EMPOWERING
THE
WORLD’S
MOST
SUCCESSFUL
COMPANIES
A N N U A L R E P O R T 2 0 1 9
thebancorp.com | 409 Silverside Road, Suite 105 | Wilmington, DE 19809 | +1 302.385.5000
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DEDICATED
TO SERVING
THE UNIQUE
BANKING NEEDS
OF LEADING
FINANCIAL
SERVICES
COMPANIES
E X E C U T I V E T E A M
C O R P O R AT E H E A D Q U A R T E R S
Damian Kozlowski
Chief Executive Officer & President
Dianne Bjork
Executive Vice President
Co-Head of Payment Solutions,
Head of Financial Operations
Matt Carberry
Executive Vice President
Head of Payment Acceptance
Erika Caesar
Managing Director
Assistant General Counsel & Chief Diversity Officer
Mark Connolly
Executive Vice President
Chief Credit Officer & Head of Credit Markets
Paul Frenkiel
Executive Vice President
Chief Financial Officer & Secretary
409 Silverside Road
Suite 105
Wilmington, Delaware 19809
P: +1 302.385.5000
I N V E S TO R R E L AT I O N S
Andres Viroslav
P: +1 215.861.7990
E: InvestorRelations@thebancorp.com
T R A N S F E R A G E N T
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
P: + 1 800.937.5449
E: info@amstock.com
Greg Gary
Executive Vice President
Chief Operating Officer
Ryan Harris
Executive Vice President
Co-Head of Payment Solutions,
Head of Business Development
John Leto
Executive Vice President
Head of Institutional Banking
Jeff Nager
Executive Vice President
Head of Commercial Lending
Thomas G. Pareigat
Executive Vice President
General Counsel
Jennifer F. Terrry
Executive Vice President
Chief Human Resources Officer
Maria Wainwright
Executive Vice President
Chief Marketing Officer
Matt Wallace
Executive Vice President
Chief Information Officer
Ron Wechsler
Executive Vice President
Head of Real Estate Capital Markets
B O A R D O F D I R E C TO R S
Daniel Gideon Cohen
Chairman of the Board
Damian Kozlowski
Chief Executive Officer & President
Walter T. Beach
Michael J. Bradley
John C. Chrystal
Matthew Cohn
John Eggemeyer
Hersh Kozlov
William H. Lamb
James Joseph McEntee III
Daniela Mielke
Stephanie Mudick
Mei-Mei Tuan
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To our investors and all in The Bancorp Community,
2019 was a busy year for the TBBK team.
We completed our three-year plan to remediate, de-risk, and build our now highly profitable franchise,
and we didn't stop there. A new four-year plan was established in each of our business lines and
enterprise-wide to create an integrated, best-in-class platform to grab the opportunities of the rapidly
evolving financial services market.
Our financial results in 2019 continued to improve.
In the last three years, our team has relentlessly delivered greater efficiency and productivity while solving
major regulatory and infrastructure issues that prevented our success. Income growth accelerated as each
improvement in our ecosystem led to increases in client revenue and a lowering of transaction costs. Both
Gross Dollar Volume of our payment transactions and loan growth in our balance sheet showed
significant progress last year as we continued to expand our capabilities and enhance our products and
services.
We are preparing for the future every day.
We are energized by the business opportunities in front of us. While other banks dread the new entrants
in the marketplace and shifting consumer buying behavior, we absolutely embrace it as OUR future. The
most innovative companies in the world are represented in our portfolio of clients, and they need a
partner that can deliver and innovate along with them. Fin-Tech, Gig, and Digital are just the beginning
of a revolution in financial services that will enable each individual and reduce the friction in banking that
holds our economy back from its true potential. We are positioning ourselves as a key leader in the
industry by helping to define the future and not waiting for the future to define us.
We will be successful by building a broad, meaningful community.
We are not going at it alone. We are building the connectivity to empower our ecosystem like no other.
We value the ideas of everyone as we seek to create new paradigms. We set the standard for inclusion,
ethics, and true partnership. Our partners are not just business associates, our people are not just
employees, our regulators are not just government oversight, and our investors are not just stock
pickers...we are all part of the same community that values and embraces the future of banking.
I would like to thank everyone in our community for a great 2019. We look forward to an exciting future
with great enthusiasm. As we move through 2020, we acknowledge that the pandemic triggered by the
COVID-19 virus will impact the economy and banks. However, we strongly believe that our business
model will perform well in these times of dislocations.
Damian Kozlowski
CEO, The Bancorp, Inc.
President, The Bancorp Bank
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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, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 51018
The Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
409 Silverside Road, Wilmington, DE
(Address of principal executive offices)
Registrant’s telephone number, including area code: (302) 385-5000
Securities registered pursuant to Section 12(b) of the Act:
23-3016517
(IRS Employer
Identification No.)
19809
(Zip Code)
Title of each class
Common Stock, par value $1.00 per share
Trading Symbol(s)
TBBK
Name of each exchange on which registered
NASDAQ Global Select
None
Securities registered pursuant to Section 12(g) of the Act:
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, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
Smaller reporting company
Accelerated filer
Emerging growth company
Non-accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the common shares of the registrant held by non-affiliates of the registrant, based upon the closing price of such shares on June 30, 2019
of $8.92 was approximately $455.7 million.
As of March 1, 2020, 57,400,556 shares of common stock, par value $1.00 per share, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for registrant’s 2020 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.
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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
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:
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15:
SIGNATURES
Exhibits and Financial Statement Schedules
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45
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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;
operating costs may increase;
adverse governmental or regulatory policies may be promulgated;
management and other key personnel may be lost;
competition may increase;
the costs of our interest bearing liabilities, principally deposits, may increase relative to the interest received on our
interest bearing assets, principally loans, thereby decreasing our net interest income;
loan and investment yields may decrease resulting in a lower net interest margin;
possible geographic concentration could result in our loan portfolio being adversely affected by economic factors unique
to the geographic area and not reflected in other regions of the country;
the market value of real estate that secures certain of our loans, principally loans we originate for sale into secondary
markets, Small Business Administration loans under the 504 Fixed Asset Financing Program and our discontinued
commercial loan portfolio, has been, and may continue to be, adversely affected by recent economic and market
conditions, and may be affected by other conditions outside of our control such as lack of demand for real estate of the
type securing our loans, natural disasters, changes in neighborhood values, competitive overbuilding, weather, casualty
losses, occupancy rates and other similar factors;
we must satisfy our regulators with respect to Bank Secrecy Act, Anti-Money Laundering and other regulatory mandates
to prevent additional restrictions on adding customers and to remove current restrictions on adding certain customers;
1
the loans from our discontinued operations are now held-for-sale and were marked to fair value based on various internal
and external inputs; however, the actual sales price could differ from those third-party fair values. The reinvestment rate
for the proceeds of those sales in investment securities depends on future market interest rates; and
we may not be able to sustain our historical growth rate in our loan, prepaid and debit card and other lines of business.
We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this
report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by
applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated events.
2
PART I
Item 1. Business.
Overview
We are a Delaware financial holding company and our primary subsidiary is The Bancorp Bank, which we wholly own and
which we refer to as the Bank. The vast majority of our revenue and income is generated through the Bank. In our continuing
operations, we have four primary lines of specialty lending: securities-backed lines of credit (SBLOC) and insurance policy cash
value-backed lines of credit (IBLOC), leasing (direct lease financing), small business loans (SBL) and loans generated for sale into
capital markets through commercial loan securitizations and other sales (CMBS). SBL are comprised primarily of Small Business
Administration (SBA) loans. SBLOCs and IBLOCs are loans which are generated through institutional banking affinity groups and
are respectively collateralized by marketable securities and the cash value of insurance policies. SBLOCs are typically offered in
conjunction with brokerage accounts and are offered nationally. Vehicle fleet and other equipment leases are generated in a number
of Atlantic Coast and other states. SBL loans and commercial loans generated for sale are made nationally. At December 31, 2019,
SBLOC and IBLOC, leasing (direct lease financing), SBL and loans for sale in secondary markets respectively totaled $1.02 billion,
$434.5 million, $572.6 million (including SBL loans held-for-sale) and $960.2 million (excluding SBL loans held-for-sale),
respectively, and comprised approximately 34%, 14%, 19% and 32% of our loan portfolio and commercial loans held-for-sale. Our
investment portfolio amounted to $1.41 billion at December 31, 2019, representing a slight increase from the prior year.
The majority of our deposits and non-interest income are generated in our payments business line which consists of consumer
deposit accounts accessed by prepaid or debit cards, or issuing, automated clearing house, or ACH accounts and the collection of
payments through credit card companies on behalf of merchants. The issuing deposit accounts are comprised of debit and prepaid
card accounts that are generated with the assistance of independent companies that market directly to end users. Our issuing deposit
account types are diverse and include: consumer and business debit, general purpose reloadable prepaid, pre-tax medical spending
benefit, payroll, gift, government, corporate incentive, reward, business payment accounts and others. Our ACH accounts facilitate
bill payments and our acquiring accounts provide clearing and settlement services for payments made to merchants which must be
settled through associations such as Visa or MasterCard. We also provide banking services to organizations with a pre-existing
customer base tailored to support or complement the services provided by these organizations to their customers. These services
include loan and deposit accounts for investment advisory companies through our institutional banking department. We typically
provide these services under the name and through the facilities of each organization with whom we develop a relationship. We refer
to this, generally, as affinity banking.
Our main office is located at 409 Silverside Road, Wilmington, Delaware 19809 and our telephone number is (302) 385-
5000. Our web address is www.thebancorp.com. We make available free of charge on our website our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports and our proxy statements as soon as
reasonably practicable after we file them with the SEC. Investors are encouraged to access these reports and other information about
our business on our website, www.thebancorp.com. Information found on our website is not part of this Annual Report on Form
10-K. We also will provide copies of our Annual Report on Form 10-K, free of charge, upon written request to our Investor Relations
Department at our address for our principal executive offices, 409 Silverside Road, Wilmington, Delaware 19809. Also posted on our
website, and available in print upon request by any stockholder to our Investor Relations Department, are the charters of the standing
committees of our Board of Directors and standards of conduct governing our directors, officers and employees.
Our Strategies
Our principal strategies are to:
Fund our Loan and Investment Portfolio Growth with Stable Deposits and Generate Non-interest Income from Prepaid and
Debit Card Accounts and Other Payment Processing. Our principal focus is to grow our specialty lending operations and investment
portfolio, and fund these loans and investments through a variety of sources that provide stable deposits, which are lower cost
compared to certain other types of funding. Funding sources include prepaid and debit card accounts, institutional banking transaction
accounts and card payment processing. We derive the largest component of our deposits and non-interest income from our prepaid
and debit card operations.
3
Develop Relationships with Affinity Groups to Gain Sponsored Access to their Membership, Client or Customer Bases to
Market our Services. We seek to develop relationships with organizations with established membership, client or customer bases.
Through these affinity group relationships, we gain access to an organization’s members, clients and customers under the
organization’s sponsorship. We believe that by marketing targeted products and services to these constituencies through their pre-
existing relationships with the organizations, we will continue to generate stable and lower cost deposits compared to certain other
funding sources, generate fee income and, with respect to private label banking, lower our customer acquisition costs and build close
customer relationships.
Use Our Existing Infrastructure as a Platform for Growth. We have made significant investments in our banking
infrastructure to support our growth. We believe that this infrastructure can accommodate significant additional growth without
proportionate increases in expense. We believe that this infrastructure enables us to maximize efficiencies through economies of scale
as we grow without adversely affecting our relationships with our customers.
Deposit Products and Services
We offer a range of products and services to our affinity group clients and their customer bases through direct or private label
banking strategies, including:
checking accounts;
savings accounts;
money market accounts;
commercial accounts; and
various types of prepaid and debit cards.
We also offer payment services such as ACH bill payment and other payment services.
Lending Activities
In the third quarter of 2014, we discontinued our Philadelphia-based commercial lending operations following our
determination that those operations were inconsistent with our strategic focus on what we believe are lower risk and more granular and
national lines of business. We currently focus our lending activities upon four specialty lending segments: SBLOC and IBLOC loans,
vehicle fleet and other equipment leasing (direct lease financing), SBA loans and loans originated for sale into CMBS securitization
capital markets.
SBLOC and IBLOC. We make loans to individuals, trusts and entities which are secured by a pledge of marketable securities
maintained in one or more accounts with respect to which we obtain a securities account control agreement. The securities pledged
may be either debt or equity securities or a combination thereof, but all such securities must be listed for trading on a national
securities exchange or automated inter-dealer quotation system. SBLOCs are typically payable on demand. Most of our SBLOCs are
drawn to meet a specific need of the borrower (such as for bridge financing of real estate) and are typically drawn for 12 to 18 months
at a time. Maximum SBLOC line amounts are calculated by applying a standard ‘advance rate’ calculation against the eligible
security type depending on asset class: typically up to 50% for equity securities and mutual fund securities and 80% for investment
grade (Standard & Poor’s rating of BBB- or higher, or Moody’s rating of Baa3 or higher) municipal or corporate debt securities.
Borrowers generally must have a credit score of 660 or higher, although we may allow exceptions based upon a review of the
borrower’s income, assets and other credit information. Substantially all SBLOCs have full recourse to the borrower. The underlying
securities that act as collateral for our SBLOC commitments are monitored on a daily basis to confirm the composition of the client
portfolio and its daily market value. Although these accounts are closely monitored, severely falling markets or sudden drops in price
with respect to individual pledged securities could result in the loan being under-collateralized and consequently in default and, upon
sale of the collateral, could result in losses to the Bank. We also make similar loans which are collateralized by the cash surrender
value of insurance policies, or IBLOCs. Should a loan default, the primary risks for IBLOCs are if the insurance company issuing the
policy were to become insolvent, or if that company would fail to recognize the Bank’s assignment of policy proceeds. To mitigate
these risks, insurance company ratings are periodically evaluated for compliance with Bank standards. Additionally, the Bank utilizes
assignments of cash surrender value which legal counsel has concluded are enforceable.
4
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 termination value.
Termination value is a contractual value agreed to by the parties at the inception of a lease as to the value of the leased asset at the end
of the lease term. A closed-end lease is one for which no such payment is due on lease termination. In a closed-end lease, the risk that
the amount received on a sale of the leased asset will be less than the residual value is assumed by us, as lessor. While we do not have
specific underwriting criteria for our lease financing, we analyze information we obtain about the lessee, including financial
statements and credit reports, to determine the lessee’s ability to perform its obligations.
SBL Loans. SBL or small business loans consist primarily of SBA loans. We participate in two loan programs established by
the SBA: the 7(a) Loan Guarantee Program and the 504 Fixed Asset Financing Program. The 7(a) Loan Guarantee Program is
designed to help small business borrowers start or expand their businesses by providing partial guarantees of loans made by banks and
non-bank lending institutions for specific business purposes, including long or short term working capital; funds for the purchase of
equipment, machinery, supplies and materials; funds for the purchase, construction or renovation of real estate; and funds to acquire,
operate or expand an existing business or refinance existing debt, all under conditions established by the SBA. The terms of the loans
must come within parameters set by the SBA, including borrower eligibility, loan maturity, and maximum loan amount. 7(a) loans
must be secured by all available business assets and personal real estate until the recovery value equals the loan amount or until all
personal real estate of the borrower have been pledged. Personal guarantees are required from all owners of 20% or more of the
equity of the business, although lenders may also require personal guarantees of owners of less than 20%. Loan guarantees can range
up to 85% of loan principal for loans of up to $150,000 and 75% for loans in excess of that amount.
The SBA loan guaranty is typically paid to the lender after the liquidation of all collateral, but may be paid prior to
liquidation of certain assets, mitigating the losses due to collateral deficiencies up to the percentage of the guarantee. To maintain the
guarantee, we must comply with applicable SBA regulations, and we risk loss of the guarantee should we fail to comply. 7(a) loan
amounts are not limited to a percentage of estimated collateral value and are instead based on the business’s ability to repay the loan
from its cash flow. If the business generates inadequate cash flow to repay principal and interest and borrowers are otherwise unable
to repay the loan, losses may result if related collateral is sold for less than the unguaranteed balance of the loan. Because these loans
are generally at variable rates, higher rate environments will increase required payments from borrowers, with increased payment
default risk. As a result of a wide variety of collateral with very specific uses, markets for resale of the collateral may be limited,
which could adversely affect amounts realized upon sale. The 7(a) program is funded through annual appropriations approved by
Congress matching funding requirements for loans approved within the budget year. Should those appropriations be reduced or cease,
our ability to make 7(a) loans will be curtailed or terminated.
The 504 Fixed Asset Financing Program is designed to provide small businesses with financing for the purchase of fixed
assets, including real estate and buildings; the purchase of improvements to real estate; the construction of new facilities or
modernizing, renovating or converting existing facilities; the purchase of long-term machinery and equipment; and debt refinancing.
A 504 loan may not be used for working capital, trading asset purchases or investment in rental real estate. In a 504 financing, the
borrower must supply 10% of the financing amount, we provide 50% of the financing amount and a Certified Development Company,
or CDC, provides 40% of the financing amount. If the borrower has less than two years of operating history or if the assets being
financed are considered “special purpose,” the funding percentages are 15%, 50% and 35%, respectively. If both conditions are met,
the funding percentages are 20%, 50% and 30%, respectively. We receive a first lien on the assets being financed and the CDC
receives a second lien. Personal guarantees of the principal owners of the business are required. The funds for the CDC loans are
raised through a monthly auction of bonds that are guaranteed by the U.S. government and, accordingly, if the government guarantees
are curtailed or terminated, our ability to make 504 loans would be curtailed or terminated. Certain basic loan terms, as with the 7(a)
program, are established by the SBA, including borrower eligibility, maximum loan amount, maximum maturity date, interest rates
and loan fees. While real estate is appraised and values are established for other collateral, and the loan amount is limited to a
percentage of cost of the assets being acquired by the borrower, such amounts may not be realized upon resale if the borrower defaults
and the Bank forecloses on the collateral.
SBA 7(a) and 504 loans may include construction advances which are subject to risk inherent to construction projects,
including environmental risks, engineering defects, contractor risk, and risk of project completion. Delays in construction may also
compromise the owner’s business plan and result in additional stresses on cash flow required to service the loan. Higher than
expected construction costs may also result, impacting repayment capability and collateral values.
Additionally, the Bank makes SBA loans to franchisees of various business concepts, including loans to multiple franchisees
with the same concept. In making loans to franchisees, we consider franchisee failure rates for the specific franchise concept.
5
However, factors adversely affecting a specific type of franchisor or franchise concept, including in particular risks that a franchise
concept loses popularity with consumers or encounters negative publicity about its products or services, could harm the value not only
of a particular franchisee’s business but also of multiple loans to other franchisees with the same concept.
CMBS. We originate loans for sale or securitization into secondary markets. These loans are collateralized by various types
of commercial real estate, including but not limited to, multi-family, retail, office, apartments and hotels, and are not recourse to the
borrower (except for carve-outs such as fraud) and, accordingly, depend on cash reserves and cash generated by the underlying
properties for repayment. The vast majority of these loans are variable rate and, as a result, higher market rates will result in higher
payments and greater cash flow requirements, although all loans require an interest rate cap to mitigate that risk. Should cash flow and
available cash reserves prove inadequate to cover debt service on these loans, repayment will primarily depend upon the sales price of
the property. Low occupancy or rental rates may negatively impact loan repayment. Because these loans are being originated for sale,
the underwriting and other criteria used are those which buyers in the capital markets indicate are most crucial when determining
whether to buy the loans. Such criteria include the loan-to-value ratio and debt yield (net operating income divided by first mortgage
debt). However, for the period during which we hold a loan prior to sale, property values may fall below appraised values and below
the outstanding balance of the loan, which would reduce the price at which we could sell the loan. While we historically have been
able to sell loans into these markets, adverse market conditions may delay, or possibly preclude, expected sales into the secondary
market or cause losses upon any resale. To mitigate these risks, we establish guidelines for the maximum amounts of such loans we
will hold on our balance sheet.
Affinity Group Banking Products and Services
Card Issuing Services. We issue debit and prepaid cards to access diverse types of deposit accounts including: consumer
and business debit, general purpose reloadable prepaid, pre-tax medical spending benefit, payroll, gift, government, corporate
incentive, reward, business payment accounts and others. Our cards are offered to end users through our relationships with benefits
administrators, third-party administrators, insurers, corporate incentive companies, rebate fulfillment organizations, payroll
administrators, large retail chains, consumer service organizations and FinTech disruptors. Our cards are network-branded through
our agreements with Visa, MasterCard, and Discover. The majority of fees we earn result from contractual fees paid by third-party
sponsors, computed on a per transaction basis, and monthly service fees. Additionally, we earn interchange fees paid through
settlement associations such as Visa, which are also determined on a per transaction basis. These accounts have demonstrated a
history of stability and lower cost compared to certain other types of funding. Our accounts are offered throughout the United States.
For information relating to current constraints on our prepaid card programs resulting from consent orders we have entered into with
federal banking authorities, see “Risk Factors-Risks Relating to Our Business-The entry into the Consent Orders and the supervisory
letter from the Federal Reserve, have imposed certain restrictions and requirements on us and the Bank.”
Card Payment and ACH Processing. We act as the depository institution for the processing of credit and debit card
payments made to various businesses. We also act as the bank sponsor and depository institution for independent service
organizations that process such payments and for other companies, such as bill payment companies for which we process their ACH
payments. We have designed products that enable those organizations to more easily process electronic payments and to better
manage their risk of loss. These accounts are a source of demand deposits and fee income.
Institutional Banking. We have developed strategic relationships with limited-purpose trust companies, registered investment
advisers, broker-dealers and other firms offering institutional banking services. We provide customized, private label demand, money
market and securities backed loan products to the client base of these groups.
Private Label Banking. Through our private label banking strategy, we provide our affinity group partners with banking
services that have been customized to the needs of their respective customers. This allows these affinity groups to provide their
members the affinity-branded banking services they desire. Affinity group websites identify the Bank as the provider of these
banking services. We and the affinity group also may create products and services, or modify products and services already on our
menu, that specifically relate to the needs and interests of the affinity group itself, or the affinity group’s members or customers. Our
private label banking services have been developed to include both deposit and lending-related products and services.
We pay fees to certain affinity groups based upon deposits and loans they generate. These fees vary, and certain fees increase
as market interest rates increase, while other fee rates may be fixed. These fees comprise substantially all of the interest expense on
deposits in our consolidated statement of operations.
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Other Operations
Account Services. Depending upon the type of account, account holders may access our products through the website of their
affinity group, or through our website. This access allows account holders to apply for loans, review account activity, enter
transactions into an online account register, pay bills electronically, receive statements electronically and print statements.
Call 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 and debit card accounts;
call center customer support, including institutional banking for overflow and after-hours support;
access to automated teller machine networks;
bank accounting and general ledger system;
data warehousing services; and
certain software development.
Because we outsource these operational functions to experienced third-party service providers that have the capacity to
process a high volume of transactions, we believe we can more readily and cost-effectively respond to growth than if we sought to
develop these capabilities internally. Should any of our current relationships terminate, we believe we could maintain business
continuity by securing the required services from an alternative source without material interruption of our operations.
Sales and Marketing
Affinity Group Banking. Because of the national scope of our affinity group banking operation, we use a personal
sales/targeted media advertising approach to market to existing and potential commercial affinity group organizations. The affinity
group organizations with which we have relationships perform marketing functions to the ultimate individual customers. Our
marketing program to affinity group organizations consists of:
print advertising;
attending and making presentations at trade shows and other events for targeted affinity organizations;
direct mail; and
direct contact with potential affinity organizations by our marketing staff, with relationship managers focusing on
particular regional markets.
Loan Administration Offices. We maintain offices to market and administer our leasing programs in Crofton, Maryland,
Kent, Washington, Charlotte, North Carolina, Raritan, New Jersey, Logan, Utah, Norristown, Pennsylvania and Orlando, Florida. We
maintain SBA loan offices in Chicago, Illinois and suburban Raleigh, North Carolina. We maintain an office in New York, New York
for CMBS.
Technology
Primary System Architecture. We provide financial products and services through a secure, tiered architecture using
commercially available software and with third party providers whom we believe to be industry leaders. We maintain a platform of
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several web technologies, databases, firewalls, and licensed and proprietary financial services software to support our unique client
base. User activity is distributed across our service offering, with internally developed software as well as third-party platforms and
processors. We also use third-party data processors. The goal of our systems designs is to service our client requirements
efficiently, which has been accomplished using data and service replication between internal data centers and cloud platforms for our
critical applications. The system’s flexible architecture is designed to meet current capacity needs and allow expansion for future
demands. In addition to built-in redundancies, we monitor our systems using automated internal tools, and use independent third
parties to validate our controls.
Security. The Bancorp has an established Cyber Security Program that is mapped to the NIST Cyber Security Framework.
The program is also fully compliant with the FFIEC Cyber Security framework and relevant ISO standards. The Bancorp obtains
annual PCI certification. Highlights of the program include:
A security testing schedule which includes internal/external penetration testing;
Regular vulnerability assessments;
Detailed vulnerability management;
Monitoring and reporting of systems and critical applications;
Data loss prevention controls;
File access and integrity monitoring and reporting;
Threat intelligence; and
Third-party vendor management.
Intellectual Property and Other Proprietary Rights
A significant portion of the core and internet banking systems and operations we use comes from third-party providers.
Where applicable, we rely principally upon trade secret and trademark law to protect our intellectual property. We do not typically
enter into intellectual property-related confidentiality agreements with our affinity group customers because we maintain control over
the software used to create the sites and their banking functions rather than licensing them for customers to use. Moreover, we believe
that factors such as the relationships we develop with our affinity group and banking customers, the quality of our banking products,
the level and reliability of the service we provide, and the customization of our products and services to meet the needs of our affinity
groups are substantially more significant to our ability to succeed.
Competition
We compete with numerous banks and other financial institutions such as finance companies, leasing companies, credit
unions, insurance companies, money market funds, investment firms and private lenders, as well as online lenders and other non-
traditional competitors. Our primary competitors in each of our business lines differ significantly from those in our other business
lines principally because few financial institutions compete against us in all business segments in which we operate. For prepaid and
debit accounts, our largest source of funding and fee income, competitors include Meta Financial and for SBLOC, our largest lending
portfolio, competitors include TriState Capital and Goldman Sachs. For SBA loans our competitors include Live Oak Bank and for
leasing our competitors include Enterprise. Significant costs of entry include BSA and other regulatory costs which may impact
competition for prepaid and debit card accounts. 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;
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our perceived safety as a depository institution, including our size, credit rating, capital strength, earnings strength and
regulatory posture;
ease of use of our banking websites and other customer interfaces; and
the capacity, reliability and security of our network infrastructure.
If we experience difficulty in any of these areas, our competitive position could be materially adversely affected, which
would affect our growth, our profitability and, possibly, our ability to continue operations. With respect to our affinity group
operations, we believe we can compete effectively as a result of our ability to customize our product offerings to the affinity group’s
needs. We believe that the costs of entry to offering prepaid and debit card accounts, especially compliance costs, are relatively high
and somewhat prohibitive to new competitors. We have competed successfully with institutions much larger than ourselves; however,
many of our competitors have larger customer bases, greater name recognition, greater financial and other resources and longer
operating histories which may impact our ability to compete. Our future success will depend on our ability to compete effectively in a
highly competitive market.
Regulation Under Banking Law
Overview
We are regulated extensively under both federal and state banking law and related regulations. We are a Delaware
corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System, or the Federal
Reserve. We are subject to supervision and regulation by the Federal Reserve and the Delaware Office of the State Bank
Commissioner, or the Commissioner. The Bank, as a state-chartered, nonmember depository institution, is supervised by the
Commissioner, as well as the Federal Deposit Insurance Corporation, or FDIC.
The Bank is subject to requirements and restrictions under federal and state law, including requirements to maintain reserves
against deposits, restrictions on the types and amount of loans that may be made and the interest that may be charged, and limitations
on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations
also affect the Bank’s operations. Any change in the regulatory requirements and policies by the Federal Reserve, the FDIC, the
Commissioner, the United States Congress, or the states in which our customers reside could have a material adverse impact on us, the
Bank and our operations. We have entered into consent orders with the FDIC and have received a supervisory letter from the Federal
Reserve which have imposed certain restrictions upon us and the Bank. See “Risk Factors-Risks Relating to Our Business-The entry
into the Consent Orders, as amended, and a supervisory letter from the Federal Reserve have imposed certain restrictions and
requirements on us and the Bank.”
Certain regulatory requirements applicable to us and the Bank are referred to below or elsewhere in this report. The
description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations or their effects on
the Bank or us and is qualified in its entirety by reference to the actual statutes and regulations.
Federal Regulation
As a financial holding company, we are subject to regular examination by the Federal Reserve and must file annual reports
and provide any additional information that the Federal Reserve may request. Under the Bank Holding Company Act of 1956, as
amended, which we refer to as the BHCA, a financial holding company may not directly or indirectly acquire ownership or control of
more than 5% of the voting shares or substantially all of the assets of any bank, or merge or consolidate with another financial holding
company, without the prior approval of the Federal Reserve.
Permitted Activities. The BHCA generally limits the activities of a financial holding company and its subsidiaries to that of
banking, managing or controlling banks, or any other activity that is determined to be so closely related to banking or to managing or
controlling banks that an exception is allowed for those activities. These activities include, among other things, and subject to
limitations, operating a mortgage company, finance company, credit card company or factoring company; performing data processing
operations; the issuance and sale of consumer-type payment instruments; providing investment and financial advice; acting as an
insurance agent for particular types of credit related insurance and providing specified securities brokerage services for customers.
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Change in Control. The BHCA prohibits a company from acquiring control of a financial holding company without prior
Federal Reserve approval. Similarly, the Change in Bank Control Act, which we refer to as the CBCA, prohibits a person or group of
persons from acquiring “control” of a financial holding company unless the Federal Reserve has been notified and has not objected to
the transaction. In general, under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of any
class of voting securities of a financial holding company is presumed to be an acquisition of control of the holding company if:
the financial holding company has a class of securities registered under Section 12 of the Securities Exchange Act of
1934; or
no other person will own or control a greater percentage of that class of voting securities immediately after the
transaction.
An acquisition of 25% or more of the outstanding shares of any class of voting securities of a financial holding company is
conclusively deemed to be the acquisition of control. In determining percentage ownership for a person, Federal Reserve policy is to
count securities obtainable by that person through the exercise of options or warrants, even if the options or warrants have not then
vested.
The Federal Reserve has revised its minority investment policy statement, under which, subject to the filing of certain
commitments with the Federal Reserve, an investor can acquire up to one-third of our equity without being deemed to have engaged in
a change in control, provided that no more than 15% of the investor’s equity is voting stock. This revised policy statement also
permits non-controlling passive investors to engage in interactions with our management without being considered as controlling our
operations.
Regulatory Restrictions on Dividends. It is the policy of the Federal Reserve that financial holding companies should pay
cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is
consistent with the organization’s expected future needs and financial condition. The policy provides that financial holding companies
should not maintain a level of cash dividends that undermines the financial holding company’s ability to serve as a source of strength
to its banking subsidiaries. See “Holding Company Liability,” below. Federal Reserve policies also affect the ability of a financial
holding company to pay in-kind dividends.
Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding
companies without regulatory approval. The Bank is also subject to limitations under state law regarding the payment of dividends,
including the requirement that dividends may be paid only out of net profits. See “Delaware Regulation” below. In addition to these
explicit limitations, federal and state regulatory agencies are authorized to prohibit a banking subsidiary or financial holding company
from engaging in unsafe or unsound banking practices. Depending upon the circumstances, the agencies could take the position that
paying a dividend would constitute an unsafe or unsound banking practice. In August 2015, we consented to the issuance of a consent
order amendment pursuant to which the payment of dividends by the Bank to us would require prior FDIC approval, and received a
Federal Reserve supervisory letter pursuant to which any payment of dividends by us would require prior approval from the Federal
Reserve. The requirement for Federal Reserve approval was lifted in fourth quarter 2019 at which time the supervisory letter was
terminated. See “Risk Factors-Risks Relating to Our Business-The entry into the Consent Orders has imposed certain restrictions and
requirements on us and the Bank.”
Because we are a legal entity separate and distinct from the Bank, our right to participate in the distribution of assets of the
Bank, or any other subsidiary, upon the Bank’s or the subsidiary’s liquidation or reorganization will be subject to the prior claims of
the Bank’s or subsidiary’s creditors. In the event of liquidation or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors have priority of payment over the claims of holders of any obligation of the
institution’s holding company or any of the holding company’s shareholders or creditors.
Holding Company Liability. Under Federal Reserve policy, a financial holding company is expected to act as a source of
financial strength to each of its banking subsidiaries and commit resources to their support. The Dodd-Frank Wall Street Reform and
Consumer Protection Act, or the Dodd-Frank Act, codified this policy as a statutory requirement. Under this requirement, we are
expected to commit resources to support the Bank, including at times when we may not be in a financial position to provide such
resources. As discussed below under “Prompt Corrective Action,” a financial holding company in certain circumstances could be
required to guarantee the capital plan of an undercapitalized banking subsidiary.
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In the event of a financial holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be
deemed to have assumed, and is required to cure immediately, any deficit under any commitment by the debtor holding company to
any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
Capital Adequacy. The Federal Reserve and the FDIC have issued standards for measuring capital adequacy for financial
holding companies and banks. These standards are designed to provide risk-based capital guidelines and to incorporate a consistent
framework. The risk-based guidelines are used by the agencies in their examination and supervisory process, as well as in the analysis
of any applications. As discussed below under “Prompt Corrective Action,” a failure to meet minimum capital requirements could
subject us or the Bank to a variety of enforcement remedies available to federal regulatory authorities, including, in the most severe
cases, termination of deposit insurance by the FDIC and placing the Bank into conservatorship or receivership.
In general, these risk-related standards require banks and financial holding companies to maintain capital based on “risk-
adjusted” assets so that the categories of assets with potentially higher credit risk will require more capital backing than categories
with lower credit risk. In addition, banks and financial holding companies are required to maintain capital to support off-balance sheet
activities such as loan commitments.
As a result of the Dodd-Frank Act, our financial holding company status depends upon our maintaining our status as “well
capitalized” and “well managed” under applicable Federal Reserve regulations. If a financial holding company ceases to meet these
requirements, the Federal Reserve may impose corrective capital and/or managerial requirements on the financial holding company
and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies. In addition,
the Federal Reserve may require divestiture of the holding company’s depository institution if the deficiencies persist.
The standards classify total capital for this risk-based measure into two tiers, referred to as Tier 1 and Tier 2. Tier 1 capital
consists of common shareholders’ equity, certain non-cumulative perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, less certain adjustments. Tier 2 capital consists of the allowance for loan and lease losses (within certain
limits), perpetual preferred stock not included in Tier 1, hybrid capital instruments, term subordinate debt, and intermediate-term
preferred stock, less certain adjustments. Together, these two categories of capital comprise a bank’s or financial holding company’s
“qualifying total capital.” However, capital that qualifies as Tier 2 capital is limited in amount to 100% of Tier 1 capital in testing
compliance with the total risk-based capital minimum standards. Banks and financial holding companies must have a minimum ratio
of 8% of qualifying total capital to total risk-weighted assets, and a minimum ratio of 4% of qualifying Tier 1 capital to total risk-
weighted assets. At December 31, 2019, we and the Bank had total capital to risk-adjusted assets ratios of 19.45% and 19.11%,
respectively, and Tier 1 capital to risk-adjusted assets ratios of 19.04% and 18.71%, respectively.
In addition, the Federal Reserve and the FDIC have established minimum leverage ratio guidelines. The principal objective
of these guidelines is to constrain the maximum degree to which a financial institution can leverage its equity capital base. It is
intended to be used as a supplement to the risk-based capital guidelines. These guidelines provide for a minimum ratio of Tier 1
capital to adjusted average total assets of 3% for financial holding companies that meet certain specified criteria, including those
having the highest regulatory rating. Other financial institutions generally must maintain a leverage ratio of at least 3% plus 100 to
200 basis points. The guidelines also provide that financial institutions experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above minimum supervisory levels, without significant reliance on
intangible assets. Furthermore, the banking agencies have indicated that they may consider other indicia of capital strength in
evaluating proposals for expansion or new activities. At December 31, 2019, we and the Bank had leverage ratios of 9.63% and
9.46%, respectively.
The federal banking agencies’ standards provide that concentration of credit risk and certain risks arising from non-traditional
activities, as well as an institution’s ability to manage these risks, are important factors to be taken into account by them in assessing a
financial institution’s overall capital adequacy. The risk-based capital standards also provide for the consideration of interest rate risk
in the agency’s determination of a financial institution’s capital adequacy. The standards require financial institutions to effectively
measure and monitor their interest rate risk and to maintain capital adequate for that risk. These standards can be expected to be
amended from time to time.
The Dodd-Frank Act includes certain related provisions which are often referred to as the “Collins Amendment.” These
provisions are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate
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or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under the
Collins Amendment, trust preferred securities issued by a company, such as our company, with total consolidated assets of less than
$15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible
as regulatory capital. The federal banking regulators issued final rules setting minimum risk-based and leverage capital requirements
for holding companies and banks on a consolidated basis that are no less stringent than the generally applicable requirements in effect
for depository institutions under the prompt corrective action regulations discussed below and other components of the Collins
Amendment.
Basel III Capital Rules. In July 2013, our primary federal regulator, the Federal Reserve, and the Bank’s primary federal
regulator, the FDIC, approved final rules, which we refer to as the New Capital Rules, establishing a new comprehensive capital
framework for U.S. banking organizations. The New Capital Rules generally implement the Basel Committee on Banking
Supervision’s December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The
New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository
institution subsidiaries, including us and the Bank, as compared to the current U.S. general risk-based capital rules. The New Capital
Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in
banking institutions’ regulatory capital ratios. The New Capital Rules also address asset risk-weights and other matters affecting the
denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach, which was
derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-sensitive approach based, in part, on the
“standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition, the New Capital Rules implement
certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the
federal agencies’ rules. The New Capital Rules became effective for us and the Bank on January 1, 2015, subject to phase-in periods
for certain of their components and other provisions.
Among other matters, the New Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1,” or CET1
and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional
Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital
measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and
adjustments to capital as compared to existing regulations. Under the New Capital Rules, for most banking organizations, the most
common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is
subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New Capital Rules’ specific
requirements.
Minimum capital ratios in effect at December 31, 2019 were as follows:
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the
“leverage ratio”).
The New Capital Rules also introduce a new “capital conservation buffer”, composed entirely of CET1, on top of these
minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress.
Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will
face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in
on January 1, 2019, we and the Bank were required to maintain such additional capital conservation buffer of 2.5% of CET1,
effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of
at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss
carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such
category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
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In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss,
or AOCI, items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio)
under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the
effects of certain AOCI items are not excluded; however, non-advanced approaches banking organizations, including us and the Bank,
may make a one-time permanent election to continue to exclude these items. This election had to be made concurrently with the first
filing of certain of our and the Bank’s periodic regulatory reports in the beginning of 2015. We and the Bank made this election in
order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of
our securities portfolio. The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from
inclusion in bank holding companies’ Tier 1 capital, subject to grandfathering in the case of bank holding companies, such as us, that
had less than $15 billion in total consolidated assets as of December 31, 2009. Implementation of the deductions and other
adjustments to CET1 began on January 1, 2015 and are being phased-in over a 4-year period (beginning at 40% on January 1, 2015
and an additional 20% per year thereafter). The implementation of the capital conservation buffer began on January 1, 2016 at the
0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019.
With respect to the Bank, the New Capital Rules revise the “prompt corrective action” or PCA, regulations adopted pursuant
to Section 38 of the Federal Deposit Insurance Act, by: (i) introducing a CET1 ratio requirement at each PCA category (other than
critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1
capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to
the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have
a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement
for any PCA category.
The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories
from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories,
depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain
equity exposures, and resulting in higher risk weights for a variety of asset classes.
We believe that we and the Bank will continue to be able to meet targeted capital ratios. Actual ratios are shown in the
following paragraph.
Prompt Corrective Action. Federal banking agencies must take prompt supervisory and regulatory actions against
undercapitalized depository institutions pursuant to the Prompt Corrective Action provisions of the Federal Deposit Insurance Act.
Depository institutions are assigned one of five capital categories—“well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized,” and “critically undercapitalized”—and are subjected to differential regulation corresponding to the
capital category within which the institution falls. Under certain circumstances, a well-capitalized, adequately capitalized or
undercapitalized institution may be treated as if the institution were in the next lower capital category. As we describe in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” an
institution is deemed to be well capitalized if it has a total risk-based capital ratio of at least 10.00%, a Tier 1 risk-based capital ratio of
at least 6.50% and a leverage ratio of at least 5.00%. An institution is adequately capitalized if it has a total risk-based capital ratio of
at least 8.00%, a Tier 1 risk-based capital ratio of at least 4.50% and a leverage ratio of at least 4.00%. At December 31, 2019, our
total risk-based capital ratio was 19.45%, our Tier 1 risk-based capital ratio was 19.04% and our leverage ratio was 9.63% while the
Bank’s ratios were 19.11%, 18.71% and 9.46%, respectively and, accordingly, both we and the Bank were “well capitalized” within
the meaning of the regulations. A depository institution is generally prohibited from making capital distributions (including paying
dividends) or paying management fees to a holding company if the institution would thereafter be undercapitalized. Adequately
capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to
restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll over
brokered deposits. The majority of the Bank’s deposits are classified as brokered, because related accounts, primarily prepaid and
debit card deposit accounts, are obtained with the assistance of third parties. On December 12, 2019, the FDIC issued a proposed
notice of regulatory change which, if adopted, could result in the reclassification of the majority of our deposits to non-brokered, see
“Insurance of Deposit Accounts” below.
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Bank regulatory agencies are permitted or, in certain cases, required to take action with respect to institutions falling within
one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective powers
include, among other things:
prohibiting the payment of principal and interest on subordinated debt;
prohibiting the holding company from making distributions without prior regulatory approval;
placing limits on asset growth and restrictions on activities;
placing additional restrictions on transactions with affiliates;
restricting the interest rate the institution may pay on deposits;
prohibiting the institution from accepting deposits from correspondent banks; and
in the most severe cases, appointing a conservator or receiver for the institution.
A banking institution that is undercapitalized must submit a capital restoration plan. This plan will not be accepted unless,
among other things, the banking institution’s holding company guarantees the plan up to an agreed-upon amount. Any guarantee by a
depository institution’s holding company is entitled to a priority of payment in bankruptcy. Failure to implement a capital plan, or
failure to have a capital restoration plan accepted, may result in a conservatorship or receivership.
As noted above, the New Capital Rules became effective as of January 1, 2015, with the first measurement date as of March
31, 2015 subject to phased implementation in certain respects, and revised the PCA regulations. We are in compliance with these
rules.
Insurance of Deposit Accounts. The Bank’s deposits are insured to the maximum extent permitted by the Deposit Insurance
Fund or DIF. Upon enactment of the Emergency Economic Stabilization Act of 2008 on October 3, 2008, federal deposit insurance
coverage levels under the DIF temporarily increased from $100,000 to $250,000 per deposit category, per depositor, per institution,
through December 31, 2009. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase through
December 31, 2012. The Dodd-Frank Act permanently increases the maximum amount of deposit insurance to $250,000 per deposit
category, per depositor, per institution retroactive to January 1, 2008. The Dodd-Frank Act provided unlimited deposit insurance
coverage on non-interest bearing transaction accounts through December 31, 2012. Due to the expiration of this unlimited deposit
insurance on December 31, 2012, beginning January 1, 2013 deposits held in non-interest bearing transaction accounts are aggregated
with any interest bearing deposits the owner may hold in the same ownership category, and the combined total is insured up to at least
$250,000.
As the insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions.
The FDIC also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to
pose a serious threat to the DIF. The FDIC also has the authority to initiate enforcement actions against banks.
The FDIC has implemented a risk-based assessment system under which FDIC-insured depository institutions pay annual
premiums at rates based on their risk classification. A bank’s risk classification is based on its capital levels and the level of
supervisory concern the bank poses to the regulators. Institutions assigned to higher risk classifications (that is, institutions that pose a
greater risk of loss to the DIF) pay assessments at higher rates than institutions that pose a lower risk. A decrease in the Bank’s capital
ratios or the occurrence of events that have an adverse effect on a bank’s asset quality, management, earnings, liquidity or sensitivity
to market risk could result in a substantial increase in deposit insurance premiums paid by the Bank, which would adversely affect
earnings. In addition, the FDIC can impose special assessments in certain instances. The range of assessments in the risk-based
system is a function of the reserve ratio in the DIF. Each insured institution is assigned to one of four risk categories based on
supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category
to which it is assigned. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis
of financial ratios, examination component ratings and other information. Assessment rates are determined by the FDIC and,
including potential adjustments to reflect an institution’s risk profile, currently range from five to nine basis points for the healthiest
institutions (Risk Category I) to 35 basis points of assessable liabilities for the riskiest (Risk Category IV). Rates may be increased an
additional ten basis points depending on the amount of brokered deposits utilized. The above rates apply to institutions with assets
under $10 billion. Other rates apply for larger or “highly complex” institutions. The FDIC may adjust rates uniformly from one
quarter to the next, except that no single adjustment can exceed three basis points. At December 31, 2019, the Bank’s DIF assessment
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rate was 19 basis points. A reduction in the assessment rate will depend on future FDIC evaluations of the Bank. In December 2014,
the FDIC issued new guidance which reclassified the Bank’s prepaid card deposits and most other deposits as brokered deposits
because such deposits are obtained with the assistance of third parties. The reclassification resulted in a 10 basis point increase in our
assessment rate which is reflected in the increased FDIC insurance expense in subsequent periods. On December 12, 2019, the FDIC
issued a notice for a proposed regulatory change, which would reclassify certain brokered deposits obtained with the assistance of
third parties as non-brokered. The proposal requires an application to the FDIC, and if the proposal is adopted, we intend to apply for
the classification change. If the classification change is approved, our FDIC insurance expense could decrease depending on other
factors. However, there can be no assurance that the proposed regulation will be adopted, or that our application will be approved and
that FDIC insurance expense will decrease.
Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (DRR), that is, the ratio of the
DIF to insured deposits of the total industry. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of
1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the
effect on institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former
statutory minimum of 1.15%. The FDIC issued a final rule regarding this offset on March 25, 2016. Accordingly, the Bank received
an assessment credit for the portion of its assessment that offset the impact of the increase from 1.15% to 1.35%.
Loans-to-One Borrower. Generally, a bank may not make a loan or extend credit to a single or related group of borrowers in
excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and
surplus, if such loan is secured by specified collateral, generally readily marketable collateral (which is defined to include certain
financial instruments and bullion) and real estate. At December 31, 2019, the Bank’s limit on loans-to-one borrower was
$71.7 million ($119.5 million for secured loans).
Transactions with Affiliates and other Related Parties. There are various legal restrictions on the extent to which a financial
holding company and its non-bank subsidiaries can borrow or otherwise obtain credit from banking subsidiaries or engage in other
transactions with or involving those banking subsidiaries. The Bank’s authority to engage in transactions with related parties or
“affiliates” (that is, any entity that controls, is controlled by or is under common control with an institution, including us and our non-
bank subsidiaries) is limited by Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. Section
23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the Bank’s capital and surplus. At
December 31, 2019, we were not indebted to the Bank. The aggregate amount of covered transactions with all affiliates is limited to
20% of the Bank’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of
a type described in Section 23A and the purchase of low quality assets from affiliates are generally prohibited. Section 23B generally
provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Section 23A and 23B of the
Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for
which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded
through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits,
including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing
transactions. Restrictions are also placed on certain assets sales to and from an insider to an institution including requirements that
such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.
The Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities
controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
of the Federal Reserve. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable
features; and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate,
which limits are based, in part, on the amount of the Bank’s capital. In addition, extensions of credit in excess of certain limits must
be approved by the Bank’s board of directors. At December 31, 2019 and 2018, loans to these related parties included in assets held-
for-sale amounted to $2.3 million and $2.0 million.
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Standards for Safety and Soundness. The Federal Deposit Insurance Act requires each federal banking agency to prescribe
for all insured depository institutions standards relating to, among other things, internal controls, information and audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, fees, benefits and such other operational
and managerial standards as the agency deems appropriate. The federal banking agencies have adopted final regulations and
Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these safety and soundness standards. The
guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard.
Privacy. Financial institutions are required to disclose their policies for collecting and protecting confidential information.
Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third
parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial
institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may
not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other
marketing to consumers. The Bank has adopted privacy standards that we believe will satisfy regulatory scrutiny, and communicates
its privacy practices to its customers through privacy disclosures designed in a manner consistent with recommended model forms.
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.”
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On July 26, 2011, FinCEN issued a final rule expanding the reach of BSA-AML related compliance to certain defined
“providers” and “sellers” of “prepaid access” either outside of, or minimally regulated under the BSA. The final rule became effective
on September 27, 2011 and imposed expanded affirmative BSA-AML compliance obligations on providers and sellers of prepaid
access. The Bank has evaluated the impact of these rules on its operations and its third-party relationships, and has established
internal processes accordingly.
On May 11, 2016, FinCEN issued a final rule related to Customer Due Diligence (CDD) under the Bank Secrecy Act for
banks and other covered financial institutions, which we refer to as the “CDD Rule”. The CDD Rule became effective on July 11,
2016, and imposes a new requirement that the Bank identify and verify the identity of the natural persons who are beneficial owners of
legal entity customers. Financial institutions were required to be in full compliance by May 11, 2018. As a covered institution, the
Bank is required to maintain written compliance procedures that are “reasonably designed to identify and verify the beneficial owners
of legal entity customers,” except for those specifically excluded from the definition of “legal entity customer.” As required, the Bank
adopted procedures related to the identification and verification of a beneficial owner at the time a new account is opened.
USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, which we refer to as the USA PATRIOT Act, amended, in part, the BSA, by, in pertinent part,
criminalizing the financing of terrorism and augmenting the existing BSA framework by strengthening customer identification
procedures, requiring financial institutions to have due diligence procedures, including enhanced due diligence procedures and, most
significantly, improving information sharing between financial institutions and the U.S. government.
Under the USA PATRIOT Act, FinCEN can send bank regulatory agencies lists of the names of persons suspected of
involvement in terrorist activities or money laundering. The Bank must search its records for any relationships or transactions with
persons on those lists. If the Bank finds any relationships or transactions, it must report specific information to FinCEN and
implement other internal compliance procedures in accordance with the Bank’s BSA-AML compliance procedures.
Office of Foreign Assets Control Regulations for the Financial Community. The Office of Foreign Assets Control, which we
refer to as OFAC, is a division of the U.S. Treasury Department, and administers and enforces economic and trade sanctions based on
U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and
those engaged in activities related to the proliferation of weapons of mass destruction. OFAC functions under the President’s wartime
and national emergency powers, as well as under authority granted by specific legislation, to impose controls on transactions and
freeze assets under U.S. jurisdiction. In addition, many of the sanctions are based on United Nations and other international mandates,
and typically involve close cooperation with allied governments. OFAC maintains lists of names of persons and organizations
suspected of aiding, harboring or engaging in terrorist acts, as well as sanctions programs for certain countries. If the Bank finds a
name on any transaction, account or wire transfer that is on an OFAC list or is otherwise asked to facilitate a transaction prohibited
under a government sanctions program, the Bank must freeze or block such account or reject a transaction, and perform additional
procedures as required by OFAC regulations. The Bank filters its customer base and transactional activity against OFAC-issued lists.
The Bank performs these checks utilizing purpose directed software, which is updated each time a modification is made to the lists
provided by OFAC and other agencies.
Unfair or Deceptive or Abusive Acts or Practices. Section 5 of the Federal Trade Commission Act prohibits all persons,
including financial institutions, from engaging in any unfair or deceptive acts or practices in or affecting commerce. The Dodd-Frank
Act codifies this prohibition, and expands it even further by prohibiting “abusive” practices as well. These prohibitions, which we
refer to as UDAAP, apply in all areas of the Bank, including marketing and advertising practices, product features, terms and
conditions, operational practices, and the conduct of third parties with whom the Bank may partner or on whom the Bank may rely in
bringing Bank products and services to consumers.
Other Consumer Protection-Related Laws and Regulations. The Bank is subject to a wide range of consumer protection laws
and regulations which may have an enterprise-wide impact or may principally govern its lending or deposit operations. To the extent
the Bank engages third-party service providers in any aspect of its products and services, these third parties may also be subject to
compliance with applicable law, and must therefore be subject to Bank oversight.
The Bank’s loan operations are also subject to federal consumer protection laws applicable to credit transactions, including:
the federal “Truth in Lending Act,” governing disclosures of credit terms to consumer borrowers;
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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.
In addition, interest and other charges collected or contracted for by the Bank will be subject to state usury laws and federal
laws concerning interest rates.
The deposit operations of the Bank are subject to various consumer protection laws including but not limited to:
the “Truth in Savings Act,” which imposes disclosure obligations to enable consumers to make informed decisions about
accounts at depository institutions;
the “Right to Financial Privacy Act,” which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
the “Expedited Funds Availability Act,” which establishes standards related to when financial institutions must make
various deposit items available for withdrawal, and requires depository institutions to disclose their availability policies
to their depositors;
the “Electronic Fund Transfer Act,” which governs electronic fund transfers to and withdrawals from deposit accounts
and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking
services; and
the rules and regulations of various federal agencies charged with the responsibility of implementing these federal laws.
Final Prepaid Account Rule Amending Regulation E and Regulation Z. On April 1, 2019, a final rule issued by the CFPB
went into effect related to prepaid accounts and the applicability of provisions of Regulation E and Regulation Z, respectively, which
we call the Final Prepaid Rule.
The Final Prepaid Rule includes a significant number of changes to the regulatory framework for prepaid products, some of
which include: (a) establishing a definition of “prepaid account” within Regulation E that includes reloadable and non-reloadable
physical cards, as well as codes or other devices, and focuses on how the product is issued and used; (b) modifying Regulation E to
require that short form and long form disclosures be provided to a consumer prior to a consumer agreeing to acquire a prepaid account
with certain exceptions and with specified forms that, if used, would provide a safe harbor for financial institutions; (c) extending to
prepaid accounts the periodic transaction history and statement requirements of Regulation E currently applicable to payroll and
Federal government benefit accounts; (d) extending the error resolution and limited liability provisions of Regulation E currently
applicable to payroll cards to registered network branded prepaid cards; (e) requiring financial institutions to post prepaid account
agreements to the issuers’ websites and to submit them to the CFPB; (f) extending Regulation Z’s credit card rules and disclosure
requirements to prepaid accounts that provide overdraft protection and other credit features; (g) requiring an issuer to obtain a prepaid
account holder’s consent prior to adding overdraft services or other credit features and prohibiting the issuer from adding overdraft
services or other credit features for at least 30 calendar days after a consumer registers the prepaid account; and (h) prohibiting the
application of different terms and conditions, such as charging different fees, to a prepaid account depending on whether the consumer
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elects to link the prepaid account to overdraft services or other credit features. The Bank has evaluated the impact of the Final Prepaid
Rule on its operations and its third-party relationships, and has established internal processes accordingly.
Community Reinvestment Act. Under the Community Reinvestment Act of 1977, which we refer to as the CRA, a federally-
insured institution has a continuing and affirmative obligation to help meet the credit needs of its community, including low-and
moderate-income neighborhoods, consistent with the safe and sound operation of the institution. The bank shall delineate one or more
assessment areas within which the FDIC evaluates the bank's record of helping to meet the credit needs of its community. The CRA
further requires that a record be kept of whether a financial institution meets its community’s credit needs, which record will be taken
into account when evaluating applications for, among other things, domestic branches and mergers and acquisitions. The regulations
promulgated pursuant to the CRA contain three evaluation tests which are part of the traditional CRA evaluation:
a lending test evaluates a bank's record of helping to meet the credit needs of its assessment area(s) through its lending
activities by considering a bank's home mortgage, small business, small farm, and community development lending;
a service test, evaluates a bank's record of helping to meet the credit needs of its assessment area(s) by analyzing both the
availability and effectiveness of a bank's systems for delivering retail banking services and the extent and innovativeness
of its community development services; and
an investment test evaluates a bank's record of helping to meet the credit needs of its assessment area(s) through
qualified investments that benefit its assessment area(s) or a broader statewide or regional area that includes the bank's
assessment area(s).
As an alternative to the traditional evaluation tests summarized above, the CRA permits a financial institution to develop its
own strategic plan setting forth specific goals for CRA compliance and related performance ratings. If approved by its regulator, a
financial institution may operate under its strategic plan and CRA ratings will be applied based on an institution’s performance under
its approved strategic plan.
The Bank operates its CRA program under an FDIC-approved CRA Strategic Plan. The Bank now operates under an
approved plan for the period of January 1, 2020 through December 31, 2020. On July 3, 2019, the Bank received its 2018 CRA
Performance Evaluation which was completed on November 11, 2018. The Bank was assigned a “Satisfactory” CRA rating. The
Bank continues to closely monitor its performance in alignment with its CRA Strategic Plan to meet the specified lending, service and
investment requirements contained therein.
On January 9, 2020, the FDIC and the Comptroller of the Currency issued a joint notice of proposed rulemaking to strengthen
the CRA regulations by clarifying which activities qualify for CRA credit, updating where activities count for CRA credit, creating a
more transparent and objective method for measuring CRA performance, and providing for more transparent, consistent, and timely
CRA-related data collection, recordkeeping, and reporting. The Bank is evaluating the impact of these proposed rules on the Bank
and its Strategic Plan.
Enforcement. Under the Federal Deposit Insurance Act, the FDIC has the authority to bring actions against a bank and all
affiliated parties, including stockholders, attorneys, appraisers and accountants, who knowingly or recklessly participate in wrongful
actions likely to have an adverse effect on the bank. Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers and/or directors, to institution of receivership or conservatorship proceedings, or
termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even
$1 million per day in especially egregious cases. Federal law also establishes criminal penalties for certain violations.
Federal Reserve System. Federal Reserve regulations require banks to maintain non-interest bearing reserves against their
transaction accounts (primarily demand deposits and regular checking accounts). For 2019, Federal Reserve regulations generally
required that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $110.6 million or less
(subject to adjustment by the Federal Reserve), the reserve requirement is 3%; and, for accounts aggregating greater than
$110.6 million, the reserve requirement is 10% (subject to adjustment by the Federal Reserve to between 8% and 14%). The first
$16.0 million of otherwise reservable balances (subject to adjustments by the Federal Reserve) are exempt from the reserve
requirements. At December 31, 2019, the Bank met these requirements by maintaining $314.7 million in cash and balances at the
Federal Reserve.
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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;
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
20
impact on our business, financial condition, liquidity or results of operations. We cannot predict whether, or in what form, any
proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.
Economic Growth, Regulator Relief, and Consumer Protection Act of 2018. On May 24, 2018, the Economic Growth,
Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was signed into law, which amended provisions of the Dodd-Frank
Act and was intended to ease regulatory burden and refine the rules, particularly with respect to smaller-sized institutions such as the
Company. EGRRCPA’s highlights include, among other things: (i) exempts banks with less than $10 billion in assets from the ability-
to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) waives certain appraisal requirements for
certain transactions valued at less than $400,000 in rural areas; (iii) clarifies that, subject to various conditions, reciprocal deposits of
another depository institution obtained using a deposit broker through a deposit placement network for purposes of obtaining
maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations; (iv) raises
eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (v) simplifies capital calculations by
requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (tangible equity to average
consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general
applicable risk-based capital requirements for determining well capitalized status.
Volcker Rule Adoption. On December 10, 2013, five financial regulatory agencies, including our primary federal regulators
the Federal Reserve and the FDIC, adopted final rules (the “Final Volcker Rules”) implementing the Volcker Rule embodied in
Section 13 of the Bank Holding Company Act, which was added by Section 619 of the Dodd-Frank Act. The Final Volcker Rules
prohibit banking entities from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership
interests in and relationships with hedge funds or private equity funds (“covered funds”). The Final Volcker Rules also require each
regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered
by the Final Volcker Rules, which must include (for the largest entities) making regular reports about those activities to regulators.
Smaller banks and community banks, including the Bank, are afforded some relief under the Final Volcker Rules. Smaller banks,
including the Bank, that are engaged only in exempted proprietary trading, such as trading in U.S. government, agency, state and
municipal obligations, are exempt from compliance program requirements. Moreover, even if a community or small bank engages in
proprietary trading or covered fund activities under the Final Volcker Rules, they need only incorporate references to the Volcker Rule
into their existing policies and procedures. The Final Rules became effective April 1, 2014, but the conformance period was extended
from its statutory end date of July 21, 2014 until July 21, 2017. This did not have a material impact on our operations.
Consumer Protections for Remittance Transfers. On February 7, 2012, the CFPB published a final rule to implement Section
1073 of the Dodd-Frank Act. The final rule creates a comprehensive set of consumer protections for remittance transfers sent by
consumers in the United States to parties in foreign countries. The final rule, among other things, mandates certain disclosures and
consumer cancellation rights for foreign remittances covered by the rule.
Federal Regulatory Guidance on Incentive Compensation. On June 21, 2010, federal banking regulators released final
guidance on sound incentive compensation policies for banking organizations. This guidance, which covers all employees that have
the ability to materially affect the risk profile of an organization either individually or as part of a group, is based upon key principles
including: (1) incentive compensation arrangements at a banking organization should provide employees incentives that appropriately
balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk;
(2) these arrangements should be compatible with effective controls and risk-management; and (3) these arrangements should be
supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. The final
guidance seeks to address the safety and soundness risks of incentive compensation practices to ultimately be sure that compensation
practices are not structured in a manner to give employees incentives to take imprudent risks. Federal regulators intend to actively
monitor the actions being taken by banking organizations with respect to incentive compensation arrangements and will review and
update their guidance as appropriate to incorporate best practices that emerge.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation
arrangements of banking organizations such as ours that are not considered “large, complex banking organizations.” These reviews
will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive
compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will
be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take
other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related
risk-management controls or governance processes, pose a risk to the organization’s safety and soundness and the organization is not
taking prompt and effective measures to correct the deficiencies.
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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 Law and Regulation and Other State Laws and Regulations
General. As a Delaware financial holding company, we are subject to the supervision of and periodic examination by the
Delaware Office of the State Bank Commissioner and must comply with the reporting requirements of the Delaware Office of the
State Bank Commissioner. The Bank, as a banking corporation chartered under Delaware law, is subject to comprehensive regulation
by the Delaware Office of the State Bank Commissioner, including regulation of the conduct of its internal affairs, the extent and
exercise of its banking powers, the issuance of capital notes or debentures, any mergers, consolidations or conversions, its lending and
investment practices and its revolving and closed-end credit practices. The Bank also is subject to periodic examination by the
Delaware Office of the State Bank Commissioner and must comply with the reporting requirements of the Delaware Office of the
State Bank Commissioner. The Delaware Office of the State Bank Commissioner has the power to issue cease and desist orders
prohibiting unsafe and unsound practices in the conduct of a banking business.
Limitation on Dividends. Under Delaware banking law, the Bank’s directors may declare dividends on common or preferred
stock of so much of its net profits as they judge expedient; but the Bank must, before the declaration of a dividend on common stock
from net profits, carry 50% of its net profits of the preceding period for which the dividend is paid to its surplus fund until its surplus
fund amounts to 50% of its capital stock and thereafter must carry 25% of its net profits for the preceding period for which the
dividend is paid to its surplus fund until its surplus fund amounts to 100% of its capital stock. The Bank’s payment of dividends is
also governed by federal banking laws and regulations promulgated by the FDIC, and by an amendment to the 2014 Consent Order
with the FDIC which provides that any payment of dividends by the Bank must receive prior approval from the FDIC.
Other State Laws and Regulations. The Bank is governed by other state laws and regulations in connection with some of its
business and operational practices. This includes, for example, complying with state laws governing abandoned or unclaimed
property, state and local licensing requirements and other state-based rules which direct how the Bank may conduct its activities.
Employees
As of December 31, 2019, we had 612 full-time employees and believe our relationships with our employees to be good. Our
employees are not employed under a collective bargaining agreement.
Item 1A. Risk Factors
Risks Relating to Our Business
Our business may be affected materially by various risks and uncertainties. Any of the risks described below or elsewhere in
this Annual Report on Form 10-K or our other SEC filings, as well as other risks we have not identified, may have a material
negative impact on our financial condition and operating results.
The Bank’s allowance for loan losses may not be adequate to cover actual losses.
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Like all financial institutions, the Bank maintains an allowance for loan losses to provide for probable losses inherent in its
loan portfolio. At December 31, 2019, the ratios of the allowance for loan losses to total loans and to non-performing loans were,
respectively, 0.56% and 113.0%. The Bank’s allowance for loan losses may not be adequate to cover actual loan losses and future
provisions for loan losses could materially and adversely affect the Bank’s operating results. The Bank’s allowance for loan losses is
determined by management after analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem
loan resolution, changes in the size and composition of the loan portfolio and industry information. Also included in management’s
estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which are uncertain. The
determination by management of the allowance for loan losses involves a high degree of subjectivity and requires management to
estimate current and future credit risk based on both qualitative and quantitative facts, each of which is subject to significant change.
The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest
rates that may be beyond the Bank’s control, and these loan losses may exceed current estimates. Bank regulatory agencies, as an
integral part of their examination process, review the Bank’s loans and allowance for loan losses. Although we believe that the
Bank’s allowance for loan losses is adequate to provide for probable losses and that the methodology used by the Bank to determine
the amount of both the allowance and provision is effective, we cannot assure you that we will not need to increase the Bank’s
allowance for loan losses, change our methodology for determining our allowance and provision for loan losses or that our regulators
will not require us to increase this allowance. Any of these occurrences could materially reduce our earnings and profitability and
could result in our sustaining losses. For more information about risks which are specific to the different types of loans we make and
which could impact the allowance for loan losses, see Item 1,” Business –Lending Activities.”
Recent changes to the FASB accounting standards will result in a significant change to our recognition of credit losses and
may materially impact our financial condition or results of operations.
In June 2016, the FASB issued an update to Accounting Standards Update (ASU or Update) 2016-13 – “Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The Update changes the
accounting for credit losses on loans and debt securities. For loans and held-to-maturity debt securities, the Update requires a current
expected credit loss (CECL) approach to determine the allowance for credit losses. CECL requires loss estimates for the remaining
estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Also, the
Update eliminates the existing guidance for purchased credit impaired loans, but requires an allowance for purchased financial assets
with more than insignificant deterioration since origination. In addition, the Update modifies the other-than-temporary impairment
model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows
for reversal of credit impairments in future periods based on improvements in credit. The CECL model will materially impact how we
determine our allowance for loan and lease losses and may require us to significantly increase our allowance for loan and lease
losses. Furthermore, our allowance for loan and lease losses may experience more fluctuations, some of which may be significant.
Were we required to significantly increase our allowance for loan and lease losses, it may negatively impact our business, earnings,
financial condition and results of operations. We expect that the transition to the CECL model will result in an increase in the
allowance for credit losses given the change to estimated losses over the contractual life of the asset adjusted for expected
prepayments, an additional allowance for the uninsured portion of SBA loan commitments and the potential addition of an allowance
for debt securities. The amount of the increase will be impacted by the portfolio composition and credit quality at the adoption date as
well as economic conditions and forecasts at that time. If we are required to materially increase our level of allowance for loan and
lease losses for any reason, such increase could adversely affect our business, financial condition and results of operations. The
guidance is effective in first quarter 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of
adoption.
The Bank may suffer losses in its loan portfolio despite its underwriting practices.
The Bank seeks to mitigate the risks inherent in its loan portfolio by adhering to specific underwriting practices. These
practices vary depending on the facts and circumstances of each loan. For other than SBLOC and IBLOC loans, these practices may
include analysis of a borrower’s prior credit history, financial statements, tax returns and cash flow projections, valuation of certain
types of collateral based on reports of independent appraisers and verification of liquid assets. For SBLOC loans, a primary element
of the credit decision is the market value of the borrower’s brokerage account, which is reduced by the varying collateral percentages
against which the Company is willing to lend, resulting in excess collateral. Rapid excessive movements in the market value of
brokerage accounts might not be sufficiently offset by the excess collateral and losses could result. For example, we typically lend
against 50% of the value of equity securities. For IBLOC, the credit decision is primarily based upon the cash value of insurance
policies which may ultimately be dependent upon the insurer for repayment. Although the Bank believes that its underwriting criteria
are appropriate for the various kinds of loans it makes, the Bank may incur losses on loans that meet its underwriting criteria, and
these losses may exceed the amounts set aside as reserves in the Bank’s allowance for loan losses. In addition, only certain SBA loans
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are 75% guaranteed by the U.S. government, and even for those, we still assume credit risk on the remaining 25%. These borrowers,
which include new start-ups, may have a higher probability of failure which may result in higher losses on such loans. If the level of
non-performing assets increases, interest income will be reduced. If we experience loan defaults in excess of amounts that we have
included in our allowance for loan losses, we will have to increase the provision for loan losses which will reduce our income and
might cause us to incur losses. At the time loans are classified as troubled debt restructurings, losses are recognized if the fair value of
collateral is less than the loan balance. For more information about the risks which are specific to the different types of loans we make
and which could impact loan losses, see Item 1,” Business –Lending Activities.”
An inconsistent recovery from an extended period of weak economic and slow growth conditions in the U.S. economy have
had, and may continue to have, significant adverse effects on our assets and operating results.
Since the end of the recession in 2009, the United States economy has been subject to low rates of growth in general and, in
particular localities, recession-like conditions have occurred. As a result, the financial system in the United States, including credit
markets and markets for real estate and real-estate related assets, have periodically been subject to weakness. These weaknesses have
episodically resulted in declines in the availability of credit, reduction in the values of real estate and real estate-related assets, the
reduction of markets for those assets and impairment of the ability of certain borrowers to repay their obligations. As a result of these
conditions, we increased our provision for loan losses, and experienced increases in the amount of loans charged off and non-
performing assets in our Philadelphia-based commercial loan portfolio which is now reflected in discontinued operations. Rated
investment securities, generally considered to be less risky than loans, have in recent economic periods, in certain instances,
experienced greater than expected losses, which could recur. A continuation of weak economic conditions could further harm our
financial condition and results of operations.
We are subject to extensive government regulation and supervision.
We and our subsidiary, The Bancorp Bank, are subject to extensive federal and state regulation and supervision. Banking
regulations are primarily intended to protect customers, depositors’ funds, the federal deposit insurance funds and the banking system
as a whole, not stockholders. These regulations affect the Bank’s lending practices, capital structure and requirements, investment
activities, dividend policy, product offerings, expansionary strategies and growth, among other things. The legal and regulatory
landscape is frequently changing as Congress and the regulatory agencies having jurisdiction over our operations adopt or amend
laws, or change interpretation of existing statutes, regulations or policies. These changes could affect the Company and the Bank in
substantial and unpredictable ways. Additionally, while we have policies and procedures designed to prevent violations of the
extensive federal and state regulations that we are subject to, there can be no assurance that such violations will not occur. Failure to
comply with these statutes, regulations or policies could result in sanctions against us or the Bank by regulatory agencies, civil money
penalties, criminal penalties, reputational damage, and a downgrade in the Bank’s ratings for capital adequacy, asset quality,
management, earnings, liquidity and market sensitivity, any of which alone or in combination could have a material adverse effect on
our financial condition and results of operations.
The entry into the Consent Orders has imposed certain restrictions and requirements upon us and the Bank.
The Bank entered into a Stipulation and Consent to the Issuance of a Consent Order effective August 7, 2012, which we refer
to as the 2012 Consent Order. The Bank took this action without admitting or denying any charges of unsafe or unsound banking
practices or violations of law or regulation. Under the 2012 Consent Order, the Bank agreed to increase its supervision of third-party
relationships, develop new written compliance and related internal audit compliance programs, develop a new third-party risk
management program and screen new third-party relationships as provided in the 2012 Consent Order. As part of the 2012 Consent
Order, the Bank agreed to pay a civil money penalty in the amount of $172,000, which was paid in 2012. The 2012 Consent Order
was amended and restated in 2015 as noted below.
On June 5, 2014, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC, which
we refer to as the 2014 Consent Order. The Bank took this action without admitting or denying any charges of unsafe or unsound
banking practices or violations of law or regulation relating to the Bank’s BSA compliance program. The 2014 Consent Order
requires the Bank to take certain affirmative actions to comply with its BSA obligations. Satisfaction of the requirements of the 2014
Consent Order is subject to the review of the FDIC and the Delaware State Bank Commissioner. The Bank has and expects to
continue to expend significant management and financial resources to address the Bank’s BSA compliance program. Expenses
associated with the required look back review were significant in 2015 and 2016. The look back review was completed in the third
quarter of 2016.
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The 2014 Consent Order restricts the Bank from signing and boarding new independent sales organizations, establishing new
non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related
payments until the Bank submits to the FDIC and the Delaware State Bank Commissioner a report summarizing the completion of
certain BSA-related corrective actions (“BSA Report”). Until the BSA Report is approved by the FDIC and Delaware State Bank
Commissioner, those aspects of the growth of our card payment processing and prepaid card operations will be affected, which, unless
offset by growth from existing customers and new customers in other areas of our prepaid card operations, could reduce growth of our
deposits and non-interest income and, possibly, limit our ability to raise additional capital on acceptable terms. The Bank provided the
FDIC and the Delaware State Bank Commissioner with the required BSA Report as of December 31, 2019 and it is under review by
the regulators.
On August 27, 2015, the Bank entered into an Amendment to Consent Order, or the 2014 Consent Order Amendment, with
the FDIC, amending the 2014 Consent Order. The Bank took this action without admitting or denying any additional charges of
unsafe or unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA
compliance program. The 2014 Consent Order Amendment provides that the Bank shall not declare or pay any dividend without the
prior written consent of the FDIC and for certain assurances regarding management.
On May 11, 2015, the Federal Reserve issued a letter, or the Supervisory Letter, to us as a result of the 2014 Consent Order
and the 2014 Consent Order Amendment (which, at the time of the Supervisory Letter, was in proposed form), which provides that we
shall not pay any dividends on our common stock or make any interest payments on our trust preferred securities, without the prior
written approval of the Federal Reserve. It further provides that we may not incur any debt (excluding payables in the ordinary course
of business) or redeem any shares of our stock, without the prior written approval of the Federal Reserve. The requirement for such
approval was lifted by the Federal Reserve in the fourth quarter of 2019, and that letter was terminated at that time.
On December 23, 2015, the Bank entered into a Stipulation and Consent to the Issuance of an Amended Consent Order,
Order for Restitution, and Order to Pay Civil Money Penalty with the FDIC, which we refer to as the 2015 Consent Order. The Bank
took this action without admitting or denying any charges of violations of law or regulation. The 2015 Consent Order amended and
restated in its entirety the terms of the 2012 Consent Order.
The 2015 Consent Order was based on FDIC allegations regarding electronic fund transfer, or EFT, error resolution practices,
account termination practices and fee practices of various third parties with whom the Bank had previously provided, or currently
provides, deposit-related products, whom we refer to as Third Parties. The 2015 Consent Order continues the Bank's obligations
originally set forth in the 2012 Consent Order, including its obligations to increase board oversight of the Bank's compliance
management system, or CMS, improve the Bank's CMS, enhance its internal audit program, increase its management and oversight of
Third Parties, and correct any apparent violations of law.
In addition to restating the general terms of the 2012 Consent Order, the 2015 Consent Order directs the Bank’s Board of
Directors to establish a Complaint and Error Claim Oversight and Review Committee, which we refer to as the Complaint and Error
Claim Committee to review and oversee the Bank’s processes and practices for handling, monitoring and resolving consumer
complaints and EFT error claims (whether received directly or through Third Parties) and to review management's plans for correcting
any weaknesses that may be found in such processes and practices. The Bank’s Board of Directors appointed the required Complaint
and Error Claim Committee on January 29, 2016.
The 2015 Consent Order also requires the Bank to implement a corrective action plan, or CAP, to remediate and provide
restitution to those prepaid cardholders who asserted or attempted to assert, or were discouraged from initiating EFT error claims, and
to provide restitution to cardholders harmed by EFT error resolution practices. The 2015 Consent Order requires that if, through the
CAP, the Bank identifies prepaid cardholders who have been adversely affected by a denial or failure to resolve an EFT error claim,
the Bank will ensure that monetary restitution is made. The Bank completed its implementation of the CAP on January 15, 2020. As
of the completion date, $1,592,469.20 of restitution was paid to consumers of which $4,352.61 was paid by the Bank and the
remaining amount by Third Parties.
The 2015 Consent Order also imposed a $3 million civil money penalty on the Bank, which the Bank has paid and which was
recognized as expense in the fourth quarter of 2015.
On March 7, 2018, the Bank entered into a Stipulation and Consent to Order for Restitution and Order To Pay Civil Money
Penalty with the FDIC, which we refer to as the 2018 Restitution Order and 2018 CMP Order, respectively. The Bank took this action
without admitting or denying any alleged violations of law or regulation. The FDIC’s action principally emanated from one of the
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Bank’s third-party payment processors (“Third-Party Processor”) that suffered an internal system programming glitch. This
inadvertently resulted in consumers that engaged in signature-based point of sale transactions during the period from December 2010
to November 2014 being charged a greater fee than what was disclosed by the Bank. The FDIC alleged the Bank’s incorrect fee
imposition due to the Third-Party Processor error was an unfair or deceptive act or practice and violated Section 5 of the Federal Trade
Commission Act. The 2018 CMP Order imposed a $2 million civil money penalty on the Bank which the Bank has paid, and was
recognized as expense on September 30, 2017. The civil money penalty was not subject to any indemnification or recovery from any
third party.
The 2018 Restitution Order required the Bank to develop a written Restitution Plan, subject to independent audit and FDIC
non-objection, to ensure impacted consumers are compensated for any incorrectly charged fees. The 2018 Restitution Order required
the Bank to make such reimbursements if not otherwise made by the Third-Party Processor and the Bank is indemnified by the Third-
Party Processor for such reimbursements. Impacted consumers were reimbursed by the Third-Party Processor at its own expense. On
December 19, 2019, the FDIC concluded the Bank had fully complied with the 2018 Restitution Order and issued an order terminating
the 2018 Restitution Order.
On December 18, 2019, the Bank’s Board of Directors, without admitting or denying any violations of law, regulation or the
provisions of the 2014 Consent Order, executed a Stipulation and Consent to the Issuance of an Order to Pay Civil Money Penalty in
the amount of $7.5 million based on supervisory findings during the period of 2013 to 2019 related principally to deficiencies in the
Bank’s legacy Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Programs and alleged violations of law during the period, as
well as the length of time the Bank has taken to fully implement the corrective actions required by the 2014 Consent Order. The Bank
paid this amount, and it was recognized as an expense in the Company’s financial statements in the fourth quarter of 2019.
We cannot assure you that our regulators will ultimately determine that we have met all of the requirements of the 2014
Consent Order, the 2014 Consent Order Amendment, and the 2015 Consent Order, collectively, the Consent Orders, to their
satisfaction. If our regulators believe that we have not made sufficient progress in complying with these Consent Orders, they could
seek to impose additional regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties. If any
of these measures is imposed in the future, it could reduce our earnings, result in our incurring losses or otherwise materially adversely
affect our financial condition and results of operations and reduce or eliminate our ability to raise additional capital on acceptable
terms. Further, we are at risk of the imposition of additional civil money penalties by our regulators, based on, among other things,
apparent violations of law, repeat violations, or supervisory determinations of non-compliance with any consent order. Depending on
the circumstances, the imposition and size of any such penalty is at the discretion of the regulator. While the Bank is contractually
indemnified for related losses, civil money penalties, if assessed against the Bank, are not recoverable from third parties.
Our reputation and business could be damaged by our entry into the Consent Orders and any future enforcement matters
with our regulators and other negative publicity.
Reputational risk, or the risk to our business, earnings and capital from negative publicity, is inherent in our business.
Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending
practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from
actions taken by regulators and others as a result of that conduct. Damage to our reputation, including as a result of negative publicity
associated with the Consent Orders, or future regulatory enforcement actions, could impact our ability to attract new and maintain
existing loan and deposit customers, employees and business relationships, and could result in the imposition of additional regulatory
requirements, operational restrictions, enhanced supervision and/or civil money penalties. Such damage could also adversely affect
our ability to raise additional capital on acceptable terms.
The provisions contained in the Consent Orders present interpretive challenges that may give rise to a difference of
interpretation by us and our regulators.
The provisions of the Consent Orders are subject to interpretation and may give rise to differing views between us and our
regulators with respect to their scope and application. Accordingly, management, employees at all levels, and legal counsel of the
Bank face significant challenges in applying the terms of the Consent Orders to the myriad factual scenarios that arise in the ordinary
course of business. While we have sought, and will continue to seek, guidance from our regulators as to the application of the Consent
Orders on our business, there can be no assurance that our regulators will provide such guidance or that we and our regulators will
interpret the terms of the Consent Orders uniformly in every instance.
26
If the regulators interpret the Consent Orders in a manner contrary to our interpretation despite our good faith efforts to
comply, including the time required to comply, the FDIC may conclude a violation has occurred, which may result in the imposition
of additional regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties.
We may have difficulty managing our growth which may divert resources and limit our ability to expand our operations
successfully.
Our future profitability will depend in part on our continued ability to grow; however, we may not be able to sustain our
historical growth rate or be able to grow. Our future success will depend on the ability of our officers and key employees to continue
to implement and improve our operational, financial and management controls, reporting systems and procedures and manage a
growing number of customer relationships. We may not implement improvements to our management information and control
systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. Consequently, any future
growth may place a strain on our administrative and operational infrastructure. Any such strain could increase our costs, reduce or
eliminate our profitability and reduce the price at which our common shares trade.
New lines of business, and new products and services may result in exposure to new risks and the value and earnings related to
existing lines of business are subject to market conditions.
The Bank has introduced, and in the future, may introduce new products and services to differing markets either alone or in
conjunction with third parties. New lines of business, products or services could have a significant impact on the effectiveness of our
system of internal controls or the controls of third parties and could reduce our revenues and potentially generate losses. There are
material inherent risks and uncertainties associated with offering new products and services, especially when new markets are not
fully developed or when the laws and regulations regarding a new product are not mature. New products and services, or entrance into
new markets, may require substantial time, resources and capital, and profitability targets may not be achieved. Factors outside of our
control, such as developing laws and regulations, regulatory orders, competitive product offerings and changes in commercial and
consumer demand for products or services may also materially impact the successful launch and implementation of new products or
services. Failure to manage these risks, or failure of any product or service offerings to be successful and profitable, could have a
material adverse effect on our financial condition and results of operations. Additionally, there are uncertainties regarding the market
values of existing lines of business which are difficult to measure and are subject to market conditions which may change
significantly. We originate significant amounts of loans for sale or securitization in the CMBS markets which are subject to changes
in market conditions at the time of sale, and the sales price realized may accordingly change significantly. Should planned sales of
loans not take place, credit risks would increase, as loans would be held on the balance sheet as interest earning assets for longer
periods. These loans are accounted for at market value, and a decrease in such value would reduce income and might also impact
potential sales, and resulting gains on sale. These loans were underwritten as if they would be held on the balance sheet, to address
the possibility of market disruptions delaying or precluding sales. Holding the loans on balance sheet would result in additional
interest income, but might impact the level of new originations and future potential gain on sale.
Changes in interest rates and loan production could reduce our income, cash flows and asset values.
A significant portion of our income and cash flows depends on the difference between the interest rates we earn on interest
earning assets, such as loans and investment securities, and the interest rates we pay on interest bearing liabilities such as deposits and
borrowings. The value of our assets, and particularly loans with fixed or capped rates of interest, may also vary with interest rate
changes. We discuss the effects of interest rate changes on the market value of our portfolio and net interest income in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Asset and Liability Management.”
Interest rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of
various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes
in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we
pay on deposits, but also our ability to originate loans and obtain deposits and our costs in doing so. If the rate of interest we pay on
our deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest
income, and therefore our earnings, could decline or we could sustain losses. Our earnings could also decline or we could sustain
losses if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings. While the
Bank is generally asset sensitive, which implies that significant increases in market rates would generally increase margins, while
decreases in interest rates would generally decrease margins, we cannot assure you that increases or decreases in margins will follow
such a pattern in the future. Our net interest income is also determined by our level of loan production to replace loan payoffs and to
grow our different loan portfolios. In the case of loans held-for-sale into secondary markets or securitizations, loans must be originated
to replace loans sold to maintain related net interest income. Loan demand may vary for economic and competitive reasons and we
27
cannot assure you that historical rates of loan growth will continue or as to other loan production. Net interest income is difficult to
project, and our models for making such projections are theoretical. While they may indicate the general direction of changes in net
interest income, they do no indicate actual future results. In March 2020, the Federal Reserve instituted an emergency rate cut of 50
basis points, and additional rate cuts may still occur in response to economic and other conditions. These decreases will decrease net
interest income, to the extent the reduction is not offset with the impact of loan growth.
We are subject to lending risks.
There are risks inherent in making all loans. These risks include interest rate changes over the time period in which loans
may be repaid and changes in the national economy or local economies in which our borrowers operate. Such changes may impact the
ability of our borrowers to repay their loans or the value of the collateral securing those loans. Although we have discontinued our
Philadelphia-based commercial lending operations, we still hold a significant number of commercial, construction and commercial
mortgage loans, some with relatively large balances. The deterioration of one or a few of these loans would cause a significant
increase in non-performing loans, notwithstanding that such loans are now held-for-sale. Weak economic conditions have caused
increases in our delinquent and defaulted loans in recent years. We cannot assure you that we will not experience further increases in
delinquencies and defaults or that any such increases will not be material. On a consolidated basis, an increase in non-performing
loans could result in an increase in our provision for loan losses or in loan charge-offs and consequent reductions in our earnings. Our
specialty lending operations are subject to additional risks including, with respect to our SBA loans, the risk that the U.S.
Government’s partial guaranty on SBA loans is withdrawn due to noncompliance with regulations. For more information about the
risks which are specific to the different types of loans we make and which could impact our allowance for loan losses, see Item 1,”
Business –Lending Activities.”
There is a significant concentration in prepaid and debit card fee income which is subject to various risks.
We realize a significant portion of our revenues from prepaid and debit card and other prepaid products and services.
Actions by government agencies relating to service charges, or increased regulatory compliance costs, could result in reductions in
income which may not be offset by reductions in expense. Some of our clients have significant volume, the loss of which would
materially affect our revenues. The top ten largest contributors to prepaid, debit card and related fees account for 63% of such fees.
Prepaid and debit card deposits comprise a significant portion of the Bank’s deposits.
Regulatory and legal requirements applicable to the prepaid and debit card industry are unique and frequently changing.
Achieving and maintaining compliance with frequently changing legal and regulatory requirements requires a significant
investment in qualified personnel, hardware, software and other technology platforms, external legal counsel and consultants and other
infrastructure components. These investments may not ensure compliance or otherwise mitigate risks involved in this business. Our
failure to satisfy regulatory mandates applicable to prepaid financial products could result in actions against us by our regulators, legal
proceedings being instituted against us by consumers, or other losses, each of which could reduce our earnings or result in losses,
make it more difficult to conduct our operations, or prohibit us from conducting specific operations. Other risks related to prepaid
cards include competition for prepaid, debit and other payment mediums, possible changes in the rules of networks, such as Visa and
MasterCard and others, in which the Bank operates and state regulations related to prepaid cards including escheatment.
The potential for fraud in the card payment industry is significant.
Issuers of prepaid and debit cards and other companies have suffered significant losses in recent years with respect to the
theft of cardholder data that has been illegally exploited for personal gain. The theft of such information is regularly reported and
affects individuals and businesses. Losses from various types of fraud have been substantial for certain card industry
participants. The Bank in many cases has indemnification agreements with third parties; however, such indemnifications may not
fully cover losses. Although fraud has not had a material impact on the profitability of the Bank, it is possible that such activity could
impact the Bank in the future.
Risk management processes and strategies must be effective, and concentration of risk increases the potential for losses.
Our risk management processes and strategies must be effective, otherwise losses may result. We manage asset quality,
liquidity, market sensitivity, operational, regulatory, third-party vendor and partner relationship risks and other risks through
various processes and strategies throughout the organization. If our risk management judgments and strategies are not effective, or
unanticipated risks arise, our income could be reduced or we could sustain losses.
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We may depend in part upon wholesale and brokered certificates of deposit to satisfy funding needs.
We may rely in part on funds provided by wholesale deposits and brokered certificates of deposit to support the growth of
our loan portfolio. Wholesale and brokered certificates of deposit are highly sensitive to changes in interest rates and, accordingly,
can be a more volatile source of funding. Use of wholesale and brokered deposits involves the risk that growth supported by such
deposits would be halted, or the Bank’s total assets could contract, if the rates offered by the Bank were less than those offered by
other institutions seeking such deposits, or if the depositors were to perceive a decline in the Bank’s safety and soundness, or both. In
addition, if we were unable to match the maturities of the interest rates we pay for wholesale and brokered certificates of deposit to the
maturities of the loans we make using those funds, increases in the interest rates we pay for such funds could decrease our
consolidated net interest income. Moreover, if the Bank ceases to be categorized as “well capitalized” under banking regulations, it
will be prohibited from accepting, renewing or rolling over brokered deposits without the consent of the FDIC.
Our prepaid and debit card and other deposit accounts obtained with the assistance of third parties have been classified as
brokered.
In December 2014, the FDIC issued new guidance classifying prepaid deposit accounts and other deposit accounts obtained
in cooperation with third parties as brokered, resulting in the vast majority of the Bank’s deposits being classified as brokered. We do
not believe that these deposits are subject to the volatility risks associated with brokered wholesale deposits or brokered certificates of
deposit. However, if the Bank ceases to be categorized as “well capitalized” under banking regulations, it will be prohibited from
accepting, renewing or rolling over brokered deposits without the consent of the FDIC. In such a case, the FDIC’s refusal to grant
consent to our accepting, renewing or rolling over brokered deposits could effectively restrict or eliminate the ability of the Bank to
operate its business lines as presently conducted.
We operate in highly competitive markets.
We face substantial competition in all phases of our operations from a variety of different competitors, including commercial
banks and their holding companies, credit unions, leasing companies, consumer finance companies, factoring companies, insurance
companies and money market mutual funds and card issuers. In 2018, the Office of the Comptroller of the Currency announced that it
would begin to accept and evaluate charters for entities that wanted to conduct certain components of a banking business pursuant to a
federal charter, known as a "special purpose national bank" ("SPNB") charter. Intended to promote economic opportunity and spur
financial innovation, SPNBs may engage in any of the following activities: paying checks, lending money or taking deposits. If any
such applications are granted, recipients of an SPNB charter may enter the U.S. payments market in which the Bank operates, which
could have a material adverse effect on the Bank and its Payments division.
We face national and even global competition with respect to our other products and services, including payment acceptance
products and services, private label banking, fleet leasing, government guaranteed lending and payment solutions. Our commercial
partners and banking customers for these products and services are located throughout the United States, and the competition is strong
in each category. We encounter competition from some of the largest financial institutions in the world as well as smaller specialized
regional banks and financial service companies. Increased competition with any of these product or service offerings could result in
reduced pricing and lower profit margins, fragmented market share and a failure to enjoy economies of scale, loss of customer and
depositor base, and other risks that individually, or in the aggregate, could have a material adverse effect on our financial condition
and results of operations.
Some of the financial services organizations with which we compete are not subject to the same degree of regulation as
federally-insured and regulated financial institutions such as ours. As a result, those competitors may be able to access funding and
provide various services more easily or at less cost than we can.
We derive a significant percentage of our deposits, total assets and income from deposit accounts generated with the assistance
of diverse independent companies, including those which provide card account marketing services, and investment advisory
firms.
Deposit accounts acquired with the assistance of our top twenty affinity relationships totaled $4.21 billion at December 31,
2019. The top twenty relationships result in the majority of our payments related income. We provide oversight over these
relationships which must meet all internal and regulatory requirements. We may exit relationships where such requirements are not
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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, 2019 to any one customer or related group of customers was $71.7 million
for unsecured loans and $119.5 million for secured loans. Our lending limit is substantially smaller than that of many financial
institutions with which we compete. While we believe that our lending limit is sufficient for our targeted market of small to mid-size
businesses within the four specialty lending operations upon which we focus as well as affinity group members, it may in the future
affect our ability to attract or maintain customers or to compete with other financial institutions. Moreover, to the extent that we incur
losses and do not obtain additional capital, our lending limit, which depends upon the amount of our capital, will decrease.
Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances
were discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of
the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether
we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at
another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor
operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit use of properties
we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In
addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure
to environmental liability.
As a financial institution whose principal medium for delivery of banking services is the internet, we are subject to risks
particular to that medium and other technological risks and costs.
We utilize the internet and other automated electronic processing in our banking services without physical locations, as
distinguished from the internet banking service of an established conventional bank. Independent internet banks often have found it
difficult to achieve profitability and revenue growth. Several factors contribute to the unique problems that internet banks face. These
include concerns for the security of personal information, the absence of personal relationships between bankers and customers, the
absence of loyalty to a conventional hometown bank, the customer’s difficulty in understanding and assessing the substance and
financial strength of an Internet bank, a lack of confidence in the likelihood of success and permanence of internet banks and many
individuals’ unwillingness to trust their personal assets to a relatively new technological medium such as the internet. As a result,
many potential customers may be unwilling to establish a relationship with us.
Many conventional financial institutions offer the option of internet banking and financial services to their existing and
prospective customers. The public may perceive conventional financial institutions as being safer, more responsive, more comfortable
to deal with and more accountable as providers of their banking and financial services, including their internet banking services. We
may not be able to offer internet banking and financial services and personal relationship characteristics that have sufficient
advantages over the internet banking and financial services and other characteristics of established conventional financial institutions
to enable us to compete successfully.
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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.
We face fund transfer and payments-related reputational risks.
Financial institutions, including ourselves, bear fund transfer risks of different types which result from large transaction
volumes and large dollar amounts of incoming and outgoing money transfers. Loss exposure may result if money is transferred from
the bank before it is received, or legal rights to reclaim monies transferred are asserted. Such exposure results from payments which
are made to merchants for payment clearing, while customers have statutory periods to reverse their payments. It also results from
funds transfers made prior to receipt of offsetting funds, as accommodations to customers. Transfers could also be made in error.
Additionally, as with other financial institutions, we may incur legal liability or reputational risk, if we unknowingly process payments
for companies in violation of money laundering laws or regulations or immoral activities.
Our operations may be interrupted if our network or computer systems, or those of our providers, fail.
Because we deliver our products and services over the internet and outsource several critical functions to third parties, our
operations depend on our ability, as well as that of our service providers, to protect computer systems and network infrastructure
against interruptions in service due to damage from fire, power loss, telecommunications failure, physical break-ins and computer
hacking or similar catastrophic events. Our operations also depend upon our ability to replace a third-party provider if it experiences
difficulties that interrupt our operations or if an operationally essential third-party service terminates. Service interruptions to
customers may adversely affect our ability to obtain or retain customers and could result in regulatory sanctions. Moreover, if a
customer were unable to access his or her account or complete a financial transaction due to a service interruption, we could be subject
to a claim by the customer for his or her loss. While our accounts and other agreements contain disclaimers of liability for these kinds
of losses, we cannot predict the outcome of litigation if a customer were to make a claim against us.
A failure of cyber security may result in a loss of customers and our being liable for damages for such failure.
A significant barrier to online and other financial transactions is the secure transmission of confidential information over
public networks and other mediums. The systems we use rely on encryption and authentication technology to provide secure
transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other
developments could result in a compromise or breach of the algorithms used to protect customer transaction data. If we, or another
provider of financial services through the internet, were to suffer damage from a security breach, public acceptance and use of the
internet as a medium for financial transactions could suffer. Any security breach could deter potential customers or cause existing
customers to leave, thereby impairing our ability to grow and maintain profitability and, possibly, our ability to continue delivering
our products and services through the internet. We could also be liable for any customer damages arising from such a breach. Other
cyber threats involving theft of confidential information could also result in liability. Although we, with the help of third-party service
providers, intend to continue to implement security technology and establish operational procedures to prevent security breaches, these
measures may not be successful.
We outsource many essential services to third-party providers who may terminate their agreements with us, resulting in
interruptions to our banking operations.
We obtain essential technological and customer services support for the systems we use from third-party providers. We
outsource our check processing, check imaging, transaction processing, electronic bill payment, statement rendering, and other
services to third-party vendors. For a description of these services, see Item 1, “Business—Other Operations—Third-Party Service
Providers.” Our agreements with each service provider are generally cancelable without cause by either party upon specified notice
periods. If one of our third-party service providers terminates its agreement with us and we are unable to replace it with another
service provider, our operations may be interrupted. Even a temporary disruption in services could result in our losing customers,
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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 stockholders.
Regulatory requirements affect lending practices, product offerings, capital structure, investment practices, dividend policy and
growth. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classification of us and the Bank are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors. Moreover, capital requirements may be modified
based upon regulatory rules or by regulatory discretion at any time reflecting a variety of factors including deterioration in asset
quality. A failure by either the Bank or us to meet regulatory capital requirements will result in the imposition of limitations on our
operations and could, if capital levels drop significantly, result in our being required to cease operations. Regulatory capital
requirements must also be satisfied such that mandated capital ratios are maintained as the Bank grows, or growth may be required to
be curtailed. Moreover, a failure by either the Bank or us to comply with regulatory requirements regarding lending practices,
investment practices, customer relationships, anti-money laundering detection and prevention, and other operational practices (see
"Business--Regulation Under Banking Law" and “Risk Factors- The entry into the Consent Orders and a supervisory letter from the
Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank”) could result in regulatory sanctions and
possibly third-party liabilities. Changes in governing law, regulations or regulatory practices could impose additional costs on us or
impair our ability to obtain deposits or make loans and, as a consequence, negatively impact our consolidated revenues and
profitability.
As a Delaware-chartered bank whose depositors and financial services customers are located in several states, the Bank may
be subject to additional licensure requirements or other regulation of its activities by state regulatory authorities and laws outside of
Delaware. If the Bank’s compliance with licensure requirements or other regulation becomes overly burdensome, we may seek to
convert its state charter to a federal charter in order to gain the benefits of federal preemption of some of those laws and regulations.
Conversion of the Bank to a federal charter will require the prior approval of the relevant federal bank regulatory authorities, which
we may not be able to obtain. Moreover, even if we obtain approval, there could be a significant period of time between our
application and receipt of the approval, and/or any approval we do obtain may be subject to burdensome conditions or restrictions.
Failure to maintain a satisfactory CRA rating may result in business restrictions. The Bank operates its CRA program under
an FDIC-approved CRA Strategic Plan. The Bank operated an approved plan during the period of July 1, 2018 through December 31,
2019 and now operates under an approved plan for the period of January 1, 2020 through December 31, 2020. On July 3, 2019, the
Bank received its 2018 CRA Performance Evaluation which was completed on November 11, 2018. The Bank was assigned a
“Satisfactory” CRA rating. The Bank continues to closely monitor its performance in alignment with its CRA Strategic Plan to meet
the specified lending, service and investment requirements contained therein. There can be no assurance that we will maintain a
satisfactory rating, and if not maintained, the Bank would be subject to certain business restrictions as required by the Community
Reinvestment Act and FDIC regulations.
Implemented, proposed and future regulatory and legislative financial reforms may result in new laws and regulations that we
expect will increase our compliance burdens and operating costs.
The passage of new laws and the adoption of new rules and regulations cannot be fully or accurately predicted. Any such
proposed laws and regulations may limit our operations, require higher levels of capital and liquidity, create additional compliance
burdens, or otherwise impact our operations. The passage of the Dodd-Frank Act in 2010, and the rules and regulations emanating
therefrom, have significantly changed, and will continue to change the bank regulatory structure, and affect the lending, deposit,
investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires
various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and
reports for Congress. While a significant number of regulations have already been promulgated to implement the Dodd-Frank Act,
many of the details and much of the impact of the Dodd-Frank Act may not be known for lengthy periods, which could have a
material adverse effect on the financial services industry, generally, and our company in particular.
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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.
It is difficult to predict at this time what specific impact many aspects of the Dodd-Frank Act and the yet to be written
implementing rules and regulations will have on regional banks. The Economic Growth, Regulatory Relief, and Consumer Protection
Act of 2018 scaled back portions of the Dodd-Frank Act, and the current administration in the United States may ultimately roll back
or modify certain of the regulations adopted since the financial crisis. However, future changes in bank regulation are uncertain and
could negatively impact our business and could increase our operating and compliance costs and obligations, which could reduce or
eliminate our ability to generate profits.
The CFPB’s Final Prepaid Rule went into effect on April 1, 2019. The Final Prepaid Rule represents a material change in the
rules and regulations governing prepaid cards. We rely on prepaid cards as the largest single component of our deposits and the
largest single component of our non-interest income. We cannot reasonably quantify the financial impact, if any, that implementation
of the Final Prepaid Rule may have on the Bank’s business, financial condition, or results of operations.
A further downgrade of the U.S. government credit rating could negatively impact our investment portfolio and other
operations.
A significant amount of our investment portfolio is rated by outside ratings agencies as explicitly or implicitly backed by
the United States government. In 2011, the credit rating of the United States government was lowered, and it is possible it may be
downgraded further, based upon rating agencies’ evaluations of the effect of increasing levels of government debt and related
Congressional actions. A lowering of the United States government credit ratings may reduce the market value or liquidity of our
investment portfolio.
Potential acquisitions may disrupt our business and dilute stockholder value.
Acquiring other banks or businesses involves various risks including, but not limited to:
potential exposure to unknown or contingent liabilities of the target entity;
exposure to potential asset quality issues of the target entity;
difficulty and expense of integrating the operations and personnel of the target entity;
potential disruption to our business;
potential diversion of our management’s time and attention;
the possible loss of key employees and customers of the target entity;
difficulty in estimating the value of the target entity;
potential changes in banking or tax laws or regulations that may affect the target entity; and
33
difficulty navigating and integrating legal, operating cultural differences between the United States and the countries of
the target entity’s operations.
From time to time we evaluate merger and acquisition opportunities and conduct due diligence activities related to possible
transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in
some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any
time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our
tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to
realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from
an acquisition could have a material adverse effect on our financial condition and results of operations. The Consent Orders likely
constrain us from making acquisitions.
We may be subject to potential liability and business risk from actions by our regulators related to supervision of third
parties.
Our regulators or auditors may require us to increase the level and manner of our oversight of the third parties which provide
marketing services which generate most of our accounts and through which we offer products and services. Although we have added
significant compliance staff and have used outside consultants, our internal and external compliance examiners must be satisfied with
the results of such augmentation and enhancement. We cannot assure you that we will satisfy all related requirements. See “Risk
Factors The entry into the Consent Orders and a supervisory letter from the Federal Reserve, have imposed certain restrictions and
requirements upon us and the Bank”. Not achieving a compliance management system which is deemed adequate could result in
sanctions against the Bank. Our ongoing review and analysis of our compliance management system and implementation of any
changes resulting from that review and analysis will likely result in increased non-interest expense.
The Bank may be subject to civil money penalties in connection with examination findings.
Like all regulated banking institutions, we are at risk of the imposition of civil money penalties by our regulators, based on,
among other things, apparent violations of law, repeat violations, or supervisory determinations of non-compliance with any consent
order. Depending on the circumstances, the imposition and size of any such penalty is at the discretion of the regulator. While the
Bank is contractually indemnified for related losses, civil money penalties, if assessed against the Bank, are not recoverable from third
parties.
We are subject to tax audits, and challenges to our tax positions or adverse changes or interpretations of tax laws could result
in tax liability.
We are subject to federal and applicable state income tax laws and regulations and related audits. We are also periodically
subject to state escheat audits. Income tax and escheat laws and regulations are often complex and require significant judgment in
determining our effective tax rate and in evaluating our tax positions. Challenges of such determinations may adversely affect our
effective tax rate, tax payments or financial condition.
Recently enacted U.S. tax legislation made significant changes to federal tax law, including the taxation of corporations, by,
among other changes, reducing the corporate income tax rate, disallowing certain deductions that had previously been allowed, and
altering the expensing of capital expenditures. The implementation and evaluation of these changes may require significant judgment
and substantial planning on our behalf. These judgments and plans may require us to take new and different tax positions that if
challenged could adversely affect our effective tax rate, tax payments or financial condition.
In addition, the new tax legislation remains subject to potential amendments, technical corrections, and further regulatory
guidance and interpretation, any of which could lessen or increase certain adverse impacts on us. Furthermore, as the new tax
legislation goes into effect, future changes may occur at the federal or state level that could result in unfavorable adjustments to our
tax liability.
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The appraised fair value of the assets from our discontinued commercial loan operations may be more than the amounts
received upon sale or other disposition.
Various internal and external inputs were utilized to analyze fair value of the discontinued commercial loan portfolio and the
investment in unconsolidated entity which reflects the financing of the securitization of a portion of the discontinued assets. The
valuations are estimates and actual sales prices could be significantly less than the estimates, which could materially affect our results
of operations in future quarters.
We cannot predict whether income resulting from the reinvestment of proceeds from the loans we hold will match or exceed
the income from loan dispositions.
We are seeking to sell or otherwise dispose of the loans in our discontinued commercial loan operations and expect that we
will obtain a significant amount of cash from these dispositions. Although we believe, based upon current market conditions, that we
will be able to invest such proceeds profitably, reinvestment income is difficult to predict and depends upon a number of economic
and market conditions beyond our control, including interest rates and the availability of suitable investments. We cannot assure you
that we will be able to generate the same level of income from the reinvested proceeds as we generated from the loan portfolio being
sold, or that suitable investments will be available to us. If not, our revenues and net income could be reduced materially.
Any future FDIC insurance premium increases will adversely affect our earnings.
Any further assessments or special assessments that the FDIC levies will be recorded as an expense during the appropriate
period and will decrease our earnings. On February 9, 2011, the FDIC adopted a final rule which redefines the deposit insurance
assessment base as required by the Dodd-Frank Act. The final rule sets the deposit insurance assessment base as average consolidated
total assets minus average tangible equity. It also sets a new assessment rate schedule which reflects assessment rate adjustments
based upon regulatory examination classification with increased rates for brokered deposits. The final rule became effective on April
1, 2011. If the Bank’s rating is changed, insurance premiums will increase which will adversely affect our earnings.
We have had material weaknesses in internal control over financial reporting in the past and cannot assure you that additional
material weaknesses will not be identified in the future. Our failure to implement and maintain effective internal control over
financial reporting could result in material misstatements in our financial statements which could require us to restate
financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on our
stock price.
As previously reported, our management had identified material weaknesses in our internal and disclosure controls over
financial reporting that resulted in a restatement of our financial statements in 2014 for that year and for prior periods. These
weaknesses related to the timing of the recognition of loan losses and the recognition of other loan losses. We believe these
weaknesses have been remediated. However, we cannot assure you that additional significant deficiencies or material weaknesses in
our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or
improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, cause us to
fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could
also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness
of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated under Section 404. The existence of a material weakness could result in errors in our financial statements that could
result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors or customers to
lose confidence in our reported financial information, leading to a decline in our stock price or a loss of business, and could result in
stockholder actions against us for damages.
Unclaimed funds from deposit accounts or represented by unused value on prepaid cards present compliance and other risks.
Unclaimed funds held in deposit accounts or represented by unused balances on prepaid cards may be subject to state
escheatment laws where the Bank is the actual holder of the funds and when, after a period of time as set forth in applicable state law,
the rightful owner of the funds cannot be readily located and/or identified. The Bank implements controls to comply with state
unclaimed property laws and regulations, however these laws and regulations are often open to interpretation, particularly when being
applied to unused balances on prepaid card products. State regulators may choose to initiate collection or other litigation action
against the Bank for unreported abandoned property, and such actions may seek to assess fines and penalties.
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A prolonged U.S. government shutdown or default by the U.S. on government obligations could harm our results of
operations.
Our results of operations, including revenue, non-interest income, expenses and net interest income, could be adversely
affected in the event of widespread financial and business disruption due to a default by the United States on U.S. government
obligations or a prolonged failure to maintain significant U.S. government operations, particularly those pertaining to the SBA. Any
such failure to maintain such U.S. government operations would impede our ability to originate SBA loans and our ability to sell such
loans.
Severe weather, natural disasters, acts of war or terrorism or other adverse external events could harm the Company's
business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact
on our ability to conduct business. The nature and level of severe weather and/or natural disasters cannot be predicted and may be
exacerbated by global climate change. Severe weather and natural disasters could harm our operations through interference with
communications, including the interruption or loss of our computer systems, which could prevent or impede us from gathering
deposits, originating loans and processing and controlling the flow of business, as well as through the destruction of facilities and our
operational, financial and management information systems. Additionally, the United States remains a target for potential acts of war
or terrorism. Such severe weather, natural disasters, acts of war or terrorism or other adverse external events could negatively impact
our business operations or the stability of our deposit base, cause significant property damage, adversely impact the values of
collateral securing our loans and/or interrupt our borrowers' abilities to conduct their business in a manner to support their debt
obligations, which could result in losses and increased provisions for credit losses. There is no assurance that our business continuity
and disaster recovery program can adequately mitigate the risks of such business disruptions and interruptions.
Pandemic events could have a material adverse effect on our operations and our financial condition.
The outbreak of disease on a national or global level, such as the spread of the COVID-19 coronavirus, could have a material
adverse effect on commerce, which may, in turn impact our lines of business. Such an event may also impact our ability to manage
those portions of our business or operations which rely on vendors and suppliers from other countries or regions impacted by such a
pandemic event.
We may be adversely impacted by the transition from LIBOR as a reference rate.
In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase
out LIBOR by the end of 2021, and for LIBOR to be replaced with an alternative reference rate that will be calculated in a different
manner. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions
for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable
market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or
alternatives may be on the markets for LIBOR-indexed financial instruments. Substantially all of our commercial mortgages held for
sale are indexed to LIBOR. Additionally, the interest rates of certain of our investment securities and our trust preferred securities are
indexed to LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates
are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition
will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging
strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.
Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately
manage the transition could have a material adverse effect on our business, financial condition and results of operations.
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Risks related to ownership of our common stock.
The trading volume in our common stock is less than that of many financial services companies, which may reduce the price at
which our common stock would otherwise trade.
Although our common stock is traded on The NASDAQ Global Select Market, the trading volume is less than that of many
financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on
the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the
individual decisions of investors and general economic and market conditions over which we have no control. Given the lower
trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock
price to fall.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance
fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this
“Risk Factors” section and is subject to the same market forces that affect the price of common stock in any company. As a result, if
you acquire our common stock, you may lose some or all of your investment.
Our ability to issue additional shares of our common stock, or the issuance of such additional shares, may reduce the price at
which our common stock trades.
We cannot predict whether future issuances of shares of our common stock or the availability of shares for resale in the open
market will decrease the market price per share of our common stock. We are not restricted from issuing additional shares of common
stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive shares of common
stock. Sales of a substantial number of shares of our common stock in the public market or the perception that such sales might occur
could materially adversely affect the market price of the shares of our common stock. The exercise of any options granted to
directors, executive officers and other employees under our stock compensation plans, the vesting of restricted stock grants, the
issuance of shares of common stock in acquisitions and other issuances of our common stock also could have an adverse effect on the
market price of the shares of our common stock. The existence of options, or shares of our common stock reserved for issuance as
restricted shares of our common stock may materially adversely affect the terms upon which we may be able to obtain additional
capital in the future through the sale of equity securities.
Future offerings of debt, which would be senior to our common stock upon liquidation, and/or preferred equity securities
which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may reduce the market
price at which our common stock trades.
In the future, we may attempt to increase our capital resources or, if the Bank’s capital ratios fall below the required
minimums, we could be forced to raise additional capital by making additional offerings of debt or preferred equity securities,
including medium-term notes, senior or subordinated notes or preferred stock. Upon liquidation, holders of our debt securities and
shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the
holders of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution.
The Bank’s ability to pay dividends is subject to regulatory limitations which, to the extent we require such dividends in the
future, may affect our ability to pay our obligations and pay dividends.
We are a separate legal entity from the Bank and our other subsidiaries, and we do not have significant operations of our
own. We have historically depended on the Bank’s cash and liquidity, as well as dividends, to pay our operating expenses. Various
federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without
regulatory approval. The Bank is also subject to limitations under state law regarding the payment of dividends, including the
requirement that dividends may be paid only out of net profits. In addition to these explicit limitations, it is possible, depending upon
the financial condition of the Bank and other factors, that federal and state regulatory agencies could take the position that payment of
dividends by the Bank would constitute an unsafe or unsound banking practice and may therefore seek to prevent the Bank from
paying such dividends. Moreover, under the 2014 Consent Order Amendment, the Bank may not pay dividends without the approval
of the FDIC. See “Risk Factors-Risks Relating to Our Business-The entry into the Consent has imposed certain restrictions and
requirements upon us and the Bank.” Although we believe we have sufficient existing liquidity for our needs for the foreseeable
37
future, there is risk that, if the amendment remains undischarged for a lengthy period and the Bank is unable to obtain FDIC approval
for one or more dividends, we may not be able to service our obligations as they become due or to pay dividends on our common
stock or preferred stock. Even if, absent the amendment, the Bank has the capacity to pay dividends, it is not obligated to pay the
dividends. Its Board of Directors may determine, as it did in the past, to retain some or all of its earnings to support or increase its
capital base.
Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may make it more difficult for holders
of our common stock to receive a change in control premium.
Certain provisions of our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest more
difficult, even if such events were perceived by many of our stockholders as beneficial to their interests. These provisions include in
particular our ability to issue shares of our common stock and preferred stock with such provisions as our board of directors may
approve without further shareholder approval. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware
General Corporation Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more of
a corporation’s outstanding voting stock, from engaging in a business combination with our company for three years following the
date that person became an interested stockholder unless certain specified conditions are satisfied.
Item 1B. Unresolved Staff Comments.
None.
38
Item 2. Properties.
Our executive office and banking facility are located at 409 Silverside Road, Wilmington, Delaware. We maintain business
development offices in New York, New York, Chicago, Illinois, and Morrisville, North Carolina. Leasing offices are located in
Charlotte, North Carolina, Crofton, Maryland, Kent, Washington, Logan, Utah, Orlando, Florida, Raritan, New Jersey, and
Warminster, Pennsylvania. Prepaid and debit card offices and other executive offices are located in Minneapolis, Minnesota, and
Sioux Falls, South Dakota. The Philadelphia, Pennsylvania, Tampa, Florida and a portion of the New York properties are no longer
occupied by the Company, and have been subleased to outside parties, which pay the majority of the rent. Locations and certain
additional information regarding our offices and other material properties at December 31, 2019 are listed below. We own a property
in Orlando, Florida which houses our leasing operations business, consisting of a stand-alone building of 8,850 square feet.
Expiration
Square Feet
Monthly Rent
Location
Bank Owned Property
Orlando, Florida
Leased Property
Charlotte, North Carolina
Chicago, Illinois
Crofton, Maryland
Kent, Washington
Logan, Utah
Minneapolis, Minnesota
Morrisville, North Carolina
New York, New York (1 property subleased)
2024 - 2025
Norristown, Pennsylvania
Raritan, New Jersey
Philadelphia, Pennsylvania (subleased)
Sioux Falls, South Dakota
Tampa, Florida (subleased)
Warminster, Pennsylvania
Wilmington, Delaware
2024
2020
2025
2022
2020
2022
2025
We believe that our offices are suitable and adequate for our operations.
Item 3. Legal Proceedings.
-
2021
2020
2020
2021
2021
2020
2024
8,850
2,345
6,864
2,287
1,700
3,000
3,181
3,590
11,701
7,180
2,145
14,839
38,611
10,303
2,003
62,136
-
$ 4,028
10,987
3,640
2,576
1,401
2,836
5,535
32,120
10,500
3,687
7,626
54,674
4,297
2,228
136,829
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. On September 19, 2019, the Company agreed, without admitting or
denying any of the SEC’s allegations, to resolve the investigation by consenting to the entry of an order by the SEC that: (1) the
Company will cease and desist from committing or causing any violations of the books-and-records provisions of the Securities
Exchange Act and the relevant rules thereunder; and (2) the Company will pay a penalty of $1.4 million (the “Settlement Payment”) to
the SEC. The Company recognized a charge in its third fiscal quarter in the amount of the Settlement Payment. As a result of the
39
settlement certain costs to the Company related to the investigation will cease, including the legal costs of the investigation,
compliance with the SEC’s subpoena, and cooperation with the SEC.
On July 16, 2018, certain investors in a hotel project of one of the Bank’s former borrowers, 550 Seabreeze Development
LLC (“Seabreeze Development”), filed an adversary action against the Bank and others in the United States Bankruptcy Court of the
Southern District of Florida. The note for the related loan was sold in the second quarter of 2018 and the loan is no longer on the
Bank’s books. The adversary action was filed within the context of a Chapter 11 bankruptcy proceeding in which Seabreeze
Development is the debtor, and alleged that the Bank and others defrauded the plaintiffs into investing a total of $10.5 million in the
project. Three causes of actions were asserted against the Bank: (i) fraud in the inducement; (ii) civil conspiracy; and (iii) aiding and
abetting fraud. The Bank believed the claims were without merit and vigorously defended against them. On November 1, 2018, the
bankruptcy court entered an order dismissing the claims against the Bank for lack of jurisdiction. The order further stated that the
dismissal was without prejudice, and that the plaintiffs may file their causes of action in an appropriate forum. On February 7, 2019,
certain investors filed a new action in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade Country, Florida, asserting:
(i) fraudulent misrepresentation; (ii) negligent misrepresentation; (iii) aiding and abetting fraud; and (iv) civil conspiracy. Three
additional investors were included as plaintiffs in the matter, increasing the total amount at issue to $12 million. The Bank filed a
motion to dismiss the state court action as to the Bank and on October 16, 2019, the state court granted the Bank’s motion and
dismissed the plaintiffs’ claims against the Bank without prejudice.
On June 12, 2019, the Bank was served with a qui tam lawsuit filed in the Superior Court of the State of Delaware, New
Castle County. The Delaware Department of Justice intervened in the litigation. The case is titled The State of Delaware, Plaintiff,
Ex rel. Russell S. Rogers, Plaintiff-Relator, v. The Bancorp Bank, Interactive Communications International, Inc., and InComm
Financial Services, Inc., Defendants. The lawsuit alleges that the defendants violated the Delaware False Claims Act by not paying
balances on certain open-loop “Vanilla” prepaid cards to the State of Delaware as unclaimed property. The complaint seeks actual
and treble damages, statutory penalties, and attorneys’ fees. The Bank denies the allegations and is defending itself. The Bank and
other defendants filed a motion to dismiss the action, but the motion was denied on February 7, 2020. At this time, the Company is
unable to determine whether the ultimate resolution of the matter will have a material adverse effect on our financial condition or
operations.
In addition, we are a party to various routine legal proceedings arising out of the ordinary course of our business.
Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial
condition or operations.
Item 4. Mine Safety Disclosures.
Not applicable.
40
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the NASDAQ Global Select Market under the symbol “TBBK.” As of February 20, 2020, there
were 57,385,556 shares of common stock outstanding held of record by 5,414 shareholders.
We have not paid cash dividends on our common stock since our inception, and do not currently have plans to pay cash
dividends on our common stock. Our payment of dividends is subject to restrictions discussed in Item 1, “Business—Regulation
under Banking Law,” and in Item 1A, “Risk Factors-Risks Relating to Our Business-The entry into the Consent Orders and a
supervisory letter from the Federal Reserve, have imposed certain restrictions and requirements upon us and the Bank.” Moreover,
irrespective of such restrictions, it is our intent to retain earnings, if any, to increase our capital and fund the development and growth
of our operations subject to regulatory restrictions. Our board of directors will determine any changes in our dividend policy based
upon its analysis of factors it deems relevant. We expect that these factors would include our earnings, financial condition, cash
requirements, regulatory capital levels and available investment opportunities.
Equity Compensation Plan Information
RSU's to be
Number of securities
remaining available for
issued upon
Number of securities to be Weighted-average
future issuance under
vesting of
issued upon exercise of
exercise price of
equity compensation plans
outstanding
outstanding options,
outstanding options,
(excluding securities
grants
warrants and rights
warrants and rights
reflected in column (a))
1999 Omnibus plan
2005 Omnibus plan
Stock option and equity plan of 2011
Stock option and equity plan of 2013
2018 Equity incentive plan
Total
-
-
-
107,485
1,146,442
1,253,927
* All plans have been authorized by shareholders.
(a)
221,000
174,000
551,500
300,000
65,104
1,311,604
(b)
$9.60
$7.81
$8.60
$6.75
$8.57
$8.24
(c)
-
-
-
-
284,143
284,143
41
Performance graph
The following graph compares the performance of our common stock to the NASDAQ Composite Index and the NASDAQ
Bank Stock Index. The graph shows the value of $100 invested in our common stock and both indices on December 31, 2014 for a
five-year period and the change in the value of our common stock compared to the indices as of the end of each year. The graph
assumes the reinvestment of all dividends. Historical stock price performance is not necessarily indicative of future stock price
performance.
200.00
150.00
100.00
50.00
-
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
The Bancorp, Inc.
NASDAQ Bank Stock Index
NASDAQ Composite Stock Index
Index
The Bancorp, Inc.
NASDAQ Bank Stock Index
NASDAQ Composite Stock Index
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
100.00
100.00
100.00
58.49
106.62
105.73
72.18
143.97
113.66
90.73
149.02
145.76
73.09
122.34
140.10
119.10
148.32
189.45
42
The following graph reflects stock performance since 2014, compared to the KBW bank index, which is an industry
recognized peer group of regional and money center banks.
200.00
150.00
100.00
50.00
0.00
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
The Bancorp, Inc.
KBW Bank Index
Index
The Bancorp, Inc.
KBW Bank Index
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
100.00
100.00
58.49
98.41
72.18
123.61
90.73
149.30
73.09
115.53
119.10
152.65
As of
43
Item 6. Selected Financial Data.
The following table sets forth selected financial data as of and for the years ended December 31, 2019, 2018, 2017, 2016 and
2015. We derived the selected financial data from our consolidated financial statements for those periods included in this annual
report on Form 10-K or our prior annual reports on Form 10-K. We have reclassified certain amounts in our historical audited
consolidated financial statements, including amounts related to assets and liabilities reclassified as held-for-sale during these periods.
These reclassifications had no effect on our reported net income (loss).
You should read the selected financial data in this table together with, and such selected financial data is qualified by
reference to, our consolidated financial statements and the notes to those restated consolidated financial statements in Item 8 of this
report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report.
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 expense (benefit)
Net income (loss) from continuing operations
Net income (loss) 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
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
$
$
$
$
$
$
$
$
$
$
2019
179,569 $
38,281
141,288
4,400
136,888
104,127
168,521
72,494
21,226
51,268
291
51,559 $
0.90 $
0.01 $
0.91 $
0.89 $
0.01 $
0.90 $
As of and for the years ended
December 31,
2017
(in thousands, except per share data)
2018
2016
147,960 $
27,111
120,849
3,585
122,020 $
15,340
106,680
2,920
102,219 $
12,253
89,966
3,360
117,264
153,795
151,278
119,781
32,241
87,540
1,137
88,677 $
1.55 $
0.02 $
1.57 $
1.53 $
0.02 $
1.55 $
103,760
91,548
154,914
40,394
23,056
17,338
4,335
21,673 $
0.31 $
0.08 $
0.39 $
0.31 $
0.08 $
0.39 $
86,606
42,486
198,573
(69,481)
(12,664)
(56,817)
(39,675)
(96,492) $
(1.28) $
(0.89) $
(2.17) $
(1.28) $
(0.89) $
(2.17) $
2015
83,530
13,599
69,931
2,100
67,831
133,067
194,088
6,810
1,450
5,360
8,072
13,432
0.14
0.21
0.35
0.14
0.21
0.35
5,656,963 $
1,824,245
10,238
944,472
5,052,030
484,497
$
4,437,911 $
1,501,976
8,653
554,302
3,935,714
406,776
4,708,147
1,390,458
7,096
908,935
4,260,842
324,149
$
4,858,114
1,220,729
6,332
999,059
4,238,304
298,963
4,765,823
1,074,843
4,400
1,155,162
4,414,757
320,001
1.09%
11.57%
3.32%
8.52 $
8.56%
9.63%
19.04%
19.45%
0.56%
2.07%
24.26%
3.19%
7.22 $
9.17%
10.11%
20.64%
21.07%
0.58%
nm
nm
3.04%
5.81 $
6.88%
7.90%
16.73%
17.09%
0.51%
nm
nm
2.74%
5.40 $
6.15%
6.90%
13.34%
13.63%
0.52%
0.29%
4.20%
2.37%
8.47
6.71%
7.17%
14.67%
14.88%
0.41%
44
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides information to assist in understanding our financial condition and results of operations.
This discussion should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8 of this
report.
Overview
In 2019, we recorded net income of $51.3 million and income before tax of $72.5 million in continuing operations compared
to $87.5 million and $119.8 million, respectively, in 2018. The decrease in income before tax of $47.3 million reflected a
$65.0 million gain on sale of the Safe Harbor Individual Retirement Account (SHIRA) portfolio in 2018. The decrease also reflected
civil money penalties of $7.5 million to the FDIC and $1.4 million to the SEC in 2019. After adjusting for the civil money penalties
and gain on sale, income before tax of $81.4 million in 2019 was $26.6 million, or 48.6%, higher than the $54.8 million for 2018. The
$26.6 million increase reflected a $20.4 million, or 16.9%, increase in net interest income and a $15.3 million, or 17.3% increase in
non-interest income, excluding the SHIRA gain on sale. These increases were partially offset with an $8.3 million, or 5.5%, increase
in non-interest expense, excluding the civil money penalties. The increase in net interest income primarily reflected the impact of
higher balances of commercial real estate loans held for sale and other loan growth and higher loan yields resulting from Federal
Reserve rate increases in 2018. The impact of the prior year rate increases was partially offset by Federal Reserve rate decreases in
the latter part of 2019. In 2019 compared to 2018, the largest component of non-interest income, prepaid, debit and related fees
increased $10.5 million, or 19.2%, to $65.1 million. Gain on sale of loans increased $3.6 million, or 17.4%, to $24.1 million which
resulted primarily from a higher volume of loans sold into securitizations in 2019. Service fees on deposit accounts decreased
$3.5 million, or 97.9%, to $75,000 as a result of the sale of the SHIRA portfolio. As a result of the sale of the SHIRA portfolio, this
income category will be substantially eliminated. In 2018, $3.7 million of charges resulted from the investment in unconsolidated
entity while in 2019 there were no such charges. That investment resulted from the sale of certain discontinued loans into a
securitization in 2014. See Note W to the financial statements. The aforementioned $8.3 million increase in non-interest expense,
exclusive of the 2019 civil money penalties, resulted primarily from increases in salaries and benefits. Salaries and benefits increased
$14.4 million, or 18.1%, to $94.3 million, reflecting higher incentive compensation for loan, deposit and fee production and higher IT
and other infrastructure expense. The increase in salaries and benefits was partially offset by decreases in legal, FDIC insurance, data
processing and other expenses.
In 2014, we discontinued our Philadelphia commercial lending operations following our determination that those operations
were inconsistent with our strategic focus on what we believe to be lower risk and more granular and national lines of business. We
currently focus our lending activities upon four specialty lending segments: SBLOC and IBLOC loans, SBA loans, vehicle fleet and
equipment leasing, and the origination of loans for sale into commercial securitizations. These loans are made nationally. At year end
2019, our net discontinued assets amounted to $140.7 million compared to $197.8 million at year end 2018. As these balances are
reduced, either through sales or repayment, we plan to invest the proceeds into our continuing lending lines. Additionally, at year end
2019 a balance of $39.2 million in investment in unconsolidated entity reflected the remaining balance of the investment in
discontinued loans and related assets sold into a securitization.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform with generally accepted accounting principles in the United States and to
general practices within the financial services industry. The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those
estimates. We believe that the determination of our allowance for loan and lease losses and our determination of the fair value of
financial instruments involve a higher degree of judgment and complexity than our other significant accounting policies.
We determine our allowance for loan and lease losses with the objective of maintaining a reserve level we believe to be
sufficient to absorb our estimated probable credit losses. We base our determination of the adequacy of the allowance on periodic
evaluations of our loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material
estimates, including, among others, expected default probabilities, the amount of loss we may incur on a defaulted loan, expected
commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on
consumer loans and residential mortgages, and general amounts for historical loss experience. We also evaluate economic conditions
and uncertainties in estimating losses and inherent risks in our loan portfolio. To the extent actual outcomes differ from our estimates,
45
we may need additional provisions for loan losses. Any such additional provisions for loan losses will be a direct charge to our
earnings. See “Allowance for Loan and Lease Losses.”
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument
using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market
prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted
prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do
not exist, we estimate fair value. Our valuation methods and inputs consider factors such as types of underlying assets or liabilities,
rates of estimated credit losses, interest rate or discount rate and collateral. Our best estimate of fair value involves assumptions
including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings,
current delinquency rates, loan-to-value ratios and the possibility of obligor refinancing.
At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. From time to time, assets or
liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at
the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period.
We periodically review our investment portfolio to determine whether unrealized losses on securities are temporary, based on
evaluations of the creditworthiness of the issuers or guarantors, and underlying collateral, as applicable. In addition, we consider the
continuing performance of the securities. We recognize credit losses through the consolidated statement of operations. If
management believes market value losses are temporary and that we have the ability and intention to hold those securities to maturity,
we recognize the reduction in other comprehensive income, through equity. We evaluate whether an other than temporary impairment
exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the
amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether
the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s
underlying collateral and (e) the payment structure of the security. If other than temporary impairment is determined, we estimate
expected future cash flows to determine the credit loss amount with a quantitative and qualitative process that incorporates
information received from third-party sources and internal assumptions and judgments regarding the future performance of the
security.
We account for our stock-based compensation plans based on the fair value of the awards made, which include stock options,
restricted stock, and performance based shares. To assess the fair value of the awards made, management makes assumptions as to
expected stock price volatility, option terms, forfeiture rates and dividend rates. All of these estimates and assumptions may be
susceptible to significant change that may impact earnings in future periods.
We account for income taxes under the liability method whereby we determine deferred tax assets and liabilities based on the
difference between the carrying values on our consolidated financial statements and the tax basis of assets and liabilities as measured
by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes
in deferred tax assets and liabilities.
Regulatory Actions
The Bank entered into a Stipulation and Consent to the Issuance of a Consent Order effective August 7, 2012, which we refer
to as the 2012 Consent Order. The Bank took this action without admitting or denying any charges of unsafe or unsound banking
practices or violations of law or regulation. Under the 2012 Consent Order, the Bank agreed to increase its supervision of third-party
relationships, develop new written compliance and related internal audit compliance programs, develop a new third-party risk
management program and screen new third-party relationships as provided in the Consent Order. As part of the Consent Order, the
Bank agreed to pay a civil money penalty in the amount of $172,000, which was paid in 2012. The 2012 Consent Order was amended
and restated in 2015 as noted below.
On June 5, 2014, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC, which
we refer to as the 2014 Consent Order. The Bank took this action without admitting or denying any charges of unsafe or unsound
banking practices or violations of law or regulation relating to the Bank’s Bank Secrecy Act, or BSA, compliance program. The 2014
Consent Order requires the Bank to take certain affirmative actions to comply with its BSA obligations. Satisfaction of the
requirements of the 2014 Consent Order is subject to the review of the FDIC and the Delaware State Bank Commissioner. The Bank
has and expects to continue to expend significant management and financial resources to address the Bank’s BSA compliance program
46
which will reduce our net income. Expenses associated with the required look back review were significant in 2015 and 2016. The
look back review was completed in the third quarter of 2016.
The 2014 Consent Order restricts the Bank from signing and boarding new independent sales organizations, establishing new
non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related
payments until the Bank submits to the FDIC and the Delaware State Bank Commissioner a report summarizing the completion of
certain BSA-related corrective actions (“BSA Report”). Until the BSA Report is approved by the FDIC and Delaware State Bank
Commissioner, those aspects of the growth of our card payment processing and prepaid card operations will be affected, which, unless
offset by growth from existing customers and new customers in other areas of our prepaid card operations, could reduce growth of our
deposits and non-interest income and, possibly, limit our ability to raise additional capital on acceptable terms. The Bank provided the
FDIC and the Delaware State Bank Commissioner with the required BSA Report as of December 31, 2019 and it is now under review
by the regulators.
On August 27, 2015, the Bank entered into an Amendment to Consent Order, or the 2014 Consent Order Amendment, with
the FDIC, amending the 2014 Consent Order. The Bank took this action without admitting or denying any additional charges of
unsafe or unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA
compliance program. The 2014 Consent Order Amendment provides that the Bank shall not declare or pay any dividend without the
prior written consent of the FDIC and for certain assurances regarding management.
On May 11, 2015, the Federal Reserve issued a letter, or the Supervisory Letter, to us as a result of the 2014 Consent Order
and the 2014 Consent Order Amendment (which, at the time of the Supervisory Letter, was in proposed form), which provides that we
shall not pay any dividends on our common stock or make any interest payments on our trust preferred securities, without the prior
written approval of the Federal Reserve. It further provides that we may not incur any debt (excluding payables in the ordinary course
of business) or redeem any shares of our stock, without the prior written approval of the Federal Reserve. The requirement for such
approval was lifted by the Federal Reserve in the fourth quarter of 2019, and the Supervisory Letter was terminated at that time.
On December 23, 2015, the Bank entered into a Stipulation and Consent to the Issuance of an Amended Consent Order, Order
for Restitution, and Order to Pay Civil Money Penalty with the FDIC, which we refer to as the 2015 Consent Order. The Bank took
this action without admitting or denying any charges of violations of law or regulation. The 2015 Consent Order amended and
restated in its entirety the terms of the 2012 Consent Order.
The 2015 Consent Order was based on FDIC allegations regarding electronic fund transfer, or EFT, error resolution practices,
account termination practices and fee practices of various third parties with whom the Bank had previously provided, or currently
provides, deposit-related products whom we refer to as Third Parties. The 2015 Consent Order continues the Bank's obligations
originally set forth in the 2012 Consent Order, including its obligations to increase board oversight of the Bank's compliance
management system, or CMS, improve the Bank's CMS, enhance its internal audit program, increase its management and oversight of
Third Parties, and correct any apparent violations of law.
In addition to restating the general terms of the 2012 Consent Order, the 2015 Consent Order directs the Bank’s Board of
Directors to establish a Complaint and Error Claim Oversight and Review Committee, which we refer to as the Complaint and Error
Claim Committee to review and oversee the Bank’s processes and practices for handling, monitoring and resolving consumer
complaints and EFT error claims (whether received directly or through Third Parties) and to review management's plans for correcting
any weaknesses that may be found in such processes and practices. The Bank’s Board of Directors appointed the required Complaint
and Error Claim Committee on January 29, 2016.
The 2015 Consent Order also requires the Bank to implement a corrective action plan, or CAP, to remediate and provide
restitution to those prepaid cardholders who asserted or attempted to assert, or were discouraged from initiating EFT error claims, and
to provide restitution to cardholders harmed by EFT error resolution practices. The 2015 Consent Order requires that if, through the
CAP, the Bank identifies prepaid cardholders who have been adversely affected by a denial or failure to resolve an EFT error claim,
the Bank will ensure that monetary restitution is made. The Bank completed its implementation of the CAP on January 15, 2020. As
of the completion date, $1,592,469.20 of restitution was paid to consumers of which $4,352.61 was paid by the Bank and the
remaining amount by Third Parties.
The 2015 Consent Order also imposed a $3 million civil money penalty on the Bank, which the Bank has paid and which was
recognized as expense in the fourth quarter of 2015.
47
On March 7, 2018, the Bank entered into a Stipulation and Consent to Order for Restitution and Order To Pay Civil Money
Penalty with the FDIC, which we refer to as the 2018 Restitution Order and 2018 CMP Order, respectively. The Bank took this action
without admitting or denying any alleged violations of law or regulation. The FDIC’s action principally emanated from one of the
Bank’s third-party payment processors (“Third-Party Processor”) that suffered an internal system programming glitch. This
inadvertently resulted in consumers that engaged in signature-based point of sale transactions during the period from December 2010
to November 2014 being charged a greater fee than what was disclosed by the Bank. The FDIC alleged the Bank’s incorrect fee
imposition due to the Third-Party Processor error was an unfair or deceptive act or practice and violated Section 5 of the Federal Trade
Commission Act. The 2018 CMP Order imposed a $2 million civil money penalty on the Bank which the Bank has paid, and was
recognized as expense on September 30, 2017.
The 2018 Restitution Order required the Bank to develop a written Restitution Plan, subject to independent audit and FDIC
non-objection, to ensure impacted consumers are compensated for any incorrectly charged fees. The 2018 Restitution Order required
the Bank to make such reimbursements if not otherwise made by the Third-Party Processor and the Bank is indemnified by the Third-
Party Processor for such reimbursements. Impacted consumers were reimbursed by the Third-Party Processor at its own expense.
The civil money penalty was not subject to any indemnification or recovery from any third party. On December 19, 2019, the FDIC
concluded the Bank had fully complied with the 2018 Restitution Order and issued an order terminating the 2018 Restitution Order.
On December 18, 2019, the Bank’s Board of Directors, without admitting or denying any violations of law, regulation or the
provisions of the 2014 Consent Order, executed a Stipulation and Consent to the Issuance of an Order to Pay Civil Money Penalty in
the amount of $7.5 million based on supervisory findings during the period of 2013 to 2019 related principally to deficiencies in the
Bank’s legacy Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Programs and alleged violations of law during the period, as
well as the length of time the Bank has taken to fully implement the corrective actions required by the 2014 Consent Order. The Bank
paid this amount, and it was recognized as an expense in the Company’s financial statements in the fourth quarter of 2019.
Results of Operations
Overview: Net interest income continued its upward trend in 2019, increasing $20.4 million over the prior year, primarily as
a result of higher balances of commercial loans originated for sale. Net interest income also benefited from increases in other loan
categories. From year end 2018 to year end 2019, SBLOC and IBLOC, SBA and leasing balances grew 30%, 22% and 10%,
respectively. Net interest income also reflected higher yields resulting from the Federal Reserve’s 2018 interest rate increases, the
impact of which was partially offset by Federal Reserve rate reductions in latter 2019. While our loans generally adjust more fully to
Federal Reserve interest rate changes, funding costs generally adjust to only a portion of such rate changes. For 2019, funding costs
were 22 basis points higher than 2018 compared to a 32 basis point increase in yield on interest earning assets. Reflecting the above
factors, net interest income increased by $20.4 million or 16.9% in 2019 compared to the prior year. The provision for loan and lease
losses increased $815,000 to $4.4 million in 2019 as decreases in provisions for small business loans and leasing were more than
offset by a $1.0 million provision for other consumer loans. Non-interest income in 2019 decreased by $49.7 million. That decrease
reflected a $65.0 million gain on sale of the SHIRA portfolio in 2018 which was partially offset by an increase of $10.5 million in
prepaid, debit card and related fees in 2019.
In 2019, total non-interest expense increased $17.2 million to $168.5 million, reflecting a $14.4 million increase in salaries
and employee benefits and $8.9 million in civil money penalties which were partially offset by decreases of $2.5 million in legal fees,
$1.8 million in FDIC insurance expense and $1.3 million in data processing expense.
In 2017, income tax expense was impacted by legislation reducing federal corporate income tax rates. As a result, deferred
tax assets were adjusted to the new rates, decreasing the value of those assets and increasing tax expense in that year. The lower 21%
federal corporate tax rate was effective for 2018 and 2019.
In 2014, the Bank discontinued its regional Philadelphia commercial loan division to focus on its aforementioned national
specialty lending lines of business. At year end 2019, our net discontinued assets amounted to $140.7 million compared to
$197.8 million at year end 2018. Net commercial discontinued loans included in those totals were, respectively, $70.6 million and
$118.1 million. These loans consisted primarily of loans secured by commercial real estate including construction and land loans. As
these balances are reduced, either through sales or repayment, we plan to invest the proceeds into our continuing lending lines. Efforts
to sell or otherwise dispose of these loans continue and if not sold, the loans will be retained. We also retain the financing receivable
of $39.2 million from the 2014 Walnut Street securitization. See Note W to the financial statements. That entity is also primarily
48
comprised of discontinued commercial real estate loans, including construction and land loans or real estate collateral resulting from
the default of such loans.
At December 31, 2019, our total loans amounted to $1.82 billion, an increase of $322.3 million, or 21.5%, over the
$1.50 billion balance at December 31, 2018, reflecting growth in all major categories of loans. Our investment securities available-
for-sale increased $84.4 million to $1.32 billion from $1.24 billion between those respective dates as reinvestments were accelerated
when long term rates increased.
Net Income: 2019 compared to 2018. Net income from continuing operations was $51.3 million in 2019 compared to
$87.5 million in 2018 while income before taxes was, respectively, $72.5 million and $119.8 million, a decrease of $47.3 million. In
2019, net interest income grew by $20.4 million and non-interest income decreased $49.7 million. The $20.4 million, or 16.9%,
increase in 2019 net interest income over 2018 resulted primarily from higher balances of commercial loans originated for sale. Net
interest income also benefited from increases in other loan categories. From year end 2018 to year end 2019, SBLOC and IBLOC,
SBA and leasing balances grew 30%, 22% and 10%, respectively. The $49.7 million decrease in non-interest income reflected a
$65.0 million gain on sale of the SHIRA portfolio in 2018 and a $10.5 million increase in prepaid, debit card and related fees in 2019.
In 2019 compared to 2018, the primary drivers of fee income, prepaid, debit and related fees and fees on ACH, card and other
payment processing fees, increased 17.8% to $74.5 million. Gain on sale of loans increased $3.6 million to $24.1 million which
resulted primarily from a higher volume of loans sold into securitizations in 2019. Additionally, in 2018, $3.7 million of charges
resulted from the investment in unconsolidated entity while we had no such charges in 2019. That investment resulted from the sale
of certain discontinued loans into a securitization in 2014. See Note W to the financial statements. In 2019, total non-interest expense
increased $17.2 million to $168.5 million, reflecting a $14.4 increase in salaries and employee benefits and $8.9 million in civil
money penalties which were partially offset by decreases of $2.5 million in legal fees, $1.8 million in FDIC expense and $1.3 million
in data processing expense. Salary and benefits expense increased by $14.4 million reflecting higher incentive compensation for loan,
deposit and fee production and higher information technology and loan and payments infrastructure expense. In 2019, non-interest
expense included $8.9 million of expense for a $1.4 million SEC civil money penalty and a $7.5 million FDIC civil money penalty.
FDIC insurance expense decreased $1.8 million in 2019, primarily as a result of a decrease in the insurance rate applicable to the
Bank.
In 2017, income tax expense was impacted by legislation reducing federal corporate income tax rates. As a result, deferred
tax assets were adjusted to the new rates, decreasing the value of those assets and increasing tax expense in that year. The lower 21%
federal corporate tax rate was effective for 2018 and 2019. The combined federal and state income tax rate was 29% in 2019. It was
higher than the 27% rate in 2018 primarily as a result of the non-deductibility of $8.9 million of civil penalties in 2019.
Reflecting these changes, net income from continuing operations amounted to $51.3 million in 2019 compared to $87.5
million in 2018, or continuing operations earnings per diluted share of $0.89 compared to $1.53 in 2018. Net income from
discontinued operations was $291,000 for 2019 compared to $1.1 million for 2018. Including discontinued operations, diluted income
per share was $0.90 for 2019 compared to $1.55 for 2018 on net income of $51.6 million and $88.7 million, respectively.
Net Income: 2018 compared to 2017. Net income from continuing operations was $87.5 million in 2018 compared to $17.3
million in 2017 while income before taxes was, respectively, $119.8 million and $40.4 million, an increase of $79.4 million. In 2018,
net interest income grew by $14.2 million and non-interest income increased $62.2 million which accounted for the majority of the
increase. The $14.2 million, or 13.3%, increase in 2018 net interest income over 2017 resulted primarily from loan growth and higher
yields, reflecting Federal Reserve rate increases. From year end 2017 to year end 2018, SBLOC, SBA and leasing balances grew 8%,
17% and 5%, respectively. The $62.2 million increase in non-interest income reflected a $65.0 million gain on sale of the SHIRA
portfolio and a $3.2 million reduction in service fees on deposit accounts related to that portfolio.
In 2018 compared to 2017, the primary drivers of fee income, prepaid and debit card fees and fees on ACH, card and other
payment processing fees, increased 6.0% to $63.3 million. Gain on sale of loans increased $2.6 million to $20.5 million which
resulted primarily from a higher volume of loans sold into securitizations in 2018. Additionally, in 2018, $3.7 million of charges
resulted from the investment in unconsolidated entity while such charges in 2017 were $20,000. That investment resulted from the
sale of certain discontinued loans into a securitization in 2014. See Note W to the financial statements. In 2018, total non-interest
expense decreased $3.6 million to $151.3 million, reflecting a $4.0 million reduction in data processing expense resulting from a
renegotiated contract and reduced transaction volume resulting from the planned exit of an affinity group which had changed
ownership. Salary and benefits expense increased by $4.0 million reflecting higher BSA and compliance expenses and higher
incentive compensation expense. In 2017, non-interest expense included $2.3 million of expense for an FDIC civil money penalty.
49
FDIC insurance expense decreased $1.3 million in 2018, primarily as a result of a decrease in the insurance rate applicable to the
Bank.
In 2017, income tax expense was impacted by legislation reducing federal corporate income tax rates. As a result, deferred
tax assets were adjusted to the new rates, decreasing the value of those assets and increasing tax expense in that year. The lower 21%
corporate tax rate was effective for 2018 and the combined federal and state income tax rate in 2018 was 27%.
Reflecting these changes, net income from continuing operations amounted to $87.5 million in 2018 compared to
$17.3 million in 2017, or continuing operations income per diluted share of $1.53 compared to $0.31 in 2017. Net income from
discontinued operations was $1.1 million for 2018 compared to $4.3 million for 2017. Including discontinued operations, diluted
income per share was $1.55 for 2018 compared to $0.39 for 2017 on net income of $88.7 million and $21.7 million, respectively.
Net Interest Income: 2019 compared to 2018. Our net interest income for 2019 increased to $141.3 million, an increase of
$20.4 million, or 16.9%, from $120.8 million for 2018, reflecting a $31.6 million, or 21.4%, increase in interest income to
$179.6 million from $148.0 million for 2018. The increase in net interest income primarily reflected the impact of higher balances of
commercial real estate loans held for sale and other loan growth and higher loan yields resulting from Federal Reserve rate increases
in 2018. The impact of the prior year rate increases was partially offset by Federal Reserve rate decreases in the latter part of 2019.
Our average loans and leases increased 24.9% to $2.42 billion in 2019 from $1.94 billion for 2018, while related interest income
increased $31.8 million on a tax equivalent basis. The largest increases in average loans and leases and related interest income was in
commercial loans originated for sale, which respectively increased $300.2 million and $17.6 million. Small business loan, SBLOC and
IBLOC and leasing interest income respectively increased $6.3 million, $6.1 million and $2.4 million. Our average investment
securities were $1.41 billion for 2019 compared to $1.38 billion for 2018, while related interest income increased $245,000 on a tax
equivalent basis.
Our net interest margin (calculated by dividing net interest income by average interest earning assets) for 2019 increased
13 basis points to 3.32% from 3.19% for 2018. The increase reflected higher yields on variable rate loans resulting from the
aforementioned Federal Reserve increases, partially offset by decreased yields on taxable investment securities. While the yield on
loans increased to 5.25% from 4.92%, the yield on taxable investment securities decreased to 3.01% from 3.05%. The decrease
reflected higher premium amortization resulting from prepayments. The average yield on our interest earning assets increased to
4.18% from 3.86% for 2018, an increase of 32 basis points, while the cost of total deposits and interest bearing liabilities increased to
0.92% for 2019 from 0.70% for 2018, an increase of 22 basis points. While variable rate loans and securities adjusted more fully to
Federal Reserve rate changes, deposits adjusted only partially to the Federal Reserve changes. In 2019, average demand and interest
checking deposits amounted to $3.82 billion, compared to $3.50 billion in 2018, an increase of 9.1%. The yield on those deposits
increased to 0.80% in 2019 compared to 0.66% in 2018. Savings and money market balances averaged $37.7 million in 2019
compared to $362.3 million in 2018 with an average 0.48% rate in 2019 compared to 0.79% in 2018. The decrease reflected the
SHIRA sale.
Net Interest Income: 2018 compared to 2017. Our net interest income for 2018 increased to $120.8 million, an increase of
$14.2 million, or 13.3%, from $106.7 million for 2017, reflecting a $25.9 million, or 21.3%, increase in interest income to
$148.0 million from $122.0 million for 2017. The increase in net interest income resulted primarily from higher loan balances and
higher yields. Our average loans and leases increased 8.5% to $1.94 billion in 2018 from $1.78 billion for 2017, while related interest
income increased $16.0 million on a tax equivalent basis. Our average investment securities were $1.38 billion for 2018 compared to
$1.30 billion for 2017, while related interest income increased $5.7 million on a tax equivalent basis. Yields on both loans and
investment securities increased as a result of the impact of the Federal Reserve’s rate increases on variable rate loans and securities.
Our net interest margin (calculated by dividing net interest income by average interest earning assets) for 2018 increased
15 basis points to 3.19% from 3.04% for 2017. The increase reflected higher yields on variable rate loans and securities resulting
from the aforementioned Federal Reserve increases. The average yield on our interest earning assets increased to 3.86% from 3.37%
for 2017, an increase of 49 basis points, while the cost of total deposits and interest bearing liabilities increased to 0.70% for 2018
from 0.40% for 2017, an increase of 30 basis points. While variable rate loans adjusted more fully to Federal Reserve rate increases,
deposits adjusted only partially to Federal Reserve rate increases. In 2018, average demand and interest checking deposits amounted
to $3.50 billion, compared to $3.37 billion in 2017, an increase of 3.8%. The yield on those deposits increased to 0.66% in 2018
compared to 0.36% in 2017. Savings and money market balances averaged $362.3 million in 2018 compared to $439.6 million in
2017 with an average 0.79% rate in 2018 compared to 0.51% in 2017. The decrease reflected the SHIRA sale.
50
Average Daily Balance. The following table presents the average daily balances of assets, liabilities, and shareholders’
equity and the respective interest earned or paid on interest earning assets and interest bearing liabilities, as well as average rates for
the periods indicated:
Average
balance
2019
Interest
Year ended December 31,
Average
rate
Average
balance
(dollars in thousands)
2018
Interest
Average
rate
Assets:
Interest earning assets:
Loans net of deferred fees and costs **
Leases - bank qualified*
Investment securities-taxable
Investment securities-nontaxable*
Interest earning deposits at Federal Reserve Bank
$ 2,402,686
14,968
1,406,247
6,533
472,279
$ 126,176
1,177
42,286
215
10,007
5.25% $ 1,915,456
7.86%
20,025
1,375,566
3.01%
8,631
3.29%
460,577
2.12%
$ 94,232
1,370
41,994
262
8,737
4.92%
6.84%
3.05%
3.04%
1.90%
Federal funds sold and securities purchased under agreements
to resell
Net interest earning assets
-
4,302,713
-
179,861
-
4.18%
59,157
3,839,412
1,708
148,303
2.89%
3.86%
Allowance for loan and lease losses
Assets held-for-sale from discontinued operations
Other assets
(9,696)
169,986
254,674
6,710
3.95%
(7,528)
253,348
190,252
8,810
3.48%
$ 4,717,677
$ 4,275,484
Liabilities and Shareholders' Equity:
Deposits:
Demand and interest checking
Savings and money market
Time
Total deposits
Short-term borrowings
Repurchase agreements
Subordinated debt
Total deposits and interest bearing liabilities
Other liabilities
Total liabilities
Shareholders' equity
Net interest income on tax equivalent basis *
Tax equivalent adjustment
Net interest income
Net interest margin *
$ 3,817,176
37,671
$ 30,664
181
0.80% $ 3,499,288
362,267
0.48%
$ 23,068
2,878
3,555
34,400
3,131
-
750
38,281
2.09%
0.85%
2.43%
0.00%
5.60%
0.92%
170,438
4,025,285
129,031
90
13,401
4,167,807
104,233
4,272,040
445,637
-
25,946
451
-
714
27,111
-
3,861,555
20,346
173
13,401
3,895,475
14,546
3,910,021
365,463
$ 4,717,677
$ 4,275,484
0.66%
0.79%
-
0.67%
2.22%
0.00%
5.33%
0.70%
$ 148,290
292
$ 147,998
$ 130,002
343
$ 129,659
3.32%
3.19%
* Full taxable equivalent basis, using 21% respective statutory Federal tax rates in 2019 and 2018.
** Includes loans held for sale.
51
Assets:
Interest earning assets:
Loans net of deferred fees and costs **
Leases - bank qualified*
Investment securities-taxable
Investment securities-nontaxable*
Interest earning deposits at Federal Reserve Bank
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
Total deposits
Short-term borrowings
Repurchase agreements
Subordinated debentures
Total deposits and interest bearing liabilities
Other liabilities
Total liabilities
Shareholders' equity
Net interest income on tax equivalent basis *
Tax equivalent adjustment
Net interest income
Net interest margin *
Year ended December 31,
2017
Average
balance
Average
rate
Interest
(dollars in
thousands)
$ 1,763,392
20,750
1,284,941
14,094
495,568
$ 78,033
1,613
36,121
470
5,202
4.43%
7.77%
2.81%
3.33%
1.05%
2.14%
3.37%
1,310
122,749
12,655
4.08%
61,309
3,640,054
(6,865)
310,058
221,096
$ 4,164,343
$ 3,371,969
439,625
3,811,594
$ 12,155
2,263
14,418
24,224
239
13,401
3,849,458
3,329
3,852,787
311,556
$ 4,164,343
336
-
586
15,340
$ 120,064
729
$ 119,335
0.36%
0.51%
0.38%
1.39%
0.00%
4.37%
0.40%
3.04%
* Full taxable equivalent basis, using a 35% statutory Federal tax rate.
** Includes loans held for sale.
In 2019 compared to 2018, average interest earning assets increased to $4.30 billion, an increase of $463.3 million, or 12.1%,
from 2018. The increase reflected a $482.2 million, or 24.9%, increase in average loans and leases. The increase resulted primarily
from higher balances in loans originated for sale into securitizations, SBLOC and IBLOC, SBA and leasing. Average balances of
52
investment securities increased $28.6 million, or 2.1%, as reinvestments were accelerated when long term rates increased. Average
demand and interest checking deposits increased $317.9 million, or 9.1%. In 2018 compared to 2017, average interest earning assets
increased to $3.84 billion, an increase of $199.4 million or 5.5% from 2017, reflecting higher loan balances including loans held for
sale. Average investment securities increased $85.2 million or 6.6%. Average demand and interest checking deposits increased
$127.3 million, or 3.8%.
Volume and Rate Analysis. The following table sets forth the changes in net interest income attributable to either changes in
volume (average balances) or to changes in average rates from 2017 through 2019 on a tax equivalent basis. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to
rate.
Interest income:
Taxable loans net of unearned discount
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:
Demand and interest checking
Savings and money market
Time
Total deposit interest expense
Short-term borrowings
Subordinated debt
Total interest expense
Net interest income:
2019 versus 2018
Due to change in:
Rate
Volume
2018 versus 2017
Due to change in:
Rate
Total
Total
Volume
(in thousands)
$ 25,248 $ 6,696 $ 31,944 $ 7,057 $ 9,142
$ 16,199
(472)
894
(72)
227
(854)
(3,564)
21,407
279
(602)
25
1,043
(854)
1,464
8,051
(193)
292
(47)
1,270
(1,708)
(2,100)
29,458
(55)
2,646
(169)
(339)
(44)
(2,125)
6,971
(188)
3,227
(39)
3,874
442
(243)
5,873
(208)
3,535
398
(1,720)
14,738
(3,845)
21,709
$ 2,096 $ 5,500 $ 7,596 $ 459 $ 10,454
910
-
11,364
157
128
11,649
$ 14,995 $ 3,293 $ 18,288 $ 6,849 $ 3,089
(2,697)
3,555
8,454
2,680
36
11,170
(1,872)
3,555
3,779
2,633
-
6,412
(825)
-
4,675
47
36
4,758
(295)
-
164
(42)
-
122
$ 10,913
615
-
11,528
115
128
11,771
$ 9,938
Provision for Loan and Lease Losses. Our provision for loan and lease losses was $4.4 million for 2019, $3.6 million for
2018 and $2.9 million for 2017. Provisions are based on our evaluation of the adequacy of our allowance for loan and lease losses,
particularly in light of current economic conditions. That evaluation reflected the impact of the levels of charge-offs. The provision
for loan and lease losses increased $815,000 over the prior year, to $4.4 million in 2019, as decreases in provisions for small business
loans and leasing were more than offset by a $1.0 million provision for other consumer loans. The $1.0 million provision resulted
primarily from the loss on a home equity line of credit. In September 2016, this product became inactive and is no longer being
marketed to customers, and the current unimpaired portfolio balance is $2.8 million, consisting of 32 accounts averaging $88,000. The
increase in the 2018 provision over 2017 reflected higher provisions for SBA non-real estate and leasing. At December 31, 2019, our
allowance for loan and lease losses amounted to $10.2 million, or 0.56%, of total loans. We believe that our allowance is adequate to
cover expected losses. For more information about our provision and allowance for loan and lease losses and our loss experience see
“—Financial Condition—Allowance for Loan and Lease Losses” and “—Summary of Loan and Lease Loss Experience,” below.
Non-Interest Income: 2019 compared to 2018. Non-interest income was $104.1 million for 2019, compared to
$153.8 million for 2018. The $49.7 million decrease reflected a $65.0 million gain on the sale of the SHIRA portfolio in 2018. In
2019 compared to 2018, the primary drivers of fee income, prepaid, debit and related fees and fees on ACH, card and other payment
processing fees, increased $11.2 million, or 17.8%, to $74.5 million. The majority of the growth resulted from prepaid, debit and
related fees which increased $10.5 million, or 19.2%, to $65.1 million, primarily as a result of transaction volume increases from new
clients and organic growth from existing clients. ACH, card and other payment processing fees, which increased $723,000, or 8.4%,
53
to $9.4 million reflected increases in payment volume, especially from the rapid funds transfer product. That product allows
customers to transfer funds from their bank account to their payee’s account in minutes. Gain on sale of loans increased $3.6 million
to $24.1 million, which resulted primarily from a higher volume of loans sold into securitizations in 2019 which more than offset the
decrease in market spreads. Any gain or loss is subject to market conditions.
Non-Interest Income: 2018 compared to 2017. Non-interest income was $153.8 million for 2018, compared to $91.5 million
for 2017. The $62.2 million increase reflected a $65.0 million gain on the sale of the SHIRA portfolio and a $3.2 million reduction in
service fees on deposit accounts related to that portfolio. In 2018 compared to 2017, the primary drivers of fee income, prepaid and
debit card fees and fees on ACH, card and other payment processing fees, increased $3.6 million, or 6.0%, to $63.3 million. The
majority of the growth resulted from card payment and ACH processing fees, which increased $2.3 million, or 37.0%, to $8.7 million
reflecting increases in payment volume, especially from the rapid funds transfer product. That product allows customers to transfer
funds from their bank account to their payee’s account in minutes. Prepaid and debit card fees increased $1.3 million, or 2.4%, to
$54.6 million, primarily as a result of transaction volume increases from new clients and organic growth from existing clients. Gain
on sale of loans increased $2.6 million to $20.5 million which resulted primarily from a higher volume of loans sold into
securitizations in 2018. Additionally, in 2018, $3.7 million of charges resulted from the investment in unconsolidated entity while
such charges in 2017 were $20,000. The charges reflected continued clarification of market and credit loss related assumptions based
on information from available sources including updated market information and projections of potential future loan losses based on
new facts or circumstances. See “Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings”
for a description of the charge related to one of those loans. The investment in unconsolidated entity resulted from the sale of certain
discontinued loans into a securitization in 2014. See Note W to the financial statements. The vast majority of the $3.6 million of
service fees on deposit accounts in 2018 resulted from the IRA and health savings portfolios which have now been sold.
Non-Interest Expense: 2019 compared to 2018. Total non-interest expense in 2019 was $168.5 million, an increase of
$17.2 million, or 11.4%, over the $151.3 million in 2018. Salary expense increased $14.4 million to $94.3 million in 2019, an
increase of 18.1% over the $79.8 million in 2018. The increase reflected higher incentive compensation for loan, deposit and fee
production and higher information technology and loan and payments infrastructure expense. Depreciation and amortization
decreased $301,000 to $3.7 million, or 7.5%, from $4.0 million in 2018, which reflected reduced spending on fixed assets and
equipment. Rent and occupancy increased $1.2 million to $6.6 million, or 21.1%, from $5.5 million in 2018, which reflected newly
leased space for the commercial real estate loan origination department. Data processing expense decreased $1.3 million, or 20.9%, to
$4.9 million from $6.2 million in 2018. The decrease reflected the impact of a renegotiated data processing contract and lower
account and transaction volume as a result of the planned exit of an affinity program which had changed ownership and the SHIRA
sale. Printing and supplies expense decreased $269,000, or 29.7%, to $637,000 from $906,000 in 2018. The decrease reflected a
reduction for SHIRA accounts which were transferred in the third quarter of 2018, in connection with the related sale. Audit expense
decreased $217,000, or 10.8%, to $1.8 million from $2.0 million in 2018, which reflected decreased regulatory and tax compliance
audit fees. Legal expense decreased $2.5 million, or 32.2%, to $5.3 million from $7.8 million in 2018. The decrease in legal expense
reflected lower fees related to regulatory matters including fees associated with an SEC subpoena related to the restatement of the
financial statements (see “—Regulatory Actions”). Amortization of intangible assets remained consistent at $1.5 million in 2019 and
2018. FDIC insurance decreased $1.8 million, or 20.3%, to $7.0 million from $8.8 million in 2018, which reflected the impact of a
decrease in the FDIC assessment rate. Software expense decreased $573,000, or 4.3%, to $12.7 million from $13.3 million in 2018.
The decrease reflected reduced expenditures for technology infrastructure to improve efficiency and scalability, including BSA
software to satisfy BSA regulatory requirements. Insurance expense decreased $103,000, or 4.0%, to $2.5 million from $2.6 million
in 2018. Telecom and information technology network communications expense increased $120,000, or 8.7%, to $1.5 million from
$1.4 million in 2018. Securitization and servicing expense decreased $36,000, or 30.8%, to $81,000 from $117,000 in 2018.
Consulting expense remained consistent at $3.2 million in 2019 and 2018. Other non-interest expense decreased $394,000, or 3.0%,
to $12.9 million from $13.3 million in 2018. The decrease resulted primarily from decreases of $317,000 in credit bureau expense,
$280,000 for prepaid and debit deposit account losses, $163,000 for customer identification expense and $100,000 for postage. These
decreases were partially offset by a $748,000 increase in travel.
Non-Interest Expense: 2018 compared to 2017. Total non-interest expense in 2018 was $151.3 million, a decrease of
$3.6 million, or 2.3%, over the $154.9 million in 2017. Salary expense increased $4.0 million to $79.8 million in 2018, an increase of
5.3% over the $75.8 million in 2017. The increase reflected increases in BSA and compliance expenses and higher incentive
compensation expense. Depreciation and amortization decreased $455,000 to $4.0 million, or 10.2%, from $4.5 million in 2017,
which reflected reduced spending on fixed assets and equipment. Rent and occupancy decreased $206,000 to $5.5 million, or 3.6%,
from $5.7 million in 2017. Data processing expense decreased $4.0 million, or 39.1%, to $6.2 million from $10.2 million in 2017.
The decrease reflected the impact of a renegotiated data processing contract and lower account and transaction volume as a result of
the planned exit of an affinity program which had changed ownership. Printing and supplies expense decreased $448,000, or 33.1%,
54
to $906,000 from $1.4 million in 2017. The decrease reflected a reduction for health savings accounts which were sold in the second
quarter of 2017 and safe harbor accounts which were transferred in the third quarter of 2018. Audit expense increased $320,000, or
19.0%, to $2.0 million from $1.7 million in 2017, which reflected increased regulatory and tax compliance audit fees. Legal expense
decreased $227,000, or 2.8%, to $7.8 million from $8.1 million in 2017. The decrease in legal expense reflected lower fees related to
regulatory matters including fees associated with an SEC subpoena related to the restatement of the financial statements
(see “—Regulatory Actions”). Amortization of intangible assets remained consistent at $1.5 million in 2018 and 2017. FDIC
insurance decreased $1.3 million, or 12.7%, to $8.8 million from $10.1 million in 2017, which reflected the impact of a decrease in the
FDIC assessment rate. Software expense increased $707,000, or 5.6%, to $13.3 million from $12.6 million in 2017. The increase
reflected additional information technology infrastructure to improve efficiency and scalability, including BSA software to satisfy
BSA regulatory requirements. Insurance expense increased $245,000, or 10.5%, to $2.6 million from $2.3 million in 2017. The
increase reflected the impact of increased limits for liability coverages. Telecom and information technology network
communications expense decreased $420,000, or 23.4%, to $1.4 million from $1.8 million in 2017, reflecting cost cutting efforts
including the closure of certain locations. Securitization and servicing expense decreased $53,000, or 31.2%, to $117,000 from
$170,000 in 2017. Consulting expense increased $1.0 million, or 45.4%, to $3.2 million from $2.2 million in 2017. The increased
expense reflected increased BSA and other regulatory compliance consulting. Other non-interest expense decreased $199,000, or
1.5%, to $13.3 million from $13.5 million in 2017. The decrease resulted primarily from decreases of $365,000 for operations losses
and recoveries, $314,000 for prepaid and debit deposit account losses, $228,000 for correspondent bank fees and $161,000 for
customer identification expense. These decreases were partially offset by a $573,000 increase in travel.
Income Tax Benefit and Expense
Income tax expense for continuing operations was $21.2 million, $32.2 million and $23.1 million, respectively, for 2019,
2018 and 2017. The tax expense rate of 29.3% in 2019 was higher than the 26.9% rate in the prior year, primarily as the result of the
non-deductibility of $8.9 million of civil money penalties. The difference between those rates and the federal statutory rate of 21%
consisted primarily of state income taxes. The 57.1% tax expense rate in 2017 primarily reflected an adjustment through tax expense
for the difference between the prior 34% and 21% tax rate which was effective for 2018, applied to total net deferred tax assets. Tax
expense in 2017 was increased by that 13% differential to recognize the decrease in future value of those deferred tax assets.
Liquidity and Capital Resources
Liquidity defines our ability to generate funds to support asset growth, meet deposit withdrawals, satisfy borrowing needs
and otherwise operate on an ongoing basis. We invest the funds we do not need for daily operations primarily in our interest bearing
account at the Federal Reserve. Interest-bearing balances at the Federal Reserve Bank, maintained on an overnight basis, averaged
$472.3 million for 2019, compared to $460.6 million for 2018.
Our primary source of funding has been deposits. The sale of the SHIRA portfolio was the primary factor in the
$324.6 million reduction of average savings and money market balances in 2019 compared to 2018. That reduction was partially
offset by growth in prepaid and debit card and other payments deposit accounts. That growth was reflected in a $317.9 million
increase in average demand and interest checking balances. Additionally, $170.4 million of average time deposits were newly utilized
in 2019 to fund increased commercial real estate originations held for sale. As a result, average deposits amounted to $4.03 billion in
2019 compared to $3.86 billion in 2018. Overnight borrowings were also used to fund such increased originations, and average
borrowings increased to $129.0 million in 2019 from $20.3 million in 2018.
Our primary source of liquidity is available for sale securities which amounted to $1.32 billion at December 31, 2019
compared to $1.24 billion at December 31, 2018. In excess of $800 million of our available-for-sale securities are U.S. government
agency securities which are highly liquid and which may be pledged as collateral for our Federal Home Loan Bank line of credit.
Loan repayments, also a source of funds, were exceeded by new loan disbursements during 2019. As a result, at December
31, 2019 outstanding loans amounted to $1.82 billion, compared to $1.50 billion at the prior year end, an increase of $322.3 million,
which was generally funded by deposits. Commercial loans held-for-sale increased to $1.18 billion from $688.5 million between
those respective dates, an increase of $492.1 million. The increase reflected increases in originations. In 2018 and 2019, the
Company sold significant amounts of commercial loans held-for-sale and plans to continue that practice in 2020.
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
55
guidance for classification of deposit accounts as brokered is relatively broad, and generally includes accounts which were referred to
or “placed” with the institution by other companies. If the Bank ceases to be categorized as “well capitalized” under banking
regulations, it will be prohibited from accepting, renewing or rolling over brokered deposits without the consent of the FDIC. In such
a case, the FDIC’s refusal to grant consent to our accepting, renewing or rolling over brokered deposits could effectively restrict or
eliminate the ability of the Bank to operate its business lines as presently conducted.
We focus on customer service which we believe has resulted in a history of customer loyalty. Stability, lower cost compared
to certain other funding sources and customer loyalty comprise key characteristics of core deposits which we believe are comparable
to core deposits of peers with branch systems. Certain components of our deposits do experience seasonality, creating greater excess
liquidity at certain times in 2019. The largest deposit inflows occur in the first quarter of the year when certain of our accounts are
credited with tax refund payments from the U.S. Treasury.
While consumer transaction accounts including prepaid and debit card accounts comprise the majority of our funding needs,
we maintain secured borrowing lines with the Federal Home Loan Bank, or the FHLB, and the Federal Reserve. As of December 31,
2019, we had lines of credit exceeding $250 million with the FHLB and $1.0 billion with the Federal Reserve. The FHLB line can be
increased to more than $800 million, by pledging U.S. agency securities. These lines may be collateralized by specified types of loans
or securities. As of December 31, 2019, we had no amounts outstanding on these borrowing lines. We expect to continue to maintain
our facilities with the FHLB and Federal Reserve. We actively monitor our positions and contingent funding sources on a daily basis.
As a result of the discontinuance of our commercial loan operations, we have received and expect to continue to receive
during 2020, cash proceeds from the sale or repayment of discontinued assets. We currently anticipate that these proceeds will be
deployed into loans in our continuing operations. Approximately $140.7 million of discontinued assets remained on our balance sheet
as of December 31, 2019 (compared to $197.8 million at the prior year end), consisting primarily of loans secured by commercial real
estate. If not sold, these loans will be retained until repaid. We also retain the financing receivable from the 2014 Walnut Street
securitization for a portion of the discontinued commercial loans. At December 31, 2019, the balance of that receivable was
$39.2 million, compared to $59.3 million at the prior year end.
Included in our cash and cash-equivalents at December 31, 2019, were $924.5 million of interest earning deposits, which
primarily consisted of deposits with the Federal Reserve. These amounts may vary on a daily basis. Accordingly, the majority of our
available liquidity is comprised of the aforementioned available-for-sale securities and lines of credit with the FHLB and Federal
Reserve.
In 2019, $173.9 million of securities sales and repayments exceeded purchases of $157.5 million. In 2018, $213.2 million of
securities sales and repayments exceeded purchases of $134.8 million. In 2017, $569.7 million of securities sales and repayments
were comparable to purchases of $579.9 million. At December 31, 2019, we had outstanding commitments to fund loans, including
unused lines of credit, of $2.34 billion, the vast majority of which are SBLOC lines of credit which are variable rate. We attempt to
increase such line usage; however, usage has been historically consistent and the majority of these lines of credit have historically not
been drawn upon. As shown in the consolidated statements of cash flows, cash required to fund loans was $326.0 million in 2019,
$115.1 million in 2018 and $172.9 million in 2017.
As a holding company conducting substantially all of our business through our bank subsidiary, our need for liquidity
consists principally of cash needed to make required interest payments on our trust preferred securities. As of December 31, 2019, we
had approximate cash reserves of $13.3 million at the holding company. Current quarterly interest payments on the $13.4 million of
trust preferred securities are approximately $180,000 based on a floating rate of 3.25% over the three-month London Interbank
Offered Rate, or LIBOR. A Supervisory Letter from the Federal Reserve, requiring its approval for any dividend from us, was lifted
in 2019. FDIC approval is required for any dividend from the Bank to us, which, apart from the $13.3 million of cash on hand, is our
principal source of liquidity. See Item 1, “Business—Regulation under Banking Law,” and Item 1A, “Risk Factors-Risks Relating to
Our Business-The entry into the Consent Orders has imposed certain restrictions and requirements upon us and the Bank.”
We expect that the conditions under which the 2014 Consent Order Amendment was issued will be remediated and the FDIC
will permit the Bank to resume paying dividends to us to fund holding company operations. There can, however, be no assurance that
the FDIC will, in fact, allow the resumption of Bank dividends to us upon completion of the remediation or, if allowed, as to the
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.
56
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 1 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 1 leverage ratio is the ratio of Tier 1
capital to average assets for the period. “Tier 1 capital” includes common shareholders’ equity, certain qualifying perpetual preferred
stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles. At December 31, 2019, we were “well
capitalized” under banking regulations.
The following table sets forth our regulatory capital amounts and ratios for the periods indicated:
Tier 1 capital
to average
assets ratio
Tier 1 capital
Total capital
to risk-weighted to risk-weighted
assets ratio
assets ratio
Common equity
tier 1 to risk-
weighted assets
As of December 31, 2019
The Bancorp, Inc.
The Bancorp Bank
"Well capitalized" institution (under FDIC
regulations-Basel III)
As of December 31, 2018
The Bancorp, Inc.
The Bancorp Bank
"Well capitalized" institution (under FDIC
regulations)
Asset and Liability Management
9.63%
9.46%
5.00%
10.11%
9.70%
19.04%
18.71%
8.00%
20.64%
20.18%
19.45%
19.11%
10.00%
21.07%
20.61%
19.04%
18.71%
6.50%
20.64%
20.18%
5.00%
8.00%
10.00%
6.50%
The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest
margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest
rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of an institution’s interest margin
resulting from changes in market interest rates.
As a financial institution, potential interest rate volatility is a primary component of our market risk. Fluctuations in interest
rates will ultimately impact the level of our earnings and the market value of all of our interest earning assets, other than those with
short-term maturities. We do not own any trading assets. We used hedging transactions only for fixed rate commercial loans
originated for sale into secondary securities markets. We have discontinued making fixed rate loans requiring hedging transactions.
We have adopted policies designed to manage net interest income and preserve capital over a broad range of interest rate
movements. To effectively administer the policies and to monitor our exposure to fluctuations in interest rates, we maintain an
asset/liability committee, consisting of the Bank’s Chief Executive Officer, Chief Accounting Officer, Chief Financial Officer and
Chief Credit Officer. This committee meets quarterly to review our financial results, develop strategies to optimize margins and to
respond to market conditions. The primary goal of our policies is to optimize margins and manage interest rate risk, subject to overall
policy constraints for prudent management of interest rate risk.
We monitor, manage and control interest rate risk through a variety of techniques, including use of traditional interest rate
sensitivity analysis (also known as “gap analysis”) and an interest rate risk management model. With the interest rate risk
management model, we project future net interest income and then estimate the effect of various changes in interest rates and balance
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.
57
Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of
significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and
when yields and costs on individual categories of interest earning assets and interest bearing liabilities will respond to general changes
in market rates, future cash flows and discount rates. Gap analysis requires estimates as to when individual categories of interest
sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at
the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is
discretionary and subject to competitive and other pressures. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of falling interest rates, a positive gap would tend to adversely affect
net interest income, while a negative gap would tend to result in an increase in net interest income, all else equal. During a period of
rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect
net interest income adversely.
The following table sets forth the estimated maturity or repricing structure of our interest earning assets and interest bearing
liabilities at December 31, 2019. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a
particular period were determined in accordance with the contractual terms of each asset or liability. Loans currently at their interest
rate floors are classified at their maturity date, though they are tied to variable interest rates. The majority of demand and interest
bearing demand deposits and savings deposits are assumed to be “core” deposits, or deposits that will generally remain with us
regardless of market interest rates. We estimate the repricing characteristics of these deposits based on historical performance, past
experience, judgmental predictions and other deposit behavior assumptions. However, we may choose not to reprice liabilities
proportionally to changes in market interest rates for competitive or other reasons. Additionally, although non-interest bearing
demand accounts are not paid interest, we estimate certain of the balances will reprice as a result of the contractual fees that are paid to
the affinity groups which are based upon a rate index, and therefore are included in interest expense. We have adjusted the demand
and interest checking balances in the table downward, to better reflect the impact of their partial adjustment to changes in rates. Loan
and security balances, which adjust more fully to market rate changes, are based upon actual balances. The table does not assume any
prepayment of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including
prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest
rate movements on our net interest income because the repricing and related behavior of certain categories of assets and liabilities is
beyond our control as, for example, prepayments of loans and withdrawal of deposits. As a result, certain assets and liabilities
indicated as repricing within a stated period may, in fact, reprice at different times and at different rate levels.
58
Interest earning assets:
Commercial loans held-for-sale
Loans net of deferred loan costs
Investment securities
Interest earning deposits
Total interest earning assets
Interest bearing liabilities:
Demand and interest checking
Savings and money market
Time deposits
Securities sold under agreements to repurchase
Subordinated debentures
Total interest bearing liabilities
Gap
Cumulative gap
Gap to assets ratio
Cumulative gap to assets ratio
1-90
Days
91-364
Days
1-3
Years
3-5
Years
Over 5
Years
(dollars in thousands)
$ 1,021,433 $ 25,958 $ 36,539 $ 7,629 $ 88,987
17,971
1,284,814
187,035
257,084
77,341
639,735
924,544
3,870,526
2,865,899
43,572
475,000
82
13,401
3,397,954
101,818
-
205,117
62,358
87,146
-
-
-
149,504
127,190
-
420,813
252,548
-
447,212
283,788
-
390,746
62,358
43,572
-
-
-
105,930
-
-
-
-
-
-
-
-
-
-
-
-
$ 472,572 $ 55,613 $ 314,883 $ 447,212 $ 390,746
$ 472,572 $ 528,185 $ 843,068 $ 1,290,280 $ 1,681,026
8%
8%
*
9%
6%
15%
8%
23%
7%
30%
The method used to analyze interest rate sensitivity in this table has a number of limitations. Certain assets and liabilities
may react differently to changes in interest rates even though they reprice or mature in the same or similar time periods. The interest
rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changing in
advance of changes in market rates and some lagging behind changes in market rates. Additionally, the actual prepayments and
withdrawals we experience when interest rates change may deviate significantly from those assumed in calculating the data shown in
the table.
Because of the limitations in the gap analysis discussed above, we believe that interest sensitivity modeling may more
accurately reflect the effects of our exposure to changes in interest rates, notwithstanding its own limitations. Net interest income
simulation considers the relative sensitivities of the consolidated balance sheet including the effects of interest rate caps on adjustable
rate mortgages and the relatively stable aspects of core deposits. As such, net interest income simulation is designed to address the
probability of interest rate changes and the behavioral response of the consolidated balance sheet to those changes. Market Value of
Portfolio Equity, or MVPE, represents the modeled fair value of the net present value of assets, liabilities and off-balance sheet items.
We believe that the assumptions utilized in evaluating our estimated net interest income are reasonable; however, the interest
rate sensitivity of our assets, liabilities and off-balance sheet financial instruments as well as the estimated effect of changes in interest
rates on estimated net interest income could vary substantially if different assumptions are used or actual experience differs from
presumed behavior of various deposit and loan categories. The following table shows the effects of interest rate shocks on our MVPE
and net interest income. Rate shocks assume that current interest rates change immediately and sustain parallel shifts. For interest
rate increases or decreases of 100 and 200 basis points, our policy includes a guideline that our MVPE ratio should not decrease more
than 10% and 15%, respectively, and that net interest income should not decrease more than 10% and 15%, respectively. As
illustrated in the following table, we complied with our asset/liability policy at December 31, 2019. While our modeling suggests an
increase in market rates will have a positive impact on margin (as shown in the table below), the amount of such increase cannot be
determined, and there can be no assurance any increase will be realized.
59
Rate scenario
Amount
Percentage
change
Net portfolio value at
December 31, 2019
Net interest income
Amount
Percentage
change
+200 basis points
+100 basis points
Flat rate
-100 basis points
-200 basis points
$ 676,188
670,847
661,733
644,254
578,841
(dollars in thousands)
2.18%
1.38%
0.00%
-2.64%
-12.53%
$ 172,557
164,432
154,698
145,463
136,020
11.54%
6.29%
0.00%
-5.97%
12.07%
If we should experience a mismatch in our desired gap ranges or an excessive decline in our MVPE subsequent to an
immediate and sustained change in interest rate, we have a number of options available to remedy such a mismatch. We could
restructure our investment portfolio through the sale or purchase of securities with more favorable repricing attributes. We could also
emphasize loan products with appropriate maturities or repricing attributes, or we could emphasize deposits or obtain borrowings with
desired maturities.
We do not use derivatives except for swaps outstanding for fixed rate loans which were originated for sale. The swaps hedge
interest rate risk between the time the loans are disbursed and sold.
Historically, we have used variable rate loans as the principal means of limiting interest rate risk. The Bank’s SBLOC,
IBLOC and SBA loans are primarily variable rate as are the vast majority of commercial loans generated for sale. We continue to
evaluate market conditions and may change our current gap strategy in response to changes in those conditions.
Financial Condition
General. Our total assets at December 31, 2019 were $5.66 billion, of which our total loans and commercial loans held-for-
sale from continuing operations were $3.00 billion and our assets held-for-sale from discontinued operations were $140.7 million,
$115.9 million of which were loans. At December 31, 2018, our total assets were $4.44 billion, of which our total loans and loans
held-for-sale from continuing operations were $2.19 billion and our assets held-for-sale from discontinued operations were
$197.8 million, $170.7 million of which were loans. Investment securities available-for-sale increased to $1.32 billion at December
31, 2019 from $1.24 billion at December 31, 2018. The increase in total assets at December 31, 2019 reflected increased originations
of commercial loans held for sale and loan growth.
Interest Earning Deposits and Federal Funds Sold. At December 31, 2019, we had a total of $924.5 million of interest
earning deposits, comprised primarily of balances at the Federal Reserve, which pays interest on such balances. At December 31,
2018, we had $551.9 million of such balances. The increase reflected higher deposit balances, including $475.0 million of short term
certificates of deposit used to fund increased commercial mortgage loan origination which are held for sale.
Investment Portfolio. The Financial Accounting Standards Board Accounting Standards Codification (ASC) 320,
Investments—Debt and Equity Securities, requires that debt and equity securities classified as available-for-sale be reported at fair
value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Marking an available-
for-sale portfolio to market (fair value) results in fluctuations in the level of shareholders’ equity and equity-related financial ratios as
market interest rates and market demand for such securities cause the fair value of fixed-rate securities to fluctuate. Debt securities for
which we have the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost.
For detailed information on the composition and maturity distribution of our investment portfolio, see Note D to the
Consolidated Financial Statements. Total investment securities increased to $1.41 billion on December 31, 2019, an increase of
$84.3 million, or 6.4%, from a year earlier. The increase in investment securities reflected the acceleration of purchases when long
term rates increased.
60
Other securities included in the held-to-maturity classification at December 31, 2019 consisted of three securities secured by
diversified portfolios of corporate securities and one single-issuer trust preferred security.
The trust preferred security is an unrated security issued by an insurance company with a book value of $9.2 million and a fair
value of $7.2 million.
A total of $75.2 million of other debt securities is comprised of three securities secured by diversified portfolios of corporate
securities, and have a fair value of $75.9 million.
Under the accounting guidance related to the recognition of other-than-temporary impairment charges on debt securities, an
impairment on a debt security is deemed to be other-than-temporary if it meets either of the following conditions: i) we intend to sell
or it is more likely than not we will be required to sell the security before a recovery in value, or ii) we do not expect to recover the
entire amortized cost basis of the security. If we intend to sell or it is more likely than not we will be required to sell the security
before a recovery in value, a charge is recorded in net realized losses in the consolidated statement of operations equal to the
difference between the fair value and amortized cost basis of the security. For those other-than-temporarily impaired debt securities
which do not meet the first condition and for which we do not expect to recover the entire amortized cost basis, the difference between
the security’s amortized cost basis and the fair value is separated into the portion representing a credit impairment, which is recorded
in net realized losses in the consolidated statement of operations, and the remaining impairment, which is recorded in other
comprehensive income. Generally, a security’s credit impairment is the difference between its amortized cost basis and the best
estimate of its expected future cash flows discounted at the security’s effective yield prior to impairment. The previous amortized cost
basis, less the impairment recognized in net realized losses on the consolidated income statement, becomes the security’s new cost
basis. We recognized no other-than-temporary impairment charges related to trust preferred securities classified in our held-to-
maturity portfolio for 2019, 2018 and 2017.
61
The following table presents the book value and the approximate fair value for each major category of our investment
securities portfolio. At December 31, 2019 and 2018, our investments were categorized as either available-for-sale or held-to-maturity
(in thousands).
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
Corporate debt securities
Available-for-sale
December 31, 2019
Held-to-maturity
December 31, 2019
Amortized
cost
Fair
value
Amortized
cost
Fair
value
$ 52,415
$ 52,910
$ -
$ -
244,751
5,174
58,258
335,068
221,109
394,852
-
244,349
5,318
60,250
336,596
222,727
398,542
-
-
-
-
-
-
-
-
-
-
-
-
-
84,387
83,002
$ 1,311,627
$ 1,320,692
$ 84,387
$ 83,002
Available-for-sale
December 31, 2018
Held-to-maturity
December 31, 2018
Amortized
cost
Fair
value
Amortized
cost
Fair
value
$ 54,095
$ 53,362
$ -
$ -
189,850
7,546
60,152
377,199
265,914
300,143
-
188,602
7,551
60,435
369,741
262,207
294,426
-
-
-
-
-
-
-
-
-
-
-
-
-
84,432
83,391
$ 1,254,899
$ 1,236,324
$ 84,432
$ 83,391
Investments in FHLB and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $5.3 million at
December 31, 2019 and $1.1 million at December 31, 2018. Both the FHLB and Atlantic Central Bankers Bank require its
correspondent banking institutions to hold stock as a condition of membership. The increase resulted from an increase in FHLB stock,
required to permit increased overnight borrowings.
At December 31, 2019 and 2018, investment securities with a fair value of approximately $262.0 million and $116.0 million,
respectively, were pledged to secure a line of credit with the FHLB. At December 31, 2019 and 2018, investment securities with a fair
value of approximately $0 and $169.5 million, respectively, were pledged to secure a line of credit with the Federal Reserve.
62
The following tables show the contractual maturity distribution and the weighted average yields of our investment securities
portfolio as of December 31, 2019 (in thousands):
Available-for-sale
Zero
to one
Average
year
yield
After
one to
five
years
After
five to
Average
ten
Average
Over
ten
Average
yield
years
yield
years
yield
Total
U.S. Government agency securities
Asset-backed securities *
$ -
-
-
-
$ 202
8,916
3.33% $ 33,771
24,278
2.98%
2.68%
3.34%
$ 18,937 2.78% $ 52,910
244,349
211,155 3.31%
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
Weighted average yield
1,135
1.40%
2,222
2.82%
1,961
2.65%
-
-
5,318
2,516
3,205
-
-
2.70%
2.21%
-
-
18,056
8,160
-
47,690
3.16%
2.53%
-
2.64%
33,662
81,857
13,075
50,901
3.58%
2.51%
2.31%
2.51%
6,016 5.90%
243,374 2.51%
209,652 2.50%
299,951 3.34%
60,250
336,596
222,727
398,542
$ 6,856
$ 85,246
$ 239,505
$ 989,085
$ 1,320,692
2.26%
2.78%
2.76%
2.95%
* The average yield of asset backed securities is as follows: collateralized loan obligation securities 3.31%, federally insured student loan
securities 3.24%.
** If adjusted to their taxable equivalents, yields would approximate 1.77%, 3.56% and 3.35% for zero to one year, one to five years and five to ten
years, respectively, at a Federal tax rate of 21%.
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
Over
ten
years
Average
yield
Average
yield
Total
$ -
$ -
- $ -
$ -
- $ -
$ -
- $ 84,387 4.81% $ 84,387
$ 84,387
$ 84,387
-
4.81%
Loans Held-for-Sale. Loans held-for-sale are comprised of commercial mortgage loans and SBA loans originated for sale or
securitization in the secondary market. The fair value of commercial mortgage loans and the SBA loans originated for sale is based on
purchase commitments, quoted prices for the same or similar loans or fair market valuations based on other market information. The
analysis is performed on an individual loan basis for commercial mortgage loans and a pooled basis for SBA loans. Commercial loans
held-for-sale increased to $1.18 billion at December 31, 2019 from $688.5 million at December 31, 2018. The increase resulted from
an increase in the volume of commercial real estate loans originated for future sale or securitization.
Loan Portfolio. We have developed a detailed credit policy for our lending activities and utilize loan committees to oversee
the lending function. SBLOC, IBLOC and other consumer loans, SBL, Leases and CMBS each have their own loan committee. The
Chief Executive Officer and Chief Credit Officer serve on all loan committees. Each committee also includes lenders from that
particular type of specialty lending. The Chief Credit Officer is responsible for both regulatory compliance and adherence to our
internal credit policy. Key committee members have lengthy experience and certain of them have had similar positions at
substantially larger institutions.
63
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):
SBL non-real estate
SBL commercial mortgage
SBL construction
Small business loans *
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Other consumer loans
December 31, December 31,
December 31, December 31,
December 31,
2019
2018
2017
2016
2015
$ 84,579 $ 76,340 $ 70,379 $ 73,488 $ 67,398
218,110
45,310
347,999
434,460
1,024,420
3,055
4,554
165,406
21,636
263,382
394,770
785,303
31,836
16,302
142,086
16,740
229,205
375,890
730,462
30,720
14,133
126,159
8,826
208,473
343,941
630,400
11,073
17,374
114,029
6,977
188,404
228,280
575,948
48,315
23,180
1,814,488
1,491,593
1,380,410
1,211,261
1,064,127
Unamortized loan fees and costs
9,757
10,383
10,048
9,468
10,716
Total loans, net of unamortized loan fees and costs
$ 1,824,245 $ 1,501,976 $ 1,390,458 $ 1,220,729 $ 1,074,843
*SBL loans consist primarily of SBA loans. SBL loans held for sale consist of the U.S. government guaranteed portion of
SBA loans. The following table shows SBL loans and SBL loans held-for-sale for the periods indicated (in thousands):
December 31,
December 31, December 31,
December 31,
December 31,
2019
2018
2017
2016
2015
SBL loans, including unamortized fees and costs of $4,215 and $7,478
for December 31, 2019 and December 31, 2018, respectively
$ 352,214
$ 270,860
$ 236,724
$ 215,786
$ 197,966
SBL loans included in held-for-sale
220,358
199,977
165,177
154,016
109,174
Total small business loans
$ 572,572
$ 470,837
$ 401,901
$ 369,802
$ 307,140
64
The following table presents selected loan categories by maturity for the periods indicated (in thousands):
Within
one year
December 31, 2019
One to five
years
After
five years
(in thousands)
Total
SBL non-real estate
$ 233
$ 26,821
$ 57,525
$ 84,579
SBL commercial mortgage
SBL construction
9,755
4,742
7,604
140
200,751
40,428
218,110
45,310
$ 14,730
$ 34,565
$ 298,704
$ 347,999
Loans at fixed rates
Loans at variable rates
Total
$ 4,382
$ 16,002
$ 20,384
30,183
282,702
216,058
$ 34,565
$ 298,704
$ 333,269
Allowance for Loan and Lease Losses. We review the adequacy of our allowance for loan and lease losses on at least a
quarterly basis to determine a provision for loan losses in an amount necessary to maintain our allowance at a level that is appropriate,
based on management’s estimate of inherent losses. Our estimates of loan and lease losses are intended to, and, in management’s
opinion, do meet the criteria for accrual of loss contingencies in accordance with ASC 450, Contingencies and ASC 310, Receivables.
The process of evaluating this adequacy has two basic elements: first, the identification of problem loans or leases based on current
financial information and the fair value of the underlying collateral; and second, a methodology for estimating general loss reserves.
For loans or leases classified as “special mention” or “substandard”, we reserve all estimated losses at the time we classify the loan or
lease. This “specific” portion of the allowance is the total of potential, although unconfirmed, losses for individually classified loans.
In this process, we establish specific reserves based on an analysis of the most probable sources of repayment and liquidation of
collateral. While each impaired loan is individually evaluated, not every loan requires a reserve when the collateral value and
estimated cash flows exceed the current balance. When loans are classified as troubled debt restructurings, their collateral is valued
and a specific reserve is established if the collateral valuation, less disposition costs, is lower than the recorded value of the loan. At
December 31, 2019, there were eleven troubled debt restructured loans with a balance of $2.1 million which had specific reserves of
$1.0 million. These reserves related to the non-guaranteed portion of SBA loans for start-up businesses.
The second phase of our analysis represents an allocation of the allowance. This methodology analyzes pools of loans that
have similar characteristics and applies historical loss experience and other factors for each pool including management’s experience
with similar loan and lease portfolios at other institutions, the historic loss experience of our peers and a review of statistical
information from various industry reports to determine the allocable portion of the allowance. This estimate is intended to represent
the potential and inherent losses within the portfolio. Individual loan pools are created for major loan categories: SBLOC and IBLOC,
SBA loans, direct lease financing and other specialty lending and consumer loans. We augment historical experience for each loan
pool by accounting for such items as current economic conditions, current loan portfolio performance, loan policy or management
changes, loan concentrations, increases in our lending limit, average loan size and other factors as appropriate. Our chief credit officer
oversees the loan review department, which measures the adequacy of the allowance for loan and lease losses independently of loan
production officers. A description of loan review coverage targets is as follows.
At December 31, 2019, in excess of 50% of the total continuing loan portfolio was reviewed. The targeted coverages and
scope of the reviews are risk-based and vary according to each portfolio. These thresholds are maintained as follows:
Security Backed Lines of Credit (SBLOC) – The targeted review threshold for 2019 was 40% with the largest 25% of
SBLOCs by commitment to be reviewed annually. A random sampling of a minimum of 20 of the remaining loans will be reviewed
each quarter. At December 31, 2019, approximately 55% of the SBLOC portfolio had been reviewed.
Insurance Backed Lines of Credit (IBLOC) – The targeted review threshold for 2019 was 40%, with the largest 25% of
IBLOCs by commitment to be reviewed annually. A random sampling of a minimum of 20 of the remaining loans will be reviewed
each quarter. At December 31, 2019, approximately 57% of the IBLOC portfolio had been reviewed.
65
SBA Loans – The targeted review or rated threshold for 2019 was 100%, to be rated and/or reviewed within 90 days of
funding, less fully guaranteed loans purchased for CRA. The 100% coverage includes loans rated by designated SBA department
personnel, with a review threshold for the independent loan review department of all loans exceeding $1.0 million and any classified
loans. At December 31, 2019, approximately 100% of the government guaranteed loan portfolio had been rated and/or reviewed.
Direct Lease Financing – The targeted review threshold for 2019 was 35%. At December 31, 2019, approximately 54% of
the leasing portfolio had been reviewed. All lease relationships exceeding $1.0 million are reviewed.
Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold for 2019 was 100%. Floating rate
loans will be reviewed initially within 90 days of funding and will be monitored on an ongoing basis as to payment status. Subsequent
reviews will be performed based on a sampling each quarter. Each floating rate loan will be reviewed if any available extension
options are exercised. At December 31, 2019, approximately 100% of the CMBS floating rate loans on the books for more than
90 days had been reviewed.
Commercial Mortgaged Backed Securities (Fixed Rate) – 100% of fixed rate loans that are unable to be readily sold on the
secondary market and remain on the Bank's books after nine months will be reviewed at least annually. At December 31, 2019,
approximately 100% of the CMBS fixed rate portfolio had been reviewed.
Specialty Lending – Specialty Lending, defined as commercial loans unique in nature that do not fit into other established
categories, have a review coverage threshold of 100% for non-Community Reinvestment Act (“CRA”) loans. At December 31, 2019,
approximately 100% of the non-CRA loans had been reviewed.
Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2019 was 50%. The largest 25% of HELOCs
by commitment will be reviewed annually. A random sampling of a minimum of ten of the remaining loans will be reviewed each
quarter. At December 31, 2019, approximately 85% of the HELOC portfolio had been reviewed.
66
The following table presents delinquencies by type of loan for December 31, 2019 and 2018 (in thousands):
30-59 Days
past due
60-89 Days
past due
90+ Days
still accruing Non-accrual
Total
past due
Current
Total
loans
December 31, 2019
SBL non-real estate
$ 36 $ 125 $ - $ 3,693 $ 3,854 $ 80,725 $ 84,579
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and costs
-
-
2,008
290
-
-
-
-
1,983
-
2,692
75
-
-
-
-
-
-
3,264
-
-
-
-
-
1,047
711
-
-
-
-
345
-
3,030
711
7,964
365
-
-
345
-
215,080
44,599
426,496
218,110
45,310
434,460
1,024,055
1,024,420
3,055
1,137
3,072
9,757
3,055
1,137
3,417
9,757
$ 2,334 $ 4,875 $ 3,264 $ 5,796 $ 16,269 $ 1,807,976 $ 1,824,245
30-59 Days
60-89 Days
90+ Days
Total
past due
past due
still accruing Non-accrual
past due
Current
Total
loans
December 31, 2018
SBL non-real estate
$ 346 $ 125 $ - $ 2,590 $ 3,061 $ 73,279 $ 76,340
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and costs
-
-
2,594
487
108
-
-
-
-
694
1,572
-
-
-
-
-
-
-
954
-
-
-
-
-
458
-
-
-
-
-
1,468
-
458
694
5,120
487
108
-
1,468
-
164,948
20,942
389,650
784,816
31,728
9,147
5,687
10,383
165,406
21,636
394,770
785,303
31,836
9,147
7,155
10,383
$ 3,535 $ 2,391 $ 954 $ 4,516 $ 11,396 $ 1,490,580 $ 1,501,976
Although we consider our allowance for loan and lease losses to be adequate based on information currently available, future
additions to the allowance may be necessary due to changes in economic conditions, our ongoing loss experience and that of our
peers, changes in management’s assumptions as to future delinquencies, recoveries and losses, deterioration of specific credits and
management’s intent with regard to the disposition of loans and leases.
67
The following table presents an allocation of the allowance for loan and lease losses among the types of loans or leases in our
portfolio at December 31, 2019, 2018, 2017, 2016 and 2015 (in thousands):
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Consumer loans
Unallocated
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC
Other specialty lending
Consumer loans
Unallocated
December 31, 2019
December 31, 2018
December 31, 2017
Allowance
$ 4,985
1,472
432
2,426
553
12
40
318
% Loan
type to
total loans
4.66%
12.02%
2.50%
23.94%
56.46%
0.17%
0.25%
-
Allowance
$ 4,636
941
250
2,025
393
60
108
240
% Loan
type to
total loans
5.11%
11.07%
1.45%
26.60%
52.55%
2.13%
1.09%
-
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%
-
$ 10,238
100.00%
$ 8,653
100.00%
$ 7,096
100.00%
December 31, 2016
December 31, 2015
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%
-
$ 6,332
100.00%
$ 4,400
100.00%
68
Summary of Loan and Lease Loss Experience. The following tables summarize our credit loss experience for each of the
periods indicated (in thousands):
December 31, 2019
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC /
IBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
$ 4,636
(1,362)
125
1,586
$ 4,985
$ 941 $ 250
-
-
182
$ 1,472 $ 432
-
-
531
$ 2,025
(528)
51
878
$ 2,426
$ 393
-
$ 60
-
160
$ 553
(48)
$ 12
$ 108
(1,103)
2
1,033
$ 40
$ 240
-
-
78
$ 318
$ 8,653
(2,993)
178
4,400
$ 10,238
$ 2,961
$ 136 $ 36
$ -
$ -
$ -
$ 9
$ -
$ 3,142
$ 2,024
$ 1,336 $ 396
$ 2,426
$ 553
$ 12
$ 31
$ 318
$ 7,096
$ 84,579
$ 218,110 $ 45,310
$ 434,460
$ 1,024,420
$ 3,055
$ 4,554
$ 9,757
$ 1,824,245
$ 4,139
$ 1,047 $ 711
$ 286
$ -
$ -
$ 610
$ -
$ 6,793
$ 80,440
$ 217,063 $ 44,599
$ 434,174
$ 1,024,420
$ 3,055
$ 3,944
$ 9,757
$ 1,817,452
December 31, 2018
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
$ 3,145
(1,348)
57
2,782
$ 4,636
$ 1,120 $ 136
-
-
114
$ 941 $ 250
(157)
13
(35)
$ 1,495
(637)
64
1,103
$ 2,025
$ 365
-
$ 57
-
28
$ 393
3
$ 60
$ 581
(21)
1
(453)
$ 108
$ 197
-
-
43
$ 240
$ 7,096
(2,163)
135
3,585
$ 8,653
$ 2,806
$ 71 $ -
$ 145
$ -
$ -
$ 17
$ -
$ 3,039
$ 1,830
$ 870 $ 250
$ 1,880
$ 393
$ 60
$ 91
$ 240
$ 5,614
$ 76,340
$ 165,406 $ 21,636
$ 394,770
$ 785,303
$ 31,836
$ 16,302
$ 10,383
$ 1,501,976
$ 3,716
$ 458 $ -
$ 871
$ -
$ -
$ 1,741
$ -
$ 6,786
$ 72,624
$ 164,948 $ 21,636
$ 393,899
$ 785,303
$ 31,836
$ 14,561
$ 10,383
$ 1,495,190
Beginning balance
1/1/2019
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
Beginning balance
1/1/2018
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
69
December 31, 2017
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
$ 1,976
(1,171)
19
2,321
$ 3,145
$ 737 $ 76
-
-
60
$ 1,120 $ 136
-
-
383
$ 1,994
(927)
8
420
$ 1,495
$ 315
-
$ 32
-
50
$ 365
25
$ 57
$ 975
(109)
24
(309)
$ 581
$ 227
-
-
(30)
$ 197
$ 6,332
(2,207)
51
2,920
$ 7,096
$ 1,689
$ 225 $ -
$ -
$ -
$ -
$ -
$ -
$ 1,914
$ 1,456
$ 895 $ 136
$ 1,495
$ 365
$ 57
$ 581
$ 197
$ 5,182
$ 70,379
$ 142,086 $ 16,740
$ 375,890
$ 730,462
$ 30,720
$ 14,133
$ 10,048
$ 1,390,458
$ 2,858
$ 693 $ -
$ 229
$ -
$ -
$ 1,695
$ -
$ 5,475
$ 67,521
$ 141,393 $ 16,740
$ 375,661
$ 730,462
$ 30,720
$ 12,438
$ 10,048
$ 1,384,983
December 31, 2016
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
$ 844
(128)
1
1,259
$ 1,976
$ 408 $ 48
-
-
28
$ 737 $ 76
-
-
329
$ 1,022
(119)
17
1,074
$ 1,994
$ 762
-
-
(447)
$ 315
$ 199
-
-
(167)
$ 32
$ 936
(1,211)
12
1,238
$ 975
$ 181
-
-
46
$ 227
$ 4,400
(1,458)
30
3,360
$ 6,332
$ 938
$ - $ -
$ 216
$ -
$ -
$ -
$ -
$ 1,154
$ 1,038
$ 737 $ 76
$ 1,778
$ 315
$ 32
$ 975
$ 227
$ 5,178
$ 73,488
$ 126,159 $ 8,826
$ 343,941
$ 630,400
$ 11,073
$ 17,374
$ 9,468
$ 1,220,729
$ 2,374
$ - $ -
$ 734
$ -
$ -
$ 1,730
$ -
$ 4,838
$ 71,114
$ 126,159 $ 8,826
$ 343,207
$ 630,400
$ 11,073
$ 15,644
$ 9,468
$ 1,215,891
Beginning balance
1/1/2017
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
Beginning balance
1/1/2016
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
70
December 31, 2015
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
$ 385
(111)
-
570
$ 844
$ 461 $ 114
-
-
(66)
$ 408 $ 48
-
-
(53)
$ 836
(30)
-
216
$ 1,022
$ 562
-
-
200
$ 762
$ 66
-
-
133
$ 199
$ 1,181
(1,220)
23
952
$ 936
$ 33
-
-
148
$ 181
$ 3,638
(1,361)
23
2,100
$ 4,400
$ 123
$ - $ -
$ -
$ -
$ -
$ 26
$ -
$ 149
$ 721
$ 408 $ 48
$ 1,022
$ 762
$ 199
$ 910
$ 181
$ 4,251
$ 67,398
$ 114,029 $ 6,977
$ 228,280
$ 575,948
$ 48,315
$ 23,180
$ 10,716
$ 1,074,843
$ 904
$ - $ -
$ -
$ -
$ -
$ 1,524
$ -
$ 2,428
$ 66,494
$ 114,029 $ 6,977
$ 228,280
$ 575,948
$ 48,315
$ 21,656
$ 10,716
$ 1,072,415
Beginning balance
1/1/2015
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
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,
2019
2018
0.56%
113.00%
0.16%
0.12%
0.58%
158.19%
0.12%
0.10%
(1) Non-performing loans are defined as nonaccrual loans and loans 90 days past due and still accruing interest and are both included in our ratios.
The ratio of the allowance for loan and lease losses to total loans decreased to 0.56% at December 31, 2019 compared to
0.58% at December 31, 2018. The lower ratio in 2019 reflected an increase in the allowance which was relatively less than the
increase in loan balances. The largest component of the increase in the allowance to $10.2 million at year end 2019 from from
$8.7 million at year end 2018 was in the non guaranteed portion of SBA loans which comprise the majority of small business (SBL)
loans. The allowance on SBL loan increased $1.1 million between those dates. The increase reflected the impact of historical charge-
off ratios and qualitative factors which may increase such ratios, applied against the related loan category balance at period end. In
addition, the total allowance includes allowances on specific loans (see “-Allowance for Loan and Lease Losses”). For the year 2019,
the largest segment of the loan portfolio continued to be SBLOC, which has historically experienced low levels of losses as a result of
the marketable securities collateralizing these loans and related loan to value requirements (see Item 1. “Business-Lending-SBL
Loans”). The ratio of the allowance for loan losses to non-performing loans decreased to 113.0% at December 31, 2019 from
158.19% over the prior year end, reflecting an increase in non-performing loans, especially SBL non-real estate and leasing, which
exceeded the relative increase in the allowance for loan losses. The ratio of non-performing assets to total assets increased to 0.16%
from 0.12% primarily as a result of the increase in non-performing loans. The ratio of net charge-offs to average loans increased to
71
0.12% for 2019 compared to 0.10% for the prior year, reflecting loan growth and an increase in net charge-offs in 2019 to $2.8 million
from $2.0 million.
Net Charge-Offs. Net charge-offs were $2.8 million in 2019, $2.0 million in 2018 and $2.2 million in 2017. The increase in net
charge-offs in 2019 compared to 2018 was primarily due to a $1.1 million consumer loan charge-off in 2019. That charge off resulted
from a home equity line of credit. In September 2016, this product became inactive and is no longer being marketed to customers, and
the current unimpaired portfolio balance is $2.8 million, consisting of 32 accounts averaging $88,000.
Non-Performing Loans, Loans 90 Days Delinquent and Still Accruing, and Troubled Debt 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.
Non-accrual loans
SBL non-real estate
SBL commercial mortgage
SBL construction
Consumer
Total non-accrual loans
2019
2018
December 31,
2017
(in thousands)
2016
2015
$ 3,693
1,047
711
345
5,796
$ 2,590
458
-
1,468
4,516
$ 1,889 $ 1,530
-
-
1,442
2,972
693
-
1,414
3,996
$ 733
-
-
1,194
1,927
Loans past due 90 days or more and still accruing
Total non-performing loans
Other real estate owned
Total non-performing assets
3,264
9,060
-
954
5,470
-
227
4,223
450
661
3,633
104
403
2,330
-
$ 9,060
$ 5,470
$ 4,673 $ 3,737
$ 2,330
In February 2020, a single borrower under financial stress, became delinquent on vehicle loans, the total balance of which as
of March 6, 2020 was $15.7 million. The Company is in discussions with the borrower for accelerated repayment. While the
Company’s estimates of the disposition value of the vehicles exceed the amounts due, there can be no assurance that all amounts will
be fully collected or recovered from vehicle sales. Further, should the borrower declare bankruptcy, related court actions may impact
the timing or amount of recovery.
The loans that were modified for the years ended December 31, 2019 and 2018 and considered troubled debt restructurings
are as follows (in thousands):
December 31, 2019
December 31, 2018
Pre-
modification
recorded
investment
Post-
modification
recorded
investment
Pre-
modification
recorded
investment
Post-
modification
recorded
investment
Number
Number
8 $ 1,309 $ 1,309
286
1
286
2
489
489
11 $ 2,084 $ 2,084
5 $ 1,564 $ 1,564
870
3
2
513
513
10 $ 2,947 $ 2,947
870
SBL non-real estate
Direct lease financing
Consumer
Total
72
The balances below provide information as to how the loans were modified as troubled debt restructured loans at December
31, 2019 and 2018 (in thousands):
SBL non-real estate
Direct lease financing
Consumer
Total
Adjusted
interest rate
$ -
December 31, 2019
Extended
maturity
Combined rate
Adjusted
and maturity
interest rate
$ 51 $ 1,258 $ -
December 31, 2018
Extended
maturity
Combined rate
and maturity
$ 85 $ 1,479
-
-
$ -
286
-
489
-
$ 337 $ 1,747 $ -
-
-
434
-
436
513
$ 519 $ 2,428
We had no commitments to extend credit related to one loan classified as a troubled debt restructuring as of December 31,
2019 and a commitment to extend $27,000 to one loan classified as a troubled debt restructuring as of December 31, 2018.
The following table summarizes as of December 31, 2019 loans that were restructured within the last 12 months that have
subsequently defaulted (in thousands).
SBL non-real estate
Total
December 31, 2019
Number
Pre-modification recorded
investment
1
1
$ 660
$ 660
Please see “Investment in Unconsolidated Entity” below for discussion of a large restructured loan which is accounted for at
fair value.
73
The following table provides information about impaired loans at December 31, 2019 and 2018 (in thousands):
Without an allowance recorded
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
Consumer - home equity
With an allowance recorded
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
Consumer - home equity
Total
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
Consumer - home equity
Without an allowance recorded
SBL non-real estate
SBL commercial mortgage
Direct lease financing
Consumer - home equity
With an allowance recorded
SBL non-real estate
SBL commercial mortgage
Direct lease financing
Consumer - home equity
Total
SBL non-real estate
SBL commercial mortgage
Direct lease financing
Consumer - home equity
December 31, 2019
Recorded
investment
Unpaid
principal
balance
Related
allowance
Average
recorded
investment
Interest
income
recognized
$ 335
$ 2,717
$ -
$ 277
$ 5
76
-
286
489
3,804
971
711
-
121
4,139
1,047
711
286
610
76
-
286
489
4,371
971
711
-
121
7,088
1,047
711
286
610
-
-
-
-
(2,961)
(136)
(36)
-
(9)
(2,961)
(136)
(36)
-
(9)
15
284
362
1,161
3,925
561
284
244
344
4,202
576
568
606
1,505
-
-
11
9
30
-
-
-
-
35
-
-
11
9
$ 6,793
$ 9,742
$ (3,142)
$ 7,457
$ 55
December 31, 2018
Recorded
investment
Unpaid
principal
balance
Related
allowance
Average
recorded
investment
Interest
income
recognized
$ 175
$ 1,469
$ -
$ 334
$ -
-
437
1,612
3,541
458
434
129
3,716
458
871
1,741
-
548
1,612
3,541
458
434
129
5,010
458
982
1,741
-
-
-
(2,806)
(71)
(145)
(17)
(2,806)
(71)
(145)
(17)
-
425
1,648
2,816
505
617
26
3,150
505
1,042
1,674
-
28
10
70
-
66
-
70
-
94
10
$ 6,786
$ 8,191
$ (3,039)
$ 6,371
$ 174
We had $5.8 million of non-accrual loans at December 31, 2019, compared to $4.5 million of non-accrual loans at December
31, 2018. The $1.3 million increase reflected $6.2 million of loans placed on non-accrual status, partially offset by $2.5 million of
loan charge-offs and $2.4 million of loan payments. Loans past due 90 days or more still accruing interest amounted to $3.3 million
74
and $954,000 at December 31, 2019 and December 31, 2018, respectively. The $2.3 million increase reflected $4.5 million of
additions, partially offset by $1.0 million of loan payments, $82,000 of charge-offs, and $1.1 million of transfers to repossessed assets.
We had no OREO at December 31, 2019 and December 31, 2018.
We evaluate loans under an internal loan risk rating system as a means of identifying problem loans. The following table
provides information by credit risk rating indicator for each segment of the loan portfolio excluding loans held-for-sale at the dates
indicated (in thousands):
Pass
Special mention Substandard
Doubtful
Loss
Unrated subject
to review *
Unrated not
subject to review
*
Total loans
December 31, 2019
SBL non-real estate
$ 76,108 $ 3,045 $ 4,430 $ - $ - $ - $ 996 $ 84,579
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Consumer
Unamortized loan fees and costs
208,809
44,599
420,289
942,858
3,055
2,545
-
2,249
-
-
-
-
-
-
5,577
711
8,792
-
345
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,475
-
5,379
81,562
-
1,664
9,757
218,110
45,310
434,460
1,024,420
3,055
4,554
9,757
$ 1,698,263 $ 5,294 $ 19,855 $ - $ - $ - $ 100,833 $ 1,824,245
Pass
Special mention Substandard
Doubtful
Loss
Unrated subject
to review *
Unrated not
subject to review
*
Total loans
December 31, 2018
SBL non-real estate
$ 67,809 $ 1,641 $ 4,517 $ - $ - $ 347 $ 2,026 $ 76,340
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC
Other specialty lending
Consumer
Unamortized loan fees and costs
158,667
19,912
382,860
775,153
31,749
5,849
-
273
-
2,157
-
-
-
-
458
694
1,456
-
-
1,742
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,498
843
3,623
-
-
-
-
510
187
4,674
10,150
87
8,711
10,383
165,406
21,636
394,770
785,303
31,836
16,302
10,383
$ 1,441,999 $ 4,071 $ 8,867 $ - $ - $ 10,311 $ 36,728 $ 1,501,976
*
For information on targeted loan review thresholds see “-Allowance for Loan Losses”
Investment in Unconsolidated 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. At
December 31, 2019, a balance of $39.2 million remained on the consolidated balance sheet, representing the remaining balances of
these notes. Interest is not being accrued on this investment and changes in its value, determined by discounting estimated future cash
flows, are recorded in the income statement under “change in value of investment in unconsolidated entity”. In 2019, there was no net
decrease in value, compared to a $3.7 million decrease in value in 2018. A $30 million credit, collateralized by a commercial retail
property with multiple tenants, is comprised of a $17.0 million loan which had been sold to Walnut Street, and $13.0 million which is
included in commercial loans held-for-sale. In 2019, this loan was marked down by $1.6 million after having previously been marked
75
down by $1.9 million. Both markdowns resulted primarily from updated appraisals. The charges to Walnut Street were based on the
ratio of the $17.0 million owned by that entity to the $30 million loan balance, with the remainder of the charges reflected in net
realized and unrealized gains on commercial loans originated for sale. The underlying collateral which was written down consisted of
a multi-tenant shopping center. On March 13, 2019, we renewed this loan for four years and reduced the interest rate to the following:
LIBOR plus 2% in year one, increasing .5% each year until the fourth year when the rate will be LIBOR plus 3.5% which will also be
the rate for a one year extension, if exercised. The loan is performing in accordance with those restructured terms. The retail space is
partially leased and appears to be on a path toward stabilization, based upon negotiations with prospective tenants. We previously
noted that collateral securing two loans recorded at $12.1 million was in the process of disposition. The collateral has subsequently
been disposed of at the approximate carrying value of the loans, which was reflected in the reduction in the balance of investment in
unconsolidated entity.
Assets Held-for-Sale from Discontinued Operations. Assets held-for-sale as a result of discontinued operations, primarily
commercial, commercial mortgage and construction loans, amounted to $140.7 million at December 31, 2019 and were comprised of
$115.9 million of net loans and $24.8 million of other real estate owned. The balance of other real estate owned includes a Florida
mall, which has been written down to $15.0 million. We expect to continue our efforts to dispose of the mall, which was appraised in
September 2018 for $16.9 million. We previously noted that collateral comprised of multiple commercial properties recorded at
$12.8 million as being in the process of disposition. The collateral has subsequently been partially disposed of and the remaining
collateral was marked down on the basis of an updated appraisal. As a result, a related net loss of $1.6 million was recorded in income
from discontinued operations. At December 31, 2019, $4.3 million of commercial real estate collateral remained on the books, after
being marked down to its fourth quarter 2019 appraisal.
At December 31, 2018, discontinued assets of $197.8 million were comprised of $170.6 million of net loans and
$27.2 million of other real estate owned.
Deposits. Our primary source of funding is deposit acquisition. We offer a variety of deposit accounts with a range of
interest rates and terms, including prepaid and debit card and demand and money market accounts. The majority of deposit balances
are comprised of accounts obtained with the assistance of third parties. At December 31, 2019, we had total deposits of $5.05 billion
compared to $3.94 billion at December 31, 2018, which reflected an increase of $1.12 billion, or 28.4%, between 2019 and 2018. The
increase reflected $475.0 million of short-term time deposits utilized to fund increased originations of commercial real estate held for
sale. The increase in deposits also reflects growth in prepaid and debit card accounts and daily balance variances. A diversified group
of prepaid and debit card accounts, which have an established history of stability and lower cost than certain other types of funding,
comprise the majority of our deposits. Prepaid accounts include general purpose reloadable, debit, medical spending, payroll, gift,
commercial, incentive plan and other accounts. The following table presents the average balance and rates paid on deposits for the
periods indicated (in thousands):
December 31, 2019
December 31, 2018
December 31, 2017
Average
balance
Average
rate
Average
balance
Average
rate
Average
balance
Average
rate
Demand and interest checking *
$
3,817,176
0.80%
$
3,499,288
Savings and money market
Time
Total deposits
37,671
170,438
0.48%
2.09%
362,267
-
0.66%
0.79%
-
$
3,371,969
439,625
-
0.36%
0.51%
-
$
4,025,285
0.85%
$
3,861,555
0.67%
$
3,811,594
0.38%
* Non-interest bearing demand accounts are not paid interest. The rate shown reflects the fees paid to affinity groups, which are based upon a rate index, and
therefore classified as interest expense.
Short-Term Borrowings. We had no outstanding advances from the FHLB at December 31, 2019 on our line of credit with
them. The Bank also has a line of credit with the Federal Reserve, which we discuss in “Liquidity and Capital Resources”. We had no
outstanding amounts borrowed on the Bank’s lines of credit at December 31, 2019. We do not have any policy prohibiting us from
incurring debt. Tables showing information for securities sold under repurchase agreements and short-term borrowings are as follows.
76
2019
As of or for the year ended December 31,
2018
(dollars in thousands)
2017
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
$ 82
90
93
0.00%
0.15%
$ 93
173
223
0.00%
0.15%
$ 217
240
274
0.00%
0.23%
2019
As of or for the year ended December 31,
2018
(dollars in thousands)
2017
Short-term borrowings
Balance at year-end
Average during the year
Maximum month-end balance
Weighted average rate during the year
Rate at December 31
$ -
129,031
300,000
$ -
20,346
100,000
$ -
23,281
50,000
2.43%
1.50%
2.22%
2.35%
1.39%
1.34%
As of December 31, 2019, we had two established statutory business trusts: The Bancorp Capital Trust II and The Bancorp
Capital Trust III, which we refer to as the Trusts. In each case, we own all the common securities of the Trust. These trusts issued
preferred capital securities to investors and invested the proceeds in us through the purchase of junior subordinated debentures issued
by us. These debentures are the sole assets of the trusts. The $10.3 million of debentures issued to The Bancorp Capital Trust II on
November 28, 2007, mature on March 15, 2038 and bear interest equal to 3-month LIBOR plus 3.25%. The $3.1 million of
debentures issued to The Bancorp Capital Trust III on November 28, 2007 mature on March 15, 2038, and bear interest at a floating
annual rate equal to 3-month LIBOR plus 3.25%.
Long-term Borrowings. At December 31, 2019 and 2018, we had long term borrowings of $41.0 million and $41.7 million
respectively, which consisted of sold loans which were accounted for as a secured borrowing, because they did not qualify for true
sale accounting.
Shareholders’ Equity. At December 31, 2019, we had $484.5 million in shareholders’ equity compared to $406.8 million at
the prior year end. The increase primarily reflected 2019 earnings as the Company has not paid cash dividends. The difference also
reflected the increase in market value of securities resulting from the decrease in longer term interest rates.
Off-balance Sheet Commitments
We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated financial
statements.
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to
perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and
standby letters of credit is represented by the contractual amount of these instruments. We use the same underwriting standards and
policies in making credit commitments as we do for on-balance sheet instruments.
Financial instruments whose contract amounts represent potential credit risk for us at December 31, 2019, were our unused
commitments to extend credit, which were approximately $2.34 billion, and standby letters of credit, which were approximately
$3.5 million, at December 31, 2019. The vast majority of commitments reflect SBLOC commitments, which are variable rate, and
connected to lines of credit collateralized by marketable securities. The amount of the line is generally based upon the value of the
collateral, and not expected usage. The majority of these available lines are not drawn upon.
77
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the
payment of a fee. Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third
party. Since we expect that many of the commitments or letters of credit we issue will not be fully drawn upon, the total commitment
or letter of credit amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a
case-by-case basis. We base the amount of collateral we obtain when we extend credit on our credit evaluation of the customer.
Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
Contractual Obligations and Other Commitments
The following table sets forth our contractual obligations and other commitments, including off-balance sheet commitments,
representing required and potential cash outflows as of December 31, 2019:
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
$ 20,542
$ 4,314
$ 7,475
$ 6,531
$ 2,222
Loan commitments
Subordinated debentures
Interest expense on subordinated
debentures (1)
Standby letters of credit
Total
2,340,954
13,401
13,661
3,512
173,225
-
750
3,388
92,747
-
1,501
124
2,052
-
1,501
-
2,072,930
13,401
9,909
-
$ 2,392,070
$ 181,677
$ 101,847
$ 10,084
$ 2,098,462
(1) Presentation assumes a weighted average interest rate of 5.77%
Impact of Inflation
The primary impact of inflation on our operations is on our operating costs. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a
financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services. While we anticipate that inflation will affect our future
operating costs, we cannot predict the timing or amounts of any such effects.
Recently Issued Accounting Standards
Information on recent accounting pronouncements is set forth in Note B, item 23, to the consolidated financial statements
included in this report and is incorporated herein by this reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information with respect to quantitative and qualitative disclosures about market risk is included under the section entitled
“Asset and Liability Management” in Part 2 Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”.
78
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
The Bancorp, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of The Bancorp, Inc. (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in
shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the
2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated March 13, 2020 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note B to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the
adoption of ASU 2016-02, Leases (Topic 842).
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2000.
Philadelphia, Pennsylvania
March 13, 2020
79
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2019
December 31,
2018
(in thousands)
ASSETS
Cash and cash equivalents
Cash and due from banks
Interest earning deposits at Federal Reserve Bank
Total cash and cash equivalents
Investment securities, available-for-sale, at fair value
Investment securities, held-to-maturity (fair value $83,002 and $83,391, respectively)
Commercial loans held-for-sale, at fair value
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
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
Time deposits
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; 56,940,521 and 56,446,088
shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively
Treasury stock, at cost (100,000 shares)
Additional paid-in capital
Accumulated earnings (deficit)
Accumulated other comprehensive income (loss)
Total shareholders' equity
$
$
$
$
19,928
924,544
944,472
$
$
1,320,692
84,387
1,180,546
1,824,245
(10,238)
1,814,007
5,342
17,538
13,619
2,315
12,538
39,154
140,657
81,696
5,656,963
4,402,740
174,290
475,000
5,052,030
82
13,401
40,991
65,962
5,172,466
56,941
(866)
371,633
50,742
6,047
484,497
2,440
551,862
554,302
1,236,324
84,432
688,471
1,501,976
(8,653)
1,493,323
1,113
18,895
12,753
3,846
21,622
59,273
197,831
65,726
4,437,911
3,904,638
31,076
-
3,935,714
93
13,401
41,674
40,253
4,031,135
56,446
(866)
366,181
(817)
(14,168)
406,776
Total liabilities and shareholders' equity
$
5,656,963
$
4,437,911
The accompanying notes are an integral part of these consolidated financial statements.
80
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Interest income
Loans, including fees
Investment securities:
Taxable interest
Tax-exempt interest
Federal funds sold/securities purchased under agreements to resell
Interest earning deposits
Interest expense
Deposits
Short-term borrowings
Subordinated debentures
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
ACH, card and other payment processing fees
Prepaid, debit card and related fees
Net realized and unrealized gains on commercial loans
originated for sale
Gain on sale of investment securities
Gain on sale of IRA portfolio
Gain on sale of health savings portfolio
Change in value of investment in unconsolidated entity
Leasing related 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
Civil money penalties
Prepaid relationship exit expense
Lease termination expense
Other
Total non-interest expense
Income from continuing operations before income taxes
Income tax expense
Net income from continuing operations
Discontinued operations
Income from discontinued operations before income taxes
Income tax expense (benefit)
Income from discontinued operations, net of tax
Net income
Net income per share from continuing operations - basic
Net income per share from discontinued operations - basic
Net income per share - basic
Net income per share from continuing operations - diluted
Net income per share from discontinued operations - diluted
Net income per share - diluted
2019
For the year ended December 31,
2018
(in thousands, except per share data)
2017
$
127,106
$
95,315
$
79,081
42,286
170
-
10,007
179,569
34,400
3,131
750
38,281
141,288
4,400
136,888
75
9,376
65,141
24,072
-
-
-
-
3,243
-
-
2,220
104,127
94,259
3,696
6,628
4,894
-
637
1,785
5,319
1,531
7,025
12,731
2,475
1,493
81
3,240
8,900
-
908
12,919
168,521
72,494
21,226
51,268
510
219
291
51,559
0.90
0.01
0.91
0.89
0.01
0.90
41,993
207
1,708
8,737
147,960
25,946
451
714
27,111
120,849
3,585
117,264
3,622
8,653
54,627
20,498
41
65,000
-
(3,689)
3,071
281
-
1,691
153,795
79,816
3,997
5,474
6,187
-
906
2,002
7,845
1,531
8,819
13,304
2,578
1,373
117
3,239
(290)
672
395
13,313
151,278
119,781
32,241
87,540
1,491
354
1,137
88,677
1.55
0.02
1.57
1.53
0.02
1.55
$
$
$
$
$
$
$
$
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
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
81
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31,
2019
2018
2017
(in thousands)
Net income
$
51,559 $
88,677 $
21,673
Other comprehensive income, net of reclassifications into net income:
Other comprehensive income (loss)
Securities available-for-sale:
Change in net unrealized gains (losses) during the year
Reclassification adjustments for gains included in income
Reclassification adjustments for foreign currency translation gains
Amortization of losses previously held as available-for-sale
Other comprehensive income (loss)
Income tax expense (benefit) related to items of other comprehensive income (loss)
Securities available-for-sale:
Change in net unrealized gains (losses) during the year
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)
27,662
-
-
30
27,692
7,469
-
8
7,477
(13,223)
(41)
-
99
(13,165)
(3,570)
(11)
27
(3,554)
2,617
(2,231)
216
34
636
1,046
(892)
14
168
Other comprehensive income (loss), net of tax and reclassifications into net income
20,215
Comprehensive income
$ 71,774 $
(9,611)
79,066 $
468
22,141
The accompanying notes are an integral part of these consolidated financial statements.
82
THE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2019, 2018 and 2017
(in thousands, except share data)
Common
stock
shares
Common
Treasury
stock
stock
Additional
paid-in
capital
Retained
earnings/
Accumulated
other
(accumulated
comprehensive
deficit)
income/(loss)
Total
Balance at December 31, 2016
55,419,204 $
55,419 $
(866) $
360,564
$
(111,941)
$
(4,213) $
298,963
Net income
Common stock issuance costs
Common stock issued from restricted units,
net of tax benefits
Reclassification due to the adoption of
ASU No. 2018-02
Stock-based compensation
Other comprehensive income net of
reclassification adjustments and tax
-
441,946
-
-
-
-
442
-
-
-
-
-
-
-
-
(200)
(413)
-
3,245
-
21,673
-
(29)
812
-
-
21,673
(200)
-
3,245
468
-
(812)
-
468
Balance at December 31, 2017
55,861,150 $
55,861 $
(866) $
363,196
$
(89,485)
$
(4,557) $
324,149
Net income
Common stock issued from restricted units,
net of tax benefits
Common stock issued from restricted units,
net of tax benefits
Stock-based compensation
Other comprehensive loss net of
reclassification adjustments and tax
13,390
571,548
-
-
13
572
-
-
-
-
-
-
107
(572)
3,450
-
88,677
(9)
-
-
-
88,677
111
-
3,450
-
-
-
(9,611)
(9,611)
Balance at December 31, 2018
56,446,088 $
56,446 $
(866) $
366,181
$
(817)
$
(14,168) $
406,776
Net income
Common stock issued from option exercises,
net of tax benefits
Common stock issued from restricted units,
net of tax benefits
Stock-based compensation
Other comprehensive income net of
reclassification adjustments and tax
30,000
464,433
-
-
30
465
-
-
-
-
-
-
228
(465)
5,689
-
51,559
-
-
-
-
51,559
258
-
5,689
-
-
-
20,215
20,215
Balance at December 31, 2019
56,940,521 $
56,941 $
(866) $
371,633
$
50,742
$
6,047
$
484,497
The accompanying notes are an integral part of these consolidated financial statements.
83
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2019
Year ended December 31,
2018
2017
Operating activities
Net income from continuing operations
Net income from discontinued operations, net of tax
Adjustments to reconcile net income to net cash provided by (used in) operating activities
$
51,268
291
$
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 commercial loans originated for resale
Gain on sales of commercial loans originated for resale
Deferred income tax expense
Gain on sale of IRA portfolio
Loss (gain) from discontinued operations
Loss on sale of fixed assets
Loss on sale of other real estate owned
Fair value adjustment on investment in unconsolidated entity
Writedown of other real estate owned
Change in fair value of loans held-for-sale
Change in fair value of derivatives
Gain on sales of investment securities
Increase in accrued interest receivable
(Increase) decrease in other assets
Change in fair value of discontinued loans held-for-sale
Change in fair value of discontinued assets held-for-sale
Increase (decrease) in other liabilities
Net cash used in operating activities
Investing activities
Purchase of investment securities available-for-sale
Cash from call of investment securities held-to-maturity
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
Change in receivable from investment in unconsolidated entity
Return of investment in unconsolidated entity
Decrease in discontinued assets held-for-sale
Net cash (used in) provided by investing activities
Financing activities
Net increase (decrease) in deposits
Net decrease in securities sold under agreements to repurchase
Costs from issuance of common stock
Proceeds from the issuance of common stock options
Proceeds from the sale of IRA portfolio
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure:
Interest paid
Taxes paid
Non-cash reclassification of commercial loans sold
Non-cash investing and financing activities
Investment securities transferred in securitizations
Transfers of discontinued loans to other real estate owned
5,227
4,400
20,337
5,689
(1,795,376)
1,235,413
(25,023)
1,607
-
2,014
-
-
-
-
(963)
1,914
-
(866)
(10,422)
-
487
10,920
(493,083)
(157,478)
-
-
-
173,916
-
(322,611)
49,170
-
(2,012)
83
20,119
5,503
(233,310)
1,116,316
(11)
-
258
-
1,116,563
390,170
554,302
$
87,540
1,137
5,528
3,585
15,636
3,450
(866,303)
638,274
(20,830)
15,824
(65,000)
3,993
15
-
3,689
45
979
(647)
(41)
(1,853)
(8,184)
352
195
8,655
(173,961)
(134,758)
2,000
3,529
-
207,703
405
(115,054)
94,371
-
(2,379)
9,570
11,511
7,570
84,468
(325,128)
(124)
-
112
60,000
(265,140)
(354,633)
908,935
17,338
4,335
5,980
2,920
10,828
3,245
(521,913)
458,942
(18,072)
20,799
-
(3,293)
122
19
(20)
-
1,964
(1,811)
(2,231)
(311)
5,678
2,736
3,158
(18,504)
(28,091)
(579,925)
-
284,373
7,000
278,290
85
(172,853)
52,343
945
(515)
(7,989)
52,477
1,454
(84,315)
22,538
(57)
(200)
-
-
22,281
(90,125)
999,059
908,935
15,326
4,159
240,714
46,359
450
$
944,472
$
554,302
$
$
$
$
$
37,532
20,683
-
93,191
5,295
$
$
$
$
$
27,021
12,663
-
62,076
-
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
84
THE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A—Organization and Nature of Operations
The Bancorp, Inc. (the Company) is a Delaware corporation and a registered financial holding company. Its primary
subsidiary is The Bancorp Bank (the Bank) which is wholly owned by the Company. The Bank is a Delaware chartered commercial
bank located in Wilmington, Delaware and is a Federal Deposit Insurance Corporation (FDIC) insured institution. In its continuing
operations, the Bank has four primary lines of specialty lending: securities-backed lines of credit (SBLOC) and cash value of
insurance-backed lines of credit (IBLOC), leasing (direct lease financing), Small Business Administration (SBA) loans and loans
generated for sale into capital markets (CMBS). Through the Bank, the Company also provides banking services nationally, which
include prepaid and debit cards, private label banking, deposit accounts to investment advisors’ customers, card payment and other
payment processing.
The Company and the Bank are subject to regulation by certain state and federal agencies and, accordingly, they are
examined periodically by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities,
the Company’s and the Bank’s businesses may be affected by state and federal legislation and regulations.
Note B—Summary of Significant Accounting Policies
1. Basis of Presentation
The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United
States of America (U.S. GAAP) and predominant practices within the banking industry. The consolidated financial statements include
the accounts of the Company and all its subsidiaries. All inter-company balances have been eliminated. Certain reclassifications have
been made to the 2018 and 2017 consolidated financial statements to conform to the 2019 presentation.
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
The principal estimates that are particularly susceptible to a significant change in the near term relate to the allowance for
loan and lease losses, investment in unconsolidated entity and assets held-for-sale from discontinued operations measured at fair
value, investment other than temporary impairment (OTTI), investments measured at fair value and deferred income taxes.
2. Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and amounts due from banks with an original maturity from date of
purchase of three months or less and federal funds sold. The Company at times maintains balances in excess of insured limits at
various financial institutions including the Federal Reserve Bank (FRB), the Federal Home Loan Bank (FHLB) and other private
institutions. The Company does not believe these instruments carry a significant risk of loss, but cannot provide assurances that no
losses could occur if these institutions were to become insolvent. The Company also funds cash in ATMs on cruise ships for use by
certain of its card account holders, for which insurance is maintained.
3. Investment Securities
Investments in debt securities which the Company has both the ability and intent to hold to maturity are carried at cost,
adjusted for the amortization of premiums and accretion of discounts computed by the effective interest method. Investments in debt
and equity securities which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk,
liquidity requirements, or other factors, are classified as available-for-sale. Net unrealized gains for such securities, net of tax effect,
are reported as other comprehensive income, through equity and are excluded from the determination of net income. The unrealized
losses for both the held-to-maturity and available-for-sale securities are evaluated to determine first if the impairment is other than
85
temporary then to determine the amount of other-than-temporary impairment (OTTI) that is attributable to credit loss versus non-
credit loss. If a credit loss is determined, an OTTI charge is recorded within the consolidated statement of operations. For available-
for-sale securities, if management believes market value losses are temporary and it believes the Company has the ability and intention
to hold those securities through recovery of the temporary losses, the reduction in value is recognized in other comprehensive income.
The Company does not engage in securities trading. Gains or losses on disposition of investment securities are based on the net
proceeds and the adjusted carrying amount of the securities sold using the specific identification method.
The Company evaluates whether OTTI exists by considering primarily the following factors: (a) the length of time and extent
to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and
near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments,
(d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security. The
Company’s best estimate of expected future cash flows used to determine the amount of OTTI attributable to credit loss is a
quantitative and qualitative process that incorporates information received from third-party sources and internal assumptions and
judgments regarding the future performance of the security. The Company’s best estimate of future cash flows involves assumptions
including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings,
current delinquency rates, loan-to-value ratios and the possibility of obligor refinancing. These assumptions require the use of
significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected
recoveries which may include estimating the underlying collateral value. In addition, projections of expected future cash flows from a
debt security may change based upon new information regarding the performance of the issuer and/or underlying collateral such as
changes in the projections of the underlying property value estimates. The Company did not recognize any OTTI charges in 2019,
2018 and 2017.
4. Loans and Allowance for Loan and Lease Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the
amount of unpaid principal and are net of unearned discounts, unearned loan fees and an allowance for loan and lease losses. The
allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense. Loan principal
considered to be uncollectible by management is charged against the allowance for loan and lease losses. The allowance is an amount
that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible based upon an
evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration historical losses by loan category
and factors such as changes in the nature and size of the loan portfolio, overall portfolio quality, specific problem loans and current
economic conditions which may affect the borrowers’ ability to pay. The resulting loss factors are applied to current total loan
amounts to compute the historical loss component of the allowance. The historical loss component is added to allowance allocations
for specific loans and an unallocated component and the allowance is adjusted to the total of those three components through the
provision.
Interest income is accrued as earned on a simple interest method. Accrual of interest is discontinued on a loan when
management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial
condition is such that collection of interest is doubtful.
When a loan is placed on non-accrual status, all accumulated accrued interest receivable applicable to periods prior to the
current year is charged off to the allowance for loan and lease losses. Interest that had accrued in the current year is reversed from
current period income. Loans reported as having missed four or more consecutive monthly payments and still accruing interest must
have both principal and accruing interest adequately secured and must be in the process of collection. Such loans are reported as 90
days delinquent and still accruing. For all loan types, the Company uses the method of reporting delinquencies which considers a loan
past due or delinquent if a monthly payment has not been received by the close of business on the loan’s next due date. In the
Company’s reporting, two missed payments are reflected as 30 to 59 day delinquencies and three missed payments are reflected as 60
to 89 day delinquencies.
The allowance for loan losses represents management's estimate of losses inherent in the loan and lease portfolio as of the
consolidated balance sheet date and is recorded as a reduction to loans and leases. The allowance for loan losses is increased by the
provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of
loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance
86
is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted
to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The evaluation of the adequacy of the allowance for loan and lease losses includes, among other factors, an analysis of
historical loss rates and environmental factors by category, applied to current loan totals. However, actual losses may be higher or
lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may
vary from those estimated loss percentages, which are established based upon a limited number of potential loss classifications.
Management performs a quarterly evaluation of the adequacy of the allowance, which is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, the volume and mix of the existing loan and lease portfolios, including the
volume and severity of non-performing and adversely classified credits, an analysis of net charge-offs experienced on previously
classified credits, the trend in loan and lease growth, including any rapid increase in loan and lease volume within a relatively short
time period, general and local economic conditions affecting the collectability of the Company’s loans and leases, previous loan and
lease experience by type, including net charge-offs, as a percentage of average loans and leases over the past several years, and other
relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant
revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans and leases
that are classified as impaired. For such loans and leases, an allowance is established when the discounted cash flows, collateral value
or observable market price of the impaired loan is lower than the carrying value of that loan. Regardless of the measurement method,
the Company measures impairment based on the fair value of the collateral when foreclosure is probable.
The allowance calculation methodology includes further segregation of loan classes into regulatory risk rating categories of
special mention and substandard. Loans classified as special mention have potential weaknesses that deserve management's close
attention. If uncorrected, the potential weaknesses may result in deterioration of repayment prospects. Loans classified substandard
have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately
protected by the current sound net worth and paying capacity of the obligor or by the market value of the collateral pledged, if any.
Loans rated as special mention and substandard are reserved for based on the average charge-off history for loans and leases
previously classified in those categories. Loans not classified are included in the general component of the reserve calculation, which
applies historical loss percentages by type of loan, against current outstanding balances.
The general component covers pools of loans by loan type. These pools of loans are evaluated for loss exposure based upon
historical loss rates for each of these categories of loans, adjusted for relevant qualitative factors. Separate qualitative adjustments are
made for higher-risk criticized loans that are not impaired. These qualitative risk factors include:
Changes in lending policies or procedures;
Changes in economic conditions;
Portfolio growth;
Changes in the nature or volume of the portfolio;
Changes in management’s experience;
Past due volume;
Non-accrual volume;
Adversely classified loans;
Quality of the loan review system;
Changes in the value of underlying collateral;
Concentrations of credit; and
External factors.
Applicable factors are considered based on management's best judgment using relevant information available at the time of
the evaluation. The smallest component of the allowance is an unallocated component, which results from uncertainties that could
affect management's estimate of probable losses.
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A loan is considered impaired when, based on current information and events, it is probable that the loan will not be collected
according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record
and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all
impaired loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value
of the collateral if the loan is collateral dependent. A reserve allocation is established for an impaired loan if its carrying value
exceeds its estimated fair value. The estimated fair values of substantially all of the Company's impaired loans are measured based on
the estimated fair value of the loan's collateral.
For SBL commercial loans secured by real estate, estimated fair values are determined primarily through third-party
appraisals or evaluations. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated
certified appraisal of the real estate is necessary. This decision is based on various considerations including the age of the most recent
appraisal and the condition of the property. Appraised value, discounted by the estimated costs to sell the collateral, is considered to
be the estimated fair value. For SBL commercial and industrial loans secured by non-real estate collateral, such as accounts receivable
or inventory and equipment, estimated fair values for impairment are determined based on the borrower's financial statements,
inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources may be
discounted based on the age of the financial information or the quality of the assets. Amounts guaranteed by the U.S. government are
excluded from the Company’s assessment of impairment.
Loans originated from continuing operations and intended for sale in secondary markets are carried at estimated fair value
and are excluded from the allowance valuation. Changes in fair value prior to sale, if any, are recognized as unrealized gains or losses
on commercial loans originated for sale on the statements of operations. The Company originates specific commercial mortgage
loans for sale in secondary markets. These loans are accounted for under the fair value option and amounted to $1.18 billion at
December 31, 2019, and $688.5 million at December 31, 2018. These loans were classified as held-for-sale.
Loans from discontinued operations intended for sale or other disposition are carried at the lower of cost or market on the
balance sheet, determined by loan type or, for larger loans, on an individual loan basis. See Note W to the financial statements.
5. Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation
expense is computed on the straight-line method over the useful lives of the assets. Leasehold improvements are depreciated over the
shorter of the estimated useful lives of the improvements or the terms of the related leases.
6. Internal Use Software
The Company capitalizes costs associated with internally developed and/or purchased software systems for new products and
enhancements to existing products that have reached the application stage and meet recoverability tests. Capitalized costs include
external direct costs of materials and services utilized in developing or obtaining internal use software and payroll and payroll related
expenses for employees who are directly associated with, and devote time to, the internal use software project. Capitalization of such
costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially
complete and ready for its intended purpose.
The carrying value of the Company’s software is periodically reviewed and a loss is recognized if the value of the estimated
undiscounted cash flow benefit related to the asset falls below the unamortized cost. Amortization is provided using the straight-line
method over the estimated useful life of the related software, which is generally seven years. As of December 31, 2019 and 2018, the
Company had net capitalized software costs of approximately $7.5 million and $6.2 million, respectively. Net capitalized software is
presented as part of other assets on the consolidated balance sheets. The Company recorded amortization expense of approximately
$2.3 million, $2.4 million and $2.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
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7. Income Taxes
The Company accounts for income taxes under the liability method whereby deferred tax assets and liabilities are determined
based on the difference between their carrying values on the consolidated balance sheet and their tax basis as measured by the enacted
tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax
assets and liabilities.
The Company recognizes the benefit of a tax position in the consolidated financial statements only after determining that the
relevant tax authority would more likely than not sustain the position following an audit by the tax authority. For tax positions
meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that
has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. For these analyses,
the Company may engage attorneys to provide opinions related to the positions. The Company applies this policy to all tax positions
for which the statute of limitations remain open, but this application does not materially impact the Company’s consolidated balance
sheet or consolidated statement of operations. Any interest or penalties related to uncertain tax positions are recognized in income tax
expense (benefit) in the consolidated statement of operations.
Deferred tax assets are recorded on the consolidated balance sheet at their net realizable value. The Company performs an
assessment each reporting period to evaluate the amount of the deferred tax asset it is more likely than not to realize. Realization of
deferred tax assets is dependent upon the amount of taxable income expected in future periods, as tax benefits require taxable income
to be realized. If a valuation allowance is required, the deferred tax asset on the consolidated balance sheet is reduced via a
corresponding income tax expense in the consolidated statement of operations.
8. Share-Based Compensation
The Company recognizes compensation expense for stock options and restricted stock units (“RSUs”) in accordance with
Accounting Standards Codification (ASC) 718, Stock Based Compensation. The fair value of the option or RSU is generally
measured on the grant date with compensation expense recognized over the service period, which is usually the stated vesting period.
For options subject to a service condition, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value on
the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current
price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for
the expected life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from
historical experience and may not necessarily equate to its market value when fully vested. In accordance with ASC 718, the
Company estimates the number of options for which the requisite service is expected to be rendered.
9. Other Real Estate Owned
Other real estate owned is recorded at estimated fair market value less cost of disposal; which establishes a new cost basis or
carrying value. When property is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance
for loan and lease losses. Periodically thereafter, the asset is reviewed for subsequent declines in the estimated fair market value
against the carrying value. Subsequent declines, if any, and holding costs, as well as gains and losses on subsequent sale, are included
in the consolidated statements of operations. The Company had no other real estate owned in continuing operations at December 31,
2019 and 2018, respectively.
10. Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs amounted to $782,000, $423,000 and $435,000 for
the years ended December 31, 2019, 2018 and 2017, respectively. Advertising expense is reflected under “other” in the non-interest
expense section of the consolidated statements of operations.
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11. Earnings Per Share
The Company calculates earnings per share under ASC 260, Earnings Per Share. Basic earnings per share exclude dilution
and are computed by dividing income available to common shareholders by the weighted average common shares outstanding during
the period. Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.
The following tables show the Company’s earnings per share for the periods presented:
Income
(numerator)
Year ended December 31, 2019
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
$ 51,268
56,765,635
$ 0.90
Common stock options and restricted stock units
-
573,350
(0.01)
Diluted earnings per share
Net income available to common shareholders
$ 51,268
57,338,985
$ 0.89
Income
(numerator)
Year ended December 31, 2019
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
$ 291
56,765,635
$ 0.01
Common stock options and restricted stock units
-
573,350
-
Diluted earnings per share
Net income available to common shareholders
$ 291
57,338,985
$ 0.01
Income
(numerator)
Year ended December 31, 2019
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic earnings per share
Net income available to common shareholders
$ 51,559
56,765,635
$ 0.91
Effect of dilutive securities
Common stock options and restricted stock units
-
573,350
(0.01)
Diluted earnings per share
Net income available to common shareholders
$ 51,559
57,338,985
$ 0.90
Stock options for 971,604 shares, exercisable at prices between $6.75 and $9.58 per share, were outstanding at December 31,
2019 and included in the dilutive earnings per share computation because the exercise price per share was less than the average market
price. Stock options for 340,000 shares were anti-dilutive and not included in the earnings per share calculation.
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Income
(numerator)
Year ended December 31, 2018
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
$ 87,540
56,343,845
$ 1.55
Common stock options and restricted stock units
-
724,461
(0.02)
Diluted earnings per share
Net income available to common shareholders
$ 87,540
57,068,306
$ 1.53
Income
(numerator)
Year ended December 31, 2018
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
$ 1,137
56,343,845
$ 0.02
Common stock options and restricted stock units
-
724,461
-
Diluted earnings per share
Net income available to common shareholders
$ 1,137
57,068,306
$ 0.02
Income
(numerator)
Year ended December 31, 2018
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic earnings per share
Net income available to common shareholders
$ 88,677
$ 56,343,845
$ 1.57
Effect of dilutive securities
Common stock options and restricted stock units
-
724,461
(0.02)
Diluted earnings per share
Net income available to common shareholders
$ 88,677
57,068,306
$ 1.55
Stock options for 1,160,000 shares, exercisable at prices between $6.75 and $9.84 per share, were outstanding at December
31, 2018, and included in the dilutive earnings per share computation because the exercise price per share was less than the average
market price.
Income
(numerator)
Year ended December 31, 2017
Shares
(denominator)
(dollars in thousands except per share data)
Per share
amount
Basic income per share from continuing operations
Net earnings available to common shareholders
Effect of dilutive securities
$ 17,338
55,686,507
$ 0.31
Common stock options and restricted stock units
-
489,762
-
Diluted income per share
Net earnings available to common shareholders
$ 17,338
56,176,269
$ 0.31
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Year ended December 31, 2017
Income
Shares
Per share
(numerator)
(denominator)
(dollars in thousands except per share data)
amount
Basic income per share from discontinued operations
Net earnings available to common shareholders
Effect of dilutive securities
$ 4,335
55,686,507
$ 0.08
Common stock options and restricted stock units
-
489,762
-
Diluted income per share
Net earnings available to common shareholders
$ 4,335
56,176,269
$ 0.08
Year ended December 31, 2017
Income
Shares
Per share
(numerator)
(denominator)
(dollars in thousands except per share data)
amount
Basic income per share
Net earnings available to common shareholders
$ 21,673
$ 55,686,507
$ 0.39
Effect of dilutive securities
Common stock options and restricted stock units
-
489,762
-
Diluted income per share
Net earnings available to common shareholders
$ 21,673
56,176,269
$ 0.39
Stock options for 1,152,625 shares, exercisable at prices between $7.36 and $10.45 per share, were outstanding at
December 31, 2017, but were not included in the dilutive earnings per share computation because the exercise price per share was
greater than the average market price.
12. Restrictions on Cash and Due from Banks
The Bank is required to maintain reserves against customer demand deposits by keeping cash on hand or balances with the
FRB. The amount of those required reserves at December 31, 2019 and 2018 was approximately $314.7 million and $294.2 million,
respectively.
13. Other Identifiable Intangible Assets
On November 29, 2012, the Company acquired certain software rights for approximately $1.8 million for use in managing
prepaid cards in connection with an acquisition. The software is being amortized over eight years. Amortization expense is $217,000
per year ($159,000 over the remainder of the amortization period). The gross carrying value of the software is $1.8 million, and as of
December 31, 2019 and December 31, 2018, respectively, the accumulated amortization was $1.7 million and $1.5 million.
The Company accounts for its prepaid card customer list in accordance with ASC 350, Intangibles—Goodwill and Other.
The acquisition of the Stored Value Solutions division of Marshall Bank First in 2007 resulted in a customer list intangible of
$12.0 million which is being amortized over a 12-year period. Amortization expense is $1.0 million per year ($0.0 over the
remainder of the amortization period). The gross carrying value of the software is $12.0 million, and as of December 31, 2019 and
December 31, 2018, respectively, the accumulated amortization was $12.0 million and $11.0 million. It is fully amortized as of
December 31, 2019.
In May 2016, the Company purchased approximately $60 million of lease receivables which resulted in a customer list
intangible of $3.4 million which is being amortized over a 10-year period. Amortization expense is $340,000 per year ($1.7 million
over the next five years). The gross carrying value is $3.4 million and, as of December 31, 2019 and December 31, 2018,
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respectively, the accumulated amortization was $1.2 million and $908,000. The purchase price allocation related to this intangible was
finalized in 2017 and remained unchanged from the purchase price allocation recorded in 2016 when the purchase was made.
The gross carrying value and accumulated amortization related to the Company’s intangible items at December 31, 2019 and
2018 are presented below.
December 31,
2019
2018
Gross
Carrying
Amount
Accumulated
Amortization
(in thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Customer list intangibles
$ 15,411
$ 13,255
$ 15,411
$ 11,914
Software intangible
Total
1,817
$ 17,228
1,658
$ 14,913
1,817
$ 17,228
1,468
$ 13,382
The approximate future annual amortization of both the Company’s intangible items are as follows (in thousands):
Year ending December 31,
2020
2021
2022
2023
2024
Thereafter
$ 499
340
340
340
340
456
$ 2,315
14. Prepaid and Debit Card and Related Fees, Card Payment and Automated Clearing House (ACH) Processing Fees
The Company recognizes prepaid and debit card, payment processing and affinity fees in the periods in which they are earned
by performance of the related services. The majority of fees the Company earns result from contractual transaction fees paid by third-
party sponsors to the Company and monthly service fees. Additionally, the Company earns interchange fees paid through settlement
with associations such as Visa, which are also determined on a per transaction basis. The Company records this revenue net of costs
such as association fees and interchange transaction charges. The Company also earns monthly fees for the use of its cash in payroll
card sponsor ATM’s for payroll cardholders. Fees earned by the Company from processing card payments for recipients of such
payments, or from processing ACH payments or other payments are also determined primarily on a per transaction basis.
15. Derivative Financial Instruments
The Company has utilized derivatives to hedge interest rate risk on fixed rate loans which are held-for-sale. These
derivatives are recorded on the consolidated balance sheets at fair value. Changes in the fair value of these derivatives, designated as
fair value hedges, are recorded in earnings with and in the same consolidated income statement line item as changes in the fair value
of the related hedged item. All derivatives are utilized to hedge against interest rate changes between the time commercial mortgages
are funded and sold. These derivatives are intended to serve as a hedge against interest rate movements which might otherwise
decrease sales proceeds.
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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 2019, 2018 or 2017.
17. Sale of Health Savings Account Portfolio and European Prepaid Operations
Substantially all of the remaining health savings accounts were sold in the second quarter of 2017 at a gain of $2.5 million.
In the second quarter of 2017, the Company sold its European prepaid operations at a loss of $3.4 million.
18. Long-term Borrowings
The $41.0 million and $41.7 million respectively outstanding for long-term borrowings at December 31, 2019 and 2018,
reflected the proceeds from two loans which were sold in which we retained a participating interest that did not qualify for sale
accounting.
19. Revenue Recognition
The Company recognizes revenue when the performance obligations related to the transfer of goods or services under the
terms of a contract are satisfied. Some obligations are satisfied at a point in time while others are satisfied over a period of time.
Revenue is recognized as the amount of consideration to which the Company expects to be entitled to in exchange for transferring
goods or services to a customer. When consideration includes a variable component, the amount of consideration attributable to
variability is included in the transaction price only to the extent it is probable that significant revenue recognized will not be reversed
when uncertainty associated with the variable consideration is subsequently resolved. The Company’s contracts generally do not
contain terms that require significant judgment to determine the variability impacting the transaction price.
A performance obligation is deemed satisfied when the control over goods or services is transferred to the customer. Control
is transferred to a customer either at a point in time or over time. To determine when control is transferred at a point in time, the
Company considers indicators, including but not limited to the right to payment for the asset, transfer of significant risk and rewards
of ownership of the asset and acceptance of the asset by the customer. When control is transferred over a period of time, for different
performance obligations, either the input or output method is used to measure progress for the transfer. The measure of progress used
to assess completion of the performance obligation varies between performance obligations and may be based on time throughout the
period of service or on the value of goods and services transferred to the customer. As each distinct service or activity is performed,
the Company transfers control to the customer based on the services performed as the customer simultaneously receives the benefits of
those services. This timing of revenue recognition aligns with the resolution of any uncertainty related to variable consideration.
Costs incurred to obtain a revenue producing contract generally are expensed when incurred as a practical expedient as the contractual
period for the majority of contracts is one year or less. The Company’s revenue streams that are in the scope of Accounting Standards
Update (ASU) 606 include prepaid and debit card, card payment, ACH and deposit processing and other fees. The fees on those
revenue streams are generally assessed and collected as the transaction occurs, or on a monthly or quarterly basis. The Company has
completed its review of the contracts and other agreements that are within the scope of revenue guidance and did not identify any
material changes to the timing or amount of revenue recognition. The Company’s accounting policies did not change materially since
the principles of revenue recognition in ASU 2014-09, “Revenue from Contracts with Customers” are largely consistent with previous
practices already implemented and applied by the Company. The vast majority of the Company’s services related to its revenues are
performed, earned and recognized monthly.
Prepaid and debit card fees primarily include fees for services related to reconciliation, fraud detection, regulatory
compliance and other services which are performed and earned daily or monthly and are also billed and collected on a monthly basis.
Accordingly, there is no significant component of the services the Company performs or related revenues which are deferred. The
Company earns transactional and/or interchange fees on prepaid and debit card accounts when transactions occur and revenue is billed
and collected monthly or quarterly. Certain volume or transaction based interchange expenses paid to payment networks such as Visa,
reduce revenue which is presented net on the income statement. Card payment and ACH processing fees include transaction fees
earned for processing merchant transactions. Revenue is recognized when a cardholder’s transaction is approved and settled, or
monthly. ACH processing fees are earned on a per item basis as the transactions are processed for third party clients and are also
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billed and collected monthly. Service charges on deposit accounts include fees and other charges the Company receives to provide
various services, including but not limited to, account maintenance, check writing, wire transfer and other services normally
associated with deposit accounts. Revenue for these services is recognized monthly as the services are performed. The Company’s
customer contracts do not typically have performance obligations and fees are collected and earned when the transaction occurs. The
Company may, from time to time, waive certain fees for customers but generally does not reduce the transaction price to reflect
variability for future reversals due to the insignificance of the amounts. Waiver of fees reduces the revenue in the period the waiver is
granted to the customer.
20. Sale of IRA Portfolio
On July 10, 2018, the Company executed an agreement to sell and transfer the fiduciary rights and obligations related to its
Safe Harbor Individual Retirement Account (SHIRA) portfolio, totaling approximately $400 million, to Millennium Trust Company,
LLC (Buyer). In consideration for the sale and transfer, Buyer paid the Company $65.0 million. Because the $65 million represented
consideration for the sale and transfer of the fiduciary rights and obligations which were transferred during the third quarter of 2018,
the $65.0 million was recognized as a gain on sale in that quarter. In 2018 the Company earned fees on the SHIRA portfolio of
$3.4 million, which comprise the vast majority of fees reported in the consolidated statement of operations under service fees on
deposit accounts. As a result of the sale, substantially no future fees will be realized in this income category. The fiduciary rights and
obligations related to the SHIRA portfolio were unrelated to the Company’s payments businesses and related accounts, which
comprise the vast majority of the Company’s funding.
21. Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. This
ASU establishes a comprehensive revenue recognition standard for virtually all industries conforming to U.S. GAAP, including those
that previously followed industry-specific guidance such as the real estate and construction industries. The revenue standard’s core
principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the
exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the
vendor is entitled. To accomplish this, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify
the performance obligations in the contract, (iii) identify the transaction price, (iv) allocate the transaction price to the performance
obligations in the contract, (v) recognize revenue when (or as) the entity satisfies the performance obligation. Three basic transition
methods are available: full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the
cumulative effect alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S.
GAAP at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening
balance of retained earnings. The guidance in this ASU is effective for annual periods and interim reporting periods within those
annual periods, beginning after December 15, 2017. Our payments business contracts encompass our services which are performed,
and earned on a daily or monthly basis; accordingly, these contracts with various third parties generally do not entail significant
amounts of deferred revenues. These services consist of reconciliation, fraud detection, regulatory compliance and other services
which are performed and earned daily or monthly and are also billed and collected on a monthly basis. Accordingly, there is no
significant component of the services we perform or related revenues which are deferred. We have nonetheless reviewed a significant
number of such contracts for prepaid and debit card accounts, merchant acquiring (processing card payments for merchants) and
automated clearing house, or ACH for any potentially significant ramifications of the guidance. We also reviewed other non-interest
income producing categories of the Company which include service fees on deposit accounts, gains and losses on other real estate
owned, gains and losses on the sale of loans and others. Additionally, the standard does not apply to revenue from loans, securities
and other financial instruments. Based upon the nature of our businesses and the reviews we performed to ascertain potential
applicability, the adoption of this standard did not have a significant impact on our consolidated results of operations or our
consolidated financial position.
In January 2016, the Financial Accounting Standards Board, or FASB, issued Subtopic 825-10, “Financial Instruments-
Overall” Recognition and Measurement of Financial Assets and Financial Liabilities”. The main provisions of the guidance include,
(i) the measurement of most equity investments at fair value with changes in fair value recorded through net income, except those
accounted for under the equity method of accounting, or those that do not have a readily determinable fair value (for which a practical
expedient can be elected); (ii) the required use of the exit price notion when valuing financial instruments for disclosure purposes;
(iii) the separate presentation in other comprehensive income of the instrument-specific credit risk portion of the total change in the
fair value of a liability under the fair value option; and (iv) the determination of the need for a valuation allowance on a deferred tax
asset related to available-for-sale securities must be made in combination with other deferred tax assets. The guidance eliminates the
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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.
The Company adopted this guidance on its effective date using a modified retrospective transition approach, applying the new
standard to all leases existing at the date of initial application, January 1, 2019. Consequently, financial information will not be
updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company has elected the practical
expedients option which does not require reassessment of its prior conclusions about lease identification, lease classification and initial
direct costs. The Company has not elected the use-of-hindsight or the practical expedient pertaining to land easements; the latter not
being applicable to it.
The effect of this adoption was the recognition at January 1, 2019 of a $16.4 million operating lease right-of-use (ROU)
asset, which has been adjusted for previously recorded accrued rent of $1.7 million, and an $18.1 million operating lease obligation.
No opening retained earnings adjustments are necessary under the modified retrospective transition approach. The adoption of this
guidance did not have an impact on the consolidated results of operations of the Company.
The ASU also includes disclosure requirements for lessors which encompass the Company’s direct financing leases. The
first disclosure requirement is to discuss significant shifts, if any, in the balance of unguaranteed residual assets and deferred selling
profit on direct financing leases. The Company’s direct financing lease portfolio consists primarily of vehicles which are sold at the
end of lease terms. The Company does not hold title to the vehicles prior to inception of the lease and, thus, selling profit is not
expected or deferred. However, sales of the vehicles may result in income when sales prices exceed residual values. This income is
reported in the consolidated statements of operations under non-interest income. Since the majority of the portfolio is comprised of
vehicle leases, sales prices may differ from residual values as a result of changes in the used vehicle market for both commercial
vehicles such as trucks and passenger vehicles.
Additionally, the Company is required to disclose the scheduled maturities of its direct financing leases reconciled to the total
lease receivables in the consolidated balance sheet, which are as follows (in thousands):
2020
2021
2022
2023
2024
2025 and thereafter
Total undiscounted cash flows
Residual value *
Difference between undiscounted cash flows and discounted cash flows
Present value of lease payments recorded as lease receivables
*
Of the $142,730, $29,638 is not guaranteed by the lessee.
$ 134,202
96,385
61,090
32,712
11,930
1,809
338,128
142,730
(46,398)
$ 434,460
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
96
employee stock compensation. The Update requires these income tax effects to be recognized in the statement of income within
income tax expense instead of within additional paid-in capital. In addition, the Update requires changes to the statement of cash
flows including the classification between the operating and financing section for tax activity related to employee stock compensation.
The Company adopted the guidance in the first quarter of 2017, and that adoption did not have a material impact on our consolidated
financial statements.
In June 2016, the FASB issued an update to Accounting Standards Update (ASU or Update) 2016-13 – “Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The Update changes the
accounting for credit losses on loans and debt securities by eliminating the probable initial recognition threshold in Current GAAP.
Instead, for loans and held-to-maturity debt securities, the Update requires a current expected credit loss (CECL) approach to
determine the allowance for credit losses. CECL requires loss estimates for the remaining estimated life of the financial asset using
historical experience, current conditions, and reasonable and supportable forecasts. Also, the Update eliminates the existing guidance
for purchased credit impaired loans, but requires an allowance for purchased financial assets with more than insignificant deterioration
since origination. The Company has utilized a commercially available modeling tool to input its historical loan balances and losses to
determine historical loss ratios. For pools other than SBLOC and IBLOC, vintage analysis is being utilized. The vintage analysis
computes weighted average loss ratios, based upon estimated loan life, which are applied against current outstanding balances as one
component of the allowance. The other component of the allowance is a qualitative factors component based upon loan quality,
economic factors and other relevant factors. For SBLOC and IBLOC, a probability of default methodology is being utilized. Both
the vintage and qualitative components of the allowance are determined on the basis of pools within each lending category. In
addition, the Update modifies the OTTI impairment model for available-for-sale debt securities to require an allowance for credit
impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in
credit. The Company’s implementation team includes loan review, finance, representatives of the lending departments and a third-
party advisor. The team concurred as to the division of each loan portfolio into their agreed upon common loss character pools. The
team also concurred as to the qualitative factors which varied according to pool. The Company expects the Update will result in an
increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected
prepayments, as well as the addition of an allowance for debt securities. While the Company continues to analyze data and modify
calculations, we currently expect an increase in the allowance for loan losses in the range of $1 million to $3 million. The amount of
the increase will be impacted by the portfolio composition and credit quality at the adoption date as well as economic conditions and
forecasts at that time. The guidance is effective in first quarter 2020 with a cumulative-effect adjustment to retained earnings as of the
beginning of the year of adoption. The Company is evaluating the impact of the Update on the consolidated financial statements.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S.
GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the “2017
Act”). This guidance provided registrants with three scenarios 1) Measurement of certain income tax effects is complete, 2)
Measurement of certain income tax effects can be reasonably estimated and 3) Measurement of certain income tax effects cannot be
reasonably estimated. The Company has acted in good faith to estimate the effects of the 2017 Act. The results have been recognized
and are reflected in the tax accounts in these financial statements. The analysis was completed in 2018 and did not have a material
impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220);
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. ASU 2018-02 allows a reclassification
from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Act.
Consequently, the amendment eliminates the stranded tax effect resulting from the 2017 Act and will improve the usefulness of
information reported to financial statement users. ASU 2018-02 is effective for financial statements issued for annual periods
beginning after December 15, 2018. The Company has early adopted ASU 2018-02. The effect of this adoption was a reclassification
of $812,000 from accumulated other comprehensive income to retained earnings in the Company’s December 31, 2017 consolidated
financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement” which eliminates certain fair value disclosures, adds new disclosures and
amends another disclosure applicable to the Company as follows. The amendment states that disclosure of measurement uncertainty
of the fair values to changes in inputs will be required for the reporting date and not future dates. New fair value disclosures consist of
disclosure of: a) total gains and losses in OCI from fair value changes in Level 3 assets and liabilities that are held on the balance sheet
date; b) the range and weighted average of inputs and how the weighted average was calculated and c) if weighted average is not
97
meaningful, other quantitative information that better reflects the distribution of inputs. ASU 2018-13 is effective for annual periods
beginning after December 15, 2019.
Note C— Subsequent Events
The Company evaluated its December 31, 2019 consolidated financial statements for subsequent events through the date the
consolidated financial statements were issued. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have
arisen which are likely to negatively impact net interest income. Other financial impact could occur though such potential impact is
unknown at this time.
Note D—Investment Securities
The amortized cost, gross unrealized gains and losses and fair values of the Company’s investment securities classified as
available-for-sale and held-to-maturity are summarized as follows (in thousands):
Available-for-sale
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
* Asset-backed securities as shown above
Federally insured student loan securities
Collateralized loan obligation securities
Held-to-maturity
Other debt securities - single issuers
Other debt securities - pooled
December 31, 2019
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 52,415
$ 672
$ (177)
$ 52,910
244,751
5,174
58,258
335,068
221,109
394,852
132
144
1,992
2,629
1,826
3,836
(534)
-
-
(1,101)
(208)
(146)
244,349
5,318
60,250
336,596
222,727
398,542
$ 1,311,627
$ 11,231
$ (2,166)
$ 1,320,692
December 31, 2019
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 33,852 $ 10
$ (323)
$ 33,539
210,899
122
(211)
210,810
$ 244,751
$ 132
$ (534)
$ 244,349
December 31, 2019
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 9,219 $ -
$ (2,067)
$ 7,152
75,168
682
-
75,850
$ 84,387
$ 682
$ (2,067)
$ 83,002
98
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
* 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, 2018
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 54,095
$ 146
$ (879)
$ 53,362
189,850
7,546
60,152
377,199
265,914
300,143
104
50
803
648
287
190
(1,352)
(45)
(520)
(8,106)
(3,994)
(5,907)
188,602
7,551
60,435
369,741
262,207
294,426
$ 1,254,899
$ 2,228
$ (20,803)
$ 1,236,324
December 31, 2018
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 59,705 $ 87
$ (283)
$ 59,509
125,045
5,100
-
17
(1,069)
-
123,976
5,117
$ 189,850
$ 104
$ (1,352)
$ 188,602
December 31, 2018
Gross
Amortized
unrealized
cost
gains
Gross
unrealized
losses
Fair
value
$ 9,168 $ -
$ (1,890)
$ 7,278
75,264
849
-
76,113
$ 84,432
$ 849
$ (1,890)
$ 83,391
The amortized cost and fair value of the Company’s investment securities at December 31, 2019, by contractual maturity are
shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
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
$ 6,853
$ 6,856
$ -
$ -
83,690
236,008
985,076
85,246
239,505
989,085
-
-
-
-
84,387
83,002
$ 1,311,627
$ 1,320,692
$ 84,387
$ 83,002
At December 31, 2019 and 2018, investment securities with a fair value of approximately $262.0 million and $116.0 million,
respectively, were pledged to FHLB to secure a line of credit. At December 31, 2019 and 2018, investment securities with a fair value
of approximately $0 and $169.5 million were pledged to secure a line of credit with the FRB. The Company also pledged the majority
of its loans to the FRB for that line of credit which it has never used. The amount of loans pledged varies and since the Bank does not
utilize this line the collateral may be unpledged at any time. The line is maintained consistent with the Bank’s liquidity policy which
maximizes potential liquidity. Gross gains on sales of securities were $0, $41,000 and $2.7 million for the years ended December 31,
99
2019, 2018 and 2017, respectively. Gross losses on sales of securities were $0, $0 and $429,000 for the years ended December 31,
2019, 2018 and 2017, respectively.
Investment securities fair values are based on a fair market value supplied by a third-party market data provider when
available. If not available, prices provided by securities dealers with expertise in the securities being evaluated may also be utilized.
When such market information is not available, fair values are based on the present value of cash flows, which discounts expected
cash flows from principal and interest using yield to maturity at the measurement date. The Company periodically reviews its
investment portfolio to determine whether unrealized losses are other than temporary, based on evaluations of the creditworthiness of
the issuers/guarantors as well as the underlying collateral if applicable, in addition to the continuing performance of the securities.
The Company did not recognize any other-than-temporary impairment charges in 2019, 2018 and 2017.
Investments in FHLB and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $5.3 million at
December 31, 2019 and $1.1 million at December 31, 2018.
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at
December 31, 2019 (in thousands):
Available-for-sale
Less than 12 months
12 months or longer
Total
Description of Securities
U.S. Government agency securities
Asset-backed securities
Residential mortgage-backed securities
Collateralized mortgage obligation securities
Commercial mortgage-backed securities
Total temporarily impaired
investment securities
Number
of
securities
5
28
64
22
4
Fair Value
Unrealized losses
Fair Value
Unrealized losses
Fair Value
Unrealized
losses
$ 12,214
115,909
$ (44)
(275)
$ 3,986
56,427
$ (133)
(260)
$ 16,200 $ (177)
(535)
172,336
58,682
37,387
35,095
(114)
(85)
(129)
73,311
18,136
3,162
(987)
(123)
(16)
131,993
(1,101)
55,523
38,257
(208)
(145)
123
$ 259,287
$ (647)
$ 155,022
$ (1,519)
$ 414,309 $ (2,166)
Held-to-maturity
Less than 12 months
12 months or longer
Total
Number
of
securities Fair Value
Unrealized losses
Fair Value
Unrealized losses
Fair Value
Unrealized
losses
Description of Securities
Single issuers
Total temporarily impaired
investment securities
1
1
$ -
$ -
$ 7,152 $ (2,067)
$ 7,152 $ (2,067)
$ -
$ -
$ 7,152 $ (2,067)
$ 7,152 $ (2,067)
100
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at
December 31, 2018 (in thousands):
Available-for-sale
Less than 12 months
12 months or longer
Total
Number
of
securities Fair Value
Unrealized losses Fair Value
Unrealized losses
Fair Value
Unrealized
losses
Description of Securities
U.S. Government agency securities
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
10
26
3
22
118
44
26
$ 679
$ (2) $ 41,719
$ (877) $ 42,398
$ (879)
148,753
(1,230)
11,506
(122)
160,259
(1,352)
-
-
3,625
(45)
3,625
(45)
4,492
17,168
1,522
(19)
(49)
(3)
121,860
(2,020)
35,599
302,407
193,355
151,453
(501)
(8,057)
(3,991)
(3,887)
40,091
319,575
194,877
273,313
(520)
(8,106)
(3,994)
(5,907)
249
$ 294,474
$ (3,323) $ 739,664
$ (17,480) $ 1,034,138
$ (20,803)
Held-to-maturity
Less than 12 months
12 months or longer
Total
Number
of
securities Fair Value
Unrealized losses Fair Value
Unrealized losses
Fair Value
Unrealized
losses
Description of Securities
Single issuers
Total temporarily impaired
investment securities
1
1
$ -
$ -
$ 7,278
$ (1,890)
$ 7,278
$ (1,890)
$ -
$ -
$ 7,278
$ (1,890)
$ 7,278
$ (1,890)
The Company owns one single issuer trust preferred security issued by an insurance company. The security is not rated by
any bond rating service. At December 31, 2019, it had a book value of $9.2 million and a fair value of $7.2 million. The Company
has evaluated the securities in the above tables as of December 31, 2019 and has concluded that none of these securities has
impairment that is other-than-temporary. The Company evaluates whether an other than temporary impairment exists by considering
primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the
security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on
contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral
and (e) the payment structure of the security. If other than temporary impairment is determined, the Company estimates expected
future cash flows to determine the credit loss amount with a quantitative and qualitative process that incorporates information received
from third-party sources and internal assumptions and judgments regarding the future performance of the security. Based upon this
evaluation, the Company concluded that most of the securities that are in an unrealized loss position are in a loss position because of
changes in interest rates after the securities were purchased. The securities that have been in an unrealized loss position for 12 months
or longer include other securities whose market values are sensitive to interest rates. The Company’s unrealized loss for the debt
securities, which includes one single issuer trust preferred security, is primarily related to general market conditions and the resultant
lack of liquidity in the market. The severity of the temporary impairments in relation to the carrying amounts of the individual
investments is consistent with market developments. The Company’s analysis for each investment is performed at the security level.
As a result of its review, the Company concluded that other-than-temporary impairment did not exist due to the Company’s ability and
intention to hold these securities to recover their amortized cost basis.
Note E—Loans
The Company originates loans for sale or securitization into commercial mortgage backed securities or to other commercial
loan purchasers and to secondary government guaranteed loan markets. The Company has elected the fair value option for the balance
of these loans, classified as commercial loans held-for-sale, to better reflect the economics of the transactions. At December 31, 2019
101
and 2018, the fair value of these loans was $1.18 billion and $688.5 million, and the unpaid principal balance was $1.17 billion and
$685.1 million, respectively. Included in the net realized and unrealized gains (losses) on loans originated for sale in the consolidated
statement of operations were changes in fair value resulting in an unrealized gain of $963,000 in 2019, unrealized loss of $979,000 in
2018 and unrealized gains of $1.8 million in 2017. These amounts are net of credit related reductions in fair value of $486,000 and
$829,000, respectively, in 2019 and 2018, related to a single loan. In 2017, there was no decrease in fair value based upon instrument-
specific credit risk. The fair value of such loans is reduced to the amount of the government guarantee. Interest earned on loans held-
for-sale during the period held is recorded in Interest Income – Loans, including fees in the consolidated statements of operations.
The Company has periodically sponsored the structuring of commercial mortgage loan securitizations. The loans sold to the
commercial mortgage-backed securitizations are transitional commercial mortgage loans which are made to improve and rehabilitate
existing properties which are already cash flowing. Servicing rights are not retained. Each of the securitizations is considered a
variable interest entity of which the Company is not the primary beneficiary. Further, true sale accounting has been applicable to each
of the securitizations, as supported by a review performed by an independent third-party consultant. In each of the securitizations, the
Company has obtained a tranche of certificates which are accounted for as available-for-sale debt securities. The securities are
recorded at fair value at acquisition, which is determined by an independent third party based on the discounted cash flow method
using unobservable (level 3) inputs. The loans securitized are structured with some prepayment protection and with extension options
which are common for rehabilitation loans. It was expected that those factors would generally offset the impact of prepayments which
would therefore not be significant. Accordingly, prepayments on CRE securities were not originally assumed in the first four
securitizations. However, as a result of higher than expected prepayments on CRE2, annual prepayments of 15% on CRE5 were
assumed, beginning after the first-year anniversary of the CRE5 securitization. For CRE6, there was no premium or discount
associated with the tranche purchased and prepayments were accordingly not estimated.
Because of credit enhancements for each security, cash flows were not reduced by expected losses. For each of the
securitizations, the Company has recorded a gain upon structuring which is comprised of (i) the excess of consideration received by
the Company in the transaction over the carrying value of the loans at securitization, less related transactions costs incurred; and
(ii) the recognition of previously deferred origination and exit fees.
A summary of securitizations and securities obtained from those securitizations is as follows:
In the third quarter of 2019, the Company sponsored The Bancorp Commercial Mortgage 2019-CRE6 Trust, securitizing
$778.2 million of loans and recording a $14.2 million gain. The certificates obtained by the Company in the transaction had
an acquisition date fair value of $51.6 million based upon an initial discount rate of 4.12%.
In the first quarter of 2019, the Company sponsored The Bancorp Commercial Mortgage 2019-CRE5 Trust, securitizing
$518.3 million of loans and recording a $11.2 million gain. The certificates obtained by the Company in the transaction had
an acquisition date fair value of $41.6 million based upon an initial discount rate of 4.75%.
In the third quarter of 2018, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE4 Trust, securitizing
$341.0 million of loans and recording a $9.0 million gain. The certificates obtained by the Company in the transaction had an
acquisition date fair value of $33.7 million based upon an initial discount rate of 4.88%.
In the first quarter of 2018, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE3 Trust, securitizing
$304.3 million of loans and recording an $11.7 million gain. The certificates obtained by the Company in the transaction had
an acquisition date fair value of $28.4 based upon an initial discount rate of 5.79%.
In the third quarter of 2017, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE2 Trust, securitizing
$314.4 million of loans and recording a $12.0 million gain. The certificates obtained by the Company had an acquisition date
fair value of $24.6 million based upon an initial discount rate of 9.41%.
In the first quarter of 2017, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE1 Trust, securitizing
$263.1 million of loans and recording a $5.1 million gain. The certificates obtained by the Company in the transaction had an
acquisition date fair value of $21.7 million based upon an initial discount rate of 4.78%.
The Company analyzes credit risk prior to making loans, on an individual loan basis. The Company considers relevant
aspects of the borrowers’ financial position and cash flow, past borrower performance, management’s knowledge of market
conditions, collateral and the ratio of the loan amount to estimated collateral value in making its credit determinations.
102
Major classifications of loans, excluding loans held-for-sale, are as follows (in thousands):
SBL non-real estate
SBL commercial mortgage
SBL construction
Small business loans *
Direct lease financing
SBLOC / IBLOC **
Other specialty lending
Other consumer loans ***
Unamortized loan fees and costs
Total loans, net of unamortized loan fees and costs
SBL loans, including unamortized fees and costs of $4,215 and $7,478
for December 31, 2019 and December 31, 2018, respectively
SBL loans included in held-for-sale
Total small business loans
December 31,
December 31,
2019
2018
$ 84,579
$ 76,340
218,110
45,310
347,999
434,460
1,024,420
3,055
4,554
1,814,488
9,757
165,406
21,636
263,382
394,770
785,303
31,836
16,302
1,491,593
10,383
$ 1,824,245
$ 1,501,976
December 31,
2019
December 31,
2018
$ 352,214
$ 270,860
220,358
199,977
$ 572,572
$ 470,837
*
The preceding table shows small business loans (SBL) and SBL held-for-sale at the dates indicated (in thousands). While the majority of SBL is comprised of
SBA loans, SBL also includes $16,952,000 and $0 of non-SBA loans as of December 31, 2019 and 2018, respectively.
** Securities Backed Lines of Credit (SBLOC) are collateralized by marketable securities, while Insurance Backed Lines of Credit (IBLOC) are collateralized by the
cash surrender value of insurance policies.
*** Included in the table above under Other consumer loans are demand deposit overdrafts reclassified as loan balances totaling $882,000 and $7.2 million at
December 31, 2019 and 2018, respectively. Overdraft charge-offs and recoveries are reflected in the allowance for loan and leases losses.
103
The following table provides information about impaired loans at December 31, 2019 and 2018 (in thousands):
Without an allowance recorded
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
Consumer - home equity
With an allowance recorded
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
Consumer - home equity
Total
SBL non-real estate
SBL commercial mortgage
SBL construction
Direct lease financing
Consumer - home equity
Without an allowance recorded
SBL non-real estate
SBL commercial mortgage
Direct lease financing
Consumer - home equity
With an allowance recorded
SBL non-real estate
SBL commercial mortgage
Direct lease financing
Consumer - home equity
Total
SBL non-real estate
SBL commercial mortgage
Direct lease financing
Consumer - home equity
Recorded
investment
Unpaid
principal
balance
December 31, 2019
Related
allowance
Average
recorded
investment
Interest
income
recognized
$ 335
$ 2,717
$ -
$ 277
$ 5
76
-
286
489
3,804
971
711
-
121
4,139
1,047
711
286
610
76
-
286
489
4,371
971
711
-
121
7,088
1,047
711
286
610
-
-
-
-
(2,961)
(136)
(36)
-
(9)
(2,961)
(136)
(36)
-
(9)
15
284
362
1,161
3,925
561
284
244
344
4,202
576
568
606
1,505
-
-
11
9
30
-
-
-
-
35
-
-
11
9
$ 6,793
$ 9,742
$ (3,142)
$ 7,457
$ 55
Recorded
investment
Unpaid
principal
balance
December 31, 2018
Related
allowance
Average
recorded
investment
Interest
income
recognized
$ 175
$ 1,469
$ -
$ 334
$ -
-
437
1,612
3,541
458
434
129
3,716
458
871
1,741
-
548
1,612
3,541
458
434
129
5,010
458
982
1,741
-
-
-
(2,806)
(71)
(145)
(17)
(2,806)
(71)
(145)
(17)
-
425
1,648
2,816
505
617
26
3,150
505
1,042
1,674
-
28
10
70
-
66
-
70
-
94
10
$ 6,786
$ 8,191
$ (3,039)
$ 6,371
$ 174
104
The following table summarizes the Company’s non-accrual loans, loans past due 90 days and other real estate owned at
December 31, 2019 and 2018, respectively (the Company had no non-accrual leases at December 31, 2019 or December 31, 2018):
Non-accrual loans
SBL non-real estate
SBL commercial mortgage
SBL construction
Consumer
Total non-accrual loans
Loans past due 90 days or more and still accruing
Total non-performing loans
Other real estate owned
Total non-performing assets
December 31,
2019
2018
(in thousands)
$ 3,693
1,047
711
345
5,796
3,264
9,060
-
$ 2,590
458
-
1,468
4,516
954
5,470
-
$ 9,060
$ 5,470
Interest which would have been earned on loans classified as non-accrual at December 31, 2019 and 2018, was $388,000 and
$255,000, respectively.
The Company’s loans that were modified as of December 31, 2019 and 2018 and considered troubled debt restructurings are
as follows (in thousands):
December 31, 2019
December 31, 2018
Pre-
modification
recorded
investment
Post-
modification
recorded
investment
Pre-
modification
recorded
investment
Post-
modification
recorded
investment
Number
Number
8 $ 1,309 $ 1,309
286
1
286
489
489
2
11 $ 2,084 $ 2,084
5 $ 1,564 $ 1,564
870
3
513
2
513
10 $ 2,947 $ 2,947
870
SBL 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, 2019 and 2018 (in thousands):
SBL non-real estate
Direct lease financing
Consumer
Total
Adjusted
interest rate
$ -
December 31, 2019
Extended
maturity
Combined rate
Adjusted
and maturity
interest rate
$ 51 $ 1,258 $ -
December 31, 2018
Extended
maturity
Combined rate
and maturity
$ 85 $ 1,479
-
-
$ -
286
-
489
-
$ 337 $ 1,747 $ -
-
-
434
-
436
513
$ 519 $ 2,428
The Company had no commitments to extend additional credit to loans classified as a troubled debt restructuring as of
December 31, 2019 and a commitment to extend $27,000 to one loan classified as a troubled debt restructuring as of December 31,
2018.
105
When loans are classified as troubled debt restructurings, their collateral is valued and a specific reserve is established if the
collateral valuation, less disposition costs, is lower than the recorded value of the loan. At December 31, 2019, there were eleven
troubled debt restructured loans with a balance of $2.1 million which had specific reserves of $1.0 million. These reserves related
primarily to the non-guaranteed portion of SBA loans for start-up businesses.
The following table summarizes as of December 31, 2019 loans that were restructured within the last 12 months that have
subsequently defaulted (in thousands).
SBL non-real estate
Total
December 31, 2019
Number
Pre-modification recorded
investment
1
1
$ 660
$ 660
A detail of the changes in the allowance for loan and lease losses by loan category is as follows (in thousands):
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC /
IBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
December 31, 2019
$ 4,636
(1,362)
125
1,586
$ 4,985
$ 941
-
-
531
$ 1,472
$ 250
-
-
182
$ 432
$ 2,025
(528)
51
878
$ 2,426
$ 393
-
$ 60
-
160
$ 553
(48)
$ 12
$ 108
(1,103)
2
1,033
$ 40
$ 240
-
-
78
$ 318
$ 8,653
(2,993)
178
4,400
$ 10,238
$ 2,961
$ 136
$ 36
$ -
$ -
$ -
$ 9
$ -
$ 3,142
$ 2,024
$ 1,336
$ 396
$ 2,426
$ 553
$ 12
$ 31
$ 318
$ 7,096
$ 84,579
$ 218,110
$ 45,310
$ 434,460
$ 1,024,420
$ 3,055
$ 4,554
$ 9,757
$ 1,824,245
$ 4,139
$ 1,047
$ 711
$ 286
$ -
$ -
$ 610
$ -
$ 6,793
$ 80,440
$ 217,063
$ 44,599 $ 434,174
$ 1,024,420
$ 3,055
$ 3,944
$ 9,757
$ 1,817,452
Beginning balance
1/1/2019
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
106
SBL non-real
estate
SBL
commercial
mortgage
SBL
construction
Direct lease
financing
SBLOC
Other specialty
lending
Other
consumer
loans
Unallocated
Total
December 31, 2018
$ 3,145
(1,348)
57
2,782
$ 4,636
$ 1,120
(157)
13
(35)
$ 941
$ 136
-
-
114
$ 250
$ 1,495
(637)
64
1,103
$ 2,025
$ 365
-
$ 57
-
28
$ 393
3
$ 60
$ 581
(21)
1
(453)
$ 108
$ 197
-
-
43
$ 240
$ 7,096
(2,163)
135
3,585
$ 8,653
$ 2,806
$ 71
$ -
$ 145
$ -
$ -
$ 17
$ -
$ 3,039
$ 1,830
$ 870
$ 250
$ 1,880
$ 393
$ 60
$ 91
$ 240
$ 5,614
$ 76,340
$ 165,406
$ 21,636
$ 394,770
$ 785,303
$ 31,836
$ 16,302
$ 10,383
$ 1,501,976
$ 3,716
$ 458
$ -
$ 871
$ -
$ -
$ 1,741
$ -
$ 6,786
$ 72,624
$ 164,948
$ 21,636
$ 393,899
$ 785,303
$ 31,836
$ 14,561
$ 10,383
$ 1,495,190
Beginning balance
1/1/2018
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
The Company did not have loans acquired with deteriorated credit quality at either December 31, 2019 or December 31,
2018.
107
A detail of the Company’s delinquent loans by loan category is as follows (in thousands):
30-59 Days
past due
60-89 Days
past due
90+ Days
still accruing Non-accrual
Total
past due
Current
Total
loans
December 31, 2019
SBL non-real estate
$ 36 $ 125 $ - $ 3,693 $ 3,854 $ 80,725 $ 84,579
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and costs
-
-
2,008
290
-
-
-
-
1,983
-
2,692
75
-
-
-
-
-
-
3,264
-
-
-
-
-
1,047
711
-
-
-
-
345
-
3,030
711
7,964
365
-
-
345
-
215,080
44,599
426,496
218,110
45,310
434,460
1,024,055
1,024,420
3,055
1,137
3,072
9,757
3,055
1,137
3,417
9,757
$ 2,334 $ 4,875 $ 3,264 $ 5,796 $ 16,269 $ 1,807,976 $ 1,824,245
30-59 Days
60-89 Days
90+ Days
Total
past due
past due
still accruing Non-accrual
past due
Current
Total
loans
December 31, 2018
SBL non-real estate
$ 346 $ 125 $ - $ 2,590 $ 3,061 $ 73,279 $ 76,340
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC
Other specialty lending
Consumer - other
Consumer - home equity
Unamortized loan fees and costs
-
-
2,594
487
108
-
-
-
-
694
1,572
-
-
-
-
-
-
-
954
-
-
-
-
-
458
-
-
-
-
-
1,468
-
458
694
5,120
487
108
-
1,468
-
164,948
20,942
389,650
784,816
31,728
9,147
5,687
10,383
165,406
21,636
394,770
785,303
31,836
9,147
7,155
10,383
$ 3,535 $ 2,391 $ 954 $ 4,516 $ 11,396 $ 1,490,580 $ 1,501,976
108
The Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans. The
following table provides information by credit risk rating indicator for each segment of the loan portfolio excluding loans held-for-sale
at the dates indicated (in thousands):
December 31, 2019
Pass
Special mention Substandard
Doubtful
Loss
Unrated subject
to review *
Unrated not
subject to review
*
Total loans
SBL non-real estate
$ 76,108 $ 3,045 $ 4,430 $ - $ - $ - $ 996 $ 84,579
SBL commercial mortgage
208,809
2,249
SBL construction
Direct lease financing
SBLOC / IBLOC
Other specialty lending
Consumer
Unamortized loan fees and costs
44,599
420,289
942,858
3,055
2,545
-
-
-
-
-
-
-
5,577
711
8,792
-
345
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,475
-
5,379
218,110
45,310
434,460
81,562
1,024,420
-
1,664
9,757
3,055
4,554
9,757
$ 1,698,263 $ 5,294 $ 19,855 $ - $ - $ - $ 100,833 $ 1,824,245
Pass
Special mention Substandard
Doubtful
Loss
Unrated subject
to review *
Unrated not
subject to review
*
Total loans
December 31, 2018
SBL non-real estate
$ 67,809 $ 1,641 $ 4,517 $ - $ - $ 347 $ 2,026 $ 76,340
SBL commercial mortgage
SBL construction
Direct lease financing
SBLOC
Other specialty lending
Consumer
158,667
19,912
382,860
775,153
31,749
5,849
Unamortized loan fees and costs
-
273
-
458
694
2,157
1,456
-
-
-
-
-
-
1,742
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,498
843
3,623
-
-
-
-
510
187
4,674
10,150
87
8,711
10,383
165,406
21,636
394,770
785,303
31,836
16,302
10,383
$ 1,441,999 $ 4,071 $ 8,867 $ - $ - $ 10,311 $ 36,728 $ 1,501,976
* At December 31, 2019, in excess of 50% of the total continuing loan portfolio was reviewed. The targeted coverages and scope of the reviews are risk-
based and vary according to each portfolio. These thresholds are maintained as follows:
Security Backed Lines of Credit (SBLOC) – The targeted review threshold for 2019 was 40% with the largest 25% of SBLOCs by commitment to be
reviewed annually. A random sampling of a minimum of 20 of the remaining loans will be reviewed each quarter. At December 31, 2019, approximately 55% of the
SBLOC portfolio had been reviewed.
Insurance Backed Lines of Credit (IBLOC) – The targeted review threshold for 2019 was 40% with the largest 25% of IBLOCs by commitment to be
reviewed annually. A random sample of the remaining loans will also be reviewed and a minimum of 20 loans will be reviewed each quarter. At December 31, 2019,
approximately 57% of the IBLOC portfolio had been reviewed.
SBA Loans – The targeted review or rated threshold for 2019 was 100%, to be rated and/or reviewed within 90 days of funding, less fully guaranteed loans
purchased for CRA. The 100% coverage includes loans rated by designated SBA department personnel, with a review threshold for the independent loan review
department of all loans exceeding $1.0 million and any classified loans. At December 31, 2019, approximately 100% of the government guaranteed loan portfolio had
been rated and/or reviewed.
Direct Lease Financing – The targeted review threshold for 2019 was 35%. At December 31, 2019, approximately 54% of the leasing portfolio had been
reviewed. All lease relationships exceeding $1.0 million are reviewed.
Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold for 2019 was 100%. Floating rate loans will be reviewed initially
within 90 days of funding and will be monitored on an ongoing basis as to payment status. Subsequent reviews will be performed based on a sampling each
109
quarter. Each floating rate loan will be reviewed if any available extension options are exercised. At December 31, 2019, approximately 100% of the CMBS floating
rate loans on the books more than 90 days had been reviewed.
Commercial Mortgaged Backed Securities (Fixed Rate) - 100% of fixed rate loans that are unable to be readily sold on the secondary market and remain on
the Bank's books after nine months will be reviewed at least annually. At December 31, 2019, approximately 100% of the CMBS fixed rate portfolio had been
reviewed.
Specialty Lending - Specialty Lending, defined as commercial loans unique in nature that do not fit into other established categories, have a review coverage
threshold of 100% for non-Community Reinvestment Act (“CRA”) loans. At December 31, 2019, approximately 100% of the non-CRA loans had been reviewed.
Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2019 was 50%. The largest 25% of HELOCs by commitment will be reviewed
annually. A random sampling of a minimum of ten of the remaining loans will be reviewed each quarter. At December 31, 2019, approximately 85% of the HELOC
portfolio had been reviewed.
Note F—Premises and Equipment
Premises and equipment are as follows (in thousands):
Land
Buildings
Furniture, fixtures, and equipment
Leasehold improvements
Accumulated depreciation
Estimated
useful lives
-
39 years
3 to 12 years
6 to 10 years
December 31,
2019
2018
$ 1,732
$ -
3,436
52,172
11,035
68,375
(50,837)
-
51,789
14,246
66,035
(47,140)
$ 17,538
$ 18,895
Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was approximately $3.7 million, $4.0 million
and $4.5 million, respectively.
Note G—Time Deposits
At December 31, 2019, the scheduled maturities of time deposits (certificates of deposit) are as follows (in thousands):
2020
2021
2022
2023
2024
$ 475,000
-
-
-
-
$ 475,000
There were no time deposits outstanding at December 31, 2018.
110
Note H—Variable Interest Entity (VIE)
VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional
subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions
relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the
right to receive the residual returns of the entity.
The most common type of VIE is a special purpose entity (SPE). SPEs are commonly used in securitization transactions in
order to isolate certain assets and distribute the cash flows from those assets to investors. The basic SPE structure involves a company
selling assets to the SPE with the SPE funding the purchase of those assets by issuing securities to investors. The agreements that
govern the transaction specify how the cash earned on the assets must be allocated to the SPE’s investors and other parties that have
rights to those cash flows. SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other
entities, including the creditors of the seller of the assets. The primary beneficiary of a VIE (i.e., the party that has a controlling
financial interest) is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both
(1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and (2) through its
interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to
the VIE.
The Company holds variable interests in Walnut Street 2014-1 LLC (WS 2014), accounted for as a debt instrument for which
the Company elected the fair value option. The debt acquired was a 49% equity interest in WS 2014 as well as 100% of the A-Notes
and 49% of the B-Notes that WS 2014 issued in a securitization transaction. The assets within the securitization consisted of loans and
loan collateral from the Company’s discontinued loan portfolio. The variable interests relate to the economic interests held by the
Company in WS 2014 and the asset management contract between the Company and WS 2014. The Company is not the primary
beneficiary, as it does not have the controlling financial interest in WS 2014, and therefore does not consolidate WS 2014. At
December 31, 2019, the Company’s investment in WS 2014 was $39.2 million and was classified as an investment in unconsolidated
entity in the consolidated balance sheet. The Company’s remaining exposure to loss is equal to the balance of the Company’s interest,
or $39.2 million.
The following table shows the total unpaid principal amount of assets held in WS 2014, shown as commercial and other, at
December 31, 2019 and 2018 (in thousands). Continuing involvement for WS 2014 includes servicing the loans and holding senior
interests or subordinated interests. It also separately shows the Company’s interests in CRE1, CRE2, CRE3, CRE4, CRE5 and CRE6,
which represent single securities purchased by the Company in each of the securitizations for which the Company generated all of the
commercial mortgage-backed loan collateral.
111
December 31, 2019
Principal amount outstanding
The Company's
Assets held in
interest
Total assets
Assets held in
nonconsolidated
in securitized
held by
consolidated
securitization
securitization
VIEs (a)
VIEs
VIEs with
continuing
involvement
assets in
nonconsolidated
VIEs (b)
Commercial and other
$ 56,661 $ - $ 56,661 $ 39,154
Commercial mortgage-backed securities
CRE1 (c)
CRE2
CRE3
CRE4
CRE5
CRE6
52,143
134,216
221,285
296,827
494,567
775,557
-
-
-
-
-
-
52,143
134,216
221,285
296,827
494,567
775,557
16,794
12,570
19,861
29,612
38,496
51,558
December 31, 2018
Principal amount outstanding
The Company's
Assets held in
interest
Total assets
Assets held in
nonconsolidated
in securitized
held by
consolidated
securitization
securitization
VIEs (a)
VIEs
VIEs with
continuing
involvement
assets in
nonconsolidated
VIEs
Commercial and other
$ 152,893 $ - $ 152,893 $ 59,273
Commercial mortgage-backed securities
CRE1
CRE2
CRE3
CRE4
126,393
238,231
284,069
336,374
-
-
-
-
126,393
238,231
284,069
336,374
16,687
16,565
24,390
32,513
(a) Consists of notes backed by commercial loans predominantly secured by real estate.
(b) For securities purchased from securitizations which comprise the Company's interest: CRE1 and CRE2 are non-rated and CRE3, CRE4, CRE5
and CRE6 are "A-" rated as of December 31, 2019. CRE1, CRE2, CRE3, CRE4, and CRE5 are valued by discounted cash flow analysis and
CRE6 is priced by a pricing service.
(c) The Company's $16.8 million interest would have been repaid in October 2019 had remaining underlying loan collateral been paid as agreed.
However, remaining collateral comprised of one commercial real estate owned property, a second loan in process of collection and an extended
loan, are instead in the process of disposition. While the estimated value of these sources of repayment exceeds the amount to be repaid to the
Company and other applicable bondholders, there can be no assurance that the Company's interest will be fully repaid or as to the timing of
repayment.
112
Note I—Debt
1. Short-term borrowings
The Bank has overnight borrowing capacity with the Federal Home Loan Bank of Pittsburgh which amounted to
$248.8 million at December 31, 2019. Borrowings under this arrangement have a variable interest rate. The Bank also had a $1.11
billion line with the FRB as of that date. As of December 31, 2019, the Bank did not have any borrowings outstanding on these lines.
The details of these categories are presented below:
2019
As of or for the year ended December 31,
2018
(dollars in thousands)
2017
Short-term borrowings
Balance at year-end
Average during the year
Maximum month-end balance
Weighted average rate during the year
Rate at December 31
2. Securities sold under agreements to repurchase
$ -
129,031
300,000
2.43%
1.50%
$ -
20,346
100,000
2.22%
2.35%
$ -
23,281
50,000
1.39%
1.34%
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:
2019
As of or for the year ended December 31,
2018
(dollars in thousands)
2017
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
$ 82
90
93
0.00%
0.15%
$ 93
173
223
0.00%
0.15%
$ 217
240
274
0.00%
0.23%
3. Guaranteed preferred beneficiary interest in the Company’s subordinated debt
As of December 31, 2019, the Company held two statutory business trusts: The Bancorp Capital Trust II and The Bancorp
Capital Trust III. In each case, the Company owns all the common securities of the Trust. The Trusts issued preferred capital
securities to investors and invested the proceeds in the Company through the purchase of junior subordinated debentures issued by the
Company. These debentures are the sole assets of the Trusts.
The $10.3 million of debentures issued to The Bancorp Capital Trust II on November 28, 2007 mature on March 15,
2038, and bear interest at an annual rate equal to 3-month LIBOR plus 3.25%.
The $3.1 million of debentures issued to The Bancorp Capital Trust III on November 28, 2007 mature on March 15,
2038, and bear interest at a floating annual rate equal to 3-month LIBOR plus 3.25%.
As of December 31, 2019, the Trusts qualify as VIEs under ASC 810, Consolidation. However, the Company is not
considered the primary beneficiary and, therefore, the Trusts are not consolidated in the Company’s consolidated financial statements.
The Trusts are accounted for under the equity method of accounting.
113
Note J—Shareholders’ Equity
In 2011, the Company adopted a common stock repurchase program in which share repurchases reduce the amount of shares
outstanding. Repurchased shares may be reissued for various corporate purposes. As of December 31, 2011, the Company had
repurchased 100,000 shares of the total 750,000 maximum number of shares authorized by the Board of Directors. The 100,000
shares were repurchased at an average cost of $8.66 per share. Shares were repurchased at market price and were recorded as treasury
stock at that amount, using the cost method
Note K—Benefit Plans
401 (k) Plan
The Company maintains a 401(k) savings plan covering substantially all employees of the Company. Under the plan, the
Company matches 50% of the employee contributions for all participants, not to exceed 6% of their salary. Contributions made by the
Company were approximately $1.6 million, $1.3 million and $1.0 million for the years ended December 31, 2019, 2018 and 2017,
respectively and are reflected in salaries and employee benefits in the consolidated statement of operations.
Supplemental Executive Retirement Plan
In 2005, the Company began contributing to a supplemental executive retirement plan for its former Chief Executive Officer
that provides annual retirement benefits of $25,000 per month until death. There were $300,000 of disbursements under the plan in
2019, 2018 and 2017, respectively. The actuarial assumptions reflected a discount rate of 2.62% and a monthly benefit of $25,000.
Projected payouts for years each of years 2020 through 2024, inclusive are projected at $300,000 per year, and $1.1 million for each of
the subsequent five years. The Company adjusts its related liability to actuarially derived estimates of lifetime payouts based upon
actuarial tables as follows: SOA Pri-2012 Amount-Weighted White Collar Retiree Mortality Table with Mortality Improvement Scale
MP-2019. The Company expensed $357,000 for the year ended December 31, 2019. The Company reversed $34,000 of expense for
the year ended December 31, 2018 and expensed $219,000 for this plan for the year ended December 31, 2017 based upon changes to
actuarial tables. As of December 31, 2019, the Company had accrued $3.3 million for potential future payouts.
Note L—Income Taxes
The Company operates predominantly in the United States and is subject to corporate net income taxes for federal and state
purposes. The Company sold its minimal operations in Europe in April 2017. These taxes were not considered material to the overall
financial statements. Tax expense is computed in total on combined continuing and discontinued operations, then separately for
continuing operations which is subtracted from that total. The remainder is shown as tax expense for discontinued operations. The
components of income tax expense included in the statements of continuing operations are as follows:
Current tax provision
Federal
State
Deferred tax provision (benefit)
Federal
State
2019
For the years ended
December 31,
2018
(in thousands)
2017
$ 14,407
5,212
19,619
$ 11,038
5,379
16,417
$ 1,044
1,213
2,257
1,382
225
1,607
$ 21,226
13,926
1,898
15,824
$ 32,241
22,599
(1,800)
20,799
$ 23,056
114
The differences between applicable income tax expense (benefit) from continuing operations and the amounts computed by
applying the statutory federal income tax rate of 21% for 2019 and 2018 and 34% for 2017, are as follows:
Computed tax expense at statutory rate
Tax effect of federal rate change
State taxes
Tax-exempt interest income
Meals and entertainment
Civil money penalty
Other nondeductible items
Valuation allowance - domestic
Other
2019
$ 15,224
-
4,140
(467)
97
1,870
263
-
99
$ 21,226
For the years ended
December 31,
2018
(in thousands)
$ 25,154
-
6,148
(408)
80
-
546
721
-
$ 32,241
2017
$ 13,734
17,293
1,199
(1,600)
63
-
2,421
(9,813)
(241)
$ 23,056
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:
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
Other
Total gross deferred tax assets
Federal and state valuation allowance
Deferred tax liabilities:
Unrealized gains on investment securities available for sale
Discount on Class A notes
Depreciation
Total deferred tax liabilities
Net deferred tax asset
115
For the years ended
December 31,
2019
2018
(in thousands)
$ 2,150
867
692
1,333
1,806
3,579
3,064
12,420
808
3,434
-
1,326
31,479
(14,869)
2,237
92
1,743
4,072
$ 12,538
$ 1,817
1,993
680
1,558
1,440
3,579
3,462
10,412
753
4,352
5,240
1,260
36,546
(12,952)
-
92
1,880
1,972
$ 21,622
Management assesses all available positive and negative evidence to determine whether it is more likely than not that the
Company will be able to recognize the existing deferred tax assets. The majority of valuation allowances reversed in 2017 with the
remaining valuation allowance reflecting capital losses in Walnut Street. The remaining valuation allowance will likely reverse only
to the extent that recoveries exceed any potential future losses in Walnut Street. The federal and state valuation allowance at
December 31, 2019 and 2018, respectively, was $14.9 million and $12.9 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Beginning balance at January 1
Decreases in tax provisions for prior years
Gross unrecognized tax benefits at December 31
2019
$ 338
-
$ 338
For the years ended
December 31,
2018
(in thousands)
$ 338
-
$ 338
2017
$ 339
(1)
$ 338
Management does not believe these amounts will significantly increase or decrease within 12 months of December 31, 2019.
The total amount of unrecognized tax benefits, if recognized, will impact the effective tax rate.
Tax years after 2016 remain subject to examination by the federal authorities and 2015 and after remain subject to
examination by most of the state tax authorities. The Company recognizes interest accrued and penalties related to unrecognized tax
benefits in income tax expense for all periods presented. To date, no amounts of interest or penalties relating to unrecognized tax
benefits have been recorded.
Note M—Stock-Based Compensation.
In May 2018, the Company adopted an Equity Incentive Plan (the 2018 Plan). Employees and directors of the Company and
the Bank and consultants (with restrictions) are eligible to participate in the 2018 Plan. The option term may not exceed 10 years from
the date of the grant. Any employee or consultant who possesses more than 10 percent of voting power of all classes of stock of the
Company, or any parent or subsidiary, may not have options with terms exceeding five years from the date of grant. An aggregate of
1,700,000 shares of common stock were reserved for issuance under the 2018 Plan. Restricted stock units may also be granted under
the 2018 Plan with conditions similar to those for options.
In May 2013, the Company adopted a Stock Option and Equity Plan (the 2013 Plan). Employees and directors of the
Company and the Bank and consultants (with restrictions) are eligible to participate in the 2013 Plan. The option term may not exceed
10 years from the date of the grant. An employee or consultant who possesses more than 10 percent of voting power of all classes of
stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five years from the date of grant. An
aggregate of 2,200,000 shares of common stock were originally reserved for issuance under the 2013 Plan but none remain. Restricted
stock units may also be granted under the 2013 Plan with conditions similar to those for options.
In May 2011, the Company adopted a Stock Option and Equity Plan (the 2011 Plan). Employees and directors of the
Company and the Bank and consultants (with restrictions) are eligible to participate in the 2011 Plan. The option term may not exceed
10 years from the date of the grant. An employee or consultant who possesses more than 10 percent of voting power of all classes of
stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five years from the date of grant. An
aggregate of 1,400,000 shares of common stock were originally reserved for issuance under the 2011 Plan but none remain.
In June 2005, the Company adopted an Omnibus Equity Compensation Plan (the 2005 Plan). Employees and directors of the
Company and the Bank are eligible to participate in the 2005 Plan. An employee or consultant who possesses more than 10 percent of
voting power of all classes of stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five
years from the date of grant. An aggregate of 1,000,000 shares of common stock were originally reserved for issuance under the 2005
Plan but none remain. Options granted under the 2005 Plan expire on the tenth anniversary of their grant.
In October 1999, the Company adopted a stock option plan (the 1999 Plan). Employees and directors of the Company and
the Bank were eligible to participate in the 1999 Plan. An employee or consultant who possesses more than 10 percent of voting
116
power of all classes of stock of the Company, or any parent or subsidiary, may not have options with terms exceeding five years from
the date of grant. An aggregate of 1,000,000 shares of common stock were originally reserved for issuance under the 1999 Plan, with
no more than 75,000 shares being issuable to non-employee directors, but none remain. Options vested over four years and expire on
the tenth anniversary of the grant.
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, 2019
1,276,500
$ 8.23
Granted
Exercised
Expired
Forfeited
65,104
(30,000)
-
-
8.57
8.59
-
-
Outstanding at December 31, 2019
Exercisable at December 31, 2019
1,311,604
$ 8.24
1,171,500
$ 8.32
A summary of the Company’s restricted stock units is presented below:
3.77
3.13
-
-
-
3.11
2.56
$ 511,200
286,458
75,975
-
-
$ 6,203,523
$ 5,450,565
Weighted-average
Average remaining
Outstanding at January 1, 2019
Granted
Vested
Forfeited
Shares
850,937
930,831
(464,430)
(63,411)
grant date
fair value
$ 8.84
contractual
term (years)
8.57
8.21
8.96
Outstanding at December 31, 2019
1,253,927
$ 8.87
1.44
1.96
-
-
1.64
In 2019, The Company granted 930,831 restricted stock units at a fair value of $8.57 of which 863,331 had a vesting period
of three years and 67,500 had a vesting period of one year. In 2018, the Company granted 507,792 restricted stock units at a fair value
of $11.07 per unit of which 440,292 had a vesting period of 2.8 years and 67,500 had a vesting period of one year. In 2017, the
Company granted 955,024 restricted stock units at a fair value of $5.47 per unit of which 820,024 had a vested period of three years
and 135,000 had a vesting period of one year.
117
A summary of the status of the Company’s non-vested options under the plans as of December 31, 2019, and changes during
the year then ended, is presented below:
Non-Vested at January 1, 2019
Granted
Vested
Expired
Forfeited
Shares
150,000
65,104
(75,000)
-
-
Weighted-average
grant date
fair value
$ 2.89
3.84
2.89
-
-
Non-Vested at December 31, 2019
140,104
$ 3.33
The Company granted 65,104 common stock options in 2019, with a vesting period of four years, whereas in 2018 and 2017
the Company did not grant any common stock options. The weighted average fair value of the stock options issued in 2019 was
$3.84.
There were 494,430 options exercised and restricted stock units vested in 2019, 594,673 options exercised and restricted
stock units vested in 2018 and 468,431 options exercised and restricted stock units vested in 2017. The total intrinsic value of the
options exercised and stock units vested in 2019, 2018 and 2017 was $4.4 million, $6.2 million and $3.0 million, respectively. The
total issuance date fair value of options that were exercised and restricted units which vested during the year ended December 31,
2019 was $4.0 million.
As of December 31, 2019, there was a total of $7.3 million of unrecognized compensation cost related to unvested awards
under share-based plans. This cost is expected to be recognized over a weighted average period of approximately 1.6 years. For the
years ended December 31, 2019, 2018 and 2017 total compensation expense under share based payment arrangements was
$5.7 million, $3.4 million and $3.2 million respectively, and the related tax benefits recognized were $1.2 million, $724,000 and
$1.1 million, respectively.
For the years ended December 31, 2019, 2018 and 2017, the Company estimated the fair value of each stock option grant on
the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions:
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected lives (years)
2019
2.63%
0%
0% - 41.8%
1.0 - 6.3
December 31,
2018
2017
-
-
-
-
-
-
-
-
Expected volatility is based on the historical volatility of the Company’s stock and peer group comparisons over the expected
life of the grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at
the time of the grant. The life of the option is based on historical factors which include the contractual term, vesting period, exercise
behavior and employee terminations. In accordance with the ASC 718, Stock Based Compensation, stock based compensation
expense for the year ended December 31, 2019 is based on awards that are ultimately expected to vest and has been reduced for
estimated forfeitures. The Company estimates forfeitures using historical data based upon the groups identified by management.
Note N—Transactions with Affiliates
The Bank maintains deposits for various affiliated companies totaling approximately $0 million and $2.6 million as of
December 31, 2019 and 2018, respectively.
118
The Bank has entered into lending transactions in the ordinary course of business with directors, executive officers, principal
stockholders and affiliates of such persons. All loans were made on substantially the same terms, including interest rate and collateral,
as those prevailing at the time for comparable loans with persons not related to the lender. At December 31, 2019, these loans were
current as to principal and interest payments, and did not involve more than normal risk of collectability. At December 31, 2019 and
2018, loans to these related parties amounted to $2.3 million and $2.0 million, respectively.
The Bank has periodically purchased securities under agreements to resell and engaged in other securities transactions
through J.V.B. Financial Group, LLC (JVB), a broker dealer in which the Company’s Chairman is a registered representative and has
a minority interest. The Company’s Chairman also serves as the President, a director and the Chief Investment Officer of Cohen &
Company Financial Limited (formerly Euro Dekania Management Ltd.), a wholly-owned subsidiary of Cohen & Company Inc.
(formerly Institutional Financial Markets Inc.), the parent company of JVB. In 2019, the Company purchased $2.3 million of
government guaranteed SBA loans for Community Reinvestment Act purposes from JVB. Prices for the SBA loans are verified to
market rates and no separate commissions or fees are paid to that firm. The Company has previously purchased securities under
agreements to resell through JVB primarily consisting of Government National Mortgage Association certificates which are full faith
and credit obligations of the United States government issued at competitive rates. JVB complied fully with the terms of the
repurchase agreements. There were no repurchase agreements outstanding at December 31, 2019 and 2018.
Mr. Hersh Kozlov, a director of the Company, is a partner at Duane Morris LLP, an international law firm. The Company
paid Duane Morris LLP $1.1 million in 2019, $3.0 million in 2018 and $3.5 million in 2017 for legal services.
Note O—Commitments and Contingencies
1.
Operating Leases
As part of its cost control efforts, the Company is actively managing its facilities. The Company exited its Philadelphia and
Tampa leased sites and one of its New York offices, and has subleased all three offices. The Company’s lease for its Delaware
operations facility expires in 2025. The occupied New York and Norristown sites are business production offices, and the leases will
expire in 2024. The Company also has leases for business production offices in Maryland, Minnesota, North Carolina, Pennsylvania,
Utah and Washington State that expire at various times through 2022. The Company’s lease in South Dakota for its prepaid and debit
card division, also expires in 2022. The Company’s leases in Illinois for its Small Business Lending division, and in New Jersey for
its leasing business, expire in 2020.
These leases require the Company to pay the real estate taxes and insurance on the leased properties in addition to rent. The
approximate future minimum annual rental payments, including any additional rents for escalation clauses, are as follows (in
thousands):
Year ending December 31,
2020
2021
2022
2023
2024
Thereafter
$ 4,314
3,939
3,536
3,320
3,211
2,222
$ 20,542
Rent and related expense for the years ended December 31, 2019, 2018 and 2017 was approximately $5.0 million,
$4.5 million and $4.4 million net of sublease rentals of approximately $586,300, $186,300 and $100,200, respectively.
119
2.
Legal Proceedings
The Company received a subpoena from the SEC, dated March 22, 2016, relating to an investigation by the SEC of the
Company's restatement of its financial statements for the years ended December 31, 2010 through December 31, 2013 and the interim
periods ended March 31, 2014, June 30, 2014 and September 30, 2014, which restatement was filed with the SEC on September 28,
2015, and the facts and circumstances underlying the restatement. On September 19, 2019, the Company agreed, without admitting or
denying any of the SEC’s allegations, to resolve the investigation by consenting to the entry of an order by the SEC that: (1) the
Company will cease and desist from committing or causing any violations of the books-and-records provisions of the Securities
Exchange Act and the relevant rules thereunder; and (2) the Company will pay a penalty of $1.4 million (the “Settlement Payment”) to
the SEC. The Company recognized a charge in its third fiscal quarter in the amount of the Settlement Payment. As a result of the
settlement certain costs to the Company related to the investigation will cease, including the legal costs of the investigation,
compliance with the SEC’s subpoena, and cooperation with the SEC.
On July 16, 2018, certain investors in a hotel project of one of the Bank’s former borrowers, 550 Seabreeze Development
LLC (“Seabreeze Development”), filed an adversary action against the Bank and others in the United States Bankruptcy Court of the
Southern District of Florida. The note for the related loan was sold in the second quarter of 2018 and the loan is no longer on the
Bank’s books. The adversary action was filed within the context of a Chapter 11 bankruptcy proceeding in which Seabreeze
Development is the debtor, and alleged that the Bank and others defrauded the plaintiffs into investing a total of $10.5 million in the
project. Three causes of actions were asserted against the Bank: (i) fraud in the inducement; (ii) civil conspiracy; and (iii) aiding and
abetting fraud. The Bank believed the claims were without merit and vigorously defended against them. On November 1, 2018, the
bankruptcy court entered an order dismissing the claims against the Bank for lack of jurisdiction. The order further stated that the
dismissal was without prejudice, and that the plaintiffs may file their causes of action in an appropriate forum. On February 7, 2019,
certain investors filed a new action in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade Country, Florida, asserting:
(i) fraudulent misrepresentation; (ii) negligent misrepresentation; (iii) aiding and abetting fraud; and (iv) civil conspiracy. Three
additional investors were included as plaintiffs in the matter, increasing the total amount at issue to $12 million. The Bank filed a
motion to dismiss the state court action as to the Bank and on October 16, 2019, the state court granted the Bank’s motion and
dismissed the plaintiffs’ claims against the Bank without prejudice.
On June 12, 2019, the Bank was served with a qui tam lawsuit filed in the Superior Court of the State of Delaware, New
Castle County. The Delaware Department of Justice intervened in the litigation. The case is titled The State of Delaware, Plaintiff,
Ex rel. Russell S. Rogers, Plaintiff-Relator, v. The Bancorp Bank, Interactive Communications International, Inc., and InComm
Financial Services, Inc., Defendants. The lawsuit alleges that the defendants violated the Delaware False Claims Act by not paying
balances on certain open-loop “Vanilla” prepaid cards to the State of Delaware as unclaimed property. The complaint seeks actual and
treble damages, statutory penalties, and attorneys’ fees. The Bank denies the allegations and is defending itself. The Bank and other
defendants filed a motion to dismiss the action, but the motion was denied on February 7, 2020. At this time, the Company is unable
to determine whether the ultimate resolution of the matter will have a material adverse effect on our financial condition or operations.
In addition, the Company is a party to various routine legal proceedings arising out of the ordinary course of its business.
The Company believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial
condition or operations.
Note P—Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.
Such financial instruments are recorded in the consolidated financial statements when they become payable. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance
sheets. The contractual, or notional, amounts of those instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
120
The approximate contract amounts and maturity term of the Company’s unused credit commitments are as follows:
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit
Standby letters of credit
December 31,
2019
2018
(in thousands)
$ 2,340,954
$ 1,683,499
3,512
1,150
$ 2,344,466
$ 1,684,649
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit
evaluation. The vast majority of commitments to extend credit arise from security backed lines of credit (SBLOC) which are variable
rate and which represent collateral values available to support additional extensions of credit, and not expected usage. The majority of
such lines of credit have historically not been drawn upon.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial
paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company holds residential or commercial real estate, accounts receivable,
inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary. Based upon periodic
analysis of the Company’s standby letters of credit, management has determined that a reserve is not necessary at December 31, 2019.
The Company reduces any potential liability on its standby letters of credit based upon its estimate of the proceeds obtainable upon the
liquidation of the collateral held. Fair values of unrecognized financial instruments, including commitments to extend credit and the
fair value of letters of credit, are considered immaterial. The standby letters of credit expire as follows: $3.4 million in 2020 and
$124,000 in 2021.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Note Q—Fair Value of Financial Instruments
ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered
to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered
to be financial instruments. However, many of such instruments lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial
instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities, except for
certain loans. For fair value disclosure purposes, the Company utilized the fair value measurement criteria of ASC 820, Fair Value
Measurements and Disclosures.
ASC 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to assets
and liabilities. It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for
measuring fair value and expands disclosures concerning fair value measurements. ASC 820 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has
121
access at the measurement date. Level 2 valuation is based on other observable inputs for the asset or liability, either directly or
indirectly. This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are
observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are
derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based
on “unobservable inputs” that are the best information available in the circumstances. A financial instrument’s level within the fair
value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers between levels in
2019, 2018 and 2017, consisted only of transfers resulting from the availability or non-availability of third party pricing for CRE
securities from the Company’s securitizations, see Note E. For fair value disclosure purposes, the Company utilized certain value
measurement criteria required under the ASC 820, “Fair Value Measurements and Disclosures”, as discussed below.
Estimated fair values have been determined by the Company using the best available data and an estimation methodology it
believes to be suitable for each category of financial instruments. Changes in the assumptions or methodologies used to estimate fair
values may materially affect the estimated amounts. Also, there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high
degree of subjectivity in estimating financial instrument fair values.
Cash and cash equivalents, which are comprised of cash and due from banks, the Company’s balance at the FRB and
securities purchased under agreements to resell, had recorded values of $944.5 million and $554.3 million at December 31, 2019 and
2018, respectively, which approximated fair values.
Investment securities have estimated fair values based on quoted market prices or other observable inputs, if available, or by
an estimation methodology based on management’s inputs. The fair values of the Company’s investment securities held-to-maturity
and investments in certain available-for-sale securities are determined using unobservable (Level 3) inputs that are based on the best
information available in the circumstances when market information is not available. For these investment securities, fair values are
based on the present value of expected cash flows from principal and interest.
Commercial loans held-for-sale generally have estimated fair values based upon market indications of the sales price of such
loans from recent sales transactions. If such information is not available, fair values reflect cash flow analysis based upon pricing for
similar loans. The analysis is performed on an individual loan basis for commercial mortgage loans and a pooled basis for SBA loans.
Loans, net of deferred loan fees and costs, have an estimated fair value using the present value of future cash flow where
market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for
borrower-specific credit risk. The carrying value of accrued interest approximates fair value.
FHLB and Atlantic Central Bankers Bank stock are held as required by those respective institutions and are carried at cost.
Federal law requires a member institution of the FHLB to hold stock according to predetermined formulas. Atlantic Central Bankers
Bank requires its correspondent banking institutions to hold stock as a condition of membership.
Investment in unconsolidated entity - On December 30, 2014, the Bank entered into an agreement for, and closed on, the sale
of a portion of its discontinued commercial loan portfolio. The purchaser of the loan portfolio was a newly formed entity, WS
2014. For information regarding this transaction see Note H. The fair value of the notes issued to the Bank by WS 2014 was initially
established by the sales price and subsequently marked to fair value which is determined using a discounted cash flow analysis. At
December 31, 2019, the cash flows were modeled using a discount rate of 5.84%, based on market indications. A constant default rate
on cash flowing loans of 1%, net of recoveries, was utilized. The change in value of investment in unconsolidated entity in the
consolidated statements of operations reflects changes in estimated fair value.
Assets held-for-sale from discontinued operations as of December 31, 2019 are held at the lower of cost basis or market
value. For loans, market value was determined using the income approach which converts expected cash flows from the loan portfolio
by unit of measurement to a present value estimate. Unit of measurement was determined by loan type and for significant loans on an
individual loan basis. The fair values of the Company’s loans classified as assets held-for-sale are based on “unobservable inputs”
that are based upon available information. For commercial loans, a market adjusted rate to discount expected cash flows from
outstanding principal and interest to expected maturity at the measurement date was utilized. For other real estate owned, market
value was based upon appraisals of the underlying collateral by third party appraisers, reduced by 7% to 10% for estimated selling
costs.
122
Demand deposits (comprising interest and non-interest bearing checking accounts, savings, and certain types of money
market accounts) are equal to the amount payable on demand at the reporting date (generally, their carrying amounts). The fair values
of securities sold under agreements to repurchase and short term borrowings are equal to their carrying amounts as they are overnight
borrowings. There were no short term borrowings outstanding at December 31, 2019 or 2018.
Time deposits and subordinated debentures have a fair value estimated using a discounted cash flow calculation that applies
current interest rates to discount expected cash flows. There were $475.0 million time deposits outstanding at December 31, 2019 and
$0 at December 31, 2018.
Long term borrowings resulted from sold loans which did not qualify for true sale accounting. They are presented in the
amount of principal of such loans.
Interest rate swaps are recorded in other assets and have a fair value which is estimated using models that use readily
observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period
to maturity and the applicable interest rate index.
The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment
fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of
credit. Fair values of unrecognized financial instruments, including commitments to extend credit, and the fair value of letters of
credit are considered immaterial. Fair value information for specific balance sheet categories is as follows.
123
Carrying
amount
Estimated
fair value
December 31, 2019
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
$ 1,320,692 $ 1,320,692 $ - $ 1,203,359 $ 117,333
Investment securities, held-to-maturity
Federal Home Loan Bank and Atlantic Central Bankers Bank
stock
Commercial loans held-for-sale
Loans, net of deferred loan fees and costs
Investment in unconsolidated entity
Assets held-for-sale from discontinued operations
Interest rate swaps, liability
Demand and interest checking
Savings and money market
Time deposits
Subordinated debentures
Securities sold under agreements to repurchase
84,387
5,342
1,180,546
1,824,245
39,154
140,657
232
83,002
5,342
1,180,546
1,826,154
39,154
140,657
232
4,402,740
4,402,740
174,290
475,000
13,401
82
174,290
475,000
9,736
82
-
-
-
-
-
-
-
-
-
-
-
82
75,850
-
-
-
-
-
232
4,402,740
174,290
7,152
5,342
1,180,546
1,826,154
39,154
140,657
-
-
-
-
-
-
475,000
9,736
-
Carrying
amount
Estimated
fair value
December 31, 2018
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
$ 1,236,324 $ 1,236,324 $ - $ 1,211,934 $ 24,390
Investment securities, held-to-maturity
84,432
83,391
Federal Home Loan Bank and Atlantic Central Bankers Bank
stock
Commercial loans held-for-sale
1,113
688,471
1,113
688,471
Loans, net of deferred loan fees and costs
1,501,976
1,503,780
Investment in unconsolidated entity
Assets held-for-sale from discontinued operations
Interest rate swaps, asset
Demand and interest checking
Savings and money market
Subordinated debentures
Securities sold under agreements to repurchase
59,273
197,831
1,681
59,273
197,831
1,681
3,904,638
3,904,638
31,076
13,401
93
31,076
9,975
93
-
-
-
-
-
-
-
-
-
-
93
76,113
7,278
-
-
-
-
-
1,681
3,904,638
31,076
-
-
1,113
688,471
1,503,780
59,273
197,831
-
-
-
9,975
-
124
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
markets for identical
assets
Significant other
observable
inputs
Fair value
December 31, 2019
(Level 1)
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investment securities, available-for-sale
U.S. Government agency securities
$ 52,910 $ - $ 52,910 $ -
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
Commercial loans held-for-sale
Investment in unconsolidated entity
Assets held-for-sale from discontinued operations
Interest rate swaps, liability
244,349
65,568
336,596
222,727
398,542
1,320,692
1,180,546
39,154
140,657
232
-
-
-
-
-
-
-
-
-
-
244,349
65,568
336,596
222,727
281,209
1,203,359
-
-
-
232
-
-
-
-
117,333
117,333
1,180,546
39,154
140,657
-
$ 2,680,817 $ - $ 1,203,127 $ 1,477,690
Fair Value Measurements at Reporting Date Using
Quoted prices in active
markets for identical
assets
Significant other
observable
inputs
Fair value
December 31, 2018
(Level 1)
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investment securities, available-for-sale
U.S. Government agency securities
$ 53,362 $ - $ 53,362 $ -
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
Commercial loans held-for-sale
Investment in unconsolidated entity
Assets held-for-sale from discontinued operations
Interest rate swaps, asset
188,602
67,986
369,741
262,207
294,426
1,236,324
688,471
59,273
197,831
1,681
-
-
-
-
-
-
-
-
-
-
188,602
67,986
369,741
262,207
270,036
1,211,934
-
-
-
1,681
-
-
-
-
24,390
24,390
688,471
59,273
197,831
-
$ 2,183,580 $ - $ 1,213,615 $ 969,965
125
The Company’s Level 3 asset activity for the categories shown for the years 2019 and 2018 is as follows (in thousands):
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Available-for-sale
securities
Commercial loans
held-for-sale
Beginning balance
Transfers into level 3
Transfers out of level 3
Total gains or (losses) (realized/unrealized)
Included in earnings
Included in other comprehensive gain (loss)
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.
December 31, 2019
$ 24,390
100,664
-
December 31, 2018
December 31, 2019
$ 40,644 $ 688,471
-
-
-
(74,355)
December 31, 2018
$ 503,316
-
-
-
688
-
(688)
25,986
-
19,850
-
-
-
-
(8,409)
$ 117,333
-
1,795,376
(1,329,287)
-
$ 24,390 $ 1,180,546
62,076
-
-
(3,287)
-
866,303
(700,998)
-
$ 688,471
$ - $ - $ 963
$ (922)
Transfers between levels in 2019 and 2018, consisted of transfers resulting from the availability or non-availability of third
party pricing for CRE securities from the Company’s securitizations, see Note E.
126
The Company’s Level 3 asset activity for the categories shown for the years 2019 and 2018 is as follows (in thousands):
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Investment in
unconsolidated entity
Assets held-for-sale
from discontinued operations
December 31, 2018
December 31, 2019
$ 59,273 $ 74,473 $ 197,831
-
December 31, 2019
-
-
-
-
-
-
(3,689)
-
-
-
-
(20,119)
-
-
-
-
(11,511)
-
(2,655)
$ 39,154 $ 59,273 $ 140,657
December 31, 2018
$ 304,313
-
-
352
-
-
1,664
(35,000)
(62,754)
(10,744)
$ 197,831
-
(487)
-
-
2,125
(7,136)
(49,021)
Beginning balance
Transfers into level 3
Transfers out of level 3
Total gains or (losses) (realized/unrealized)
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales, settlements and
charge-offs
Purchases
Issuances
Sales
Settlements
Charge-offs
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.
$ -
$ (3,689)
$ (487)
$ 352
Level 3 instruments only
Investment securities, available-for-sale
Investment securities, held-to-maturity
Federal Home Loan Bank and Atlantic
Central Bankers Bank stock
Loans, net of deferred loan fees and
costs
Commercial - SBL
Commercial - fixed
Commercial - floating
Commercial loans held-for-sale
Investment in unconsolidated entity
Assets held-for-sale from discontinued
operations
Fair value at
December 31,
2019
Fair value at
December 31,
2018
Valuation techniques
Unobservable inputs
Range at
December 31,
2019
Range at
December 31,
2018
$ 117,333 $ 24,390 Discounted cash flow
7,278 Discounted cash flow
1,113 Cost
7,152
5,342
Discount rate
4.05% - 8.18%
Discount rate
N/A
8.01%
N/A
6.55%
8.80%
N/A
1,826,154
1,503,780 Discounted cash flow
Discount rate
3.11% - 6.93% 4.22% - 6.93%
220,358
88,986
871,202
1,180,546
39,154
199,977 Traders' pricing
95,307 Discounted cash flow
393,187 Discounted cash flow
688,471
59,273 Discounted cash flow
Credit analysis
Offered quotes
$101.6 - $107.9 $99.125 - $110
Discount rate
4.33% - 7.13% 5.23% - 6.92%
Discount rate
4.51% - 6.81% 5.41% - 7.75%
Discount rate
Default rate
5.84%
1.00%
6.30%
1.00%
140,657
197,831 Discounted cash flow
Discount rate,
3.49% -7.58%
4.26% - 8.36%
Credit analysis
Subordinated debentures
9,736
9,975 Discounted cash flow
Discount rate
8.01%
8.81%
127
The following considerations are subject to judgments and uncertainties as of the balance sheet date. Fair values in the above
table which are estimated by the discounted cash flow method, are subject to uncertainty resulting from the discount rate used as of the
reporting date. The discount rates used are based on market comparables, which may vary significantly between periods based on
credit spreads, interest rates movements or expected interest rate movements, or competitive factors. Changes in these factors could
have a significant impact on estimated fair values. The discount rates utilized for loans, net of deferred loan fees and costs, and assets
held-for-sale from discontinued operation reflect the results of credit analysis and collateral valuations, including that performed by
the independent loan review department, to identify credit weaknesses which might require a higher discount rate. Credit analysis of
borrowers’ repayment capabilities are based on historical financial information or performance, which may not reflect future
performance. Collateral valuations such as appraisals, may not be realized upon ultimate sale.
Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, at December 31, 2019 and 2018 are
summarized below (in thousands):
Quoted prices in active
Fair Value Measurements at Reporting Date Using
Significant other
Significant
Description
December 31, 2019
markets for identical
observable
unobservable
assets
(Level 1)
inputs
(Level 2)
inputs (1)
(Level 3)
Impaired loans - collateral dependent (1)
$ 3,651 $ - $ - $ 3,651
Intangible assets
2,315
-
-
2,315
$ 5,966 $ - $ - $ 5,966
Quoted prices in active
Fair Value Measurements at Reporting Date Using
Significant other
Significant
Description
markets for identical
observable
unobservable
Fair value
December 31, 2018
assets
(Level 1)
inputs
(Level 2)
inputs (1)
(Level 3)
Impaired loans - collateral dependent (1)
$ 3,747 $ - $ - $ 3,747
Intangible assets
3,846
-
-
3,846
$ 7,593 $ - $ - $ 7,593
(1) The method of valuation approach for the impaired loans and other real estate owned was the market approach based upon appraisals of the
underlying collateral by external appraisers, reduced by 7% to 10% for estimated selling costs. Intangible assets are valued based upon internal
analyses.
At December 31, 2019, principal on impaired loans and troubled debt restructurings that is accounted for on the basis of the
value of underlying collateral, is shown in the above table at an estimated fair value of $3.7 million. To arrive at that fair value,
related loan principal of $6.8 million was reduced by specific reserves of $3.1 million within the allowance for loan losses, as of that
date, representing the deficiency between principal and estimated collateral values, which were reduced by estimated costs to sell.
When the deficiency is deemed uncollectible, it is charged off by reducing the specific reserve and decreasing principal. Included in
the impaired balance at December 31, 2019, were troubled debt restructured loans with a balance of $2.1 million which had specific
reserves of $1.0 million. At December 31, 2018, principal on impaired loans and troubled debt restructurings accounted for on the
basis of the value of underlying collateral, is shown in the above table at estimated fair value of $3.7 million. To arrive at that fair
value, related loan principal of $6.7 million was reduced by the specific reserves of $3.0 million within the allowance for loan losses,
as of that date, representing the deficiency between principal and estimated collateral values, which were reduced by estimated costs
to sell. Included in the impaired balance at December 31, 2018, were troubled debt restructured loans with a balance of $2.9 million,
which had specific reserves of $1.5 million. Valuation techniques consistent with the market and/or cost approach were used to
measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of
128
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.
Note R –Derivatives
The Company utilizes derivative instruments to assist in the management of interest rate sensitivity by modifying the
repricing, maturity and option characteristics on commercial real estate loans held-for-sale. These instruments are not accounted for
as effective hedges. As of December 31, 2019, the Company had entered into six interest rate swap agreements with an aggregate
notional amount of $37.8 million. Under these swap agreements the Company receives an adjustable rate of interest based upon
LIBOR. The Company recorded a loss of $1.9 million and income of $647,000 and $1.8 million for the years ended December 31,
2019 and 2018 and 2017, respectively, to recognize the fair value of derivative instruments. Those amounts are recorded on the
consolidated statements of operations under net realized and unrealized gains (losses) on loans originated for sale. At December 31,
2019, the amount payable by the Company under these swap agreements was $232,000. At December 31, 2018, the amount
receivable by the Company under these swap agreements was $1.7 million. At December 31, 2019 and 2018, the Company had
minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $1.3 million and
$251,000, respectively.
The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s remaining interest rate
swap agreements as of December 31, 2019 are summarized below (in thousands):
Maturity date
August 4, 2021
December 23, 2025
December 24, 2025
January 28, 2026
July 20, 2026
December 12, 2026
Total
December 31, 2019
Notional amount
Interest rate paid
10,300
6,800
8,200
3,000
6,300
3,200
1.12%
2.16%
2.17%
1.87%
1.44%
2.26%
Interest rate received
1.90%
1.93%
1.93%
1.94%
1.97%
1.89%
Fair value
95
(152)
(192)
(18)
133
(98)
$ 37,800
$ (232)
The $232,000 fair value loss position of the outstanding derivatives at December 31, 2019 as detailed in the above table, was
recorded in other liabilities on the consolidated balance sheet.
Note S—Regulatory Matters
It is the policy of the Federal Reserve that financial holding companies should pay cash dividends on common stock only
from income available over the past year and only if prospective earnings retention is consistent with the organization’s expected
future needs and financial condition. The policy provides that financial holding companies should not maintain a level of cash
dividends that undermines the financial holding company’s ability to serve as a source of strength to its banking subsidiaries.
Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding
companies without regulatory approval. Under Delaware banking law, the Bank’s directors may declare dividends on common or
preferred stock of so much of its net profits as they judge expedient, but the Bank must, before the declaration of a dividend on
common stock from net profits, carry 50% of its net profits from the preceding period for which the dividend is paid to its surplus fund
until its surplus fund amounts to 50% of its capital stock and thereafter must carry 25% of its net profits for the preceding period for
which the dividend is paid to its surplus fund until its surplus fund amounts to 100% of its capital stock.
In addition to these explicit limitations, federal and state regulatory agencies are authorized to prohibit a banking subsidiary
or financial holding company from engaging in an unsafe or unsound practice. Depending upon the circumstances, the agencies could
take the position that paying a dividend would constitute an unsafe or unsound banking practice. The Bank has entered into consent
129
orders with the FDIC which prohibits the Bank from paying dividends without prior FDIC approval. The Company had also received
a Supervisory Letter from the Federal Reserve pursuant to which the Company might not pay dividends without prior Federal Reserve
approval. The requirement for Federal Reserve approval was lifted in fourth quarter 2019 at which time the letter was terminated.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification of the Company and the Bank are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors. Moreover, capital requirements may be modified
based upon regulatory rules or by regulatory discretion at any time reflecting a variety of factors including deterioration in asset
quality.
As of December 31, 2019
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, 2018
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
Actual
For capital
adequacy purposes
To be well
capitalized under
prompt corrective
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
$ 486,372
478,033
19.45% $ 200,074
200,068
19.11%
>= 8.00
8.00
N/A
250,085
N/A
>= 10.00%
476,134
467,796
19.04%
18.71%
150,055
150,051
>= 6.00
6.00
N/A
200,068
N/A
>= 8.00%
476,134
467,796
9.63%
9.46%
197,837
197,831
>= 4.00
4.00
N/A
247,289
N/A
>= 5.00%
476,134
467,796
19.04%
18.71%
100,037
112,538
>= 4.00
4.50
N/A
162,555
N/A
>= 6.50%
$ 424,682
416,077
21.07% $ 161,238
161,506
20.61%
>= 8.00
8.00
N/A
201,882
N/A
>= 10.00%
416,029
407,425
20.64%
20.18%
120,928
121,129
>= 6.00
6.00
N/A
161,506
N/A
>= 8.00%
416,029
407,425
10.11%
9.70%
168,160
171,019
>= 4.00
4.00
N/A
213,774
N/A
>= 5.00%
416,029
407,425
20.64%
20.18%
80,619
90,847
>= 4.00
4.50
N/A
131,223
N/A
>= 6.50%
130
As of December 31, 2019, the Company and the Bank met all regulatory requirements for classification as well capitalized
under the regulatory framework for prompt corrective action. Effective January 1, 2015, capital rules were modified as part of a
multi-year phase in period. The new rules emphasize common equity capital of which the vast majority of the Company and the
Bank’s capital is comprised.
The Bank has entered into several consent orders with the FDIC relating to several aspects of its operations as follows.
2014 Consent Order. On June 5, 2014, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order
with the FDIC, which we refer to as the 2014 Consent Order. The Bank took this action without admitting or denying any charges of
unsafe or unsound banking practices or violations of law or regulation relating to the Bank’s BSA compliance program. The 2014
Consent Order requires the Bank to take certain affirmative actions to comply with its BSA obligations. Satisfaction of the
requirements of the 2014 Consent Order is subject to the review of the FDIC and the Delaware State Bank Commissioner. The Bank
has and expects to continue to expend significant management and financial resources to address the Bank’s BSA compliance
program. Expenses associated with the required look back review were significant in 2015 and 2016. The look back review was
completed in the third quarter of 2016. The 2014 Consent Order restricts the Bank from signing and boarding new independent sales
organizations, establishing new non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions
for new merchant-related payments until the Bank submits to the FDIC and the Delaware State Bank Commissioner a report
summarizing the completion of certain BSA-related corrective actions (“BSA Report”). Until the BSA Report is approved by the
FDIC and Delaware State Bank Commissioner, those aspects of the growth of our card payment processing and prepaid card
operations will be affected, which, unless offset by growth from existing customers and new customers in other areas of our prepaid
card operations, could reduce growth of our deposits and non-interest income and, possibly, limit our ability to raise additional capital
on acceptable terms. The Bank provided the FDIC and the Delaware State Bank Commissioner with the required BSA Report as of
December 31, 2019 and it is under review by the regulators.
On August 27, 2015, the Bank entered into an Amendment to Consent Order, or the 2014 Consent Order Amendment, with
the FDIC, amending the 2014 Consent Order. The Bank took this action without admitting or denying any additional charges of
unsafe or unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA
compliance program. The 2014 Consent Order Amendment provides that the Bank shall not declare or pay any dividend without the
prior written consent of the FDIC and for certain assurances regarding management.
2015 Consent Order. On December 23, 2015, the Bank entered into a Stipulation and Consent to the Issuance of an Amended
Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty with the FDIC, which we refer to as the 2015 Consent
Order. The Bank took this action without admitting or denying any violations of law or regulation. The 2015 Consent Order amended
and restated and superceded in its entirety the terms of a prior Consent Order issued in 2012. The 2015 Consent Order the Bank
agreed to increase its supervision of third-party relationships, develop new written compliance and related internal audit compliance
programs, develop a new third-party risk management program and screen new third-party relationships. The 2015 Consent Order
also addressed FDIC allegations regarding electronic fund transfer, or EFT, error resolution practices, account termination practices
and fee practices of various third parties with whom the Bank had previously provided, or currently provides, deposit-related products,
whom we refer to as Third Parties. The 2015 Consent Order directs the Bank’s Board of Directors to establish a Complaint and Error
Claim Oversight and Review Committee, which we refer to as the Complaint and Error Claim Committee to review and oversee the
Bank’s processes and practices for handling, monitoring and resolving consumer complaints and EFT error claims (whether received
directly or through Third Parties) and to review management's plans for correcting any weaknesses that may be found in such
processes and practices. The Bank’s Board of Directors appointed the required Complaint and Error Claim Committee on January 29,
2016. The 2015 Consent Order also requires the Bank to implement a corrective action plan, or CAP, to remediate and provide
restitution to those prepaid cardholders who asserted or attempted to assert, or were discouraged from initiating EFT error claims, and
to provide restitution to cardholders harmed by EFT error resolution practices. The 2015 Consent Order requires that if, through the
CAP, the Bank identifies prepaid cardholders who have been adversely affected by a denial or failure to resolve an EFT error claim,
the Bank will ensure that monetary restitution is made. The Bank completed its implementation of the CAP on January 15, 2020. As
of the completion date, $1,592,469 of restitution was paid to consumers of which $ $4,352 was paid by the Bank and the remaining
amount by Third Parties. The 2015 Consent Order also imposed a $3 million civil money penalty on the Bank, which the Bank has
paid and which was recognized as expense in the fourth quarter of 2015.
131
2018 CMP Order and 2018 Restitution Order. On March 7, 2018, the Bank entered into a Stipulation and Consent to Order
for Restitution and Order To Pay Civil Money Penalty with the FDIC, which we refer to as the 2018 Restitution Order and 2018 CMP
Order, respectively. The Bank took this action without admitting or denying any alleged violations of law or regulation. The FDIC’s
action principally emanated from one of the Bank’s third-party payment processors (“Third-Party Processor”) that suffered an internal
system programming glitch. This inadvertently resulted in consumers that engaged in signature-based point of sale transactions during
the period from December 2010 to November 2014 being charged a greater fee than what was disclosed by the Bank. The FDIC
alleged the Bank’s incorrect fee imposition due to the Third-Party Processor error was an unfair or deceptive act or practice and
violated Section 5 of the Federal Trade Commission Act. The 2018 CMP Order imposed a $2 million civil money penalty on the
Bank which the Bank has paid, and was recognized as expense on September 30, 2017. The civil money penalty was not subject to
any indemnification or recovery from any third party. The 2018 Restitution Order required the Bank to develop a written Restitution
Plan, subject to independent audit and FDIC non-objection, to ensure impacted consumers are compensated for any incorrectly
charged fees. The 2018 Restitution Order required the Bank to make such reimbursements if not otherwise made by the Third-Party
Processor and the Bank is indemnified by the Third-Party Processor for such reimbursements. Impacted consumers were reimbursed
by the Third-Party Processor at its own expense. On December 19, 2019, the FDIC concluded the Bank had fully complied with the
2018 Restitution Order and issued an order terminating the 2018 Restitution Order.
On December 18, 2019, the Bank’s Board of Directors, without admitting or denying any violations of law, regulation or the
provisions of the 2014 Consent Order, executed a Stipulation and Consent to the Issuance of an Order to Pay Civil Money Penalty in
the amount of $7.5 million based on supervisory findings during the period of 2013 to 2019 related principally to deficiencies in the
Bank’s legacy Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Programs and alleged violations of law during the period, as
well as the length of time the Bank has taken to fully implement the corrective actions required by the 2014 Consent Order. The Bank
paid this amount, and it was recognized as an expense in the Company’s financial statements in the fourth quarter of 2019.
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.
2019
March 31,
June 30,
September 30,
December 31,
(in thousands, except per share data)
Three months ended
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
Net income from continuing operations
Net income (loss) from discontinued operations, net of tax
Net income available to common shareholders
$ 43,578 $ 44,080 $ 48,375
37,560
650
33,515
42,051
28,374
7,975
20,399
26
$ 17,930 $ 11,350 $ 20,425
34,539
600
19,749
39,519
14,169
3,575
10,594
756
34,010
1,700
30,365
39,229
23,446
6,035
17,411
519
$ 43,536
35,179
1,450
20,498
47,722
6,505
3,641
2,864
(1,010)
$ 1,854
Net earnings per share from continuing operations - basic
Net earnings (loss) per share from discontinued operations - basic
Net earnings per share - basic
$ 0.31 $ 0.19 $ 0.36
$ 0.01 $ 0.01 $ -
$ 0.32 $ 0.20 $ 0.36
$ 0.05
$ (0.02)
$ 0.03
Net earnings per share from continuing operations - diluted
Net earnings (loss) per share from discontinued operations - diluted
Net earnings per share - diluted
$ 0.31 $ 0.19 $ 0.36
$ 0.01 $ 0.01 $ -
$ 0.32 $ 0.20 $ 0.36
$ 0.05
$ (0.02)
$ 0.03
132
2018
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
Net income from continuing operations
Net income (loss) from discontinued operations, net of tax
Net income available to common shareholders
Three months ended
March 31,
June 30,
September 30,
(in thousands, except per share data)
December 31,
$ 35,307 $ 35,360 $ 38,656 $ 38,637
30,609
925
16,690
37,620
8,754
2,691
6,063
1,056
$ 7,119
30,074
700
29,095
39,049
19,420
5,399
14,021
119
$ 14,140
29,534
900
17,040
37,310
8,364
2,209
6,155
(14)
$ 6,141
30,632
1,060
90,970
37,299
83,243
21,942
61,301
(24)
$ 61,277
Net earnings per share from continuing operations - basic
Net earnings per share from discontinued operations - basic
Net earnings per share - basic
$ 0.25
$ -
$ 0.25
$ 0.11
$ -
$ 0.11
$ 1.09
$ -
$ 1.09
$ 0.11
$ 0.02
$ 0.13
Net earnings per share from continuing operations - diluted
Net earnings per share from discontinued operations - diluted
Net earnings per share - diluted
$ 0.25
$ -
$ 0.25
$ 0.11
$ -
$ 0.11
$ 1.07
$ -
$ 1.07
$ 0.11
$ 0.02
$ 0.13
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,
2019
2018
(in thousands)
$ 13,286
$ 14,090
475,998
8,644
396,753
9,368
$ 497,928
$ 420,211
$ 30
$ 34
13,401
484,497
13,401
406,776
$ 497,928
$ 420,211
133
Condensed Statements of Operations
Income
Other income
Total income
Expense
Interest on subordinated debentures
Non-interest expense
Total expense
Equity in undistributed income of subsidiaries
Income before tax benefit
Income tax benefit
For the year ended December 31,
2019
2018
(in thousands)
2017
$ -
$ 517
$ 31,852
-
517
31,852
750
6,721
7,471
59,030
51,559
-
714
4,528
5,242
93,402
88,677
-
586
37,465
38,051
25,097
18,898
(2,775)
Net income available to common shareholders
$ 51,559
$ 88,677
$ 21,673
Condensed Statements of Cash Flows
Operating activities
Net income
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Stock based compensation expense
Equity in undistributed income loss
Net cash provided by (used in) operating activities
Investing activities
Contribution to subsidiary
Net cash used in investing activities
Financing activities
Proceeds from the issuance of common stock
Proceeds from the exercise of common stock options
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
134
Year ended December 31,
2019
2018
(in thousands)
2017
$ 51,559
$ 88,677
$ 21,673
724
(4)
5,689
(59,030)
(1,062)
(22)
6
3,450
(93,402)
(1,291)
3,045
5
3,245
(25,097)
2,871
-
-
-
-
-
258
-
258
(804)
14,090
-
111
-
111
(1,180)
15,270
-
-
-
-
4,128
4,128
6,999
8,271
$ 13,286
$ 14,090
$ 15,270
Note V—Segment Financials
The Company performed a strategic evaluation of its businesses in the third quarter of 2014. As a result of the evaluation, the
Company decided to discontinue its Philadelphia commercial lending operations, as described in Note W- Discontinued Operations.
The shift from a traditional bank balance sheet led the Company to evaluate its remaining business structure. Based on the continuing
operations of the Company, it was determined that there would be four segments of the business: specialty finance, payments,
corporate and discontinued operations. The chief decision maker for these segments is the Chief Executive Officer. Specialty finance
includes commercial mortgage loan sales and securitizations, SBA loans, direct lease financing and security and insurance backed
lines of credit and deposits generated by those business lines. Payments include prepaid and debit cards, card payments, ACH
processing and healthcare accounts and deposits generated by those business lines. Corporate includes the Company’s investment
portfolio, corporate overhead and non-allocated expenses. Investment income is reallocated to the payments segment. These
operating segments reflect the way the Company views its current operations.
For the year ended December 31, 2019
Specialty finance
Payments
Corporate
Discontinued
operations
Total
Interest income
Interest allocation
Interest expense
Net interest income (loss)
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income (loss) from continuing operations before taxes
Income tax expense
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
Interest income
Interest allocation
Interest expense
Net interest income (loss)
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income (loss) from continuing operations before taxes
Income tax expense
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
(in thousands)
$ 126,814 $ - $ 52,755 $ - $ 179,569
-
38,281
141,288
4,400
104,127
168,521
72,494
21,226
51,268
291
$ 86,241 $ 30,642 $ (65,615) $ 291 $ 51,559
-
1,429
125,385
4,400
29,140
63,884
86,241
-
86,241
-
(52,755)
7,881
(7,881)
-
245
36,753
(44,389)
21,226
(65,615)
-
52,755
28,971
23,784
-
74,742
67,884
30,642
-
30,642
-
-
-
-
-
-
-
-
-
-
291
For the year ended December 31, 2018
Specialty finance
Payments
Corporate
Discontinued
operations
Total
(in thousands)
$ 95,221 $ - $ 52,739 $ - $ 147,960
-
27,111
120,849
3,585
153,795
151,278
119,781
32,241
87,540
1,137
$ 118,902 $ 29,492 $ (60,854) $ 1,137 $ 88,677
-
3,970
91,251
3,585
89,187
57,952
118,902
-
118,902
-
(52,739)
1,849
(1,849)
-
668
27,432
(28,613)
32,241
(60,854)
-
52,739
21,293
31,446
-
63,939
65,894
29,492
-
29,492
-
-
-
-
-
-
-
-
-
-
1,137
135
Interest income
Interest allocation
Interest expense
Net interest income (loss)
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income (loss) from continuing operations before taxes
Income tax expense
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
For the year ended December 31, 2017
Specialty finance
Payments
Corporate
Discontinued
operations
Total
(in thousands)
$ 78,464 $ - $ 43,556 $ - $ 122,020
-
15,340
106,680
2,920
91,548
154,914
40,394
23,056
17,338
4,335
$ 43,569 $ 23,833 $ (50,064) $ 4,335 $ 21,673
(43,556)
1,410
(1,410)
-
1,815
27,413
(27,008)
23,056
(50,064)
-
-
3,455
75,009
2,920
27,952
56,472
43,569
-
43,569
-
43,556
10,475
33,081
-
61,781
71,029
23,833
-
23,833
-
-
-
-
-
-
-
-
-
-
4,335
Specialty finance
Payments
Corporate
Discontinued
operations
Total
December 31, 2019
(in thousands)
Total assets
Total liabilities
$ 3,008,304 $ 57,746 $ 2,450,256 $ 140,657 $ 5,656,963
$ 247,485 $ 4,030,921 $ 894,060 $ - $ 5,172,466
Specialty finance
Payments
Corporate
Discontinued
operations
Total
December 31, 2018
(in thousands)
Total assets
Total liabilities
$ 2,181,499 $ 43,737 $ 2,014,844 $ 197,831 $ 4,437,911
$ 281,326 $ 3,545,877 $ 203,932 $ - $ 4,031,135
Note W—Discontinued Operations
The Company performed a strategic evaluation of its businesses in the third quarter of 2014 and decided to discontinue its
Philadelphia commercial lending operations and focus on its specialty finance lending. The loans which constitute the Philadelphia
commercial loan portfolio are in the process of disposition including transfers to other financial institutions. As such, financial results
of the commercial lending operations are presented as separate from continuing operations on the consolidated statements of
operations, and the assets of the commercial lending operations to be disposed are presented as assets held-for-sale from discontinued
operations in the consolidated balance sheets.
136
The following table presents financial results of the commercial lending business included in net income (loss) from
discontinued operations for the twelve months ended December 31, 2019, 2018 and 2017. The majority of non-interest expense is
comprised of loan related charges including charge-offs, realized and unrealized gains and losses, other real estate loan charges and
attorney fees.
Interest income
Interest expense
Net interest income
Non-interest income
Non-interest expense
Income before taxes
Income tax (benefit) expense
Net income
Loans, net
Other real estate owned
Total assets
For the year ended December 31,
2019
2018
(in thousands)
2017
$ 6,710
$ 8,810
$ 12,655
-
6,710
34
6,234
510
219
-
8,810
910
8,229
1,491
354
-
12,655
1,095
9,691
4,059
(276)
$ 291
$ 1,137
$ 4,335
December 31,
2019
December 31,
2018
(in thousands)
$ 115,879
$ 170,662
24,778
27,169
$ 140,657
$ 197,831
Discontinued operations loans are recorded at the lower of their cost or fair value. Fair value is determined using a
discontinued cash flows analysis where projections of cash flows are developed in consideration of internal loan review analysis and
default/prepayment assumptions for smaller pools of loans.
The Company has securitized or sold loans with a book value of approximately $406.8 million, of the approximately
$1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations. The
$406.8 million of loans sold had a face value of approximately $481.7 million. Loans with an approximate face and book value of
$267.6 million and $192.7 million, respectively, were securitized in the fourth quarter of 2014 to WS 2014. The securitization,
referred to as Walnut Street, is managed by an independent investor, which contributed $16 million of equity to that entity. The
balance of the securitization was financed by the Bank and is reflected on the consolidated balance sheet as investment in
unconsolidated entity. After $74.9 million of loan charges reflected in the difference between the face value and book value of the
loans securitized, the Company recognized a gain on sale of $17.0 million. In the second quarter of 2015, an additional $149.6 million
of loans were sold at a gain of approximately $2.2 million. In the third quarter of 2016, $64.6 million of loans were sold at minimal
gain. In 2017 and 2018, further dispositions including refinancings at other financial institutions and were reflected in the reduction of
the discontinued operations balance to $140.7 million, compared to a balance of $197.8 million and $304.3 million, respectively at
December 31, 2018 and 2017. The Company continues to pursue additional loan and other collateral dispositions.
Additionally, the consolidated balance sheet reflects $39.2 million in investment in unconsolidated entity, which is comprised
of notes owned by the Company as a result of the sale of certain discontinued loans to Walnut Street, in which the Company retains an
interest as explained above.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
137
Item 9A. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Members of our operational management and internal audit meet regularly to provide an established
structure to report any weaknesses or other issues with controls, or any matter that has not been reported previously, to our Chief
Executive Officer and Chief Financial Officer, and, in turn to the Audit Committee of our Board of Directors. In designing and
evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our Chief Executive Officer and Chief Financial Officer, we have carried out an evaluation of the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation,
our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the
reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Pursuant
to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed
by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those
policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our consolidated financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance
and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can
be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these
inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
A material weakness is defined as a deficiency or a combination of deficiencies, in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis.
Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2019 based on
the control criteria established in the 2013 Internal Control—Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission and concluded that our internal control over financial reporting was effective as of
December 31, 2019.
138
Our independent registered public accounting firm, Grant Thornton LLP, audited our internal control over financial reporting
as of December 31, 2019. Their report dated March 13, 2020 appears below in this Item 9A.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of the fiscal year ended December 31, 2019, there were no changes in our internal control over
financial reporting that have materially affected, or were reasonably likely to materially affect, our internal control over financial
reporting.
139
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
The Bancorp, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of The Bancorp, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019,
based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on
criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial
statements of the Company as of and for the year ended December 31, 2019, and our report dated March 13, 2020 expressed an unqualified opinion on those financial
statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Philadelphia, Pennsylvania
March 13, 2020
140
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.
Item 11. Executive Compensation
Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information included in the 2020 Proxy Statement to be filed is incorporated herein by reference.
141
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
PART IV
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet at December 31, 2019 and 2018
Consolidated Statement of Operations for each of the three years in the period ended December 31, 2019
Consolidated Statement of Changes in Shareholders’ Equity for each of the three years in the period ended
December 31, 2019
Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2019
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Exhibits
Exhibit No.
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
10.14.1
10.14.2
10.15
10.16
10.17
Description
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 (13)
Amendment to Certificate of Incorporation filed June 1, 2016 (13)
Amended and Restated Bylaws (14)
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 (10)
Form of Grant of Stock Option under the 2013 Plan (11)
Form of Grant of Stock Award under the 2013 Plan (11)
The Bancorp, Inc. 2018 Equity Incentive Plan (12)
First Amendment to The Bancorp, Inc 2018 Equity Incentive Plan (12)
Form of Restricted Stock Unit Award Agreement (12)
Sales Agreement dated December 30, 2014 among the Bancorp Bank and Walnut Street 2014-1 Issuer, LLC (15)
Amended Consent Order, Order for Restitution and Order to Pay Civil Money Penalty, dated December 23,
2015 (16)
142
10.18
10.19
10.20
10.21
21.1
23.1
31.1
31.2
32.1
32.2
Letter Agreement with Damian Kozlowski (17)
Letter Agreement with Hugh McFadden (17)
Letter Agreement with John Leto (17)
Asset Purchase Agreement dated as of July 10, 2018 (18)
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 *
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
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 annual report on Form 10-K filed March 16, 2018, 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 current report on Form 8-K/A filed May 17, 2018, 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, and by this reference incorporated
herein (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).
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 July 10, 2018, and by this reference incorporated
herein (File No. 000-51018).
143
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 13, 2020
By:
/s/ Damian M. Kozlowski
DAMIAN M. KOZLOWSKI
Chief Executive Officer (principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/S/ Damian M. Kozlowski
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
MEI-MEI TUAN
/S/ Hersh Kozlov
HERSH KOZLOV
/S/ John Eggemeyer
JOHN EGGEMEYER
/S/ Daniela A. Mielke
DANIELA A. MIELKE
/S/ Stephanie B. Mudick
STEPHANIE B. MUDICK
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
/S/ Paul Frenkiel
PAUL FRENKIEL
Executive Vice President of Strategy, Chief Financial Officer and
Secretary
(principal accounting officer)
144
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
Subsidiaries of Registrant
Exhibit 21.1
The Bancorp Bank
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We have issued our reports dated March 13, 2020, 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, 2019. 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, and File No. 333-210979, effective April 28, 2016).
March 13, 2020
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, 2019 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 13, 2020
/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, 2019 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 13, 2020
/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, 2019 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 13, 2020
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, 2019 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 13, 2020
Dated
/S/ Paul Frenkiel
Executive Vice President of Strategy,
Chief Financial Officer and Secretary
DEDICATED
TO SERVING
THE UNIQUE
BANKING NEEDS
OF LEADING
FINANCIAL
SERVICES
COMPANIES
E X E C U T I V E T E A M
C O R P O R AT E H E A D Q U A R T E R S
Damian Kozlowski
Chief Executive Officer & President
Dianne Bjork
Executive Vice President
Co-Head of Payment Solutions,
Head of Financial Operations
Matt Carberry
Executive Vice President
Head of Payment Acceptance
Erika Caesar
Managing Director
Assistant General Counsel & Chief Diversity Officer
Mark Connolly
Executive Vice President
Chief Credit Officer & Head of Credit Markets
Paul Frenkiel
Executive Vice President
Chief Financial Officer & Secretary
409 Silverside Road
Suite 105
Wilmington, Delaware 19809
P: +1 302.385.5000
I N V E S TO R R E L AT I O N S
Andres Viroslav
P: +1 215.861.7990
E: InvestorRelations@thebancorp.com
T R A N S F E R A G E N T
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
P: + 1 800.937.5449
E: info@amstock.com
Greg Gary
Executive Vice President
Chief Operating Officer
Ryan Harris
Executive Vice President
Co-Head of Payment Solutions,
Head of Business Development
John Leto
Executive Vice President
Head of Institutional Banking
Jeff Nager
Executive Vice President
Head of Commercial Lending
Thomas G. Pareigat
Executive Vice President
General Counsel
Jennifer F. Terrry
Executive Vice President
Chief Human Resources Officer
Maria Wainwright
Executive Vice President
Chief Marketing Officer
Matt Wallace
Executive Vice President
Chief Information Officer
Ron Wechsler
Executive Vice President
Head of Real Estate Capital Markets
B O A R D O F D I R E C TO R S
Daniel Gideon Cohen
Chairman of the Board
Damian Kozlowski
Chief Executive Officer & President
Walter T. Beach
Michael J. Bradley
John C. Chrystal
Matthew Cohn
John Eggemeyer
Hersh Kozlov
William H. Lamb
James Joseph McEntee III
Daniela Mielke
Stephanie Mudick
Mei-Mei Tuan
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EMPOWERING
THE
WORLD’S
MOST
SUCCESSFUL
COMPANIES
A N N U A L R E P O R T 2 0 1 9
thebancorp.com | 409 Silverside Road, Suite 105 | Wilmington, DE 19809 | +1 302.385.5000
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