.3 million in the first quarter of 2016.  Salaries and employee benefits totaled $18.0 million, a decrease of $1.6 million, or 8.1%, from $19.6 million for the first quarter of 2016.  The decrease in salaries and employee benefits reflected bankwide staff reductions in the third quarter of 2016 which reduced total staff by approximately 20%, the impact of which was partially offset by temporary staff utilized for regulatory compliance including BSA and the SEC subpoena.  Depreciation and amortization decreased  by $33,000, or 2.7%, to $1.2 million in the first quarter of 2017 from $1.2 million in the first quarter of 2016. The decrease reflected reduced spending on fixed assets.  Rent and occupancy was comparable at $1.5 million in the first quarter of 2017.  Data processing decreased by $480,000, or 12.1%, to $3.5 million in the first quarter of 2017 from $4.0 million in the first quarter of 2016. The decrease reflected lower account and transaction volume as a result of the phase out an affinity program. It also reflected the impact of the consolidation of our call centers as an efficiency and cost cutting measure.  Printing and supplies decreased $38,000, or 7.0%, to $505,000 in the first quarter of 2017 from $543,000 in the first quarter of 2016.  Audit expense increased $166,000, or 65.1%, to $421,000 in the first quarter of 2017 from $255,000 in the first quarter of 2016 which reflected increased regulatory compliance audit fees and fees related to our lease receivables purchase.  Legal expense increased $989,000,  or 132.0%, to  $1.7 million in the first quarter of 2017 from $749,000 in the first quarter of 2016 primarily as a result of regulatory costs  associated with an SEC subpoena related to the restatement of the financial statements (see “Financial Statements; Regulatory Actions”).  Amortization of intangible assets increased $85,000, or 28.9%, to $379,000 for the first quarter of 2017 from $294,000 for the first quarter of 2016.  The increase resulted primarily from the amortization of the intangible asset resulting from the second quarter 2016 purchase of $60 million of lease receivables.  FDIC insurance expense decreased $285,000, or 12.1%,  to $2.1 million for the first quarter of 2017 from $2.4 million in the first quarter of 2016 due to a decrease in the FDIC assessment rate.  Software expense increased $1.1 million, or 48.9%, to $3.2 million in the first quarter of 2017 from $2.2 million in the first quarter of 2016 as a result of additional information technology infrastructure to improve efficiency and scalability, including BSA software required to satisfy regulatory requirements.  Insurance expense increased $168,000, or 32.9%, to $678,000 in the first quarter of 2017 compared to $510,000 in the first quarter of 2016. The increase reflected higher cyber, director and officer coverages and an increase resulting from the acquisition of $60 million of lease receivables. Telecom and IT network communications increased $214,000,or 56.6%, to $592,000 in the first quarter of 2017 from $378,000 in the first quarter of 2016. Securitization and servicing expense decreased $574,000, or 100.9%, to a credit of $5,000 for the first quarter of 2017 from $569,000 for the first quarter of 2016 reflecting the timing of professional services performed in connection with potential loan sales into securitizations. Consulting decreased $1.1 million, or 68.2%, to $534,000 in the first quarter of 2017 from $1.7 million in the first quarter of 2016. The decrease reflected consulting related to investor relations, CMBS loans, information technology and  regulatory consulting that was incurred in 2016. Other non-interest expense decreased $1.6 million, or 31.3%, to $3.5 million in the first quarter of 2017 from $5.1 million in the first quarter of 2016.  The decrease reflected reductions of $523,000 in travel and entertainment expense, $235,000 in postage, $133,000 in other leasing expense, $109,000 in prepaid deposit losses, $109,000 in SBA loan related expense, $91,000 in directors’ fees, $85,000 in customer identification expense and $80,000 in dues and subscriptions.  





Income Taxes. Income tax expense for continuing operations was $4.0 million for the first quarter of 2017 compared to a benefit of $5.3 million in the first quarter of 2016.  The 38.8% effective tax rate in 2017 reflected the statutory 35% rate and the impact of state income taxes.  The 33.2% effective benefit rate in 2016 reflected statutory rates which were reduced by a greater amount of tax exempt municipal income in that year.  



42

 


 

Liquidity and Capital Resources



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



Our primary source of funding has been deposits.  We have been exiting deposit relationships to reduce excess balances at the Federal Reserve which earn nominal rates of interest. While such exits continued in the first quarter of 2017, they were offset by growth in prepaid card deposits. Accordingly, overnight balances at the Federal Reserve Bank averaged $771.5 million for the first quarter of 2017, which was comparable to the prior year first quarter. Investment securities available-for-sale also provide a significant source of liquidity. Loan repayments, also a source of funds, were exceeded by new loan disbursements during the first three months of 2017.  While we do not have a traditional branch system, we believe that our core deposits, which include our demand, interest checking, savings and money market accounts, have similar characteristics to those of a bank with a branch system.  We believe that the rate on our deposits is at or below competitors’ rates. However, the focus of our business model is to identify affinity groups that control significant deposits as part of their business. A key component to the model is that the affinity group deposits are both stable and “sticky,” in the sense that they do not react to fluctuations in the market. Nonetheless, certain components of the deposits do experience seasonality, creating greater excess liquidity at certain times during the year, especially the first quarter as a result of tax refund prepaid card balances. We plan to exit additional deposit relationships to continue to manage excess liquidity. 



Historically, we have also used sources outside of our deposit products to fund our loan growth, including Federal Home Loan Bank advances, repurchase agreements, and institutional (brokered) certificates of deposit.  In the first three months of 2017, the vast majority of our funding was derived from prepaid cards and transaction accounts.  While the FDIC now classifies prepaid and most of our other deposits obtained with the cooperation of third parties as brokered, they continue to acknowledge that such deposits are stable and low cost.  We maintain secured borrowing lines with the Federal Home Loan Bank of Pittsburgh and the Federal Reserve Bank.  As of March  31, 2017, we had a $359.6 million line of credit with the Federal Home Loan Bank and  a $181.0 million line of credit with the Federal Reserve Bank.  These lines may be collateralized by specified types of loans or securities, and we expect to continue to maintain these facilities.  We actively monitor our positions and contingent funding sources on a daily basis. As of March  31, 2017, we did not have any borrowings outstanding on our lines of credit.



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 March 31, 2017, we had approximate cash reserves of $13.8 million at the holding company. Current quarterly interest payments on the $13.4 million of trust preferred securities are approximately $150,000 based on a floating rate of 3.25% over LIBOR. We expect that the conditions under which the amendment to the 2014 Consent Order was issued will have been remediated, and the FDIC will permit the Bank to resume paying dividends to us to fund holding company operations.  There can, however, be no assurance that the FDIC will, in fact, allow the resumption of Bank dividends to us at the end of that period or at all and, accordingly, there is risk that we will need to obtain alternate sources of funding.  There can be no assurance that such sources would be available to us on acceptable terms or at all.



Included in our cash and cash-equivalents at March  31, 2017 were $669.0 million of interest earning deposits which primarily consisted of deposits with the Federal Reserve and included deposits for reserve requirements. Traditionally, we sell our excess funds overnight to other financial institutions, with which we have correspondent relationships, to obtain better returns. As the federal funds rates decreased to approximately the 75 basis point level offered by the Federal Reserve, we have adjusted our strategy to retain our excess funds at the Federal Reserve, which also offers the full guarantee of the federal government.



Funding was directed primarily at cash outflows required for net loan growth of $41.3 million for the three months ended March  31, 2017, and $36.0 million for the three months ended March  31, 2016.   Net redemptions of investment securities for the three months ended March 31, 2017, were $34.8 million compared to net purchases of $173.3 million for the prior year. Deposit outflows resulted from exiting deposits to reduce excess balances at the Federal Reserve Bank.  We had outstanding commitments to fund loans, including unused lines of credit, of $1.22 billion and  $1.09 billion as of March  31, 2017 and December 31, 2016, respectively. The majority of our commitments originate with security backed lines of credit.  Such commitments are normally based on the full amount of collateral in a customer’s investment account. However, such commitments have historically been drawn at only a fraction of the total commitment.  The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth.



We must comply with capital adequacy guidelines issued by the FDIC.  A bank must, in general, have a Tier 1 leverage ratio of 5.00%, a ratio of Tier I capital to risk-weighted assets of 8.0%, a ratio of total capital to risk-weighted assets of 10.0% and a ratio of common equity Tier 1 to risk weighted assets of 6.5% to be considered “well capitalized.” The Tier I leverage ratio is the ratio of Tier 1 capital to average assets for the period. “Tier I capital” includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles.  At March 31, 2017, we were “well capitalized” under banking regulations. 



43

 


 

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











 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Tier 1 capital

 

Tier 1 capital

 

Total capital

 

Common equity



 

to average

 

to risk-weighted

 

to risk-weighted

 

tier 1 to risk



 

assets ratio

 

assets ratio

 

assets ratio

 

weighted assets



 

 

 

 

 

 

 

 

As of  March 31, 2017

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

6.96% 

 

14.74% 

 

15.09% 

 

14.74% 

The Bancorp Bank

 

6.74% 

 

14.28% 

 

14.63% 

 

14.28% 

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

 

5.00% 

 

8.00% 

 

10.00% 

 

6.50% 



 

 

 

 

 

 

 

 

As of  December 31, 2016

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

6.90% 

 

13.34% 

 

13.63% 

 

13.34% 

The Bancorp Bank

 

6.84% 

 

13.24% 

 

13.53% 

 

13.24% 

"Well capitalized" institution (under FDIC regulations)

 

5.00% 

 

8.00% 

 

10.00% 

 

6.50% 







Asset and Liability Management



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



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

 

Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest earning assets and interest bearing liabilities will respond to general changes in market rates, future cash flows and discount rates.  Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other pressures.  A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities.  A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets.  During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely.



The following table sets forth the estimated maturity or repricing structure of our interest earning assets and interest bearing liabilities at March  31, 2017.   We estimate the repricing characteristics of deposits based on historical performance, past experience at other institutions and other deposit behavior assumptions.  However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons.  The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities, which are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing of certain categories of assets and liabilities is beyond our control as, for example, prepayments of loans and withdrawal of deposits. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels.





44

 


 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

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

 

$                   187,678 

 

$                   11,766 

 

$                   52,154 

 

$                35,713 

 

$              193,602 

Loans net of deferred loan costs

 

819,845 

 

58,226 

 

209,846 

 

166,550 

 

9,660 

Investment securities

 

422,677 

 

166,487 

 

158,149 

 

186,808 

 

375,214 

Interest earning deposits

 

669,042 

 

 -

 

 -

 

 -

 

 -

Securities purchased under agreements to resell

 

65,248 

 

 -

 

 -

 

 -

 

 -

Total interest earning assets

 

2,164,490 

 

236,479 

 

420,149 

 

389,071 

 

578,476 



 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

2,320,641 

 

93,795 

 

93,795 

 

 -

 

 -

Savings and money market

 

107,181 

 

214,361 

 

107,181 

 

 -

 

 -

Securities sold under agreements to repurchase

 

273 

 

 -

 

 -

 

 -

 

 -

Subordinated debenture

 

13,401 

 

 -

 

 -

 

 -

 

 -

Total interest bearing liabilities

 

2,441,496 

 

308,156 

 

200,976 

 

 -

 

 -

Gap

 

$                 (277,006)

 

$                 (71,677)

 

$                 219,173 

 

$              389,071 

 

$              578,476 

Cumulative gap

 

$                 (277,006)

 

$               (348,683)

 

$               (129,510)

 

$              259,561 

 

$              838,037 

Gap to assets ratio

 

-6%

 

-2%

 

5%

 

9%

 

13%

Cumulative gap to assets ratio

 

-6%

 

-8%

 

-3%

 

6%

 

19%



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



The methods used to analyze interest rate sensitivity in this table have a number of limitations.  Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same or similar time periods. The interest rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates.  Additionally, the actual prepayments and withdrawals we experience when interest rates change may deviate significantly from those assumed in calculating the data shown in the table.  Accordingly, actual results can and often do differ from projections.



Financial Condition



General.    Our total assets at March 31, 2017 were $4.40 billion, of which our total loans were $1.26 billion. At December 31, 2016, our total assets were $4.86 billion, of which our total loans were $1.22 billion.    



Interest earning deposits and federal funds sold.  At March 31, 2017, we had a total of $669.0 million of interest earning deposits compared to $955.7 million at December 31, 2016, a decrease of $286.7 million, or 30.0%.  These deposits were comprised primarily of balances at the Federal Reserve, which pays interest on such balances.  Reductions in such balances reflected their deployment into higher yielding loans and the exit of less profitable deposit relationships.

Investment portfolio.  For detailed information on the composition and maturity distribution of our investment portfolio, see Note 5 to the Financial Statements.  Total investment securities decreased to $1.31 billion at March 31, 2017, a decrease of $32.7 million, or 2.4%, from year-end 2016.  The decrease in investment securities was primarily a result of maturities and payments.  Other securities, included in the held-to-maturity classification at March 31, 2017, consisted of three securities secured by diversified portfolios of corporate securities, one bank senior note and two single-issuer trust preferred securities. 



A total of $18.0 million of other debt securities - single issuers is comprised of the following: (i) amortized cost of two single-issuer trust preferred securities of $11.0 million, of which one security for $1.9 million was issued by a bank and one security for $9.1 million was issued by an insurance company; and (ii) the book value of a bank senior note of $7.0 million. 



A total of $75.4 million of other debt securities - pooled is comprised of three securities consisting of diversified portfolios of corporate securities.



The following table provides additional information related to our single issuer trust preferred securities as of March 31, 2017 (in thousands):



 

 

 

 

 

 

 

 

45

 


 



 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

Security A

 

$                1,911 

 

$                 2,005 

 

$                      94 

 

Not rated

Security B

 

9,078 

 

6,177 

 

(2,901)

 

Not rated



 

 

 

 

 

 

 

 

Class: All of the above are trust preferred securities.

 

 

 

 

 

 

 

 



Under the accounting guidance related to the recognition of other-than-temporary impairment charges on debt securities,   an impairment on a debt security is deemed to be other-than-temporary if it meets the following conditions: (i) we intend to sell or it is more likely than not we will be required to sell the security before a recovery in value, or (ii) we do not expect to recover the entire amortized cost basis of the security.  If we intend to sell or it is more likely than not we will be required to sell the security before a recovery in value, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security.  For those other-than-temporarily impaired debt securities which do not meet the first condition and for which we do not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit impairment, which is recorded in net realized capital losses, and the remaining impairment, which is recorded in other comprehensive income.  Generally, a security’s credit impairment is the difference between its amortized cost basis and the best estimate of its expected future cash flows discounted at the security’s effective yield prior to impairment.  The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s new cost basis. For the three months ended March 31, 2017 and March  31, 2016,  we recognized no other-than-temporary impairment charges related to trust preferred securities classified in our held-to-maturity portfolio.

Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $2.6 million at March 31, 2017, compared to $1.6 million at December 31, 2016.  The increase resulted from additional Federal Home Loan Bank stock required for larger daily advances to enhance liquidity management and for . 

Investment securities with a carrying value of $594.1 million at March 31, 2017 and $607.2 million at December 31, 2016 were pledged to secure a line of credit with the Federal Home Loan Bank and a letter of credit with that institution, as required or permitted by law.

Loans held for sale.  Loans held for sale are comprised of commercial mortgage loans and SBA loans originated for sale in secondary markets.  The fair value of commercial mortgage loans and the SBA loans originated for sale is based on purchase commitments or quoted prices for the same or similar loans.  Commercial loans held for sale decreased to $480.9 million at March  31, 2017 from $663.1 million at December 31, 2016 as a result of loan sales.

Loan portfolio. Total loans increased to $1.26 billion at March  31, 2017 from $1.22 billion at December 31, 2016.



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







 

 

 



 

 

 



March 31,

 

December 31,



2017

 

2016



 

 

 

SBA non real estate

$                       75,800 

 

$                       74,644 

SBA commercial mortgage

114,703 

 

126,159 

SBA construction

12,985 

 

8,826 

SBA loans *

203,488 

 

209,629 

Direct lease financing

363,172 

 

346,645 

SBLOC

660,423 

 

630,400 

Other specialty lending

12,443 

 

11,073 

Other consumer loans

16,318 

 

17,374 



1,255,844 

 

1,215,121 

Unamortized loan fees and costs

8,283 

 

7,790 

Total loans, net of deferred loan costs

$                  1,264,127 

 

$                  1,222,911 



 

 

 



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

46

 


 







 

 

 



March 31,

 

December 31,



2017

 

2016



 

 

 

SBA loans, including deferred fees and costs

$                     209,980 

 

$                     215,786 

SBA loans included in held for sale

159,831 

 

154,016 

Total SBA loans

$                     369,811 

 

$                     369,802 



Allowance for loan and lease  losses.  We review the adequacy of our allowance for loan and lease losses on at least a quarterly basis to determine that the provision for loan losses is made in an amount necessary to maintain our allowance at a level that is appropriate, based on management’s estimate of inherent losses. Our estimates of loan and lease losses are intended to, and, in management’s opinion, do, meet the criteria for accrual of loss contingencies in accordance with ASC 450, Contingencies, and ASC 310, Receivables.   The process of evaluating this adequacy has two basic elements: first, the identification of problem loans or leases based on current financial information and the fair value of the underlying collateral; and second, a methodology for estimating general loss reserves.  For loans or leases classified as “special mention,” “substandard” or “doubtful,” we reserve losses inherent in the portfolio at the time we classify the loan or lease. This “specific” portion of the allowance is the total of potential, although unconfirmed, losses for individually classified loans.  In this process, we establish specific reserves based on an analysis of the most probable sources of repayment and liquidation of collateral.  While each impaired loan is individually evaluated, not every loan requires a reserve when the collateral value and estimated cash flows exceed the current balance.



The second phase of our analysis represents an allocation of the allowance.  This methodology analyzes pools of loans that have similar characteristics and applies historical loss experience and other factors for each pool including management’s experience with similar loan and lease portfolios at other institutions, the historic loss experience of our peers and a review of statistical information from various industry reports to determine the allocable portion of the allowance.  This estimate is intended to represent the potential unconfirmed and inherent losses within the portfolio.  Individual loan pools are created for major loan categories: SBLOCs, SBA loans, direct lease financing and other specialty lending and consumer loans.  We augment historical experience for each loan pool by accounting for such items as current economic conditions, current loan portfolio performance, loan policy or management changes, loan concentrations, increases in our lending limit, average loan size and other factors as appropriate.  Our Chief Credit Officer oversees the loan review department processes and measures the adequacy of the allowance for loan and lease losses independently of loan production officers. A description of loan review coverage targets is stated below.



At March 31, 2017, approximately 50% of the total continuing loan portfolio had been reviewed as a result of the coverage of each loan portfolio type. The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio.  These thresholds are maintained as follows: 



Securities Backed Lines of Credit – The targeted review threshold for 2017 is 40%, with the largest 25% of SBLOCs by commitment to be reviewed annually.  A random sampling of a minimum of 20 of the remaining loans will be reviewed each quarter.  At March 31, 2017, approximately 45% of the SBLOC portfolio had been reviewed. 



SBA Loans – The targeted review threshold for 2017 is 100%, less guaranteed portions of any purchased loans and loans funded within 90 days of quarter end. The 100% coverage includes loan review work performed by designated SBA department personnel.  Although loans are not typically purchased, loans for Community Reinvestment Act, or CRA,   purposes are periodically purchased.  At March  31, 2017, approximately 77% of the government guaranteed loan portfolio had been reviewed.  The review threshold for the independent loan review department is $1,000,000.    



Leasing – The targeted review threshold for 2017 is 35%.  At March 31, 2017, approximately 39% of the leasing portfolio had been reviewed. The review threshold is $1,000,000, of which 100% of such relationships were reviewed.



CMBS (Floating Rate) – The targeted review threshold for 2017 is 100%, to be reviewed within 90 days of booking. Floating rate loans will be reviewed initially within 90 days of funding and will be monitored on an ongoing basis as to payment status. Subsequent reviews will be performed based on a sampling each quarter. Floating rate loans will be re-reviewed if any available extension options are exercised. By April 30, 2017, 100% of loans outstanding at March 31, 2017 had been reviewed.



CMBS (Fixed Rate) CMBS fixed rate loans will generally not be reviewed as they are sold on the secondary market in a relatively short period of time. 100% of fixed rate loans that are unable to be readily sold on the secondary market and remain on the Bank's books after nine months will be reviewed at least annually. At March  31, 2017,  100% of the CMBS fixed rate portfolio on the books for nine months  had been reviewed.



47

 


 

Specialty Lending Specialty Lending, defined as commercial loans unique in nature that do not fit into other established categories, will have a review coverage threshold of 100% for non CRA loans. At March 31, 2017, approximately 100% of the non CRA loans had been reviewed.

 

Home Equity Lines of Credit (HELOC) – The targeted review threshold for 2017 is 50%.  The largest 25% of  HELOCs by commitment will be reviewed annually. A random sampling of a minimum of ten of the remaining loans will be reviewed each quarter.  At March  31, 2017, approximately 83% of the HELOC portfolio had been reviewed.



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







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

March 31, 2017

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                   203 

 

$                   393 

 

$                        - 

 

$                3,028 

 

$                3,624 

 

$               72,176 

 

$               75,800 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

908 

 

908 

 

113,795 

 

114,703 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

12,985 

 

12,985 

Direct lease financing

 

2,538 

 

754 

 

1,534 

 

 -

 

4,826 

 

358,346 

 

363,172 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

660,423 

 

660,423 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

12,443 

 

12,443 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

5,165 

 

5,165 

Consumer - home equity

 

 -

 

 -

 

 -

 

1,433 

 

1,433 

 

9,720 

 

11,153 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,283 

 

8,283 



 

$                2,741 

 

$                1,147 

 

$                1,534 

 

$                5,369 

 

$              10,791 

 

$          1,253,336 

 

$          1,264,127 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

Greater than

 

 

 

Total

 

 

 

Total

December 31, 2016

 

past due

 

past due

 

90 days

 

Non-accrual

 

past due

 

Current

 

loans

SBA non real estate

 

$                   559 

 

$                      - 

 

$                        - 

 

$                1,530 

 

$                2,089 

 

$               72,555 

 

$               74,644 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

 -

 

 -

 

126,159 

 

126,159 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,826 

 

8,826 

Direct lease financing

 

11,856 

 

1,998 

 

661 

 

 -

 

14,515 

 

332,130 

 

346,645 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

630,400 

 

630,400 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

11,073 

 

11,073 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

5,403 

 

5,403 

Consumer - home equity

 

155 

 

 -

 

 -

 

1,442 

 

1,597 

 

10,374 

 

11,971 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

7,790 

 

7,790 



 

$              12,570 

 

$               1,998 

 

$                   661 

 

$                2,972 

 

$              18,201 

 

$          1,204,710 

 

$          1,222,911 



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.



48

 


 

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



 

 

 

 



 

 

 

 



 

As of or



 

for the three months ended



 

March 31,



 

2017

 

2016



 

 

 

 

Ratio of the allowance for loan losses to total loans

 

0.58% 

 

0.39% 

Ratio of the allowance for loan losses to nonperforming loans *

 

105.66% 

 

162.45% 

Ratio of nonperforming assets to total assets *

 

0.16% 

 

0.06% 

Ratio of net charge-offs to average loans

 

0.00% 

 

0.00% 

Ratio of net charge-offs to average loans annualized

 

0.01% 

 

0.01% 



 

 

 

 

* Includes loans 90 days past due still accruing interest

 

 

 

 

The ratio of the allowance for loan and lease losses to total loans was 0.58% at March  31, 2017, compared to 0.39% at March  31, 2016. The higher current period ratio reflected an increase in the allowance which exceeded proportional loan growth during the period. The higher allowance reflected an increased allowance for the non government guaranteed portion of non real estate secured SBA loans. The increased allowance for those loans reflected higher levels of non performing SBA loans which reduced the ratio of the allowance to non-performing loans. The ratio of the allowance for loan losses to non-performing loans decreased to 105.66% at March  31, 2017, from 162.45% at March  31,  2016, primarily as a result of an increase in SBA non-performing loans.  The ratio of non-performing assets to total assets also increased  as a result of that increase in non-performing loans, to .16% from .06%.  Net charge-offs to average loans remained at 0.00% for the three months ended March 31, 2017 and 2016.

Net charge-offs.  Net charge-offs were $38,000 for the three months ended March  31, 2017,  an increase of $16,000 from net charge-offs for the same period of 2016.  The majority of the charge-offs in the first three months of 2017 and 2016 were associated with leasing relationships. 



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







 

 

 

 



 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

 

 

 

Non-accrual loans

 

 

 

 

SBA non real estate

 

$                 3,028 

 

$                  1,530 

SBA commercial mortgage

 

908 

 

 -

Consumer

 

1,433 

 

1,442 

Total non-accrual loans

 

5,369 

 

2,972 



 

 

 

 

Loans past due 90 days or more

 

1,534 

 

661 

Total non-performing loans

 

6,903 

 

3,633 

Other real estate owned

 

104 

 

104 

Total non-performing assets

 

$                 7,007 

 

$                  3,737 



49

 


 

Loans that were modified as of March 31, 2017 and December 31, 2016 and considered troubled debt restructurings are as follows (dollars in thousands):

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017

 

December 31, 2016



 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBA non real estate

 

 

$            1,041 

 

$             1,041 

 

 

$               844 

 

$                844 

Direct lease financing

 

 

684 

 

684 

 

 

734 

 

734 

Consumer

 

 

286 

 

286 

 

 

288 

 

288 

Total

 

 

$            2,011 

 

$             2,011 

 

 

$            1,866 

 

$             1,866 



The balances below provide information as to how the loans were modified as troubled debt restructurings loans at March 31, 2017 and December 31, 2016 (in thousands).

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017

 

December 31, 2016



 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBA non real estate

 

$                    - 

 

$               144 

 

$                897 

 

$                 - 

 

$               144 

 

$                700 

Direct lease financing

 

 -

 

 -

 

684 

 

 -

 

 -

 

734 

Consumer

 

 -

 

 -

 

286 

 

 -

 

 -

 

288 

Total

 

$                    - 

 

$               144 

 

$             1,867 

 

$                 - 

 

$               144 

 

$             1,722 



The following table summarized as of March 31, 2017 loans that had been restructured within the last 12 months that have subsequently defaulted.







 

 

 

 



 

 

 

 



 

Number

 

Pre-modification recorded investment

SBA non real estate

 

 

$               897 

Total

 

 

$               897 



As of March 31, 2017 and December 31, 2016,  we had no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.



50

 


 

The following table provides information about impaired loans at March 31, 2017 and December 31, 2016:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

March 31, 2017

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      181 

 

$                      181 

 

$                        - 

 

$                      187 

 

$                           - 

SBA commercial mortgage

 -

 

 -

 

 -

 

 -

 

 -

Direct lease financing

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

1,719 

 

1,719 

 

 -

 

1,724 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 -

SBA non real estate

2,990 

 

2,990 

 

1,569 

 

2,586 

 

 -

SBA commercial mortgage

908 

 

908 

 

145 

 

454 

 

 -

Direct lease financing

684 

 

684 

 

166 

 

709 

 

 -

Consumer - home equity

 -

 

 -

 

 -

 

 -

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

3,171 

 

3,171 

 

1,569 

 

2,773 

 

 -

SBA commercial mortgage

908 

 

908 

 

145 

 

454 

 

 -

Direct lease financing

684 

 

684 

 

166 

 

709 

 

 -

Consumer - home equity

1,719 

 

1,719 

 

 -

 

1,724 

 

 -



6,482 

 

6,482 

 

1,880 

 

5,660 

 

 -







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

$                      191 

 

$                      191 

 

$                        - 

 

$                      336 

 

$                           - 

Direct lease financing

 -

 

 -

 

 -

 

 -

 

 -

Consumer - other

 -

 

 -

 

 -

 

259 

 

 -

Consumer - home equity

1,730 

 

1,730 

 

 -

 

1,187 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non real estate

2,183 

 

2,183 

 

938 

 

1,277 

 

 -

Direct lease financing

734 

 

734 

 

216 

 

147 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

 -

 

 -

 

 -

 

549 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non real estate

2,374 

 

2,374 

 

938 

 

1,613 

 

 -

Direct lease financing

734 

 

734 

 

216 

 

147 

 

 -

Consumer - other

 -

 

 -

 

 -

 

259 

 

 -

Consumer - home equity

1,730 

 

1,730 

 

 -

 

1,736 

 

 -



4,838 

 

4,838 

 

1,154 

 

3,755 

 

 -



We had $5.4 million of non-accrual loans at March  31, 2017 compared to $3.0 million of non-accrual loans at December 31, 2016.  The $2.4 million increase in non-accrual loans was primarily due to $2.5 million of loans placed on non-accrual status partially offset by $86,000 of loan payments.  Loans past due 90 days or more still accruing interest amounted to $1.5 million at March  31, 2017 and $661,000 at December 31, 2016.  The $873,000 increase reflected $1.2 million of additions partially offset by $301,000 of loan payments and $28,000 of loans moved to repossessed assets. 



We had $104,000 of other real estate owned at March 31, 2017 and December 31, 2016



51

 


 

The following table classifies our loans (not including loans held for sale) by categories which are used throughout the industry as of March 31, 2017 and December 31, 2016:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non real estate

 

$           50,145 

 

$            3,011 

 

$            4,664 

 

$                   - 

 

$                    - 

 

$                        - 

 

$                 17,980 

 

$              75,800 

SBA commercial mortgage

 

84,925 

 

 -

 

908 

 

 -

 

 -

 

10,335 

 

18,535 

 

114,703 

SBA construction

 

12,985 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

12,985 

Direct lease financing

 

138,829 

 

 -

 

4,426 

 

 -

 

 -

 

20,233 

 

199,684 

 

363,172 

SBLOC

 

295,012 

 

 -

 

 -

 

 -

 

 -

 

11,365 

 

354,046 

 

660,423 

Other specialty lending

 

12,443 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

12,443 

Consumer

 

9,087 

 

286 

 

2,265 

 

 -

 

 -

 

 -

 

4,680 

 

16,318 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,283 

 

8,283 



 

$         603,426 

 

$            3,297 

 

$          12,263 

 

$                   - 

 

$                    - 

 

$              41,933 

 

$               603,208 

 

$         1,264,127 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non real estate

 

$           51,437 

 

$            2,723 

 

$            3,628 

 

$                   - 

 

$                    - 

 

$                        - 

 

$                 16,856 

 

$              74,644 

SBA commercial mortgage

 

92,485 

 

 -

 

 -

 

 -

 

 -

 

15,164 

 

18,510 

 

126,159 

SBA construction

 

8,060 

 

 -

 

 -

 

 -

 

 -

 

 -

 

766 

 

8,826 

Direct lease financing

 

122,571 

 

 -

 

3,736 

 

 -

 

 -

 

30,881 

 

189,457 

 

346,645 

SBLOC

 

277,489 

 

 -

 

 -

 

 -

 

 -

 

 -

 

352,911 

 

630,400 

Other specialty lending

 

11,073 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

11,073 

Consumer

 

9,837 

 

288 

 

2,312 

 

 -

 

 -

 

 -

 

4,937 

 

17,374 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

7,790 

 

7,790 



 

$         572,952 

 

$            3,011 

 

$            9,676 

 

$                   - 

 

$                    - 

 

$              46,045 

 

$               591,227 

 

$         1,222,911 



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



Premises and equipment, net.  Premises and equipment amounted to $23.0 million at March  31, 2017 compared to $24.1 million at December 31, 2016.  The decrease reflected depreciation and a reduction in purchases compared to prior periods.



Investment in Unconsolidated Entity.  On December 30, 2014, the Bank entered into an agreement for, and closed on, the securitization of a portion of its discontinued commercial loan portfolio. The purchaser of the loan portfolio was a newly formed entity, Walnut Street 2014-1 Issuer, LLC (“Walnut Street”).  The price paid to the Bank for the loan portfolio, which had a face value of approximately $267.6 million, was approximately $209.6 million, of which approximately $193.6 million was in the form of two notes issued by Walnut Street to the Bank; (i) 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 (ii) 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 $126.0 million investment in unconsolidated entity at March 31, 2017.  



Assets held for sale. Assets held for sale as a result of discontinued operations, primarily commercial, commercial mortgage and construction loans, amounted to $341.3 million at March 31, 2017 compared to $360.7 million at December 31, 2016.  The decrease resulted primarily from loan repayments.



Deposits. Our primary source of funding is deposit acquisition.  We offer a variety of deposit accounts with  a range of interest rates and terms, including demand, checking and money market accounts.  One strategic focus is growing these accounts through affinity groups.  At March 31, 2017, we had total deposits of $4.04 billion compared to $4.24 billion at December 31, 2016, a decrease of $202.5 million or 4.8%.  The decrease reflected the planned exit of deposit relationships and excess balances at the Federal Reserve at overnight rates, which distort capital ratiosThe following table presents the average balance and rates paid on deposits for the periods indicated (in thousands):



52

 


 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

For the three months ended

 

For the three months ended



 

 

March 31, 2017

 

March 31, 2016



 

 

Average

 

Average

 

Average

 

Average



 

 

balance

 

rate

 

balance

 

rate



 

 

 

 

 

Demand and interest checking *

 

$              3,657,413 

 

0.30% 

 

$              3,471,909 

 

0.28% 

Savings and money market

 

429,713 

 

0.60% 

 

387,651 

 

0.39% 

Time

 

 

 -

 

0.00% 

 

206,393 

 

0.58% 



Total deposits

 

$              4,087,126 

 

0.34% 

 

$              4,065,953 

 

0.30% 



 

 

 

 

 

 

 

 

 

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

Borrowings.  We had $0 of outstanding advances from the Federal Home Loan Bank as of March 31, 2017 and December 31, 2016.   Long-term borrowings of $263.1 million at December 31, 2016 reflected the proceeds of loans sold into a securitization which, at that date, was accounted for as a secured borrowing. In the first quarter of 2017, the documentation required for true sale accounting was completed, and the sale was recorded in that quarter. We do not have any policy prohibiting us from incurring debt.

Other liabilities.  Other liabilities amounted to $45.4 million at March 31, 2017 compared to $44.1 million at December 31, 2016, representing an increase of $1.3 million.  Other liabilities consist primarily of prepaid card payables and accrued expenses.

Off balance sheet arrangements.  There were no off-balance sheet arrangements during the three months ended March 31, 2017 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except as discussed in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” there has been no material change in our assessment of our sensitivity to market risk since our presentation in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  Members of our operational management and internal audit meet regularly to provide an established structure to report any weaknesses or other issues with controls, or any matter that has not been reported previously, to our Chief Executive Officer and Chief Financial Officer, and, in turn to the Audit Committee of our Board of Directors.  In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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

There has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



 

54

 


 

PART II – OTHER INFORMATION



Item 1. Legal Proceedings



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



On July 17, 2014, a class action securities complaint captioned Fletcher v. The Bancorp Inc., et al., was filed in the United States District Court for the District of Delaware.   A consolidated version of that class action complaint was filed before the same court on January 23, 2015 on behalf of Lead Plaintiffs Arkansas Public Employees Retirement System and Arkansas Teacher Retirement System under the caption of In Re The Bancorp, Inc. Securities Litigation, Case No. 14-cv-0952 (SLR).  On October 26, 2015, Lead Plaintiffs filed an amended consolidated complaint against Bancorp, Betsy Z. Cohen, Paul Frenkiel, Frank M. Mastrangelo and Jeremy Kuiper, which alleges that during a class period beginning January 26, 2011 through June 26, 2015, the defendants made materially false and/or misleading statements and/or failed to disclose that (i) Bancorp had wrongfully extended and modified problem loans and under-reserved for loan losses due to adverse loans, (ii) Bancorp’s operations and credit practices were in violation of the Bank Secrecy Act (BSA), and (iii) as a result, Bancorp’s financial statements, press releases and public statements were materially false and misleading during the relevant period. The amended consolidated complaint further alleged 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 asked for an unspecified amount of damages, prejudgment and post-judgment interest and attorneys’ fees.  On July 27, 2016, we and all other individually-named defendants entered into a Stipulation and Agreement of Settlement (Settlement Agreement) with respect to the consolidated class action.  Under the terms of the Settlement Agreement, we agreed to pay $17.5 million to the plaintiffs as full and complete settlement of the litigation.  All amounts paid by us were fully funded by the Company’s insurance carriers.  All terms of the Settlement Agreement were approved by the Court on December 15, 2016.



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



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



The Company received a letter, dated August 1, 2016, demanding inspection of its books and records pursuant to Section 220 of the Delaware General Corporation Law, or DGCL,  from legal counsel representing a shareholder (the "Demand Letter"). The Company, through outside legal counsel, responded to the Demand Letter by permitting the shareholder to inspect certain of the Company’s books and records and by objecting to other requests.  On January 30, 2017, the shareholder filed a complaint in the Court of Chancery of the State of Delaware seeking an order from the court, pursuant to Section 220 of the DGCL, compelling the Company to permit the shareholder to inspect additional books and records of the Company.  The Company believes that its original response to the Demand Letter was appropriate in all respects and intends to defend against the complaint. Both the Demand Letter and the complaint threaten the commencement of a shareholder’s derivative suit against certain officers and directors of the Company seeking damages and other remedies on behalf of the Company.  We have been advised by our counsel in the matter that reasonably possible losses cannot be estimated.



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









55

 


 

Item 6. Exhibits



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



SIGNATURES



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





 

 



 

THE BANCORP INC



 

(Registrant)



 

 

May 10, 2017

 

/s/ Damian Kozlowski

Date

 

Damian Kozlowski



 

President/Chief Executive Officer



 

 

May 10, 2017

 

/s/ Paul Frenkiel

Date

 

Paul Frenkiel

Executive Vice President of Strategy,



 

Chief Financial Officer and Secretary









 

 

Exhibit No.

 

Description



 

 

31.1

 

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



 

 

31.2

 

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



 

 

32.1

 

Section 1350 Certifications *



 

 

32.2

 

Section 1350 Certifications *



 

 

101.INS

 

XBRL Instance Document 



 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document



 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document



 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document



 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document



 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document



 

 

*

 

Filed herewith



 

 





 

 



 

 







 

56