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RITM0077613 Annual Report Cover 2017 BW_Outlines_v03.indd 1
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To Our Valued Shareholders, Clients, Partners, Regulators and Employees:
This was a year of accomplishments and transition for the Bancorp. I will highlight three areas that have contributed to
significantly better performance and strengthened our institution for the future.
1. We significantly de-risked the Bank
Our discontinued and Walnut Street portfolios started the year at $361 million and $127 million respectively. We have
enhanced our credit risk management processes with the focus of reducing volatility from these assets. During 2017, we
reduced discontinued exposure by 16% from $361 million to $304 million and Walnut Street by 41% from $127 million to
$74 million. While we may continue to have some gains or costs to resolving some of these credits, we believe these
portfolios are correctly marked and these adjustments will not significantly adversely impact our operating performance.
We also made significant progress in exiting non-core assets. The two most notable was the sale of our European franchise
and our HSA business. These dispositions provide us more focus and management time for other business opportunities and
lower our overall risks and costs.
Moreover, we significantly enhanced our compliance activities in BSA, third-party risk and consumer compliance. During
2017, we developed the Integrated Compliance Program that deals with the root causes of our regulatory issues. A video
detailing this initiative is on our website. While we cannot predict when we will exit any outstanding regulatory actions, we
believe we will continue to make substantial progress resolving these issues in 2018.
2. We greatly enhanced our productivity and efficiently
Both our revenue productivity and cost efficiency greatly improved in 2017. Due to annual revenue growth of 17% and the
restructuring and delayering of personnel, revenue per employee increased from $219,000 to $377,000, a 72% increase. In
addition, non-interest expense in 2017 was reduced from $199 million to $155 million, a 22% reduction. The current run-rate
allows us to selectively invest in new initiatives and opportunities. We are now in the 3rd phase of our organizational design
process. The first 2 phases focused on employees and operating costs. The 3rd phase is about creating a more flexible
platform to better service our clients, while enhancing our ability to innovate with both improved productivity and efficiency.
3. We have created the necessary conditions for future success
A lot of our focus in 2017 was to set the organization on the right course for 2018 and beyond. We think we have taken the
right steps to do that by investing significant time and energy not only across our platform in resolving issues and enhancing
processes, but in thinking through what drives the performance of each of our businesses. We have looked at everything from
sales compensation to technology platforms and have made many changes that not only supported 2017 growth, but go a long
way in unlocking the future potential of our organization to innovate and create new solutions for our clients.
The most important factor in creating these necessary conditions for future success is the Bancorp team. Our team today is
professional, engaged, informed, knowledgeable and excited to succeed. Over the last year we have had a lot change, but we
begin 2018 with an exceptional group of individuals that act as a team with the same goals and aspirations, simply put…
Our objective is to achieve extraordinary client and financial success through both business and organizational
innovation while always maintaining a safe and sound institution.
Thank you to everyone in The Bancorp Community for making 2017 a turning point for our company.
Damian Kozlowski
President, The Bancorp Bank
CEO, The Bancorp
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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, 2017
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
(State or other jurisdiction of
incorporation or organization)
409 Silverside Road, Wilmington, DE
(Address of principal executive offices)
23-3016517
(IRS Employer
Identification No.)
19809
(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
Common Stock, par value $1.00 per share
Name of each exchange on which registered
NASDAQ Global Select
Securities registered pursuant to Section 12(g) of the Act:
None
Title of class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(a) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Smaller reporting company [ ]
Accelerated filer [X]
Emerging growth company [ ]
Non-accelerated filer [ ]
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, 2017
of $7.58, was approximately $376.5 million.
As of February 21, 2018, 56,149,494 shares of common stock, par value $1.00 per share, of the registrant were outstanding.
Portions of the proxy statement for registrant’s 2018 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
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THE BANCORP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Forward-looking statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART I
Item 1:
Item 1A:
Item 1B:
Item 2:
Item 3:
Item 4:
PART II
Item 5:
Item 6:
Item 7:
Item 7A:
Item 8:
Item 9:
Item 9A:
Item 9B:
PART III
Item 10:
Item 11:
Item 12:
Item 13:
Item 14:
PART IV
Item 15:
Exhibits and Financial Statement Schedules
SIGNATURES
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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;
adverse governmental or regulatory policies may be promulgated;
operating costs may increase;
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 card and other lines of business.
We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this
report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by
applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances
after the date of this filing or to reflect the occurrence of unanticipated events.
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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 currently generated through the Bank. In our
continuing operations, we have four primary lines of specialty lending: securities backed lines of credit, or SBLOC, vehicle fleet and
other equipment leasing, Small Business Administration lending, or SBA loans and commercial mortgage-backed loans, or CMBS,
generated for sale into commercial mortgage backed securities markets primarily through securitizations. SBLOCs are loans which
are generated through institutional banking affinity groups and are collateralized by marketable securities. SBLOCs are typically
offered in conjunction with brokerage accounts and are offered nationally. Vehicle fleet and other equipment leases are generated in a
number of Atlantic Coast and other states. SBA loans and commercial loans generated for sale are made nationally. At December 31,
2017, SBLOC, leasing, SBA and loans for sale in secondary markets totaled $730.5 million, $378.0 million, $401.9 million (including
SBA loans held for sale) and $331.5 million (excluding SBA loans held for sale), respectively, and comprised approximately 39%,
20%, 21% and 17% of our loan portfolio and commercial loans held for sale. Our investment portfolio amounted to $1.38 billion at
December 31, 2017, 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 issuing,
acquiring and automated clearing house, or ACH, accounts. The issuing deposit accounts are comprised of debit and prepaid card
accounts that are generated with the assistance of independent companies that market directly to end users for account acquisition.
Our issuing deposit account types are diverse and include: consumer and business debit, general purpose reloadable prepaid, pre-tax
medical spending benefit, payroll, gift, government, corporate incentive, reward, business payment accounts and others. Our ACH
accounts facilitate payments such as payroll and bill payments and our acquiring accounts provide clearing and settlement services for
payments made to merchants which must be settled through associations such as Visa or MasterCard. We also provide banking
services to organizations with a pre-existing customer base tailored to support or complement the services provided by these
organizations to their customers. These services include loan and deposit accounts for investment advisory companies through our
institutional banking department. We typically provide these services under the name and through the facilities of each organization
with whom we develop a relationship. We refer to this, generally, as affinity banking. In April 2017, we sold our minimal European
prepaid operations to reduce regulatory and compliance risk.
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 shareholder to our Investor Relations Department, are the charters of the standing
committees of our Board of Directors and standards of conduct governing our directors, officers and employees.
Our Strategies
Our principal strategies are to:
Fund our Loan and Investment Portfolio Growth through Low-cost Deposits and Generate Non-interest Income from
Prepaid Card Accounts and Other Areas. 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 low cost and stable deposits. Funding sources include
prepaid cards, institutional banking money market accounts and card payment processing. We derive the largest component of our
deposits and non-interest income from our prepaid card operations.
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
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organization’s sponsorship. We believe that by marketing targeted products and services to these constituencies through their pre-
existing relationships with the organizations, we will continue to generate lower cost deposits, generate fee income and, with respect
to private label banking, lower our customer acquisition costs and build close customer relationships.
Use Our Existing Infrastructure as a Platform for Growth. We have made significant investments in our banking
infrastructure to support our growth. We believe that this infrastructure can accommodate significant additional growth without
proportionate increases in expense. We believe that this infrastructure enables us to maximize efficiencies through economies of scale
as we grow without adversely affecting our relationships with our customers.
Deposit Products and Services.
We offer a range of products and services to our affinity groups and their client bases, including:
checking accounts;
savings accounts;
money market accounts;
commercial accounts; and
various types of prepaid and debit cards.
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 generating low cost deposits and deploying that
funding into lower risk, more granular and national lines of business. We currently focus our lending activities upon four specialty
lending segments: SBLOC loans, vehicle fleet and other equipment leasing, SBA loans and loans originated for sale into CMBS
securitization capital markets.
SBLOC. We make loans to individuals, trusts and entities which are secured by a pledge of marketable securities maintained
in one or more accounts with respect to which we obtain a securities account control agreement. The securities pledged may be either
debt or equity securities or a combination thereof, but all such securities must be listed for trading on a national securities exchange or
automated inter-dealer quotation system. SBLOCs are typically payable on demand. Most of our SBLOCs are drawn to meet a
specific need of the borrower (such as for bridge financing of real estate) and are typically drawn for 12 to 18 months at a
time. Maximum SBLOC line amounts are calculated by applying a standard ‘advance rate’ calculation against the eligible security
type depending on asset class: typically up to 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.
Leases. We 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 “residual value.”
“Residual value” is a contractual value agreed to by the parties at the inception of a lease as to the value of the leased asset at the end
of the lease term. A closed-end lease is one in which no such payment is due on lease termination. In a closed-end lease, the risk that
the amount received on a sale of the leased asset will be less than the residual value is assumed by us, as lessor. While we do not have
specific underwriting criteria for our lease financing, we analyze information we obtain about the lessee, including financial
statements and credit reports, to determine the lessee’s ability to perform its obligations.
SBA Loans. We participate in two loan programs established by the SBA: the 7(a) Loan Guarantee Program and the 504
Fixed Asset Financing Program. The 7(a) Loan Guarantee Program is designed to help small 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,
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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 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.
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 into secondary markets, generally through securitizations. These loans are collateralized
by various types of commercial real estate, including but not limited to, 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 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 rates are capped to mitigate that risk. Inadequate sales at retail properties and
inadequate occupancy rates for office space, apartments and hotels may negatively impact loan repayment. Should cash flow and
available cash reserves prove inadequate to cover debt service on these loans, repayment will depend upon the sales price of the
property. Because these loans are being originated for sale, the underwriting and other criteria used are those which buyers in the
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capital markets indicate are most crucial when determining whether to buy the loans, including loan-to-value ratio and maturity date.
However, in the period during which we hold a loan prior to sale, property values may fall below appraised values and below the
outstanding balance of the loan, which would reduce the price at which we could sell the loan. 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 Banking
Issuing Services. 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 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 low cost. 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 payroll 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.
Retirement Accounts. We acquire individual retirement accounts which originate from third-party administrators who
provided record keeping and account maintenance for what were previously 401K plan participants. These accounts, most of which
have small balances, originate from employees who have changed employers but have not transferred their 401K accounts. Plan
sponsors often prefer to exit these accounts to reduce their administrative costs. These accounts are converted into money market
accounts and also contribute fee income.
Private Label Banking. Our private label banking services are offered to members of affinity groups, which allows these
groups to provide their members the banking services they desire. Related websites indicate that we are 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’s members or customers.
We pay fees to certain affinity groups based upon deposits and loans they generate. These fees vary, and certain fees increase
as market interest rates increase, while other fee rates may be fixed. We classify these fees which comprise substantially all of the
interest expense on deposits in our consolidated statement of operations. The reduction in deposit interest expense in 2016 compared
to 2015 reflected the sale of the majority of health savings accounts in the latter part of 2015.
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.
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Call Centers. We 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 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 secure the required
services from an alternative source without material interruption of our operations.
European Prepaid Operations. We sold all of our European prepaid operations in April 2017 to reduce regulatory and
compliance risk.
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 and Orlando, Florida. We maintain SBA loan offices in Chicago,
Illinois and 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 three-tiered architecture using
commercially available software. We maintain a platform of several web technologies, databases, firewalls, and licensed and
proprietary financial services software to support our unique client base. User activity is distributed using load-balancing technologies
and our proprietary design, with internally developed software and third-party equipment. We also use third-party data
processors. The goal of our systems designs is to service our client requirements efficiently, which has been accomplished using data
and service replication between multiple data centers. The system’s flexible architecture is designed to meet current capacity needs
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and allow expansion for future demands. In addition to built-in redundancies, we operate automated internal tools and use
independent third parties to continuously monitor our systems.
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. Our
proprietary intellectual property includes the software for creating affinity group bank websites. We rely principally upon trade secret
and trademark law to protect our intellectual property. We do not typically enter into intellectual property-related confidentiality
agreements with our affinity group customers because we maintain control over the software used to create the sites and their banking
functions rather than licensing them for customers to use. Moreover, we believe that factors such as the relationships we develop with
our affinity group and banking customers, the quality of our banking products, the level and reliability of the service we provide, and
the customization of our products and services to meet the needs of our affinity groups are substantially more significant to our ability
to succeed.
Competition
We compete with numerous 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. A number of
banks and other financial institutions compete with us in the prepaid card market; however, we do not believe that any single bank or
group of banks is a predominant provider. We believe that our ability to compete successfully depends on a number of factors,
including:
our ability to expand our affinity group banking program;
competitors’ interest rates and service fees;
the scope of our products and services;
the relevance of our products and services to customer needs and the rate at which we and our competitors introduce
them;
satisfaction of our customers with our customer service;
our perceived safety as a depository institution, including our size, credit rating, capital strength, earnings strength and
regulatory posture;
ease of use of our banking websites and other customer interfaces; and
the capacity, reliability and security of our network infrastructure.
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If we experience difficulty in any of these areas, our competitive position could be materially adversely affected, which
would affect our growth, our profitability and, possibly, our ability to continue operations. With respect to our affinity group
operations, we believe we can compete effectively as a result of our ability to customize our product offerings to the affinity group’s
needs. We believe that the costs of entry, especially compliance costs, to offering prepaid card accounts 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 herein. The description of
statutes and regulations is not intended to be a complete explanation of such statutes and regulations or their effects on the Bank or us
and is qualified in its entirety by reference to the actual statutes and regulations.
Federal Regulation
As a financial holding company, we are subject to regular examination by the Federal Reserve and must file annual reports
and provide any additional information that the Federal Reserve may request. Under the Bank Holding Company Act of 1956, as
amended, which we refer to as the BHCA, a financial holding company may not directly or indirectly acquire ownership or control of
more than 5% of the voting shares or substantially all of the assets of any bank, or merge or consolidate with another financial holding
company, without the prior approval of the Federal Reserve.
Permitted Activities. The BHCA generally limits the activities of a financial holding company and its subsidiaries to that of
banking, managing or controlling banks, or any other activity that is determined to be so closely related to banking or to managing or
controlling banks that an exception is allowed for those activities. These activities include, among other things, and subject to
limitations, operating a mortgage company, finance company, credit card company or factoring company; performing data processing
operations; the issuance and sale of consumer-type payment instruments; provide investment and financial advice; acting as an
insurance agent for particular types of credit related insurance and providing specified securities brokerage services for customers.
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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. See “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.”
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.
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
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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, 2017, we and the Bank had total capital to risk-adjusted assets ratios of 17.09% and 16.59%,
respectively, and Tier 1 capital to risk-adjusted assets ratios of 16.73% and 16.23%, 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, 2017, we and the Bank had leverage ratios of 7.90% and
7.61%, respectively.
The federal banking agencies’ standards provide that concentration of credit risk and certain risks arising from nontraditional
activities, as well as an institution’s ability to manage these risks, are important factors to be taken into account by them in assessing a
financial institution’s overall capital adequacy. The risk-based capital standards also provide for the consideration of interest rate risk
in the agency’s determination of a financial institution’s capital adequacy. The standards require financial institutions to effectively
measure and monitor their interest rate risk and to maintain capital adequate for that risk. These standards can be expected to be
amended from time to time.
The Dodd-Frank Act includes certain related provisions which are often referred to as the “Collins Amendment.” These
provisions are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate
or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under the
Collins Amendment, trust preferred securities issued by a company, such as our company, with total consolidated assets of less than
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$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, 2017 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% 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 will be required to maintain such additional capital conservation buffer of 2.5% of CET1,
effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of
at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss
carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such
category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss,
or AOCI, items included in shareholders’ equity (for example, marks-to-market of securities held in the available for sale portfolio)
under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the
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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 will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and
an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the
0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.
With respect to the Bank, the New Capital Rules revise the “prompt corrective action” or PCA, regulations adopted pursuant to
Section 38 of the Federal Deposit Insurance Act, by: (i) introducing a CET1 ratio requirement at each PCA category (other than
critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1
capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to
the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have
a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement
for any PCA category.
The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories
from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories,
depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain
equity exposures, and resulting in higher risk weights for a variety of asset classes.
We believe that we and the Bank will continue to be able to meet targeted capital ratios. 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%, a Tier 1 risk-based capital ratio of at
least 6.0% and a leverage ratio of at least 5%. An institution is adequately capitalized if it has a total risk-based capital ratio of at least
8%, a Tier 1 risk-based capital ratio of at least 4% and a leverage ratio of at least 4%. At December 31, 2017, our total risk-based
capital ratio was 17.09%, our Tier 1 risk-based capital ratio was 16.73% and our leverage ratio was 7.90% while the Bank’s ratios
were 16.59%, 16.23% and 7.61%, 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.
Bank regulatory agencies are permitted or, in certain cases, required to take action with respect to institutions falling within one
of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective powers include,
among other things:
prohibiting the payment of principal and interest on subordinated debt;
prohibiting the holding company from making distributions without prior regulatory approval;
placing limits on asset growth and restrictions on activities;
placing additional restrictions on transactions with affiliates;
restricting the interest rate the institution may pay on deposits;
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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, 2017, the Bank’s DIF assessment
rate was 26 basis points. A reduction in the assessment rate will depend on future FDIC evaluations of the Bank.
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 proposed rules in October 2015 regarding the offset. Under the proposal, banks with less
than $10 billion in assets would receive an assessment credit for the portion of their assessments that contribute to the increase from
1.15% to 1.35%. These rules have not yet been finalized.
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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, 2017, the Bank’s limit on loans-to-one borrower was $48.1
million ($80.2 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, 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, 2017, we were not indebted to the Bank. The aggregate amount of covered transactions with all affiliates is limited to
20% of the Bank’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of
a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally
provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Section 23A and 23B of the
Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for
which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded
through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits,
including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing
transactions. Restrictions are also placed on certain assets sales to and from an insider to an institution including requirements that
such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.
The Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities
controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
of the Federal Reserve. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable
features; and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate,
which limits are based, in part, on the amount of the Bank’s capital. In addition, extensions of credit in excess of certain limits must
be approved by the Bank’s board of directors. At December 31, 2017 and 2016, loans to these related parties included in assets held
for sale amounted to $1.7 million and $649,000.
Standards for Safety and Soundness. The Federal Deposit Insurance Act requires each federal banking agency to prescribe
for all insured depository institutions standards relating to, among other things, internal controls, information and audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, fees, benefits and such other operational
and managerial standards as the agency deems appropriate. The federal banking agencies have adopted final regulations and
Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these safety and soundness standards. The
guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard.
Privacy. Financial institutions are required to disclose their policies for collecting and protecting confidential information.
Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third
parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial
institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may
not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other
marketing to consumers. The Bank has adopted privacy standards that we believe will satisfy regulatory scrutiny, and communicates
its privacy practices to its customers through privacy disclosures designed in a manner consistent with recommended model forms.
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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 June 21, 2010, FinCEN proposed new rules as directed by the Credit Card Accountability Responsibility and Disclosure
Act of 2009 to expand the reach of BSA-AML related compliance responsibilities to certain defined “prepaid access providers and
sellers, a class of money services businesses formerly either outside or lightly regulated under the BSA.” On July 26, 2011, FinCEN
issued its final rule imposing these affirmative BSA-AML compliance obligations. The Bank has evaluated the impact of these rules
on its operations and its third-party relationships, and has established internal processes accordingly.
On May 11, 2016, FinCEN issued a final rule related to Customer Due Diligence (CDD) under the Bank Secrecy Act (BSA)
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 must be in full compliance by May 11, 2018. As a covered institution, the Bank will be
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.” The new procedures must
outline how the Bank will identify and verify each beneficial owner at the time a new account is opened. The Bank has begun to
prepare for compliance with this new requirement.
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
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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, the Bank must freeze or block such account, and perform
additional procedures as required by OFAC regulations. The Bank filters its customer base and transactional activity against OFAC-
issued lists. The Bank performs these checks utilizing purpose directed software, which is updated each time a modification is made
to the lists provided by OFAC and other agencies.
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;
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.
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In addition, interest and other charges collected or contracted for by the Bank will be subject to state usury laws and federal
laws concerning interest rates.
The deposit operations of the Bank are subject to various consumer protection laws including but not limited to:
the “Truth in Savings Act,” which imposes disclosure obligations to enable consumers to make informed decisions about
accounts at depository institutions;
the “Right to Financial Privacy Act,” which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
the “Expedited Funds Availability Act” which establishes standards related to when financial institutions must make
various deposit items available for withdrawal, and requires depository institutions to disclose their availability policies
to their depositors;
the “Electronic Fund Transfer Act” and which governs electronic fund transfers to and withdrawals from deposit
accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic
banking services; and
the rules and regulations of various federal agencies charged with the responsibility of implementing these federal laws.
Final Prepaid Account Rule Amending Regulation E and Regulation Z. The original effective date of the Final Prepaid Rule
was October 1, 2017, but applicability of certain requirements of the Final Prepaid Rule were delayed until October 1, 2018. On April
20, 2017, the CFPB released a final rule delaying the general effective date of the Final Prepaid Rule until April 1, 2018. However, on
January 25, 2018 the CFPB issued additional technical amendments and extended the effective date of the Final Prepaid Rule to April
1, 2019. The Bank is preparing itself for compliance with its requirements.
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; (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.
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
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
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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).
In the 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.
On July 1, 2016, the Bank began operating under an FDIC-approved CRA Strategic Plan. On September 11, 2017, the Bank
underwent a “hybrid” CRA examination. This included an evaluation of the Bank under traditional CRA evaluation standards for the
period from June 2, 2015 to June 30, 2016 and an evaluation of the Bank under its CRA Strategic Plan for the period from July 1,
2016 to September 11, 2017. On January 18, 2018, the Bank received its 2017 CRA Performance Evaluation that accorded the
institution a “Satisfactory” rating which was an upgrade from the “Needs to Improve” rating it had been assigned since June of 2015.
Subsequent to the upgraded rating, the Bank filed its Community Support Statement with the Federal Housing Finance Agency who
determined the Bank was in compliance with 12 CFR part 1290 effective as of February 5, 2018. Certain restrictions imposed on the
Company by the Federal Reserve have also been lifted as a result of the “Satisfactory” 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.
Enforcement. Under the Federal Deposit Insurance Act, the FDIC has the authority to bring actions against a bank and all
affiliated parties, including stockholders, attorneys, appraisers and accountants, who knowingly or recklessly participate in wrongful
actions likely to have an adverse effect on the bank. Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers and/or directors, to institution of receivership or conservatorship proceedings, or
termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1
million per day in especially egregious cases. Federal law also establishes criminal penalties for certain violations.
Federal Reserve System. Federal Reserve regulations require banks to maintain non-interest bearing reserves against their
transaction accounts (primarily negotiated order of withdrawal, or NOW, and regular checking accounts). For 2016, Federal Reserve
regulations generally required that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating
$95.0 million or less (subject to adjustment by the Federal Reserve), the reserve requirement is 3%; and, for accounts aggregating
greater than $95.0 million, the reserve requirement is 10% (subject to adjustment by the Federal Reserve to between 8% and 14%).
The first $15.2 million of otherwise reservable balances (subject to adjustments by the Federal Reserve) are exempt from the reserve
requirements. At December 31, 2017, the Bank met these requirements by maintaining $264.7 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;
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;
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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.
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. We do not at this time expect the Final Volcker Rules to
have a material impact on our operations.
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Consumer Protections for Remittance Transfers. On February 7, 2012, the CFPB published a final rule to implement Section
1073 of the Dodd-Frank Act. The final rule creates a comprehensive set of consumer protections for remittance transfers sent by
consumers in the United States to parties in foreign countries. The final rule, among other things, mandates certain disclosures and
consumer cancellation rights for foreign remittances covered by the rule.
Federal Regulatory Guidance on Incentive Compensation. On June 21, 2010, federal banking regulators released final
guidance on sound incentive compensation policies for banking organizations. This guidance, which covers all employees that have
the ability to materially affect the risk profile of an organization either individually or as part of a group, is based upon key principles
including: (1) incentive compensation arrangements at a banking organization should provide employees incentives that appropriately
balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (2)
these arrangements should be compatible with effective controls and risk-management; and (3) these arrangements should be
supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. The final
guidance seeks to address the safety and soundness risks of incentive compensation practices to ultimately be sure that compensation
practices are not structured in a manner to give employees incentives to take imprudent risks. Federal regulators intend to actively
monitor the actions being taken by banking organizations with respect to incentive compensation arrangements and will review and
update their guidance as appropriate to incorporate best practices that emerge.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation
arrangements of banking organizations such as ours that are not considered “large, complex banking organizations.” These reviews
will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive
compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will
be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take
other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related
risk-management controls or governance processes, pose a risk to the organization’s safety and soundness and the organization is not
taking prompt and effective measures to correct the deficiencies.
In February 2011, the Federal Reserve, the Office of Comptroller of the Currency and the FDIC approved a joint proposed
rulemaking to implement Section 956 of the Dodd-Frank Act, which prohibits incentive-based compensation arrangements that
encourage inappropriate risk-taking by covered financial institutions and that are deemed to be excessive, or that may lead to material
losses.
Effect of Governmental Monetary Policies. The commercial banking business is affected not only by general economic
conditions but also by both U.S. fiscal policy and the monetary policies of the Federal Reserve. Some of the instruments of fiscal and
monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating
availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements
against member banks’ deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain
borrowings by banks and their affiliates, and the placing of limits on interest rates that member banks may pay on time and savings
deposits. Such policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest
rates charged on loans or paid on time and savings deposits (see “Item 7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations”). We cannot predict the nature of future fiscal and monetary policies and the effect of such
policies on the future business and our earnings.
Delaware Regulation
General. As a Delaware financial holding company, we are subject to the supervision of and periodic examination by the
Delaware Office of the State Bank Commissioner and must comply with the reporting requirements of the Delaware Office of the
State Bank Commissioner. The Bank, as a banking corporation chartered under Delaware law, is subject to comprehensive regulation
by the Delaware Office of the State Bank Commissioner, including regulation of the conduct of its internal affairs, the extent and
exercise of its banking powers, the issuance of capital notes or debentures, any mergers, consolidations or conversions, its lending and
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
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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.
Employees
As of December 31, 2017, we had 538 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, 2017, the ratios of the allowance for loan losses to total loans and to non-performing loans were,
respectively, 0.51% and 168.03%. 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
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. While we cannot yet determine how significantly transitioning to the CECL model will
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impact our allowance for loan and lease losses, we expect that it will result in an increase in the allowance for credit losses given the
change to estimated losses over the contractual life adjusted for expected prepayments, as well as the addition of an allowance for debt
securities. The amount of the increase will be impacted by the portfolio composition and credit quality at the adoption date as well as
economic conditions and forecasts at that time. 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, but generally include analysis of a borrower’s prior credit
history, financial statements, tax returns and cash flow projections, valuation of certain types of collateral based on reports of
independent appraisers and verification of liquid assets. Although the Bank believes that its underwriting criteria are appropriate for
the various kinds of loans it makes, the Bank may incur losses on loans that meet its underwriting criteria, and these losses may
exceed the amounts set aside as reserves in the Bank’s allowance for loan losses. 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%. Such businesses 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.
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.
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 have been increasing our provision for loan losses, and have experienced an increase 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, 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 and a supervisory letter from the Federal Reserve, have imposed certain restrictions and
requirements upon us and the Bank.
The Bank entered into a Stipulation and Consent to the Issuance of a Consent Order effective August 7, 2012, which we refer
to as the 2012 Consent Order. The Bank took this action without admitting or denying any charges of unsafe or unsound banking
practices or violations of law or regulation. Under the 2012 Consent Order, the Bank agreed to increase its supervision of third-party
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
23
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 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.
Until the Bank submits to the FDIC a report summarizing the completion of certain BSA-related corrective action (“BSA
Report”), the 2014 Consent Order restricts the Bank from signing and boarding new independent sales organizations, establishing new
non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related
payments. Until the BSA Report is submitted to and approved by the FDIC and Delaware State Bank Commissioner, those aspects of
the growth of our card payment processing and prepaid card operations will be affected, which, unless offset by growth from existing
customers and new customers in other areas of our prepaid card operations, could reduce growth of our deposits and non-interest
income and, possibly, limit our ability to raise additional capital on acceptable terms.
On August 27, 2015, the Bank entered into an Amendment to Consent Order, or the 2014 Consent Order Amendment, with
the FDIC, amending the 2014 Consent Order. The Bank took this action without admitting or denying any additional charges of
unsafe or unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA
compliance program. The 2014 Consent Order Amendment provides that the Bank shall not declare or pay any dividend without the
prior written consent of the FDIC and for certain assurances regarding management.
On May 11, 2015, the Federal Reserve issued a letter, or the Supervisory Letter, to us as a result of the 2014 Consent Order
and the 2014 Consent Order Amendment (which, at the time of the Supervisory Letter, was in proposed form), which provides that we
shall not pay any dividends on our common stock or make any interest payments on our trust preferred securities, without the prior
written approval of the Federal Reserve. It further provides that we may not incur any debt (excluding payables in the ordinary course
of business) or redeem any shares of our stock, without the prior written approval of the Federal Reserve.
On December 23, 2015, the Bank entered into a Stipulation and Consent to the Issuance of an Amended Consent Order, Order
for Restitution, and Order to Pay Civil Money Penalty with the FDIC, which we refer to as the 2015 Consent Order. The Bank took
this action without admitting or denying any charges of violations of law or regulation. The 2015 Consent Order amended and
restated in its entirety the terms of the 2012 Consent Order.
The 2015 Consent Order was based on FDIC allegations regarding electronic fund transfer, or EFT, error resolution practices,
account termination practices and fee practices of various third parties with whom the Bank had previously provided, or currently
provides, deposit-related products, whom we refer to as Third Parties. The 2015 Consent Order continues the Bank's obligations
originally set forth in the 2012 Consent Order, including its obligations to increase board oversight of the Bank's compliance
management system, or CMS, improve the Bank's CMS, enhance its internal audit program, increase its management and oversight of
Third Parties, and correct any apparent violations of law.
In addition to restating the general terms of the 2012 Consent Order, the 2015 Consent Order directs the Bank’s Board of
Directors to establish a Complaint and Error Claim Oversight and Review Committee, which we refer to as the Complaint and Error
Claim Committee to review and oversee the Bank’s processes and practices for handling, monitoring and resolving consumer
complaints and EFT error claims (whether received directly or through Third Parties) and to review management's plans for correcting
any weaknesses that may be found in such processes and practices. The Bank’s Board of Directors appointed the required Complaint
and Error Claim Committee on January 29, 2016.
The 2015 Consent Order also requires the Bank to implement a corrective action plan, or CAP, to remediate and provide
restitution to those prepaid cardholders who asserted or attempted to assert, or were discouraged from initiating EFT error claims, and
to provide restitution to cardholders harmed by EFT error resolution practices. The 2015 Consent Order requires that if, through the
CAP, the Bank identifies prepaid cardholders who have been adversely affected by a denial or failure to resolve an EFT error claim,
the Bank will ensure that monetary restitution is made. Neither we nor the Bank can predict the amount of any restitution which may
24
be required, or the amount, if any, that the Bank may pay in connection therewith. Under the Bank's agreements with Third Parties,
we believe that restitution is reimbursable to the Bank. The CAP is currently being implemented. To date, no restitution under the
CAP has been made.
The 2015 Consent Order also imposed a $3 million civil money penalty on the Bank, which the Bank has paid and which was
recognized as expense in the fourth quarter of 2015.
On March 7, 2018, the Bank entered into a Stipulation and Consent to Order for Restitution and Order To Pay Civil Money
Penalty with the FDIC, which we refer to as the 2018 Restitution Order and 2018 CMP Order, respectively. The Bank took this
action without admitting or denying any alleged violations of law or regulation. The FDIC’s action principally emanates from one of
the Bank’s third-party payment processors (“Third-Party Processor”) that suffered an internal system programming glitch. This
inadvertently resulted in consumers that engaged in signature-based point of sale transactions during the period from December 2010
to November 2014 being charged a greater fee than what was disclosed by the Bank. The FDIC alleged the Bank’s incorrect fee
imposition due to the Third-Party Processor error was an unfair or deceptive act or practice and violated Section 5 of the Federal Trade
Commission Act. The 2018 Restitution Order requires the Bank to develop a written Restitution Plan, subject to independent audit
and FDIC non-objection, to ensure impacted consumers are compensated for any incorrectly charged fees. The 2018 Restitution
Order requires the Bank to make such reimbursements if not otherwise made by the Third-Party Processor and the Bank is
indemnified by the Third-Party Processor for such reimbursements. Impacted consumers have been reimbursed by the Third-Party
Processor at its own expense. The Bank is in the process of complying with the written documentation and audit requirements of the
Restitution Order.
The 2018 CMP Order imposed a $2 million civil money penalty on the Bank which the Bank has paid, and was recognized as
expense on September 30, 2017. The civil money penalty is not subject to any indemnification or recovery from any third party.
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, the 2015 Consent Order, the Supervisory Letter, the 2018 Restitution Order or
2018 CMP Order to their satisfaction. We refer collectively to the 2014 Consent Order, the 2014 Consent Order Amendment, the
2015 Consent Order, the 2018 Restitution Order and the 2018 CMP Order as the Consent Orders. 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.
Our reputation and business could be damaged by our entry into the Consent Orders with the FDIC and other negative
publicity.
Reputational risk, or the risk to our business, earnings and capital from negative publicity, is inherent in our business.
Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending
practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from
actions taken by regulators and others as a result of that conduct. Damage to our reputation, including as a result of negative publicity
associated with the Consent Orders or the Supervisory Letter, now or in the future could impact our ability to attract new and maintain
existing loan and deposit customers, employees and business relationships, and could result in the imposition of additional regulatory
requirements, operational restrictions, enhanced supervision and/or civil money penalties. Such damage could also adversely affect
our ability to raise additional capital on acceptable terms.
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 and the Supervisory Letter 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 and the Supervisory Letter 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 and the Supervisory Letter 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 and the
Supervisory Letter uniformly in every instance.
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If the regulators interpret the Consent Orders or the Supervisory Letter in a manner contrary to our interpretation despite our
good faith efforts to comply, the FDIC may conclude a violation has occurred, which may result in the imposition of additional
regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties.
We may have difficulty managing our growth which may divert resources and limit our ability to expand our operations
successfully.
Our future profitability will depend in part on our continued ability to grow; however, we may not be able to sustain our
historical growth rate or be able to grow. Our future success will depend on the ability of our officers and key employees to continue
to implement and improve our operational, financial and management controls, reporting systems and procedures and manage a
growing number of customer relationships. We may not implement improvements to our management information and control
systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. Consequently, 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.
The Bank has introduced, and in the future may introduce, new products and services to differing markets either alone or in
conjunction with third parties. New lines of business, products or services could have a significant impact on the effectiveness of our
system of internal controls or the controls of third parties and could reduce our revenues and potentially generate losses. There are
material inherent risks and uncertainties associated with offering new products and services, especially when new markets are not
fully developed or when the laws and regulations regarding a new product are not mature. New products and services, or entrance into
new markets, may require substantial time, resources and capital, and profitability targets may not be achieved. Factors outside of our
control, such as developing laws and regulations, regulatory orders, competitive product offerings and changes in commercial and
consumer demand for products or services may also materially impact the successful launch and implementation of new products or
services. Failure to manage these risks, or failure of any product or service offerings to be successful and profitable, could have a
material adverse effect on our financial condition and results of operations.
Changes in interest rates 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.
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
26
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 card fee income which is subject to various risks.
We realize a significant portion of our revenues from prepaid card and other prepaid products and services. 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. Prepaid card deposits comprise a significant portion of the Bank’s deposits.
Regulatory and legal requirements applicable to the prepaid card industry are unique and frequently changing.
Achieving and maintaining compliance with frequently changing legal and regulatory requirements requires a significant
investment in qualified personnel, hardware, software and other technology platforms, external legal counsel and consultants and other
infrastructure components. 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 and other payment mediums, possible changes in the rules of networks, such as Visa and
MasterCard and others, in which the Bank operates and state regulations related to prepaid cards including escheatment.
The potential for fraud in the card payment industry is significant.
Issuers of prepaid cards and other companies have suffered significant losses in recent years with respect to the theft of
cardholder data that has been illegally exploited for personal gain. The theft of such information is regularly reported and affects
individuals and businesses. Losses from various types of fraud have been substantial for certain card industry participants. The Bank
in many cases has indemnification agreements with third parties; however, such indemnifications may not fully cover losses.
Although fraud has not had a material impact on the profitability of the Bank, it is possible that such activity could impact 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.
In the future we may rely in part on funds provided by wholesale deposits and brokered certificates of deposit to support the
growth of our loan portfolio. Wholesale and brokered certificates of deposit are highly sensitive to changes in interest 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 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.
27
Our prepaid 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, savings and loan associations, mutual savings banks, credit unions, leasing companies, consumer
finance companies, factoring companies, insurance companies and money market mutual funds and card issuers.
We face national and even global competition with respect to our other products and services, including payment acceptance
products and services, private label banking, fleet leasing, government guaranteed lending and prepaid payment solutions. Our
commercial partners and banking customers for these products and services are located throughout the United States, and 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 prepaid card account marketing services, and investment
advisory firms.
Deposit accounts acquired with the assistance of our top twenty affinity relationships totaled $2.98 billion at December 31,
2017. 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.
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, 2017 to any one customer or related group of customers was $48.1 million
for unsecured loans and $80.2 million for secured loans. Our lending limit is substantially smaller than that of many financial
28
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
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.
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
29
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.
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 shareholders.
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, 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
30
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. On January 18, 2018, the Bank received its
2017 CRA Performance Evaluation that accorded the institution a “Satisfactory” rating which was an upgrade from the “Needs to
Improve” rating it had been assigned since June 2015. Subsequent to the upgraded rating, the Bank filed its Community Support
Statement with the Federal Housing Finance Agency who determined the Bank was in compliance with 12 CFR part 1290 effective as
of February 5, 2018. Certain restrictions imposed on the holding company by the Federal Reserve have also been lifted as a result of
the “Satisfactory” rating. The Bank continues to oversee its CRA activities in accordance with its Strategic Plan which is effective
through June 30, 2018.
As a result of the previous needs to improve rating, certain business restrictions had been in place, including FDIC limits on
change in control, new branches, branch relocation, main office relocation, and mergers (regular, interim or corporate
reorganizations). The Federal Reserve restrictions include limitations on holding company commencement of direct or indirect new
financial activity and holding company change in control. The Federal Housing Finance Agency has also imposed restrictions on
receiving long-term advances and participating in their Affordable Housing Program and Community Investment Cash Advances
Program. There can be no assurance that we will maintain a satisfactory rating and if not maintained, the business restrictions
previously in place would be reinstated.
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-
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.
31
It is difficult to predict at this time what specific impact many aspects of the Dodd-Frank Act and the yet to be written
implementing rules and regulations will have on regional banks; however, we expect that at a minimum they will increase our
operating and compliance costs and obligations, which could reduce or eliminate our ability to generate profits.
On October 5, 2016, the CFPB released the Final Prepaid Rule. The original effective date of the Final Prepaid Rule was
October 1, 2017, but applicability of certain requirements of the Final Prepaid Rule were delayed until October 1, 2018. On April 20,
2017, the CFPB released a final rule delaying the general effective date of the Final Prepaid Rule until April 1, 2018. However, on
January 25, 2018 the CFPB issued additional technical amendments and extended the effective date of the Final Prepaid Rule to April
1, 2019. The Bank is preparing itself for compliance with its requirements. 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
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 from which we
acquire deposit accounts and with 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
32
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 currently 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. On June 30, 2016, we received written notice
from the Internal Revenue Service that it will be conducting an audit of our tax returns for the tax years 2011, 2012, 2013 and 2014.
The audit is in process. 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. The current audits
or any future audits or 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.
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
33
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. At December 31,
2017, the Bank’s FDIC premium was increased to 26 basis points as a result of new guidance by the FDIC which reflected its previous
reclassification of the vast majority of the Bank’s deposits as brokered. A reduction in the assessment rate will depend on future FDIC
evaluations of the Bank.
We have had material weaknesses in internal control over financial reporting in the past and cannot assure you that additional
material weaknesses will not be identified in the future. Our failure to implement and maintain effective internal control over
financial reporting could result in material misstatements in our financial statements which could require us to restate
financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on our
stock price.
As previously reported, our management had identified material weaknesses in our internal and disclosure controls over
financial reporting that affected our financial statements for the fiscal years ended December 31, 2012, 2013 and 2014 and prior
periods. These weaknesses related to the timing of the recognition of loan losses and the recognition of other loan losses and resulted
in a restatement of our financial statements for such periods. 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.
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
34
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 Orders and a supervisory letter from the
Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank.” Although we believe we have sufficient
existing liquidity for our needs for the foreseeable future, there is risk that, if the amendment remains undischarged for a lengthy
period and the Bank is unable to obtain FDIC approval for one or more dividends, we may not be able to service our obligations as
they become due or to pay dividends on our common stock or preferred stock. Even if, absent the amendment, the Bank has the
capacity to pay dividends, it is not obligated to pay the dividends. Its Board of Directors may determine, as it did in the past, to retain
some or all of its earnings to support or increase its capital base. Moreover, even if the Bank receives permission to pay dividends to
us, under the Supervisory Letter, we may not pay dividends to our stockholders without the consent of the Federal Reserve until the
Supervisory Letter is discharged.
Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may make it more difficult for holders
of our common stock to receive a change in control premium.
Certain provisions of our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest more
difficult, even if such events were perceived by many of our stockholders as beneficial to their interests. These provisions include in
particular our ability to issue shares of our common stock and preferred stock with such provisions as our board of directors may
approve without further shareholder approval. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware
General Corporation Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more of
a corporation’s outstanding voting stock, from engaging in a business combination with our company for three years following the
date that person became an interested stockholder unless certain specified conditions are satisfied.
Item 1B. Unresolved Staff Comments.
The staff of the SEC has commented on three of our loan relationships, now included in discontinued operations, requesting
detailed information concerning the amount and timing of our recognition of impairment losses originally reported in the first quarter
of 2014, with respect to those relationships. As a result of these comments, we analyzed the relationships and on March 29, 2015 our
audit committee, as reported in a Form 8-K filed April 1, 2015, determined that certain of our financial statements could not be relied
upon and that such charges should be restated to prior periods. Upon resulting analysis of other unrelated loan charges, losses on other
35
loans were also restated to prior periods including previously unreported losses. The restatements were made in our Form 10-K for
2014. We cannot assure you that the staff of the SEC will not have further comments related to the foregoing.
Item 2. Properties.
Our executive office and banking facility are located at 409 Silverside Road, Wilmington, Delaware. We maintain business
development offices in Philadelphia, Pennsylvania, New York, New York, Chicago, Illinois, and Raleigh, North Carolina. Leasing
offices are located in Charlotte, North Carolina, Crofton, Maryland, Orlando, Florida, Kent, Washington and Raritan, New Jersey.
Prepaid card offices are located in the United States in Minneapolis, Minnesota, San Francisco, California and Sioux Falls, South
Dakota. BSA/AML offices are in Tampa, Florida. Locations and certain additional information regarding our offices and other
material properties at December 31, 2017 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
Bank Owned Property
Orlando, Florida
Leased Property
Charlotte, North Carolina
Chicago, Illinois
Crofton, Maryland
Kent, Washington
Minneapolis, Minnesota
New York, New York
Raritan, New Jersey
Philadelphia, Pennsylvania
Raleigh, North Carolina
San Francisco, California
Sioux Falls, South Dakota
Tampa, Florida
Warminster, Pennsylvania
Wilmington, Delaware
Expiration
Square Feet
Monthly Rent
-
2021
2020
2020
month-to-month
2020
2025
2020
2025
2019
2020
2022
2020
2022
2025
8,850
2,345
6,864
2,287
4,500
3,181
7,815
2,145
14,839
1,729
2,622
38,611
10,303
2,003
62,136
-
$ 3,911
10,701
3,640
5,000
2,757
44,936
3,597
30,812
2,848
17,719
54,674
16,859
2,153
132,742
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.”
The Company received a subpoena from the SEC, dated March 22, 2016, relating to an investigation by the SEC of the
Company's restatement of its financial statements for the years ended December 31, 2010 through December 31, 2013 and the interim
periods ended March 31, 2014, June 30, 2014 and September 30, 2014, which restatement was filed with the SEC on September 28,
2015, and the facts and circumstances underlying the restatement. The Company is cooperating fully with the SEC's investigation.
The costs to respond to the subpoena and cooperate with the SEC's investigation have been material and we expect such costs to
continue to be material at least through the completion of the SEC’s investigation.
On June 30, 2016, the Company received written notice from the Internal Revenue Service that it will be conducting an audit
of the Company's tax returns for the tax years 2011, 2012, 2013 and 2014. The audit is in process.
36
The Company received a letter dated August 1, 2016, demanding inspection of its books and records pursuant to Section 220
of the Delaware General Corporation Law, or DCGL, from legal counsel representing a shareholder (the "Demand Letter"). The
Company, through outside legal counsel, responded to the Demand Letter by permitting the shareholder to inspect certain of the
Company’s books and records and by objecting to other requests. On January 30, 2017, the shareholder filed a complaint in the Court
of Chancery of the State of Delaware seeking an order from the court, pursuant to Section 220 of the DGCL, compelling the Company
to permit the shareholder to inspect additional books and records of the Company. The Company believes that its original response to
the Demand Letter was appropriate in all respects and continues to defend against the complaint. On July 27, 2017, the Court of
Chancery ruled in favor of the Company and granted an Order of Final Judgment Denying Plaintiff’s Demand To Inspect The Books
And Records of Defendant. The court’s Order was subject to an appeal right which has now expired; no appeal was filed. Both the
Demand Letter and the complaint threaten the commencement of a shareholder’s derivative suit against certain officers and directors
of the Company seeking damages and other remedies on behalf of the Company. We have been advised by our counsel in the matter
that reasonably possible losses cannot be estimated, but we and our counsel continue to believe the claim is without merit.
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.
37
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the NASDAQ National Market under the symbol “TBBK.” The following table sets forth the
range of high and low sales prices for the indicated periods for our common stock.
2017
2016
Quarter Ended
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
Price Range
High
Low
$ 7.98
$ 7.77
$ 8.37
$ 10.25
$ 6.36
$ 7.05
$ 6.45
$ 8.20
$ 4.73
$ 4.86
$ 7.51
$ 8.33
$ 3.88
$ 5.03
$ 4.74
$ 5.63
As of February 21, 2018, there were 56,149,494 shares of common stock outstanding held of record by 4,817 shareholders.
We have not paid cash dividends on our common stock since our inception, and do not plan to pay cash dividends on our
common stock for the foreseeable future. Our payment of dividends is subject to restrictions discussed in Item 1, “Business—
Regulation under Banking Law,” and to a supervisory letter issued by the Federal Reserve discussed in Item 1A, “Risk Factors-Risks
Relating to Our Business-The entry into the 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 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.
38
Equity Compensation Plan Information
1999 Omnibus plan
2005 Omnibus plan
Stock option and equity plan of 2011
Stock option and equity plan of 2013
Total
Number of securities
remaining available for
Number of securities to be
Weighted-average
future issuance under
issued upon exercise of
exercise price of
equity compensation plans
outstanding options,
outstanding options,
(excluding securities
warrants and rights
warrants and rights
reflected in column (a)
(a)
255,000
212,750
684,875
1,564,454
2,717,079
(b)
$9.63
$7.81
$8.63
$6.75
$8.30
(c)
-
-
462,352
269,880
732,232
* All plans have been authorized by shareholders.
39
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, 2012 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.
250.00
200.00
150.00
100.00
50.00
‐
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
The Bancorp, Inc.
NASDAQ Bank Stock Index
NASDAQ Composite Stock Index
Index
The Bancorp, Inc.
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
100.00
163.26
99.27
58.07
71.65
90.06
NASDAQ Bank Stock Index
100.00
138.90
142.85
152.31
205.66
212.88
NASDAQ Composite Stock Index
100.00
138.32
156.85
165.84
178.28
228.63
As of
40
The following graph reflects stock performance since 2012, compared to the KBW bank index, which is an industry
recognized peer group of regional and money center banks.
250.00
200.00
150.00
100.00
50.00
‐
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
The Bancorp, Inc.
KBW Bank Index
Index
The Bancorp, Inc.
KBW Bank Index
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
100.00
100.00
163.26
135.06
99.27
144.81
58.07
142.51
71.65
179.00
90.06
216.21
As of
41
Item 6. Selected Financial Data.
The following table sets forth selected financial data as of and for the years ended December 31, 2017, 2016, 2015, 2014, and
2013. We derived the selected financial data from our consolidated financial statements for those periods included in this annual
report on Form 10-K or our prior annual reports on Form 10-K. Our historical financial information for the three years ended
December 31, 2014 has been adjusted to reflect the discontinuance of our commercial lending operations. As a result, our results of
operations for the three years ended December 31, 2014 may not be comparable to the results of our operations reported for the prior
periods. In addition, 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.
Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan
and lease losses
Non-interest income
Non-interest expense
Income (loss) before income tax benefit
Income tax provision (benefit)
Net income (loss) from continuing operations
Net income (loss) discontinued operations net of tax
Net income (loss) available to common shareholders
As of and for the years ended
December 31,
2017
2016
2015
2014
2013
(in thousands, except per share data)
$ 122,020 $ 102,219 $ 83,530 $ 70,720
11,295
59,425
1,202
15,340
106,680
2,920
12,253
89,966
3,360
13,599
69,931
2,100
$ 51,150
10,768
40,382
355
103,760
91,548
154,914
40,394
23,056
17,338
4,335
40,027
82,073
101,817
20,283
6,767
13,516
(27,938)
$ 21,673 $ (96,492) $ 13,432 $ 57,109 $ (14,422)
58,223
85,049
135,980
7,292
(14,523)
21,815
35,294
67,831
133,067
194,088
6,810
1,450
5,360
8,072
86,606
42,486
198,573
(69,481)
(12,664)
(56,817)
(39,675)
Net income (loss) per share from continuing operations - basic
Net income (loss) per share from discontinued operations - basic
Net income (loss) per share - basic
$ 0.31 $ (1.28) $ 0.14 $ 0.58 $ 0.36
$ 0.08 $ (0.89) $ 0.21 $ 0.94 $ (0.75)
$ 0.39 $ (2.17) $ 0.35 $ 1.52 $ (0.39)
Net income (loss) per share from continuing operations - diluted
Net income (loss) per share from discontinued operations - diluted
Net income (loss) per share - diluted
$ 0.31 $ (1.28) $ 0.14 $ 0.57 $ 0.35
$ 0.08 $ (0.89) $ 0.21 $ 0.92 $ (0.75)
$ 0.39 $ (2.17) $ 0.35 $ 1.49 $ (0.40)
Balance Sheet Data:
Total assets
Total loans, net of unearned costs
Allowance for loan and lease losses
Total cash and cash equivalents
Deposits
Shareholders' equity
Selected Ratios:
Return on average assets
Return on average common equity
Net interest margin
Book value per common share
Selected Capital and Asset Quality Ratios:
Equity/assets
Tier I capital to average assets
Tier 1 or common equity capital to total risk-weighted assets
Total capital to total risk-weighted assets
Allowance for loan and lease losses to total loans
nm = not meaningful
$ 4,708,147 $ 4,858,114 $ 4,765,823 $ 4,986,317
874,593
3,638
1,114,235
4,621,784
319,023
1,078,077
4,400
1,155,162
4,414,757
320,001
1,392,228
7,096
908,935
4,260,842
324,149
1,222,911
6,332
999,059
4,238,304
298,963
1.28%
20.17%
2.60%
$ 5.81 $ 5.40 $ 8.47 $ 8.46
nm
nm
2.74%
nm
nm
3.04%
0.29%
4.20%
2.37%
$ 4,593,588
636,001
3,881
1,235,949
4,272,989
247,127
nm
nm
2.44%
$ 6.57
6.15%
6.90%
13.34%
13.63%
0.52%
6.71%
7.17%
14.67%
14.88%
0.41%
6.40%
7.07%
11.54%
11.67%
0.42%
5.38%
6.09%
10.55%
11.87%
0.61%
6.88%
7.90%
16.73%
17.09%
0.51%
42
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 2017, we recorded net income of $17.3 million in continuing operations. Net interest income increased 18.6% to $106.7
million from $90.0 million in 2016, primarily reflecting loan growth in SBLOC, SBA and leasing balances. From year end 2016 to
year end 2017, SBLOC loans, SBA loans and leasing grew 16%, 9% and 9%, respectively. In both 2017 and 2016, the Federal
Reserve increased short term rates, which also contributed to increased net interest income. Future rate increases should result in
higher levels of net interest income in 2018, partially offset by lesser expected increases in funding costs. While our loans generally
adjust more fully to Federal Reserve interest rate increases, funding costs generally increase to only a fraction of such rate increases.
In 2017 compared to 2016, the primary driver of recurring fee income, prepaid fees, increased 4% to $53.4 million. Gain on sale of
loans increased $15.0 million which resulted primarily from the sale of loans into securitizations in 2017.
We are working with our regulators to satisfy BSA and other compliance requirements and believe we are progressing. Our
BSA and compliance efforts included the use of BSA consultants which resulted in significant costs: $29.1 million in 2016 and $41.4
million in 2015. Those expenses ended in the third quarter of 2016.
In 2017, total non-interest expense decreased $43.7 million mainly due to the conclusion of the BSA and look back
consulting expenses in 2016 and significant staff position reductions at the end of third quarter 2016. Ongoing cost cutting efforts
were also reflected in a reduction in data processing and other expense categories. 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. The lower 21% tax rate is currently estimated to result in a combined 27% federal
and state income tax rate in 2018.
In 2014, we discontinued our Philadelphia commercial lending operations following our determination that those operations
were inconsistent with our strategic focus on generating low cost deposits and deploying that funding into lower risk, more granular
and national lines of business and investment securities. We currently focus our lending activities upon four specialty lending
segments: SBLOC loans, SBA loans, vehicle fleet and other equipment leasing, and the origination of loans for sale into commercial
securitizations. The majority of the $39.7 million loss in discontinued operations in 2016 resulted from loans against a Florida mall
which were written down by $23.9 million as a result of an “as is” appraisal when the loans became non-performing. The Bank has
assumed legal ownership and possession of the mall and a letter of intent for its sale has been signed. The sale is scheduled to close in
2018. At year end 2017, our net discontinued assets amounted to $304.3 million compared to $360.7 million at year end 2016. As
these balances are reduced, either through sales or repayment, we plan to invest the proceeds into our continuing lending lines.
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”.
43
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument
using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market
prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted
prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do
not exist, we estimate fair value. Our valuation methods and inputs consider factors such as types of underlying assets or liabilities,
rates of estimated credit losses, interest rate or discount rate and collateral. Our best estimate of fair value involves assumptions
including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings,
current delinquency rates, loan-to-value ratios and the possibility of obligor refinancing.
At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. From time to time, assets or
liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at
the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period.
We periodically review our investment portfolio to determine whether unrealized losses on securities are temporary, based on
evaluations of the creditworthiness of the issuers or guarantors, and underlying collateral, as applicable. In addition, we consider the
continuing performance of the securities. We recognize credit losses through the consolidated statement of operations. If
management believes market value losses are temporary and that we have the ability and intention to hold those securities to maturity,
we recognize the reduction in other comprehensive income, through equity. We evaluate whether an other than temporary impairment
exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the
amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether
the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s
underlying collateral and (e) the payment structure of the security. If other than temporary impairment is determined, we estimate
expected future cash flows to determine the credit loss amount with a quantitative and qualitative process that incorporates
information received from third-party sources along with internal assumptions and judgments regarding the future performance of the
security.
We account for our stock-based compensation plans based on the fair value of the awards made, which include stock options,
restricted stock, and performance based shares. To assess the fair value of the awards made, management makes assumptions as to
expected stock price volatility, option terms, forfeiture rates and dividend rates. All of these estimates and assumptions may be
susceptible to significant change that may impact earnings in future periods.
We account for income taxes under the liability method whereby we determine deferred tax assets and liabilities based on the
difference between the carrying values on our consolidated financial statements and the tax basis of assets and liabilities as measured
by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes
in deferred tax assets and liabilities.
Financial Statement Restatement
We have adjusted our financial statement presentation for items related to discontinued operations. Separately, we have
restated our financial statements for periods from 2010 through September 30, 2014, the last date through which financial statements
previously had been filed prior to our filing of our Annual Report on Form 10-K for the year ended December 31, 2014 in September
2015. The restatement reflected the recognition of provisions for loan losses and loan charge-offs for discontinued operations in
periods earlier than those in which those charges were initially recognized. The majority of these loan charges were originally
recognized in 2014, primarily in the third quarter, when commercial lending operations were discontinued. An additional $28.5
million of discontinued operations losses that were not previously reported were included within these periods. Also, $12.7 million of
losses incurred in 2015 related to loans that were resolved before the issuance date of our financial statements, were reflected in our
2014 financial statements. Substantially all of the losses and corresponding restatement adjustments resulted from the discontinued
commercial loan operations.
Regulatory Actions
The Bank entered into a Stipulation and Consent to the Issuance of a Consent Order effective August 7, 2012, which we refer
to as the 2012 Consent Order. The Bank took this action without admitting or denying any charges of unsafe or unsound banking
practices or violations of law or regulation. Under the 2012 Consent Order, the Bank agreed to increase its supervision of third-party
relationships, develop new written compliance and related internal audit compliance programs, develop a new third-party risk
44
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.
Until the Bank submits to the FDIC a report summarizing the completion of certain BSA-related corrective action (“BSA
Report”), the 2014 Consent Order restricts the Bank from signing and boarding new independent sales organizations, establishing new
non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related
payments. Until the BSA Report is submitted to and approved by the FDIC and Delaware State Bank Commissioner, those aspects of
the growth of our card payment processing and prepaid card operations will be affected, which, unless offset by growth from existing
customers and new customers in other areas of our prepaid card operations, could reduce growth of our deposits and non-interest
income and, possibly, limit our ability to raise additional capital on acceptable terms.
On August 27, 2015, the Bank entered into an Amendment to Consent Order, or the 2014 Consent Order Amendment, with
the FDIC, amending the 2014 Consent Order. The Bank took this action without admitting or denying any additional charges of
unsafe or unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA
compliance program. The 2014 Consent Order Amendment provides that the Bank shall not declare or pay any dividend without the
prior written consent of the FDIC and for certain assurances regarding management.
On May 11, 2015, the Federal Reserve issued a letter, or the Supervisory Letter, to us as a result of the 2014 Consent Order
and the 2014 Consent Order Amendment, (which, at the time of the Supervisory Letter, was in proposed form), which provides that
we shall not pay any dividends on our common stock or make any interest payments on our trust preferred securities, without the prior
written approval of the Federal Reserve. It further provides that we may not incur any debt (excluding payables in the ordinary course
of business) or redeem any shares of our stock, without the prior written approval of the Federal Reserve.
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,
45
the Bank will ensure that monetary restitution is made. Neither we nor the Bank can predict the amount of any restitution which may
be required, or the amount, if any, that the Bank may pay in connection therewith. Under the Bank's agreements with Third Parties,
we believe that restitution is reimbursable to the Bank. The CAP is currently being implemented. To date, no restitution under the
CAP has been made.
The 2015 Consent Order also imposed a $3 million civil money penalty on the Bank, which the Bank has paid and which was
recognized as expense in the fourth quarter of 2015.
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. A
reduction in the assessment rate will depend on future FDIC evaluations of the Bank. The Bank’s deposits do not exhibit the volatility
normally associated with brokered deposits obtained through deposit brokers and are considered to be stable and low cost.
On March 7, 2018, the Bank entered into a Stipulation and Consent to Order for Restitution and Order To Pay Civil Money
Penalty with the FDIC, which we refer to as the 2018 Restitution Order and 2018 CMP Order, respectively. The Bank took this
action without admitting or denying any alleged violations of law or regulation. The FDIC’s action principally emanates from one of
the Bank’s third-party payment processors (“Third-party Processor”) that suffered an internal system programming glitch. This
inadvertently resulted in consumers that engaged in signature-based point of sale transactions during the period from December 2010
to November 2014 being charged a greater fee than what was disclosed by the Bank. The FDIC alleged the Bank’s incorrect fee
imposition due to the Third-party Processor error was an unfair or deceptive act or practice and violated Section 5 of the Federal Trade
Commission Act. The 2018 Restitution Order requires the Bank to develop a written Restitution Plan, subject to independent audit
and FDIC non-objection, to ensure impacted consumers are compensated for any incorrectly charged fees. The 2018 Restitution
Order requires the Bank to make such reimbursements if not otherwise made by the Third-party Processor and the Bank is indemnified
by the Third-party Processor for such reimbursements. Impacted consumers have been reimbursed by the Third-party Processor at its
own expense. The Bank is in the process of complying with the written documentation and audit requirements of the Restitution
Order. The 2018 CMP Order imposed a $2 million civil money penalty on the Bank which the Bank has paid, and was recognized as
expense on September 30, 2017. The civil money penalty is not subject to any indemnification or recovery from any third party.
Results of Operations
Overview: Net interest income continued its upward trend in 2017 and 2016 as a result of higher loan balances and higher
yields, reflecting the Federal Reserve’s interest rate increases. Future rate increases should support higher levels of net interest
income in 2018, partially offset by lesser expected increases in funding costs. While our loans generally adjust more fully to Federal
Reserve interest rate increases, funding costs generally increase to only a fraction of such rate increases. Funding costs remained at
low levels in 2017, 2016 and 2015, and amounted to .40% in 2017. The increase in net interest income resulted primarily from loan
growth and higher yields in targeted specialty lending segments, primarily SBLOC, SBA and leasing. The provision for loan and
lease losses decreased $440,000 to $2.9 million in 2017 reflecting lower provisions for other consumer loans. Non-interest income in
2017 increased by $11.5 million after adjusting 2016 for a $37.5 million change in value of investment in unconsolidated entity.
Investment in unconsolidated entity is the Bank’s interest in Walnut Street, which is comprised of discontinued loans sold into a
securitization as detailed in the following paragraph. The $11.5 million increase reflected a $15.0 million increase in gain on sale of
loans into securitizations. In 2017, compared to 2016, the primary driver of recurring fee income, prepaid fees, increased $2.0 million
to $53.4 million. Non-interest expense in 2017 decreased $43.7 million, reflecting a $29.1 million decrease in BSA expense and $14.6
million of reductions in salary, data processing and other expenses. Expense reductions in 2017 were partially offset by a $2.3 million
civil money penalty and a $1.1 million data processing contract exit fee in that year. The exit fee will be significantly exceeded by
future savings. Lower data processing expense reflected the impact of a renegotiated data processing contract and the phase out of an
affinity program. In 2017, income tax expense was impacted by legislation reducing the federal corporate income tax rate to 21%. As
a result, deferred tax assets were adjusted to the new rates, lowering their value and increasing tax expense. The lower 21% tax rate is
currently estimated to result in a combined 27% federal and state income tax rate in 2018.
In 2014, the Bank discontinued its regional Philadelphia commercial loan division to focus on its aforementioned national
specialty lending lines of business. The majority of a $40.0 million loss in 2016 in discontinued operations resulted from loans against
a Florida mall which were written down by $23.9 million as a result of an “as is” appraisal when the loans became non-performing.
We have taken ownership of that mall property and its sale is expected to conclude in second quarter 2018. At year end 2017, our net
discontinued assets amounted to $304.3 million compared to $360.7 million at year end 2016. Net commercial discontinued loans
totaled $209.0 million at year end 2017. These loans consisted primarily of loans secured by commercial real estate including
46
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 these loans continue and if not sold, the loans will be retained. We also retain the financing
receivable of $74.5 million from the 2014 Walnut Street securitization. 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, 2017, our continuing specialty lending lines had grown over the year between 9% to 16% and total loans
amounted to $1.39 billion, an increase of $169.3 million over the $1.22 billion balance at December 31, 2016. Our investment
securities available for sale increased $45.9 million to $1.29 billion from $1.25 billion between those respective dates. The increase in
our investment securities balances reflected the timing of investment security purchases based upon market conditions.
Net Income: 2017 compared to 2016. Net income from continuing operations was $17.3 million in 2017 as compared to a
net loss of $56.8 million in 2016. In 2017, net interest income grew by $16.7 million and non-interest income increased $11.5 million
after adjusting 2016 for a $37.5 million change in value of investment in unconsolidated entity, noted previously. The $16.7 million,
or 18.6%, increase in 2017 net interest income over 2016 resulted primarily from loan growth and higher yields in targeted specialty
lending segments, primarily SBLOC, SBA and leasing. The $11.5 million increase in non-interest income reflected a $15.0 million
increase in gain on sale of loans into securitizations and a $2.0 million, or 4%, increase in prepaid fees to approximately $53.4 million.
In 2017, a $2.5 million gain on the sale of our health savings accounts was offset by a loss of $3.4 million on the sale of our European
prepaid operations. The largest decrease in other non-interest expense in 2017 was the conclusion of the BSA and look back
consulting expenses in the third quarter of 2016. These expenses amounted to $29.1 million in 2016. Salaries decreased $6.1 million
primarily due to company-wide staff reductions made at the end of the third quarter of 2016, which reversed an increasing trend. Data
processing expense decreased in 2017 by $4.5 million primarily due to contract renegotiations. Legal expense increased $1.4 million
reflecting increased SEC subpoena expense related to the restatement of the financial statements. We expect SEC subpoena expense
to continue to be significant through the completion of the SEC’s inquiries. Software expense increased $1.4 million which reflected
additional information technology infrastructure to improve efficiency and scalability, including BSA software to satisfy BSA
regulatory requirements. A decrease in other non-interest expense of $3.9 million resulted primarily from a $2.2 million decrease in
travel and entertainment expense. In 2017, income tax expense was impacted by legislation reducing corporate income tax rates. As a
result, deferred tax assets were adjusted to the new rates, lowering their value and increasing tax expense. The lower 21% federal tax
rate is currently estimated to result in a combined 27% federal and state income tax rate in 2018. Reflecting these changes, net income
from continuing operations amounted to $17.3 million in 2017 compared to net loss of $56.8 million in 2016, or continuing operations
earnings per diluted share of $0.31 compared to continuing operations loss per share of $1.28 in 2016. Net income from discontinued
operations was $4.3 million for 2017 compared to net loss from discontinued operations of $39.7 million for 2016. Including
discontinued operations, diluted income per share was $0.39 for 2017 compared to loss per share of $2.17 for 2016 on net income of
$21.7 million and net loss of $96.5 million, respectively.
Net Income: 2016 compared to 2015. Net loss from continuing operations was $56.8 million in 2016 reflecting a tax benefit
rate of 18.2% instead of the statutory 34% as a result of additional valuation allowances against deferred tax assets. Our 2016 net loss
compared to net income from continuing operations of $5.4 million in 2015. While in 2016, net interest income grew by $20.0
million, and BSA look back expense decreased by $12.4 million, 2016 BSA look back expense still amounted to $29.1 million.
Additionally, in 2016, there was a $16.8 million increase in other non-interest expenses and $37.5 million of charges from the change
in value of our investment in the unconsolidated entity, Walnut Street. The remaining BSA look back expense, increases in other non-
interest expense and the Walnut Street charge resulted in the 2016 loss. The $37.5 million of charges to the retained interest in Walnut
Street 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. As a result
of deferred tax assets relating primarily to Walnut Street and discontinued loan charges, at December 31, 2016 approximately $25.0
million of valuation allowances against income taxes had been established. The BSA look back expense concluded in third quarter
2016. Additionally, at the end of the third quarter of 2016, significant bank-wide and department-wide reductions were made in
staffing and in the fourth quarter, non-interest expense was reduced compared to third quarter 2016. The $20.0 million, or 28.6%,
increase in 2016 net interest income over 2015 resulted primarily from loan growth in targeted specialty lending segments, primarily
SBLOC, SBA, leasing, and loans generated for sale in secondary capital markets for commercial loan securitizations. Prepaid fee
income grew 8.1% to approximately $51.3 million. The largest increase in other non-interest expense in 2016 was in salary which
increased $13.6 million. Staff additions and related increases in costs were made to our BSA and regulatory compliance functions and
to our information technology, institutional banking and SBA departments. At the end of the third quarter of 2016, company-wide
staff reductions were made and salary expense in the fourth quarter of 2016 decreased, which reversed an increasing trend. Legal
expense increased $2.9 million reflecting increased SEC subpoena expense related to the restatement of the financial statements. We
expect SEC subpoena expense to continue to be significant through the completion of the SEC’s inquiries. Software expense
47
increased $3.9 million, which reflected additional information technology infrastructure to improve efficiency and scalability
including BSA software to satisfy BSA regulatory requirements. A decrease in other non-interest expense of $3.7 million resulted
primarily from a $3 million civil money penalty recognized in 2015. Reflecting these changes, net loss from continuing operations
amounted to $56.8 million in 2016 compared to net income of $5.4 million in 2015, or a continuing operations loss per share of $1.28
compared to continuing operations income per diluted share of $.14 in 2015. Net loss from discontinued operations was $39.7 million
for 2016 compared to net income from discontinued operations of $8.1 million for 2015. Including discontinued operations, loss per
share was $2.17 for 2016 compared to diluted income per share of $.35 for 2015 on net loss of $96.5 million and net income of $13.4
million, respectively.
Net Interest Income: 2017 compared to 2016. Our net interest income for 2017 increased to $106.7 million, an increase of
$16.7 million, or 18.6%, from $90.0 million for 2016, reflecting a $19.8 million, or 19.4%, increase in interest income to $122.0
million from $102.2 million for 2016. The increase in net interest income resulted primarily from higher loan balances and yields in
SBLOC, SBA and leasing. Loans generated for sale in secondary markets until those loans are sold or securitized, also contributed
significant interest income. Additionally, in 2017, the Federal Reserve increased short term rates by 75 basis points in total while in
December 2016 it had increased those rates by 25 basis points. Those increases resulted in higher yields on those loans which
immediately adjust to changes in market interest rates, which comprise the majority of our loans. The 2017 increases and any future
rate increases we expect should further increase net interest income. Our average loans and leases increased 11.0% to $1.78 billion in
2017 from $1.61 billion for 2016, while related interest income increased $11.5 million on a tax equivalent basis. Our average
investment securities were $1.30 billion for 2017 compared to $1.36 billion for 2016, while related interest income increased $4.2
million on a tax equivalent basis. The increase was largely due to floating rate securities which adjusted to the Federal Reserve’s
interest rate increases.
Our net interest margin (calculated by dividing net interest income by average interest earning assets) for 2017 increased 30
basis points to 3.04% from 2.74% for 2016. The increase reflected higher yields on loans and floating rate securities resulting from the
aforementioned Federal Reserve increases. For 2017, the average yield on our interest earning assets increased to 3.37% from 2.98%
for 2016, an increase of 39 basis points. The cost of total deposits for 2017 increased to 0.38% from 0.30% for 2016. The cost of total
deposits and interest bearing liabilities also increased to 0.40% for 2017 from 0.31% for 2016. These increases reflected the lesser
impact of the Federal Reserve increases on deposits. In 2017, average demand and interest checking deposits amounted to $3.37
billion, compared to $3.35 billion in 2016, an increase of 0.7%. Average savings and money market balances comprise a minimal
portion of the Bank’s funding and averaged $439.6 million in 2017 with an average 0.51% rate.
Net Interest Income: 2016 compared to 2015. Our net interest income for 2016 increased to $90.0 million, an increase of
$20.0 million, or 28.6%, from $69.9 million for 2015, reflecting an $18.7 million, or 22.4%, increase in interest income to $102.2
million from $83.5 million for 2015. The increase in net interest income resulted primarily from higher loan balances in various
lending categories including SBLOC, SBA leasing and loans generated for sale or securitization in secondary markets. Additionally,
in both December 2016 and 2015, the Federal Reserve increased short term interest rates by 25 basis points. Those increases resulted
in higher yields on those loans and securities which immediately adjust to changes in market interest rates. The 2016 increase and any
future rate increases we expect should further increase net interest income. Our average loans and leases increased 26.6% to $1.61
billion in 2016 from $1.27 billion for 2015, while related interest income increased $17.7 million on a tax equivalent basis. Our
average investment securities decreased 5.9% to $1.36 billion for 2016 from $1.44 billion for 2015, while related interest income
decreased $4.2 million on a tax equivalent basis. We decreased our nontaxable investment securities portfolio because our deferred
tax assets were available to eliminate federal income taxes in future periods, precluding the need for tax exempt income in the short
term. Interest expense decreased by $1.3 million in 2016 compared to 2015, reflecting lower average deposit balances, as yields were
comparable in both periods.
Our net interest margin (calculated by dividing net interest income by average interest earning assets) for 2016 increased 37
basis points to 2.74% from 2.37% for 2015. The increase reflected lower balances maintained at the Federal Reserve. Deposits
invested at the Federal Reserve bore interest at only 50 basis points beginning in fourth quarter 2015 and 25 basis points previously.
The increase also reflected an increased yield on loans and securities which repriced immediately to the 25 basis point rate increase by
the Federal Reserve in December 2015. For 2016, the average yield on our interest earning assets increased to 2.98% from 2.44% for
2015, an increase of 54 basis points. The cost of total deposits remained flat at 0.30% for 2016 and 2015. The cost of total deposits
and interest bearing liabilities also remained flat at 0.31% for 2016 and 2015. In 2016, average demand and interest checking deposits
amounted to $3.35 billion, compared to $3.98 billion in 2015, a decrease of 15.8%. The decrease primarily reflected our exit from less
profitable deposit relationships, including the sale of health savings accounts. Average savings and money market balances comprise
a minimal portion of the Bank’s liabilities and, while they grew in 2016, their yield decreased, consistent with the strategy to exit less
48
profitable deposit relationships. As a result of that strategy, in 2016, average total deposits decreased 12.4% to $3.82 billion,
compared to $4.36 billion in 2015.
Average Daily Balances. The following table presents the average daily balances of assets, liabilities and shareholders’
equity and the respective interest earned or paid on interest earning assets and interest bearing liabilities, as well as average rates for
the periods indicated:
Year ended December 31,
2017
2016
Average
balance
Average
Interest
rate
Average
balance
Interest
Average
rate
(dollars in thousands)
Assets:
Interest earning assets:
Loans net of unearned fees and costs **
Leases - bank qualified*
$ 1,763,392 $ 78,033
1,613
20,750
4.43% $ 1,587,306 $ 66,436
1,748
7.77%
20,718
Investment securities-taxable
Investment securities-nontaxable*
Interest earning deposits at Federal Reserve
Federal funds sold and securities purchased under
agreements to resell
Net interest earning assets
Allowance for loan and lease losses
Assets held for sale from discontinued operations
Other assets
1,284,941
14,094
495,568
61,309
3,640,054
(6,865)
310,058
221,096
36,121
470
5,202
1,310
122,749
2.81%
3.33%
1.05%
2.14%
3.37%
12,655
4.08%
1,303,445
54,271
466,728
31,219
1,139
2,237
30,448
450
3,462,916
103,229
(4,741)
490,115
266,777
18,275
3.73%
Liabilities and Shareholders' Equity:
Deposits:
Demand and interest checking
Savings and money market
Time
Total deposits
$ 4,164,343
$ 4,215,067
$ 3,371,969 $ 12,155
0.36% $ 3,347,191 $ 9,399
439,625
2,263
0.51%
-
-
-
3,811,594
14,418
0.38%
Short-term borrowings
Securities sold under agreements to repurchase
Subordinated debt
24,224
239
13,401
336
-
586
Total deposits and interest bearing liabilities
3,849,458
15,340
1.39%
0.00%
4.37%
0.40%
Other liabilities
Total liabilities
Shareholders' equity
3,329
3,852,787
311,556
$ 4,164,343
$ 4,215,067
Net interest income on tax equivalent basis *
$ 120,064
$ 109,251
Tax equivalent adjustment
Net interest income
Net interest margin *
729
1,010
$ 119,335
$ 108,241
3.04%
2.74%
* Full taxable equivalent basis, using a 35% statutory tax rate.
** Includes loans held for sale.
49
394,434
77,576
3,819,201
57,517
685
13,401
1,526
447
11,372
359
2
520
3,890,804
12,253
14,916
3,905,720
309,347
4.19%
8.44%
2.40%
2.10%
0.48%
1.48%
2.98%
0.28%
0.39%
0.58%
0.30%
0.62%
0.29%
3.88%
0.31%
Assets:
Interest earning assets:
Loans net of unearned fees and costs **
Leases - bank qualified*
Investment securities-taxable
Investment securities-nontaxable*
Interest earning deposits at Federal Reserve
Federal funds sold and securities purchased under
agreements to resell
Net interest earning assets
Allowance for loan and lease losses
Assets held for sale from discontinued operations
Other assets
Liabilities and Shareholders' Equity:
Deposits:
Demand and interest checking
Savings and money market
Time
Total deposits
Short-term borrowings
Securities sold under agreements to repurchase
Subordinated debentures
Total deposits and interest bearing liabilities
Other liabilities
Total liabilities
Shareholders' equity
Year ended December 31,
2015
Average
balance
Interest
Average
rate
(dollars in thousands)
$ 1,245,189
25,126
989,705
452,526
935,093
$ 48,733
1,734
19,918
16,646
2,354
40,402
3,688,041
(4,111)
715,116
311,501
$ 4,710,547
578
89,963
28,925
4.04%
$ 3,975,475
$ 10,982
1,867
275
13,124
12
15
448
13,599
337,168
44,789
4,357,432
4,575
5,224
13,401
4,380,632
10,403
4,391,035
319,512
$ 4,710,547
3.91%
6.90%
2.01%
3.68%
0.25%
1.43%
2.44%
0.28%
0.55%
0.61%
0.30%
0.26%
0.29%
3.34%
0.31%
2.37%
Net interest income on tax equivalent basis *
$ 105,289
Tax equivalent adjustment
Net interest income
Net interest margin *
* Full taxable equivalent basis, using a 35% statutory
** Includes loans held for sale.
6,433
$ 98,856
50
In 2017, average interest earning assets increased to $3.64 billion, an increase of $177.1 million, or 5.1%, from 2016. The
increase reflected a $176.1 million, or 11.0%, increase in average loans and leases. The increase resulted primarily from higher
SBLOC, SBA and leasing balances. Average balances of investment securities decreased $58.7 million, or 4.3%, as investment
security maturities were reinvested into higher yielding loans. Average demand and interest checking deposits were comparable,
increasing only $24.8 million, or 0.7%.
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 2015 through 2017 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.
2017 versus 2016
Due to change in:
Rate
Volume
2016 versus 2015
Due to change in:
Rate
Total
Total
Volume
(in thousands)
Interest income:
Taxable loans net of unearned discount
$ 7,648 $ 3,949 $ 11,597 $ 14,132 $ 3,571 $ 17,703
Bank qualified tax free leases net of
unearned discount
Investment securities-taxable
Investment securities-nontaxable
Interest earning deposits
Federal funds sold
Assets held for sale from discontinued
operations
Total interest earning assets
Interest expense:
3
(436)
(3,272)
146
597
(7,569)
(2,883)
(138)
5,338
2,603
2,819
263
(135)
4,902
(669)
2,965
860
(52)
7,064
(10,422)
145
(148)
66
4,237
(5,085)
(262)
20
14
11,301
(15,507)
(117)
(128)
1,949
(5,620)
(8,531)
(2,119)
(10,650)
16,783
13,900
2,188
428
2,616
Demand and interest checking
$ 70 $ 2,686 $ 2,756 $ (1,736) $ 153 $ (1,583)
Savings and money market
Time
Total deposit interest expense
Short-term borrowings
Subordinated debt
Other borrowed funds
Total interest expense
190
(223)
37
21
-
(1)
57
547
(224)
3,009
(44)
66
(1)
737
(447)
3,046
(23)
66
(2)
3,030
3,087
441
188
(1,107)
310
-
(13)
(810)
(782)
(16)
(645)
37
72
-
(341)
172
(1,752)
347
72
(13)
(536)
(1,346)
Net interest income:
$ (2,940) $ 13,753 $ 10,813 $ 2,998 $ 964 $ 3,962
Provision for Loan and Lease Losses. Our provision for loan and lease losses was $2.9 million for 2017, $3.4 million for
2016 and $2.1 million for 2015. Provisions are based on our evaluation of the adequacy of our allowance for loan and lease losses,
particularly in light of current economic conditions. That evaluation reflected the impact of the levels of charge-offs which totaled
$2.2 million, $1.5 million and $1.4 million in 2017, 2016 and 2015, respectively, and growth in loan portfolios. The decrease in the
2017 provision over 2016 reflected a lower provision for other consumer loan balances, which continued to decline. The increase in
the 2016 provision over 2015 reflected higher SBA loan and leasing provisions which reflected higher levels of classified loans and
growth in those portfolios. At December 31, 2017, our allowance for loan and lease losses amounted to $7.1 million, or 0.51%, 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.
51
Non-Interest Income: 2017 compared to 2016. Non-interest income was $91.5 million for 2017, compared to $42.5 million
for 2016. The $49.1 million increase reflected the $37.5 million reduction of charges for the change in value of investment in
unconsolidated entity (Walnut Street) in 2016. 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. After adjustment for that charge in 2016, the $11.5 million increase in non-interest
income primarily reflected a $15.0 million increase in loan sales into securitizations, reflecting higher margins. Prepaid card fees
increased $2.0 million, or 4.0%, from $51.3 million to $53.4 million in 2017 resulted from new clients and organic growth from
existing clients. In 2017, service fees on deposit accounts increased $1.7 million, or 32.5%, to $6.8 million, primarily due to increases
in service charges on retirement accounts. Card payment and ACH processing fees increased $792,000, or 14.3%, to $6.3 million
reflecting increases in ACH payment volume. Non-interest income also reflected a $3.4 million loss on the sale of European card
operations which was partially offset by a $2.5 million gain on sale of the remaining health savings portfolio. These sales resulted as
we focused on our more profitable and, with respect to European operations, less risky lines of business.
Non-Interest Income: 2016 compared to 2015. Non-interest income was $42.5 million for 2016, compared to $133.1 million
for 2015. The $90.6 million decrease reflected a $33.5 million gain on sale of the majority of our health savings business and $14.4
million of securities gains in 2015. The health savings sale resulted from a strategy to decrease non-strategic and less profitable
deposits and the securities gains resulted from the sale of substantially the entire tax-exempt municipal bond portfolio in the fourth
quarter of 2015. The sales were made to accelerate the Bank’s utilization of deferred tax assets and a portion of the proceeds were
invested in taxable securities with slightly higher yields. The 2016 reduction also included $37.5 million of charges for the change in
value of investment in unconsolidated entity which consists of Walnut Street. 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. Prepaid card fees increased $3.8 million, or 8.1%, from $47.5
million to $51.3 million in 2016 as a result of the addition of new clients and organic growth from existing clients. Commercial loan
sales income decreased $7.2 million to $2.9 million reflecting a lower volume of loan sales and lower margins reflecting increased
competition. In 2016, service fees on deposit accounts decreased $2.3 million, or 31.3%, to $5.1 million, reflecting the impact of the
sale of the majority of our healthcare accounts, which was partially offset by increases in service charges on retirement accounts. The
sale of health savings accounts also was reflected in the elimination of the debit card income in 2016, which had totaled $1.6 million
in 2015. Health savings account holders utilized debit cards to access their accounts, which resulted in fee income.
Non-Interest Expense: 2017 compared to 2016. Total non-interest expense in 2017 was $154.9 million, a decrease of $43.7
million, or 22.0%, over the $198.6 million in 2016. In 2017, there was a decrease of $29.1 million in BSA look back consulting
expenses, which ended in the third quarter of 2016. Look back expenses were being incurred to analyze historical transactions for
potential BSA exceptions as required by the 2014 Consent Order. Salary expense decreased $6.1 million to $75.8 million in 2017, a
decrease of 7.5% over the $82.0 million in 2016. The decrease reflected bank-wide and department-wide reductions in staffing at the
end of third quarter 2016. Depreciation and amortization decreased $530,000 to $4.5 million, or 10.6%, from $5.0 million in 2016,
which reflected reduced spending on fixed assets and equipment. Rent and occupancy decreased $640,000 to $5.7 million, or 10.1%,
from $6.3 million in 2016, which reflected a reduction in leased space and more efficient use of office space. Data processing expense
decreased $4.5 million, or 30.9%, to $10.2 million from $14.7 million in 2016. The decrease reflected the impact of a renegotiated
data processing contract and lower account and transaction volume as a result of the planned exit of an affinity program which had
changed ownership. It also reflected the impact of the consolidation of our call centers as an efficiency and cost cutting measure.
Also in 2017, we paid a $1.1 million one time fee to exit a data processing contract which will result in future savings. Printing and
supplies expense decreased $1.6 million, or 54.3%, to $1.4 million from $3.0 million in 2016. The decrease reflected elevated expense
in 2016 due to service charge mailings and other communications in that year as well as cost reduction efforts. Audit expense
increased $577,000, or 52.2%, to $1.7 million from $1.1 million in 2016 which reflected increased regulatory compliance audit fees.
Legal expense increased $1.4 million, or 20.8%, to $8.1 million from $6.7 million in 2016. The increase in legal expense reflected
higher 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 increased $125,000, or 8.9%, to $1.5 million in 2017
from $1.4 million in 2016. The increase resulted from the amortization of customer intangibles resulting from the purchase of
approximately $60 million of lease receivables in 2016. FDIC insurance remained relatively flat at $10.1 million for 2017 and 2016.
Software expense increased $1.4 million, or 12.9%, to $12.6 million from $11.2 million in 2016. The increase reflected additional
information technology infrastructure to improve efficiency and scalability including BSA software to satisfy BSA regulatory
requirements. Insurance expense remained relatively flat at $2.3 million in 2017 and 2016. Telecom and information technology
network communications expense decreased $189,000, or 9.5%, to $1.8 million from $2.0 million in 2016, reflecting the closure of
certain locations. Securitization and servicing expense decreased $874,000, or 83.7%, to $170,000 from $1.0 million in 2016.
Expense in 2016 reflected expenditures related to a potential securitization for loans which were instead sold directly to a single buyer.
Consulting expense decreased $3.2 million, or 58.8%, to $2.2 million from $5.4 million in 2016. The decreased expense reflected
52
reduced regulatory related and investor relations consulting. Other non-interest expense decreased $3.9 million, or 22.4%, to $13.5
million from $17.4 million in 2016. The decrease resulted primarily from decreases of $2.2 million for travel and entertainment, $1.0
million for customer identification expense and $745,000 for postage. The decrease in travel and entertainment expense reflected the
impact of staff reductions and cost cutting efforts. The decrease in customer identification expense primarily reflected the exit of one
affinity group and reduced health savings volume due to the sale of that business. The decrease in postage expense reflected the
impact of the sale of the health savings business and elevated 2016 expense resulting from service charge and other communications
mailings in that year.
Non-Interest Expense: 2016 compared to 2015. Total non-interest expense in 2016 was $198.6 million, an increase of $4.5
million, or 2.3%, over the $194.1 million in 2015. In 2016, there was a decrease of $12.4 million in BSA look back consulting
expenses, which ended in the third quarter of 2016. Look back expenses were being incurred to analyze historical transactions for
potential BSA exceptions as required by the 2014 Consent Order. That decrease was offset by a $13.6 million increase in salary
expense which amounted to $82.0 million in 2016, an increase of 19.8% over the $68.4 million in 2015. Staff additions and related
increases in costs were made to our BSA and regulatory compliance functions and to our information technology, institutional banking
and SBA departments. At the end of the third quarter of 2016, significant bank-wide and department-wide reductions were made in
staffing and, in the fourth quarter, non-interest expense was reduced compared to third quarter 2016. Depreciation and amortization
increased $235,000 to $5.0 million, or 5.0%, from $4.7 million in 2015, which reflected additional leasehold improvements and
equipment for staff additions and information technology upgrades. Rent and occupancy increased $661,000 to $6.3 million, or
11.7%, from $5.7 million in 2015, which reflected a new sales office in San Francisco, leasing sales offices in Washington state and
New Jersey and an SBA office in North Carolina. Data processing expense increased $339,000, or 2.4%, to $14.7 million from $14.4
million in 2015, reflecting increased transaction volume. Printing and supplies expense increased $315,000, or 11.9%, to $3.0 million
from $2.7 million in 2015 reflecting mailings related to service charge increases and other periodic communications with customers.
Audit expense decreased $898,000, or 44.8%, to $1.1 million from $2.0 million in 2015. The lower expense in 2016 reflected lower
compliance audit expense and the transfer of certain audit functions in-house. Legal expense increased $2.9 million, or 74.6%, to $6.7
million from $3.8 million in 2015. The increase in legal expense reflected higher 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 increased $217,000, or 18.3%, to $1.4 million in 2016 from $1.2 million in 2015. The increase resulted from the
amortization of customer intangibles resulting from the purchase of lease receivables. FDIC insurance decreased $1.2 million, or
10.8%, to $10.1 million from $11.3 million for 2015. The decrease resulted primarily from decreased average deposits. In 2015, we
also had an additional assessment of approximately $293,000 due to the prior period financial restatements. Software expense
increased $3.9 million, or 54.6%, to $11.2 million from $7.2 million in 2015. The increase reflected additional information
technology infrastructure to improve efficiency and scalability including BSA software to satisfy BSA regulatory requirements.
Insurance expense increased $372,000, or 19.3%, to $2.3 million from $1.9 million in 2015. The increase reflected higher limits and
premiums for cyber and director and officer coverages. Telecom and information technology network communications expense were
comparable in both years at $2.0 million. Securitization and servicing expense decreased $904,000, or 46.4%, to $1.0 million from
$1.9 million in 2015 reflecting a lower volume of sales. Consulting expense increased $1.1 million, or 24.7%, to $5.4 million from
$4.3 million in 2015. The increased expense reflected consulting related to reducing European prepaid operations expense, a more
scalable SBLOC loan processing system, consulting for information related to internal reporting and investor relations consulting.
Other non-interest expense decreased $3.7 million or, 17.4%, to $17.4 million from $21.1 million in 2015. The decrease reflected a $3
million civil money penalty assessed in 2015 in connection with the amendment to the 2014 Consent Order, a $1.0 million decrease in
other operating taxes and a $372,000 decrease in meals and entertainment. European prepaid operations were sold in April 2017.
Income Tax Benefit and Expense
Income tax expense for continuing operations was $23.1 million for 2017 versus benefit of $12.7 million for 2016 and
expense of $1.5 million for 2015. The tax expense rate of 57.1% in 2017 significantly exceeded statutory federal and state rates, as a
result of the net impact of the reduction in federal corporate tax rate from 34% to 21%. The reduction required an adjustment through
tax expense for the difference between the prior and new tax rate, which will be effective in 2018, applied to total net deferred tax
assets. We currently estimate a combined federal and state statutory tax rate of 27% for 2018. The tax benefit rate of 18.2% in 2016
was lower than the 34% statutory rate as a result of additional allowances against deferred tax assets recognized in that year. The
effective tax rate for 2015 was 21.3% which reflected the impact of tax exempt municipal securities income. As a result of deferred
tax assets relating to Walnut Street, at December 31, 2017 there were approximately $10.0 million of related valuation allowances.
Future reversals of these allowances are dependent on the excess of future recoveries on loans over any additional charges related to
Walnut Street. The amount of those reversals and corresponding decreases to income tax expense in any period will also depend on
53
the level of taxable income and projected period of utilization of the deferred tax assets. Based upon available information, we do not
believe that these allowances will reverse in the future.
Liquidity and Capital Resources
Liquidity defines our ability to generate funds to support asset growth, meet deposit withdrawals, satisfy borrowing needs
and otherwise operate on an ongoing basis. We invest the funds we do not need for daily operations primarily in our interest bearing
account at the Federal Reserve.
Our primary source of funding has been deposits. While there was only a modest increase in deposits of $22.5 million in
2017, our deposit levels in 2017 exceeded our ability to deploy the funds in our loan portfolios. Excess funds were invested in
available for sale securities which increased to $1.29 billion at December 31, 2017 from $1.25 billion at December 31, 2016. Loan
repayments, also a source of funds, were exceeded by new loan disbursements during 2017, resulting in net loan growth of
approximately $172.9 million.
While we do not have a traditional branch system, we believe that our core deposits, which include our demand, interest
checking, savings and money market accounts, have similar characteristics to those of a bank with a branch system. The majority of
our deposit accounts are obtained with the assistance of third parties and as a result are classified as brokered by the FDIC. The FDIC
guidance for classification of deposit accounts as brokered is relatively broad, and generally includes accounts which were referred to
or “placed” with the institution by other companies. If the Bank ceases to be categorized as “well capitalized” under banking
regulations, it will be prohibited from accepting, renewing or rolling over brokered deposits without the consent of the FDIC. In such a
case, the FDIC’s refusal to grant consent to our accepting, renewing or rolling over brokered deposits could effectively restrict or
eliminate the ability of the Bank to operate its business lines as presently conducted.
We focus on customer service which we believe has resulted in a history of customer loyalty. Stability, low cost and
customer loyalty comprise key characteristics of core deposits which we believe are comparable to core deposits of peers with branch
systems. As a result of the stability and low cost of our transaction account deposits, we have not, unlike peers, required the use of
more costly and volatile certificates of deposit. However, certain components of our deposits do experience seasonality, creating
greater excess liquidity at certain times in 2017. The largest deposit inflows occur in the first quarter of the year when certain of our
accounts are credited with tax refund payments from the U.S. Treasury.
While consumer transaction accounts including prepaid accounts comprise the vast majority of our funding needs, we
maintain secured borrowing lines with the Federal Home Loan Bank, or the FHLB, and the Federal Reserve. As of December 31,
2017, we had a $294.4 million line of credit with the FHLB and a $327.6 million line with the Federal Reserve. These lines may be
collateralized by specified types of loans or securities. As of December 31, 2017, 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 2018, cash proceeds from the sale or repayment of discontinued loans. We currently anticipate that these proceeds will be
deployed into loans in our continuing operations. Approximately $304.3 million of discontinued assets remained on our balance sheet
as of December 31, 2017, 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, 2017, the balance of that receivable was $74.5 million.
Included in our cash and cash-equivalents at December 31, 2017, were $841.5 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 2017, $569.7 million of securities sales and repayments were comparable to purchases of $579.9 million. In 2016, $362.0
million of sales and repayments of investment securities were exceeded by purchases of $549.5 million which reflected purchases to
replace sales of tax exempt securities in the fourth quarter of 2016. In 2015, sales and repayments of securities exceeded purchases,
with related funding used for loan funding. At December 31, 2017, we had outstanding commitments to fund loans, including unused
lines of credit, of $1.45 billion, the vast majority of which are SBLOC lines. We attempt to increase line usage; however, usage has
54
been historically consistent. Additionally, net loan growth was $172.9 million in 2017, $146.4 million in 2016 and $205.0 million in
2015.
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, 2017, we
had approximate cash reserves of $15.3 million at the holding company. Current quarterly interest payments on the $13.4 million of
trust preferred securities are approximately $150,000 based on a floating rate of 3.25% over the three-month London Interbank
Offered Rate, or LIBOR. As a result of a Supervisory Letter, Federal Reserve approval is required for any dividend from us, and
FDIC approval is required for any dividend from the Bank to us, which, apart from the $15.3 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 and a supervisory letter from the Federal Reserve, have imposed certain restrictions and
requirements upon us and the Bank”. The Federal Reserve approved the payment of the interest due March 15, 2018 on our trust
preferred securities. Future payments are subject to future approval by the Federal Reserve.
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
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, 2017, 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
to average
assets ratio
Tier 1 capital
to risk-weighted
assets ratio
Total capital
to risk-weighted
assets ratio
Common equity
tier 1 to risk
weighted assets
As of December 31, 2017
The Bancorp, Inc.
The Bancorp Bank
"Well capitalized" institution
(under FDIC regulations)
As of December 31, 2016
The Bancorp, Inc.
The Bancorp Bank
"Well capitalized" institution
(under FDIC regulations)
7.90%
7.61%
5.00%
6.90%
6.84%
5.00%
16.73%
16.23%
8.00%
13.34%
13.24%
8.00%
17.09%
16.59%
10.00%
13.63%
13.53%
10.00%
16.73%
16.23%
6.50%
13.34%
13.24%
6.50%
55
Asset and Liability Management
The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest
margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest
rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of an institution’s interest margin
resulting from changes in market interest rates.
As a financial institution, potential interest rate volatility is a primary component of our market risk. Fluctuations in interest
rates will ultimately impact the level of our earnings and the market value of all of our interest earning assets, other than those with
short-term maturities. We do not own any trading assets. We use hedging transactions only for fixed rate commercial loans
originated for sale into secondary securities markets. During 2017, we discontinued making fixed rate loans requiring hedging
transactions.
We have adopted policies designed to stabilize net interest income and preserve capital over a broad range of interest rate
movements. To effectively administer the policies and to monitor our exposure to fluctuations in interest rates, we maintain an
asset/liability committee, consisting of the Bank’s Chief Executive Officer, Chief Accounting Officer, Chief Financial Officer and
Chief Credit Officer. This committee meets quarterly to review our financial results, develop strategies to 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
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, 2017. 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 fees that are paid to the affinity
groups which are based upon a rate index, and therefore are included in interest expense. The table does not assume any prepayment
of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on
historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our
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.
56
1-90
Days
91-364
Days
1-3
Years
3-5
Years
Over 5
Years
(dollars in thousands)
Interest earning assets:
Commercial loans held for sale
Loans net of deferred loan costs
Investment securities
Interest earning deposits
Securities purchased under agreements to resell
$ 296,929 $ 20,999
$ 50,310
$ 16,279
$ 118,799
921,809
367,911
841,471
64,312
59,210
160,287
-
-
215,976
177,540
186,558
241,188
-
-
-
-
8,675
433,938
-
-
Total interest earning assets
2,492,432
240,496
443,826
444,025
561,412
Interest bearing liabilities:
Demand and interest checking
Savings and money market
Securities sold under agreements to repurchase
Subordinated debenture
2,470,279
113,469
217
13,401
66,121
226,939
-
-
66,121
113,469
-
-
Total interest bearing liabilities
2,597,366
293,060
179,590
-
-
-
-
-
-
-
-
-
-
Gap
Cumulative gap
Gap to assets ratio
Cumulative gap to assets ratio
$ (104,934) $ (52,564)
$ 264,236
$ 444,025
$ 561,412
$ (104,934) $ (157,498)
$ 106,738
$ 550,763
$ 1,112,175
-2%
-2%
-1%
-3%
6%
2%
9%
12%
12%
24%
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, 2017. 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.
57
Rate scenario
Amount
Percentage
change
Net portfolio value at
December 31, 2017
Net interest income
Amount
Percentage
change
+200 basis points
+100 basis points
Flat rate
-100 basis points
-200 basis points
$ 635,190
627,578
619,884
597,171
523,120
(dollars in thousands)
2.47%
1.24%
0.00%
-3.66%
-15.61%
$ 166,037
157,097
147,811
140,594
123,924
12.33%
6.28%
0.00%
-4.88%
-16.16%
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 for fixed rate loans which are originated for sale into securitizations. The swaps
hedge interest rate risk between the time the loans are disbursed and sold.
Historically, we have used variable rate commercial loans as the principal means of limiting interest rate risk. Both the
Bank’s SBLOC and SBA loans are primarily variable rate. We continue to evaluate market conditions and may change our current gap
strategy in response to changes in those conditions.
Financial Condition
General. Our total assets at December 31, 2017 were $4.71 billion, of which our total loans and loans held for sale from
continuing operations were $1.90 billion and our assets held for sale (from discontinued operations) were $304.3 million, $270.0
million of which were loans. At December 31, 2016, our total assets were $4.86 billion, of which our total loans and loans held for
sale from continuing operations were $1.89 billion and our assets held for sale (from discontinued operations) were $360.7 million,
$340.4 million of which were loans. Investment securities available for sale increased to $1.29 billion at December 31, 2017 from
$1.25 billion at December 31, 2016. The decrease in total assets at December 31, 2017 reflected a decrease in commercial loans held
for sale. Variations in this balance result from the timing of securitizations and originations. The decrease was more than offset by
planned exits of less profitable deposit relationships in 2017.
Interest earning deposits and federal funds sold. At December 31, 2017, we had a total of $841.5 million of interest earning
deposits, comprised primarily of balances at the Federal Reserve, which pays interest on such balances.
Investment portfolio. The Financial Accounting Standards Board Accounting Standards Codification (ASC) 320,
Investments—Debt and Equity Securities, requires that debt and equity securities classified as available-for-sale be reported at fair
value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Accordingly, marking
an available-for-sale portfolio to market results in fluctuations in the level of shareholders’ equity and equity-related financial ratios as
market interest rates and market demand for such securities cause the fair value of fixed-rate securities to fluctuate. Debt securities 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 $1.38 billion on December 31, 2017, an increase of $38.8
million, or 2.9%, from a year earlier. The increase in investment securities was primarily a result of purchases of government agency
securities in anticipation of security paydowns expected in the first half of 2018.
58
Other securities included in the held-to-maturity classification at December 31, 2017 consisted of three securities secured by
diversified portfolios of corporate securities and two single-issuer trust preferred securities.
A total of $11.0 million of other debt securities - single issuers is comprised of the amortized cost of two single-issuer trust
preferred securities of $11.0 million, of which one security for $1.9 million was issued by a bank and one security for $9.1 million was
issued by an insurance company.
A total of $75.3 million of other debt securities – pooled is comprised of three securities consisting of diversified portfolios of
corporate securities.
The following table provides additional information related to our single issuer trust preferred securities as of December 31,
2017 (in thousands):
Security A
Security B
Single issuer
Book value
Fair value
Unrealized gain/(loss)
Credit rating
$ 1,915
$ 2,020
$ 105
9,116
6,600
(2,516)
Not rated
Not rated
Class: All of the above are trust preferred securities.
Under the accounting guidance related to the recognition of other-than-temporary impairment charges on debt securities, an
impairment on a debt security is deemed to be other-than-temporary if it meets 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 2017, 2016 and 2015.
59
The following table presents the book value and the approximate fair value for each major category of our investment
securities portfolio. At December 31, 2017 and 2016, our investments were categorized as either available-for-sale or held-to-maturity
(in thousands).
U.S. Government agency securities
Asset-backed securities
Tax-exempt obligations of states and political subdivisions
Taxable obligations of states and political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Corporate debt securities
U.S. Government agency securities
Asset-backed securities
Tax-exempt obligations of states and political subdivisions
Taxable obligations of states and political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Foreign debt securities
Corporate debt securities
Available-for-sale
December 31, 2017
Held-to-maturity
December 31, 2017
Amortized
cost
Fair
value
Amortized
cost
Fair
value
$ 50,107
$ 49,902
$ -
$ -
269,164
9,893
64,739
452,723
248,663
204,469
-
270,085
9,988
65,861
448,852
246,493
203,303
-
-
-
-
-
-
-
-
-
-
-
-
-
86,380
85,345
$ 1,299,758
$ 1,294,484
$ 86,380
$ 85,345
Available-for-sale
December 31, 2016
Held-to-maturity
December 31, 2016
Amortized
cost
Fair
value
Amortized
cost
Fair
value
$ 27,771
$ 27,702
$ -
$ -
355,622
15,492
78,143
347,120
160,649
117,844
56,603
95,005
355,396
15,484
79,049
342,569
159,823
117,086
56,497
95,008
-
-
-
-
-
-
-
-
-
-
-
-
-
-
93,467
91,799
$ 1,254,249
$ 1,248,614
$ 93,467
$ 91,799
Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $991,000
at December 31, 2017 and $1.6 million at December 31, 2016.
At December 31, 2017 and 2016, investment securities with a fair value of approximately $310.9 million and $607.2 million,
respectively, were pledged to secure a line of credit with the FHLB. At December 31, 2017 and 2016, investment securities with a
fair value of approximately $225.6 million and $0 million, respectively, were pledged to secure a line of credit with the Federal
Reserve.
60
The following tables show the contractual maturity distribution and the weighted average yields of our investment securities
portfolio as of December 31, 2017 (in thousands):
Available-for-sale
Zero
to one
Average
year
yield
After
one to
five
years
After
five to
ten
years
Average
yield
Average
Over
ten
Average
yield
years
yield
Total
U.S. Government agency securities
Asset-backed securities *
$ -
-
- $ 451
6,912
-
3.47% $ 24,067
55,907
2.66%
2.29% $ 25,384 2.39% $ 49,902
270,085
2.54%
207,266 2.86%
Tax-exempt obligations of states and
political subdivisions **
Taxable obligations of states and
political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation
i i
Commercial mortgage-backed securities
Total
Weighted average yield
1,488
0.98%
3,734
2.06%
3,722
2.81%
1,044 4.50%
9,988
758
-
-
-
1.50%
-
-
-
5,168
4,756
-
-
2.69%
2.39%
-
-
52,285
98,090
6,522
78,038
3.41%
2.41%
2.21%
2.64%
7,650 5.92%
346,006 2.23%
239,971 2.51%
125,265 4.72%
65,861
448,852
246,493
203,303
$ 2,246
$ 21,021
$ 318,631
$ 952,586
$ 1,294,484
1.16%
2.52%
2.64%
2.80%
* The average yield of asset backed securities is as follows: collateralized loan obligation securities 3.01%, federally insured student loan securities
2.37% and other asset-backed securities 2.98%.
** If adjusted to their taxable equivalents, yields would approximate 1.24%, 2.61%, 3.56% and 5.70% for zero to one year, one to five years, five to
ten years and over ten years, respectively, at a Federal tax rate of 21%.
Held-to-maturity
Other debt securities
Total
Weighted average yield
Zero
to one
year
Average
yield
After
one to
five
years
After
five to
ten
years
Average
yield
Average
yield
Over
ten
years
Average
yield
Total
$ -
$ -
- $ -
$ -
- $ -
$ -
- $ 86,380 4.53% $ 86,380
$ 86,380
$ 86,380
-
4.53%
Loan Portfolio. We have developed a detailed credit policy for our lending activities and utilize loan committees to oversee
the lending function. SBLOC and other consumer loans, SBA, Leases and CMBS each have their own loan committee. The Chief
Executive Officer 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.
61
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):
SBA non-real estate
SBA commercial mortgage
SBA construction
SBA loans *
Direct lease financing
SBLOC
Other specialty lending
Other consumer loans
December 31,
December 31,
December 31,
December 31,
December 31,
2017
2016
2015
2014
2013
$ 71,263
$ 74,644
$ 68,887
$ 62,425
$ 45,875
142,086
16,740
230,089
378,029
730,462
30,720
14,133
126,159
8,826
209,629
346,645
630,400
11,073
17,374
114,029
6,977
189,893
231,514
575,948
48,315
23,180
1,383,433
1,215,121
1,068,850
82,317
20,392
165,134
194,464
421,862
48,625
36,168
866,253
8,340
69,730
51
115,656
175,610
293,109
1,588
45,152
631,115
4,886
Unamortized loan fees and costs
8,795
7,790
9,227
Total loans, net of deferred loan fees and costs
$ 1,392,228
$ 1,222,911
$ 1,078,077
$ 874,593
$ 636,001
*The following table shows SBA loans and SBA loans held for sale for the periods indicated (in thousands):
December 31,
December 31,
December 31,
December 31,
December 31,
2017
2016
2015
2014
2013
SBA loans, including deferred fees and costs
$ 236,724
$ 215,786
$ 197,966
$ 172,660
$ 120,016
SBA loans included in held for sale
165,177
154,016
109,174
38,704
14,708
Total SBA loans
$ 401,901
$ 369,802
$ 307,140
$ 211,364
$ 134,724
The following table presents selected loan categories by maturity for the periods indicated (in thousands):
Within
one year
December 31, 2017
One to five
years
After
five years
(in thousands)
Total
SBA non-real estate
$ 288
$ 10,126
$ 60,849
$ 71,263
SBA commercial mortgage
SBA construction
12,260
1,483
3,054
-
126,772
15,257
142,086
16,740
$ 14,031
$ 13,180
$ 202,878
$ 230,089
Loans at fixed rates
Loans at variable rates
Total
$ -
$ -
$ -
13,180
202,878
216,058
$ 13,180
$ 202,878
$ 216,058
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
62
financial information and the fair value of the underlying collateral; and second, a methodology for estimating general loss reserves.
For loans or leases classified as “special mention,” “substandard” or “doubtful,” we reserve all estimated losses at the time we classify
the loan or lease. This “specific” portion of the allowance is the total of potential, although unconfirmed, losses for individually
classified loans. In this process, we establish specific reserves based on an analysis of the most probable sources of repayment and
liquidation of collateral. While each impaired loan is individually evaluated, not every loan requires a reserve when the collateral
value and estimated cash flows exceed the current balance.
The second phase of our analysis represents an allocation of the allowance. This methodology analyzes pools of loans that
have similar characteristics and applies historical loss experience and other factors for each pool including management’s experience
with similar loan and lease portfolios at other institutions, the historic loss experience of our peers and a review of statistical
information from various industry reports to determine the allocable portion of the allowance. This estimate is intended to represent
the potential unconfirmed and inherent losses within the portfolio. Individual loan pools are created for major loan categories:
SBLOCs, SBA loans, direct lease financing and other specialty lending and consumer loans. We augment historical experience for
each loan pool by accounting for such items as current economic conditions, current loan portfolio performance, loan policy or
management changes, loan concentrations, increases in our lending limit, average loan size and other factors as appropriate. Our chief
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, 2017, in excess of 60% 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 2017 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, 2017, approximately 49% of the SBLOC portfolio had been reviewed.
SBA Loans – The targeted review threshold for 2017 was 100%, to be reviewed within 90 days of funding, less guaranteed
portions of any purchased loans. The 100% coverage includes loan review work performed by designated SBA personnel. At
December 31, 2017, approximately 100% of the government guaranteed loan portfolio had been reviewed. The review threshold for
the independent loan review department is $1,000,000.
Leasing – The targeted review threshold for 2017 was 35%. At December 31, 2017, approximately 55% of the leasing
portfolio had been reviewed. The review threshold is $1,000,000.
Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold for 2017 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, 2017, 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, 2017,
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, 2017,
approximately 100% of the non- CRA loans had been reviewed.
Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2017 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, 2017, approximately 86% of the HELOC portfolio had been reviewed.
63
The following table presents delinquencies by type of loan for December 31, 2017 and 2016 (in thousands):
December 31, 2017
SBA non-real estate
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and costs
December 31, 2016
SBA non-real estate
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and costs
30-59 Days past
due
60-89 Days past
due
90 Days or
greater
Non-accrual
Total past due
Current
Total loans
$ 58 $ 268 $ - $ 1,889 $ 2,215 $ 69,048 $ 71,263
-
-
-
-
-
-
3,789
2,233
227
-
-
-
142
-
-
-
-
73
-
-
-
-
-
-
693
693
141,393
142,086
-
16,740
16,740
6,249
371,780
378,029
730,462
730,462
30,720
30,720
4,482
8,022
8,795
4,482
9,651
8,795
1,414
1,629
-
-
$ 3,989 $ 2,574 $ 227 $ 3,996 $ 10,786 $ 1,381,442 $ 1,392,228
$ 559 $ - $ - $ 1,530 $ 2,089 $ 72,555 $ 74,644
-
-
-
-
-
-
11,856
1,998
661
-
-
-
155
-
-
-
-
-
-
-
-
-
-
-
-
-
126,159
126,159
8,826
8,826
14,515
332,130
346,645
630,400
630,400
11,073
5,403
10,374
7,790
11,073
5,403
11,971
7,790
1,442
1,597
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 12,570 $ 1,998 $ 661 $ 2,972 $ 18,201 $ 1,204,710 $ 1,222,911
The decrease in direct lease financing 30-59 day delinquencies resulted from leases to one state government, which brought
its leases current.
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.
64
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, 2017, 2016, 2015, 2014 and 2013 (in thousands):
SBA non-real estate
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer loans
Unallocated
SBA non-real estate
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer loans
Unallocated
December 31, 2017
December 31, 2016
December 31, 2015
Allowance
$ 3,145
1,120
136
1,495
365
57
581
197
% Loan
type to
total loans
5.15%
10.27%
1.21%
27.33%
52.80%
2.22%
1.02%
-
Allowance
$ 1,976
737
76
1,994
315
32
975
227
% Loan
type to
total loans
6.14%
10.38%
0.73%
28.53%
51.88%
0.91%
1.43%
-
Allowance
$ 844
408
48
1,022
762
199
936
181
% Loan
type to
total loans
6.44%
10.67%
0.65%
21.66%
53.88%
4.52%
2.18%
-
$ 7,096
100.00%
$ 6,332
100.00%
$ 4,400
100.00%
December 31, 2014
December 31, 2013
Allowance
$ 385
461
114
836
562
66
1,181
33
% Loan
type to
total loans
7.21%
9.50%
2.35%
22.45%
48.70%
5.61%
4.18%
-
Allowance
$ 419
496
-
311
293
1
2,361
-
% Loan
type to
total loans
7.27%
11.05%
0.01%
27.83%
46.44%
0.25%
7.15%
-
$ 3,638
100.00%
$ 3,881
100.00%
65
Summary of Loan and Lease Loss Experience. The following tables summarize our credit loss experience for each of the
periods indicated (in thousands):
SBA non-real
estate
SBA
commercial
mortgage
SBA
construction
Direct lease
financing
SBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
December 31, 2017
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
Loans:
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
December 31, 2016
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
Loans:
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
$ 1,976 $ 737 $ 76 $ 1,994 $ 315 $ 32 $ 975 $ 227 $ 6,332
(2,207)
51
2,920
$ 3,145 $ 1,120 $ 136 $ 1,495 $ 365 $ 57 $ 581 $ 197 $ 7,096
(1,171)
19
2,321
(109)
24
(309)
(927)
8
420
-
-
383
-
-
(30)
-
-
60
50
25
-
-
$ 1,689 $ 225 $ - $ - $ - $ - $ - $ - $ 1,914
$ 1,456 $ 895 $ 136 $ 1,495 $ 365 $ 57 $ 581 $ 197 $ 5,182
$ 71,263 $ 142,086 $ 16,740 $ 378,029 $ 730,462 $ 30,720 $ 14,133 $ 8,795 $ 1,392,228
$ 2,858 $ 693 $ - $ 229 $ - $ - $ 1,695 $ - $ 5,475
$ 68,405 $ 141,393 $ 16,740 $ 377,800 $ 730,462 $ 30,720 $ 12,438 $ 8,795 $ 1,386,753
$ 844 $ 408 $ 48 $ 1,022 $ 762 $ 199 $ 936 $ 181 $ 4,400
(1,458)
30
3,360
$ 1,976 $ 737 $ 76 $ 1,994 $ 315 $ 32 $ 975 $ 227 $ 6,332
(1,211)
12
1,238
(119)
17
1,074
(128)
1
1,259
-
-
329
-
-
28
-
-
46
(167)
(447)
-
-
$ 938 $ - $ - $ 216 $ - $ - $ - $ - $ 1,154
$ 1,038 $ 737 $ 76 $ 1,778 $ 315 $ 32 $ 975 $ 227 $ 5,178
$ 74,644 $ 126,159 $ 8,826 $ 346,645 $ 630,400 $ 11,073 $ 17,374 $ 7,790 $ 1,222,911
$ 2,374 $ - $ - $ 734 $ - $ - $ 1,730 $ - $ 4,838
$ 72,270 $ 126,159 $ 8,826 $ 345,911 $ 630,400 $ 11,073 $ 15,644 $ 7,790 $ 1,218,073
66
December 31, 2015
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
Loans:
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
December 31, 2014
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
Loans:
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
SBA non-real
estate
SBA
commercial
mortgage
SBA
construction
Direct lease
financing
SBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
$ 385 $ 461 $ 114 $ 836 $ 562 $ 66 $ 1,181 $ 33 $ 3,638
(1,361)
23
2,100
$ 844 $ 408 $ 48 $ 1,022 $ 762 $ 199 $ 936 $ 181 $ 4,400
(1,220)
23
952
(111)
-
570
-
-
200
-
-
148
(30)
-
216
-
-
133
-
-
(53)
-
-
(66)
$ 123 $ - $ - $ - $ - $ - $ 26 $ - $ 149
$ 721 $ 408 $ 48 $ 1,022 $ 762 $ 199 $ 910 $ 181 $ 4,251
$ 68,887 $ 114,029 $ 6,977 $ 231,514 $ 575,948 $ 48,315 $ 23,180 $ 9,227 $ 1,078,077
$ 904 $ - $ - $ - $ - $ - $ 1,524 $ - $ 2,428
$ 67,983 $ 114,029 $ 6,977 $ 231,514 $ 575,948 $ 48,315 $ 21,656 $ 9,227 $ 1,075,649
$ 419 $ 496 $ - $ 311 $ 293 $ 1 $ 2,361 $ - $ 3,881
(1,504)
59
1,202
$ 385 $ 461 $ 114 $ 836 $ 562 $ 66 $ 1,181 $ 33 $ 3,638
(323)
25
823
(871)
22
(331)
(307)
12
261
-
-
114
(3)
-
272
-
-
(35)
-
-
33
-
-
65
$ 40 $ - $ - $ - $ - $ - $ 271 $ - $ 311
$ 345 $ 461 $ 114 $ 836 $ 562 $ 66 $ 910 $ 33 $ 3,327
$ 62,425 $ 82,317 $ 20,392 $ 194,464 $ 421,862 $ 48,625 $ 36,168 $ 8,340 $ 874,593
$ 197 $ - $ - $ - $ - $ - $ 2,253 $ - $ 2,450
$ 62,228 $ 82,317 $ 20,392 $ 194,464 $ 421,862 $ 48,625 $ 33,915 $ 8,340 $ 872,143
67
December 31, 2013
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
SBA non-real
estate
SBA
commercial
mortgage
SBA
construction
Direct lease
financing
SBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
$ 193 $ 104 $ 42 $ 239 $ 236 $ - $ 3,171 $ - $ 3,985
(520)
61
355
$ 419 $ 496 $ - $ 311 $ 293 $ 1 $ 2,361 $ - $ 3,881
(447)
53
(416)
-
-
392
(44)
-
270
(29)
8
93
-
-
(42)
-
-
57
-
-
1
-
-
-
Ending balance:
Individually evaluated for
i
i
t
$ 95 $ - $ - $ - $ - $ - $ 135 $ - $ 230
Ending balance:
Collectively evaluated for
impairment
Loans:
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
$ 324 $ 496 $ - $ 311 $ 293 $ 1 $ 2,226 $ - $ 3,651
$ 45,875 $ 69,730 $ 51 $ 175,610 $ 293,109 $ 1,588 $ 45,152 $ 4,886 $ 636,001
$ 385 $ - $ - $ - $ - $ - $ 1,356 $ - $ 1,741
$ 45,490 $ 69,730 $ 51 $ 175,610 $ 293,109 $ 1,588 $ 43,796 $ 4,886 $ 634,260
The following table summarizes select asset quality ratios for each of the periods indicated:
Ratio of the allowance for loan losses to total loans
Ratio of the allowance for loan losses to non-performing loans (1)
Ratio of non-performing assets to total assets (1)
Ratio of net charge-offs to average loans
As of or
for the years ended
December 31,
2017
2016
0.51%
168.03%
0.10%
0.12%
0.52%
174.29%
0.08%
0.09%
(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 of 0.51% at December 31, 2017 was comparable to the
0.52% at December 31, 2016. Reserves on specific classified loans reflect one component of the allowance. Our loan loss
methodology also includes the measurement of historical net charge-offs by loan category. The resulting ratios are applied against
current outstanding balances for each loan category. Those computed reserves are added to the aforementioned reserves on specific
classified loans and, with an allocation for economic and other factors, comprise the required level of the allowance for loan losses
(see “Allowance for Loan and Lease Losses”). For the year 2017, 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-SBA Loans”). The ratio of the allowance for loan losses to non-
performing loans decreased to 168.03% at December 31, 2017 from 174.29% over the prior year end, reflecting an increase in non-
performing loans which exceeded the relative increase in the allowance for loan losses. The ratio of non-performing assets to total
assets increased to .10% from .08% primarily as a result of the increase in non-performing assets. The ratio of net charge-offs to
average loans increased to 0.12% for 2017 compared to 0.09% for the prior year, primarily as a result of increased charge-offs in
2017.
68
Net charge-offs. Net charge-offs of $2.2 million in 2017 were higher than the $1.4 million in 2016 and the $1.3 million in
2015. The increase of charge-offs was primarily due to increased SBA non-real estate charge-offs.
Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings. Loans are considered
to be non-performing if they are on a non-accrual basis or they are past due 90 days or more and still accruing interest. A loan which
is past due 90 days or more and still accruing interest remains on accrual status only when it is both adequately secured as to principal
and interest, and is in the process of collection. Troubled debt restructurings are loans with terms that have been renegotiated to
provide a reduction or deferral of interest or principal because of a weakening in the financial positions of the borrowers. The
following tables summarize our non-performing loans, other real estate owned (OREO) and our loans past due 90 days or more still
accruing interest (in thousands).
2017
2016
December 31,
2015
(in thousands)
2014
2013
Non-accrual loans
SBA non-real estate
SBA commercial mortgage
Consumer
Total non-accrual loans
Loans past due 90 days or more
Total non-performing loans
Other real estate owned
Total non-performing assets
$ 1,889 $ 1,530 $ 733 $ - $ 168
-
1,356
1,524
-
1,907
1,907
-
1,194
1,927
-
1,442
2,972
693
1,414
3,996
227
4,223
450
661
3,633
104
403
2,330
-
149
2,056
-
110
1,634
-
$ 4,673 $ 3,737 $ 2,330 $ 2,056 $ 1,634
The loans that were modified for the years ended December 31, 2017 and 2016 and considered troubled debt restructurings
are as follows (in thousands):
December 31, 2017
December 31, 2016
Number
Pre-modification
recorded
investment
Post-
modification
recorded
investment
5 $ 1,476 $ 1,476
1
230
2
535
535
8 $ 2,241 $ 2,241
230
Pre-
modification
recorded
investment
Post-
modification
recorded
investment
Number
2 $ 844 $ 844
1 $ 734 $ 734
1
288
288
4 $ 1,866 $ 1,866
SBA non-real estate
Direct lease financing
Consumer
Total
The balances below provide information as to how the loans were modified as troubled debt restructured loans at December
31, 2017 and 2016 (in thousands):
December 31, 2017
December 31, 2016
SBA non-real estate
Direct lease financing
Consumer
Total
Adjusted
interest rate
Extended
maturity
Combined rate
and maturity
Adjusted
interest rate
Extended
maturity
Combined rate
and maturity
$ -
-
$ 115 $ 1,361
$ - $ 144 $ 700
-
230
$ - $ - $ 734
288
$ - $ 115 $ 2,126 $ - $ 144 $ 1,722
535
-
-
-
-
69
As of December 31, 2017 there was a commitment to extend $228,000 on one loan classified as a troubled debt restructuring.
However, based upon available information, the borrower does not intend to draw on the commitment. As of December 31, 2016, we
had no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.
The following table summarizes as of December 31, 2017 loans that were restructured within the last 12 months that have
subsequently defaulted (in thousands).
SBA non-real estate
Consumer
Total
December 31, 2017
Number
Pre-modification recorded
investment
1
1
2
$ 38
255
$ 293
70
The following table provides information about impaired loans at December 31, 2017 and 2016 (in thousands):
Recorded
investment
Unpaid
principal
balance
Related
allowance
Average
recorded
investment
Interest
income
recognized
December 31, 2017
Without an allowance recorded
SBA non-real estate
$ 459 $ 1,286 $ - $ 311 $ -
SBA commercial mortgage
Direct lease financing
Consumer - other
Consumer - home equity
With an allowance recorded
SBA non-real estate
SBA commercial mortgage
Direct lease financing
Consumer - other
Consumer - home equity
Total
SBA non-real estate
SBA commercial mortgage
Direct lease financing
Consumer - other
Consumer - home equity
December 31, 2016
Without an allowance recorded
SBA non-real estate
Direct lease financing
Consumer - other
Consumer - home equity
With an allowance recorded
SBA non-real estate
Direct lease financing
Consumer - other
Consumer - home equity
Total
SBA non-real estate
Direct lease financing
Consumer - other
Consumer - home equity
-
229
-
-
341
-
1,695
1,695
2,399
693
-
-
-
2,399
693
-
-
-
2,858
3,685
693
229
-
693
341
-
1,695
1,695
-
-
-
-
1,689
225
-
-
-
1,689
225
-
-
-
-
103
259
1,712
2,507
747
405
14
-
2,818
747
508
273
1,712
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 5,475 $ 6,414
$ 1,914 $ 6,058 $ -
$ 191 $ 191 $ - $ 336 $ -
-
-
-
-
1,730
1,730
2,183
734
-
-
2,374
734
-
1,730
2,183
734
-
-
2,374
734
-
1,730
-
-
-
938
216
-
-
938
216
-
-
-
259
1,187
1,277
147
-
549
1,613
147
259
1,736
-
-
-
-
-
-
-
-
-
-
-
$ 4,838 $ 4,838
$ 1,154 $ 3,755 $ -
71
We had $4.0 million of non-accrual loans at December 31, 2017, compared to $3.0 million of non-accrual loans at December
31, 2016. The $1.0 million increase reflected $4.7 million of loans placed on non-accrual status, partially offset by $1.4 million of
loan charge-offs, $1.3 million of loan payments, $479,000 for participations sold and $450,000 of loans transferred to OREO. Loans
past due 90 days or more still accruing interest amounted to $227,000 and $661,000 at December 31, 2017 and December 31, 2016,
respectively. The $434,000 decrease reflected $1.8 million of additions, partially offset by $1.5 million of loan payments, $250,000 of
charge-offs and $526,000 of transfers to repossessed assets. We had $450,000 of OREO at December 31, 2017 and $104,000 at
December 31, 2016. Activity in 2017 reflected the sale of the $104,000 prior year end balance, with additions of $450,000 during the
year.
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, 2017
Pass
Special mention Substandard
Doubtful
Loss
Unrated subject
to review *
Unrated not
subject to
review *
Total loans
SBA non-real estate
$ 63,547 $ 3,392 $ 3,450 $ - $ - $ - $ 874 $ 71,263
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer
141,084
16,740
204,906
357,050
30,720
7,910
Unamortized loan fees and costs
-
277
-
-
-
-
281
-
693
-
2,895
-
-
1,947
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
8,820
-
-
-
-
32
-
161,408
373,412
-
3,995
8,795
142,086
16,740
378,029
730,462
30,720
14,133
8,795
$ 821,957 $ 3,950 $ 8,985 $ - $ - $ 8,820 $ 548,516 $ 1,392,228
December 31, 2016
SBA non-real estate
$ 51,437 $ 2,723 $ 3,628 $ - $ - $ - $ 16,856 $ 74,644
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer
92,485
8,060
122,571
277,489
11,073
9,837
Unamortized loan fees and costs
-
-
-
-
-
-
288
-
-
-
3,736
-
-
2,312
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
15,164
18,510
126,159
-
30,881
-
-
-
-
766
189,457
352,911
-
4,937
7,790
8,826
346,645
630,400
11,073
17,374
7,790
$ 572,952 $ 3,011 $ 9,676 $ - $ - $ 46,045 $ 591,227 $ 1,222,911
*For information on targeted loan review thresholds see “Allowance for Loan Losses”
Investment in Unconsolidated Entity. On 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. Interest is
not being accrued on this investment and changes in its value are recorded in the income statement under “change in value of
investment in unconsolidated entity”. In 2017, there was a $20,000 increase in value, while in 2016 there was a $37.5 million decrease
in value. At December 31, 2017, a balance of $74.5 million remained on the consolidated balance sheet.
72
Deposits. A primary source of funding is deposit acquisition. We offer a variety of deposit accounts with a range of interest
rates and terms, including prepaid 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, 2017, we had total deposits of $4.26 billion compared to
$4.24 billion at December 31, 2016, which reflected an increase of $22.5 million, or 0.5%, between 2017 and 2016. A diversified
group of prepaid accounts, which have an established history of stability and low cost, 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, 2017
December 31, 2016
December 31, 2015
Average
Average
Average
Average
Average
Average
balance
rate
balance
rate
balance
rate
Demand and interest checking *
$ 3,371,969
0.36%
$ 3,347,191
0.28%
$ 3,975,475
Savings and money market
439,625
0.51%
-
-
394,434
77,576
0.39%
0.58%
337,168
44,789
$ 3,811,594
0.38%
$ 3,819,201
0.30%
$ 4,357,432
Time
Total deposits
0.28%
0.55%
0.61%
0.30%
* 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.
Borrowings. We had no outstanding advances from the FHLB at December 31, 2017 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 used these lines
minimally in 2017, as a result of deposit growth. We had no outstanding amounts borrowed on the Bank’s lines of credit at December
31, 2017. We do not have any policy prohibiting us from incurring debt.
2017
As of or for the year ended December 31,
2016
(dollars in thousands)
2015
Securities sold under repurchase agreements
Balance at year-end
Average during the year
Maximum month-end balance
Weighted average rate during the year
Rate at December 31
$ 217
240
274
0.00%
0.23%
$ 274
685
862
0.29%
0.14%
$ 925
5,225
15,857
0.29%
0.24%
2017
As of or for the year ended December 31,
2016
(dollars in thousands)
2015
Short-term borrowings and federal funds purchased
Balance at year-end
Average during the year
Maximum month-end balance
Weighted average rate during the year
Rate at December 31
$ -
23,281
50,000
1.39%
1.34%
$ -
57,518
225,000
0.62%
0.54%
$ -
4,575
-
0.26%
0.23%
As of December 31, 2017, we have two established statutory business trusts: The Bancorp Capital Trust II and The Bancorp
Capital Trust III, which we refer to as the Trusts. In each case, we own all the common securities of the Trust. These trusts issued
preferred capital securities to investors and invested the proceeds in us through the purchase of junior subordinated debentures issued
by us. These debentures are the sole assets of the trusts. The $10.3 million of debentures issued to The Bancorp Capital Trust II on
November 28, 2007, mature on March 15, 2038 and bear interest equal to 3-month LIBOR plus 3.25%. The $3.1 million of
73
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. In 2017, long term borrowings of $42.3 million consisted of sold loans which were accounted for as
a secured borrowing, because they did not qualify for true sale accounting. Long-term borrowings of $263.1 million at December 31,
2016 reflected the proceeds of loans sold into a securitization which, at December 31, 2016 was accounted for as a secured borrowing.
In the first quarter of 2017, the documentation required for true sale accounting was completed and the sale was recorded in that
quarter.
Shareholders’ Equity. At December 31, 2017, we had $324.2 million in shareholders’ equity. In September 2016, we issued
17.5 million shares of our common stock, par value $1.00, at an offering price of $4.50 per share in a private offering. The sale of the
common stock resulted in net proceeds to us, after underwriting discounts, commissions and expenses, of approximately $74.8
million.
Discontinued Operations. As of December 31, 2017, “Assets held for sale from discontinued operations” reflected the
$304.3 million balance of discontinued operations assets, which included $270.0 million of net loans and $33.5 million of other real
estate owned. At December 31, 2016, the total of such assets was $360.7 million. The reduction reflected our efforts to transfer loans
to other financial institutions. See “Investment in Unconsolidated Entity” above. In the second quarter of 2015, $149.6 million of
loans were sold at a net gain of $2.2 million. In the third quarter of 2016, $64.6 million of loans were sold at a minimal gain. The
reductions in 2017 reflected collection efforts on impaired loans and efforts to have borrowers refinance at other institutions. The
Bank’s largest credit exposure is a construction loan in discontinued operations which has unpaid principal of $36.9 million,
collateralized by a hotel under construction and parking lot in the southeastern United States. Based upon an independent first quarter
2018 appraisal, the loan to value is approximately 80% on an as is basis, with personal guarantees of certain of the borrower’s
principals. The loan became delinquent in the first quarter of 2018 and the borrower, a development corporation, subsequently
declared bankruptcy. The Bank is pursuing collection and we currently believe that there will be no loss of principal.
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, 2017, were our
commitments to extend credit, which were approximately $1.45 billion, and standby letters of credit, which were approximately $2.3
million, at December 31, 2017. The vast majority of commitments are SBLOC lines. We attempt to increase line usage, which
nonetheless has been historically consistent.
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.
74
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, 2017:
Total
Less than
one year
One to
three years
(in thousands)
Three to
five years
After
five years
Minimum annual rentals on
noncancelable operating leases
$ 26,238
$ 3,928
$ 7,874
$ 6,484
$ 7,952
Loan commitments
Subordinated debenture
Interest expense on subordinated
debenture (1)
Standby letters of credit
Total
1,445,425
13,401
9,705
2,279
41,105
-
458
2,279
30,898
-
915
-
7,962
1,365,460
-
13,401
915
-
7,417
-
$ 1,497,048
$ 47,770
$ 39,687
$ 15,361
$ 1,394,230
(1) Presentation assumes a weighted average interest rate of 4.50%
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.
Recently Issued Accounting Standards
Information on recent accounting pronouncements is set forth in Note B, item 21, 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”.
75
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, 2017 and 2016, 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, 2017, 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, 2017 and 2016, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2017, 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, 2017, 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 16, 2018 expressed an unqualified opinion.
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.
We have served as the Company’s auditor since 2000.
Philadelphia, Pennsylvania
March 16, 2018
76
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and cash equivalents
Cash and due from banks
Interest earning deposits at Federal Reserve Bank
Securities purchased under agreements to resell
Total cash and cash equivalents
Investment securities, available-for-sale, at fair value
Investment securities, held-to-maturity (fair value $85,345 and $91,799, respectively)
Commercial loans held for sale
Loans, net of deferred loan fees and costs
Allowance for loan and lease losses
Loans, net
Federal Home Loan Bank and Atlantic Central Bankers Bank stock
Premises and equipment, net
Accrued interest receivable
Intangible assets, net
Other real estate owned
Deferred tax asset, net
Investment in unconsolidated entity, at fair value
Assets held for sale from discontinued operations
Other assets
Total assets
LIABILITIES
Deposits
Demand and interest checking
Savings and money market
Total deposits
Securities sold under agreements to repurchase
Subordinated debentures
Long-term borrowings
Other liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Common stock - authorized, 75,000,000 shares of $1.00 par value; 55,861,150 and 55,419,204
shares issued at December 31, 2017 and December 31, 2016, respectively
Treasury stock, at cost (100,000 shares)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total shareholders' equity
December 31,
2017
December 31,
2016
(in thousands)
$ 3,152 $ 4,127
955,733
39,199
999,059
841,471
64,312
908,935
1,294,484
86,380
503,316
1,392,228
(7,096)
1,385,132
991
20,051
10,900
5,377
450
34,802
74,473
304,313
78,543
1,248,614
93,467
663,140
1,222,911
(6,332)
1,216,579
1,613
24,125
10,589
6,906
104
55,666
126,930
360,711
50,611
$ 4,708,147 $ 4,858,114
$ 3,806,965 $ 3,816,524
421,780
4,238,304
453,877
4,260,842
217
13,401
42,323
67,215
4,383,998
55,861
(866)
363,196
(89,485)
(4,557)
324,149
274
13,401
263,099
44,073
4,559,151
55,419
(866)
360,564
(111,941)
(4,213)
298,963
Total liabilities and shareholders' equity
$ 4,708,147 $ 4,858,114
The accompanying notes are an integral part of these consolidated financial statements.
77
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Interest income
Loans, including fees
Interest on investment securities:
Taxable interest
Tax-exempt interest
Federal funds sold/securities purchased under agreements to resell
Interest earning deposits
Interest expense
Deposits
Securities sold under agreements to repurchase
Short-term borrowings
Subordinated debenture
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Non-interest income
Service fees on deposit accounts
Card payment and ACH processing fees
Prepaid card fees
Gain on sale of loans
Gain on sale of investment securities
Gain on sale of health savings portfolio
Change in value of investment in unconsolidated entity
Leasing income
Debit card income
Affinity fees
Loss from sale of European prepaid card operations
Other
Total non-interest income
Non-interest expense
Salaries and employee benefits
Depreciation and amortization
Rent and related occupancy cost
Data processing expense
One time fee to exit data processing contract
Printing and supplies
Audit expense
Legal expense
Amortization of intangible assets
FDIC Insurance
Software
Insurance
Telecom and IT network communications
Securitization and servicing expense
Consulting
Bank Secrecy Act and look back consulting expenses
Civil money penalty
Other
Total non-interest expense
Income (loss) from continuing operations before income taxes
Income tax (benefit) provision
Net income (loss) from continuing operations
Discontinued operations
Income (loss) from discontinued operations before income taxes
Income tax (benefit) provision
Income (loss) from discontinued operations, net of tax
Net income (loss) available to common shareholders
Net income (loss) per share from continuing operations - basic
Net income (loss) per share from discontinued operations - basic
Net income (loss) per share - basic
Net income (loss) per share from continuing operations - diluted
Net income (loss) per share from discontinued operations - diluted
Net income (loss) per share - diluted
2017
For the year ended December 31,
2016
(in thousands, except per share data)
2015
$ 79,081
$ 67,571
$ 49,861
36,121
306
1,310
5,202
122,020
14,418
-
336
586
15,340
106,680
2,920
103,760
6,788
6,318
53,367
17,919
2,231
2,538
(20)
2,663
-
1,545
(3,437)
1,636
91,548
31,219
740
452
2,237
102,219
11,372
2
359
520
12,253
89,966
3,360
86,606
5,124
5,526
51,326
2,901
3,171
-
(37,533)
2,007
-
4,563
-
5,401
42,486
19,918
10,820
577
2,354
83,530
13,124
15
12
448
13,599
69,931
2,100
67,831
7,468
5,731
47,496
10,080
14,435
33,531
1,729
2,291
1,611
3,358
-
5,337
133,067
75,832
4,452
5,680
10,159
1,136
1,354
1,682
8,072
1,528
10,097
12,597
2,333
1,793
170
2,227
-
2,290
13,512
154,914
40,394
23,056
$ 17,338
4,059
(276)
4,335
$ 21,673
$ 0.31
$ 0.08
$ 0.39
$ 0.31
$ 0.08
$ 0.39
81,951
4,982
6,320
14,698
-
2,966
1,105
6,683
1,403
10,091
11,162
2,295
1,982
1,044
5,404
29,081
-
17,406
198,573
(69,481)
(12,664)
$ (56,817)
(43,117)
(3,442)
(39,675)
$ (96,492)
$ (1.28)
$ (0.89)
$ (2.17)
$ (1.28)
$ (0.89)
$ (2.17)
68,390
4,747
5,659
14,359
-
2,651
2,003
3,828
1,186
11,315
7,222
1,923
2,016
1,948
4,333
41,444
3,000
18,064
194,088
6,810
1,450
$ 5,360
12,793
4,721
8,072
$ 13,432
$ 0.14
$ 0.21
$ 0.35
$ 0.14
$ 0.21
$ 0.35
The accompanying notes are an integral part of these consolidated financial statements.
78
9,533
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss)
$ 21,673 $ (96,492)$ 13,432
Other comprehensive income (loss), net of reclassifications into net income:
For the year ended December 31,
2017
2016
2015
(in thousands)
Other comprehensive income (loss)
Change in net unrealized gains (losses) during the year
Reclassification adjustments for gains included in income
Reclassification adjustments for foreign currency translation losses (gains)
Amortization of losses previously held as available-for-sale
Net unrealized gains (losses)
Deferred tax expense (benefit)
Change in net unrealized gains (losses) during the year
Reclassification adjustments for gains included in income
Amortization of losses previously held as available-for-sale
Income tax expense (benefit) related to items of other comprehensive income (loss)
Other comprehensive income (loss), net of tax and reclassifications into net income
Comprehensive income (loss)
2,617
(2,231)
216
34
636
1,046
(892)
14
168
(953)
(3,170)
335
34
(3,754)
(381)
(1,268)
14
(1,635)
(7,169)
(14,436)
(551)
56
(22,100)
(2,544)
(5,147)
20
(7,671)
(14,429)
$ 22,141 $ (98,611) $ (997)
(2,119)
468
The accompanying notes are an integral part of these consolidated financial statements.
79
THE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2017, 2016 and 2015
(in thousands, except share data)
Common
stock
shares
Common
Treasury
stock
stock
Additional
paid-in
capital
Balance at December 31, 2014
37,808,862
37,809
(866)
297,987
Net income
Common stock issued from restricted shares,
cashless exercise, net of tax benefits
52,441
Stock-based compensation
Other comprehensive loss net of
reclassification adjustments and tax
-
-
52
-
-
-
-
-
587
1,975
-
Retained
earnings/
Accumulated
other
(accumulated
comprehensive
deficit)
income/(loss)
Total
(28,242)
13,432
(639)
-
-
12,335
-
-
319,023
13,432
-
1,975
(14,429)
(14,429)
Balance at December 31, 2015
37,861,303 $ 37,861 $ (866) $ 300,549 $ (15,449) $ (2,094) $ 320,001
Net loss
Issuance of common stock
17,473,881
17,474
Common stock issued from restricted shares,
cashless exercise, net of tax benefits
84,020
Stock-based compensation
Other comprehensive loss net of
reclassification adjustments and tax
-
-
84
-
-
-
-
-
-
57,338
(84)
2,761
-
(96,492)
-
-
-
-
(96,492)
74,812
-
2,761
-
-
(2,119)
(2,119)
Balance at December 31, 2016
55,419,204 $ 55,419 $ (866) $ 360,564 $ (111,941) $ (4,213) $ 298,963
Net income
Common stock issuance costs
-
-
Common stock issued from restricted shares,
cashless exercise, net of tax benefits
441,946
442
Reclassification due to the adoption of
ASU No. 2018-02
Stock-based compensation
Other comprehensive income net of
reclassification adjustments and tax
-
-
-
-
-
-
-
-
-
-
-
(200)
(413)
-
3,245
-
21,673
-
(29)
812
-
-
-
-
(812)
-
21,673
(200)
-
-
3,245
468
468
Balance at December 31, 2017
55,861,150 $ 55,861 $ (866) $ 363,196 $ (89,485) $ (4,557) $ 324,149
The accompanying notes are an integral part of these consolidated financial statements.
80
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities
Net income (loss) from continuing operations
Net income (loss) from discontinued operations, net of tax
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization
Provision for loan and lease losses
Net amortization of investment securities discounts/premiums
Stock-based compensation expense
Loans originated for sale
Sale of loans originated for resale
Loss (gain) on sales of loans originated for resale
Deferred income tax expense (benefit)
Loss (gain) on sale of fixed assets
Loss on sale of other real estate owned
Fair value adjustment on investment in unconsolidated entity
Gain on sales of investment securities
Decrease (increase) in accrued interest receivable
Decrease (increase) in other assets
Decrease (increase) in discontinued assets held for sale
Increase in other liabilities
Net cash used in operating activities
Investing activities
Purchase of investment securities available-for-sale
Proceeds from sale of investment securities available-for-sale
Proceeds from redemptions and prepayments of securities held-to-maturity
Proceeds from redemptions and prepayments of securities available-for-sale
Proceeds from sale of other real estate owned
Net increase in loans
Net decrease in discontinued loans held for sale
Proceeds from sale of fixed assets
Purchases of premises and equipment
Investment in unconsolidated entity
Net cash provided by (used in) investing activities
Financing activities
Net increase (decrease) in deposits
Net decrease in securities sold under agreements to repurchase
Costs from issuance of common stock
Net increase in long-term liabilities
Net cash provided by (used in) financing activities
2017
Year ended December 31,
2016
2015
$ 17,338
4,335
$ (56,817)
(39,675)
$ 5,360
8,072
5,980
2,920
10,828
3,245
(521,913)
458,942
(17,919)
20,799
122
19
(20)
(2,231)
(311)
(27,194)
4,612
6,380
(34,068)
(579,925)
284,373
7,000
278,290
85
(172,853)
51,786
945
(515)
52,477
(78,337)
22,538
(57)
(200)
-
22,281
6,385
3,360
8,204
2,761
(528,584)
352,481
2,901
(14,381)
6
-
37,533
(3,171)
(1,118)
(10,021)
(5,153)
27,335
(217,954)
(549,502)
148,205
51
213,730
-
(146,366)
228,351
542
(8,024)
14,057
(98,956)
(176,453)
(651)
74,812
263,099
160,807
5,933
2,100
12,884
1,975
(681,526)
418,748
(10,080)
84
(9)
-
2,430
(14,435)
1,780
2,391
5,369
4,044
(234,880)
(346,227)
505,534
118
244,293
-
(205,019)
298,651
327
(8,999)
12,645
501,323
(207,027)
(18,489)
-
-
(225,516)
Net increase (decrease) in cash and cash equivalents
(90,124)
(156,103)
40,927
Cash and cash equivalents, beginning of year
999,059
1,155,162
1,114,235
Cash and cash equivalents, end of year
$ 908,935
$ 999,059
$ 1,155,162
Supplemental disclosure:
Interest paid
Taxes paid
Transfers of loans to other real estate owned
Transfer of loans to held for sale
Non-cash reclassification of commercial loans sold
$ 15,326
$ 4,159
$ 450
$ -
$ 240,714
$ 12,420
$ 1,502
$ -
$ -
$ -
$ 13,397
$ 592
$ -
$ -
$ -
The accompanying notes are an integral part of these consolidated financial statements.
81
THE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A—Organization and Nature of Operations
The Bancorp, Inc. (the Company) is a Delaware corporation and a registered financial holding company. Its primary
subsidiary is a wholly owned subsidiary bank, The Bancorp Bank (the Bank). The Bank is a Delaware chartered commercial bank
located in Wilmington, Delaware and is a Federal Deposit Insurance Corporation (FDIC) insured institution. In its continuing
operations, the Bank has four primary lines of specialty lending: securities-backed lines of credit (SBLOC), leasing, Small Business
Administration (SBA) loans and loans generated for sale into capital markets primarily through commercial loan securitizations
(CMBS). Through the Bank, the Company also provides banking services nationally, which include prepaid card accounts, private
label banking, institutional banking, card payment and other payment processing.
The Company and the Bank are subject to regulation by certain state and federal agencies and, accordingly, they are
examined periodically by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities,
the Company’s and the Bank’s businesses may be affected by state and federal legislation and regulations.
Note 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 (US GAAP) and predominant practices within the banking industry. The consolidated financial statements include
the accounts of the Company and all its subsidiaries. All inter-company balances have been eliminated.
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
The principal estimates that are particularly susceptible to a significant change in the near term relate to the allowance for
loan and lease losses, investment 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.
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.
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.
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,
82
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
temporary then to determine the amount of other-than-temporary impairment that is attributable to credit loss versus non-credit loss.
If a credit loss is determined, an OTTI charge is recorded within the consolidated statement of operations. If management believes
market value losses are temporary and it believes the Company has the ability and intention to hold those securities to maturity, for
available for sale securities the reduction in value is recognized in other comprehensive income. 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 2017, 2016 and
2015.
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 basis. Accrual of interest is discontinued on a loan when
management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial
condition is such that collection of interest is doubtful.
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
83
loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance
is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted
to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The evaluation of the adequacy of the allowance for loan and lease losses includes, among other factors, an analysis of
historical loss rates and environmental factors by category, applied to current loan totals. However, actual losses may be higher or
lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may
vary from those estimated loss percentages, which are established based upon a limited number of potential loss classifications.
Management performs a quarterly evaluation of the adequacy of the allowance, which is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, the volume and mix of the existing loan and lease portfolios, including the
volume and severity of non-performing and adversely classified credits, an analysis of net charge-offs experienced on previously
classified credits, the trend in loan and lease growth, including any rapid increase in loan and lease volume within a relatively short
time period, general and local economic conditions affecting the collectability of the Company’s loans and leases, previous loan and
lease experience by type, including net charge-offs, as a percentage of average loans and leases over the past several years and other
relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant
revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans and leases
that are classified as impaired. For such loans and leases, an allowance is established when the discounted cash flows, 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, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve
management's close attention. If uncorrected, the potential weaknesses may result in deterioration of repayment prospects. Loans
classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that
are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.
Loans rated as special mention and substandard are reserved for based on the average charge-off history for loans and leases
previously classified in those categories. Loans classified as doubtful have all the weaknesses inherent in loans classified substandard
with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.
Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are
included in the general component of the reserve calculation.
The general component covers pools of loans by loan type. These pools of loans are evaluated for loss exposure based upon
historical loss rates for each of these categories of loans, adjusted for relevant qualitative factors. Separate qualitative adjustments are
made for higher-risk criticized loans that are not impaired. These qualitative risk factors include:
Changes in lending policies or procedures;
Changes in economic conditions;
Portfolio growth;
Changes in the nature or volume of the portfolio;
Changes in management’s experience;
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.
84
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.
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 SBA commercial loans secured by real estate, estimated fair values are determined primarily through third-party
appraisals or evaluations. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated
certified appraisal of the real estate is necessary. This decision is based on various considerations including the age of the most recent
appraisal 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 SBA commercial and industrial loans secured by non-real estate collateral, such as accounts receivable,
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 are generally
discounted based on the age of the financial information or the quality of the assets. Amounts guaranteed by the U.S. government are
not impaired.
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. Net unrealized gains or losses, if any, are recognized through marks to fair value
through the income statement. 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 $503.3 million at December 31, 2017, and $663.1 million at
December 31, 2016. These loans were classified as held for sale.
Loans from discontinued operations intended for sale primarily to other financial institutions are carried at the lower of cost
or market on the balance sheet, determined by loan type or, for larger loans, on an individual loan basis. See Note W to the financial
statements.
5. Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation
expense is computed on the straight-line method over the useful lives of the assets. Leasehold improvements are depreciated over the
shorter of the estimated useful lives of the improvements or the terms of the related leases.
6. Internal Use Software
The Company capitalizes costs associated with internally developed and/or purchased software systems for new products and
enhancements to existing products that have reached the application stage and meet recoverability tests. Capitalized costs include
external direct costs of materials and services utilized in developing or obtaining internal use software, payroll and payroll related
expenses for employees who are directly associated with, and devote time to, the internal use software project. 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, 2017 and 2016, the
85
Company had net capitalized software costs of approximately $8.2 million and $9.9 million, respectively. Net capitalized software is
presented as part of other assets on the consolidated balance sheet. The Company recorded amortization expense of approximately
$2.6 million, $2.1 million and $1.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
7. Income Taxes
The Company accounts for income taxes under the liability method whereby deferred tax assets and liabilities are determined
based on the difference between their carrying values on the consolidated 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 and 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 in accordance with Accounting Standards Codification
(ASC) 718, Stock Based Compensation. The expense of the option is generally measured at fair value at the grant date with
compensation expense recognized over the service period, which is usually the vesting period. For grants subject to a service
condition, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value of each option on the date of grant.
The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the
underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected
life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from historical
experience and may not necessarily equate to its market value when fully vested. In accordance with ASC 718, the Company
estimates the number of options for which the requisite service is expected to be rendered.
9. Other Real Estate Owned
Other real estate owned is recorded at estimated fair market value less cost of disposal; which establishes a new cost basis or
carrying value. When property is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance
for loan and lease losses. Periodically thereafter, the asset is reviewed for subsequent declines in the estimated fair market value
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 $450,000 and $104,000 in other real estate owned at December 31,
2017 and 2016, respectively.
10. Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs amounted to $435,000, $349,000 and $387,000 for
the years ended December 31, 2017, 2016 and 2015, respectively. Advertising expense is reflected under “other” in the non-interest
expense section of the consolidated statement of operations.
86
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:
Income
(numerator)
Year ended December 31, 2017
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic earnings per share from continuing operations
Net income available to common shareholders
Effect of dilutive securities
Common stock options
Diluted earnings per share
$ 17,338
55,686,507
$ 0.31
-
489,762
-
Net income available to common shareholders
$ 17,338
56,176,269
$ 0.31
Income
(numerator)
Year ended December 31, 2017
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic earnings per share from discontinued operations
Net income available to common shareholders
Effect of dilutive securities
Common stock options
Diluted earnings per share
$ 4,335
55,686,507
$ 0.08
-
489,762
-
Net income available to common shareholders
$ 4,335
56,176,269
$ 0.08
Income
(numerator)
Year ended December 31, 2017
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic earnings per share
Net income available to common shareholders
$ 21,673
55,686,507
$ 0.39
Effect of dilutive securities
Common stock options
Diluted earnings per share
-
489,762
-
Net income 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.
87
Income
(numerator)
Year ended December 31, 2016
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic loss per share from continuing operations
Net loss available to common shareholders
Effect of dilutive securities
Common stock options
Diluted loss per share
$ (56,817)
44,567,357
$ (1.28)
-
-
-
Net loss available to common shareholders
$ (56,817)
44,567,357
$ (1.28)
Income
(numerator)
Year ended December 31, 2016
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic loss per share from discontinued operations
Net loss available to common shareholders
Effect of dilutive securities
Common stock options
Diluted loss per share
$ (39,675)
44,567,357
$ (0.89)
-
-
-
Net loss available to common shareholders
$ (39,675)
44,567,357
$ (0.89)
Income
(numerator)
Year ended December 31, 2016
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic loss per share
Net loss available to common shareholders
$ (96,492)
$ 44,567,357
$ (2.17)
Effect of dilutive securities
Common stock options
Diluted loss per share
-
-
-
Net loss available to common shareholders
$ (96,492)
44,567,357
$ (2.17)
Stock options for 2,021,625 shares, exercisable at prices between $6.75 and $25.43 per share were outstanding at December
31, 2016, but were not included in the dilutive shares because the Company had a net loss available to common shareholders.
Income
(numerator)
Year ended December 31, 2015
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic earnings per share from continuing operations
Net income available to common shareholders
Effect of dilutive securities
Common stock options
Diluted earnings per share
$ 5,360
37,755,588
$ 0.14
-
318,630
-
Net income available to common shareholders
$ 5,360
38,074,218
$ 0.14
88
Income
(numerator)
Year ended December 31, 2015
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic earnings per share from discontinued operations
Net income available to common shareholders
Effect of dilutive securities
Common stock options
Diluted earnings per share
$ 8,072
37,755,588
$ 0.21
-
318,630
-
Net income available to common shareholders
$ 8,072
38,074,218
$ 0.21
Income
(numerator)
Year ended December 31, 2015
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic earnings per share
Net income available to common shareholders
$ 13,432
$ 37,755,588
$ 0.35
Effect of dilutive securities
Common stock options
Diluted earnings per share
-
318,630
-
Net income available to common shareholders
$ 13,432
38,074,218
$ 0.35
Stock options for 619,250 shares, exercisable at prices between $9.58 and $25.43 per share, were outstanding at
December 31, 2015 but were not included in the dilutive earnings per share computation because the exercise price per share was
greater than the average market price.
89
12. Other Comprehensive Income
Other comprehensive income consists of revenues, expenses, gains and losses that bypass the statement of operations and are
reported directly in a separate component of equity.
For the year ended December 31,
2017
2016
2015
(in thousands)
Other comprehensive income (loss)
Change in net unrealized gains (losses) during the year
$ 2,617 $ (953) $ (7,169)
Reclassification adjustments for gains included in income
(2,231)
(3,170)
(14,436)
Reclassification adjustments for foreign currency translation losses (gains)
Amortization of losses previously held as available-for-sale
Net unrealized gains (losses)
Deferred tax expense (benefit)
Available-for-sale securities:
216
34
636
335
34
(551)
56
(3,754)
(22,100)
Change in net unrealized gains (losses) during the period
Reclassification adjustments for gains included in income
Amortization of losses previously held as available-for-sale
Income tax expense (benefit) related to items of other comprehensive income (loss)
1,046
(892)
14
168
(381)
(1,268)
14
(1,635)
(2,544)
(5,147)
20
(7,671)
Other comprehensive income (loss), net of tax and reclassifications into net income
$ 468 $ (2,119) $ (14,429)
13. Restrictions on Cash and Due from Banks
The Bank is required to maintain reserves against customer demand deposits by keeping cash on hand or balances with the
FRB. The amount of those required reserves at December 31, 2017 and 2016 was approximately $264.7 million and $283.1 million,
respectively.
14. 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 and $539,000 over the remainder of the amortization period. The gross carrying value of the software is $1.8 million, and as
of December 31, 2017, the accumulated amortization was $1.3 million.
The Company accounts for its prepaid card customer list in accordance with ASC 350, Intangibles—Goodwill and Other.
The acquisition of the Stored Value Solutions division of Marshall Bank First in 2007 resulted in a customer list intangible of $12.0
million which is being amortized over a 12 year period. Amortization expense is $1.0 million per year ($2.0 million over the
remainder of the amortization period). The gross carrying value of the software is $12.0 million, and as of December 31, 2017, the
accumulated amortization was $10.0 million.
In May 2016, the Company purchased approximately $60 million of lease receivables which resulted in a customer list
intangible of $3.4 million which is being amortized over a 10 year period. Amortization expense is $340,000 per year ($1.7 million
over the next five years). The gross carrying value is $3.4 million and, as of December 31, 2017, the accumulated amortization was
$573,000. 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.
90
The gross carrying value and accumulated amortization related to the Company’s intangible items at December 31, 2017 and
2016 are presented below.
December 31,
2017
2016
Gross
Carrying
Amount
Accumulated
Amortization
(in thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Customer list intangibles
$ 15,411
$ 10,573
$ 15,411
$ 9,232
Software intangible
Total
1,817
$ 17,228
1,278
$ 11,851
1,817
$ 17,228
1,090
$ 10,322
The approximate future annual amortization of both the Company’s intangible items are as follows (in thousands):
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
$ 1,531
1,531
499
340
340
1,136
$ 5,377
15. Prepaid Card, Card Payment and Automated Clearing House (ACH) Processing Fees
The Company recognizes prepaid card fees 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. Fees earned by the Company from processing card payments for recipients of such payments, or
from processing ACH payments for companies are also determined primarily on a per transaction basis.
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
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 2017, 2016 or 2015.
17. Derivative Financial Instruments
The Company utilizes derivatives to hedge interest rate risk on the fixed rate loans it originates for sale into commercial
mortgage backed securities markets. These derivatives are recorded on the consolidated balance sheet at fair value. Changes in the
fair value of these derivatives, 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
91
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.
18. Sale of Health Savings Account Portfolio and European Prepaid Operations
The Company sold the majority of its health savings account portfolio in the fourth quarter of 2015. A $33.5 million gain
was realized after the contractually required transfer of approximately $400.0 million of related deposit accounts to the purchaser.
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.
19. Long-term Borrowings
The Company sold loans into a securitization which, at December 31, 2016 was accounted for as a secured borrowing. In the
first quarter of 2017, the documentation required to account for the transaction as a sale was completed and the sale was recorded in
that quarter. Specifically, the Company had an option to repurchase underlying loans in the future which it could unilaterally
renounce. Upon the delivery of its unilateral renunciation to all other applicable parties to the transaction, the transaction qualified as
a sale. The $42.3 million outstanding at December 31, 2017, reflected the proceeds from two loans which were sold in which we
retained a participating interest that did not qualify for sale accounting.
20. Purchase of Lease Receivables
On May 12, 2016, the Company purchased approximately $60.0 million of lease receivables from New Concepts Leasing
Company, Inc., a New Jersey leasing company which originated commercial vehicle fleet leases. The leases were purchased as they
could be integrated into the Company’s portfolio of similar type vehicle leases and contribute to the growth of the Company’s leasing
portfolio. The lease purchase was effectuated through the payment of a premium which resulted in an intangible as more fully
described in item 14 of this Note B.
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 card accounts, merchant acquiring (processing card payments for merchants) and automated
clearing house, or ACH for any potentially significant ramifications of the guidance. We also reviewed other non-interest income
producing categories of the Company which include service fees on deposit accounts, gains and losses on other real estate owned,
gains and losses on the sale of loans and others. Additionally, the standard does not apply to revenue from loans, securities and other
financial instruments. Based upon the nature of our businesses and the reviews we have performed to ascertain potential applicability,
the adoption of this standard will not have a significant impact on our consolidated results of operations or our consolidated financial
position.
92
In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-
40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”. The guidance in this ASU affects
creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Home Administration (FHA)
and the Veterans Administration (VA). It requires that a mortgage loan be derecognized and a separate other receivable be recognized
upon foreclosure if the following conditions are met:
1. The loan has a government guarantee that is not separable from the loan before foreclosure.
2. At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim
on the guarantee, and the creditor has the ability to recover under the claim.
3. At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is
fixed.
Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and
interest) expected to be recovered from the guarantor. The guidance in this ASU was effective for public business entities for annual
periods, and interim periods within those annual periods, beginning after December 15, 2014. The guidance may be applied using a
prospective transition method in which a reporting entity applies the guidance to foreclosures that occur after the date of adoption, or a
modified retrospective transition using a cumulative-effect adjustment (through a reclassification to a separate other receivable) as of
the beginning of the annual period of adoption. Prior periods should not be adjusted. A reporting entity must apply the same method
of transition as elected under ASU 2014-04. The guidance of this ASU did not have a significant impact on the Company’s balance
sheet.
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; (iv) the determination of the need for a valuation allowance on a deferred tax asset
related to available for sale securities must be made in combination with other deferred tax assets. The guidance eliminates the current
classifications of equity securities as trading or available for sale securities and will require separate presentation of financial assets
and liabilities by category and form of the financial assets on the face of the balance sheet or within the accompanying notes. The
guidance also eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value of financial
instruments measured at amortized cost on the balance sheet. The Company adopted this guidance in the first quarter of 2018. The
adoption did not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases”. The FASB issued this ASU to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases
classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments
in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.
Early application of this ASU is permitted for all entities. The Company is currently assessing the impact that the adoption of this
standard will have on the financial condition and results of operations of the Company.
In March 2016, the FASB issued ASU 2016-09 – “Compensation – Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting”. The Update simplifies several areas of accounting for share-based payment awards
issued to employees. There are income tax effects resulting from changes in stock price from the grant date to the vesting date of the
employee stock compensation. The Update will require these income tax effects to be recognized in the statement of income within
income tax expense instead of within additional paid-in capital. In addition, the Update requires changes to the Statement of Cash
Flows including the classification between the operating and financing section for tax activity related to employee stock
compensation. The Company adopted the guidance in the first quarter of 2017, and the adoption did not have a material impact on
first quarter results.
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
93
Update eliminates the existing guidance for purchased credit impaired loans, but requires an allowance for purchased financial assets
with more than insignificant deterioration since origination. In addition, the Update modifies the OTTI impairment model for
available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for
reversal of credit impairments in future periods based on improvements in credit. The guidance is effective in first quarter 2020 with a
cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted
beginning in first quarter 2019, the Company does not expect to elect that option. The Company is evaluating the impact of the Update
on the consolidated financial statements. The Company expects the Update will result in an increase in the allowance for credit losses
given the change to estimated losses over the contractual life adjusted for expected prepayments, as well as the addition of an
allowance for debt securities. The amount of the increase will be impacted by the portfolio composition and credit quality at the
adoption date as well as economic conditions and forecasts at that time.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S.
GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the “2017
Act”). This guidance provided registrants with three scenarios 1) Measurement of certain income tax effects is complete, 2)
Measurement of certain income tax effects can be reasonably estimated and 3) Measurement of certain income tax effects cannot be
reasonably estimated. The Company has acted in good faith to estimate the effects of the 2017 Act. The results have been recognized
and is reflected in the tax accounts in these financial statements. The analysis will be completed in 2018 and we may make
adjustments to these provisional amounts.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220);
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. ASU 2018-02 allows a reclassification
from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs
Act. Consequently, the amendment eliminates the stranded tax effect resulting from the Tax Cuts and Jobs Act and will improve the
usefulness of information reported to financial statement users. ASU 2018-02 is effective for financial statements issued for annual
periods beginning after December 15, 2018. The Company 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 on the Company’s December 31,
2017 combined financial statements.
Note C— Subsequent Events
The Company evaluated its December 31, 2017 consolidated financial statements for subsequent events through the date the
consolidated financial statements were issued. The Company is not aware of any subsequent events which would require recognition
or disclosure in the consolidated financial statements.
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
U.S. Government agency securities
Asset-backed securities *
Tax-exempt obligations of states and political subdivisions
Taxable obligations of states and political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
December 31, 2017
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 50,107
$ 21
$ (226)
$ 49,902
269,164
9,893
64,739
452,723
248,663
204,469
1,196
131
1,377
727
148
585
(275)
(36)
(255)
(4,598)
(2,318)
(1,751)
270,085
9,988
65,861
448,852
246,493
203,303
$ 1,299,758
$ 4,185
$ (9,459)
$ 1,294,484
94
* Asset-backed securities as shown above
Federally insured student loan securities
Collateralized loan obligation securities
Other
Held-to-maturity
Other debt securities - single issuers
Other debt securities - pooled
Available-for-sale
U.S. Government agency securities
Asset-backed securities *
Tax-exempt obligations of states and political subdivisions
Taxable obligations of states and political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Foreign debt securities
Corporate debt securities
* Asset-backed securities as shown above
Federally insured student loan securities
Collateralized loan obligation securities
Other
Held-to-maturity
Other debt securities - single issuers
Other debt securities - pooled
December 31, 2017
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 90,140
$ 271
$ (270)
$ 90,141
170,825
8,199
880
45
(5)
-
171,700
8,244
$ 269,164
$ 1,196
$ (275)
$ 270,085
December 31, 2017
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 11,031
$ 105
$ (2,516)
$ 8,620
75,349
1,376
-
76,725
$ 86,380
$ 1,481
$ (2,516)
$ 85,345
December 31, 2016
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 27,771
$ 23
$ (92)
$ 27,702
355,622
15,492
78,143
347,120
160,649
117,844
56,603
95,005
1,811
129
1,539
598
619
250
168
421
(2,037)
(137)
(633)
(5,149)
(1,445)
(1,008)
(274)
(418)
355,396
15,484
79,049
342,569
159,823
117,086
56,497
95,008
$ 1,254,249
$ 5,558
$ (11,193)
$ 1,248,614
December 31, 2016
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 122,579
$ 346
$ (2,000)
$ 120,925
215,117
17,926
1,294
171
(14)
(23)
216,397
18,074
$ 355,622
$ 1,811
$ (2,037)
$ 355,396
December 31, 2016
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 17,983
$ 179
$ (3,026)
$ 15,136
75,484
1,179
-
76,663
$ 93,467
$ 1,358
$ (3,026)
$ 91,799
95
The amortized cost and fair value of the Company’s investment securities at December 31, 2017, by contractual maturity are
shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Due before one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Available-for-sale
Held-to-maturity
Amortized
cost
Fair
value
Amortized
cost
Fair
value
$ 2,251
$ 2,246
$ -
$ -
20,931
319,354
957,222
21,021
318,631
952,586
-
-
-
-
86,380
85,345
$ 1,299,758
$ 1,294,484
$ 86,380
$ 85,345
At December 31, 2017 and 2016, investment securities with a fair value of approximately $310.9 million and $607.2 million,
respectively, were pledged to secure a line of credit with the FHLB and a letter of credit with that institution at December 31,
2016. At December 31, 2017, investment securities with a fair value of approximately $225.6 million were pledged to secure a line of
credit with the FRB. There were no investment securities pledged to the FRB as of December 31, 2016. Gross gains on sales of
securities were $2.7 million, $4.8 million and $15.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Gross losses on sales of securities were $429,000, $1.6 million and $543,000 for the years ended December 31, 2017, 2016 and 2015,
respectively.
Available-for-sale securities fair values are based on a fair market value supplied by a third-party market data provider. Held-
to-maturity securities fair values are based on the present value of cash flows, which discounts expected cash flows from principal and
interest using yield to maturity at the measurement date, when market information is not available. 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 2017, 2016 and 2015.
Investments in FHLB and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $991,000 at December
31, 2017 and $1.6 million at December 31, 2016.
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at
December 31, 2017 (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
Asset-backed securities
Tax-exempt obligations of states and
political subdivisions
Taxable obligations of states and
political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Total temporarily impaired
investment securities
9
8
5
15
116
41
16
$ 44,808 $ (226) $ - $ - $ 44,808 $ (226)
11,264
(6)
37,894
(269)
49,158
(275)
3,982
(19)
1,143
(17)
5,125
(36)
22,231
249,572
148,655
150,530
(181)
(1,771)
(921)
(1,681)
2,853
125,096
63,274
3,299
(74)
(2,827)
(1,397)
(70)
25,084
374,668
211,929
153,829
(255)
(4,598)
(2,318)
(1,751)
210
$ 631,042 $ (4,805) $ 233,559 $ (4,654) $ 864,601 $ (9,459)
96
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
Total temporarily impaired
investment securities
1
$ - $ - $ 6,600 $ (2,516) $ 6,600 $ (2,516)
1
$ - $ - $ 6,600 $ (2,516) $ 6,600 $ (2,516)
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at
December 31, 2016 (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
Asset-backed securities
Tax-exempt obligations of states and
political subdivisions
Taxable obligations of states and
political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Foreign debt securities
Corporate debt securities
Total temporarily impaired
investment securities
5
23
8
27
68
28
28
34
39
$ 7,414
$ (36) $ 7,824 $ (56) $ 15,238
$ (92)
10,186
(49)
93,375
(1,988)
103,561
(2,037)
6,056
(118)
3,301
(19)
9,357
(137)
42,963
180,357
88,936
79,345
26,696
30,418
(633)
(4,833)
(1,004)
(963)
(274)
(414)
-
54,254
30,386
4,547
700
645
-
(316)
(441)
(45)
-
(4)
42,963
234,611
119,322
83,892
27,396
31,063
(633)
(5,149)
(1,445)
(1,008)
(274)
(418)
260
$ 472,371
$ (8,324) $ 195,032 $ (2,869) $ 667,403
$ (11,193)
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
Total temporarily impaired
investment securities
1
$ - $ - $ 6,039
$ (3,026) $ 6,039
$ (3,026)
1
$ - $ - $ 6,039
$ (3,026) $ 6,039
$ (3,026)
The following table provides additional information related to the Company’s single issuer trust preferred securities as of
December 31, 2017:
Security A
Security B
Single issuer
Book value
Fair value
Unrealized gain/(loss)
Credit rating
$ 1,915
$ 2,020
$ 105
9,116
6,600
(2,516)
Not rated
Not rated
Class: All of the above are trust preferred securities.
The Company has evaluated the securities in the above tables as of December 31, 2017 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
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amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether
the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s
underlying collateral and (e) the payment structure of the security. If other than temporary impairment is determined, the Company
estimates expected future cash flows to determine the credit loss amount with a quantitative and qualitative process that incorporates
information received from third-party sources along with internal assumptions and judgments regarding the future performance of the
security. Based upon this evaluation, the Company concluded that most of the securities that are in an unrealized loss position are in a
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 two single issuer trust preferred securities, 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 E—Loans
The Company originates loans for sale into securitizations for 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, 2017
and 2016, the fair value of these loans was $503.3 million and $663.1 million, and the unpaid principal balance was $498.6 million
and $660.3 million, respectively. Included in gain on sale of loans in the consolidated statement of operations were changes in fair
value resulting in gains of $1.8 million in 2017 and losses of $3.1 million in 2016. There were no amounts of changes in fair value
related to instrument-specific credit risk with the exception of the government guaranteed portion of non accrual SBA loans. 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 are recorded in Interest Income – Loans, including fees in the consolidated statement of operations.
In the second quarter of 2016, the Company purchased approximately $60 million of fleet vehicle leases which resulted in a
customer intangible of approximately $3.4 million. The balance of the $8.0 million purchase price was allocated to premium which is
being amortized over the lives of the purchased leases.
The Company analyzes credit risk prior to making loans, on an individual loan basis. The Company considers relevant
aspects of the borrowers’ financial position and cash flow, past borrower performance, management’s knowledge of market
conditions, collateral and the ratio of the loan amount to estimated collateral value in making its credit determinations.
Major classifications of loans are as follows (in thousands):
SBA non-real estate
SBA commercial mortgage
SBA construction
SBA loans *
Direct lease financing
SBLOC
Other specialty lending
Other consumer loans
Unamortized loan fees and costs
Total loans, net of deferred loan fees and costs
December 31,
2017
December 31,
2016
$ 71,263
$ 74,644
142,086
16,740
230,089
378,029
730,462
30,720
14,133
1,383,433
8,795
126,159
8,826
209,629
346,645
630,400
11,073
17,374
1,215,121
7,790
$ 1,392,228
$ 1,222,911
98
Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $2.3 million and $2.4 million
at December 31, 2017 and 2016, respectively. Overdraft charge-offs and recoveries are reflected in the allowance for loan and lease
losses.
*The following table shows SBA loans, both guaranteed and non-guaranteed, and the guaranteed portion of the SBA loans
included in held for sale for the periods indicated (in thousands):
SBA loans, including deferred fees and costs
SBA loans included in held for sale
Total SBA loans
December 31,
2017
December 31,
2016
$ 236,724
$ 215,786
165,177
154,016
$ 401,901
$ 369,802
99
The following table provides information about impaired loans at December 31, 2017 and 2016 (in thousands):
Recorded
investment
Unpaid
principal
balance
Related
allowance
Average
recorded
investment
Interest
income
recognized
December 31, 2017
Without an allowance recorded
SBA non-real estate
$ 459
$ 1,286
$ -
$ 311
$ -
SBA commercial mortgage
Direct lease financing
Consumer - other
Consumer - home equity
With an allowance recorded
SBA non-real estate
SBA commercial mortgage
Direct lease financing
Consumer - other
Consumer - home equity
Total
SBA non-real estate
SBA commercial mortgage
Direct lease financing
Consumer - other
Consumer - home equity
December 31, 2016
Without an allowance recorded
SBA non-real estate
Direct lease financing
Consumer - other
Consumer - home equity
With an allowance recorded
SBA non-real estate
Direct lease financing
Consumer - other
Consumer - home equity
Total
SBA non-real estate
Direct lease financing
Consumer - other
Consumer - home equity
-
229
-
1,695
2,399
693
-
-
-
2,858
693
229
-
1,695
-
341
-
1,695
2,399
693
-
-
-
3,685
693
341
-
1,695
-
-
-
-
1,689
225
-
-
-
1,689
225
-
-
-
-
103
259
1,712
2,507
747
405
14
-
2,818
747
508
273
1,712
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 5,475
$ 6,414
$ 1,914
$ 6,058
$ -
$ 191
$ 191
$ -
$ 336
$ -
-
-
-
-
1,730
1,730
2,183
734
-
-
2,374
734
-
1,730
2,183
734
-
-
2,374
734
-
1,730
-
-
-
938
216
-
-
938
216
-
-
-
259
1,187
1,277
147
-
549
1,613
147
259
1,736
-
-
-
-
-
-
-
-
-
-
-
$ 4,838
$ 4,838
$ 1,154
$ 3,755
$ -
100
The following table summarizes the Company’s non-accrual loans, loans past due 90 days and other real estate owned at
December 31, 2017 and 2016, respectively (the Company had no non-accrual leases at December 31, 2017 or December 31, 2016):
Non-accrual loans
SBA non-real estate
SBA commercial mortgage
Consumer
Total non-accrual loans
Loans past due 90 days or more
Total non-performing loans
Other real estate owned
Total non-performing assets
December 31,
2017
2016
(in thousands)
$ 1,889
693
1,414
3,996
$ 1,530
-
1,442
2,972
227
4,223
450
661
3,633
104
$ 4,673
$ 3,737
The Company’s loans that were modified for the years ended December 31, 2017 and 2016 and considered troubled debt
restructurings are as follows (in thousands):
December 31, 2017
December 31, 2016
Number
Pre-modification
recorded
investment
Post-
modification
recorded
investment
5 $ 1,476 $ 1,476
1
230
535
2
535
8 $ 2,241 $ 2,241
230
Pre-
modification
recorded
investment
Post-
modification
recorded
investment
Number
2 $ 844 $ 844
1 $ 734 $ 734
288
1
288
4 $ 1,866 $ 1,866
SBA non-real estate
Direct lease financing
Consumer
Total
The balances below provide information as to how the loans were modified as troubled debt restructured loans at December
31, 2017 and 2016 (in thousands):
SBA non-real estate
Direct lease financing
Consumer
Total
December 31, 2017
December 31, 2016
Adjusted
interest rate
Extended
maturity
Combined rate
and maturity
Adjusted
interest rate
Extended
maturity
Combined rate
and maturity
$ -
-
$ 115 $ 1,361
$ - $ 144 $ 700
-
230
$ - $ - $ 734
288
$ - $ 115 $ 2,126 $ - $ 144 $ 1,722
535
-
-
-
-
As of December 31, 2017, there was a commitment to extend $228,000 on one loan classified as a troubled debt
restructuring. As of December 31, 2016, we had no commitments to lend additional funds to loan customers whose terms have been
modified in troubled debt restructurings.
101
The following table summarizes as of December 31, 2017 loans that were restructured within the last 12 months that have
subsequently defaulted (in thousands).
SBA non-real estate
Consumer
Total
December 31, 2017
Number
Pre-modification recorded
investment
1
1
2
$ 38
255
$ 293
102
A detail of the changes in the allowance for loan and lease losses by loan category is as follows (in thousands):
SBA non-real
estate
SBA
commercial
mortgage
SBA
construction
Direct lease
financing
SBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
December 31, 2017
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
Loans:
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
December 31, 2016
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
Loans:
Ending balance
Ending balance:
Individually evaluated for
impairment
Ending balance:
Collectively evaluated for
impairment
$ 1,976 $ 737 $ 76 $ 1,994 $ 315 $ 32 $ 975 $ 227 $ 6,332
(2,207)
51
2,920
$ 3,145 $ 1,120 $ 136 $ 1,495 $ 365 $ 57 $ 581 $ 197 $ 7,096
(1,171)
19
2,321
(109)
24
(309)
(927)
8
420
-
-
383
-
-
(30)
-
-
60
50
25
-
-
$ 1,689 $ 225 $ - $ - $ - $ - $ - $ - $ 1,914
$ 1,456 $ 895 $ 136 $ 1,495 $ 365 $ 57 $ 581 $ 197 $ 5,182
$ 71,263 $ 142,086 $ 16,740 $ 378,029 $ 730,462 $ 30,720 $ 14,133 $ 8,795 $ 1,392,228
$ 2,858 $ 693 $ - $ 229 $ - $ - $ 1,695 $ - $ 5,475
$ 68,405 $ 141,393 $ 16,740 $ 377,800 $ 730,462 $ 30,720 $ 12,438 $ 8,795 $ 1,386,753
$ 844 $ 408 $ 48 $ 1,022 $ 762 $ 199 $ 936 $ 181 $ 4,400
(1,458)
30
3,360
$ 1,976 $ 737 $ 76 $ 1,994 $ 315 $ 32 $ 975 $ 227 $ 6,332
(1,211)
12
1,238
(128)
1
1,259
(119)
17
1,074
-
-
329
-
-
28
-
-
46
(167)
(447)
-
-
$ 938 $ - $ - $ 216 $ - $ - $ - $ - $ 1,154
$ 1,038 $ 737 $ 76 $ 1,778 $ 315 $ 32 $ 975 $ 227 $ 5,178
$ 74,644 $ 126,159 $ 8,826 $ 346,645 $ 630,400 $ 11,073 $ 17,374 $ 7,790 $ 1,222,911
$ 2,374 $ - $ - $ 734 $ - $ - $ 1,730 $ - $ 4,838
$ 72,270 $ 126,159 $ 8,826 $ 345,911 $ 630,400 $ 11,073 $ 15,644 $ 7,790 $ 1,218,073
103
The Company did not have loans acquired with deteriorated credit quality at either December 31, 2017 or December 31,
2016.
A detail of the Company’s delinquent loans by loan category is as follows (in thousands):
December 31, 2017
SBA non-real estate
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and costs
December 31, 2016
SBA non-real estate
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and costs
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30-59 Days past
due
60-89 Days past
due
90 Days or
greater
Non-accrual
Total past due
Current
Total loans
$ 58 $ 268 $ - $ 1,889 $ 2,215 $ 69,048 $ 71,263
-
-
-
-
-
-
3,789
2,233
227
-
-
-
142
-
-
-
-
73
-
-
-
-
-
-
693
693
141,393
142,086
-
16,740
16,740
6,249
371,780
378,029
730,462
730,462
30,720
30,720
4,482
8,022
8,795
4,482
9,651
8,795
1,414
1,629
-
-
$ 3,989 $ 2,574 $ 227 $ 3,996 $ 10,786 $ 1,381,442 $ 1,392,228
$ 559 $ - $ - $ 1,530 $ 2,089 $ 72,555 $ 74,644
-
-
-
-
-
-
11,856
1,998
661
-
-
-
155
-
-
-
-
-
-
-
-
-
-
-
-
-
126,159
126,159
8,826
8,826
14,515
332,130
346,645
630,400
630,400
11,073
5,403
10,374
7,790
11,073
5,403
11,971
7,790
1,442
1,597
-
-
$ 12,570 $ 1,998 $ 661 $ 2,972 $ 18,201 $ 1,204,710 $ 1,222,911
104
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, 2017
Pass
Special mention Substandard Doubtful
Loss
Unrated subject
to review *
Unrated not
subject to review *
Total loans
SBA non-real estate
$ 63,547 $ 3,392 $ 3,450 $ - $ - $ - $ 874 $ 71,263
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer
141,084
16,740
204,906
357,050
30,720
7,910
Unamortized loan fees and costs
-
277
-
-
-
-
281
-
693
-
2,895
-
-
1,947
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
8,820
-
-
-
-
32
-
161,408
373,412
-
3,995
8,795
142,086
16,740
378,029
730,462
30,720
14,133
8,795
$ 821,957 $ 3,950 $ 8,985 $ - $ - $ 8,820 $ 548,516 $ 1,392,228
December 31, 2016
SBA non-real estate
$ 51,437 $ 2,723 $ 3,628 $ - $ - $ - $ 16,856 $ 74,644
SBA commercial mortgage
SBA construction
Direct lease financing
SBLOC
Other specialty lending
Consumer
92,485
8,060
122,571
277,489
11,073
9,837
Unamortized loan fees and costs
-
-
-
-
-
-
288
-
-
-
3,736
-
-
2,312
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
15,164
18,510
126,159
-
30,881
-
-
-
-
766
189,457
352,911
-
4,937
7,790
8,826
346,645
630,400
11,073
17,374
7,790
$ 572,952 $ 3,011 $ 9,676 $ - $ - $ 46,045 $ 591,227 $ 1,222,911
* At December 31, 2017, in excess of 60% 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 2017 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, 2017, approximately 49% of the
SBLOC portfolio had been reviewed.
SBA Loans – The targeted review threshold for 2017 was 100%, to be reviewed within 90 days of funding, less guaranteed portions of any purchased
loans. The 100% coverage includes loan review work performed by designated SBA department personnel. At December 31, 2017, approximately 100% of the
government guaranteed loan portfolio had been reviewed. The review threshold for the independent loan review department is $1,000,000.
Leasing – The targeted review threshold for 2017 was 35%. At December 31, 2017, approximately 55% of the leasing portfolio had been reviewed. The
review threshold is $1,000,000.
Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold for 2017 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, 2017, 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, 2017, 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, 2017, approximately 100% of the non-CRA loans had been reviewed.
105
Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2017 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, 2017, approximately 86% of the HELOC
portfolio had been reviewed.
Note F—Premises and Equipment
Premises and equipment are as follows (in thousands):
Furniture, fixtures, and equipment
Leasehold improvements
Accumulated depreciation
Estimated
useful lives
3 to 12 years
6 to 10 years
December 31,
2017
$ 49,995
13,216
63,211
(43,160)
$ 20,051
2016
$ 50,930
13,213
64,143
(40,018)
$ 24,125
Depreciation expense for the years ended December 31, 2017, 2016 and 2015 was approximately $4.5 million, $5.0 million
and $4.7 million, respectively.
Note G—Time Deposits
There were no time deposits outstanding at December 31, 2017 or 2016.
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 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, 2017, the Company’s investment in the WS 2014 was $74.5 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 $74.5 million.
The following table presents the total unpaid principal amount of assets held in WS 2014, shown as commercial and other, at
December 31, 2017 and 2016 (in thousands). Continuing involvement includes servicing the loans and holding senior interests or
106
subordinated interests. It also shows Security A and B which represent single securities purchased by the Company in each of the two
securitizations for which the Company generated all of the commercial mortgage-backed loan collateral.
December 31, 2017
Principal amount outstanding
Assets held in
The Company's
interest
Total assets
Assets held in
nonconsolidated
in securitized
held by
consolidated
securitization
securitization
VIEs
VIEs
VIEs with
continuing
involvement
assets in
nonconsolidated
VIEs (b)
Commercial and other (a)
$ 158,508
$ -
$ 158,508
$ 74,473
Commercial mortgage-backed securities
Security A
Security B
264,593
314,361
-
-
264,593
314,361
17,634
23,010
December 31, 2016
Principal amount outstanding
Assets held in
The Company's
interest
Total assets
Assets held in
nonconsolidated
in securitized
held by
consolidated
securitization
securitization
VIEs
VIEs
VIEs with
continuing
involvement
assets in
nonconsolidated
VIEs (b)
Commercial and other (a)
$ 184,816
$ -
$ 184,816
$ 126,930
(a) Consists of notes backed by commercial loans predominately secured by real estate.
(b) The retained interest in the commercial and other securitization trusts are non-rated and are accounted for at fair value using cash flow analysis.
Note I—Debt
1. Short-term borrowings
The Bank has overnight borrowing capacity with the Federal Home Loan Bank of Pittsburgh which amounted to $294.4
million at December 31, 2017. Borrowings under this arrangement have a variable interest rate. The Bank also had a $327.6 million
line with the FRB as of that date. As of December 31, 2017, the Bank did not have any borrowings outstanding on these lines. The
details of these categories are presented below:
2017
As of or for the year ended December 31,
2016
(dollars in thousands)
2015
Short-term borrowings and federal funds purchased
Balance at year-end
Average during the year
Maximum month-end balance
Weighted average rate during the year
Rate at December 31
$ -
23,281
50,000
1.39%
1.34%
$ -
57,518
225,000
0.62%
0.54%
$ -
4,575
-
0.26%
0.23%
107
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:
2017
As of or for the year ended December 31,
2016
(dollars in thousands)
2015
Securities sold under repurchase agreements
Balance at year-end
Average during the year
Maximum month-end balance
Weighted average rate during the year
Rate at December 31
$ 217
240
274
0.00%
0.23%
$ 274
685
862
0.29%
0.14%
$ 925
5,225
15,857
0.29%
0.24%
3. Guaranteed Preferred Beneficiary Interest in Company’s Subordinated Debt
As of December 31, 2017, 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
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, 2017, 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.
4. Secured borrowings
The Company sold loans into a securitization which, at December 31, 2016 was accounted for as a secured borrowing. In the
first quarter of 2017, the documentation required to account for the transaction as a sale was completed and the sale was recorded in
that quarter. Specifically, the Company had an option to repurchase underlying loans in the future which it could unilaterally
renounce. Upon the delivery of its unilateral renunciation to all other applicable parties to the transaction, the transaction qualified as a
sale.
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. The Company did not repurchase shares in 2017, 2016 or 2015.
108
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 $1.0 million, $1.3 million and $1.2 million for the years ended December 31, 2017, 2016 and 2015,
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
2017, 2016 and 2015, respectively. The actuarial assumptions reflected a discount rate of 3.37%, a maximum potential life
expectancy of 120 years and a monthly benefit of $25,000. The Company expensed $219,000 and $126,000 for this plan for the years
ended December 31, 2017 and 2016, respectively, and credited expense for $115,000 for the year ended December 31, 2015 based
upon changes to actuarial tables. As of December 31, 2017, the Company had accrued $3.6 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 (benefit) 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 (benefit) included in the statements of continuing operations are as follows:
Current tax provision (benefit)
Federal
Foreign
State
Deferred tax provision (benefit)
Federal
State
2017
For the years ended
December 31,
2016
(in thousands)
2015
$ 1,044
$ 702
$ 286
-
1,213
2,257
22,599
(1,800)
20,799
329
686
1,717
(13,406)
(975)
(14,381)
353
727
1,366
132
(48)
84
$ 23,056
$ (12,664)
$ 1,450
109
The differences between applicable income tax expense (benefit) from continuing operations and the amounts computed by
applying the statutory federal income tax rate of 34% for 2017, 2016 and 2015, respectively, are as follows:
Computed tax expense at statutory rate
Tax effect of federal rate change
State taxes
Tax-exempt interest income
Foreign income tax rate difference
Meals and entertainment
Other nondeductible items
Foreign dividend income
Valuation allowance - domestic
Valuation allowance - foreign
Other
2017
$ 13,734
17,293
1,199
(1,600)
-
63
2,421
-
(9,813)
-
(241)
$ 23,056
For the years ended
December 31,
2016
(in thousands)
$ (23,509)
0
(191)
(1,771)
(147)
128
-
719
8,780
3,327
0
$ (12,664)
2015
$ 2,713
0
448
(4,165)
(163)
196
1,020
-
884
395
122
$ 1,450
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,
2017
2016
(in thousands)
$ 1,490
1,496
750
3,456
1,330
1,343
3,895
8,774
621
11,789
1,686
2,951
4,776
-
1,533
45,890
(9,995)
-
-
92
1,001
1,093
$ 34,802
$ 2,153
2,656
1,250
1,638
3,446
-
7,071
1,654
13,447
17,297
2,665
2,183
28,525
891
1,914
86,790
(24,990)
(891)
3,327
1,479
437
5,243
$ 55,666
Deferred tax assets:
Allowance for loan and lease losses
Non-accrual interest
Deferred compensation
State taxes
Nonqualified stock options
Capital loss limitations
Tax deductible goodwill
Partnership interest, Walnut St basis difference
Fair value adjustment to investments
Loan charges
Unrealized loss on AFS securities
AMT tax credit
Federal net operating loss
Foreign net operating loss
Other
Total gross deferred tax assets
Federal and state valuation allowance
Foreign valuation allowance
Deferred tax liabilities:
Foreign tax liabilities
Discount on Class A notes
Depreciation
Total deferred tax liabilities
Net deferred tax asset
110
The Company has a federal net operating loss carryforward of approximately $21.1 million that will begin to expire in 2035.
The Company has approximately $54.6 million of state net operating losses from several states that will expire at varying times over
the next 20 years. Additionally, the Company has alternative minimum tax credits of $3.0 million to offset taxable income in the
future. The corporate alternative tax was repealed effective for tax years beginning after 2017 and any unused AMT credits will be
recovered as a refundable credit in tax years 2018 through 2021. The refundable credit amount is equal to 50 percent of the excess of
the minimum tax credits available for the tax year over the computed regular tax liability for the years 2018 through 2020. In 2021 the
remainder of any tax credits will be refunded. Therefore, the full amount of the available AMT credits at December 31, 2017 will be
recovered not later than 2021.
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, 2017 and 2016, respectively, was $10.0 million and $25.0 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Beginning balance at January 1
Increases (decreases) in tax provisions for prior years
Gross unrecognized tax benefits at December 31
For the years ended
December 31,
2016
(in thousands)
$ 340
(1)
$ 339
2017
$ 339
(1)
$ 338
2015
$ 313
27
$ 340
Management does not believe these amounts will significantly increase or decrease within 12 months of December 31, 2017.
The total amount of unrecognized tax benefits, if recognized, will impact the effective tax rate.
The Company files federal and state returns in jurisdictions with varying statutes of limitations. An examination of the 2011-
2014 Company’s federal tax returns by the Internal Revenue Service is currently in process. Tax years after 2015 remain subject to
examination by the federal authorities and 2013 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.
The U.S. Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 and introduces significant changes to U.S.
income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%. Due to the timing of the
enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of the effects
and recorded provisional amounts in our financial statements for the year ended December 31, 2017. As we collect and prepare
necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS or other standard-setting
bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact the provision for income
taxes and the effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the enactment of
the Tax Act will be completed in 2018.
Note M—Stock-Based Compensation
In May 2013, the Company adopted a Stock Option and Equity Plan (the 2013 Plan). Employees and directors of the
Company and the Bank and consultants (with restrictions) are eligible to participate in the 2013 Plan. The option term may not exceed
10 years from the date of the grant. An employee or consultant who possesses more than 10 percent of voting power of all classes of
stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five years from the date of grant. An
aggregate of 2,200,000 shares of common stock were reserved for issuance by the 2013 Plan. Restricted stock units may also be
granted under the 2013 Plan with conditions similar to those for options.
111
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 reserved for issuance by the 2011 Plan.
In June 2005, the Company adopted an Omnibus Equity Compensation Plan (the 2005 Plan). Employees and directors of the
Company and the Bank are eligible to participate in the 2005 Plan. An 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 reserved for issuance by the 2005 plan.
Options granted under the 2005 Plan expire on the tenth anniversary of their grant.
In October 1999, the Company adopted a stock option plan (the 1999 Plan). Employees and directors of the Company and
the Bank were eligible to participate in the 1999 Plan. An 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 reserved under the 1999 Plan, with no more than 75,000
shares being issuable to non-employee directors. Options vested over four years and expire on the tenth anniversary of the grant.
A summary of the Company’s stock options is presented below.
Weighted average
Weighted average
remaining
contractual
Aggregate
Shares
exercise price
term (years)
intrinsic value
(in thousands except per share data)
Outstanding at January 1, 2017
2,021,625
$ 8.32
5.24
Granted
Exercised
Expired
Forfeited
-
(29,990)
(1,000)
(538,010)
-
-
25.43
8.36
-
-
-
-
-
-
-
-
Outstanding at December 31, 2017
Exercisable at December 31, 2017
1,452,625
$ 8.30
1,216,375
$ 8.57
4.64
3.91
$ 2,382,663
$ 1,677,738
A summary of the Company’s restricted stock units is presented below:
Weighted average
Average remaining
Outstanding at January 1, 2017
Granted
Vested
Forfeited
Shares
831,775
955,024
(438,441)
(83,904)
grant date
fair value
$ 5.77
contractual
term (years)
5.47
5.89
5.93
Outstanding at December 31, 2017
1,264,454
$ 5.49
1.62
1.88
1.67
In 2017, The Company granted 955,024 restricted stock units at a fair value of $5.47 of which 820,024 with a vesting period
of three years and 135,000 with a vesting period of one year. The Company granted 789,000 restricted stock units with a vesting
period of three years at a fair value of $5.36 in 2016. The Company granted 86,992 restricted stock units with a vesting period of two
years at a fair value of $9.11 in 2015.
112
A summary of the status of the Company’s non-vested options under the plans as of December 31, 2017, and changes during
the year then ended, is presented below:
Non-Vested at January 1, 2017
Granted
Vested
Expired
Forfeited
Shares
360,625
-
(124,375)
-
-
Weighted average
grant date
fair value
$ 3.19
-
3.65
-
-
Non-Vested at December 31, 2017
236,250
$ 2.95
The Company granted 300,000 common stock options in 2016, with a vesting period of four years, whereas in 2017 and
2015, the Company did not grant any common stock options. The weighted average fair value of the stock options issued in 2016 was
$2.89. There were 468,431 options exercised and restricted stock units vested in 2017, 84,020 options exercised and restricted stock
units vested in 2016 and 132,960 options exercised and restricted stock units vested in 2015. The total intrinsic value of the options
exercised and stock units vested in 2017, 2016 and 2015 was $3.0 million, $415,000 and $455,000, respectively. The total issuance
date fair value of options that were exercised and restricted units which vested during the year ended December 31, 2017 was $3.2
million.
As of December 31, 2017, there was a total of $5.0 million of unrecognized compensation cost related to unvested awards
under share-based plans. This cost is expected to be recognized over a weighted average period of approximately 2.0 years. For the
years ended December 31, 2017, 2016 and 2015 total compensation expense under share based payment arrangements was $3.2
million, $2.8 million and $2.0 million respectively and the related tax benefits recognized were $1.1 million, $952,000 and $672,000,
respectively.
For the years ended December 31, 2017, 2016 and 2015, the Company estimated the fair value of each grant on the date of
grant using the Black-Scholes options pricing model with the following weighted average assumptions:
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected lives (years)
2017
December 31,
2016
2015
-
-
-
-
1.85%
-
44.54%
1.0-5.5
-
-
-
-
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, 2017 is based on awards that are ultimately expected to vest and has been reduced for
estimated forfeitures. The Company estimates forfeitures using historical data based upon the groups identified by management.
Note N—Transactions with Affiliates
The Company entered into a space sharing agreement for office space in New York, New York with Resource America Inc.
commencing in September 2011, which terminated on January 31, 2015. The Company paid only its proportionate share of the lease
rate to a lessor which was an unrelated third party. The former Chairman of the Board of Resource America, Inc. is the father of the
Chairman of the Board and the spouse of the former Chief Executive Officer of the Company. The former Chief Executive Officer of
Resource America is the brother of the Chairman of the Board and the son of the former Chief Executive Officer of the Company.
113
Rent expense was 50% of the fixed rent, real estate tax payment and the base expense charges. Rent expense was $0 for the years
ended December 31, 2017 and 2016, respectively and $9,000 for the year ended December 31, 2015.
The Company entered into a space sharing agreement for office space in New York, New York with Atlas Energy, L.P.
commencing May 2012, which expired in May 2015. As a result of certain transactions, Atlas Energy, L.P. assigned the lease to its
successor, Atlas Energy Group, LLC. in 2015. The Company paid only its proportionate share of the lease rate to a lessor which was
an unrelated third party. The Executive Chairman of the Board of Atlas Energy Group. LLC and, prior thereto, of the general partner
of Atlas Energy, L.P., is the brother of the Chairman of the Board and son of the former Chief Executive Officer of the Company. The
Chief Executive Officer and President of Atlas Energy Group, LLC and, prior thereto, of the general partner of Atlas Energy, L.P. is
the father of the Chairman of the Board and spouse of the former Chief Executive Officer of the Company. Rent expense was 50% of
the fixed rent, real estate tax payment, and the base expense charges. Rent expense was $0 for the years ended December 31, 2017
and 2016, respectively and $35,000 for the year ended December 31, 2015.
The Bank maintains deposits for various affiliated companies totaling approximately $4.7 million and $5.5 million as of
December 31, 2017 and 2016, respectively.
The Bank has entered into lending transactions in the ordinary course of business with directors, executive officers, principal
stockholders and affiliates of such persons. All loans were made on substantially the same terms, including interest rate and collateral,
as those prevailing at the time for comparable loans with persons not related to the lender. At December 31, 2017, these loans were
current as to principal and interest payments, and did not involve more than normal risk of collectability. At December 31, 2017 and
2016, loans to these related parties amounted to $1.7 million and $649,000, 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 Chairman and has a minority interest. The
Company’s Chairman also serves as the President of Cohen & Company Financial Limited (formerly Euro Dekania Management
Ltd.), a wholly-owned subsidiary of Cohen & Company Inc. (formerly Institutional Financial Markets Inc.), the parent company of
JVB. In 2017, the Bank purchased $11.9 million of Government National Mortgage Association securities from JVB and $3.7 million
of government guaranteed SBA loans for Community Reinvestment Act purposes. The Company purchased securities under
agreements to resell through JVB primarily consisting of Government National Mortgage Association certificates which are full faith
and credit obligations of the United States government issued at competitive rates. JVB was in full compliance with all of the terms of
the repurchase agreements at December 31, 2017 and had complied with the terms for all prior repurchase agreements. There were
$64.3 million and $39.2 million of repurchase transactions outstanding at December 31, 2017 and 2016, respectively.
Mr. Hersh Kozlov, a director of the Company, is a partner at Duane Morris LLP, an international law firm. The Company
paid Duane Morris LLP $3.5 million in 2017, $4.0 million in 2016 and $338,000 in 2015 for legal services.
114
Note O—Commitments and Contingencies
1.
Operating Leases
The Company leases its Delaware operations facility, its New York executive offices and its Philadelphia offices, all of
which have terms expiring in 2025. The Company also has leases for business production offices in Maryland, Minnesota, New
Jersey, North Carolina, and Pennsylvania that expire at various times through 2022. The Company leases space in South Dakota for
its prepaid card division, which also expires in 2022. The Company leases space in Illinois for its small business lending division, in
California for its payments businesses, and in Florida for compliance operations, all of which are for a term expiring 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 due to escalation clauses, required by these leases are as
follows (in thousands):
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
$ 3,928
4,012
3,862
3,422
3,062
7,952
$ 26,238
Rent expense for the years ended December 31, 2017, 2016 and 2015 was approximately $4.4 million, $4.6 million and $4.6
million, net of sublease rentals of approximately $100,000, $67,000 and $0, 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. The Company is cooperating fully with the SEC's investigation.
The costs to respond to the subpoena and cooperate with the SEC's investigation have been material and we expect such costs to
continue to be material at least through the completion of the SEC’s investigation.
On June 30, 2016, the Company received written notice from the Internal Revenue Service that it will be conducting an audit
of the Company's tax returns for the tax years 2011, 2012, 2013 and 2014. The audit is in process.
The Company received a letter dated August 1, 2016, demanding inspection of its books and records pursuant to Section 220
of the Delaware General Corporation Law, or DCGL, from legal counsel representing a shareholder (the "Demand Letter"). The
Company, through outside legal counsel, responded to the Demand Letter by permitting the shareholder to inspect certain of the
Company’s books and records and by objecting to other requests. On January 30, 2017, the shareholder filed a complaint in the Court
of Chancery of the State of Delaware seeking an order from the court, pursuant to Section 220 of the DGCL, compelling the Company
to permit the shareholder to inspect additional books and records of the Company. The Company believes that its original response to
the Demand Letter was appropriate in all respects and continues to defend against the complaint. On July 27, 2017, the Court of
Chancery ruled in favor of the Company and granted an Order of Final Judgment Denying Plaintiff’s Demand To Inspect The Books
And Records of Defendant. The court’s Order was subject to an appeal right which has now expired; no appeal was filed. Both the
Demand Letter and the complaint threaten the commencement of a shareholder’s derivative suit against certain officers and directors
of the Company seeking damages and other remedies on behalf of the Company. We have been advised by our counsel in the matter
that reasonably possible losses cannot be estimated, but we and our counsel continue to believe the claim is without merit.
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.
115
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 credit commitments are as follows:
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit
Standby letters of credit
December 31,
2017
2016
(in thousands)
$ 1,445,425
$ 1,086,304
2,279
3,936
$ 1,447,704
$ 1,090,240
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit
evaluation.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial
paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company holds residential or commercial real estate, accounts receivable,
inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary. Based upon periodic
analysis of the Company’s standby letters of credit, management has determined that a reserve is not necessary at December 31, 2017.
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 $2.3 million of standby letters of credit expire in 2018.
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.
116
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. In 2016, certain securities were
reclassified to level 2 from level 1 based upon an assessment of current market information. In 2015, certain securities were
reclassified to level 2 from level 3 based upon current market information.
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 $908.9 million and $999.1 million at December 31, 2017 and
2016, respectively, which approximated fair values.
Investment securities have estimated fair values based on quoted market prices, if available, or by an estimation methodology
based on management’s inputs. The fair values of the Company’s investment securities held-to-maturity are based on using
“unobservable inputs,” that are the best information available in the circumstances when market information is not available. Level 3
investment securities fair values are based on the present value of cash flows, which discounts expected cash flows from principal and
interest using yield to maturity at the measurement date.
Commercial loans held for sale have estimated fair values based upon market indications of the sales price of such loans from
recent sales transactions.
Loans, net of deferred loan fees and costs, have an estimated fair value using the present value of discounted cash flow where
market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit
risk. The carrying value of accrued interest approximates fair value.
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
established by the sales price and subsequently subjected to cash flow analysis. At December 31, 2017, the cash flows were modeled
using discount rates of 4.75% on the senior note and 11% on the subordinate note, based on market indications. A constant default
rate on cash flowing loans of 1%, which was net of recoveries, was utilized. The change in value of investment in unconsolidated
entity in the income statement includes interest paid and changes in estimated fair value.
117
Assets held for sale as of December 31, 2017 are held at the lower of cost basis or market value. For loans, market value was
determined using the income approach which converts expected cash flows from the loan portfolio by unit of measurement to a
present value estimate. Unit of measurement was determined by loan type and for significant loans on an individual loan basis. The
fair values of the Company’s loans classified as assets held for sale are based on “unobservable inputs” that are the best information
available in the circumstances. For commercial loans, a market adjusted rate to discount expected cash flows from outstanding
principal and interest to expected maturity at the measurement date, was utilized. For other real estate owned, market value was based
upon appraisals of the underlying collateral by third-party appraisers, reduced by 7-10% for estimated selling costs.
Demand deposits (comprising interest and non-interest bearing checking accounts, savings, and certain types of money
market accounts) are equal to the amount payable on demand at the reporting date (generally, their carrying amounts). The fair values
of securities sold under agreements to repurchase and short term borrowings are equal to their carrying amounts as they are overnight
borrowings.
Time deposits and subordinated debentures have a fair value estimated using a discounted cash flow calculation that applies
current interest rates to discount expected cash flows. There were no time deposits outstanding at December 31, 2017 or 2016.
Interest rate swaps 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 interest rate indices.
The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment
fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of
credit. Fair values of unrecognized financial instruments, including commitments to extend credit, and the fair value of letters of
credit are considered immaterial.
118
Carrying
amount
Estimated
fair value
December 31, 2017
Quoted prices
in active
markets for
identical assets
(Level 1)
(in thousands)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investment securities available-for-sale
$ 1,294,484 $ 1,294,484 $ - $ 1,253,840 $ 40,644
Investment securities held-to-maturity
Securities purchased under agreements to resell
Federal Home Loan Bank and Atlantic Central Bankers Bank
stock
Commercial loans held for sale
Loans, net
Investment in unconsolidated entity, senior note
Assets held for sale
Demand and interest checking
Savings and money market
Subordinated debentures
Securities sold under agreements to repurchase
Interest rate swaps, asset
86,380
64,312
991
503,316
1,392,228
74,473
304,313
85,345
64,312
991
503,316
1,391,701
74,473
304,313
-
64,312
-
-
-
-
-
3,806,965
3,806,965
3,806,965
453,877
13,401
217
1,243
453,877
453,877
9,173
217
1,243
-
217
-
78,745
6,600
-
-
-
-
-
-
-
-
-
-
1,243
-
991
503,316
1,391,701
74,473
304,313
-
-
9,173
-
-
Carrying
amount
Estimated
fair value
December 31, 2016
Quoted prices
in active
markets for
identical assets
(Level 1)
(in thousands)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investment securities available-for-sale
$ 1,248,614 $ 1,248,614 $ - $ 1,248,614 $ -
Investment securities held-to-maturity
Securities purchased under agreements to resell
Federal Home Loan Bank and Atlantic Central Bankers Bank
stock
Commercial loans held for sale
Loans, net
Investment in unconsolidated entity, senior note
Investment in unconsolidated entity, subordinated note
Assets held for sale
Demand and interest checking
Savings and money market
Subordinated debentures
Securities sold under agreements to repurchase
Interest rate swaps, asset
85,760
6,039
-
-
-
-
-
-
-
-
-
-
-
3,207
-
1,613
663,140
1,219,625
118,389
8,541
360,711
-
-
9,290
-
-
93,467
39,199
1,613
663,140
91,799
39,199
1,613
663,140
1,222,911
1,219,625
118,389
8,541
360,711
118,389
8,541
360,711
-
39,199
-
-
-
-
-
-
3,816,524
3,816,524
3,816,524
421,780
421,780
9,290
274
3,207
-
274
-
421,780
13,401
274
3,207
119
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
markets for identical
observable
Fair value
assets
December 31, 2017
(Level 1)
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investment securities available-for-sale
U.S. Government agency securities
$ 49,902 $ - $ 49,902 $ -
Asset-backed securities
Obligations of states and political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Total investment securities available-for-sale
Loans held for sale
Investment in unconsolidated entity, senior note
Interest rate swaps, asset
270,085
75,849
448,852
246,493
203,303
1,294,484
503,316
74,473
1,243
-
-
-
-
-
-
-
-
-
270,085
75,849
448,852
246,493
162,659
1,253,840
-
-
1,243
-
-
-
-
40,644
40,644
503,316
74,473
-
$ 1,873,516 $ - $ 1,255,083 $ 618,433
Fair Value Measurements at Reporting Date Using
Quoted prices in active
Significant other
markets for identical
observable
Fair value
assets
December 31, 2016
(Level 1)
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investment securities available-for-sale
U.S. Government agency securities
$ 27,702 $ - $ 27,702 $ -
Asset-backed securities
Obligations of states and political subdivisions
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Foreign debt securities
Corporate debt securities
Total investment securities available-for-sale
Loans held for sale
Investment in unconsolidated entity, senior note
Investment in unconsolidated entity, subordinated note
Interest rate swaps, asset
355,396
94,533
342,569
159,823
117,086
56,497
95,008
1,248,614
663,140
118,389
8,541
3,207
-
-
-
-
-
-
-
-
-
-
-
-
355,396
94,533
342,569
159,823
117,086
56,497
95,008
1,248,614
-
-
-
3,207
-
-
-
-
-
-
-
-
663,140
118,389
8,541
-
$ 2,041,891 $ - $ 1,251,821 $ 790,070
120
The Company’s Level 3 asset activity is as follows (in thousands).
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Beginning balance
$ - $ - $ 663,140 $ 489,938
Available-for-sale
securities
Commercial loans
held for sale
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Transfers into level 3
Transfers out of level 3
Total gains or losses (realized/unrealized)
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales and settlements
Purchases
Issuances
Sales
Settlements
Ending balance
The amount of total gains or (losses) for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets still
held at the reporting date.
19,441
-
-
(497)
24,112
-
-
(2,412)
-
-
-
-
-
-
-
-
-
-
-
-
19,883
(3,078)
-
-
521,914
(701,621)
-
-
-
528,584
(352,304)
-
$ 40,644 $ - $ 503,316 $ 663,140
$ - $ - $ 911 $ (2,674)
121
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Beginning balance
$ 126,930 $ 178,520 $ 360,711 $ 583,909
Investment in
unconsolidated entity
Assets
held for sale
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Transfers into level 3
Transfers out of level 3
Total gains or losses (realized/unrealized)
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales, settlements and
charge-offs
Purchases
Issuances
Sales
Settlements
Charge-offs
Ending balance
The amount of total losses for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets still
-
-
-
-
-
-
-
-
(20)
(39,816)
557
(48,836)
-
-
-
-
-
-
-
-
(52,437)
-
(11,774)
-
-
-
11,450
-
(52,450)
(15,955)
-
-
-
(63,712)
(110,650)
-
$ 74,473 $ 126,930 $ 304,313 $ 360,711
held at the reporting date.
$ (20) $ (39,816) $ (4,776) $ (48,836)
Level 3 instruments only
December 31, 2017
December 31, 2016
Valuation techniques
Unobservable inputs
average)
Fair value at
Fair value at
Range (weighted
Investment securities available-for-sale
$ 40,644 $ - Discounted cash flow
Discount rate
7.0%-9.5%
Investment securities held-to-maturity
Federal Home Loan Bank and Atlantic
Central Bankers Bank stock
Loans, net of deferred loan fees and costs
Commercial loans held for sale
Investment in unconsolidated entity,
senior note
Investment in unconsolidated entity,
subordinated note
6,600
991
1,391,701
503,316
74,473
6,039 Discounted cash flow
Discount rate
1,613 Cost
N/A
1,219,625 Discounted cash flow
Discount rate
663,140 Discounted cash flow
Discount rate
118,389 Discounted cash flow
Discount rate
Default rate
-
8,541 Discounted cash flow
Discount rate
Default rate
8.00%
N/A
3.5%-7.2%
4.85%-7.05%
4.75%
1.00%
11.00%
1.00%
Assets held for sale
Subordinated debentures
304,313
9,173
360,711 Discounted cash flow
Discount rate
3.89%-9.59%
9,290 Discounted cash flow
Discount rate
7.00%
122
Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, at December 31, 2017 and 2016 are
summarized below (in thousands):
Description
Impaired loans
Other real estate owned
Intangible assets
Description
Impaired loans
Other real estate owned
Intangible assets
Fair Value Measurements at Reporting Date Using
Quoted prices in active
Significant other
Significant
markets for identical
observable
unobservable
December 31, 2017
assets
(Level 1)
inputs
(Level 2)
inputs (1)
(Level 3)
$ 3,559 $ - $ - $ 3,559
450
5,377
-
-
-
-
450
5,377
$ 9,386 $ - $ - $ 9,386
Fair Value Measurements at Reporting Date Using
Quoted prices in active
Significant other
Significant
markets for identical
observable
unobservable
Fair value
December 31, 2016
assets
(Level 1)
inputs
(Level 2)
inputs (1)
(Level 3)
$ 3,685 $ - $ - $ 3,685
104
6,906
-
-
-
-
104
6,906
$ 10,695 $ - $ - $ 10,695
(1) The method of valuation approach for the impaired loans and other real estate owned was the market value approach based upon appraisals of
the underlying collateral by external appraisers, reduced by 7-10% for estimated selling costs. Intangible assets are valued based upon internal
analyses.
At December 31, 2017, 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 estimated fair value of $3.6 million. To arrive at that fair value, related
loan principal of $5.5 million was reduced by specific reserves of $1.9 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, 2017, were troubled debt restructured loans with a balance of $1.8 million which had specific
reserves of $501,000. Valuation techniques consistent with the market and/or cost approach were used to measure fair value and
primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or
observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected
within the Level 3 hierarchy. The fair value of other real estate owned is based on an appraisal of the property using the market
approach for valuation.
Note R –Derivatives
The Company utilizes derivative instruments to assist in the management of interest rate sensitivity by modifying the
repricing, maturity and option characteristics on commercial real estate loans held for sale. These instruments are not accounted for as
hedges. As of December 31, 2017, the Company had entered into eleven interest rate swap agreements with an aggregate notional
amount of $59.7 million. Under these swap agreements the Company receives an adjustable rate of interest based upon LIBOR. The
Company recorded income of $2.0 million, $3.2 million and $984,000 for the years ended December 31, 2017, 2016 and 2015,
respectively, to recognize the fair value of derivative instruments. At December 31, 2017, the amount receivable by the Company
under these swap agreements was $1.2 million. At December 31, 2016, the amount receivable by the Company under these swap
agreements was $3.0 million. At December 31, 2017 and 2016, the Company had minimum collateral posting thresholds with certain
of its derivative counterparties and had posted cash collateral of $757,000 and $2,000, respectively.
123
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, 2017 are summarized below (in thousands):
Maturity date
August 4, 2021
August 17, 2025
August 17, 2025
December 11, 2025
December 23, 2025
December 24, 2025
January 28, 2026
July 20, 2026
December 12, 2026
January 4, 2027
April 27, 2027
Total
December 31, 2017
Notional amount
Interest rate paid
$ 10,300
2,500
2,500
2,400
6,800
8,200
3,000
6,300
3,200
10,100
4,400
1.12%
2.27%
2.27%
2.14%
2.16%
2.17%
1.87%
1.44%
2.26%
2.35%
2.32%
Interest rate received
1.39%
1.42%
1.42%
1.54%
1.67%
1.67%
1.38%
1.36%
1.55%
1.34%
1.37%
Fair value
$ 378
9
9
35
92
100
104
450
27
18
21
$ 59,700
$ 1,243
The $1.2 million fair value of the outstanding derivatives at December 31, 2017 as detailed in the above table, were recorded
in other assets 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. In addition, the Company
received a Supervisory Letter from the Federal Reserve pursuant to which the Company may not pay dividends without prior Federal
Reserve approval. The Federal Reserve approved the payment of the distributions on the Company’s trust preferred securities due
December 15, 2017. Future payments are subject to future approval by the Federal Reserve. (See Note I)
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
124
based upon regulatory rules or by regulatory discretion at any time reflecting a variety of factors including deterioration in asset
quality.
Actual
For capital
adequacy purposes
To be well
capitalized under
prompt corrective
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
As of December 31, 2017
Total capital
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
Tier I capital
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
Tier I capital
(to average assets)
The Bancorp, Inc.
The Bancorp Bank
Common equity tier 1
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
As of December 31, 2016
Total capital
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
Tier I capital
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
Tier I capital
(to average assets)
The Bancorp, Inc.
The Bancorp Bank
Common equity tier 1
(to risk-weighted assets)
The Bancorp, Inc.
The Bancorp Bank
$ 331,500
17.09% $ 155,183
320,743
16.59%
154,648
>=8.00
8.00
N/A
N/A
193,310
>= 10.00%
324,404
313,648
16.73%
16.23%
116,387
115,986
>=6.00
6.00
N/A
N/A
154,648
>= 8.00%
324,404
313,648
7.90%
7.61%
168,442
167,782
>=4.00
4.00
N/A
N/A
209,728
>= 5.00%
324,404
313,648
16.73%
16.23%
77,591
86,990
>=4.00
4.50
N/A
N/A
125,652
>= 6.50%
$ 296,937
13.63% $ 174,290
293,348
13.53%
173,437
>=8.00
8.00
N/A
N/A
216,796
>= 10.00%
290,605
287,016
13.34%
13.24%
130,717
130,078
>=6.00
6.00
N/A
N/A
173,437
>= 8.00%
290,605
287,016
6.90%
6.84%
168,442
167,782
>=4.00
4.00
N/A
N/A
211,595
>= 5.00%
290,605
287,016
13.34%
13.24%
87,145
97,558
>=4.00
4.50
N/A
N/A
140,917
>= 6.50%
125
As of December 31, 2017, 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.
In 2017, the FDIC informed the Bank that it would pursue a civil money penalty for which the Bank accrued of $2.3 million
of expense in that year. The FDIC’s action principally emanates from one of the Bank’s third-party payment processors suffering 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 that disclosed by the Bank.
Impacted consumers are being reimbursed by the third-party processor at its own expense.
The Bank has entered into several consent orders with the FDIC relating to several aspects of its operations. The consent
orders required the Bank to pay a $3.0 million civil money penalty in 2015, and to substantially revise and enhance its compliance
programs with respect to the Bank Secrecy Act, or BSA, Anti-Money Laundering Act, or AML, and other areas. As a result of these
orders, the Bank incurred significant remediation expenses for third-party consultants in 2016 and 2015. The vast majority of the
expense was to perform a “look back” to analyze historical transactions which was concluded in the third quarter of 2016. Additional
permanent expenses have and will result due to a significant increase in the number of employees performing BSA/AML related
functions. The consent orders restrict the Bank from signing and boarding new independent sales organizations, establishing new non-
benefit reloadable prepaid card programs and originating ACH transactions for new merchant-related payments. The removal of these
limitations depends upon the Bank’s issuance of a BSA report to the FDIC summarizing the completion of certain corrective action
and the FDIC’s approval thereof.
On March 7, 2018, the Bank entered into a Stipulation and Consent to Order for Restitution and Order To Pay Civil Money
Penalty with the FDIC, which we refer to as the 2018 Restitution Order and 2018 CMP Order, respectively. The Bank took this action
without admitting or denying any alleged violations of law or regulation. The FDIC’s action principally emanates from one of the
Bank’s third-party payment processors (“Third-party Processor”) that suffered an internal system programming glitch. This
inadvertently resulted in consumers that engaged in signature-based point of sale transactions during the period from December 2010
to November 2014 being charged a greater fee than what was disclosed by the Bank. The FDIC alleged the Bank’s incorrect fee
imposition due to the Third-party Processor error was an unfair or deceptive act or practice and violated Section 5 of the Federal Trade
Commission Act. The 2018 Restitution Order requires the Bank to develop a written Restitution Plan, subject to independent audit
and FDIC non-objection, to ensure impacted consumers are compensated for any incorrectly charged fees. The 2018 Restitution
Order requires the Bank to make such reimbursements if not otherwise made by the Third-party Processor and the Bank is indemnified
by the Third-party Processor for such reimbursements. Impacted consumers have been reimbursed by the Third-party Processor at its
own expense. The Bank is in the process of complying with the written documentation and audit requirements of the Restitution
Order. The 2018 CMP Order imposed a $2 million civil money penalty on the Bank which the Bank has paid, and was recognized as
expense on September 30, 2017. The civil money penalty is not subject to any indemnification or recovery from any third party.
126
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.
2017
Interest income
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income from continuing operations before income tax expense
Income tax expense (benefit)
Net income (loss) from continuing operations
Net income from discontinued operations, net of tax
Net income (loss) available to common shareholders
Three months ended
March 31,
June 30,
September 30,
December 31,
(in thousands, except per share data)
$ 28,449 $ 30,813 $ 31,914 $ 30,844
26,687
770
20,149
35,885
10,181
23,513
(13,332)
897
$ 7,963 $ 18,864 $ 7,281 $ (12,435)
27,215
350
18,173
37,363
7,675
(9,923)
17,598
1,266
24,877
1,000
24,219
37,783
10,313
4,011
6,302
1,661
27,901
800
29,007
43,883
12,225
5,455
6,770
511
Net earnings (loss) per share from continuing operations - basic
Net earnings per share from discontinued operations - basic
Net earnings (loss) per share - basic
$ 0.11 $ 0.32 $ 0.12 $ (0.24)
$ 0.03 $ 0.02 $ 0.01 $ 0.02
$ 0.14 $ 0.34 $ 0.13 $ (0.22)
Net earnings (loss) per share from continuing operations - diluted
Net earnings per share from discontinued operations - diluted
Net earnings (loss) per share - diluted
$ 0.11 $ 0.32 $ 0.12 $ (0.24)
$ 0.03 $ 0.02 $ 0.01 $ 0.02
$ 0.14 $ 0.34 $ 0.13 $ (0.22)
127
2016
Interest income
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Loss from continuing operations before income tax expense
Income tax expense (benefit)
Net loss from continuing operations
Net loss from discontinued operations, net of tax
Net loss available to common shareholders
Three months ended
March 31,
June 30,
September 30,
December 31,
(in thousands, except per share data)
$ 23,651 $ 23,944 $ 26,732 $ 27,892
24,978
1,550
(5,646)
42,128
(24,346)
2,557
(26,903)
(1,766)
(28,669)
20,556
-
18,688
55,138
(15,894)
(5,272)
(10,622)
(290)
$ (10,912)
20,890
1,060
9,540
57,136
(27,766)
(10,004)
(17,762)
(13,598)
(31,360)
23,542
750
19,904
44,171
(1,475)
55
(1,530)
(24,021)
(25,551)
Net loss per share from continuing operations - basic
Net loss per share from discontinued operations - basic
Net loss per share - basic
$ (0.28) $ (0.47) $ (0.03) $ (0.49)
$ (0.01) $ (0.36) $ (0.51) $ (0.03)
$ (0.29) $ (0.83) $ (0.54) $ (0.52)
Net loss per share from continuing operations - diluted
Net loss per share from discontinued operations - diluted
Net loss per share - diluted
$ (0.28) $ (0.47) $ (0.03) $ (0.49)
$ (0.01) $ (0.36) $ (0.51) $ (0.03)
$ (0.29) $ (0.83) $ (0.54) $ (0.52)
Note U—Condensed Financial Information—Parent Only
Condensed Balance Sheets
Assets
Cash and due from banks
Investment in subsidiaries
Other assets
Total assets
Liabilities and stockholders' equity
Other liabilities
Subordinated debentures
Stockholders' equity
Total liabilities and stockholders' equity
December 31,
2017
2016
(in thousands)
$ 15,270
312,961
9,347
$ 337,578
$ 28
13,401
324,149
$ 337,578
$ 8,271
295,788
8,328
$ 312,387
$ 23
13,401
298,963
$ 312,387
128
Condensed Statements of Operations
Income
Interest on intercompany loans
Other income
Total income
Expense
Interest on subordinated debentures
Non-interest expense
Total expense
Equity in undistributed income of subsidiaries
Income (loss) before tax benefit
Income tax benefit
Net income (loss) available to common shareholders
2017
For the year ended December 31,
2016
(in thousands)
2015
$ -
31,852
31,852
$ -
40,851
40,851
$ 4
36,283
36,287
586
37,465
38,051
25,097
18,898
(2,775)
$ 21,673
520
42,416
42,936
(94,407)
(96,492)
-
$ (96,492)
448
37,137
37,585
14,730
13,432
-
$ 13,432
129
Condensed Statements of Cash Flows
Operating activities
Net income (loss)
Decrease in other assets
Increase (decrease) in other liabilities
Stock based compensation expense
Equity in undistributed (income) loss
Net cash provided by operating activities
Investing activities
Net (increase) decrease in loans
Contribution to subsidiary
Net cash provided by (used in) investing activities
Financing activities
Proceeds from the issuance of common stock
Proceeds from advances from subsidiaries
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2017
Year ended December 31,
2016
(in thousands)
2015
$ 21,673
3,045
5
3,245
(25,097)
2,871
$ (96,492)
1,308
2
2,761
94,407
1,986
$ 13,432
1,580
(18)
1,975
(14,730)
2,239
-
-
-
-
(78,000)
(78,000)
3,857
(3,009)
848
-
4,128
4,128
6,999
8,271
$ 15,270
74,812
-
74,812
(1,202)
9,473
$ 8,271
-
-
-
3,087
6,386
$ 9,473
130
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 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, SBA loans, leasing and security backed lines of credit and any deposits generated by those business
lines. Payments include prepaid cards, card payments, ACH processing and healthcare accounts. Corporate includes the Company’s
investment portfolio, 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.
Interest income
Interest allocation
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income (loss) from continuing operations before taxes
Income taxes
Income (loss) from continuing operations
43,569
23,833
Income from discontinued operations
-
-
-
4,335
Net income (loss)
$ 43,569 $ 23,833 $ (50,064) $ 4,335 $ 21,673
For the year ended December 31, 2017
Specialty finance
Payments
Corporate
Discontinued
operations
Total
(in thousands)
$ 78,464 $ - $ 43,556 $ - $ 122,020
-
3,455
75,009
2,920
27,952
56,472
43,569
-
43,556
10,475
33,081
-
61,781
71,029
23,833
-
(43,556)
1,410
(1,410)
-
1,815
27,413
(27,008)
23,056
(50,064)
-
-
-
-
-
-
-
-
-
For the year ended December 31, 2016
Specialty finance
Payments
Corporate
Discontinued
operations
Total
$ 67,506 $ 2 $ 34,711 $ - $ 102,219
(in thousands)
-
2,958
64,548
3,360
(27,913)
64,266
(30,991)
-
34,711
7,554
27,159
-
63,172
117,888
(27,557)
-
(34,711)
1,741
(1,741)
-
7,228
16,420
(10,933)
(12,664)
1,731
-
-
-
-
-
-
-
-
-
-
-
-
(39,675)
$ (30,991)$ (27,557)$ 1,731 $ (39,675)$ (96,492)
131
-
15,340
106,680
2,920
91,548
154,914
40,394
23,056
17,338
4,335
-
12,253
89,966
3,360
42,486
198,573
(69,481)
(12,664)
(56,817)
(39,675)
Interest income
Interest allocation
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Loss from continuing operations before taxes
Income tax benefit
Loss from discontinued operations
Net income (loss)
Income (loss) from continuing operations
(30,991)
(27,557)
Interest income
Interest allocation
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income (loss) from continuing operations before taxes
Income taxes
For the year ended December 31, 2015
Specialty finance
Payments
Corporate
Discontinued
operations
Total
(in thousands)
$ 49,789 $ 11 $ 33,730 $ - $ 83,530
-
5,039
44,750
2,100
17,891
47,863
12,678
-
33,730
7,445
26,296
-
97,963
128,828
(4,569)
-
(33,730)
1,115
(1,115)
-
17,213
17,397
(1,299)
1,450
(2,749)
-
-
-
-
-
-
-
-
-
-
13,599
69,931
2,100
133,067
194,088
6,810
1,450
5,360
8,072
Income (loss) from continuing operations
12,678
(4,569)
Income from discontinued operations
-
-
-
8,072
Net income (loss)
$ 12,678 $ (4,569)$ (2,749) $ 8,072 $ 13,432
Specialty finance
Payments
Corporate
Discontinued
operations
Total
December 31, 2017
(in thousands)
Total assets
Total liabilities
$ 1,865,572 $ 29,615 $ 2,508,647 $ 304,313 $ 4,708,147
$ 653,952 $ 3,371,730 $ 358,316 $ - $ 4,383,998
Specialty finance
Payments
Corporate
Discontinued
operations
Total
December 31, 2016
(in thousands)
Total assets
Total liabilities
$ 2,019,180 $ 27,935 $ 2,450,288 $ 360,711 $ 4,858,114
$ 596,574 $ 3,401,142 $ 561,435 $ - $ 4,559,151
Note W—Discontinued Operations
The Company performed a strategic evaluation of its businesses in the third quarter of 2014 and decided to discontinue its
commercial lending operations and focus on its specialty finance lending. The loans which constitute the commercial loan portfolio
are in the process of disposition including sales to independent purchasers. As such, financial results of the commercial lending
operations are presented as separate from continuing operations on the consolidated statements of operations, and the assets of the
commercial lending operations to be disposed are presented as assets held for sale from discontinued operations on the consolidated
balance sheets.
132
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, 2017, 2016 and 2015.
Interest income
Interest expense
Provision for loan and lease losses
Net interest income after provision
Non-interest income
Non-interest expense
Income (loss) before taxes
Income tax (benefit) provision
Net income (loss)
Loans, net
Other assets
Total assets
For the year ended December 31,
2017
2016
(in thousands)
2015
$ 12,655
$ 18,275
$ 28,925
-
-
12,655
1,095
9,691
4,059
(276)
-
-
18,275
749
62,141
(43,117)
(3,442)
-
-
28,925
2,513
18,645
12,793
4,721
$ 4,335
$ (39,675)
$ 8,072
December 31,
2017
December 31,
2016
(in thousands)
$ 270,050
$ 340,396
34,262
20,315
$ 304,313
$ 360,711
Based upon an independent third-party review performed as of September 30, 2014, the first reporting date after
discontinuance of commercial loan operations, the Company marked the $1.20 billion commercial lending portfolio balance as of that
date to lower of cost or market. An independent third-party financial advisory firm assisted in the lower of cost or market valuation,
using the income approach in a discounted cash flow model. Large balance commercial loans were modeled on a loan level basis.
Small balance commercial loans were modeled on a pool basis where loans are grouped by common characteristics including loan
type, loan collateral, amortization type and coupon. The expected cash flows for the loans or pools were derived from the contractual
loan terms, adjusted for prepayments and credit considerations as applicable. An independent third party also assisted in the valuation
by reviewing the majority of the credit portfolio for credit inputs into the model. Subsequently, credit reviews were performed
internally. Based on that review, weighted average fair values were applied to the loans not specifically reviewed. Discount rates
used in the model were derived from observable market interest rates or credit spreads for comparable loans including national and
regional commercial loan pricing surveys, dealer market research and market pricing quotations for new issuance. Market quoted
interest rates were adjusted for the subject loan or pool to account for differences in loan characteristics including loan term, loan size,
loan vintage and loan credit quality. These analyses are performed at each quarterly and annual reporting period based on available
internal and external inputs including loan workout and loan review department inputs.
133
Various elements of the lower of cost or market valuation are as follows:
Measured on a recurring basis
Valuation techniques
Significant unobservable inputs
Range
Large balance commercial loans
Discounted cash flows
Discount rate
Small balance commercial loans
Discounted cash flows
Discount rate
3.89%-9.59%
4.39%-7.52%
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 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. The Company continues to pursue additional loan
dispositions. At December 31, 2017, the balance of WS 2014 was $74.5 million.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Members of our operational management and internal audit meet regularly to provide an established
structure to report any weaknesses or other issues with controls, or any matter that has not been reported previously, to our Chief
Executive Officer and Chief Financial Officer, and, in turn to the Audit Committee of our Board of Directors. In designing and
evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well
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
134
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, 2017 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, 2017.
Our independent registered public accounting firm, Grant Thornton LLP, audited our internal control over financial reporting
as of December 31, 2017. Their report dated March 16, 2018 appears below in this Item 9A.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of the fiscal year ended December 31, 2017, 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.
135
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, 2017, 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, 2017, 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, 2017, and our report dated March 16, 2018 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.
Philadelphia, Pennsylvania
March 16, 2018
136
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information included in the 2018 Proxy Statement to be filed is incorporated herein by reference
Item 11. Executive Compensation
Information included in the 2018 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 2018 Proxy Statement to be filed is incorporated herein by reference
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information included in the 2018 Proxy Statement to be filed is incorporated herein by reference
Item 14. Principal Accountant Fees and Services
Information included in the 2018 Proxy Statement to be filed is incorporated herein by reference
137
Item 15. Exhibits and Financial Statement Schedules.
PART IV
(a) The following documents are filed as part of this Annual Report on From 10-K:
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet at December 31, 2017 and 2016
Consolidated Statement of Operations for each of the three years in the period ended December 31, 2017
Consolidated Statement of Changes in Shareholders’ Equity for each of the three years in the period ended
December 31, 2017
Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2017
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Exhibits
Exhibit No. Description
3.1.1
3.1.2
3.1.3
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11.1
10.11.2
10.12
10.13
10.14
10.15
Certificate of Incorporation filed July 20, 1999, amended July 27, 1999, amended June 7, 2001, and amended
October 8, 2002 (1)
Amendment to Certificate of Incorporation filed July 30, 2009 (11)
Amendment to Certificate of Incorporation filed May 18, 2016 (11)
Amended and Restated Bylaws (12)
Specimen stock certificate (1)
1999 Stock Option Plan (the “1999 SOP”) (2)
Form of Grant of Non-Qualified Stock Options under the 1999 SOP (2)
Form of Grant of Incentive Stock Options under the 1999 SOP (2)
The Bancorp, Inc. 2005 Omnibus Equity Compensation Plan (the “2005 Plan”) (3)
Form of Grant of Non-Qualified Stock Option under the 2005 Plan (4)
Form of Grant of Incentive Stock Option under the 2005 Plan (4)
Form of Stock Unit Award Agreement under the 2005 Plan (5)
Stock Option and Equity Plan of 2011 (7)
Form of Grant of Nonqualified Stock Option under the 2011 Plan (6)
Form of Restricted Stock Unit Award Agreement (8)
The Bancorp, Inc. Stock Option and Equity Plan of 2013 (9)
Amendment One to Stock Option and Equity Plan of 2013 *
Form of Grant of Stock Option under the 2013 Plan (10)
Form of Grant of Stock Award under the 2013 Plan (10)
Sales Agreement dated December 30, 2014 among the Bancorp Bank and Walnut Street 2014-1 Issuer, LLC (13)
Amended Consent Order, Order for Restitution and Order to Pay Civil Money Penalty, dated December 23, 2015 (14)
138
10.16
10.17
10.18
10.19
10.20
10.21
12.1
21.1
23.1
31.1
31.2
32.1
32.2
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
Letter Agreement with Damian Kozlowski (15)
Letter Agreement with Hugh McFadden (15)
Letter Agreement with John Leto (15)
Securities Purchase Agreement, dated August 5, 2016, between The Bancorp, Inc. and each of the Investors (16)
Registration Rights Agreement, dated August 5, 2016, between The Bancorp, Inc. and each of the Investors (16)
Subscription Agreement, dated August 5, 2016, between The Bancorp, Inc. and the purchasers named therein (16)
Ratio of earnings to fixed changes *
Subsidiaries of Registrant *
Consent of Grant Thornton LLP *
Rule 13a-14(a)/15d-14(a) Certifications *
Rule 13a-14(a)/15d-14(a) Certifications *
Section 1350 Certifications *
Section 1350 Certifications *
Filed herewith.
Filed previously as an exhibit to our Registration Statement on Form S-4, registration number 333-117385, and by this
reference incorporated herein.
Filed previously as an exhibit to our Registration Statement on Form S-8, registration number 333-124339, and by this
reference incorporated herein.
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).
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).
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).
Filed previously as an exhibit to our Registration Statement on Form S-8, registration number 333-176208, and by this
reference incorporated herein.
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).
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).
Filed previously as an appendix to our proxy statement filed March 20, 2013, and by this reference incorporated herein (File
No. 000-51018).
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).
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).
Filed previously as an exhibit to our annual report on Form 10-K filed March 16, 2017 (File No. 000-51018).
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).
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).
139
(15)
(16)
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).
Filed previously as an exhibit to our current report on Form 8-K filed August 8, 2016, and by this reference incorporated
herein (File No. 000-51018).
140
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.
SIGNATURES
March 16, 2018
By:
/s/ Damian M. Kozlowski
DAMIAN M. KOZLOWSKI
Chief Executive Officer (principal executive officer)
/s/ Damian M. Kozlowski
DAMIAN M. KOZLOWSKI
Chief Executive Officer
(principal executive officer)
/s/ John C. Chrystal
JOHN C. CHRYSTAL
/s/ Daniel G. Cohen
DANIEL G. COHEN
/s/ Walter T. Beach
WALTER T. BEACH
/s/ Michael J. Bradley
MICHAEL J. BRADLEY
/s/ Matthew Cohn
MATTHEW COHN
/s/ William H. Lamb
WILLIAM H. LAMB
/s/ James J. McEntee III
JAMES J. MCENTEE III
/s/ Mei-Mei Tuan
EI-MEI TUAN
/s/ Hersh Kozlov
HERSH KOZLOV
/s/ John Eggemeyer
JOHN EGGEMEYER
/s/ Paul Frenkiel
PAUL FRENKIEL
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Executive Vice President of Strategy, Chief Financial
Officer and Secretary
(principal accounting officer)
141
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
AMENDMENT ONE
TO
THE BANCORP, INC.
STOCK OPTION AND EQUITY PLAN OF 2013
Exhibit 10.11.2
WHEREAS, The Bancorp, Inc. (the “Company”) maintains The Bancorp, Inc. Stock
Option and Equity Plan of 2013 (“the “Plan”) which was approved by the Company’s stockholders
on May 6, 2013; and
WHEREAS, the Company desires to amend the Plan to provide additional ways for
participants to satisfy tax withholding obligations; and
WHEREAS, Section 20 of the Plan provides that the Board of Directors of the Company
(the “Board”) may amend the Plan at any time, provided, however, that the Board shall not amend
the Plan without approval of the stockholders of the Company if such approval is required in order
to comply with the Internal Revenue Code of 1986, as amended (the “Code”), or applicable laws,
or to comply with applicable stock exchange requirements; and
WHEREAS, the Company’s common stock is traded on The Nasdaq Global Select Market
(the “NASDAQ”); and
WHEREAS, NASDAQ Rule 5635(c) generally requires stockholder approval when an
equity plan is established or materially amended; and
WHEREAS, NASDAQ Rule 5635(c) provides that a material amendment would include,
but is not limited to, any material increase in benefits to participants; and
WHEREAS, this Amendment One does not constitute a material increase in benefits to
participants; and
WHEREAS, the Code does not require shareholder approval of this Amendment One.
NOW THEREFORE, the Plan is hereby amended as follows effective as of January 18,
2018:
1.
Section 16 of the Plan is amended and restated to read in its entirety as follows:
“Tax Withholding.
(a)
Effective January 18, 2018, where a Participant is entitled to receive shares
of Stock upon the vesting of a Grant (excluding an Option), the Company
shall have the right to require or allow such Participant to pay to the
Company the amount of any tax that the Company is required to withhold
with respect to such vesting, or, in lieu thereof, to retain, or to sell (with or
without notice), a sufficient number of shares of Stock to cover the amount
required to be withheld. In addition, a Participant shall have the right to
direct the Company to satisfy the required federal, state and local tax
withholding by, with respect to Restricted Stock, SARs, Stock Units,
Performance Shares, Stock Awards, Dividend Equivalents or Other Stock-
Based Awards, withholding (or selling) a number of shares (based on the
Fair Market Value of TBBK on the date immediately prior to the vesting
date, or another method as determined by the Compensation Committee)
otherwise vesting that would satisfy the amount of required tax withholding,
and (iii) any other method as allowable by applicable law. Provided there
are no adverse accounting consequences to the Company (a requirement to
have liability classification of an award under FASB ASC Topic 718 is an
adverse consequence), a Participant who is not required to have taxes
withheld may require the Company to withhold in accordance with the
preceding sentence as if the award were subject to tax withholding
requirements.
(b)
For purposes of clarity, this Amendment does not apply to Section 7(g) of
the Plan which covers withholding for Incentive Stock Options and
Nonqualified Stock Options and consequently this Amendment does not
constitute a material modification of an Incentive Stock Option.”
IN WITNESS WHEREOF, the Board has adopted this Amendment on the date
set forth below.
THE BANCORP, INC.
January 17, 2018
Date
By: Paul Frenkiel
Its: Secretary
Ratio of Earnings to Fixed Charges
Exhibit 12.1
Pre tax income
Total fixed charges
Interest expense
Estimated interest portion of rent expense (1)
2017
2016
2015
2014
40,394
16,871
57,265
(69,481)
13,849
(55,632)
15,340
1,531
16,871
12,253
1,596
13,849
6,810
15,073
21,883
13,599
1,474
15,073
7,292
12,604
19,896
11,295
1,309
12,604
57,265
16,871
(55,632)
13,849
21,883
15,073
19,896
12,604
Earnings to combined fixed charges and preferred
stock dividend requirements including interest on
deposits
3.39
(4.02)
1.45
1.58
Ratio of earnings to fixed charges
3.39
(4.02)
1.45
1.58
(1) Estimated to be 33% of rent expense paid.
Subsidiaries of Registrant
Exhibit 21.1
The Bancorp Bank
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated March 16, 2018, with respect to the consolidated financial statements
and internal control over financial reporting included in the Annual Report of The Bancorp, Inc. on Form
10-K for the year ended December 31, 2017. We consent to the incorporation by reference of said reports
in the Registration Statements of The Bancorp, Inc. on Form S-3 (File No. 333-213977, effective October
18, 2016) and on Forms S-8 (File No. 333-124338 and File No. 333-124339, effective April 26, 2005,
File No. 333-130709, effective December 27, 2005, File No. 333-176208, effective August 10, 2011, File
No. 333-189014, effective May 31, 2013, File No. 333-210979, effective April 28, 2016).
March 16, 2018
Philadelphia, Pennsylvania
Exhibit 31.1
CERTIFICATION
I, Damian Kozlowski, certify that:
1. I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2017 of The
Bancorp, Inc. (the “Registrant”);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the Registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that
occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s
internal control over financial reporting.
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the Registrant’s auditors and the audit committee of the
Registrant’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 16, 2018
/S/ DAMIAN KOZLOWSKI
Damian Kozlowski
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Paul Frenkiel, certify that:
1. I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2017 of The
Bancorp, Inc. (the “Registrant”);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the Registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that
occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s
internal control over financial reporting.
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s
board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the Registrant’s internal control over financial reporting.
Date: March 16, 2018
/S/ Paul Frenkiel
Executive Vice President of Strategy,
Chief Financial Officer and Secretary
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Bancorp, Inc. (the “Company”) on Form 10-K for the fiscal year
ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I, Damian Kozlowski, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
March 16, 2018
Dated
/s/ DAMIAN KOZLOWSKI
Damian Kozlowski
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Bancorp, Inc. (the “Company”) on Form 10-K for the fiscal year
ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I, Paul Frenkiel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
March 16, 2018
Dated
/S/ Paul Frenkiel
Executive Vice President of Strategy,
Chief Financial Officer and Secretary
B O A R D O F D I R E C T O R S
Daniel Gideon Cohen
Chairman of the Board
John C. Chrystal
Vice Chairman of the Board
Damian Kozlowski
Chief Executive Officer and President
Walter T. Beach
Michael J. Bradley
Matthew Cohn
John Eggemeyer
Hersh Kozlov
William H. Lamb
James Joseph McEntee III
Mei-Mei Tuan
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