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Bancorp, Inc. - Annual Report: 2019 (Form 10-K)



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-K

_______________

(Mark One)



 

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



For the fiscal year ended December 31, 2019

OR

 



 

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



For the transition period from              to              

Commission File Number 51018

The Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 



 

 

Delaware

 

23-3016517

(State or other jurisdiction of                                      

incorporation or organization)

 

(IRS Employer

Identification No.)

 



 

 

 

409 Silverside Road, Wilmington, DE

 

 

19809

(Address of principal executive offices)

 

 

(Zip Code)

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





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





 

 

 

Title of each class

 

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.00 per share

 

TBBK

NASDAQ Global Select





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





 

 

Title of class

                                                                                        None

 



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

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

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

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). Yes      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.    



 

 

Large accelerated filer  

Accelerated filer  

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   

The aggregate market value of the common shares of the registrant held by non-affiliates of the registrant, based upon the closing price of such shares on June 30, 2019 of $8.92 was approximately $455.7 million.

As of March 1, 2020, 57,400,556 shares of common stock, par value $1.00 per share, of the registrant were outstanding.



DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for registrant’s 2020 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.  

 


 





 

 

 

 

THE BANCORP, INC.

INDEX TO ANNUAL REPORT

ON FORM 10-K



 

 

 

 



 

 

 

Page

PART I

 

 

 

 



 

Forward-looking statements 

 

1



 

 

 

 

Item 1:

 

Business 

 

3

Item 1A:

 

Risk Factors

 

22

Item 1B:

 

Unresolved Staff Comments 

 

38

Item 2:

 

Properties 

 

39

Item 3:

 

Legal Proceedings

 

39

Item 4:

 

Mine Safety Disclosures

 

40

PART II 

 

 

 

 

Item 5:

 

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

 

40

Item 6:

 

Selected Financial Data

 

44

Item 7:

 

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

 

45

Item 7A:

 

Quantitative and Qualitative Disclosures About Market Risk 

 

80

Item 8:

 

Financial Statements and Supplementary Data 

 

81

Item 9:

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 

 

142

Item 9A:

 

Controls and Procedures 

 

143

Item 9B:

 

Other Information

 

146

PART III 

 

 

 

 

Item 10:

 

Directors, Executive Officers and Corporate Governance

 

146

Item 11:

 

Executive Compensation

 

146

Item 12:

 

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

 

146

Item 13:

 

Certain Relationships and Related Transactions, and Director Independence 

 

146

Item 14:

 

Principal Accountant Fees and Services 

 

146


 

PART IV 

 

 

 

 

Item 15:

 

Exhibits and Financial Statement Schedules  

 

147

SIGNATURES

 

 

 

150





 


 

FORWARD-LOOKING STATEMENTS



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



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



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



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



·

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

·

an inconsistent recovery from an extended period of weak economic and slow growth conditions in the U.S. economy have had, and may in the future have, significant adverse effects on our assets and operating results, including increases in payment defaults and other credit risks, decreases in the fair value of some assets and increases in our provision for loan losses;

·

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

·

operating costs may increase;

·

adverse governmental or regulatory policies may be promulgated;

·

management and other key personnel may be lost;

·

competition may increase;

·

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

·

loan and investment yields may decrease resulting in a lower net interest margin;

·

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

·

the market value of real estate that secures certain of  our loans, principally loans we originate for sale into secondary markets, Small Business Administration loans under the 504 Fixed Asset Financing Program and our discontinued commercial loan portfolio,  has been, and may continue to be, adversely affected by recent economic and market conditions, and may be affected by other conditions outside of our control such as lack of demand for real estate of the type securing our loans, natural disasters, changes in neighborhood values, competitive overbuilding, weather, casualty losses, occupancy rates and other similar factors;

·

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

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·

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

·

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



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

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PART I

Item 1. Business.  

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 generated through the Bank.  In our continuing operations, we have four primary lines of specialty lending: securities-backed lines of credit (SBLOC) and insurance policy cash value-backed lines of credit (IBLOC), leasing (direct lease financing), small business loans (SBL) and loans generated for sale into capital markets through commercial loan securitizations and other sales (CMBS).  SBL are comprised primarily of Small Business Administration (SBA) loans. SBLOCs and IBLOCs are loans which are generated through institutional banking affinity groups and are respectively collateralized by marketable securities and the cash value of insurance policies. 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.  SBL loans and commercial loans generated for sale are made nationally.  At December 31, 2019, SBLOC and IBLOC, leasing (direct lease financing), SBL and loans for sale in secondary markets respectively totaled $1.02 billion, $434.5 million, $572.6 million (including SBL loans held-for-sale) and $960.2 million (excluding SBL loans held-for-sale), respectively, and comprised approximately 34%, 14%, 19% and 32% of our loan portfolio and commercial loans held-for-sale.  Our investment portfolio amounted to $1.41 billion at December 31, 2019, representing a slight increase from the prior year. 

The majority of our deposits and non-interest income are generated in our payments business line which consists of consumer deposit accounts accessed by prepaid or debit cards, or issuing, automated clearing house, or ACH accounts and the collection of payments through credit card companies on behalf of merchants.  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.  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  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.

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

Our Strategies 

Our principal strategies are to:



Fund our Loan and Investment Portfolio Growth with Stable Deposits and Generate Non-interest Income from Prepaid and Debit Card Accounts and Other Payment Processing. Our principal focus is to grow our specialty lending operations and investment portfolio, and fund these loans and investments through a variety of sources that provide stable deposits, which are lower cost compared to certain other types of funding.  Funding sources include prepaid and debit card accounts, institutional banking transaction accounts and card payment processing.  We derive the largest component of our deposits and non-interest income from our prepaid and debit card operations.       

 

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



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



Deposit Products and Services  



We offer a range of products and services to our affinity group clients and their customer bases through direct or private label banking strategies, including:

 

·

checking accounts;

·

savings accounts;

·

money market accounts;

·

commercial accounts; and

·

various types of prepaid and debit cards.



We also offer payment services such as ACH bill payment and other payment services.



Lending Activities



In the third quarter of 2014, we discontinued our Philadelphia-based commercial lending operations following our determination that those operations were inconsistent with our strategic focus on what we believe are lower risk and more granular and national lines of business.  We currently focus our lending activities upon four specialty lending segments:  SBLOC and IBLOC loans, vehicle fleet and other equipment leasing (direct lease financing), SBA loans and loans originated for sale into CMBS securitization capital markets.



SBLOC and IBLOC.  We make loans to individuals, trusts and entities which are secured by a pledge of marketable securities maintained in one or more accounts with respect to which we obtain a securities account control agreement.  The securities pledged may be either debt or equity securities or a combination thereof, but all such securities must be listed for trading on a national securities exchange or automated inter-dealer quotation system.  SBLOCs are typically payable on demand.  Most of our SBLOCs are drawn to meet a specific need of the borrower (such as for bridge financing of real estate) and are typically drawn for 12 to 18 months at a time.  Maximum SBLOC line amounts are calculated by applying a standard ‘advance rate’ calculation against the eligible security type depending on asset class:  typically up to 50% for equity securities and mutual fund securities and 80% for investment grade (Standard & Poor’s rating of BBB- or higher, or Moody’s rating of Baa3 or higher) municipal or corporate debt securities.  Borrowers generally must have a credit score of 660 or higher, although we may allow exceptions based upon a review of the borrower’s income, assets and other credit information.  Substantially all SBLOCs have full recourse to the borrower.  The underlying securities that act as collateral for our SBLOC commitments are monitored on a daily basis to confirm the composition of the client portfolio and its daily market value.  Although these accounts are closely monitored, severely falling markets or sudden drops in price with respect to individual pledged securities could result in the loan being under-collateralized and consequently in default and, upon sale of the collateral, could result in losses to the Bank.  We also make similar loans which are collateralized by the cash surrender value of insurance policies, or IBLOCs. Should a loan default, the primary risks for IBLOCs are if the insurance company issuing the policy were to become insolvent, or if that company would fail to recognize the Bank’s assignment of policy proceeds. To mitigate these risks, insurance company ratings are periodically evaluated for compliance with Bank standards.  Additionally, the Bank utilizes assignments of cash surrender value which legal counsel has concluded are enforceable.



4


 

LeasesWe provide lease financing for commercial and government vehicle fleets and, to a lesser extent, provide lease financing for other equipment.  Our leases are either open-end or closed-end. An open-end lease is one in which, at the end of the lease term, the lessee must pay us the difference between the amount at which we sell the leased asset and the stated termination value. Termination value is a contractual value agreed to by the parties at the inception of a lease as to the value of the leased asset at the end of the lease term.  A closed-end lease is one for which no such payment is due on lease termination.  In a closed-end lease, the risk that the amount received on a sale of the leased asset will be less than the residual value is assumed by us, as lessor.  While we do not have specific underwriting criteria for our lease financing, we analyze information we obtain about the lessee, including financial statements and credit reports, to determine the lessee’s ability to perform its obligations.



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



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



The 504 Fixed Asset Financing Program is designed to provide small businesses with financing for the purchase of fixed assets, including real estate and buildings; the purchase of improvements to real estate; the construction of new facilities or modernizing, renovating or converting existing facilities; the purchase of long-term machinery and equipment; and debt refinancing.  A 504 loan may not be used for working capital, trading asset purchases or investment in rental real estate.  In a 504 financing, the borrower must supply 10% of the financing amount, we provide 50% of the financing amount and a Certified Development Company, or CDC, provides 40% of the financing amount.  If the borrower has less than two years of operating history or if the assets being financed are considered “special purpose,” the funding percentages are 15%, 50% and 35%, respectively. If both conditions are met, the funding percentages are 20%, 50% and 30%, respectively.  We receive a first lien on the assets being financed and the CDC receives a second lien.  Personal guarantees of the principal owners of the business are required.  The funds for the CDC loans are raised through a monthly auction of bonds that are guaranteed by the U.S. government and, accordingly, if the government guarantees are curtailed or terminated, our ability to make 504 loans would be curtailed or terminated.  Certain basic loan terms, as with the 7(a) program, are established by the SBA, including borrower eligibility, maximum loan amount, maximum maturity date, interest rates and loan fees.  While real estate is appraised and values are established for other collateral, and the loan amount is limited to a percentage of cost of the assets being acquired by the borrower, such amounts may not be realized upon resale if the borrower defaults and the Bank forecloses on the collateral.



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



Additionally, the Bank makes SBA loans to franchisees of various business concepts, including loans to multiple franchisees with the same concept.  In making loans to franchisees, we consider franchisee failure rates for the specific franchise concept. 

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



CMBS.  We originate loans for sale or securitization into secondary markets. These loans are collateralized by various types of commercial real estate, including but not limited to, multi-family, retail, office, apartments and hotels, and are not recourse to the borrower (except for carve-outs such as fraud) and, accordingly, depend on cash reserves and cash generated by the underlying properties for repayment.  The vast majority of these loans are variable rate and, as a result, higher market rates will result in higher payments and greater cash flow requirements, although all loans require an interest rate cap to mitigate that risk. Should cash flow and available cash reserves prove inadequate to cover debt service on these loans, repayment will primarily depend upon the sales price of the property.  Low occupancy or rental rates may negatively impact loan repayment.  Because these loans are being originated for sale, the underwriting and other criteria used are those which buyers in the capital markets indicate are most crucial when determining whether to buy the loans.  Such criteria include the loan-to-value ratio and debt yield (net operating income divided by first mortgage debt).  However, for the period during which we hold a loan prior to sale, property values may fall below appraised values and below the outstanding balance of the loan, which would reduce the price at which we could sell the loan.  While we historically have been able to sell loans into these markets, adverse market conditions may delay, or possibly preclude, expected sales into the secondary market or cause losses upon any resale.  To mitigate these risks, we establish guidelines for the maximum amounts of such loans we will hold on our balance sheet.



Affinity Group Banking Products and Services



Card Issuing ServicesWe issue debit and prepaid cards to access diverse types of deposit accounts including: 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 cards are offered to end users through our relationships with benefits administrators, third-party administrators, insurers, corporate incentive companies, rebate fulfillment organizations, payroll administrators, large retail chains, consumer service organizations and FinTech disruptors.  Our cards are network-branded through our agreements with Visa, MasterCard, and Discover.  The majority of fees we earn result from contractual fees paid by third-party sponsors, computed on a per transaction basis, and monthly service fees.  Additionally, we earn interchange fees paid through settlement associations such as Visa, which are also determined on a per transaction basis.  These accounts have demonstrated a history of stability and lower cost compared to certain other types of funding.  Our accounts are offered throughout the United States. For information relating to current constraints on our prepaid card programs resulting from consent orders we have entered into with federal banking authorities, see “Risk Factors-Risks Relating to Our Business-The entry into the Consent Orders and the supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements on us and the Bank.”



Card Payment and ACH Processing.  We act as the depository institution for the processing of credit and debit card payments made to various businesses.  We also act as the bank sponsor and depository institution for independent service organizations that process such payments and for other companies, such as bill payment companies for which we process their ACH payments.  We have designed products that enable those organizations to more easily process electronic payments and to better manage their risk of loss. These accounts are a source of demand deposits and fee income.

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

Private Label Banking.  Through our private label banking strategy, we provide our affinity group partners with banking services that have been customized to the needs of their respective customers.  This allows these affinity groups to provide their members the affinity-branded banking services they desire.   Affinity group websites identify the Bank as the provider of these banking services.  We and the affinity group also may create products and services, or modify products and services already on our menu, that specifically relate to the needs and interests of the affinity group itself, or the affinity group’s members or customers.  Our private label banking services have been developed to include both deposit and lending-related products and services.

We pay fees to certain affinity groups based upon deposits and loans they generate. These fees vary, and certain fees increase as market interest rates increase, while other fee rates may be fixed.  These fees comprise substantially all of the interest expense on deposits in our consolidated statement of operations.

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Other Operations



Account Services.  Depending upon the type of account, account holders may access our products through the website of their affinity group, or through our website.  This access allows account holders to apply for loans, review account activity, enter transactions into an online account register, pay bills electronically, receive statements electronically and print statements.



Call CentersWe have call center operations that serve as inbound customer support.  The call center provides account holders or potential account holders with assistance accessing the Bank’s products and services, and in resolving any problems that may arise in the servicing of accounts or other banking products.  A third-party servicer provides virtually all customer support, including institutional banking, for after hours and overflow support.  Located in Manila, Philippines, TELUS International currently operates 24 hours a day, seven days a week.  

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

·

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

·

servicing of prepaid and debit card accounts;

·

call center customer support, including institutional banking for overflow and after-hours support;

·

access to automated teller machine networks;

·

bank accounting and general ledger system;

·

data warehousing services; and

·

certain software development.

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

Sales and Marketing

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

·

print advertising;

·

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

·

direct mail; and

·

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

Loan Administration Offices.  We maintain offices to market and administer our leasing programs in Crofton, Maryland, Kent, Washington, Charlotte, North Carolina, Raritan, New Jersey, Logan, Utah, Norristown, Pennsylvania and Orlando, Florida.  We maintain SBA loan offices in Chicago, Illinois and suburban Raleigh, North Carolina. We maintain an office in New York, New York for CMBS.

Technology



Primary System Architecture.  We provide financial products and services through a secure, tiered architecture using commercially available software and with third party providers whom we believe to be industry leaders.  We maintain a platform of

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several web technologies, databases, firewalls, and licensed and proprietary financial services software to support our unique client base.  User activity is distributed across our service offering, with internally developed software as well as third-party platforms and processors.  We also use third-party data processors.  The goal of our systems designs is to service our client requirements efficiently, which has been accomplished using data and service replication between internal data centers and cloud platforms for our critical applications.  The system’s flexible architecture is designed to meet current capacity needs and allow expansion for future demands.  In addition to built-in redundancies, we monitor our systems using automated internal tools, and use independent third parties to validate our controls.



 Security.  The Bancorp has an established Cyber Security Program that is mapped to the NIST Cyber Security Framework. The program is also fully compliant with the FFIEC Cyber Security framework and relevant ISO standards.  The Bancorp obtains annual PCI certification. Highlights of the program include:



·

A security testing schedule which includes internal/external penetration testing;

·

Regular vulnerability assessments;

·

Detailed vulnerability management;

·

Monitoring and reporting of systems and critical applications;

·

Data loss prevention controls;

·

File access and integrity monitoring and reporting;

·

Threat intelligence; and

·

Third-party vendor management.



Intellectual Property and Other Proprietary Rights

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

Competition

We compete with numerous banks and other financial institutions such as finance companies, leasing companies, credit unions, insurance companies, money market funds, investment firms and private lenders, as well as online lenders and other non-traditional competitors.  Our primary competitors in each of our business lines differ significantly from those in our other business lines principally because few financial institutions compete against us in all business segments in which we operate.  For prepaid and debit accounts, our largest source of funding and fee income, competitors include Meta Financial and for SBLOC, our largest lending portfolio, competitors include TriState Capital and Goldman Sachs.  For SBA loans our competitors include Live Oak Bank and for leasing our competitors include Enterprise.  Significant costs of entry include BSA and other regulatory costs which may impact competition for prepaid and debit card accountsWe believe that our ability to compete successfully depends on a number of factors, including:

·

our ability to expand our affinity group banking program;

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competitors’ interest rates and service fees;

·

the scope of our products and services;

·

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

·

satisfaction of our customers with our customer service;

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·

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

·

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

·

the capacity, reliability and security of our network infrastructure.



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



Regulation Under Banking Law  



Overview

We are regulated extensively under both federal and state banking law and related regulations.  We are a Delaware corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System, or the Federal Reserve.  We are subject to supervision and regulation by the Federal Reserve and the Delaware Office of the State Bank Commissioner, or the Commissioner.  The Bank, as a state-chartered, nonmember depository institution, is supervised by the Commissioner, as well as the Federal Deposit Insurance Corporation, or FDIC. 

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

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

Federal Regulation

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

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

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

·

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

·

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

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

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

Regulatory Restrictions on Dividends.  It is the policy of the Federal Reserve that financial holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.  The policy provides that financial holding companies should not maintain a level of cash dividends that undermines the financial holding company’s ability to serve as a source of strength to its banking subsidiaries.  See “Holding Company Liability,” below.  Federal Reserve policies also affect the ability of a financial holding company to pay in-kind dividends.

Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval.  The Bank is also subject to limitations under state law regarding the payment of dividends, including the requirement that dividends may be paid only out of net profits.  See “Delaware Regulation” below.  In addition to these explicit limitations, federal and state regulatory agencies are authorized to prohibit a banking subsidiary or financial holding company from engaging in unsafe or unsound banking practices.  Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.  In August 2015, we consented to the issuance of a consent order amendment pursuant to which the payment of dividends by the Bank to us would require prior FDIC approval, and received a Federal Reserve supervisory letter pursuant to which any payment of dividends by us would require prior approval from the Federal Reserve.  The requirement for Federal Reserve approval was lifted in fourth quarter 2019 at which time the supervisory letter was terminated.  See “Risk Factors-Risks Relating to Our Business-The entry into the Consent Orders has imposed certain restrictions and requirements on us and the Bank.”

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

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

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

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

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

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

The standards classify total capital for this risk-based measure into two tiers, referred to as Tier 1 and Tier 2.  Tier 1 capital consists of common shareholders’ equity, certain non-cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less certain adjustments.  Tier 2 capital consists of the allowance for loan and lease losses (within certain limits), perpetual preferred stock not included in Tier 1, hybrid capital instruments, term subordinate debt, and intermediate-term preferred stock, less certain adjustments.  Together, these two categories of capital comprise a bank’s or financial holding company’s “qualifying total capital.” However, capital that qualifies as Tier 2 capital is limited in amount to 100% of Tier 1 capital in testing compliance with the total risk-based capital minimum standards.  Banks and financial holding companies must have a minimum ratio of 8% of qualifying total capital to total risk-weighted assets, and a minimum ratio of 4% of qualifying Tier 1 capital to total risk-weighted assets.  At December 31, 2019, we and the Bank had total capital to risk-adjusted assets ratios of 19.45% and 19.11%, respectively, and Tier 1 capital to risk-adjusted assets ratios of 19.04% and 18.71%, respectively.

In addition, the Federal Reserve and the FDIC have established minimum leverage ratio guidelines.  The principal objective of these guidelines is to constrain the maximum degree to which a financial institution can leverage its equity capital base.  It is intended to be used as a supplement to the risk-based capital guidelines.  These guidelines provide for a minimum ratio of Tier 1 capital to adjusted average total assets of 3% for financial holding companies that meet certain specified criteria, including those having the highest regulatory rating.  Other financial institutions generally must maintain a leverage ratio of at least 3% plus 100 to 200 basis points.  The guidelines also provide that financial institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above minimum supervisory levels, without significant reliance on intangible assets.  Furthermore, the banking agencies have indicated that they may consider other indicia of capital strength in evaluating proposals for expansion or new activities.  At December 31, 2019, we and the Bank had leverage ratios of 9.63% and 9.46%, respectively. 

The federal banking agencies’ standards provide that concentration of credit risk and certain risks arising from non-traditional activities, as well as an institution’s ability to manage these risks, are important factors to be taken into account by them in assessing a financial institution’s overall capital adequacy.  The risk-based capital standards also provide for the consideration of interest rate risk in the agency’s determination of a financial institution’s capital adequacy.  The standards require financial institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk.  These standards can be expected to be amended from time to time.

The Dodd-Frank Act includes certain related provisions which are often referred to as the “Collins Amendment.”  These provisions are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate

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



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

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



Minimum capital ratios in effect at December 31, 2019 were as follows:



·

4.5% CET1 to risk-weighted assets;

·

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

·

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

·

4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).



The New Capital Rules also introduce a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-weighted asset ratios.  The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.  Thus, when fully phased-in on January 1, 2019, we and the Bank were required to maintain such additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.



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



In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss, or AOCI, items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio)

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



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



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



We believe that we and the Bank will continue to be able to meet targeted capital ratios. Actual ratios are shown in the following paragraph.



Prompt Corrective Action.  Federal banking agencies must take prompt supervisory and regulatory actions against undercapitalized depository institutions pursuant to the Prompt Corrective Action provisions of the Federal Deposit Insurance Act.  Depository institutions are assigned one of five capital categories—“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”—and are subjected to differential regulation corresponding to the capital category within which the institution falls.  Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category.  As we describe in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” an institution is deemed to be well capitalized if it has a total risk-based capital ratio of at least 10.00%, a Tier 1 risk-based capital ratio of at least 6.50% and a leverage ratio of at least 5.00%.  An institution is adequately capitalized if it has a total risk-based capital ratio of at least 8.00%, a Tier 1 risk-based capital ratio of at least 4.50% and a leverage ratio of at least 4.00%.  At December 31, 2019, our total risk-based capital ratio was 19.45%, our Tier 1 risk-based capital ratio was 19.04% and our leverage ratio was 9.63% while the Bank’s ratios were 19.11%, 18.71% and 9.46%, respectively and, accordingly, both we and the Bank were “well capitalized” within the meaning of the regulations.  A depository institution is generally prohibited from making capital distributions (including paying dividends) or paying management fees to a holding company if the institution would thereafter be undercapitalized.  Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits.  Undercapitalized institutions may not accept, renew, or roll over brokered deposits.  The majority of the Bank’s deposits are classified as brokered, because related accounts, primarily prepaid and debit card deposit accounts, are obtained with the assistance of third parties.  On December 12, 2019, the FDIC issued a proposed notice of regulatory change which, if adopted, could result in the reclassification of the majority of our deposits to non-brokered, see “Insurance of Deposit Accounts” below.

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

·

prohibiting the payment of principal and interest on subordinated debt;

·

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

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·

placing limits on asset growth and restrictions on activities;

·

placing additional restrictions on transactions with affiliates;

·

restricting the interest rate the institution may pay on deposits;

·

prohibiting the institution from accepting deposits from correspondent banks; and

·

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

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

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

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

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

The FDIC has implemented a risk-based assessment system under which FDIC-insured depository institutions pay annual premiums at rates based on their risk classification.  A bank’s risk classification is based on its capital levels and the level of supervisory concern the bank poses to the regulators.  Institutions assigned to higher risk classifications (that is, institutions that pose a greater risk of loss to the DIF) pay assessments at higher rates than institutions that pose a lower risk.  A decrease in the Bank’s capital ratios or the occurrence of events that have an adverse effect on a bank’s asset quality, management, earnings, liquidity or sensitivity to market risk could result in a substantial increase in deposit insurance premiums paid by the Bank, which would adversely affect earnings.  In addition, the FDIC can impose special assessments in certain instances.  The range of assessments in the risk-based system is a function of the reserve ratio in the DIF.  Each insured institution is assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors.  An institution’s assessment rate depends upon the category to which it is assigned.  Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information.  Assessment rates are determined by the FDIC and, including potential adjustments to reflect an institution’s risk profile, currently range from five to nine basis points for the healthiest institutions (Risk Category I) to 35 basis points of assessable liabilities for the riskiest (Risk Category IV).  Rates may be increased an additional ten basis points depending on the amount of brokered deposits utilized.  The above rates apply to institutions with assets under $10 billion.  Other rates apply for larger or “highly complex” institutions.  The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points.  At December 31, 2019, the Bank’s DIF assessment rate was 19 basis pointsA reduction in the assessment rate will depend on future FDIC evaluations of the Bank. In December 2014, the FDIC issued new guidance which reclassified the Bank’s prepaid card deposits and most other deposits as brokered deposits because such deposits are obtained with the assistance of third parties.  The reclassification resulted in a 10 basis point increase in our assessment rate which is reflected in the increased FDIC insurance expense in subsequent periods. On December 12, 2019, the FDIC issued a notice for a proposed regulatory change, which would reclassify certain brokered deposits obtained with the assistance of third parties as non-brokered. The proposal requires an application to the FDIC, and if the proposal is adopted, we intend to apply for the classification change. If the classification change is approved, our FDIC insurance expense could decrease depending on other

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factors. However, there can be no assurance that the proposed regulation will be adopted, or that our application will be approved and that FDIC insurance expense will decrease.



Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (DRR), that is, the ratio of the DIF to insured deposits of the total industry.  The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.  The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%.  The FDIC issued a final rule regarding this offset on March 25, 2016.  Accordingly, the Bank received an assessment credit for the portion of its assessment that offset the impact of the increase from 1.15% to 1.35%. 



Loans-to-One Borrower.  Generally, a bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus.  An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by specified collateral, generally readily marketable collateral (which is defined to include certain financial instruments and bullion) and real estate.  At December 31, 2019, the Bank’s limit on loans-to-one borrower was $71.7 million ($119.5 million for secured loans).    



Transactions with Affiliates and other Related Parties.  There are various legal restrictions on the extent to which a financial holding company and its non-bank subsidiaries can borrow or otherwise obtain credit from banking subsidiaries or engage in other transactions with or involving those banking subsidiaries.  The Bank’s authority to engage in transactions with related parties or “affiliates” (that is, any entity that controls, is controlled by or is under common control with an institution, including us and our non-bank subsidiaries) is limited by Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder.  Section 23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the Bank’s capital and surplus.  At December 31, 2019, we were not indebted to the Bank.  The aggregate amount of covered transactions with all affiliates is limited to 20% of the Bank’s capital and surplus.  Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates are generally prohibited.  Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.



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

The Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve.  Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.  In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors.  At December 31, 2019 and 2018, loans to these related parties included in assets held-for-sale amounted to $2.3 million and $2.0 million.

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

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institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

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

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



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



·

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

·

detect red flags that have been incorporated into the program;

·

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

·

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

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

On July 26, 2011, FinCEN issued a final rule expanding the reach of BSA-AML related compliance to certain defined “providers” and “sellers” of “prepaid access” either outside of, or minimally regulated under the BSA.  The final rule became effective on September 27, 2011 and imposed expanded affirmative BSA-AML compliance obligations on providers and sellers of prepaid access.  The Bank has evaluated the impact of these rules on its operations and its third-party relationships, and has established internal processes accordingly. 

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On May 11, 2016, FinCEN issued a final rule related to Customer Due Diligence (CDD) under the Bank Secrecy Act for banks and other covered financial institutions, which we refer to as the “CDD Rule”.  The CDD Rule became effective on July 11, 2016, and imposes a new requirement that the Bank identify and verify the identity of the natural persons who are beneficial owners of legal entity customers.  Financial institutions were required to be in full compliance by May 11, 2018.  As a covered institution, the Bank is required to maintain written compliance procedures that are “reasonably designed to identify and verify the beneficial owners of legal entity customers,” except for those specifically excluded from the definition of “legal entity customer.” As required, the Bank adopted procedures related to the identification and verification of a beneficial owner at the time a new account is opened. 

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

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

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

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

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

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

·

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

·

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

·

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

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·

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

·

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

·

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

·

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

·

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



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



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



·

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

·

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

·

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

·

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

·

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



Final Prepaid Account Rule Amending Regulation E and Regulation Z.  On April 1, 2019, a final rule issued by the CFPB went into effect related to prepaid accounts and the applicability of provisions of Regulation E and Regulation Z, respectively, which we call the Final Prepaid Rule.



The Final Prepaid Rule includes a significant number of changes to the regulatory framework for prepaid products, some of which include: (a) establishing a definition of “prepaid account” within Regulation E that includes reloadable and non-reloadable physical cards, as well as codes or other devices, and focuses on how the product is issued and used; (b) modifying Regulation E to require that short form and long form disclosures be provided to a consumer prior to a consumer agreeing to acquire a prepaid account with certain exceptions and with specified forms that, if used, would provide a safe harbor for financial institutions; (c) extending to prepaid accounts the periodic transaction history and statement requirements of Regulation E currently applicable to payroll and Federal government benefit accounts; (d) extending the error resolution and limited liability provisions of Regulation E currently applicable to payroll cards to registered network branded prepaid cards; (e) requiring financial institutions to post prepaid account agreements to the issuers’ websites and to submit them to the CFPB; (f) extending Regulation Z’s credit card rules and disclosure requirements to prepaid accounts that provide overdraft protection and other credit features; (g) requiring an issuer to obtain a prepaid account holder’s consent prior to adding overdraft services or other credit features and prohibiting the issuer from adding overdraft services or other credit features for at least 30 calendar days after a consumer registers the prepaid account; and (h) prohibiting the application of different terms and conditions, such as charging different fees, to a prepaid account depending on whether the consumer elects to link the prepaid account to overdraft services or other credit features. The Bank has evaluated the impact of the Final Prepaid Rule on its operations and its third-party relationships, and has established internal processes accordingly.  



Community Reinvestment Act.    Under the Community Reinvestment Act of 1977, which we refer to as the CRA, a federally-insured institution has a continuing and affirmative obligation to help meet the credit needs of its community, including low-and moderate-income neighborhoods, consistent with the safe and sound operation of the institution.  The bank shall delineate one or more

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assessment areas within which the FDIC evaluates the bank's record of helping to meet the credit needs of its community.  The CRA further requires that a record be kept of whether a financial institution meets its community’s credit needs, which record will be taken into account when evaluating applications for, among other things, domestic branches and mergers and acquisitions.  The regulations promulgated pursuant to the CRA contain three evaluation tests which are part of the traditional CRA evaluation:



·

a lending test evaluates a bank's record of helping to meet the credit needs of its assessment area(s) through its lending activities by considering a bank's home mortgage, small business, small farm, and community development lending;

·

a service test, evaluates a bank's record of helping to meet the credit needs of its assessment area(s) by analyzing both the availability and effectiveness of a bank's systems for delivering retail banking services and the extent and innovativeness of its community development services; and

·

an investment test evaluates a bank's record of helping to meet the credit needs of its assessment area(s) through qualified investments that benefit its assessment area(s) or a broader statewide or regional area that includes the bank's assessment area(s).



As an alternative to the traditional evaluation tests summarized above, the CRA permits a financial institution to develop its own strategic plan setting forth specific goals for CRA compliance and related performance ratings.  If approved by its regulator, a financial institution may operate under its strategic plan and CRA ratings will be applied based on an institution’s performance under its approved strategic plan.



The Bank operates its CRA program under an FDIC-approved CRA Strategic Plan.  The Bank now operates under an approved plan for the period of January 1, 2020 through December 31, 2020. On July 3, 2019, the Bank received its 2018 CRA Performance Evaluation which was completed on November 11, 2018.  The Bank was assigned a “Satisfactory” CRA rating.  The Bank continues to closely monitor its performance in alignment with its CRA Strategic Plan to meet the specified lending, service and investment requirements contained therein.



On January 9, 2020, the FDIC and the Comptroller of the Currency issued a joint notice of proposed rulemaking to strengthen the CRA regulations by clarifying which activities qualify for CRA credit, updating where activities count for CRA credit, creating a more transparent and objective method for measuring CRA performance, and providing for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting.  The Bank is evaluating the impact of these proposed rules on the Bank and its Strategic Plan. 



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



Federal Reserve System. Federal Reserve regulations require banks to maintain non-interest bearing reserves against their transaction accounts (primarily demand deposits and regular checking accounts).  For 2019, Federal Reserve regulations generally required that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $110.6 million or less (subject to adjustment by the Federal Reserve), the reserve requirement is 3%; and, for accounts aggregating greater than $110.6 million, the reserve requirement is 10% (subject to adjustment by the Federal Reserve to between 8% and 14%).  The first $16.0 million of otherwise reservable balances (subject to adjustments by the Federal Reserve) are exempt from the reserve requirements.  At December 31, 2019, the Bank met these requirements by maintaining $314.7 million in cash and balances at the Federal Reserve.



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



·

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

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·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

Allow de novo interstate branching by banks;

·

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

·

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

·

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

·

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



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



Economic Growth, Regulator Relief, and Consumer Protection Act of 2018.  On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was signed into law, which amended provisions of the Dodd-Frank Act and was intended to ease regulatory burden and refine the rules, particularly with respect to smaller-sized institutions such as the Company. EGRRCPA’s highlights include, among other things: (i) exempts banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) waives certain appraisal requirements for certain transactions valued at less than $400,000 in rural areas; (iii) clarifies that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement network for purposes of obtaining

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maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations; (iv) raises eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (v) simplifies capital calculations by requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general applicable risk-based capital requirements for determining well capitalized status.



Volcker Rule Adoption.  On December 10, 2013, five financial regulatory agencies, including our primary federal regulators the Federal Reserve and the FDIC, adopted final rules (the “Final Volcker Rules”) implementing the Volcker Rule embodied in Section 13 of the Bank Holding Company Act, which was added by Section 619 of the Dodd-Frank Act.  The Final Volcker Rules prohibit banking entities from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in and relationships with hedge funds or private equity funds (“covered funds”).  The Final Volcker Rules also require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Final Volcker Rules, which must include (for the largest entities) making regular reports about those activities to regulators.  Smaller banks and community banks, including the Bank, are afforded some relief under the Final Volcker Rules.  Smaller banks, including the Bank, that are engaged only in exempted proprietary trading, such as trading in U.S. government, agency, state and municipal obligations, are exempt from compliance program requirements.  Moreover, even if a community or small bank engages in proprietary trading or covered fund activities under the Final Volcker Rules, they need only incorporate references to the Volcker Rule into their existing policies and procedures.  The Final Rules became effective April 1, 2014, but the conformance period was extended from its statutory end date of July 21, 2014 until July 21, 2017.  This did not have a material impact on our operations. 



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



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



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



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

Effect of Governmental Monetary Policies.   The commercial banking business is affected not only by general economic conditions but also by both U.S. fiscal policy and the monetary policies of the Federal Reserve.  Some of the instruments of fiscal and monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements against member banks’ deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates, and the placing of limits on interest rates that member banks may pay on time and savings

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deposits.  Such policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on time and savings deposits (see “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations”).  We cannot predict the nature of future fiscal and monetary policies and the effect of such policies on the future business and our earnings.



Delaware Law and Regulation and Other State Laws and Regulations



General. As a Delaware financial holding company, we are subject to the supervision of and periodic examination by the Delaware Office of the State Bank Commissioner and must comply with the reporting requirements of the Delaware Office of the State Bank Commissioner.  The Bank, as a banking corporation chartered under Delaware law, is subject to comprehensive regulation by the Delaware Office of the State Bank Commissioner, including regulation of the conduct of its internal affairs, the extent and exercise of its banking powers, the issuance of capital notes or debentures, any mergers, consolidations or conversions, its lending and investment practices and its revolving and closed-end credit practices.  The Bank also is subject to periodic examination by the Delaware Office of the State Bank Commissioner and must comply with the reporting requirements of the Delaware Office of the State Bank Commissioner.  The Delaware Office of the State Bank Commissioner has the power to issue cease and desist orders prohibiting unsafe and unsound practices in the conduct of a banking business.

 

Limitation on Dividends.  Under Delaware banking law, the Bank’s directors may declare dividends on common or preferred stock of so much of its net profits as they judge expedient; but the Bank must, before the declaration of a dividend on common stock from net profits, carry 50% of its net profits of the preceding period for which the dividend is paid to its surplus fund until its surplus fund amounts to 50% of its capital stock and thereafter must carry 25% of its net profits for the preceding period for which the dividend is paid to its surplus fund until its surplus fund amounts to 100% of its capital stock.  The Bank’s payment of dividends is also governed by federal banking laws and regulations promulgated by the FDIC, and by an amendment to the 2014 Consent Order with the FDIC which provides that any payment of dividends by the Bank must receive prior approval from the FDIC.



Other State Laws and Regulations.  The Bank is governed by other state laws and regulations in connection with some of its business and operational practices.  This includes, for example, complying with state laws governing abandoned or unclaimed property, state and local licensing requirements and other state-based rules which direct how the Bank may conduct its activities.



Employees

As of December 31, 2019, we had 612 full-time employees and believe our relationships with our employees to be good. Our employees are not employed under a collective bargaining agreement.

Item 1A. Risk Factors

Risks Relating to Our Business

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

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



Like all financial institutions, the Bank maintains an allowance for loan losses to provide for probable losses inherent in its loan portfolio.  At December 31, 2019, the ratios of the allowance for loan losses to total loans and to non-performing loans were, respectively, 0.56% and 113.0%.  The Bank’s allowance for loan losses may not be adequate to cover actual loan losses and future provisions for loan losses could materially and adversely affect the Bank’s operating results.  The Bank’s allowance for loan losses is determined by management after analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, changes in the size and composition of the loan portfolio and industry information.  Also included in management’s estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which are uncertain.  The determination by management of the allowance for loan losses involves a high degree of subjectivity and requires management to estimate current and future credit risk based on both qualitative and quantitative facts, each of which is subject to significant change.  The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond the Bank’s control, and these loan losses may exceed current estimates.  Bank regulatory agencies, as an

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



Recent changes to the FASB accounting standards will result in a significant change to our recognition of credit losses and may materially impact our financial condition or results of operations.



In June 2016, the FASB issued an update to Accounting Standards Update (ASU or Update) 2016-13 – “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”.  The Update changes the accounting for credit losses on loans and debt securities. For loans and held-to-maturity debt securities, the Update requires a current expected credit loss (CECL) approach to determine the allowance for credit losses.  CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts.  Also, the Update eliminates the existing guidance for purchased credit impaired loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination.  In addition, the Update modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit.  The CECL model will materially impact how we determine our allowance for loan and lease losses and may require us to significantly increase our allowance for loan and lease losses.  Furthermore, our allowance for loan and lease losses may experience more fluctuations, some of which may be significant. Were we required to significantly increase our allowance for loan and lease losses, it may negatively impact our business, earnings, financial condition and results of operations.  We expect that the transition to the CECL model will result in an increase in the allowance for credit losses given the change to estimated losses over the contractual life of the asset adjusted for expected prepayments, an additional allowance for the uninsured portion of SBA loan commitments and the potential 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. If we are required to materially increase our level of allowance for loan and lease losses for any reason, such increase could adversely affect our business, financial condition and results of operations.  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.



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



The Bank seeks to mitigate the risks inherent in its loan portfolio by adhering to specific underwriting practices.  These practices vary depending on the facts and circumstances of each loan.  For other than SBLOC and IBLOC loans, these practices may include analysis of a borrower’s prior credit history, financial statements, tax returns and cash flow projections, valuation of certain types of collateral based on reports of independent appraisers and verification of liquid assets.  For SBLOC loans, a primary element of the credit decision is the market value of the borrower’s brokerage account, which is reduced by the varying collateral percentages against which the Company is willing to lend, resulting in excess collateral. Rapid excessive movements in the market value of brokerage accounts might not be sufficiently offset by the excess collateral and losses could result. For example, we typically lend against 50% of the value of equity securities.  For IBLOC, the credit decision is primarily based upon the cash value of insurance policies which may ultimately be dependent upon the insurer for repayment.  Although the Bank believes that its underwriting criteria are appropriate for the various kinds of loans it makes, the Bank may incur losses on loans that meet its underwriting criteria, and these losses may exceed the amounts set aside as reserves in the Bank’s allowance for loan losses.  In addition, only certain SBA loans are 75% guaranteed by the U.S. government, and even for those, we still assume credit risk on the remaining 25%.  These borrowers, which include new start-ups, may have a higher probability of failure which may result in higher losses on such loans.  If the level of non-performing assets increases, interest income will be reduced.  If we experience loan defaults in excess of amounts that we have included in our allowance for loan losses, we will have to increase the provision for loan losses which will reduce our income and might cause us to incur losses.  At the time loans are classified as troubled debt restructurings, losses are recognized if the fair value of collateral is less than the loan balance. For more information about the risks which are specific to the different types of loans we make and which could impact loan losses, see Item 1,” Business –Lending Activities.”



An inconsistent recovery from an extended period of weak economic and slow growth conditions in the U.S. economy have had, and may continue to have, significant adverse effects on our assets and operating results.



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Since the end of the recession in 2009, the United States economy has been subject to low rates of growth in general and, in particular localities, recession-like conditions have occurred.  As a result, the financial system in the United States, including credit markets and markets for real estate and real-estate related assets, have periodically been subject to weakness.  These weaknesses have episodically resulted in declines in the availability of credit, reduction in the values of real estate and real estate-related assets, the reduction of markets for those assets and impairment of the ability of certain borrowers to repay their obligations.  As a result of these conditions, we increased our provision for loan losses, and experienced increases in the amount of loans charged off and non-performing assets in our Philadelphia-based commercial loan portfolio which is now reflected in discontinued operations.  Rated investment securities, generally considered to be less risky than loans, have in recent economic periods, in certain instances, experienced greater than expected losses, which could recur.  A continuation of weak economic conditions could further harm our financial condition and results of operations. 



We are subject to extensive government regulation and supervision.



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



The entry into the Consent Orders has imposed certain restrictions and requirements upon us and the Bank.



The Bank entered into a Stipulation and Consent to the Issuance of a Consent Order effective August 7, 2012, which we refer to as the 2012 Consent Order.  The Bank took this action without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation.  Under the 2012 Consent Order, the Bank agreed to increase its supervision of third-party 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 2012 Consent Order.  As part of the 2012 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 BSA compliance program.  The 2014 Consent Order requires 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.  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 restricts the Bank from signing and boarding new independent sales organizations, establishing new non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments until the Bank submits to the FDIC and the Delaware State Bank Commissioner a report summarizing the completion of certain BSA-related corrective actions (“BSA Report”).  Until the BSA Report is 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.  The Bank provided the FDIC and the Delaware State Bank Commissioner with the required BSA Report as of December 31, 2019 and it is under review by the regulators.    



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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. The requirement for such approval was lifted by the Federal Reserve in the fourth quarter of 2019, and that letter was terminated at that time.



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.  The Bank completed its implementation of the CAP on January 15, 2020.  As of the completion date, $1,592,469.20 of restitution was paid to consumers of which $4,352.61 was paid by the Bank and the remaining amount by Third Parties.



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 emanated from one of the Bank’s third-party payment processors (“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 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 was not subject to any indemnification or recovery from any third party.  



The 2018 Restitution Order required 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 required

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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 were reimbursed by the Third-Party Processor at its own expense.  On December 19, 2019, the FDIC concluded the Bank had fully complied with the 2018 Restitution Order and issued an order terminating the 2018 Restitution Order. 



On December 18, 2019, the Bank’s Board of Directors, without admitting or denying any violations of law, regulation or the provisions of the 2014 Consent Order, executed a Stipulation and Consent to the Issuance of an Order to Pay Civil Money Penalty in the amount of $7.5 million based on supervisory findings during the period of 2013 to 2019 related principally to deficiencies in the Bank’s legacy Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Programs and alleged violations of law during the period, as well as the length of time the Bank has taken to fully implement the corrective actions required by the 2014 Consent Order. The Bank paid this amount, and it was recognized as an expense in the Company’s financial statements in the fourth quarter of 2019.



We cannot assure you that our regulators will ultimately determine that we have met all of the requirements of the 2014 Consent Order, the 2014 Consent Order Amendment, and the 2015 Consent Order, collectively, the Consent Orders, to their satisfaction. If our regulators believe that we have not made sufficient progress in complying with these Consent Orders, they could seek to impose additional regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties.  If any of these measures is imposed in the future, it could reduce our earnings, result in our incurring losses or otherwise materially adversely affect our financial condition and results of operations and reduce or eliminate our ability to raise additional capital on acceptable terms.  Further, we are at risk of the imposition of additional civil money penalties by our regulators, based on, among other things, apparent violations of law, repeat violations, or supervisory determinations of non-compliance with any consent order.  Depending on the circumstances, the imposition and size of any such penalty is at the discretion of the regulator. While the Bank is contractually indemnified for related losses, civil money penalties, if assessed against the Bank, are not recoverable from third parties. 



Our reputation and business could be damaged by our entry into the Consent Orders and any future enforcement matters with our regulators and other negative publicity.



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



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



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



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



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



Our future profitability will depend in part on our continued ability to grow; however, we may not be able to sustain our historical growth rate or be able to grow.  Our future success will depend on the ability of our officers and key employees to continue to implement and improve our operational, financial and management controls, reporting systems and procedures and manage a growing number of customer relationships.  We may not implement improvements to our management information and control

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systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.  Consequently, any future growth may place a strain on our administrative and operational infrastructure.  Any such strain could increase our costs, reduce or eliminate our profitability and reduce the price at which our common shares trade.



New lines of business, and new products and services may result in exposure to new risks and the value and earnings related to existing lines of business are subject to market conditions. 



The Bank has introduced, and in the future, may introduce new products and services to differing markets either alone or in conjunction with third parties.  New lines of business, products or services could have a significant impact on the effectiveness of our system of internal controls or the controls of third parties and could reduce our revenues and potentially generate losses.  There are material inherent risks and uncertainties associated with offering new products and services, especially when new markets are not fully developed or when the laws and regulations regarding a new product are not mature.  New products and services, or entrance into new markets, may require substantial time, resources and capital, and profitability targets may not be achieved.  Factors outside of our control, such as developing laws and regulations, regulatory orders, competitive product offerings and changes in commercial and consumer demand for products or services may also materially impact the successful launch and implementation of new products or services.  Failure to manage these risks, or failure of any product or service offerings to be successful and profitable, could have a material adverse effect on our financial condition and results of operations.  Additionally, there are uncertainties regarding the market values of existing lines of business which are difficult to measure and are subject to market conditions which may change significantly.  We originate significant amounts of loans for sale or securitization in the CMBS markets which are subject to changes in market conditions at the time of sale, and the sales price realized may accordingly change significantly. Should planned sales of loans not take place, credit risks would increase, as loans would be held on the balance sheet as interest earning assets for longer periods. These loans are accounted for at market value, and a decrease in such value would reduce  income and might also impact potential sales, and resulting gains on sale. These loans  were underwritten as if they would be held on the balance sheet, to address the possibility of market disruptions delaying or precluding sales. Holding the loans on balance sheet would result in additional interest income, but might impact the level of new originations and future potential gain on sale.



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



A significant portion of our income and cash flows depends on the difference between the interest rates we earn on interest earning assets, such as loans and investment securities, and the interest rates we pay on interest bearing liabilities such as deposits and borrowings.  The value of our assets, and particularly loans with fixed or capped rates of interest, may also vary with interest rate changes.  We discuss the effects of interest rate changes on the market value of our portfolio and net interest income in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Asset and Liability Management.” Interest rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve.  Changes in monetary policy, including changes in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits, but also our ability to originate loans and obtain deposits and our costs in doing so.  If the rate of interest we pay on our deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest income, and therefore our earnings, could decline or we could sustain losses.  Our earnings could also decline or we could sustain losses if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings.  While the Bank is generally asset sensitive, which implies that significant increases in market rates would generally increase margins, while decreases in interest rates would generally decrease margins, we cannot assure you that increases or decreases in margins will follow such a pattern in the future.  Our net interest income is also determined by our level of loan production to replace loan payoffs and to grow our different loan portfolios. In the case of loans held-for-sale into secondary markets or securitizations, loans must be originated to replace loans sold to maintain related net interest income.  Loan demand may vary for economic and competitive reasons and we cannot assure you that historical rates of loan growth will continue or as to other loan production.  Net interest income is difficult to project, and our models for making such projections are theoretical.  While they may indicate the general direction of changes in net interest income, they do no indicate actual future results. In March 2020, the Federal Reserve instituted an emergency rate cut of 50 basis points, and additional rate cuts may still occur in response to economic and other conditions. These decreases will decrease net interest income, to the extent the reduction is not offset with the impact of loan growth.



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We are subject to lending risks.



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



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



We realize a significant portion of our revenues from prepaid and debit card and other prepaid products and services.   Actions by government agencies relating to service charges, or increased regulatory compliance costs, could result in reductions in income which may not be offset by reductions in expense.  Some of our clients have significant volume, the loss of which would materially affect our revenues. The top ten largest contributors to prepaid, debit card and related fees account for 63% of such fees.  Prepaid and debit card deposits comprise a significant portion of the Bank’s deposits.



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



Achieving and maintaining compliance with frequently changing legal and regulatory requirements requires a significant investment in qualified personnel, hardware, software and other technology platforms, external legal counsel and consultants and other infrastructure components.  These investments may not ensure compliance or otherwise mitigate risks involved in this business.  Our failure to satisfy regulatory mandates applicable to prepaid financial products could result in actions against us by our regulators, legal proceedings being instituted against us by consumers, or other losses, each of which could reduce our earnings or result in losses, make it more difficult to conduct our operations, or prohibit us from conducting specific operations.  Other risks related to prepaid cards include competition for prepaid, debit and other payment mediums, possible changes in the rules of networks, such as Visa and MasterCard and others, in which the Bank operates and state regulations related to prepaid cards including escheatment.



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



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



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



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



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



We may rely in part on funds provided by wholesale deposits and brokered certificates of deposit to support the growth of our loan portfolio.  Wholesale and brokered certificates of deposit are highly sensitive to changes in interest rates and, accordingly, can be a more volatile source of funding.  Use of wholesale and brokered deposits involves the risk that growth supported by such

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



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



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



We face substantial competition in all phases of our operations from a variety of different competitors, including commercial banks and their holding companies, credit unions, leasing companies, consumer finance companies, factoring companies, insurance companies and money market mutual funds and card issuers. In 2018, the Office of the Comptroller of the Currency announced that it would begin to accept and evaluate charters for entities that wanted to conduct certain components of a banking business pursuant to a federal charter, known as a "special purpose national bank" ("SPNB") charter.  Intended to promote economic opportunity and spur financial innovation, SPNBs may engage in any of the following activities: paying checks, lending money or taking deposits.  If any such applications are granted, recipients of an SPNB charter may enter the U.S. payments market in which the Bank operates, which could have a material adverse effect on the Bank and its Payments division.

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

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

We derive a significant percentage of our deposits, total assets and income from deposit accounts generated with the assistance of diverse independent companies, including those which provide card account marketing services, and investment advisory firms. 



Deposit accounts acquired with the assistance of our top twenty affinity relationships totaled $4.21 billion at December 31, 2019.  The top twenty relationships result in the majority of our payments related income.  We provide oversight over these relationships which must meet all internal and regulatory requirements.  We may exit relationships where such requirements are not met or be required by our regulators to exit such relationships.  Also, an affinity group could terminate a relationship with us for many reasons, including being able to obtain better terms from another provider or dissatisfaction with the level or quality of our services.  If an affinity group relationship were to be terminated, it could materially reduce our deposits, assets and income.  We cannot assure you that we could replace such relationship.  If we cannot replace such relationship, we may be required to seek higher rate funding sources as compared to the exiting affinity group and interest expense might increase.  We may also be required to sell securities or other assets to meet funding needs which would reduce revenues or potentially generate losses.

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

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

Our lending limit may adversely affect our competitiveness.

Our regulatory lending limit as of December 31, 2019 to any one customer or related group of customers was $71.7 million for unsecured loans and $119.5 million for secured loans.  Our lending limit is substantially smaller than that of many financial institutions with which we compete.  While we believe that our lending limit is sufficient for our targeted market of small to mid-size businesses within the four specialty lending operations upon which we focus as well as affinity group members, it may in the future affect our ability to attract or maintain customers or to compete with other financial institutions.  Moreover, to the extent that we incur losses and do not obtain additional capital, our lending limit, which depends upon the amount of our capital, will decrease.

Environmental liability associated with lending activities could result in losses.

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

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

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

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

Moreover, both the internet and the financial services industry are undergoing rapid technological changes, with frequent introductions of new technology-driven products and services.  In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.  Our ability to compete will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.  Many of our competitors have substantially greater resources to

30


 

invest in technological improvements.  We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.  Such products may also prove costly to develop or acquire.

We face fund transfer and payments-related reputational risks.

Financial institutions, including ourselves, bear fund transfer risks of different types which result from large transaction volumes and large dollar amounts of incoming and outgoing money transfers.  Loss exposure may result if money is transferred from the bank before it is received, or legal rights to reclaim monies transferred are asserted.  Such exposure results from payments which are made to merchants for payment clearing, while customers have statutory periods to reverse their payments. It also results from funds transfers made prior to receipt of offsetting funds, as accommodations to customers.  Transfers could also be made in error.  Additionally, as with other financial institutions, we may incur legal liability or reputational risk, if we unknowingly process payments for companies in violation of money laundering laws or regulations or immoral activities.

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

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

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

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

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

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

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We may be affected by government regulation including those mandating capital levels and those specifying limitations resulting from Community Reinvestment Act ratings.

We are subject to extensive federal and state banking regulation and supervision, which has increased in the past several years as a result of stresses the financial system has undergone for an extended period of years.  The regulations are intended primarily to protect our depositors’ funds, the federal deposit insurance fund and the safety and soundness of the Bank, not our stockholders. Regulatory requirements affect lending practices, product offerings, capital structure, investment practices, dividend policy and growth.   Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we 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 us and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Moreover, capital requirements may be modified based upon regulatory rules or by regulatory discretion at any time reflecting a variety of factors including deterioration in asset quality.  A failure by either the Bank or us to meet regulatory capital requirements will result in the imposition of limitations on our operations and could, if capital levels drop significantly, result in our being required to cease operations.  Regulatory capital requirements must also be satisfied such that mandated capital ratios are maintained as the Bank grows, or growth may be required to be curtailed.  Moreover, a failure by either the Bank or us to comply with regulatory requirements regarding lending practices, investment practices, customer relationships, anti-money laundering detection and prevention, and other operational practices (see "Business--Regulation Under Banking Law" and “Risk Factors- The entry into the Consent Orders and a supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank”) could result in regulatory sanctions and possibly third-party liabilities.  Changes in governing law, regulations or regulatory practices could impose additional costs on us or impair our ability to obtain deposits or make loans and, as a consequence, negatively impact our consolidated revenues and profitability.

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

Failure to maintain a satisfactory CRA rating may result in business restrictions.  The Bank operates its CRA program under an FDIC-approved CRA Strategic Plan.  The Bank operated an approved plan during the period of July 1, 2018 through December 31, 2019 and now operates under an approved plan for the period of January 1, 2020 through December 31, 2020.  On July 3, 2019, the Bank received its 2018 CRA Performance Evaluation which was completed on November 11, 2018.  The Bank was assigned a “Satisfactory” CRA rating.  The Bank continues to closely monitor its performance in alignment with its CRA Strategic Plan to meet the specified lending, service and investment requirements contained therein.  There can be no assurance that we will maintain a satisfactory rating, and if not maintained, the Bank would be subject to certain business restrictions as required by the Community Reinvestment Act and FDIC regulations. 



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



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

The Dodd-Frank Act’s “Durbin Amendment,” which applies to all banks, required the Federal Reserve to adopt a rule establishing debit card interchange fee standards and limits and prohibiting network exclusivity and routing requirements.  The Dodd-

32


 

Frank Act exempts from the debit card interchange fee standards any issuing bank that, together with its affiliates, have assets of less than $10 billion.  Because of our asset size, we are exempt from the debit card interchange fee standards but may lose the exemption if it is amended or we, together with our subsidiaries, surpass $10 billion in assets.

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

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



It is difficult to predict at this time what specific impact many aspects of the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on regional banks. The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 scaled back portions of the Dodd-Frank Act, and the current administration in the United States may ultimately roll back or modify certain of the regulations adopted since the financial crisis.  However, future changes in bank regulation are uncertain and could negatively impact our business and could increase our operating and compliance costs and obligations, which could reduce or eliminate our ability to generate profits.



The CFPB’s Final Prepaid Rule went into effect on April 1, 2019.  The Final Prepaid Rule represents a material change in the rules and regulations governing prepaid cards.  We rely on prepaid cards as the largest single component of our deposits and the largest single component of our non-interest income.  We cannot reasonably quantify the financial impact, if any, that implementation of the Final Prepaid Rule may have on the Bank’s business, financial condition, or results of operations.

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

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

Potential acquisitions may disrupt our business and dilute stockholder value.  



Acquiring other banks or businesses involves various risks including, but not limited to:



·

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

·

exposure to potential asset quality issues of the target entity;

·

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

·

potential disruption to our business;

·

potential diversion of our management’s time and attention;

·

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

·

difficulty in estimating the value of the target entity;

·

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

33


 

·

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



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



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



Our regulators or auditors may require us to increase the level and manner of our oversight of the third parties which provide marketing services which generate most of our accounts and through which we offer products and services.  Although we have added significant compliance staff and have used outside consultants, our internal and external compliance examiners must be satisfied with the results of such augmentation and enhancement.  We cannot assure you that we will satisfy all related requirements.  See “Risk Factors   The entry into the Consent Orders and a supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank”.  Not achieving a compliance management system which is deemed adequate could result in sanctions against the Bank.  Our ongoing review and analysis of our compliance management system and implementation of any changes resulting from that review and analysis will likely result in increased non-interest expense.



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

 

Like all regulated banking institutions, we are at risk of the imposition of civil money penalties by our regulators, based on, among other things, apparent violations of law, repeat violations, or supervisory determinations of non-compliance with any consent order.  Depending on the circumstances, the imposition and size of any such penalty is at the discretion of the regulator.  While the Bank is contractually indemnified for related losses, civil money penalties, if assessed against the Bank, are not recoverable from third parties. 



We are subject to tax audits, and challenges to our tax positions or adverse changes or interpretations of tax laws could result in tax liability.



We are subject to federal and applicable state income tax laws and regulations and related audits.  We are also periodically subject to state escheat audits.  Income tax and escheat laws and regulations are often complex and require significant judgment in determining our effective tax rate and in evaluating our tax positions.  Challenges of such determinations may adversely affect our effective tax rate, tax payments or financial condition.



Recently enacted U.S. tax legislation made significant changes to federal tax law, including the taxation of corporations, by, among other changes, reducing the corporate income tax rate, disallowing certain deductions that had previously been allowed, and altering the expensing of capital expenditures.  The implementation and evaluation of these changes may require significant judgment and substantial planning on our behalf.  These judgments and plans may require us to take new and different tax positions that if challenged could adversely affect our effective tax rate, tax payments or financial condition.

 

In addition, the new tax legislation remains subject to potential amendments, technical corrections, and further regulatory guidance and interpretation, any of which could lessen or increase certain adverse impacts on us.  Furthermore, as the new tax legislation goes into effect, future changes may occur at the federal or state level that could result in unfavorable adjustments to our tax liability.



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



Various internal and external inputs were utilized to analyze fair value of the discontinued commercial loan portfolio and the investment in unconsolidated entity which reflects the financing of the securitization of a portion of the discontinued assets.  The valuations are estimates and actual sales prices could be significantly less than the estimates, which could materially affect our results of operations in future quarters.



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



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



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

   

Any further assessments or special assessments that the FDIC levies will be recorded as an expense during the appropriate period and will decrease our earnings.  On February 9, 2011, the FDIC adopted a final rule which redefines the deposit insurance assessment base as required by the Dodd-Frank Act.  The final rule sets the deposit insurance assessment base as average consolidated total assets minus average tangible equity.  It also sets a new assessment rate schedule which reflects assessment rate adjustments based upon regulatory examination classification with increased rates for brokered deposits.  The final rule became effective on April 1, 2011.  If the Bank’s rating is changed, insurance premiums will increase which will adversely affect our earnings. 



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



As previously reported, our management had identified material weaknesses in our internal and disclosure controls over financial reporting that resulted in a restatement of our financial statements in 2014 for that year and for prior periods.  These weaknesses related to the timing of the recognition of loan losses and the recognition of other loan losses.  We believe these weaknesses have been remediated.  However, we cannot assure you that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future.  Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements.  Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated under Section 404.  The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors or customers to lose confidence in our reported financial information, leading to a decline in our stock price or a loss of business, and could result in stockholder actions against us for damages. 



Unclaimed funds from deposit accounts or represented by unused value on prepaid cards present compliance and other risks.



Unclaimed funds held in deposit accounts or represented by unused balances on prepaid cards may be subject to state escheatment laws where the Bank is the actual holder of the funds and when, after a period of time as set forth in applicable state law, the rightful owner of the funds cannot be readily located and/or identified. The Bank implements controls to comply with state unclaimed property laws and regulations, however these laws and regulations are often open to interpretation, particularly when being applied to unused balances on prepaid card products.  State regulators may choose to initiate collection or other litigation action against the Bank for unreported abandoned property, and such actions may seek to assess fines and penalties.



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A prolonged U.S. government shutdown or default by the U.S. on government obligations could harm our results of operations.



Our results of operations, including revenue, non-interest income, expenses and net interest income, could be adversely affected in the event of widespread financial and business disruption due to a default by the United States on U.S. government obligations or a prolonged failure to maintain significant U.S. government operations, particularly those pertaining to the SBA.  Any such failure to maintain such U.S. government operations would impede our ability to originate SBA loans and our ability to sell such loans. 



Severe weather, natural disasters, acts of war or terrorism or other adverse external events could harm the Company's business.



Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. The nature and level of severe weather and/or natural disasters cannot be predicted and may be exacerbated by global climate change. Severe weather and natural disasters could harm our operations through interference with communications, including the interruption or loss of our computer systems, which could prevent or impede us from gathering deposits, originating loans and processing and controlling the flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. Additionally, the United States remains a target for potential acts of war or terrorism. Such severe weather, natural disasters, acts of war or terrorism or other adverse external events could negatively impact our business operations or the stability of our deposit base, cause significant property damage, adversely impact the values of collateral securing our loans and/or interrupt our borrowers' abilities to conduct their business in a manner to support their debt obligations, which could result in losses and increased provisions for credit losses. There is no assurance that our business continuity and disaster recovery program can adequately mitigate the risks of such business disruptions and interruptions.



Pandemic events could have a material adverse effect on our operations and our financial condition.



The outbreak of disease on a national or global level, such as the spread of the COVID-19 coronavirus, could have a material adverse effect on commerce, which may, in turn impact our lines of business.  Such an event may also impact our ability to manage those portions of our business or operations which rely on vendors and suppliers from other countries or regions impacted by such a pandemic event.



We may be adversely impacted by the transition from LIBOR as a reference rate.



In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021, and for LIBOR to be replaced with an alternative reference rate that will be calculated in a different manner. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. Substantially all of our commercial mortgages held for sale are indexed to LIBOR. Additionally, the interest rates of certain of our investment securities and our trust preferred securities are indexed to LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.



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Risks related to ownership of our common stock.



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



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



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



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



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



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

 

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



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



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



We are a separate legal entity from the Bank and our other subsidiaries, and we do not have significant operations of our own.  We have historically depended on the Bank’s cash and liquidity, as well as dividends, to pay our operating expenses.  Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval.  The Bank is also subject to limitations under state law regarding the payment of dividends, including the requirement that dividends may be paid only out of net profits.  In addition to these explicit limitations, it is possible, depending upon the financial condition of the Bank and other factors, that federal and state regulatory agencies could take the position that payment of dividends by the Bank would constitute an unsafe or unsound banking practice and may therefore seek to prevent the Bank from paying such dividends.  Moreover, under the 2014 Consent Order Amendment, the Bank may not pay dividends without the approval of the FDIC.  See “Risk Factors-Risks Relating to Our Business-The entry into the Consent has imposed certain restrictions and requirements upon us and the Bank.”  Although we believe we have sufficient existing liquidity for our needs for the foreseeable

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future, there is risk that, if the amendment remains undischarged for a lengthy period and the Bank is unable to obtain FDIC approval for one or more dividends, we may not be able to service our obligations as they become due or to pay dividends on our common stock or preferred stock.  Even if, absent the amendment, the Bank has the capacity to pay dividends, it is not obligated to pay the dividends.  Its Board of Directors may determine, as it did in the past, to retain some or all of its earnings to support or increase its capital base. 



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



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



Item 1B. Unresolved Staff Comments.



None.



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Item 2. Properties.  

Our executive office and banking facility are located at 409 Silverside Road, Wilmington, Delaware.  We maintain business development offices in New York, New York, Chicago, Illinois, and Morrisville, North Carolina.  Leasing offices are located in Charlotte, North Carolina, Crofton, Maryland, Kent, Washington, Logan, Utah, Orlando, Florida, Raritan, New Jersey, and Warminster, Pennsylvania.  Prepaid and debit card offices and other executive offices are located in Minneapolis, Minnesota, and Sioux Falls, South Dakota.  The Philadelphia, Pennsylvania, Tampa, Florida and a portion of the New York properties are no longer occupied by the Company, and have been subleased to outside parties, which pay the majority of the rent.  Locations and certain additional information regarding our offices and other material properties at December 31, 2019 are listed below.  We own a property in Orlando, Florida which houses our leasing operations business, consisting of a stand-alone building of 8,850 square feet. 



 

 

 

 

 

Location

Expiration

 

Square Feet

 

Monthly Rent

Bank Owned Property

 

 

 

 

 

Orlando, Florida

-

 

8,850 

 

-

Leased Property

 

 

 

 

 

Charlotte, North Carolina

2021

 

2,345 

 

$                      4,028 

Chicago, Illinois

2020

 

6,864 

 

10,987 

Crofton, Maryland

2020

 

2,287 

 

3,640 

Kent, Washington

2021

 

1,700 

 

2,576 

Logan, Utah 

2021

 

3,000 

 

1,401 

Minneapolis, Minnesota

2020

 

3,181 

 

2,836 

Morrisville, North Carolina

2024

 

3,590 

 

5,535 

New York, New York (1 property subleased)

2024 - 2025

 

11,701 

 

32,120 

Norristown, Pennsylvania

2024

 

7,180 

 

10,500 

Raritan, New Jersey

2020

 

2,145 

 

3,687 

Philadelphia, Pennsylvania (subleased)

2025

 

14,839 

 

7,626 

Sioux Falls, South Dakota

2022

 

38,611 

 

54,674 

Tampa, Florida (subleased)

2020

 

10,303 

 

4,297 

Warminster, Pennsylvania

2022

 

2,003 

 

2,228 

Wilmington, Delaware

2025

 

62,136 

 

136,829 

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

Item 3. Legal Proceedings.  



For a discussion of the Consent Orders issued by the FDIC to the Bank and a supervisory letter the Company received from the Federal Reserve, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Regulatory Actions” and “Risk Factors- Risks relating to Our Business, the entry into the Consent Orders and a supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank.”



39


 

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.  On September 19, 2019, the Company agreed, without admitting or denying any of the SEC’s allegations, to resolve the investigation by consenting to the entry of an order by the SEC that: (1) the Company will cease and desist from committing or causing any violations of the books-and-records provisions of the Securities Exchange Act and the relevant rules thereunder; and (2) the Company will pay a penalty of $1.4 million (the “Settlement Payment”) to the SEC.  The Company recognized a charge in its third fiscal quarter in the amount of the Settlement Payment.  As a result of the settlement certain costs to the Company related to the investigation will cease, including the legal costs of the investigation, compliance with the SEC’s subpoena, and cooperation with the SEC.



On July 16, 2018, certain investors in a hotel project of one of the Bank’s former borrowers, 550 Seabreeze Development LLC (“Seabreeze Development”), filed an adversary action against the Bank and others in the United States Bankruptcy Court of the Southern District of Florida. The note for the related loan was sold in the second quarter of 2018 and the loan is no longer on the Bank’s books. The adversary action was filed within the context of a Chapter 11 bankruptcy proceeding in which Seabreeze Development is the debtor, and alleged that the Bank and others defrauded the plaintiffs into investing a total of $10.5 million in the project.  Three causes of actions were asserted against the Bank: (i) fraud in the inducement; (ii) civil conspiracy; and (iii) aiding and abetting fraud.  The Bank believed the claims were without merit and vigorously defended against them.  On November 1, 2018, the bankruptcy court entered an order dismissing the claims against the Bank for lack of jurisdiction.  The order further stated that the dismissal was without prejudice, and that the plaintiffs may file their causes of action in an appropriate forum.  On February 7, 2019, certain investors filed a new action in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade Country, Florida, asserting: (i) fraudulent misrepresentation; (ii) negligent misrepresentation; (iii) aiding and abetting fraud; and (iv) civil conspiracy.  Three additional investors were included as plaintiffs in the matter, increasing the total amount at issue to $12 million.  The Bank filed a motion to dismiss the state court action as to the Bank and on October 16, 2019, the state court granted the Bank’s motion and dismissed the plaintiffs’ claims against the Bank without prejudice.



On June 12, 2019, the Bank was served with a qui tam lawsuit filed in the Superior Court of the State of Delaware, New Castle County.  The Delaware Department of Justice intervened in the litigation.  The case is titled The State of Delaware, Plaintiff, Ex rel. Russell S. Rogers, Plaintiff-Relator, v. The Bancorp Bank, Interactive Communications International, Inc., and InComm Financial Services, Inc., Defendants.  The lawsuit alleges that the defendants violated the Delaware False Claims Act by not paying balances on certain open-loop “Vanilla” prepaid cards to the State of Delaware as unclaimed property.  The complaint seeks actual and treble damages, statutory penalties, and attorneys’ fees.  The Bank denies the allegations and is defending itself.  The Bank and other defendants filed a motion to dismiss the action, but the motion was denied on February 7, 2020.  At this time, the Company is unable to determine whether the ultimate resolution of the matter will have a material adverse effect on our financial condition or operations.



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

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

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



Our common stock trades on the NASDAQ Global Select Market under the symbol “TBBK.” As of February 20, 2020, there were 57,385,556 shares of common stock outstanding held of record by 5,414 shareholders.



We have not paid cash dividends on our common stock since our inception, and do not currently have plans to pay cash dividends on our common stock.  Our payment of dividends is subject to restrictions discussed in Item 1, “Business—Regulation under Banking Law,” and in Item 1A, “Risk Factors-Risks Relating to Our Business-The entry into the Consent Orders and a supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank.”  Moreover, irrespective of such restrictions, it is our intent to retain earnings, if any, to increase our capital and fund the development and growth

40


 

of our operations subject to regulatory restrictions. Our board of directors will determine any changes in our dividend policy based upon its analysis of factors it deems relevant.  We expect that these factors would include our earnings, financial condition, cash requirements, regulatory capital levels and available investment opportunities. 





 

 

 

 

 

 

 

 

Equity Compensation Plan Information

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Number of securities

 

 

RSU's to be

 

 

 

 

 

remaining available for



  

issued upon

 

Number of securities to be

  

Weighted-average

  

future issuance under

      

 

vesting of

 

issued upon exercise of

 

exercise price of

 

equity compensation plans



 

outstanding

 

outstanding options,

 

outstanding options,

 

(excluding securities



 

grants

 

warrants and rights

 

warrants and rights

 

reflected in column (a))



 

 

 

(a)

 

(b)

 

(c)

1999 Omnibus plan

  

 -

 

221,000 

  

$9.60

  

 -

2005 Omnibus plan

  

 -

 

174,000 

  

$7.81

  

 -

Stock option and equity plan of 2011

  

 -

 

551,500 

  

$8.60

  

 -

Stock option and equity plan of 2013

  

107,485 

 

300,000 

  

$6.75

  

 -

2018 Equity incentive plan

 

1,146,442 

 

65,104 

 

$8.57

 

284,143 

Total

  

1,253,927 

 

1,311,604 

  

$8.24

  

284,143 



 

 

 

 

 

 

 

 

* All plans have been authorized by shareholders.

 

 

 

 

 

 

 

 

41


 

Performance graph 



The following graph compares the performance of our common stock to the NASDAQ Composite Index and the NASDAQ Bank Stock Index.  The graph shows the value of $100 invested in our common stock and both indices on December 31, 2014 for a five-year period and the change in the value of our common stock compared to the indices as of the end of each year.  The graph assumes the reinvestment of all dividends.  Historical stock price performance is not necessarily indicative of future stock price performance.



Picture 4









 

 

 

 

 

 

Index

12/31/2014

12/31/2015

12/31/2016

12/31/2017

12/31/2018

12/31/2019

The Bancorp, Inc.

100.00  58.49  72.18  90.73  73.09  119.10 

NASDAQ Bank Stock Index

100.00  106.62  143.97  149.02  122.34  148.32 

NASDAQ Composite Stock Index

100.00  105.73  113.66  145.76  140.10  189.45 



42


 



The following graph reflects stock performance since 2014, compared to the KBW bank index, which is an industry recognized peer group of regional and money center banks.



A close up of a map

Description automatically generated







 

 

 

 

 

 



As of

Index

12/31/2014

12/31/2015

12/31/2016

12/31/2017

12/31/2018

12/31/2019

The Bancorp, Inc.

100.00  58.49  72.18  90.73  73.09  119.10 

KBW Bank Index

100.00  98.41  123.61  149.30  115.53  152.65 



























43


 

Item 6. Selected Financial Data.



The following table sets forth selected financial data as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.  We derived the selected financial data from our consolidated financial statements for those periods included in this annual report on Form 10-K or our prior annual reports on Form 10-K.  We have reclassified certain amounts in our historical audited consolidated financial statements, including amounts related to assets and liabilities reclassified as held-for-sale during these periods.  These reclassifications had no effect on our reported net income (loss).  



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



































 

 

 

 

 

 

 

 

 



As of and for the years ended



December 31,



2019

 

2018

 

2017

 

2016

 

2015

Income Statement Data:

(in thousands, except per share data)

Interest income

$               179,569 

 

$                 147,960 

 

$              122,020 

 

$              102,219 

 

$                83,530 

Interest expense

38,281 

 

27,111 

 

15,340 

 

12,253 

 

13,599 

Net interest income

141,288 

 

120,849 

 

106,680 

 

89,966 

 

69,931 

Provision for loan and lease losses

4,400 

 

3,585 

 

2,920 

 

3,360 

 

2,100 

Net interest income after provision for loan

 

 

 

 

 

 

 

 

 

   and lease losses

136,888 

 

117,264 

 

103,760 

 

86,606 

 

67,831 

Non-interest income

104,127 

 

153,795 

 

91,548 

 

42,486 

 

133,067 

Non-interest expense

168,521 

 

151,278 

 

154,914 

 

198,573 

 

194,088 

Income (loss) before income tax benefit

72,494 

 

119,781 

 

40,394 

 

(69,481)

 

6,810 

Income tax expense (benefit)

21,226 

 

32,241 

 

23,056 

 

(12,664)

 

1,450 

Net income (loss) from continuing operations

51,268 

 

87,540 

 

17,338 

 

(56,817)

 

5,360 

Net income (loss) discontinued operations net of tax

291 

 

1,137 

 

4,335 

 

(39,675)

 

8,072 

 Net income (loss) available to common shareholders

$                 51,559 

 

$                   88,677 

 

$                21,673 

 

$              (96,492)

 

$                13,432 



 

 

 

 

 

 

 

 

 

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

$                     0.90 

 

$                       1.55 

 

$                    0.31 

 

$                  (1.28)

 

$                    0.14 

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

$                     0.01 

 

$                       0.02 

 

$                    0.08 

 

$                  (0.89)

 

$                    0.21 

Net income (loss) per share - basic

$                     0.91 

 

$                       1.57 

 

$                    0.39 

 

$                  (2.17)

 

$                    0.35 



 

 

 

 

 

 

 

 

 

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

$                     0.89 

 

$                       1.53 

 

$                    0.31 

 

$                  (1.28)

 

$                    0.14 

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

$                     0.01 

 

$                       0.02 

 

$                    0.08 

 

$                  (0.89)

 

$                    0.21 

Net income (loss) per share - diluted

$                     0.90 

 

$                       1.55 

 

$                    0.39 

 

$                  (2.17)

 

$                    0.35 



 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

Total assets

$            5,656,963 

 

$              4,437,911 

 

$           4,708,147 

 

$           4,858,114 

 

$           4,765,823 

Total loans, net of unearned costs

1,824,245 

 

1,501,976 

 

1,390,458 

 

1,220,729 

 

1,074,843 

Allowance for loan and lease losses

10,238 

 

8,653 

 

7,096 

 

6,332 

 

4,400 

Total cash and cash equivalents

944,472 

 

554,302 

 

908,935 

 

999,059 

 

1,155,162 

Deposits

5,052,030 

 

3,935,714 

 

4,260,842 

 

4,238,304 

 

4,414,757 

Shareholders' equity

484,497 

 

406,776 

 

324,149 

 

298,963 

 

320,001 



 

 

 

 

 

 

 

 

 

44


 

Selected Ratios:

 

 

 

 

 

 

 

 

 

Return on average assets

1.09% 

 

2.07% 

 

nm

 

nm

 

0.29% 

Return on average common equity

11.57% 

 

24.26% 

 

nm

 

nm

 

4.20% 

Net interest margin

3.32% 

 

3.19% 

 

3.04% 

 

2.74% 

 

2.37% 

Book value per common share

$                     8.52 

 

$                       7.22 

 

$                    5.81 

 

$                    5.40 

 

$                    8.47 



 

 

 

 

 

 

 

 

 

Selected Capital and Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

Equity/assets

8.56% 

 

9.17% 

 

6.88% 

 

6.15% 

 

6.71% 

Tier I capital to average assets

9.63% 

 

10.11% 

 

7.90% 

 

6.90% 

 

7.17% 

Tier 1 or common equity capital to total risk-weighted assets

19.04% 

 

20.64% 

 

16.73% 

 

13.34% 

 

14.67% 

Total capital to total risk-weighted assets

19.45% 

 

21.07% 

 

17.09% 

 

13.63% 

 

14.88% 

Allowance for loan and lease losses to total loans

0.56% 

 

0.58% 

 

0.51% 

 

0.52% 

 

0.41% 



 

 

 

 

 

 

 

 

 

nm = not meaningful

 

 

 

 

 

 

 

 

 







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



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

Overview

In 2019, we recorded net income of $51.3 million and income before tax of $72.5 million in continuing operations compared to $87.5 million and $119.8 million, respectively, in 2018.  The decrease in income before tax of $47.3 million reflected a $65.0 million gain on sale of the Safe Harbor Individual Retirement Account (SHIRA) portfolio in 2018.  The decrease also reflected civil money penalties of $7.5 million to the FDIC and $1.4 million to the SEC in 2019.  After adjusting for the civil money penalties and gain on sale, income before tax of $81.4 million in 2019 was $26.6 million, or 48.6%, higher than the $54.8 million for 2018.  The $26.6 million increase reflected a $20.4 million, or 16.9%, increase in net interest income and a $15.3 million, or 17.3%  increase in non-interest income, excluding the SHIRA gain on sale.  These increases were partially offset with an $8.3 million, or 5.5%, increase in non-interest expense, excluding the civil money penalties.  The increase in net interest income primarily reflected the impact of higher balances of commercial real estate loans held for sale and other loan growth and higher loan yields resulting from Federal Reserve rate increases in 2018.  The impact of the prior year rate increases was partially offset by Federal Reserve rate decreases in the latter part of 2019.  In 2019 compared to 2018, the largest component of non-interest income, prepaid, debit and related fees increased $10.5 million, or 19.2%, to $65.1 million.  Gain on sale of loans increased $3.6 million, or 17.4%, to $24.1 million which resulted primarily from a higher volume of loans sold into securitizations in 2019.  Service fees on deposit accounts decreased $3.5 million, or 97.9%, to $75,000 as a result of the sale of the SHIRA portfolio.  As a result of the sale of the SHIRA portfolio, this income category will be substantially eliminated.  In 2018, $3.7 million of charges resulted from the investment in unconsolidated entity while in 2019 there were no such charges.  That investment resulted from the sale of certain discontinued loans into a securitization in 2014. See Note W to the financial statements. The aforementioned $8.3 million increase in non-interest expense, exclusive of the 2019 civil money penalties, resulted primarily from increases in salaries and benefits. Salaries and benefits increased $14.4 million, or 18.1%, to $94.3 million, reflecting higher incentive compensation for loan, deposit and fee production and higher IT and other infrastructure expense.  The increase in salaries and benefits was partially offset by decreases in legal, FDIC insurance, data processing and other expenses.



In 2014, we discontinued our Philadelphia commercial lending operations following our determination that those operations were inconsistent with our strategic focus on what we believe to be lower risk and more granular and national lines of business.  We currently focus our lending activities upon four specialty lending segments: SBLOC and IBLOC loans, SBA loans, vehicle fleet and equipment leasing, and the origination of loans for sale into commercial securitizations.  These loans are made nationally.  At year end 2019, our net discontinued assets amounted to $140.7 million compared to $197.8 million at year end 2018.  As these balances are reduced, either through sales or repayment, we plan to invest the proceeds into our continuing lending lines. Additionally, at year end

45


 

2019 a balance of $39.2 million in investment in unconsolidated entity reflected the remaining balance of the investment in  discontinued loans and related assets sold into a securitization.



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.

46


 

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.

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 requires 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 restricts the Bank from signing and boarding new independent sales organizations, establishing new non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments until the Bank submits to the FDIC and the Delaware State Bank Commissioner a report summarizing the completion of certain BSA-related corrective actions (“BSA Report”).  Until the BSA Report is 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.  The Bank provided the FDIC and the Delaware State Bank Commissioner with the required BSA Report as of December 31, 2019 and it is now under review by the regulators.    



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. The requirement for such approval was lifted by the Federal Reserve in the fourth quarter of 2019, and the Supervisory Letter was terminated at that time.



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

47


 

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.  The Bank completed its implementation of the CAP on January 15, 2020.  As of the completion date, $1,592,469.20 of restitution was paid to consumers of which $4,352.61 was paid by the Bank and the remaining amount by Third Parties.



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 emanated from one of the Bank’s third-party payment processors (“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 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 2018 Restitution Order required 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 required 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 were reimbursed by the Third-Party Processor at its own expense.    The civil money penalty was not subject to any indemnification or recovery from any third party.   On December 19, 2019, the FDIC concluded the Bank had fully complied with the 2018 Restitution Order and issued an order terminating the 2018 Restitution Order. 

On December 18, 2019, the Bank’s Board of Directors, without admitting or denying any violations of law, regulation or the provisions of the 2014 Consent Order, executed a Stipulation and Consent to the Issuance of an Order to Pay Civil Money Penalty in the amount of $7.5 million based on supervisory findings during the period of 2013 to 2019 related principally to deficiencies in the Bank’s legacy Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Programs and alleged violations of law during the period, as well as the length of time the Bank has taken to fully implement the corrective actions required by the 2014 Consent Order. The Bank paid this amount, and it was recognized as an expense in the Company’s financial statements in the fourth quarter of 2019.

Results of Operations

Overview:  Net interest income continued its upward trend in 2019, increasing $20.4 million over the prior year, primarily as a result of  higher balances of commercial loans originated for sale.  Net interest income also benefited from increases in other loan categories.  From year end 2018 to year end 2019, SBLOC and IBLOC, SBA and leasing balances grew 30%, 22% and 10%, respectively.    Net interest income also reflected higher yields  resulting from the Federal Reserve’s 2018 interest rate increases, the impact of which was partially offset by Federal Reserve rate reductions in latter 2019.  While our loans generally adjust more fully to Federal Reserve interest rate changes, funding costs generally adjust to only a portion of such rate changes.  For 2019, funding costs were 22 basis points higher than 2018 compared to a 32 basis point increase in yield on interest earning assets.  Reflecting the above

48


 

factors, net interest income increased by $20.4 million or 16.9% in 2019 compared to the prior year.  The provision for loan and lease losses increased $815,000 to $4.4 million in 2019 as decreases in provisions for small business loans and leasing were more than offset by a $1.0 million provision for other consumer loans.  Non-interest income in 2019 decreased by $49.7 million. That decrease reflected a $65.0 million gain on sale of the SHIRA portfolio in 2018 which was partially offset by an increase of $10.5 million in prepaid, debit card and related fees in 2019.



In 2019, total non-interest expense increased $17.2 million to $168.5 million, reflecting a $14.4 million increase in salaries and employee benefits and $8.9 million in civil money penalties which were partially offset by decreases of $2.5 million in legal fees, $1.8 million in FDIC insurance expense and $1.3 million in data processing expense. 



In 2017, income tax expense was impacted by legislation reducing federal corporate income tax rates.  As a result, deferred tax assets were adjusted to the new rates, decreasing the value of those assets and increasing tax expense in that year.  The lower 21% federal corporate tax rate was effective for 2018 and 2019.



In 2014, the Bank discontinued its regional Philadelphia commercial loan division to focus on its aforementioned national specialty lending lines of business.  At year end 2019, our net discontinued assets amounted to $140.7 million compared to $197.8 million at year end 2018.  Net commercial discontinued loans included in those totals were, respectively, $70.6  million and $118.1 million.  These loans consisted primarily of loans secured by commercial real estate including construction and land loans.  As these balances are reduced, either through sales or repayment, we plan to invest the proceeds into our continuing lending lines.  Efforts to sell or otherwise dispose of these loans continue and if not sold, the loans will be retained.  We also retain the financing receivable of $39.2 million from the 2014 Walnut Street securitization. See Note W to the financial statements.  That entity is also primarily comprised of discontinued commercial real estate loans, including construction and land loans or real estate collateral resulting from the default of such loans.

At December 31, 2019, our total loans amounted to $1.82 billion, an increase of $322.3 million, or 21.5%, over the $1.50 billion balance at December 31, 2018, reflecting growth in all major categories of loans.  Our investment securities available-for-sale increased $84.4 million to $1.32 billion from $1.24 billion between those respective dates as reinvestments were accelerated when long term rates increased.  

Net Income: 2019 compared to 2018.  Net income from continuing operations was $51.3 million in 2019 compared to $87.5 million in 2018 while income before taxes was, respectively, $72.5 million and $119.8 million, a decrease of $47.3 million.  In 2019, net interest income grew by $20.4 million and non-interest income decreased $49.7 million.  The $20.4 million, or 16.9%, increase in 2019 net interest income over 2018 resulted primarily from higher balances of commercial loans originated for saleNet interest income also benefited from increases in other loan categories.  From year end 2018 to year end 2019, SBLOC and IBLOC, SBA and leasing balances grew 30%, 22% and 10%, respectively.    The $49.7 million decrease in non-interest income reflected a $65.0 million gain on sale of the SHIRA portfolio in 2018 and a $10.5 million increase in prepaid, debit card and related fees in 2019.



In 2019 compared to 2018, the primary drivers of fee income, prepaid, debit and related fees and fees on ACH, card and other payment processing fees, increased 17.8% to $74.5 million.  Gain on sale of loans increased $3.6 million to $24.1 million which resulted primarily from a higher volume of loans sold into securitizations in 2019. Additionally, in 2018, $3.7 million of charges resulted from the investment in unconsolidated entity while we had no such charges in 2019.  That investment resulted from the sale of certain discontinued loans into a securitization in 2014.  See Note W to the financial statements.    In 2019, total non-interest expense increased $17.2 million to $168.5 million, reflecting a $14.4 increase in salaries and employee benefits and $8.9 million in civil money penalties which were partially offset by decreases of $2.5 million in legal fees, $1.8 million in FDIC expense and $1.3 million in data processing expense.  Salary and benefits expense increased by $14.4 million reflecting higher incentive compensation for loan, deposit and fee production and higher information technology and loan and payments infrastructure expenseIn 2019, non-interest expense included $8.9 million of expense for a $1.4 million SEC civil money penalty and a $7.5 million FDIC civil money penalty. FDIC insurance expense decreased $1.8 million in 2019, primarily as a result of a decrease in the insurance rate applicable to the Bank.



In 2017, income tax expense was impacted by legislation reducing federal corporate income tax rates.  As a result, deferred tax assets were adjusted to the new rates, decreasing the value of those assets and increasing tax expense in that year.  The lower 21% federal corporate tax rate was effective for 2018 and 2019. The combined federal and state income tax rate was 29% in 2019. It was higher than the 27% rate in 2018 primarily as a result of the non-deductibility of $8.9 million of civil penalties in 2019.



49


 

Reflecting these changes, net income from continuing operations amounted to $51.3 million in 2019 compared to $87.5 million in 2018, or continuing operations earnings per diluted share of $0.89 compared to $1.53 in 2018.  Net income from discontinued operations was $291,000 for 2019 compared to $1.1 million for 2018.  Including discontinued operations, diluted income per share was $0.90 for 2019 compared to $1.55 for 2018 on net income of $51.6 million and $88.7 million, respectively.



Net Income: 2018 compared to 2017.  Net income from continuing operations was $87.5 million in 2018 compared to $17.3 million in 2017 while income before taxes was, respectively, $119.8 million and $40.4 million, an increase of $79.4 million.  In 2018, net interest income grew by $14.2 million and non-interest income increased $62.2 million which accounted for the majority of the increase.  The $14.2 million, or 13.3%, increase in 2018 net interest income over 2017 resulted primarily from loan growth and higher yields, reflecting Federal Reserve rate increases. From year end 2017 to year end 2018, SBLOC, SBA and leasing balances grew 8%, 17% and 5%, respectively.    The $62.2 million increase in non-interest income reflected a $65.0 million gain on sale of the SHIRA portfolio and a $3.2 million reduction in service fees on deposit accounts related to that portfolio.



In 2018 compared to 2017, the primary drivers of fee income, prepaid and debit card fees and fees on ACH, card and other payment processing fees, increased 6.0% to $63.3 million.  Gain on sale of loans increased $2.6 million to $20.5 million which resulted primarily from a higher volume of loans sold into securitizations in 2018.  Additionally, in 2018, $3.7 million of charges resulted from the investment in unconsolidated entity while such charges in 2017 were $20,000. That investment resulted from the sale of certain discontinued loans into a securitization in 2014.  See Note W to the financial statements.    In 2018, total non-interest expense decreased $3.6 million to $151.3 million, reflecting a $4.0 million reduction in data processing expense resulting from a renegotiated contract and reduced transaction volume resulting from the planned exit of an affinity group which had changed ownership.  Salary and benefits expense increased by $4.0 million reflecting higher BSA and compliance expenses and higher incentive compensation expense.  In 2017, non-interest expense included $2.3 million of expense for an FDIC civil money penalty.  FDIC insurance expense decreased $1.3 million in 2018, primarily as a result of a decrease in the insurance rate applicable to the Bank.



In 2017, income tax expense was impacted by legislation reducing federal corporate income tax rates.  As a result, deferred tax assets were adjusted to the new rates, decreasing the value of those assets and increasing tax expense in that year. The lower 21% corporate tax rate was effective for 2018 and the combined federal and state income tax rate in 2018 was 27%.



Reflecting these changes, net income from continuing operations amounted to $87.5 million in 2018 compared to $17.3 million in 2017, or continuing operations income per diluted share of $1.53 compared to $0.31 in 2017.  Net income from discontinued operations was $1.1 million for 2018 compared to $4.3 million for 2017.  Including discontinued operations, diluted income per share was $1.55 for 2018 compared to $0.39 for 2017 on net income of $88.7 million and $21.7 million, respectively.



Net Interest Income: 2019 compared to 2018.  Our net interest income for 2019 increased to $141.3 million, an increase of $20.4 million, or 16.9%, from $120.8 million for 2018, reflecting a $31.6 million, or 21.4%, increase in interest income to $179.6 million from $148.0 million for 2018.    The increase in net interest income primarily reflected the impact of higher balances of commercial real estate loans held for sale and other loan growth  and higher loan yields resulting from Federal Reserve rate increases in 2018. The impact of the prior year rate increases was partially offset by Federal Reserve rate decreases in the latter part of 2019.   Our average loans and leases increased 24.9% to $2.42 billion in 2019 from $1.94 billion for 2018, while related interest income increased $31.8 million on a tax equivalent basis. The largest increases in average loans and leases and related interest income was in commercial loans originated for sale, which respectively increased $300.2 million and $17.6 million. Small business loan, SBLOC and IBLOC and leasing interest income respectively increased $6.3 million, $6.1 million and $2.4 million.  Our average investment securities were $1.41 billion for 2019 compared to $1.38 billion for 2018, while related interest income increased $245,000 on a tax equivalent basis.

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for 2019 increased 13 basis points to 3.32% from 3.19% for 2018.  The increase reflected higher yields on variable rate loans resulting from the aforementioned Federal Reserve increases, partially offset by decreased yields on taxable investment securities. While the yield on loans increased to 5.25% from 4.92%, the yield on taxable investment securities decreased to 3.01% from 3.05%. The decrease reflected higher premium amortization resulting from prepayments. The average yield on our interest earning assets increased to 4.18% from 3.86% for 2018, an increase of 32 basis points, while the cost of total deposits and interest bearing liabilities increased to 0.92% for 2019 from 0.70% for 2018, an increase of 22 basis points. While variable rate loans and securities adjusted more fully to Federal Reserve rate changes, deposits adjusted only partially to the Federal Reserve changes.  In 2019, average demand and interest checking deposits amounted to $3.82 billion, compared to $3.50 billion in 2018, an increase of 9.1%.  The yield on those deposits increased to 0.80% in 2019 compared to 0.66% in 2018.  Savings and money market balances  averaged $37.7 million in 2019

50


 

compared to $362.3 million in 2018 with an average 0.48% rate in 2019 compared to 0.79% in 2018.  The decrease reflected the SHIRA sale.

Net Interest Income: 2018 compared to 2017.  Our net interest income for 2018 increased to $120.8 million, an increase of $14.2 million, or 13.3%, from $106.7 million for 2017, reflecting a $25.9 million, or 21.3%, increase in interest income to $148.0 million from $122.0 million for 2017.  The increase in net interest income resulted primarily from higher loan balances and higher yields.  Our average loans and leases increased 8.5% to $1.94 billion in 2018 from $1.78 billion for 2017, while related interest income increased $16.0 million on a tax equivalent basis.  Our average investment securities were $1.38 billion for 2018 compared to $1.30 billion for 2017, while related interest income increased $5.7 million on a tax equivalent basis.  Yields on both loans and investment securities increased as a result of the impact of the Federal Reserve’s rate increases on variable rate loans and securities. 

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for 2018 increased 15 basis points to 3.19% from 3.04% for 2017.  The increase reflected higher yields on variable rate loans and securities resulting from the aforementioned Federal Reserve increases.  The average yield on our interest earning assets increased to 3.86% from 3.37% for 2017, an increase of 49 basis points, while the cost of total deposits and interest bearing liabilities increased to 0.70% for 2018 from 0.40% for 2017, an increase of 30 basis points. While variable rate loans adjusted more fully to Federal Reserve rate increases, deposits adjusted only partially to Federal Reserve rate increases.  In 2018, average demand and interest checking deposits amounted to $3.50 billion, compared to $3.37 billion in 2017, an increase of 3.8%.  The yield on those deposits increased to 0.66% in 2018 compared to 0.36% in 2017.  Savings and money market balances averaged $362.3 million in 2018 compared to $439.6 million in 2017 with an average 0.79% rate in 2018 compared to 0.51% in 2017.  The decrease reflected the SHIRA sale.

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

51


 



 

 

 

 

 

 

 

 

 

 

 

 



 

Year ended December 31,



 

2019

 

2018



 

Average

 

 

 

Average

 

Average

 

 

 

Average



 

balance

 

Interest

 

rate

 

balance

 

Interest

 

rate



 

(dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans net of deferred fees and costs **

 

$                 2,402,686 

 

$            126,176 

 

5.25% 

 

$                 1,915,456 

 

$              94,232 

 

4.92% 

Leases - bank qualified*

 

14,968 

 

1,177 

 

7.86% 

 

20,025 

 

1,370 

 

6.84% 

Investment securities-taxable

 

1,406,247 

 

42,286 

 

3.01% 

 

1,375,566 

 

41,994 

 

3.05% 

Investment securities-nontaxable*

 

6,533 

 

215 

 

3.29% 

 

8,631 

 

262 

 

3.04% 

Interest earning deposits at Federal Reserve Bank

 

472,279 

 

10,007 

 

2.12% 

 

460,577 

 

8,737 

 

1.90% 

Federal funds sold and securities purchased under agreements to resell

 

 -

 

 -

 

-

 

59,157 

 

1,708 

 

2.89% 

Net interest earning assets

 

4,302,713 

 

179,861 

 

4.18% 

 

3,839,412 

 

148,303 

 

3.86% 



 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

(9,696)

 

 

 

 

 

(7,528)

 

 

 

 

Assets held-for-sale from discontinued operations

 

169,986 

 

6,710 

 

3.95% 

 

253,348 

 

8,810 

 

3.48% 

Other assets

 

254,674 

 

 

 

 

 

190,252 

 

 

 

 



 

$                 4,717,677 

 

 

 

 

 

$                 4,275,484 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$                 3,817,176 

 

$              30,664 

 

0.80% 

 

$                 3,499,288 

 

$              23,068 

 

0.66% 

Savings and money market

 

37,671 

 

181 

 

0.48% 

 

362,267 

 

2,878 

 

0.79% 

Time

 

170,438 

 

3,555 

 

2.09% 

 

 -

 

 -

 

-

Total deposits

 

4,025,285 

 

34,400 

 

0.85% 

 

3,861,555 

 

25,946 

 

0.67% 



 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

129,031 

 

3,131 

 

2.43% 

 

20,346 

 

451 

 

2.22% 

Repurchase agreements

 

90 

 

 -

 

0.00% 

 

173 

 

 -

 

0.00% 

Subordinated debt

 

13,401 

 

750 

 

5.60% 

 

13,401 

 

714 

 

5.33% 

Total deposits and interest bearing liabilities

 

4,167,807 

 

38,281 

 

0.92% 

 

3,895,475 

 

27,111 

 

0.70% 



 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

104,233 

 

 

 

 

 

14,546 

 

 

 

 

Total liabilities

 

4,272,040 

 

 

 

 

 

3,910,021 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

445,637 

 

 

 

 

 

365,463 

 

 

 

 



 

$                 4,717,677 

 

 

 

 

 

$                 4,275,484 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$            148,290 

 

 

 

 

 

$            130,002 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

292 

 

 

 

 

 

343 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$            147,998 

 

 

 

 

 

$            129,659 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

3.32% 

 

 

 

 

 

3.19% 



 

 

 

 

 

 

 

 

* Full taxable equivalent basis, using 21% respective statutory Federal tax rates in 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 



52


 









 

 

 

 

 

 



 

Year ended December 31,



 

2017



 

Average

 

 

 

Average



 

balance

 

Interest

 

rate



 

 

 

(dollars in thousands)

 

 

Assets:

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

Loans net of deferred fees and costs **

 

$                 1,763,392 

 

$             78,033 

 

4.43% 

Leases - bank qualified*

 

20,750 

 

1,613 

 

7.77% 

Investment securities-taxable

 

1,284,941 

 

36,121 

 

2.81% 

Investment securities-nontaxable*

 

14,094 

 

470 

 

3.33% 

Interest earning deposits at Federal Reserve Bank

 

495,568 

 

5,202 

 

1.05% 

Federal funds sold and securities purchased under agreements to resell

 

61,309 

 

1,310 

 

2.14% 

Net interest earning assets

 

3,640,054 

 

122,749 

 

3.37% 



 

 

 

 

 

 

Allowance for loan and lease losses

 

(6,865)

 

 

 

 

Assets held-for-sale from discontinued operations

 

310,058 

 

12,655 

 

4.08% 

Other assets

 

221,096 

 

 

 

 



 

$                 4,164,343 

 

 

 

 



 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand and interest checking

 

$                 3,371,969 

 

$             12,155 

 

0.36% 

Savings and money market

 

439,625 

 

2,263 

 

0.51% 

Total deposits

 

3,811,594 

 

14,418 

 

0.38% 



 

 

 

 

 

 

Short-term borrowings

 

24,224 

 

336 

 

1.39% 

Repurchase agreements

 

239 

 

 -

 

0.00% 

Subordinated debentures

 

13,401 

 

586 

 

4.37% 

Total deposits and interest bearing liabilities

 

3,849,458 

 

15,340 

 

0.40% 



 

 

 

 

 

 

Other liabilities

 

3,329 

 

 

 

 

Total liabilities

 

3,852,787 

 

 

 

 



 

 

 

 

 

 

Shareholders' equity

 

311,556 

 

 

 

 



 

$                 4,164,343 

 

 

 

 



 

 

 

 

 

 

Net interest income on tax equivalent basis *

 

 

 

$           120,064 

 

 



 

 

 

 

 

 

Tax equivalent adjustment

 

 

 

729 

 

 



 

 

 

 

 

 

Net interest income

 

 

 

$           119,335 

 

 



 

 

 

 

 

 

Net interest margin *

 

 

 

 

 

3.04% 



 

 

 

 

 

 

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

 

 

 

 

 

 

** Includes loans held for sale.

 

 

 

 

 

 



In 2019 compared to 2018, average interest earning assets increased to $4.30 billion, an increase of $463.3 million, or 12.1%, from 2018.  The increase reflected a $482.2 million, or 24.9%, increase in average loans and leases.  The increase resulted primarily from higher balances in loans originated for sale into securitizations,  SBLOC and IBLOC, SBA and leasing.  Average balances of

53


 

investment securities increased $28.6 million, or 2.1%, as reinvestments were accelerated when long term rates increased.  Average demand and interest checking deposits increased $317.9 million, or 9.1%.  In 2018 compared to 2017, average interest earning assets increased to $3.84 billion, an increase of $199.4 million or 5.5% from 2017, reflecting higher loan balances including loans held for sale.  Average investment securities increased $85.2 million or 6.6%.  Average demand and interest checking deposits increased $127.3 million, or 3.8%.



Volume and Rate Analysis.  The following table sets forth the changes in net interest income attributable to either changes in volume (average balances) or to changes in average rates from 2017 through 2019 on a tax equivalent basis.  The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.







 

 

 

 

 

 

 

 

 

 

 

 



 

2019 versus 2018

 

2018 versus 2017



 

Due to change in:

 

Due to change in:



 

Volume

 

Rate

 

Total

 

Volume

 

Rate

 

Total



 

(in thousands)

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable loans net of unearned discount

 

$               25,248 

 

$                   6,696 

 

$              31,944 

 

$                7,057 

 

$                  9,142 

 

$            16,199 

Bank qualified tax free leases net of

 

 

 

 

 

 

 

 

 

 

 

 

unearned discount

 

(472)

 

279 

 

(193)

 

(55)

 

(188)

 

(243)

Investment securities-taxable

 

894 

 

(602)

 

292 

 

2,646 

 

3,227 

 

5,873 

Investment securities-nontaxable

 

(72)

 

25 

 

(47)

 

(169)

 

(39)

 

(208)

Interest earning deposits

 

227 

 

1,043 

 

1,270 

 

(339)

 

3,874 

 

3,535 

Federal funds sold

 

(854)

 

(854)

 

(1,708)

 

(44)

 

442 

 

398 

Assets held-for-sale from discontinued

 

 

 

 

 

 

 

 

 

 

 

 

operations

 

(3,564)

 

1,464 

 

(2,100)

 

(2,125)

 

(1,720)

 

(3,845)

Total interest earning assets

 

21,407 

 

8,051 

 

29,458 

 

6,971 

 

14,738 

 

21,709 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

$                 2,096 

 

$                   5,500 

 

$                7,596 

 

$                   459 

 

$                10,454 

 

$            10,913 

Savings and money market

 

(1,872)

 

(825)

 

(2,697)

 

(295)

 

910 

 

615 

Time

 

3,555 

 

 -

 

3,555 

 

 -

 

 -

 

 -

Total deposit interest expense

 

3,779 

 

4,675 

 

8,454 

 

164 

 

11,364 

 

11,528 

Short-term borrowings

 

2,633 

 

47 

 

2,680 

 

(42)

 

157 

 

115 

Subordinated debt

 

 -

 

36 

 

36 

 

 -

 

128 

 

128 

Total interest expense

 

6,412 

 

4,758 

 

11,170 

 

122 

 

11,649 

 

11,771 

Net interest income:

 

$               14,995 

 

$                   3,293 

 

$              18,288 

 

$                6,849 

 

$                  3,089 

 

$              9,938 

Provision for Loan and Lease Losses.  Our provision for loan and lease losses was $4.4 million for 2019, $3.6 million for 2018 and $2.9 million for 2017.  Provisions are based on our evaluation of the adequacy of our allowance for loan and lease losses, particularly in light of current economic conditions.  That evaluation reflected the impact of the levels of charge-offs.  The provision for loan and lease losses increased $815,000 over the prior year, to $4.4 million in 2019, as decreases in provisions for small business loans and leasing were more than offset by a $1.0 million provision for other consumer loans.  The $1.0 million provision resulted primarily from the loss on a home equity line of credit.  In September 2016, this product became inactive and is no longer being marketed to customers, and the current unimpaired portfolio balance is $2.8 million, consisting of 32 accounts averaging $88,000. The increase in the 2018 provision over 2017 reflected higher provisions for SBA non-real estate and leasing.  At December 31, 2019, our allowance for loan and lease losses amounted to $10.2 million, or 0.56%, of total loans.  We believe that our allowance is adequate to cover expected losses.  For more information about our provision and allowance for loan and lease losses and our loss experience see “—Financial Condition—Allowance for Loan and Lease Losses” and “—Summary of Loan and Lease Loss Experience,” below.

Non-Interest Income: 2019 compared to 2018.  Non-interest income was $104.1 million for 2019, compared to $153.8 million for 2018.  The $49.7 million decrease reflected a $65.0 million gain on the sale of the SHIRA portfolio in 2018In 2019 compared to 2018, the primary drivers of fee income, prepaid, debit and related fees and fees on ACH, card and other payment processing fees, increased $11.2 million, or 17.8%, to $74.5 million.  The majority of the growth resulted from prepaid, debit and related fees which increased $10.5 million, or 19.2%, to $65.1 million, primarily as a result of transaction volume increases from new clients and organic growth from existing clients.  ACH, card and other payment processing fees, which increased $723,000, or 8.4%,

54


 

to $9.4 million reflected increases in payment volume, especially from the rapid funds transfer product.  That product allows customers to transfer funds from their bank account to their payee’s account in minutes.  Gain on sale of loans increased $3.6 million to $24.1 million, which resulted primarily from a higher volume of loans sold into securitizations in 2019 which more than offset the decrease in market spreads.  Any gain or loss is subject to market conditions. 

Non-Interest Income: 2018 compared to 2017.  Non-interest income was $153.8 million for 2018, compared to $91.5 million for 2017.  The $62.2 million increase reflected a $65.0 million gain on the sale of the SHIRA portfolio and a $3.2 million reduction in service fees on deposit accounts related to that portfolio.  In 2018 compared to 2017, the primary drivers of fee income, prepaid and debit card fees and fees on ACH, card and other payment processing fees, increased $3.6 million, or 6.0%, to $63.3 million.  The majority of the growth resulted from card payment and ACH processing fees, which increased $2.3 million, or 37.0%, to $8.7 million reflecting increases in payment volume, especially from the rapid funds transfer product.  That product allows customers to transfer funds from their bank account to their payee’s account in minutes.  Prepaid and debit card fees increased $1.3 million, or 2.4%, to $54.6 million, primarily as a result of transaction volume increases from new clients and organic growth from existing clients.  Gain on sale of loans increased $2.6 million to $20.5 million which resulted primarily from a higher volume of loans sold into securitizations in 2018Additionally, in 2018, $3.7 million of charges resulted from the investment in unconsolidated entity while such charges in 2017 were $20,000.  The charges reflected continued clarification of market and credit loss related assumptions based on information from available sources including updated market information and projections of potential future loan losses based on new facts or circumstances.  See “Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings” for a description of the charge related to one of those loans.  The investment in unconsolidated entity resulted from the sale of certain discontinued loans into a securitization in 2014. See Note W to the financial statements.  The vast majority of the $3.6 million of service fees on deposit accounts in 2018 resulted from the IRA and health savings portfolios which have now been sold.

Non-Interest Expense: 2019 compared to 2018.  Total non-interest expense in 2019 was $168.5 million, an increase of $17.2 million, or 11.4%, over the $151.3 million in 2018.  Salary expense increased $14.4 million to $94.3 million in 2019, an increase of 18.1% over the $79.8 million in 2018.  The increase reflected higher incentive compensation for loan, deposit and fee production and higher information technology and loan and payments infrastructure expense.  Depreciation and amortization decreased $301,000 to $3.7 million, or 7.5%, from $4.0 million in 2018, which reflected reduced spending on fixed assets and equipment.  Rent and occupancy increased $1.2 million to $6.6 million, or 21.1%, from $5.5 million in 2018, which reflected newly leased space for the commercial real estate loan origination department.  Data processing expense decreased $1.3 million, or 20.9%, to $4.9 million from $6.2 million in 2018.  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 and the SHIRA sale.  Printing and supplies expense decreased $269,000, or 29.7%, to $637,000 from $906,000 in 2018.  The decrease reflected a reduction for SHIRA accounts which were transferred in the third quarter of 2018, in connection with the related sale.  Audit expense decreased $217,000, or 10.8%, to $1.8 million from $2.0 million in 2018, which reflected decreased regulatory and tax compliance audit fees.  Legal expense decreased $2.5 million, or 32.2%, to $5.3 million from $7.8 million in 2018.  The decrease in legal expense reflected lower fees related to regulatory matters including fees associated with an SEC subpoena related to the restatement of the financial statements (see “—Regulatory Actions”).  Amortization of intangible assets remained consistent at $1.5 million in 2019 and 2018.  FDIC insurance decreased $1.8 million, or 20.3%, to $7.0 million from $8.8 million in 2018, which reflected the impact of a decrease in the FDIC assessment rate.  Software expense decreased $573,000, or 4.3%, to $12.7 million from $13.3 million in 2018.  The decrease reflected reduced expenditures for technology infrastructure to improve efficiency and scalability, including BSA software to satisfy BSA regulatory requirements.  Insurance expense decreased $103,000, or 4.0%, to $2.5 million from $2.6 million in 2018.  Telecom and information technology network communications expense increased $120,000, or 8.7%, to $1.5 million from $1.4 million in 2018.  Securitization and servicing expense decreased $36,000, or 30.8%, to $81,000 from $117,000 in 2018.  Consulting expense remained consistent at $3.2 million in 2019 and 2018.  Other non-interest expense decreased $394,000, or 3.0%, to $12.9 million from $13.3 million in 2018.  The decrease resulted primarily from decreases of $317,000 in credit bureau expense, $280,000 for prepaid and debit deposit account losses, $163,000 for customer identification expense and $100,000 for postage.  These decreases were partially offset by a $748,000 increase in travel.

 

Non-Interest Expense: 2018 compared to 2017.  Total non-interest expense in 2018 was $151.3 million, a decrease of $3.6 million, or 2.3%, over the $154.9 million in 2017.  Salary expense increased $4.0 million to $79.8 million in 2018, an increase of 5.3% over the $75.8 million in 2017. The increase reflected increases in BSA and compliance expenses and higher incentive compensation expense.  Depreciation and amortization decreased $455,000 to $4.0 million, or 10.2%, from $4.5 million in 2017, which reflected reduced spending on fixed assets and equipment.  Rent and occupancy decreased $206,000 to $5.5 million, or 3.6%, from $5.7 million in 2017. Data processing expense decreased $4.0 million, or 39.1%, to $6.2 million from $10.2 million in 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

55


 

of an affinity program which had changed ownership.  Printing and supplies expense decreased $448,000, or 33.1%, to $906,000 from $1.4 million in 2017. The decrease reflected a reduction for health savings accounts which were sold in the second quarter of 2017 and safe harbor accounts which were transferred in the third quarter of 2018.  Audit expense increased $320,000, or 19.0%, to $2.0 million from $1.7 million in 2017, which reflected increased regulatory and tax compliance audit fees.  Legal expense decreased $227,000, or 2.8%, to $7.8 million from $8.1 million in 2017.  The decrease in legal expense reflected lower fees related to regulatory matters including fees associated with an SEC subpoena related to the restatement of the financial statements (see “—Regulatory Actions”).  Amortization of intangible assets remained consistent at $1.5 million in 2018 and 2017.  FDIC insurance decreased $1.3 million, or 12.7%, to $8.8 million from $10.1 million in 2017, which reflected the impact of a decrease in the FDIC assessment rate.  Software expense increased $707,000, or 5.6%, to $13.3 million from $12.6 million in 2017.  The increase reflected additional information technology infrastructure to improve efficiency and scalability, including BSA software to satisfy BSA regulatory requirements.  Insurance expense increased $245,000, or 10.5%, to $2.6 million from $2.3 million in 2017.  The increase reflected the impact of increased limits for liability coverages.  Telecom and information technology network communications expense decreased $420,000, or 23.4%, to $1.4 million from $1.8 million in 2017, reflecting cost cutting efforts including the closure of certain locations.  Securitization and servicing expense decreased $53,000, or 31.2%, to $117,000 from $170,000 in 2017.  Consulting expense increased $1.0 million, or 45.4%, to $3.2 million from $2.2 million in 2017.  The increased expense reflected increased BSA and other regulatory compliance consulting.  Other non-interest expense decreased $199,000, or 1.5%, to $13.3 million from $13.5 million in 2017.  The decrease resulted primarily from decreases of $365,000 for operations losses and recoveries, $314,000 for prepaid and debit deposit account losses, $228,000 for correspondent bank fees and $161,000 for customer identification expense.  These decreases were partially offset by a $573,000 increase in travel.

Income Tax Benefit and Expense

Income tax expense for continuing operations was $21.2 million, $32.2 million and $23.1 million, respectively, for 2019, 2018 and 2017.  The tax expense rate of 29.3% in 2019 was higher than the 26.9% rate in the prior year, primarily as the result of the non-deductibility of $8.9 million of civil money penalties.  The difference between those rates and the federal statutory rate of 21% consisted primarily of state income taxes. The 57.1% tax expense rate in 2017 primarily reflected an adjustment through tax expense for the difference between the prior 34% and 21% tax rate which was effective for 2018, applied to total net deferred tax assets.  Tax expense in 2017 was increased by that 13% differential to recognize the decrease in future value of those deferred tax assets

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. Interest-bearing balances at the Federal Reserve Bank, maintained on an overnight basis, averaged $472.3 million for 2019, compared to $460.6 million for 2018. 



Our primary source of funding has been depositsThe sale of the SHIRA portfolio was the primary factor in the $324.6 million reduction of average savings and money market balances in 2019 compared to 2018. That reduction was partially offset by growth in prepaid and debit card and other payments deposit accounts.  That growth was reflected in a $317.9 million increase in average demand and interest checking balances. Additionally, $170.4 million of average time deposits were newly utilized in 2019 to fund increased commercial real estate originations held for sale. As a result, average deposits amounted to $4.03 billion in 2019 compared to $3.86 billion in 2018. Overnight borrowings were also used to fund such increased originations, and average borrowings  increased to $129.0 million in 2019 from $20.3 million in 2018.   

 

Our primary source of liquidity is available for sale securities which amounted to $1.32 billion at December 31, 2019 compared to $1.24 billion at December 31, 2018.  In excess of $800 million of our available-for-sale securities are U.S. government agency securities which are highly liquid and which may be pledged as collateral for our Federal Home Loan Bank line of credit.

Loan repayments, also a source of funds, were exceeded by new loan disbursements during 2019.  As a result, at December 31, 2019 outstanding loans amounted to $1.82 billion, compared to $1.50 billion at the prior year end, an increase of $322.3 million, which was generally funded by deposits.  Commercial loans held-for-sale increased to $1.18 billion from $688.5 million between those respective dates, an increase of $492.1 million.  The increase reflected increases in originations.  In 2018 and 2019, the Company sold significant amounts of commercial loans held-for-sale and plans to continue that practice in 2020. 

56


 

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, lower cost compared to certain other funding sources and customer loyalty comprise key characteristics of core deposits which we believe are comparable to core deposits of peers with branch systems.  Certain components of our deposits do experience seasonality, creating greater excess liquidity at certain times in 2019.  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 and debit card accounts comprise the 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 December 31, 2019, we had lines of credit exceeding $250 million with the FHLB and $1.0 billion with the Federal Reserve.  The FHLB line can be increased to more than $800 million, by pledging U.S. agency securities.  These lines may be collateralized by specified types of loans or securities.  As of December 31, 2019, 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 result of the discontinuance of our commercial loan operations, we have received and expect to continue to receive during 2020, cash proceeds from the sale or repayment of discontinued assets.  We currently anticipate that these proceeds will be deployed into loans in our continuing operationsApproximately $140.7 million of discontinued assets remained on our balance sheet as of December 31, 2019 (compared to $197.8 million at the prior year end), consisting primarily of loans secured by commercial real estate.  If not sold, these loans will be retained until repaid.  We also retain the financing receivable from the 2014 Walnut Street securitization for a portion of the discontinued commercial loans.  At December 31, 2019, the balance of that receivable was $39.2 million, compared to $59.3 million at the prior year end.



Included in our cash and cash-equivalents at December 31, 2019, were $924.5 million of interest earning deposits, which primarily consisted of deposits with the Federal Reserve.  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.



In 2019, $173.9 million of securities sales and repayments exceeded purchases of $157.5 million.  In 2018, $213.2 million of securities sales and repayments exceeded purchases of $134.8 million.  In 2017, $569.7 million of securities sales and repayments were comparable to purchases of $579.9 million.  At December 31, 2019, we had outstanding commitments to fund loans, including unused lines of credit, of $2.34 billion, the vast majority of which are SBLOC lines of credit which are variable rate.  We attempt to increase such line usage; however, usage has been historically consistent and the majority of these lines of credit have historically not been drawn upon.   As shown in the consolidated statements of cash flows, cash required to fund loans was $326.0 million in 2019, $115.1 million in 2018 and $172.9 million in 2017.



As a holding company conducting substantially all of our business through our bank subsidiary, our need for liquidity consists principally of cash needed to make required interest payments on our trust preferred securities.  As of December 31, 2019, we had approximate cash reserves of $13.3 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 the three-month London Interbank Offered Rate, or LIBOR.  A Supervisory Letter from the  Federal Reserve, requiring its approval for any dividend from us, was lifted in 2019.  FDIC approval is required for any dividend from the Bank to us, which, apart from the $13.3 million of cash on hand, is our principal source of liquidity.  See Item 1, “Business—Regulation under Banking Law,” and Item 1A, “Risk Factors-Risks Relating to Our Business-The entry into the Consent Orders has imposed certain restrictions and requirements upon us and the Bank.” 



We expect that the conditions under which the 2014 Consent Order Amendment was issued will be remediated and the FDIC will permit the Bank to resume paying dividends to us to fund holding company operations.  There can, however, be no assurance that the FDIC will, in fact, allow the resumption of Bank dividends to us upon completion of the remediation or, if allowed, as to the

57


 

timing thereof.  Accordingly, there is risk that we will need to obtain alternate sources of funding at the holding company level to service our trust preferred securities.  There can be no assurance that such sources would be available to us on acceptable terms or at all.



We must comply with capital adequacy guidelines issued by the FDIC.  A bank must, in general, have a Tier 1 leverage ratio of 5.0%, a ratio of Tier I capital to risk-weighted assets of 8.0%, a ratio of total capital to risk-weighted assets of 10.0% and a ratio of common equity to risk-weighted assets of 6.50% to be considered “well capitalized”.  The Tier I leverage ratio is the ratio of Tier 1 capital to average assets for the period. “Tier I capital” includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles.  At December 31, 2019, 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 December 31, 2019

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

9.63% 

 

19.04% 

 

19.45% 

 

19.04% 

The Bancorp Bank

 

9.46% 

 

18.71% 

 

19.11% 

 

18.71% 

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

 

5.00% 

 

8.00% 

 

10.00% 

 

6.50% 



 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

10.11% 

 

20.64% 

 

21.07% 

 

20.64% 

The Bancorp Bank

 

9.70% 

 

20.18% 

 

20.61% 

 

20.18% 

"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.



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



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



We monitor, manage and control interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as “gap analysis”) and an interest rate risk management model.  With the interest rate risk management model, we project future net interest income and then estimate the effect of various changes in interest rates and balance

58


 

sheet growth rates on that projected net interest income.  We also use the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios.  Traditional gap analysis involves arranging our interest earning assets and interest bearing liabilities by repricing periods and then computing the difference (or “interest rate sensitivity gap”) between the assets and liabilities that we estimate will reprice during each time period and cumulatively through the end of each time period.

 

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



The following table sets forth the estimated maturity or repricing structure of our interest earning assets and interest bearing liabilities at December 31, 2019.  Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability.  Loans currently at their interest rate floors are classified at their maturity date, though they are tied to variable interest rates.  The majority of demand and interest bearing demand deposits and savings deposits are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates.  We estimate the repricing characteristics of these deposits based on historical performance, past experience, judgmental predictions and other deposit behavior assumptions.  However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons.  Additionally, although non-interest bearing demand accounts are not paid interest, we estimate certain of the balances will reprice as a result of the contractual fees that are paid to the affinity groups which are based upon a rate index, and therefore are included in interest expense. We have adjusted the demand and interest checking balances in the table downward, to better reflect the impact of their partial adjustment to changes in rates. Loan and security balances, which adjust more fully to market rate changes, are based upon actual balances. The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends.  The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing and related behavior of certain categories of assets and liabilities is beyond our control as, for example, prepayments of loans and withdrawal of deposits.  As a result, certain assets and liabilities indicated as repricing within a stated period may, in fact, reprice at different times and at different rate levels.









59


 



 

 

 

 

 

 

 

 

 

 



 

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

 

$             1,021,433 

 

$               25,958 

 

$              36,539 

 

$              7,629 

 

$            88,987 

Loans net of deferred loan costs

 

1,284,814 

 

77,341 

 

257,084 

 

187,035 

 

17,971 

Investment securities

 

639,735 

 

101,818 

 

127,190 

 

252,548 

 

283,788 

Interest earning deposits

 

924,544 

 

 -

 

 -

 

 -

 

 -

Total interest earning assets

 

3,870,526 

 

205,117 

 

420,813 

 

447,212 

 

390,746 



 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

Demand and interest checking

 

2,865,899 

 

62,358 

 

62,358 

 

 -

 

 -

Savings and money market

 

43,572 

 

87,146 

 

43,572 

 

 -

 

 -

Time deposits

 

475,000 

 

 -

 

 -

 

 -

 

 -

Securities sold under agreements to repurchase

 

82 

 

 -

 

 -

 

 -

 

 -

Subordinated debentures

 

13,401 

 

 -

 

 -

 

 -

 

 -

Total interest bearing liabilities

 

3,397,954 

 

149,504 

 

105,930 

 

 -

 

 -

Gap

 

$                472,572 

 

$               55,613 

 

$            314,883 

 

$          447,212 

 

$          390,746 

Cumulative gap

 

$                472,572 

 

$             528,185 

 

$            843,068 

 

$       1,290,280 

 

$       1,681,026 

Gap to assets ratio

 

8%

 

*

 

6%

 

8%

 

7%

Cumulative gap to assets ratio

 

8%

 

9%

 

15%

 

23%

 

30%



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



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



We believe that the assumptions utilized in evaluating our estimated net interest income are reasonable; however, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments as well as the estimated effect of changes in interest rates on estimated net interest income could vary substantially if different assumptions are used or actual experience differs from presumed behavior of various deposit and loan categories.  The following table shows the effects of interest rate shocks on our MVPE and net interest income.  Rate shocks assume that current interest rates change immediately and sustain parallel shifts.  For interest rate increases or decreases of 100 and 200 basis points, our policy includes a guideline that our MVPE ratio should not decrease more than 10% and 15%, respectively, and that net interest income should not decrease more than 10% and 15%, respectively.  As illustrated in the following table, we complied with our asset/liability policy at December 31, 2019.  While our modeling suggests an increase in market rates will have a positive impact on margin (as shown in the table below), the amount of such increase cannot be determined, and there can be no assurance any increase will be realized. 



60


 



 

 

 

 

 

 

 

 



 

Net portfolio value at

 

 



 

December 31, 2019

 

Net interest income



 

 

 

Percentage

 

 

 

Percentage

Rate scenario

 

Amount

 

change

 

Amount

 

change



 

(dollars in thousands)



 

 

 

 

 

 

 

 

+200 basis points

 

$            676,188 

 

2.18% 

 

$            172,557 

 

11.54% 

+100 basis points

 

670,847 

 

1.38% 

 

164,432 

 

6.29% 

Flat rate

 

661,733 

 

0.00% 

 

154,698 

 

0.00% 

-100 basis points

 

644,254 

 

-2.64%

 

145,463 

 

-5.97%

-200 basis points

 

578,841 

 

-12.53%

 

136,020 

 

12.07% 



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



We do not use derivatives except for swaps outstanding for fixed rate loans which were originated for sale.  The swaps hedge interest rate risk between the time the loans are disbursed and sold.

 

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

Financial Condition

General.  Our total assets at December 31, 2019 were $5.66 billion, of which our total loans and commercial loans held-for-sale from continuing operations were $3.00 billion and our assets held-for-sale from discontinued operations were $140.7 million, $115.9 million of which were loans.  At December 31, 2018, our total assets were $4.44 billion, of which our total loans and loans held-for-sale from continuing operations were $2.19 billion and our assets held-for-sale from discontinued operations were $197.8 million, $170.7 million of which were loans.  Investment securities available-for-sale increased to $1.32 billion at December 31, 2019 from $1.24 billion at December 31, 2018.  The increase in total assets at December 31, 2019 reflected increased originations of commercial loans held for sale and loan growth.

Interest Earning Deposits and Federal Funds Sold.  At December 31, 2019, we had a total of $924.5 million of interest earning deposits, comprised primarily of balances at the Federal Reserve, which pays interest on such balances. At December 31, 2018, we had $551.9 million of such balances. The increase reflected higher deposit balances, including $475.0 million of short term certificates of deposit used to fund increased commercial mortgage loan origination which are held for sale.

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

For detailed information on the composition and maturity distribution of our investment portfolio, see Note D to the Consolidated Financial Statements.  Total investment securities increased to $1.41 billion on December 31, 2019, an increase of $84.3 million, or 6.4%, from a year earlier.  The increase in investment securities reflected the acceleration of purchases when long term rates increased.  

61


 



Other securities included in the held-to-maturity classification at December 31, 2019 consisted of three securities secured by diversified portfolios of corporate securities and one single-issuer trust preferred security.



The trust preferred security is an unrated security issued by an insurance company with a book value of $9.2 million and a fair value of $7.2 million.



A total of $75.2 million of other debt securities is comprised of three securities secured by diversified portfolios of corporate securities, and have a fair value of $75.9 million.



Under the accounting guidance related to the recognition of other-than-temporary impairment charges on debt securities, an impairment on a debt security is deemed to be other-than-temporary if it meets either of the following conditions: i) we intend to sell or it is more likely than not we will be required to sell the security before a recovery in value, or ii) we do not expect to recover the entire amortized cost basis of the security.  If we intend to sell or it is more likely than not we will be required to sell the security before a recovery in value, a charge is recorded in net realized losses in the consolidated statement of operations equal to the difference between the fair value and amortized cost basis of the security.  For those other-than-temporarily impaired debt securities which do not meet the first condition and for which we do not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit impairment, which is recorded in net realized losses in the consolidated statement of operations, and the remaining impairment, which is recorded in other comprehensive income.  Generally, a security’s credit impairment is the difference between its amortized cost basis and the best estimate of its expected future cash flows discounted at the security’s effective yield prior to impairment.  The previous amortized cost basis, less the impairment recognized in net realized losses on the consolidated income statement, becomes the security’s new cost basis.  We recognized no other-than-temporary impairment charges related to trust preferred securities classified in our held-to-maturity portfolio for 2019, 2018 and 2017. 

62


 

The following table presents the book value and the approximate fair value for each major category of our investment securities portfolio.  At December 31, 2019 and 2018, our investments were categorized as either available-for-sale or held-to-maturity (in thousands).









 

 

 

 

 

 

 



Available-for-sale

 

Held-to-maturity



December 31, 2019

 

December 31, 2019



Amortized

 

Fair

 

Amortized

 

Fair



cost

 

value

 

cost

 

value

U.S. Government agency securities

$                 52,415 

 

$                 52,910 

 

$                        - 

 

$                        - 

Asset-backed securities

244,751 

 

244,349 

 

 -

 

 -

Tax-exempt obligations of states and political subdivisions

5,174 

 

5,318 

 

 -

 

 -

Taxable obligations of states and political subdivisions

58,258 

 

60,250 

 

 -

 

 -

Residential mortgage-backed securities

335,068 

 

336,596 

 

 -

 

 -

Collateralized mortgage obligation securities

221,109 

 

222,727 

 

 -

 

 -

Commercial mortgage-backed securities

394,852 

 

398,542 

 

 -

 

 -

Corporate debt securities

 -

 

 -

 

84,387 

 

83,002 



$            1,311,627 

 

$            1,320,692 

 

$              84,387 

 

$              83,002 







 

 

 

 

 

 

 



Available-for-sale

 

Held-to-maturity



December 31, 2018

 

December 31, 2018



Amortized

 

Fair

 

Amortized

 

Fair



cost

 

value

 

cost

 

value

U.S. Government agency securities

$                 54,095 

 

$                 53,362 

 

$                        - 

 

$                        - 

Asset-backed securities

189,850 

 

188,602 

 

 -

 

 -

Tax-exempt obligations of states and political subdivisions

7,546 

 

7,551 

 

 -

 

 -

Taxable obligations of states and political subdivisions

60,152 

 

60,435 

 

 -

 

 -

Residential mortgage-backed securities

377,199 

 

369,741 

 

 -

 

 -

Collateralized mortgage obligation securities

265,914 

 

262,207 

 

 -

 

 -

Commercial mortgage-backed securities

300,143 

 

294,426 

 

 -

 

 -

Corporate debt securities

 -

 

 -

 

84,432 

 

83,391 



$            1,254,899 

 

$            1,236,324 

 

$              84,432 

 

$              83,391 



Investments in FHLB and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $5.3 million at December 31, 2019 and $1.1 million at December 31, 2018.  Both the FHLB and Atlantic Central Bankers Bank require its correspondent banking institutions to hold stock as a condition of membership. The increase resulted from an increase in FHLB stock, required to permit increased overnight borrowings.



At December 31, 2019 and 2018, investment securities with a fair value of approximately $262.0 million and $116.0 million, respectively, were pledged to secure a line of credit with the FHLB.  At December 31, 2019 and 2018, investment securities with a fair value of approximately $0 and $169.5 million, respectively, were pledged to secure a line of credit with the Federal Reserve.  



63


 

The following tables show the contractual maturity distribution and the weighted average yields of our investment securities portfolio as of December 31, 2019 (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

After

 

 

 

After

 

 

 

 

 

 

 

 



Zero

 

 

 

one to

 

 

 

five to

 

 

 

Over

 

 

 

 



to one

 

Average

 

five

 

Average

 

ten

 

Average

 

ten

 

Average

 

 

Available-for-sale

year

 

yield

 

years

 

yield

 

years

 

yield

 

years

 

yield

 

Total

U.S. Government agency securities

$                          - 

 

-

 

$                    202 

 

3.33% 

 

$            33,771 

 

2.68% 

 

$             18,937 

 

2.78% 

 

$                52,910 

Asset-backed securities *

 -

 

-

 

8,916 

 

2.98% 

 

24,278 

 

3.34% 

 

211,155 

 

3.31% 

 

244,349 

Tax-exempt obligations of states and political subdivisions **

1,135 

 

1.40% 

 

2,222 

 

2.82% 

 

1,961 

 

2.65% 

 

 -

 

-

 

5,318 

Taxable obligations of states and political subdivisions

2,516 

 

2.70% 

 

18,056 

 

3.16% 

 

33,662 

 

3.58% 

 

6,016 

 

5.90% 

 

60,250 

Residential mortgage-backed securities

3,205 

 

2.21% 

 

8,160 

 

2.53% 

 

81,857 

 

2.51% 

 

243,374 

 

2.51% 

 

336,596 

Collateralized mortgage obligation securities

 -

 

-

 

 -

 

-

 

13,075 

 

2.31% 

 

209,652 

 

2.50% 

 

222,727 

Commercial mortgage-backed securities

 -

 

-

 

47,690 

 

2.64% 

 

50,901 

 

2.51% 

 

299,951 

 

3.34% 

 

398,542 

Total

$                  6,856 

 

 

 

$               85,246 

 

 

 

$          239,505 

 

 

 

$           989,085 

 

 

 

$           1,320,692 

Weighted average yield

 

 

2.26% 

 

 

 

2.78% 

 

 

 

2.76% 

 

 

 

2.95% 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















* The average yield of asset backed securities is as follows: collateralized loan obligation securities 3.31%, federally insured student loan securities 3.24%.

** If adjusted to their taxable equivalents, yields would approximate 1.77%, 3.56% and 3.35% for zero to one year, one to five years and five to ten years, respectively, at a Federal tax rate of 21%.













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

After

 

 

 

After

 

 

 

 

 

 

 

 



Zero

 

 

 

one to

 

 

 

five to

 

 

 

Over

 

 

 

 



to one

 

Average

 

five

 

Average

 

ten

 

Average

 

ten

 

Average

 

 

Held-to-maturity

year

 

yield

 

years

 

yield

 

years

 

yield

 

years

 

yield

 

Total

Other debt securities

$                          - 

 

-

 

$                        - 

 

-

 

$                    - 

 

-

 

$             84,387 

 

4.81% 

 

$                84,387 

Total

$                          - 

 

 

 

$                        - 

 

 

 

$                    - 

 

 

 

$             84,387 

 

 

 

$                84,387 

Weighted average yield

 

 

 

 

 

 

-

 

 

 

 

 

 

 

4.81% 

 

 



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. The analysis is performed on an individual loan basis for commercial mortgage loans and a pooled basis for SBA loans.  Commercial loans held-for-sale increased to $1.18 billion at December 31, 2019 from $688.5 million at December 31, 2018.  The increase resulted from an increase in the volume of commercial real estate loans originated for future sale or securitization.



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

64


 

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





 

 

 

 

 

 

 

 

 



December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,



2019

 

2018

 

2017

 

2016

 

2015



 

 

 

 

 

 

 

 

 

SBL non-real estate

$                84,579 

 

$                76,340 

 

$                70,379 

 

$                73,488 

 

$                67,398 

SBL commercial mortgage

218,110 

 

165,406 

 

142,086 

 

126,159 

 

114,029 

SBL construction

45,310 

 

21,636 

 

16,740 

 

8,826 

 

6,977 

Small business loans *

347,999 

 

263,382 

 

229,205 

 

208,473 

 

188,404 

Direct lease financing

434,460 

 

394,770 

 

375,890 

 

343,941 

 

228,280 

SBLOC / IBLOC

1,024,420 

 

785,303 

 

730,462 

 

630,400 

 

575,948 

Other specialty lending

3,055 

 

31,836 

 

30,720 

 

11,073 

 

48,315 

Other consumer loans

4,554 

 

16,302 

 

14,133 

 

17,374 

 

23,180 



1,814,488 

 

1,491,593 

 

1,380,410 

 

1,211,261 

 

1,064,127 

Unamortized loan fees and costs

9,757 

 

10,383 

 

10,048 

 

9,468 

 

10,716 

Total loans, net of unamortized loan fees and costs

$           1,824,245 

 

$           1,501,976 

 

$           1,390,458 

 

$           1,220,729 

 

$           1,074,843 



 

 

 

 

 

 

 

 

 

*SBL loans consist primarily of SBA loans. SBL loans held for sale consist of the U.S. government guaranteed portion of SBA loans.  The following table shows SBL loans and SBL loans held-for-sale for the periods indicated (in thousands):





 

 

 

 

 

 

 

 

 



December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,



2019

 

2018

 

2017

 

2016

 

2015



 

 

 

 

 

 

 

 

 

SBL loans, including unamortized fees and costs of $4,215 and $7,478
for December 31, 2019 and December 31, 2018, respectively

$              352,214 

 

$          270,860 

 

$              236,724 

 

$      215,786 

 

$            197,966 

SBL loans included in held-for-sale

220,358 

 

199,977 

 

165,177 

 

154,016 

 

109,174 

Total small business loans

$572,572 

 

$          470,837 

 

$             401,901 

 

$      369,802 

 

$            307,140 



65


 

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







 

 

 

 

 

 

 

 



 

December 31, 2019



 

Within

 

One to five

 

After

 

 



 

one year

 

years

 

five years

 

Total



 

(in thousands)

SBL non-real estate

 

$                                       233 

 

$                           26,821 

 

$                           57,525 

 

$                           84,579 

SBL commercial mortgage

 

9,755 

 

7,604 

 

200,751 

 

218,110 

SBL construction

 

4,742 

 

140 

 

40,428 

 

45,310 



 

$                                  14,730 

 

$                           34,565 

 

$                         298,704 

 

$                         347,999 



 

 

 

 

 

 

 

 

Loans at fixed rates

 

 

 

$                             4,382 

 

$                           16,002 

 

$                           20,384 

Loans at variable rates

 

 

 

30,183 

 

282,702 

 

216,058 

    Total

 

 

 

$                           34,565 

 

$                         298,704 

 

$                         333,269 



Allowance for Loan and Lease Losses.  We review the adequacy of our allowance for loan and lease losses on at least a quarterly basis to determine a provision for loan losses in an amount necessary to maintain our allowance at a level that is appropriate, based on management’s estimate of inherent losses.  Our estimates of loan and lease losses are intended to, and, in management’s opinion, do meet the criteria for accrual of loss contingencies in accordance with ASC 450, Contingencies and ASC 310, Receivables.  The process of evaluating this adequacy has two basic elements: first, the identification of problem loans or leases based on current financial information and the fair value of the underlying collateral; and second, a methodology for estimating general loss reserves.  For loans or leases classified as “special mention” or “substandard”, we reserve all estimated losses at the time we classify the loan or lease.  This “specific” portion of the allowance is the total of potential, although unconfirmed, losses for individually classified loans.  In this process, we establish specific reserves based on an analysis of the most probable sources of repayment and liquidation of collateral.  While each impaired loan is individually evaluated, not every loan requires a reserve when the collateral value and estimated cash flows exceed the current balance. When loans are classified as troubled debt restructurings, 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 December 31, 2019, there were eleven troubled debt restructured loans with a balance of $2.1 million which had specific reserves of $1.0 million. These reserves related to the non-guaranteed portion of SBA loans for start-up businesses. 



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 and inherent losses within the portfolio.  Individual loan pools are created for major loan categories: SBLOC and IBLOC, 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, which measures the adequacy of the allowance for loan and lease losses independently of loan production officers. A description of loan review coverage targets is as follows.



At December 31, 2019, in excess of 50% of the total continuing loan portfolio was reviewed. The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio.  These thresholds are maintained as follows:



Security Backed Lines of Credit (SBLOC) – The targeted review threshold for 2019 was 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 December 31, 2019, approximately 55% of the SBLOC portfolio had been reviewed.



Insurance Backed Lines of Credit (IBLOC) – The targeted review threshold for 2019 was 40%, with the largest 25% of IBLOCs by commitment to be reviewed annually.  A random sampling of a minimum of 20 of the remaining loans will be reviewed each quarter.  At December 31, 2019, approximately 57% of the IBLOC portfolio had been reviewed. 

   

66


 

 SBA Loans – The targeted review or rated threshold for 2019 was 100%, to be rated and/or reviewed within 90 days of funding, less fully guaranteed loans purchased for CRA.  The 100% coverage includes loans rated by designated SBA department personnel, with a review threshold for the independent loan review department of all loans exceeding $1.0 million and any classified loans.  At December 31, 2019, approximately 100% of the government guaranteed loan portfolio had been rated and/or reviewed.



Direct Lease Financing – The targeted review threshold for 2019 was 35%.  At December 31, 2019, approximately 54% of the leasing portfolio had been reviewed. All lease relationships exceeding $1.0 million are reviewed.

 

Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold for 2019 was 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 December 31, 2019, approximately 100% of the CMBS floating rate loans on the books for more than 90 days had been reviewed.  



Commercial Mortgaged Backed Securities (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 December 31, 2019, 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 December 31, 2019, approximately 100% of the non-CRA loans had been reviewed.



Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2019 was 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 December 31, 2019, approximately 85% of the HELOC portfolio had been reviewed.

67


 

The following table presents delinquencies by type of loan for December 31, 2019 and 2018 (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019



 

30-59 Days

 

60-89 Days

 

90+ Days

 

 

 

Total

 

 

 

Total



 

past due

 

past due

 

still accruing

 

Non-accrual

 

past due

 

Current

 

loans

SBL non-real estate

 

$                   36 

 

$                 125 

 

$                      - 

 

$              3,693 

 

$              3,854 

 

$            80,725 

 

$            84,579 

SBL commercial mortgage

 

 -

 

1,983 

 

 -

 

1,047 

 

3,030 

 

215,080 

 

218,110 

SBL construction

 

 -

 

 -

 

 -

 

711 

 

711 

 

44,599 

 

45,310 

Direct lease financing

 

2,008 

 

2,692 

 

3,264 

 

 -

 

7,964 

 

426,496 

 

434,460 

SBLOC / IBLOC

 

290 

 

75 

 

 -

 

 -

 

365 

 

1,024,055 

 

1,024,420 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

3,055 

 

3,055 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,137 

 

1,137 

Consumer - home equity

 

 -

 

 -

 

 -

 

345 

 

345 

 

3,072 

 

3,417 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,757 

 

9,757 



 

$              2,334 

 

$              4,875 

 

$              3,264 

 

$              5,796 

 

$            16,269 

 

$       1,807,976 

 

$       1,824,245 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

30-59 Days

 

60-89 Days

 

90+ Days

 

 

 

Total

 

 

 

Total



 

past due

 

past due

 

still accruing

 

Non-accrual

 

past due

 

Current

 

loans

SBL non-real estate

 

$                 346 

 

$                 125 

 

$                      - 

 

$              2,590 

 

$              3,061 

 

$            73,279 

 

$            76,340 

SBL commercial mortgage

 

 -

 

 -

 

 -

 

458 

 

458 

 

164,948 

 

165,406 

SBL construction

 

 -

 

694 

 

 -

 

 -

 

694 

 

20,942 

 

21,636 

Direct lease financing

 

2,594 

 

1,572 

 

954 

 

 -

 

5,120 

 

389,650 

 

394,770 

SBLOC

 

487 

 

 -

 

 -

 

 -

 

487 

 

784,816 

 

785,303 

Other specialty lending

 

108 

 

 -

 

 -

 

 -

 

108 

 

31,728 

 

31,836 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,147 

 

9,147 

Consumer - home equity

 

 -

 

 -

 

 -

 

1,468 

 

1,468 

 

5,687 

 

7,155 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,383 

 

10,383 



 

$              3,535 

 

$              2,391 

 

$                 954 

 

$              4,516 

 

$            11,396 

 

$       1,490,580 

 

$       1,501,976 





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.



68


 

The following table presents an allocation of the allowance for loan and lease losses among the types of loans or leases in our portfolio at December 31, 2019, 2018, 2017, 2016 and 2015 (in thousands): 







 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019

 

December 31, 2018

 

December 31, 2017



 

 

 

 

 

 

 

 



 

 

 

% Loan

 

 

 

% Loan

 

 

 

% Loan



 

 

 

type to

 

 

 

type to

 

 

 

type to



 

Allowance

 

total loans

 

Allowance

 

total loans

 

Allowance

 

total loans

SBL non-real estate

 

$                4,985 

 

4.66% 

 

$                4,636 

 

5.11% 

 

$                3,145 

 

5.15% 

SBL commercial mortgage

 

1,472 

 

12.02% 

 

941 

 

11.07% 

 

1,120 

 

10.27% 

SBL construction

 

432 

 

2.50% 

 

250 

 

1.45% 

 

136 

 

1.21% 

Direct lease financing

 

2,426 

 

23.94% 

 

2,025 

 

26.60% 

 

1,495 

 

27.33% 

SBLOC / IBLOC

 

553 

 

56.46% 

 

393 

 

52.55% 

 

365 

 

52.80% 

Other specialty lending

 

12 

 

0.17% 

 

60 

 

2.13% 

 

57 

 

2.22% 

Consumer loans

 

40 

 

0.25% 

 

108 

 

1.09% 

 

581 

 

1.02% 

Unallocated

 

318 

 

 -

 

240 

 

 -

 

197 

 

 -



 

$              10,238 

 

100.00% 

 

$                8,653 

 

100.00% 

 

$                7,096 

 

100.00% 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2016

 

December 31, 2015

 

 



 

 

 

 

 

 

 

 



 

 

 

% Loan

 

 

 

% Loan

 

 

 

 



 

 

 

type to

 

 

 

type to

 

 

 

 



 

Allowance

 

total loans

 

Allowance

 

total loans

 

 

 

 

SBL non-real estate

 

$                1,976 

 

6.14% 

 

$                   844 

 

6.44% 

 

 

 

 

SBL commercial mortgage

 

737 

 

10.38% 

 

408 

 

10.67% 

 

 

 

 

SBL construction

 

76 

 

0.73% 

 

48 

 

0.65% 

 

 

 

 

Direct lease financing

 

1,994 

 

28.53% 

 

1,022 

 

21.66% 

 

 

 

 

SBLOC

 

315 

 

51.88% 

 

762 

 

53.88% 

 

 

 

 

Other specialty lending

 

32 

 

0.91% 

 

199 

 

4.52% 

 

 

 

 

Consumer loans

 

975 

 

1.43% 

 

936 

 

2.18% 

 

 

 

 

Unallocated

 

227 

 

 -

 

181 

 

 -

 

 

 

 



 

$                6,332 

 

100.00% 

 

$                4,400 

 

100.00% 

 

 

 

 



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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019



 

SBL non-real estate

 

SBL commercial mortgage

 

SBL construction

 

Direct lease financing

 

SBLOC / IBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

Beginning balance 1/1/2019

 

$           4,636 

 

$                941 

 

$                250 

 

$             2,025 

 

$                  393 

 

$                 60 

 

$               108 

 

$                  240 

 

$               8,653 

Charge-offs

 

(1,362)

 

 -

 

 -

 

(528)

 

 -

 

 -

 

(1,103)

 

 -

 

(2,993)

Recoveries

 

125 

 

 -

 

 -

 

51 

 

 

 

 

 

 

 -

 

178 

Provision (credit)

 

1,586 

 

531 

 

182 

 

878 

 

160 

 

(48)

 

1,033 

 

78 

 

4,400 

Ending balance

 

$           4,985 

 

$             1,472 

 

$                432 

 

$             2,426 

 

$                  553 

 

$                 12 

 

$                 40 

 

$                  318 

 

$             10,238 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$           2,961 

 

$                136 

 

$                  36 

 

$                     - 

 

$                      - 

 

$                    - 

 

$                   9 

 

$                      - 

 

$               3,142 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$           2,024 

 

$             1,336 

 

$                396 

 

$             2,426 

 

$                  553 

 

$                 12 

 

$                 31 

 

$                  318 

 

$               7,096 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$         84,579 

 

$         218,110 

 

$           45,310 

 

$         434,460 

 

$        1,024,420 

 

$            3,055 

 

$            4,554 

 

$             9,757 

 

$        1,824,245 

69


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$           4,139 

 

$             1,047 

 

$                711 

 

$                286 

 

$                      - 

 

$                    - 

 

$               610 

 

$                      - 

 

$               6,793 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$         80,440 

 

$         217,063 

 

$           44,599 

 

$         434,174 

 

$        1,024,420 

 

$            3,055 

 

$            3,944 

 

$             9,757 

 

$        1,817,452 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

SBL non-real estate

 

SBL commercial mortgage

 

SBL construction

 

Direct lease financing

 

SBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

Beginning balance 1/1/2018

 

$           3,145 

 

$             1,120 

 

$                136 

 

$             1,495 

 

$                  365 

 

$                 57 

 

$               581 

 

$                  197 

 

$               7,096 

Charge-offs

 

(1,348)

 

(157)

 

 -

 

(637)

 

 -

 

 -

 

(21)

 

 -

 

(2,163)

Recoveries

 

57 

 

13 

 

 -

 

64 

 

 

 

 

 

 

 -

 

135 

Provision (credit)

 

2,782 

 

(35)

 

114 

 

1,103 

 

28 

 

 

(453)

 

43 

 

3,585 

Ending balance

 

$           4,636 

 

$                941 

 

$                250 

 

$             2,025 

 

$                  393 

 

$                 60 

 

$               108 

 

$                  240 

 

$               8,653 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$           2,806 

 

$                  71 

 

$                    - 

 

$                145 

 

$                      - 

 

$                    - 

 

$                 17 

 

$                      - 

 

$               3,039 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$           1,830 

 

$                870 

 

$                250 

 

$             1,880 

 

$                  393 

 

$                 60 

 

$                 91 

 

$                  240 

 

$               5,614 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$         76,340 

 

$         165,406 

 

$           21,636 

 

$         394,770 

 

$           785,303 

 

$          31,836 

 

$          16,302 

 

$             10,383 

 

$        1,501,976 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$           3,716 

 

$                458 

 

$                    - 

 

$                871 

 

$                      - 

 

$                    - 

 

$            1,741 

 

$                      - 

 

$               6,786 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$         72,624 

 

$         164,948 

 

$           21,636 

 

$         393,899 

 

$           785,303 

 

$          31,836 

 

$          14,561 

 

$             10,383 

 

$        1,495,190 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2017



 

SBL non-real estate

 

SBL commercial mortgage

 

SBL construction

 

Direct lease financing

 

SBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

Beginning balance 1/1/2017

 

$           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 

70


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$         70,379 

 

$         142,086 

 

$           16,740 

 

$         375,890 

 

$           730,462 

 

$          30,720 

 

$          14,133 

 

$             10,048 

 

$        1,390,458 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

$         375,661 

 

$           730,462 

 

$          30,720 

 

$          12,438 

 

$             10,048 

 

$        1,384,983 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2016



 

SBL non-real estate

 

SBL commercial mortgage

 

SBL construction

 

Direct lease financing

 

SBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

Beginning balance 1/1/2016

 

$              844 

 

$                408 

 

$                  48 

 

$             1,022 

 

$                  762 

 

$               199 

 

$               936 

 

$                  181 

 

$               4,400 

Charge-offs

 

(128)

 

 -

 

 -

 

(119)

 

 -

 

 -

 

(1,211)

 

 -

 

(1,458)

Recoveries

 

 

 -

 

 -

 

17 

 

 -

 

 -

 

12 

 

 -

 

30 

Provision (credit)

 

1,259 

 

329 

 

28 

 

1,074 

 

(447)

 

(167)

 

1,238 

 

46 

 

3,360 

Ending balance

 

$           1,976 

 

$                737 

 

$                  76 

 

$             1,994 

 

$                  315 

 

$                 32 

 

$               975 

 

$                  227 

 

$               6,332 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$              938 

 

$                     - 

 

$                    - 

 

$                216 

 

$                      - 

 

$                    - 

 

$                    - 

 

$                      - 

 

$               1,154 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$           1,038 

 

$                737 

 

$                  76 

 

$             1,778 

 

$                  315 

 

$                 32 

 

$               975 

 

$                  227 

 

$               5,178 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$         73,488 

 

$         126,159 

 

$             8,826 

 

$         343,941 

 

$           630,400 

 

$          11,073 

 

$          17,374 

 

$               9,468 

 

$        1,220,729 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$           2,374 

 

$                     - 

 

$                    - 

 

$                734 

 

$                      - 

 

$                    - 

 

$            1,730 

 

$                      - 

 

$               4,838 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$         71,114 

 

$         126,159 

 

$             8,826 

 

$         343,207 

 

$           630,400 

 

$          11,073 

 

$          15,644 

 

$               9,468 

 

$        1,215,891 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2015



 

SBL non-real estate

 

SBL commercial mortgage

 

SBL construction

 

Direct lease financing

 

SBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

Beginning balance 1/1/2015

 

$              385 

 

$                461 

 

$                114 

 

$                836 

 

$                  562 

 

$                 66 

 

$            1,181 

 

$                    33 

 

$               3,638 

Charge-offs

 

(111)

 

 -

 

 -

 

(30)

 

 -

 

 -

 

(1,220)

 

 -

 

(1,361)

Recoveries

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

23 

 

 -

 

23 

Provision (credit)

 

570 

 

(53)

 

(66)

 

216 

 

200 

 

133 

 

952 

 

148 

 

2,100 

Ending balance

 

$              844 

 

$                408 

 

$                  48 

 

$             1,022 

 

$                  762 

 

$               199 

 

$               936 

 

$                  181 

 

$               4,400 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$              123 

 

$                     - 

 

$                    - 

 

$                     - 

 

$                      - 

 

$                    - 

 

$                 26 

 

$                      - 

 

$                  149 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71


 

Ending balance: Collectively evaluated for impairment

 

$              721 

 

$                408 

 

$                  48 

 

$             1,022 

 

$                  762 

 

$               199 

 

$               910 

 

$                  181 

 

$               4,251 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$         67,398 

 

$         114,029 

 

$             6,977 

 

$         228,280 

 

$           575,948 

 

$          48,315 

 

$          23,180 

 

$             10,716 

 

$        1,074,843 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$              904 

 

$                     - 

 

$                    - 

 

$                     - 

 

$                      - 

 

$                    - 

 

$            1,524 

 

$                      - 

 

$               2,428 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$         66,494 

 

$         114,029 

 

$             6,977 

 

$         228,280 

 

$           575,948 

 

$          48,315 

 

$          21,656 

 

$             10,716 

 

$        1,072,415 



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



 

 

 



As of or



for the years ended



December 31,



2019

 

2018



 

 

 

Ratio of the allowance for loan losses to total loans

0.56% 

 

0.58% 

Ratio of the allowance for loan losses to non-performing loans (1)

113.00% 

 

158.19% 

Ratio of non-performing assets to total assets (1)

0.16% 

 

0.12% 

Ratio of net charge-offs to average loans

0.12% 

 

0.10% 



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

The ratio of the allowance for loan and lease losses to total loans decreased to 0.56% at December 31, 2019 compared to 0.58% at December 31, 2018.  The lower ratio in 2019 reflected an increase in the allowance which was relatively less than the increase in loan balances.  The largest component of the increase in the allowance to $10.2 million at year end 2019 from from $8.7 million at year end 2018 was in the non guaranteed portion of SBA loans which comprise the majority of small business (SBL) loans. The allowance on SBL loan increased $1.1 million between those dates. The increase reflected the impact of  historical charge-off ratios and qualitative factors which may increase such ratios, applied against the related loan category balance at period end.  In addition, the total allowance includes allowances on specific loans (see “-Allowance for Loan and Lease Losses”).  For the year 2019, the largest segment of the loan portfolio continued to be SBLOC, which has historically experienced low levels of losses as a result of the marketable securities collateralizing these loans and related loan to value requirements (see Item 1. “Business-Lending-SBL Loans”).  The ratio of the allowance for loan losses to non-performing loans decreased to 113.0% at December 31, 2019 from 158.19% over the prior year end, reflecting an increase in non-performing loans, especially SBL non-real estate and leasing, which exceeded the relative increase in the allowance for loan losses.  The ratio of non-performing assets to total assets increased to 0.16% from 0.12% primarily as a result of the increase in non-performing loans.  The ratio of net charge-offs to average loans increased to 0.12% for 2019 compared to 0.10% for the prior year, reflecting loan growth and an increase in net charge-offs in 2019 to $2.8 million from $2.0 million.

Net Charge-OffsNet charge-offs were $2.8 million in 2019, $2.0 million in 2018 and $2.2 million in 2017.  The increase in net charge-offs in 2019 compared to 2018 was primarily due to a $1.1 million consumer loan charge-off in 2019.  That charge off resulted from a home equity line of credit.  In September 2016, this product became inactive and is no longer being marketed to customers, and the current unimpaired portfolio balance is $2.8 million, consisting of 32 accounts averaging $88,000.

Non-Performing Loans, Loans 90 Days Delinquent and Still Accruing, and Troubled Debt RestructuringsLoans are considered to be non-performing if they are on a non-accrual basis or they are past due 90 days or more and still accruing interest.  A loan which is past due 90 days or more and still accruing interest remains on accrual status only when it is both adequately secured as to principal and interest, and is in the process of collection.  Troubled debt restructurings are loans with terms that have been renegotiated to provide a reduction or deferral of interest or principal because of a weakening in the financial positions of the

72


 

borrowers.  The following tables summarize our non-performing loans, other real estate owned (OREO) and our loans past due 90 days or more still accruing interest







 

 

 

 

 

 

 

 

 

 



 

December 31,



 

2019

 

2018

 

2017

 

2016

 

2015



 

(in thousands)

Non-accrual loans

 

 

 

 

 

 

 

 

 

 

SBL non-real estate

 

$              3,693 

 

$              2,590 

 

$              1,889 

 

$              1,530 

 

$                 733 

SBL commercial mortgage

 

1,047 

 

458 

 

693 

 

 -

 

 -

SBL construction

 

711 

 

 -

 

 -

 

 -

 

 -

Consumer

 

345 

 

1,468 

 

1,414 

 

1,442 

 

1,194 

Total non-accrual loans

 

5,796 

 

4,516 

 

3,996 

 

2,972 

 

1,927 



 

 

 

 

 

 

 

 

 

 

Loans past due 90 days or more and still accruing

 

3,264 

 

954 

 

227 

 

661 

 

403 

Total non-performing loans

 

9,060 

 

5,470 

 

4,223 

 

3,633 

 

2,330 

Other real estate owned

 

 -

 

 -

 

450 

 

104 

 

 -

Total non-performing assets

 

$              9,060 

 

$              5,470 

 

$              4,673 

 

$              3,737 

 

$              2,330 



In February 2020, a single borrower under financial stress, became delinquent on vehicle loans, the total balance of which as of March 6, 2020 was $15.7 million. The Company is in discussions with the borrower for accelerated repayment.   While the Company’s estimates of the disposition value of the vehicles exceed the amounts due, there can be no assurance that all amounts will be fully collected or recovered from vehicle sales. Further, should the borrower declare bankruptcy, related court actions may impact the timing or amount of recovery.



The loans that were modified for the years ended December 31, 2019 and 2018 and considered troubled debt restructurings are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019

 

December 31, 2018



 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBL non-real estate

 

 

$              1,309 

 

$              1,309 

 

 

$              1,564 

 

$              1,564 

Direct lease financing

 

 

286 

 

286 

 

 

870 

 

870 

Consumer

 

 

489 

 

489 

 

 

513 

 

513 

Total

 

11 

 

$              2,084 

 

$              2,084 

 

10 

 

$              2,947 

 

$              2,947 





The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2019 and 2018 (in thousands):









 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019

 

December 31, 2018



 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBL non-real estate

 

$                    - 

 

$                   51 

 

$              1,258 

 

$                    - 

 

$                   85 

 

$              1,479 

Direct lease financing

 

 -

 

286 

 

 -

 

 -

 

434 

 

436 

Consumer

 

 -

 

 -

 

489 

 

 -

 

 -

 

513 

Total

 

$                    - 

 

$                 337 

 

$              1,747 

 

$                    - 

 

$                 519 

 

$              2,428 



We had no commitments to extend credit related to one loan classified as a troubled debt restructuring as of December 31, 2019 and a commitment to extend $27,000 to one loan classified as a troubled debt restructuring as of December 31, 2018.



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The following table summarizes as of December 31, 2019 loans that were restructured within the last 12 months that have subsequently defaulted (in thousands).









 

 

 

 



 

December 31, 2019



 

Number

 

Pre-modification recorded investment

SBL non-real estate

 

 

$                 660 

Total

 

 

$                 660 



Please see “Investment in Unconsolidated Entity” below for discussion of a large restructured loan which is accounted for at fair value.

74


 

The following table provides information about impaired loans at December 31, 2019 and 2018 (in thousands):





 

 

 

 

 

 

 

 

 



December 31, 2019



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBL non-real estate

$                       335 

 

$                    2,717 

 

$                        - 

 

$                       277 

 

$                           5 

SBL commercial mortgage

76 

 

76 

 

 -

 

15 

 

 -

SBL construction

 -

 

 -

 

 -

 

284 

 

 -

Direct lease financing

286 

 

286 

 

 -

 

362 

 

11 

Consumer - home equity

489 

 

489 

 

 -

 

1,161 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBL non-real estate

3,804 

 

4,371 

 

(2,961)

 

3,925 

 

30 

SBL commercial mortgage

971 

 

971 

 

(136)

 

561 

 

 -

SBL construction

711 

 

711 

 

(36)

 

284 

 

 -

Direct lease financing

 -

 

 -

 

 -

 

244 

 

 -

Consumer - home equity

121 

 

121 

 

(9)

 

344 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBL non-real estate

4,139 

 

7,088 

 

(2,961)

 

4,202 

 

35 

SBL commercial mortgage

1,047 

 

1,047 

 

(136)

 

576 

 

 -

SBL construction

711 

 

711 

 

(36)

 

568 

 

 -

Direct lease financing

286 

 

286 

 

 -

 

606 

 

11 

Consumer - home equity

610 

 

610 

 

(9)

 

1,505 

 



$                    6,793 

 

$                    9,742 

 

$              (3,142)

 

$                    7,457 

 

$                         55 



 

 

 

 

 

 

 

 

 



December 31, 2018



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBL non-real estate

$                       175 

 

$                    1,469 

 

$                        - 

 

$                       334 

 

$                            - 

SBL commercial mortgage

 -

 

 -

 

 -

 

 -

 

 -

Direct lease financing

437 

 

548 

 

 -

 

425 

 

28 

Consumer - home equity

1,612 

 

1,612 

 

 -

 

1,648 

 

10 

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBL non-real estate

3,541 

 

3,541 

 

(2,806)

 

2,816 

 

70 

SBL commercial mortgage

458 

 

458 

 

(71)

 

505 

 

 -

Direct lease financing

434 

 

434 

 

(145)

 

617 

 

66 

Consumer - home equity

129 

 

129 

 

(17)

 

26 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBL non-real estate

3,716 

 

5,010 

 

(2,806)

 

3,150 

 

70 

SBL commercial mortgage

458 

 

458 

 

(71)

 

505 

 

 -

Direct lease financing

871 

 

982 

 

(145)

 

1,042 

 

94 

Consumer - home equity

1,741 

 

1,741 

 

(17)

 

1,674 

 

10 



$                    6,786 

 

$                    8,191 

 

$              (3,039)

 

$                    6,371 

 

$                       174 



We had $5.8 million of non-accrual loans at December 31, 2019, compared to $4.5 million of non-accrual loans at December 31, 2018.  The $1.3 million increase reflected $6.2 million of loans placed on non-accrual status, partially offset by $2.5 million of loan charge-offs and $2.4 million of loan payments.    Loans past due 90 days or more still accruing interest amounted to $3.3 million 

75


 

and $954,000 at December 31, 2019 and December 31, 2018, respectively.  The $2.3 million increase reflected $4.5 million of additions, partially offset by $1.0 million of loan payments, $82,000 of charge-offs, and $1.1 million of transfers to repossessed assets.  We had no OREO at December 31, 2019 and December 31, 2018. 



We evaluate loans under an internal loan risk rating system as a means of identifying problem loans.  The following table provides information by credit risk rating indicator for each segment of the loan portfolio excluding loans held-for-sale at the dates indicated (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019



 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBL non-real estate

 

$             76,108 

 

$              3,045 

 

$              4,430 

 

$                 - 

 

$               - 

 

$                      - 

 

$                     996 

 

$                84,579 

SBL commercial mortgage

 

208,809 

 

2,249 

 

5,577 

 

 -

 

 -

 

 -

 

1,475 

 

218,110 

SBL construction

 

44,599 

 

 -

 

711 

 

 -

 

 -

 

 -

 

 -

 

45,310 

Direct lease financing

 

420,289 

 

 -

 

8,792 

 

 -

 

 -

 

 -

 

5,379 

 

434,460 

SBLOC / IBLOC

 

942,858 

 

 -

 

 -

 

 -

 

 -

 

 -

 

81,562 

 

1,024,420 

Other specialty lending

 

3,055 

 

 -

 

 

 

 -

 

 -

 

 -

 

 -

 

3,055 

Consumer

 

2,545 

 

 -

 

345 

 

 -

 

 -

 

 -

 

1,664 

 

4,554 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,757 

 

9,757 



 

$        1,698,263 

 

$              5,294 

 

$            19,855 

 

$                 - 

 

$               - 

 

$                      - 

 

$              100,833 

 

$           1,824,245 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBL non-real estate

 

$             67,809 

 

$              1,641 

 

$              4,517 

 

$                 - 

 

$               - 

 

$                  347 

 

$                  2,026 

 

$                76,340 

SBL commercial mortgage

 

158,667 

 

273 

 

458 

 

 -

 

 -

 

5,498 

 

510 

 

165,406 

SBL construction

 

19,912 

 

 -

 

694 

 

 -

 

 -

 

843 

 

187 

 

21,636 

Direct lease financing

 

382,860 

 

2,157 

 

1,456 

 

 -

 

 -

 

3,623 

 

4,674 

 

394,770 

SBLOC

 

775,153 

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,150 

 

785,303 

Other specialty lending

 

31,749 

 

 -

 

 -

 

 -

 

 -

 

 -

 

87 

 

31,836 

Consumer

 

5,849 

 

 -

 

1,742 

 

 -

 

 -

 

 -

 

8,711 

 

16,302 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,383 

 

10,383 



 

$        1,441,999 

 

$              4,071 

 

$              8,867 

 

$                 - 

 

$               - 

 

$             10,311 

 

$                36,728 

 

$           1,501,976 



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

 

Investment in Unconsolidated EntityOn December 30, 2014, the Bank sold 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 or Walnut Street.  The price paid to the Bank for the loan portfolio with a face value of approximately $267.6 million was approximately $209.6 million, of which approximately $193.6 million was in the form of two notes issued by Walnut Street to the Bank; a senior note in the principal amount of approximately $178.2 million bearing interest at 1.5% per year and maturing in December 2024 and a subordinate note in the principal amount of approximately $15.4 million, bearing interest at 10.0% per year and maturing in December 2024.  At December 31, 2019, a balance of $39.2 million remained on the consolidated balance sheet, representing the remaining balances of these notes.   Interest is not being accrued on this investment and changes in its value, determined by discounting estimated future cash flows, are recorded in the income statement under “change in value of investment in unconsolidated entity”.  In 2019, there was no net decrease in value, compared to a $3.7 million decrease in value in 2018.  A $30 million credit, collateralized by a commercial retail property with multiple tenants, is comprised of a $17.0 million loan which had been sold to Walnut Street, and $13.0 million which is

76


 

included in commercial loans held-for-sale. In 2019, this loan was marked down by $1.6 million after having previously been marked down by $1.9 million.  Both markdowns resulted primarily from updated appraisals. The charges to Walnut Street  were based on the ratio of the $17.0 million owned by that entity to the $30 million loan balance, with the remainder of the charges reflected in net realized and unrealized gains on commercial loans originated for sale.  The underlying collateral which was written down consisted of a multi-tenant shopping center.  On March 13, 2019, we renewed this loan for four years and reduced the interest rate to the following: LIBOR plus 2% in year one, increasing .5% each year until the fourth year when  the rate will be LIBOR plus 3.5% which will also be the rate for  a one year extension, if exercised.   The loan is performing in accordance with those restructured terms.  The retail space is partially leased and appears to be on a path toward stabilization, based upon negotiations with prospective tenants. We previously noted that collateral securing two loans recorded at $12.1 million was in the process of disposition.  The collateral has subsequently been disposed of at the  approximate carrying value of the loans, which was reflected in the reduction in the balance of investment in unconsolidated entity.  



Assets Held-for-Sale from Discontinued Operations.  Assets held-for-sale as a result of discontinued operations, primarily commercial, commercial mortgage and construction loans, amounted to $140.7 million at December 31, 2019 and were comprised of $115.9 million of net loans and $24.8 million of other real estate owned.  The balance of other real estate owned includes a Florida mall, which has been written down to $15.0 million.  We expect to continue our efforts to dispose of the mall, which was appraised in September 2018 for $16.9 million.  We previously noted that collateral comprised of multiple commercial properties  recorded at $12.8 million as being in the process of disposition. The collateral has subsequently been partially disposed of and the remaining collateral was marked down on the basis of an updated appraisal.  As a result, a related net loss of $1.6 million was recorded in income from discontinued operations.  At December 31, 2019, $4.3 million of commercial real estate collateral remained on the books, after being marked down to its fourth quarter 2019 appraisal.



At December 31, 2018, discontinued assets of $197.8 million were comprised of $170.6 million of net loans and $27.2 million of other real estate owned. 



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 prepaid and debit card and demand and money market accounts.  The majority of deposit balances are comprised of accounts obtained with the assistance of third parties.  At December 31, 2019, we had total deposits of $5.05 billion compared to $3.94 billion at December 31, 2018, which reflected an increase of $1.12 billion, or 28.4%, between 2019 and 2018.  The increase reflected $475.0 million of short-term time deposits utilized to fund increased originations of commercial real estate held for sale.  The increase in deposits also reflects growth in prepaid and debit card accounts and daily balance variances.  A diversified group of prepaid and debit card accounts, which have an established history of stability and lower cost than certain other types of funding, comprise the majority of our deposits.  Prepaid accounts include general purpose reloadable, debit, medical spending, payroll, gift, commercial, incentive plan and other accounts.  The following table presents the average balance and rates paid on deposits for the periods indicated (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019

 

December 31, 2018

 

December 31, 2017



 

Average

 

Average

 

Average

 

Average

 

Average

 

Average



 

balance

 

rate

 

balance

 

rate

 

balance

 

rate

Demand and interest checking *

 

$       3,817,176 

 

0.80% 

 

$       3,499,288 

 

0.66% 

 

$       3,371,969 

 

0.36% 

Savings and money market

 

37,671 

 

0.48% 

 

362,267 

 

0.79% 

 

439,625 

 

0.51% 

Time

 

170,438 

 

2.09% 

 

 -

 

 -

 

 -

 

 -

Total deposits

 

$       4,025,285 

 

0.85% 

 

$       3,861,555 

 

0.67% 

 

$       3,811,594 

 

0.38% 



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





Short-Term Borrowings.  We had no outstanding advances from the FHLB at December 31, 2019 on our line of credit with them. The Bank also has a line of credit with the Federal Reserve, which we discuss in “Liquidity and Capital Resources”.  We had no outstanding amounts borrowed on the Bank’s lines of credit at December 31, 2019. We do not have any policy prohibiting us from incurring debt.  Tables showing information for securities sold under repurchase agreements and short-term borrowings are as follows.



77


 



 

 

 

 

 

 



 

As of or for the year ended December 31,



 

2019

 

2018

 

2017



 

(dollars in thousands)

Securities sold under repurchase agreements

 

 

 

 

 

 

Balance at year-end

 

$                    82

 

$                   93

 

$                  217

Average during the year

 

90 

 

173 

 

240 

Maximum month-end balance

 

93 

 

223 

 

274 

Weighted average rate during the year

 

0.00% 

 

0.00% 

 

0.00% 

Rate at December 31

 

0.15% 

 

0.15% 

 

0.23% 







 

 

 

 

 

 



 

As of or for the year ended December 31,



 

2019

 

2018

 

2017



 

(dollars in thousands)



 

 

 

 

 

 

Short-term borrowings

 

 

 

 

 

 

Balance at year-end

 

$                      -

 

$                      -

 

$                      -

Average during the year

 

129,031 

 

20,346 

 

23,281 

Maximum month-end balance

 

300,000 

 

100,000 

 

50,000 

Weighted average rate during the year

 

2.43% 

 

2.22% 

 

1.39% 

Rate at December 31

 

1.50% 

 

2.35% 

 

1.34% 



As of December 31, 2019, we had two established statutory business trusts: The Bancorp Capital Trust II and The Bancorp Capital Trust III, which we refer to as the Trusts.  In each case, we own all the common securities of the Trust.  These trusts issued preferred capital securities to investors and invested the proceeds in us through the purchase of junior subordinated debentures issued by us.  These debentures are the sole assets of the trusts.  The $10.3 million of debentures issued to The Bancorp Capital Trust II on November 28, 2007, mature on March 15, 2038 and bear interest equal to 3-month LIBOR plus 3.25%.  The $3.1 million of debentures issued to The Bancorp Capital Trust III on November 28, 2007 mature on March 15, 2038, and bear interest at a floating annual rate equal to 3-month LIBOR plus 3.25%.

Long-term Borrowings.  At December 31, 2019 and 2018, we had long term borrowings of $41.0 million and $41.7 million respectively, which consisted of sold loans which were accounted for as a secured borrowing, because they did not qualify for true sale accounting.  

Shareholders’ Equity.  At December 31, 2019, we had $484.5 million in shareholders’ equity compared to $406.8 million at the prior year end.  The increase primarily reflected 2019 earnings as the Company has not paid cash dividends.  The difference also reflected the increase in market value of securities resulting from the decrease in longer term interest rates. 

Off-balance Sheet Commitments

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

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

Financial instruments whose contract amounts represent potential credit risk for us at December 31, 2019, were our unused commitments to extend credit, which were approximately $2.34 billion, and standby letters of credit, which were approximately $3.5 million, at December 31, 2019.  The vast majority of commitments reflect SBLOC commitments, which are variable rate, and

78


 

connected to lines of credit collateralized by marketable securities. The amount of the line is generally based upon the value of the collateral, and not expected usage. The majority of these available lines are not drawn upon.

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

Contractual Obligations and Other Commitments

The following table sets forth our contractual obligations and other commitments, including off-balance sheet commitments, representing required and potential cash outflows as of December 31, 2019:





 

 

 

 

 

 

 

 

 

 



 

 

 

Less than

 

One to

 

Three to

 

After



 

Total

 

one year

 

three years

 

five years

 

five years



 

(in thousands)

Minimum annual rentals on

 

 

 

 

 

 

 

 

 

 

noncancelable operating leases

 

$              20,542 

 

$               4,314 

 

$                7,475 

 

$                6,531 

 

$                2,222 

Loan commitments

 

2,340,954 

 

173,225 

 

92,747 

 

2,052 

 

2,072,930 

Subordinated debentures

 

13,401 

 

 -

 

 -

 

 -

 

13,401 

Interest expense on subordinated

 

 

 

 

 

 

 

 

 

 

debentures (1)

 

13,661 

 

750 

 

1,501 

 

1,501 

 

9,909 

Standby letters of credit

 

3,512 

 

3,388 

 

124 

 

 -

 

 -

Total

 

$         2,392,070 

 

$           181,677 

 

$            101,847 

 

$              10,084 

 

$         2,098,462 

(1) Presentation assumes a weighted average interest rate of 5.77%

 

 

 

 

 

 

 

 

 

 

Impact of Inflation

The primary impact of inflation on our operations is on our operating costs.  Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.  While we anticipate that inflation will affect our future operating costs, we cannot predict the timing or amounts of any such effects.

79


 

Recently Issued Accounting Standards

Information on recent accounting pronouncements is set forth in Note B, item 23, to the consolidated financial statements included in this report and is incorporated herein by this reference.

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

Information with respect to quantitative and qualitative disclosures about market risk is included under the section entitled “Asset and Liability Management” in Part

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

80


 



Item 8. Financial Statements and Supplementary Data.











REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Shareholders

The Bancorp, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of The Bancorp, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 13, 2020 expressed an unqualified opinion.



Change in accounting principle

As  discussed in Note B to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of ASU 2016-02, Leases (Topic 842). 



Basis for opinion

These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audits provide a reasonable basis for our opinion.





/s/ Grant Thornton LLP

We have served as the Company’s auditor since 2000.

Philadelphia, Pennsylvania

March 13, 2020





81


 

THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS





 

 

 

 



 

December 31,

 

December 31,



 

2019

 

2018

 

 

(in thousands)

ASSETS

 

 

 

 

Cash and cash equivalents

 

 

 

 

Cash and due from banks

 

$                     19,928 

 

$                        2,440 

Interest earning deposits at Federal Reserve Bank

 

924,544 

 

551,862 

Total cash and cash equivalents

 

944,472 

 

554,302 



 

 

 

 

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

 

1,320,692 

 

1,236,324 

Investment securities, held-to-maturity (fair value $83,002 and $83,391, respectively)

 

84,387 

 

84,432 

Commercial loans held-for-sale, at fair value

 

1,180,546 

 

688,471 

Loans, net of deferred loan fees and costs

 

1,824,245 

 

1,501,976 

Allowance for loan and lease losses

 

(10,238)

 

(8,653)

Loans, net

 

1,814,007 

 

1,493,323 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

 

5,342 

 

1,113 

Premises and equipment, net

 

17,538 

 

18,895 

Accrued interest receivable

 

13,619 

 

12,753 

Intangible assets, net

 

2,315 

 

3,846 

Deferred tax asset, net

 

12,538 

 

21,622 

Investment in unconsolidated entity, at fair value

 

39,154 

 

59,273 

Assets held-for-sale from discontinued operations

 

140,657 

 

197,831 

Other assets

 

81,696 

 

65,726 

Total assets

 

$                5,656,963 

 

$                 4,437,911 



 

 

 

 

LIABILITIES

 

 

 

 

Deposits

 

 

 

 

Demand and interest checking

 

$                4,402,740 

 

$                 3,904,638 

Savings and money market

 

174,290 

 

31,076 

Time deposits

 

475,000 

 

 -

Total deposits

 

5,052,030 

 

3,935,714 



 

 

 

 

Securities sold under agreements to repurchase

 

82 

 

93 

Subordinated debentures

 

13,401 

 

13,401 

Long-term borrowings

 

40,991 

 

41,674 

Other liabilities

 

65,962 

 

40,253 

Total liabilities

 

5,172,466 

 

4,031,135 



 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Common stock - authorized, 75,000,000 shares of $1.00 par value; 56,940,521 and 56,446,088

 

 

 

 

shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively

 

56,941 

 

56,446 

Treasury stock, at cost (100,000 shares)

 

(866)

 

(866)

Additional paid-in capital

 

371,633 

 

366,181 

Accumulated earnings (deficit)

 

50,742 

 

(817)

Accumulated other comprehensive income (loss)

 

6,047 

 

(14,168)

Total shareholders' equity

 

484,497 

 

406,776 



 

 

 

 

Total liabilities and shareholders' equity

 

$                5,656,963 

 

$                 4,437,911 



 

 

 

 

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

82


 



THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS







 

 

 

 

 

 



 

For the year ended December 31,



 

2019

 

2018

 

2017



 

(in thousands, except per share data)

Interest income

 

 

 

 

 

 

Loans, including fees

 

$                127,106 

 

$                 95,315 

 

$                 79,081 

Investment securities:

 

 

 

 

 

 

Taxable interest

 

42,286 

 

41,993 

 

36,121 

Tax-exempt interest

 

170 

 

207 

 

306 

Federal funds sold/securities purchased under agreements to resell

 

 -

 

1,708 

 

1,310 

Interest earning deposits

 

10,007 

 

8,737 

 

5,202 



 

179,569 

 

147,960 

 

122,020 

Interest expense

 

 

 

 

 

 

Deposits

 

34,400 

 

25,946 

 

14,418 

Short-term borrowings

 

3,131 

 

451 

 

336 

Subordinated debentures

 

750 

 

714 

 

586 



 

38,281 

 

27,111 

 

15,340 

Net interest income

 

141,288 

 

120,849 

 

106,680 

Provision for loan and lease losses

 

4,400 

 

3,585 

 

2,920 

Net interest income after provision for loan and lease losses

 

136,888 

 

117,264 

 

103,760 



 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

Service fees on deposit accounts

 

75 

 

3,622 

 

6,788 

ACH, card and other payment processing fees

 

9,376 

 

8,653 

 

6,318 

Prepaid, debit card and related fees

 

65,141 

 

54,627 

 

53,367 

Net realized and unrealized gains on commercial loans

 

 

 

 

 

 

  originated for sale

 

24,072 

 

20,498 

 

17,919 

Gain on sale of investment securities

 

 -

 

41 

 

2,231 

Gain on sale of IRA portfolio

 

 -

 

65,000 

 

 -

Gain on sale of health savings portfolio

 

 -

 

 -

 

2,538 

Change in value of investment in unconsolidated entity

 

 -

 

(3,689)

 

(20)

Leasing related income

 

3,243 

 

3,071 

 

2,663 

Affinity fees

 

 -

 

281 

 

1,545 

Loss from sale of European prepaid card operations

 

 -

 

 -

 

(3,437)

Other

 

2,220 

 

1,691 

 

1,636 

Total non-interest income

 

104,127 

 

153,795 

 

91,548 



 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

Salaries and employee benefits

 

94,259 

 

79,816 

 

75,832 

Depreciation and amortization

 

3,696 

 

3,997 

 

4,452 

Rent and related occupancy cost

 

6,628 

 

5,474 

 

5,680 

Data processing expense

 

4,894 

 

6,187 

 

10,159 

One-time fee to exit data processing contract

 

 -

 

 -

 

1,136 

Printing and supplies

 

637 

 

906 

 

1,354 

Audit expense

 

1,785 

 

2,002 

 

1,682 

Legal expense

 

5,319 

 

7,845 

 

8,072 

Amortization of intangible assets

 

1,531 

 

1,531 

 

1,528 

FDIC Insurance

 

7,025 

 

8,819 

 

10,097 

Software

 

12,731 

 

13,304 

 

12,597 

Insurance

 

2,475 

 

2,578 

 

2,333 

Telecom and IT network communications

 

1,493 

 

1,373 

 

1,793 

83


 

Securitization and servicing expense

 

81 

 

117 

 

170 

Consulting

 

3,240 

 

3,239 

 

2,227 

Civil money penalties

 

8,900 

 

(290)

 

2,290 

Prepaid relationship exit expense

 

 -

 

672 

 

 -

Lease termination expense

 

908 

 

395 

 

 -

Other

 

12,919 

 

13,313 

 

13,512 

Total non-interest expense

 

168,521 

 

151,278 

 

154,914 

Income from continuing operations before income taxes

 

72,494 

 

119,781 

 

40,394 

Income tax expense

21,226 

 

32,241 

 

23,056 

Net income from continuing operations

 

$                  51,268 

 

$                 87,540 

 

$                 17,338 

Discontinued operations

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

510 

 

1,491 

 

4,059 

Income tax expense (benefit)

219 

 

354 

 

(276)

Income from discontinued operations, net of tax

 

291 

 

1,137 

 

4,335 

Net income

 

$                  51,559 

 

$                 88,677 

 

$                 21,673 



 

 

 

 

 

 

Net income per share from continuing operations - basic

 

$                      0.90 

 

$                     1.55 

 

$                     0.31 

Net income per share from discontinued operations - basic

 

$                      0.01 

 

$                     0.02 

 

$                     0.08 

Net income per share - basic

 

$                      0.91 

 

$                     1.57 

 

$                     0.39 



 

 

 

 

 

 

Net income per share from continuing operations - diluted

 

$                      0.89 

 

$                     1.53 

 

$                     0.31 

Net income per share from discontinued operations - diluted

 

$                      0.01 

 

$                     0.02 

 

$                     0.08 

Net income per share - diluted

 

$                      0.90 

 

$                     1.55 

 

$                     0.39 



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

84


 













 

 

 

 

 

THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



 

 

 

 

 



For the year ended December 31,



2019

 

2018

 

2017



(in thousands)

Net income

$                  51,559 

 

$                  88,677 

 

$                   21,673 

Other comprehensive income, net of reclassifications into net income:

 

 

 

 

 



 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 Securities available-for-sale:

 

 

 

 

 

Change in net unrealized gains (losses) during the year

27,662 

 

(13,223)

 

2,617 

Reclassification adjustments for gains included in income

 -

 

(41)

 

(2,231)

Reclassification adjustments for foreign currency translation gains

 -

 

 -

 

216 

Amortization of losses previously held as available-for-sale

30 

 

99 

 

34 

Other comprehensive income (loss)

27,692 

 

(13,165)

 

636 



 

 

 

 

 

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

 

 

 

 

 

 Securities available-for-sale:

 

 

 

 

 

Change in net unrealized gains (losses) during the year

7,469 

 

(3,570)

 

1,046 

Reclassification adjustments for gains included in income

 -

 

(11)

 

(892)

Amortization of losses previously held as available-for-sale

 

27 

 

14 

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

7,477 

 

(3,554)

 

168 



 

 

 

 

 

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

20,215 

 

(9,611)

 

468 

Comprehensive income

$                  71,774 

 

$                  79,066 

 

$                   22,141 









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

85


 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

THE BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the years ended December 31, 2019, 2018 and 2017

(in thousands, except share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 



 

Common

 

 

 

 

 

Additional

 

earnings/

 

other

 

 



 

stock

 

Common

 

Treasury

 

paid-in

 

(accumulated

 

comprehensive

 

 



 

shares

 

stock

 

stock

 

capital

 

deficit)

 

income/(loss)

 

Total

Balance at December 31, 2016

 

55,419,204 

 

$             55,419 

 

$                (866)

 

$              360,564 

 

$              (111,941)

 

$                  (4,213)

 

$              298,963 

Net income

 

 

 

 

 

 

 

 

 

21,673 

 

 

 

21,673 

Common stock issuance costs

 

 -

 

 -

 

 -

 

(200)

 

 -

 

 

 

(200)

Common stock issued from restricted units,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

441,946 

 

442 

 

 -

 

(413)

 

(29)

 

 -

 

 -

Reclassification due to the adoption of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASU No. 2018-02

 

 -

 

 -

 

 -

 

 -

 

812 

 

(812)

 

 

Stock-based compensation

 

 -

 

 -

 

 -

 

3,245 

 

 -

 

 -

 

3,245 

Other comprehensive income net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

468 

 

468 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

55,861,150 

 

$             55,861 

 

$                (866)

 

$              363,196 

 

$                (89,485)

 

$                  (4,557)

 

$              324,149 

Net income

 

 

 

 

 

 

 

 

 

88,677 

 

 

 

88,677 

Common stock issued from restricted units,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

13,390 

 

13 

 

 -

 

107 

 

(9)

 

 -

 

111 

Common stock issued from restricted units,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

571,548 

 

572 

 

 -

 

(572)

 

 -

 

 -

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

3,450 

 

 -

 

 -

 

3,450 

Other comprehensive loss net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

(9,611)

 

(9,611)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

56,446,088 

 

$             56,446 

 

$                (866)

 

$              366,181 

 

$                     (817)

 

$                (14,168)

 

$              406,776 

Net income

 

 

 

 

 

 

 

 

 

51,559 

 

 

 

51,559 

Common stock issued from option exercises,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

30,000 

 

30 

 

 -

 

228 

 

 -

 

 -

 

258 

Common stock issued from restricted units,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax benefits

 

464,433 

 

465 

 

 -

 

(465)

 

 -

 

 -

 

 -

Stock-based compensation

 

 -

 

 -

 

 -

 

5,689 

 

 -

 

 -

 

5,689 

Other comprehensive income net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reclassification adjustments and tax

 

 -

 

 -

 

 -

 

 -

 

 -

 

20,215 

 

20,215 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

56,940,521 

 

$             56,941 

 

$                (866)

 

$              371,633 

 

$                  50,742 

 

$                    6,047 

 

$              484,497 





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

86


 

THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)







 

 

 

 

 

 



 

 

 

 



 

Year ended December 31,



 

2019

 

2018

 

2017



 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

Net income from continuing operations

 

$                 51,268 

 

$                 87,540 

 

$                 17,338 

Net income from discontinued operations, net of tax

 

291 

 

1,137 

 

4,335 

Adjustments to reconcile net income to net cash provided by (used in) operating activities

 

 

 

 

 

 

Depreciation and amortization

 

5,227 

 

5,528 

 

5,980 

Provision for loan and lease losses

 

4,400 

 

3,585 

 

2,920 

Net amortization of investment securities discounts/premiums

 

20,337 

 

15,636 

 

10,828 

Stock-based compensation expense

 

5,689 

 

3,450 

 

3,245 

Loans originated for sale

 

(1,795,376)

 

(866,303)

 

(521,913)

Sale of commercial loans originated for resale

 

1,235,413 

 

638,274 

 

458,942 

Gain on sales of commercial loans originated for resale

 

(25,023)

 

(20,830)

 

(18,072)

Deferred income tax expense

 

1,607 

 

15,824 

 

20,799 

Gain on sale of IRA portfolio

 

 -

 

(65,000)

 

 -

Loss (gain) from discontinued operations

 

2,014 

 

3,993 

 

(3,293)

Loss on sale of fixed assets

 

 -

 

15 

 

122 

Loss on sale of other real estate owned

 

 -

 

 -

 

19 

Fair value adjustment on investment in unconsolidated entity

 

 -

 

3,689 

 

(20)

Writedown of other real estate owned

 

 -

 

45 

 

 -

Change in fair value of loans held-for-sale

 

(963)

 

979 

 

1,964 

Change in fair value of derivatives

 

1,914 

 

(647)

 

(1,811)

Gain on sales of investment securities

 

 -

 

(41)

 

(2,231)

Increase in accrued interest receivable

 

(866)

 

(1,853)

 

(311)

(Increase) decrease in other assets

 

(10,422)

 

(8,184)

 

5,678 

Change in fair value of discontinued loans held-for-sale

 

 -

 

352 

 

2,736 

Change in fair value of discontinued assets held-for-sale

 

487 

 

195 

 

3,158 

Increase (decrease) in other liabilities

 

10,920 

 

8,655 

 

(18,504)

 Net cash used in operating activities

 

(493,083)

 

(173,961)

 

(28,091)



 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(157,478)

 

(134,758)

 

(579,925)

Cash from call of investment securities held-to-maturity

 

 -

 

2,000 

 

 -

Proceeds from sale of investment securities available-for-sale

 

 -

 

3,529 

 

284,373 

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

 

 -

 

 -

 

7,000 

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

 

173,916 

 

207,703 

 

278,290 

Proceeds from sale of other real estate owned

 

 -

 

405 

 

85 

Net increase in loans

 

(322,611)

 

(115,054)

 

(172,853)

Net decrease in discontinued loans held-for-sale

 

49,170 

 

94,371 

 

52,343 

Proceeds from sale of fixed assets

 

 -

 

 -

 

945 

Purchases of premises and equipment

 

(2,012)

 

(2,379)

 

(515)

Change in receivable from investment in unconsolidated entity

 

83 

 

9,570 

 

(7,989)

Return of investment in unconsolidated entity

 

20,119 

 

11,511 

 

52,477 

Decrease in discontinued assets held-for-sale

 

5,503 

 

7,570 

 

1,454 

 Net cash (used in) provided by investing activities

 

(233,310)

 

84,468 

 

(84,315)



 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Net increase (decrease) in deposits

 

1,116,316 

 

(325,128)

 

22,538 

87


 

Net decrease in securities sold under agreements to repurchase

 

(11)

 

(124)

 

(57)

Costs from issuance of common stock

 

 -

 

 -

 

(200)

Proceeds from the issuance of common stock options

 

258 

 

112 

 

 -

Proceeds from the sale of IRA portfolio

 

 -

 

60,000 

 

 -

Net cash provided by (used in) financing activities

 

1,116,563 

 

(265,140)

 

22,281 



 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

390,170 

 

(354,633)

 

(90,125)



 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

554,302 

 

908,935 

 

999,059 



 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$               944,472 

 

$               554,302 

 

$               908,935 



 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

Interest paid

 

$                 37,532 

 

$                 27,021 

 

$                 15,326 

Taxes paid

 

$                 20,683 

 

$                 12,663 

 

$                   4,159 

Non-cash reclassification of commercial loans sold

 

$                           - 

 

$                           - 

 

$               240,714 

Non-cash investing and financing activities

 

 

 

 

 

 

   Investment securities transferred in securitizations

 

$                 93,191 

 

$                 62,076 

 

$                 46,359 

Transfers of discontinued loans to other real estate owned

 

$                   5,295 

 

$                           - 

 

$                      450 

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

 

 

88


 

THE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A—Organization and Nature of Operations

The Bancorp, Inc. (the Company) is a Delaware corporation and a registered financial holding company.  Its primary subsidiary is 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) and cash value of insurance-backed lines of credit (IBLOC), leasing (direct lease financing), Small Business Administration (SBA) loans and loans generated for sale into capital markets (CMBS).  Through the Bank, the Company also provides banking services nationally, which include prepaid and debit cards, private label banking, deposit accounts to investment advisors’ customers, 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 B—Summary of Significant Accounting Policies



1. Basis of Presentation



The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America (U.S. GAAP) and predominant practices within the banking industry.  The consolidated financial statements include the accounts of the Company and all its subsidiaries.  All inter-company balances have been eliminated. Certain reclassifications have been made to the 2018 and 2017 consolidated financial statements to conform to the 2019 presentation.

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

The principal estimates that are particularly susceptible to a significant change in the near term relate to the allowance for loan and lease losses, investment in unconsolidated entity and assets held-for-sale from discontinued operations measured at fair value, investment other than temporary impairment (OTTI), investments measured at fair value and deferred income taxes.

2. Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand and amounts due from banks with an original maturity from date of purchase of three months or less and federal funds sold.    The Company at times maintains balances in excess of insured limits at various financial institutions including the Federal Reserve Bank (FRB), the Federal Home Loan Bank (FHLB) and other private institutions.  The Company does not believe these instruments carry a significant risk of loss, but cannot provide assurances that no losses could occur if these institutions were to become insolvent. The Company also funds cash in ATMs on cruise ships for use by certain of its card account holders, for which insurance is maintained.

3. Investment Securities 

Investments in debt securities which the Company has both the ability and intent to hold to maturity are carried at cost, adjusted for the amortization of premiums and accretion of discounts computed by the effective interest method.  Investments in debt and equity securities which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk, liquidity requirements, or other factors, are classified as available-for-sale.  Net unrealized gains for such securities, net of tax effect, are reported as other comprehensive income, through equity and are excluded from the determination of net income.  The unrealized losses for both the held-to-maturity and available-for-sale securities are evaluated to determine first if the impairment is other than

89

 


 

temporary then to determine the amount of other-than-temporary impairment (OTTI) that is attributable to credit loss versus non-credit loss.  If a credit loss is determined, an OTTI charge is recorded within the consolidated statement of operations. For available-for-sale securities, if management believes market value losses are temporary and it believes the Company has the ability and intention to hold those securities through recovery of the temporary losses, the reduction in value is recognized in other comprehensive income. The Company does not engage in securities trading.  Gains or losses on disposition of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method.

The Company evaluates whether OTTI exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security.  The Company’s best estimate of expected future cash flows used to determine the amount of OTTI attributable to credit loss is 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.  The Company’s best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, current delinquency rates, loan-to-value ratios and the possibility of obligor refinancing.  These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value.  In addition, projections of expected future cash flows from a debt security may change based upon new information regarding the performance of the issuer and/or underlying collateral such as changes in the projections of the underlying property value estimates.  The Company did not recognize any OTTI charges in 2019, 2018 and 2017. 

4. Loans and Allowance for Loan and Lease Losses

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

Interest income is accrued as earned on a simple interest method.  Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. 

When a loan is placed on non-accrual status, all accumulated accrued interest receivable applicable to periods prior to the current year is charged off to the allowance for loan and lease losses.  Interest that had accrued in the current year is reversed from current period income.  Loans reported as having missed four or more consecutive monthly payments and still accruing interest must have both principal and accruing interest adequately secured and must be in the process of collection.  Such loans are reported as 90 days delinquent and still accruing.  For all loan types, the Company uses the method of reporting delinquencies which considers a loan past due or delinquent if a monthly payment has not been received by the close of business on the loan’s next due date.  In the Company’s reporting, two missed payments are reflected as 30 to 59 day delinquencies and three missed payments are reflected as 60 to 89 day delinquencies.



The allowance for loan losses represents management's estimate of losses inherent in the loan and lease portfolio as of the consolidated balance sheet date and is recorded as a reduction to loans and leases.  The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries.  Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.  All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance

90

 


 

is highly unlikely.  Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.



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



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



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



The allowance calculation methodology includes further segregation of loan classes into regulatory risk rating categories of special mention and substandard.  Loans classified as special mention have potential weaknesses that deserve management's close attention.  If uncorrected, the potential weaknesses may result in deterioration of repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or by the market value of the collateral pledged, if any.  Loans rated as special mention and substandard are reserved for based on the average charge-off history for loans and leases previously classified in those categories.  Loans not classified are included in the general component of the reserve calculation, which applies historical loss percentages by type of loan, against current outstanding balances.



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



·

Changes in lending policies or procedures;

·

Changes in economic conditions;

·

Portfolio growth;

·

Changes in the nature or volume of the portfolio;

·

Changes in management’s experience;

·

Past due volume;

·

Non-accrual volume;

·

Adversely classified loans;

·

Quality of the loan review system;

·

Changes in the value of underlying collateral;

·

Concentrations of credit; and

·

External factors.

Applicable factors are considered based on management's best judgment using relevant information available at the time of the evaluation.  The smallest component of the allowance is an unallocated component, which results from uncertainties that could affect management's estimate of probable losses.

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

For SBL commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals or evaluations.  When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary.  This decision is based on various considerations including the age of the most recent appraisal and the condition of the property.  Appraised value, discounted by the estimated costs to sell the collateral, is considered to be the estimated fair value.  For SBL commercial and industrial loans secured by non-real estate collateral, such as accounts receivable or inventory and equipment, estimated fair values for impairment are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices.  Indications of value from these sources may be discounted based on the age of the financial information or the quality of the assets.  Amounts guaranteed by the U.S. government are excluded from the Company’s assessment of impairment.

Loans originated from continuing operations and intended for sale in secondary markets are carried at estimated fair value and are excluded from the allowance valuation. Changes in fair value prior to sale, if any, are recognized as unrealized gains or losses on commercial loans originated for sale on the statements of operations.   The Company originates specific commercial mortgage loans for sale in secondary markets.  These loans are accounted for under the fair value option and amounted to $1.18 billion at December 31, 2019, and $688.5 million at December 31, 2018.  These loans were classified as held-for-sale. 

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

5. Premises and Equipment

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

6. Internal Use Software

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

The carrying value of the Company’s software is periodically reviewed and a loss is recognized if the value of the estimated undiscounted cash flow benefit related to the asset falls below the unamortized cost.  Amortization is provided using the straight-line method over the estimated useful life of the related software, which is generally seven years.  As of December 31, 2019 and 2018, the Company had net capitalized software costs of approximately $7.5 million and $6.2 million, respectively.  Net capitalized software is presented as part of other assets on the consolidated balance sheets.  The Company recorded amortization expense of approximately $2.3 million, $2.4 million and $2.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.

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7. Income Taxes

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

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

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

8. Share-Based Compensation

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

9. Other Real Estate Owned

Other real estate owned is recorded at estimated fair market value less cost of disposal; which establishes a new cost basis or carrying value.  When property is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance for loan and lease losses.  Periodically thereafter, the asset is reviewed for subsequent declines in the estimated fair market value against the carrying value.  Subsequent declines, if any, and holding costs, as well as gains and losses on subsequent sale, are included in the consolidated statements of operations.  The Company had no other real estate owned in continuing operations at December 31, 2019 and 2018, respectively.

10. Advertising Costs



The Company expenses advertising costs as incurred.  Advertising costs amounted to $782,000,  $423,000 and $435,000 for the years ended December 31, 2019, 2018 and 2017, respectively.  Advertising expense is reflected under “other” in the non-interest expense section of the consolidated statements of operations.

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11. Earnings Per Share

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

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





 

 

 

 

 

 



 

Year ended December 31, 2019



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except per share data)

Basic earnings per share from continuing operations

 

 

 

 

 

 

Net income available to common shareholders

 

$               51,268

 

56,765,635 

 

$                   0.90

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

573,350 

 

(0.01)

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               51,268

 

57,338,985 

 

$                   0.89







 

 

 

 

 

 



 

Year ended December 31, 2019



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except per share data)

Basic earnings per share from discontinued operations

 

 

 

 

 

 

Net income available to common shareholders

 

$                    291

 

56,765,635 

 

$                   0.01

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

573,350 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$                    291

 

57,338,985 

 

$                   0.01





 

 

 

 

 

 



 

Year ended December 31, 2019



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except per share data)

Basic earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               51,559

 

56,765,635 

 

$                   0.91

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

573,350 

 

(0.01)

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               51,559

 

57,338,985 

 

$                   0.90



Stock options for 971,604 shares, exercisable at prices between $6.75 and $9.58 per share, were outstanding at December 31, 2019 and included in the dilutive earnings per share computation because the exercise price per share was less than the average market price.  Stock options for 340,000 shares were anti-dilutive and not included in the earnings per share calculation.





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Year ended December 31, 2018



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except per share data)

Basic earnings per share from continuing operations

 

 

 

 

 

 

Net income available to common shareholders

 

$               87,540

 

56,343,845 

 

$                   1.55

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

724,461 

 

(0.02)

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               87,540

 

57,068,306 

 

$                   1.53







 

 

 

 

 

 



 

Year ended December 31, 2018



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except per share data)

Basic earnings per share from discontinued operations

 

 

 

 

 

 

Net income available to common shareholders

 

$                 1,137

 

56,343,845 

 

$                   0.02

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

724,461 

 

 -

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$                 1,137

 

57,068,306 

 

$                   0.02







 

 

 

 

 

 



 

Year ended December 31, 2018



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except per share data)

Basic earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               88,677

 

$        56,343,845

 

$                   1.57

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

724,461 

 

(0.02)

Diluted earnings per share

 

 

 

 

 

 

Net income available to common shareholders

 

$               88,677

 

57,068,306 

 

$                   1.55



Stock options for 1,160,000 shares, exercisable at prices between $6.75 and $9.84 per share, were outstanding at December 31, 2018, and included in the dilutive earnings per share computation because the exercise price per share was less than the average market price.







 

 

 

 

 

 



 

Year ended December 31, 2017



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except per share data)

Basic income per share from continuing operations

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               17,338

 

55,686,507 

 

$                   0.31

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

489,762 

 

 -

Diluted income per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               17,338

 

56,176,269 

 

$                   0.31





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Year ended December 31, 2017



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except per share data)

Basic income per share from discontinued operations

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 4,335

 

55,686,507 

 

$                   0.08

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

489,762 

 

 -

Diluted income per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$                 4,335

 

56,176,269 

 

$                   0.08







 

 

 

 

 

 



 

Year ended December 31, 2017



 

Income

 

Shares

 

Per share



 

(numerator)

 

(denominator)

 

amount



 

(dollars in thousands except per share data)

Basic income per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               21,673

 

$        55,686,507

 

$                   0.39

Effect of dilutive securities

 

 

 

 

 

 

Common stock options and restricted stock units

 

 -

 

489,762 

 

 -

Diluted income per share

 

 

 

 

 

 

Net earnings available to common shareholders

 

$               21,673

 

56,176,269 

 

$                   0.39



Stock options for 1,152,625 shares, exercisable at prices between $7.36 and $10.45 per share, were outstanding at December 31, 2017, but were not included in the dilutive earnings per share computation because the exercise price per share was greater than the average market price



12. Restrictions on Cash and Due from Banks

The Bank is required to maintain reserves against customer demand deposits by keeping cash on hand or balances with the FRB.  The amount of those required reserves at December 31, 2019 and 2018 was approximately $314.7 million and $294.2 million, respectively.

13. 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 ($159,000 over the remainder of the amortization period).  The gross carrying value of the software is $1.8 million, and as of December 31, 2019 and December 31, 2018, respectively, the accumulated amortization was $1.7 million and $1.5 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 ($0.0  over the remainder of the amortization period).  The gross carrying value of the software is $12.0 million, and as of December 31, 2019 and December 31, 2018, respectively, the accumulated amortization was $12.0 million and $11.0 million.  It is fully amortized as of December 31, 2019.

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 value is $3.4 million and, as of December 31, 2019 and December 31, 2018, respectively, the accumulated amortization was $1.2 million and $908,000. The purchase price allocation related to this intangible was finalized in 2017 and remained unchanged from the purchase price allocation recorded in 2016 when the purchase was made.

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The gross carrying value and accumulated amortization related to the Company’s intangible items at December 31, 2019 and 2018 are presented below.







 

 

 

 

 

 

 

 



 

December 31,



 

2019

 

2018



 

Gross

 

 

 

Gross

 

 



 

Carrying

 

Accumulated

 

Carrying

 

Accumulated



 

Amount

 

Amortization

 

Amount

 

Amortization



 

(in thousands)



 

 

 

 

 

 

 

 

Customer list intangibles

 

$                  15,411 

 

$                13,255 

 

$              15,411 

 

$                11,914 

Software intangible

 

1,817 

 

1,658 

 

1,817 

 

1,468 

Total

 

$                  17,228 

 

$                14,913 

 

$              17,228 

 

$                13,382 



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







 

 

Year ending December 31,

 

 

2020

 

$                      499 

2021

 

340 

2022

 

340 

2023

 

340 

2024

 

340 

Thereafter

 

456 



 

$                   2,315 









 



 

14. Prepaid and Debit Card and Related Fees, Card Payment and Automated Clearing House (ACH) Processing Fees



The Company recognizes prepaid and debit card, payment processing and affinity fees in the periods in which they are earned by performance of the related services.  The majority of fees the Company earns result from contractual transaction fees paid by third-party sponsors to the Company and monthly service fees.  Additionally, the Company earns interchange fees paid through settlement with associations such as Visa, which are also determined on a per transaction basis.  The Company records this revenue net of costs such as association fees and interchange transaction charges. The Company also earns monthly fees for the use of its cash in  payroll card sponsor ATM’s for payroll cardholders.  Fees earned by the Company from processing card payments for recipients of such payments, or from processing ACH payments or other payments are also determined primarily on a per transaction basis.



15. Derivative Financial Instruments



The Company has utilized derivatives to hedge interest rate risk on fixed rate loans which are held-for-sale.  These derivatives are recorded on the consolidated balance sheets at fair value.  Changes in the fair value of these derivatives, designated as fair value hedges, are recorded in earnings with and in the same consolidated income statement line item as changes in the fair value of the related hedged item.  All derivatives are utilized to hedge against interest rate changes between the time commercial mortgages are funded and sold.  These derivatives are intended to serve as a hedge against interest rate movements which might otherwise decrease sales proceeds.



16. Common Stock Repurchase Program



In 2011, the Company adopted a common stock repurchase program in which share repurchases reduce the amount of shares outstanding.  Repurchased shares may be reissued for various corporate purposes.  As of December 31, 2011, the Company had

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repurchased 100,000 shares of the total 750,000 maximum number of shares authorized by the Board of Directors.  The 100,000 shares were repurchased at an average cost of $8.66.  The Company did not repurchase shares in 2019, 2018 or 2017.



17. Sale of Health Savings Account Portfolio and European Prepaid Operations



Substantially all of the remaining health savings accounts were sold in the second quarter of 2017 at a gain of $2.5 million.  In the second quarter of 2017, the Company sold its European prepaid operations at a loss of $3.4 million.



18. Long-term Borrowings



The $41.0 million and $41.7 million respectively outstanding for long-term borrowings at December 31, 2019 and 2018, reflected the proceeds from two loans which were sold in which we retained a participating interest that did not qualify for sale accounting.



19. 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 judgment 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 the scope of Accounting Standards Update (ASU) 606 include prepaid and debit 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 the 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 ASU 2014-09, “Revenue from Contracts with Customers are largely consistent with previous practices already implemented and applied by the Company.  The vast majority of the Company’s services related to its revenues are performed, earned and recognized monthly.



Prepaid and debit 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 and debit 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

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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.



20. Sale of IRA Portfolio



On July 10, 2018, the Company executed an agreement to sell and transfer the fiduciary rights and obligations related to its Safe Harbor Individual Retirement Account (SHIRA) portfolio, totaling approximately $400 million, to Millennium Trust Company, LLC (Buyer).  In consideration for the sale and transfer, Buyer paid the Company $65.0 million. Because the $65 million represented consideration for the sale and transfer of the fiduciary rights and obligations which were transferred during the third quarter of 2018, the $65.0 million was recognized as a gain on sale in that quarter.  In 2018 the Company earned fees on the SHIRA portfolio of $3.4 million, which comprise the vast majority of fees reported in the consolidated statement of operations under service fees on deposit accounts.  As a result of the sale,  substantially no future fees will be realized in this income category.  The fiduciary rights and obligations related to the SHIRA portfolio were unrelated to the Company’s payments businesses and related accounts, which comprise the vast majority of the Company’s funding.



21. 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 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  and debit 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 performed to ascertain potential applicability, the adoption of this standard did not have a significant impact on our consolidated results of operations or our consolidated financial position. 



In January 2016, the Financial Accounting Standards Board, or 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; and (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

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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.  The Company adopted this guidance on its effective date using a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application, January 1, 2019.  Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.  



The new standard provides a number of optional practical expedients in transition.  The Company has elected the practical expedients option which does not require reassessment of its prior conclusions about lease identification, lease classification and initial direct costs.  The Company has not elected the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to it. 



The effect of this adoption was the recognition at January 1, 2019 of a $16.4 million operating lease right-of-use (ROU) asset, which has been adjusted for previously recorded accrued rent of $1.7 million, and an $18.1 million operating lease obligation.  No opening retained earnings adjustments are necessary under the modified retrospective transition approach.  The adoption of this guidance did not have an impact on the consolidated results of operations of the Company. 



The ASU also includes disclosure requirements for lessors which encompass the Company’s direct financing leases.  The first disclosure requirement is to discuss significant shifts, if any, in the balance of unguaranteed residual assets and deferred selling profit on direct financing leases.  The Company’s direct financing lease portfolio consists primarily of vehicles which are sold at the end of lease terms.  The Company does not hold title to the vehicles prior to inception of the lease and, thus, selling profit is not expected or deferred.  However, sales of the vehicles may result in income when sales prices exceed residual values.  This income is reported in the consolidated statements of operations under non-interest income.  Since the majority of the portfolio is comprised of vehicle leases, sales prices may differ from residual values as a result of changes in the used vehicle market for both commercial vehicles such as trucks and passenger vehicles.



Additionally, the Company is required to disclose the scheduled maturities of its direct financing leases reconciled to the total lease receivables in the consolidated balance sheet, which are as follows (in thousands):







 

 

2020

 

$               134,202 

2021

 

96,385 

2022

 

61,090 

2023

 

32,712 

2024

 

11,930 

2025 and thereafter

 

1,809 

Total undiscounted cash flows

 

338,128 

Residual value *

 

142,730 

Difference between undiscounted cash flows and discounted cash flows

 

(46,398)

Present value of lease payments recorded as lease receivables

 

$               434,460 

*Of the $142,730, $29,638 is not guaranteed by the lessee. 



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 requires 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. 

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The Company adopted the guidance in the first quarter of 2017, and that adoption did not have a material impact on our consolidated financial statements.



In June 2016, the FASB issued an update to Accounting Standards Update (ASU or Update) 2016-13 – “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”.  The Update changes the accounting for credit losses on loans and debt securities by eliminating the probable initial recognition threshold in Current GAAP.  Instead, 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. The Company has utilized a commercially available modeling tool to input its historical loan balances and losses to determine historical loss ratios. For pools other than SBLOC and IBLOC, vintage analysis is being utilized. The vintage analysis computes weighted average loss ratios, based upon estimated loan life, which are applied against current outstanding balances as one component of the allowance. The other component of the allowance is a qualitative factors component based upon loan quality, economic factors and other relevant factors. For SBLOC and IBLOC, a probability of  default methodology is being utilized.   Both the vintage and qualitative components of the allowance are determined on the basis of pools within each lending category. 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 Company’s implementation team includes loan review, finance, representatives of the lending departments and a third-party advisor. The team concurred as to the division of each loan portfolio into their agreed upon common loss character pools. The team also concurred as to the qualitative factors which varied according to pool. The Company expects the Update will result in an increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments, as well as the addition of an allowance for debt securities. While the Company continues to analyze data and modify calculations, we currently expect an increase in the allowance for loan losses in the range of $1 million to $3 million.  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. 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.  The Company is evaluating the impact of the Update on the consolidated financial statements. 



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 are reflected in the tax accounts in these financial statements.  The analysis was completed in 2018 and did not have a material impact on our consolidated 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 2017 Act.  Consequently, the amendment eliminates the stranded tax effect resulting from the 2017 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 has early adopted ASU 2018-02.  The effect of this adoption was a reclassification of $812,000 from accumulated other comprehensive income to retained earnings in the Company’s December 31, 2017 consolidated financial statements.



In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” which eliminates certain fair value disclosures, adds new disclosures and amends another disclosure applicable to the Company as follows.  The amendment states that disclosure of measurement uncertainty of the fair values to changes in inputs will be required for the reporting date and not future dates.  New fair value disclosures consist of disclosure of: a) total gains and losses in OCI from fair value changes in Level 3 assets and liabilities that are held on the balance sheet date; b) the range and weighted average of inputs and how the weighted average was calculated and c) if weighted average is not meaningful, other quantitative information that better reflects the distribution of inputs. ASU 2018-13 is effective for annual periods beginning after December 15, 2019. 

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Note C— Subsequent Events



The Company evaluated its December 31, 2019 consolidated financial statements for subsequent events through the date the consolidated financial statements were issued.  As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income. Other financial impact could occur though such potential impact is unknown at this time.

 

Note D—Investment Securities

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





 

 

 

 

 

 

 

 

Available-for-sale

 

December 31, 2019



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$              52,415 

 

$                   672 

 

$                   (177)

 

$              52,910 

Asset-backed securities *

 

244,751 

 

132 

 

(534)

 

244,349 

Tax-exempt obligations of states and political subdivisions

 

5,174 

 

144 

 

 -

 

5,318 

Taxable obligations of states and political subdivisions

 

58,258 

 

1,992 

 

 -

 

60,250 

Residential mortgage-backed securities

 

335,068 

 

2,629 

 

(1,101)

 

336,596 

Collateralized mortgage obligation securities

 

221,109 

 

1,826 

 

(208)

 

222,727 

Commercial mortgage-backed securities

 

394,852 

 

3,836 

 

(146)

 

398,542 



 

$         1,311,627 

 

$              11,231 

 

$                (2,166)

 

$         1,320,692 









 

 

 

 

 

 

 

 



 

December 31, 2019



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

* Asset-backed securities as shown above

 

cost

 

gains

 

losses

 

value

Federally insured student loan securities

 

$              33,852 

 

$                     10 

 

$                   (323)

 

$              33,539 

Collateralized loan obligation securities

 

210,899 

 

122 

 

(211)

 

210,810 



 

$            244,751 

 

$                   132 

 

$                   (534)

 

$            244,349 







 

 

 

 

 

 

 

 

Held-to-maturity

 

December 31, 2019



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$                9,219 

 

$                        - 

 

$                (2,067)

 

$                7,152 

Other debt securities - pooled

 

75,168 

 

682 

 

 -

 

75,850 



 

$              84,387 

 

$                   682 

 

$                (2,067)

 

$              83,002 





102

 


 



 

 

 

 

 

 

 

 

Available-for-sale

 

December 31, 2018



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

U.S. Government agency securities

 

$              54,095 

 

$                   146 

 

$                   (879)

 

$              53,362 

Asset-backed securities *

 

189,850 

 

104 

 

(1,352)

 

188,602 

Tax-exempt obligations of states and political subdivisions

 

7,546 

 

50 

 

(45)

 

7,551 

Taxable obligations of states and political subdivisions

 

60,152 

 

803 

 

(520)

 

60,435 

Residential mortgage-backed securities

 

377,199 

 

648 

 

(8,106)

 

369,741 

Collateralized mortgage obligation securities

 

265,914 

 

287 

 

(3,994)

 

262,207 

Commercial mortgage-backed securities

 

300,143 

 

190 

 

(5,907)

 

294,426 



 

$         1,254,899 

 

$                2,228 

 

$              (20,803)

 

$         1,236,324 







 

 

 

 

 

 

 

 



 

December 31, 2018



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

* Asset-backed securities as shown above

 

cost

 

gains

 

losses

 

value

Federally insured student loan securities

 

$              59,705 

 

$                     87 

 

$                   (283)

 

$              59,509 

Collateralized loan obligation securities

 

125,045 

 

 -

 

(1,069)

 

123,976 

Other

 

5,100 

 

17 

 

 -

 

5,117 



 

$            189,850 

 

$                   104 

 

$                (1,352)

 

$            188,602 







 

 

 

 

 

 

 

 

Held-to-maturity

 

December 31, 2018



 

 

 

Gross

 

Gross

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair



 

cost

 

gains

 

losses

 

value

Other debt securities - single issuers

 

$                9,168 

 

$                        - 

 

$                (1,890)

 

$                7,278 

Other debt securities - pooled

 

75,264 

 

849 

 

 -

 

76,113 



 

$              84,432 

 

$                   849 

 

$                (1,890)

 

$              83,391 

The amortized cost and fair value of the Company’s investment securities at December 31, 2019, by contractual maturity are shown below (in thousands).  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



 

 

 

 

 

 

 

 



 

Available-for-sale

 

Held-to-maturity



 

Amortized

 

Fair

 

Amortized

 

Fair



 

cost

 

value

 

cost

 

value

Due before one year

 

$                6,853 

 

$                6,856 

 

$                        - 

 

$                        - 

Due after one year through five years

 

83,690 

 

85,246 

 

 -

 

 -

Due after five years through ten years

 

236,008 

 

239,505 

 

 -

 

 -

Due after ten years

 

985,076 

 

989,085 

 

84,387 

 

83,002 



 

$         1,311,627 

 

$         1,320,692 

 

$              84,387 

 

$              83,002 



At December 31, 2019 and 2018, investment securities with a fair value of approximately $262.0 million and $116.0 million, respectively, were pledged to FHLB to secure a line of credit.  At December 31, 2019 and 2018, investment securities with a fair value of approximately $0 and $169.5 million were pledged to secure a line of credit with the FRB.  The Company also pledged the majority of its loans to the FRB for that line of credit which it has never used.  The amount of loans pledged varies and since the Bank does not utilize this line the collateral may be unpledged at any time.  The line is maintained consistent with the Bank’s liquidity policy which maximizes potential liquidity.  Gross gains on sales of securities were $0,  $41,000 and $2.7 million for the years ended December 31,

103

 


 

2019, 2018 and 2017, respectively.  Gross losses on sales of securities were $0, $0 and $429,000 for the years ended December 31, 2019, 2018 and 2017, respectively.



Investment securities fair values are based on a fair market value supplied by a third-party market data provider when available. If not available, prices provided by securities dealers with expertise in the securities being evaluated may also be utilized.  When such market information is not available, 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.  The Company periodically reviews its investment portfolio to determine whether unrealized losses are other than temporary, based on evaluations of the creditworthiness of the issuers/guarantors as well as the underlying collateral if applicable, in addition to the continuing performance of the securities.  The Company did not recognize any other-than-temporary impairment charges in 2019, 2018 and 2017. 



Investments in FHLB and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $5.3 million at December 31, 2019 and $1.1 million at December 31, 2018.



The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2019 (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

Less than 12 months

 

12 months or longer

 

Total



 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

5

 

$              12,214 

 

$                     (44)

 

$                3,986 

 

$                       (133)

 

$              16,200 

 

$                (177)

Asset-backed securities

 

28

 

115,909 

 

(275)

 

56,427 

 

(260)

 

172,336 

 

(535)

Residential mortgage-backed securities

 

64

 

58,682 

 

(114)

 

73,311 

 

(987)

 

131,993 

 

(1,101)

Collateralized mortgage obligation securities

 

22

 

37,387 

 

(85)

 

18,136 

 

(123)

 

55,523 

 

(208)

Commercial mortgage-backed securities

 

4

 

35,095 

 

(129)

 

3,162 

 

(16)

 

38,257 

 

(145)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

123

 

$            259,287 

 

$                   (647)

 

$            155,022 

 

$                    (1,519)

 

$            414,309 

 

$             (2,166)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

Less than 12 months

 

12 months or longer

 

Total



 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

1

 

$                      - 

 

$                        - 

 

$              7,152 

 

$                    (2,067)

 

$                7,152 

 

$             (2,067)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                      - 

 

$                        - 

 

$              7,152 

 

$                    (2,067)

 

$                7,152 

 

$             (2,067)



104

 


 

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

Less than 12 months

 

12 months or longer

 

Total



 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

10

 

$                  679 

 

$                      (2)

 

$             41,719 

 

$                       (877)

 

$              42,398 

 

$                (879)

Asset-backed securities

 

26

 

148,753 

 

(1,230)

 

11,506 

 

(122)

 

160,259 

 

(1,352)

Tax-exempt obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

3

 

 -

 

 -

 

3,625 

 

(45)

 

3,625 

 

(45)

Taxable obligations of states and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    political subdivisions

 

22

 

4,492 

 

(19)

 

35,599 

 

(501)

 

40,091 

 

(520)

Residential mortgage-backed securities

 

118

 

17,168 

 

(49)

 

302,407 

 

(8,057)

 

319,575 

 

(8,106)

Collateralized mortgage obligation securities

 

44

 

1,522 

 

(3)

 

193,355 

 

(3,991)

 

194,877 

 

(3,994)

Commercial mortgage-backed securities

 

26

 

121,860 

 

(2,020)

 

151,453 

 

(3,887)

 

273,313 

 

(5,907)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

249

 

$           294,474 

 

$               (3,323)

 

$           739,664 

 

$                  (17,480)

 

$         1,034,138 

 

$           (20,803)



 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

Less than 12 months

 

12 months or longer

 

Total



 

Number of securities

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

 

Fair Value

 

Unrealized losses

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuers

 

1

 

$                      - 

 

$                        - 

 

$              7,278 

 

$                    (1,890)

 

$                7,278 

 

$             (1,890)

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    investment securities

 

1

 

$                      - 

 

$                        - 

 

$              7,278 

 

$                    (1,890)

 

$                7,278 

 

$             (1,890)



 

The Company owns one single issuer trust preferred security issued by an insurance company.  The security is not rated by any bond rating service.  At December 31, 2019, it had a book value of $9.2 million and a fair value of $7.2 million.  The Company has evaluated the securities in the above tables as of December 31, 2019 and has concluded that none of these securities has impairment that is other-than-temporary.  The Company evaluates whether an other than temporary impairment exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security.  If other than temporary impairment is determined, the Company estimates expected future cash flows to determine the credit loss amount with a quantitative and qualitative process that incorporates information received from third-party sources and internal assumptions and judgments regarding the future performance of the security.  Based upon this evaluation, the Company concluded that most of the securities that are in an unrealized loss position are in a loss position because of changes in interest rates after the securities were purchased.  The securities that have been in an unrealized loss position for 12 months or longer include other securities whose market values are sensitive to interest rates.  The Company’s unrealized loss for the debt securities, which includes one single issuer trust preferred security, is primarily related to general market conditions and the resultant lack of liquidity in the market.  The severity of the temporary impairments in relation to the carrying amounts of the individual investments is consistent with market developments.  The Company’s analysis for each investment is performed at the security level.  As a result of its review, the Company concluded that other-than-temporary impairment did not exist due to the Company’s ability and intention to hold these securities to recover their amortized cost basis.



 Note  ELoans



The Company originates loans for sale or securitization into commercial mortgage backed securities or to other commercial loan purchasers and to secondary government guaranteed loan markets.  The Company has elected the fair value option for the balance of these loans, classified as commercial loans held-for-sale, to better reflect the economics of the transactions.  At December 31, 2019

105

 


 

and 2018, the fair value of these loans was $1.18 billion and $688.5 million, and the unpaid principal balance was $1.17 billion and $685.1 million, respectively.  Included in the net realized and unrealized gains (losses) on loans originated for sale in the consolidated statement of operations were changes in fair value resulting in an unrealized gain of $963,000 in 2019, unrealized loss of $979,000 in 2018 and unrealized gains of $1.8 million in 2017. These amounts are net of credit related reductions in fair value of $486,000 and $829,000, respectively, in 2019 and 2018, related to a single loan.  In 2017, there was no decrease in fair value based upon instrument-specific credit risk.  The fair value of such loans is reduced to the amount of the government guarantee.  Interest earned on loans held-for-sale during the period held is recorded in Interest Income – Loans, including fees in the consolidated statements of operations. 



The Company has periodically sponsored the structuring of commercial mortgage loan securitizations.  The loans sold to the commercial mortgage-backed securitizations are transitional commercial mortgage loans which are made to improve and rehabilitate existing properties which are already cash flowing.  Servicing rights are not retained.  Each of the securitizations is considered a variable interest entity of which the Company is not the primary beneficiary.  Further, true sale accounting has been applicable to each of the securitizations, as supported by a review performed by an independent third-party consultant. In each of the securitizations, the Company has obtained a tranche of certificates which are accounted for as available-for-sale debt securities.  The securities are recorded at fair value at acquisition, which is determined by an independent third party based on the discounted cash flow method using unobservable (level 3) inputs.  The loans securitized are structured with some prepayment protection and with extension options which are common for rehabilitation loans.  It was expected that those factors would generally offset the impact of prepayments which would therefore not be significant.  Accordingly, prepayments on CRE securities were not originally assumed in the first four securitizations.  However, as a result of higher than expected prepayments on CRE2, annual prepayments of 15% on CRE5 were assumed, beginning after the first-year anniversary of the CRE5 securitization. For CRE6, there was no premium or discount associated with the tranche purchased and prepayments were accordingly not estimated.



Because of credit enhancements for each security, cash flows were not reduced by expected losses.  For each of the securitizations, the Company has recorded a gain upon structuring which is comprised of (i) the excess of consideration received by the Company in the transaction over the carrying value of the loans at securitization, less related transactions costs incurred; and (ii) the recognition of previously deferred origination and exit fees.



A summary of securitizations and securities obtained from those securitizations is as follows:

·

In the third quarter of 2019, the Company sponsored The Bancorp Commercial Mortgage 2019-CRE6 Trust, securitizing $778.2 million of loans and recording a $14.2 million gain.  The certificates obtained by the Company in the transaction had an acquisition date fair value of $51.6 million based upon an initial discount rate of 4.12%.

·

In the first quarter of 2019, the Company sponsored The Bancorp Commercial Mortgage 2019-CRE5 Trust, securitizing $518.3 million of loans and recording a $11.2 million gain.  The certificates obtained by the Company in the transaction had an acquisition date fair value of $41.6 million based upon an initial discount rate of 4.75%.

·

In the third quarter of 2018, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE4 Trust, securitizing $341.0 million of loans and recording a $9.0 million gain. The certificates obtained by the Company in the transaction had an acquisition date fair value of $33.7 million based upon an initial discount rate of 4.88%.  

·

In the first quarter of 2018, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE3 Trust, securitizing $304.3 million of loans and recording an $11.7 million gain. The certificates obtained by the Company in the transaction had an acquisition date fair value of $28.4 based upon an initial discount rate of 5.79%.  

·

In the third quarter of 2017, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE2 Trust, securitizing $314.4 million of loans and recording a $12.0 million gain. The certificates obtained by the Company had an acquisition date fair value of $24.6 million based upon an initial discount rate of 9.41%.  

·

In the first quarter of 2017, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE1 Trust, securitizing $263.1 million of loans and recording a $5.1 million gain. The certificates obtained by the Company in the transaction had an acquisition date fair value of $21.7 million based upon an initial discount rate of 4.78%.  



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



106

 


 

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







 

 

 



December 31,

 

December 31,



2019

 

2018



 

 

 

SBL non-real estate

$                84,579 

 

$                76,340 

SBL commercial mortgage

218,110 

 

165,406 

SBL construction

45,310 

 

21,636 

Small business loans *

347,999 

 

263,382 

Direct lease financing

434,460 

 

394,770 

SBLOC / IBLOC **

1,024,420 

 

785,303 

Other specialty lending

3,055 

 

31,836 

Other consumer loans ***

4,554 

 

16,302 



1,814,488 

 

1,491,593 

Unamortized loan fees and costs

9,757 

 

10,383 

Total loans, net of unamortized loan fees and costs

$           1,824,245 

 

$           1,501,976 



 

 

 







 

 

 



December 31,

 

December 31,



2019

 

2018



 

 

 

SBL loans, including unamortized fees and costs of $4,215 and $7,478 
for December 31, 2019 and December 31, 2018, respectively

$                         352,214 

 

$                         270,860 

SBL loans included in held-for-sale

220,358 

 

199,977 

Total small business loans

$                         572,572 

 

$                         470,837 



*The preceding table shows small business loans (SBL) and SBL held-for-sale at the dates indicated (in thousands).  While the majority of SBL is comprised of SBA loans, SBL also includes $16,952,000 and $0 of non-SBA loans as of December 31, 2019 and 2018, respectively

**Securities Backed Lines of Credit (SBLOC) are collateralized by marketable securities, while Insurance Backed Lines of Credit (IBLOC) are collateralized by the cash surrender value of insurance policies.

***Included in the table above under Other consumer loans are demand deposit overdrafts reclassified as loan balances totaling $882,000 and $7.2 million at December 31, 2019 and 2018, respectively.  Overdraft charge-offs and recoveries are reflected in the allowance for loan and leases losses. 

107

 


 



The following table provides information about impaired loans at December 31, 2019 and 2018 (in thousands):



 

 

 

 

 

 

 

 

 



December 31, 2019



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBL non-real estate

$                       335 

 

$                    2,717 

 

$                        - 

 

$                       277 

 

$                           5 

SBL commercial mortgage

76 

 

76 

 

 -

 

15 

 

 -

SBL construction

 -

 

 -

 

 -

 

284 

 

 -

Direct lease financing

286 

 

286 

 

 -

 

362 

 

11 

Consumer - home equity

489 

 

489 

 

 -

 

1,161 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBL non-real estate

3,804 

 

4,371 

 

(2,961)

 

3,925 

 

30 

SBL commercial mortgage

971 

 

971 

 

(136)

 

561 

 

 -

SBL construction

711 

 

711 

 

(36)

 

284 

 

 -

Direct lease financing

 -

 

 -

 

 -

 

244 

 

 -

Consumer - home equity

121 

 

121 

 

(9)

 

344 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBL non-real estate

4,139 

 

7,088 

 

(2,961)

 

4,202 

 

35 

SBL commercial mortgage

1,047 

 

1,047 

 

(136)

 

576 

 

 -

SBL construction

711 

 

711 

 

(36)

 

568 

 

 -

Direct lease financing

286 

 

286 

 

 -

 

606 

 

11 

Consumer - home equity

610 

 

610 

 

(9)

 

1,505 

 



$                    6,793 

 

$                    9,742 

 

$              (3,142)

 

$                    7,457 

 

$                         55 



 

 

 

 

 

 

 

 

 



December 31, 2018



Recorded
investment

 

Unpaid
principal
balance

 

Related
allowance

 

Average
recorded
investment

 

Interest
income
recognized

Without an allowance recorded

 

 

 

 

 

 

 

 

 

SBL non-real estate

$                       175 

 

$                    1,469 

 

$                        - 

 

$                       334 

 

$                            - 

SBL commercial mortgage

 -

 

 -

 

 -

 

 -

 

 -

Direct lease financing

437 

 

548 

 

 -

 

425 

 

28 

Consumer - home equity

1,612 

 

1,612 

 

 -

 

1,648 

 

10 

With an allowance recorded

 

 

 

 

 

 

 

 

 

SBL non-real estate

3,541 

 

3,541 

 

(2,806)

 

2,816 

 

70 

SBL commercial mortgage

458 

 

458 

 

(71)

 

505 

 

 -

Direct lease financing

434 

 

434 

 

(145)

 

617 

 

66 

Consumer - home equity

129 

 

129 

 

(17)

 

26 

 

 -

Total

 

 

 

 

 

 

 

 

 

SBL non-real estate

3,716 

 

5,010 

 

(2,806)

 

3,150 

 

70 

SBL commercial mortgage

458 

 

458 

 

(71)

 

505 

 

 -

Direct lease financing

871 

 

982 

 

(145)

 

1,042 

 

94 

Consumer - home equity

1,741 

 

1,741 

 

(17)

 

1,674 

 

10 



$                    6,786 

 

$                    8,191 

 

$              (3,039)

 

$                    6,371 

 

$                       174 



108

 


 

The following table summarizes the Company’s non-accrual loans, loans past due 90 days and other real estate owned at December 31, 2019 and 2018, respectively (the Company had no non-accrual leases at December 31, 2019 or December 31, 2018):









 

 

 

 



 

December 31,



 

2019

 

2018



 

(in thousands)

Non-accrual loans

 

 

 

 

SBL non-real estate

 

$              3,693 

 

$              2,590 

SBL commercial mortgage

 

1,047 

 

458 

SBL construction

 

711 

 

 -

Consumer

 

345 

 

1,468 

Total non-accrual loans

 

5,796 

 

4,516 



 

 

 

 

Loans past due 90 days or more and still accruing

 

3,264 

 

954 

Total non-performing loans

 

9,060 

 

5,470 

Other real estate owned

 

 -

 

 -

Total non-performing assets

 

$              9,060 

 

$              5,470 



Interest which would have been earned on loans classified as non-accrual at December 31, 2019 and 2018, was $388,000 and $255,000, respectively.



The Company’s loans that were modified as of December 31, 2019 and 2018 and considered troubled debt restructurings are as follows (in thousands):













 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019

 

December 31, 2018



 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

 

Number

 

Pre-modification recorded investment

 

Post-modification recorded investment

SBL non-real estate

 

 

$              1,309 

 

$              1,309 

 

 

$              1,564 

 

$              1,564 

Direct lease financing

 

 

286 

 

286 

 

 

870 

 

870 

Consumer

 

 

489 

 

489 

 

 

513 

 

513 

Total

 

11 

 

$              2,084 

 

$              2,084 

 

10 

 

$              2,947 

 

$              2,947 



The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2019 and 2018 (in thousands):









 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019

 

December 31, 2018



 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

 

Adjusted interest rate

 

Extended maturity

 

Combined rate and maturity

SBL non-real estate

 

$                    - 

 

$                   51 

 

$              1,258 

 

$                    - 

 

$                   85 

 

$              1,479 

Direct lease financing

 

 -

 

286 

 

 -

 

 -

 

434 

 

436 

Consumer

 

 -

 

 -

 

489 

 

 -

 

 -

 

513 

Total

 

$                    - 

 

$                 337 

 

$              1,747 

 

$                    - 

 

$                 519 

 

$              2,428 





The Company had no commitments to extend additional credit to loans classified as a troubled debt restructuring as of December 31, 2019 and a commitment to extend $27,000 to one loan classified as a troubled debt restructuring as of December 31, 2018. 



109

 


 

When loans are classified as troubled debt restructurings, 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 December 31, 2019, there were eleven troubled debt restructured loans with a balance of $2.1 million which had specific reserves of $1.0 million.  These reserves related primarily to the non-guaranteed portion of SBA loans for start-up businesses.  



The following table summarizes as of December 31, 2019 loans that were restructured within the last 12 months that have subsequently defaulted (in thousands).





 

 

 

 



 

December 31, 2019



 

Number

 

Pre-modification recorded investment

SBL non-real estate

 

 

$                 660 

Total

 

 

$                 660 



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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019



 

SBL non-real estate

 

SBL commercial mortgage

 

SBL construction

 

Direct lease financing

 

SBLOC / IBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

Beginning balance 1/1/2019

 

$           4,636 

 

$                941 

 

$                250 

 

$             2,025 

 

$                  393 

 

$                 60 

 

$               108 

 

$                  240 

 

$               8,653 

Charge-offs

 

(1,362)

 

 -

 

 -

 

(528)

 

 -

 

 -

 

(1,103)

 

 -

 

(2,993)

Recoveries

 

125 

 

 -

 

 -

 

51 

 

 

 

 

 

 

 -

 

178 

Provision (credit)

 

1,586 

 

531 

 

182 

 

878 

 

160 

 

(48)

 

1,033 

 

78 

 

4,400 

Ending balance

 

$           4,985 

 

$             1,472 

 

$                432 

 

$             2,426 

 

$                  553 

 

$                 12 

 

$                 40 

 

$                  318 

 

$             10,238 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$           2,961 

 

$                136 

 

$                  36 

 

$                     - 

 

$                      - 

 

$                    - 

 

$                   9 

 

$                      - 

 

$               3,142 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$           2,024 

 

$             1,336 

 

$                396 

 

$             2,426 

 

$                  553 

 

$                 12 

 

$                 31 

 

$                  318 

 

$               7,096 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$         84,579 

 

$         218,110 

 

$           45,310 

 

$         434,460 

 

$        1,024,420 

 

$            3,055 

 

$            4,554 

 

$               9,757 

 

$        1,824,245 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$           4,139 

 

$             1,047 

 

$                711 

 

$                286 

 

$                      - 

 

$                    - 

 

$               610 

 

$                      - 

 

$               6,793 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$         80,440 

 

$         217,063 

 

$           44,599 

 

$         434,174 

 

$        1,024,420 

 

$            3,055 

 

$            3,944 

 

$               9,757 

 

$        1,817,452 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

SBL non-real estate

 

SBL commercial mortgage

 

SBL construction

 

Direct lease financing

 

SBLOC

 

Other specialty lending

 

Other consumer loans

 

Unallocated

 

Total

Beginning balance 1/1/2018

 

$           3,145 

 

$             1,120 

 

$                136 

 

$             1,495 

 

$                  365 

 

$                 57 

 

$               581 

 

$                  197 

 

$               7,096 

Charge-offs

 

(1,348)

 

(157)

 

 -

 

(637)

 

 -

 

 -

 

(21)

 

 -

 

(2,163)

Recoveries

 

57 

 

13 

 

 -

 

64 

 

 

 

 

 

 

 -

 

135 

Provision (credit)

 

2,782 

 

(35)

 

114 

 

1,103 

 

28 

 

 

(453)

 

43 

 

3,585 

Ending balance

 

$           4,636 

 

$                941 

 

$                250 

 

$             2,025 

 

$                  393 

 

$                 60 

 

$               108 

 

$                  240 

 

$               8,653 

110

 


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$           2,806 

 

$                  71 

 

$                    - 

 

$                145 

 

$                      - 

 

$                    - 

 

$                 17 

 

$                      - 

 

$               3,039 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$           1,830 

 

$                870 

 

$                250 

 

$             1,880 

 

$                  393 

 

$                 60 

 

$                 91 

 

$                  240 

 

$               5,614 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$         76,340 

 

$         165,406 

 

$           21,636 

 

$         394,770 

 

$           785,303 

 

$          31,836 

 

$          16,302 

 

$             10,383 

 

$        1,501,976 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$           3,716 

 

$                458 

 

$                    - 

 

$                871 

 

$                      - 

 

$                    - 

 

$            1,741 

 

$                      - 

 

$               6,786 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Collectively evaluated for impairment

 

$         72,624 

 

$         164,948 

 

$           21,636 

 

$         393,899 

 

$           785,303 

 

$          31,836 

 

$          14,561 

 

$             10,383 

 

$        1,495,190 





The Company did not have loans acquired with deteriorated credit quality at either December 31, 2019 or December 31, 2018.



111

 


 

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









 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019



 

30-59 Days

 

60-89 Days

 

90+ Days

 

 

 

Total

 

 

 

Total



 

past due

 

past due

 

still accruing

 

Non-accrual

 

past due

 

Current

 

loans

SBL non-real estate

 

$                   36 

 

$                 125 

 

$                      - 

 

$              3,693 

 

$              3,854 

 

$            80,725 

 

$            84,579 

SBL commercial mortgage

 

 -

 

1,983 

 

 -

 

1,047 

 

3,030 

 

215,080 

 

218,110 

SBL construction

 

 -

 

 -

 

 -

 

711 

 

711 

 

44,599 

 

45,310 

Direct lease financing

 

2,008 

 

2,692 

 

3,264 

 

 -

 

7,964 

 

426,496 

 

434,460 

SBLOC / IBLOC

 

290 

 

75 

 

 -

 

 -

 

365 

 

1,024,055 

 

1,024,420 

Other specialty lending

 

 -

 

 -

 

 -

 

 -

 

 -

 

3,055 

 

3,055 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,137 

 

1,137 

Consumer - home equity

 

 -

 

 -

 

 -

 

345 

 

345 

 

3,072 

 

3,417 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,757 

 

9,757 



 

$              2,334 

 

$              4,875 

 

$              3,264 

 

$              5,796 

 

$            16,269 

 

$       1,807,976 

 

$       1,824,245 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

30-59 Days

 

60-89 Days

 

90+ Days

 

 

 

Total

 

 

 

Total



 

past due

 

past due

 

still accruing

 

Non-accrual

 

past due

 

Current

 

loans

SBL non-real estate

 

$                 346 

 

$                 125 

 

$                      - 

 

$              2,590 

 

$              3,061 

 

$            73,279 

 

$            76,340 

SBL commercial mortgage

 

 -

 

 -

 

 -

 

458 

 

458 

 

164,948 

 

165,406 

SBL construction

 

 -

 

694 

 

 -

 

 -

 

694 

 

20,942 

 

21,636 

Direct lease financing

 

2,594 

 

1,572 

 

954 

 

 -

 

5,120 

 

389,650 

 

394,770 

SBLOC

 

487 

 

 -

 

 -

 

 -

 

487 

 

784,816 

 

785,303 

Other specialty lending

 

108 

 

 -

 

 -

 

 -

 

108 

 

31,728 

 

31,836 

Consumer - other

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,147 

 

9,147 

Consumer - home equity

 

 -

 

 -

 

 -

 

1,468 

 

1,468 

 

5,687 

 

7,155 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,383 

 

10,383 



 

$              3,535 

 

$              2,391 

 

$                 954 

 

$              4,516 

 

$            11,396 

 

$       1,490,580 

 

$       1,501,976 



112

 


 

The Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans.  The following table provides information by credit risk rating indicator for each segment of the loan portfolio excluding loans held-for-sale at the dates indicated (in thousands):









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019



 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBL non-real estate

 

$             76,108 

 

$              3,045 

 

$              4,430 

 

$                 - 

 

$               - 

 

$                      - 

 

$                     996 

 

$                84,579 

SBL commercial mortgage

 

208,809 

 

2,249 

 

5,577 

 

 -

 

 -

 

 -

 

1,475 

 

218,110 

SBL construction

 

44,599 

 

 -

 

711 

 

 -

 

 -

 

 -

 

 -

 

45,310 

Direct lease financing

 

420,289 

 

 -

 

8,792 

 

 -

 

 -

 

 -

 

5,379 

 

434,460 

SBLOC / IBLOC

 

942,858 

 

 -

 

 -

 

 -

 

 -

 

 -

 

81,562 

 

1,024,420 

Other specialty lending

 

3,055 

 

 -

 

 

 

 -

 

 -

 

 -

 

 -

 

3,055 

Consumer

 

2,545 

 

 -

 

345 

 

 -

 

 -

 

 -

 

1,664 

 

4,554 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

9,757 

 

9,757 



 

$        1,698,263 

 

$              5,294 

 

$            19,855 

 

$                 - 

 

$               - 

 

$                      - 

 

$              100,833 

 

$           1,824,245 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

Pass

 

Special mention

 

Substandard

 

Doubtful

 

Loss

 

Unrated subject to review *

 

Unrated not subject to review *

 

Total loans

SBL non-real estate

 

$             67,809 

 

$              1,641 

 

$              4,517 

 

$                 - 

 

$               - 

 

$                  347 

 

$                  2,026 

 

$                76,340 

SBL commercial mortgage

 

158,667 

 

273 

 

458 

 

 -

 

 -

 

5,498 

 

510 

 

165,406 

SBL construction

 

19,912 

 

 -

 

694 

 

 -

 

 -

 

843 

 

187 

 

21,636 

Direct lease financing

 

382,860 

 

2,157 

 

1,456 

 

 -

 

 -

 

3,623 

 

4,674 

 

394,770 

SBLOC

 

775,153 

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,150 

 

785,303 

Other specialty lending

 

31,749 

 

 -

 

 -

 

 -

 

 -

 

 -

 

87 

 

31,836 

Consumer

 

5,849 

 

 -

 

1,742 

 

 -

 

 -

 

 -

 

8,711 

 

16,302 

Unamortized loan fees and costs

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

10,383 

 

10,383 



 

$        1,441,999 

 

$              4,071 

 

$              8,867 

 

$                 - 

 

$               - 

 

$             10,311 

 

$                36,728 

 

$           1,501,976 





* At December 31, 2019, in excess of 50% of the total continuing loan portfolio was reviewed. The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio.  These thresholds are maintained as follows:



Security Backed Lines of Credit (SBLOC) – The targeted review threshold for 2019 was 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 December 31, 2019, approximately 55% of the SBLOC portfolio had been reviewed.



Insurance Backed Lines of Credit (IBLOC) – The targeted review threshold for 2019 was 40% with the largest 25% of IBLOCs by commitment to be reviewed annually.  A random sample of the remaining loans will also be reviewed and a minimum of 20 loans will be reviewed each quarter.  At December 31, 2019, approximately 57% of the IBLOC portfolio had been reviewed. 

   

SBA Loans – The targeted review or rated threshold for 2019 was 100%, to be rated and/or reviewed within 90 days of funding, less fully guaranteed loans purchased for CRA.  The 100% coverage includes loans rated by designated SBA department personnel, with a review threshold for the independent loan review department of all loans exceeding $1.0 million and any classified loans.  At December 31, 2019, approximately 100% of the government guaranteed loan portfolio had been rated and/or reviewed.



Direct Lease Financing – The targeted review threshold for 2019 was 35%.  At December 31, 2019, approximately 54% of the leasing portfolio had been reviewed. All lease relationships exceeding $1.0 million are reviewed.

 

113

 


 

Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold for 2019 was 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 December 31, 2019, approximately 100% of the CMBS floating rate loans on the books more than 90 days had been reviewed.  



Commercial Mortgaged Backed Securities (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 December 31, 2019, 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 December 31, 2019, approximately 100% of the non-CRA loans had been reviewed.

Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2019 was 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 December 31, 2019, approximately 85% of the HELOC portfolio had been reviewed.

Note F—Premises and Equipment



Premises and equipment are as follows (in thousands):







 

 

 

 

 

 



 

 

 

December 31,



 

Estimated

 

 

 

 



 

useful lives

 

2019

 

2018

Land

 

-

 

$                1,732

 

$                     -

Buildings

 

39 years

 

3,436 

 

 -

Furniture, fixtures, and equipment

 

3 to 12 years

 

52,172 

 

51,789 

Leasehold improvements

 

6 to 10 years

 

11,035 

 

14,246 



 

 

 

68,375 

 

66,035 

Accumulated depreciation

 

 

 

(50,837)

 

(47,140)



 

 

 

$              17,538

 

$            18,895

Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was approximately $3.7 million,  $4.0 million and $4.5 million, respectively.

Note G—Time Deposits

At December 31, 2019, the scheduled maturities of time deposits (certificates of deposit) are as follows (in thousands):





 

 

2020 

 

$                        475,000 

2021 

 

 -

2022 

 

 -

2023 

 

 -

2024 

 

 -



 

$                        475,000 

There were no time deposits outstanding at December 31, 2018.

114

 


 

Note H—Variable Interest Entity (VIE)



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



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



The Company holds variable interests in Walnut Street 2014-1 LLC (WS 2014), accounted for as a debt instrument for which the Company elected the fair value option.  The debt acquired was a 49% equity interest in WS 2014 as well as 100% of the A-Notes and 49% of the B-Notes that WS 2014 issued in a securitization transaction. The assets within the securitization consisted of loans and loan collateral from the Company’s discontinued loan portfolio.  The variable interests relate to the economic interests held by the Company in WS 2014 and the asset management contract between the Company and WS 2014.  The Company is not the primary beneficiary, as it does not have the controlling financial interest in WS 2014, and therefore does not consolidate WS 2014.  At December 31, 2019, the Company’s investment in WS 2014 was $39.2 million and was classified as an investment in unconsolidated entity in the consolidated balance sheet.  The Company’s remaining exposure to loss is equal to the balance of the Company’s interest, or $39.2 million.



The following table shows the total unpaid principal amount of assets held in WS 2014, shown as commercial and other, at December 31, 2019 and 2018 (in thousands).  Continuing involvement for WS 2014 includes servicing the loans and holding senior interests or subordinated interests.  It also separately shows the Company’s interests in CRE1, CRE2, CRE3, CRE4, CRE5 and CRE6, which represent single securities purchased by the Company in each of the securitizations for which the Company generated all of the commercial mortgage-backed loan collateral.





115

 


 



 

 

 

 

 

 

 

 

 



 

December 31, 2019

 



 

Principal amount outstanding

 

The Company's

 



 

 

 

 

 

Assets held in

 

interest

 



 

Total assets

 

Assets held in

 

nonconsolidated

 

in securitized

 



 

held by

 

consolidated

 

VIEs with

 

assets in

 



 

securitization

 

securitization

 

continuing

 

nonconsolidated

 



 

VIEs (a)

 

VIEs

 

involvement

 

VIEs (b)

 

Commercial and other

 

$                        56,661 

 

$                              - 

 

$                                    56,661 

 

$                                     39,154 

 

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

CRE1 (c)

 

52,143 

 

 -

 

52,143 

 

16,794 

 

CRE2

 

134,216 

 

 -

 

134,216 

 

12,570 

 

CRE3

 

221,285 

 

 -

 

221,285 

 

19,861 

 

CRE4

 

296,827 

 

 -

 

296,827 

 

29,612 

 

CRE5

 

494,567 

 

 -

 

494,567 

 

38,496 

 

CRE6

 

775,557 

 

 -

 

775,557 

 

51,558 

 



 

 

 

 

 

 

 

 

 



 

December 31, 2018

 



 

Principal amount outstanding

 

The Company's

 



 

 

 

 

 

Assets held in

 

interest

 



 

Total assets

 

Assets held in

 

nonconsolidated

 

in securitized

 



 

held by

 

consolidated

 

VIEs with

 

assets in

 



 

securitization

 

securitization

 

continuing

 

nonconsolidated

 



 

VIEs (a)

 

VIEs

 

involvement

 

VIEs

 

Commercial and other

 

$                      152,893 

 

$                              - 

 

$                                  152,893 

 

$                                     59,273 

 

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

CRE1

 

126,393 

 

 -

 

126,393 

 

16,687 

 

CRE2

 

238,231 

 

 -

 

238,231 

 

16,565 

 

CRE3

 

284,069 

 

 -

 

284,069 

 

24,390 

 

CRE4

 

336,374 

 

 -

 

336,374 

 

32,513 

 



 

 

 

 

 

 

 

 

 

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

 

(b) For securities purchased from securitizations which comprise the Company's interest: CRE1 and CRE2 are non-rated and CRE3, CRE4, CRE5 and CRE6 are "A-" rated as of December 31, 2019.  CRE1, CRE2, CRE3, CRE4, and CRE5 are valued  by discounted cash flow analysis and CRE6 is priced by a pricing service.

 

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(c) The  Company's $16.8 million  interest would have been repaid in October 2019 had remaining underlying loan collateral been paid as agreed. However, remaining collateral comprised of one commercial real estate owned property, a second loan in process of collection and an extended loan, are instead in the process of disposition.  While the estimated value of these sources of repayment exceeds the amount to be repaid to the Company and other applicable bondholders, there can be no assurance that the Company's interest will be fully repaid or as to the timing of repayment.

 











Note I—Debt



1.

Short-term borrowings



The Bank has overnight borrowing capacity with the Federal Home Loan Bank of Pittsburgh which amounted to $248.8 million at December 31, 2019.  Borrowings under this arrangement have a variable interest rate.  The Bank also had a $1.11 billion line with the FRB as of that date.  As of December 31, 2019, the Bank did not have any borrowings outstanding on these lines.  The details of these categories are presented below:









 

 

 

 

 

 



 

As of or for the year ended December 31,



 

2019

 

2018

 

2017



 

(dollars in thousands)



 

 

 

 

 

 

Short-term borrowings

 

 

 

 

 

 

Balance at year-end

 

$                      -

 

$                      -

 

$                      -

Average during the year

 

129,031 

 

20,346 

 

23,281 

Maximum month-end balance

 

300,000 

 

100,000 

 

50,000 

Weighted average rate during the year

 

2.43% 

 

2.22% 

 

1.39% 

Rate at December 31

 

1.50% 

 

2.35% 

 

1.34% 



2.Securities sold under agreements to repurchase



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







 

 

 

 

 

 



 

As of or for the year ended December 31,



 

2019

 

2018

 

2017



 

(dollars in thousands)

Securities sold under repurchase agreements

 

 

 

 

 

 

Balance at year-end

 

$                    82

 

$                   93

 

$                  217

Average during the year

 

90 

 

173 

 

240 

Maximum month-end balance

 

93 

 

223 

 

274 

Weighted average rate during the year

 

0.00% 

 

0.00% 

 

0.00% 

Rate at December 31

 

0.15% 

 

0.15% 

 

0.23% 

3. Guaranteed preferred beneficiary interest in the Company’s subordinated debt



As of December 31, 2019, the Company held two statutory business trusts: The Bancorp Capital Trust II and The Bancorp Capital Trust III.  In each case, the Company owns all the common securities of the Trust.  The Trusts issued preferred capital

117

 


 

securities to investors and invested the proceeds in the Company through the purchase of junior subordinated debentures issued by the Company.  These debentures are the sole assets of the Trusts.



·

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

·

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



As of December 31, 2019, the Trusts qualify as VIEs under ASC 810, Consolidation.  However, the Company is not considered the primary beneficiary and, therefore, the Trusts are not consolidated in the Company’s consolidated financial statements. The Trusts are accounted for under the equity method of accounting.  





Note J—Shareholders’ Equity

In 2011, the Company adopted a common stock repurchase program in which share repurchases reduce the amount of shares outstanding.  Repurchased shares may be reissued for various corporate purposes.  As of December 31, 2011, the Company had repurchased 100,000 shares of the total 750,000 maximum number of shares authorized by the Board of Directors.  The 100,000 shares were repurchased at an average cost of $8.66 per share.  Shares were repurchased at market price and were recorded as treasury stock at that amount, using the cost method

Note K—Benefit Plans



401 (k) Plan



The Company maintains a 401(k) savings plan covering substantially all employees of the Company.  Under the plan, the Company matches 50% of the employee contributions for all participants, not to exceed 6% of their salary.  Contributions made by the Company were approximately $1.6 million, $1.3 million and $1.0 million for the years ended December 31, 2019, 2018 and 2017, respectively and are reflected in salaries and employee benefits in the consolidated statement of operations.



Supplemental Executive Retirement Plan

In 2005, the Company began contributing to a supplemental executive retirement plan for its former Chief Executive Officer that provides annual retirement benefits of $25,000 per month until death.  There were $300,000 of disbursements under the plan in 2019, 2018 and 2017, respectively.  The actuarial assumptions reflected a discount rate of 2.62% and a monthly benefit of $25,000. Projected payouts for years each of years 2020 through 2024, inclusive are projected at $300,000 per year, and $1.1 million for each of the subsequent five years. The Company adjusts its related liability to actuarially derived estimates of lifetime payouts based upon actuarial tables as follows: SOA Pri-2012 Amount-Weighted White Collar Retiree Mortality Table with Mortality Improvement Scale MP-2019. The Company expensed $357,000 for the year ended December 31, 2019.  The Company reversed $34,000 of expense for the year ended December 31, 2018 and expensed $219,000 for this plan for the year ended December 31, 2017 based upon changes to actuarial tables.  As of December 31, 2019, the Company had accrued $3.3 million for potential future payouts. 



Note L—Income Taxes



The Company operates predominantly in the United States and is subject to corporate net income taxes for federal and state purposes.  The Company sold its minimal operations in Europe in April 2017.  These taxes were not considered material to the overall financial statements. Tax expense is computed in total on combined continuing and discontinued operations, then separately for continuing operations which is subtracted from that total.  The remainder is shown as tax expense for discontinued operations.  The components of income tax expense included in the statements of continuing operations are as follows:





118

 


 



 

 

 

 

 

 



 

For the years ended



 

December 31,



 

2019

 

2018

 

2017



 

(in thousands)

Current tax provision

 

 

 

 

 

 

Federal

 

$               14,407 

 

$               11,038 

 

$                 1,044 

State

 

5,212 

 

5,379 

 

1,213 



 

19,619 

 

16,417 

 

2,257 

Deferred tax provision (benefit)

 

 

 

 

 

 

Federal

 

1,382 

 

13,926 

 

22,599 

State

 

225 

 

1,898 

 

(1,800)



 

1,607 

 

15,824 

 

20,799 



 

$               21,226 

 

$               32,241 

 

$               23,056 



The differences between applicable income tax expense (benefit) from continuing operations and the amounts computed by applying the statutory federal income tax rate of 21% for 2019 and 2018 and 34% for 2017, are as follows:







 

 

 

 

 

 



 

For the years ended



 

December 31,



 

2019

 

2018

 

2017



 

(in thousands)



 

 

 

 

 

 

Computed tax expense at statutory rate

 

$            15,224 

 

$            25,154 

 

$            13,734 

Tax effect of federal rate change

 

 -

 

 -

 

17,293 

State taxes

 

4,140 

 

6,148 

 

1,199 

Tax-exempt interest income

 

(467)

 

(408)

 

(1,600)

Meals and entertainment

 

97 

 

80 

 

63 

Civil money penalty

 

1,870 

 

 -

 

 -

Other nondeductible items

 

263 

 

546 

 

2,421 

Valuation allowance - domestic

 

 -

 

721 

 

(9,813)

Other

 

99 

 

 -

 

(241)



 

$            21,226 

 

$            32,241 

 

$            23,056 



119

 


 

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







 

 

 

 



 

For the years ended



 

December 31,



 

2019

 

2018



 

(in thousands)

Deferred tax assets:

 

 

 

 

Allowance for loan and lease losses

 

$                 2,150 

 

$                 1,817 

Non-accrual interest

 

867 

 

1,993 

Deferred compensation

 

692 

 

680 

State taxes

 

1,333 

 

1,558 

Nonqualified stock options

 

1,806 

 

1,440 

Capital loss limitations

 

3,579 

 

3,579 

Tax deductible goodwill

 

3,064 

 

3,462 

Partnership interest, Walnut St basis difference

 

12,420 

 

10,412 

Fair value adjustment to investments

 

808 

 

753 

Loan charges

 

3,434 

 

4,352 

Unrealized loss on AFS securities

 

 -

 

5,240 

Other

 

1,326 

 

1,260 

Total gross deferred tax assets

 

31,479 

 

36,546 

Federal and state valuation allowance

 

(14,869)

 

(12,952)



 

 

 

 

Deferred tax liabilities:

 

 

 

 

Unrealized gains on investment securities available for sale

 

2,237 

 

 -

Discount on Class A notes

 

92 

 

92 

Depreciation

 

1,743 

 

1,880 

Total deferred tax liabilities

 

4,072 

 

1,972 

Net deferred tax asset

 

$               12,538 

 

$               21,622 



Management assesses all available positive and negative evidence to determine whether it is more likely than not that the Company will be able to recognize the existing deferred tax assets.  The majority of valuation allowances reversed in 2017 with the remaining valuation allowance reflecting capital losses in Walnut Street.  The remaining valuation allowance will likely reverse only to the extent that recoveries exceed any potential future losses in Walnut Street.  The federal and state valuation allowance at December 31, 2019 and 2018, respectively, was $14.9 million and $12.9 million. 



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

 





 

 

 

 

 

 



 

For the years ended



 

December 31,



 

2019

 

2018

 

2017



 

(in thousands)

Beginning balance at January 1

 

$                    338 

 

$                    338 

 

$                    339 

Decreases in tax provisions for prior years

 

 -

 

 -

 

(1)

Gross unrecognized tax benefits at December 31

 

$                    338 

 

$                    338 

 

$                    338 



Management does not believe these amounts will significantly increase or decrease within 12 months of December 31, 2019.  The total amount of unrecognized tax benefits, if recognized, will impact the effective tax rate.

120

 


 

Tax years after 2016 remain subject to examination by the federal authorities and 2015 and after remain subject to examination by most of the state tax authorities. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense for all periods presented.  To date, no amounts of interest or penalties relating to unrecognized tax benefits have been recorded.



Note M—Stock-Based Compensation. 



In May 2018, the Company adopted an Equity Incentive Plan (the 2018 Plan).  Employees and directors of the Company and the Bank and consultants (with restrictions) are eligible to participate in the 2018 Plan.  The option term may not exceed 10 years from the date of the grant.  Any employee or consultant who possesses more than 10 percent of voting power of all classes of stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five years from the date of grant.  An aggregate of 1,700,000 shares of common stock were reserved for issuance under the 2018 Plan. Restricted stock units may also be granted under the 2018 Plan with conditions similar to those for options.



In May 2013, the Company adopted a Stock Option and Equity Plan (the 2013 Plan).  Employees and directors of the Company and the Bank and consultants (with restrictions) are eligible to participate in the 2013 Plan.  The option term may not exceed 10 years from the date of the grant.  An employee or consultant who possesses more than 10 percent of voting power of all classes of stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five years from the date of grant.  An aggregate of 2,200,000 shares of common stock were originally reserved for issuance under the 2013 Plan but none remain. Restricted stock units may also be granted under the 2013 Plan with conditions similar to those for options.



In May 2011, the Company adopted a Stock Option and Equity Plan (the 2011 Plan).  Employees and directors of the Company and the Bank and consultants (with restrictions) are eligible to participate in the 2011 Plan.  The option term may not exceed 10 years from the date of the grant.  An employee or consultant who possesses more than 10 percent of voting power of all classes of stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five years from the date of grant.  An aggregate of 1,400,000 shares of common stock were originally reserved for issuance under the 2011 Plan but none remain.



In June 2005, the Company adopted an Omnibus Equity Compensation Plan (the 2005 Plan).  Employees and directors of the Company and the Bank are eligible to participate in the 2005 Plan.  An employee or consultant who possesses more than 10 percent of voting power of all classes of stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five years from the date of grant.  An aggregate of 1,000,000 shares of common stock were originally reserved for issuance under the 2005 Plan but none remain.  Options granted under the 2005 Plan expire on the tenth anniversary of their grant.



In October 1999, the Company adopted a stock option plan (the 1999 Plan).  Employees and directors of the Company and the Bank were eligible to participate in the 1999 Plan.  An employee or consultant who possesses more than 10 percent of voting power of all classes of stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five years from the date of grant.  An aggregate of 1,000,000 shares of common stock were originally reserved for issuance under the 1999 Plan, with no more than 75,000 shares being issuable to non-employee directors, but none remain.  Options vested over four years and expire on the tenth anniversary of the grant.



121

 


 

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







 

 

 

 

 

 

 



 

 

 

 

Weighted-average

 

 



 

 

 

 

remaining

 

 



 

 

Weighted-average

 

contractual

 

Aggregate



Shares

 

exercise price

 

term (years)

 

intrinsic value



(in thousands except per share data)



 

 

 

 

 

 

 

Outstanding at January 1, 2019

1,276,500 

 

$                     8.23 

 

3.77 

 

$              511,200 

Granted

65,104 

 

8.57 

 

3.13 

 

286,458 

Exercised

(30,000)

 

8.59 

 

-

 

75,975 

Expired

 -

 

 -

 

-

 

 -

Forfeited

 -

 

 -

 

-

 

 -

Outstanding at December 31, 2019

1,311,604 

 

$                     8.24 

 

3.11 

 

$           6,203,523 

Exercisable at December 31, 2019

1,171,500 

 

$                     8.32 

 

2.56 

 

$           5,450,565 



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





 

 

 

 

 



 

 

Weighted-average

 

Average remaining



 

 

grant date

 

contractual



Shares

 

fair value

 

term (years)

Outstanding at January 1, 2019

850,937 

 

$                     8.84 

 

1.44 

Granted

930,831 

 

8.57 

 

1.96 

Vested

(464,430)

 

8.21 

 

 -

Forfeited

(63,411)

 

8.96 

 

 -

Outstanding at December 31, 2019

1,253,927 

 

$                     8.87 

 

1.64 



In 2019, The Company granted 930,831 restricted stock units at a fair value of $8.57 of which 863,331 had a vesting period of three years and 67,500 had a vesting period of one year.  In 2018, the Company granted 507,792 restricted stock units at a fair value of $11.07 per unit of which 440,292 had a vesting period of 2.8 years and 67,500 had a vesting period of one year.  In 2017, the Company granted 955,024 restricted stock units at a fair value of $5.47 per unit of which 820,024 had a vested period of three years and 135,000 had a vesting period of one year.  

 

A summary of the status of the Company’s non-vested options under the plans as of December 31, 2019, and changes during the year then ended, is presented below:







 

 

 



 

 

Weighted-average



 

 

grant date



Shares

 

fair value

Non-Vested at January 1, 2019

150,000 

 

$                     2.89 

Granted

65,104 

 

3.84 

Vested

(75,000)

 

2.89 

Expired

 -

 

 -

Forfeited

 -

 

 -

Non-Vested at December 31, 2019

140,104 

 

$                     3.33 



122

 


 

The Company granted 65,104 common stock options in 2019, with a vesting period of four years, whereas in 2018 and 2017 the Company did not grant any common stock options.  The weighted average fair value of the stock options issued in 2019 was $3.84.    



There were 494,430 options exercised and restricted stock units vested in 2019, 594,673 options exercised and restricted stock units vested in 2018 and 468,431 options exercised and restricted stock units vested in 2017.  The total intrinsic value of the options exercised and stock units vested in 2019, 2018 and 2017 was $4.4 million, $6.2 million and $3.0 million, respectively.  The total issuance date fair value of options that were exercised and restricted units which vested during the year ended December 31, 2019 was $4.0 million.



As of December 31, 2019, there was a total of $7.3 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 1.6 years.  For the years ended December 31, 2019, 2018 and 2017 total compensation expense under share based payment arrangements was $5.7 million, $3.4 million and $3.2 million respectively, and the related tax benefits recognized were $1.2 million, $724,000 and $1.1 million, respectively. 



For the years ended December 31, 2019, 2018 and 2017, the Company estimated the fair value of each stock option grant on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions:







 

 

 

 

 



December 31,



2019

 

2018

 

2017

Risk-free interest rate

2.63% 

 

 -

 

 -

Expected dividend yield

0% 

 

 -

 

 -

Expected volatility

0% - 41.8%

 

 -

 

 -

Expected lives (years)

1.0 - 6.3

 

 -

 

 -



Expected volatility is based on the historical volatility of the Company’s stock and peer group comparisons over the expected life of the grant.  The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at the time of the grant.  The life of the option is based on historical factors which include the contractual term, vesting period, exercise behavior and employee terminations.  In accordance with the ASC 718, Stock Based Compensation, stock based compensation expense for the year ended December 31, 2019 is based on awards that are ultimately expected to vest and has been reduced for estimated forfeitures. The Company estimates forfeitures using historical data based upon the groups identified by management.



Note N—Transactions with Affiliates



The Bank maintains deposits for various affiliated companies totaling approximately $0 million and $2.6 million as of December 31, 2019 and 2018, respectively.

 

The Bank has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons.  All loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to the lender.  At December 31, 2019, these loans were current as to principal and interest payments, and did not involve more than normal risk of collectability.  At December 31, 2019 and 2018, loans to these related parties amounted to $2.3 million and $2.0 million, respectively. 



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 a registered representative and has a minority interest. The Company’s Chairman also serves as the President, a director and the Chief Investment Officer 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 2019, the Company purchased $2.3 million of government guaranteed SBA loans for Community Reinvestment Act purposes from JVB.  Prices for the SBA loans are verified to market rates and no separate commissions or fees are paid to that firm. The Company has previously purchased securities under agreements to resell through JVB primarily consisting of Government National Mortgage Association certificates which are full faith

123

 


 

and credit obligations of the United States government issued at competitive rates.  JVB complied fully with the terms of the repurchase agreements. There were no repurchase agreements outstanding at December 31, 2019 and 2018. 



Mr. Hersh Kozlov, a director of the Company, is a partner at Duane Morris LLP, an international law firm.  The Company paid Duane Morris LLP $1.1 million in 2019, $3.0 million in 2018 and $3.5 million in 2017 for legal services.



Note O—Commitments and Contingencies



1. Operating Leases



As part of its cost control efforts, the Company is actively managing its facilities.  The Company exited its Philadelphia and Tampa leased sites and one of its New York offices, and has subleased all three offices.  The Company’s lease for its Delaware operations facility expires in 2025.  The occupied New York and Norristown sites are business production offices, and the leases will expire in 2024. The Company also has leases for business production offices in Maryland, Minnesota, North Carolina, Pennsylvania, Utah and Washington State that expire at various times through 2022.  The Company’s lease in South Dakota for its prepaid and debit card division, also expires in 2022.  The Company’s leases in Illinois for its Small Business Lending division, and in New Jersey for its leasing business, expire in 2020. 



These leases require the Company to pay the real estate taxes and insurance on the leased properties in addition to rent.  The approximate future minimum annual rental payments, including any additional rents for escalation clauses, are as follows (in thousands):







 

 

Year ending December 31,

 

 



 

 

2020 

 

$                        4,314

2021 

 

3,939 
2022 

 

3,536 
2023 

 

3,320 
2024 

 

3,211 

Thereafter

 

2,222 



 

$                      20,542



Rent and related expense for the years ended December 31, 2019, 2018 and 2017 was approximately $5.0 million, $4.5 million and $4.4 million net of sublease rentals of approximately $586,300,  $186,300 and $100,200, respectively.    



2.

Legal Proceedings



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.   On September 19, 2019, the Company agreed, without admitting or denying any of the SEC’s allegations, to resolve the investigation by consenting to the entry of an order by the SEC that: (1) the Company will cease and desist from committing or causing any violations of the books-and-records provisions of the Securities Exchange Act and the relevant rules thereunder; and (2) the Company will pay a penalty of $1.4 million (the “Settlement Payment”) to the SEC.  The Company recognized a charge in its third fiscal quarter in the amount of the Settlement Payment.  As a result of the settlement certain costs to the Company related to the investigation will cease, including the legal costs of the investigation, compliance with the SEC’s subpoena, and cooperation with the SEC.

On July 16, 2018, certain investors in a hotel project of one of the Bank’s former borrowers, 550 Seabreeze Development LLC (“Seabreeze Development”), filed an adversary action against the Bank and others in the United States Bankruptcy Court of the Southern District of Florida. The note for the related loan was sold in the second quarter of 2018 and the loan is no longer on the Bank’s books. The adversary action was filed within the context of a Chapter 11 bankruptcy proceeding in which Seabreeze Development is the debtor, and alleged that the Bank and others defrauded the plaintiffs into investing a total of $10.5 million in the project.  Three causes of actions

124

 


 

were asserted against the Bank: (i) fraud in the inducement; (ii) civil conspiracy; and (iii) aiding and abetting fraud.  The Bank believed the claims were without merit and vigorously defended against them.  On November 1, 2018, the bankruptcy court entered an order dismissing the claims against the Bank for lack of jurisdiction.  The order further stated that the dismissal was without prejudice, and that the plaintiffs may file their causes of action in an appropriate forum.  On February 7, 2019, certain investors filed a new action in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade Country, Florida, asserting: (i) fraudulent misrepresentation; (ii) negligent misrepresentation; (iii) aiding and abetting fraud; and (iv) civil conspiracy.  Three additional investors were included as plaintiffs in the matter, increasing the total amount at issue to $12 million.  The Bank filed a motion to dismiss the state court action as to the Bank and on October 16, 2019, the state court granted the Bank’s motion and dismissed the plaintiffs’ claims against the Bank without prejudice.  



On June 12, 2019, the Bank was served with a qui tam lawsuit filed in the Superior Court of the State of Delaware, New Castle County.  The Delaware Department of Justice intervened in the litigation.  The case is titled The State of Delaware, Plaintiff, Ex rel. Russell S. Rogers, Plaintiff-Relator, v. The Bancorp Bank, Interactive Communications International, Inc., and InComm Financial Services, Inc., Defendants.  The lawsuit alleges that the defendants violated the Delaware False Claims Act by not paying balances on certain open-loop “Vanilla” prepaid cards to the State of Delaware as unclaimed property.  The complaint seeks actual and treble damages, statutory penalties, and attorneys’ fees.  The Bank denies the allegations and is defending itself.  The Bank and other defendants filed a motion to dismiss the action, but the motion was denied on February 7, 2020.  At this time, the Company is unable to determine whether the ultimate resolution of the matter will have a material adverse effect on our financial condition or operations.



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



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



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









 

 

 



December 31,



2019

 

2018



(in thousands)

Financial instruments whose contract amounts represent credit risk

 

 

 

Commitments to extend credit

$          2,340,954 

 

$        1,683,499 

Standby letters of credit

3,512 

 

1,150 



$          2,344,466 

 

$        1,684,649 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. The vast majority of commitments to extend credit arise from security backed lines of credit (SBLOC) which are variable rate and which represent collateral values available to support additional extensions of credit, and not expected usage. The majority of such lines of credit have historically not been drawn upon.

125

 


 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Company holds residential or commercial real estate, accounts receivable, inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary.  Based upon periodic analysis of the Company’s standby letters of credit, management has determined that a reserve is not necessary at December 31, 2019. The Company reduces any potential liability on its standby letters of credit based upon its estimate of the proceeds obtainable upon the liquidation of the collateral held.  Fair values of unrecognized financial instruments, including commitments to extend credit and the fair value of letters of credit, are considered immaterial.  The standby letters of credit expire as follows: $3.4 million in 2020 and $124,000 in 2021.

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

Note Q—Fair Value of Financial Instruments

ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments.  For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments.  However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.  Also, it is the Company’s general practice and intent to hold its financial instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities, except for certain loans.  For fair value disclosure purposes, the Company utilized the fair value measurement criteria of ASC 820, Fair Value Measurements and Disclosures.

ASC 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to assets and liabilities.  It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  It also establishes a framework for measuring fair value and expands disclosures concerning fair value measurements.  ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date.  Level 2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly.  This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based on “unobservable inputs” that are the best information available in the circumstances.  A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers between levels in 2019, 2018 and 2017, consisted only of transfers resulting from the availability or non-availability of third party pricing for CRE securities from the Company’s securitizations, see Note E. For fair value disclosure purposes, the Company utilized certain value measurement criteria required under the ASC 820, “Fair Value Measurements and Disclosures”, as 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 FRB and securities purchased under agreements to resell, had recorded values of $944.5 million and $554.3 million at December 31, 2019 and 2018, respectively, which approximated fair values.



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

126

 


 

and investments in certain available-for-sale securities are determined using unobservable (Level 3) inputs that are based on the best information available in the circumstances when market information is not available.  For these investment securities, fair values are based on the present value of expected cash flows from principal and interest.



Commercial loans held-for-sale generally have estimated fair values based upon market indications of the sales price of such loans from recent sales transactions. If such information is not available, fair values reflect cash flow analysis based upon pricing for similar loans. The analysis is performed on an individual loan basis for commercial mortgage loans and a pooled basis for SBA loans. 



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



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



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, WS 2014. For information regarding this transaction see Note H.  The fair value of the notes issued to the Bank by WS 2014 was initially established by the sales price and subsequently marked to fair value which is determined using a discounted cash flow analysis.  At December 31, 2019, the cash flows were modeled using a discount rate of 5.84%, based on market indications.  A constant default rate on cash flowing loans of 1%, net of recoveries, was utilized.  The change in value of investment in unconsolidated entity in the consolidated statements of operations reflects changes in estimated fair value.

 

Assets held-for-sale from discontinued operations as of December 31, 2019 are held at the lower of cost basis or market value.  For loans, market value was determined using the income approach which converts expected cash flows from the loan portfolio by unit of measurement to a present value estimate.  Unit of measurement was determined by loan type and for significant loans on an individual loan basis.  The fair values of the Company’s loans classified as assets held-for-sale are based on “unobservable inputs” that are based upon available information.  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.



Demand deposits (comprising interest and non-interest bearing checking accounts, savings, and certain types of money market accounts) are equal to the amount payable on demand at the reporting date (generally, their carrying amounts).  The fair values of securities sold under agreements to repurchase and short term borrowings are equal to their carrying amounts as they are overnight borrowings. There were no short term borrowings outstanding at December 31, 2019 or 2018.



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. There were $475.0 million time deposits outstanding at December 31, 2019 and $0 at December 31, 2018.



Long term borrowings resulted from sold loans which did not qualify for true sale accounting. They are presented in the amount of principal of such loans.



Interest rate swaps are recorded in other assets and have a fair value which is estimated using models that use readily observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period to maturity and the applicable interest rate index.

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. Fair value information for specific balance sheet categories is as follows.

127

 


 



 

 

 

 

 

 

 

 

 



December 31, 2019



 

 

 

 

Quoted prices

 

Significant

 

 



 

 

 

 

in active

 

other

 

Significant



 

 

 

 

markets for

 

observable

 

unobservable

   

Carrying

 

Estimated

 

identical assets

 

inputs

 

inputs



amount

 

fair value

 

(Level 1)

 

(Level 2)

 

(Level 3)



(in thousands)

Investment securities, available-for-sale

$                 1,320,692 

 

$                 1,320,692 

 

$                        - 

 

$             1,203,359 

 

$          117,333 

Investment securities, held-to-maturity

84,387 

 

83,002 

 

 -

 

75,850 

 

7,152 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

5,342 

 

5,342 

 

 -

 

 -

 

5,342 

Commercial loans held-for-sale

1,180,546 

 

1,180,546 

 

 -

 

 -

 

1,180,546 

Loans, net of deferred loan fees and costs

1,824,245 

 

1,826,154 

 

 -

 

 -

 

1,826,154 

Investment in unconsolidated entity

39,154 

 

39,154 

 

 -

 

 -

 

39,154 

Assets held-for-sale from discontinued operations

140,657 

 

140,657 

 

 -

 

 -

 

140,657 

Interest rate swaps, liability

232 

 

232 

 

 -

 

232 

 

 -

Demand and interest checking

4,402,740 

 

4,402,740 

 

 -

 

4,402,740 

 

 -

Savings and money market

174,290 

 

174,290 

 

 -

 

174,290 

 

 -

Time deposits

475,000 

 

475,000 

 

 -

 

 -

 

475,000 

Subordinated debentures

13,401 

 

9,736 

 

 -

 

 -

 

9,736 

Securities sold under agreements to repurchase

82 

 

82 

 

82 

 

 -

 

 -







 

 

 

 

 

 

 

 

 



December 31, 2018



 

 

 

 

Quoted prices

 

Significant

 

 



 

 

 

 

in active

 

other

 

Significant



 

 

 

 

markets for

 

observable

 

unobservable

   

Carrying

 

Estimated

 

identical assets

 

inputs

 

inputs



amount

 

fair value

 

(Level 1)

 

(Level 2)

 

(Level 3)



(in thousands)

Investment securities, available-for-sale

$                 1,236,324 

 

$                 1,236,324 

 

$                        - 

 

$             1,211,934 

 

$            24,390 

Investment securities, held-to-maturity

84,432 

 

83,391 

 

 -

 

76,113 

 

7,278 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

1,113 

 

1,113 

 

 -

 

 -

 

1,113 

Commercial loans held-for-sale

688,471 

 

688,471 

 

 -

 

 -

 

688,471 

Loans, net of deferred loan fees and costs

1,501,976 

 

1,503,780 

 

 -

 

 -

 

1,503,780 

Investment in unconsolidated entity

59,273 

 

59,273 

 

 -

 

 -

 

59,273 

Assets held-for-sale from discontinued operations

197,831 

 

197,831 

 

 -

 

 -

 

197,831 

Interest rate swaps, asset

1,681 

 

1,681 

 

 -

 

1,681 

 

 -

Demand and interest checking

3,904,638 

 

3,904,638 

 

 -

 

3,904,638 

 

 -

Savings and money market

31,076 

 

31,076 

 

 -

 

31,076 

 

 -

Subordinated debentures

13,401 

 

9,975 

 

 -

 

 -

 

9,975 

Securities sold under agreements to repurchase

93 

 

93 

 

93 

 

 -

 

 -



128

 


 

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



December 31, 2019

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

Investment securities, available-for-sale

 

 

 

 

 

 

 

U.S. Government agency securities

$                            52,910 

 

$                                    - 

 

$                              52,910 

 

$                                        - 

Asset-backed securities

244,349 

 

 -

 

244,349 

 

 -

Obligations of states and political subdivisions

65,568 

 

 -

 

65,568 

 

 -

Residential mortgage-backed securities

336,596 

 

 -

 

336,596 

 

 -

Collateralized mortgage obligation securities

222,727 

 

 -

 

222,727 

 

 -

Commercial mortgage-backed securities

398,542 

 

 -

 

281,209 

 

117,333 

Total investment securities, available-for-sale

1,320,692 

 

 -

 

1,203,359 

 

117,333 

Commercial loans held-for-sale

1,180,546 

 

 -

 

 -

 

1,180,546 

Investment in unconsolidated entity

39,154 

 

 -

 

 -

 

39,154 

Assets held-for-sale from discontinued operations

140,657 

 

 -

 

 -

 

140,657 

Interest rate swaps, liability

232 

 

 -

 

232 

 

 -



$                       2,680,817 

 

$                                    - 

 

$                         1,203,127 

 

$                         1,477,690 







 

 

 

 

 

 

 



 

 

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, 2018

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

Investment securities, available-for-sale

 

 

 

 

 

 

 

U.S. Government agency securities

$                            53,362 

 

$                                    - 

 

$                              53,362 

 

$                                        - 

Asset-backed securities

188,602 

 

 -

 

188,602 

 

 -

Obligations of states and political subdivisions

67,986 

 

 -

 

67,986 

 

 -

Residential mortgage-backed securities

369,741 

 

 -

 

369,741 

 

 -

Collateralized mortgage obligation securities

262,207 

 

 -

 

262,207 

 

 -

Commercial mortgage-backed securities

294,426 

 

 -

 

270,036 

 

24,390 

Total investment securities, available-for-sale

1,236,324 

 

 -

 

1,211,934 

 

24,390 

Commercial loans held-for-sale

688,471 

 

 -

 

 -

 

688,471 

Investment in unconsolidated entity

59,273 

 

 -

 

 -

 

59,273 

Assets held-for-sale from discontinued operations

197,831 

 

 -

 

 -

 

197,831 

Interest rate swaps, asset

1,681 

 

 -

 

1,681 

 

 -



$                       2,183,580 

 

$                                    - 

 

$                         1,213,615 

 

$                            969,965 



129

 


 

The Company’s Level 3 asset activity for the categories shown for the years 2019 and 2018 is as follows (in thousands):







 

 

 

 

 

 

 



Fair Value Measurements Using



Significant Unobservable Inputs



(Level 3)



 

 

 

 

 

 

 



Available-for-sale

 

Commercial loans



securities

 

held-for-sale



December 31, 2019

 

December 31, 2018

 

December 31, 2019

 

December 31, 2018

Beginning balance

$                            24,390 

 

$                            40,644 

 

$                             688,471 

 

$                             503,316 

Transfers into level 3

100,664 

 

 -

 

 -

 

 -

Transfers out of level 3

 -

 

(74,355)

 

 -

 

 -

Total gains or (losses) (realized/unrealized)

 

 

 

 

 

 

 

Included in earnings

 -

 

 -

 

25,986 

 

19,850 

Included in other comprehensive gain (loss)

688 

 

(688)

 

 -

 

 -

Purchases, issuances, sales and settlements

 

 

 

 

 

 

 

Purchases

 -

 

62,076 

 

 -

 

 -

Issuances

 -

 

 -

 

1,795,376 

 

866,303 

Sales

 -

 

 -

 

(1,329,287)

 

(700,998)

Settlements

(8,409)

 

(3,287)

 

 -

 

 -

Ending balance

$                         117,333 

 

$                            24,390 

 

$                          1,180,546 

 

$                             688,471 



 

 

 

 

 

 

 

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.

$                                     - 

 

$                                     - 

 

$                                    963 

 

$                                  (922)



Transfers between levels in 2019 and 2018, consisted of transfers resulting from the availability or non-availability of third party pricing for CRE securities from the Company’s securitizations, see Note E.



The Company’s Level 3 asset activity for the categories shown for the years 2019 and 2018 is as follows (in thousands):









130

 


 



 

 

 

 

 

 

 

 



Fair Value Measurements Using

 



Significant Unobservable Inputs

 



(Level 3)

 



 

 

 

 

 

 

 

 



Investment in

 

Assets held-for-sale

 



unconsolidated entity

 

from discontinued operations

 



December 31, 2019

 

December 31, 2018

 

December 31, 2019

 

December 31, 2018

 

Beginning balance

$                            59,273 

 

$                            74,473 

 

$                             197,831 

 

$                             304,313 

 

Transfers into level 3

 -

 

 -

 

 -

 

 -

 

Transfers out of level 3

 -

 

 -

 

 -

 

 -

 

Total gains or (losses) (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 -

 

(3,689)

 

(487)

 

352 

 

Included in other comprehensive income

 -

 

 -

 

 -

 

 -

 

Purchases, issuances, sales, settlements and charge-offs

 

 

 

 

 

 

 

 

Purchases

 -

 

 -

 

 -

 

 -

 

Issuances

 -

 

 -

 

2,125 

 

1,664 

 

Sales

 -

 

 -

 

(7,136)

 

(35,000)

 

Settlements

(20,119)

 

(11,511)

 

(49,021)

 

(62,754)

 

Charge-offs

 -

 

 -

 

(2,655)

 

(10,744)

 

Ending balance

$                            39,154 

 

$                            59,273 

 

$                             140,657 

 

$                             197,831 

 



 

 

 

 

 

 

 

 

The amount of total gains or (losses) for the period

 

 

 

 

 

 

 

 

included in earnings attributable to the change in

 

 

 

 

 

 

 

 

unrealized gains or losses relating to assets still

 

 

 

 

 

 

 

 

held at the reporting date.

$                                     - 

 

$                           (3,689)

 

$                                  (487)

 

$                                    352 

 



 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Fair value at

 

Fair value at

 

 

 

 

 

Range at

 

Range at

Level 3 instruments only

 

December 31, 2019

 

December 31, 2018

 

Valuation techniques

 

Unobservable inputs

 

December 31, 2019

 

December 31, 2018



 

 

 

 

 

 

 

 

 

 

 

 

Investment securities, available-for-sale

 

$             117,333 

 

$                24,390 

 

Discounted cash flow

 

Discount rate

 

4.05% - 8.18%

 

6.55%

Investment securities, held-to-maturity

 

7,152 

 

7,278 

 

Discounted cash flow

 

Discount rate

 

8.01%

 

8.80%

Federal Home Loan Bank and Atlantic

 

5,342 

 

1,113 

 

Cost

 

N/A

 

N/A

 

N/A

  Central Bankers Bank stock

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net of deferred loan fees and

 

1,826,154 

 

1,503,780 

 

Discounted cash flow

 

Discount rate

 

3.11% - 6.93%

 

4.22% - 6.93%

  costs

 

 

 

 

 

 

 

Credit analysis

 

 

 

 

 Commercial - SBL

 

220,358 

 

199,977 

 

Traders' pricing

 

Offered quotes

 

$101.6 - $107.9

 

$99.125 - $110

 Commercial - fixed

 

88,986 

 

95,307 

 

Discounted cash flow

 

Discount rate

 

4.33% - 7.13%

 

5.23% - 6.92%

 Commercial - floating

 

871,202 

 

393,187 

 

Discounted cash flow

 

Discount rate

 

4.51% - 6.81%

 

5.41% - 7.75%

Commercial loans held-for-sale

 

1,180,546 

 

688,471 

 

 

 

 

 

 

 

 

Investment in unconsolidated entity

 

39,154 

 

59,273 

 

Discounted cash flow

 

Discount rate

 

5.84%

 

6.30%



 

 

 

 

 

 

 

Default rate

 

1.00%

 

1.00%

Assets held-for-sale from discontinued

 

140,657 

 

197,831 

 

Discounted cash flow

 

Discount rate,

 

3.49% -7.58%

 

4.26% - 8.36%

 operations

 

 

 

 

 

 

 

Credit analysis

 

 

 

 

Subordinated debentures

 

9,736 

 

9,975 

 

Discounted cash flow

 

Discount rate

 

8.01%

 

8.81%



The following considerations are subject to judgments and uncertainties as of the balance sheet date.  Fair values in the above table which are estimated by the discounted cash flow method, are subject to uncertainty resulting from the discount rate used as of the

131

 


 

reporting date.  The discount rates used are based on market comparables, which may vary significantly between periods based on credit spreads, interest rates movements or expected interest rate movements, or competitive factors.  Changes in these factors could have a significant impact on estimated fair values.  The discount rates utilized for loans, net of deferred loan fees and costs, and assets held-for-sale from discontinued operation reflect the results of credit analysis and collateral valuations, including that performed by the independent loan review department, to identify credit weaknesses which might require a higher discount rate.  Credit analysis of borrowers’ repayment capabilities are based on historical financial information or performance, which may not reflect future performance.  Collateral valuations such as appraisals, may not be realized upon ultimate sale.



Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, at December 31, 2019 and 2018 are summarized below (in thousands):







 

 

 

 

 

 

 



 

 

Fair Value Measurements at Reporting Date Using



 

 

Quoted prices in active

 

Significant other

 

Significant



 

 

markets for identical

 

observable

 

unobservable



 

 

assets

 

inputs

 

inputs (1)

Description

December 31, 2019

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 

Impaired loans - collateral dependent (1)

$                             3,651 

 

$                                    - 

 

$                                       - 

 

$                               3,651 

Intangible assets

2,315 

 

 -

 

 -

 

2,315 



$                             5,966 

 

$                                    - 

 

$                                       - 

 

$                               5,966 









 

 

 

 

 

 

 



 

 

Fair Value Measurements at Reporting Date Using



 

 

Quoted prices in active

 

Significant other

 

Significant



 

 

markets for identical

 

observable

 

unobservable



Fair value

 

assets

 

inputs

 

inputs (1)

Description

December 31, 2018

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Impaired loans - collateral dependent (1)

$                             3,747 

 

$                                    - 

 

$                                       - 

 

$                               3,747 

Intangible assets

3,846 

 

 -

 

 -

 

3,846 



$                             7,593 

 

$                                    - 

 

$                                       - 

 

$                               7,593 

(1)

The method of valuation approach for the impaired loans and other real estate owned was the market 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 December 31, 2019, principal on impaired loans and troubled debt restructurings that is accounted for on the basis of the value of underlying collateral, is shown in the above table at an estimated fair value of $3.7 million.  To arrive at that fair value, related loan principal of $6.8 million was reduced by specific reserves of $3.1 million within the allowance for loan losses, as of that date, representing the deficiency between principal and estimated collateral values, which were reduced by estimated 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 December 31, 2019, were troubled debt restructured loans with a balance of $2.1 million which had specific reserves of $1.0 million. At December 31, 2018, principal on impaired loans and troubled debt restructurings accounted for on the basis of the value of underlying collateral, is shown in the above table at estimated fair value of $3.7 million.  To arrive at that fair value, related loan principal of $6.7 million was reduced by the specific reserves of $3.0 million within the allowance for loan losses, as of that date, representing the deficiency between principal and estimated collateral values, which were reduced by estimated costs to sell.  Included in the impaired balance at December 31, 2018, were troubled debt restructured loans with a balance of $2.9 million, which had specific reserves of $1.5 million.  Valuation techniques consistent with the market and/or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs.  In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy. 

132

 


 

Note R –Derivatives



The Company utilizes derivative instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics on commercial real estate loans held-for-sale.  These instruments are not accounted for as effective hedges.  As of December 31, 2019, the Company had entered into six interest rate swap agreements with an aggregate notional amount of $37.8 million.  Under these swap agreements the Company receives an adjustable rate of interest based upon LIBOR.  The Company recorded a loss of $1.9 million and income of $647,000 and $1.8 million for the years ended December 31, 2019 and 2018 and 2017, respectively,  to recognize the fair value of derivative instruments. Those amounts are recorded on the consolidated statements of operations under net realized and unrealized gains (losses) on loans originated for sale.  At December 31, 2019, the amount payable by the Company under these swap agreements was $232,000.  At December 31, 2018, the amount receivable by the Company under these swap agreements was $1.7 million.  At December 31, 2019 and 2018, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $1.3 million and $251,000, respectively.



The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s remaining interest rate swap agreements as of December 31, 2019 are summarized below (in thousands):







 

 

 

 

 

 

 

 



 

December 31, 2019

Maturity date

 

Notional amount

 

Interest rate paid

 

Interest rate received

 

Fair value

August 4, 2021

 

10,300 

 

1.12% 

 

1.90% 

 

95 

December 23, 2025

 

6,800 

 

2.16% 

 

1.93% 

 

(152)

December 24, 2025

 

8,200 

 

2.17% 

 

1.93% 

 

(192)

January 28, 2026

 

3,000 

 

1.87% 

 

1.94% 

 

(18)

July 20, 2026

 

6,300 

 

1.44% 

 

1.97% 

 

133 

December 12, 2026

 

3,200 

 

2.26% 

 

1.89% 

 

(98)

Total

 

$                  37,800 

 

 

 

 

 

$            (232)





The $232,000 fair value loss position of the outstanding derivatives at December 31, 2019 as detailed in the above table, was recorded in other liabilities on the consolidated balance sheet.

Note S—Regulatory Matters

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

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

In addition to these explicit limitations, federal and state regulatory agencies are authorized to prohibit a banking subsidiary or financial holding company from engaging in an unsafe or unsound practice.  Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.  The Bank has entered into consent orders with the FDIC which prohibits the Bank from paying dividends without prior FDIC approval. The Company had also received a Supervisory Letter from the Federal Reserve pursuant to which the Company might not pay dividends without prior Federal Reserve approval.  The requirement for Federal Reserve approval was lifted in fourth quarter 2019 at which time the letter was terminated.



133

 


 

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.  Moreover, capital requirements may be modified based upon regulatory rules or by regulatory discretion at any time reflecting a variety of factors including deterioration in asset quality.





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

To be well



 

 

 

 

 

 

 

 

 

capitalized under



 

 

 

 

 

For capital

 

prompt corrective



 

Actual

 

adequacy purposes

 

action provisions



 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio



 

(dollars in thousands)

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Total capital

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

$          486,372 

 

19.45% 

 

$            200,074 

 

>=8.00

 

N/A

 

 N/A

The Bancorp Bank

 

478,033 

 

19.11% 

 

200,068 

 

8.00 

 

250,085 

 

>= 10.00%



 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

476,134 

 

19.04% 

 

150,055 

 

>=6.00

 

N/A

 

 N/A

The Bancorp Bank

 

467,796 

 

18.71% 

 

150,051 

 

6.00 

 

200,068 

 

>= 8.00%



 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

 

 

 

 

 

 

 

 

 

 

(to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

476,134 

 

9.63% 

 

197,837 

 

>=4.00

 

N/A

 

 N/A

The Bancorp Bank

 

467,796 

 

9.46% 

 

197,831 

 

4.00 

 

247,289 

 

>= 5.00%



 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

476,134 

 

19.04% 

 

100,037 

 

>=4.00

 

N/A

 

 N/A

The Bancorp Bank

 

467,796 

 

18.71% 

 

112,538 

 

4.50 

 

162,555 

 

>= 6.50%



 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Total capital

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

$          424,682 

 

21.07% 

 

$            161,238 

 

>=8.00

 

N/A

 

 N/A

The Bancorp Bank

 

416,077 

 

20.61% 

 

161,506 

 

8.00 

 

201,882 

 

>= 10.00%



 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

416,029 

 

20.64% 

 

120,928 

 

>=6.00

 

N/A

 

 N/A

134

 


 

The Bancorp Bank

 

407,425 

 

20.18% 

 

121,129 

 

6.00 

 

161,506 

 

>= 8.00%



 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

 

 

 

 

 

 

 

 

 

 

(to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

416,029 

 

10.11% 

 

168,160 

 

>=4.00

 

N/A

 

 N/A

The Bancorp Bank

 

407,425 

 

9.70% 

 

171,019 

 

4.00 

 

213,774 

 

>= 5.00%



 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

The Bancorp, Inc.

 

416,029 

 

20.64% 

 

80,619 

 

>=4.00

 

N/A

 

 N/A

The Bancorp Bank

 

407,425 

 

20.18% 

 

90,847 

 

4.50 

 

131,223 

 

>= 6.50%



 

 

 

 

 

 

 

 

 

 

 

 





As of December 31, 2019, the Company and the Bank met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action.  Effective January 1, 2015, capital rules were modified as part of a multi-year phase in period.  The new rules emphasize common equity capital of which the vast majority of the Company and the Bank’s capital is comprised.



The Bank has entered into several consent orders with the FDIC relating to several aspects of its operations as follows



2014 Consent Order. 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 BSA compliance program.  The 2014 Consent Order requires 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.  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 restricts the Bank from signing and boarding new independent sales organizations, establishing new non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments until the Bank submits to the FDIC and the Delaware State Bank Commissioner a report summarizing the completion of certain BSA-related corrective actions (“BSA Report”).  Until the BSA Report is 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.  The Bank provided the FDIC and the Delaware State Bank Commissioner with the required BSA Report as of December 31, 2019 and it is under review by the regulators.    



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.



2015 Consent Order.  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 violations of law or regulation.  The 2015 Consent Order amended and restated and superceded in its entirety the terms of a prior Consent Order issued in 2012.  The 2015 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.   The 2015 Consent Order also addressed 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,

135

 


 

whom we refer to as Third Parties.  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.  The Bank completed its implementation of the CAP on January 15, 2020.  As of the completion date, $1,592,469 of restitution was paid to consumers of which $ $4,352 was paid by the Bank and the remaining amount by Third Parties.  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.



2018 CMP Order and 2018 Restitution Order.  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 emanated from one of the Bank’s third-party payment processors (“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 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 was not subject to any indemnification or recovery from any third party.   The 2018 Restitution Order required 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 required 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 were reimbursed by the Third-Party Processor at its own expense.  On December 19, 2019, the FDIC concluded the Bank had fully complied with the 2018 Restitution Order and issued an order terminating the 2018 Restitution Order. 



On December 18, 2019, the Bank’s Board of Directors, without admitting or denying any violations of law, regulation or the provisions of the 2014 Consent Order, executed a Stipulation and Consent to the Issuance of an Order to Pay Civil Money Penalty in the amount of $7.5 million based on supervisory findings during the period of 2013 to 2019 related principally to deficiencies in the Bank’s legacy Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Programs and alleged violations of law during the period, as well as the length of time the Bank has taken to fully implement the corrective actions required by the 2014 Consent Order. The Bank paid this amount, and it was recognized as an expense in the Company’s financial statements in the fourth quarter of 2019.

   



136

 


 

Note T –Quarterly Financial Data (Unaudited)



The following represents summarized quarterly financial data of the Company which, in the opinion of management, reflects all adjustments (comprised of normal accruals) necessary for fair presentation.

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





 

 

 

 

 

 

 

 



 

Three months ended

2019

 

March 31,

 

June 30,

 

September 30,

 

December 31,



 

(in thousands, except per share data)



 

 

 

 

 

 

 

 

Interest income

 

$                 43,578 

 

$                 44,080 

 

$                 48,375 

 

$                 43,536 

Net interest income

 

34,010 

 

34,539 

 

37,560 

 

35,179 

Provision for loan and lease losses

 

1,700 

 

600 

 

650 

 

1,450 

Non-interest income

 

30,365 

 

19,749 

 

33,515 

 

20,498 

Non-interest expense

 

39,229 

 

39,519 

 

42,051 

 

47,722 

Income from continuing operations before income tax expense

 

23,446 

 

14,169 

 

28,374 

 

6,505 

Income tax expense

 

6,035 

 

3,575 

 

7,975 

 

3,641 

Net income from continuing operations

 

17,411 

 

10,594 

 

20,399 

 

2,864 

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

 

519 

 

756 

 

26 

 

(1,010)

Net income available to common shareholders

 

$                 17,930 

 

$                 11,350 

 

$                 20,425 

 

$                   1,854 



 

 

 

 

 

 

 

 

Net earnings per share from continuing operations - basic

 

$                     0.31 

 

$                     0.19 

 

$                     0.36 

 

$                     0.05 

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

 

$                     0.01 

 

$                     0.01 

 

$                           - 

 

$                    (0.02)

Net earnings per share - basic

 

$                     0.32 

 

$                     0.20 

 

$                     0.36 

 

$                     0.03 



 

 

 

 

 

 

 

 

Net earnings per share from continuing operations - diluted

 

$                     0.31 

 

$                     0.19 

 

$                     0.36 

 

$                     0.05 

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

 

$                     0.01 

 

$                     0.01 

 

$                           - 

 

$                    (0.02)

Net earnings per share - diluted

 

$                     0.32 

 

$                     0.20 

 

$                     0.36 

 

$                     0.03 







137

 


 



 

 

 

 

 

 

 

 



 

Three months ended

2018

 

March 31,

 

June 30,

 

September 30,

 

December 31,



 

(in thousands, except per share data)



 

 

 

 

 

 

 

 

Interest income

 

$                 35,307 

 

$                 35,360 

 

$                 38,656 

 

$                 38,637 

Net interest income

 

30,074 

 

29,534 

 

30,632 

 

30,609 

Provision for loan and lease losses

 

700 

 

900 

 

1,060 

 

925 

Non-interest income

 

29,095 

 

17,040 

 

90,970 

 

16,690 

Non-interest expense

 

39,049 

 

37,310 

 

37,299 

 

37,620 

Income from continuing operations before income tax expense

 

19,420 

 

8,364 

 

83,243 

 

8,754 

Income tax expense

 

5,399 

 

2,209 

 

21,942 

 

2,691 

Net income from continuing operations

 

14,021 

 

6,155 

 

61,301 

 

6,063 

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

 

119 

 

(14)

 

(24)

 

1,056 

Net income available to common shareholders

 

$                 14,140 

 

$                   6,141 

 

$                 61,277 

 

$                   7,119 



 

 

 

 

 

 

 

 

Net earnings per share from continuing operations - basic

 

$                     0.25 

 

$                     0.11 

 

$                     1.09 

 

$                     0.11 

Net earnings per share from discontinued operations - basic

 

$                           - 

 

$                           - 

 

$                           - 

 

$                     0.02 

Net earnings per share - basic

 

$                     0.25 

 

$                     0.11 

 

$                     1.09 

 

$                     0.13 



 

 

 

 

 

 

 

 

Net earnings per share from continuing operations - diluted

 

$                     0.25 

 

$                     0.11 

 

$                     1.07 

 

$                     0.11 

Net earnings per share from discontinued operations - diluted

 

$                           - 

 

$                           - 

 

$                           - 

 

$                     0.02 

Net earnings per share - diluted

 

$                     0.25 

 

$                     0.11 

 

$                     1.07 

 

$                     0.13 



 

 

 

 

 

 

 

 















Note U—Condensed Financial Information—Parent Only



Condensed Balance Sheets







 

 

 

 



 

December 31,



 

2019

 

2018



 

(in thousands)

Assets

 

 

 

 

Cash and due from banks

 

$           13,286

 

$          14,090

Investment in subsidiaries

 

475,998 

 

396,753 

Other assets

 

8,644 

 

9,368 

Total assets

 

$         497,928

 

$        420,211



 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

Other liabilities

 

$                  30

 

$                 34

Subordinated debentures

 

13,401 

 

13,401 

Stockholders' equity

 

484,497 

 

406,776 

Total liabilities and stockholders' equity

 

$         497,928

 

$        420,211



138

 


 

Condensed Statements of Operations







 

 

 

 

 

 



 

For the year ended December 31,



 

2019

 

2018

 

2017



 

(in thousands)

Income

 

 

 

 

 

 

Other income

 

$                -

 

$            517

 

$       31,852

Total income

 

 -

 

517 

 

31,852 



 

 

 

 

 

 

Expense

 

 

 

 

 

 

Interest on subordinated debentures

 

750 

 

714 

 

586 

Non-interest expense

 

6,721 

 

4,528 

 

37,465 

Total expense

 

7,471 

 

5,242 

 

38,051 

Equity in undistributed income of subsidiaries

 

59,030 

 

93,402 

 

25,097 

Income before tax benefit

 

51,559 

 

88,677 

 

18,898 

Income tax benefit

 

 -

 

 -

 

(2,775)

Net income available to common shareholders

 

$       51,559

 

$       88,677

 

$       21,673



139

 


 

Condensed Statements of Cash Flows



























 

 

 

 

 

 



 

Year ended December 31,



 

2019

 

2018

 

2017



 

(in thousands)

Operating activities

 

 

 

 

 

 

Net income 

 

$           51,559

 

$          88,677

 

$          21,673

(Increase) decrease in other assets

 

724 

 

(22)

 

3,045 

Increase (decrease) in other liabilities

 

(4)

 

 

Stock based compensation expense

 

5,689 

 

3,450 

 

3,245 

Equity in undistributed income loss

 

(59,030)

 

(93,402)

 

(25,097)

Net cash provided by (used in) operating activities

 

(1,062)

 

(1,291)

 

2,871 



 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Contribution to subsidiary

 

 -

 

 -

 

 -

Net cash used in investing activities

 

 -

 

 -

 

 -



 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Proceeds from the issuance of common stock

 

 -

 

 -

 

 -

Proceeds from the exercise of common stock options

 

258 

 

111 

 

 -

Proceeds from advances from subsidiaries

 

 -

 

 -

 

4,128 

Net cash provided by financing activities

 

258 

 

111 

 

4,128 

Net increase (decrease) in cash and cash equivalents

 

(804)

 

(1,180)

 

6,999 

Cash and cash equivalents, beginning of year

 

14,090 

 

15,270 

 

8,271 

Cash and cash equivalents, end of year

 

$           13,286

 

$          14,090

 

$          15,270



 

 

 

 

 

 









Note V—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 Philadelphia commercial lending operations, as described in Note W- Discontinued Operations.  The shift from a traditional bank balance sheet led the Company to evaluate its remaining business structure.  Based on the continuing operations of the Company, it was determined that there would be four segments of the business: specialty finance, payments, corporate and discontinued operations.  The chief decision maker for these segments is the Chief Executive Officer.  Specialty finance includes commercial mortgage loan sales and securitizations, SBA loans, direct lease financing and security and insurance backed lines of credit and deposits generated by those business lines.  Payments include prepaid and debit cards, card payments, ACH processing and healthcare accounts and deposits generated by those business lines.  Corporate includes the Company’s investment portfolio, corporate overhead and non-allocated expenses.  Investment income is reallocated to the payments segment.  These operating segments reflect the way the Company views its current operations.





140

 


 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the year ended December 31, 2019



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$            126,814 

 

$                        - 

 

$              52,755 

 

$                        - 

 

$            179,569 

Interest allocation

 

 -

 

52,755 

 

(52,755)

 

 -

 

 -

Interest expense

 

1,429 

 

28,971 

 

7,881 

 

 -

 

38,281 

Net interest income (loss)

 

125,385 

 

23,784 

 

(7,881)

 

 -

 

141,288 

Provision for loan and lease losses

 

4,400 

 

 -

 

 -

 

 -

 

4,400 

Non-interest income

 

29,140 

 

74,742 

 

245 

 

 -

 

104,127 

Non-interest expense

 

63,884 

 

67,884 

 

36,753 

 

 -

 

168,521 

Income (loss) from continuing operations before taxes

 

86,241 

 

30,642 

 

(44,389)

 

 -

 

72,494 

Income tax expense

 

 -

 

 -

 

21,226 

 

 -

 

21,226 

Income (loss) from continuing operations

 

86,241 

 

30,642 

 

(65,615)

 

 -

 

51,268 

Income from discontinued operations

 

 -

 

 -

 

 -

 

291 

 

291 

Net income (loss)

 

$              86,241 

 

$              30,642 

 

$            (65,615)

 

$                   291 

 

$              51,559 



 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the year ended December 31, 2018



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$              95,221 

 

$                        - 

 

$              52,739 

 

$                        - 

 

$            147,960 

Interest allocation

 

 -

 

52,739 

 

(52,739)

 

 -

 

 -

Interest expense

 

3,970 

 

21,293 

 

1,849 

 

 -

 

27,111 

Net interest income (loss)

 

91,251 

 

31,446 

 

(1,849)

 

 -

 

120,849 

Provision for loan and lease losses

 

3,585 

 

 -

 

 -

 

 -

 

3,585 

Non-interest income

 

89,187 

 

63,939 

 

668 

 

 -

 

153,795 

Non-interest expense

 

57,952 

 

65,894 

 

27,432 

 

 -

 

151,278 

Income (loss) from continuing operations before taxes

 

118,902 

 

29,492 

 

(28,613)

 

 -

 

119,781 

Income tax expense

 

 -

 

 -

 

32,241 

 

 -

 

32,241 

Income (loss) from continuing operations

 

118,902 

 

29,492 

 

(60,854)

 

 -

 

87,540 

Income from discontinued operations

 

 -

 

 -

 

 -

 

1,137 

 

1,137 

Net income (loss)

 

$            118,902 

 

$              29,492 

 

$            (60,854)

 

$                1,137 

 

$              88,677 









141

 


 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the year ended December 31, 2017



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Interest income

 

$              78,464 

 

$                        - 

 

$              43,556 

 

$                        - 

 

$            122,020 

Interest allocation

 

 -

 

43,556 

 

(43,556)

 

 -

 

 -

Interest expense

 

3,455 

 

10,475 

 

1,410 

 

 -

 

15,340 

Net interest income (loss)

 

75,009 

 

33,081 

 

(1,410)

 

 -

 

106,680 

Provision for loan and lease losses

 

2,920 

 

 -

 

 -

 

 -

 

2,920 

Non-interest income

 

27,952 

 

61,781 

 

1,815 

 

 -

 

91,548 

Non-interest expense

 

56,472 

 

71,029 

 

27,413 

 

 -

 

154,914 

Income (loss) from continuing operations before taxes

 

43,569 

 

23,833 

 

(27,008)

 

 -

 

40,394 

Income tax expense

 

 -

 

 -

 

23,056 

 

 -

 

23,056 

Income (loss) from continuing operations

 

43,569 

 

23,833 

 

(50,064)

 

 -

 

17,338 

Income from discontinued operations

 

 -

 

 -

 

 -

 

4,335 

 

4,335 

Net income (loss)

 

$              43,569 

 

$              23,833 

 

$            (50,064)

 

$                4,335 

 

$              21,673 









 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

December 31, 2019



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Total assets

 

$          3,008,304 

 

$               57,746 

 

$          2,450,256 

 

$             140,657 

 

$          5,656,963 

Total liabilities

 

$             247,485 

 

$          4,030,921 

 

$             894,060 

 

$                         - 

 

$          5,172,466 













 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

Specialty finance

 

Payments

 

Corporate

 

Discontinued operations

 

Total



 

(in thousands)

Total assets

 

$          2,181,499 

 

$               43,737 

 

$          2,014,844 

 

$             197,831 

 

$          4,437,911 

Total liabilities

 

$             281,326 

 

$          3,545,877 

 

$             203,932 

 

$                         - 

 

$          4,031,135 











Note W—Discontinued Operations



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



The following table presents financial results of the commercial lending business included in net income (loss) from discontinued operations for the twelve months ended December 31, 2019, 2018 and 2017. The majority of non-interest expense is comprised of loan related charges including charge-offs, realized and unrealized gains and losses, other real estate loan charges and attorney fees.



142

 


 



 

 

 

 

 



 

 

 

 

 



For the year ended December 31,



2019

 

2018

 

2017



 

(in thousands)

 

Interest income

$                             6,710 

 

$                             8,810 

 

$                          12,655 

Interest expense

 -

 

 -

 

 -

Net interest income

6,710 

 

8,810 

 

12,655 



 

 

 

 

 

Non-interest income

34 

 

910 

 

1,095 

Non-interest expense

6,234 

 

8,229 

 

9,691 



 

 

 

 

 

Income before taxes

510 

 

1,491 

 

4,059 

Income tax (benefit) expense

219 

 

354 

 

(276)

Net income

$                               291 

 

$                             1,137 

 

$                             4,335 







 

 

 



 

 

 



December 31,

 

December 31,



2019

 

2018



(in thousands)

Loans, net

$                         115,879 

 

$                         170,662 

Other real estate owned

24,778 

 

27,169 

Total assets

$                         140,657 

 

$                         197,831 



 

 

 



Discontinued operations loans are recorded at the lower of their cost or fair value.  Fair value is determined using a discontinued cash flows analysis where projections of cash flows are developed in consideration of internal loan review analysis and default/prepayment assumptions for smaller pools of loans.



The Company has securitized or sold loans with a book value of approximately $406.8 million, of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations.  The $406.8 million of loans sold had a face value of approximately $481.7 million.  Loans with an approximate face and book value of $267.6 million and $192.7 million, respectively, were securitized in the fourth quarter of 2014 to WS 2014.  The securitization, referred to as Walnut Street, is managed by an independent investor, which contributed $16 million of equity to that entity.  The balance of the securitization was financed by the Bank and is reflected on the consolidated balance sheet as investment in unconsolidated entity.  After $74.9 million of loan charges reflected in the difference between the face value and book value of the loans securitized, the Company recognized a gain on sale of $17.0 million.  In the second quarter of 2015, an additional $149.6 million of loans were sold at a gain of approximately $2.2 million.  In the third quarter of 2016, $64.6 million of loans were sold at minimal gain. In 2017 and 2018, further dispositions including refinancings at other financial institutions and were reflected in the reduction of the discontinued operations balance to $140.7 million, compared to a balance of $197.8 million and $304.3 million, respectively at December 31, 2018 and 2017.  The Company continues to pursue additional loan and other collateral dispositions.



Additionally, the consolidated balance sheet reflects $39.2 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, in which the Company retains an interest as explained above. 



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



None



143

 


 

Item 9A. Controls and Procedures.



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



Management’s Report on Internal Control Over Financial Reporting



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



·

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

·

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

·

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



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



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



Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2019 based on the control criteria established in the 2013 Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission and concluded that our internal control over financial reporting was effective as of December 31, 2019.



Our independent registered public accounting firm, Grant Thornton LLP, audited our internal control over financial reporting as of December 31, 2019.  Their report dated March 13, 2020 appears below in this Item 9A.

144

 


 



Changes in Internal Control Over Financial Reporting



During the fourth quarter of the fiscal year ended December 31, 2019, there were no changes in our internal control over financial reporting that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

145

 


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Shareholders

The Bancorp, Inc.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of The Bancorp, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated March 13, 2020 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

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



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



/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

March 13, 2020

146

 


 

Item 9B. Other Information

None.



PART III

Item 10. Directors, Executive Officers and Corporate Governance 

Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.

Item 11. Executive Compensation 

Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.



147

 


 

PART IV

Item 15. Exhibits and Financial Statement Schedules.

 

(a)  The following documents are filed as part of this Annual Report on Form 10-K:



1. Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheet at December 31, 2019 and 2018

Consolidated Statement of Operations for each of the three years in the period ended December 31, 2019

Consolidated Statement of Changes in Shareholders’ Equity for each of the three years in the period ended December 31, 2019

Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2019

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

None

3. Exhibits

 





 

 

Exhibit No.

 

Description

3.1.1

 

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

3.1.2

 

Amendment to Certificate of Incorporation filed July 30, 2009 (13)

3.1.3

 

Amendment to Certificate of Incorporation filed June 1, 2016 (13)

3.2

 

Amended and Restated Bylaws (14)

4.1

 

Specimen stock certificate (1)

10.1

 

1999 Stock Option Plan (the “1999 SOP”) (2)

10.2

 

Form of Grant of Non-Qualified Stock Options under the 1999 SOP (2)

10.3

 

Form of Grant of Incentive Stock Options under the 1999 SOP (2)

10.4

 

The Bancorp, Inc. 2005 Omnibus Equity Compensation Plan (the “2005 Plan”) (3)

10.5

 

Form of Grant of Non-Qualified Stock Option under the 2005 Plan (4)

10.6

 

Form of Grant of Incentive Stock Option under the 2005 Plan (4)

10.7

 

Form of Stock Unit Award Agreement under the 2005 Plan (5)

10.8

 

Stock Option and Equity Plan of 2011 (7) 

10.9

 

Form of Grant of Nonqualified Stock Option under the 2011 Plan (6) 

10.10

 

Form of Restricted Stock Unit Award Agreement (8)

10.11.1

 

The Bancorp, Inc. Stock Option and Equity Plan of 2013 (9)

10.11.2

 

Amendment One to Stock Option and Equity Plan of 2013 (10)

10.12

 

Form of Grant of Stock Option under the 2013 Plan (11)

10.13

 

Form of Grant of Stock Award under the 2013 Plan (11)

10.14.1

 

The Bancorp, Inc. 2018 Equity Incentive Plan (12)

10.14.2

 

First Amendment to The Bancorp, Inc 2018 Equity Incentive Plan (12)

10.15

 

Form of Restricted Stock Unit Award Agreement (12)

10.16

 

Sales Agreement dated December 30, 2014 among the Bancorp Bank and Walnut Street 2014-1 Issuer, LLC (15)

148

 


 

10.17

 

Amended Consent Order, Order for Restitution and Order to Pay Civil Money Penalty, dated December 23, 2015 (16)

10.18

 

Letter Agreement with Damian Kozlowski (17)

10.19

 

Letter Agreement with Hugh McFadden (17)

10.20

 

Letter Agreement with John Leto (17)

10.21

 

Asset Purchase Agreement dated as of July 10, 2018 (18)

21.1

 

Subsidiaries of Registrant  *

23.1

 

Consent of Grant Thornton LLP  *

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  *



 







 

 

*

 

Filed herewith.

(1)

 

Filed previously as an exhibit to our Registration Statement on Form S-4, registration number 333-117385, and by this reference incorporated herein.

(2)

 

Filed previously as an exhibit to our Registration Statement on Form S-8, registration number 333-124339, and by this reference incorporated herein.

(3)

 

Filed previously as an appendix to the definitive proxy statement on Schedule 14A filed on May 2, 2005, and by this reference incorporated herein (File No. 000-51018).

(4)

 

Filed previously as an exhibit to our current report on Form 8-K filed December 30, 2005, and by this reference incorporated herein (File No. 000-51018).

(5)

 

Filed previously as an exhibit to our current report on Form 8-K filed January 20, 2006, and by this reference incorporated herein (File No. 000-51018).

(6)

 

Filed previously as an exhibit to our Registration Statement on Form S-8, registration number 333-176208, and by this reference incorporated herein.

(7)

 

Filed previously as an appendix to the definitive proxy statement on Schedule 14A filed March 23, 2011, and by this reference incorporated herein (File No. 000-51018).

(8)

 

Filed previously as an exhibit to our current report on Form 8-K filed January 29, 2013, and by this reference incorporated herein (File No. 000-51018).

(9)

 

Filed previously as an appendix to our proxy statement filed March 20, 2013, and by this reference incorporated herein (File No. 000-51018).

(10)

 

Filed previously as an exhibit to our annual report on Form 10-K filed March 16, 2018, and by this reference incorporated herein (File No. 000-51018).

(11)

 

Filed previously as an exhibit to our quarterly report on Form 10-Q filed May 10, 2013, and by this reference incorporated herein (File No. 000-51018).

(12)

 

Filed previously as an exhibit to our current report on Form 8-K/A filed May 17, 2018, and by this reference incorporated herein (File No. 000-51018).

(13)

 

Filed previously as an exhibit to our quarterly report on Form 10-Q filed November 9, 2016, and by this reference incorporated herein (File No. 000-51018).

(14)

 

Filed previously as an exhibit to our annual report on Form 10-K filed March 16, 2017, and by this reference incorporated herein (File No. 000-51018).

(15)

 

Filed previously as an exhibit to our annual report on Form 10-K filed September 25, 2015, and by this reference incorporated herein (File No. 000-51018).

(16)

 

Filed previously as an exhibit to our current report on Form 8-K filed December 28, 2015, and by this reference incorporated herein (File No. 000-51018).

149

 


 

(17)

 

Filed previously as an exhibit to our quarterly report on Form 10-Q filed August 9, 2016, and by this reference incorporated herein (File No. 000-51018).

(18)

 

Filed previously as an exhibit to our current report on Form 8-K filed July 10, 2018, and by this reference incorporated herein (File No. 000-51018).





 

150

 


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



March 13, 2020

By:

/s/ Damian M. Kozlowski



 

DAMIAN M. KOZLOWSKI

Chief Executive Officer (principal executive officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





 

 

 

 

/S/ Damian M. Kozlowski

 

Chief Executive Officer

 

March 13, 2020

DAMIAN M. KOZLOWSKI

 

(principal executive officer)

 

 



 

 

 

 

/S/ John C. Chrystal

 

Director

 

March 13, 2020

JOHN C. CHRYSTAL

 

 

 

 



 

 

 

 

/S/ Daniel G. Cohen

 

Director

 

March 13, 2020

DANIEL G. COHEN

 

 

 

 



 

 

 

 

/S/ Walter T. Beach

 

Director

 

March 13, 2020

WALTER T. BEACH

 

 

 

 



 

 

 

 

/S/ Michael J. Bradley

 

Director

 

March 13, 2020

MICHAEL J. BRADLEY

 

 

 

 



 

 

 

 

/S/ Matthew Cohn

 

Director

 

March 13, 2020

MATTHEW COHN

 

 

 

 



 

 

 

 

/S/ William H. Lamb

 

Director

 

March 13, 2020

WILLIAM H. LAMB

 

 

 

 



 

 

 

 

/S/ James J. McEntee III

 

Director

 

March 13, 2020

JAMES J. MCENTEE III

 

 

 

 



 

 

 

 

/S/ Mei-Mei Tuan

 

Director

 

March 13, 2020

MEI-MEI TUAN

 

 

 

 



 

 

 

 

/S/ Hersh Kozlov

 

Director

 

March 13, 2020

HERSH KOZLOV

 

 

 

 



 

 

 

 

/S/ John Eggemeyer

 

Director

 

March 13, 2020

JOHN EGGEMEYER

 

 

 

 



 

 

 

 

151

 


 

/S/ Daniela A. Mielke

 

Director

 

March 13, 2020

DANIELA A. MIELKE

 

 

 

 



 

 

 

 

/S/ Stephanie B. Mudick

 

Director

 

March 13, 2020

STEPHANIE B. MUDICK

 

 

 

 



 

 

 

 

/S/ Paul Frenkiel

 

Executive Vice President of Strategy, Chief Financial Officer and Secretary

 

March 13, 2020

PAUL FRENKIEL

 

(principal accounting officer)

 

 









152