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Bancorp, Inc. - Quarter Report: 2018 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, 2018





 

 



 

 

[  ]

 

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”, “smaller reporting company” and “emerging growth 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, 2018, there were 56,307,238 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, 2018 (unaudited) and December 31, 2017

3



 

 



Unaudited Consolidated Statements of Operations – Three months ended March 31, 2018 and 2017

4



 

 



Unaudited Consolidated Statements of Comprehensive Income – Three months ended March 31, 2018 and 2017

6



 

 



Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Three months ended March 31, 2018

7



 

 



Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2018 and 2017

8



 

 



Notes to Unaudited Consolidated Financial Statements

9



 

 

Item 2.

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

34



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53



 

 

Item 4.

Controls and Procedures

53



 

 

Part II Other Information



 

 

Item 1.

Legal Proceedings

54

Item 6.

Exhibits

55



 

 

Signatures

 

55



 

 









 

2


 



PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS





 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017



 

(unaudited)

 

 



 

(in thousands)

ASSETS

 

 

 

 

Cash and cash equivalents

 

 

 

 

Cash and due from banks

 

$                    1,999 

 

$                    3,152 

Interest earning deposits at Federal Reserve Bank

 

508,847 

 

841,471 

Securities purchased under agreements to resell

 

64,312 

 

64,312 

Total cash and cash equivalents

 

575,158 

 

908,935 



 

 

 

 

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

 

1,381,020 

 

1,294,484 

Investment securities, held-to-maturity (fair value $85,949 and $85,345, respectively)

 

86,370 

 

86,380 

Commercial loans held for sale

 

349,806 

 

503,316 

Loans, net of deferred loan fees and costs

 

1,463,064 

 

1,392,228 

Allowance for loan and lease losses

 

(7,285)

 

(7,096)

Loans, net

 

1,455,779 

 

1,385,132 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

 

991 

 

991 

Premises and equipment, net

 

19,052 

 

20,051 

Accrued interest receivable

 

11,778 

 

10,900 

Intangible assets, net

 

4,995 

 

5,377 

Other real estate owned

 

405 

 

450 

Deferred tax asset, net

 

38,139 

 

34,802 

Investment in unconsolidated entity, at fair value

 

70,016 

 

74,473 

Assets held for sale from discontinued operations

 

289,038 

 

304,313 

Other assets

 

86,553 

 

78,543 

Total assets

 

$             4,369,100 

 

$             4,708,147 



 

 

 

 

LIABILITIES

 

 

 

 

Deposits

 

 

 

 

Demand and interest checking

 

$             3,461,881 

 

$             3,806,965 

Savings and money market

 

493,288 

 

453,877 

Total deposits

 

3,955,169 

 

4,260,842 



 

 

 

 

Securities sold under agreements to repurchase

 

182 

 

217 

Subordinated debentures

 

13,401 

 

13,401 

Long-term borrowings

 

42,157 

 

42,323 

Other liabilities

 

28,299 

 

67,215 

Total liabilities

 

4,039,208 

 

4,383,998 



 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Common stock - authorized, 75,000,000 shares of $1.00 par value; 56,307,088 and 55,861,150

 

 

 

 

shares issued at March 31, 2018 and December 31, 2017, respectively

 

56,307 

 

55,861 

Treasury stock, at cost (100,000 shares)

 

(866)

 

(866)

Additional paid-in capital

 

363,605 

 

363,196 

Accumulated deficit

 

(75,345)

 

(89,485)

Accumulated other comprehensive loss

 

(13,809)

 

(4,557)

Total shareholders' equity

 

329,892 

 

324,149 



 

 

 

 

Total liabilities and shareholders' equity

 

$             4,369,100 

 

$             4,708,147 



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,

 



 

2018

 

2017

 



 

(in thousands, except per share data)

Interest income

 

 

 

 

 

Loans, including fees

 

$               23,302 

 

$               17,629 

 

Interest on investment securities:

 

 

 

 

 

Taxable interest

 

9,699 

 

9,005 

 

Tax-exempt interest

 

60 

 

72 

 

Federal funds sold/securities purchased under agreements to resell

 

414 

 

227 

 

Interest earning deposits

 

1,832 

 

1,516 

 



 

35,307 

 

28,449 

 

Interest expense

 

 

 

 

 

Deposits

 

4,969 

 

3,434 

 

Short-term borrowings

 

104 

 

 -

 

Subordinated debenture

 

160 

 

138 

 



 

5,233 

 

3,572 

 

Net interest income

 

30,074 

 

24,877 

 

Provision for loan and lease losses

 

700 

 

1,000 

 

Net interest income after provision for loan and lease losses

 

29,374 

 

23,877 

 



 

 

 

 

 

Non-interest income

 

 

 

 

 

Service fees on deposit accounts

 

1,576 

 

1,675 

 

Card payment and ACH processing fees

 

1,692 

 

1,528 

 

Prepaid card fees

 

14,282 

 

13,547 

 

Gain on sale of loans

 

11,729 

 

5,383 

 

Gain on sale of investment securities

 

26 

 

503 

 

Change in value of investment in unconsolidated entity

 

(1,171)

 

(19)

 

Leasing income

 

487 

 

551 

 

Affinity fees

 

102 

 

1,021 

 

Other

 

372 

 

30 

 

Total non-interest income

 

29,095 

 

24,219 

 



 

 

 

 

 

Non-interest expense

 

 

 

 

 

Salaries and employee benefits

 

21,073 

 

18,006 

 

Depreciation and amortization

 

1,031 

 

1,206 

 

Rent and related occupancy cost

 

1,359 

 

1,461 

 

Data processing expense

 

2,005 

 

3,480 

 

Printing and supplies

 

189 

 

505 

 

Audit expense

 

469 

 

421 

 

Legal expense

 

2,431 

 

1,738 

 

Amortization of intangible assets

 

383 

 

379 

 

Losses on sale and write downs on other real estate owned

 

45 

 

 -

 

FDIC insurance

 

2,219 

 

2,065 

 

Software

 

3,291 

 

3,228 

 

Insurance

 

621 

 

678 

 

Telecom and IT network communications

 

326 

 

592 

 

Consulting

 

665 

 

534 

 

Civil money penalty

 

(290)

 

 -

 

Other

 

3,232 

 

3,490 

 

Total non-interest expense

 

39,049 

 

37,783 

 

Income from continuing operations before income taxes

 

19,420 

 

10,313 

 

Income tax expense

5,399 

 

4,011 

 

Net income from continuing operations

 

$               14,021 

 

$                 6,302 

 

Discontinued operations

 

 

 

 

 

4

 


 

Income from discontinued operations before income taxes

 

156 

 

2,667 

 

Income tax expense

37 

 

1,006 

 

Income from discontinued operations, net of tax

 

119 

 

1,661 

 

Net income available to common shareholders

 

$               14,140 

 

$                 7,963 

 



 

 

 

 

 

Net income per share from continuing operations - basic

 

$                   0.25 

 

$                   0.11 

 

Net income per share from discontinued operations - basic

 

$                         - 

 

$                   0.03 

 

Net income per share - basic

 

$                   0.25 

 

$                   0.14 

 



 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                   0.25 

 

$                   0.11 

 

Net income per share from discontinued operations - diluted

 

$                         - 

 

$                   0.03 

 

Net income per share - diluted

 

$                   0.25 

 

$                   0.14 

 



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

5

 


 





THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME







 

 

 



 

 

 



For the three months



ended March 31,



2018

 

2017



(in thousands)



 

 

 

Net income

$                  14,140 

 

$                  7,963 

Other comprehensive income net of reclassifications into net income:

 

 

 



 

 

 

Other comprehensive income (loss)

 

 

 

Change in net unrealized gain (loss) during the period

(12,658)

 

4,273 

Reclassification adjustments for gains included in income

(26)

 

(503)

Amortization of losses previously held as available-for-sale

10 

 

Net unrealized gain (loss)

(12,674)

 

3,779 



 

 

 

Deferred tax expense

 

 

 

 Securities available-for-sale:

 

 

 

Change in net unrealized gain (loss) during the period

(3,418)

 

1,709 

Reclassification adjustments for gains included in income

(7)

 

(201)

Amortization of losses previously held as available-for-sale

 

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

(3,422)

 

1,512 



 

 

 

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

(9,252)

 

2,267 

Comprehensive income

$                    4,888 

 

$                10,230 



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, 2018

(in thousands, except share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 



 

Common

 

 

 

 

 

Additional

 

 

 

other

 

 



 

stock

 

Common

 

Treasury

 

paid-in

 

Accumulated

 

comprehensive

 

 



 

shares

 

stock

 

stock

 

capital

 

deficit

 

loss

 

Total



 

 

 

 

Balance at January 1, 2018

 

55,861,150 

 

$        55,861 

 

$        (866)

 

$      363,196 

 

$       (89,485)

 

$              (4,557)

 

$          324,149 

Net income

 

 -

 

 -

 

 -

 

 -

 

14,140 

 

 -

 

14,140 

Common stock issued from option exercises,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

12,594 

 

13 

 

 -

 

99 

 

 -

 

 -

 

112 

Common stock issued from restricted shares,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

433,344 

 

433 

 

 -

 

(433)

 

 -

 

 -

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

743 

 

 -

 

 -

 

743 

Other comprehensive loss net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

(9,252)

 

(9,252)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

56,307,088 

 

$        56,307 

 

$        (866)

 

$      363,605 

 

$       (75,345)

 

$            (13,809)

 

$          329,892 



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,



 

2018

 

2017



 

(in thousands)

Operating activities

 

 

 

 

Net income from continuing operations

 

$            14,021 

 

$              6,302 

Net income from discontinued operations

 

119 

 

1,661 

Adjustments to reconcile net income to net cash

 

 

 

 

provided by operating activities

 

 

 

 

Depreciation and amortization

 

1,414 

 

1,585 

Provision for loan and lease losses

 

700 

 

1,000 

Net amortization of investment securities discounts/premiums

 

3,580 

 

2,219 

Stock-based compensation expense

 

743 

 

775 

Loans originated for sale

 

(152,574)

 

(100,618)

Sale of loans originated for resale

 

316,124 

 

24,974 

Gain on sales of loans originated for resale

 

(11,661)

 

(5,383)

Gain on sale of fixed assets

 

 -

 

(13)

Fair value adjustment on investment in unconsolidated entity

 

1,171 

 

(19)

Writedown of other real estate

 

45 

 

 -

Change in fair value loans held for sale

 

1,455 

 

155 

Change in fair value of derivatives

 

(1,524)

 

(450)

Gain on sales of investment securities

 

(26)

 

(503)

Decrease (increase) in accrued interest receivable

 

(878)

 

293 

Increase in other assets

 

(8,011)

 

(5,033)

Change in fair value discontinued loans held for sale

 

960 

 

 -

Decrease (increase) in discontinued assets held for sale

 

(263)

 

5,102 

Increase (decrease) in other liabilities

 

(22,357)

 

1,778 

 Net cash provided by (used in) operating activities

 

143,038 

 

(66,175)



 

 

 

 

Investing activities

 

 

 

 

Purchase of investment securities available-for-sale

 

(157,980)

 

(36,693)

Proceeds from sale of investment securities available-for-sale

 

 -

 

30,374 

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

 

40,276 

 

41,127 

Net increase in loans

 

(71,379)

 

(41,254)

Net decrease in discontinued loans held for sale

 

14,578 

 

14,323 

Proceeds from sale of fixed assets

 

 -

 

132 

Purchases of premises and equipment

 

 -

 

(193)

Investment in unconsolidated entity

 

3,286 

 

967 

 Net cash (used in) provided by investing activities

 

(171,219)

 

8,783 



 

 

 

 

Financing activities

 

 

 

 

Net decrease in deposits

 

(305,673)

 

(202,505)

Net decrease in securities sold under agreements to repurchase

 

(35)

 

(1)

Common stock issuance expense

 

 -

 

(200)

Proceeds from the issuance of common stock

 

112 

 

 -

 Net cash used in financing activities

 

(305,596)

 

(202,706)



 

 

 

 

 Net decrease in cash and cash equivalents

 

(333,777)

 

(260,098)



 

 

 

 

Cash and cash equivalents, beginning of period

 

908,935 

 

999,059 



 

 

 

 

Cash and cash equivalents, end of period

 

$          575,158 

 

$          738,961 



 

 

 

 

Supplemental disclosure:

 

 

 

 

Interest paid

 

$              5,114 

 

$              3,566 

Taxes paid

 

$                   40 

 

$                   35 











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

8

 


 

THE BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED 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), vehicle fleet and other equipment leasing, Small Business Administration (SBA) loans and commercial  mortgage-backed loans (CMBS) generated for sale into commercial mortgage-backed securities markets primarily through securitizations.   Through the Bank, the Company also provides banking services nationally, which include prepaid card accounts, 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, 2018 and for the three month periods ended March 31, 2018 and 2017, 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, 2017 (2017 Form 10-K Report).  The results of operations for the three month period ended March 31, 2018 may not necessarily be indicative of the results of operations for the full year ending December 31, 2018.

Revenue Recognition



The Company recognizes revenue when the performance obligations related to the transfer of goods or services under the terms of a contract are satisfied. Some obligations are satisfied at a point in time while others are satisfied over a period of time. Revenue is recognized as the amount of consideration to which the Company expects to be entitled to in exchange for transferring goods or services to a customer. When consideration includes a variable component, the amount of consideration attributable to variability is included in the transaction price only to the extent it is probable that significant revenue recognized will not be reversed when uncertainty associated with the variable consideration is subsequently resolved. The Company’s contracts generally do not contain terms that require significant judgement to determine the variability impacting the transaction price.



A performance obligation is deemed satisfied when the control over goods or services is transferred to the customer. Control is transferred to a customer either at a point in time or over time. To determine when control is transferred at a point in time, the Company considers indicators, including but not limited to the right to payment for the asset, transfer of significant risk and rewards of ownership of the asset and acceptance of the asset by the customer. When control is transferred over a period of time, for different performance obligations, either the input or output method is used to measure progress for the transfer. The measure of progress used to assess completion of the performance obligation varies between performance obligations and may be based on time throughout the period of service or on the value of goods and services transferred to the customer. As each distinct service or activity is performed, the Company transfers control to the customer based on the services performed as the customer simultaneously receives the benefits of those services. This timing of revenue recognition aligns with the resolution of any uncertainty related to variable consideration. Costs incurred to obtain a revenue producing contract generally are expensed when incurred as a practical expedient as the contractual period for the majority of contracts is one year or less. The Company’s revenue streams that are in scope include prepaid card, card payment, ACH  and deposit processing and other fees. The fees on those revenue streams are generally assessed and collected as the transaction occurs, or on a monthly or quarterly basis.  The Company has completed its review of the contracts and other agreements that are within scope of revenue guidance and did not identify any material changes to the timing or amount of revenue recognition.  The Company’s accounting policies did not change materially since the principles of revenue recognition in the ASU are largely consistent with current practices applied by the Company.  The vast majority of the Company’s services related to its revenues are performed, earned and recognized monthly.



9

 


 

Prepaid card fees primarily include fees for services related to reconciliation, fraud detection, regulatory compliance and other services which are performed and earned daily or monthly and are also billed and collected on a monthly basis. Accordingly, there is no significant component of the services the Company performs or related revenues which are deferred.  The Company earns transactional and/or interchange fees on prepaid card accounts when transactions occur and revenue is billed and collected monthly or quarterly. Certain volume or transaction based interchange expenses paid to payment networks such as Visa, reduce revenue which is presented net on the income statement. Card payment and ACH processing fees include transaction fees earned for processing merchant transactions.  Revenue is recognized when a cardholder’s transaction is approved and settled, or monthly. ACH processing fees are earned on a per item basis as the transactions are processed for third party clients and are also billed and collected monthly. Service charges on deposit accounts include fees and other charges the Company receives to provide various services, including but not limited to, account maintenance, check writing, wire transfer and other services normally associated with deposit accounts. Revenue for these services is recognized monthly as the services are performed. The Company’s customer contracts do not typically have performance obligations and fees are collected and earned when the transaction occurs. The Company may, from time to time, waive certain fees for customers but generally does not reduce the transaction price to reflect variability for future reversals due to the insignificance of the amounts. Waiver of fees reduces the revenue in the period the waiver is granted to the customer.

Note 3. Stock-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, 2018, the Company had  two active  stock-based compensation plans, which are more fully described in its 2017 Form 10-K Report.  



The Company did not grant stock options during the three month period ended March 31, 2018 or 2017There were 15,000  common stock options exercised in the three month period ended March 31, 2018.  There were no common stock options exercised in the three month period ended March 31, 2017.  



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, 2018

1,452,625 

 

$                     8.30 

 

4.64 

 

$                         - 

Granted

 -

 

 -

 

 -

 

 -

Exercised

(15,000)

 

9.13 

 

 -

 

 -

Expired

 -

 

 -

 

 -

 

 -

Forfeited

 -

 

 -

 

 -

 

 -

Outstanding at March 31, 2018

1,437,625 

 

$                     8.29 

 

4.40 

 

$          3,608,029 

Exercisable at March 31, 2018

1,201,375 

 

$                     8.56 

 

3.67 

 

$          2,685,754 



The Company did not grant restricted stock units (RSUs) in the first three months of 2018. In the first three months of 2017, the Company granted 799,559 restricted RSUs of which 664,559 had a vesting period of three years and 135,000 had a vesting period of one year.  All the RSUs granted in the first quarter of 2017 had a fair value of $5.06 at issuance.



10

 


 

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, 2018

1,264,454 

 

$                  5.49 

 

1.67 

Granted

 -

 

 -

 

 

Vested

(433,344)

 

4.94 

 

 

Forfeited

 -

 

 -

 

 

Outstanding at March 31, 2018

831,110 

 

$                  5.78 

 

1.64 



As of March 31, 2018, there was a total of $4.3 million of unrecognized compensation cost related to unvested awards under share-based plans.  This cost is expected to be recognized over a weighted average period of approximately 1.7 years.  Related compensation expense for the three months ended March 31, 2018 and 2017 was $743,000 and $775,000, respectively.  The total intrinsic value of options that were exercised and restricted units which vested during the first three months of 2018 and 2017 was $4.6 million and $2.4 million, respectively. The total issuance date fair value of RSUs vested and options exercised during the three months ended March 31, 2018 and 2017 was $2.1 million and $1.9 million, respectively.



Note 4. Earnings Per Share



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



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







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

March 31, 2018



 

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

 

$               14,021

 

56,141,830 

 

$                  0.25

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

881,291 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               14,021

 

57,023,121 

 

$                  0.25







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

March 31, 2018



 

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

 

$                    119

 

56,141,830 

 

$                      -

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

881,291 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                    119

 

57,023,121 

 

$                      -





11

 


 



 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended



 

March 31, 2018



 

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

 

$               14,140

 

56,141,830 

 

$                  0.25

Effect of dilutive securities

 

 

 

 

 

 

Common stock options

 

 -

 

881,291 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               14,140

 

57,023,121 

 

$                  0.25



Stock options for 1,437,625 shares, exercisable at prices between $6.75 and $10.45 per share, were outstanding at March 31, 2018, and  included in the dilutive shares because the exercise price per share was less than the average market price.







 

 

 

 

 

 



 

 

 

 

 

 



 

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

12

 


 



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 dilutive shares because the exercise price per share was less than the average market price.



Note 5. Investment Securities



The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities classified as available-for-sale and held-to-maturity at March 31, 2018 and December 31, 2017 are summarized as follows (in thousands):









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Available-for-sale

 

March 31, 2018



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$            58,376 

 

$                  3 

 

$            (898)

 

$           57,481 

Asset-backed securities *

 

264,753 

 

1,237 

 

(429)

 

265,561 

Tax-exempt obligations of states and political subdivisions

 

9,894 

 

50 

 

(67)

 

9,877 

Taxable obligations of states and political subdivisions

 

60,850 

 

964 

 

(764)

 

61,050 

Residential mortgage-backed securities

 

429,891 

 

597 

 

(9,647)

 

420,841 

Collateralized mortgage obligation securities

 

292,802 

 

146 

 

(4,786)

 

288,162 

Commercial mortgage-backed securities

 

282,416 

 

 

(4,372)

 

278,048 



 

$       1,398,982 

 

$           3,001 

 

$       (20,963)

 

$      1,381,020 







 

 

 

 

 

 

 

 



 

March 31, 2018



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

* Asset-backed securities as shown above

 

cost

 

gains

 

losses

 

value

Federally insured student loan securities

 

$               86,515 

 

$                  183 

 

$                (429)

 

$              86,269 

Collateralized loan obligation securities

 

170,843 

 

1,015 

 

 -

 

171,858 

Other

 

7,395 

 

39 

 

 -

 

7,434 



 

$             264,753 

 

$               1,237 

 

$                (429)

 

$            265,561 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Held-to-maturity

 

March 31, 2018



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$               11,046 

 

$                    94 

 

$             (1,928)

 

$                9,212 

Other debt securities - pooled

 

75,324 

 

1,413 

 

 -

 

76,737 



 

$               86,370 

 

$               1,507 

 

$             (1,928)

 

$              85,949 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Available-for-sale

 

December 31, 2017



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$               50,107 

 

$                    21 

 

$                (226)

 

$              49,902 

Asset-backed securities *

 

269,164 

 

1,196 

 

(275)

 

270,085 

Tax-exempt obligations of states and political subdivisions

 

9,893 

 

131 

 

(36)

 

9,988 

Taxable obligations of states and political subdivisions

 

64,739 

 

1,377 

 

(255)

 

65,861 

Residential mortgage-backed securities

 

452,723 

 

727 

 

(4,598)

 

448,852 

Collateralized mortgage obligation securities

 

248,663 

 

148 

 

(2,318)

 

246,493 

Commercial mortgage-backed securities

 

204,469 

 

585 

 

(1,751)

 

203,303 



 

$          1,299,758 

 

$               4,185 

 

$             (9,459)

 

$         1,294,484 





13

 


 



 

 

 

 

 

 

 

 



 

December 31, 2017



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

* Asset-backed securities as shown above

 

cost

 

gains

 

losses

 

value

Federally insured student loan securities

 

$               90,140 

 

$                  271 

 

$                (270)

 

$              90,141 

Collateralized loan obligation securities

 

170,825 

 

880 

 

(5)

 

171,700 

Other

 

8,199 

 

45 

 

 -

 

8,244 



 

$             269,164 

 

$               1,196 

 

$                (275)

 

$            270,085 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Held-to-maturity

 

December 31, 2017



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$               11,031 

 

$                  105 

 

$             (2,516)

 

$                8,620 

Other debt securities - pooled

 

75,349 

 

1,376 

 

 -

 

76,725 



 

$               86,380 

 

$               1,481 

 

$             (2,516)

 

$              85,345 



Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $991,000 at March 31, 2018 and December 31, 2017, respectively.



The amortized cost and fair value of the Company’s investment securities at March 31, 2018, 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

 

$                 1,998 

 

$                1,994 

 

$                       - 

 

$                      - 

Due after one year through five years

 

41,475 

 

41,204 

 

 -

 

 -

Due after five years through ten years

 

317,468 

 

311,934 

 

 -

 

 -

Due after ten years

 

1,038,041 

 

1,025,888 

 

86,370 

 

85,949 



 

$          1,398,982 

 

$         1,381,020 

 

$              86,370 

 

$            85,949 



At March 31, 2018 and December 31, 2017, investment securities with a fair value of approximately $496.1 million and $310.9 million, respectively, were pledged to secure a line of credit with the Federal Home Loan Bank.  At March 31, 2018 and December 31, 2017, investment securities with a fair value of approximately $281.4 million and $225.6 million, respectively, were pledged to secure a line of credit with the Federal Reserve Bank.  



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, or prices provided by securities dealers with expertise in the securities being evaluated, or actual trade data from an independent pricing service.   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 2018. 



14

 


 

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at March 31, 2018 (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

 

11

 

$              56,423 

 

$                 (898)

 

$                      - 

 

$                       - 

 

$                 56,423 

 

$                (898)

Asset-backed securities

 

11

 

18,631 

 

(65)

 

36,637 

 

(364)

 

55,268 

 

(429)

Tax-exempt obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

4

 

2,982 

 

(18)

 

1,111 

 

(49)

 

4,093 

 

(67)

Taxable obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

23

 

36,376 

 

(636)

 

3,056 

 

(128)

 

39,432 

 

(764)

Residential mortgage-backed securities

 

122

 

245,285 

 

(4,632)

 

137,063 

 

(5,015)

 

382,348 

 

(9,647)

Collateralized mortgage obligation securities

 

45

 

161,315 

 

(2,742)

 

59,657 

 

(2,044)

 

220,972 

 

(4,786)

Commercial mortgage-backed securities

 

28

 

253,799 

 

(4,246)

 

3,133 

 

(126)

 

256,932 

 

(4,372)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

244

 

$            774,811 

 

$            (13,237)

 

$          240,657 

 

$              (7,726)

 

$            1,015,468 

 

$           (20,963)







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$                      - 

 

$                      - 

 

$                7,201 

 

$             (1,928)

 

$                  7,201 

 

$             (1,928)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                      - 

 

$                      - 

 

$                7,201 

 

$             (1,928)

 

$                  7,201 

 

$             (1,928)



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

 

9

 

$              44,808 

 

$                 (226)

 

$                      - 

 

$                       - 

 

$                 44,808 

 

$                (226)

Asset-backed securities

 

8

 

11,264 

 

(6)

 

37,894 

 

(269)

 

49,158 

 

(275)

Tax-exempt obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

5

 

3,982 

 

(19)

 

1,143 

 

(17)

 

5,125 

 

(36)

Taxable obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

15

 

22,231 

 

(181)

 

2,853 

 

(74)

 

25,084 

 

(255)

Residential mortgage-backed securities

 

116

 

249,572 

 

(1,771)

 

125,096 

 

(2,827)

 

374,668 

 

(4,598)

Collateralized mortgage obligation securities

 

41

 

148,655 

 

(921)

 

63,274 

 

(1,397)

 

211,929 

 

(2,318)

Commercial mortgage-backed securities

 

16

 

150,530 

 

(1,681)

 

3,299 

 

(70)

 

153,829 

 

(1,751)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

210

 

$            631,042 

 

$              (4,805)

 

$          233,559 

 

$              (4,654)

 

$               864,601 

 

$             (9,459)







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$                      - 

 

$                      - 

 

$                6,600 

 

$             (2,516)

 

$                  6,600 

 

$             (2,516)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                      - 

 

$                      - 

 

$                6,600 

 

$             (2,516)

 

$                  6,600 

 

$             (2,516)



Other securities included in the held-to-maturity classification at March 31, 2018 consisted of three securities secured by diversified portfolios of corporate securities and two single-issuer trust preferred securities.

15

 


 



A total of $11.0 million of other debt securities - single issuers is comprised of the following: 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. 



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, 2018 (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

Security A

 

$                1,916 

 

$                 2,010 

 

$                      94 

 

Not rated

Security B

 

9,129 

 

7,201 

 

(1,928)

 

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.     The Company’s unrealized loss for other debt securities, which include two single issuer trust preferred securities, 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 of 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 into commercial mortgage backed securitizations or to secondary government guaranteed loan markets.  These sales are accounted for as true sales and 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, 2018, the fair value of the loans held for sale was $349.8 million and their book value was $346.6 million.  Included in the gain on sale of loans in the Statements of Operations were losses recognized from changes in fair value of $1.5 million for the three months ended March 31, 2018.  There were no changes in fair value related to credit risk.  Interest earned on loans held for sale during the period held are recorded in Interest Income-Loans, including fees, on the Statements of Operations.



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.



16

 


 

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







 

 

 



 

 

 



March 31,

 

December 31,



2018

 

2017



 

 

 

SBA non-real estate

$                       75,225 

 

$                       70,379 

SBA commercial mortgage

149,227 

 

142,086 

SBA construction

20,143 

 

16,740 

SBA loans *

244,595 

 

229,205 

Direct lease financing

385,467 

 

377,660 

SBLOC

759,369 

 

730,462 

Other specialty lending

45,729 

 

30,720 

Other consumer loans

17,416 

 

14,133 



1,452,576 

 

1,382,180 

Unamortized loan fees and costs

10,488 

 

10,048 

Total loans, net of deferred loan fees and costs

$                  1,463,064 

 

$                  1,392,228 



 

 

 

Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $6.2 million and $2.3 million at March 31, 2018 and December 31, 2017, respectively.  Overdraft charge-offs and recoveries are reflected in the allowance for loan and lease losses.



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







 

 

 



March 31,

 

December 31,



2018

 

2017



 

 

 

SBA loans, including deferred fees and costs

$                     252,457 

 

$                     236,724 

SBA loans included in held for sale

172,030 

 

165,177 

Total SBA loans

$                     424,487 

 

$                     401,901 



17

 


 

The following table provides information about impaired loans at March 31, 2018 and December 31, 2017 (in thousands):







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

March 31, 2018

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non-real estate

$                      652 

 

$                   1,204 

 

$                        - 

 

$                      555 

 

$                           - 

SBA commercial mortgage

 -

 

83 

 

 -

 

 -

 

 -

Direct lease financing

526 

 

637 

 

 -

 

378 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

1,690 

 

1,690 

 

 -

 

1,692 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 -

SBA non-real estate

1,954 

 

1,954 

 

1,464 

 

2,177 

 

 -

SBA commercial mortgage

458 

 

458 

 

74 

 

575 

 

 -

Direct lease financing

1,006 

 

1,006 

 

74 

 

503 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

 -

 

 -

 

 -

 

 -

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non-real estate

2,606 

 

3,158 

 

1,464 

 

2,732 

 

 -

SBA commercial mortgage

458 

 

541 

 

74 

 

575 

 

 -

Direct lease financing

1,532 

 

1,643 

 

74 

 

881 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

1,690 

 

1,690 

 

 -

 

1,692 

 

 -



$                   6,286 

 

$                   7,032 

 

$                1,612 

 

$                   5,880 

 

$                           - 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non-real estate

$                      459 

 

$                   1,286 

 

$                        - 

 

$                      311 

 

$                           - 

SBA commercial mortgage

 -

 

 -

 

 -

 

 -

 

 -

Direct lease financing

229 

 

341 

 

 -

 

103 

 

 -

Consumer - other

 -

 

 -

 

 -

 

259 

 

 -

Consumer - home equity

1,695 

 

1,695 

 

 -

 

1,712 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non-real estate

2,399 

 

2,399 

 

1,689 

 

2,507 

 

 -

SBA commercial mortgage

693 

 

693 

 

225 

 

747 

 

 -

Direct lease financing

 -

 

 -

 

 -

 

405 

 

 -

Consumer - other

 -

 

 -

 

 -

 

14 

 

 -

Consumer - home equity

 -

 

 -

 

 -

 

 -

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non-real estate

2,858 

 

3,685 

 

1,689 

 

2,818 

 

 -

SBA commercial mortgage

693 

 

693 

 

225 

 

747 

 

 -

Direct lease financing

229 

 

341 

 

 -

 

508 

 

 -

Consumer - other

 -

 

 -

 

 -

 

273 

 

 -

Consumer - home equity

1,695 

 

1,695 

 

 -

 

1,712 

 

 -



$                   5,475 

 

$                   6,414 

 

$                1,914 

 

$                   6,058 

 

$                           - 



18

 


 

The following tables summarize the Company’s non-accrual loans, loans past due 90 days and still accruing and other real estate owned as of the dates indicated (the Company had no non-accrual leases at March 31, 2018 or December 31, 2017) (in thousands):





 

 

 

 



 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017



 

 

 

 

Non-accrual loans

 

 

 

 

SBA non-real estate

 

$                 1,647 

 

$                  1,889 

SBA commercial mortgage

 

458 

 

693 

Consumer

 

1,411 

 

1,414 

Total non-accrual loans

 

3,516 

 

3,996 



 

 

 

 

Loans past due 90 days or more

 

2,643 

 

227 

Total non-performing loans

 

6,159 

 

4,223 

Other real estate owned

 

405 

 

450 

Total non-performing assets

 

$                 6,564 

 

$                  4,673 



The Company’s loans that were modified as of March 31, 2018 and December 31, 2017 and considered troubled debt restructurings are as follows (dollars in thousands):



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2018

 

December 31, 2017



 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBA non-real estate

 

 

$               959 

 

$                959 

 

 

$            1,476 

 

$             1,476 

Direct lease financing

 

 

1,532 

 

1,532 

 

 

230 

 

230 

Consumer

 

 

530 

 

530 

 

 

535 

 

535 

Total

 

 

$            3,021 

 

$             3,021 

 

 

$            2,241 

 

$             2,241 



The balances below provide information as to how the loans were modified as troubled debt restructurings loans as of March 31, 2018 and December 31, 2017 (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2018

 

December 31, 2017



 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBA non-real estate

 

$                    - 

 

$               108 

 

$                851 

 

$                 - 

 

$               115 

 

$             1,361 

Direct lease financing

 

 -

 

1,006 

 

526 

 

 -

 

 -

 

230 

Consumer

 

 -

 

 -

 

530 

 

 -

 

 -

 

535 

Total

 

$                    - 

 

$            1,114 

 

$             1,907 

 

$                 - 

 

$               115 

 

$             2,126 







The following table summarizes, as of March 31, 2018, loans that had been restructured within the last 12 months that have subsequently defaulted.





 

 

 

 



 

 

 

 



 

Number

 

Pre-modification recorded investment

SBA non-real estate

 

 

$               185 

Total

 

 

$               185 



As of March 31, 2018 and December 31, 2017, the Company had a commitment to extend $228,000 on one loan classified as  a troubled debt restructuring.  However, based upon available information, the borrower does not intend to draw on the commitment.

 



19

 


 

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, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$              3,145 

 

$              1,120 

 

$                 136 

 

$             1,495 

 

$              365 

 

$               57 

 

$              581 

 

$                 197 

 

$                7,096 

Charge-offs

 

(388)

 

(157)

 

 -

 

(56)

 

 -

 

 -

 

(14)

 

 -

 

(615)

Recoveries

 

40 

 

 

 -

 

58 

 

 -

 

 -

 

 -

 

 -

 

104 

Provision (credit)

 

391 

 

130 

 

97 

 

(23)

 

15 

 

92 

 

15 

 

(17)

 

700 

Ending balance

 

$              3,188 

 

$              1,099 

 

$                 233 

 

$             1,474 

 

$              380 

 

$             149 

 

$              582 

 

$                 180 

 

$                7,285 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$              1,464 

 

$                   74 

 

$                      - 

 

$                     - 

 

$                   - 

 

$               74 

 

$                   - 

 

$                      - 

 

$                1,612 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$              1,724 

 

$              1,025 

 

$                 233 

 

$             1,474 

 

$              380 

 

$               75 

 

$              582 

 

$                 180 

 

$                5,673 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$            75,225 

 

$          149,227 

 

$            20,143 

 

$         385,467 

 

$       759,369 

 

$        45,729 

 

$         17,416 

 

$            10,488 

 

$         1,463,064 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$              2,606 

 

$                 458 

 

$                      - 

 

$             1,532 

 

$                   - 

 

$                 - 

 

$           1,690 

 

$                      - 

 

$                6,286 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$            72,619 

 

$          148,769 

 

$            20,143 

 

$         383,935 

 

$       759,369 

 

$        45,729 

 

$         15,726 

 

$            10,488 

 

$         1,456,778 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$              1,976 

 

$                 737 

 

$                   76 

 

$             1,994 

 

$              315 

 

$               32 

 

$              975 

 

$                 227 

 

$                6,332 

Charge-offs

 

(1,171)

 

 -

 

 -

 

(927)

 

 -

 

 -

 

(109)

 

 -

 

(2,207)

Recoveries

 

19 

 

 -

 

 -

 

 

 -

 

 -

 

24 

 

 -

 

51 

Provision (credit)

 

2,321 

 

383 

 

60 

 

420 

 

50 

 

25 

 

(309)

 

(30)

 

2,920 

Ending balance

 

$              3,145 

 

$              1,120 

 

$                 136 

 

$             1,495 

 

$              365 

 

$               57 

 

$              581 

 

$                 197 

 

$                7,096 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$              1,689 

 

$                 225 

 

$                      - 

 

$                     - 

 

$                   - 

 

$                 - 

 

$                   - 

 

$                      - 

 

$                1,914 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$              1,456 

 

$                 895 

 

$                 136 

 

$             1,495 

 

$              365 

 

$               57 

 

$              581 

 

$                 197 

 

$                5,182 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$            70,379 

 

$          142,086 

 

$            16,740 

 

$         377,660 

 

$       730,462 

 

$        30,720 

 

$         14,133 

 

$            10,048 

 

$         1,392,228 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$              2,858 

 

$                 693 

 

$                      - 

 

$                229 

 

$                   - 

 

$                 - 

 

$           1,695 

 

$                      - 

 

$                5,475 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$            67,521 

 

$          141,393 

 

$            16,740 

 

$         377,431 

 

$       730,462 

 

$        30,720 

 

$         12,438 

 

$            10,048 

 

$         1,386,753 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

20

 


 

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 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 





The Company did not have loans acquired with deteriorated credit quality at either March 31, 2018 or December 31, 2017.



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

90 Days

 

 

 

Total

 

 

 

Total

March 31, 2018

 

past due

 

past due

 

or greater

 

Non-accrual

 

past due

 

Current

 

loans

SBA non-real estate

 

$                   658 

 

$                      - 

 

$                   268 

 

$                1,647 

 

$                2,573 

 

$               72,652 

 

$               75,225 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

458 

 

458 

 

148,769 

 

149,227 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,143 

 

20,143 

Direct lease financing

 

1,435 

 

794 

 

2,375 

 

 -

 

4,604 

 

380,863 

 

385,467 

SBLOC

 

86 

 

 -

 

 -

 

 -

 

86 

 

759,283 

 

759,369 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

45,729 

 

45,729 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,329 

 

8,329 

Consumer - home equity

 

69 

 

 -

 

 -

 

1,411 

 

1,480 

 

7,607 

 

9,087 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,488 

 

10,488 



 

$                2,248 

 

$                  794 

 

$                2,643 

 

$                3,516 

 

$                9,201 

 

$          1,453,863 

 

$          1,463,064 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

90 Days

 

 

 

Total

 

 

 

Total

December 31, 2017

 

past due

 

past due

 

or greater

 

Non-accrual

 

past due

 

Current

 

loans

SBA non-real estate

 

$                     58 

 

$                   268 

 

$                        - 

 

$                1,889 

 

$                2,215 

 

$               68,164 

 

$               70,379 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

693 

 

693 

 

141,393 

 

142,086 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

16,740 

 

16,740 

Direct lease financing

 

3,789 

 

2,233 

 

227 

 

 -

 

6,249 

 

371,411 

 

377,660 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

730,462 

 

730,462 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

30,720 

 

30,720 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

4,482 

 

4,482 

Consumer - home equity

 

142 

 

73 

 

 -

 

1,414 

 

1,629 

 

8,022 

 

9,651 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,048 

 

10,048 



 

$                3,989 

 

$                2,574 

 

$                   227 

 

$                3,996 

 

$              10,786 

 

$          1,381,442 

 

$          1,392,228 



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, 2018

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non-real estate

 

$           66,000 

 

$            3,481 

 

$            3,588 

 

$                   - 

 

$                    - 

 

$                    176 

 

$                   1,980 

 

$              75,225 

SBA commercial mortgage

 

142,845 

 

276 

 

458 

 

 -

 

 -

 

4,087 

 

1,561 

 

149,227 

SBA construction

 

19,384 

 

 -

 

682 

 

 -

 

 -

 

 -

 

77 

 

20,143 

Direct lease financing

 

214,198 

 

 -

 

2,890 

 

 -

 

 -

 

5,132 

 

163,247 

 

385,467 

SBLOC

 

370,497 

 

 -

 

 -

 

 -

 

 -

 

3,653 

 

385,219 

 

759,369 

Other specialty lending

 

45,729 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

45,729 

Consumer

 

7,970 

 

 -

 

1,616 

 

 -

 

 -

 

 -

 

7,830 

 

17,416 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,488 

 

10,488 



 

$         866,623 

 

$            3,757 

 

$            9,234 

 

$                   - 

 

$                    - 

 

$               13,048 

 

$               570,402 

 

$         1,463,064 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non-real estate

 

$           63,547 

 

$            3,392 

 

$            3,450 

 

$                   - 

 

$                    - 

 

$                         - 

 

$                       (10)

 

$              70,379 

SBA commercial mortgage

 

141,084 

 

277 

 

693 

 

 -

 

 -

 

 -

 

32 

 

142,086 

SBA construction

 

16,740 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

16,740 

Direct lease financing

 

204,906 

 

 -

 

2,895 

 

 -

 

 -

 

8,820 

 

161,039 

 

377,660 

SBLOC

 

357,050 

 

 -

 

 -

 

 -

 

 -

 

 -

 

373,412 

 

730,462 

Other specialty lending

 

30,720 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

30,720 

Consumer

 

7,910 

 

281 

 

1,947 

 

 -

 

 -

 

 -

 

3,995 

 

14,133 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,048 

 

10,048 



 

$         821,957 

 

$            3,950 

 

$            8,985 

 

$                   - 

 

$                    - 

 

$                 8,820 

 

$               548,516 

 

$         1,392,228 



* 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 $2.2 million and $4.7 million as of March 31, 2018 and December 31, 2017, 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 lenderAt March 31, 2018, 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 amounted to $1.6 million at March 31, 2018 and $1.7 million at December 31, 2017.



The Bank has periodically purchased securities under agreements to resell and engaged in other securities transactions through J.V.B. Financial Group, LLC (JVB), a broker dealer in which the Company’s Chairman is Chairman and has a minority interest. The Company’s Chairman also serves as the President of Cohen & Company Financial Limited (formerly Euro Dekania Management Ltd.), a wholly-owned subsidiary of Cohen & Company Inc. (formerly Institutional Financial Markets Inc.), the parent company of JVB. In 2018, the Company purchased $3.2 million of government guaranteed SBA loans for Community Reinvestment Act purposes from 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, 2018 and had complied with all terms for all prior repurchase agreements. There were $64.3 million of repurchase agreements outstanding at March 31, 2018 and December 31, 2017, 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 $812,000  and $1.0 million for legal services for the three months ended March 31, 2018 and March 31, 2017, respectively.



Note 8. Fair Value Measurements



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

22

 


 

general practice and intent to hold its financial instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities, except for the sale of commercial loans to secondary markets.  For fair value disclosure purposes, the Company utilized certain value measurement criteria required under the ASC 820, Fair Value Measurements and Disclosures, and discussed below.



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



Cash and cash equivalents, which are comprised of cash and due from banks, the Company’s balance at the Federal Reserve Bank and securities purchased under agreements to resell, had recorded values of $575.2 million and $908.9 million as of March 31, 2018 and December 31, 2017, respectively, which approximated fair values. 



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



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



Commercial loans held for sale have estimated fair values based upon either market indications of the sales price of such loans from recent sales transactions or discounted cash flow analysis on an individual loan basis.



The net loan portfolio at March 31, 2018 and December 31, 2017 has been valued using the present value of discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk.  Accrued interest receivable has a carrying value that approximates fair value.



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



Discontinued assets held for sale as of March 31, 2018 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 held for sale are based on “unobservable inputs” that are based on available information.  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 of interest and non-interest bearing checking accounts, savings accounts, 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 short term 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, 2018, 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, 2018



 

 

 

 

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)

Investment securities available-for-sale

$            1,381,020 

 

$               1,381,020 

 

$                            - 

 

$               1,314,769 

 

$                   66,251 

Investment securities held-to-maturity

86,370 

 

85,949 

 

 -

 

78,748 

 

7,201 

Securities purchased under agreements to resell

64,312 

 

64,312 

 

64,312 

 

 -

 

 -

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

991 

 

991 

 

 -

 

 -

 

991 

Commercial loans held for sale

349,806 

 

349,806 

 

 -

 

 -

 

349,806 

Loans, net of deferred loan fees and costs

1,463,064 

 

1,461,268 

 

 -

 

 -

 

1,461,268 

Investment in unconsolidated entity, senior note

70,016 

 

70,016 

 

 -

 

 -

 

70,016 

Assets held for sale

289,038 

 

289,038 

 

 -

 

 -

 

289,038 

Demand and interest checking

3,461,881 

 

3,461,881 

 

3,461,881 

 

 -

 

 -

Savings and money market

493,288 

 

493,288 

 

493,288 

 

 -

 

 -

Subordinated debentures

13,401 

 

9,822 

 

 -

 

 -

 

9,822 

Securities sold under agreements to repurchase

182 

 

182 

 

182 

 

 -

 

 -

Interest rate swaps, asset

2,767 

 

2,767 

 

 -

 

2,767 

 

 -





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



December 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)

Investment securities available-for-sale

$            1,294,484 

 

$               1,294,484 

 

$                            - 

 

$               1,253,840 

 

$                   40,644 

Investment securities held-to-maturity

86,380 

 

85,345 

 

 -

 

78,745 

 

6,600 

Securities purchased under agreements to resell

64,312 

 

64,312 

 

64,312 

 

 -

 

 -

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

991 

 

991 

 

 -

 

 -

 

991 

Commercial loans held for sale

503,316 

 

503,316 

 

 -

 

 -

 

503,316 

Loans, net of deferred loan fees and costs

1,392,228 

 

1,391,701 

 

 -

 

 -

 

1,391,701 

Investment in unconsolidated entity, senior note

74,473 

 

74,473 

 

 -

 

 -

 

74,473 

Assets held for sale

304,313 

 

304,313 

 

 -

 

 -

 

304,313 

Demand and interest checking

3,806,965 

 

3,806,965 

 

3,806,965 

 

 -

 

 -

Savings and money market

453,877 

 

453,877 

 

453,877 

 

 -

 

 -

Subordinated debentures

13,401 

 

9,173 

 

 -

 

 -

 

9,173 

Securities sold under agreements to repurchase

217 

 

217 

 

217 

 

 -

 

 -

Interest rate swaps, asset

1,243 

 

1,243 

 

 -

 

1,243 

 

 -



24

 


 

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, 2018

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$                           57,481 

 

$                                       - 

 

$                             57,481 

 

$                                       - 

Asset-backed securities

 

265,561 

 

 -

 

265,561 

 

 -

Obligations of states and political subdivisions

 

70,927 

 

 -

 

70,927 

 

 -

Residential mortgage-backed securities

 

420,841 

 

 -

 

420,841 

 

 -

Collateralized mortgage obligation securities

 

288,162 

 

 -

 

288,162 

 

 -

Commercial mortgage-backed securities

 

278,048 

 

 -

 

211,797 

 

66,251 

Total investment securities available-for-sale

 

1,381,020 

 

 -

 

1,314,769 

 

66,251 

Loans held for sale

 

349,806 

 

 -

 

 -

 

349,806 

Investment in unconsolidated entity, senior note

 

70,016 

 

 -

 

 -

 

70,016 

Interest rate swaps, asset

 

2,767 

 

 -

 

2,767 

 

 -



 

$                      1,803,609 

 

$                                       - 

 

$                        1,317,536 

 

$                           486,073 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

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, 2017

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$                           49,902 

 

$                                       - 

 

$                             49,902 

 

$                                       - 

Asset-backed securities

 

270,085 

 

 -

 

270,085 

 

 -

Obligations of states and political subdivisions

 

75,849 

 

 -

 

75,849 

 

 -

Residential mortgage-backed securities

 

448,852 

 

 -

 

448,852 

 

 -

Collateralized mortgage obligation securities

 

246,493 

 

 -

 

246,493 

 

 -

Commercial mortgage-backed securities

 

203,303 

 

 -

 

162,659 

 

40,644 

Total investment securities available-for-sale

 

1,294,484 

 

 -

 

1,253,840 

 

40,644 

Loans held for sale

 

503,316 

 

 -

 

 -

 

503,316 

Investment in unconsolidated entity, senior note

 

74,473 

 

 -

 

 -

 

74,473 

Interest rate swaps, asset

 

1,243 

 

 -

 

1,243 

 

 -



 

$                      1,873,516 

 

$                                       - 

 

$                        1,255,083 

 

$                           618,433 



 

 

 

 

 

 

 

 



In addition, ASC 820 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

25

 


 

input that is significant to the fair value measurement.  The changes in the Company’s Level 3 assets measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below (in thousands): 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Fair Value Measurements Using



 

Significant Unobservable Inputs



 

(Level 3)



 

 

 

 

 

 

 

 



 

Available-for-sale

 

Commercial loans



 

securities

 

held for sale



 

March 31, 2018

 

December 31, 2017

 

March 31, 2018

 

December 31, 2017

Beginning balance

 

$                           40,644 

 

$                                       - 

 

$                           503,316 

 

$                           663,140 

Transfers into level 3

 

 -

 

19,441 

 

 -

 

 -

Transfers out of level 3

 

-

 

 -

 

-

 

 -

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

 -

 

 -

 

10,206 

 

19,883 

Included in other comprehensive loss

 

(385)

 

(497)

 

 -

 

 -

Purchases, issuances, sales and settlements

 

 

 

 

 

 

 

 

Purchases

 

28,365 

 

24,112 

 

 

 

 

Issuances

 

 -

 

 -

 

152,574 

 

521,914 

Sales

 

 -

 

 -

 

(316,290)

 

(701,621)

Settlements

 

(2,373)

 

(2,412)

 

 -

 

 -

Ending balance

 

$                           66,251 

 

$                             40,644 

 

$                           349,806 

 

$                           503,316 



 

 

 

 

 

 

 

 

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.

 

$                                    - 

 

$                                       - 

 

$                             (1,406)

 

$                                  911 







 

 

 

 

 

 

 

 



Fair Value Measurements Using



Significant Unobservable Inputs



(Level 3)



 

 

 

 

 

 

 

 



Investment in

 

Assets



unconsolidated entity

 

held for sale



 

March 31, 2018

 

December 31, 2017

 

March 31, 2018

 

December 31, 2017

Beginning balance

 

$                           74,473 

 

$                             126,930 

 

$                             304,313 

 

$                             360,711 

Transfers into level 3

 

 -

 

 -

 

 -

 

 -

Transfers out of level 3

 

 -

 

 -

 

 -

 

 -

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

(1,171)

 

(20)

 

(960)

 

557 

Included in other comprehensive income

 

 -

 

 -

 

 -

 

 -

Purchases, issuances, sales, settlements and charge-offs

 

 

 

 

 

 

 

 

Purchases

 

 -

 

 -

 

 -

 

 -

Issuances

 

 -

 

 -

 

215 

 

11,450 

Sales

 

 -

 

 -

 

 -

 

 -

Settlements

 

(3,286)

 

(52,437)

 

(14,530)

 

(52,450)

Charge-offs

 

 -

 

 -

 

 -

 

(15,955)

Ending balance

 

$                           70,016 

 

$                               74,473 

 

$                             289,038 

 

$                             304,313 



 

 

 

 

 

 

 

 

The amount of total 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.

 

$                          (1,171)

 

$                                    (20)

 

$                                  (960)

 

$                               (4,776)



26

 


 









 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Fair value at

 

Fair value at

 

 

 

 

 

 

Level 3 instruments only

 

March 31, 2018

 

December 31, 2017

 

Valuation techniques

 

Unobservable inputs

 

Range



 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

$                         66,251 

 

$                        40,644 

 

Discounted cash flow

 

Discount rate

 

5.46% - 9.61%

Investment securities held-to-maturity

 

7,201 

 

6,600 

 

Discounted cash flow

 

Discount rate

 

8.00%

Federal Home Loan Bank and Atlantic

 

991 

 

991 

 

Cost

 

N/A

 

N/A

  Central Bankers Bank stock

 

 

 

 

 

 

 

 

 

 

Loans, net of deferred loan fees and costs

 

1,461,268 

 

1,391,701 

 

Discounted cash flow

 

Discount rate

 

3.67% - 7.20%

Commercial loans held for sale

 

349,806 

 

503,316 

 

Discounted cash flow

 

Discount rate

 

4.74% - 7.19%

Investment in unconsolidated entity,

 

70,016 

 

74,473 

 

Discounted cash flow

 

Discount rate

 

5.10%

 senior note

 

 

 

 

 

 

 

Default rate

 

1.00%

Assets held for sale

 

289,038 

 

304,313 

 

Discounted cash flow

 

Discount rate

 

4.65% - 9.95%

Subordinated debentures

 

9,822 

 

9,173 

 

Discounted cash flow

 

Discount rate

 

8.08%





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 (1)

 

March 31, 2018

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Impaired loans - collateral dependent

 

$                             4,673 

 

$                                       - 

 

$                                       - 

 

$                               4,673 

Other real estate owned

 

405 

 

 -

 

 -

 

405 

Intangible assets

 

4,995 

 

 -

 

 -

 

4,995 



 

$                          10,073 

 

$                                       - 

 

$                                       - 

 

$                             10,073 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

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 (1)

 

December 31, 2017

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

 

Impaired loans - collateral dependent

 

$                             3,559 

 

$                                       - 

 

$                                       - 

 

3,559 

Other real estate owned

 

450 

 

 -

 

 -

 

450 

Intangible assets

 

5,377 

 

 -

 

 -

 

5,377 



 

$                             9,386 

 

$                                       - 

 

$                                       - 

 

$                               9,386 



(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, 2018, principal on impaired loans and troubled debt restructurings that is accounted for on the basis of the value of underlying collateral is shown at estimated fair value of $4.7 million.  To arrive at that fair value, related loan principal of $6.3 million was reduced by specific reserves of $1.6 million within the allowance for loan losses as of that date, representing the deficiency between  principal and estimated collateral values, which were reduced by costs to sell.  When the deficiency is deemed uncollectible, it is charged off by reducing the specific reserve and decreasing principal. Included in the impaired balance at March 31, 2018 were eight troubled debt restructured loans with a balance of $3.0 million which had specific reserves of $574,000.  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

27

 


 

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, 2018, the Company had entered into eleven interest rate swap agreements with an aggregate notional amount of $59.7 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 $1.5 million for the three months ended March 31, 2018 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 $2.8 million at March 31, 2018 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 $251,000 as of March 31, 2018.



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, 2018 are summarized below (dollars in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31, 2018

Maturity date

 

Notional amount

 

Interest rate paid

 

Interest rate received

 

Fair value

August 4, 2021

 

$                  10,300 

 

1.12% 

 

1.79% 

 

$              503 

August 17, 2025

 

2,500 

 

2.27% 

 

1.88% 

 

77 

August 17, 2025

 

2,500 

 

2.27% 

 

1.88% 

 

77 

December 11, 2025

 

2,400 

 

2.14% 

 

2.07% 

 

100 

December 23, 2025

 

6,800 

 

2.16% 

 

2.27% 

 

279 

December 24, 2025

 

8,200 

 

2.17% 

 

2.29% 

 

327 

January 28, 2026

 

3,000 

 

1.87% 

 

1.76% 

 

185 

July 20, 2026

 

6,300 

 

1.44% 

 

1.75% 

 

616 

December 12, 2026

 

3,200 

 

2.26% 

 

2.07% 

 

122 

January 4, 2027

 

10,100 

 

2.35% 

 

1.70% 

 

324 

April 27, 2027

 

4,400 

 

2.32% 

 

1.76% 

 

157 

Total

 

$                  59,700 

 

 

 

 

 

$           2,767 





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  ($492,000 over the remainder of the amortization period).  The gross carrying amount of the software is $1.8 million, and as of March 31, 2018, the accumulated amortization was $1.3 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 ($1.8 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, 2018, the accumulated amortization was $10.2 million.  



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.  Amortization expense is $340,000 per year  ($1.7 million over the next five years).  The gross carrying amount of the customer list intangible is $3.4 million, and as of March 31, 2018, the accumulated amortization was $653,000.

 

Note 11. Recent Accounting Pronouncements



In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. This ASU establishes a comprehensive revenue recognition standard for virtually all industries conforming to U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate and construction industries.  The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services.  It attempts to depict the exchange of

28

 


 

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.  Our payments business contracts encompass our services which are performed, and earned on a daily or monthly basis; accordingly, these contracts with various third parties generally do not entail significant amounts of deferred revenues. These services consist of reconciliation, fraud detection, regulatory compliance and other services which are performed and earned daily or monthly, and are also billed and collected on a monthly basis.  Accordingly, there is no significant component of the services we perform or related revenues which are deferred.  We have nonetheless reviewed a significant number of such contracts for prepaid card accounts, merchant acquiring (processing card payments for merchants) and automated clearing house, or ACH, for any potentially significant ramifications of the guidance.  We also reviewed other non-interest income producing categories of the Company which include service fees on deposit accounts, gains and losses on other real estate owned, gains and losses on the sale of loans and others.  Additionally, the standard does not apply to revenue from loans, securities and other financial instruments.  Based upon the nature of our businesses and the reviews we have performed to ascertain potential applicability, the adoption of this standard in the first quarter of 2018 did not have a significant impact on our consolidated results of operations or our consolidated financial position. 



In January 2016, the FASB issued Subtopic 825-10, “Financial Instruments-Overall” Recognition and Measurement of Financial Assets and Financial Liabilities”.  The main provisions of the guidance include, (i) the measurement of most equity investments at fair value with changes in fair value recorded through net income, except those accounted for under the equity method of accounting, or those that do not have a readily determinable fair value (for which a practical expedient can be elected); (ii) the required use of the exit price notion when valuing financial instruments for disclosure purposes; (iii) the separate presentation in other comprehensive income of the instrument-specific credit risk portion of the total change in the fair value of a liability under the fair value option; (iv) the determination of the need for a valuation allowance on a deferred tax asset related to available for sale securities must be made in combination with other deferred tax assets.  The guidance eliminates the current classifications of equity securities as trading or available for sale securities and will require separate presentation of financial assets and liabilities by category and form of the financial assets on the face of the balance sheet or within the accompanying notes.  The guidance also eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value of financial instruments measured at amortized cost on the balance sheet. The Company adopted this guidance in the first quarter of 2018. The adoption did not have a material impact on our consolidated financial statements. 



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 several areas of 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 the first quarter of 2017, and the adoption has not had a material impact.  



In June 2016, the FASB issued an update ASU 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 OTTI 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 first quarter 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

29

 


 

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. 



On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the “2017 Act”).  This guidance provided registrants with three scenarios: 1) Measurement of certain income tax effects is complete, 2) Measurement of certain income tax effects can be reasonably estimated, and 3) Measurement of certain income tax effects cannot be reasonably estimated.  The Company has acted in good faith to estimate the effects of the 2017 Act. The results have been recognized and were reflected in the tax accounts in the 2017 year end financial statements.



In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”.  ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.  Consequently, the amendment eliminates the stranded tax effect resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users.  ASU 2018-02 is effective for financial statements issued for annual periods beginning after December 15, 2018.  The Company early adopted ASU 2018-02.  The effect of this adoption was a reclassification of $812,000 from accumulated other comprehensive income to retained earnings on the Company’s December 31, 2017 consolidated financial statements.



Note 12.  Regulatory Matters



It is the policy of the Federal Reserve that financial holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and 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 which were due March 15, 2018.  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



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.

30

 


 



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 2011, 2012, 2013 and 2014.  The audit is in process.



In addition, the Company is a party to various routine legal proceedings arising out of the ordinary course of its business.  The Company 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 affinity accounts.  Corporate includes the investment portfolio, corporate overhead and other non-allocated expenses.  Investment income is allocated to the payments segment.  These operating segments reflect the way the Company views its current operations.











 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the three months ended March 31, 2018



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$            22,813 

 

$                     - 

 

$            12,494 

 

$                     - 

 

$           35,307 

Interest allocation

 

 -

 

12,494 

 

(12,494)

 

 -

 

 -

Interest expense

 

928 

 

3,902 

 

403 

 

 -

 

5,233 

Net interest income (loss)

 

21,885 

 

8,592 

 

(403)

 

 -

 

30,074 

Provision for loan and lease losses

 

700 

 

 -

 

 -

 

 -

 

700 

Non-interest income

 

12,710 

 

16,354 

 

31 

 

 -

 

29,095 

Non-interest expense

 

15,140 

 

16,194 

 

7,715 

 

 -

 

39,049 

Income (loss) from continuing operations before taxes

 

18,755 

 

8,752 

 

(8,087)

 

 -

 

19,420 

Income tax expense

 

 -

 

 -

 

5,399 

 

 -

 

5,399 

Income (loss) from continuing operations

 

18,755 

 

8,752 

 

(13,486)

 

 -

 

14,021 

Income from discontinued operations

 

 -

 

 -

 

 -

 

119 

 

119 

Net income (loss)

 

$            18,755 

 

$             8,752 

 

$          (13,486)

 

$                119 

 

$           14,140 



 

 

 

 

 

 

 

 

 

 









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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 (loss)

 

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 expense

 

 -

 

 -

 

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 



 

 

 

 

 

 

 

 

 

 























 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

March 31, 2018



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Total assets

 

$        1,767,877 

 

$             38,517 

 

$        2,273,668 

 

$           289,038 

 

$        4,369,100 

Total liabilities

 

$           684,286 

 

$        3,089,032 

 

$           265,890 

 

$                       - 

 

$        4,039,208 







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

December 31, 2017



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Total assets

 

$        1,865,572 

 

$             29,615 

 

$        2,508,647 

 

$           304,313 

 

$        4,708,147 

Total liabilities

 

$           653,952 

 

$        3,371,730 

 

$           358,316 

 

$                       - 

 

$        4,383,998 





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.



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The following table presents financial results of the commercial lending business included in net income  from discontinued operations for the three months ended March 31, 2018 and 2017 (in thousands).





 

 

 

 



 

 

 

 



For the three months ended March 31,

 



2018

 

2017

 

Interest income

$                             2,527 

 

$                            3,361 

 

Interest expense

 -

 

 -

 

Provision for loan and lease losses

 -

 

 -

 

Net interest income after provision

2,527 

 

3,361 

 



 

 

 

 

Non-interest income

364 

 

106 

 

Non-interest expense

2,735 

 

800 

 



 

 

 

 

Income before taxes

156 

 

2,667 

 

Income tax provision

37 

 

1,006 

 

Net income

$                               119 

 

$                            1,661 

 







 

 

 



 

 

 



March 31,

 

December 31,



2018

 

2017

Loans, net

$                    253,523 

 

$                    270,050 

Other real estate owned

35,515 

 

34,262 

Total assets

$                    289,038 

 

$                    304,313 



 

 

 



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 and internal loan review analysis.  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, $289.0 million of loans and other real estate owned 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 $70.0 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. 



 

 

 

 

 

 



Note 16. Subsequent Events



The Company evaluated its March 31, 2018 financial statements for subsequent events through the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements, not otherwise disclosed herein.



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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, 2017 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, 2017.



Overview



We are a Delaware financial holding company and our primary subsidiary is The Bancorp Bank, which we wholly own and which we refer to as the Bank.  The vast majority of our revenue and income is currently generated through the Bank.  In our continuing operations, we have four primary lines of specialty lending: securities backed lines of credit, or SBLOC, vehicle fleet and other equipment leasing, Small Business Administration lending, or SBA loans and commercial mortgage-backed loans, or CMBS, generated for sale into commercial mortgage backed securities markets primarily through securitizations.  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. Vehicle fleet and other equipment leases are generated in a number of Atlantic Coast and other states.  SBA loans and commercial loans generated for sale are made nationally.  



The majority of our deposit accounts and non-interest income are generated in our payments business line which consists of issuing, acquiring and automated clearing house, or ACH, accounts.  The issuing deposit accounts are comprised of debit and prepaid card accounts that are generated with the assistance of independent companies that market directly to end users for account acquisition.  Our issuing  deposit account types are diverse and include: consumer and business debit, general purpose reloadable prepaid, pre-tax medical spending benefit, payroll, gift, government, corporate incentive, reward, business payment accounts and others.  Our ACH accounts facilitate payments such as payroll and bill payments and our acquiring accounts provide clearing and settlement services for payments made to merchants which must be settled through associations such as Visa or MasterCard.  We also provide banking services to organizations with a pre-existing customer base tailored to support or complement the services provided by these organizations to their customers.  These services include loan and deposit accounts for investment advisory companies through our institutional banking department. 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 banking.



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 approximate $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, $289.0 million of loans and other real estate owned remain in assets held for sale on the balance sheet, which reflects the impact of related sales, paydowns and fair value charges.  Additionally, the balance sheet reflects $70.0 million in investment in unconsolidated entity, Walnut Street, which is comprised of notes and other assets owned by the Company as a result of the sale of certain discontinued loans.



Net income for 2018 reflected increased profitability over 2017, consistent with our business plan and budget. Year to date net income for 2018 was $14.1 million compared to $8.0 million for 2017. The improvement primarily reflected revenue growth, including an $11.7 gain on sale of loans into a securitization.  Continuing growth in net interest income, which increased $5.2 million, reflected a $2.1 million, or 48.1%, increase in SBLOC interest between those respective periods. The increase reflected the impact of multiple Federal Reserve Bank rate increases and a 15.0% increase in end of period SBLOC loans.  Over the same periods, SBA loans also increased approximately 15% and benefited from the rate increases. Interest income on commercial mortgage backed loans increased $2.2 million primarily due to higher balances as a result of the timing of sales.  Interest income on commercial mortgage backed loans is expected to

34

 


 

decrease from the first quarter, as a result of the loan sale at the end of first quarter 2018. While rates on these loan categories adjusted more fully to the Federal Reserve increases, interest expense increased to a significantly lesser extent. The Bank’s largest funding source, prepaid card accounts, contractually adjust to only a portion of increases in market rates. Prepaid card fees are the largest driver of non-interest income. Year to date fees in 2018 increased 5.4% over year to date 2017 and totaled $14.3 million. Revenues, consisting of net interest income and non-interest income increased $10.1 million to $59.2 million compared to $49.1 million in the prior year, an increase of  20.5%.  Non-interest expense increased 3.4%, or $1.3 million over those periods.  As a result of seasonal tax refund accounts, average assets in the first quarter of the year have increased over the fourth quarter.  As a result, the leverage capital ratio decreased in the quarter ended March 31, 2018 compared to the linked quarter, as it has historically.  The holding company leverage ratio was 7.69% at March 31, 2018 compared to 6.96% at March 31, 2017.



Critical Accounting Policies and Estimates



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



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



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



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



We periodically review our investment portfolio to determine whether unrealized losses on securities are temporary, based on evaluations of the creditworthiness of the issuers or guarantors, and underlying collateral, as applicable.  In addition, we consider the continuing performance of the securities.  We recognize credit losses through the consolidated statement of operations.  If management believes market value losses are temporary and that we have the ability and intention to hold those securities to maturity, we recognize the reduction in other comprehensive income, through equity.  We evaluate whether an other than temporary impairment exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security.  If other than temporary impairment is determined, we estimate expected future cash flows to determine the credit loss amount with a quantitative and qualitative process that incorporates information received from third-party sources and internal assumptions and judgments regarding the future performance of the security.



We account for our stock-based compensation plans based on the fair value of the awards made, which include stock options, restricted stock, and performance based shares.  To assess the fair value of the awards made, management makes assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates.  All of these estimates and assumptions may be susceptible to significant change that may impact earnings in future periods.



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



Financial Statement Restatement; Regulatory Actions 



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



Regulatory Actions



The Bank entered into a Stipulation and Consent to the Issuance of a Consent Order effective August 7, 2012, which we refer to as the 2012 Consent Order.  The Bank took this action without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation.  Under the 2012 Consent Order, the Bank agreed to increase its supervision of third-party relationships, develop new written compliance and related internal audit compliance programs, develop a new third-party risk management program and screen new third-party relationships as provided in the Consent Order.  As part of the Consent Order, the Bank agreed to pay a civil money penalty in the amount of $172,000, which was paid in 2012.  The 2012 Consent Order was amended and restated in 2015 as noted below.



On June 5, 2014, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC, which we refer to as the 2014 Consent Order.  The Bank took this action without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation relating to the Bank’s Bank Secrecy Act, or BSA, compliance program.  The 2014 Consent Order required the Bank to take certain affirmative actions to comply with its BSA obligations.  Satisfaction of the requirements of the 2014 Consent Order is subject to the review of the FDIC and the Delaware State Bank Commissioner.  The Bank has and expects to continue to expend significant management and financial resources to address the Bank’s BSA compliance program which will reduce our net income. Expenses associated with the required look back review were significant in 2015 and 2016.  The look back review was completed in the third quarter of 2016.  The 2014 Consent Order reserves the right for our federal or state banking regulators or any other federal or state agency or department to take additional action against the Bank or any of the Bank’s current or former institution-affiliated parties which, based on the alleged violations, could include civil or criminal proceedings and civil money penalties.



Until the Bank submits to the FDIC a report summarizing the completion of certain BSA-related corrective action (“BSA Report”), the 2014 Consent Order restricts the Bank from signing and boarding new independent sales organizations, establishing new non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments.  The BSA Report will be filed when the Bank is able to demonstrate the sustained adequacy of BSA policies and procedures, training, and internal controls related to the restricted activities, including validation of the same by the Bank’s independent BSA testing function.  Until the BSA Report is submitted to and approved by the FDIC and Delaware State Bank Commissioner, those aspects of the growth of our card payment processing and prepaid card operations will be affected, which, unless offset by growth from existing customers and new customers in other areas of our prepaid card operations, could reduce growth of our deposits and non-interest income and, possibly, limit our ability to raise additional capital on acceptable terms. 



On August 27, 2015, the Bank entered into an Amendment to Consent Order, or the 2014 Consent Order 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 2014 Consent Order Amendment provides that the Bank shall not declare or pay any dividend without the prior written consent of the FDIC and for certain assurances regarding management.



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



36

 


 

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 amended and restated in its entirety the terms of the 2012 Consent Order. 



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 whom we refer to as Third Parties.  The 2015 Consent Order continues the Bank's obligations originally set forth in the 2012 Consent Order, including its obligations to increase board oversight of the Bank's compliance management system, or CMS, improve the Bank's CMS, enhance its internal audit program, increase its management and oversight of Third Parties, and correct any apparent violations of law.



In addition to restating the general terms of the 2012 Consent Order, the 2015 Consent Order directs the Bank’s Board of Directors 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.  The Bank’s Board of Directors appointed the required Complaint and Error Claim Committee on January 29, 2016.



The 2015 Consent Order also requires the Bank to implement a corrective action plan, or CAP, to remediate and provide restitution to those prepaid cardholders who asserted or attempted to assert, or were discouraged from initiating EFT error claims and to provide restitution to cardholders harmed by EFT error resolution practices.  The 2015 Consent Order requires that if, through the CAP, the Bank identifies prepaid cardholders who have been adversely affected by a denial or failure to resolve an EFT error claim, the Bank will ensure that monetary restitution is made.  Neither we nor the Bank can predict the amount of any restitution which may be required, or the amount, if any, that the Bank may pay in connection therewith.  Under the Bank's agreements with Third Parties, we believe that restitution is reimbursable to the Bank.  The CAP is currently being implemented.  To date, no restitution under the CAP has been made.



The 2015 Consent Order also imposed a $3 million civil money penalty on the Bank, which the Bank has paid and which was recognized as expense in the fourth quarter of 2015. 

 

On March 7, 2018, the Bank entered into a Stipulation and Consent to Order for Restitution and Order To Pay Civil Money Penalty with the FDIC, which we refer to as the 2018 Restitution Order and 2018 CMP Order, respectively.  The Bank took this action without admitting or denying any alleged violations of law or regulation.  The FDIC’s action principally emanates from one of the Bank’s third-party payment processors, or Third Party Processor, that suffered an internal system programming glitch.  This inadvertently resulted in consumers that engaged in signature-based point of sale transactions during the period from December 2010 to November 2014 being charged a greater fee than what was disclosed by the Bank.  The FDIC alleged the Bank’s incorrect fee imposition due to the Third Party Processor error was an unfair or deceptive act or practice and violated Section 5 of the Federal Trade Commission Act.  The 2018 Restitution Order requires the Bank to develop a written Restitution Plan, subject to independent audit and FDIC non-objection, to ensure impacted consumers are compensated for any incorrectly charged fees.  The 2018 Restitution Order requires the Bank to make such reimbursements if not otherwise made by the Third Party Processor and the Bank is indemnified by the Third Party Processor for such reimbursements.  Impacted consumers have been reimbursed by the Third Party Processor at its own expense.  The Bank is in the process of complying with the written documentation and audit requirements of the Restitution Order.  The 2018 CMP Order imposed a $2 million civil money penalty on the Bank which the Bank has paid, and was recognized as expense on September 30, 2017.  The civil money penalty is not subject to any indemnification or recovery from any third party.

    

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Results of Operations

First quarter 2018 to first quarter 2017

Net Income: Net income from continuing operations for the first quarter of 2018 was $14.0 million, or $0.25 per diluted share, compared to $6.3 million, or $0.11 per diluted share, for the first quarter of 2017.  After discontinued operations, net income for the first quarter of 2018 was $14.1 million compared to $8.0 million for the first quarter of 2017.   The increase resulted primarily from increased revenues in both net interest income and non-interest income. Net interest income for the first quarter of 2018 compared to the first quarter of 2017 increased $5.2 million, or 20.9%, to $30.1 million from $24.9 million, primarily as a result of higher loan balances and higher yields, reflecting Federal Reserve rate increases.  The provision for loan and lease losses decreased $300,000 to $700,000 in the first quarter of 2018 compared to $1.0 million in the first quarter of 2017.  Non-interest income (excluding security gains and losses) increased $5.4 million, to $29.1 million, which resulted primarily from an increase in gain on sale of loans.  Non-interest expense increased $1.3 million, or 3.4%, to $39.0 million, compared to $37.8 million in first quarter 2017. Diluted income per share was $0.25 in the first quarter of 2018 compared to $0.14 income per share in the first quarter of 2017, primarily reflecting the factors noted above.  



Net Interest Income: Our net interest income for the first quarter of 2018 increased to $30.1 million, an increase of $5.2 million, or 20.9%,  from $24.9 million in the first quarter of  2017.  Our interest income for the first quarter of 2018 increased to $35.3 million, an increase of $6.9 million, or 24.1%,  from $28.4 million for the first quarter of 2017The increase in interest income resulted primarily from higher loan balances and higher yields.  Our average loans and leases increased to $1.97 billion for the first quarter of 2018 from $1.66 billion for the first quarter of 2017,  an increase of $313.0 million, or 18.9%. Related interest income increased $5.6 million on a tax equivalent basis. The impact of the sale of commercial loans into a securitization at the end of the first quarter of 2018 will be at least partially offset by ongoing new originations for future sales. The increase in average loans reflected organic growth in leasing, SBA and SBLOC lending.  Our average investment securities balances increased slightly to $1.39 billion for the first quarter of 2018 from $1.34 billion for the first quarter of 2017, as purchases for estimated 2018 maturities were accelerated as a result of increases in market rates.  Yields on both loans and investment securities rose as a result of the impact of the Federal Reserve’s rate increases on variable rate loans and securities.  Rates paid on deposits and resulting interest expense adjusted only partially to the Federal Reserve’s rate increases. 



Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the first quarter of 2018 increased to 3.12% from 2.70% in the first quarter of 2017,  an increase of 42 basis points.  The increase in the net interest margin reflected higher yields on loans and investment securities, reflecting the impact of the aforementioned Federal Reserve rate increases on variable rate loans and securities. In the first quarter of 2018, the average yield on our loans increased to 4.73% from 4.25% for the first quarter of 2017, an increase of 48 basis points.  Yields on taxable investment securities in the first quarter of 2018 increased to 2.82% compared to 2.72% for the first quarter of 2017, an increase of 10 basis points.  Average interest earning deposits at the Federal Reserve Bank decreased $269.3 million, or 34.9%,  to $502.2 million in the first quarter of 2018 from $771.5 million in the first quarter of 2017. The reduction reflected lower seasonal tax refund deposits resulting from the exit from one of our program managers of a tax preparation software company.   The interest cost of total deposits and interest bearing liabilities increased to 0.52% for the first quarter of 2018  compared to 0.35% in the first quarter of 2017.  The cost of deposits increased significantly less than the increase in variable rates on loans and investments primarily due to prepaid card deposit accountsContractual provisions related to those deposits result in only partial adjustment to Federal Reserve rate increases. 

 

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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,



 

2018

 

2017



 

Average

 

 

 

Average

 

Average

 

 

 

Average



 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate



 

(dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans net of unearned fees and costs **

 

$                 1,947,320 

 

$             23,039 

 

4.73% 

 

$                 1,634,136 

 

$             17,371 

 

4.25% 

Leases - bank qualified*

 

21,036 

 

334 

 

6.35% 

 

21,180 

 

396 

 

7.48% 

Investment securities-taxable

 

1,375,568 

 

9,699 

 

2.82% 

 

1,325,247 

 

9,005 

 

2.72% 

Investment securities-nontaxable*

 

9,893 

 

75 

 

3.03% 

 

15,423 

 

111 

 

2.88% 

Interest earning deposits at Federal Reserve Bank

 

502,233 

 

1,832 

 

1.46% 

 

771,529 

 

1,516 

 

0.79% 

Federal funds sold and securities purchased under agreement to resell

 

64,216 

 

414 

 

2.58% 

 

49,829 

 

227 

 

1.82% 

Net interest earning assets

 

3,920,266 

 

35,393 

 

3.61% 

 

3,817,344 

 

28,626 

 

3.00% 



 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

(6,976)

 

 

 

 

 

(6,221)

 

 

 

 

Assets held for sale from discontinued operations

 

294,708 

 

2,527 

 

3.43% 

 

335,929 

 

3,361 

 

4.00% 

Other assets

 

203,095 

 

 

 

 

 

280,505 

 

 

 

 



 

$                 4,411,093 

 

 

 

 

 

$                 4,427,557 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$                 3,535,791 

 

$               4,301 

 

0.49% 

 

$                 3,657,413 

 

$               2,787 

 

0.30% 

Savings and money market

 

487,380 

 

668 

 

0.55% 

 

429,713 

 

647 

 

0.60% 

Total deposits

 

4,023,171 

 

4,969 

 

0.49% 

 

4,087,126 

 

3,434 

 

0.34% 



 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

24,844 

 

104 

 

1.67% 

 

 -

 

 -

 

0.00% 

Repurchase agreements

 

205 

 

 -

 

0.00% 

 

275 

 

 -

 

0.00% 

Subordinated debt

 

13,401 

 

160 

 

4.78% 

 

13,401 

 

138 

 

4.12% 

Total deposits and interest bearing liabilities

 

4,061,621 

 

5,233 

 

0.52% 

 

4,100,802 

 

3,572 

 

0.35% 



 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

22,452 

 

 

 

 

 

20,234 

 

 

 

 

Total liabilities

 

4,084,073 

 

 

 

 

 

4,121,036 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

327,020 

 

 

 

 

 

306,521 

 

 

 

 



 

$                 4,411,093 

 

 

 

 

 

$                 4,427,557 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$             32,687 

 

 

 

 

 

$             28,415 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

86 

 

 

 

 

 

177 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$             32,601 

 

 

 

 

 

$             28,238 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

3.12% 

 

 

 

 

 

2.70% 



 

 

 

 

 

 

 

 

* Full taxable equivalent basis, using a 21% statutory tax rate.

 

 

 

 

 

 

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



For the first quarter of 2018, average interest earning assets increased to $3.92 billion, an increase of $102.9 million, or 2.7%, from $3.82 billion in the first quarter of 2017The increase reflected increases in average balances of loans and leases of $313.0 million, or 18.9%, and increases in average balances of investment securities of $44.8 million, or 3.3%, net of  $269.3 million of decreases in

39

 


 

average interest earning deposits at the Federal Reserve Bank. For those respective periods, average demand and interest checking deposits decreased $121.6 million, or 3.3%.   The decrease reflected the planned exit of certain less profitable deposit relationships



Provision for Loan and Lease Losses.  Our provision for loan and lease losses was $700,000 for the first quarter of 2018 compared to $1.0 million for the first quarter of 2017.  The allowance for loan losses amounted to $7.3 million, or 0.50% of total loans at March 31, 2018, which was comparable to the  $7.1 million, or 0.51% of total loans, at December 31, 2017We 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 $29.1 million in the first quarter of 2018 compared to $23.7 million in the first quarter of 2017 before gains on sale of investment securities of $26,000 in the first quarter of 2018 and $503,000 in the first quarter of 2017.  The $5.4 million, or 22.6%,  increase between those respective periods reflected an increase in gain on sale of loans to $11.7  million for the first quarter of 2018 from $5.4 million in the first quarter of 2017.  The increase resulted primarily from higher market spreads in the 2018 loan sale compared to the prior year sale.    Change in value of investment in unconsolidated entity resulted in a loss of $1.2 million in 2018 compared to a loss of $19,000 in 2017.  The loss in 2018 reflected the impact of a loan work out settlement and changes in market rates which are used to discount future cash flow of the entity.  Prepaid card fees increased by $735,000,  or 5.4%,  to $14.3 million for the first quarter of 2018 compared to $13.5 million in first quarter 2017.   The increase resulted as organic growth offset the impact of the exit of one of our program manager’s programs associated with a tax preparation software company.  Service fees on deposit accounts decreased $99,000, or 5.9%, to $1.6 million for the first quarter of 2018 from $1.7 million for the first quarter of 2017, reflecting decreases in service charges from health savings accounts which were sold in the second quarter of 2017.  Leasing income decreased $64,000,  or 11.6%,  to $487,000 for the first quarter of 2018 from $551,000 for the first quarter of 2017, which reflected the impact of a lower number of vehicles sold in 2018.  Affinity fees decreased by $919,000, or 90.0%,  to $102,000 for the first quarter of 2018 from $1.0 million for the first quarter of 2017The decrease resulted from the exit of one affinity relationship whose ownership had changed.  Other non-interest income increased $342,000 to $372,000 for the first quarter of 2018 from $30,000 in the first quarter of 2017.   The increase reflected the impact of a 2017 adjustment to European operations which were sold in that year.



Non-Interest Expense.  Total non-interest expense was $39.0 million for the first quarter of 2018,  an increase of $1.3 million, or 3.4%,  compared to $37.8 million for the first quarter of 2017Salaries and employee benefits increased to $21.1 million for the first quarter of 2018, an increase of $3.1 million, or 17.0%,  from $18.0 million for the first quarter of 2017.   The increase reflected incentive compensation expense related to revenue and performance based compensation including that related to the $11.7 million gain on sale of loans in first quarter 2018.  Depreciation and amortization decreased $175,000,  or 14.5%,  to $1.0 million in the first quarter of 2018 from $1.2 million in the first quarter of 2017.  The decrease reflected reduced spending on fixed assets and equipment. Rent and occupancy decreased $102,000,  or 7.0%, to $1.4 million in the first quarter of 2018 from $1.5 million in the first quarter of 2017.   The decrease reflected a reduction in leased space and more efficient use of office space. Data processing decreased by $1.5 million, or 42.4%, to $2.0 million in the first quarter of 2018 from $3.5 million in the first quarter of 2017.  The decrease reflected the impact of a renegotiated data processing contract and lower account and transaction volume as a result of the planned exit of an affinity program which had changed ownership.  It also reflected the impact of the consolidation of our call centers as an efficiency and cost cutting measure.  Printing and supplies decreased $316,000,  or 62.6%,  to $189,000 in the first quarter of 2018 from $505,000 in the first quarter of 2017, which reflected a reduction in printing expense related to the health savings accounts which were sold in the second quarter of 2017, and cost cutting.  Audit expense increased $48,000,  or 11.4%, to $469,000 in the first quarter of 2018 from $421,000 in the first quarter of 2017 which reflected increased regulatory compliance audit fees.  Legal expense increased $693,000, or 39.9%, to $2.4 million in the first quarter of 2018 from $1.7 million in the first quarter of 2017, reflecting costs associated with an SEC subpoena related to the restatement of the financial statements (see “-Financial Statements; Regulatory Actions”) and other regulatory related legal fees.  Amortization of intangible assets increased $4,000, or 1.1%, to $383,000 for the first quarter of 2018 from $379,000 for the first quarter of 2017.  FDIC insurance expense increased $154,000,  or 7.5%,  to $2.2 million for the first quarter of 2018 from $2.1 million in the first quarter of 2017 reflecting an increase in rate.  Software expense increased $63,000,  or 2.0%,  to $3.3 million in the first quarter of 2018 from $3.2 million in the first quarter of 2017 as a result of additional information technology infrastructure to improve efficiency and scalability, including BSA software required to satisfy regulatory requirements.    Insurance expense decreased $57,000,  or 8.4%,  to $621,000 in the first quarter 2018 compared to $678,000 in the first quarter of 2017. The decrease reflected the impact of the sale of European operations in the second quarter of 2017 and a reduction in office space which no longer required insurance coverage.  Telecom and IT network communications decreased $266,000,  or 44.9%, to $326,000 in the first quarter of 2018 from $592,000 in the first quarter of 2017.  The decrease reflected cost cutting efforts which included the elimination of corporate sponsored cell phones.  Consulting increased $131,000,  or 24.5%,  to $665,000 in the first quarter of 2018 from $534,000 in the first quarter of 2017 reflecting increased regulatory related consulting expense including BSA/AML related consulting.  Other non-interest expense decreased $258,000, or 7.4%, to $3.2 million in the first quarter of 2018 from $3.5 million in the first quarter of 2017.  The decrease reflected a decline of $146,000 in operations losses and a $134,000 reduction in postage which reflected the sale of health savings accounts in the second quarter of 2017.



Income Taxes.  Income tax expense for continuing operations was $5.4 million for the first quarter of 2018 compared to $4.0 million in the first quarter of 2017.   A 27.8% effective tax rate in 2018 reflected the reduced 21% federal tax rate effective in that year, compared

40

 


 

to the prior year federal rate of 34%.  A 38.8% effective tax rate in 2017 reflected  the statutory rate of 34%  applicable to that year and reflected the impact of state income taxes.



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 our interest-bearing account at the Federal Reserve.



Our primary source of funding has been deposits.  In 2017, we exited deposit relationships to reduce excess balances at the Federal Reserve which earn relatively low rates of interest.  While such exits reduced balances in the first quarter of 2018, they were partially offset by growth in prepaid card and other payments deposits.  Accordingly, overnight balances at the Federal Reserve Bank averaged $502.2 million for the first quarter of 2018, which was $269.3 million lower than the prior year first quarter average of $771.5 million.  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 2018.



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.  The majority of our deposit accounts are obtained with the assistance of third parties and as a result are classified as brokered by the FDIC.  The FDIC guidance for classification of deposit accounts as brokered is relatively broad, and generally includes accounts which were referred to or “placed” with the institution by other companies.  If the Bank ceases to be categorized as “well capitalized” under banking regulations, it will be prohibited from accepting, renewing or rolling over brokered deposits without the consent of the FDIC.  In such a case, the FDIC’s refusal to grant consent to our accepting, renewing or rolling over brokered deposits could effectively restrict or eliminate the ability of the Bank to operate its business lines as presently conducted. 



We focus on customer service which we believe has resulted in a history of customer loyalty.  Stability, low cost and customer loyalty comprise key characteristics of core deposits which we believe are comparable to core deposits of peers with branch systems.  As a result of the stability and low cost of our transaction account deposits, we have not, unlike peers, required the use of more costly and volatile certificates of deposit.  However, certain components of our deposits do experience seasonality, creating greater excess liquidity at certain times.  The largest deposit inflows occur in the first quarter of the year when certain of our accounts are credited with tax refund payments from the U.S. Treasury.



While consumer transaction accounts including prepaid accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with the Federal Home Loan Bank, or the FHLB, and the Federal Reserve.  As of March 31, 2018, we had a $469.6 million line of credit with the FHLB and a $1.00 billion line with the Federal Reserve.  These lines may be collateralized by specified types of loans or securities.  As of March 31, 2018, we had no amounts outstanding on these borrowing lines.  We expect to continue to maintain our facilities with the FHLB and Federal Reserve.  We actively monitor our positions and contingent funding sources on a daily basis.



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, 2018, we had cash reserves of approximately $15.1 million at the holding company.  Current quarterly interest payments on the $13.4 million of trust preferred securities are approximately $180,000 based on a floating rate of 3.25% over LIBOR.  We expect that when the conditions under which the amendment to the 2014 Consent Order was issued are remediated, 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, 2018 were $508.8 million of interest earning deposits which primarily consisted of deposits with the Federal Reserve and included deposits for reserve requirements.  These amounts may vary on a daily basis. Accordingly, the majority of our available liquidity is comprised of the aforementioned available for sale securities and lines of credit with the FHLB and Federal Reserve.



Funding was directed primarily at cash outflows required for net loan growth of $71.4 million for the three months ended March 31, 2018, and $41.3 million for the three months ended March 31, 2017.  Net purchases of investment securities for the three months ended March 31, 2018, were $117.7 million compared to net redemptions of $34.8 million for the prior year.  We had outstanding commitments to fund loans, including unused lines of credit, of $1.48 billion and $1.45 billion as of March 31, 2018 and December 31, 2017, respectively. The majority of our commitments originate with security backed lines of credit.  Such commitments are normally based on the full amount of collateral in a customers investment account.  However, such commitments have historically been drawn at only a fraction of the total commitment.  The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth.    

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We must comply with capital adequacy guidelines issued by the FDIC.  A bank must, in general, have a Tier 1 leverage ratio of 5.0%, a ratio of Tier I capital to risk-weighted assets of 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, 2018, we were “well capitalized” under banking regulations. 



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







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Tier 1 capital

 

Tier 1 capital

 

Total capital

 

Common equity



 

to average

 

to risk-weighted

 

to risk-weighted

 

tier 1 to risk



 

assets ratio

 

assets ratio

 

assets ratio

 

weighted assets



 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

7.69% 

 

18.36% 

 

18.75% 

 

18.36% 

The Bancorp Bank

 

7.31% 

 

17.82% 

 

18.22% 

 

17.82% 

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

 

5.00% 

 

8.00% 

 

10.00% 

 

6.50% 



 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

7.90% 

 

16.73% 

 

17.09% 

 

16.73% 

The Bancorp Bank

 

7.61% 

 

16.23% 

 

16.59% 

 

16.23% 

"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, 2018.   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 bank loans. Mortgage-backed and other callable securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our 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

42

 


 

of deposits.  As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels.







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

1-90

 

91-364

 

1-3

 

3-5

 

Over 5



 

Days

 

Days

 

Years

 

Years

 

Years



 

(dollars in thousands)

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

Commercial loans held for sale

 

$                   151,763 

 

$                   22,623 

 

$                   46,389 

 

$                11,558 

 

$              117,473 

Loans net of deferred loan costs

 

977,945 

 

60,095 

 

228,635 

 

177,632 

 

18,757 

Investment securities

 

394,663 

 

121,936 

 

187,712 

 

297,052 

 

466,027 

Interest earning deposits

 

508,847 

 

 -

 

 -

 

 -

 

 -

Securities purchased under agreements to resell

 

64,312 

 

 -

 

 -

 

 -

 

 -

Total interest earning assets

 

2,097,530 

 

204,654 

 

462,736 

 

486,242 

 

602,257 



 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

2,241,097 

 

68,351 

 

68,351 

 

 -

 

 -

Savings and money market

 

123,322 

 

246,644 

 

123,322 

 

 -

 

 -

Securities sold under agreements to repurchase

 

182 

 

 -

 

 -

 

 -

 

 -

Subordinated debenture

 

13,401 

 

 -

 

 -

 

 -

 

 -

Total interest bearing liabilities

 

2,378,002 

 

314,995 

 

191,673 

 

 -

 

 -

Gap

 

$                 (280,472)

 

$               (110,341)

 

$                 271,063 

 

$              486,242 

 

$              602,257 

Cumulative gap

 

$                 (280,472)

 

$               (390,813)

 

$               (119,750)

 

$              366,492 

 

$              968,749 

Gap to assets ratio

 

-6%

 

-3%

 

6%

 

11%

 

14%

Cumulative gap to assets ratio

 

-6%

 

-9%

 

-3%

 

8%

 

22%



* 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, 2018 were $4.37 billion, of which our total loans were $1.46 billion.  At December 31, 2017, our total assets were $4.71 billion, of which our total loans were $1.39  billion.  The decrease in assets reflected seasonally higher gift card account balances at December 31, 2017.  



Interest earning deposits and federal funds sold.  At March 31, 2018, we had a total of $508.8 million of interest earning deposits compared to $841.5 million at December 31, 2017, a decrease of $332.6 million, or 39.5%.  These deposits were comprised primarily of balances at the Federal Reserve, which pays interest on such balances.  Reductions in such balances reflected seasonally higher gift card account balances at December 31, 2017, some of which are maintained at the Federal Reserve.



Investment portfolio.  For detailed information on the composition and maturity distribution of our investment portfolio, see Note 5 to the Financial Statements.  Total investment securities increased to $1.47 billion at March 31, 2018, an increase of $86.5 million, or 6.3%, from year-end 2017.  The increase in investment securities reflected a management decision to accelerate purchases for anticipated maturities as a result of increases in market interest rates.  Other securities, included in the held-to-maturity classification at March 31, 2018, consisted of three securities secured by diversified portfolios of corporate securities and two single-issuer trust preferred securities.



A total of $11.0 million of other debt securities - single issuers is comprised of the following: 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. 



43

 


 

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, 2018 (in thousands):



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Single issuer

 

Book value

 

Fair value

 

Unrealized gain/(loss)

 

Credit rating

Security A

 

$                1,916 

 

$                 2,010 

 

$                      94 

 

Not rated

Security B

 

9,129 

 

7,201 

 

(1,928)

 

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, 2018 and March 31, 2017,  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 $991,000 at March 31, 2018 and December 31, 2017.    



Investment securities with a fair value of approximately  $496.1 million at March 31, 2018 and $310.9 million at December 31, 2017, were pledged as collateral to secure a line of credit with the Federal Home Loan Bank.  At March 31, 2018, and December 31, 2017, investment securities with a fair value of approximately $281.4 million and $225.6 million, respectively, were pledged to secure a line of credit with the Federal Reserve Bank. 



Loans held for sale.  Loans held for sale are comprised of commercial mortgage loans and SBA loans originated for sale or securitization in the secondary market.  The fair value of commercial mortgage loans and the SBA loans originated for sale is based on purchase commitments, quoted prices for the same or similar loans or fair market valuations based on other market information on an individual loan basis.  Commercial loans held for sale decreased to $349.8 million at March 31, 2018 from $503.3 million at December 31, 2017. The decrease resulted from the sale of loans into a securitization in the first quarter of 2018.



Loan portfolio. Total loans increased to $1.46 billion at March 31, 2018 from $1.39  billion at December 31, 2017.



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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,



2018

 

2017



 

 

 

SBA non-real estate

$                       75,225 

 

$                       70,379 

SBA commercial mortgage

149,227 

 

142,086 

SBA construction

20,143 

 

16,740 

SBA loans *

244,595 

 

229,205 

Direct lease financing

385,467 

 

377,660 

SBLOC

759,369 

 

730,462 

Other specialty lending

45,729 

 

30,720 

Other consumer loans

17,416 

 

14,133 



1,452,576 

 

1,382,180 

Unamortized loan fees and costs

10,488 

 

10,048 

Total loans, net of deferred loan fees and costs

$                  1,463,064 

 

$                  1,392,228 



 

 

 



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









 

 

 



March 31,

 

December 31,



2018

 

2017



 

 

 

SBA loans, including deferred fees and costs

$                     252,457 

 

$                     236,724 

SBA loans included in held for sale

172,030 

 

165,177 

Total SBA loans

$                     424,487 

 

$                     401,901 



Allowance for loan and lease  losses.  We review the adequacy of our allowance for loan and lease losses on at least a quarterly basis to determine that the provision for loan losses is made in an amount necessary to maintain our allowance at a level that is appropriate, based on management’s estimate of inherent losses. Our estimates of loan and lease losses are intended to, and, in management’s opinion, do, meet the criteria for accrual of loss contingencies in accordance with ASC 450, Contingencies,” and ASC 310, Receivables.  The process of evaluating this adequacy has two basic elements: first, the identification of problem loans or leases based on current financial information and the fair value of the underlying collateral; and second, a methodology for estimating general loss reserves.  For loans or leases classified as “special mention,” “substandard” or “doubtful,” we reserve all losses inherent in the portfolio at the time we classify the loan or lease. This “specific” portion of the allowance is the total of potential, although unconfirmed, losses for individually classified loans.  In this process, we establish specific reserves based on an analysis of the most probable sources of repayment and liquidation of collateral.  While each impaired loan is individually evaluated, not every loan requires a reserve when the collateral value and estimated cash flows exceed the current balance. When loans are classified as troubled debt restructions, their collateral is valued and a specific reserve is established if the collateral valuation, less disposition costs, is lower than the recorded value of the loan. At March 31, 2018  there were eight troubled debt restructured loans with a balance of $3.0 million which had specific reserves of $574,000. Approximately $500,000 of these reserves related to SBA loans for start up businesses with the balance attributable to leasing.



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 the following 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 set forth below.



At March 31, 2018, in excess of 50% of the total continuing loan portfolio had been reviewed.  The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio.  These thresholds are maintained as follows:



45

 


 

Securities Backed Lines of Credit (SBLOC) – The targeted review threshold for 2018 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, 2018, approximately 49% of the SBLOC portfolio had been reviewed. 



SBA Loans – The targeted review threshold for 2018 is 100%, to be reviewed within 90 days of funding, less guaranteed portions of any purchased loans.  The 100% coverage includes loan review work performed by designated SBA department personnel. At March 31, 2018, approximately 100% 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 2018 is 35%. At March 31, 2018, approximately 56% of the leasing portfolio had been reviewed.  The review threshold is $1,000,000.



CMBS (Floating Rate) – The targeted review threshold for 2018 is 100%.  Floating rate loans will be reviewed initially within 90 days of funding and will be monitored on an ongoing basis as to payment status.  Subsequent reviews will be performed based on a sampling each quarter. Each floating rate loan will be reviewed if any available extension options are exercised.  At March 31, 2018, approximately 100% of the CMBS floating rate loans on the books for more than 90 days had been reviewed.   



CMBS (Fixed Rate)  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, 2018,  approximately 100% of the CMBS fixed rate portfolio had been reviewed. 



Specialty Lending Specialty Lending, defined as commercial loans unique in nature that do not fit into other established categories, have a review coverage threshold of 100% for non-Community Reinvestment Act (“CRA”) loans.  At March 31, 2018, approximately 100% of the non-CRA loans had been reviewed.

 

Home Equity Lines of Credit (HELOC) – The targeted review threshold for 2018 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, 2018, approximately 85% 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

 

90 Days

 

 

 

Total

 

 

 

Total

March 31, 2018

 

past due

 

past due

 

or greater

 

Non-accrual

 

past due

 

Current

 

loans

SBA non-real estate

 

$                   658 

 

$                      - 

 

$                   268 

 

$                1,647 

 

$                2,573 

 

$               72,652 

 

$               75,225 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

458 

 

458 

 

148,769 

 

149,227 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,143 

 

20,143 

Direct lease financing

 

1,435 

 

794 

 

2,375 

 

 -

 

4,604 

 

380,863 

 

385,467 

SBLOC

 

86 

 

 -

 

 -

 

 -

 

86 

 

759,283 

 

759,369 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

45,729 

 

45,729 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

8,329 

 

8,329 

Consumer - home equity

 

69 

 

 -

 

 -

 

1,411 

 

1,480 

 

7,607 

 

9,087 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,488 

 

10,488 



 

$                2,248 

 

$                  794 

 

$                2,643 

 

$                3,516 

 

$                9,201 

 

$          1,453,863 

 

$          1,463,064 





46

 


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days

 

60-89 Days

 

90 Days

 

 

 

Total

 

 

 

Total

December 31, 2017

 

past due

 

past due

 

or greater

 

Non-accrual

 

past due

 

Current

 

loans

SBA non-real estate

 

$                     58 

 

$                   268 

 

$                        - 

 

$                1,889 

 

$                2,215 

 

$               68,164 

 

$               70,379 

SBA commercial mortgage

 

 -

 

 -

 

 -

 

693 

 

693 

 

141,393 

 

142,086 

SBA construction

 

 -

 

 -

 

 -

 

 -

 

 -

 

16,740 

 

16,740 

Direct lease financing

 

3,789 

 

2,233 

 

227 

 

 -

 

6,249 

 

371,411 

 

377,660 

SBLOC

 

 -

 

 -

 

 -

 

 -

 

 -

 

730,462 

 

730,462 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

30,720 

 

30,720 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

4,482 

 

4,482 

Consumer - home equity

 

142 

 

73 

 

 -

 

1,414 

 

1,629 

 

8,022 

 

9,651 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,048 

 

10,048 



 

$                3,989 

 

$                2,574 

 

$                   227 

 

$                3,996 

 

$              10,786 

 

$          1,381,442 

 

$          1,392,228 



The tables above do not include delinquency information for loans which are held for sale, which are fair valued.  A note for an $8.0 million held for sale loan in New York City matured in January 2018 and was therefore delinquent at March 31, 2018.  We are in the process of accumulating information for potential renewal or to otherwise address disposition.  The estimated loan to value for this loan is 78% based upon a first quarter 2018 appraisal.



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



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



 

 

 

 



 

 

 

 



 

As of or



 

for the three months ended



 

March 31,



 

2018

 

2017



 

 

 

 

Ratio of the allowance for loan losses to total loans

 

0.50% 

 

0.58% 

Ratio of the allowance for loan losses to non-performing loans *

 

118.28% 

 

105.66% 

Ratio of non-performing assets to total assets *

 

0.15% 

 

0.16% 

Ratio of net charge-offs to average loans

 

0.03% 

 

0.00% 

Ratio of net charge-offs to average loans annualized

 

0.11% 

 

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 0.50% at March 31, 2018, compared to 0.58% at March 31, 2017.  The lower current period ratio reflected an increase in loans which exceeded the proportionate increase in the allowance for loan losses.  The ratio of the allowance for loan losses to non-performing loans increased to 118.28% at March 31, 2018, from 105.66% at March 31, 2017,  primarily as a result of a decrease in non-performing loans.  The ratio of non-performing assets to total assets decreased to 0.15% at March 31, 2018, from 0.16% at March 31, 2017,  primarily as a result of a decrease in non-performing loans.  Net charge-offs to average loans increased to 0.03% for the three months ended March 31, 2018, from 0.00% for the three months ended March 31, 2017,  primarily as a result of higher net charge offs. 



Net charge-offs.  Net charge-offs were $511,000 for the three months ended March 31, 2018, an increase of $473,000 from net charge-offs of $38,000 for the same period of 2017.  The majority of the charge-offs in the first three months of 2018 were associated with SBA non-real estate and SBA commercial mortgage relationships.  The majority of the charge-offs in the first three months of 2017 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

47

 


 

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,



 

2018

 

2017



 

 

 

 

Non-accrual loans

 

 

 

 

SBA non-real estate

 

$                 1,647 

 

$                  1,889 

SBA commercial mortgage

 

458 

 

693 

Consumer

 

1,411 

 

1,414 

Total non-accrual loans

 

3,516 

 

3,996 



 

 

 

 

Loans past due 90 days or more

 

2,643 

 

227 

Total non-performing loans

 

6,159 

 

4,223 

Other real estate owned

 

405 

 

450 

Total non-performing assets

 

$                 6,564 

 

$                  4,673 



Loans that were modified as of March 31, 2018 and December 31, 2017 and considered troubled debt restructurings are as follows (dollars in thousands):

 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2018

 

December 31, 2017



 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBA non-real estate

 

 

$               959 

 

$                959 

 

 

$            1,476 

 

$             1,476 

Direct lease financing

 

 

1,532 

 

1,532 

 

 

230 

 

230 

Consumer

 

 

530 

 

530 

 

 

535 

 

535 

Total

 

 

$            3,021 

 

$             3,021 

 

 

$            2,241 

 

$             2,241 



The balances below provide information as to how the loans were modified as troubled debt restructurings loans at March 31, 2018 and December 31, 2017 (in thousands).

 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2018

 

December 31, 2017



 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBA non-real estate

 

$                    - 

 

$               108 

 

$                851 

 

$                 - 

 

$               115 

 

$             1,361 

Direct lease financing

 

 -

 

1,006 

 

526 

 

 -

 

 -

 

230 

Consumer

 

 -

 

 -

 

530 

 

 -

 

 -

 

535 

Total

 

$                    - 

 

$            1,114 

 

$             1,907 

 

$                 - 

 

$               115 

 

$             2,126 





The following table summarizes, as of March 31, 2018, loans that had been restructured within the last 12 months that have subsequently defaulted.







 

 

 

 



 

 

 

 



 

Number

 

Pre-modification recorded investment

SBA non-real estate

 

 

$               185 

Total

 

 

$               185 



48

 


 

As of March 31, 2018 and December 31, 2017, we had a commitment to extend $228,000 on one loan classified as  a troubled debt restructuring.  However, based upon available information, the borrower does not intend to draw on the commitment.



The following table provides information about impaired loans at March 31, 2018 and December 31, 2017:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

March 31, 2018

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non-real estate

$                      652 

 

$                   1,204 

 

$                        - 

 

$                      555 

 

$                           - 

SBA commercial mortgage

 -

 

83 

 

 -

 

 -

 

 -

Direct lease financing

526 

 

637 

 

 -

 

378 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

1,690 

 

1,690 

 

 -

 

1,692 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 -

SBA non-real estate

1,954 

 

1,954 

 

1,464 

 

2,177 

 

 -

SBA commercial mortgage

458 

 

458 

 

74 

 

575 

 

 -

Direct lease financing

1,006 

 

1,006 

 

74 

 

503 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

 -

 

 -

 

 -

 

 -

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non-real estate

2,606 

 

3,158 

 

1,464 

 

2,732 

 

 -

SBA commercial mortgage

458 

 

541 

 

74 

 

575 

 

 -

Direct lease financing

1,532 

 

1,643 

 

74 

 

881 

 

 -

Consumer - other

 -

 

 -

 

 -

 

 -

 

 -

Consumer - home equity

1,690 

 

1,690 

 

 -

 

1,692 

 

 -



$                   6,286 

 

$                   7,032 

 

$                1,612 

 

$                   5,880 

 

$                           - 

49

 


 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non-real estate

$                      459 

 

$                   1,286 

 

$                        - 

 

$                      311 

 

$                           - 

SBA commercial mortgage

 -

 

 -

 

 -

 

 -

 

 -

Direct lease financing

229 

 

341 

 

 -

 

103 

 

 -

Consumer - other

 -

 

 -

 

 -

 

259 

 

 -

Consumer - home equity

1,695 

 

1,695 

 

 -

 

1,712 

 

 -

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBA non-real estate

2,399 

 

2,399 

 

1,689 

 

2,507 

 

 -

SBA commercial mortgage

693 

 

693 

 

225 

 

747 

 

 -

Direct lease financing

 -

 

 -

 

 -

 

405 

 

 -

Consumer - other

 -

 

 -

 

 -

 

14 

 

 -

Consumer - home equity

 -

 

 -

 

 -

 

 -

 

 -

Total

 

 

 

 

 

 

 

 

 

SBA non-real estate

2,858 

 

3,685 

 

1,689 

 

2,818 

 

 -

SBA commercial mortgage

693 

 

693 

 

225 

 

747 

 

 -

Direct lease financing

229 

 

341 

 

 -

 

508 

 

 -

Consumer - other

 -

 

 -

 

 -

 

273 

 

 -

Consumer - home equity

1,695 

 

1,695 

 

 -

 

1,712 

 

 -



$                   5,475 

 

$                   6,414 

 

$                1,914 

 

$                   6,058 

 

$                           - 



We had $3.5 million of non-accrual loans at March 31, 2018 compared to $4.0 million of non-accrual loans at December 31, 2017.  The $500,000 decrease in non-accrual loans was primarily due to $2.7 million of loans placed on non-accrual status offset by $2.7 million of loan payments and $545,000 of charge-offs.  Loans  past due 90 days or more still accruing interest amounted to $2.6 million at March 31, 2018 and $227,000 at December 31, 2017.  The $2.3 million increase reflected $2.6 million of additions partially offset by $227,000 of loan payments. 



We had $405,000 and $450,000 of other real estate owned at March 31, 2018 and at December 31, 2017, respectively.  The reduction resulted from a $45,000 writedown.



50

 


 

The following table classifies our loans (not including loans held for sale) by categories which are used throughout the industry as of March 31, 2018 and December 31, 2017: 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBA non-real estate

 

$           66,000 

 

$            3,481 

 

$            3,588 

 

$                   - 

 

$                    - 

 

$                    176 

 

$                   1,980 

 

$              75,225 

SBA commercial mortgage

 

142,845 

 

276 

 

458 

 

 -

 

 -

 

4,087 

 

1,561 

 

149,227 

SBA construction

 

19,384 

 

 -

 

682 

 

 -

 

 -

 

 -

 

77 

 

20,143 

Direct lease financing

 

214,198 

 

 -

 

2,890 

 

 -

 

 -

 

5,132 

 

163,247 

 

385,467 

SBLOC

 

370,497 

 

 -

 

 -

 

 -

 

 -

 

3,653 

 

385,219 

 

759,369 

Other specialty lending

 

45,729 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

45,729 

Consumer

 

7,970 

 

 -

 

1,616 

 

 -

 

 -

 

 -

 

7,830 

 

17,416 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,488 

 

10,488 



 

$         866,623 

 

$            3,757 

 

$            9,234 

 

$                   - 

 

$                    - 

 

$               13,048 

 

$               570,402 

 

$         1,463,064 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA non-real estate

 

$           63,547 

 

$            3,392 

 

$            3,450 

 

$                   - 

 

$                    - 

 

$                         - 

 

$                       (10)

 

$              70,379 

SBA commercial mortgage

 

141,084 

 

277 

 

693 

 

 -

 

 -

 

 -

 

32 

 

142,086 

SBA construction

 

16,740 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

16,740 

Direct lease financing

 

204,906 

 

 -

 

2,895 

 

 -

 

 -

 

8,820 

 

161,039 

 

377,660 

SBLOC

 

357,050 

 

 -

 

 -

 

 -

 

 -

 

 -

 

373,412 

 

730,462 

Other specialty lending

 

30,720 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

30,720 

Consumer

 

7,910 

 

281 

 

1,947 

 

 -

 

 -

 

 -

 

3,995 

 

14,133 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,048 

 

10,048 



 

$         821,957 

 

$            3,950 

 

$            8,985 

 

$                   - 

 

$                    - 

 

$                 8,820 

 

$               548,516 

 

$         1,392,228 



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



Premises and equipment, net.  Premises and equipment amounted to $19.1 million at March 31, 2018 compared to $20.1 million at December 31, 2017.  The decrease reflected depreciation and reduced purchases compared to prior periods. 



Investment in Unconsolidated Entity.  On December 30, 2014, the Bank entered into an agreement for, and closed on, the sale of a portion of its 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; a senior note in the principal amount of approximately $178.2 million bearing interest at 1.5% per year and maturing in December 2024 and a subordinate note in the principal amount of approximately $15.4 million, bearing interest at 10.0% per year and maturing in December 2024.  The balance of these notes comprise the $70.0 million investment in unconsolidated entity at March 31, 2018.  



Assets held for sale.  Assets held for sale as a result of discontinued operations, primarily commercial, commercial mortgage and construction loans, amounted to $289.0 million at March 31, 2018 compared to $304.3 million at December 31, 2017.  The decrease resulted primarily from loan repayments.  An increase in non-performing loans in the first quarter of 2018 resulted from a $36.9 million loan, collateralized by a hotel under construction and parking lot in the southeastern United States.  Based upon an independent first quarter 2018 appraisal, the loan to value is approximately 80% on an as-is” basis, with personal guarantees of certain of the borrower’s principals.  The loan became delinquent in the first quarter of 2018 and the borrower, a development corporation, subsequently declared bankruptcy.  The Bank is pursuing collection and we currently believe that there will be no loss of principal. An increase in delinquencies in the first quarter of 2018 resulted from a $17.0 million loan which was delinquent 90 days as of the loan’s May 1, 2018 monthly payment due date.  The loan is secured by multiple commercial real estate properties which cumulatively have a 95% loan to value based on December 2016 appraisals.  The loan has been impaired by approximately $300,000.



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.  However, the majority of our deposits are generated through prepaid card and other payments related deposit accounts. One strategic focus is growing these accounts through affinity groups.  At March 31, 2018, we had total deposits of $3.96 billion compared to $4.26 billion at December 31, 2017,  a decrease of $305.7 million or 7.2%.    The decrease reflected seasonally higher gift card account balances at December 31, 2017.  The following table presents the average balance and rates paid on deposits for the periods indicated (in thousands):



51

 


 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

For the three months ended

 

For the year ended



 

 

March 31, 2018

 

December 31, 2017



 

 

Average

 

Average

 

Average

 

Average



 

 

balance

 

rate

 

balance

 

rate



 

 

 

 

 

Demand and interest checking *

 

$              3,535,791 

 

0.49% 

 

$              3,371,969 

 

0.36% 

Savings and money market

 

487,380 

 

0.55% 

 

439,625 

 

0.51% 



Total deposits

 

$              4,023,171 

 

0.49% 

 

$              3,811,594 

 

0.38% 



 

 

 

 

 

 

 

 

 

* 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.



BorrowingsAt March 31, 2018, we had long-term borrowings of $42.2 million compared to $42.3 million at December 31, 2017.  These borrowings consisted of sold loans which were accounted for as a secured borrowing, because they did not qualify for true sale accounting.  We do not have any policy prohibiting us from incurring debt.



Other liabilities.  Other liabilities amounted to $28.3 million at March 31, 2018 compared to $67.2 million at December 31, 2017, representing a  decrease of $38.9 million.  Other liabilities consist primarily of investment payables and accrued expenses.



Off balance sheet arrangements.  There were no off-balance sheet arrangements during the three months ended March 31, 2018 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.

52

 


 

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, 2017.



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, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  



 

53

 


 

PART II – OTHER INFORMATION



Item 1. Legal Proceedings



For a discussion of 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”.



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 2011, 2012, 2013 and 2014.  The audit is in process.



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

54

 


 

Item 6. Exhibits



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









 

 

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



 

 



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, 2018

 

/s/ DAMIAN KOZLOWSKI

Date

 

Damian Kozlowski



 

Chief Executive Officer



 

 

May 10, 2018

 

/s/ PAUL FRENKIEL

Date

 

Paul Frenkiel

Executive Vice President of Strategy,



 

Chief Financial Officer and Secretary







 

 



 

 







 

55